Press Release - New York, NY, 3 March 2008.
Knight Vinke’s view of HSBC’s 2007 results and Annual Report published today

Introduction and Background Knight Vinke has criticised HSBC in the past few months for its strategy of seeking earnings diversification above all else regardless of the strategic fit of the assets and businesses it has bought. As a result of this strategy we argue that HSBC has ended up owning businesses which lack critical mass and scale in many parts of the world (such as France) and/or which have no strategic fit with the rest of HSBC’s activities (such as the US sub-prime business) while it has neglected its comparative advantage in Asia and the emerging markets. We attributed a great deal of this strategic failure to poor corporate governance and to insufficient independence on the Board, in particular.

The changes to the Board announced today and over the past couple of months have gone a long way to addressing our concerns in this respect.

We are also pleased that HSBC acknowledges and regrets the way in which the executive remuneration plan was described in annual reports in previous years. We note that, in line with our suggestions, the old scheme is to be dropped and a new one adopted after much wider consultation than in the past.

HSBC’s financial results

HSBC’s results apparently show a positive picture with earnings per share up 17.9% to $1.65 per share.

Our initial analysis of the results shows that much of the increase has come from one-offs, acquisitions and currency changes rather than from underlying improvements in operating performance. The figures in the table below are taken from HSBC’s 2007 annual report which was published today. This shows that underlying profits from the business units excluding currency changes, acquisitions and one-offs fell by $2.9 billion or almost 14%, which contrasts with the headline message that earnings per share have increased by 18%.

US Sub-Prime situation is worse than previously thought

The deterioration in the underlying profitability of HSBC’s PFS division is due mostly to its losses in the US sub-prime business (“HFC”). In 2007, provisions made against losses in HFC amounted to some $12.1 billion, which represents an increase of almost $5 billion on 2006, and a further $6 billion of goodwill has had to be written off.

We believe that HFC is structurally unable to support the $150 billion of debt that is currently on its balance sheet. We note that in 2007, HSBC was required to inject $950 million into HFC and within the first few weeks of 2008 has had to inject a further $1.6 billion.

In our view if HSBC were to “ring fence” HFC by selling the business, spinning it off or, more radically, walking away from it (which it could do since HSBC has not guaranteed its borrowings), the share price would be some 200 to 300 pence higher than where it stands today. Doing so would not preclude HSBC from keeping all or part of HFC’s credit card portfolio, which we admit could be of strategic benefit to HSBC.

Further details of our thinking on these matters including previous correspondence with HSBC can be accessed on our website www.kvamllc.com.

About Knight Vinke Asset Management

Knight Vinke Asset Management is an institutional fund manager which specialises in the linkage between value creation and better governance in large cap public companies. Its clients include some of the world’s largest public pension funds and institutional investors.

This announcement is not intended, and shall not be construed, as an offer, solicitation, invitation or inducement to buy or sell securities or interests therein or other investments.

For further information, please contact:

Martin Forrest
Director of Communications
Knight Vinke Asset Management
T: +377 93 30 06 36
forrest@kvamllc.com

David Trenchard/John Sunnucks
Tulchan Communications
T: +44 20 7353 4200
knightvinke@tulchangroup.com