hsbc amanah malaysia berhad (company …incorporated in malaysia) financial statements 31 december...

HSBC AMANAH MALAYSIA BERHAD(Company No. 807705-X)

(Incorporated in Malaysia)

FINANCIAL STATEMENTS31 DECEMBER 2009

HSBC AMANAH MALAYSIA BERHAD(Company No. 807705-X)(Incorporated in Malaysia)

CONTENTS

1 Board of Directors

2 Profile of Directors

4 Board Responsibility and OversightBoard of DirectorsBoard Committees

20 Management Reports

21 Internal Audit and Internal Control Activities

22 Risk Management

27 Directors’ Report

35 Directors’ Statement

36 Statutory Declaration

37 Shariah Committee’s Report

39 Independent Auditors’ Report

41 Balance Sheet

42 Income Statement

43 Statement of Changes in Equity

44 Cash Flow Statement

45 Notes to the Financial Statements


1

BOARD OF DIRECTORS

Irene Mitchell Dorner, Non-Independent Non-Executive Chairman(Resigned on 15 December 2009)

Mukhtar Malik Hussain, Non-Independent Non-Executive Chairman(Appointed on 15 December 2009)

Musa bin Abdul Malek, Executive Director and Chief Executive Officer

Mohamed Ross bin Mohd Din, Non-Independent Non-Executive Director

Azlan bin Abdullah, Independent Non-Executive Director

Mohd Razlan bin Mohamed, Independent Non-Executive Director

Mohamed Ashraf bin Mohamed Iqbal, Independent Non-Executive Director

Lee Choo Hock, Independent Non-Executive Director


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PROFILE OF DIRECTORS

Mukhtar Malik Hussain, Non-Independent Non-Executive Chairman

Age 49. Appointed on 15 December 2009. He was the Deputy Chairman of HSBC Bank Middle EastLimited, Global CEO of HSBC Amanah and CEO of Global Banking and Markets, Middle East andNorth Africa, a dual role with global responsibilities for Islamic Finance and HSBC’s wholesale bankingactivities in the Middle East and North Africa before he came to Malaysia.

Mr. Mukhtar joined HSBC in 1982 as a Graduate Trainee after graduating in Economics from theUniversity of Wales. He held several positions in HSBC London where he was involved in driving thebusinesses in Latin America, Emerging Markets and the Middle East.

Mr. Mukhtar was the CEO of HSBC Financial Services (Middle East) Limited from 1995 to 2003. In2003, he assumed the position of CEO, Corporate and Investment Banking and became the Co-Head ofGlobal Banking in 2005. He was then appointed as the Global Head of Principal Investments from 2006to 2008.

Mr. Mukhtar is currently the Deputy Chairman and Chief Executive Officer of HSBC Bank MalaysiaBerhad. In addition, he is also a non-executive Director of HSBC Bank Middle East Limited.

Musa bin Abdul Malek, Executive Director and Chief Executive Officer

Age 54. Encik Musa was with HSBC Bank Malaysia Berhad for more than 29 years and served invarious capacities ranging from Branch Management, Credit Management, Operations and TradeServices. He has also worked in the areas of Personal Financial Services, Commercial Banking, CreditRelationship Management, Corporate Banking, and since 2001 in Islamic Banking. He assumed the roleof the Deputy Head, HSBC Amanah (the Islamic window of HSBC Bank Malaysia Berhad) in 2000 andsubsequently appointed as the Deputy Managing Director in 2007.

Mohamed Ross bin Mohd Din, Non-Independent Non-Executive Director

Age 57. Encik Mohamed Ross was with HSBC Bank Malaysia Berhad since 1972 and served in variouscapacities ranging from Corporate and Retail Banking to Area and Branch Management. He also servedas Head of Treasury and Group Audit Malaysia. Prior to his retirement from HSBC Bank MalaysiaBerhad in December 2007, Mohd Ross was managing the HSBC Amanah Onshore business franchise inMalaysia and was responsible for the Islamic retail and corporate business emanating from the branchnetwork.

He was also the Executive Director and Senior Advisor of HSBC Amanah Takaful Malaysia Sdn. Bhd.from 1 January 2008 to 31 December 2008.


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PROFILE OF DIRECTORS (continued)

Azlan bin Abdullah, Independent Non-Executive Director

Age 51. Encik Azlan Abdullah was appointed on 6 August 2008. He graduated from Trinity UniversitySan Antonio, Texas with Bachelor of Science in Business Administration. Thereafter, he obtained aMasters in Business Administration from Morehead State University, Kentucky. He was attached toCitibank Berhad as the Vice President and Head of the Public Sector division, which is a division of theCorporate Banking Group focusing on lending to government-owned entities.

He is currently the Executive Director of Melewar Industrial Group Berhad and the Chief ExecutiveOfficer of Mycron Steel Berhad. He is also a director of several public listed companies including MGICBerhad and Bandar Raya Development Berhad.

Mohd Razlan bin Mohamed, Independent Non-Executive Director

Age 43. Encik Mohd Razlan graduated from Duke University, Durham, North Carolina with Bachelor ofScience in Civil and Environmental Engineering in 1988. He then obtained a Masters in BusinessAdministration in Finance and Marketing from Rice University, Houston Texas in 1990. He wasattached to various investment banks in Malaysia including BSN Merchant Bankers, Affin MerchantBank, Aseambankers and MIMB Investment Bank, principally in the area of capital markets andstructured finance. Mohd Razlan was heading the Investment Banking Division of MIMB InvestmentBank in 2007.

He is currently the Chief Executive Officer of Malaysian Rating Corporation Berhad (MARC).

Mohamed Ashraf bin Mohamed Iqbal, Independent Non-Executive Director

Age 44. Encik Mohamed Ashraf graduated from California State University with Bachelor of Science inMechanical Engineering and thereafter obtained a Masters in Business Administration from the sameinstitution. He began his career with Shell Malaysia Trading Sdn. Bhd. and moved on to Proton Berhadwhere he assumed the positions of Managing Director of Proton Cars (UK) Ltd, Executive Director ofProton Cars (Europe) Ltd and Director of Proton Cars (Australia) Ltd in 1998. He then assumed theposition of Managing Director of Federal Auto Holdings Berhad from 2002 to 2005.

He is currently, an Advisor to Maestro Solutions Sdn. Bhd and a director of MindSpring Sdn. Bhd.

Lee Choo Hock, Independent Non-Executive Director

Age 56. Appointed on 2 January 2009, Mr. Lee is a member of the Institute of Chartered Accountants inEngland and Wales. He is also a member of the Malaysian Institute of Accountants. He began his careerwith Miller, Brener & Co., London, a professional accounting firm in 1975. In 1982, he joined MalayanBanking Berhad in which he served various management positions until his retirement in 2008.

The management positions he held during his tenure with Malayan Banking Berhad included that of theHead of IT Audit and Head of Accounting Services and Treasury Back Office Operations.

He had also served as a Director of a number of subsidiaries of Malayan Banking Berhad.


4

BOARD RESPONSIBILITY AND OVERSIGHT

BOARD OF DIRECTORS

Composition of the Board

At the date of this report, the Board consists of seven (7) members; comprising one (1) non-independentexecutive Director, two (2) non-independent non-executive Directors and four (4) independent non-executive Directors.

The concept of independence adopted by the Board is as defined in paragraph 2.26 of Bank NegaraMalaysia’s Guidelines on Corporate Governance for Licensed Islamic Banks (BNM/GP1-i). The keyrequirements for independent Directors are that they do not have a substantial shareholding interest in theBank (5% equity interest, directly or indirectly), have not been employed or have an immediate familyemployed in an executive position in the Bank within the past two (2) years, have not engaged in anytransaction worth more than RM1 million with the Bank within the past two (2) years and generally, areindependent of management and free from any business or other relationship which could interfere with theexercise of independent judgement or the ability to act in the best interest of the Bank.

There is a clear division of responsibilities at the helm of the Bank to ensure a balance of authority andpower. The Board is led by Mr Mukhtar Malik Hussain as the non-executive Chairman and the executivemanagement of the Bank is led by Encik Musa bin Abdul Malek, the Chief Executive Officer.

Roles and Responsibilities of the Board

The Board is responsible for the overall corporate governance of the Bank, including its strategic direction,establishing goals for management and monitoring the achievement of these goals. The role and function ofthe Board are clearly documented in a Shareholder’s Mandate.

The Board has a formal schedule of matters reserved to itself for approval, which includes annual plans andperformance targets, procedures for monitoring and control of operations, specified senior appointments,acquisitions and disposals above pre-determined thresholds and any substantial changes in the balance sheetmanagement policy.

The Board carries out various functions and responsibilities laid down by Bank Negara Malaysia inguidelines and directives that are issued by Bank Negara Malaysia from time to time.

Frequency and Conduct of Board Meetings

The Board has determined that it shall meet at least six (6) times a year in accordance with the BNM/GP1-iGuidelines.

The Board receives reports on the progress of the Bank’s business operations and minutes of meetings ofManagement Committees for review at each of its meetings. At these meetings, the members also considera variety of matters including the Bank’s financial results, strategic decisions and corporate governancematters. The Board also receives presentations from each key business area, and on any other topic as theyrequest.


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BOARD RESPONSIBILITY AND OVERSIGHT (continued)

BOARD OF DIRECTORS (continued)

Frequency and Conduct of Board Meetings (continued)

The agenda for every Board meeting, together with comprehensive management reports, proposal papersand supporting documents are distributed to the Directors in advance of all Board meetings, to allow timefor appropriate review and to enable full discussion at the meetings. All proceedings from the Boardmeetings are minuted. Minutes of every Board meeting are circulated to all Directors for their perusal priorto confirmation of the minutes at the following Board meeting.

The BNM/GP1-i requires non-executive Directors to have a minimum attendance of at least 75% of allBoard meetings.

The attendance of Directors at the Board meetings held in the financial year ended 31 December 2009 wasas follows:

Name of members Independent/ Non-Independent Attendanceand numberof meetings

Irene Mitchell Dorner Chairman, Non-Independent Non-ExecutiveDirector

6 / 6

Musa bin Abdul Malek Executive Director and Chief Executive Officer 5 / 6Mohamed Ross bin Mohd Din Non-independent Non-Executive Director 6 / 6Azlan bin Abdullah Independent Non-Executive Director 5 / 6Mohd Razlan bin Mohamed Independent Non-Executive Director 6 / 6Mohamed Ashraf bin MohamedIqbal

Independent Non-Executive Director 6 / 6

Lee Choo Hock Independent Non-Executive Director 6 / 6


6


BOARD COMMITTEES

The Board has established the Board Committees and Management Committees to assist them in therunning of the Bank. The functions and the Terms of Reference of the Board Committees and ManagementCommittees, as well as the authority delegated by the Board to these Committees, have been clearly definedby the Board.

The Board Committees and Management Committees in the Bank are as follows:

Board Committees Audit Committee Risk Management Committee Nominating Committee Connected Party Transactions Committee

The Audit Committee, Risk Management Committee and Nominating Committee were established pursuantto BNM/GP1-i. The BNM/GP1-i also requires the Board to establish a Remuneration Committee. However,the Bank has, on 8 July 2008, obtained Bank Negara Malaysia’s exemption from this requirement.

Management Committees Executive Committee Asset and Liability Management Committee Credit Committee

In addition to the above Management Committees established by the Board, the Bank has establishedvarious sub-committees such as, the IT Steering Committee, Basel II Steering Committee, Stress TestSteering Committee and Operational Risk Management Committee. These sub-committees are establishedto assist the Executive Committee and the Asset and Liability Management Committee in performing theirroles and responsibilities and to assist the Chief Executive Officer in the day to day running of the Bank andto ensure that policy decisions are implemented in accordance with the directives of the Board.


7


AUDIT COMMITTEE

Composition

The present members of the Audit Committee comprise:

Lee Choo Hock (Chairman)Azlan bin AbdullahMohd Razlan bin Mohamed

Frequency of Meetings

A total of three (3) Audit Committee meetings were held during the financial year. The attendance of theDirectors at the Audit Committee meetings held in 2009 are as follows:

Name of members Independent/ Non-Independent Attendance andnumber ofmeetings

Lee Choo Hock Chairman, Independent Non-Executive Director 3 / 3

Azlan bin Abdullah Independent Non-Executive Director 3 / 3

Mohd Razlan bin Mohamed Independent Non-Executive Director 3 / 3

Terms of Reference

The Terms of Reference were first approved at the Board meeting on 4 February 2009 and adopted at thefirst Audit Committee meeting on 28 April 2009.

Membership

The Committee shall comprise not less than three (3) members, of which the majority shall be independentnon-executive directors.

The Board may from time to time appoint additional members to the Committee from among the non-executive directors it has determined to be independent. In the absence of sufficient independent non-executive directors, the Board may appoint individuals from elsewhere in the HSBC Group with no line orfunctional responsibility for the activities of HSBC Amanah Malaysia Berhad (the Bank).

The Chairman of the Committee shall be an independent director and shall be appointed by the Boardfollowing election by the members of the Committee.

The Committee may invite any director, executive, external auditor or other person to attend any meeting(s)of the Committee as it may from time to time consider desirable to assist the Committee in the attainment ofits objective.


8


AUDIT COMMITTEE (continued)

Meetings and Quorum

The Committee shall meet with such frequency and at such times as it may determine. It is expected thatthe Committee shall meet at least four times each year.

The quorum for meetings shall be two Directors.

Objective

The Committee shall be accountable to the Board and shall assist the Board in meeting its responsibilities inensuring an effective system of internal control and compliance and for meeting its external financialreporting obligations, including its obligations under applicable stock exchange listing rules, laws andregulations and shall be directly responsible on behalf of the Board for the selection, oversight andremuneration of the external auditor.

Responsibilities of the Committee

Without limiting the generality of the Committee’s objective, the Committee shall have the followingresponsibilities, powers, authorities and discretion.

1. To monitor the integrity of the financial statements of the Bank, and any formal announcementsrelating to the Bank’s financial performance, reviewing significant financial reporting judgementscontained in them. In reviewing the Bank’s financial statements before submission to the Board, theCommittee shall focus particularly on:

(i) any changes in accounting policies and practices;(ii) major judgemental areas;(iii) significant adjustments resulting from audit;(iv) the going concern assumptions and any qualifications;(v) compliance with accounting standards; and(vi) compliance with applicable listing and other legal requirements in relation to financial

reporting.

In regard to the above:

(i) members of the Committee shall liaise with the Board, members of senior management andthe principal financial officer and the Committee shall meet, at least once a year, with theexternal auditor and head of internal audit;

(ii) the Committee shall consider any significant or unusual items that are, or may need to be,reflected in the annual report and accounts and shall give due consideration to any mattersraised by the principal financial officer, head of internal audit, head of compliance orexternal auditor; and

(iii) the Committee shall ensure that the accounts are prepared and published in a timely andaccurate manner with frequent reviews of the adequacy of provisions against contingenciesand bad and doubtful debts.


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2. To review the Bank’s financial and accounting policies and practices.

3. To review the Bank’s internal financial controls and its internal control and risk managementsystems.

4. To monitor and review the internal audit plan, the effectiveness of the internal audit function and co-ordination between the internal and external auditors, consider the major findings of internalinvestigations and management’s response, obtain assurances that the internal audit function isadequately resourced and has appropriate standing within the Bank and is free from constraint bymanagement or other restrictions.

5. To make recommendations to the Board, for it to put to the shareholders for their approval in generalmeeting, in relation to the appointment, re-appointment and removal of the external auditor and toapprove the remuneration and terms of engagement of the external auditor.

6. To review and monitor the external auditor’s independence and objectivity and the effectiveness ofthe audit process, taking into consideration relevant professional and regulatory requirements andreports from the external auditors on their own policies and procedures regarding independence andquality control and to oversee the appropriate rotation of audit partners with the external auditor.

7. To implement the Bank’s policy on the engagement of the external auditor to supply non-auditservices, taking into account relevant ethical guidance regarding the provision of non-audit servicesby the external audit firm; where required under that policy to approve in advance any non-auditservices provided by the external auditor that are not prohibited by the Sarbanes-Oxley Act of 2002(in amounts to be pre-determined by the HSBC Group Audit Committee) and the fees for any suchservices; to report to the Board, identifying any matters in respect of which it considers that action orimprovement is needed and make recommendations as to the steps to be taken. For this purpose“external auditor” shall include any entity that is under common control, ownership or managementwith the audit firm or any entity that a reasonable and informed third party having knowledge of allrelevant information would reasonably conclude as part of the audit firm nationally or internationally.

8. To review the external auditor’s management letter and management’s response, any material queriesraised by the external auditor to management in respect of the accounting records, financial accountsor systems of control and management’s response, the external auditors’ annual report on theprogress of the audit and management’s annual internal control report.

9. To ensure a timely response is provided to the issues raised in the external auditor’s managementletter.


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10. To discuss with the external auditor their general approach, nature and scope of their audit andreporting obligations before the audit commences including, in particular, the nature of anysignificant unresolved accounting and auditing problems and reservations arising from their interimreviews and final audits, major judgemental areas (including all critical accounting policies andpractices used by the Bank and changes thereto), all alternative accounting treatments that have beendiscussed with management together with the potential ramifications of using those alternatives, thenature of any significant adjustments, the going concern assumption, compliance with accountingstandards and stock exchange and legal requirements, reclassifications or additional disclosuresproposed by the external auditor which are significant or which may in the future become material,the nature and impact of any material changes in accounting policies and practices, any writtencommunications provided by the external auditor to management and any other matters the externalauditor may wish to discuss (in the absence of management where necessary).

11. To review and discuss management’s statement on internal control systems prior to endorsement bythe Board, the effectiveness of the Bank’s internal control systems and procedures for compliancewith the HSBC Group compliance policy and the relevant regulatory and legal requirements in eachof the markets where the Company is represented and whether management has discharged its duty tohave an effective internal control system including the adequacy of resources, qualifications andexperience of staff of the accounting and financial reporting function, and their training programmesand budget.

12. To consider any findings of major investigations of internal control matters as delegated by the Boardor on the Committee’s initiative and management’s response.

13. To receive an annual report, and other reports from time to time as may be required by applicablelaws and regulations, from the principal executive officer and principal financial officer to the effectthat such persons have disclosed to the Committee and to the external auditor all significantdeficiencies and material weaknesses in the design or operation of internal controls over financialreporting which could adversely affect the Bank’s ability to record and report financial data and anyfraud, whether material or not, that involves management or other employees who have a significantrole in the Bank's internal controls over financial reporting.

14. To provide to the Board such assurances as it may reasonably require regarding compliance by theBank, its subsidiaries and those of its associates for which it provides management services with allsupervisory and other regulations to which they are subject.

15. To provide to the Board such additional assurance as it may reasonably require regarding thereliability of financial information submitted to it.

16. To receive from the Compliance function reports on the treatment of substantiated complaintsregarding accounting, internal accounting controls or auditing matters received through the HSBCGroup Disclosure Line (or such other system as the HSBC Group Audit Committee may approve) forthe confidential, anonymous submission by employees of concerns regarding questionable accountingor auditing matters.


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17. To review regular risk management reports setting out the risks involved in the Bank’s business andhow they are controlled and monitored by management and to review the effectiveness of the Bank’srisk management framework.

18. To agree the Bank’s policy for the employment of former employees of the external auditor, withinthe terms of the HSBC Group's policy.

19. Where applicable to review the composition, powers, duties and responsibilities of subsidiarycompanies’ Audit Committees.

20. To undertake or consider on behalf of the Chairman or the Board such other related tasks or topics asthe Chairman or the Board may from to time entrust to it.

21. The Committee alone shall meet with the external auditor and with the head of internal audit at leastonce each year to ensure that there are no unresolved issues or concerns.

22. The Committee may appoint, employ or retain such professional advisors as the Committee mayconsider appropriate. Any such appointment shall be made through the secretary to the Committee,who shall be responsible for the contractual arrangements and payment of fees by the Bank on behalfof the Committee.

23. The Committee shall review annually the Committee’s terms of reference and its own effectivenessand recommend to the Board any necessary changes.

24. To report to the Board on the matters set out in these terms of reference.

25. To provide half-yearly certificates to the Audit Committee of HSBC Bank Malaysia Berhad, in theform required by the said audit committee. Such certificates to include a statement that the membersof the Committee are independent.

26. To review any related party transactions that may arise within the Bank pursuant to the applicablelaws and regulations.

27. To investigate any matter within these terms of reference, to have full access to and co-operation bymanagement and to have full and unrestricted access to information.

Where the Committee’s monitoring and review activities reveal cause for concern or scope forimprovement, it shall make recommendations to the Board on action needed to address the issue or to makeimprovements and, where necessary, shall report any such concerns to the Audit Committee of HSBC BankMalaysia Berhad.


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RISK MANAGEMENT COMMITTEE

Composition

The present members of the Risk Management Committee comprise:

Mohd Razlan bin Mohamed (Chairman)Lee Choo HockMohamed Ross bin Mohd Din

Frequency of Meetings

A total of three (3) Risk Management Committee meetings were held during the financial year. Theattendance of the Directors at the Risk Management Committee meetings held in 2009 are as follows:


Mohd Razlan bin Mohamed Chairman, Independent Non-Executive Director 3 / 3

Lee Choo Hock Independent Non-Executive Director 3 / 3

Mohamed Ross bin Mohd Din Non-Independent Non-Executive Director 3 / 3

Terms of Reference

The Terms of Reference were first approved at the Board meeting on 4 February 2009 and adopted at theRisk Management Committee meeting on 28 April 2009.

Membership

The Committee shall comprise not less than three (3) non-executive directors. All members shall be non-executive directors.

The Chairman of the Committee shall be an independent non-executive director appointed by the Board.

The Committee shall be supported by the Chief Financial Officer, Chief Risk Officer, Head of Operationsand Treasurer of HSBC Bank Malaysia Berhad. The Committee may invite any director, executive or otherperson to attend any meeting(s) of the Committee as it may from time to time consider desirable to assistthe Committee in the attainment of its objective.

The Committee shall be supported by executives from the Bank’s Executive Committee and Asset andLiability Committee (Management Commmittees), or such other persons as the Committee shall considerappropriate. The Committee Secretary shall circulate such reports and minutes of the ManagementCommittees as are appropriate to all members of the Committee.


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RISK MANAGEMENT COMMITTEE (continued)

Meetings and Quorum

The Committee shall meet with such frequency and at such times as it may determine but in any event, notless than once every quarter.

The quorum for meetings shall be two non-executive directors, including one independent non-executivedirector.

At all meetings of the Committee, the Chairman of the Committee, if present, shall preside. If the Chairmanis absent, the members present at the meeting shall elect a chairman of the meeting, who shall be anindependent non-executive director.

Objective

The purpose of the Committee is to oversee senior management’s activities in managing credit, market,liquidity, operational, legal and other risk (including reputational risk) and to ensure that the riskmanagement process is in place and functioning.


1. Without limiting the generality of the Committee’s objective, the Committee shall have thefollowing responsibilities:

1.1 To review and recommend risk management strategies, policies and risk tolerance for theBoard’s approval.

1.2 To review and assess adequacy of risk management policies and framework in identifying,measuring, monitoring and controlling risk and the extent to which these are operatingeffectively.

1.3 To ensure infrastructure, resources and systems are in place for risk management, i.e.ensuring that the staff responsible for implementing risk management systems performthose duties independent of the Bank’s risk taking activities.

1.4 To review management’s periodic reports on risk exposure, risk portfolio composition andrisk management activities.

1.5 To ensure a comprehensive risk management infrastructure is in place for managing therisks associated with contracts under the Mudharabah and Musharakah financing orinvestments, which includes, at the minimum:

(a) Establishment of a process of periodic review on performance of Mudharabah andMusharakah financing or investments;


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RISK MANAGEMENT COMMITTEE (continued)

(b) Identification and establishment of exit strategies for Mudharabah and Musharakahfinancing or investments, including extension and redemptions;

(c) Update the Board on any material progress of Mudharabah and Musharakah financingor investments in a timely manner.

2. In order to be consistent with HSBC Group’s global risk management strategies, where strategiesand policies related to the objective of this Committee are driven by the parent company, HSBCBank Malaysia Berhad, the Committee shall:

2.1 Discuss, evaluate and provide input on strategies and policies to suit local environment; and

2.2 Deliberate and make the necessary recommendations on such strategies and policies toassist the Board when approving major issues and strategies

3. Where major decisions related to the objective of this Committee are made by the parent company,HSBC Bank Malaysia Berhad, the Committee shall evaluate the issues before makingrecommendations to the Board for endorsement and adoption of the decision/strategy/policy. Thepolicies adopted shall adhere to the laws of Malaysian jurisdiction and regulations.

4. The Committee shall not be delegated with decision making powers but shall report itsrecommendation to the Board for decision.

Written or Circulating Resolution

Any resolution in writing, signed or assented to by all the members of the Committee shall be as valid andeffectual as if it had been passed at a meeting of the Committee duly called and constituted and may consistof several documents in the like form each signed by one or more of the members of the Committee.

Amendment

The Committee shall from time to time review the Committees’ terms of reference and its owneffectiveness and recommend to the Board any necessary changes.


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NOMINATING COMMITTEE

Composition

The present members of the Nominating Committee comprise:

Mohamed Ashraf bin Mohamed Iqbal (Chairman)Musa bin Abdul MalekMohamed Ross bin Mohd DinAzlan bin AbdullahMohd Razlan bin Mohamed

Frequency of Meeting

A total of one (1) Nominating meeting was held during the financial year. The attendance of the Directorsat the Nominating Committee meeting held in 2009 are as follows:


Encik Mohamed Ashraf binMohamed Iqbal

Chairman, Independent Non-Executive Director 1 / 1

Encik Musa bin Abdul Malek Non-Independent Executive Director 1 / 1

Encik Mohamed Ross bin MohdDin

Non-Independent Non-Executive Director 1 / 1

Encik Azlan bin Abdullah Independent Non-Executive Director 1 / 1

Encik Mohd Razlan binMohamed

Independent Non-Executive Director 1 / 1

Terms of Reference

The Terms of Reference were first approved at the Board meeting on 4 February 2009 and adopted at theNominating Committee meeting on 20 May 2009.

Membership

The Committee shall consist of a minimum of five (5) members, of which at least four (4) must be non-executive directors.

The Chairman of the Committee shall be an independent non-executive director appointed by the Board. Inorder to avoid conflict of interest, a member of the Committee shall abstain from participating indiscussions and decisions on matters involving themselves.


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NOMINATING COMMITTEE (continued)

The Committee shall be supported by the Head of Human Resources and may invite any director, executiveor other person to attend any meeting(s) of the Committee as it may from time to time consider appropriateto assist the Committee in the attainment of its objective.

Meetings and Quorum

The Committee shall meet with such frequency and at such times as it may determine but in any event, notless than once a year.

The quorum for meetings shall be three directors, one of which must be an executive director.

At all meetings of the Committee, the Chairman of the Committee, if present, shall preside. If the Chairmanis absent, the members present at the meeting shall elect a Chairman, who shall be an independent non-executive director.

Objective

The Committee shall be responsible for ensuring that there are formal and transparent procedures for theassessment of the effectiveness of the Board and the Board’s various committees, and the performance ofthe key Senior Management Officers of the Bank.


1. Without limiting the generality of the Committee’s objective, the Committee shall have thefollowing responsibilities:

1.1 To assess and recommend the nominees for directorship and Shariah Committee members.This includes assessing and recommending directors and Shariah Committee members forreappointment, before an application is submitted to Bank Negara Malaysia for approval;

1.2 To oversee the overall composition of the Board in terms of the appropriate size, skills,knowledge and experience and make recommendations to the Board with regards to anychanges through an annual review;

1.3 To recommend to the Board the removal of any director or Shariah Committee member ifhe/she is ineffective, errant and negligent in discharging his/her responsibilities;

1.4 To ensure the establishment of performance evaluation processes on the effectiveness ofthe Board, the Board’s various committees and the key Senior Management Officers of theBank that are conducted based on objective performance criteria;

1.5 To ensure that there are established procedures to oversee appointment and successionplanning for key Senior Management Officers;


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NOMINATING COMMITTEE (continued)

1.6 To make recommendations to the Board concerning the re-election by shareholders ofdirectors retiring by rotation;

1.7 To ensure that all directors and Shariah Committee members receive an appropriatecontinuous training program in order to keep abreast with the latest developments in theindustry;

1.8 To assess on an annual basis, to ensure that the directors and key Senior ManagementOfficers are not disqualified under section 23 of the Islamic Banking Act 1983 and theShariah Committee members are not disqualified under the Bank Negara MalaysiaGuidelines on the Governance of Shariah Committee for the Islamic Financial Institutions(BNM/GPS 1).

2.1 In order to be consistent with HSBC Group’s global strategies, where strategies and policies relatedto the objective of this Committee are driven by the parent company, HSBC Bank MalaysiaBerhad, the Committee shall:

2.1 Discuss, evaluate and provide input on strategies and policies to suit the local environment;and

2.2 Deliberate and make the necessary recommendations on such strategies and policies toassist the Board when approving major issues and strategies.

3.1 Where major decisions related to the objective of this Committee are made by the parent company,HSBC Bank Malaysia Berhad, the Committee shall evaluate the issues before makingrecommendations to the Board for adoption.

4.1 The Committee will not be delegated with decision making powers but shall report itsrecommendation to the Board for decision.

Written or Circulating Resolution

Any resolution in writing, signed or assented to by all the members of the Committee shall be as valid andeffectual as if it had been passed at a meeting of the Committee duly called and constituted. Any suchresolution may consist of several documents in the like form each signed by one or more directors.

Amendment

The Committee shall from time to time review the Committees’ terms of reference and its owneffectiveness and recommend to the Board any necessary changes.


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CONNECTED PARTY TRANSACTIONS COMMITTEE

Composition

The present members of the Connected Party Transactions Committee comprise:

Azlan bin AbdullahMohamed Ashraf bin Mohamed IqbalPaul Norton (Chief Risk Officer)Edmund Pui (Senior Manager Regional Credit, HSBC Bank Malaysia Berhad)

Objective

The Connected Party Transaction Committee was established by the Board in June 2009 pursuant to therequirements under the Bank Negara Malaysia Guidelines on Credit Transactions and Exposures withConnected Parties. The Guidelines provide that the approval of non-material credit transactions withconnected parties may be delegated to a committee comprising of at least 2 non-executive Directors.

Terms of Reference

The Terms of Reference were first approved at the Board meeting on 29 June 2009.

Composition and Quorum

The Committee shall consist of at least four (4) members, of which two (2) must be non-executive directors.The other two (2) members are as follows:

Chief Risk Officer (“CRO”) Senior Manager Regional Credit

The CRO is empowered to delegate the exercise of his authorities as a member of the Committee, in hisabsence, to such executive(s) as he sees fit.

A minimum of three (3) members’ authorisation shall constitute an approval by the Committee, one ofwhom must be the CRO, or in his absence, his delegate.

Meetings

There is no requirement for meetings to be held.

Powers Delegated by the Board

The Committee is delegated with the authority of the Board to approve all corporate/commercial credittransactions with a connected party of the Bank, not exceeding RM5 million.


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CONNECTED PARTY TRANSACTIONS COMMITTEE (continued)

The exercise of the above authority by the Committee shall be subject to the Bank’s normal creditevaluation process as well as the existing credit policies and lending guidelines, which include thefollowing:

Credit Policy and Procedures on Credit Transactions with Connected Parties Business Instruction Manual - Volume 3 Credit Amanah Area Financing Guidelines Large Credit Exposure Policy BNM/GP5 Guidelines on Single Customer Limit Companies Act 1965 Hong Kong Banking Ordinance Applicable laws and regulations


20

MANAGEMENT REPORTS

Board meetings are structured around a pre-set agenda and reports for discussion, notation and approvalsare circulated in advance of the meeting dates. To enable directors to keep abreast with the performance ofthe Bank, reports submitted to the Board include:

Quarterly business progress report Quarterly assets and liabilities summary Quarterly profit and loss statement Quarterly key financial ratios and statistics Quarterly significant Bank Negara Malaysia and HSBC Group’s requirements Quarterly derivatives outstanding Quarterly update on Basel II Quarterly risk management reports on assets quality Quarterly credit advances reports Quarterly sustainability issues update Half-yearly Bank Negara Malaysia’s benchmarking statistics Minutes of the monthly Executive Committee meetings held Minutes of the monthly Asset and Liability Management Committee meetings held Minutes of the Audit Committee meetings held Minutes of the Risk Management Committee meetings held Minutes of the Shariah Committee meetings held Human resource update Comparative analysis of competitor banks and competitor performance report Bank Negara Malaysia stress testing results


21

INTERNAL AUDIT AND INTERNAL CONTROL ACTIVITIES

It is the responsibility of all management at all levels to ensure that effective internal controls are in placefor all the operations for which they are responsible. Primary controls within the internal controlenvironment are provided by established and documented procedures, secondary controls by managerialand executive supervision. Internal Audit provides tertiary control through independent inspection.

Systems and procedures are in place to identify, control and report on all major risks including credit,volatility in the market prices of financial papers, liquidity, operational error, breaches of law orregulations, unauthorized activities, or fraud. These are monitored by the Asset and Liability ManagementCommittee (ALCO), the Executive Committee (EXCO), the Operational Risk Committee, the AuditCommittee, the Risk Management Committee and the Board of Directors.

Responsibilities for financial performance against plans and for capital expenditure, credit exposures andmarket risk exposures are delegated within limits to line management. Functional management in HSBCGroup Head Office has been given responsibility to set policies, procedures and standards in the areas offinance; legal and regulatory compliance; internal audit; human resources; credit; market risk; operationalrisk; computer systems and operations; property management; and for selected global product lines. TheBank operates within these policies, procedures and standards set by the HSBC Group Head Officefunctions.

The Bank’s internal audit function monitors compliance with policies and standards and the effectiveness ofinternal control structures across the whole Bank in conjunction with other HSBC Group Internal Auditunits. The work of the internal audit function is focused on areas of greatest risk to the Bank on a risk-basedapproach. The head of Operational Risk Assurance and Audit reports functionally to the Audit Committeeand the Regional Head of Operational Risk Management Asia Pacific and administratively to the ChiefExecutive Officer

The Audit Committee has kept under review the effectiveness of this system of internal control and hasreported regularly to the Board of Directors. The key processes used by the Committee in carrying out itsreviews include regular reports from the heads of key risk functions; the annual review of the internalcontrol framework (RICF – a self certification process) against HSBC Group benchmarks, which covers allinternal controls, both financial and non-financial; annual confirmations from the Chief Executive Officerthat there have been no material losses, contingencies or uncertainties caused by weaknesses in internalcontrols; internal audit reports; external audit reports; prudential reviews; and regulatory reports.

The Audit Committee has also reviewed the annual internal audit plan to ensure adequate scope andcomprehensive coverage on the audit activities, effectiveness of the audit process, adequate resourcedeployment for the year and satisfactory performance of the Bank’s Internal Audit Unit. The Committeehas reviewed the internal audit reports, audit recommendations made and management’s response to theserecommendations. Where appropriate, the Committee has directed actions to be taken by the Bank’smanagement team to rectify any deficiencies identified by internal audit and improve the system of internalcontrols based on the internal auditors’ recommendations for improvements.


22

RISK MANAGEMENT

All of the Bank’s activities involve analysis, evaluation, acceptance and management of some degree of riskor combination of risks. The key business risks are credit risk, liquidity risk, market risk and operationalrisk. Market risk includes foreign exchange, profit rates, basis risk and equity/ commodity price risk.

The Bank’s risk management policies are designed to identify and analyse these risks, to set appropriaterisk limits and controls, and to monitor the risks and limits continually by means of reliable and up-to-dateadministrative and information systems. The Bank regularly reviews its risk management policies andsystems to reflect changes in markets, products and best practice risk management processes. Training,individual responsibility and accountability, together with a disciplined, conservative and constructiveculture of control, lie at the heart of the Bank’s management of risk.

The Executive Committee, Risk Management Committee (constituted by non-executive directors) andAsset and Liability Management Committee, appointed by the Board of Directors, formulate riskmanagement policy, monitor risk and regularly review the effectiveness of the Bank’s risk managementpolicies.

The Risk Management Committee is entrusted with the responsibility to oversee senior management’sactivities in managing credit, market, liquidity, operational, legal and other risks and to ensure that therisk management process is in place and functioning.

Credit risk management

Credit risk is the risk that financial loss arises from the failure of a customer or counterparty to meet itsobligations under a contract. It arises principally from financing, trade finance and treasury activities. TheBank has dedicated standards, policies and procedures to control and monitor all such risks.

A Credit and Risk Management structure under the Chief Risk Officer who reports to the Chief ExecutiveOfficer, is in place to ensure a more coordinated management of credit risk and a more independentevaluation of credit proposals. The Chief Risk Officer, who also has strong oversight of market, liquidity,funding, operational and environmental risk, has a functional reporting line to the HSBC Group Chief RiskOfficer.

The Bank has established a credit process involving credit policies, procedures and financing guidelineswhich are regularly updated and credit approval authorities delegated from the Board of Directors to theCredit Committee. Excesses or deterioration in credit risk grade are monitored on a regular and ongoingbasis and at the periodic, normally annual, review of the facility. The objective is to build and maintain riskassets of acceptable quality where risk and return are commensurate. Reports are produced for ExecutiveCommittee, Risk Management Committee and the Board, covering:

risk concentrations and exposures to industry sectors; large customer group exposures; and large non-performing accounts and impairment allowances.


23

Risk Management (continued)

Credit risk management (continued)

The Bank has systems in place to control and monitor its exposure at the customer and counterparty level.Regular audits of credit processes are undertaken by the Internal Audit function. Such audits includeconsideration of the completeness and adequacy of credit manuals and financing guidelines, together withan in-depth analysis of a representative sample of accounts, an overview of homogeneous portfolios ofsimilar assets to assess the quality of the financing book and other exposures, and adherence to HSBCGroup standards and policies in the extension of credit facilities.

Individual accounts are reviewed to ensure that risk grades are appropriate, that credit and collectionprocedures have been properly followed and that, where an account evidences deterioration, impairmentallowances are raised in accordance with the HSBC Group’s established processes. Internal Audit willdiscuss with management risk ratings they consider to be inappropriate, and their subsequentrecommendations for revised grades must then be assigned to the facilities concerned.

Liquidity and funding management

Liquidity risk is the risk that the Bank does not have sufficient financial resources to meet its obligationswhen they fall due, or will have to do at excessive cost. This risk can arise from mismatches in thetiming of cash flows. Funding risk arises when the necessary liquidity to fund illiquid asset positionscannot be obtained at the expected terms and when required.

The Bank maintains a diversified and stable funding base comprising core retail and corporate customerdeposits and institutional balances. This is augmented by wholesale funding and portfolios of highlyliquid assets. The objective of the Bank’s liquidity and funding management is to ensure that allforeseeable funding commitments and deposit withdrawals can be met when due and that wholesalemarket access is coordinated and cost effective.

The management of liquidity and funding is primarily carried out in accordance with the Bank NegaraMalaysia New Liquidity Framework; and practices and limits set by the HSBC Group ManagementBoard. The HSBC Group Management Board (‘GMB’) operates as a general management committeeunder the direct authority of the HSBC Group Board of Directors. The HSBC GMB exercises thepowers, authorities and discretions of the HSBC Group Board of Directors in so far as they concern themanagement and day to day running of the HSBC Group in accordance with such policies and directionsas the HSBC Group Board of Directors may from time to time determine. These limits vary to takeaccount of the depth and liquidity of the local market in which we operate. The Bank maintains a strongliquidity position and manages the liquidity profile of its assets, liabilities and commitments to ensurethat cash flows are appropriately balanced and all obligations are met when due.

The Bank’s liquidity and funding management process includes:

projecting cash flows and considering the level of liquid assets necessary in relation thereto; monitoring balance sheet liquidity ratios against internal and regulatory requirements; maintaining a diverse range of funding sources with adequate back-up facilities; monitoring depositor concentration in order to avoid undue reliance on large individual depositors

and ensure a satisfactory overall funding mix; and maintaining liquidity and funding contingency plans. These plans identify early indicators of stress

conditions and describe actions to be taken in the event of difficulties arising from systemic orinstitution specific crisis while minimising adverse long-term implications for the business.


24


Market risk management

Market risk is the risk that movements in market risk factors, including foreign exchange rates, profitrates, basis risk and equity/ commodity prices will reduce the Bank’s income or the value of itsportfolios.

The objective of the Bank’s market risk management is to manage and control market risk exposures inorder to optimise return on risk while maintaining a market profile consistent with the HSBC Group’sstatus as a premier provider of financial products and services.

The Bank separates exposures to market risk into either trading or non-trading portfolios. Tradingportfolios include those positions arising from market making and proprietary position taking. Non-trading portfolios primarily arise from the profit rate management of the Bank’s retail and commercialbanking assets and liabilities.

The management of market risk is principally undertaken using risk limit mandates approved by theHSBC Group Traded Credit and Market Risk Unit (‘TMR’), an independent unit which develops HSBCGroup’s market risk management policies and measurement techniques. Market risks which arise oneach product is transferred to either the Bank’s Global Markets unit or to a separate book managed underthe supervision of ALCO. The aim is to ensure that all market risks are consolidated within operationswhich have the necessary skills, tools, management and governance to manage such risks professionally.Limits are set for portfolios, products and risk types, with market liquidity being the principal factor indetermining the level of limits set. The Bank has an independent market risk control function that isresponsible for measuring market risk exposures in accordance with the policies defined by TMR.Positions are monitored daily and excesses against the prescribed limits are reported immediately tolocal senior management and HSBC Group Markets.

Market risk in the trading portfolio is monitored and controlled at both portfolio and position levelsusing a complementary set of techniques such as value at risk and present value of a basis point, togetherwith stress and sensitivity testing and concentration limits. Other controls to contain trading portfoliomarket risk at an acceptable level include rigorous new product approval procedures and a list ofpermissible instruments to be traded.

Market risk in non-trading portfolios arises principally from mismatches between the future yields onassets and their funding cost as a result of profit rate changes. This market risk is transferred to GlobalMarkets and ALCO portfolios, taking into account both the contractual and behavioural characteristicsof each product to enable the risk to be managed effectively. Behavioural assumptions for products withno contractual maturity are normally based on a two-year historical trend. These assumptions areimportant as they reflect the underlying profit rate risk of the products and hence are subject to scrutinyfrom ALCO, the regional head office and TMR. The net exposure is monitored against the limits grantedby TMR for the respective portfolios and, depending on the view on future market movement,economically hedged with the use of financial instruments within agreed limits.


25


Market risk management (continued)

Value at risk (‘VAR’)One of the principal tools used by the Bank to monitor and limit market risk exposure is VAR. VAR is atechnique that estimates the potential losses that could occur on risk positions as a result of movementsin market rates and prices over a specified time horizon and to a 99 per cent level of confidence. TheVAR models used by the Bank are predominantly based on historical simulation. The historicalsimulation models derive plausible future scenarios from historical market rate time series, taking intoaccount inter-relationships between different markets and rates, for example between profit rates andforeign exchange rates. Potential market movements are calculated with reference to market data fromthe last two years. Historical market rates and prices are calculated with reference to foreign exchangerates, profit rates, equity prices and the associated volatilities. VAR is calculated for a one-day holdingperiod.

The Bank routinely validates the accuracy of its VAR models by back-testing the actual daily profit andloss results, adjusted to remove non-modeled items such as fees and commission, against thecorresponding VAR numbers. Statistically, the Bank would expect to see losses in excess of VAR onlyone percent of the time over a one-year period. The actual number of excesses over this period cantherefore be used to gauge how well the models are performing.

Although a valuable guide to risk, VAR should always be viewed in the context of its limitations. Forexample:

the use of historical data as a proxy for estimating future events may not encompass all potentialevents, particularly those which are extreme in nature;

the use of a 1-day holding period assumes that all positions can be liquidated or hedged in one day.This may not fully reflect the market risk arising at times of severe illiquidity, when a 1-day holdingperiod may be insufficient to liquidate or hedge all positions fully;

the use of a 99 per cent confidence level, by definition, does not take into account losses that mightoccur beyond this level of confidence;

VAR is calculated on the basis of exposures outstanding at the close of business and therefore doesnot necessarily reflect intra-day exposures.

The Bank recognises these limitations by augmenting its VAR limits with other position and sensitivitylimit structures. Stress tests are produced on a monthly basis based on the HSBC Group’s stress-testingparameters, and on a quarterly basis based on Bank Negara Malaysia’s parameters to determine theimpact of changes in profit rates, exchange rates and other main economic indicators on the Bank’sprofitability, capital adequacy and liquidity. The stress-testing provides ALCO with an assessment of thefinancial impact of identified extreme events on the market risk exposures of the Bank.

Derivative financial instruments (principally profit rate swaps) are used for hedging purposes in themanagement of asset and liability portfolios and structured positions. This enables the Bank to mitigatethe market risk which would otherwise arise from structural imbalances in the maturity and otherprofiles of the assets and liabilities.


26


Operational risk management

Operational risk is the risk of loss arising from fraud, unauthorised activities, error, omission,inefficiency, systems failure or external events, including legal risk. It is inherent to every businessorganisation and covers a wide spectrum of issues.

The Bank manages this risk through a control-based environment in which processes are documented,authorisation is independent and transactions are reconciled and monitored. This is supported by anindependent programme of periodic reviews undertaken by Operational Risk and Audit, and bymonitoring external operational risk events, which ensure that the Bank stays in line with best practiceand takes account of lessons learned from publicised operational failures within the financial servicesindustry.

The Bank adheres to the HSBC Group standard on operational risk. This standard explains how HSBCmanages operational risk by identifying, assessing, monitoring, controlling and mitigating the risk,rectifying operational risk events and implementing any additional procedures required for compliancewith local statutory requirements. The standard covers the following:

operational risk management responsibility is assigned at senior management level within thebusiness operation;

information systems are used to record the identification and assessment of operational risks andgenerate appropriate, regular management reporting;

operational risks are identified by assessments covering operational risks facing each business andrisk inherent in processes, activities and products. Risk assessment incorporates a regular review ofidentified risks to monitor significant changes;

operational risk loss data is collected and reported to senior management. Aggregate operationalrisk losses are recorded and details of incidents above a materiality threshold are reported to theOperational Risk Management Committee. The items are also reported to the Audit Committee,Risk Management Committee and Regional Head of Operational Risk Management Asia Pacific;and

risk mitigation, including insurance, is considered where this is cost-effective.

The Bank maintains and tests contingency facilities to support operations in the event of disasters.Additional reviews and tests are conducted in the event that the Bank is affected by a business disruptionevent to incorporate lessons learned in the operational recovery from those circumstances.


27

DIRECTORS’ REPORT FOR THE YEAR ENDED 31 DECEMBER 2009

The directors have pleasure in presenting their report together with the audited financial statements of theBank for the year ended 31 December 2009.

Principal Activities

The principal activities of the Bank are Islamic banking business and related financial services.

There have been no significant changes in these activities during the year.

ResultsRM’000

Profit before taxation and zakat 77,428Taxation and zakat (19,942)

Profit after taxation and zakat 57,486

Dividend

The directors do not recommend any dividend payment in respect of the current financial year.

Reserves and Provisions

There were no material transfers to or from reserves or provisions during the year other than those disclosedin the financial statements.

Bad and Doubtful Financing

Before the financial statements of the Bank were finalised, the directors took reasonable steps to ascertainthat action had been taken in relation to the writing off of bad financing and the making of allowance fordoubtful financing, and satisfied themselves that all known bad financing had been written off and adequateallowance had been made for doubtful financing.

At the date of this report, the directors are not aware of any circumstances which would render the amountwritten off for bad financing, or the amount of the allowance for doubtful financing in the financialstatements of the Bank, inadequate to any substantial extent.

Current Assets

Before the financial statements of the Bank were finalised, the directors took reasonable steps to ascertainthat any current assets, other than financing, which were unlikely to be realised in the ordinary course ofbusiness at their values as shown in the accounting records of the Bank have been written down to anamount which they might be expected to realise.

At the date of this report, the directors are not aware of any circumstances which would render the valuesattributed to the current assets in the financial statements of the Bank misleading.


28

Directors’ Report (continued)

Valuation Methods

At the date of this report, the directors are not aware of any circumstances which have arisen which wouldrender adherence to the existing methods of valuation of assets or liabilities in the financial statements ofthe Bank misleading or inappropriate.

Contingent and Other Liabilities

At the date of this report there does not exist:

a. any charge on the assets of the Bank which has arisen since the end of the financial year whichsecures the liabilities of any other person, or

b. any contingent liability in respect of the Bank that has arisen since the end of the financial yearother than in the ordinary course of business.

No contingent or other liability of the Bank has become enforceable, or is likely to become enforceablewithin the period of twelve months after the end of the financial year which, in the opinion of the directors,will or may affect the ability of the Bank to meet its obligations as and when they fall due.

Change of Circumstances

At the date of this report, the directors are not aware of any circumstances, not otherwise dealt with in thisreport or the financial statements of the Bank, that would render any amount stated in the financialstatements misleading.

Items of an Unusual Nature

The results of the operations of the Bank for the financial year were not, in the opinion of the directors,substantially affected by any item, transaction or event of a material and unusual nature.

There has not arisen in the interval between the end of the financial year and the date of this report, anyitem, transaction or event of a material and unusual nature likely to affect substantially the results of theoperations of the Bank for the current financial year in which this report is made.

Performance Review

The Bank recorded a profit before taxation and zakat of RM77.4 million for the year ended 2009. Earningsper share increased to 57.5 sen from 54.0 sen in 2008.

A total income of RM323.9 million was derived from the investment of depositors and shareholders’ fund.Main sources of income are financing and advances (RM252.4 million) and fees and commissions (RM23.9million). Operating expenses for the year amounted to RM123.7 million, of which 63.7% was related toshared-service fees paid to HSBC Bank Malaysia Berhad while 12.8% was on personnel expenses.

Balance sheet size contracted by RM0.2 billion or 3.8% against 31 December 2008, in tandem with thedecrease in customer deposits, which declined by RM0.8 billion. However, net financing and advancesgrew by RM0.2 billion or 8.1%, largely bolstered by term financing and credit card receivables. Assetquality remained strong with net non-performing financing ratio of 0.6%.


29


Performance Review (continued)

The Bank is strongly capitalised with core capital and risk weighted capital ratios of 20.6% and 22.0%respectively.

During the year, the Bank widened its network through the opening of two additional branches, one inAmpang and another in Shah Alam, and set up its first offsite self service banking terminal in Suria KLCC.Various new products and financial packages were introduced to meet customers’ need, such as theAmanah HomeSmart Financing-i, Amanah Export Trade Solutions, Islamic Foreign Currency accounts, andCommodity Murabahah Term Deposit-i.

The Bank also made history with the launch of Amanah Premier proposition, offering the world’s firstglobally linked-up banking services with Shariah compliant financial solutions. In addition, various awardswere won during the year for its groundbreaking jointly led deals, which include the following:

1. Best Islamic Project Finance Deal (Malaysia) (MRCB Southern Link Berhad Sukuk Transaction)– The Asset

2. Most Innovative Islamic Finance Deals (MRCB Southern Link Berhad Sukuk Transaction)– TheAsset

Business Plan and Outlook For 2010

The negative sentiments on the global economy have eased towards the year end. With the stabilisation ofthe financial markets and the stimulus measures implemented by various countries, 2010 is expected to be ayear of economic recovery. The Malaysian economy has shown gradual signs of recovery in the last quarterof 2009 and its strong macroeconomic fundamentals and sound financial system should aid its recoveryfrom the worldwide economic downturn which started in the second half of 2008.

Liquidity in the local financial markets is likely to remain ample. The volatility in the capital markets isexpected to improve modestly, while demand for credit could show some small increase as investor andconsumer sentiments gradually improve.

The business environment for Islamic financial services in Malaysia, in particular, remains positive as it issupported by a stable regulatory framework and concerted efforts by the relevant government bodies topromote the industry. The financial liberalisation plan, which saw the issuance of new Islamic bankinglicences to foreign players, will bring increased competition to the financial sector, but at the same time willhelp reinforce Malaysia’s position as an international Islamic financial hub.

Against this backdrop, the Bank will continue to expand its range of Shariah compliant products andservices and widen its geographical reach through more branches and offsite self service terminals in 2010.The Bank will also continue to strengthen its operational excellence to deliver services that focus oncustomers.



30


Directors and their Interests in Shares

The names of the directors of the Bank in office at the date of this report are:

Irene Mitchell Dorner (resigned on 15 December 2009) Mukhtar Malik Hussain (appointed on 15 December 2009) Musa bin Abdul Malek Azlan bin Abdullah Mohamed Ashraf bin Mohamed Iqbal Mohamed Ross bin Mohd Din Mohd Razlan bin Mohamed Lee Choo Hock

In accordance with the Articles 72 and 107 of the Articles of Association, Mohamed Ross bin Mohd Din andAzlan bin Abdullah shall retire from the Board at the forthcoming Annual General Meeting and, beingeligible, offer themselves for re-election.

In accordance with Article 78 of the Articles of Association, Mr. Mukhtar Malik Hussain who was appointedafter the last Annual General Meeting shall retire at the forthcoming Annual General Meeting, and beingeligible, offers himself for re-election.

According to the register of directors’ shareholdings maintained by the Bank in accordance with Section 134of the Companies Act, 1965, the directors holding office at year end (including the spouses or children of theDirectors) who have beneficial interests in the shares of related corporations are as follows:

Number of Shares

NameHSBC Holdings plc

Ordinary shares of USD0.50

Balance at1.1.2009 or at

date ofappointment Bought (Sold)

Balance at31.12.2009

Mohamed Ross bin Mohd Din 5,300 - 5,300 -

Ms. Irene Mitchell Dorner, a former director of the Bank, acquired 14,443 ordinary shares through scripdividends, rights issue acquisition and transfer of shares and disposed 6,134 ordinary shares during thefinancial year prior to her resignation. As of the date of her resignation of 15 December 2009, she held38,583 ordinary shares.

Number of Shares

NameHSBC Holdings plc

Restricted Share Plan

Awardsheld at

1.1.2009 or atdate of

appointment

Awardsmade

during thefinancial

year *

(Awardsforfeited

during thefinancial

year)

(Awardssold/

convertedduring thefinancial

year)

Awards heldat

31.12.2009Mukhtar Malik Hussain 198,196 - - - 198,196Musa bin Abdul Malek 3,217 - - - 3,217

* Includes scrip dividends



31


Directors and their Interests in Shares (continued)

Under the HSBC Restricted Share Plan, Ms. Irene Mitchell Dorner, was awarded 97,427 shares and had13,990 shares vested during the financial year prior to her resignation. As of the date of her resignation of 15December 2009, she had been awarded 97,427 shares under the Restricted Share Plan.

Number of Shares

NameHSBC Holdings plcHSBC Share Plan

Awardsheld at

1.1.2009 or atdate of

appointment

Awardsmade

during thefinancialyear ^

(Awardsforfeited

during thefinancial

year)

(Awardssold/

convertedduring thefinancial

year)Awards heldat 31.12.2009

Mukhtar Malik Hussain 546,820 - - - 546,820

^Includes scrip dividends

Ms. Irene Mitchell Dorner, a former director of the Bank, was awarded 9,122 shares during the financial yearprior to her resignation. As of the date of her resignation of 15 December 2009, she held 53,947 shares.

Number of Shares

NameOptions over HSBC Holdingsplc shares

Balance at1.1.2009 or at

date ofappointment Granted (Exercised) (Lapsed)

Balance at31.12.2009

Mohamed Ross bin Mohd Din - 3,443 - - 3,443

Ms. Irene Mitchell Dorner, a former director of the Bank, was granted 2,717 options and had exercised 2,247options during the financial year prior to her resignation. As of the date of her resignation of 15 December2009, she held 2,717 options.

Directors’ Benefits

Since the end of the previous financial period, no Director of the Bank has received or become entitled toreceive any benefit (other than a benefit included in the aggregate amount of emoluments received or due andreceivable by Directors as shown in the financial statements or the fixed salary of a full-time employee of theBank or of a related company) by reason of a contract made by the Bank or a related corporation with theDirector or with a firm of which the Director is a member, or with a company in which the Director has asubstantial financial interest.



32


Directors’ Benefits (continued)

Neither at the end of the financial year, nor at any time during that year, did there subsist any arrangementsto which the Bank is a party whereby Directors might acquire benefits by means of the acquisition of sharesin, or debentures of, the Bank or any other body corporate, except for:

i Directors who were granted the option to subscribe for shares in the ultimate holding company,HSBC Holdings plc, under Executive/Savings-Related Share Option Schemes at prices and terms asdetermined by the schemes, and

ii Directors who were conditionally awarded shares of the ultimate holding company, HSBC Holdingsplc, under its Restricted Share Plan/HSBC Share Plan.

Immediate and Ultimate Holding Company

The Directors regard HSBC Bank Malaysia Berhad, a company incorporated in Malaysia, as the immediateholding company of the Bank. Prior to 1 January 2009, HSBC Holdings BV, a company incorporated in theNetherlands, and HSBC Holdings plc, a company incorporated in England, were the penultimate andultimate holding companies of the Bank, respectively.

On 1 January 2009, as part of an internal re-organisation exercise, the immediate holding company of theBank became the direct wholly-owned subsidiary of The Hongkong and Shanghai Banking CorporationLimited, a company incorporated in Hong Kong.

Disclosure of Shariah Committee

The Bank’s business activities are subject to the Shariah compliance and conformation by the ShariahCommittee consisting of three (3) members appointed by the Board for two (2) years term.

All Shariah Committee members are expected to participate and engage themselves actively in deliberatingShariah issues put before them. The main duties and responsibilities of the Shariah Committee as per theBank’s Shariah Compliance Manual and Guidelines on the Shariah Committee are as follows:

a. To vet the Memorandum and Articles of Association and to ensure its compliance with theShariah rulings.

b. To advise the Board of Directors on Shariah matters in order to ensure that the businessoperations of the Bank comply with Shariah principles at all times.

c. To evaluate and endorse all legal documents but not limited to the samples of contracts,agreements, activities for the whole business and operations of the Institutions with theshareholders, investors, depositors, and others, and also to participate in amending anddeveloping the above said samples if necessary, and contracts which will be signed by thecompany and do not have any previous sample. This is to ensure that the above said contract,agreements and operations does not involve any prohibited elements from Shariah point of view.

d. To ensure that the products of the Islamic financial institutions comply with Shariah principles inall aspects, the Shariah Committee must endorse the following:

the terms and conditions contained in the proposal form, contract, agreement or other legaldocumentation used in executing the transactions; and

the product manual, marketing advertisements, sales illustrations and brochures used todescribe the product.



33


Disclosure of Shariah Committee (continued)

e. To clarify the Shariah rulings in relation to the Bank’s transactions as observed by the ShariahCommittee based on what is referred to it by the Management, Board of Directors or the ShariahDepartment.

f. To present to the Board of Directors the Shariah view relevant to any matters raise in relation tothe Bank’s banking and financial activities.

g. To confirm that the Bank’s business and operations are in compliance with Shariah and that isdone through reports submitted by the Shariah Department to the Shariah Committee on aperiodic basis, explaining the activity and the implementation of the resolutions and rulingsissued by the Shariah Committee. Should there be any non-Shariah compliance related mattersoccurs, the Shariah Committee shall advise, propose or rectify the necessary to ensure itsconformity to Shariah requirements.

h. To represent the Bank’s Shariah view to the relevant parties on the related topics wheneverrequired.

i. To provide written Shariah opinion. The Shariah Committee is required to record any opiniongiven. In particular, the Committee shall prepare written Shariah opinions in the followingcircumstances:

where the Bank makes reference to the Shariah Advisory Council (SAC) for advice; or where the Bank submits applications to Bank Negara Malaysia (BNM) for new product

approval in accordance with guidelines on product approval issued by BNM.

j. To provide Shariah Compliant endorsement in the Bank’s Annual Financial Statement supportedby the Annual Shariah Committee Report.

k. To ensure the commitment of the Management and the Board of Directors in providing fulldisclosure of all transactions to the Shariah Committee via the Shariah Department.

l. To supervise the compilation of Shariah resolution issued by the Shariah Committee forreference. The Shariah resolution shall be adhered to by the Bank, without any contradiction,unless it is otherwise revise by the Shariah Committee.

m. To assist the SAC of BNM on reference for advice. The Shariah Committee must explain theShariah issues involved and the recommendations for a decision. It must be supported byrelevant Shariah jurisprudential literature from the established sources. The Shariah Committeeis also expected to assist the SAC on any matters referred by the Bank. Upon obtaining anyadvice of the SAC, the Shariah Committee shall ensure that all SAC’s decisions are properlyimplemented by the Bank.

n. To endorse the Shariah Compliance Manual in which the Bank shall have it in place. TheManual must specify the manner in which a submission or request for advice be made to theShariah Committee, the conduct of the Shariah Committee's meeting and the manner ofcompliance with any Shariah decision.

HSBC AMANAH MALAYSIA BERHAD(Company No. 807705-'0


Directors ' Report (continued)

Zakat Obligations

The Bank only pays zakat on its business. The Bank does not pay zakat on behalf of the shareholders ordepositors.

Auditors

The auditors, Messrs KPMG, have indicated their willingness to accept re-appointment.

Signed on behalf of the Board of Directors in accordance with a resolution of the Directors:

Director

Kuala Lumpur, Malaysia2 February 2010

34

HSBC AMANAH MALAYSIA BEHEAD(Company No. 807705-X)


DIRECTORS' STATEMENT

In the opinion of the directors:

We, Mukhtar Malik Hussain and Musa bin Abdul Malek, being two of the directors of HSBC AmanahMalaysia Berhad, do hereby state on behalf of the directors that, in our opinion, the financial statements setout on pages 41 to 81 are drawn up in accordance with the provision of the Companies Act, 1965 andFinancial Reporting Standards as modified by Bank Negara Malaysia's guidelines so as to give a true andfair view of the financial position of the Bank as at 31 December 2009 and of the financial performance andcash flows of the Bank for the financial year ended on that date.

Signed on behalf of the Board of Directors in accordance with a resolution of the Directors:


35

HSBC AMANAH MALAYSIA BERHAD(Company No. 807705-0


STATUTORY DECLARATION

I, Baldev Singh s/o Gurdial Singh, being the officer primarily responsible for the financial management ofHSBC Amanah Malaysia Berhad, do solemnly and sincerely declare that, to the best of my knowledge andbelief, the financial statements set out on pages 41 to 81 are correct, and I make this solemn declarationconscientiously believing the same to be true, and by virtue of the provisions of the Statutory DeclarationsAct, 1960.

Subscribed and solemnly declared by the above named in Kuala Lumpur, Malaysia on 2nd February 2010.

DEV SINGH s/o GURDIAL SINGH

20th Floor, Ambnk GroupBuilding

No. 55, Jalan Raja Chetan50200 Kuala Lum pur

36



37

SHARIAH COMMITTEE’S REPORT

In the name of Allah, the most Beneficent, the most Merciful.

Praise to Allah, the Lord of the Worlds and peace and blessings be upon our Prophet Muhammad, his familyand companions.

Assalamu ‘Alaikum Warahmatullahi Wabarakatuh

In carrying out the roles and responsibilities as Shariah Committee of HSBC Amanah Malaysia Berhad asprescribed in the Guidelines on the Governance of Shariah Committee for Islamic Financial Institutionsissued by Bank Negara Malaysia and Guidelines on the Shariah Committee of HSBC Amanah MalaysiaBerhad, we hereby submit the following report for the financial year ended 31 December 2009:

1. We have conducted thirteen (13) meetings for the whole year of 2009 to review various products,transactions and processes to ensure conformity with the Shariah requirements.

2. We have reviewed the principles and contracts relating to the transactions and applicationsundertaken by HSBC Amanah Malaysia Berhad and its branches during the year ended 31 December2009.

3. We have also conducted our review to form an opinion as to whether HSBC Amanah MalaysiaBerhad has complied with Shariah rules and principles and also with the specific fatwa, rulings andguidelines issued by us.

4. HSBC Amanah Malaysia Berhad’s management is responsible for ensuring that HSBC AmanahMalaysia Berhad conducts its business in accordance with Shariah rules and principles. It is ourresponsibility to form our independent opinion, based on our review of the operations of HSBCAmanah Malaysia Berhad.

5. We conducted our review which included pre and post examination, on a test basis, products andbranches, the relevant documents and procedures adopted by HSBC Amanah Malaysia Berhad.

6. In performing our duties, we had obtained all the information and explanations which we consideredindispensable in order to provide us with satisfactory evidences to arrive at fair decisions andreasonable justifications that HSBC Amanah Malaysia Berhad has complied with Shariahrequirement and has not violated the Shariah rules and principles.

On that note, we, being the members of the Shariah Committee of HSBC Amanah Malaysia Berhad, dohereby confirm that in our opinion:-

a) the contracts, transactions, dealings entered into by HSBC Amanah Malaysia Berhad during the yearended 31 December 2009 have been reviewed by us and are in compliance with Shariah rules andprinciples; and

b) the calculation of zakat is in compliance with Shariah rules and principles.

HSBC AMANAH MALAYSIA BERHAD(Company No. 807705-30


SHARIAH COMMITTEE'S REPORT (continued)

We pray to Allah the Almighty to grant us success and the path of straight forwardness.

Wassalamu `Alaikum Warahmatullahi Wabarakatuh

Dr. Younes Sow

Dr\Rusni H —

Khairul Anuar AhmadChairman

Mem^e

MemberShariah Committee

Shariah Committee

Shariah Committee


38

KPMG

KPMG (Firm No. AF 0758)

Telephone +60 (3) 7721 3388Chartered Accountants

Fax

+60 (3) 7721 3399Level 10, KPMG Tower

Internet

www.kpmg.com.my8, First Avenue, Bandar Utama47800 Petaling JayaSelangor Darul Ehsan, Malaysia

INDEPENDENT AUDITORS' REPORTTO THE MEMBERS OF HSBC AMANAH MALAYSIA BERHAD

Report on the Financial Statements

We have audited the financial statements of HSBC Amanah Malaysia Berhad, which comprise the balancesheet as at 31 December 2009, and the income statement, statement of changes in equity and cash flowstatement for the year then ended, and a summary of significant accounting policies and other explanatorynotes, as set out on pages 41 to 81.

Directors' Responsibility for the Financial Statements

The Directors of the Bank are responsible for the preparation and fair presentation of these financialstatements in accordance with the Companies Act, 1965 and Financial Reporting Standards in Malaysia asmodified by Bank Negara Malaysia Guidelines. This responsibility includes: designing, implementing andmaintaining internal control relevant to the preparation and fair presentation of financial statements that arefree from material misstatement, whether due to fraud or error; selecting and applying appropriate accountingpolicies; and making accounting estimates that are reasonable in the circumstances.

Auditors' Responsibility

Our responsibility is to express an opinion on these financial statements based on our audit. We conductedour audit in accordance with approved standards on auditing in Malaysia. Those standards require that wecomply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether thefinancial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in thefinancial statements. The procedures selected depend on our judgement, including the assessment of risks ofmaterial misstatement of the financial statements, whether due to fraud or error. In making those riskassessments, we consider internal control relevant to the Bank's preparation and fair presentation of thefinancial statements in order to design audit procedures that are appropriate in the circumstances, but not forthe purpose of expressing an opinion on the effectiveness of the Bank's internal control. An audit alsoincludes evaluating the appropriateness of accounting policies used and the reasonableness of accountingestimates made by the Directors, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for ouraudit opinion.

Opinion

In our opinion, the financial statements have been properly drawn up in accordance with the Companies Act,1965 and Financial Reporting Standards in Malaysia as modified by Bank Negara Malaysia Guidelines so asto give a true and fair view of the financial position of the Bank as of 31 December 2009 and of its financialperformance and cash flows for the year then ended.

39KPMG, a partnership established under Malaysian law and amember firm of the KPMG network of independent member firmsaffiliated with KPMG International, a Swiss cooperative.

KPMG

Independent Auditors ' Report (continued)

Report on Other Legal and Regulatory Requirements

In accordance with the requirements of the Companies Act, 1965 in Malaysia, we also report that in ouropinion the accounting and other records and the registers required by the Act to be kept by the Bank havebeen properly kept in accordance with the provisions of the Act.

Other Matters

This report is made solely to the members of the Bank, as a body, in accordance with Section 174 of theCompanies Act, 1965 in Malaysia and for no other purpose. We do not assume responsibility to any otherperson for the content of this report.

Jc''u.,

1/-1KPMGFirm Number: AF 0758Chartered Accountants

Date: 2 February 2010

Petaling Jaya

Foong Mun KongApproval Number: 2613/12/10(J)Chartered Accountant

40

31 Dec 2009 31 Dec 2008Note RM'000 RM'000

AssetsCash and short-term funds 4 687,308 1,009,083Securities held for trading 5 127,386 267,738Securities available for sale 6 384,220 565,561Financing and advances 7 3,164,973 2,927,031Other assets 9 376,653 122,416Statutory deposits with Bank Negara Malaysia 10 28,529 72,529Equipment 11 7,500 2,483Intangible assets 12 2,223 1,364Deferred tax assets 13 13,884 15,203

Total Assets 4,792,676 4,983,408

LiabilitiesDeposits from customers 14 2,472,411 3,244,341Deposits and placements of banks

and other financial institutions 15 1,510,907 969,295Bills and acceptances payable 3,298 1,053Other liabilities 16 61,629 84,837Provision for taxation and zakat 17 3,787 70

Total Liabilities 4,052,032 4,299,596

Shareholders' EquityShare capital 18 50,000 50,000Reserves 19 690,644 633,812

Total Shareholders' Equity 740,644 683,812

Total Liabilities and Shareholders' Equity 4,792,676 4,983,408

Commitments and Contingencies 32 1,680,000 1,675,975

The accompanying notes form an integral part of the financial statements.



BALANCE SHEET AS AT 31 DECEMBER 2009

The financial statements were approved and authorised for issue by the Board of Directors on 2 February 2010.

41

From26 Feb 2008

(incorporation)to

31 Dec 2009 31 Dec 2008Note RM'000 RM'000

Income derived from investment ofdepositors' funds and others 20 248,760 112,622

Income derived from investment ofshareholders' funds 21 75,167 25,749

Allowance for losses on financing 22 (47,440) (15,447)

Total distributable income 276,487 122,924

Income attributable to depositors 23 (75,315) (50,242)

Total net income 201,172 72,682

Personnel expenses 24 (15,849) (5,398)Other overheads and expenditures 25 (107,895) (35,420)

Profit before taxation and zakat 77,428 31,864

Taxation 27 (19,892) (9,073)Zakat (50) (70)

Net profit for the financial year/ period 57,486 22,721

Earnings per RM0.50 ordinary share- basic 28 57.5 sen 54.0 sen




INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2009

42

DistributableAvailable-

Share Share Statutory for-sale Retained Totalcapital premium reserve reserve profits

RM'000 RM'000 RM'000 RM'000 RM'000 RM'0002008At date of incorporation * - - - - -Issue of shares during the period 50,000 610,000 - - - 660,000Net unrealised gain on revaluation of

securities available for sale, net of tax - - - 1,091 - 1,091Net profit for the financial period - - - - 22,721 22,721Transfer to Statutory Reserve (note) - - 11,361 - (11,361) -Balance as at 31 December 2008 50,000 610,000 11,361 1,091 11,360 683,812

* At date of incorporation, two ordinary shares were issued at RM0.50 each.

2009Balance as at 1 January 2009 50,000 610,000 11,361 1,091 11,360 683,812Net unrealised losses on revaluation of

securities available for sale, net of tax - - - (654) - (654)Net profit for the year - - - - 57,486 57,486Transfer to Statutory Reserve (note) - - 28,743 - (28,743) -Balance as at 31 December 2009 50,000 610,000 40,104 437 40,103 740,644

Note:


Non-distributable



STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2009

Pursuant to Section 15(1) of the Islamic Banking Act, 1983, the Bank has transferred 50% of its net profit after taxation and zakat to the statutory reserve fund.

43

From26 Feb 2008

(incorporation)to

31 Dec 2009 31 Dec 2008RM'000 RM'000

Cash Flows from Operating ActivitiesProfit before taxation and zakat 77,428 31,864Adjustments for :

Depreciation of equipment 1,553 137Amortisation of intangible assets 687 380Net loss on disposal of equipment (56) -

Operating profit before changes in operating assets and liabilities 79,612 32,381

Decrease/ (Increase) in operating assetsSecurities held for trading 140,352 (267,738)Financing and advances (237,942) 230,571Other assets (255,487) (51,221)Statutory deposits with Bank Negara Malaysia 44,000 28,371

(Decrease)/ Increase in operating liabilitiesDeposits from customers (771,930) (1,814,276)Deposits and placements of banks and other financial institutions 541,612 836,048Bills and acceptances payable 2,245 1,053Other liabilities (23,208) (913,352)

Net cash used in operating activities before income tax (480,746) (1,918,163)Taxation paid (13,419) (10,000)

Net cash used in operating activities (494,165) (1,928,163)

Cash Flows from Investing ActivitiesPurchase of equipment (6,743) (2,271)Purchase of intangible assets (1,546) (1,635)Proceeds from disposal of equipment 229 -Securities available for sale 180,450 82,103

Net cash generated from investing activities 172,390 78,197

Cash Flows from Financing ActivitiesIssuance of ordinary shares - 660,000Payment for net assets vested from HSBC Bank Malaysia Berhad - (659,400)

Net cash generated from financing activities - 600

Net decrease in Cash and Cash Equivalents (321,775) (1,849,366)Cash and Cash Equivalents at beginning of the year /

vested over from HSBC Bank Malaysia Berhad 1,009,083 2,858,449Cash and Cash Equivalents at end of the year/ financial period 687,308 1,009,083

Analysis of Cash and Cash EquivalentsCash and short-term funds 687,308 1,009,083


CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2009

(Incorporated in Malaysia)(Company No. 807705-X)

HSBC AMANAH MALAYSIA BERHAD

44

45



NOTES TO THE FINANCIAL STATEMENTS AS AT 31 DECEMBER 2009

1 General Information

HSBC Amanah Malaysia Berhad (“the Bank”) is a licensed Islamic Bank under the Islamic BankingAct, 1983. The Bank was incorporated on 26 February 2008 and domiciled in Malaysia. The registeredoffice of the Bank is at No. 2, Leboh Ampang, 50100 Kuala Lumpur.

The immediate holding company of the Bank is HSBC Bank Malaysia Berhad (“HSBC Bank”), alicensed bank incorporated in Malaysia.

The penultimate and ultimate holding companies of the Bank are The Hongkong and Shanghai BankingCorporation Limited, a company incorporated in Hong Kong, and HSBC Holdings plc, a companyincorporated in England, respectively.

2 Basis of Preparation

(a) Statement of compliance

The financial statements of the Bank have been prepared in accordance with the provisions of theCompanies Act, 1965, Financial Reporting Standards (“FRS”) as modified by Bank Negara Malaysia’s(“BNM”) guidelines on Financial Reporting for Licensed Islamic Banks (BNM/GP8-i) and theprinciples of Shariah.

The significant accounting policies adopted are consistent with those of the audited financial statementsfor the financial period ended 31 December 2008.

The Bank has not applied the following accounting standards, amendments and interpretations that havebeen issued by the Malaysian Accounting Standards Board (MASB) during the financial year but arenot yet effective for the Bank.

FRS/ Interpretations Effective date- Amendments to FRS 1, First Time Adoption of Financial Reporting 1 January 2010

Standards and FRS 127, Consolidated and Separate FinancialStatements: Cost of an Investment in a Subsidiary, JointlyControlled Entity or Associate

- Amendments to FRS 2, Share-based Payment: Vesting Conditions 1 January 2010and Cancellations

- FRS 4, Insurance Contracts 1 January 2010- FRS 7, Financial Instruments: Disclosures 1 January 2010- FRS 8, Operating Segments 1 July 2009- FRS 101, Presentation of Financial Statements 1 January 2010- FRS 123, Borrowing Costs 1 January 2010- FRS 132, Financial Instruments: Presentation and FRS 101, 1 January 2010

Presentation of Financial Statements – Puttable FinancialInstruments and Obligations Arising on Liquidation

- FRS 139, Financial Instruments: Recognition and Measurement 1 January 2010- Amendments to FRS 139, Financial Instruments: Recognition and 1 January 2010

Measurement, FRS 7, Financial Instruments: Disclosures andIC Interpretations 9, Reassessment of Embedded Derivatives

- Improvements to FRSs (2009) 1 January 2010- IC Interpretations 9, Reassessment of Embedded Derivatives 1 January 2010- IC Interpretations 10, Interim Financial Reporting and Impairment 1 January 2010- IC Interpretations 11, FRS 2 – Group and Treasury Share Transactions 1 January 2010

HSBC Amanah Malaysia Berhad807705-X

46

2 Basis of Preparation (continued)

(a) Statement of compliance (continued)

FRS/ Interpretations Effective date- IC Interpretations 13, Customer Loyalty Programmes 1 January 2010- IC Interpretations 14, FRS 119 – The Limit on a Defined Benefit 1 January 2010

Asset, Minimum Funding Requirements and Their Interaction- TR i-3, Presentation of Financial Statements of Islamic Financial Institutions 1 January 2010

The Bank plans to adopt the abovementioned standards, amendments, interpretations and technicalrelease from the annual period beginning on 1 January 2010, except for FRS 4, FRS 8 and ICInterpretation 14 which are not applicable to the Bank. The impact of applying FRS 7 and FRS 139 onthe financial statements upon first adoption as required by FRS 108.30(b), Accounting Policies,Changes in Accounting Estimates and Errors is not disclosed by virtue of the exemptions given in therespective FRSs. The initial application of the other applicable standards, amendments andinterpretations is not expected to have any material impact on the financial statements of the Bank.

Subsequent to the end of the financial year, on 8 January 2010, the MASB issued the following revisedFRSs, new IC Interpretations and Amendments to FRSs:

FRS/ Interpretations Effective date- FRS 1, First-time Adoption of Financial Reporting Standards 1 July 2010- FRS 3, Business Combinations 1 July 2010- FRS 127, Consolidated and Separate Financial Statements 1 July 2010- IC Interpretation 12, Service Concession Arrangements 1 July 2010- IC Interpretation 15, Agreements for the Construction of Real Estate 1 July 2010- IC Interpretation 16, Hedges of a Net Investment in a Foreign Operation 1 July 2010- IC Interpretation 17, Distribution of Non-cash Assets to Owners 1 July 2010- Amendments to FRS 2, Share-based Payment 1 July 2010- Amendments to FRS 5, Non-current Assets Held for Sale and Discontinued 1 July 2010

Operations- Amendments to FRS 138, Intangible Assets 1 July 2010- Amendments to FRS 139, Financial Instruments: Recognition and 1 January 2010

Measurement- Amendments to IC Interpretation 9, Reassessment of Embedded Derivatives 1 July 2010

The new requirements above take effect for the annual periods beginning on or after 1 July 2010, exceptfor Amendments to FRS 139 which applies for annual periods beginning on or after 1 January 2010. ICInterpretations 12 and 15 are not expected to have any impact on the Financial Statements of the Bankas they are not relevant to the operations of the Bank. The adoption of the other revised FRSs,amendments to FRSs and IC Interpretations is not expected to have a significant financial impact on theBank, other than the Amendments to FRS 139.

The Amendments to FRS 139 include an additional transitional arrangement for entities in the financialservices sector, whereby BNM may prescribe the use of an alternative basis for collective assessment ofimpairment for banking institutions. This transitional arrangement is prescribed in BNM guidelines onClassification and Impairment Provisions for Loans/ Financing issued on 8 January 2010, wherebybanking institutions are required to maintain collective impairment provisions of at least 1.5% of totaloutstanding financing, net of individual impairment provision. Subject to the prior written approvalfrom BNM, banking institutions are allowed to maintain a lower collective impairment assessmentprovision.


47

2 Basis of Preparation (continued)

(b) Basis of measurement

The financial statements of the Bank have been prepared on the historical cost basis, except for thefollowing assets and liabilities as explained in their respective accounting policy notes: Held-for-trading securities Available-for-sale securities

(c) Functional and presentation currency

The financial statements are presented in Ringgit Malaysia (RM), which is the Bank’s functionalcurrency. All financial information presented in RM has been rounded to the nearest thousand, unlessotherwise stated.

(d) Use of estimates and judgements

The preparation of financial statements requires management to make judgements, estimates andassumptions that affect the application of accounting policies and the reported amounts of assets,liabilities, income and expenses. Actual results may differ from these estimates.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accountingestimates are recognised in the period in which the estimate is revised and in any future periodsaffected.

Significant areas of estimation uncertainty and critical judgements used in applying accounting policiesthat have significant effect on the amount recognized in the financial statements include the following:Estimation of recoverable amount based on the discounted cash flow methodology for impaired

financing Fair value estimation of financial assets and liabilities

3 Significant Accounting Policies

The accounting policies set out below have been applied consistently by the Bank, unless otherwise stated.

(a) Income Recognition

i) Finance income on Al-Ijarah Thumma Al-Bai (“AITAB”) is recognised using the “sum-of-digits”method over the lease terms, whilst for financing under other types of Shariah concept, the income isrecognised on accrual basis applying the effective profit method in accordance with the principles ofShariah.

Where an Islamic financing account becomes non-performing, the recognition of income fromfinancing is suspended until it is realised on a cash basis. Customers’ accounts are deemed to be non-performing when repayments are in arrears for more than ninety (90) days or when there is objectiveevidence that impairment of a financing has occurred.

ii) Income from securities portfolio and placements which includes coupons earned, accrued discountand amortisation of premium of these securities is recognised on an accrual basis applying theeffective profit method in accordance with the principles of Shariah.


48

3 Significant Accounting Policies (continued)

(a) Income Recognition (continued)

iii) Fee and commissions income are recognised as follow:

If the income is earned on the execution of a significant act, it is recognised as revenue whenthe significant act has been completed (for example, fees arising from negotiating, orparticipating in the negotiation of, a transaction for a third party, such as the arrangement forthe acquisition of shares or other securities);

If the income is earned as services are provided, it is recognised as revenue as the servicesare provided (for example, portfolio and other management advisory and service fee); and

If the income is an integral part of the effective profit rate of a financial instrument, it isrecognised as an adjustment to the effective profit rate (for example, financing commitmentfees) and recorded in ‘finance income’.

(b) Financing and Related Expense Recognition

Finance cost and income attributable on deposits and borrowings of the Bank are amortised using theeffective profit method in accordance with the principles of Shariah.

(c) Cash and Cash Equivalents

For the purpose of the cash flow statement, cash and cash equivalents comprise cash and bank balances,and short term deposits and placements maturing within one month that are readily convertible to knownamounts of cash and which are subject to an insignificant risk of change in value.

(d) Securities

The holdings of securities portfolio of the Bank are classified based on the following categories andvaluation methods:

i Held-for-tradingSecurities are classified as held-for-trading if acquired principally for the purpose of selling orrepurchasing it in the near term or are part of a portfolio of identified securities that are managedtogether and for which there is evidence of a recent actual pattern of short-term profit-taking.Securities classified as held-for-trading are stated at fair value and any gains or losses from achange in the fair value, together with related profit earned, are recognised in the income statement.

ii Held-to-maturityHeld-to-maturity investments are securities with fixed or determinable payments and fixedmaturities that the Bank has the positive intention and ability to hold until maturity. Theseinvestments are initially recorded at fair value plus any directly attributable transaction costs, andare subsequently measured at amortised cost using the effective profit rate method, less anyimpairment losses.


49


(d) Securities (continued)

iii Available-for-saleAvailable-for-sale securities are securities that are not classified as held-for-trading or held-to-maturity investments; and measured at fair value. Investments in equity instruments that do nothave a quoted market price in an active market and whose fair value cannot be reliably measuredare stated at cost. Changes in the fair value are recognised directly in equity, net of applicabletaxes, until the securities are either sold or impaired. On the sale of available-for-sale securities,cumulative gains or losses previously recognised in equity are recognised through incomestatement. Profit earned from the available-for-sale securities is recognised in the income statementusing the effective profit method, calculated over the asset’s expected life. Where dated available-for-sale securities have been purchased at a premium or discount, these premiums and discounts areincluded in the calculation of the effective profit rate. Dividends on available-for-sale equityinstruments are recognised in the income statement when the rights to receive payment isestablished.

An assessment is made at each balance sheet date as to whether there is any objective evidence ofimpairment, being circumstances where an adverse impact on estimated future cash flows of thesecurities or group of securities can be reliably measured.

If an available-for-sale security is determined to be impaired, the cumulative loss that had beenrecognised directly in equity shall be removed from equity and recognised in the income statement.The amount of cumulative loss is measured as the difference between the acquisition cost (net ofany principal repayment and amortisation) and the current fair value, less any impairment loss onthat security previously recognised in the income statement. If, in subsequent period, the fair valueof a debt instrument classified as available-for-sale increases and the increase can be objectivelyrelated to an event occurring after the impairment loss was recognised in the income statement, thatportion of impairment loss is reversed through the income statement. Impairment losses recognisedin the income statement on equity instruments are not reversed through the income statement.

If an available-for-sale security carried at cost is determined to be impaired, the amount ofimpairment loss is measured as the difference between the carrying amount of the securities and thepresent value of estimated future cash flows discounted at the current market rate of return forsimilar securities. Such impairment losses shall not be reversed.

For financing converted into debt or equity instruments classified as available-for-sale, theseinstruments are measured at fair value. The difference between the net book value of therestructured financing (outstanding amount of financing net of specific allowance) and the fairvalue of the debt or equity instruments will be gain or loss from the conversion scheme.

Where the net book value of the restructured financing is higher than the fair value of the debtor equity instruments, the loss shall be recognised in income statement in the current reportingperiod.

Where the fair value of the debt or equity instruments is higher than the net book value of therestructured financing, the gain from the conversion exercise is transferred to the “impairmentloss” account, which would be netted off from the “Securities” account in the balance sheet.


50


(e) Financing and Advances

Financing and advances are recognised when cash is disbursed to customers. They are initially recordedat fair value plus any directly attributable transaction costs and are subsequently measured at amortisedcost using the effective profit method, less impairment losses.

(f) Allowance for Losses on Financing

The Bank's allowance for non-performing financing is in conformity with the requirements of BankNegara Malaysia's "Guidelines on Classification of Non-Performing Loans and Provision forSubstandard, Bad and Doubtful Debts, BNM/GP3". Accounts are classified as non-performing whenrepayments are in arrears for more than ninety (90) days or when there is objective evidence thatimpairment of a financing has occurred.

Specific allowances are made for doubtful financing which have been individually reviewed andspecifically identified as bad or doubtful.

A general allowance based on a percentage of the financing portfolio is also made to cover possiblelosses which are not specifically identified.

Financing (and related allowances) are normally written off, either partially or in full, when there is norealistic prospect of recovery of these amounts and, for collateralised financing, when the proceeds fromthe realisation of security have been received.

Impaired financing are measured at their estimated recoverable amount based on the discounted cashflow methodology. Specific allowances are provided if the recoverable amount (present value ofestimated future cash flows discounted at original effective profit rate) is lower than the net book valueof the financing (outstanding amount of financing net of specific allowance). The expected cash flowsare based on projections of liquidation proceeds, realisation of assets or estimates of future operatingcash flows.

If, in a subsequent period, the amount of an impairment loss decreases and the decrease can be relatedobjectively to an event occurring after the impairment was recognised, the previously recognisedimpairment loss is reversed to the extent it is now excessive by reducing the financing impairmentallowance account. The amount of any reversal is recognised in the income statement.

In addition, the Bank makes additional specific allowance as follows:

i fifty per cent (50%) of the secured portion of non-performing financing which are in arrears formore than five (5) years but less than seven (7) years; and

ii hundred per cent (100%) of the secured portion of non-performing financing which are in arrearsfor more than seven (7) years.


51


(g) Equipment

Equipment is stated at cost less accumulated depreciation and any accumulated impairment losses.

Depreciation of equipment is calculated to write off the cost of the equipment on a straight line basisover the expected useful lives of the assets concerned. The principal annual rates are:

Office equipment, fixtures and fittings 5 to 10 yearsComputer equipment 3 to 5 yearsMotor vehicles 5 years

Additions to equipment costing RM1,000 and under are fully depreciated in the year of purchase; forthose assets costing more than RM1,000, depreciation is provided at the above rates.

(h) Intangible Assets

Intangible assets represent computer software and are stated at cost less amortisation and anyaccumulated impairment losses. Amortisation of intangible assets is calculated to write off the cost ofthe intangible assets on a straight line basis over the expected useful lives of 3 to 5 years.

(i) Bills and Acceptances Payable

Bills and acceptances payable represent the Bank’s own bills and acceptances rediscounted andoutstanding in the market.

(j) Taxation and Deferred Taxation

Tax on the profit or loss for the financial year comprises current tax and deferred tax. Income tax isrecognised in the income statement except to the extent that it relates to items recognised directly inequity, in which case it is recognised in equity.

Current tax expense is the expected tax payable on the taxable income for the financial year, calculatedusing tax rates enacted or substantially enacted by the balance sheet date.

Deferred tax is provided, using the liability method, on temporary differences arising between the taxbases of assets and liabilities and their carrying amounts in the balance sheet. Temporary differences arenot recognised for the initial recognition of assets or liabilities that at the time of the transaction affectsneither accounting nor taxable profit. The amount of deferred tax provided is based on the expectedmanner or realisation of settlement of the carrying amount of assets and liabilities, using tax ratesenacted or substantially enacted by the balance sheet date.

A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will beavailable against which the asset can be utilised.

Deferred tax relating to fair value re-measurement of available-for-sale investments, which is charged orcredited directly to equity, is also credited or charged directly to equity and is subsequently recognisedin the income statement when the deferred fair value gain or loss is recognised in the income statement.


52


(k) Derivatives

Derivatives are recognised initially, and are subsequently re-measured, at fair value. Fair values areobtained from quoted market prices in active markets, or by using valuation techniques, including recentmarket data, where an active market does not exist. Valuation techniques include discounted cash flowmodels and option pricing models as appropriate. All derivatives are classified as assets when their fairvalue is positive, or as liabilities when their fair value is negative. All gains and losses from changes inthe fair value of derivatives held for trading are recognised in the income statement.

(l) Currency Translations

Individual foreign currency assets and liabilities are stated in the balance sheet at spot rates of exchangewhich closely approximate those ruling at the balance sheet date. Income statement items are translatedat rates prevailing on transaction dates. Exchange gains and losses are recognised in the incomestatement in the year they arise.

(m) Provisions

A provision is recognised when it is probable that an outflow of resources embodying economic benefitswill be required to settle a present legal or constructive obligation as a result of a past event and areliable estimate can be made of the amount of the obligation.

(n) Profit Equalisation Reserves (‘PER’)

PER refers to the amount appropriated out of total gross income in order to maintain an acceptable levelof return to depositors as stipulated by Bank Negara Malaysia’s “The Framework of Rate of Return”.PER is a provision shared by both the depositors and the Bank, and is deducted from the Bank’s totalgross income. Maximum monthly provision of PER is up to 15% of the gross income and can beaccumulated up to a maximum of 30% of the Bank’s capital fund.

(o) Zakat

This represents business zakat. It is an obligatory amount payable by the Bank to comply with theprinciples of Shariah. Zakat provision is calculated at 2.5% on the profits paid out to Muslim investorson their general investment accounts and savings accounts.

(p) Employee Benefits

i Short term employee benefitsWages, salaries, bonuses, paid annual and sick leave, social security contributions and non-monetary benefits are accrued in the period in which the associated services are rendered by theemployees of the Bank.

ii Defined contribution planAs required by law, companies in Malaysia make contributions to the Employees Provident Fund(“EPF”). Such contributions are recognised as an expense in the income statement as incurred.


4 Cash and short-term funds31 Dec 2009 31 Dec 2008

RM'000 RM'000

Cash and balances with banks and other financial institutions 11,046 37,109Money at call and interbank placements with

remaining maturity not exceeding one month 676,262 971,974687,308 1,009,083

5 Securities held for trading31 Dec 2009 31 Dec 2008

RM'000 RM'000Money market instruments:

Bank Negara Malaysia Islamic bills - 161,351Malaysian Government Islamic bonds 88,074 106,387Malaysian Government treasury bills 39,312 -

127,386 267,738

6 Securities available for sale31 Dec 2009 31 Dec 2008

RM'000 RM'000Money market instruments:

Malaysian Government treasury bills 89,791 9,318Malaysian Government Islamic bonds 106,341 355,138Khazanah bonds 47,946 51,096Negotiable instruments of deposit 70,005 29,991

314,083 445,543Unquoted securities:

Private debt securities 70,137 120,018

384,220 565,561

The maturity structure of money market instruments held as securitiesavailable for sale is as follows:

Maturing within one year 207,742 399,331One year to three years 106,341 46,212

314,083 445,543

53


7 Financing and advances(i) By type

31 Dec 2009 31 Dec 2008RM'000 RM'000

Cash line 4,937 813Term financing

House financing 84,073 60,499Hire purchase receivables 222,434 280,074Lease receivables 276 302Other term financing 2,300,535 1,957,882

Claims on customers under acceptance credits 559,753 821,410Staff financing 2,895 1,298Credit/ charge cards 168,429 11,491

3,343,332 3,133,769Less: Unearned income (90,379) (133,002)

3,252,953 3,000,767Less: Allowance for bad and doubtful financing:

General (52,597) (52,597)Specific (35,383) (21,139)

Total net financing and advances 3,164,973 2,927,031

(ii) By contract31 Dec 2009 31 Dec 2008

RM'000 RM'000

Bai Bithaman Ajil (deferred payment sale) 835,091 960,382Ijarah (lease) 250 262Ijarah Thumma Al-Bai (AITAB) (hire purchase) 201,537 250,745Murabahah (cost-plus) 840,687 692,905Musharakah (profit and loss sharing) 46,143 -Bai Al-Inah (sell and buy back) 1,048,312 913,274Bai Al-Dayn (sale of debt) 112,504 171,708Ujrah (fee-based) 168,041 10,538Qard (benevolent financing ) 388 953

3,252,953 3,000,767

(iii) By type of customer31 Dec 2009 31 Dec 2008

RM'000 RM'000

Domestic banking institutions 51,859 25,992Domestic business enterprises

Small medium enterprises 754,434 314,706Others 1,090,730 1,664,264

Individuals 1,273,215 988,565Other domestic entities 4,235 -Foreign entities 78,480 7,240

3,252,953 3,000,767

54


7 Financing and advances (continued)(iv) By profit rate sensitivity

31 Dec 2009 31 Dec 2008RM'000 RM'000

Fixed rateHouse financing 32,282 50,014Hire purchase receivables 201,537 250,745Other financing 2,407,117 2,638,901

Variable rateHouse financing 45,293 -Other financing 566,724 61,107

3,252,953 3,000,767

(v) By sector31 Dec 2009 31 Dec 2008

RM'000 RM'000

Agriculture, hunting, forestry and fishing 95,757 124,321Mining and quarrying 15,504 18,530Manufacturing 783,245 714,180Electricity, gas and water 7,502 17,360Construction 54,486 65,239Real estate 243,192 5,862Purchase of landed property:

Residential 77,981 50,030Non-residential 7,337 7,639

Wholesale & retail trade and restaurants & hotels 278,066 503,678Transport, storage and communication 140,760 211,030Finance, insurance and business services 237,593 275,125Purchase of securities 1,356 1,676Purchase of transport vehicles 507 -Consumption credit 1,201,483 942,280Others 108,184 63,817

3,252,953 3,000,767

(vi) By maturity structure31 Dec 2009 31 Dec 2008

RM'000 RM'000

Maturing within one year 1,617,013 1,314,704One year to three years 614,744 635,607Three years to five years 838,347 795,270Over five years 182,849 255,186

3,252,953 3,000,767

55


8 Non-performing financing (NPF)(i) Movements in non-performing financing and advances

31 Dec 2009 31 Dec 2008RM'000 RM'000

At beginning of year/ at date of incorporation 28,476 -Amount vested from HSBC Bank - 22,681Classified as non-performing during the year/ period 79,395 22,138Reclassified as performing (255) (194)Amount recovered (10,724) (3,428)Amount written off (49,088) (12,956)Other movements 7,649 235At end of year/ period 55,453 28,476Less: Specific allowance (35,383) (21,139)Net non-performing financing and advances 20,070 7,337

Ratio of net non-performing financing and advancesto net financing and advances 0.6% 0.3%

(ii) Movements in allowance for bad and doubtful financing31 Dec 2009 31 Dec 2008

RM'000 RM'000General allowanceAt beginning of year/ at date of incorporation 52,597 -Amount vested from HSBC Bank - 52,597Made during the year/ period - -At end of year/ period 52,597 52,597

As % of gross financing and advances less specific allowance 1.6% 1.8%

Specific allowance RM'000 RM'000At beginning of year/ at date of incorporation 21,139 -Amount vested from HSBC Bank - 16,884Allowance made during the year/ period 65,498 18,453Amount recovered (10,979) (1,558)Amount written off (47,924) (12,875)Other movement 7,649 235At end of year/ period 35,383 21,139

56


8 Non-performing financing (NPF)(iii) By sector

31 Dec 2009 31 Dec 2008RM'000 RM'000

Manufacturing 5,477 398Real estate 196 232Purchase of landed property:

Residential 1,168 1,110Non-residential 122 -

Wholesale & retail trade and restaurants & hotels 3,856 3,620Finance, insurance and business services 56 -Consumption credit 44,578 21,333Others - 1,783

55,453 28,476

9 Other assets31 Dec 2009 31 Dec 2008

RM'000 RM'000

Revaluation gain on equity related contracts (Note 32) 10,237 6,803Income receivable 2,872 5,735Amount due from holding company 356,775 103,049Other receivables, deposits and prepayments 6,769 6,829

376,653 122,416

10 Statutory deposits with Bank Negara Malaysia

The non-profit bearing statutory deposits are maintained with Bank Negara Malaysia in compliance with Section37(1)(c) of the Central Bank of Malaysia Act, 1958 (revised 1994), the amounts of which are determined at setpercentages of total eligible liabilities.

57


11 Equipment

Officeequipment,

fixtures and Computer Motor2009 fittings equipment vehicles Total

RM'000 RM'000 RM'000 RM'000Cost

Balance as at 1 January 2009 580 2,084 377 3,041Additions 5,305 1,438 - 6,743Disposals (87) - (377) (464)Written off (42) - - (42)Balance as at 31 December 2009 5,756 3,522 - 9,278

Accumulated depreciation

Balance as at 1 January 2009 279 60 219 558Charge for the year 860 662 31 1,553Disposals (41) - (250) (291)Written off (42) - - (42)Balance as at 31 December 2009 1,056 722 - 1,778

Net book value as at 31 December 2009 4,700 2,800 - 7,500

Officeequipment,

fixtures and Computer Motor2008 fittings equipment vehicles Total

RM'000 RM'000 RM'000 RM'000Cost

Amount vested from HSBC Bank 389 4 377 770Additions 191 2,080 - 2,271Balance as at 31 December 2008 580 2,084 377 3,041


Amount vested from HSBC Bank 229 4 188 421Charge for the period 50 56 31 137Balance as at 31 December 2008 279 60 219 558

Net book value as at 31 December 2008 301 2,024 158 2,483

58


12 Intangible assets

2009 Computer softwareRM'000

Cost

Balance as at 1 January 2009 4,321Additions 1,546Balance as at 31 December 2009 5,867


Balance as at 1 January 2009 2,957Charge for the year 687Balance as at 31 December 2009 3,644

Net book value as at 31 December 2009 2,223

2008 Computer softwareRM'000

Cost

Amount vested from HSBC Bank 2,686Additions 1,635Balance as at 31 December 2008 4,321


Amount vested from HSBC Bank 2,577Charge for the period 380Balance as at 31 December 2008 2,957

Net book value as at 31 December 2008 1,364

59


13 Deferred tax assets31 Dec 2009 31 Dec 2008

The amounts, determined after appropriate offsetting are as follows: RM'000 RM'000

Deferred tax assets 14,825 15,909Deferred tax liabilities (941) (706)

13,884 15,203

The recognised deferred tax assets and liabilities (before offsetting) are as follows:31 Dec 2009 31 Dec 2008

RM'000 RM'000Equipment

Capital allowances (784) (300)Available-for-sale reserve (146) (383)Allowances

General allowance 13,149 13,675Others 1,676 2,234

Lease receivables (11) (23)13,884 15,203

The movements in temporary differences during the year/ period are as follows:Recognised

in income Effect ofAs at statement change in Recognised As at

1 Jan 2009 (Note 27) tax rate in equity 31 Dec 20092009 RM'000 RM'000 RM'000 RM'000 RM'000Equipment

Capital allowances (300) (495) 11 - (784)Available-for-sale reserve (383) - - 237 (146)Allowances

General allowance 13,675 - (526) - 13,149Others 2,234 (472) (86) - 1,676

Lease receivables (23) 11 1 - (11)15,203 (956) (600) 237 13,884

RecognisedAmount in income Effect of

vested from statement change in Recognised As atHSBC Bank (Note 27) tax rate in equity 31 Dec 2008

2008 RM'000 RM'000 RM'000 RM'000 RM'000Equipment

Capital allowances - (300) - - (300)Available-for-sale reserve - - - (383) (383)Allowances

General allowance 13,675 - - - 13,675Others 2,234 - - - 2,234

Lease receivables - (23) - - (23)15,909 (323) - (383) 15,203

Deferred tax assets and liabilities are offset where there is a legally enforceable right to set-off current tax assetsagainst current tax liabilities.

60


14 Deposits from customers(i) By type of deposit

31 Dec 2009 31 Dec 2008RM'000 RM'000

Non-Mudharabah FundDemand deposits 128,276 67,195Savings deposits 508,146 441,799Fixed return investment deposits 7,017 -

643,439 508,994Mudharabah Fund

General investment deposits 1,628,130 2,508,818Others 200,842 226,529

2,472,411 3,244,341

The maturity structure of general investment deposits and fixed return investment deposits are as follows:

RM'000 RM'000

Due within six months 1,360,450 2,197,743Six months to one year 273,078 287,791One year to three years 461 23,164Three years to five years 1,158 120

1,635,147 2,508,818

(ii) By type of customer31 Dec 2009 31 Dec 2008

RM'000 RM'000

Government and statutory bodies 75,116 114,275Business enterprises 739,460 1,331,782Individuals 1,260,537 1,428,784Others 397,298 369,500

2,472,411 3,244,341

15 Deposits and placements of banks and other financial institutions31 Dec 2009 31 Dec 2008

RM'000 RM'000Mudharabah Fund

Licensed banks 1,401,291 969,295Other financial institutions 109,616 -

1,510,907 969,295

61


16 Other liabilities31 Dec 2009 31 Dec 2008

RM'000 RM'000

Revaluation loss on equity related contracts 10,237 6,803Profit payable 8,043 14,111Amounts due to holding company/ related companies 6,285 29,408Profit equalisation reserve 6,700 6,700Other creditors and accruals 30,364 27,815

61,629 84,837

Movement in profit equalisation reserve is as follows:RM'000 RM'000

At beginning and end of financial year/ period * 6,700 6,700

*

17 Provision for taxation and zakat31 Dec 2009 31 Dec 2008

RM'000 RM'000

Taxation 3,667 -Zakat 120 70

3,787 70

18 Share capital31 Dec 2009 31 Dec 2008

RM'000 RM'000Authorised:Ordinary shares of RM0.50 each 300,000 300,000

Issued and fully paid:Ordinary shares of RM0.50 each

At beginning of year/ date of incorporation 50,000 *Issued during the year/ financial period - 50,000At as 31 December 2009 50,000 50,000

* At date of incorporation (26 February 2008), two ordinary shares were issued at RM0.50 each.

The shareholders' portion of profit equalisation reserve as at end of the financial year/ period isRM1,703,000.00 (2008: RM1,300,000.00).

62


19 Reserves31 Dec 2009 31 Dec 2008

RM'000 RM'000Non-distributable

Share premium 610,000 610,000Statutory reserve 40,104 11,361Available-for-sale reserve 437 1,091

650,541 622,452Distributable

Retained profits 40,103 11,360

Total reserves 690,644 633,812

20 Income derived from investment of depositors' funds and othersFrom

26 Feb 2008(incorporation)

to31 Dec 2009 31 Dec 2008

RM'000 RM'000Income derived from investment of:

(i) general investment deposits 185,730 89,535(ii) specific investment deposits 20,024 8,455(iii) other deposits 43,006 14,632

248,760 112,622

(i) Income derived from investment of general investment depositsFrom


to31 Dec 2009 31 Dec 2008

RM'000 RM'000Finance income and hibah:Financing and advances 166,734 65,898Money at call and deposit with financial institutions 15,406 18,507

182,140 84,405

Other operating incomeNet gains from dealing in foreign currency 614 714Net gains from sale of held-for-trading securities and

other financial instruments 416 3,160Net unrealised gains from revaluation of trading securities 868 691Net profit earned from trading securities 1,692 565

3,590 5,130

185,730 89,535

The statutory reserve is maintained in compliance with Section 15 (1) of the Islamic Banking Act, 1983 and isnot distributable as cash dividends.

63


20 Income derived from investment of depositors' funds and others (continued)

(ii) Income derived from investment of specific investment depositsFrom


to31 Dec 2009 31 Dec 2008

RM'000 RM'000Finance income and hibah:Financing and advances 2,544 -Available-for-sale securities 10,605 7,115Accretion of discount less amortisation of premium 4,950 1,340

18,099 8,455

Other operating incomeNet gains from dealing in foreign currency 2,201 -Net loss from sale of held-for-trading securities and

other financial instruments (2,062) -Net unrealised loss from revaluation of trading securities (1,134) -Net profit earned from trading securities 2,920 -

1,925 -

20,024 8,455

(iii) Income derived from investment of other depositsFrom


to31 Dec 2009 31 Dec 2008


42,312 13,794

Other operating incomeNet gains from dealing in foreign currency 119 117Net gains from sale of held-for-trading securities and

other financial instruments 80 516Net unrealised gains from revaluation of trading securities 168 113Net profit earned from trading securities 327 92

694 838

43,006 14,632

64


21 Income derived from investment of shareholders' fundFrom


to31 Dec 2009 31 Dec 2008


48,457 17,886

Other operating incomeFees and commissions 23,914 6,727Net gains from dealing in foreign currency 143 151Net gains from sale of held-for-trading securities and

other financial instruments 97 670Net unrealised gains from revaluation of trading securities 203 146Net profit earned from trading securities 395 120Shared-service fees from holding company 1,746 -Net gains on disposal of equipment 56 -Other income 156 49

26,710 7,863

75,167 25,749

The above fees and commissions were derived from the following major contributors:Service charges and fees 10,943 5,138Cards 8,546 461Agency fees 2,519 770

65


22 Allowance for losses on financingFrom


to31 Dec 2009 31 Dec 2008

RM'000 RM'000Allowance for bad and doubtful financing:(a) Specific allowance

- Provided 65,498 18,453- Written back (10,979) (1,558)

(b) General allowance- Provided - -- Written back - -

Bad debts on financing- Recovered (8,244) (1,596)- Written off 1,165 148

47,440 15,447

23 Income attributable to depositorsFrom


to31 Dec 2009 31 Dec 2008

RM'000 RM'000Deposits from customers

- Mudharabah Fund 46,684 35,188- Non-Mudharabah Fund 3,644 2,994

Deposits and placements of banks and other financial institutions- Mudharabah Fund 24,732 12,060

Others 255 -75,315 50,242

66


24 Personnel expensesFrom


to31 Dec 2009 31 Dec 2008

RM'000 RM'000

Salaries, allowances and bonuses 12,397 4,214Employees Provident Fund contributions 1,882 669Other staff related costs 1,570 515

15,849 5,398

25 Other overheads and expendituresFrom


to31 Dec 2009 31 Dec 2008

RM'000 RM'000Promotion and marketing related expenses

Advertising and promotion 15,762 2,742

Establishment related expensesDepreciation of equipment 1,553 137Amortisation of intangible assets 687 380Information technology costs 352 86Hire of Equipment 116 4Rental of premises 4,087 505Others 924 155

7,719 1,267

General administrative expensesShared-service fees to immediate holding company 78,848 25,785Auditors' fees

Statutory audit 50 50Non-audit services 38 10

Professional fees 1,266 2,754Others 4,212 2,812

84,414 31,411

107,895 35,420

67


26 Shariah committee's remunerationFrom


to31 Dec 2009 31 Dec 2008

RM'000 RM'000

Shariah committee members 109 34

27 TaxationFrom


to31 Dec 2009 31 Dec 2008

RM'000 RM'000Tax expense for the financial year/ period:

Malaysian income tax 18,336 8,750

Deferred tax:Origination and reversal of temporary differences 956 323Effect of change in tax rate 600 -

19,892 9,073

RM'000 RM'000

Profit before taxation and zakat 77,428 31,864

Taxation at Malaysian tax rate of 25% (2008: 26%) 19,357 8,285Non-deductible expenses 327 804Tax exempt income (392) (16)Effect of change in tax rate * 600 -

Tax expense for the period 19,892 9,073

*

28 Earnings per share (EPS)

A numerical reconciliation between tax expense and the product of accounting profit multiplied by theapplicable tax rate is as follows:

The earnings per ordinary share have been calculated based on net profit and 100,000,000 (2008: weightedaverage of 42,071,199) number of ordinary shares of RM0.50 each in issue during the financial year.

The corporate tax rates are 26% for year of assessment 2008 and 25% for the subsequent years ofassessment. Consequently, deferred tax assets and liabilities are measured using these tax rates.

68


29 Significant related party transactions and balances

Parties are considered to be related if : -a.

b. they are under common control by another party

The related parties of the Bank comprise: -i

ii subsidiary and associated companies of the Bank's parent companies,iii

iv

(a)

Other OtherParent related Parent related

companies companies companies companiesRM'000 RM'000 RM'000 RM'000

IncomeProfit derived from intercompany placements - - 49 -Profit derived from current account - 1 - -Fees and commission - 2,099 - 519Other income 1,746 - - -

1,746 2,100 49 519

ExpenditureProfit attributable to intercompany deposits 24,331 1,115 11,821 533Fees and commission - 3 - -Operating expenses 78,876 4,494 25,785 2,950

103,207 5,612 37,606 3,483

Amount due fromCurrent account balances - 4,190 - 27,563Other assets 356,775 - 103,049 -

356,775 4,190 103,049 27,563

Amount due toIntercompany deposits 1,401,291 339,264 969,295 206,107Current account balances - 2,872 - 3,330Other liabilities 1,747 4,538 26,604 2,804

1,403,038 346,674 995,899 212,241

26 Feb 2008 (incorporation)From

the Bank's immediate, penultimate and ultimate holding companies (hereinafter collectively referred to as"parent companies"),

to 31 Dec 200831 Dec 2009

one party has the ability to control the other party or exercise significant influence over the other party inmaking financial or operational decisions, or

key management personnel who are defined as those person having authority and responsibility for planning,directing and controlling the activities of the Bank, being the members of the Board of Directors of HSBCAmanah Malaysia Berhad, andthe close family members of key management personnel.

The significant transactions and outstanding balances of the Bank with parent companies and other relatedcompanies are as follows:

All transactions between the Bank and its related parties are made in the ordinary course of business and onsubstantially the same terms, including profit rates, as comparable to transactions with a third party.

Total financing due by key management personnel of the Bank as at 31 December 2009 is RM95,927(2008: RM8,116).

69


29 Significant related party transactions and balances (continued)

(b) Key Management Personnel Compensation

From26 Feb 2008

(incorporation)to

31 Dec 2009 31 Dec 2008RM'000 RM'000

Executive DirectorShort-term employee benefits

Salary, allowances and other remuneration 682 146Bonuses 212 -

894 146Non-Executive Directors

Short-term employee benefitsFees 384 85

(c)

31 Dec 2009 31 Dec 2008

Number ofDirectors

Number ofDirectors

Executive DirectorRM850,001 - RM900,000 1 -RM100,001 - RM150,000 - 1

Non-Executive DirectorsRM50,001 - RM100,000 5 -RM50,000 and below - 5

30 Credit exposure to connected parties

31 Dec 2009

Aggregate value of outstanding credit exposures to connected parties (RM'000) 191As a percentage of total credit exposures 0.005%

Aggregate value of outstanding credit exposures to connected parties which isnon-performing or in default (RM'000) -

As a percentage of total credit exposures -

The number of directors of the Bank whose total remuneration and fees for the financial year/ period falls intothe following bands:

The remuneration of the key management personnel, being the members of the Board of Directors of the Bank,during the financial year/ period are as follows: -

The credit exposures of the Bank to connected parties, as defined by Bank Negara Malaysia's Guidelines onCredit Transactions and Exposures with Connected Parties' are as follows:

The above credit exposure are derived based on Bank Negara Malaysia's "Guidelines on Credit Transactionsand Exposures with Connected Parties" which came into effect in April 2009.

70


31 Capital adequacy31 Dec 2009 31 Dec 2008

RM'000 RM'000Tier 1 capitalPaid-up ordinary share capital 50,000 50,000Share premium 610,000 610,000Retained profits 40,103 11,360Statutory reserve 40,104 11,361

740,207 682,721Deferred tax adjustments 1,879 323Total Tier 1 capital 742,086 683,044

Tier 2 capitalGeneral allowance for bad and doubtful financing 52,597 52,597Total Tier 2 capital 52,597 52,597

Capital base 794,683 735,641

Core capital ratio 20.6% 19.6%Risk-weighted capital ratio 22.0% 21.2%

Breakdown of risk-weighted assets:

Principal Risk-weighted Principal Risk-weightedRM'000 RM'000 RM'000 RM'000

Total RWA for credit risk 5,041,611 3,264,777 5,246,924 3,272,489Total RWA for market risk - 24,658 - 40,471Total RWA for operational risk - 315,695 - 165,244

5,041,611 3,605,130 5,246,924 3,478,204

31 Dec 200831 Dec 2009

The capital ratios have been computed in accordance with the Capital Adequacy Framework for IslamicBanks (CAFIB).

71


31 Capital adequacy (continued)

31 Dec 2009Exposure Class Net Risk RWA Total Capital

Exposures Weighted Absorbed RWA RequirementAssets by PSIA after

(RWA) PSIA(RM'000) (RM'000) (RM'000) (RM'000) (RM'000)

Credit RiskOn-Balance Sheet Exposures

Sovereigns/Central Banks 907,146 - - - -

Banks, Development FinancialInstitutions & MDBs 518,979 119,353 - 119,353 9,548Corporates 1,742,714 1,666,199 - 1,666,199 133,296Regulatory Retail 1,359,098 1,018,998 - 1,018,998 81,520Residential Mortgages 76,483 57,363 - 57,363 4,589Other Assets 60,238 60,238 - 60,238 4,819Defaulted Exposures 21,699 30,271 - 30,271 2,422Total for On-Balance Sheet 4,686,357 2,952,422 - 2,952,422 236,194

Off-Balance Sheet Exposures

OTC Derivatives 20,216 4,043 - 4,043 323Off balance sheet exposuresother than OTC derivatives orcredit derivatives 335,030 308,304 - 308,304 24,664Defaulted Exposures 8 8 - 8 1Total for Off-Balance SheetExposures 355,254 312,355 - 312,355 24,988Total On and Off-BalanceSheet Exposures 5,041,611 3,264,777 - 3,264,777 261,182

Large Exposures RiskRequirement - - - - - -

Market Risk Longposition

Shortpositio

nProfit Rate Risk 127,386 - 127,386 19,888 - 19,888 1,591Foreign Currency Risk 4,770 - 4,770 4,770 - 4,770 382Total market risk 132,156 - 132,156 24,658 - 24,658 1,973

Operational Risk - - - 315,695 - 315,695 25,256

Total RWA and CapitalRequirement - - - 3,605,130 - 3,605,130 288,411

Note:PSIA - Profit Sharing Investment AccountMDBs - Multilateral Development BanksOTC - Over the counter

335,0308

355,254

5,051,199

GrossExposures

(RM'000)

4,695,945

907,146

518,9791,745,7531,365,645

76,48360,23821,701

20,216

72



31 Dec 2008Exposure Class Net Risk RWA Total Capital

Exposures Weighted Absorbed RWA RequirementAssets by PSIA after

(RWA) PSIA(RM'000) (RM'000) (RM'000) (RM'000) (RM'000)

Credit RiskOn-Balance Sheet Exposures

Sovereigns/Central Banks 1,463,828 - - - -Banks, Development FinancialInstitutions & MDBs

123,316 24,663 - 24,663 1,973Corporates 1,989,266 1,869,318 - 1,869,318 149,545Regulatory Retail 1,061,525 796,143 - 796,143 63,692Residential Mortgages 59,450 44,587 - 44,587 3,567Other Assets 16,411 16,411 - 16,411 1,313Defaulted Exposures 30,121 44,215 - 44,215 3,537Total for On-Balance Sheet 4,743,917 2,795,337 - 2,795,337 223,627

Off-Balance Sheet Exposures

OTC Derivatives 17,223 3,445 - 3,445 276Off balance sheet exposuresother than OTC derivatives orcredit derivatives 485,782 473,704 - 473,704 37,896Defaulted Exposures 2 3 - 3 -Total for Off-Balance SheetExposures 503,007 477,152 - 477,152 38,172Total On and Off-BalanceSheet Exposures 5,246,924 3,272,489 - 3,272,489 261,799

Large Exposures RiskRequirement - - - - - -

Market Risk Longposition

Shortposition

Profit Rate Risk 267,738 - 267,738 38,639 - 38,639 3,090Foreign Currency Risk 1,832 - 1,832 1,832 - 1,832 147Total market risk 269,570 - 269,570 40,471 - 40,471 3,237

Operational Risk - - - 165,244 - 165,244 13,220

Total RWA and CapitalRequirement - - - 3,478,204 - 3,478,204 278,256

Note:PSIA - Profit Sharing Investment AccountMDBs - Multilateral Development BanksOTC - Over the counter

1,463,828

123,3161,989,7661,063,356

59,45016,41130,135

17,223

GrossExposures

(RM'000)

4,746,262

486,2482

503,473

5,249,735

73



31 Dec 2009RM'000

Sovereigns& Central

Banks

Banks,MDBs and

DFIsCorporates Regulatory

RetailResidentalMortgages

OtherAssets

SpecialisedFinancing /Investment

0% 907,146 - - 450 - - - 907,596 -20% - 487,335 94,227 - - - - 581,562 116,31250% - 51,859 2,292 322 - - - 54,473 27,23775% - - - 1,461,541 80,399 - - 1,541,940 1,156,455100% - - 1,874,417 2,687 1,233 60,238 - 1,938,575 1,938,575150% - - 128 17,337 - - - 17,465 26,198

Total RiskWeight - - - - - - - 5,041,611 3,264,777Average

Risk Weight - - - - - - - 280,090 181,377Deduction

from CapitalBase - - - - - - - - -

31 Dec 2008RM'000

Sovereigns& Central

Banks

Banks,MDBs and

DFIsCorporates

RegulatoryRetail

ResidentalMortgages

OtherAssets

SpecialisedFinancing /Investment

0% 1,463,828 - - - - - - 1,463,828 -20% - 140,539 153,776 - - - - 294,315 58,86350% - - - 286 - - - 286 14375% - - - 1,097,548 59,450 - - 1,156,998 867,749100% - - 2,285,249 13 1,351 - 16,410 2,303,023 2,303,023150% - - 490 27,984 - - - 28,474 42,711

Total RiskWeight - - - - - - - 5,246,924 3,272,489Average

Risk Weight - - - - - - - 291,496 181,805

Deductionfrom Capital

Base - - - - - - - - -

Note:MDBs - Multilateral Development BanksDFIs - Development Financial Institutions

RiskWeights

Exposures after Netting and Credit Risk Mitigation TotalExposures

after Netting& Credit

RiskMitigation

Total RiskWeighted

Assets

Total RiskWeighted

Assets

Exposures after Netting and Credit Risk Mitigation

RiskWeights

TotalExposures

after Netting& Credit Risk

Mitigation

74


32 Commitments and contingencies

Positive fairvalue of Credit Risk

Principal derivative equivalent weightedamount contract amount * amount *

31 Dec 2009 RM'000 RM'000 RM'000 RM'000

Direct credit substitutes 26,018 - 26,018 25,942Transaction-related contingent items 12,325 - 6,163 6,064Short-term self-liquidating trade-

related contingencies 49,733 - 9,947 9,850Irrevocable commitments to

extend credit:- Maturity not exceeding one year 722,787 - - -- Maturity exceeding one year 51,530 - 25,765 24,657

Unutilised credit card lines 506,940 - 101,388 76,041Sell and buy back agreement 165,757 - 165,757 165,757Equity related contracts

- Less than one year 80,720 2,804 7,647 1,528- One year to less than five years 64,190 7,433 12,569 2,515

1,680,000 10,237 355,254 312,354

Positive fairvalue of Credit Risk

Principal derivative equivalent weightedamount contract amount * amount *

31 Dec 2008 RM'000 RM'000 RM'000 RM'000

Direct credit substitutes 1,794 - 1,794 1,754Transaction-related contingent items 8,100 - 4,050 4,050Short-term self-liquidating trade-

related contingencies 12,909 - 2,582 2,533Irrevocable commitments to

extend credit:- Maturity not exceeding one year 1,170,157 - 234,031 227,947- Maturity exceeding one year 511 - 255 193

Unutilised credit card lines 126,160 - 25,232 18,924Sell and buy back agreement 218,306 - 218,306 218,306Equity related contracts

- Less than one year 31,112 1,086 2,952 590- One year to less than five years 106,926 5,717 14,271 2,855

1,675,975 6,803 503,473 477,152

* The credit equivalent and risk weighted amount were computed using credit conversion factors and riskweighting rules as per Bank Negara Malaysia guidelines (including the temporary (until 31 December2010) measure related to credit conversion factor for undrawn facilities) and based on Basel 2 StandardisedApproach.

The table below shows the contract or underlying principal amounts, positive fair value of derivative contract,credit equivalents amounts and risk weighted amounts of unmatured off-balance sheet transactions as at balancesheet date. The contract or underlying principle amounts indicate the volume of business outstanding and do notrepresent amount at risk.

75


33 Profit rate risk

EffectiveUp to >1 - 3 >3 - 12 1 - 5 Over 5 Non-profit Trading profit

31 Dec 2009 1 month months months years years sensitive book Total rateRM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 %

ASSETSCash and short-term funds 676,262 - - - - 11,046 - 687,308 2.00Securities held for trading - - - - - - 127,386 127,386 2.54Securities available for sale 47,946 229,933 - 106,341 - - - 384,220 3.20Financing and advances

- performing 968,583 342,527 257,691 1,359,529 163,253 53,320 - 3,144,903 8.20- non-performing * - - - - - 20,070 - 20,070 -

Others - - - - - 417,891 10,898 428,789 -

Total Assets 1,692,791 572,460 257,691 1,465,870 163,253 502,327 138,284 4,792,676

LIABILITIES ANDSHAREHOLDERS' FUNDS

Deposits from customers 1,453,661 273,918 418,223 1,619 - 324,990 - 2,472,411 1.80Deposits and placements of

banks and other financialinstitutions 98,658 782,557 607,426 22,266 - - - 1,510,907 1.90

Bills and acceptances payable - - - - - 3,298 - 3,298 -Others - - - - - 55,179 10,237 65,416 -

Total Liabilities 1,552,319 1,056,475 1,025,649 23,885 - 383,467 10,237 4,052,032Shareholders' Equity - - - - - 740,644 - 740,644

Total Liabilities andShareholders' Equity 1,552,319 1,056,475 1,025,649 23,885 - 1,124,111 10,237 4,792,676

On-balance sheetprofit sensitivity gap 140,472 (484,015) (767,958) 1,441,985 163,253 (621,784) 128,047 -

Total profitsensitivity gap 140,472 (484,015) (767,958) 1,441,985 163,253 (621,784) 128,047 -

* This is arrived at after deducting the specific allowance from non-performing financing.

Non-trading book

The Bank is exposed to various risks associated with the effects of fluctuations in the prevailing levels of market profit rates on its financialposition and cash flows. The following table summarises the Bank's exposure to the profit rates risk. The assets and liabilities at carryingamount are allocated to time bands by reference to the earlier of the next contractual repricing dates and maturity dates.

76


33 Profit rate risk (continued)

Effective

Up to >1 - 3 >3 - 12 1 - 5 Over 5 Non-profit Trading profit31 Dec 2008 1 month months months years years sensitive book Total rate

RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 %

ASSETSCash and short term funds 971,974 - - - - 37,109 - 1,009,083 3.26Securities held for trading - - - - - - 267,738 267,738 3.09Securities available for sale 10,000 20,046 419,567 115,948 - - - 565,561 4.09Financing and advances

- performing 339,884 558,240 426,231 1,336,046 249,749 9,544 - 2,919,694 7.90- non-performing * - - - - - 7,337 - 7,337 -

Others - - - - - 206,991 7,004 213,995 -

Total Assets 1,321,858 578,286 845,798 1,451,994 249,749 260,981 274,742 4,983,408

LIABILITIES ANDSHAREHOLDERS' FUNDS

Deposits from customers 1,833,611 632,140 465,946 23,284 - 289,360 - 3,244,341 2.86Deposits and placements of

banks and other financialinstitutions 31,548 70,441 721,413 145,893 - - - 969,295 3.27

Bills and acceptances payable - - - - - 1,053 - 1,053 -Others - - - - - 78,104 6,803 84,907 -

Total Liabilities 1,865,159 702,581 1,187,359 169,177 - 368,517 6,803 4,299,596

Shareholders' Equity - - - - - 683,812 - 683,812

Total Liabilities andShareholders' Equity 1,865,159 702,581 1,187,359 169,177 - 1,052,329 6,803 4,983,408

On-balance sheetprofit sensitivity gap (543,301) (124,295) (341,561) 1,282,817 249,749 (791,348) 267,939 -

Total profitsensitivity gap (543,301) (124,295) (341,561) 1,282,817 249,749 (791,348) 267,939 -

* This is arrived at after deducting the specific allowance from non-performing financing.

Non-trading book

77


34 Collateral

31 Dec 2009 31 Dec 2008Carrying amount of assets pledged as collateral RM'000 RM'000

- Collateral pledged for repurchase agreements 165,757 218,306

35 Fair values of financial assets and liabilities

31 Dec 2009 31 Dec 2009 31 Dec 2008 31 Dec 2008Carrying Fair Carrying Fair

amount Value amount ValueRM'000 RM'000 RM'000 RM'000

Financial AssetsCash and short-term funds 687,308 687,308 1,009,083 1,009,083Securities held for trading 127,386 127,386 267,738 267,738Securities available for sale 384,220 384,220 565,561 565,561Financing and advances 3,164,973 3,161,401 2,927,031 2,883,929

Financial LiabilitiesDeposits from customers 2,472,411 2,484,178 3,244,341 3,255,714Deposits and placements of banks and

other financial institutions 1,510,907 1,509,750 969,295 904,351Bills and acceptances payable 3,298 3,298 1,053 1,053

The methods and assumptions used in estimating the fair values of financial instruments are as follows:

Cash and short-term fundsBills and acceptances payable

The carrying amounts approximate fair values due to their relatively short-term nature.

Securities

The following table summarises the fair values of the financial assets and liabilities carried on the balancesheet as at 31 December.

In the normal course of business, the Bank pledges assets to raise liabilities and accepts assets as collateralthat are permitted for resale or repledge. Collateral pledged and received are mainly via repurchaseagreements and reverse repurchase agreements.

Listed equity shares are valued at the quoted closing market price whilst unlisted equity shares whose fairvalue cannot be reliably measured are stated at cost. Fair value of the unlisted equity shares (if any), isreliably measurable if (a) the variability in the range of reasonable fair value estimates is not significant forthat instrument or (b) the probabilities of the various estimates within the range can be reasonably assessedand used in estimating fair value. Unlisted equity shares, whose fair value can be reliably measured, arevalued using an appropriate valuation model.

Fair values for other securities are estimated using market prices for these financial instruments. Wheremarket prices are not available, fair values have been estimated using prices for financial instruments withsimilar characteristics, or a suitable valuation technique where practicable to do so.

78


35 Fair values of financial assets and liabilities (continued)

Financing and advances

Deposits from customersDeposits and placements of banks and other financial institutions

Unrecognised financial instruments

36 Lease commitments

31 Dec 2009 31 Dec 2008Year RM'000 RM'000

Less than one year 32 20Between one and five years 22 17

54 37

37 Capital commitments31 Dec 2009 31 Dec 2008

RM'000 RM'000Capital expenditure:- Authorised and contracted for 4,035 1,180- Authorised but not contracted for 2,008 1,430

6,043 2,610

The Bank has lease commitments in respect of rented premises and hired equipment, all of which areclassified as operating leases. A summary of the non-cancellable long term commitments net of sub-leases(if any) are as follows:

For personal and commercial financing which mature or reprice after six months, fair value is principallyestimated by discounting anticipated cash flows (including profit at contractual rates). Performingfinancing are grouped to the extent possible, into homogenous pools segregated by maturity within eachpool. In general, cash flows are discounted using current market rates for instruments with similar maturity,repricing and credit risk characteristics. For non-performing financing, the fair value is the carrying valueof the financing, net of specific allowances. General allowances are deducted from the fair value offinancing.

Deposits, placements and obligations which mature or reprice after six months are grouped by residualmaturity. Fair value is estimated using discounted cash flows, applying either market rates, whereapplicable, or current rates offered for deposits of similar remaining maturities.

The valuation of financial instruments not recognised in the balance sheet reflects their current market ratesat the balance sheet date. The contracted amount and fair value of financial instruments not recognised inthe balance sheet as at 31 December are disclosed in Note 32.

79


38 Equity-based compensation

Savings-Related Share Option Schemes

Movements in the number of share options held by employees are as follows:

Weighted Weightedaverage average

Year 31 Dec 2009 exercise 31 Dec 2008 exerciseNumber price Number price

('000) £ ('000) £Outstanding as at 1 January /

Amount vested from HSBC Bank 13 7.12 13 7.12Granted in the year/ period 41 3.31 -Exercised in the year/ period (1) 7.26 -Lapsed in the year/ period (9) 6.69 -Transfers - -Outstanding as at 31 December 44 4.32 13 7.12

Options vested as at 31 December - -

From26 Feb 2008

(incorporation)to

31 Dec 2009 31 Dec 2008RM'000 RM'000

Compensation cost recognisedduring the year/ period 115 29

The Bank participated in the Savings-Related Share Option Schemes operated by the HSBC Group for theacquisition of HSBC Holdings plc shares.

The Savings-Related Share Option Schemes are all-employee share plans under which eligible HSBCemployees are granted options to acquire HSBC Holdings ordinary shares. Employees may make monthlycontributions up to £250 over a period of one, three or five years which may be used to exercise theoptions; alternatively the employee may elect to have the savings repaid in cash. The options areexercisable within three months following the first anniversary of the commencement of a one-year savingscontract or within six months following either the third or the fifth anniversary of the commencement ofthree-year or five-year savings contracts. The exercise price is set at a discount of up to 20 per cent of themarket value of the ordinary shares at the date of grant. The cost of the awards is amortised over thevesting period.

80


39 Shariah advisors

1)

2)

3)

40 Comparative figures

The following comparatives have been restated to be consistent with current financial year's presentation:

Previouslystated Restated

RM'000 RM'000

Balance Sheet as at 31 December 2008:Financing and advances

By contract:Others 182,246 -Bai Al-Dayn (sale of debt) - 171,708Ujrah (fee-based) - 10,538

By type of customer:Domestic non-bank financial institutions

Others 25,992 -Domestic banking institutions - 25,992

By profit rate sensitivity:Fixed rate

Hire purchase receivables 251,007 250,745Other financing 2,638,639 2,638,901

In line with Bank Negara Malaysia's "Guidelines on the Governance of Shariah Committee for TheIslamic Financial Institutions" known as BNM/GPS 1, the following Shariah scholars were appointed:

Dr. Younes Soualhi, Associate Professor in International Islamic University Malaysia (IIUM). Heholds a Bachelor, Master, and PhD in Usul al-Fiqh from the Emir Abdul Qadir University for IslamicSciences in Algeria, IIUM and University of Malaya respectively. He also holds a diploma in IslamicBanking and Insurance from the Institute of Islamic Banking and Insurance in London, U.K.

Dr. Rusni binti Hassan, Assistant Professor of Law at International Islamic University of Malaysia.She holds a double degree, LLB and LLB (Shariah), Master as well as Ph.D in Law from the sameuniversity.

Khairul Anuar bin Ahmad, lecturer with Selangor International Islamic University College. He holds aBachelor and Master of Shariah from University of Malaya.

81

hsbc amanah malaysia berhad (company …incorporated in malaysia) financial statements 31 december...

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