hsbc amanah malaysia berhad (company no. …€¦ · (incorporated in malaysia) financial...

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

(Incorporated in Malaysia)

FINANCIAL STATEMENTS31 DECEMBER 2010

Domiciled in Malaysia.Registered Office:2, Leboh Ampang,50100 Kuala Lumpur

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

CONTENTS

1 Board of Directors

2 Profile of Directors

6 Board Responsibility and OversightBoard of DirectorsBoard Committees

28 Management Reports

29 Internal Audit and Internal Control Activities

30 Directors’ Report

39 Directors’ Statement

40 Statutory Declaration

41 Shariah Committee’s Report

43 Independent Auditors’ Report

45 Statement of Financial Position

46 Statement of Comprehensive Income

47 Statement of Changes in Equity

48 Statement of Cash Flows

49 Notes to the Financial Statements

HSBC AMANAH MALAYSIA BERHADCompany No. 807705-XIncorporated in Malaysia

1

BOARD OF DIRECTORS

Mukhtar Malik HussainChairman, Non-Independent Non-Executive Director

Musa bin Abdul MalekChief Executive Officer, Non-Independent Executive Director

[resigned on 1 August 2010]

Mohamed Rafe bin Mohamed HaneefChief Executive Officer, Non-Independent Executive Director

[appointed on 22 November 2010]

Mohamed Ross bin Mohd DinNon-Independent Non-Executive Director

Azlan bin AbdullahIndependent Non-Executive Director

Mohd Razlan bin MohamedIndependent Non-Executive Director

Mohamed Ashraf bin Mohamed IqbalIndependent Non-Executive Director

Lee Choo HockIndependent Non-Executive Director


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PROFILE OF DIRECTORS

Mukhtar Malik HussainChairman, Non-Independent Non-Executive Director

Age 50. Appointed on 15 December 2009. Mr Hussain graduated from University of Wales,United Kingdom with a Bachelor of Science in Economics. He first joined the HSBC Group in1982 as a Graduate Trainee in Midland Bank International. He was appointed as AssistantDirector in Samuel Montagu in 1991. After close to 11 years of working in the Group’s Londonoffices, Mr Hussain then held numerous posts in Dubai including Chief Executive Officer ofHSBC Financial Services (Middle East) Limited from 1995 to 2003 and established the initiativeto create the first foreign investment bank in Saudi Arabia for HSBC. In 2003, he assumed theposition of Chief Executive Officer, Corporate and Investment Banking and became the Co-Headof Global Banking in 2005. He headed back to London as the Global Head of PrincipalInvestments, the proprietorial and fund investment arm of HSBC from 2006 to 2008. He was theDeputy Chairman of HSBC Bank Middle East Limited, Global Chief Executive Officer of HSBCAmanah and Chief Executive Officer of Global Banking and Markets, Middle East and NorthAfrica, 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 Hussain is currently the Deputy Chairman and Chief Executive Officer of HSBC BankMalaysia Berhad. He is also a Non-Executive Director of HSBC Bank Middle East Limited. Inaddition, he continued in his role as Global Chief Executive Officer of HSBC Amanah.

Mohamed Rafe bin Mohamed HaneefChief Executive Officer, Non-Independent Executive Director

Age 40. Appointed on 22 November 2010. En Rafe holds a Bachelors of Law from InternationalIslamic University of Malaysia and a Masters of Law from Harvard Law School, United States ofAmerica. He was admitted to the Malaysian Bar and practised law specialising in Islamic financewith Messrs. Mohamed Ismail & Co before joining the banking industry. En Rafe first joinedHSBC Investment Bank plc, London in 1999 and thereafter HSBC Financial Services Middle East,Dubai from 2001-2004. He then assumed several positions including as the Head of GlobalIslamic Finance of ABN Amro Bank NV, Dubai, Head of Islamic Banking of Citigroup Asia andManaging Director, Investments of Fajr Capital before rejoining HSBC Amanah as ManagingDirector Global Markets for the Asia Pacific region in July 2010.

En Rafe is currently a member of the Shariah Advisory Council of Securities CommissionMalaysia.


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PROFILE OF DIRECTORS (Cont’d)

Mohamed Ross bin Mohd DinNon-Independent Non-Executive Director

Age 58. Appointed on 26 February 2008. En Ross joined HSBC Bank Malaysia Berhad in 1972and served in various capacities ranging from Corporate and Retail Banking to Area and BranchManagement. He also served as Head of Treasury and Head of Group Audit Malaysia between1987 and 1996. During this period, he also worked in Hong Kong, London and New York in theareas of Foreign Exchange and Treasury. In his last appointment prior to his retirement fromHSBC Bank Malaysia Berhad on 31 December 2007, he managed the HSBC Amanah Onshorebusiness franchise in Malaysia and was responsible for the Islamic retail and corporate businessemanating from the branch network. En Ross joined HSBC Amanah Takaful (Malaysia) SendirianBerhad as the Executive Director and Senior Advisor from 1 January 2008 to 31 December 2008.

En Ross is currently a council member of the Outward Bound Trust of Malaysia.

Azlan bin AbdullahIndependent Non-Executive Director

Age 52. Appointed on 6 August 2008. En Azlan graduated from Trinity University, United Statesof America with a Bachelor of Science in Business Administration and Morehead State University,United States of America with a Masters in Business Administration. En Azlan began his career inCitibank N.A in the World Corporate Group, a division within the Corporate Banking Group in1983. After 5 years, he then moved on to United Asian Bank which later merged with Bank ofCommerce. In 1994, he joined Citibank Berhad as Vice President and Head of the Public Sector, adivision in the Corporate Banking Group focusing on lending to government-owned entities.

En Azlan is currently the Executive Director of Melewar Industrial Group Berhad and the ChiefExecutive Officer of Mycron Steel Berhad and Mycron Steel CRC Sdn Bhd. He is also anIndependent Director of Bandar Raya Developments Berhad and Malaysian General InvestmentCorporation Berhad and several other private limited companies. In addition, he is a councilmember of Malaysian Iron and Steel Industry Federation and an alumni member of InternationalAssociation of Traffic and Safety Sciences based in Japan.


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Mohd Razlan bin MohamedIndependent Non-Executive Director

Age 44. Appointed on 6 August 2008. En Razlan graduated with a Bachelor of Science in Civiland Environmental Engineering from Duke University, United States of America and thereafterobtained a Masters in Business Administration in Finance and Marketing from Rice University,United States of America. He is an Engineer by profession but he has spent the past 18 years in thebanking and finance field. En Razlan joined the corporate and investment banking sector startingwith Affin Merchant Bank Berhad followed by Bank of America and Aseambankers (M) Berhad.He headed the Investment Banking Division of MIMB Investment Bank Berhad in 2007. Duringhis 14-year career as an investment banker, he accumulated extensive experience originating andstructuring a wide range of corporate debt, project finance and structured finance transactions via the loan and Islamic debt capital markets, culminating in two of his Islamic project finance bond deals being accorded with international award recognitions from Project Finance International, TheAsset and Euromoney Project Finance publications.

En Razlan is currently the Chief Executive Officer of Malaysian Rating Corporation Berhad.

Mohamed Ashraf bin Mohamed IqbalIndependent Non-Executive Director

Age 45. Appointed on 6 August 2008. En Ashraf graduated from California State University,United States of America with a Bachelor of Science in Mechanical Engineering and thereafterobtained a Masters in Business Administration from the same institution. His earlier careerincluded a period of over 5 years with Shell Malaysia involved in a variety of human resource andbusiness re-engineering projects. He then moved on to Proton Berhad where he assumed thepositions of Managing Director of Proton Cars (UK) Ltd, Executive Director of Proton Cars(Europe) Ltd and Director of Proton Cars (Australia) Ltd. He then assumed the position of Directorof HayGroup, Asia from 1999 to 2002 and Managing Director of Federal Auto Holdings Berhadfrom 2002 to 2005. He was formerly a Partner of CEO Solutions Sdn Bhd and an Advisor toMaestro Planning Solutions Sdn Bhd.

En Ashraf is currently a Director of MindSpring Sdn Bhd, a one person consulting firm that hestarted after 17 years of working in various industries.


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Lee Choo HockIndependent Non-Executive Director

Age 57. Appointed on 2 January 2009, Mr Lee is a member of the Institute of CharteredAccountants in England and Wales. He is also a member of the Malaysian Institute ofAccountants. He began his career with Miller, Brener & Co., London, a professional accountingfirm in 1975. Mr Lee has built a successful career as a professional accountant since 1982 whenhe joined Malayan Banking Berhad. He served various management positions during his tenurewith Malayan Banking Berhad until his retirement in 2008.

His last position was as the Executive Vice President, Head of Accounting Services and TreasuryBack Office Operations. He has also served as a Director of a number of subsidiaries of MalayanBanking Berhad.


6

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-independent executive 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 inthe Bank (5% equity interest, directly or indirectly), have not been employed or have an immediatefamily member employed in an executive position in the Bank within the past two (2) years, have notengaged in any transaction worth more than RM1 million with the Bank within the past two (2) yearsand generally, are independent of management and free from any business or other relationship whichcould interfere with the exercise of independent judgement or the ability to act in the best interests ofthe Bank.

There is a clear division of responsibilities at the helm of the Bank to ensure a balance of authorityand power. The Board is led by Mr Mukhtar Malik Hussain as the Chairman, Non-Independent Non-Executive Director and the executive management of the Bank is led by En Mohamed Rafe binMohamed Haneef, the Chief Executive Officer, Non-Independent Executive Director.

Roles and Responsibilities of the Board

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

The Board has a formal schedule of matters reserved to itself for approval, which includes annualplans and performance targets, procedures for monitoring and control of operations, specified seniorappointments, acquisitions and disposals above pre-determined thresholds and any substantial changesin the balance sheet management 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.


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BOARD RESPONSIBILITY AND OVERSIGHT (Cont’d)

BOARD OF DIRECTORS (Cont’d)

Frequency and Conduct of Board Meetings

The Board has determined that it shall meet at least six (6) times a year in accordance withBNM/GP1-i Guidelines.

The Board receives reports on the progress of the Bank’s business operations and minutes of meetingsof Management Committees for review at each of its meetings. At these meetings, the members alsoconsider a variety of matters including the Bank’s financial results, strategic decisions and corporategovernance matters. The Board also receives presentations from each key business area, and on anyother topic as they request.

The agenda for every Board meeting, together with comprehensive management reports, proposalpapers and supporting documents are distributed to the Directors in advance of all Board meetings, toallow time for appropriate review and to enable full discussion at the meetings. All proceedings fromthe Board meetings are minuted. Minutes of every Board meeting are circulated to all Directors fortheir perusal prior to 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% ofall Board meetings. All non-executive Directors have complied with this requirement during thefinancial year. The attendance of Directors at the Board meetings held in 2010 was as follows:

Name of members Designation Attendance /No. of meetings

Mukhtar Malik Hussain Chairman, Non-Independent Non-ExecutiveDirector

6 / 6

Musa bin Abdul Malek[resigned on 1 August 2010]

Chief Executive Officer, Non-IndependentExecutive Director

2 / 6

Mohamed Rafe bin MohamedHaneef[appointed on 22 November2010]


1 / 6

Mohamed Ross bin Mohd Din Non-Independent Non-Executive Director 6 / 6

Azlan bin Abdullah Independent Non-Executive Director 6 / 6

Mohd Razlan bin Mohamed Independent Non-Executive Director 6 / 6

Mohamed Ashraf bin MohamedIqbal

Independent Non-Executive Director 6 / 6

Lee Choo Hock Independent Non-Executive Director 6 / 6


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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 andManagement Committees, as well as the authority delegated by the Board to these Committees, havebeen clearly defined by 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 Shariah Committee

The Audit Committee, Risk Management Committee, Shariah Committee and Nominating Committeewere established in September 2008 pursuant to the requirements under BNM/GP1-i. The BNM/GP1-i also requires the Board to establish a Remuneration Committee. The Bank, however, obtained BankNegara Malaysia’s exemption from this requirement on 8 July 2008.

The Connected Party Transactions Committee was established in June 2009 pursuant to therequirements under the Bank Negara Malaysia Guidelines on Credit Transactions and Exposures withConnected Parties.

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 IT Steering Committee, Basel II Steering Committee, Stress TestSteering Committee and Operational Risk and Internal Control Committee. These sub-committeeswere established to assist the Executive Committee and the Asset and Liability ManagementCommittee in performing their roles and responsibilities and to assist the Chief Executive Officer inthe day to day running of the Bank and to ensure that policy decisions are implemented in accordancewith the directives of the Board.


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AUDIT COMMITTEE

Composition

The present members of the Audit Committee comprise: Lee Choo Hock (Chairman) Azlan bin Abdullah Mohd Razlan bin Mohamed

Frequency of Meetings

A total of four (4) Audit Committee meetings were held during the financial year. The attendance ofthe Directors at the Audit Committee meetings held in 2010 was as follows:


Lee Choo Hock Chairman, Independent Non-Executive Director 4 / 4



Terms of Reference

The revised Terms of Reference as set out below were approved at the Audit Committee meeting heldon 27 October 2010 and the Board of Directors meeting held on 3 December 2010.

Membership

The Committee shall comprise not less than three (3) members. All members shall be non-executivedirectors of which the majority shall be independent non-executive directors.

The appointment to the Committee of members and the Chairman shall be subject to endorsement byThe Hongkong and Shanghai Banking Corporation Limited Audit Committee and/or HSBC Holdingsplc Group Audit Committee.

The Board may from time to time appoint to the Committee additional members 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 noline or functional responsibility for the activities of the HSBC Group.


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AUDIT COMMITTEE (Cont’d)

Terms of Reference (Cont’d)

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 anymeeting(s) of the Committee as it may from time to time consider desirable to assist the Committee inthe attainment of its objective.

The Committee shall be supported by and may invite the following to attend all or part of eachmeeting: the principal financial officer, chief risk officer (and such executives from risk as he or sheshall consider appropriate), head of operational risk assurance and audit; and head of compliance andcompany secretary. The Company Secretary of the Company shall be the Secretary of the Committee.The Secretary of the Committee shall produce such papers and minutes of the Committee’s meetingsas are appropriate and distribute them to all members of the Committee.

Meetings and Quorum

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

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

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

Objective

The Committee shall be accountable to the Board and shall have responsibility for oversight andadvice to the Board in ensuring an effective system of internal control and compliance over financialreporting and for meeting its external financial reporting obligations, including its obligations underapplicable laws and regulations and shall be directly responsible on behalf of the Board for theselection, oversight and remuneration 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.


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1. To monitor the integrity of the financial statements of the Company, and any formalannouncements relating to the Company’s financial performance or supplementary regulatoryinformation, reviewing significant financial reporting judgements contained in them. Inreviewing the Company’s financial statements before submission to the Board, the Committeeshall 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;

(vi) compliance with legal requirements in relation to financial reporting.

(vii) regulatory guidance on disclosure of areas of special interest;

(viii) comment letters from appropriate regulatory authorities; and

(ix) matters drawn to the attention of the Committee by the Company’s external auditor.

In regard to the above:

(i) members of the Committee shall liaise with the Board, members of senior management,the external auditor and head of operational risk assurance and audit; and

(ii) the Committee shall consider any significant or unusual items that are, or may need tobe, highlighted in the annual report and accounts and shall give due consideration to anymatters raised by the principal financial officer, head of operational risk assurance andaudit, head of compliance or external auditor.

(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 againstcontingencies and bad and doubtful debts.


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

3. To review the Company’s internal financial controls and its internal control and riskmanagement systems including Shariah compliance.

4. To satisfy itself that there is appropriate co-ordination between the internal and externalauditors.

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

6. To review and monitor the external auditor’s independence and objectivity and theeffectiveness of the audit process, taking into consideration relevant professional and regulatoryrequirements and reports from the external auditors on their own policies and proceduresregarding independence and quality control and to oversee the appropriate rotation of auditpartners with the external auditor.

7. To implement the HSBC Group policy on the engagement of the external auditor to supplynon-audit services, taking into account relevant ethical guidance regarding the provision ofnon-audit services by the external audit firm; where required under that policy to approve inadvance any non-audit services provided by the external auditor that are not prohibited by theSarbanes-Oxley Act of 2002 (in amounts to be pre-determined by the Group Audit Committee)and the fees for any such services; to report to the Board, identifying any matters in respect ofwhich it considers that action or improvement is needed and make recommendations as to thesteps to be taken.

For this purpose “external auditor” shall include any entity that is under common control,ownership or management with the audit firm or any entity that a reasonable and informed thirdparty having knowledge of all relevant information would reasonably conclude as part of theaudit firm nationally or internationally.

8. To review the external auditor’s management letter and management’s response, any materialqueries raised by the external auditor in respect of the accounting records, financial accountsand related systems of control and management’s response, and the external auditors’ annualreport on the progress of the audit.

9. To ensure a timely response is provided to the financial reporting and related control issuesraised in the external auditor’s management letter.


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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 theirinterim reviews and final audits, major judgemental areas (including all critical accountingpolicies and practices used by the Company and changes thereto), all alternative accountingtreatments that have been discussed with management together with the potential ramificationsof using those alternatives, the nature of any significant adjustments, the going concernassumption, compliance with accounting standards and stock exchange and legal requirements,reclassifications or additional disclosures proposed by the external auditor which are significantor which may in the future become material, the nature and impact of any material changes inaccounting policies and practices, any written communications provided by the external auditorto management and any other matters the external auditor may wish to discuss (in the absenceof management where necessary).

11. To review and discuss the adequacy of qualifications and experience of staff of the accountingand financial reporting function, and their training programmes and budget and successionplanning for key roles throughout the function.

12. To receive an annual report, and other reports from time to time as may be required byapplicable laws and regulations, from the principal executive officer and principal financialofficer to the effect that such persons have disclosed to the Committee and to the externalauditor all significant deficiencies and material weaknesses in the design or operation ofinternal controls over financial reporting which could adversely affect the Company’s ability torecord and report financial data and any fraud, whether material or not, that involvesmanagement or other employees who have a significant role in the Company's internal controlsover financial reporting.

13. To provide to the Board such assurances as it may reasonably require regarding compliance bythe Company, its subsidiaries and those of its associates for which it provides managementservices with all supervisory and other regulations to which they are subject.

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

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


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16. To agree the Company’s policy for the employment of former employees of the externalauditor, within the terms of the HSBC Group's policy.

17. To monitor and review the effectiveness of the internal audit function; consider the majorfindings of internal investigations and management’s response and the internal audit plan; andto seek such assurance as it may deem appropriate that the internal audit function is adequatelyresourced, has appropriate standing within the HSBC Group and is free from constraint bymanagement or other restrictions. The Committee shall approve the appointment,remuneration, performance appraisal, transfer and dismissal of the head of operational riskassurance and audit.

18. To consider any major findings of internal audits and any investigations into internal controlmatters as delegated by the Board or on the Committee’s initiative and assess management’sresponse.

19. To review the external auditor’s management letter and any material queries raised by theexternal auditor on the management of risk or internal control; management’s annual internalcontrol report; and monitor management’s timely and adequate response to the risk relatedissues raised.

20. To consider any major findings from regulatory reviews and interactions and assess theeffectiveness of the management framework in relation to maintaining strong and professionalrelationships with the HSBC Group’s major regulators.

21. To review management’s statement on internal control systems prior to endorsement by theBoard, the effectiveness of the Company’s internal control systems and procedures forcompliance with the HSBC Group’s compliance policy and whether management hasdischarged its duty to have an effective internal control system.

22. To review the minutes of board risk management and/or executive risk management meetingsand such further information as board risk management and/or executive risk managementmeetings may request from time to time.

23. To undertake or consider on behalf of the Chairman or the Board such other related tasks ortopics as the Chairman or the Board may from to time entrust to it.

24. The Committee shall meet alone with the external auditor and with the head of operational riskassurance and audit at least once each year to ensure that there are no unresolved issues orconcerns.


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25. The Committee may appoint, employ or retain such professional advisors as the Committeemay consider appropriate. The Committee is authorised by the Board to obtain suchprofessional external advice as it shall deem appropriate as a means of taking full account ofrelevant risk experience elsewhere and challenging its analysis and assessment. Any suchappointment shall be made through the Secretary to the Committee, who shall be responsiblefor the contractual arrangements and payment of fees by the Company on behalf of theCommittee.

26. The Committee shall review annually the Committee’s terms of reference and its owneffectiveness and recommend to the Board any necessary changes arising therefrom.

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

28. To provide half-yearly certificates to the Group Audit Committee, or to any audit committee ofan immediate holding company in the form required by the Group Audit Committee. Suchcertificates to include a statement that the members of the Committee are independent.

29. To review any related party transactions that may arise within the Company pursuant to theapplicable laws and regulations.

30. To investigate any matter within these terms of reference, to have full access to and co-operation by management 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 tomake improvements and, where necessary, shall report any such concerns to the Group AuditCommittee or to any audit committee of an immediate holding company as appropriate.


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RISK MANAGEMENT COMMITTEE

Composition

The present members of the Risk Management Committee comprise: Mohd Razlan bin Mohamed (Chairman) Lee Choo Hock Mohamed Ross bin Mohd Din


A total of four(4) Risk Management Committee meetings were held during the financial year. Theattendance of the Directors at the Risk Management Committee meetings held in 2010 was as follows:


Mohd Razlan bin Mohamed Chairman, Independent Non-Executive Director 4 / 4

Lee Choo Hock Independent Non-Executive Director 4 / 4

Mohamed Ross bin MohamedDin


Terms of Reference

The revised Terms of Reference as set out below were approved at the Risk Management Committeemeeting held on 27 October 2010 and the Board of Directors meeting on 3 December 2010.

Membership

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

The appointment to the Committee of members and of Chairman shall be subject to endorsement byThe Hongkong and Shanghai Banking Corporation Limited Audit Committee and/or HSBC Holdingsplc Group Risk Committee.


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RISK MANAGEMENT COMMITTEE (Cont’d)


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

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

The Committee shall be supported by and may invite the following to attend all or part of eachmeeting: the principal financial officer, chief risk officer (and such executives from risk as he or sheshall consider appropriate); head of operational risk assurance and audit; the head of compliance andcompany secretary. The Company Secretary of the Company shall be the Secretary of the Committee.The Secretary of the Committee shall produce such papers and minutes of the Committee’s meetingsas are appropriate and distribute them to all members of the Committee.

Meetings and Quorum

The Committee shall meet with such frequency and at such times as it may determine but in anyevent, not less than once every quarter.

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

At all meetings of the Committee, the Chairman of the Committee, if present, shall preside. If theChairman is absent, the members present at the meeting shall elect a chairman of the meeting, whoshall be an independent 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 therisk management process is in place and functioning.

The Committee shall be accountable to the Board and shall have responsibility for oversight andadvice to the Board on:

1. the Board’s risk appetite, tolerance and strategy;

2. systems of risk management, internal control and compliance to identify, measure, aggregate,control and report risks;


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3. the alignment of strategy with the Board’s risk appetite;

4. the alignment of reward structures, in relation to the management of risk, with the Board’s riskappetite; and

5. the maintenance and development of a supportive culture, in relation to the management ofrisk, appropriately embedded through procedures, training and leadership actions so that allemployees are alert to the wider impact on the whole organisation of their actions anddecisions.


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

1. To advise the Board on all high level risk matters.

In preparing advice to the Board on overall risk appetite tolerance and strategy, the Committeeshall seek such assurance as it may deem appropriate that account has been taken of the currentand prospective macroeconomic and financial environment, drawing on financial stabilityassessments published by authoritative sources that may be relevant.

2. To consider the risks associated with proposed strategic acquisitions or disposals as requestedfrom time to time by any Director in consultation with the Chairman of the Committee.

In regard to the above:

(i) the Committee, in advising the Board, should ensure that a due diligence appraisal of theproposition is undertaken, focusing in particular on risk aspects and implications for therisk appetite and tolerance of the HSBC Group, drawing on independent external advicewhere appropriate and available, before the Board takes a decision whether to proceed;and

(ii) the Committee should determine, on the basis of the business case presented and theHSBC Group’s due diligence appraisal, whether management has sufficient backing tosupport a recommendation to the Board that the proposition would be likely to benefitthe Company and its shareholders if it can be completed within an agreed framework.


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3. To require regular risk management reports from management which:

(i) enable the Committee to assess the risks involved in the HSBC Group’s business andhow they are controlled and monitored by management; and

(ii) give clear, explicit and dedicated focus to current and forward-looking aspects of riskexposure which may require a complex assessment of the HSBC Group’s vulnerability tohitherto unknown or unidentified risks.

Such reports shall be sufficiently accurate and timely to enable the Committee to monitorparticularly large exposures, product lines or risk types the relevance of which may become ofcritical importance.

Assessment of the risk management process should involve some quantitative metrics to serveas a way of tracking risk management performance in the implementation of the agreedstrategy. Such metrics may include: preferred risk asset ratios; value at risk; target creditagency ratings; a system of risk or exposure limits; concentrations in risk positions; leverageratios; economic capital measures and acceptable stress losses; and the results of stress andscenario analysis.

4. To review the effectiveness of the HSBC Group’s internal control and risk managementframework in relation to the core strategic objectives of the HSBC Group.

5. To monitor and review the effectiveness of the risk management function and to seek suchassurance as it may deem appropriate that the risk management function is adequatelyresourced, has appropriate standing within the HSBC Group and is free from constraint bymanagement or other restrictions. The Committee shall approve the appointment and removalof the chief risk officer.

6. To consider any major findings from regulatory reviews and interactions and assess theeffectiveness of the management framework in relation to maintaining strong and professionalrelationships with the HSBC Group’s major regulators.

7. To review the minutes of executive risk management meetings and such further information asan executive risk management meeting may request from time to time, if applicable.


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8. To provide to the Board such additional assurance as it may reasonable require regarding thereliability of risk information submitted to it.

9. The Committee shall seek such assurance as it may deem appropriate that the chief risk officer:

(i) participates in the risk management and oversight process at the highest level on anenterprise-wide basis;

(ii) has a status of total independence from individual business units;

(iii) reports to the Committee alongside an internal functional reporting line to the GroupChief Risk Officer;

(iv) has direct access to the chairman of the Committee in the event of need.

10. Where applicable, to review the composition, powers, duties and responsibilities ofsubsidiaries’ non-executive risk committees.

11. To undertake or consider on behalf of the Chairman or the Board such other related tasks ortopics as the Chairman or the Board may from to time entrust to it.

12. The Committee may appoint, employ or retain such professional advisors as the Committeemay consider appropriate. The Committee is authorised by the Board to obtain suchprofessional external advice as it shall deem appropriate as a means of taking full account ofrelevant risk experience elsewhere and challenging its analysis and assessment. Any suchappointment shall be made through the Secretary to the Committee, who shall be responsiblefor the contractual arrangements and payment of fees by the Company on behalf of theCommittee.

13. The Committee shall review annually the Committee’s terms of reference and its owneffectiveness and recommend to the Board, any necessary changes arising therefrom.

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


21




15. To ensure a comprehensive risk management infrastructure is in place for managing all risksincluding Shariah risks. This includes risk associated with contracts under the Mudharabah andMusharakah financing or investments, which encompasses at the minimum:

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

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

(iii) Update the Board on any material progress of Mudharabah and Musharakah financing orinvestments in a timely manner.

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 theissue or to make improvements and shall report any such concerns to the Group AuditCommittee and/or Group Risk Committee as appropriate; or to any audit and/or risk committeeof an intermediate holding company as appropriate.

In order to be consistent with HSBC Group’s global risk management strategies, where strategies andpolicies related to the objective of this Committee are driven by the parent company, the Committeeshall:

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

2 Deliberate and make the necessary recommendations on such strategies and policies to assistthe Board when approving major issues and strategies

Where major decisions related to the objective of this Committee are made by the parent company,the Committee shall evaluate the issues before making recommendations to the Board forendorsement and adoption of the decision/strategy/policy. The policies adopted shall adhere to thelaws of Malaysian jurisdiction and regulations.


22




Written or Circulating Resolution

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

NOMINATING COMMITTEE

Composition

The present members of the Nominating Committee comprise: Mohamed Ashraf bin Mohamed Iqbal (Chairman) Mohamed Ross bin Mohd Din Azlan bin Abdullah Mohd Razlan bin Mohamed Lee Choo Hock


A total of five (5) Nominating Committee meetings were held during the financial year. Theattendance of the Directors at the Nominating Committee meeting held in 2010 was as follows:


Mohamed Ashraf bin MohamedIqbal

Chairman, Independent Non-Executive Director 5 / 5

Musa bin Abdul Malek[resigned on 1 August 2010]


2 / 5

Mohamed Ross bin Mohd Din Non-Independent Non-Executive Director 5 / 5



Lee Choo Hock[appointed on 28 July 2010]



23


NOMINATING COMMITTEE (Cont’d)

Terms of Reference

The revised Terms of Reference as set out below were approved at the Board of Directors meetingheld on 28 July 2010.

Membership

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

The Chairman of the Committee shall be an independent non-executive director appointed by theBoard. In order to avoid conflicts of interest, a member of the Committee shall abstain fromparticipating in discussions and decisions on matters involving themselves.

The Committee shall be supported by the Head of Human Resources and may invite any director,executive or other person to attend any meeting(s) of the Committee as it may from time to timeconsider appropriate to 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 anyevent, not less than once a year.

The quorum for meetings shall be three directors.

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


24




Objective

The Committee shall be responsible for ensuring that there are formal and transparent procedures forthe assessment of the effectiveness of the Board and the Board’s various committees, and theperformance of the 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, board committee members,Shariah Committee members as well as nominees for the CEO. This includesassessing and recommending directors and Shariah Committee members forreappointment, before an application is submitted to Bank Negara Malaysia forapproval;

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 withregards to any changes through an annual review;

1.3 To recommend to the Board the removal of any director, CEO or Shariah Committeemember if he/she is ineffective, errant and negligent in discharging his/herresponsibilities;

1.4 To ensure the establishment of performance evaluation processes on theeffectiveness of the Board, the contribution of the Board’s various committees, theperformance of the CEO and other key Senior Management Officers of the Bank thatare conducted based on objective performance criteria;

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

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 inthe industry;


25




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 andthe Shariah Committee members are not disqualified under Bank Negara Malaysia’sShariah Governance Framework for Islamic Financial Institutions.

2. In order to be consistent with HSBC Group’s global strategies, where strategies and policiesrelated to the objective of this Committee are driven by the parent company, the Committeeshall:

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

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

3. Where major decisions related to the objective of this Committee are made by the parentcompany, the Committee shall evaluate the issues before making recommendations to theBoard for adoption.

4. 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 validand effectual as if it had been passed at a meeting of the Committee duly called and constituted. Anysuch resolution may consist of several documents in the like form each signed by one or moredirectors.

Amendment

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


26


CONNECTED PARTY TRANSACTIONS COMMITTEE

Composition

The present members of the Connected Party Transactions Committee comprise: Azlan bin Abdullah Mohamed Ashraf bin Mohamed Iqbal Paul Norton (Chief Risk Officer) Edmund Pui (Senior Manager Regional Credit, HSBC Bank Malaysia Berhad)

Terms of Reference

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

Composition and Quorom

The Committee shall consist of at least four (4) members, of which two (2) must be non-executivedirectors. 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, inhis absence, 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/commercialcredit transactions with a connected party of HSBC Amanah Malaysia Berhad, not exceeding RM5m.


27


CONNECTED PARTY TRANSACTIONS COMMITTEE (Cont’d)

The exercise of the above authority by the Committee shall be subject to HSBC Amanah MalaysiaBerhad’s normal credit evaluation process as well as the existing credit policies and lendingguidelines, which include the following:

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


28

MANAGEMENT REPORTS

The Board of Directors meetings are structured around a pre-set agenda. The reports for discussion,notation and approvals are circulated in advance of all meetings. To enable the Directors to keepabreast with the performance of the 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 Nominating 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


29

INTERNAL AUDIT AND INTERNAL CONTROL ACTIVITIES

It is the responsibility of all management at all levels to ensure that effective internal controls are inplace for all the operations for which they are responsible. Primary controls within the internal controlenvironment are provided by established and documented procedures, secondary controls bymanagerial and executive supervision. Operational Risk Assurance and Audit provides tertiary controlthrough 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 LiabilityManagement Committee (ALCO), the Executive Committee (EXCO), the Operational Risk andInternal Control Committee, the Audit Committee, the Risk Management Committee and the Board ofDirectors.

Responsibilities for financial performance against plans and for capital expenditure, credit exposuresand market risk exposures are delegated within limits to line management. Functional management inHSBC Group Head Office has been given responsibility to set policies, procedures and standards inthe areas of finance; legal and regulatory compliance; internal audit; human resources; credit; marketrisk; operational risk; computer systems and operations; property management; and for selected globalproduct lines. The Bank operates within these policies, procedures and standards set by the HSBCGroup Head Office functions.

The Bank’s operational risk assurance and audit function monitors compliance with policies andstandards and the effectiveness of internal control structures across the whole Bank in conjunctionwith other HSBC Group Internal Audit units. The work of the operational risk assurance and auditfunction is focused on areas of greatest risk to the Bank on a risk-based approach. The head ofOperational Risk Assurance and Audit reports functionally to the Audit Committee and the RegionalHead of Operational Risk Management Asia Pacific and administratively to the Chief ExecutiveOfficer

The Audit Committee has kept under review the effectiveness of this system of internal control andhas reported regularly to the Board of Directors. The key processes used by the Committee in carryingout its reviews include regular reports from the heads of key risk functions; the annual review of theinternal control framework (RICF – a self certification process) against HSBC Group benchmarks,which covers all internal controls, both financial and non-financial; annual confirmations from theChief Executive Officer that there have been no material losses, contingencies or uncertainties causedby weaknesses in internal controls; 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. TheCommittee has reviewed the internal audit reports, audit recommendations made and management’sresponse to these recommendations. Where appropriate, the Committee has directed actions to betaken by the Bank’s management team to rectify any deficiencies identified by internal audit andimprove the system of internal controls based on the internal auditors’ recommendations forimprovements.


30

DIRECTORS’ REPORT FOR THE YEAR ENDED 31 DECEMBER 2010

The directors have pleasure in presenting their report together with the audited financial statements ofHSBC Amanah Malaysia Berhad (“the Bank”) for the year ended 31 December 2010.

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 63,278Taxation and zakat (18,865)

Profit after taxation and zakat 44,413

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 thosedisclosed in the financial statements.

Other statutory information

Before the statements of comprehensive income and statements of financial position of the Bank werefinalised, the directors took reasonable steps to ascertain that:

i) all known bad debts have been written off and adequate provision made for doubtful debts,and

ii) any current assets which were unlikely to be realised in the ordinary course of business havebeen written down to an amount which they might be expected so to realise.

At the date of this report, the directors are not aware of any circumstances:

i) that would render the amount written off for bad debts, or the amount of the provision fordoubtful debts, in the financial statements of the Bank inadequate to any substantial extent.

ii) that would render the value attributed to the current assets in the financial statements of theBank misleading, or

iii) which have arisen which render adherence to the existing methods of valuation of assets orliabilities of the Bank misleading or inappropriate, or

iv) not otherwise dealt with in this report or the financial statements, that would render anyamount stated in the financial statements of the Bank misleading.


31

Directors’ Report (Cont’d)

Other statutory information (Cont’d)

At the date of this report, there does not exist:

i) any charge on the assets of the Bank that has arisen since the end of the financial year andwhich secures the liabilities of any other person, or

ii) any contingent liability in respect of the Bank that has arisen since the end of the financialyear other than in the ordinary course of business.

No contingent liability or other liability of any company in the Bank has become enforceable, or islikely to become enforceable within the period of twelve months after the end of the financial yearwhich, in the opinion of the directors, will or may affect the ability of the Bank to meet its obligationsas and when they fall due.

In the opinion of the directors, except for those matters disclosed in the financial statements, thefinancial performance of the Bank for the financial year ended 31 December 2010 has not beensubstantially affected by any item, transaction, or event of a material and unusual nature, nor has anysuch item, transaction or event occurred in the interval between the end of that financial year and thedate of this report.

Business Strategy during the Year

2010 has been a year of progressive recovery for the financial services industry. The Bank remainsstrongly capitalised with core capital and risk weighted capital ratios of 16.1% and 17.5%respectively.

During the year, the Bank expanded its network by opening four new branches, and 8 offsite ATMs,bringing its total branch and offsite ATM network to 8 and 9 respectively. The Bank continued todevelop products and solutions in response to market trends and expand its range of products andservices. Amongst the new products introduced were Amanah Premier and Advance; which offersglobally linked up banking services with Shariah compliant financial solutions, Amanah RevolvingFinancing-i and HomeSmart-i Priority.

As a testament to its commitment in providing a comprehensive and innovative range of Islamicfinancing products and services, the Bank was awarded the Best Foreign Islamic Bank in Malaysia for2010 by Alpha Southeast Asia.


32


Outlook For 2011

The Malaysian economy has shown a fairly consistent and progressive pattern of recovery since theonset of the global financial crisis which began in mid-2008. In 2010, the pace of recovery has beenfairly stable, more robust in the earlier part of the year, and gradually more subdued towards the endof the year; partly due to the economy shifting into a more normalised phase, and also over concernson vulnerable Euro area economies and slower than anticipated growth from the larger emergingmarkets. Growth in 2010 was mainly driven by healthy domestic demand and stronger trade activitiesamid slowing external demand. The expansion in domestic demand is expected to be a key driver ofgrowth in 2011.

The Malaysian government is committed to bring about the rapid resumption of growth in theeconomy through the creation of an environment conducive for trade and investment. Under the 10thMalaysia Plan ("10 MP"), the government has allocated RM230 billion as development expenditure.A number of high impact projects have been earmarked for implementation under the 10 MP, and thiscould generate more economic activity and build up the demand for credit and the need for otherbanking services. These, along with further liberalisation efforts in the financial services sector willattract more investors in the long run. The normalising profit rate environment also bodes well for theBank from a net profit margin perspective.

The increase in the number of Islamic financial institutions in the country, and the growth in assets ofthese institutions indicates a robust demand for Islamic financial services. The Bank intends toincrease its current share of high quality assets via the relationship-based approach, and build on crossreferrals and cross selling of various banking products to the Group's existing customers by leveragingon the HSBC brand name, global reach and connectivity. The focus in 2011 will remain on growingthe Premier and Advance proposition, with wealth management services being a key area of attention.

To date, the Bank has 8 branches and 9 offsite ATMs. There are plans to open more branches andoffsite ATMs nationwide within the next two years.

Rigorous credit risk management and strict cost control will remain a key to ensuring a healthybottom line for the business in 2011. Nevertheless, the Bank will continue to deliver quality customerservice and offer innovative banking products and business solutions, while at the same timedeepening relationships with valued clients and customers.


33


Directors and their Interests in Shares

The names of the directors of the Bank in office since the last report and at the date of this report are: Mukhtar Malik Hussain Musa bin Abdul Malek [resigned on 1 August 2010] Mohamed Rafe bin Mohamed Haneef [appointed on 22 November 2010] Mohamed Ross bin Mohd Din Azlan bin Abdullah Mohamed Ashraf bin Mohamed Iqbal Mohd Razlan bin Mohamed Lee Choo Hock

In accordance with the Articles 72 and 107 of the Articles of Association, En Mohamed Ashraf binMohamed Iqbal and En Mohd Razlan bin Mohamed shall retire from the Board at the forthcomingAnnual General Meeting and, being eligible, offer themselves for re-election.

In accordance with Article 78 of the Articles of Association, En Mohamed Rafe bin Mohamed Haneefwho was appointed after the last Annual General Meeting shall retire at the forthcoming AnnualGeneral Meeting, and being eligible, offers himself for re-election.

According to the register of directors’ shareholdings maintained by the Bank in accordance withSection 134 of the Companies Act, 1965, the directors holding office at year end (including thespouses or children of the Directors) who have beneficial interests in the shares of related corporationsare as follows:

Number of shares

Name

Shares heldat 1.1.2010(or at date ofappointment)

Sharesissuedduringthe year*

(Sharesforfeitedduring theyear)

(Sharesvestedduringthe year)

Sharesheld at31.12.2010

HSBC Holdings plc

Restricted Share Plan

Mukhtar Malik Hussain 198,196 - - 198,196 -

* Includes scrip dividends


34


Directors and their Interests in Shares (Cont’d)

Number of Shares

NameHSBC Holdings plcHSBC Share Plan

Awardsheld at 1.1.2010or at date ofappointment

Awardsissuedduring thefinancialyear *

(Awardsforfeitedduring thefinancialyear)

(Awardssold/convertedduring thefinancialyear)

Awards held at31.12.2010

Mukhtar Malik Hussain 546,820 198,510 - - 745,330

* Includes scrip dividends

Number of Shares

NameOptions over HSBC Holdings

plc shares

Balance at1.1.2010 or atdate ofappointment Granted (Exercised) (Lapsed)

Balance at31.12.2010

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


35


Directors’ Benefits

Since the end of the previous financial year, no Director of the Bank has received or become entitledto receive any benefit (other than a benefit included in the aggregate amount of emoluments receivedor due and receivable by Directors as shown in the financial statements or the fixed salary of a full-time employee of the Bank or of a related company) by reason of a contract made by the Bank or arelated corporation with the Director or with a firm of which the Director is a member, or with acompany in which the Director has a substantial financial interest.

Neither at the end of the financial year, nor at any time during that year, did there subsist anyarrangements to which the Bank is a party whereby Directors might acquire benefits by means of theacquisition of shares in, 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 andterms as determined by the schemes, and

ii Directors who were conditionally awarded shares of the ultimate holding company, HSBCHoldings plc, 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, and HSBCHoldings plc, a company incorporated in England, as the immediate and ultimate holding companiesof the Bank respectively.


36


Shariah Committee

The business activities of the Bank are subject to the Shariah compliance and conformation by theShariah Committee consisting of three (3) members appointed by the Board for two (2) year terms.

All Shariah Committee members are expected to participate and engage actively in deliberating onShariah issues put before them. The main duties and responsibilities of the Shariah Committee asstipulated by the Bank’s Shariah Compliance Manual and Guidelines on the Shariah Committee are asfollows:

a. to vet the Memorandum and Articles of Association to ensure Shariah compliance.

b. to make decisions on Shariah matters in an independent and objective manner without undueinfluence or duress and to be responsible and accountable for its Shariah decisions, opinions andviews (details in Appendix 3: Shariah Committee Meeting Procedure.

c. to advise the Board and HSBC Amanah on Shariah matters to help HSBC Amanah to comply withthe Shariah at all times.

d. to attend all HBMS Board meeting and accordingly update the Board members on any Shariahmatters pertaining to HSBC Amanah.

e. to endorse Shariah policies and procedures prepared by HSBC Amanah to ensure that the contentsare Shariah compliant.

f. to approve the product structures and transactions that’s being managed, executed and entered intoby HSBC Amanah.

g. to endorse and validate the following documentations:1 the terms and conditions contained in the forms, contracts, agreements or other legal

documentations used in executing the transactions; and2 the product manual, marketing advertisements, sales illustrations and brochures used to

describe the product.

h. to assess the work carried out by Shariah Review to ensure Shariah compliance.

i. to provide necessary assistance on Shariah matters to HSBC Amanah’s related parties such as itslegal counsel, compliance department and auditors to ensure compliance with the Shariah.


37


Shariah Committee (Cont’d)

j. to provide written Shariah opinions if HSBC Amanah makes a reference to the SAC for furtherdeliberation or HSBC Amanah submits an application to BNM / SC for approval on any newproduct / transaction.

k. to ratify the list of approved matters prepared by the Shariah Department that the operations andbusiness activities of HSBC Amanah are in compliance with Shariah; and

l. to provide Shariah compliant endorsement in the annual financial statements of HSBC Amanah,supported by the Annual Shariah Committee Report.

Zakat Obligations

The Bank only pays zakat on its business.

Auditors

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

HSBC AMANAII MALAYSIA BERHADCompany No. 807705-XIncorporated in Malaysia

Directors' Report (Cont'd)

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

! Director

`! Director

MOHAMED RAFE BIN MOHAMED HANEEF

Kuala Lumpur, Malaysia8 February 2011

38


DIRECTORS' STATEMENT

In the opinion of the directors:

We, Mukhtar Malik Hussain and Mohamed Rafe bin Mohamed Haneef, being two of the directors ofHSBC Amanah Malaysia Berhad, do hereby state on behalf of the directors that, in our opinion, thefinancial statements set out on pages 45 to 109 are drawn up in accordance with the provisions of theCompanies Act, 1965 and Financial Reporting Standards as modified by Bank Negara Malaysia'sguidelines so as to give a true and fair view of the financial position of the Bank as at 31 December2010 and of the financial performance and cash flows of the Bank for the financial year ended on thatdate.

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

DirectorMOHAMED RAFE BIN MOHAMED HANEEF


39


STATUTORY DECLARATION

I, Baldev Singh s/o Gurdial Singh, being the officer primarily responsible for the financialmanagement of HSBC Amanah Malaysia Berhad, do solemnly and sincerely declare that, to the bestof my knowledge and belief, the financial statements set out on pages 45 to 109 are correct, and Imake this solemn declaration conscientiously believing the same to be true, and by virtue of theprovisions of the Statutory Declarations Act, 1960.

Subscribed and solemnly declared by the above named in Kuala Lumpur, Malaysia on 8th February2011.

BEFORE ME:

SLAY20th Floor, Ambank Group

BuildingNo 55, Jalan Raja Chulan

50200 Kuala Lumpur.

40


41

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, hisfamily and companions.

Assalamu ‘Alaikum Warahmatullahi Wabarakatuh

In carrying out the roles and responsibilities as Shariah Committee of HSBC Amanah MalaysiaBerhad as prescribed in the Shariah Governance Framework for Islamic Financial Institutions issuedby 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 2010:

1. We have conducted nineteen (19) meetings for the whole year of 2010 and reviewed the principlesand the contracts relating to the transactions and applications introduced by HSBC AmanahMalaysia Berhad during the financial year ended 31 December 2010 to ensure conformity withShariah requirements.

2. We have also conducted our review to form an opinion as to whether HSBC Amanah MalaysiaBerhad has complied with the Shariah principles and with the Shariah rulings issued by the ShariahAdvisory Council of Bank Negara Malaysia, as well as Shariah decisions made by us.

3. The management of HSBC Amanah Malaysia Berhad is responsible for ensuring that the financialinstitution conducts its business in accordance with Shariah principles. It is our responsibility toform an independent opinion, based on our review of the operations of HSBC Amanah MalaysiaBerhad, and to report to you.

4. We have assessed the work carried out by Shariah department which included pre and postexamination, on a test basis, each type of transaction, the relevant documentation and proceduresadopted by HSBC Amanah Malaysia Berhad.

5. In performing our duties, we planned and performed our review and had obtained all theinformation and explanations which we considered indispensable and necessary in order to provideus with satisfactory evidence to arrive at fair Shariah decisions and to give reasonable assurancethat HSBC Amanah Malaysia Berhad has complied with Shariah requirements and has not violatedthe Shariah rules and principles.

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

a) the contracts, transactions, dealings entered into by HSBC Amanah Malaysia Berhad during thefinancial year ended 31 December 2010 have been reviewed by us and are in compliance withShariah rules and principles; and

b) the allocation of profit and charging of losses relating to investment accounts conform to the basisthat had been approved by us in accordance with Shariah principles.


SHA1UAH COMMITTEE'S REPORT (Cont'd)

We, the members of the Shariah Committee of HSBC Amanah Malaysia Berhad, do hereby confirmthat, to our view, the operations of HSBC Amanah Malaysia Berhad for the financial year ended 31December 2010 have been conducted in conformity with the Shariah principles.

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

Wassalamu `Alaikum Warahmatullahi Wabarakatuh

Chairman of the Shariah Committee(Assoc. Prof. Dr. Younes Soualhi)

Member of the Shariah Committee(Khairul Anuar Ahmad)


..................................

42

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 MEMBER OF HSBC AMANAH MALAYSIA BERHAD

Report on the Financial Statements

We have audited the financial statements of HSBC Amanah Malaysia Berhad, which comprise thestatement of financial position as at 31 December 2010, and the statements of comprehensive income,statement of changes in equity and statement of cash flow for the year then ended, and a summary ofsignificant accounting policies and other explanatory notes, as set out on pages 45 to 109.

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 inMalaysia as modified by Bank Negara Guidelines, and for such internal control as the directorsdetermine are necessary to enable the preparation of financial statements that are free from materialmisstatement, whether due to fraud or error.

Auditors' Responsibility

Our responsibility is to express an opinion on these financial statements based on our audit. Weconducted our audit in accordance with approved standards on auditing in Malaysia. Those standardsrequire that we comply with ethical requirements and plan and perform the audit to obtain reasonableassurance whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosuresin the fmancial statements. The procedures selected depend on our judgement, including theassessment of risks of material misstatement of the financial statements, whether due to fraud or error.In making those risk assessments, we consider internal control relevant to the Bank's preparation ofthe financial statements that give a true and fair view in order to design audit procedures that areappropriate in the circumstances, but not for the purpose of expressing an opinion on the effectivenessof the Bank's internal control. An audit also includes evaluating the appropriateness of accountingpolicies used and the reasonableness of accounting estimates made by the Directors, as well asevaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basisfor our audit opinion.

Opinion

In our opinion, the financial statements have been properly drawn up in accordance with theCompanies Act, 1965 and Financial Reporting Standards in Malaysia as modified by Bank NegaraMalaysia Guidelines so as to give a true and fair view of the financial position of the Bank as of 31December 2010 and of its financial performance and cash flows for the year then ended.

43

KPMG, a partnership established under Malaysian law and amember firm of the KPMG network of independent member firmsaffiliated with KPMG International Cooperative ("KPMGInternational"), a Swiss entity.

KPMG

Independent Auditors' Report (Cont'd)

Report on Other Legal and Regulatory Requirements

In accordance with the requirements of the Companies Act, 1965 in Malaysia, we also report that inour opinion the accounting and other records and the registers required by the Act to be kept by theBank have been properly kept in accordance with the provisions of the Act.

Other Matters

This report is made solely to the member of the Bank, as a body, in accordance with Section 174 ofthe Companies Act, 1965 in Malaysia and for no other purpose. We do not assume responsibility toany other person for the content of this report.

/(/'/t/tt_

/1)L4

KPMG

Foong Mun KongFirm Number: AF 0758

Approval Number: 2613/12/12(J)Chartered Accountants

Chartered Accountant

Date: 8 February 2011

Petaling Jaya

44

31 Dec 2010 31 Dec 2009Note RM'000 RM'000

AssetsCash and short-term funds 6 1,508,998 687,308Financial Assets Held-for-Trading 7 148,006 127,386Financial Investments Available-for-Sale 8 330,665 384,220Financing and advances 9 4,636,276 3,164,973Other assets 11 59,035 376,653Statutory deposits with Bank Negara Malaysia 12 34,729 28,529Equipment 13 16,425 7,500Intangible assets 14 1,499 2,223Deferred tax assets 15 18,002 13,884

Total Assets 6,753,635 4,792,676

LiabilitiesDeposits from customers 16 3,782,536 2,472,411Deposits and placements of banks

and other financial institutions 17 2,084,599 1,510,907Bills and acceptances payable 5,531 3,298Other liabilities 18 92,005 61,629Provision for taxation and zakat 19 4,448 3,787

Total Liabilities 5,969,119 4,052,032

Shareholders' EquityShare capital 20 50,000 50,000Reserves 21 734,516 690,644

Total Shareholders' Equity 784,516 740,644

Total Liabilities and Shareholders' Equity 6,753,635 4,792,676

Commitments and Contingencies 34 1,823,148 1,680,000



STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2010

The financial statements were approved for issue by the Board of Directors on 8 February 2011.

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

45

31 Dec 2010 31 Dec 2009Note RM'000 RM'000

Income derived from investment ofdepositors' funds and others 22 314,951 248,760

Income derived from investment ofshareholders' funds 23 78,811 74,191

Impairment losses on financing 24 (70,844) (47,440)

Total distributable income 322,918 275,511

Income attributable to depositors 25 (100,059) (75,315)

Total net income 222,859 200,196

Personnel expenses 26 (23,470) (15,849)Other overheads and expenditures 27 (136,111) (106,919)

Profit before taxation and zakat 63,278 77,428

Taxation and zakat 29 (18,865) (19,942)

Profit for the year 44,413 57,486

Other comprehensive incomeNet loss on revaluation of

financial investments available-for-sale (765) (872)Income tax relating to components of

other comprehensive income 192 218Other comprehensive income for the

year, net of tax (573) (654)

Total comprehensive income for the year 43,840 56,832

Basic earnings per RM0.50 ordinary share 30 44.4 sen 57.5 sen

FOR THE YEAR ENDED 31 DECEMBER 2010



STATEMENT OF COMPREHENSIVE INCOME



46

DistributableAvailable-

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

RM'000 RM'000 RM'000 RM'000 RM'000 RM'0002009Balance as at 1 January 2009 50,000 610,000 11,361 1,091 11,360 683,812Total comprehensive income for the yearNet profit for the year - - - - 57,486 57,486Transfer to Statutory Reserve - - 28,743 - (28,743) -Other comprehensive income, net of income taxNet unrealised losses on revaluation of

financial investments available-for-sale, net of tax - - - (654) - (654)Total other comprehensive income - - - (654) - (654)Total comprehensive income for the year - - - (654) 28,743 56,832Balance as at 31 December 2009 50,000 610,000 40,104 437 40,103 740,644

2010Balance as at 1 January 2010, as previously stated 50,000 610,000 40,104 437 40,103 740,644- effect of adopting FRS 139 - - - - 32 32Balance as at 1 January 2010, restated 50,000 610,000 40,104 437 40,135 740,676Total comprehensive income for the yearNet profit for the year - - - - 44,413 44,413Transfer to Statutory Reserve - - 9,896 - (9,896) -Other comprehensive income, net of income taxNet unrealised losses on revaluation of

financial investments available-for-sale, net of tax - - - (573) - (573)Total other comprehensive income - - - (573) - (573)Total comprehensive income for the year - - - (573) 34,517 43,840Balance as at 31 December 2010 50,000 610,000 50,000 (136) 74,652 784,516

Non-distributable



STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2010



47

31 Dec 2010 31 Dec 2009RM'000 RM'000

Cash Flows from Operating ActivitiesProfit before taxation and zakat 63,278 77,428Adjustments for :

Equipment written off 1 -Depreciation of equipment 3,625 1,553Amortisation of intangible assets 736 687Net loss on disposal of equipment - (56)

Operating profit before changes in operating assets and liabilities 67,640 79,612

(Increase)/ Decrease in operating assetsFinancial assets held-for-trading (20,620) 140,352Financing and advances (1,471,271) (237,942)Other assets 317,618 (255,487)Statutory deposits with Bank Negara Malaysia (6,200) 44,000

Increase/ (Decrease) in operating liabilitiesDeposits from customers 1,310,125 (771,930)Deposits and placements of banks and other financial institutions 573,692 541,612Bills and acceptances payable 2,233 2,245Other liabilities 30,387 (23,208)

Net cash generated from/ (used in) operating activities before income tax 803,604 (480,746)Taxation paid (22,121) (13,419)Zakat paid (20) -

Net cash generated from/ (used in) operating activities 781,463 (494,165)

Cash Flows from Investing ActivitiesPurchase of equipment (12,567) (6,743)Purchase of intangible assets (12) (1,546)Proceeds from disposal of equipment 16 229Financial investments available-for-sale 52,790 180,450

Net cash generated from investing activities 40,227 172,390

Net increase in Cash and Cash Equivalents 821,690 (321,775)Cash and Cash Equivalents at beginning of the year 687,308 1,009,083Cash and Cash Equivalents at end of the year 1,508,998 687,308

Analysis of Cash and Cash EquivalentsCash and short-term funds 1,508,998 687,308


HSBC AMANAH MALAYSIA BERHAD

STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2010

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

48

HSBC Amanah Malaysia Berhad807705-X

49



NOTES TO THE FINANCIAL STATEMENTS AS AT 31 DECEMBER 2010

1 General Information

HSBC Amanah Malaysia Berhad (“the Bank”) incorporated on 26 February 2008, is a licensed IslamicBank under the Islamic Banking Act, 1983. The registered office of the Bank is at No. 2, LebohAmpang, 50100 Kuala Lumpur.

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

There were no significant changes in these activities during the financial year.

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, generally accepted accounting principles and Financial Reporting Standards(“FRS”) issued by the Malaysian Accounting Standards Board ("MASB") as modified by Bank NegaraMalaysia's ("BNM") guidelines and Shariah requirements.

All significant accounting policies adopted are consistent with those of the audited annual financialstatements for the year ended 31 December 2009, except for the adoption of the following FRSs,amendments to FRSs, Issues Committee ("IC") Interpretations and Technical Release.

FRSs / Interpretations-FRS 127, Consolidated and Separate Financial Statements: Cost of an Investment in a Subsidiary,Jointly Controlled Entity or Associate-Amendments to FRS 2, Share-based Payment: Vesting Conditions and Cancellations-FRS 7, Financial Instruments: Disclosures-FRS 101, Presentation of Financial Statements-Amendments to FRS 132, Financial Instruments: Presentation and FRS 101, Presentation of FinancialStatements – Puttable Financial Instruments and Obligations Arising on Liquidation-FRS 139, Financial Instruments: Recognition and Measurement-Amendments to FRS 139, Financial Instruments: Recognition and Measurement, FRS 7, FinancialInstruments: Disclosures and IC Interpretation 9, Reassessment of Embedded DerivativesTR i-3, Presentation of Financial Statements of Islamic Financial Institutions-Improvements to FRSs (2009)-IC Interpretation 9, Reassessment of Embedded Derivatives-IC Interpretation 10, Interim Financial Reporting and Impairment-IC Interpretation 11, FRS 2 - Group and Treasury Share Transactions


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2 Basis of Preparation (Cont’d)

(a) Statement of compliance (Cont’d)

FRS 4 (Insurance Contracts), FRS 8 (Operating Segments) and IC Interpretation 14 (FRS 119 -TheLimit on a Defined Benefit Asset, Minimum Funding Requirements and Their Interaction) are notapplicable to the Bank. The adoption of FRS 7, FRS 101 and amendments to FRS 132 did not impactthe financial results of the Bank, as the changes introduced are presentational in nature. The changes inpresentation arising from the adoption of FRS7 and FRS 101 are disclosed in Note 2(e). The principaleffects of the changes in accounting policies arising from the adoption of FRS 139 and its relatedamendments are disclosed in Note 2(e).

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. BNM's guidelines on Classification and Impairment Provisions forLoans/Financing issued on 8 January 2010 require banking institutions to maintain collectiveimpairment provisions of at least 1.5% of total outstanding loans/financing, net of individual impairmentprovision. Subject to the prior written approval from BNM, banking institutions are allowed to maintaina collective impairment assessment provision based on the banks’ respective collective impairmentassessment methodology.

The adoption of the remaining FRSs, amendments to FRSs, IC Interpretations and TR did not have anymaterial impact on the financial results of the Bank.

The Bank has not applied the following accounting standards, amendments and interpretations that havebeen issued by the MASB as they are either not applicable or not yet effective for the Bank.

FRS/ Interpretations Effective date- FRS 1, First-time Adoption of Financial Reporting Standards 1 July 2010- FRS 3, Business Combinations 1 July 2010- FRS 124, Related Party Disclosures (revised) 1 Jan 2012- 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 Jan 2012- 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- IC Interpretation 18, Transfer of Assets from Customers 1 Jan 2011- IC Interpretation 19, Extinquishing Financial Liabilities with Equity Instruments 1 July 2011- Amendments to FRS 1,First Time Adoption of Financial Reporting Standards-

Limited Exemption from Comparative FRS 7 Disclosures for First-timeAdopters and Additional Exemptions for First-time Adopters 1 Jan 2011

- Amendments to FRS 2, Share-based Payment IC 1 July 2010- Amendments to FRS 2, Group Cash-settled Share-based Payment Transactions 1 Jan 2011- Amendments to FRS 5, Non-current Assets Held for Sale and Discontinued

Operations 1 July 2010- Amendments to FRS 7, Financial Instruments: Disclosures – ImprovingDisclosures about Financial Instruments 1 Jan 2011

- Amendments to FRS 138, Intangible Assets 1 July 2010- Amendments to IC Interpretation 9, Reassessment of Embedded Derivatives 1 July 2010- Amendments to IC Interpretation 14, Prepayments of a Minimum Funding

Requirement 1 July 2011- Improvements to FRSs (2010) 1 Jan 2011- Amendments to FRS 132, Financial Instruments : Presentation – Classificationof Rights Issues 1 March 2010


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(a) Statement of compliance (Cont’d)

The new requirements above take effect for the annual periods beginning on or after 1 July 2010, exceptfor :i) Amendments to FRS 132, Financial Instruments: Presentation – Classification of Rights Issues

which applies for annual periods beginning on or after 1 March 2010,ii) IC Interpretations 4 and 18 and Amendments to FRS 1 and 2 (Group Cash-settled Share-based

Payment Transactions) and 7 and Improvements to FRSs (2010) which apply for annual periodsbeginning on or after 1 January 2011,

iii) IC Interpretation 19 and Amendments to IC Interpretation 14 which applies for annual periodsbeginning on or after 1 July 2011, and

iv) FRS 124 and IC Interpretation 15 which applies for annual periods beginning on or after 1 January2012.

The Bank plans to apply the abovementioned standards, amendments and interpretations from theannual period beginning 1 January 2011 for those standards, amendments or interpretations that will beeffective for annual periods beginning on or after 1 March 2010, 1 July 2010 and 1 January 2011, exceptfor IC Interpretations 12, 15, 16 and 17 which are not applicable to the Bank. IC Interpretations 12, 15,16 and 17 are not expected to have any impact on the financial statements of the Bank as they are notrelevant to the operations of the Bank.

The initial application of a standard, and amendment or an interpretation, which will be appliedprospectively or which requires extended disclosures, is not expected to have any financial impact to thecurrent and prior periods’ financial statements upon their first application.

The initial applications of the other standards, amendments and interpretations are not expected to haveany material impact on the financial statements of the Bank.

(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: Financial assets held-for-trading Financial investments available-for-sale Property and equipment Financial instruments

(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.


52


(d) Use of estimates and judgements

The preparation of the financial statements in conformity with FRSs requires management to makejudgements, estimates and assumptions that affect the application of accounting policies and thereported amounts of assets, liabilities, income and expenses. Actual results may differ from theseestimates.

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.

There are no significant areas of estimation uncertainty and critical judgements in applying accountingpolicies that have significant effect on the amounts recognised in the financial statements other thanthose disclosed in the following notes:Estimation of recoverable amount based on the discounted cash flow methodology for impaired

financing (Note 3(k))Use of estimates and judgements (Note 5 )

(e) Change in accounting policy

The adoption of the new FRSs and amendments to FRSs shown below during the financial year hasresulted in the following changes in accounting policies: FRS 139, Financial Instruments: Recognition and Measurement Amendments to FRS 139, Financial Instruments: Recognition and Measurement, FRS 7, Financial Instruments: Disclosures IC Interpretation 9, Reassessment of Embedded Derivatives FRS 101, Presentation of Financial Statements

i) FRS 139, Financial Instruments: Recognition and Measurement

Prior to FRS 139 coming into effect on 1 January 2010, BNM's revised Guidelines on FinancialReporting for Licensed Institutions issued on 1 January 2005 adopted certain principles inconnection with the recognition, derecognition and measurement of financial instruments, includingderivative instruments, and hedge accounting that are in line with FRS 139 principles. By adhering tothe BNM guidelines, the Bank adopted these FRS 139 principles. Therefore, the adoption of FRS139 on 1 January 2010 only impacted areas where the FRS 139 principles were previously notincorporated into BNM’s Guidelines issued in 2005 and these areas are disclosed below:

Impairment of Financing and AdvancesThe Bank’s financing and advances and financing impairment policy and allowances for impairedfinancing and advances are in conformity with FRS 139 and the requirements of Bank NegaraMalaysia's revised “Guidelines on Classification and Impairment Provisions forLoans/Financing”.

In line with the Amendments to FRS 139 which relates to the transitional arrangement for thefinancial sector, BNM's “Guidelines on Classification and Impairment Provisions forLoans/Financing” issued on 8 January 2010 prescribes that banking institutions are required tomaintain collective impairment allowances of at least 1.5% of total outstanding financing, net ofindividual impairment allowance. This is similar to the previous regulatory requirement wherebybanking institutions were required to maintain general allowance provisions of at least 1.5% oftotal outstanding financing, net of specific allowance, with the exception that the determination ofindividual impairment allowance is required to be based on reasonable and well-documentedestimates of the net present value of the future cash flows that the banking institutions expect torecover. Previously, BNM allowed specific allowance to be made based on the number of days inarrears of the financing.


53


(e) Change in accounting policy (Cont’d)

Prior to 1 January 2010, the Bank’s accounting policy relating to the classification of impairedfinancing and advances and the assessment of individual impairment allowances (previouslyreferred to as specific allowances) on impaired financing (previously referred to as non-performing financing) was already largely in line with the requirements of FRS 139. The mainchange upon full adoption of FRS 139 and BNM's revised “Guidelines on Classification andImpairment Provisions for Loans/Financing” from 1 January 2010 onwards, is that BNM’sprevious requirement for additional individual impairment allowances for impaired financing ofmore than 5 years and 7 years is no longer applicable under FRS 139 principles.

In view of the above, there have been minimum changes to the opening retained profits as well asopening individual or collective impairment allowance balances.

Profit Income Recognition

Prior to the adoption of FRS 139, profit income recognised as income 90 days prior to the datethat a financing was classified as non-performing, would be reversed out of income and a profit insuspense was created. Thereafter, profit on the non-performing financing was only recognised asincome upon recovery. With the adoption of FRS 139, once a financing has been assessed asimpaired, there is no claw back of profit income recognised previously and profit income on theimpaired financing is recognised using the rate of profit used to discount the future cash flows forthe purpose of measuring the impairment loss.

Recognition of Embedded Derivatives

IC Interpretation 9 on Reassessment of Embedded Derivatives requires embedded derivatives tobe separated from the host contract and accounted for as a derivative if the economiccharacteristics and risks of the embedded derivative are not closely related to that of the hostcontract and the fair value of the resulting derivative can be reliably measured.

The Bank’s booking of embedded derivatives was already in line with this principle and hence,the implementation of IC Interpretation 9 has no impact on the Bank’s financials.

ii) FRS 101, Presentation of Financial Statements

As a result of the adoption of the revised FRS 101, income statement of the Bank for thecomparative year ended 31 December 2009 has been re-presented as a single statement ofcomprehensive income displaying components of profit and loss and other comprehensive income.All non-owner changes in equity which were previously presented in the statement of changes inequity are now included in the statement of comprehensive income as other comprehensive income.Since these changes only affect presentation aspects, there is no impact on earnings per ordinaryshare.


54


(e) Change in accounting policy (Cont’d)

iii) FRS 7, Financial Instruments: Disclosures

The adoption of FRS 7 during the financial period resulted in some changes to the disclosure offinancial instruments, whereby the disclosures are now made by categories of financial assets andliabilities. The disclosure of comparative figures in the statement of financial position as at 31December 2009 and the statement of comprehensive income for the year ended 31 December 2009have been restated to conform with the current period's presentation. Since these changes only affectthe presentation of disclosure items, there is no impact on the financial results of the Bank for thecomparative period.

iv) FRS 139, Financial Isntruments: Recognition and MeasurementThe opening retained earnings of the bank have been adjusted to reflect the recognition of discountunwind of individual impairment and the related deferred tax income/expense on the discountunwind balances not previously recognised in the Bank’s financial statements prior to 1 January2010 even though the Bank has adopted the discounted cash flow method to determine specificallowance required on non-performing financing.

As restatedAs previously

statedRM’000 RM’000

Reserves:-Retained profit 40,135 40,103

3 Significant Accounting Policies

The accounting policies set out below have been applied consistently to the periods presented in thesefinancial statements and have been applied consistently by the Bank, except as explained in Note 2(e), whichaddresses changes in accounting policies.

(a) Foreign Currency Transactions

Transactions in foreign currencies are translated to the functional currency of the Bank at exchange ratesat the dates of the transactions. The functional currency of the Bank is Ringgit Malaysia

Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated tothe functional currency at the exchange rates at that date.

Foreign currency differences arising on translation are recognised in the statement of comprehensiveincome.


55

3 Significant Accounting Policies (Cont’d)

(b) Recognition of Financing Income and Financing Expenses

Financing income and attributable profits on deposits and borrowings are recognised on an accrual basisapplying the effective profit rate method in accordance with the principles of Shariah. Financingexpense and income attributable on deposits and borrowings are amortised using the effective profit ratemethod in accordance with the principles of Shariah.

The effective profit rate is the rate that exactly discounts the estimated future cash payments andreceipts through the expected life of the financial asset or liability, or where appropriate, a shorterperiod, to the net carrying amount of the financial asset or liability. When calculating the effective profitrate, the Bank estimates cash flows considering all contractual terms of the financial instrument but notfuture credit losses.

The calculation includes all amounts paid or received by the Bank that are an integral part of theeffective profit rate of a financial instrument, including transaction costs and all other premiums ordiscounts.

(c) Recognition of Fees and Commission, Net Trading Income and Other Operating Income

The Bank earns fee income from a diverse range of services it provides to its customers. Fee income isaccounted for as follows:

- if the income is earned on the execution of a significant act, it is recognised as revenue when thesignificant act has been completed;

- if the income is earned as services are provided, it is recognised as revenue as the services areprovided; and

- Fee and commission income and expense that are integral to the effective profit rate on a financialasset or liability are included in the measurement of the effective profit rate. It is recognised as anadjustment to the effective profit rate and recorded in ‘financing income’ (see Note 3 b).

Dividend income from equity securities is recognised when the right to receive payment is established.

Net trading income comprises gains and losses from changes in the fair value of financial assets held-for-trading, together with the related profit income.


56


(d) Income tax expense

Income tax expense comprises current and deferred tax. Income tax expense is recognised in statementof comprehensive income except to the extent that it relates to items recognised directly in equity orother comprehensive income.

Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted orsubstantively enacted by the end of the reporting period, and any adjustment to tax payable in respect ofprevious years. Current tax assets and liabilities are offset when the Bank intends to settle on a net basisand the legal right to offset exists.

Deferred tax is recognised using the liability method, providing for temporary differences between thecarrying amounts of assets and liabilities in the statement of financial position and their tax bases.Deferred tax is not recognised for the initial recognition of assets or liabilities in a transaction thataffects neither accounting nor taxable profit or loss. Deferred tax is measured at the tax rates that areexpected to apply to the temporary differences when they reverse, based on the laws that have beenenacted or substantively enacted by the end of the reporting period.

Deferred tax liabilities are generally recognised for all taxable temporary differences. A deferred taxasset is recognised to the extent that it is probable that future taxable profits will be available againstwhich the temporary difference can be utilised. Deferred tax assets are reviewed at the end of eachreporting period and are reduced to the extent that it is no longer probable that the related tax benefitwill be realised.

(e) Financial instruments

i) Initial recognition and measurementThe Bank initially recognises financing and advances, deposits, debt securities issued and subordinatedliabilities on the date at which they are originated. Regular way purchases and sales of financial assetsare recognised on the trade date at which the Bank commits to purchase or sell the asset. All otherfinancial assets and liabilities (including assets and liabilities designated at fair value through statementof comprehensive income) are initially recognised on the trade date at which the Bank becomes a partyto the contractual provisions of the instrument.

A financial asset or financial liability is measured initially at fair value plus transaction costs that aredirectly attributable to its acquisition or issue.

ii) ClassificationSee accounting policies in Notes 3(h), 3(i), 3(j).

iii) DerecognitionFinancial assets are derecognised when the contractual right to receive cash flows from the assets hasexpired; or when the Bank have transferred its’ contractual right to receive the cash flows of thefinancial assets, and either:– substantially all the risks and rewards of ownership have been transferred; or– the Bank has neither retained nor transferred substantially all the risks and rewards, but has notretained control.

Financial liabilities are derecognised when the Bank’s contractual obligations are discharged, cancelled,or expire.


57


(e) Financial instruments (Cont’d)

iv) OffsettingFinancial assets and financial liabilities are offset and the net amount reported in the statement offinancial position when there is a legally enforceable right to offset the recognised amounts and there isan intention to settle on a net basis, or realise the asset and settle the liability simultaneously.

Income and expenses are presented on a net basis only when permitted under the FRSs, or for gains andlosses arising from a group of similar transactions such as in the Bank’s trading activities.

v) Amortised cost measurementThe amortised cost of a financial asset or liability is the amount at which the financial asset or liability ismeasured at initial recognition, minus principal repayments, plus or minus the cumulative amortisationusing the effective profit method of any difference between the initial amounts recognised and thematurity amount, minus any reduction for impairment.

vi) Fair value measurementAll financial instruments are recognised initially at fair value. In the normal course of business, the fairvalue of a financial instrument on initial recognition is the transaction price (that is, the fair value of theconsideration given or received). In certain circumstances, however, the fair value will be based onother observable current market transactions in the same instrument, without modification orrepackaging, or on a valuation technique whose variables include only data from observable markets,such as profit rate yield curves, option volatilities and currency rates. When such evidence exists, theBank recognises a trading gain or loss on inception of the financial instrument, being the differencebetween the transaction price and the fair value. When unobservable market data have a significantimpact on the valuation of financial instruments, the entire initial difference in fair value indicated bythe valuation model from the transaction price is not recognised immediately in statement ofcomprehensive income but is recognised over the life of the transaction on an appropriate basis, or whenthe inputs become observable, or the transaction matures or is closed out, or when the Bank enters intoan offsetting transaction.

Subsequent to initial recognition, the fair values of financial instruments measured at fair value that arequoted in active markets are based on bid prices for assets held and offer prices for liabilities issued.When independent prices are not available, fair values are determined by using valuation techniqueswhich refer to observable market data. These include comparison with similar instruments where marketprices exist, discounted cash flow analysis, option pricing models and other valuation techniquescommonly used by market participants. Fair values of financial instruments may be determined in wholeor in part using valuation techniques based on assumptions that are not supported by prices from currentmarket transactions or observable market data, where current prices or observable market data are notavailable.

Valuation techniques incorporate assumptions about factors that other market participants would use intheir valuations, including profit rate yield curves, exchange rates, volatilities, and prepayment anddefault rates. If there are additional factors that are not incorporated within the valuation model butwould be considered by market participants, further fair value adjustments are applied to modelcalculated fair values. These fair value adjustments include adjustments for bid-offer spread, modeluncertainty, credit risk and model limitation. Where a financial instrument has a quoted price in anactive market and it is part of a portfolio, the fair value of the portfolio is calculated as the product of thenumber of units and quoted price and no block discounts are made.

If the fair value of a financial asset measured at fair value becomes negative, the financial instrument isrecorded as a financial liability until the fair value becomes positive, at which time the financialinstrument is recorded as a financial asset.


58


(e) Financial instruments (Cont’d)

vi) Fair value measurement (Cont’d)

The fair values of financial liabilities are measured using quoted market prices where available, or usingvaluation techniques. These fair values include market participants’ assessments of the appropriatecredit spread to apply to the Bank’s liabilities. The amount of change during the period, andcumulatively, in the fair value of designated financial liabilities and financing and advances that isattributable to changes in their credit spread is determined as the amount of change in the fair value thatis not attributable to changes in market conditions that give rise to market risk.

vii) Identification of impairmentAt each reporting date the Bank assesses whether there is objective evidence that financial assets notcarried at fair value through profit or loss are impaired. A financial asset or a group of financial assets is(are) impaired when objective evidence demonstrates that a loss event has occurred after the initialrecognition of the asset(s), and that the loss event has an impact on the future cash flows of the asset(s)that can be estimated reliably.

An asset is to be assessed as impaired when, and only when, there is objective evidence of impairmentas a result of an event that occurred after the initial recognition of the asset (a “loss event”) and that lossevent has an adverse impact on the cash flows of the asset which can be reliably estimated.

The criteria used by the Bank to help determine whether there is objective evidence of impairment ofsuch an asset include: known cash flow difficulties experienced by the borrower; an overdue contractual payment of principal or profit; breach of financing covenants or conditions; the probability that the borrower will enter bankruptcy or other distressed financial reorganisation, based on conditions existing at the reporting date; and a significant downgrading in credit rating by an external credit rating agency - not in itself evidence

of impairment, but to be considered in conjunction with other information

The Bank takes a prudent approach, through its criteria for assessing whether objective evidence ofimpairment exists, to interpretation of the term ‘objective evidence’ and to quantifying impairmentallowance requirements. However, it also allows circumstances in which, in the absence of otherindicators of impairment, exposures designated as past due will not normally be regarded as impaired,including: individually assessed financing fewer than 90 days past due; financing fully secured by cash collateral; short-term trade facilities technically overdue, for instance through documentation delay, but where

there is no concern over the creditworthiness of the customer/ counterparty; and residential mortgages in arrears by 90 days or more, where the value of collateral is sufficient to

meet the repayment of the principal debt and all potential profit for at least, normally, one year.

(f) Cash and cash equivalents

For the purpose of the statement of cash flows, cash and cash equivalents comprise cash and bankbalances, and short term deposits and placements maturing within one month that is readily convertibleto known amounts of cash and which are subject to insignificant risk of change in value.


59


(g) Resale and Repurchase Agreements

Securities purchased under resale agreements are securities which the Bank had purchased with acommitment to resell at future date. The commitment to resell the securities is reflected as an asset onthe statement of financial position.

Conversely, obligation on securities sold under repurchase agreements are securities which the Bankhad sold from its portfolio, with a commitment to repurchase at future dates. Such financing transactionsand the obligation to repurchase the securities are reflected as a liability on the statement of financialposition.

(h) Financial assets held-for-trading

Financial assets are classified as held-for-trading if they have been acquired principally for the purposeof selling or repurchasing it in the near term or they form part of a portfolio of identified financial assetsthat are managed together and for which there is evidence of a recent actual pattern of short-term profit-taking. These financial assets are recognised on trade date, when the Bank enters into contractualarrangements with counterparties to purchase or sell the financial assets, and are normally derecognisedwhen sold. Measurement is initially at fair value, with transaction costs taken to statement ofcomprehensive income. Subsequently, the fair values are remeasured, and gains and losses therein,together with any related profit earned are recognised in statement of comprehensive income as ‘Nettrading income’.

(i) Financial investments

i Held-to-maturityHeld-to-maturity investments are non-derivative financial assets with fixed or determinablepayments and fixed maturities that the Bank positively intends, and is able, to hold to maturity.These investments are initially recorded at fair value plus any directly attributable transaction costs,and are subsequently measured at amortised cost using the effective profit rate method, less anyimpairment losses.

i i Available-for-saleAvailable-for-sale investments are non derivative financial assets that are not classified as held-for-trading or held-to-maturity investments; and are initially measured at fair value plus direct andincremental transaction costs. They are subsequently remeasured at fair value, and changes thereinare recognised in other comprehensive income in ‘Available-for-sale investments – fair valuegains/(losses)’ until the financial assets are either sold or become impaired. When available-for-salefinancial assets are sold, cumulative gains or losses previously recognised in other comprehensiveincome are recognised in statement of comprehensive income as ‘Net gains/losses arising from thesale of financial investments available-for-sale’.

Investments in equity instruments that do not have a quoted market price in an active market andwhose fair value cannot be reliably measured are stated at cost.

Profit earned is recognised on available-for-sale debt securities using the effective profit ratemethod, calculated over the asset’s expected life. Premiums and/or discounts arising on thepurchase of dated investment securities are included in the calculation of their effective profit rates.Dividends on available-for-sale equity instruments are recognised in statement of comprehensiveincome when the right to receive payment is established.


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(i) Financial investments (Cont’d)

ii Available-for-sale (Cont’d)

An assessment is made at each reporting date as to whether there is any objective evidence ofimpairment in the value of a financial asset. Impairment losses are recognised if, and only if, thereis objective evidence of impairment as a result of one or more events that occurred after the initialrecognition of the financial asset (a ‘loss event’) and that loss event (or events) has an impact onthe estimated future cash flows of the financial asset that can be reliably estimated.

If the available-for-sale financial asset is impaired, the difference between the financial asset’sacquisition cost (net of any principal repayments and amortisation) and the current fair value, lessany previous impairment loss recognised in the statement of comprehensive income, is removedfrom other comprehensive income and recognised in the statement of comprehensive income.

Impairment losses for available-for-sale debt securities are recognised within ‘Financingimpairment charges and other credit risk provisions’ in the statement of comprehensive income andimpairment losses for available-for-sale equity securities are recognised within ‘Impairment losseson available-for-sale financial investments’ in the statement of comprehensive income.

Once an impairment loss has been recognised on an available-for-sale financial asset, thesubsequent accounting treatment for changes in the fair value of that asset differs depending on thenature of the available-for-sale financial asset concerned:

for an available-for-sale debt security, a subsequent decline in the fair value of the instrument isrecognised in the statement of comprehensive income when there is further objective evidenceof impairment as a result of further decreases in the estimated future cash flows of the financialasset. Where there is no further objective evidence of impairment, the decline in the fair valueof the financial asset is recognised in other comprehensive income. If the fair value of a debtsecurity increases in a subsequent period, and the increase can be objectively related to anevent occurring after the impairment loss was recognised in the statement of comprehensiveincome, the impairment loss is reversed through the statement of comprehensive income to theextent of the increase in fair value;

for an available-for-sale equity security, all subsequent increases in the fair value of theinstrument are treated as a revaluation and are recognised in other comprehensive income.Impairment losses recognised on the equity security are not reversed through the statement ofcomprehensive income. Subsequent decreases in the fair value of the available-for-sale equitysecurity are recognised in the statement of comprehensive income, to the extent that furthercumulative impairment losses have been incurred in relation to the acquisition cost of theequity security.

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 individual impairment provision)and the fair value of the debt or equity instruments will be a gain or loss from the conversionscheme.

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 the statement of comprehensive income inthe current reporting period.

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 “Financial investments available-for-sale”account in the statement of financial position.


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(j) Financing and Advances

Financing and advances include financing and advances originated from the Bank, which are notintended to be sold in the short term and have not been classified as held for trading or designated at fairvalue. Financing and advances are recognised when cash is advanced to borrowers. They arederecognised when either the borrower repays its obligations, or the advances are sold or written off, orsubstantially all the risks and rewards of ownership are transferred. They are initially recorded at fairvalue plus any directly attributable transaction costs and are subsequently measured at amortised costusing the effective profit rate method, less any impairment losses.

(k) Impairment of financing and advances

The Bank’s allowance for impaired financing are in conformity with FRS 139 and Bank NegaraMalaysia’s “Guidelines on Classification and Impairment Provisions for Loans/Financing” issued on 1January 2010. Accounts are classified as impaired when principal or profit or both are past due for morethan ninety (90) days, or once there is objective evidence that the customer’s account is impaired,whichever is sooner. Where repayments are scheduled on intervals of 3 months or longer, the financingis classified as impaired as soon as a default occurs, unless it does not exhibit any weakness that wouldrender it classified according to the Bank’s credit risk grading framework.

Individual impairment provisions are made for impaired financing which have been individuallyreviewed and specifically identified as impaired.

Collective impairment provisions based on a percentage (1.5%) of the total outstanding financingportfolio net of individual impairment provisions is also maintained to cover possible losses which arenot 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. Individual impairment allowances are provided if the recoverable amount (presentvalue of estimated future cash flows discounted at original effective profit rate) is lower than the netbook value of the financing (outstanding amount of financing and advances, net of individualimpairment allowance). The expected cash flows are based on projections of liquidation proceeds,realisation of assets or estimates of future operating cash 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 may be reversed to the extent it is now excessive by reducing the financing impairmentallowance account. The amount of any reversal is recognised in the statement of comprehensive income.

Prior to 1 January 2010, the Bank’s accounting policy relating to the classification of impaired financingand the assessment of individual impairment allowances (previously referred to as specific allowances)on impaired financing (previously referred to as non-performing financing) was already largely in linewith the requirement of FRS 139. The main change upon full adoption of FRS 139 and BNM's revised“Guidelines on Classification and Impairment Provisions for Loans/Financing” from 1 January 2010onwards, is that BNM’s previous requirement for additional individual impairment allowances forimpaired financing of more than 5 years and 7 years is no longer applicable under FRS 139 principles.


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(l) Equipment

Equipment, fixtures and fittings are stated at cost less accumulated depreciation and any accumulatedimpairment losses. Depreciation is calculated on a straight-line basis to write off the assets over theiruseful lives as follows: -

Office equipment, fixtures and fittings 5 to 10 yearsComputer equipment 3 to 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.

The gains or losses on disposal of an item of equipment is determined by comparing the proceeds fromdisposal with the carrying amount of the equipment and is recognised net within “other operatingincome” or “other operating expenses” respectively in the statement of comprehensive income.

Equipment is subject to an impairment review if there are events or changes in circumstances whichindicate that the carrying amount may not be recoverable.

(m) Operating LeasesLeases, where the Bank does not assume substantially all the risks and rewards of ownership, areclassified as operating leases and the leased assets are not recognised in the statement of financialposition of the Bank. Rentals payable under operating leases are accounted for on a straight line basisover the periods of the leases and are included under “General administrative expenses.”

(n) 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. Intangibleassets are subject to an impairment review if there are events or changes which indicate that the carryingamount may not be recoverable.

(o) Bills and Acceptances Payable

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

(p) Provisions

Provisions are recognised when it is probable that an outflow of economic benefits will be required tosettle a current legal or constructive obligation, which had arisen as a result of past events, and forwhich a reliable estimate can made of the amount of the obligation.

(q) Financial guarantees

Liabilities under financial guarantee contracts are recorded initially at their fair value, which is generallythe fee received or receivable. Subsequently, financial guarantee liabilities are measured at the higher ofthe initial fair value, less cumulative amortisation, and the best estimate of the expenditure required tosettle the obligations. Financial guarantees are included within “other liabilities”.


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(r) Derivatives and Hedge Accounting

Derivatives are recognised initially, and are subsequently remeasured, at fair value. Fair values ofexchange traded derivatives are obtained from quoted market prices. Fair values of over-the-counterderivatives are obtained using valuation techniques, including discounted cash flow models and optionpricing models.

Derivatives may be embedded in other financial instruments, for example, a convertible bond with anembedded conversion option. Embedded derivatives are treated as separate derivatives when theireconomic characteristics and risks are not clearly and closely related to those of the host contract; theterms of the embedded derivative would meet the definition of a stand-alone derivative if they werecontained in a separate contract; and the combined contract is not held for trading or designated at fairvalue. These embedded derivatives are measured at fair value with changes therein recognised in thestatement of comprehensive income.

Derivatives are classified as assets when their fair value is positive, or as liabilities when their fair valueis negative. Derivative assets and liabilities arising from different transactions are only offset if thetransactions are with the same counterparty, a legal right of offset exists, and the parties intend to settlethe cash flows on a net basis.

The method of recognising fair value gains and losses depends on whether derivatives are held fortrading or are designated as hedging instruments, and if the latter, the nature of the risks being hedged.All gains and losses from changes in the fair value of derivatives held for trading are recognised in thestatement of comprehensive income. When derivatives are designated as hedges, The Bank classifiesthem as either: (i) hedges of the change in fair value of recognised assets or liabilities or firmcommitments (‘fair value hedges’) or (ii) hedges of the variability in highly probable future cash flowsattributable to a recognised asset or liability, or a forecast transaction (‘cash flow hedges’). Hedgeaccounting is applied to derivatives designated as hedging instruments in a fair value, cash flow or netinvestment hedge provided certain criteria are met.

Hedge accountingAt the inception of a hedging relationship, the Bank documents the relationship between the hedginginstruments and the hedged items, its risk management objective and its strategy for undertaking thehedge. The Bank also requires a documented assessment, both at hedge inception and on an ongoingbasis, of whether or not the hedging instruments, primarily derivatives, that are used in hedgingtransactions are highly effective in offsetting the changes attributable to the hedged risks in the fairvalues or cash flows of the hedged items. Profit on designated qualifying hedges is included in ‘Netfinancing income’.

i) Fair value hedgeChanges in the fair value of derivatives that are designated and qualify as fair value hedging instrumentsare recorded in the statement of comprehensive income, along with changes in the fair value of thehedged assets, liabilities or group thereof that are attributable to the hedged risk. If a hedgingrelationship no longer meets the criteria for hedge accounting, the cumulative adjustment to the carryingamount of the hedged item is amortised to profit and loss based on a recalculated effective profit rateover the residual period to maturity, unless the hedged item has been derecognised, in which case, it isreleased to statement of comprehensive income immediately.


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(r) Derivatives and Hedge Accounting(Cont’d)

ii) Cash flow hedgeThe effective portion of changes in the fair value of derivatives that are designated and qualify as cashflow hedges is recognised in other comprehensive income. Any gain or loss in fair value relating to anineffective portion is recognised immediately in the statement of comprehensive income.

The accumulated gains and losses recognised in other comprehensive income are reclassified to profit orloss in the periods in which the hedged item will affect the statement of comprehensive income.However, when the forecast transaction that is hedged results in the recognition of a non-financial assetor a non-financial liability, the gains and losses previously recognised in other comprehensive incomeare removed from equity and included in the initial measurement of the cost of the asset or liability.

When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedgeaccounting, any cumulative gain or loss recognised in other comprehensive income at that time remainsin equity until the forecast transaction is eventually recognised in the statement of comprehensiveincome. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that wasrecognised in other comprehensive income is immediately reclassified to the statement ofcomprehensive income.

(s) 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.

(t) Zakat

This represents business zakat. It is an amount payable by the Bank to comply with the principles ofShariah.

(u) Employee Benefits

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

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 statement of comprehensive income as incurred.


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(v) Share based payments

The cost of share-based payment arrangements with employees is measured by reference to the fairvalue of equity instruments on the date they are granted, and recognised as an expense on a straight -linebasis over the vesting period, with a corresponding credit to the “Share-based payment liability”. Thevesting period is the period during which all the specified vesting conditions of a share-based paymentarrangement are to be satisfied. The fair value of equity instruments that are made availableimmediately, with no vesting period attached to the award, are expensed immediately.

Fair value is determined by using appropriate valuation models, taking into account the terms andconditions upon which the equity instruments were granted. Vesting conditions include serviceconditions and performance conditions; any other features of a share-based payment arrangement arenon-vesting conditions. Market performance conditions and non-vesting conditions are taken intoaccount when estimating the fair value of equity instruments at the date of grant, so that an award istreated as vesting irrespective of whether the market performance condition or non-vesting condition issatisfied, provided all other vesting conditions are satisfied.

Vesting conditions, other than market performance conditions, are not taken into account in the initialestimate of the fair value at the grant date. They are taken into account by adjusting the number ofequity instruments included in the measurement of the transaction, so that the amount recognised forservices received as consideration for the equity instruments granted shall be based on the number ofequity instruments that eventually vest. On a cumulative basis, no expense is recognised for equityinstruments that do not vest because of a failure to satisfy non-market performance or serviceconditions.

Where an award has been modified, as a minimum, the expense of the original award continues to berecognised as if it had not been modified. Where the effect of a modification is to increase the fair valueof an award or increase the number of equity instruments, the incremental fair value of the award orincremental fair value of the extra equity instruments is recognised in addition to the expense of theoriginal grant, measured at the date of modification, over the modified vesting period.

A cancellation that occurs during the vesting period is treated as an acceleration of vesting, andrecognised immediately for the amount that would otherwise have been recognised for services over thevesting period.

(w) Earnings per share

The Bank presents basic earnings per share (EPS) data for its ordinary shares. Basic EPS is calculatedby dividing the profit or loss attributable to the ordinary shareholder of the Bank by the weightedaverage number of shares outstanding during the period.


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4 Financial risk management

a) Introduction and overview

All of the Bank’s activities involve analysis, evaluation, acceptance and management of some degree ofrisk or combination of risks. The Bank has exposure to the following risks from financial instruments:

credit risk liquidity risk market risks (includes foreign exchange, profit rate and equity/commodity price risk) operational risks

This note presents information about the Bank’s exposure to each of the above risks, the Bank’sobjectives, policies and processes for measuring and managing risk, and the Bank’s management ofcapital.

Risk management framework

The Bank’s risk management policies are designed to identify and analyse these risks, to setappropriate risk limits and controls, and to monitor the risks and limits continually by means ofreliable and up-to-date administrative and information systems. The Bank regularly reviews its riskmanagement policies and systems to reflect changes in markets, products and best practice riskmanagement processes. Training, individual responsibility and accountability, together with adisciplined, conservative and constructive culture of control, lie at the heart of the Bank’smanagement 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 riskmanagement policies.

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. In addition, a separate internal Risk Committeewas set up in 2009 in line with the Group's Risk Governance Structure to oversee and ensure that riskissues across all businesses are appropriately managed; and that adequate controls exist.

b) Credit risk management

Credit risk is the risk that financial loss arises from the failure of a customer or counterparty to meetits payment obligations under a contract. It arises principally from direct financing, trade finance andholdings of investment debt securities. The Bank has dedicated standards, policies and procedures tocontrol and monitor all such risks.

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


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4 Financial risk management (Cont’d)

b) Credit risk management (Cont’d)

The Bank has established a credit process involving credit policies, procedures and lending guidelineswhich are regularly updated and credit approval authorities delegated from the Board of Directors tothe Credit Committee. Excesses or deterioration in credit risk grade are monitored on a regular andongoing basis and at the periodic, normally annual, review of the facility. The objective is to build andmaintain risk assets of acceptable quality where risk and return are commensurate. Reports areproduced for the Executive Committee, Risk Management Committee, Risk Committee and theBoard, covering:

risk concentrations and exposures to industry sectors; large customer group exposures; and large impaired accounts and impairment allowances.

The Bank has systems in place to control and monitor its exposure at the customer and counterpartylevel. Regular audit of credit processes are undertaken by the Operational Risk Assurance and Auditfunction. Such audits include consideration of the completeness and adequacy of credit manuals andlending guidelines, together with an in-depth analysis of a representative sample of accounts, anoverview of homogeneous portfolios of similar assets to assess the quality of the financing book andother exposures, and adherence to HSBC Group standards and policies in the extension of creditfacilities.

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 and local regulatoryrequirements. Operational Risk Assurance and Audit will discuss with management, risk ratings theyconsider to be inappropriate, and their subsequent recommendations for revised grades must then beassigned to the facilities concerned.

The Bank’s exposure to credit risk is shown in Note 4b(i).

Impairment assessmentIndividually impaired financing and securities are financing and advances and investment debt securitiesfor which the Bank determines that there is objective evidence of impairment and it does not expect tocollect all principal and profit due according to the contractual terms of the financing/investmentsecurity. These loans are graded CRR 9-10 in the Group’s internal credit risk grading system.

When impairment losses occur, the Bank reduces the carrying amount of financing and advancesthrough the use of an allowance account. When impairment of available-for-sale financial assets occurs,the carrying amount of the asset is reduced directly. For further details, see Note 3i (ii) and Note 3 k.Impairment allowances may be assessed and created either for individually significant accounts or, on acollective basis, for groups of individually significant accounts for which no evidence of impairment hasbeen individually identified or for high-volume groups of homogeneous financing that are notconsidered individually significant. It is the Bank’s policy that allowances for impaired financing arecreated promptly and consistently. Management regularly evaluates the adequacy of the establishedallowances for impaired financing by conducting a detailed review of the financing portfolio, comparingperformance and delinquency statistics with historical trends and assessing the impact of currenteconomic conditions.


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Past due but not impaired financing and investment debt securitiesPast due but not impaired financing and investment debt securities are those for which contractual profitor principal payments are past due, but the Bank believes that impairment is not appropriate on the basisof the level of security/collateral available and/or the stage of collection of amounts owed to the Bank.

Examples of exposures past due but not impaired include overdue financing fully secured by cashcollateral; mortgages that are individually assessed for impairment, and that are in arrears, but where thevalue of collateral is sufficient to repay both the principal debt and potential profit; and short-term tradefacilities past due for technical reasons such as delays in documentation, but where there is no concernover the creditworthiness of the counterparty.

Financing with renegotiated termsFinancing with renegotiated terms are financing that have been restructured due to deterioration in theborrower’s financial position and where the Bank has made concessions it would not otherwiseconsider. Once the financing is restructured it remains in this category independent of satisfactoryperformance after restructuring.

Write-off of financing and advancesFinancing are normally written off, either partially or in full, when there is no realistic prospect offurther recovery. Where financing are secured, this is generally after receipt of any proceeds from therealisation of security. In circumstances where the net realisable value of any collateral has beendetermined and there is no reasonable expectation of further recovery, write off may be earlier.

It is the Bank’s policy to provide financing based on the customer’s capacity to repay, rather than relyprimarily on the value of security offered. Depending on the customer’s standing and the type ofproduct, facilities may be provided unsecured. Whenever available, collateral can be an importantmitigant of credit risk. The principal collateral types employed by the Bank are as follows:

mortgages over residential properties; charges over business assets such as premises; charges over the properties being financed; and charges over financial instruments such as cash, debt securities and equities.

The Bank does not disclose the fair value of collateral held as security or other credit enhancements onfinancing and advances past due but not impaired, or on individually assessed impaired financing andadvances, as it is not practicable to do so.

The estimated fair value of collateral and other security enhancements held against impaired financing asat 31 December 2010 amounted to RM11.8 million.


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Repossessed properties are made available for sale in an orderly fashion, with the proceeds used toreduce or repay the outstanding indebtedness. If excess funds arise after the debt has been repaid,they are made available either to repay other secured lenders with lower priority or are returned tothe customer. The Bank does not generally occupy repossessed properties for its business use.

The Bank monitors concentration of credit risk by sector and geographical location. The analysis ofconcentration of credit risk from financing and advances to customers is shown in Note 9 (vi) and 9(viii). The analysis of concentration of credit risk from financing and advances to banks andinvestment securities is shown in note 4 b(ii).

Financial assets held-for-tradingThe Bank holds financial assets held-for-trading of RM148.0 million. An analysis of the creditquality of the maximum credit exposure, based on the rating agency Standard & Poor’s, is asdisclosed in Note 7 to the financial statements.

Settlement riskSettlement risk arises in any situation where a payment in cash, securities or equities is made in theexpectation of a corresponding receipt of cash, securities or equities. Daily settlement limits areestablished for counterparties to cover the aggregate of the Bank’s transactions with each one on anysingle day. Settlement risk on many transactions, particularly those involving securities and equities,is substantially mitigated by settling through assured payment systems or on a delivery-versus-payment basis.


4 Financial risk management (Cont'd)

b) Credit Risk

i) Exposure to credit risk^

Financing andadvances tocustomers

Financing andadvances to

banks*Investment

Securities**RM'000 RM'000 RM'000

Carrying amount 4,636,276 1,508,998 330,665

Assets at amortised costIndividually impaired:

Gross amount 70,810 - -Allowance for impairment (41,858) - -Carrying amount 28,952 - -

Collective allowance for impairment (70,655) - -

Past due but not impaired:Carrying amount 232,538 - -

Past due comprises:up to 29 days 154,836 - -30 - 59 days 42,454 - -60 - 89 days 13,409 - -90 - 179 days 21,759 - -180 days and over 80 - -

232,538 - -

Neither past due nor impaired:Strong 2,028,755 1,478,998 -Medium -good 1,351,498 30,000 -Medium-satisfactory 927,250 - -Substandard 137,938 - -Carrying amount 4,445,441 1,508,998 -

of which includes accountswith renegotiated terms 12,653 - -

Carrying amount-amortised cost 4,636,276 1,508,998 -

Available-for-sale (AFS)Neither past due nor impaired:

Strong (A- and above) - - 326,163Medium-good (BBB+ to BBB-) - - -Medium-satisfactory (BB+ to B+ & unrated) - - -Medium-satisfactory - - 4,502Carrying amount - - 330,665

of which includes accountswith renegotiated terms - - -

Carrying amount-fair value - - 330,665

^

*

** Excludes equity securities

2010

Disclosure of comparative information is not required in the first year of application of FRS 7, Financial Instruments:Disclosure.Consists of cash and short term funds, deposits and placements with banks and other financial institutions and securitiespurchased under resale agreements.

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b) Credit Risk

i) Exposure to credit risk^

Credit quality of the Group's debt securities and other bills External Credit Rating*Strong A- and aboveMedium-good BBB+ and BBB-Medium-satisfactory BB+ to B+ and unratedSub-standard B and belowImpaired Impaired

* External ratings have been aligned to the five quality classifications. The ratings of Standard and Poor's are cited, with those ofother agencies being treated equivalently.

Credit quality of the Group's corporate lending Internal Credit RatingStrong CRR1 - CRR2Medium-good CRR3Medium-satisfactory CRR4 - CRR5Sub-standard CRR6 - CRR8Impaired CRR9 - CRR10

Credit quality of the Group's retail lending Internal Credit RatingStrong EL1 -EL2Medium-good EL3Medium-satisfactory EL4 - EL5Sub-standard EL6 - EL8Impaired EL9 - EL10

ii) Concentration by sector and by location^

Financing andadvances to

banks*Investment

Securities**RM'000 RM'000

Carrying amount 1,508,998 330,665

By SectorFinance, insurance and business services 1,508,998 34,505Others - 296,160

1,508,998 330,665

By geographical locationWithin Malaysia 1,508,998 330,665

1,508,998 330,665

^

*

** Excludes equity securities# Concentration by sector and location for financing and advances is disclosed under Note 9 vi) and 9 viii) to the financial

statements.

The five credit quality classifications set out and defined below describe the credit quality of HSBC’s lending, debtsecurities portfolios and derivatives. These five classifications each encompass a range of more granular, internal creditrating grades assigned to corporate and retail lending business, as well as the external ratings attributed by external agenciesto debt securities. There is no direct correlation between the internal and external ratings at granular level, except to theextent each falls within a single quality classification.

Disclosure of comparative information is not required in the first year of application of FRS 7, Financial Instruments:DisclosureConsists of cash and short term funds, deposits and placements with banks and other financial institutions and securitiespurchased under resale agreements.

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c) Liquidity and funding management

Liquidity risk is the risk that the Bank does not have sufficient financial resources to meet its obligations as theyfall due, or will have to do so at an excessive cost. This risk arises from mismatches in the timing of cash flows.Funding risk (a form of liquidity risk) arises when the liquidity needed to fund illiquid asset positions cannot beobtained at the expected terms and when required.

The management of liquidity and funding is primarily carried out in accordance with Bank Negara Malaysia's NewLiquidity Framework; and practices and limits set by HSBC regional office and ALCO. These limits vary to takeaccount of the depth and liquidity of the local market in which the Bank operates. The Bank maintains a strongliquidity position and manages the liquidity profile of its assets, liabilities and commitments to ensure that cashflows are appropriately balanced and all obligations are met when due.

The Bank maintains a diversified and stable funding base comprising core retail and corporate customer depositsand institutional balances. This is augmented by wholesale funding and portfolios of highly liquid assets. Theobjective of the Bank’s liquidity and funding management is to ensure that all foreseeable funding commitmentsand deposit withdrawals can be met when due and that wholesale market access is coordinated and cost effective.

Current accounts and savings deposits payable on demand or at short notice form a significant part of the Bank’sfunding, and the Bank places considerable importance on maintaining their stability. For deposits, stabilitydepends upon preserving depositor confidence in the Bank’s capital strength and liquidity, and on competitive andtransparent pricing.

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 advances to core funding 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 or other crises whileminimising adverse long-term implications for the business.

• stress testing and scenario analysis are important tools in HSBC's liquidity management framework. This willalso include an assessment of asset liquidity under various stress scenerios.

• manage the maturities and diversify secured and unsecured funding liabilities across markets, products andcounterparties.

• maintain liabilities of appropriate term relative to asset base.

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c) Liquidity and funding management (Cont'd)

i) Cash flows payable by the Bank under financial liabilities by remaining contractual maturities

RM'000 On DemandDue within

3 months

Duebetween 3months to12 months

Duebetween 1

and 5 yearsDue after 5

yearsAs at 31 Dec 2010Deposits by customers 1,169,328 2,123,871 452,566 179,863 -Deposits and placements by banks andother financial institutions - 1,060,643 28,885 995,071 -Bills and acceptances payable - 5,531 - - -

1,169,328 3,190,045 481,451 1,174,934 -Financing and other credit-relatedcommitments 1,239 57 49 85 -Financial guarantees and similar contracts 71,838 - - - -

1,242,405 3,190,102 481,500 1,175,019 -

The balances in the above table will not agree directly with the balances in the statement of financial position as thetable incorporates, on an undiscounted basis, all cash flows relating to principal and future coupon payments. Inaddition, financing and other credit-related commitments and financial guarantees and similar contracts aregenerally not recognised on the statement of financial position.

Cash flows payable in respect of customer accounts are primarily contractually repayable on demand or at shortnotice. However, in practice, short term deposit balances remain stable as inflows and outflows broadly match.

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d) Market risk management

Value at risk ('VAR')

Market risk is the risk that movements in market factors, including foreign exchange rates and commodity prices,profit rates, credit spreads and equity prices, will reduce the Bank’s income or the value of its portfolios.

The objective of the Bank’s market risk management is to manage and control market risk exposures in order tooptimise return on risk while maintaining a market profile consistent with HSBC’s status as a premier provider offinancial products and services.

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

The management of market risk is principally undertaken using risk limit mandates approved by HSBC’s GroupGlobal Market Risk Management (GMO TMR), an independent unit which develops HSBC Group’s market riskmanagement policies and measurement techniques. Market risks which arise on each product are transferred toeither the Group’s Global Markets unit or to a separate book managed under the supervision of ALCO. The aimis to ensure that all market risks are consolidated within operations which have the necessary skills, tools,management and governance to manage such risks professionally. Limits are set for portfolios, products and risktypes, with market liquidity being the principal factor in determining the level of limits set. The Group has anindependent market risk control function that is responsible for measuring market risk exposures in accordancewith the policies defined by GMO TMR. Positions are monitored daily and excesses against the prescribed limitsare reported immediately to local senior management and GMO TMR.

Market risk in the trading portfolio is monitored and controlled at both portfolio and position levels using acomplementary set of techniques such as value at risk and present value of a basis point, together with stress andsensitivity testing and concentration limits. Other controls to contain trading portfolio market risk at an acceptablelevel include rigorous new product approval procedures and a list of permissible instruments to be traded.

One of the principal tools used by the Bank to monitor and limit market risk exposure is VAR. VAR is a techniquethat estimates the potential losses that could occur on risk positions as a result of movements in market rates andprices over a specified time horizon and to a 99 per cent level of confidence. The VAR models used by the Bankare predominantly based on historical simulation. The historical simulation models derive plausible futurescenarios from historical market rate time series, taking into account inter-relationships between different marketsand rates, for example between profit rates and foreign exchange rates. Potential market movements are calculatedwith reference to market data from the last two years. Historical market rates and prices are calculated withreference to foreign exchange rates, profit rates, equity/commodity prices and the associated volatilities. VAR iscalculated for a one-day holding period.

The Bank routinely validates the accuracy of its VAR models by back-testing the actual daily profit and lossresults, adjusted to remove non-modeled items such as fees and commission, against the corresponding VARnumbers. Statistically, the Bank would expect to see losses in excess of VAR only one percent of the time over aone-year period. The actual number of excesses over this period can therefore be used to gauge how well themodels are performing.

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d) Market risk management (Cont'd)

Value at risk ('VAR') (Cont'd)A summary of the VAR position of the Bank's trading portfolio at the reporting date is as follows:

RM'000At 31 Dec

2010 Average Maximum MinimumForeign currentcy risk 12 19 60 2Profit rate risk 95 161 371 61Credit spread risk 48 20 368 -Overall 107 164 443 67

Exposure to profit rate risk - non-trading portfolio

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

• the use of historical data as a proxy for estimating future events may not encompass all potential events,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 maynot fully reflect the market risk arising at times of severe illiquidity, when a 1-day holding period may beinsufficient 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 might occurbeyond this level of confidence;

• VAR is calculated on the basis of exposures outstanding at the close of business and therefore does notnecessarily reflect intra-day exposures.

The Bank recognises these limitations by augmenting its VAR limits with other position and sensitivity limitstructures. Stress tests are produced on a monthly basis based on the HSBC Group’s stress-testing parameters, andon a quarterly basis based on Bank Negara Malaysia’s parameters to determine the impact of changes in profitrates, exchange rates and other main economic indicators on the Bank’s profitability, capital adequacy andliquidity. The stress-testing provides ALCO with an assessment of the financial impact of identified extreme eventson the market risk exposures of the Bank.

Derivative financial instruments (principally profit rate swaps) are used for hedging purposes in the management ofasset and liability portfolios and structured positions. This enables the Bank to mitigate the market risk whichwould otherwise arise from structural imbalances in the maturity and other profiles of the assets and liabilities

Market risk in non-trading portfolios arises principally from mismatches between the future yields on assets andtheir funding cost as a result of profit rate changes. This market risk is transferred to Global Markets and ALCOportfolios, taking into account both the contractual and behavioural characteristics of each product to enable therisk to be managed effectively. Behavioural assumptions for products with no contractual maturity are normallybased on a two-year historical trend. These assumptions are important as they reflect the underlying profit rate riskof the products and hence are subject to scrutiny from ALCO, the regional head office and TMR. The net exposureis monitored against the limits granted by GMO TMR for the respective portfolios and, depending on the view onfuture market movement, economically hedged with the use of financial instruments within agreed limits.

Profit rate risk in the banking book or Rate of Return risk in the Banking book (RORBB) is defined as the exposureof the non-trading products of the Bank to profit rates. Non-trading portfolios are subject to prospective profit ratemovements which could reduce future net finance income. The Bank manages market risk in non-trading portfoliosby monitoring the sensitivity of projected net finance income under varying profit rate scenarios (simulationmodeling). For simulation modeling, a combination of standard scenarios and non-standard scenarios relevant tothe local market are used.

75



d) Market risk management (Cont'd)

Exposure to profit rate risk - non-trading portfolio (Cont'd)

ii) Sensitivity of projected net finance income

Change in projected net finance income in next 12 months 31 Dec 2010arising from a shift in profit rates of : RM'000+ 100 basis points parallel increase 15,656- 100 basis points parallel increase (15,905)

+ 25 basis poimts at the beginning of each quarter 11,150+25 basis points at the beginning of each quarter (11,175)

iii) Sensitivity of reported reserves in "Other Comprehensive Income" to profit rate movements

Change in projected net finance income in next 12 months 31 Dec 2010arising from a shift in profit rates of : RM'000+ 100 basis points parallel increase (5,085)- 100 basis points parallel increase 5,085

Foreign Exchange Risk

Specific Issuer Risk

Equity Risk

The standard scenarios monitored monthly include a 100 basis points parallel fall or rise in profit rates and a 25basis points fall or rise in profit rates at the beginning of each quarter for the next 12 months.

The scenarios assume no management action. Hence, they do not incorporate actions that would be taken by thebusiness units to mitigate the impact of the profit rate risk. In reality, the business units would proactively seek tochange the profit rate profile to minimize losses and to optimize net revenues. Other simplifying assumptions aremade, including that all positions run to maturity.

Sensitivity of reported reserves in "Other Comprehensive Income" to profit rate movements are monitored on amonthly basis by assessing the expected reduction in valuation of available-for-sale portfolios and cash flowhedges due to parallel movements of plus or minus 100 basis points in all yield curves.

The profit rate sensitivities set out in the table below are illustrative only and are based on simplified scenarios.

Foreign exchange risk arises as a result of movements in the relative value of currencies. In addition to VAR andstress testing, the Bank controls the foreign exchange risk within the trading portfolio by limiting the open exposureto individual currencies, and on an aggregate basis.

Specific issuer (credit spread) risk arises from a change in the value of debt instruments due to a perceived changein the credit quality of the issuer or underlying assets. As well as VAR and stress testing, the Bank manages theexposure to credit spread movements within the trading portfolios through the use of limits referenced to thesensitivity of the present value of a basis point movement in credit spreads.

Equity risk arises from the holding of open positions, either long or short, in equities or equity based instruments,which create exposure to a change in the market price of the equities or underlying equity instruments. All equityderivative trades in the Bank are traded on a back-to-back basis with HSBC group offices and therefore have noopen exposure.

76



e) Operational risk management

f) Capital management

Operational risk is the risk of loss arising from fraud, unauthorised activities, error, omission, inefficiency, systemsfailure or external events, including legal risk. It is inherent to every business organisation and covers a widespectrum of issues.

The Bank manages this risk through a control-based environment in which processes are documented, authorisationis independent and transactions are reconciled and monitored. This is supported by an independent programme ofperiodic reviews undertaken by Operational Risk Assurance and Audit, and by monitoring external operational riskevents, which ensure that the Bank stays in line with best practice and takes account of lessons learned frompublicised operational failures within the financial services industry.

The Bank adheres to the HSBC Group standard on operational risk. This standard explains how HSBC managesoperational risk by identifying, assessing, monitoring, controlling and mitigating the risk, rectifying operational riskevents and implementing any additional procedures required for compliance with local statutory requirements. Thestandard covers the following

• operational risk management responsibility is assigned at senior management level within the business operation;

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

• operational risks are identified by assessments covering operational risks facing each business and risk inherentin processes, activities and products. Risk assessment incorporates a regular review of identified risks to monitorsignificant changes;

• operational risk loss data is collected and reported to senior management. Aggregate operational risk losses arerecorded and details of incidents above a materiality threshold are reported to the Operational Risk and InternalControl Committee. The items are also reported to the Risk Management Committee, the Audit Committee andRegional 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. Additionalreviews and tests are conducted in the event that the Bank is affected by a business disruption event to incorporatelessons learned in the operational recovery from those circumstances

The Bank's lead regulator, Bank Negara Malaysia ("BNM") sets and monitors capital requirements for the Bank.With effect from 2008, the Bank is required to comply with the provisions of the Basel II framework in respect ofregulatory capital and Basic Indicator Approach for Operational Risk. The Bank adopts the Standardised approachfor Credit and Market Risk in its trading portfolios. Please refer to Note 33 of the financial statements for theBank's regulatory capital position under Basel II as at the reporting date.

The Bank's regulatory capital is analysed in two tiers:• Tier 1 capital, which includes ordinary share capital, share premium, retained earnings, statutory reserves andother regulatory adjustments relating to items that are included in equity but are treated differently for capitaladequacy purposes.

• Tier 2 capital, which includes collective impairment allowances (excluding collective impairment allowancesattributable to financing classified as impaired).

77


5 Use of estimates and judgements

i) Impairment of financing and advances

ii)Valuation of financial instruments

The results of the Bank are sensitive to the accounting policies, assumptions and estimates that underlie the preparation ofits financial statements. The significant accounting policies used in the preparation of the financial statements aredescribed in Note 3 to the financial statements.

The accounting policies that are deemed critical to the Bank’s results and financial position, in terms of the materiality ofthe items to which the policy is applied, and which involve a high degree of judgement including the use of assumptionsand estimation, are discussed below.

The Bank’s accounting policy for losses arising from the impairment of customer financing and advances is describedin Note 3k to the financial statements. Financing impairment allowances represent management’s best estimate oflosses incurred in the financing portfolios at the reporting date.

The specific counterparty component of the total allowances for impairment applies to financial assets evaluatedindividually for impairment and is based upon management’s best estimate of the present value of the cash flows thatare expected to be received. In estimating these cash flows, management makes judgements about a counterparty’sfinancial situation and the net realisable value of any underlying collateral. Each impaired asset is assessed on itsmerits, and the workout strategy and estimate of cash flows considered recoverable are independently approved by theCredit Risk function.

The Bank’s accounting policy for determining the fair value of financial instruments is described in Note 3e (vi) to thefinancial statements. The best evidence of fair value is a quoted price in an actively traded market. In the event that themarket for a financial instrument is not active, a valuation technique is used. The majority of valuation techniquesemploy only observable market data, and so the reliability of the fair value measurement is high. However, certainfinancial instruments are valued on the basis of valuation techniques that feature one or more significant market inputsthat are unobservable. Valuation techniques that rely to a greater extent on unobservable inputs require a higher level ofmanagement judgement to calculate a fair value than those based wholly on observable inputs.

Valuation techniques used to calculate fair values include comparisons with similar financial instruments for whichmarket observable prices exist, discounted cash flow analysis, option pricing models and other valuation techniquescommonly used by market participants. Valuation techniques incorporate assumptions that other market participantswould use in their valuations, including assumptions about profit rate yield curves, exchange rates, volatilities, andprepayment and default rates. When valuing instruments by reference to comparable instruments, management takesinto account the maturity, structure and rating of the instrument with which the position held is being compared.

The main assumptions and estimates which management considers when applying a model with valuation techniquesare:• the likelihood and expected timing of future cash flows on the instrument. These cash flows are usually governed bythe terms of the instrument, although management judgement may be required when the ability of the counterparty toservice the instrument in accordance with the contractual terms is in doubt. Future cash flows may be sensitive tochanges in market rates;

• selecting an appropriate discount rate for the instrument. Management bases the determination of this rate on itsassessment of what a market participant would regard as the appropriate spread of the rate for the instrument overthe appropriate risk-free rate; and

• judgement to determine what model to use to calculate fair value in areas where the choice of valuation model isparticularly subjective, for example, when valuing complex derivative products.

When applying a model with unobservable inputs, estimates are made to reflect uncertainties in fair valuesresulting from a lack of market data inputs, for example, as a result of illiquidity in the market. For theseinstruments, the fair value measurement is less reliable. Inputs into valuations based on unobservable data areinherently uncertain because there is little or no current market data available from which to determine the level atwhich an arm’s length transaction would occur under normal business conditions. However, in most cases there issome market data available on which to base a determination of fair value, for example historical data, and the fairvalues of most financial instruments will be based on some market observable inputs even where the unobservableinputs are significant.

78


5 Use of estimates and judgements (Cont'd)

ii)Valuation of financial instruments (Cont'd)

Level 1 Level 2 Level 3 TotalRM'000 RM'000 RM'000 RM'000

Financial Assets Held-for-Trading (Note 7) 83,646 64,360 - 148,006Derivative financial assets (Note 11) - 6,101 5,054 11,155Financial Investments Available-for-Sale (Note 8) 326,163 4,506 - 330,669

409,809 74,967 5,054 489,830

Derivative financial liabilities (Note 18) - 6,101 5,054 11,155

2010Balance at 1 January 7,610 7,610Total gains or losses:

in profit or loss (1,450) (1,450)Transfer out of Level 3 (1,106) (1,106)Balance at 31 December 5,054 5,054

2010Total gains or losses included in profit or lossfor the year ended:- Net trading income (2,563) (2,563)

Total gains or losses for the year ended includedin profit or loss for assets and liabilities held atthe end of the year:- Net trading income 1,113 1,113

financial assets financial liabilitiesRM'000 RM'000

RM'000 RM'000

Derivative Derivative

2010

financial liabilitiesDerivativeDerivative

financial assets

The Bank measures fair values using the following fair value hierarchy that reflects the significance of the inputs usedin making the measurements.

• Level 1: Quoted market price (unadjusted) in an active market for an identical instrument.• Level 2 : Valuation techniques based on observable inputs, either directly, (ie as prices) or indirectly (derived fromprices). This category includes instruments valued using: quoted prices for identical or similar instruments in marketsthat are considered less active, or other valuation techniques where all significant inputs are directly or indirectlyobservable from market data.

• Level 3 : Valuation techniques using significant unobservable inputs. This category includes all instruments wherethe valuation technique includes inputs not based on observable data and the unobservable inputs have a significanteffect on the instrument’s valuation. This category includes instruments that are valued based on quoted prices forsimilar instruments where significant unobservable adjustments or assumptions are required to reflect differencesbetween the instruments.

The tables below analyses financial instruments measured at fair value at the end of the reporting period, by the levelin the fair value hierarchy into which the fair value measurement is categorised.

The following tables show the reconciliation from the beginning balances to the ending balances for fair valuemeasurements in Level 3 of the fair value hierarchy:

Total gains or losses included in profit or loss for the financial year in the above tables are presented in the statement ofcomprehensive income as follows:

79


6 Cash and Short-Term Funds31 Dec 2010 31 Dec 2009

RM'000 RM'000

Cash and balances with banks and other financial institutions 28,217 11,046Money at call and interbank placements

maturing within one month 1,480,781 676,2621,508,998 687,308

7 Financial Assets Held-for-Trading31 Dec 2010 31 Dec 2009

RM'000 RM'000At fair valueMoney market instruments:

Malaysian Government Islamic bonds 58,552 88,074Malaysian Government treasury bills 64,360 39,312

Unquoted securities:Private debt securities 25,094 -

148,006 127,386

Credit quality of financial assets held-for-trading based on the ratings of Standard & Poor's.*

Money market instruments:Malaysian Government treasury bills

AA+ to AA- 64,360 -Malaysian Government Islamic bonds

AA+ to AA- 58,552 -Unquoted securities:

Private debt securitiesUnrated 25,094 -

148,006 -

* Disclosure of comparative information is not required in the first year of application of FRS 7, Financial Instruments:Disclosure.

All the financial assets held-for-trading held, as disclosed above, are not pledged to any counterparties.

8 Financial Investments Available-for-Sale31 Dec 2010 31 Dec 2009

At fair value RM'000 RM'000Money market instruments:

Malaysian Government treasury bills - 89,791Malaysian Government Islamic bonds 296,161 106,341Khazanah bonds - 47,946Negotiable instruments of deposit 30,002 70,005Bankers' acceptance and Islamic accepted bills 4,502 -

330,665 314,083Unquoted securities:

Private debt securities - 70,137330,665 384,220

The maturity structure of money market instruments held as financial investmentsavailable-for-sale is as follows:

Maturing within one year 34,504 207,742More than one year to three years 296,161 106,341

330,665 314,083

80


9 Financing And Advances(i) By type

31 Dec 2010 31 Dec 2009RM'000 RM'000

Cash line 14,502 4,937Term financing

House financing 460,173 84,073Hire purchase receivables 176,381 222,434Lease receivables 187 276Other term financing 3,134,643 2,300,535

Trust receipts 704 -Claims on customers under acceptance credits 758,077 559,753Staff financing 9,332 2,895Credit/ charge cards 261,517 168,429

4,815,516 3,343,332Less: Unearned income (66,727) (90,379)

4,748,789 3,252,953Less: Allowance for impaired financing:

- Collective allowances for impairment (70,655) -- Individual allowances for impairment (41,858) -- General - (52,597)- Specific - (35,383)

Total net financing and advances 4,636,276 3,164,973

(ii) By contract31 Dec 2010 31 Dec 2009

RM'000 RM'000

Bai Bithaman Ajil (deferred payment sale) 762,967 835,091Ijarah (lease) 173 250Ijarah Thumma Al-Bai (AITAB) (hire purchase) 161,735 201,537Murabahah (cost-plus) 1,410,169 840,687Musharakah (profit and loss sharing) 552,958 46,143Bai Al-Inah (sell and buy back) 1,234,198 1,048,312Bai Al-Dayn (sale of debt) 267,797 112,504Ujrah (fee-based) 358,786 168,041Qard (benevolent financing ) 6 388

4,748,789 3,252,953

(iii) By type of customer31 Dec 2010 31 Dec 2009

RM'000 RM'000

Domestic banking institutions - 51,859Domestic non-bank financial institutions 78 -Domestic business enterprises

Small medium enterprises 942,457 754,434Others 1,562,294 1,090,730

Government and statutory bodies 25,443 -Individuals 1,969,341 1,273,215Other domestic entities 3,614 4,235Foreign entities 245,562 78,480

4,748,789 3,252,953

81


9 Financing And Advances (Cont'd)(iv) By profit rate sensitivity

31 Dec 2010 31 Dec 2009RM'000 RM'000

Fixed rateHouse financing 21,518 32,282Hire purchase receivables 161,735 201,537Other financing 2,717,503 2,407,117

Variable rateHouse financing 448,763 45,293Other financing 1,399,270 566,724

4,748,789 3,252,953

(v) By maturity structure31 Dec 2010 31 Dec 2009

RM'000 RM'000

Maturing within one year 2,483,534 1,617,013More than one year to three years 639,036 614,744More than three years to five years 935,955 838,347Over five years 690,264 182,849

4,748,789 3,252,953

(vi) By sector31 Dec 2010 31 Dec 2009

RM'000 RM'000

Agriculture, hunting, forestry & fishing 97,788 95,757Mining and quarrying 138,104 15,504Manufacturing 1,090,858 788,832Electricity, gas and water 12,273 7,502Construction 80,790 54,486Real estate 323,738 243,192Wholesale & retail trade, restaurants & hotels 231,219 278,066Transport, storage and communication 233,059 140,760Finance, insurance and business services 233,414 237,593Household - Retail 2,000,719 1,283,077Others 306,827 108,184

4,748,789 3,252,953

(vii) By purpose31 Dec 2010 31 Dec 2009

RM'000 RM'000Purchase of landed property:

Residential 455,611 77,981Non-residential 25,469 7,337

Purchase of securities 1,019 1,356Purchase of transport vehicles 1,464 94Purchase of fixed assets excluding land & building 76,779 235,009Consumption Credit 1,541,544 1,201,896Construction 80,790 54,486Working Capital 2,323,025 1,602,143Other Purpose 243,088 72,651

4,748,789 3,252,953

82


9 Financing And Advances (Cont'd)(viii) By geographical distribution

31 Dec 2010 31 Dec 2009RM'000 RM'000

Northern Region 794,176 321,943Southern Region 642,158 402,186Central Region 2,896,290 2,160,691Eastern Region 416,165 368,133

4,748,789 3,252,953

10 Impaired Financing(i) Movements in impaired financing and advances

31 Dec 2010 31 Dec 2009RM'000 RM'000

At beginning of year 55,453 28,476Classified as impaired during the year 96,333 79,395Reclassified as performing (1,456) (255)Amount recovered (18,785) (10,724)Amount written off (66,250) (49,088)Other movements 5,515 7,649At end of year 70,810 55,453Less: Individual allowances for impairment (2009: Specific allowance) (41,858) (35,383)Net impaired financing and advances 28,952 20,070

(ii) Movements in allowance for impaired financing31 Dec 2010 31 Dec 2009

RM'000 RM'000Collective allowance for impairment (2009: General allowance)At beginning of year 52,597 52,597Made during the year 18,988 -Amount written back (930) -At end of year 70,655 52,597

The Northern region consists of the states of Perlis, Kedah, Penang, Perak, Kelantan and Terengganu.The Southern region consists of the states of Johor, Malacca and Pahang.The Central region consists of the states of Selangor, Negri Sembilan and the Federal Territory of Kuala Lumpur.The Eastern region consists of the states of Sabah, Sarawak and the Federal Territory of Labuan.Concentration by location for financing and advances is based on the location of the borrower.

With the adoption of FRS 139's transitional provision, the Bank has reversed the 31 December 2009 general allowance andreinstated it as a collective impairment allowance on 1 January 2010 as both general allowance and collective impairmentallowance are based on 1.5% of customer advances net of impairment charge. Prior to 1 January 2010, the Bank'sclassification of impaired financing was already in line with FRS 139 requirement and its specific allowance was alreadycomputed on the net present value of future expected cashflows.

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10 Impaired Financing (Cont'd)

31 Dec 2010 31 Dec 2009RM'000 RM'000

Individual allowance for impairment (2009: Specific allowance)At beginning of year 35,383 21,139- effect of adopting FRS 139 (43) -At beginning of year, restated 35,340 21,139Made during the year 68,769 65,498Amount recovered (5,668) (10,979)Amount written off (61,545) (47,924)Other movement 4,962 7,649At end of year 41,858 35,383

(iii) By contract31 Dec 2010 31 Dec 2009

RM'000 RM'000

Bai Bithaman Ajil (deferred payment sale) 2,149 1,112Ijarah Thumma Al-Bai (AITAB) (hire purchase) 2,545 544Murabahah (cost-plus) 4,521 9,049Musharakah (profit and loss sharing) 1,859 -Bai Al-Inah (sell and buy back) 51,608 40,263Ujrah (fee-based) 8,128 4,485

70,810 55,453

(iv) By sector31 Dec 2010 31 Dec 2009

RM'000 RM'000

Manufacturing 2,929 5,598Real estate - 196Wholesale & retail trade, restaurants & hotels 5,246 3,856Transport, storage and communication 80 -Finance, insurance and business services 685 56Household - Retail 61,870 45,747

70,810 55,453

(v) By purpose31 Dec 2010 31 Dec 2009

RM'000 RM'000

Purchase of landed property:Residential 2,218 1,168Non-residential 111 122

Consumption credit 59,652 44,578Working Capital 8,829 9,585

70,810 55,453

(vi) By geographical distribution31 Dec 2010 31 Dec 2009

RM'000 RM'000

Northern Region 16,443 10,975Southern Region 14,399 8,534Central Region 32,923 27,648Eastern Region 7,045 8,296

70,810 55,453

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11 Other Assets31 Dec 2010 31 Dec 2009

RM'000 RM'000

Derivative financial assets (Note 34) 11,155 10,237Income receivable 4,128 2,872Amount due from holding company 30,604 356,775Other receivables, deposits and prepayments 13,148 6,769

59,035 376,653

12 Statutory deposits with Bank Negara Malaysia

The non-profit bearing statutory deposits are maintained with Bank Negara Malaysia in compliance with Section 37(1)(c) ofthe Central Bank of Malaysia Act, 1958 (revised 1994), the amounts of which are determined at set percentages of totaleligible liabilities.

85


13 Equipment

Officeequipment,

fixtures and Computer Motor2010 fittings equipment vehicles Total

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

Balance as at 1 January 2010 5,756 3,522 - 9,278Additions 9,065 3,502 - 12,567Disposals (99) - - (99)Written off (30) - - (30)Balance as at 31 December 2010 14,692 7,024 - 21,716

Accumulated depreciation

Balance as at 1 January 2010 1,056 722 - 1,778Charge for the year 2,574 1,051 - 3,625Disposals (83) - - (83)Written off (29) - - (29)Balance as at 31 December 2010 3,518 1,773 - 5,291

Net book value as at 31 December 2010 11,174 5,251 - 16,425

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


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

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14 Intangible assets

2010 Computer softwareRM'000

Cost

Balance as at 1 January 2010 5,867Additions 12Balance as at 31 December 2010 5,879


Balance as at 1 January 2010 3,644Charge for the year 736Balance as at 31 December 2010 4,380

Net book value as at 31 December 2010 1,499

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

87


15 Deferred tax assets31 Dec 2010 31 Dec 2009

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

Deferred tax assets 19,730 14,825Deferred tax liabilities (1,728) (941)

18,002 13,884

The recognised deferred tax assets and liabilities (before offsetting) are as follows:31 Dec 2010 31 Dec 2009

RM'000 RM'000Equipment

Capital allowances (1,728) (784)Available-for-sale reserve 46 (146)Allowances

Collective allowance 15,058 13,149Others 4,623 1,676

Lease receivables 3 (11)18,002 13,884

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

Recognisedin income Effect of

As at statement change in Recognised As at1 Jan 2010 (Note 29) tax rate in equity 31 Dec 2010

2010 RM'000 RM'000 RM'000 RM'000 RM'000Equipment

Capital allowances (784) (944) - - (1,728)Available-for-sale reserve (146) - - 192 46Allowances

Collective Allowance 13,149 1,909 - - 15,058Others 1,676 2,947 - - 4,623

Lease receivables (11) 14 - - 313,884 3,926 - 192 18,002

Recognisedin income Effect of

As at statement change in Recognised As at1 Jan 2009 (Note 29) tax rate in equity 31 Dec 2009

2009 RM'000 RM'000 RM'000 RM'000 RM'000Equipment

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

Collective 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

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

88


16 Deposits From Customers(i) By type of deposit

31 Dec 2010 31 Dec 2009RM'000 RM'000

Non-Mudharabah FundDemand deposits 513,731 128,276Savings deposits 655,350 508,146Fixed return investment deposits 705,179 7,017

1,874,260 643,439Mudharabah Fund

General investment deposits 1,778,568 1,628,130Others 129,708 200,842

3,782,536 2,472,411

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

RM'000 RM'000

Due within six months 2,165,113 1,360,450More than six months to one year 295,281 273,078More than one year to three years 18,736 461More than three years to five years 4,617 1,158

2,483,747 1,635,147

(ii) By type of customer31 Dec 2010 31 Dec 2009

RM'000 RM'000

Government and statutory bodies 134,519 75,116Business enterprises 1,571,992 739,460Individuals 1,699,995 1,260,537Others 376,030 397,298

3,782,536 2,472,411

17 Deposits and Placements of Banks and Other Financial Institutions31 Dec 2010 31 Dec 2009

RM'000 RM'000Mudharabah Fund

Licensed banks 1,493,087 1,401,291Other financial institutions 591,512 109,616

2,084,599 1,510,907

89


18 Other Liabilities31 Dec 2010 31 Dec 2009

RM'000 RM'000

Derivative financial liabilities 11,155 10,237Profit payable 15,182 8,043Amounts due to holding company/ related companies 22,961 6,285Profit equalisation reserve 6,700 6,700Other creditors and accruals 36,007 30,364

92,005 61,629

Movement in profit equalisation reserve is as follows:

RM'000 % RM'000 %

At beginning of financial year 6,700 6,700Shareholders' portion 1,703 25 1,300 19Depositors' portion 4,997 75 5,400 81

At end of financial year 6,700 6,700Shareholders' portion 1,276 19 1,703 25Depositors' portion 5,424 81 4,997 75

19 Provision for taxation and zakat31 Dec 2010 31 Dec 2009

RM'000 RM'000

Taxation 4,348 3,667Zakat 100 120

4,448 3,787

20 Share Capital31 Dec 2010 31 Dec 2009

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 and end of financial year 50,000 50,000

31 Dec 2010 31 Dec 2009

90


21 Reserves31 Dec 2010 31 Dec 2009

RM'000 RM'000Non-distributable

Share premium 610,000 610,000Statutory reserve 50,000 40,104Available-for-sale reserve (136) 437

659,864 650,541

DistributableRetained profits 74,652 40,103

734,516 690,644

22 Income Derived from Investment of Depositors' Funds and Others31 Dec 2010 31 Dec 2009

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

(i) general investment deposits 214,464 185,730(ii) specific investment deposits 31,413 20,024(iii) other deposits 69,074 43,006

314,951 248,760

(i) Income derived from investment of general investment deposits31 Dec 2010 31 Dec 2009

RM'000 RM'000Finance income and hibah:Financing and advances- Profit earned other than recoveries from

impaired financing 193,677 163,188- Recoveries from impaired financing 4,650 3,546Money at call and deposit with financial

institutions 16,137 15,406214,464 182,140

Other operating incomeNet gains from dealing in foreign currency - 614Net gains from sale of financial assets held-for-trading

and other financial instruments - 416Net unrealised gains from revaluation of financial

assets held-for-trading - 868Net profit earned from financial

assets held-for-trading - 1,692- 3,590

214,464 185,730

The statutory reserve is maintained in compliance with Section 15 (1) of the Islamic Banking Act, 1983and is not distributable as cash dividends.

91


22 Income Derived from Investment of Depositors' Funds and Others (Cont'd)31 Dec 2010 31 Dec 2009

RM'000 RM'000

(ii) Income derived from investment of specific investment deposits

Finance income and hibah:Financing and advances- Profit earned other than recoveries from

impaired financing 11,926 2,544Financial investments available-for-sale 10,258 10,605Accretion of discount less amortisation of premium 148 4,950

22,332 18,099

Other operating incomeFees and commission 2,434 -Net gains from dealing in foreign currency 4,936 2,201Net loss from sale of financial assets held-for-trading

and other financial instruments (4,743) (2,062)Net gain from foreign exchange 35 -Net unrealised gains/(loss) from revaluation of

financial assets held-for-trading 140 (1,134)Net profit earned from financial assets held-for-trading 6,279 2,920

9,081 1,925

31,413 20,024

The above fees and commissions were derived from the following major contributors:Service charges and fees 1,031 -

31 Dec 2010 31 Dec 2009RM'000 RM'000

(iii) Income derived from investment of other deposits

Finance income and hibah:Financing and advances- Profit earned other than recoveries from

impaired financing 62,379 37,909- Recoveries from impaired financing 1,498 824Money at call and deposit with financial

institutions 5,197 3,57969,074 42,312

Other operating incomeNet gains from dealing in foreign currency - 119Net gains from sale of financial assets held-for-trading


assets held-for-trading - 168Net profit earned from financial assets held-for-trading - 327

- 694

69,074 43,00692


23 Income Derived from Investment of Shareholders' Funds31 Dec 2010 31 Dec 2009

RM'000 RM'000Finance income and hibah:Financing and advances- Profit earned other than recoveries from

impaired financing 39,199 43,415- Recoveries from impaired financing 941 943Money at call and deposit with financial

institutions 3,266 4,09943,406 48,457

Other operating incomeFees and commission 30,584 22,938Net gains from dealing in foreign currency - 143Net gains from sale of financial assets held-for-trading


assets held-for-trading - 203Net profit earned from financial assets held-for-trading - 395Shared-service fees from holding company 4,642 1,746Net gains on disposal of equipment - 56Other income 179 156

35,405 25,734

78,811 74,191

The above fees and commissions were derived from the following major contributors:Service charges and fees 12,954 11,088Cards 11,094 7,391Agency fees 5,507 2,519

24 Impairment Losses on Financing31 Dec 2010 31 Dec 2009

RM'000 RM'000Impairment charges on financing:(a) Individual impairment/ (2009: Specific allowance)

- Provided 68,769 65,498- Written back (5,668) (10,979)

(b) Collective impairment/ (2009: General allowance)- Provided 18,988 -- Written back (930) -

Impaired financing- Recovered (15,021) (8,244)- Written off 4,706 1,165

70,844 47,440

93


25 Income Attributable to Depositors31 Dec 2010 31 Dec 2009

RM'000 RM'000Deposits from customers

- Mudharabah Fund 52,500 46,684- Non-Mudharabah Fund 11,218 3,644

Deposits and placements of banks and other financialinstitutions

- Mudharabah Fund 35,354 24,732

Others 987 255100,059 75,315

26 Personnel Expenses31 Dec 2010 31 Dec 2009

RM'000 RM'000

Salaries, allowances and bonuses 18,470 12,397Employees Provident Fund contributions 3,061 1,882Other staff related costs 1,939 1,570

23,470 15,849

27 Other Overheads and Expenditures31 Dec 2010 31 Dec 2009

RM'000 RM'000Promotion and marketing related expenses

Advertising and promotion 9,884 15,762

Establishment related expensesDepreciation of equipment 3,625 1,553Amortisation of intangible assets 736 687Information technology costs 506 352Hire of Equipment 191 116Rental of premises 4,719 4,087Equipment written off 1 -Others 1,602 924

11,380 7,719

General administrative expensesShared-service fees to immediate holding company 98,498 78,848Auditors' fees

Statutory audit 80 50Non-audit services 130 38

Professional fees 976 1,266Others 15,163 3,236

114,847 83,438

136,111 106,919

94


28 Shariah committee's remuneration31 Dec 2010 31 Dec 2009

RM'000 RM'000

Shariah committee members 127 109

29 Taxation and zakat31 Dec 2010 31 Dec 2009

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

Malaysian income tax 17,337 18,336Deferred tax:

Origination and reversal of temporary differences- Current year (995) 956- Prior year (2,931) -Effect of change in tax rate - 600

13,411 19,892Under/(Over) provision in respect of prior years 5,454 -

18,865 19,892Zakat - 50

18,865 19,942

RM'000 RM'000

Profit before taxation and zakat 63,278 77,428

Taxation at Malaysian tax rate of 25% (2009: 25%) 15,820 19,357Non-deductible expenses 980 327Tax exempt income (458) (392)Effect of change in tax rate * - 600Under/(Over) provision in respect of prior years 2,523 -Tax expense 18,865 19,892

*

30 Earnings per share

A numerical reconciliation between tax expense and the accounting profit multiplied by the applicable taxrate is as follows:

The earnings per ordinary share have been calculated based on net profit and 100,000,000 number ofordinary 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.

95


31 Significant related party transactions and balances

For the purpose of these financial statements, parties are considered to be related if : -a.

b. the Bank and the party are subject to common control or common significant influence. Related partiesmaybe individuals or other entities.

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 current account - - - 1Fees and commission 102 3,987 - 2,099Other income 4,642 2 1,746 -

4,744 3,989 1,746 2,100

ExpenditureProfit attributable to intercompany deposits 33,572 9,520 24,331 1,115Fees and commission 1 1,110 - 3Operating expenses 98,533 13,801 78,876 4,494

132,106 24,431 103,207 5,612

Amount due fromCurrent account balances 230 13,004 - 4,190Other assets 30,527 78 356,775 -

30,757 13,082 356,775 4,190

Amount due toIntercompany deposits 1,493,087 745 1,401,291 339,264Current account balances 11,296 - - 2,872Other liabilities 3,447 8,217 1,747 4,538

1,507,830 8,962 1,403,038 346,674

the Bank has the ability, directly or indirectly, to control the other party or exercise significant influence overthe other party in making financial or operational decisions, or vice versa, 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:

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

31 Dec 200931 Dec 2010

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 for comparable to transactions with a third party.

Total financing due by key management personnel of the Bank as at 31 December 2010 is RM8,839 (2009:RM95,927).

96


31 Significant related party transactions and balances (Cont'd)

(b) Key Management Personnel Compensation

` 31 Dec 2010 31 Dec 2009RM'000 RM'000

Executive DirectorShort-term employee benefits

Salary, allowances and other remuneration 961 682Bonuses 200 212

1,161 894Non-Executive Directors

Short-term employee benefitsFees 384 384

The directors' shareholdings in the shares of the ultimate holding company, HSBC Holdings plc, are shown inthe Directors' Report.

(c) 31 Dec 2010 31 Dec 2009

Number ofDirectors

Number ofDirectors

Executive DirectorRM1,000,001 - RM1,050,000 1 * 1RM100,001 - RM150,000 1 # -

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

* Resigned on 1 August 2010# Appointed on 22 November 2010

32 Credit exposure to connected parties

31 Dec 2009

Aggregate value of outstanding credit exposures to connected parties (RM'000) 4,574 191As a percentage of total credit exposures 0.090% 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 - -

31 Dec 2010

The remuneration of the key management personnel, being the members of the Board of Directors of the Bank,during the financial year 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:

97


33 Capital Adequacy31 Dec 2010 31 Dec 2009

RM'000 RM'000Tier 1 capitalPaid-up ordinary share capital 50,000 50,000Share premium 610,000 610,000Retained profits 74,652 40,103Statutory reserve 50,000 40,104

784,652 740,207Deferred tax adjustments (2,047) 1,879Total Tier 1 capital 782,605 742,086

Tier 2 capitalCollective impairment allowance/ (2009: General allowance) 69,592 52,597Total Tier 2 capital 69,592 52,597

Capital base 852,197 794,683

Core capital ratio 16.1% 20.6%Risk-weighted capital ratio 17.5% 22.0%

Breakdown of risk-weighted assets ("RWA") in the various categories of risk weighted:

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

Total RWA for credit risk 6,991,418 4,443,562 5,041,611 3,264,777Total RWA for market risk - 29,276 - 24,658Total RWA for operational risk - 394,028 - 315,695

6,991,418 4,866,866 5,041,611 3,605,130

31 Dec 200931 Dec 2010

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

98

33 Capital adequacy (Cont'd)

31 Dec 2010Exposure 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 1,786,547 - - - -Banks, Development FinancialInstitutions & MDBs 77,914 15,583 - 15,583 1,247Corporates 2,371,878 2,360,797 - 2,360,797 188,864Regulatory Retail 1,691,727 1,267,743 - 1,267,743 101,419Residential Mortgages 499,692 266,512 - 266,512 21,321Other Assets 90,315 90,315 - 90,315 7,225Defaulted Exposures 56,147 79,782 - 79,782 6,383Total for On-Balance SheetExposures

6,574,220 4,080,732 - 4,080,732 326,459

Off-Balance Sheet Exposures

OTC Derivatives 20,467 4,093 - 4,093 327Off balance sheet exposuresother than OTC derivatives orcredit derivatives 396,462 358,337 - 358,337 28,667Defaulted Exposures 269 400 - 400 32Total for Off-Balance SheetExposures 417,198 362,830 - 362,830 29,026Total On and Off-BalanceSheet Exposures 6,991,418 4,443,562 - 4,443,562 355,485

Large Exposures RiskRequirement - - - - - -

Market Risk Longposition

Shortposition

Profit Rate Risk 174,661 25,074 149,586 26,583 - 26,583 2,127Foreign Currency Risk 2,693 2,300 2,693 2,693 - 2,693 215Total market risk 177,354 27,374 152,279 29,276 - 29,276 2,342

Operational Risk - - - 394,028 - 394,028 31,522

Total RWA and CapitalRequirement - - - 4,866,866 - 4,866,866 389,349

The table above discloses the gross and net exposures, risk weighted assets and capital requirements for credit risk, market largeexposure risk and operational risk of the Bank as at reporting date. This requirement came into effect since 2008 with the adoptionof the Basel II Standardised Approach under the Risk Weighted Capital Adequacy Framework "RWCAF"

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

408,389269

429,125

7,076,393

90,31556,866

6,647,268

20,467

77,9142,426,9781,708,832

499,816

GrossExposures

(RM'000)

1,786,547

99



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

The table above discloses the gross and net exposures, risk weighted assets and capital requirements for credit risk, market largeexposure risk and operational risk of the Bank as at reporting date. This requirement came into effect since 2008 with the adoptionof the Basel II Standardised Approach under the Risk Weighted Capital Adequacy Framework "RWCAF"

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

907,146

518,9791,745,7531,365,645

76,48360,23821,701

20,216

GrossExposures

(RM'000)

4,695,945

335,0308

355,254

5,051,199

100



2010

Sovereigns& Central

Banks

Banks,MDBs and

DFIsCorporates

RegulatoryRetail

ResidentalMortgages

OtherAssets

RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'0000% 1,786,547 - - 1,402 - - 1,787,949 -

20% - 98,381 78 - - - 98,459 19,69235% - - - - 145,148 - 145,148 50,80250% - - 22,061 188 200,793 - 223,042 111,52175% - - - 1,808,757 187,770 - 1,996,527 1,497,395100% - - 2,593,749 6,284 2,226 90,315 2,692,574 2,692,574150% - - 25,782 21,937 - - 47,719 71,578

Total RiskWeight - - - - - - 6,991,418 4,443,562Average

Risk Weight - - - - - - 388,412 246,865

Deductionfrom Capital

Base - - - - - - - -

2009

Sovereigns& Central

Banks

Banks,MDBs and

DFIsCorporates

RegulatoryRetail

ResidentalMortgages

OtherAssets

RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'0000% 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 - - - - - - 280,090 181,377

Deductionfrom Capital

Base - - - - - - - -

The above are disclosures on credit risk by risk weights of the Bank as at reporting date. This disclosure requirementcame into effect since 2008 with the adoption of Basel 2 Standardised Approach under the Risk Weighted CapitalAdequacy Framework, "RWCAF".

Note:MDBs - Multilateral Development BanksDFIs - Development Financial Institutions

Total RiskWeighted

Assets

Exposures after Netting and Credit Risk Mitigation

RiskWeights

TotalExposures

after Netting& Credit Risk

Mitigation

RiskWeights

Exposures after Netting and Credit Risk Mitigation TotalExposures

after Netting& Credit

RiskMitigation

Total RiskWeighted

Assets

101


34 Commitments and Contingencies

Positive fairvalue of Credit Risk

Principal derivative equivalent weightedamount contracts amount * amount *

31 Dec 2010 RM'000 RM'000 RM'000 RM'000

Direct credit substitutes 90,224 - 90,224 80,828Transaction-related contingent items 22,347 - 11,174 9,800Short-term self-liquidating trade-

related contingencies 14,427 - 2,885 1,406Irrevocable commitments to

extend credit:- Maturity not exceeding one year 766,956 - - -- Maturity exceeding one year 81,217 - 40,609 31,995

Unutilised credit card lines 581,158 - 116,232 87,174Sell and buy back agreement 147,534 - 147,534 147,534Equity related contracts

- Less than one year 13,177 4,642 5,439 1,087- One year to less than five years 106,108 6,513 15,028 3,006

1,823,148 11,155 429,125 362,830Note 11

Positive fairvalue of Credit Risk

Principal derivative equivalent weightedamount contracts 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 10,237 355,254 312,354Note 11

* The credit equivalent and risk weighted amounts 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 the Basel 2Standardised Approach under the Risk Weighted Capital Adequacy Framework.

The table below shows the contract or underlying principal amounts, positive fair value of derivative contract,credit equivalent amounts and risk weighted amounts of unmatured off-balance sheet transactions as at balancesheet date. The underlying principal amounts indicate the volume of business outstanding and do not representamounts at risk.

102


35 Profit Rate Risk

Effective

Up to >1 - 3 >3 - 12 1 - 5 Over 5 Non-profit Trading profit31 Dec 2010 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 1,480,781 - - - - 28,217 - 1,508,998 2.73Financial assets held-for-trading - - - - - - 148,006 148,006 3.13Financial investments available-for-sale 34,504 - - 296,161 - - - 330,665 3.07Financing and advances

- performing 2,211,622 304,369 314,583 1,523,337 137,940 115,473 - 4,607,324 8.02- impaired * - - - - - 28,952 - 28,952 -

Others - - - - - 84,885 44,805 129,690 -

Total Assets 3,726,907 304,369 314,583 1,819,498 137,940 257,527 192,811 6,753,635

LIABILITIES ANDSHAREHOLDERS' FUNDS

Deposits from customers 2,011,780 753,511 413,250 23,353 - 580,642 - 3,782,536 2.10Deposits and placements of

banks and other financialinstitutions 668,547 788,583 607,426 20,043 - - - 2,084,599 2.01

Bills and acceptances payable - - - - - 5,531 - 5,531 -Others - - - - - 85,298 11,155 96,453 -

Total Liabilities 2,680,327 1,542,094 1,020,676 43,396 - 671,471 11,155 5,969,119

Shareholders' Equity - - - - - 784,516 - 784,516

Total Liabilities andShareholders' Equity 2,680,327 1,542,094 1,020,676 43,396 - 1,455,987 11,155 6,753,635

On-balance sheetprofit sensitivity gap 1,046,580 (1,237,725) (706,093) 1,776,102 137,940 (1,198,460) 181,656 -

Off-balance sheetinterest sensitivity gap - - 27,505 (27,505) - - - -

Total profitsensitivity gap 1,046,580 (1,237,725) (678,588) 1,748,597 137,940 (1,198,460) 181,656 -

* This is arrived at after deducting the individual allowance from impaired 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 financial positionand cash flows. The following table summarises the Bank's exposure to the profit rates risk. The assets and liabilities at carrying amount areallocated to time bands by reference to the earlier of the next contractual repricing dates and maturity dates.

103


35 Profit rate risk (Cont'd)

Effective

Up to >1 - 3 >3 - 12 1 - 5 Over 5 Non-profit Trading profit31 Dec 2009 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 676,262 - - - - 11,046 - 687,308 2.00Financial assets held-for-trading - - - - - - 127,386 127,386 2.54Financial investments 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 4,052,032

Shareholders' 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 -

Off-balance sheetinterest sensitivity gap - - - - - - - -

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

104


36 Collateral

31 Dec 2010 31 Dec 2009Carrying amount of assets pledged as collateral RM'000 RM'000

- Collateral pledged for repurchase agreements 147,534 165,757

37 Fair values of financial assets and liabilities

31 Dec 2010 31 Dec 2010 31 Dec 2009 31 Dec 2009Carrying Fair Carrying Fair

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

Financial AssetsCash and short-term funds 1,508,998 1,508,998 687,308 687,308Securities held for trading 148,006 148,006 127,386 127,386Securities available for sale 330,665 330,665 384,220 384,220Financing and advances 4,636,276 4,616,371 3,164,973 3,161,401

Financial LiabilitiesDeposits from customers 3,782,536 3,780,630 2,472,411 2,484,178Deposits and placements of banks and

other financial institutions 2,084,599 2,083,113 1,510,907 1,509,750Bills and acceptances payable 5,531 5,531 3,298 3,298

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.

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37 Fair values of financial assets and liabilities (Cont'd)

Financing and advances

Deposits from customersDeposits and placements of banks and other financial institutions

Unrecognised financial instruments

38 Lease commitments

31 Dec 2010 31 Dec 2009Year RM'000 RM'000

Less than one year 4,675 32Between one and five years 2,421 22

7,096 54

39 Capital commitments31 Dec 2010 31 Dec 2009

RM'000 RM'000Capital expenditure:- Authorised and contracted for 1,038 4,035- Authorised but not contracted for - 2,008

1,038 6,043

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 impaired financing, the fair value is the carrying value of thefinancing, net of individual impairment allowances. Collective impairment allowances are deducted fromthe fair value of financing.

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 principal values of some financial instruments are not recognised in the statement of financialpositions but the fair values of these financial instruments are recognised in the statement of financialpositions as at each reporting date. their fair values are disclosed in Notes 11 and 18. The principal orcontractual amounts are disclosed in Note 34.

106


40 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 2010 exercise 31 Dec 2009 exerciseNumber price Number price

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

Amount vested from HSBC Bank 44 4.32 13 7.12Granted in the year/ period 8 5.46 41 3.31Exercised in the year/ period (4) 3.51 (1) 7.26Lapsed in the year/ period (9) 3.58 (9) 6.69Outstanding as at 31 December 39 4.79 44 4.32

Options vested as at 31 December - -

31 Dec 2010 31 Dec 2009RM'000 RM'000

Compensation cost recognisedduring the year 165 115

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.

107


41 Shariah Advisors

In line with Bank Negara Malaysia's "Shariah Governance Framework for Islamic Financial Institutions", thefollowing Shariah scholars were appointed:

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

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

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

42 Comparative Figures

Restatement of Comparative Figures

The presentation and classification of items in the current financial statements have been consistent with theprevious financial year except for the following:

Reclassification/restatement to conform to current year's presentation

(i) Statement of Financial Position as at 31 December 2009(previously referred to as balance sheet)

As restated As previouslystated

RM'000 RM'000Financing and Advances

By sectorManufacturing 788,832 783,245Purchase of transport vehicles - 507Consumption credit - 1,201,483Household - Retail 1,283,077 -

By purposePurchase of transport vehicles 94 -Purchase of fixed assets excluding land & building 235,009 -Consumption credit 1,201,896 -Working capital 1,602,143 -

108


42 Comparative Figures (Cont'd)

Restatement of Comparative Figures (Cont'd)

(ii) Statement of comprehensive income for the year ended 31 December 2009(previously referred to as income statement)

As restated As previouslystated

RM'000 RM'000a) Income Derived from Investment of Shareholders' Fund

Finance income and hibah:- Profit earned other than recoveries from impaired financing 43,415 44,358- Recoveries from impaired financing 943 -Money at call and deposit with financial institutions 4,099 4,099

48,457 48,457

Other operating incomeFees and commission 22,938 16,804Net gains from dealing in foreign currency 143 143Net gains from sale of held-for-trading securities

and other financial instruments 97 97Net unrealised gains from revaluation of trading

securities 203 203Net profit earned from trading securities 395 395Shared-service fees from holding company 1,746 1,474Net gains on disposal of equipment 56 56Other income 156 113

25,734 19,285

74,191 67,742

The above fees and commissions were derived from the following major contributors:Service charges and fees 11,088 8,335Cards 7,391 5,484Agency fees 2,519 1,841

b) Other Overheads and ExpendituresPromotion and marketing related expenses

Advertising and promotion 15,762 10,579

Establishment related expensesDepreciation of equipment 1,553 1,078Amortisation of intangible assets 687 454Information technology costs 352 332Hire of Equipment 116 107Rental of premises 4,087 2,442Others 924 553

7,719 4,966

General administrative expensesShared-service fees to immediate holding company 78,848 58,939Auditors' fees

Statutory audit 50 40Non-audit services 38 -

Professional fees 1,266 1,561Others 3,236 2,354

83,438 62,894

106,919 78,439109

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