UNITED STATES SECURITIES AND

EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)
þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2006
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from           to

Commission file number 1-8198

HSBC FINANCE CORPORATION

(Exact name of registrant as specified in its charter)

Delaware	86-1052062
(State of Incorporation)	(I.R.S. Employer Identification No.)
2700 Sanders Road, Prospect Heights, Illinois	60070
(Address of principal executive offices)	(Zip Code)
(847) 564-5000
Registrant’s telephone number, including area code

          Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes þ          No o

             Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  o Accelerated filer  o Non-accelerated filer  þ

            Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes o          No þ

               As of July 31, 2006, there were 55 shares of the registrant’s common stock outstanding, all of which are owned by HSBC Investments (North America) Inc.

HSBC FINANCE CORPORATION

FORM 10-Q

TABLE OF CONTENTS

Part  I.	FINANCIAL INFORMATION
Item 1.	Consolidated Financial Statements
	Statement of Income	3
	Balance Sheet	4
	Statement of Changes in Shareholders’ Equity	5
	Statement of Cash Flows	6
	Notes to Consolidated Financial Statements	7
Item  2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Forward-Looking Statements	21
	Executive Overview	21
	Basis of Reporting	25
	Receivables Review	32
	Results of Operations	33
	Segment Results – Managed Basis	40
	Credit Quality	46
	Liquidity and Capital Resources	52
	Risk Management	57
	Reconciliations to GAAP Financial Measures	59
Item 4.	Controls and Procedures	63
Part II.	OTHER INFORMATION
Item  1.	Legal Proceedings	63
Item 1A.	Risk Factors	65
Item 6.	Exhibits	66
Signature		67
Statement of Computation of Ratio of Earnings to Fixed Charges
Section 302 Certification of CEO and CFO
Section 906 Certification of CEO and CFO
Debt and Preferred Stock Securities Ratings

2

Part I. FINANCIAL INFORMATION

Item 1.  Consolidated Financial Statements

HSBC Finance Corporation

CONSOLIDATED STATEMENT OF INCOME

			Three months ended					Six months ended
			June 30,					June 30,
			2006			2005		2006		2005
			(in millions)
Finance and other interest income			$	4,311		$	3,139	$	8,398	$	6,089
Interest expense:
		HSBC affiliates		173			134		326		285
		Non-affiliates		1,589			970		3,059		1,881
Net interest income				2,549			2,035		5,013		3,923
Provision for credit losses				1,248			1,031		2,114		1,872
Net interest income after provision for credit losses				1,301			1,004		2,899		2,051
Other revenues:
	Securitization revenue			51			54		122		139
	Insurance revenue			226			278		499		535
	Investment income			34			33		68		66
	Derivative (expense) income			(7	)		76		50		336
	Fee income			442			354		834		660
	Taxpayer financial services revenue			20			18		254		261
	Gain on receivable sales to HSBC affiliates			97			109		182		209
	Servicing and other fees from HSBC affiliates			116			109		234		220
	Other income			220			142		407		245
Total other revenues				1,199			1,173		2,650		2,671
Costs and expenses:
	Salaries and employee benefits			564			526		1,145		1,023
	Sales incentives			98			90		178		172
	Occupancy and equipment expenses			79			82		162		169
	Other marketing expenses			176			185		349		365
	Other servicing and administrative expenses			246			192		529		486
	Support services from HSBC affiliates			270			217		522		426
	Amortization of intangibles			63			83		143		190
	Policyholders’ benefits			107			116		225		238
Total costs and expenses				1,603			1,491		3,253		3,069
Income before income tax expense				897			686		2,296		1,653
Income tax expense				329			214		840		555
Net income			$	568		$	472	$	1,456	$	1,098

The accompanying notes are an integral part of the consolidated financial statements.

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HSBC Finance Corporation

CONSOLIDATED BALANCE SHEET

			June 30,		December 31,
			2006		2005
			(in millions,
			except share data)
Assets
Cash			$	526	$	903
Interest bearing deposits with banks				448		384
Securities purchased under agreements to resell				6		78
Securities				4,368		4,051
Receivables, net				150,942		136,989
Intangible assets, net				2,337		2,480
Goodwill				7,023		7,003
Properties and equipment, net				421		458
Real estate owned				620		510
Derivative financial assets				573		234
Other assets				3,430		3,579
Total assets			$	170,694	$	156,669
Liabilities
Debt:
	Commercial paper, bank and other borrowings		$	13,438	$	11,454
	Due to affiliates			15,751		15,534
	Long term debt (with original maturities over one year)			115,627		105,163
Total debt				144,816		132,151
Insurance policy and claim reserves				1,295		1,291
Derivative related liabilities				302		383
Other liabilities				3,621		3,365
	Total liabilities			150,034		137,190
Shareholders’ equity
Redeemable preferred stock, 1,501,100 shares authorized, Series B, $0.01 par value, 575,000 shares issued				575		575
Common shareholder’s equity:
		Common stock, $0.01 par value, 100 shares authorized, 55 shares issued		-		-
		Additional paid-in capital		17,120		17,145
		Retained earnings		2,295		1,280
		Accumulated other comprehensive income		670		479
Total common shareholder’s equity				20,085		18,904
Total liabilities and shareholders’ equity			$	170,694	$	156,669

The accompanying notes are an integral part of the consolidated financial statements.

4

HSBC Finance Corporation

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

Six months ended June 30,				2006			2005
				(in millions)
Preferred stock
	Balance at beginning of period			$	575		$	1,100
	Issuance of Series B preferred stock				-			575
	Balance at end of period			$	575		$	1,675
Common shareholder’s equity
	Additional paid-in capital
		Balance at beginning of period		$	17,145		$	14,627
		Issuance costs of Series B preferred stock			-			(16	)
		Employee benefit plans, including transfers and other			(25	)		51
		Balance at end of period		$	17,120		$	14,662
	Retained earnings
		Balance at beginning of period		$	1,280		$	571
		Net income			1,456			1,098
		Dividends:
			Preferred stock		(18	)		(37	)
			Common stock		(423	)		-
		Balance at end of period		$	2,295		$	1,632
	Accumulated other comprehensive income
		Balance at beginning of period		$	479		$	643
		Net change in unrealized gains (losses), net of tax, on:
			Derivatives classified as cash flow hedges		101			44
			Securities available for sale and interest-only strip receivables		(60	)		15
		Foreign currency translation adjustments			150			(182	)
		Other comprehensive income, net of tax			191			(123	)
		Balance at end of period		$	670		$	520
Total common shareholder’s equity				$	20,085		$	16,814
Comprehensive income
	Net income			$	1,456		$	1,098
	Other comprehensive income				191			(123	)
Comprehensive income				$	1,647		$	975

The accompanying notes are an integral part of the consolidated financial statements.

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HSBC Finance Corporation

STATEMENT OF CASH FLOWS

Six months ended June 30,		2006			2005
		(in millions)
Cash flows from operating activities
Net income		$	1,456		$	1,098
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
	Gain on receivable sales to HSBC affiliates		(182	)		(209	)
	Provision for credit losses		2,114			1,872
	Insurance policy and claim reserves		(135	)		(142	)
	Depreciation and amortization		201			257
	Net change in other assets		83			(620	)
	Net change in other liabilities		218			224
	Net change in loans held for sale		(13	)		(341	)
	Excess tax benefits from share-based compensation arrangements		(9	)		-
	Other, net		92			(234	)
Net cash provided by (used in) operating activities			3,825			1,905
Cash flows from investing activities
Securities:
	Purchased		(1,166	)		(363	)
	Matured		841			224
	Sold		135			79
Net change in short-term securities available for sale			(170	)		170
Net change in securities purchased under agreements to resell			72			2,230
Net change in interest bearing deposits with banks			(40	)		(317	)
Receivables:
	Originations, net of collections		(26,387	)		(24,156	)
	Purchases and related premiums		(548	)		(38	)
	Sales to affiliates		11,054			9,885
	Net change in interest-only strip receivables		-			174
Cash received in sale of U.K. credit card business			90			-
Properties and equipment:
	Purchases		(32	)		(42	)
	Sales		12			2
Net cash provided by (used in) investing activities			(16,139	)		(12,152	)
Cash flows from financing activities
Debt:
	Net change in short-term debt		1,960			1,632
	Net change in time certificates		-			(2	)
	Net change in due to affiliates		(84	)		3,164
	Long term debt issued		20,105			16,450
	Long term debt retired		(9,488	)		(11,231	)
Redemption of company obligated mandatorily redeemable preferred securities of subsidiary trusts			(206	)		(309	)
Insurance:
	Policyholders’ benefits paid		(116	)		(68	)
	Cash received from policyholders		188			181
Issuance of Series B preferred stock			-			559
Shareholders’ dividends			(441	)		-
Excess tax benefits from share-based compensation arrangements			9			-
Net cash provided by (used in) financing activities			11,927			10,376
Effect of exchange rate changes on cash			10			(9	)
Net change in cash			(377	)		120
Cash at beginning of period			903			392
Cash at end of period		$	526		$	512

The accompanying notes are an integral part of the consolidated financial statements.

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HSBC Finance Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Basis of Presentation

HSBC Finance Corporation is an indirect wholly owned subsidiary of HSBC North America Holdings Inc. (“HNAH”), which is an indirect wholly owned subsidiary of HSBC Holdings plc (“HSBC”). The accompanying unaudited interim consolidated financial statements of HSBC Finance Corporation and its subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all normal and recurring adjustments considered necessary for a fair presentation of financial position, results of operations and cash flows for the interim periods have been made. HSBC Finance Corporation may also be referred to in this Form 10-Q as “we,” “us” or “our.” These unaudited interim consolidated financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2005 (the “2005 Form 10-K”) and our Form 10-Q for the quarterly period ended March 31, 2006. Certain reclassifications have been made to prior period amounts to conform to the current period presentation.

The preparation of financial statements in conformity with U.S. GAAP requires the use of estimates and assumptions that affect reported amounts and disclosures. Actual results could differ from those estimates. Interim results should not be considered indicative of results in future periods.

2. Securities

Securities consisted of the following available-for-sale investments:

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
June 30, 2006	Cost		Gains		Losses			Value
	(in millions)
Corporate debt securities	$	2,891	$	3	$	(85	)	$	2,809
Money market funds		466		-		-			466
U.S. government sponsored enterprises(1)		57		-		(2	)		55
U.S. government and Federal agency debt securities		361		-		(7	)		354
Non-government mortgage backed securities		183		-		(1	)		182
Other		471		-		(7	)		464
Subtotal		4,429		3		(102	)		4,330
Accrued investment income		38		-		-			38
Total securities available for sale	$	4,467	$	3	$	(102	)	$	4,368

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HSBC Finance Corporation

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
December 31, 2005	Cost		Gains		Losses			Value
	(in millions)
Corporate debt securities	$	2,337	$	23	$	(38	)	$	2,322
Money market funds		315		-		-			315
U.S. government sponsored enterprises(1)		96		-		(2	)		94
U.S. government and Federal agency debt securities		744		-		(4	)		740
Non-government mortgage backed securities		88		-		(1	)		87
Other		463		1		(5	)		459
Subtotal		4,043		24		(50	)		4,017
Accrued investment income		34		-		-			34
Total securities available for sale	$	4,077	$	24	$	(50	)	$	4,051

⁽¹⁾  Includes primarily mortgage-backed securities issued by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation.

Money market funds at June 30, 2006 include $336 million which is restricted for the sole purpose of paying down certain secured financings at the established payment date. There were no such balances at December 31, 2005.

A summary of gross unrealized losses and related fair values as of June 30, 2006 and December 31, 2005, classified as to the length of time the losses have existed follows:

	Less Than One Year							Greater Than One Year
	Number		Gross			Aggregate		Number		Gross			Aggregate
	Of		Unrealized			Fair Value of		of		Unrealized			Fair Value of
June 30, 2006	Securities		Losses			Investments		Securities		Losses			Investments
	(dollars are in millions)
Corporate debt securities		383	$	(54	)	$	1,117		381	$	(31	)	$	832
U.S. government sponsored enterprises		11		(1	)		22		19		(1	)		33
U.S. government and Federal agency debt securities		25		(3	)		79		47		(4	)		133
Non-government mortgage		4		-	(1)		2		15		(1	)		19
Other		32		(3	)		115		45		(4	)		169

	Less Than One Year							Greater Than One Year
	Number		Gross			Aggregate		Number		Gross			Aggregate
	Of		Unrealized			Fair Value of		of		Unrealized			Fair Value of
December 31, 2005	Securities		Losses			Investments		Securities		Losses			Investments
	(dollars are in millions)
Corporate debt securities		272	$	(14	)	$	695		381	$	(24	)	$	898
U.S. government sponsored enterprises		11		-	(1)		28		25		(2	)		64
U.S. government and Federal agency debt securities		18		(1	)		71		40		(3	)		117
Non-government mortgage		3		-	(1)		4		16		(1	)		22
Other		12		(1	)		49		49		(4	)		148

⁽¹⁾  Less than $500 thousand.

The gross unrealized losses on our securities available for sale have increased during the six months ended June 30, 2006 due to a general increase in interest rates. The contractual terms of these securities do not

8

HSBC Finance Corporation

permit the issuer to settle the securities at a price less than the par value of the investment. Since substantially all of these securities are rated A- or better, and because we have the ability and intent to hold these investments until maturity or a market price recovery, these securities are not considered other-than-temporarily impaired.

3. Receivables

Receivables consisted of the following:

	June 30,			December 31,
	2006			2005
	(in millions)
Real estate secured	$	93,893		$	82,826
Auto finance		11,723			10,704
MasterCard(1)/ Visa(1)		24,959			24,110
Private label		2,522			2,520
Personal non-credit card		20,664			19,545
Commercial and other		198			208
Total owned receivables		153,959			139,913
HSBC acquisition purchase accounting fair value adjustments		-			63
Accrued finance charges		1,972			1,831
Credit loss reserve for owned receivables		(4,649	)		(4,521	)
Unearned credit insurance premiums and claims reserves		(464	)		(505	)
Interest-only strip receivables		4			23
Amounts due and deferred from receivable sales		120			185
Total owned receivables, net		150,942			136,989
Receivables serviced with limited recourse		1,911			4,074
Total managed receivables, net	$	152,853		$	141,063

⁽¹⁾  MasterCard is a registered trademark of MasterCard International, Incorporated and Visa is a registered trademark of VISA USA, Inc.

HSBC acquisition purchase accounting fair value adjustments represent adjustments which have been “pushed down” to record our receivables at fair value on March 28, 2003, the date we were acquired by HSBC.

We have a subsidiary, Decision One Mortgage Company, LLC, which directly originates mortgage loans sourced by mortgage brokers and sells all loans to secondary market purchasers, including our Mortgage Services business. Loans held for sale to external parties by this subsidiary totaled $1.7 billion at both June 30, 2006 and December 31, 2005 and are included in real estate secured receivables.

As part of our acquisition of Metris on December 1, 2005, we acquired $5.3 billion of receivables. The receivables acquired were subject to the requirements of Statement of Position 03-3, “Accounting for Certain Loans or Debt Securities Acquired in a Transfer” (“SOP 03-3”) to the extent there was evidence of deterioration of credit quality since origination and for which it was probable, at acquisition, that all contractually required payments would not be collected and that the associated line of credit had been closed. The carrying amount of these receivables was $302 million at June 30, 2006 and $414 million at December 31, 2005 and is included in the MasterCard/ Visa receivables in the table above. The outstanding contractual balance of these receivables was $475 million at June 30, 2006 and $804 million at December 31, 2005. At June 30, 2006, no credit loss reserve for the acquired receivables subject to SOP 03-3 has been established as there has been no decrease to the expected future cash flows since the acquisition. There was a reclassification

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HSBC Finance Corporation

to accretable yield from non-accretable difference. This reclassification from non-accretable difference represents an increase to the estimated cash flows to be collected on the underlying Metris portfolio. There were no additions or disposals to accretable yield during the quarter ended June 30, 2006. The following summarizes the accretable yield on these receivables at June 30, 2006:

	(in millions)
Accretable yield at December 31, 2005	$	(122	)
Accretable yield amortized to interest income during the period		62
Reclassification from non-accretable difference		(51	)
Accretable yield at June 30, 2006	$	(111	)

Interest-only strip receivables are reported net of our estimate of probable losses under the recourse provisions for receivables serviced with limited recourse.

Receivables serviced with limited recourse consisted of the following:

	June 30,		December 31,
	2006		2005
	(in millions)
Auto finance	$	693	$	1,192
MasterCard/ Visa		750		1,875
Personal non-credit card		468		1,007
Total	$	1,911	$	4,074

The combination of receivables owned and receivables serviced with limited recourse, which comprises our managed portfolio, is shown below:

	June 30,		December 31,
	2006		2005
	(in millions)
Real estate secured	$	93,893	$	82,826
Auto finance		12,416		11,896
MasterCard/ Visa		25,709		25,985
Private label		2,522		2,520
Personal non-credit card		21,132		20,552
Commercial and other		198		208
Total	$	155,870	$	143,987

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HSBC Finance Corporation

4. Credit Loss Reserves

An analysis of credit loss reserves was as follows:

		Three Months						Six Months
		Ended June 30,						Ended June 30,
		2006			2005			2006			2005
		(in millions)
Owned receivables:
	Credit loss reserves at beginning of period	$	4,468		$	3,581		$	4,521		$	3,625
	Provision for credit losses		1,248			1,031			2,114			1,872
	Charge-offs		(1,233	)		(961	)		(2,287	)		(1,914	)
	Recoveries		153			117			279			207
	Other, net		13			(12	)		22			(34	)
	Credit loss reserves for owned receivables		4,649			3,756			4,649			3,756
Receivables serviced with limited recourse:
	Credit loss reserves at beginning of period		161			661			215			890
	Provision for credit losses		(29	)		52			(21	)		82
	Charge-offs		(49	)		(201	)		(120	)		(472	)
	Recoveries		8			17			17			33
	Other, net		-			(4	)		-			(8	)
	Credit loss reserves for receivables serviced with limited recourse		91			525			91			525
Credit loss reserves for managed receivables		$	4,740		$	4,281		$	4,740		$	4,281

The increase in the provision for credit losses in both the current quarter and year-to-date period reflects higher receivable levels and portfolio seasoning as well as higher charge-offs and loss estimates at our Mortgage Services business due to deteriorating performance in the 2005 second lien and portions of the 2005 first lien real estate secured originations. These increases were partially offset by lower bankruptcy losses due to reduced bankruptcy filings resulting from the enactment of new bankruptcy legislation in the United States in October 2005 and a reduction in the estimated loss exposure resulting from Hurricane Katrina.

Further analysis of credit quality and credit loss reserves and our credit loss reserve methodology are presented in Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Form 10-Q under the caption “Credit Quality.”

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HSBC Finance Corporation

5. Intangible Assets

Intangible assets consisted of the following:

			Accumulated		Carrying
	Gross		Amortization		Value
	(in millions)
June 30, 2006
Purchased credit card relationships and related programs	$	1,736	$	511	$	1,225
Retail services merchant relationships		270		176		94
Other loan related relationships		326		119		207
Trade names		717		13		704
Technology, customer lists and other contracts		282		175		107
Total	$	3,331	$	994	$	2,337
December 31, 2005
Purchased credit card relationships and related programs	$	1,736	$	442	$	1,294
Retail services merchant relationships		270		149		121
Other loan related relationships		326		104		222
Trade names		717		13		704
Technology, customer lists and other contracts		282		143		139
Total	$	3,331	$	851	$	2,480

Estimated amortization expense associated with our intangible assets for each of the following years is as follows:

Year ending December 31,
	(in millions)
2006	$	269
2007		252
2008		210
2009		197
2010		168
Thereafter		520

6. Goodwill

Goodwill balances associated with our foreign businesses will change from period to period due to movements in foreign exchange. Changes in estimates of the tax basis in our assets and liabilities or other tax estimates recorded pursuant to Statement of Financial Accounting Standards Number 109, “Accounting for Income Taxes,” may result in changes to our goodwill balances. During the second quarter of 2006, we reduced our goodwill balance by approximately $18 million as a result of such changes in tax estimates.

7. Income Taxes

Our effective tax rates were as follows:

	Three months		Six months
	ended		ended
	June 30,		June 30,
	2006	2005	2006	2005
Effective tax rate	36.7%	31.2%	36.6%	33.6%

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HSBC Finance Corporation

The increase in the effective tax rate for both periods is due to higher state income taxes and an increase in pretax income with slightly lower tax credits. The increase in state income taxes is primarily due to an increase in the blended statutory tax rate of our operating companies. The effective tax rate differs from the statutory federal income tax rate primarily because of the effects of state and local income taxes and tax credits.

8. Related Party Transactions

In the normal course of business, we conduct transactions with HSBC and its subsidiaries. These transactions include funding arrangements, derivative execution, purchases and sales of receivables, servicing arrangements, information technology services, item and statement processing services, banking and other miscellaneous services. The following tables present related party balances and the income and (expense) generated by related party transactions:

	June 30,			December 31,
	2006			2005
	(in millions)
Assets, (Liabilities) and Equity:
Derivative financial assets (liability), net	$	259		$	(260	)
Affiliate preferred stock received in sale of U.K. credit card business		261			261
Other assets		477			518
Due to affiliates		(15,751	)		(15,534	)
Other liabilities		(306	)		(271	)

		Three months						Six months
		ended						ended
		June 30,						June 30,
		2006			2005			2006			2005
		(in millions)
Income/(Expense):
Interest expense on borrowings from HSBC and subsidiaries		$	(173	)	$	(134	)	$	(326	)	$	(285	)
Interest income on advances to HSBC affiliates			6			7			11			11
HSBC Bank USA, National Association (“HBUS”):
	Gain on daily sale of domestic private label receivable originations		88			100			165			192
	Gain on sale of MasterCard/ Visa receivables		9			9			17			17
	Domestic private label receivable servicing and related fees		95			90			193			182
	Real estate secured servicing, sourcing, underwriting and pricing revenues		3			5			6			10
	Other servicing, processing, origination and support revenues		12			6			23			13
	Taxpayer financial services loan origination and other fees		(1	)		(1	)		(17	)		(15	)
Support services from HSBC affiliates, primarily HSBC Technology and Services (USA) Inc. (“HTSU”)			(270	)		(217	)		(522	)		(426	)
HTSU:
	Rental revenue		12			8			23			18
	Administrative services revenue		3			7			6			12
Servicing and other fees from other HSBC affiliates			3			1			6			3
Stock based compensation expense with HSBC			(22	)		(25	)		(39	)		(36	)

The notional value of derivative contracts outstanding with HSBC subsidiaries totaled $94.9 billion at June 30, 2006 and $72.2 billion at December 31, 2005. When the fair value of our agreements with affiliate counterparties requires us to post collateral, it is provided in the form of cash which is recorded on our balance

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HSBC Finance Corporation

sheet in other assets. Beginning in the second quarter of 2006, when the fair value of our agreements with affiliate counterparties requires the posting of collateral by the affiliate, it is also provided in the form of cash. Previously, the posting of collateral by affiliates was provided in the form of securities, which were not recorded on our balance sheet. At June 30, 2006 and December 31, 2005, the fair value of our agreements with affiliate counterparties was below the level requiring the posting of collateral.

We have extended a line of credit of $2 billion to HSBC USA Inc. No balances were outstanding under this line at June 30, 2006 or December 31, 2005. Annual commitment fees associated with this line of credit are recorded in interest income and reflected as Interest income on advances to HSBC affiliates in the table above.

We extended a revolving line of credit of $.5 billion to HTSU on June 28, 2005. The balance outstanding under this line of credit was $.4 billion at June 30, 2006 and December 31, 2005 and is included in other assets. Interest income associated with this line of credit is recorded in interest income and reflected as Interest income on advances to HSBC affiliates in the table above.

We extended a promissory note of $.5 billion to HSBC Securities (USA) Inc. (“HSI”) on June 27, 2005. This promissory note was repaid during July 2005. We also extended a promissory note of $.5 billion to HSI on September 29, 2005. This promissory note was repaid during October 2005. We extended an additional promissory note of $150 million to HSI on December 28, 2005. This note was repaid during January 2006. At each reporting date these promissory notes were included in other assets. Interest income associated with this line of credit is recorded in interest income and reflected as Interest income on advances to HSBC affiliates in the table above.

On March 31, 2005, we extended a line of credit of $.4 billion to HSBC Investments (North America) Inc. (“HINO”) which was repaid during the second quarter of 2005. Interest income associated with this line of credit is recorded in interest income and reflected as Interest income on advances to HSBC affiliates in the table above.

Due to affiliates includes amounts owed to subsidiaries of HSBC (other than preferred stock).

At June 30, 2006 and December 31, 2005, we had a commercial paper back stop credit facility of $2.5 billion from HSBC supporting domestic issuances and a revolving credit facility of $5.3 billion from HSBC Bank plc (“HBEU”) to fund our operations in the U.K. As of June 30, 2006, $4.3 billion was outstanding under the U.K. lines and no balances were outstanding on the domestic lines. As of December 31, 2005, $4.2 billion was outstanding under the U.K. lines and no balances were outstanding on the domestic lines. Annual commitment fee requirements to support availability of these lines are included as a component of Interest expense – HSBC affiliates.

In December 2005, we sold our U.K. credit card business, including $2.5 billion of receivables ($3.1 billion on a managed basis), the associated cardholder relationships and the related retained interests in securitized credit card receivables to HBEU, a U.K. based subsidiary of HSBC, for an aggregate purchase price of $3.0 billion. The purchase price, which was determined based on a comparative analysis of sales of other credit card portfolios, was paid in a combination of cash and $261 million of preferred stock issued by a subsidiary of HBEU with a rate of one-year Sterling LIBOR, plus 1.30 percent. In addition to the assets referred to above, the sale also included the account origination platform, including the marketing and credit employees associated with this function, as well as the lease associated with the credit card call center and related leaseholds and call center employees to provide customer continuity after the transfer as well as to allow HBEU direct ownership and control of origination and customer service. We have retained the collection operations related to the credit card operations and have entered into a service level agreement for a period of not less than two years to provide collection services and other support services, including components of the compliance, financial reporting and human resource functions, for the sold credit card operations, to HBEU for a fee. We received $3 million during the three months ended June 30, 2006 and $11 million during the six months ended June 30, 2006 under this service level agreement. Additionally, the management teams of HBEU and our remaining U.K. operations will be jointly involved in decision making involving card marketing to ensure that growth objectives are met for both businesses. Because the sale of this business is between

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HSBC Finance Corporation

affiliates under common control, the premium of $182 million received in excess of the book value of the assets transferred including the goodwill assigned to this business, was recorded as an increase to additional paid in capital and was not included in earnings.

In December 2004, we sold our domestic private label receivable portfolio (excluding retail sales contracts at our consumer lending business), including the retained interests associated with our securitized domestic private label receivables to HBUS. We continue to service the sold private label receivables and receive servicing and related fee income from HBUS. As of June 30, 2006, we were servicing $16.5 billion of domestic private label receivables for HBUS. We received servicing and related fee income from HBUS of $95 million during the three month period ended June 30, 2006 and $193 million during the six month period ended June 30, 2006. We received servicing and related fee income from HBUS of $90 million during the three month period ended June 30, 2005 and $182 million during the six month period ended June 30, 2005. We continue to maintain the related customer account relationships and, therefore, sell new domestic private label receivable originations (excluding retail sales contracts) to HBUS on a daily basis. We sold $9,976 million of private label receivables to HBUS during the six months ended June 30, 2006 and $8,938 million during the six months ended June 30, 2005. The gains associated with the sale of these receivables are reflected in the table above and are recorded in Gain on Receivable Sales to HSBC Affiliates.

In 2003 and 2004, we sold approximately $3.7 billion of real estate secured receivables from our mortgage services business to HBUS. Under a separate servicing agreement, we have agreed to service all real estate secured receivables sold to HBUS including all business it purchased from our correspondents. As of June 30, 2006, we were servicing $3.8 billion of real estate secured receivables for HBUS. During the six months ended June 30, 2005, we also received fees from HBUS pursuant to a service level agreement under which we sourced, underwrote and priced $1.1 billion of real estate secured receivables purchased by HBUS. Purchases of real estate secured receivables from our correspondents by HBUS were discontinued effective September 1, 2005. The fee revenue associated with these receivables is recorded in Servicing and other fees from HSBC affiliates and is reflected as Real estate secured servicing, sourcing, underwriting and pricing revenues in the above table. We continue to service the receivables HBUS previously purchased from these correspondents.

Under various service level agreements, we also provide various services to HSBC affiliates. These services include credit card servicing and processing activities through our credit card services business, loan origination and servicing through our auto finance business and other operational and administrative support. Fees received for these services are reported as Servicing and other fees from HSBC affiliates and are included in the table above.

During 2003, Household Capital Trust VIII issued $275 million in mandatorily redeemable preferred securities to HSBC. Interest expense recorded on the underlying junior subordinated notes is included in Interest expense on borrowings from HSBC and subsidiaries in the table above.

During the third quarter of 2004, our Canadian business began to originate and service auto loans for an HSBC affiliate in Canada. Fees received for these services of $3 million for the three months ended June 30, 2006 and $6 million for the six months ended June 30, 2006 are included in other income and are reflected in the above table as Servicing and other fees from HSBC affiliates.

Effective October 1, 2004, HBUS became the originating lender for loans initiated by our taxpayer financial services business for clients of various third party tax preparers. We purchase the loans originated by HBUS daily for a fee. We purchased loans of $16.1 billion in the six month period ended June 30, 2006 and $15.1 billion in the six month period ended June 30, 2005. Additionally, HBUS provides services to assist with the processing of other products offered by our taxpayer financial services business. Origination and other fees paid to HBUS totaled $1 million during the three months ended June 30, 2006 and $17 million during the six months ended June 30, 2006. Origination and other fees paid to HBUS totaled $1 million during the three months ended June 30, 2005 and $15 million during the six months ended June 30, 2005. These fees are included as an offset to Taxpayer financial services revenue and are reflected as Taxpayer financial services loan origination fees in the above table.

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HSBC Finance Corporation

On July 1, 2004, HSBC Bank Nevada, National Association (“HBNV”), formerly known as Household Bank (SB), N.A., purchased the account relationships associated with $970 million of MasterCard/Visa credit card receivables from HBUS for approximately $99 million, which are included in intangible assets. The receivables continue to be owned by HBUS. We service these receivables for HBUS and receive servicing and related fee income from HBUS. As of June 30, 2006, we were servicing $1.1 billion of MasterCard/Visa receivables for HBUS. Originations of new accounts and receivables are made by HBNV and new receivables are sold daily to HBUS. We sold $1,078 million of credit card receivables to HBUS during the six months ended June 30, 2006 and $947 million of credit card receivables to HBUS during the six months ended June 30, 2005. The gains associated with the sale of these receivables are reflected in the table above and are recorded in Gain on Receivables Sales to HSBC Affiliates.

Effective January 1, 2004, our technology services employees, as well as technology services employees from other HSBC entities in North America, were transferred to HTSU. In addition, technology related assets and software purchased subsequent to January 1, 2004 are generally purchased and owned by HTSU. Technology related assets owned by HSBC Finance Corporation prior to January 1, 2004 currently remain in place and were not transferred to HTSU. In addition to information technology services, HTSU also provides certain item processing and statement processing activities to us pursuant to a master service level agreement. Support services from HSBC affiliates includes services provided by HTSU as well as banking services and other miscellaneous services provided by HBUS and other subsidiaries of HSBC. We also receive revenue from HTSU for rent on certain office space, which has been recorded as a reduction of occupancy and equipment expenses, and for certain administrative costs, which has been recorded as other income.

In December 2005, we transferred our information technology services employees in the U.K. to a subsidiary of HBEU. Subsequent to the transfer, operating expenses relating to information technology, which have previously been reported as salaries and fringe benefits or other servicing and administrative expenses, are now billed to us by HBEU and reported as Support services from HSBC affiliates. We paid $17 million during the six months ended June 30, 2006 to HBEU for these services. Additionally, during the first quarter of 2006, the information technology equipment in the U.K. was sold to HBEU for a purchase price equal to the book value of these assets of $8 million.

In addition, we utilize HSBC Markets (USA) Inc., a related HSBC entity, to lead manage the underwriting of a majority of our ongoing debt issuances. Fees paid for such services totaled approximately $7 million for the three months ended June 30, 2006 and approximately $22 million for the six months ended June 30, 2006. Fees paid for such services totaled approximately $23 million for the three months ended June 30, 2005 and approximately $26 million for the six months ended June 30, 2005. These fees are amortized over the life of the related debt as a component of interest expense in the table above.

Domestic employees of HSBC Finance Corporation participate in a defined benefit pension plan sponsored by HNAH. See Note 9, “Pension and Other Postretirement Benefits,” for additional information on this pension plan.

Employees of HSBC Finance Corporation participate in one or more stock compensation plans sponsored by HSBC. Our share of the expense of these plans was $22 million for the three months ended June 30, 2006 and $39 million for the six months ended June 30, 2006. Our share of the expense of these plans was $25 million for the three months ended June 30, 2005 and $36 million for the six months ended June 30, 2005. These expenses are recorded in salary and employee benefits and are reflected in the above table. As of June 30, 2006, the total compensation cost related to non-vested stock based compensation awards was approximately $188 million and will be recognized into compensation expense over a weighted-average period of 2.69 years. A more complete description of these plans is included in the 2005 Form 10-K.

9. Pension and Other Postretirement Benefits

Effective January 1, 2005, the two previously separate domestic defined benefit pension plans of HSBC Finance Corporation and HBUS were combined into a single HNAH defined benefit pension plan which

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HSBC Finance Corporation

facilitated the development of a unified employee benefit policy and unified employee benefit plan for HSBC companies operating in the United States.

The components of pension expense for the domestic defined benefit pension plan reflected in our consolidated statement of income are shown in the table below and reflect the portion of the pension expense of the combined HNAH pension plan which has been allocated to HSBC Finance Corporation:

	Three months						Six months
	ended						ended
	June 30,						June 30,
	2006			2005			2006			2005
				(in millions)
Service cost – benefits earned during the period	$	13		$	19		$	26		$	31
Interest cost		15			18			30			31
Expected return on assets		(20	)		(27	)		(40	)		(46	)
Recognized losses		3			1			6			1
Net periodic benefit cost	$	11		$	11		$	22		$	17

We sponsor various additional benefit pension plans for our foreign based employees. Pension expense for our foreign defined benefit pension plans was $.7 million for the three months ended June 30, 2006 and $1.3 million for the six months ended June 30, 2006. Pension expense for our foreign defined benefit pension plans was $.5 million for the three months ended June 30, 2005 and $1.0 million for the six months ended June 30, 2005.

Components of the net periodic benefit cost for our postretirement benefits other than pensions are as follows:

	Three months				Six months
	ended				ended
	June 30,				June 30,
	2006		2005		2006		2005
			(in millions)
Service cost – benefits earned during the period	$	1	$	2	$	2	$	3
Interest cost		4		4		8		8
Expected return on assets		-		-		-		-
Recognized (gains) losses		-		-		-		-
Net periodic benefit cost	$	5	$	6	$	10	$	11

10. Business Segments

We have three reportable segments: Consumer, Credit Card Services and International. Our Consumer segment consists of our consumer lending, mortgage services, retail services and auto finance businesses. Our Credit Card Services segment consists of our domestic MasterCard and Visa credit card business. Our International segment consists of our foreign operations in the United Kingdom, Canada, Ireland and the remainder of Europe. The All Other caption includes our insurance and taxpayer financial services and commercial businesses, as well as our corporate and treasury activities, each of which falls below the quantitative threshold test under SFAS No. 131 for determining reportable segments. There have been no changes in the basis of our segmentation or any changes in the measurement of segment profit as compared with the presentation in our 2005 Form 10-K.

We have historically monitored our operations and evaluated trends on a managed basis (a non-GAAP financial measure), which assumes that securitized receivables have not been sold and are still on our balance sheet. This is because the receivables that we securitize are subjected to underwriting standards comparable to our owned portfolio, are generally serviced by operating personnel without regard to ownership and result in a

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HSBC Finance Corporation

similar credit loss exposure for us. In addition, we fund our operations, and make decisions about allocating certain resources such as capital on a managed basis. When reporting on a managed basis, net interest income, provision for credit losses and fee income related to receivables securitized are reclassified from securitization related revenue in our owned statement of income into the appropriate caption.

Fair value adjustments related to purchase accounting resulting from our acquisition by HSBC and related amortization have been allocated to Corporate, which is included in the “All Other” caption within our segment disclosure. Reconciliations of our managed basis segment results to managed basis and owned basis consolidated totals are as follows:

																Managed
				Credit									Adjustments/			Basis						Owned Basis
				Card									Reconciling			Consolidated			Securitization			Consolidated
	Consumer			Services			International			All Other			Items			Totals			Adjustments			Totals
										(in millions)
Three months ended June 30, 2006:
Net interest income	$	1,851		$	764		$	178		$	(177	)	$	-		$	2,616		$	(67	)(3)	$	2,549
Securitization related revenue		(55	)		(15	)		-			(1	)		-			(71	)		122	(3)		51
Fee and other income		330			570			173			177			(76	)(1)		1,174			(26	)(3)		1,148
Intersegment revenues		63			5			9			(1	)		(76	)(1)		-			-			-
Provision for credit losses		696			399			123			-			1	(5)		1,219			29	(3)		1,248
Total costs and expenses		726			428			213			236			-			1,603			-			1,603
Net income		442			310			7			(143	)		(48	)		568			-			568
Receivables		120,316			25,815			9,545			194			-			155,870			(1,911	)(4)		153,959
Assets		121,058			25,980			10,257			23,794			(8,484	)(2)		172,605			(1,911	)(4)		170,694
Three months ended June 30, 2005:
Net interest income	$	1,699		$	507		$	224		$	(146	)	$	-		$	2,284		$	(249	)(3)	$	2,035
Securitization related revenue		(151	)		(55	)		4			(15	)		-			(217	)		271	(3)		54
Fee and other income		292			475			190			270			(34	)(1)		1,193			(74	)(3)		1,119
Intersegment revenues		26			5			4			(1	)		(34	)(1)		-			-			-
Provision for credit losses		580			334			166			-			3	(5)		1,083			(52	)(3)		1,031
Total costs and expenses		578			333			266			314			-			1,491			-			1,491
Net income		440			165			(14	)		(95	)		(24	)		472			-			472
Receivables		95,300			19,615			12,581			245			-			127,741			(8,980	)(4)		118,761
Assets		96,188			19,391			13,492			26,223			(8,571	)(2)		146,723			(8,980	)(4)		137,743

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HSBC Finance Corporation

																Managed
				Credit									Adjustments/			Basis						Owned Basis
				Card									Reconciling			Consolidated			Securitization			Consolidated
	Consumer			Services			International			All Other			Items			Totals			Adjustments			Totals
	(in millions)
Six months ended June 30, 2006:
Net interest income	$	3,672		$	1,533		$	360		$	(382	)	$	-		$	5,183		$	(170	)(3)	$	5,013
Securitization related revenue		(104	)		(18	)		-			(3	)		-			(125	)		247	(3)		122
Fee and other income		630			1,087			328			683			(144	)(1)		2,584			(56	)(3)		2,528
Intersegment revenues		120			10			16			(2	)		(144	)(1)		-			-			-
Provision for credit losses		1,099			763			230			(2	)		3	(5)		2,093			21	(3)		2,114
Total costs and expenses		1,426			861			430			536			-			3,253			-			3,253
Net income		1,052			615			14			(132	)		(93	)		1,456			-			1,456
Six months ended June 30, 2005:
Net interest income	$	3,392		$	1,013		$	453		$	(354	)	$	-		$	4,504		$	(581	)(3)	$	3,923
Securitization related revenue		(386	)		(119	)		14			(34	)		-			(525	)		664	(3)		139
Fee and other income		577			912			356			920			(68	)(1)		2,697			(165	)(3)		2,532
Intersegment revenues		53			11			7			(3	)		(68	)(1)		-			-			-
Provision for credit losses		963			655			331			-			5	(5)		1,954			(82	)(3)		1,872
Total costs and expenses		1,246			657			518			648			-			3,069			-			3,069
Net income		874			313			(23	)		(19	)		(47	)		1,098			-			1,098

(1)	Eliminates intersegment revenues.
(2)	Eliminates investments in subsidiaries and intercompany borrowings.
(3)	Reclassifies net interest income, fee income and provision for credit losses relating to securitized receivables to other revenues.
(4)	Represents receivables serviced with limited recourse.
(5)	Eliminates bad debt recovery sales between operating segments.

11. New Accounting Pronouncements

Effective January 1, 2006, we adopted FASB Statement No. 123 (Revised), “Share-Based Payment,” (“SFAS No. 123R”). Because we had previously adopted the fair value method of accounting for all equity based awards, the adoption of SFAS No. 123R did not have a significant impact on our operations or cash flow. Substantially all of the disclosure requirements of SFAS No. 123R were included in our 2005 Form 10-K. In addition to changes in the Statement of Cash Flows as required by SFAS No. 123R, other disclosure requirements which were not included in our 2005 Form 10-K are included in Note 8, “Related Party Transactions.”

Effective January 1, 2006, we adopted FASB Statement No. 154, “Accounting Changes and Error Corrections: a replacement of APB Opinion No. 20 and FASB Statement No. 3” (“SFAS No. 154”). The adoption of SFAS No 154 did not have any impact on our financial position or results of operations.

Effective January 1, 2006, we adopted FASB Staff Position Nos. FAS 115-1 and FAS 124-1 (“FSP 115-1 and FSP 124-1”), “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” in response to Emerging Issues Task Force 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” The adoption of the impairment guidance contained in FSP 115-1 and FSP 124-1 did not have a material impact on our financial position or results of operations.

In February 2006, the FASB issued FASB Statement No. 155, “Accounting for Certain Hybrid Financial Instruments” (“SFAS No. 155”). SFAS No. 155 permits companies to elect to measure at fair value entire financial instruments containing embedded derivatives that would otherwise have to be bifurcated and accounted for separately. SFAS No. 155 also requires companies to identify interests in securitized financial

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HSBC Finance Corporation

assets that are free standing derivatives or contain embedded derivatives that would have to be accounted for separately, clarifies which interest- and principal-only strips are subject to SFAS No. 133, and amends SFAS No 140 to revise the conditions of a qualifying special purpose entity. SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of a company’s first fiscal year that begins after September 15, 2006. Early adoption is permitted as of the beginning of a company’s fiscal year, provided the company has not yet issued financial statements for that fiscal year. We elected to early adopt SFAS No. 155 effective January 1, 2006. The adoption of SFAS No. 155 did not have a significant impact on our financial position or results of operations.

In March 2006, the FASB issued FASB Statement No. 156, “Accounting for Servicing of Financial Assets,” (“SFAS No. 156”). SFAS No. 156, which is an amendment to SFAS No. 140, addresses the recognition and measurement of separately recognized servicing assets and liabilities and provides an approach to simplify the efforts to obtain hedge-like (offset) accounting. SFAS No. 156 is effective for financial years beginning after September 15, 2006, with early adoption permitted. As we do not currently have servicing assets recorded on our balance sheet, SFAS No. 156 will not have any impact on our financial position or results of operations.

In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109” (“FIN No. 48”). FIN No. 48 establishes threshold and measurement attributes for financial statement measurement and recognition of tax positions taken or expected to be taken in a tax return. FIN No. 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN No. 48 is effective for fiscal years beginning after December 15, 2006. We are currently evaluating the impact that adoption of FIN No. 48 will have on our financial position or results of operations.

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HSBC Finance Corporation

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the consolidated financial statements, notes and tables included elsewhere in this report, with our Annual Report on Form 10-K for the year ended December 31, 2005 (the “2005 Form 10-K”) and Form 10-Q for the quarterly period ended March 31, 2006. MD&A may contain certain statements that may be forward-looking in nature within the meaning of the Private Securities Litigation Reform Act of 1995. In addition, we may make or approve certain statements in future filings with the SEC, in press releases, or oral or written presentations by representatives of HSBC Finance Corporation that are not statements of historical fact and may also constitute forward-looking statements. Words such as “may”, “will”, “should”, “would”, “could”, “intends”, “believe”, “expects”, “estimates”, “targeted”, “plans”, “anticipates”, “goal” and similar expressions are intended to identify forward-looking statements but should not be considered as the only means through which these statements may be made. These matters or statements will relate to our future financial condition, results of operations, plans, objectives, performance or business developments and will involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from that which was expressed or implied by such forward-looking statements. Forward-looking statements are based on our current views and assumptions and speak only as of the date they are made. HSBC Finance Corporation undertakes no obligation to update any forward-looking statement to reflect subsequent circumstances or events. Unless noted, the discussion of our financial condition and results of operations included in MD&A are presented on an owned basis of reporting.

Executive Overview

HSBC Finance Corporation is an indirect wholly owned subsidiary of HSBC Holdings plc (“HSBC”). HSBC Finance Corporation may also be referred to in MD&A as “we”, “us”, or “our”. In addition to owned basis reporting, we also monitor our operations and evaluate trends on a managed basis (a non-GAAP financial measure), which assumes that securitized receivables have not been sold and are still on our balance sheet. See “Basis of Reporting” for further discussion of the reasons we use this non-GAAP financial measure.

Net income was $568 million for the quarter ended June 30, 2006, an increase of 20 percent, compared to $472 million in the prior year quarter. Net income was $1,456 million for the first six months of 2006, an increase of 33 percent, compared to $1,098 million in the first six months of 2005. Net income increased in both periods due to higher net interest income and for the three months ended June 30, 2006 higher other revenues partially offset by higher provisions for credit losses and higher costs and expenses. The increase in net interest income was due to growth in average receivables and an improvement in the overall yield on the portfolio, partially offset by a higher interest expense. Overall yields increased due to increases in our rates on variable rate products which were in line with market movements and various other repricing initiatives, such as reduced levels of promotional rate balances in 2006. Changes in receivable mix also contributed to the increase in yield due to the impact of increased levels of higher yielding MasterCard/ Visa receivables due to lower securitization levels and our acquisition of Metris Companies, Inc. (“Metris”) in December 2005 which contributed $38 million of net income during the three months ended June 30, 2006 and $61 million of net income during the year-to-date period. Interest expense increased due to a larger balance sheet and a significantly higher cost of funds reflecting market movements. Our net interest margin was 6.66 percent for the three months ended June 30, 2006 compared to 6.81 percent for the three months ended June 30, 2005. Net interest margin was 6.68 percent for the six months ended June 30, 2006 compared to 6.75 percent for the six months ended June 30, 2005. Net interest margin decreased in both periods as the improvement in the overall yield on our receivable portfolio, as discussed above, was more than offset by the higher funding costs.

The increase in provision for credit losses in both the current quarter and year-to-date period reflects receivable growth and portfolio seasoning as well as higher charge-offs and loss estimates at our Mortgage

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Services business as loans originated and acquired in 2005 in the second lien and portions of the first lien real estate secured portfolio are experiencing higher delinquency and charge-offs. These increases were partially offset by lower bankruptcy losses as a result of reduced filings, low unemployment due to a continued stable economy in the United States and, as discussed more fully below, a reduction in the estimated loss exposure resulting from Hurricane Katrina (“Katrina”).

The increase in other revenues in the three months ended June 30, 2006 is primarily due to higher fee and other income partially offset by lower derivative income. Fee income was higher in both periods as a result of higher credit card fees due to higher volume in our MasterCard/ Visa portfolios, primarily resulting from our acquisition of Metris in December 2005, and improvements in interchange rates, partially offset by the impact of new FFIEC guidance which limits certain fee billings for non-prime credit card accounts. Other income was higher in both periods primarily due to higher ancillary credit card revenue. The decrease in derivative income was primarily due to a rising interest rate environment and a significant reduction during 2005 in the population of interest rate swaps which did not qualify for hedge accounting under SFAS No. 133, the reduction of which decreases income volatility. Costs and expenses increased in both periods primarily to support receivables growth including our acquisition of Metris. Amortization of purchase accounting fair value adjustments increased net income by $33 million for the quarter ended June 30, 2006, which included $7 million related to our acquisition of Metris, compared to an increase in net income of $30 million for the quarter ended June 30, 2005. Amortization of purchase accounting fair value adjustments increased net income by $56 million for the six months ended June 30, 2006, which included $12 million related to our acquisition of Metris, compared to an increase in net income of $21 million for the six months ended June 30, 2005.

We are monitoring the potential impact of several developing trends affecting the mortgage lending industry. Real estate markets in a large portion of the United States have continued to slow, as evidenced by a general slowing in the rate of appreciation in property values and an increase in the period of time available properties remain on the market. Interest rates continue to rise, and the resulting increase in required payments on adjustable rate mortgage loans that reach reset dates may have an impact on the ability of borrowers to repay their loans. Similarly, as interest-only mortgage loans leave the interest-only payment period, the ability of borrowers to make the increased payments may be impacted. Finally, numerous studies have been published recently indicating that mortgage loan originations from 2005 are performing worse than originations from prior years.

To date, slowing real estate markets have had little impact on our business. We are, however, beginning to experience a deterioration in the performance of our 2005 mortgage loan originations in our Mortgage Services business and particularly in the second lien and portions of the first lien portfolios. In 2005 and continuing into 2006, second lien mortgage loan originations in our Mortgage Services business increased significantly as a percentage of total originations when compared to prior periods. The second lien mortgage loans originated in 2005 to date underperformed our first lien mortgage loans from the same period. Accordingly, while overall credit quality remains stable across other parts of our mortgage portfolios and our other domestic businesses, we are expecting higher losses this year in the Mortgage Services business, largely as a result of our 2005 originations. Numerous efforts are underway in this business to mitigate the impact of the affected components of the portfolio. However, we expect our Mortgage Services loan portfolio to remain under pressure as the 2005 originations season further. Accordingly, we expect an increase in overall delinquency and charge-offs in our Mortgage Services business.

We continue to assess the financial impact of Katrina on our customers living in the Katrina FEMA designated Individual Assistance disaster areas, including the related payment patterns of these customers. As a result of these continuing assessments, including customer contact and the collection of more information associated with the properties located in the FEMA designated area, as applicable, we have reduced our estimate of credit loss exposure by approximately $25 million in the quarter ended June 30, 2006 and

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approximately $55 million in the year-to-date period. We will continue to review our estimate of credit loss exposure relating to Katrina and any adjustments will be reported in earnings when they become known.

As part of ongoing integration efforts with HSBC, we have begun working with HSBC to determine if funding synergies and management efficiencies could be achieved by transferring our Czech, Hungarian and Slovakian operations to HSBC Bank plc (“HBEU”), a U.K. based subsidiary of HSBC. As of the date of this filing, a decision has not been made regarding the potential transfer of these operations. We anticipate that a decision regarding this potential transfer will be reached in the third quarter of 2006.

Our return on average owned assets (“ROA”) was 1.36 percent for the three months ended June 30, 2006 and 1.76 percent for the six months ended June 30, 2006 compared to 1.40 percent for the three months ended June 30, 2005 and 1.65 percent for the six months ended June 30, 2005. Return on averaged managed assets (“ROMA”) (a non-GAAP financial measure which assumes that securitized receivables have not been sold and are still on our balance sheet) was 1.34 percent for the three months ended June 30, 2006 and 1.73 percent for the six months ended June 30, 2006 compared to 1.30 percent in the three months ended June 30, 2005 and 1.52 percent for the six months ended June 30, 2005. ROA increased during the six months ended June 30, 2006 and ROMA increased during both periods as net income growth, primarily due to higher net interest income, outpaced the growth in average owned and managed assets during the periods. ROA decreased during the three months ended June 30, 2006 as average owned assets during the quarter outpaced net income growth during the period.

The financial information set forth below summarizes selected financial highlights of HSBC Finance Corporation as of June 30, 2006 and 2005 and for the three and six month periods ended June 30, 2006 and 2005.

		Three months ended						Six months ended
		June 30,						June 30,
		2006			2005			2006			2005
		(dollars are in millions)
Net income:		$	568		$	472		$	1,456		$	1,098
Owned Basis Ratios:
	Return on average owned assets		1.36	%		1.40	%		1.76	%		1.65	%
	Return on average common shareholder’s equity (“ROE”)		11.19			10.87			14.62			12.92
	Net interest margin		6.66			6.81			6.68			6.75
	Consumer net charge-off ratio, annualized		2.88			2.93			2.73			3.03
	Efficiency ratio(1)		41.09			44.47			40.71			44.54
Managed Basis Ratios:(2)
	Return on average managed assets (“ROMA”)		1.34	%		1.30	%		1.73	%		1.52	%
	Net interest margin		6.72			7.04			6.77			7.05
	Risk adjusted revenue		6.88			7.37			7.33			7.44
	Consumer net charge-off ratio, annualized		2.94			3.28			2.81			3.46
	Efficiency ratio(1)		41.42			43.73			40.83			43.97

As of June 30,		2006			2005
		(dollars are in millions)
Receivables:
	Owned basis	$	153,959		$	118,761
	Managed basis(2)		155,870			127,741
Two-month-and-over contractual delinquency ratios:
	Owned basis		3.68	%		3.73	%
	Managed basis(2)		3.70			3.85

(1)	Ratio of total costs and expenses less policyholders’ benefits to net interest income and other revenues less policyholders’ benefits.
(2)	Managed basis reporting is a non-GAAP financial measure. See “Basis of Reporting” for additional discussion on the use of this non-GAAP financial measure and “Reconciliations to GAAP Financial Measures” for quantitative reconciliations to the equivalent GAAP basis financial measure.

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Owned receivables were $154.0 billion at June 30, 2006, $146.8 billion at March 31, 2006, and $118.8 billion at June 30, 2005. With the exception of private label, we experienced growth in all our receivable products compared to March 31, 2006 and June 30, 2005, with real estate secured receivables being the primary contributor to the growth. Lower securitization levels also contributed to the increase in owned receivables. The acquisition of Metris in December 2005 contributed to the increase in owned receivables as compared to June 30, 2005.

Our owned basis two-months-and-over-contractual delinquency ratio increased compared to the prior quarter but decreased compared to the prior year quarter. The increase of 6 basis points from the prior quarter was driven largely by higher real estate secured delinquency levels at our Mortgage Services business due to the deteriorating performance of certain 2005 originations as more fully discussed above. Partially offsetting these increases was the impact of strong receivable growth and the continuing stable economy in the United States. The decrease of 5 basis points from the prior year quarter is a result of lower bankruptcy levels due to the new bankruptcy legislation enacted in 2005, receivable growth and low unemployment due to a stable United States economy, partially offset by higher delinquency at our Mortgage Services business.

Net charge-offs as a percentage of average consumer receivables for the quarter decreased from the prior year quarter largely as a result of lower personal bankruptcy filings in our MasterCard/ Visa portfolio following the October 2005 enactment of new bankruptcy legislation in the United States. Also contributing to the decrease was portfolio growth and the positive impact from the lower delinquency levels we experienced throughout 2005 as a result of a strong economy. This was partially offset by higher net charge-offs in our real estate secured and personal non-credit card portfolios due to portfolio seasoning and, in the case of our real estate secured portfolio, higher than expected losses on certain 2005 loan originations in our Mortgage Services business as discussed above.

Our owned basis efficiency ratio improved compared to the prior year quarter due to higher net interest income and higher other revenues due to higher levels of receivables, partially offset by an increase in total costs and expenses to support receivable growth.

During the second quarter of 2006, we supplemented unsecured debt issuances with proceeds from the continuing sale of newly originated domestic private label receivables to HSBC Bank USA, National Association (“HBUS”), debt issued to affiliates, increased levels of secured financings and higher levels of commercial paper. Because we are a subsidiary of HSBC, our credit ratings have improved and our credit spreads relative to Treasuries have tightened compared to those we experienced during the months leading up to the announcement of our acquisition by HSBC. Primarily as a result of tightened credit spreads and improved funding availability, we recognized cash funding expense savings of approximately $439 million during the six months ended June 30, 2006 (approximately $225 million during the three months ended June 30, 2006) and approximately $252 million during the six months ended June 30, 2005 (approximately $132 million during the three months ended June 30, 2005) compared to the funding costs we would have incurred using average spreads and funding mix from the first half of 2002. These tightened credit spreads in combination with the issuance of HSBC Finance Corporation debt and other funding synergies including asset transfers and debt underwriting fees paid to HSBC affiliates have enabled HSBC to realize a pre-tax 2006 run rate for annual cash funding expense savings in excess of $1 billion per year. In the six months ended June 30, 2006, the cash funding expense savings realized by HSBC totaled approximately $571 million.

Securitization of consumer receivables has been a source of funding and liquidity for us. In order to align our accounting treatment with that of HSBC initially under U.K. GAAP and now under International Financial Reporting Standards (“IFRSs”), starting in the third quarter of 2004 we began to structure all new collateralized funding transactions as secured financings. However, because existing public MasterCard and Visa credit card transactions were structured as sales to revolving trusts that require replenishments of receivables to support previously issued securities, receivables will continue to be sold to these trusts until the revolving periods end, the last of which is currently projected to occur in the fourth quarter of 2007. We will continue to replenish at reduced levels certain personal non-credit card securities privately issued to conduits and record the resulting replenishment gains for a period of time in order to manage liquidity. Since our

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securitized receivables have varying lives, it will take time for all securitized receivables to pay-off and the related interest-only strip receivables to be reduced to zero. While the termination of sale treatment on new collateralized funding transactions reduced our reported net income under U.S. GAAP, there is no impact on cash received.

Basis of Reporting

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). Unless noted, the discussion of our financial condition and results of operations included in MD&A are presented on an owned basis of reporting.

Managed Basis Reporting We have historically monitored our operations and evaluated trends on a managed basis (a non-GAAP financial measure), which assumes that securitized receivables have not been sold and remain on our balance sheet. This is because the receivables that we securitize are subjected to underwriting standards comparable to our owned portfolio, are serviced by operating personnel without regard to ownership and result in a similar credit loss exposure for us. In addition, we fund our operations and make certain decisions about allocating resources such as capital on a managed basis.

When reporting on a managed basis, net interest income, provision for credit losses and fee income related to receivables securitized are reclassified from securitization related revenue in our owned statement of income into the appropriate caption. Additionally, charge-off and delinquency associated with these receivables are included in our managed basis credit quality statistics.

Debt analysts, rating agencies and fixed income investors have also historically evaluated our operations on a managed basis for the reasons discussed above and have historically requested managed basis information from us. We believe that managed basis information enables such investors and other interested parties to better understand the performance and quality of our entire loan portfolio and is important to understanding the quality of originations and the related credit risk inherent in our owned and securitized portfolios. As the level of our securitized receivables falls over time, managed basis and owned basis results will eventually converge. We also now report “Management Basis” results (a non-GAAP financial measure) in Reports on Form 8-K on an IFRSs basis with our quarterly results. (See discussion of the use of the IFRSs basis of accounting below.) Management Basis reporting, in addition to managed basis adjustments, assumes the private label and real estate secured receivables transferred to HBUS have not been sold and remain on balance sheet. As we continue to manage and service receivables sold to HBUS, we make decisions about allocating certain resources, such as employees, on a Management Basis.

Equity Ratios Tangible shareholder’s(s’) equity to tangible managed assets (“TETMA”), tangible shareholder’s(s’) equity plus owned loss reserves to tangible managed assets (“TETMA + Owned Reserves”) and tangible common equity to tangible managed assets are non-GAAP financial measures that are used by HSBC Finance Corporation management and certain rating agencies to evaluate capital adequacy. These ratios may differ from similarly named measures presented by other companies. The most directly comparable GAAP financial measure is common and preferred equity to owned assets.

We and certain rating agencies also monitor our equity ratios excluding the impact of the HSBC acquisition purchase accounting adjustments. We do so because we believe that the HSBC acquisition purchase accounting adjustments represent non-cash transactions which do not affect our business operations, cash flows or ability to meet our debt obligations. We include the impact of acquisition purchase accounting adjustments resulting from the Metris acquisition in December 2005 in our equity ratios as HSBC Finance Corporation was the acquirer and entered into this acquisition for the purpose of expanding our core business.

Preferred securities issued by certain non-consolidated trusts are considered equity in the TETMA and TETMA + Owned Reserves calculations because of their long-term subordinated nature and the ability to defer dividends. TETMA and TETMA + Owned Reserves exclude the Adjustable Conversion-Rate Equity

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Security Units for all periods subsequent to our acquisition by HSBC as this more accurately reflects the impact of these items on our equity post acquisition.

International Financial Reporting Standards Because HSBC reports results in accordance with IFRSs and IFRSs results are used in measuring and rewarding performance of employees, our management also separately monitors net income under IFRSs (a non-U.S. GAAP financial measure). The following table reconciles our net income on a U.S. GAAP basis to net income on an IFRSs basis:

		Three months ended						Six months ended
		June 30,						June 30,
		2006			2005			2006			2005
		(dollars are in millions)
Net income – U.S. GAAP basis		$	568		$	472		$	1,456		$	1,098
Adjustments, net of tax:
	Securitizations		13			9			34			70
	Derivatives and hedge accounting (including fair value adjustments)		(19	)		(27	)		(90	)		(43	)
	Intangible assets		26			42			62			98
	Purchase accounting adjustments		(26	)		84			30			185
	Loan origination		(1	)		(17	)		(21	)		(33	)
	Loan impairment		10			3			19			7
	Loans held for resale		18			-			18			-
	Interest recognition		101			-			101			-
	Other		25			16			36			24
Net income – IFRSs basis		$	715		$	582		$	1,645		$	1,406

Significant differences between U.S. GAAP and IFRSs are as follows:

Securitizations

IFRSs

•  The recognition of securitized assets is governed by a three-step process, which may be applied to the whole asset, or a part of an asset:

–  If the rights to the cash flows arising from securitized assets have been transferred to a third party, and all the risks and rewards of the assets have been transferred, the assets concerned are derecognized.

–  If the rights to the cash flows are retained by HSBC but there is a contractual obligation to pay them to another party, the securitized assets concerned are derecognized if certain conditions are met such as, for example, when there is no obligation to pay amounts to the eventual recipient unless an equivalent amount is collected from the original asset.

–  If some significant risks and rewards of ownership have been transferred, but some have also been retained, it must be determined whether or not control has been retained. If control has been retained, HSBC continues to recognize the asset to the extent of its continuing involvement; if not, the asset is derecognized.

•  The impact from securitizations resulting in higher net income under IFRSs is due to the recognition of income on securitized receivables under U.S. GAAP in prior periods.

US GAAP

•  SFAS 140 “Accounting for Transfers and Servicing of Finance Assets and Extinguishments of Liabilities” requires that receivables that are sold to a special purpose entity (“SPE”) and securitized can only be derecognized and a gain or loss on sale recognized if the originator has surrendered control over the securitized assets.

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•  Control is surrendered over transferred assets if, and only if, all of the following conditions are met:

–  The transferred assets are put presumptively beyond the reach of the transferor and its creditors, even in bankruptcy or other receivership.

–  Each holder of interests in the transferee (i.e. holder of issued notes) has the right to pledge or exchange their beneficial interests, and no condition constrains this right and provides more than a trivial benefit to the transferor.

–  The transferor does not maintain effective control over the assets through either an agreement that obligates the transferor to repurchase or to redeem them before their maturity or through the ability to unilaterally cause the holder to return specific assets, other than through a clean-up call.

•  If these conditions are not met the securitized assets should continue to be consolidated.

•  When HSBC retains an interest in the securitized assets, such as a servicing right or the right to residual cash flows from the special purpose entity, HSBC recognizes this interest at fair value on sale of the assets to the SPE.

Derivatives and hedge accounting

IFRSs

•  Derivatives are recognized initially, and are subsequently remeasured, at fair value. Fair values of exchange-traded derivatives are obtained from quoted market prices. Fair values of over-the-counter (“OTC”) derivatives are obtained using valuation techniques, including discounted cash flow models and option pricing models.

•  In the normal course of business, the fair value of a derivative on initial recognition is considered to be the transaction price (that is the fair value of the consideration given or received). However, in certain circumstances the fair value of an instrument will be evidenced by comparison with other observable current market transactions in the same instrument (without modification or repackaging) or will be based on a valuation technique whose variables include only data from observable markets, including interest rate yield curves, option volatilities and currency rates. When such evidence exists, HSBC recognizes a trading profit or loss on inception of the derivative. When unobservable market data have a significant impact on the valuation of derivatives, the entire initial change in fair value indicated by the valuation model is not recognized immediately in the income statement but is recognized over the life of the transaction on an appropriate basis or recognized in the income statement when the inputs become observable, or when the transaction matures or is closed out.

•  Derivatives may be embedded in other financial instruments; for example, a convertible bond has an embedded conversion option. An embedded derivative is treated as a separate derivative when its economic characteristics and risks are not clearly and closely related to those of the host contract, its terms are the same as those of a stand-alone derivative, and the combined contract is not held for trading or designated at fair value through profit and loss. These embedded derivatives are measured at fair value with changes in fair value recognized in the income statement.

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

•  The method of recognizing the resulting fair value gains or losses depends on whether the derivative is held for trading, or is designated as a hedging instrument and, if so, the nature of the risk being hedged. All gains and losses from changes in the fair value of derivatives held for trading are recognized in the income statement. When derivatives are designated as hedges, HSBC classifies them as either: (i) hedges of the change in fair value of recognized assets or liabilities or firm commitments (“fair value hedge”); (ii) hedges of the variability in highly probable future cash flows attributable to a recognized asset or liability, or a forecast transaction (“cash flow hedge”); or (iii) hedges of net investments in a foreign operation (“net investment hedge”). Hedge accounting is applied to derivatives designated as hedging instruments in a fair value, cash flow or net investment hedge provided certain criteria are met.

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Hedge Accounting:

–  It is HSBC’s policy to document, at the inception of a hedge, the relationship between the hedging instruments and hedged items, as well as the risk management objective and strategy for undertaking the hedge. The policy also requires documentation of the assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items attributable to the hedged risks.

Fair value hedge:

–  Changes in the fair value of derivatives that are designated and qualify as fair value hedging instruments are recorded in the income statement, together with changes in the fair values of the assets or liabilities or groups thereof that are attributable to the hedged risks.

–  If the hedging relationship no longer meets the criteria for hedge accounting, the cumulative adjustment to the carrying amount of a hedged item is amortized to the income statement based on a recalculated effective interest rate over the residual period to maturity, unless the hedged item has been derecognized whereby it is released to the income statement immediately.

Cash flow hedge:

–  The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges are recognized in equity. Any gain or loss relating to an ineffective portion is recognized immediately in the income statement.

–  Amounts accumulated in equity are recycled to the income statement in the periods in which the hedged item will affect the income statement. However, when the forecast transaction that is hedged results in the recognition of a non-financial asset or a non-financial liability, the gains and losses previously deferred in equity are transferred 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 hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity until the forecast transaction is ultimately recognized in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the income statement.

Net investment hedge:

–  Hedges of net investments in foreign operations are accounted for in a similar manner to cash flow hedges. Any gain or loss on the hedging instrument relating to the effective portion of the hedge is recognized in equity; the gain or loss relating to the ineffective portion is recognized immediately in the income statement. Gains and losses accumulated in equity are included in the income statement on the disposal of the foreign operation.

Hedge effectiveness testing:

–  IAS 39 requires that at inception and throughout its life, each hedge must be expected to be highly effective (prospective effectiveness) to qualify for hedge accounting. Actual effectiveness (retrospective effectiveness) must also be demonstrated on an ongoing basis.

–  The documentation of each hedging relationship sets out how the effectiveness of the hedge is assessed.

–  For prospective effectiveness, the hedging instrument must be expected to be highly effective in achieving offsetting changes in fair value or cash flows attributable to the hedged risk during the period for which the hedge is designated. For retrospective effectiveness, the changes in fair value or cash flows must offset each other in the range of 80 per cent to 125 per cent for the hedge to be deemed effective.

Derivatives that do not qualify for hedge accounting:

–  All gains and losses from changes in the fair value of any derivatives that do not qualify for hedge accounting are recognized immediately in the income statement.

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US GAAP

•  The accounting under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” is generally consistent with that under IAS 39, which HSBC has followed in its IFRSs reporting from January 1, 2005, as described above. However, specific assumptions regarding hedge effectiveness under US GAAP are not permitted by IAS 39.

•  The requirements of SFAS No. 133 have been effective from January 1, 2001.

•  The US GAAP ’shortcut method’ permits an assumption of zero ineffectiveness in hedges of interest rate risk with an interest rate swap provided specific criteria have been met. IAS 39 does not permit such an assumption, requiring a measurement of actual ineffectiveness at each designated effectiveness testing date.

•  In addition, IFRSs allows greater flexibility in the designation of the hedged item. Under US GAAP, all contractual cash flows must form part of the designated relationship, whereas IAS 39 permits the designation of identifiable benchmark interest cash flows only.

•  Under US GAAP, derivatives receivable and payable with the same counterparty may be reported net on the balance sheet when there is an executed ISDA Master Netting Arrangement covering enforceable jurisdictions. These contracts do not meet the requirements for set off under IAS 32 and hence are presented gross on the balance sheet for IFRSs.

Designation of financial assets and liabilities at fair value through profit and loss

IFRSs

•  Under IAS 39, a financial instrument, other than one held for trading, is classified in this category if it meets the criteria set out below, and is so designated by management. An entity may designate financial instruments at fair value where the designation:

–  eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise from measuring financial assets or financial liabilities or recognizing the gains and losses on them on different bases; or

–  applies to a group of financial assets, financial liabilities or both that is managed and its performance evaluated on a fair value basis, in accordance with a documented risk management or investment strategy, and where information about that group of financial instruments is provided internally on that basis to management; or

–  relates to financial instruments containing one or more embedded derivatives that significantly modify the cash flows resulting from those financial instruments.

•  Financial assets and financial liabilities so designated are recognized initially at fair value, with transaction costs taken directly to the income statement, and are subsequently remeasured at fair value. This designation, once made, is irrevocable in respect of the financial instruments to which it relates. Financial assets and financial liabilities are recognized using trade date accounting.

•  Gains and losses from changes in the fair value of such assets and liabilities are recognized in the income statement as they arise, together with related interest income and expense and dividends.

US GAAP

•  There are no provisions in US GAAP to make an election similar to that in IAS 39.

•  Generally, for financial assets to be measured at fair value with gains and losses recognized immediately in the income statement, they must meet the definition of trading securities in SFAS 115, “Accounting for Certain Investments in Debt and Equity Securities”. Financial liabilities are generally reported at amortized cost under US GAAP.

Goodwill, Purchase Accounting and Intangibles

IFRSs

•  Prior to 1998, goodwill under UK GAAP was written off against equity. HSBC did not elect to reinstate this goodwill on its balance sheet upon transition to IFRSs. From January 1, 1998 to December 31, 2003 goodwill was capitalized and amortized over its useful life. The carrying amount of

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	goodwill existing at December 31, 2003 under UK GAAP was carried forward under the transition rules of IFRS from January 1, 2004, subject to certain adjustments.
•	IFRS 3 “Business Combinations” requires that goodwill should not be amortized but should be tested for impairment at least annually at the reporting unit level by applying a test based on recoverable amounts.
•	Quoted securities issued as part of the purchase consideration are fair valued for the purpose of determining the cost of acquisition at their market price on the date the transaction is completed.

US GAAP

•  Up to June 30, 2001, goodwill acquired was capitalized and amortized over its useful life which could not exceed 25 years. The amortization of previously acquired goodwill ceased with effect from December 31, 2001.

•  Quoted securities issued as part of the purchase consideration are fair valued for the purpose of determining the cost of acquisition at their average market price over a reasonable period before and after the date on which the terms of the acquisition are agreed and announced.

•  Changes in tax estimates of the basis in assets and liabilities or other tax estimates recorded at the date of acquisition by HSBC are adjusted against goodwill.

Loan origination

IFRSs

•  Certain loan fee income and incremental directly attributable loan origination costs are amortized to the income statement over the life of the loan as part of the effective interest calculation under IAS 39.

US GAAP

•  Certain loan fee income and direct but not necessarily incremental loan origination costs, including an apportionment of overheads, are amortized to the profit and loss account over the life of the loan as an adjustment to interest income (SFAS No. 91 “Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases”.)

Loan impairment

IFRSs

•  When statistical models, using historic loss rates adjusted for economic conditions, provide evidence of impairment in portfolios of loans, their values are written down to their net recoverable amount. The net recoverable amount is the present value of the estimated future recoveries discounted at the portfolio’s original effective interest rate. The calculations include a reasonable estimate of recoveries on loans individually identified for write-off pursuant to HSBC’s credit guidelines.

US GAAP

•  Where the delinquency status of loans in a portfolio is such that there is no realistic prospect of recovery, the loans are written off in full, or to recoverable value where collateral exists. Delinquency depends on the number of days payment is overdue. The delinquency status is applied consistently across similar loan products in accordance with HSBC’s credit guidelines. When local regulators mandate the delinquency status at which write-off must occur for different retail loan products and these regulations reasonably reflect estimable recoveries on individual loans, this basis of measuring loan impairment is reflected in US GAAP accounting. Cash recoveries relating to pools of such written-off loans, if any, are reported as loan recoveries upon collection.

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HSBC Finance Corporation

Loans Held for Resale

IFRSs

•  Under IAS 39, loans held for resale are treated as trading assets.

•  As trading assets, loans held for resale are initially recorded at fair value, with changes in fair value being recognized in current period earnings.

•  Any gains realized on sales of such loans are recognized in current period earnings on the trade date.

U.S. GAAP

•  Under U.S. GAAP, loans held for resale are designated as loans on the balance sheet.

•  Such loans are recorded at the lower of amortized cost or market value (LOCOM). Therefore, recorded value cannot exceed amortized cost.

•  Subsequent gains on sales of such loans are recognized in current period earnings on the settlement date.

Interest Recognition

IFRSs

•  The calculation and recognition of effective interest rates under IAS 39 requires an estimate of “all fees and points paid or received between parties to the contract” that are an integral part of the effective interest rate be included.

US GAAP

•  FAS 91 also generally requires all fees and costs associated with originating a loan to be recognized as interest, but when the interest rate increases during the term of the loan it prohibits the recognition of interest income to the extent that the net investment in the loan would increase to an amount greater than the amount at which the borrower could settle the obligation.

During the second quarter, we implemented a methodology for calculating the effective interest rate for introductory rate MasterCard/ Visa receivables under IFRSs over the expected life of the product which resulted in an adjustment being recorded. Of the amount recognized, approximately $69 million (net of tax) would otherwise have been recorded as an IFRS opening balance sheet adjustment as at January 1, 2005 under this methodology.

Quantitative Reconciliations of Non-GAAP Financial Measures to GAAP Financial Measures For a reconciliation of managed basis net interest income, fee income and provision for credit losses to the comparable owned basis amounts, see Note 10, “Business Segments,” to the accompanying consolidated financial statements. For a reconciliation of our owned loan portfolio by product to our managed loan portfolio, see Note 3, “Receivables,” to the accompanying consolidated financial statements. For additional quantitative reconciliations of non-GAAP financial measures presented herein to the equivalent GAAP basis financial measures, see “Reconciliations to GAAP Financial Measures.”

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Receivables Review

The following table summarizes owned receivables at June 30, 2006 and increases (decreases) over prior periods:

	Increases (decreases) from
			March 31,						June 30,
			2006						2005
	June 30,
	2006		$			%			$			%
			(dollars are in millions)
Real estate secured	$	93,893	$	4,401			4.9	%	$	21,963			30.5	%
Auto finance		11,723		537			4.8			2,726			30.3
MasterCard/Visa		24,959		1,510			6.4			7,538			43.3
Private label		2,522		94			3.9			(383	)		(13.2	)
Personal non-credit card(1)		20,664		658			3.3			3,409			19.8
Commercial and other		198		(8	)		(3.9	)		(55	)		(21.7	)
Total owned receivables	$	153,959	$	7,192			4.9	%	$	35,198			29.6	%

⁽¹⁾  Personal non-credit card receivables are comprised of the following:

	Increases (decreases) from
			March 31,						June 30,
			2006						2005
	June 30,
	2006		$			%			$			%
	(dollars are in millions)
Domestic personal non-credit card	$	12,560	$	616			5.2	%	$	3,412			37.3	%
Union Plus personal non-credit card		267		(31	)		(10.4	)		(120	)		(31.0	)
Personal homeowner loans		4,249		8			.2			395			10.2
Foreign personal non-credit card		3,588		65			1.8			(278	)		(7.2	)
Total personal non-credit card	$	20,664	$	658			3.3	%	$	3,409			19.8	%

At June 30, 2006, approximately 95 percent of real estate secured receivables at our Consumer Lending business bore fixed rates and 87 percent of real estate secured receivables were in a first lien position, while approximately 48 percent of real estate secured receivables at our Mortgage Services business bore fixed rates and 79 percent of real estate secured receivables were in a first lien position. At June 30, 2006, we had $6.3 billion of interest-only loans (4 percent of receivables), substantially all of which were adjustable rate mortgages. In addition to the adjustable rate interest-only loans discussed above, at June 30, 2006 we had approximately $18.1 billion of adjustable rate mortgages (12 percent of receivables) at our Consumer Lending and Mortgage Services businesses.

Receivable increases (decreases) since June 30, 2005 Driven by growth in our correspondent and branch businesses, real estate secured receivables increased over the year-ago period. Real estate secured receivable levels in our branch-based consumer lending business improved because of higher sales volumes as we continue to emphasize real estate secured loans, including near-prime mortgage products. Also contributing to the increase were purchases of $1.1 billion from portfolio acquisition programs since the prior year quarter. We continued to enter into agreements with additional correspondents to purchase their newly originated loans on a flow basis. Auto finance receivables increased over the year-ago period due to organic growth principally in the near-prime portfolio. This came from newly originated loans acquired from our dealer network, growth in the consumer direct loan program and lower securitization levels. Additionally, we have experienced continued growth from the expansion of our auto finance program in Canada. MasterCard and Visa receivables growth reflects the $5.3 billion of receivables acquired as part of our acquisition of Metris in December 2005, strong domestic organic growth especially in our HSBC branded prime, Union Privilege and non-prime portfolios,

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HSBC Finance Corporation

lower securitization levels and the successful launch of a MasterCard program in Canada in 2005. These increases were partially offset by the sale of our U.K. credit card business in December 2005 which included $2.2 billion of MasterCard/ Visa receivables. Private label receivables decreased from the year ago period as a result of lower retail sales volumes in the U.K. and the sale of our U.K. credit card business in December 2005, which included $300 million of private label receivables, partially offset by changes in the foreign exchange rate since June 30, 2005. Personal non-credit card receivables increased from the year-ago period as a result of increased marketing, including several large direct mail campaigns, and lower securitization levels.

Receivable increases (decreases) since March 31, 2006 Both our correspondent and branch businesses reported growth in their real estate secured portfolios as discussed above. Growth in our auto finance portfolio reflects lower levels of securitizations, organic growth and increased volume in both the dealer network and the consumer direct loan program. The increase in our MasterCard/Visa portfolio reflects lower securitization levels and strong domestic organic growth especially in our GM, Union Privilege and non-prime portfolios. Decreases in our foreign private label portfolio due to decreases in retail sales volume in the U.K. were largely offset by the positive impact of changes in the foreign exchange rate since March 31, 2006. Personal non-credit card receivables increased as a result of increased marketing, lower securitization levels and changes in the foreign exchange rate since March 31, 2006.

Results of Operations

Unless noted otherwise, the following discusses amounts reported in our owned basis statement of income.

Net interest income The following table summarizes net interest income:

											Increase (decrease)
Three months ended June 30,	2006		(1)			2005		(1)			Amount		%
Finance and other interest income	$	4,311		11.27	%	$	3,139		10.50	%	$	1,172		37.3	%
Interest expense		1,762		4.61			1,104		3.69			658		59.6
Net interest income	$	2,549		6.66	%	$	2,035		6.81	%	$	514		25.3	%

											Increase (decrease)
Six months ended June 30,	2006		(1)			2005		(1)			Amount		%
Finance and other interest income	$	8,398		11.19	%	$	6,089		10.48	%	$	2,309		37.9	%
Interest expense		3,385		4.51			2,166		3.73			1,219		56.3
Net interest income	$	5,013		6.68	%	$	3,923		6.75	%	$	1,090		27.8	%

⁽¹⁾  % Columns: comparison to average owned interest-earning assets.

The increases in net interest income during the quarter and year-to-date periods were due to higher average receivables and a higher overall yield, partially offset by higher interest expense. Overall yields increased due to increases in our rates on variable rate products which reflected market movements and various other repricing initiatives, such as reduced levels of promotional rate balances in 2006. Changes in receivable mix also contributed to the increase in yield due to the impact of increased levels of higher yielding MasterCard/Visa receivables due to lower securitization levels and our acquisition of Metris in December 2005. The higher interest expense was due to a larger balance sheet and a significantly higher cost of funds due to a rising interest rate environment. In addition, as part of our overall liquidity management strategy, we continue to extend the maturity of our liability profile which results in higher interest expense. Our purchase accounting fair value adjustments include both amortization of fair value adjustments to our external debt obligations and receivables. Amortization of purchase accounting fair value adjustments increased net interest income by $115 million, which included $22 million relating to Metris, during the three months ended June 30, 2006 and $229 million, which included $39 million relating to Metris, during the six months ended June 30, 2006.

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HSBC Finance Corporation

Amortization of purchase accounting fair value adjustments increased net interest income by $147 million for the three months ended June 30, 2005 and $260 million for the six months ended June 30, 2005.

Net interest margin, annualized, decreased during the three and six months ended June 30, 2006 as compared to the year-ago periods as the improvement in the overall yield on our receivable portfolio, as discussed above, was more than offset by the higher funding costs. The following table shows the impact of these items on net interest margin at June 30, 2006:

		Three months			Six months
		ended			ended
Net interest margin – June 30, 2005			6.81	%		6.75	%
Impact to net interest margin resulting from:
	Sale of U.K. credit card business in December 2005		.05			.04
	Metris acquisition in December 2005		.32			.35
	Receivable pricing		.42			.34
	Receivable mix		.11			.08
	Cost of funds		(.95	)		(.82	)
	Other		(.10	)		(.06	)
Net interest margin – June 30, 2006			6.66	%		6.68	%

Our net interest income on a managed basis includes finance income earned on our owned receivables as well as on our securitized receivables. This finance income is offset by interest expense on the debt recorded on our balance sheet as well as the contractual rate of return on the instruments issued to investors when the receivables were securitized. Managed basis net interest income was $2.6 billion in the three months ended June 30, 2006, an increase of 14.5 percent from $2.3 billion in the three months ended June 30, 2005. For the six months ended June 30, 2006, managed basis net interest income was $5.2 billion, up 15.1 percent from $4.5 billion in the six months ended June 30, 2005. Managed basis net interest margin, annualized, was 6.72 percent in the current quarter and 6.77 percent in the year-to-date period, compared to 7.04 percent and 7.05 percent in the year-ago periods. The decreases were due to higher funding costs due to a larger managed basis balance sheet and a rising interest rate environment, partially offset by the higher overall yields on our receivables as discussed above. The following table shows the impact of these items on our net interest margin on a managed basis at June 30, 2006:

		Three months			Six months
		ended			ended
Net interest margin – June 30, 2005			7.04	%		7.05	%
Impact to net interest margin resulting from:
	Sale of U.K. credit card business in December 2005		.04			.03
	Metris acquisition in December 2005		.32			.34
	Receivable pricing		.43			.35
	Receivable mix		(.14	)		(.21	)
	Cost of funds		(.95	)		(.85	)
	Other		(.02	)		.06
Net interest margin – June 30, 2006			6.72	%		6.77	%

Net interest margin on a managed basis is greater than on an owned basis because the managed basis portfolio includes relatively more unsecured loans, which have higher yields. The effect on net interest margin of receivable mix is greater on a managed basis than on an owned basis because in the owned portfolio the impact of higher levels of higher yielding MasterCard/ Visa receivables due to lower securitization levels is partially offsetting the impact of higher levels of lower yielding correspondent real estate secured receivables.

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HSBC Finance Corporation

Managed basis risk adjusted revenue (a non-GAAP financial measure which represents net interest income, plus other revenues, excluding securitization related revenue and the mark-to-market on derivatives which do not qualify as effective hedges and ineffectiveness associated with qualifying hedges under SFAS No. 133, less net charge-offs as a percentage of average interest earning assets) decreased to 6.88 percent in the current quarter from 7.37 percent in the year-ago quarter. Managed basis risk adjusted revenue decreased to 7.33 percent in the year-to-date period from 7.44 percent in the year-ago period. Managed basis risk adjusted revenue decreased as the increase in average interest earning assets outpaced the increases in risk adjusted revenue in spite of the positive credit and delinquency trends due to the continuing stable economy in the United States we have experienced since the prior year quarter. See “Basis of Reporting” for additional discussion on the use of non-GAAP financial measures.

Provision for credit losses The following table summarizes provision for credit losses:

					Increase (decrease)
	2006		2005		Amount		%
	(dollars are in millions)
Three months ended June 30,	$	1,248	$	1,031	$	217		21.0%
Six months ended June 30,		2,114	$	1,872	$	242		12.9%

Our provision for credit losses increased during both periods. The increase in the provision for credit losses reflects higher receivable levels and portfolio seasoning as well as higher charge-offs and loss estimates at our Mortgage Services business in the 2005 second lien and portions of the 2005 first lien real estate secured originations. These increases were partially offset by lower bankruptcy levels as a result of reduced filings, low unemployment due to a stable United States economy and a reduction in the estimated loss exposure for Katrina. The provision as a percent of average owned receivables, annualized, was 3.33 percent in the current quarter and 2.87 percent year-to-date, compared to 3.57 percent and 3.33 percent in the year-ago periods. In 2006, credit loss reserves increased as the provision for owned credit losses was $168 million greater than net charge-offs in the second quarter of 2006 and $106 million greater than net charge-offs in the year-to-date period. In 2005, credit loss reserves increased as the provision for owned credit losses was $187 million greater than net charge-offs in the second quarter of 2005 and $165 million greater than net charge-offs in the year-to-date period. The provision for credit losses may vary from quarter to quarter depending on the product mix and credit quality of loans in our portfolio. See “Credit Quality” included in this MD&A for further discussion of factors affecting the provision for credit losses.

Other revenues The following table summarizes other revenues:

						Increase (decrease)
Three months ended June 30,	2006			2005		Amount			%
				(dollars are in millions)
Securitization related revenue	$	51		$	54	$	(3	)		(5.6	)%
Insurance revenue		226			278		(52	)		(18.7	)
Investment income		34			33		1			3.0
Derivative (expense) income		(7	)		76		(83	)		(100+	)
Fee income		442			354		88			24.9
Taxpayer financial services revenue		20			18		2			11.1
Gain on receivable sales to HSBC affiliates		97			109		(12	)		(11.0	)
Servicing and other fees from HSBC affiliates		116			109		7			6.4
Other income		220			142		78			54.9
Total other revenues	$	1,199		$	1,173	$	26			2.2	%

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HSBC Finance Corporation

					Increase (decrease)
Six months ended June 30,	2006		2005		Amount			%
			(dollars are in millions)
Securitization related revenue	$	122	$	139	$	(17	)		(12.2	)%
Insurance revenue		499		535		(36	)		(6.7	)
Investment income		68		66		2			3.0
Derivative income		50		336		(286	)		(85.1	)
Fee income		834		660		174			26.4
Taxpayer financial services revenue		254		261		(7	)		(2.7	)
Gain on receivable sales to HSBC affiliates		182		209		(27	)		(12.9	)
Servicing and other fees from HSBC affiliates		234		220		14			6.4
Other income		407		245		162			66.1
Total other revenues	$	2,650	$	2,671	$	(21	)		(.8	)%

Securitization related revenue is the result of the securitization of our receivables and includes the following:

					Increase (decrease)
Three months ended June 30,	2006		2005		Amount			%
			(dollars are in millions)
Net initial gains	$	-	$	-	$	-			-
Net replenishment gains(1)		4		44		(40	)		(90.9	)%
Servicing revenue and excess spread		47		10		37			100+
Total	$	51	$	54	$	(3	)		(5.6	)%

					Increase (decrease)
Six months ended June 30,	2006		2005		Amount			%
			(dollars are in millions)
Net initial gains	$	-	$	-	$	-			-
Net replenishment gains(1)		19		97		(78	)		(80.4	)%
Servicing revenue and excess spread		103		42		61			100+
Total	$	122	$	139	$	(17	)		(12.2	)%

⁽¹⁾  Net replenishment gains reflect inherent recourse provisions of $16 million in the three months ended June 30, 2006 and $30 million in six months ended June 30, 2006. Net replenishment gains reflect inherent recourse provisions of $67 million in the three months ended June 30, 2005 and $153 million in six months ended June 30, 2005.

The decline in securitization related revenue in both periods of 2006 was due to decreases in the level of securitized receivables as a result of our decision in the third quarter of 2004 to structure all new collateralized funding transactions as secured financings. Because existing public MasterCard and Visa credit card transactions were structured as sales to revolving trusts that require replenishments of receivables to support previously issued securities, receivables will continue to be sold to these trusts until the revolving periods end, the last of which is currently projected to occur in the fourth quarter of 2007. We will continue to replenish at reduced levels, certain personal non-credit card securities privately issued to conduits and record the resulting replenishment gains for a period of time in order to manage liquidity. Since our securitized receivables have varying lives, it will take time for all securitized receivables to pay-off and the related interest-only strip receivables to be reduced to zero. While the termination of sale treatment on new collateralized funding transactions reduced our reported net income under U.S. GAAP, there is no impact on cash received.

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HSBC Finance Corporation

Insurance revenue decreased during both periods as a result of lower insurance sales volumes in our U.K. operations and lower revenue in our domestic operations. The lower revenue in our domestic operations is primarily due to the restructuring of an insurance product effective April 1, 2006.

Investment income, which includes income on securities available for sale in our insurance business and realized gains and losses from the sale of securities, was essentially flat in both periods as lower average insurance investment balances were offset by increases in interest rates.

Derivative (expense) income, which includes realized and unrealized gains and losses on derivatives which do not qualify as effective hedges under SFAS No. 133 as well as the ineffectiveness on derivatives associated with our qualifying hedges, is summarized in the table below:

Three months ended June 30,	2006			2005
	(in millions)
Net realized gains (losses)	$	2		$	18
Mark-to-market on derivatives which do not qualify as effective hedges		(41	)		80
Ineffectiveness		32			(22	)
Total	$	(7	)	$	76

Six months ended June 30,	2006			2005
	(in millions)
Net realized gains (losses)	$	6		$	33
Mark-to-market on derivatives which do not qualify as effective hedges		(51	)		325
Ineffectiveness		95			(22	)
Total	$	50		$	336

Derivative income decreased in both periods primarily due to a significant reduction during 2005 in the population of interest rate swaps which do not qualify for hedge accounting under SFAS No. 133. In addition, during 2006, we have experienced a rising interest rate environment compared to a yield curve that flattened in the comparable periods of 2005 with interest rates declining for maturities of five years and longer. The income from ineffectiveness in both periods resulted from the designation during 2005 of a significant number of our derivatives as effective hedges under the long-haul method of accounting. These derivatives had not previously qualified for hedge accounting under SFAS No. 133. In addition, all of the hedge relationships which qualified under the shortcut method provisions of SFAS No. 133 have now been redesignated, substantially all of which are hedges under the long-haul method of hedge accounting. Redesignation of swaps as effective hedges reduces the overall volatility of reported mark-to-market income, although establishing such swaps as long-haul hedges creates volatility as a result of hedge ineffectiveness. For certain new hedging relationships, however, we continued to experience income volatility during the period before hedging documentation was put in place. We are working to improve this process and reduce the delay between executing the swap and establishing hedge accounting. Additionally, we continue to evaluate the steps required to regain hedge accounting treatment under SFAS No. 133 for a portion of the remaining swaps which do not currently qualify for hedge accounting. All derivatives are economic hedges of the underlying debt instruments regardless of the accounting treatment.

Net income volatility, whether based on changes in interest rates for swaps which do not qualify for hedge accounting or ineffectiveness recorded on our qualifying hedges under the long-haul method of accounting, impacts the comparability of our reported results between periods. Accordingly, derivative income for the six months ended June 30, 2006 should not be considered indicative of the results for any future periods.

Fee income, which includes revenues from fee-based products such as credit cards, increased in both periods due to higher credit card fees, particularly relating to our non-prime credit card portfolio, due to higher levels of MasterCard/Visa credit card receivables, primarily as a result of our acquisition of Metris in December

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HSBC Finance Corporation

2005 and in improvements in interchange rates. These increases were partially offset by the impact of new FFIEC guidance which limits certain fee billings for non-prime credit card accounts. See “Segment Results – Managed Basis” for additional information on fee income on a managed basis.

Taxpayer financial services (“TFS”) revenue decreased during the six months ended June 30, 2006 as TFS revenue during the six months ended June 30, 2005 reflects a gain of $24 million on the sale of certain bad debt recovery rights to a third party. Excluding the impact of this gain in the prior year, TFS revenue increased in the six months ended June 30, 2006 due to increased loan volume in the 2006 tax season.

Gain on receivable sales to HSBC affiliates includes the daily sales of domestic private label receivable originations (excluding retail sales contracts) and certain MasterCard/ Visa account originations to HBUS. The decrease in the gain on receivable sales to HSBC affiliates primarily reflects lower pricing on the daily sales of domestic private label receivable originations during 2006. Pricing for the daily sale of domestic private label receivable originations has been negatively impacted by higher funding costs as well as lower returns on new merchant relationships.

Servicing and other fees from HSBC affiliates primarily represents revenue received under service level agreements under which we service MasterCard/ Visa credit card and domestic private label receivables as well as real estate secured and auto finance receivables for HSBC affiliates. The increases relate to higher levels of receivables being serviced during the first six months of 2006.

Other income increased in both periods primarily due to higher ancillary credit card revenue as a result of higher levels of MasterCard/ Visa receivables, including the acquisition of Metris in December 2005. For the three months ended June 30, 2006, higher ancillary credit card revenue was partially offset by lower gains on miscellaneous asset sales.

Costs and expenses Effective December 20, 2005, our U.K. based technology services employees were transferred to HSBC Bank plc (“HBEU”). As a result, operating expenses relating to information technology, which have previously been reported as salaries and fringe benefits, are now billed to us by HBEU and reported as support services from HSBC affiliates.

The following table summarizes total costs and expenses:

					Increase
					(decrease)
Three months ended June 30,	2006		2005		Amount			%
	(dollars are in millions)
Salaries and employee benefits	$	564	$	526	$	38			7.2	%
Sales incentives		98		90		8			8.9
Occupancy and equipment expenses		79		82		(3	)		(3.7	)
Other marketing expenses		176		185		(9	)		(4.9	)
Other servicing and administrative expenses		246		192		54			28.1
Support services from HSBC affiliates		270		217		53			24.4
Amortization of intangibles		63		83		(20	)		(24.1	)
Policyholders’ benefits		107		116		(9	)		(7.8	)
Total costs and expenses	$	1,603	$	1,491	$	112			7.5	%

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HSBC Finance Corporation

					Increase
					(decrease)
Six months ended June 30,	2006		2005		Amount			%
	(dollars are in millions)
Salaries and employee benefits	$	1,145	$	1,023	$	122			11.9	%
Sales incentives		178		172		6			3.5
Occupancy and equipment expenses		162		169		(7	)		(4.1	)
Other marketing expenses		349		365		(16	)		(4.4	)
Other servicing and administrative expenses		529		486		43			8.8
Support services from HSBC affiliates		522		426		96			22.5
Amortization of intangibles		143		190		(47	)		(24.7	)
Policyholders’ benefits		225		238		(13	)		(5.5	)
Total costs and expenses	$	3,253	$	3,069	$	184			6.0	%

Salaries and employee benefits increased in both periods as a result of additional staffing in our Consumer Lending, Mortgage Services, retail services and Canadian operations to support growth as well as additional staffing in our credit card services operations as a result of the acquisition of Metris in December 2005. These increases were offset by lower salaries and employee benefits expense in our U.K. operations as a result of the sale of our U.K. credit card business and the transfer of our U.K. based technology services employees to HBEU in December 2005.

Sales incentives were higher in both periods. Higher volumes in our Consumer Lending branches, Canadian business and our Mortgage Services business were offset by a decrease in sales incentives in our U.K. operations.

Occupancy and equipment expenses decreased in both periods as a result of the sale of our U.K. credit card business in December 2005 which included the lease associated with the credit card call center as well as lower repairs and maintenance costs. These decreases were partially offset by higher occupancy and equipment expenses resulting from our acquisition of Metris in December 2005.

Other marketing expenses includes payments for advertising, direct mail programs and other marketing expenditures. The decrease in both periods was primarily due to decreased marketing expenses in our U.K. operations as a result of the sale of our U.K. credit card business in December 2005.

Other servicing and administrative expenses increased during both periods as a result of higher legal and other professional expenses, higher REO expenses and higher systems costs partially offset by lower insurance operating expense in the three month period and in the year-to-date period, and a lower provision for fraud losses. Additionally, other servicing and administrative expenses for both periods in 2005 included a lower estimate of exposure relating to accrued finance charges associated with certain loan restructures.

Support services from HSBC affiliates, which includes technology and other services charged to us by HSBC Technology and Services (USA) Inc. (“HTSU”), increased in both periods primarily due to receivable growth. Additionally, in 2006, support services from HSBC affiliates also includes certain information technology operating expenses for our U.K. operations charged to us by HBEU.

Amortization of intangibles decreased in both periods as a result of lower intangible amortization for our purchased credit card relationships due to a contract renegotiation with one of our co-branded credit card partners, lower amortization related to an individual contractual relationship and lower amortization associated with our U.K. operations as a result of the sale of our U.K. credit card business in December 2005. These decreases were partially offset by increased amortization associated with the Metris cardholder relationships.

Policyholders’ benefits decreased slightly in both periods as a result of the decreased sales volumes in our domestic and U.K. operations as well as lower amortization of fair value adjustments relating to our insurance business.

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HSBC Finance Corporation

Efficiency ratio The following table summarizes our owned basis efficiency ratio:

	2006			2005
Three months ended June 30		41.09	%		44.47	%
Six months ended June 30		40.71			44.54

Our owned basis efficiency ratio improved in both periods due to higher net interest income and higher other revenues due to higher levels of receivables, partially offset by an increase in total costs and expenses to support receivable growth.

Segment Results – Managed Basis

We have three reportable segments: Consumer, Credit Card Services and International. Our Consumer segment consists of our consumer lending, mortgage services, retail services and auto finance businesses. Our Credit Card Services segment consists of our domestic MasterCard and Visa credit card business. Our International segment consists of our foreign operations in the United Kingdom, Canada, the Republic of Ireland, Slovakia, the Czech Republic and Hungary. The All Other caption includes our insurance and taxpayer financial services and commercial businesses, as well as our corporate and treasury activities, each of which falls below the quantitative threshold test under SFAS No. 131 for determining reportable segments. There have been no changes in the basis of our segmentation or any changes in the measurement of segment profit as compared with the presentation in our 2005 Form 10-K.

We have historically monitored our operations and evaluated trends on a managed basis (a non-GAAP financial measure), which assumes that securitized receivables have not been sold and are still on our balance sheet. This is because the receivables that we securitize are subjected to underwriting standards comparable to our owned portfolio, are serviced by operating personnel without regard to ownership and result in a similar credit loss exposure for us. In addition, we fund our operations and make certain decisions about allocating resources such as capital on a managed basis.

When reporting on a managed basis, net interest income, provision for credit losses and fee income related to receivables securitized are reclassified from securitization related revenue in our owned statement of income into the appropriate caption.

Consumer Segment The following table summarizes results for our Consumer segment:

							Increase (decrease)
Three months ended June 30	2006			2005			Amount		%
	(dollars are in millions)
Net income	$	442		$	440		$	2		.5	%
Net interest income		1,851			1,699			152		8.9
Securitization related revenue		(55	)		(151	)		96		63.6
Fee and other income		330			292			38		13.0
Intersegment revenues		63			26			37		100+
Provision for credit losses		696			580			116		20.0
Total costs and expenses		726			578			148		25.6
Receivables		120,316			95,300			25,016		26.2
Assets		121,058			96,188			24,870		25.9
Net interest margin, annualized		6.29	%		7.27	%		-		-
Return on average managed assets		1.49			1.87			-		-

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							Increase (decrease)
Six months ended June 30	2006			2005			Amount		%
	(dollars are in millions)
Net income	$	1,052		$	874		$	178		20.4	%
Net interest income		3,672			3,392			280		8.3
Securitization related revenue		(104	)		(386	)		282		73.1
Fee and other income		630			577			53		9.2
Intersegment revenues		120			53			67		100+
Provision for credit losses		1,099			963			136		14.1
Total costs and expenses		1,426			1,246			180		14.4
Net interest margin, annualized		6.37	%		7.41	%		-		-
Return on average managed assets		1.82			1.89			-		-

Our Consumer Segment reported higher net income during the six months ended June 30, 2006 due to higher net interest income, higher fee and other income, and higher securitization related revenue, partially offset by higher provision for credit losses and higher costs and expenses. Net income was flat for the three months ended June 30, 2006 as a result of a more significant increase in the provision for credit losses during the quarter as compared to the year-to-date period. Net interest income increased during the three and six months ended June 30, 2006 primarily due to higher average receivables, partially offset by higher interest expense. Net interest margin decreased from the year ago periods due to a shift in mix due to growth in lower yielding receivables and product expansion into near-prime consumer segments. Also contributing to the decrease were lower yields on auto finance receivables as we have targeted higher credit quality customers. Although higher credit quality receivables generate lower yields, such receivables are expected to result in lower operating costs, delinquency ratios and charge-off. These lower yields were partially offset by higher pricing on our variable rate products. A higher cost of funds due to a rising interest rate environment also contributed to the decrease in net interest margin.

The increase in fee and other income in the three and six months ended June 30, 2006 was due to higher servicing fees from HBUS on the sold domestic private label receivable portfolio and higher credit insurance commissions, partially offset by lower gains on receivable sales including sales of domestic private label receivable originations to HBUS. Securitization related revenue was higher in both periods due to lower amortization of prior period gains as a result of reduced securitization levels. Costs and expenses were higher in both periods due to higher salary expense and higher support services from affiliates to support receivable growth.

Our managed basis provision for credit losses, which includes both provision for owned basis receivables and over-the-life provision for receivables serviced with limited recourse, increased during both the three and six months ended June 30, 2006 due to receivable growth as well as higher charge-offs and loss estimates at our Mortgage Services business due to deteriorating performance in the 2005 second lien and portions of the 2005 first lien real estate secured originations. These increases were partially offset by a reduction in the estimated loss exposure resulting from Katrina of approximately $23 million in the three months ended June 30, 2006 and approximately $30 million in the year-to-date period as well as a continued stable economy in the United States. We have experienced higher dollars of net charge-offs in our owned portfolio during the six months ended June 30, 2006 due to higher receivable levels in part due to lower securitization levels. These factors resulted in an increase to our owned provision for credit losses compared to the prior year quarter. Over-the-life provision for credit losses for securitized receivables recorded in any given period reflects the level and product mix of securitizations in that period. Subsequent charge-offs of securitized receivables result in a decrease in the over-the-life reserves without any corresponding increase to managed loss provision. For 2006, the provision for credit losses was greater than net charge-offs by $53 million for the three months ended June 30, 2006 and net charge-offs were greater than the provision for credit losses by $173 million for the year-to-date period. For 2005, the provision for credit losses was greater than net charge-offs by $6 million for

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the three months ended June 30, 2005 while net charge-offs were greater than the provision for credit losses by $266 million for the year-to-date period.

Managed receivables increased 4 percent to $120.3 billion at June 30, 2006 as compared to $115.4 billion at March 31, 2006. We continued to experience strong growth in the second quarter of 2006 in our real estate secured portfolio in both our Mortgage Services correspondent and Consumer Lending branch-based businesses. Our auto finance portfolio also reported growth due to organic growth from increased volume in both the dealer network and the consumer direct loan program. Personal non-credit card receivables increased as we have increased the availability of this product due to the stable U.S. economy. The success of several large direct mail campaigns also contributed to growth in the portfolio.

Compared to June 30, 2005, managed receivables increased 26 percent. Real estate growth was also strong compared to the year ago period as a result of strong growth in both our correspondent and branch-based consumer lending businesses. We continued to enter into agreements with additional correspondents to purchase their newly originated loans on a flow basis. However, we are currently tightening underwriting standards on loans purchased from correspondents including reducing purchases of second lien and selected higher risk products. These activities are expected to reduce the volume of correspondent purchases in the future which may have the effect of slowing growth in the real estate secured portfolio. Also contributing to the increase were purchases of $1.1 billion from portfolio acquisition programs since the prior year quarter. Growth in our auto finance portfolio from the year ago period is due to organic growth, principally in the near-prime portfolio. This came from newly originated loans acquired from our dealer network and growth in the consumer direct loan program. Growth in our personal non-credit card portfolio was the result of increased marketing, including several large direct mail campaigns.

Return on average managed assets (“ROMA”) was 1.49 percent for the three months ended June 30, 2006 and 1.82 percent for the six months ended June 30, 2006, compared to 1.87 percent and 1.89 percent in the year-ago periods. The decrease in the ratio in both periods is because the increase in net income discussed above was slower than the growth in average managed assets.

In accordance with Federal Financial Institutions Examination Council (“FFIEC”) guidance, the required minimum monthly payment amounts for domestic private label credit card accounts have changed. The implementation of these new requirements began in the fourth quarter of 2005 and was completed in the first quarter of 2006. As previously discussed, we sell new domestic private label receivable originations (excluding retail sales contracts) to HBUS on a daily basis. Estimates of the potential impact to the business are based on numerous assumptions and take into account a number of factors which are difficult to predict, such as changes in customer behavior, which will not be fully known or understood until the changes have been in place for a period of time. Based on current estimates, we anticipate that these changes will have an unfavorable impact on the premiums associated with these daily sales in 2007. It is not expected this reduction will have a material impact on either the results of the Consumer Segment or our consolidated results.

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HSBC Finance Corporation

Credit Card Services Segment The following table summarizes results for our Credit Card Services segment.

							Increase
							(decrease)
Three months ended June 30	2006			2005			Amount		%
	(dollars are in millions)
Net income	$	310		$	165		$	145		87.9	%
Net interest income		764			507			257		50.7
Securitization related revenue		(15	)		(55	)		40		72.7
Fee and other income		570			475			95		20.0
Intersegment revenues		5			5			-		-
Provision for credit losses		399			334			65		19.5
Total costs and expenses		428			333			95		28.5
Receivables		25,815			19,615			6,200		31.6
Assets		25,980			19,391			6,589		34.0
Net interest margin, annualized		11.71	%		10.20	%		-		-
Return on average managed assets		4.82			3.42			-		-

							Increase
							(decrease)
Six months ended June 30	2006			2005			Amount			%
	(dollars are in millions)
Net income	$	615		$	313		$	302			96.5	%
Net interest income		1,533			1,013			520			51.3
Securitization related revenue		(18	)		(119	)		101			84.9
Fee and other income		1,087			912			175			19.2
Intersegment revenues		10			11			(1	)		(9.1	)
Provision for credit losses		763			655			108			16.5
Total costs and expenses		861			657			204			31.1
Net interest margin, annualized		11.79	%		10.27	%		-			-
Return on average managed assets		4.74			3.24			-			-

Our Credit Card Services Segment reported higher net income in the three and six months ended June 30, 2006. The increase in net income in both periods was primarily due to higher net interest income, higher fee and other income and higher securitization related revenue partially offset by higher provision for credit losses and higher costs and expenses. The acquisition of Metris, which was completed in December 2005, contributed $38 million of net income during the current quarter and $61 million in the year-to-date period. Net interest income increased in both periods as a result of the Metris acquisition, which contributed to higher overall yields due in part to higher levels of near-prime receivables, partially offset by higher interest expense. Net interest margin increased in both the three and six months ended June 30, 2006 primarily due to higher overall yields due to increases in non-prime receivable levels, including the receivables acquired as part of Metris, higher pricing on variable rate products and other repricing initiatives, such as reduced levels of promotional rate balances in 2006. These increases were partially offset by a higher cost of funds. Although our non-prime receivables tend to have smaller balances, they generate higher returns both in terms of net interest margin and fee income. Increases in fee and other income resulted from portfolio growth, including the Metris receivable portfolios acquired in December 2005, and improvements in interchange rates since June 2005. This increase in fee income was partially offset in both periods by adverse impacts of limiting certain fee billings on non-prime credit card accounts as discussed below. Securitization related revenue was higher due to lower amortization of prior period gains as a result of reduce securitization levels. Our provision for credit losses was higher in the three and six months ended June 30, 2006 as a result of portfolio growth,

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including additions from the Metris acquisition, partially offset by a reduction in our estimated loss exposure related to Katrina of approximately $2 million in the three months ended June 30, 2006 and approximately $25 million in the year-to-date period and the impact of lower levels of bankruptcy filings following the enactment of new bankruptcy legislation in October 2005. We increased managed loss reserves by recording loss provision greater than net charge-off of $31 million in the three months ended June 30, 2006 and $135 million in the six months ended June 30, 2006. The increase in loss provision is related to the Metris acquisition, partly offset by a decrease in loss provision for the other portfolios. We decreased managed loss reserves by recording loss provision less than net charge-off of $3 million in the second quarter of 2005 and $26 million in the year-to-date 2005 period. Higher costs and expenses were to support receivable growth.

Managed receivables increased 3 percent to $25.8 billion at June 30, 2006 compared to $25.1 billion at March 31, 2006. The increase in the current quarter reflects organic growth in our General Motors, Union Privilege and non-prime portfolios, which was partially offset by the continued decline in certain older acquired portfolios. Compared to June 30, 2005, managed receivables increased 32 percent. The increase from the year-ago period reflects organic growth in our HSBC branded prime, Union Privilege and non-prime portfolios as well as the acquisition of Metris in December 2005 which increased receivables by $5.3 billion.

The increase in ROMA in both periods is primarily due to higher net income as discussed above.

In accordance with FFIEC guidance, our credit card services business adopted a plan to phase in changes to the required minimum monthly payment amount and limit certain fee billings for non-prime credit card accounts. The implementation of these new requirements began in July 2005 with the requirements fully phased in by December 31, 2005. These changes have resulted in lower non-prime credit card fee income in 2006. Roll rate trends in the prime book have been higher than those experienced prior to the changes in minimum payment, especially in regard to early stage delinquency. These changes will result in fluctuations in the provision for credit losses in future periods as credit loss provisions for prime accounts will increase as a result of higher required monthly payments while the non-prime provision decreases due to lower levels of fees incurred by customers. Although we do not expect this will have a material impact on our consolidated results, the impact to the Credit Card Services Segment in 2006 is currently expected to be material.

International Segment The following table summarizes results for our International segment:

							Increase (decrease)
Three months ended June 30	2006			2005			Amount			%
	(dollars are in millions)
Net income	$	7		$	(14	)	$	21			100+	%
Net interest income		178			224			(46	)		(20.5	)
Securitization related revenue		-			4			(4	)		(100.0	)
Fee and other income		173			190			(17	)		(8.9	)
Intersegment revenues		9			4			5			100+
Provision for credit losses		123			166			(43	)		(25.9	)
Total costs and expenses		213			266			(53	)		(19.9	)
Receivables		9,545			12,581			(3,036	)		(24.1	)
Assets		10,257			13,492			(3,235	)		(24.0	)
Net interest margin, annualized		7.38	%		6.93	%		-			-
Return on average managed assets		.26			(.41	)		-			-

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							Increase (decrease)
Six months ended June 30	2006			2005			Amount			%
	(dollars are in millions)
Net income	$	14		$	(23	)	$	37			100+	%
Net interest income		360			453			(93	)		(20.5	)
Securitization related revenue		-			14			(14	)		(100.0	)
Fee and other income		328			356			(28	)		(7.9	)
Intersegment revenues		16			7			9			100+
Provision for credit losses		230			331			(101	)		(30.5	)
Total costs and expenses		430			518			(88	)		(17.0	)
Net interest margin, annualized		7.60	%		6.97			-			-
Return on average managed assets		.27			(.33	)		-			-

Our International Segment reported net income in the three and six months ended June 30, 2006 after losses of $14 million and $23 million in the year-ago periods. The increase in net income reflects lower total costs and expenses and lower provision for credit losses, partially offset by lower net interest income, lower fee and other income, and lower securitization related revenue as a result of the December 2005 sale of our U.K. credit card business to HBEU. Applying constant currency rates, which uses the average rate of exchange for the three and six month periods ended June 30, 2005 to translate current period net income, the net income would have been lower by $2 million for both the three months and year-to-date period ended June 30, 2006.

Net interest income decreased during both periods primarily as a result of lower receivable levels in our U.K. subsidiary due to the sale of our U.K. credit card business including $3.1 billion in managed receivables to HBEU as well as lower receivable levels resulting from lower retail sales volumes in the U.K. This was partially offset by higher net interest income in our Canadian operations due to higher receivable levels. Net interest margin increased in both periods due to the change in receivable mix resulting from the sale of our U.K credit card business in December 2005 as well as a decreased cost of funds. Provision for credit losses decreased in the three and six month periods ended June 30, 2006 primarily due to the lower receivable balance as a result of the sale of our U.K. credit card business. We increased managed loss reserves by recording loss provision greater than net charge-offs of $14 million for the current quarter and $22 million year-to-date, compared with $53 million and $108 million in the year-ago periods. Fee and other income and total costs and expenses decreased as a result of the sale of our U.K. credit card business in December 2005. The decrease in total costs and expenses was partially offset by increased costs associated with growth in the Canadian business.

Managed receivables of $9.5 billion at June 30, 2006 increased 4 percent compared to $9.1 billion at March 31, 2006. Receivables at June 30, 2006 were positively impacted by changes in the foreign exchange rate since March 31, 2006. Applying constant currency rates, which uses the exchange rate at March 31, 2006 to translate current receivables, the receivable balance would have been lower by $527 million at June 30, 2006. Excluding the impact of foreign exchange rates, in the second quarter of 2006, our U.K. based receivable products continued to decrease due to lower retail sales volume following a slow down in retail consumer spending in the U.K. These decreases were partially offset by growth in the receivable portfolio in our Canadian operations. Branch expansions in Canada in 2005 have resulted in growth in both the secured and unsecured receivable portfolios.

Compared to June 30, 2005, managed receivables decreased 24 percent. Applying constant currency rates, which uses the exchange rate at June 30, 2005 to translate current receivables, the receivable balance would have been lower by $514 million at June 30, 2006. Excluding the impact of foreign exchange rates, receivables decreased due to the sale of our U.K. credit card business as well as lower retail sales volumes in the U.K. These decreases were partially offset by receivable growth in our Canadian operations as discussed above as well as from the successful launch of a MasterCard credit card program in Canada in 2005.

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The increase in ROMA for both periods reflects the higher net income as discussed above, and lower average managed assets as a result of the sale of our U.K. credit card business in December 2005.

As part of ongoing integration efforts with HSBC, we have begun working with HSBC to determine if funding synergies and management efficiencies could be achieved by transferring our Czech, Hungarian and Slovakian operations to HBEU. As of the date of this filing, a decision has not been made regarding the potential transfer of these operations. We anticipate that a decision regarding this potential transfer will be reached in the third quarter of 2006.

Credit Quality

Credit Loss Reserves

We maintain credit loss reserves to cover probable losses of principal, interest and fees, including late, overlimit and annual fees. Credit loss reserves are based on a range of estimates and are intended to be adequate but not excessive. We estimate probable losses for owned consumer receivables using a roll rate migration analysis that estimates the likelihood that a loan will progress through the various stages of delinquency, or buckets, and ultimately charge-off. This analysis considers delinquency status, loss experience and severity and takes into account whether loans are in bankruptcy, have been restructured or rewritten, or are subject to forbearance, an external debt management plan, hardship, modification, extension or deferment. Our credit loss reserves also take into consideration the loss severity expected based on the underlying collateral, if any, for the loan in the event of default. Delinquency status may be affected by customer account management policies and practices, such as the restructure of accounts, forbearance agreements, extended payment plans, modification arrangements, external debt management programs, loan rewrites and deferments. If customer account management policies, or changes thereto, shift loans from a “higher” delinquency bucket to a “lower” delinquency bucket, this will be reflected in our roll rate statistics. To the extent that restructured accounts have a greater propensity to roll to higher delinquency buckets, this will be captured in the roll rates. Since the loss reserve is computed based on the composite of all of these calculations, this increase in roll rate will be applied to receivables in all respective delinquency buckets, which will increase the overall reserve level. In addition, loss reserves on consumer receivables are maintained to reflect our judgment of portfolio risk factors that may not be fully reflected in the statistical roll rate calculation. Risk factors considered in establishing loss reserves on consumer receivables include recent growth, product mix, bankruptcy trends, geographic concentrations, economic conditions, portfolio seasoning, account management policies and practices, current levels of charge-offs and delinquencies, changes in laws and regulations and other items which can affect consumer payment patterns on outstanding receivables, such as the impact of natural disasters, such as Katrina and global pandemics.

While our credit loss reserves are available to absorb losses in the entire portfolio, we specifically consider the credit quality and other risk factors for each of our products. We recognize the different inherent loss characteristics in each of our products as well as customer account management policies and practices and risk management/collection practices. Charge-off policies are also considered when establishing loss reserve requirements to ensure the appropriate reserves exist for products with longer charge-off periods. We also consider key ratios such as reserves to nonperforming loans and reserves as a percentage of net charge-offs in developing our loss reserve estimate. Loss reserve estimates are reviewed periodically and adjustments are reported in earnings when they become known. As these estimates are influenced by factors outside of our control, such as consumer payment patterns and economic conditions, there is uncertainty inherent in these estimates, making it reasonably possible that they could change. See Note 3, “Receivables,” in the accompanying consolidated financial statements for receivables by product type and Note 4, “Credit Loss Reserves,” for an analysis of changes in the credit loss reserves.

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HSBC Finance Corporation

The following table summarizes owned basis credit loss reserves:

		June 30,			March 31,			June 30,
		2006			2006			2005
		(dollars are in millions)
Owned credit loss reserves		$	4,649		$	4,468		$	3,756
Reserves as a percent of:
	Receivables		3.02	%		3.04	%		3.16	%
	Net charge-offs(1)		107.6	(2)		120.4	(2)		111.3
	Nonperforming loans		106.8			104.7			107.6

(1)	Quarter-to-date, annualized.
(2)	The acquisition of Metris in December 2005 has positively impacted this ratio. Reserves as a percentage of net charge-offs excluding Metris were 107.2 percent at June 30, 2006 and 112.8 percent at March 31, 2006.

Owned credit loss reserves at June 30, 2006 increased as compared to March 31, 2006 as the provision for owned credit losses was $168 million higher than net charge-offs. The increase in owned credit loss reserves in the current quarter reflects higher levels of owned receivables, due in part to lower securitization levels, portfolio seasoning and higher delinquency levels in our portfolio driven by growth, as well as higher loss estimates due to the deteriorating performance in the 2005 second lien and portions of the 2005 first lien real estate secured originations in our Mortgage Services business. This increase was partially offset by a reduction in the estimated loss exposure resulting from Katrina and the continued shift in mix to higher levels of secured receivables.

Owned credit loss reserves at June 30, 2006 increased as compared to June 30, 2005 resulting from higher levels of owned receivables, including lower securitization levels, deterioration in the performance of certain 2005 originations at our Mortgage Services business as discussed above, the impact of Katrina, anticipated impacts from minimum monthly payment changes, and the Metris acquisition. These increases were partially offset by significantly lower personal bankruptcy levels, the benefits of a stable U.S. economy, including low unemployment levels, and the impact of the sale of our U.K. credit card business in December 2005 which decreased credit loss reserves by $104 million.

Beginning in 2004 and continuing in 2005, we have changed the mix in our loan portfolio to receivables that have a lower loss rate and consequently are priced at a lower yield, particularly real estate secured and auto finance receivables. Reserves as a percentage of receivables at June 30, 2006 were lower than at March 31, 2006 and June 30, 2005 as a result of recent portfolio growth, a higher mix of real estate secured receivables and lower levels of personal bankruptcy filings in the United States in the first six months of 2006.

Reserves as a percentage of net charge-offs at June 30, 2006 decreased from March 31, 2006. The June 30, 2006 and March 31, 2006 ratios were impacted by the acquisition of Metris in December 2005 as more fully discussed below. Excluding the Metris acquisition in both periods, reserves as a percentage of net charge-offs decreased 560 basis points. The decrease is attributable to higher charge-off levels in the second quarter due to the seasoning of our portfolios, particularly real estate secured. Reserves as a percentage of receivables and reserves as a percentage of nonperforming loans are consistent with the prior quarter.

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For securitized receivables, we also record a provision for estimated probable losses that we expect to incur under the recourse provisions. The following table summarizes managed credit loss reserves:

		June 30,			March 31,			June 30,
		2006			2006			2005
		(dollars are in millions)
Managed credit loss reserves		$	4,740		$	4,629		$	4,281
Reserves as a percent of:
	Receivables		3.04	%		3.09	%		3.35	%
	Net charge-offs(1)		105.7	(2)		116.9	(2)		104.1
	Nonperforming loans		106.6			105.4			110.2

(1)	Quarter-to-date, annualized.
(2)	The acquisition of Metris in December 2005 has positively impacted this ratio. Reserves as a percentage of net charge-offs excluding Metris were 105.0 percent at June 30, 2006 and 109.7 percent at March 31, 2006.

Managed credit loss reserves at June 30, 2006 also increased compared to March 31, 2006 and June 30, 2005 due to the increases in owned credit loss reserves discussed above and the impact of lower reserves on securitized receivables as a result of run-off. Securitized receivables of $1.9 billion at June 30, 2006 decreased from $3.1 billion at March 31, 2006 and $9.0 billion at June 30, 2005.

See “Basis of Reporting” for additional discussion on the use of non-GAAP financial measures and “Reconciliations to GAAP Financial Measures” for quantitative reconciliations of the non-GAAP financial measures to the comparable GAAP basis financial measure.

Delinquency – Owned Basis

The following table summarizes two-months-and-over contractual delinquency (as a percent of consumer receivables):

	June 30,			March 31,			June 30,
	2006			2006			2005
Real estate secured		2.52	%		2.46	%		2.56	%
Auto finance		2.25			1.65			2.08
MasterCard/ Visa		4.16			4.35			4.14
Private label		5.42			5.50			4.91
Personal non-credit card		8.93			8.86			8.84
Total		3.68	%		3.62	%		3.73	%

Total owned delinquency increased $340 million and the two-months-and-over contractual delinquency ratio increased 6 basis points compared to the prior quarter. The increase in the delinquency ratio was driven by higher real estate secured delinquency levels at our Mortgage Services business due to the deteriorating performance of certain 2005 originations as previously discussed. These increases were partially offset by recent strong receivable originations and the continuing stable economy in the United States. The increase in the delinquency ratio of our auto finance portfolio reflects seasonal patterns partially offset by receivable growth. The decrease in the MasterCard/ Visa delinquency ratio primarily reflects the impact of the minimum monthly payment changes on our non-prime portfolios as the lower fee assessments have reduced the delinquent balances outstanding. These improvements were partially offset by the seasoning of the Metris portfolio purchased in December 2005 as further described below. The decrease in the delinquency ratio in our private label receivables (which primarily consists of our foreign private label portfolio that was not sold to HBUS in December 2004) reflects increased receivables in our Canadian operations. The increase in the personal non-credit card delinquency ratio reflects the deterioration of the financial circumstances of our

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customers across the U.K, partially offset by lower bankruptcy levels and the continued stable economic conditions in the U.S.

As noted above, the MasterCard/ Visa delinquencies ratios in 2006 reflect the normal seasoning of the Metris portfolio purchased in December 2005. The receivables acquired as part of our acquisition of Metris were subject to the requirements of Statement of Position 03-3, “Accounting for Certain Loans or Debt Securities Acquired in a Transfer” (“SOP 03-3”). In accordance with SOP 03-3, our investment in any acquired receivables which showed evidence of credit deterioration at the time of acquisition was based on the net cash flows expected to be collected. The negative impacts to delinquency and charge-off reflect the seasoning of the receivables we acquired which did not show any evidence of credit deterioration at the time of the acquisition, a portion of which, as expected, have now become delinquent and have begun to charge-off.

Compared to the year-ago period, total delinquency ratio decreased 5 basis points. The improvements are generally the result of portfolio growth, the benefit of a stable U.S. economy including low unemployment levels, and lower bankruptcy levels due to the new bankruptcy legislation enacted in 2005, partially offset by higher delinquency at our Mortgage Services business as more fully discussed above.

Net Charge-offs of Consumer Receivables – Owned Basis

The following table summarizes net charge-offs of consumer receivables (as a percent, annualized, of average consumer receivables):

	June 30,			March 31,			June 30,
	2006			2006			2005
Real estate secured		.97	%		.75	%		.78	%
Auto finance		2.43			3.50			2.61
MasterCard/ Visa		5.80			4.00			6.93
Private label		5.29			5.62			4.36
Personal non-credit card		7.92			7.94			7.77
Total		2.88	%		2.58	%		2.93	%
Real estate secured net charge-offs and REO expense as a percent of average real estate secured receivables		1.04	%		.89	%		.84	%

Net charge-offs as a percent, annualized, of average consumer receivables increased compared to the quarter ended March 31, 2006 primarily due to higher losses in our real estate secured and MasterCard/ Visa portfolios. Our real estate secured portfolio experienced an increase in net charge-offs reflecting seasoning of the growing portfolio as well as higher than expected losses on certain 2005 originations in our Mortgage Services business. We anticipate the net charge-off ratio for our real estate secured portfolio to increase through the remainder of 2006 as a result of the higher delinquency levels we are experiencing in these 2005 loans. The net charge-off ratio for our MasterCard/ Visa portfolio increased 180 basis points as compared to the prior quarter primarily due to the expected seasoning of the receivables acquired in our acquisition of Metris which were subject to the reporting requirements of SOP 03-3 as discussed above. Excluding the impact of the Metris portfolio in both periods, the net charge-off ratio for our MasterCard/ Visa portfolio increased 71 basis points at June 30, 2006 as compared to March 31, 2006 due to the increase in bankruptcy filings in the second quarter of 2006 following historically low levels of bankruptcy filings subsequent to the new bankruptcy legislation in the U.S. as discussed above. The decrease in auto finance net charge-offs reflects a seasonal pattern related to higher charge-offs in the first quarter. The decrease in net charge-offs for the private label portfolio reflects higher levels of average receivables in our Canadian operations.

Total net charge-offs for the current quarter decreased from the June 2005 quarter primarily due to a decrease in personal bankruptcy filings in our MasterCard/ Visa portfolio following the October 2005 enactment of new bankruptcy legislation in the United States. This was partially offset by higher net charge-offs in our real estate

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secured and personal non-credit card portfolios due to portfolio seasoning and in the case of our real estate secured portfolio, higher than expected losses on certain 2005 loans as explained above.

Owned Nonperforming Assets

	June 30,			March 31,			June 30,
	2006			2006			2005
	(dollars are in millions)
Nonaccrual receivables	$	3,595		$	3,525		$	3,008
Accruing consumer receivables 90 or more days delinquent		758			740			482
Renegotiated commercial loans		1			1			1
Total nonperforming receivables		4,354			4,266			3,491
Real estate owned		620			563			459
Total nonperforming assets	$	4,974		$	4,829		$	3,950
Credit loss reserves as a percent of nonperforming receivables		106.8	%		104.7	%		107.6	%

Compared to March 31, 2006, the increase in total nonperforming assets is primarily due to seasonal patterns in delinquency in our auto receivables and increased real estate owned. Compared to June 2005, the increase in nonperforming assets is primarily due to the growth in receivables we have experienced and the seasoning of the Metris portfolio. Consistent with industry practice, accruing consumer receivables 90 or more days delinquent includes domestic MasterCard/ Visa receivables.

Account Management Policies and Practices

Our policies and practices for the collection of consumer receivables, including our customer account management policies and practices, permit us to reset the contractual delinquency status of an account to current, based on indicia or criteria which, in our judgment, evidence continued payment probability. Such policies and practices vary by product and are designed to manage customer relationships, maximize collection opportunities and avoid foreclosure or repossession if reasonably possible. If the account subsequently experiences payment defaults, it will again become contractually delinquent.

The tables below summarize approximate restructuring statistics in our managed basis domestic portfolio. We report our restructuring statistics on a managed basis only because the receivables that we securitize are subject to underwriting standards comparable to our owned portfolio, are generally serviced and collected without regard to ownership and result in a similar credit loss exposure for us. As previously reported, in prior periods we used certain assumptions and estimates to compile our restructure statistics. The systemic counters used to compile the information presented below exclude from the reported statistics loans that have been reported as contractually delinquent but have been reset to a current status because we have determined that the loans should not have been considered delinquent (e.g., payment application processing errors). When comparing restructuring statistics from different periods, the fact that our restructure policies and practices will change over time, that exceptions are made to those policies and practices, and that our data capture methodologies have been enhanced, should be taken into account.

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Total Restructured by Restructure Period – Domestic Portfolio⁽¹⁾

(Managed Basis)

		June 30,			March 31,			June 30,
		2006			2006			2005
		(dollars are in millions)
Never restructured			90.0	%		89.7	%		88.0	%
Restructured:
	Restructured in the last 6 months		3.7			4.0			4.2
	Restructured in the last 7-12 months		2.6			2.4			3.3
	Previously restructured beyond 12 months		3.7			3.9			4.5
	Total ever restructured(2)		10.0			10.3			12.0
Total			100.0	%		100.0	%		100.0	%
Total Restructured by Product – Domestic Portfolio(1) (Managed Basis)
Real estate secured		$	8,449		$	8,395		$	8,277
Auto finance			1,735			1,712			1,585
MasterCard/ Visa			928			937			526
Private label(3)			27			26			24
Personal non-credit card			3,421			3,411			3,396
Total		$	14,560		$	14,481		$	13,808
(As a percent of managed receivables)
Real estate secured			9.3	%		9.7	%		12.0	%
Auto finance			14.3			14.5			14.9
MasterCard/Visa			3.6			3.8			2.7
Private label(3)			7.5			7.3			7.1
Personal non-credit card			19.5			19.9			21.6
Total(2)			10.0	%		10.3	%		12.0	%

(1)	Excludes foreign businesses, commercial and other.
(2)	Total including foreign businesses was 9.7 percent at June 30, 2006, 10.1 percent at March 31, 2006, and 11.3 percent at June 30, 2005.
(3)	Only reflects consumer lending retail sales contracts which have historically been classified as private label. All other domestic private label receivables were sold to HBUS in December 2004.

See “Credit Quality Statistics” for further information regarding owned basis and managed basis delinquency, charge-offs and nonperforming loans.

The amount of domestic and foreign managed receivables in forbearance, modification, credit card services approved consumer credit counseling accommodations, rewrites or other customer account management techniques for which we have reset delinquency and that is not included in the restructured or delinquency statistics was approximately $.4 billion or .3 percent of managed receivables at June 30, 2006, March 31, 2006 and June 30, 2005.

In addition to the above, we granted an initial 30 or 60 day payment deferral (based on product) to customers living in the Katrina FEMA designated Individual Assistance disaster areas. This deferral was extended for a period of up to 90 days or longer in certain cases based on a customer’s specific circumstances, consistent with our natural disaster policies. In certain cases these arrangements have resulted in a customer’s delinquency

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status being reset by 30 days or more. These extended payment arrangements affected approximately $1.1 billion of managed receivables and are not reflected as restructures in the table above or included in the other customer account management techniques described in the paragraph above unless the accounts subsequently qualify for restructuring under our restructure policies and procedures as described in the 2005 Form 10-K.

Liquidity and Capital Resources

We continue to focus on balancing our use of affiliate and third party funding sources to minimize funding expense while managing liquidity. During the second quarter of 2006, we supplemented unsecured debt issuances with proceeds from the continuing sale of newly originated domestic private label receivables to HBUS, debt issued to affiliates, secured financings and higher levels of commercial paper. Because we are a subsidiary of HSBC, our credit ratings have improved and our credit spreads relative to Treasuries have tightened compared to those we experienced during the months leading up to the announcement of our acquisition by HSBC. Primarily as a result of tightened credit spreads and improved funding availability, we recognized cash funding expense savings of approximately $439 million during the six months ended June 30, 2006 (approximately $225 million in the three months ended June 30, 2006) and approximately $252 million during the six months ended June 30, 2005 (approximately $132 million in the three months ended June 30, 2005) compared to the funding costs we would have incurred using average spreads and funding mix from the first half of 2002. These tightened credit spreads in combination with the issuance of HSBC Finance Corporation debt and other funding synergies including asset transfers and debt underwriting fees paid to HSBC affiliates have enabled HSBC to realize a pre-tax 2006 run rate for annual cash funding expense savings in excess of $1 billion per year. In the six months ended June 30, 2006, the cash funding expense savings realized by HSBC totaled approximately $571 million.

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Debt due to affiliates and other HSBC related funding is summarized in the following table:

		June 30,			December 31,
		2006			2005
		(in billions)
Debt issued to HSBC subsidiaries:
	Drawings on bank lines in the U.K and Europe	$	4.3		$	4.2
	Term debt		11.1			11.0
	Preferred securities issued by Household Capital Trust VIII to HSBC		.3			.3
	Total debt outstanding to HSBC subsidiaries		15.7			15.5
Debt outstanding to HSBC clients:
	Euro commercial paper		.3			3.2
	Term debt		1.3			1.3
	Total debt outstanding to HSBC clients		1.6			4.5
Cash received on bulk and subsequent sales of domestic private label credit card receivables to HBUS, net (cumulative)			15.7			15.7
Real estate secured receivable activity with HBUS:
	Cash received on sales (cumulative)		3.7			3.7
	Direct purchases from correspondents (cumulative)		4.2			4.2
	Reductions in real estate secured receivables sold to HBUS		(4.1	)		(3.3	)
Total real estate secured receivable activity with HBUS			3.8			4.6
Cash received from sale of U.K. credit card business to HBEU (cumulative)			2.7			2.6
Capital contribution by HINO subsequent to our acquisition by HSBC in March 2003 (cumulative)			1.2	(1)		1.2	(1)
Total HSBC related funding		$	40.7		$	44.1

⁽¹⁾  This capital contribution was made in December 2005 in connection with the acquisition of Metris.

Funding from HSBC, including debt issuances to HSBC subsidiaries and clients, represented 12 percent of our total managed debt at June 30, 2006 and 15 percent at December 31, 2005. The decrease in funding from HSBC is due to the suspension of certain of our Euro commercial paper programs in the second quarter of 2006 due to pending changes to the settlement process. These programs will be reinstated during the third quarter of 2006.

Cash proceeds from the December 2005 sale of our managed basis U.K. credit card receivables to HBEU of $2.6 billion were used partially to pay down drawings on bank lines from HBEU in the U.K. and partially to fund operations.

At June 30, 2006, we had a commercial paper back stop credit facility of $2.5 billion from HSBC supporting domestic issuances and a revolving credit facility of $5.3 billion from HBEU to fund our operations in the U.K. There have been no draws on the domestic line. At June 30, 2006, $4.3 billion was outstanding under the U.K. lines. We had derivative contracts with a notional value of $94.9 billion, or approximately 92 percent of total derivative contracts, outstanding with HSBC affiliates at June 30, 2006. At December 31, 2005, we had derivative contracts with a notional value of $72.2 billion, or approximately 87 percent of total derivative contracts, outstanding with HSBC affiliates.

Securities and other short-term investments Securities totaled $4.4 billion at June 30, 2006 and $4.1 billion at December 31, 2005. Securities purchased under agreements to resell totaled $6 million at June 30, 2006 and $78 million at December 31, 2005. Interest bearing deposits with banks totaled $448 million at June 30, 2006 and $384 million at December 31, 2005.

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Commercial paper, bank and other borrowings totaled $13.4 billion at June 30, 2006 and $11.4 billion at December 31, 2005. The increase at June 30, 2006 is due to a decision to carry higher commercial paper balances in accordance with our funding strategy. Included in this total was outstanding Euro commercial paper sold to customers of HSBC of $271 million at June 30, 2006 and $3.2 billion at December 31, 2005. The lower levels of Euro commercial paper sold to customers of HSBC at June 30, 2006 is due to the suspension of certain of our Euro commercial paper programs in the second quarter of 2006 due to pending changes to the settlement process. These programs will be reinstated during the third quarter of 2006.

Long term debt (with original maturities over one year) increased to $115.6 billion at June 30, 2006 from $105.2 billion at December 31, 2005. As part of our overall liquidity management strategy, we continue to extend the maturity of our liability profile. Significant third party issuances during the six months ended June 30, 2006 included the following:

•  $5.8 billion of domestic and foreign medium-term notes

•  $3.5 billion of foreign currency-denominated bonds

•  $.9 billion of InterNotes^SM (retail-oriented medium-term notes)

•  $4.0 billion of global debt

•  $5.9 billion of securities backed by real estate secured, auto finance, MasterCard/ Visa and personal non-credit card receivables. For accounting purposes, these transactions were structured as secured financings.

In the first quarter of 2006, we redeemed the junior subordinated notes issued to Household Capital Trust VI with an outstanding principal balance of $206 million.

Selected capital ratios are summarized in the following table:

		June 30,			December 31,
		2006			2005
TETMA(1)			7.67	%		7.56	%
TETMA + Owned Reserves(1)			10.53			10.55
Tangible common equity to tangible managed assets(1)			6.41			6.07
Common and preferred equity to owned assets			12.10			12.43
Excluding purchase accounting adjustments:
	TETMA(1)		8.47			8.52
	TETMA + Owned Reserves(1)		11.33			11.51
	Tangible common equity to tangible managed assets(1)		7.21			7.02

⁽¹⁾  TETMA, TETMA + Owned Reserves and tangible common equity to tangible managed assets represent non-GAAP financial ratios that are used by HSBC Finance Corporation management and certain rating agencies to evaluate capital adequacy and may differ from similarly named measures presented by other companies. See “Basis of Reporting” for additional discussion on the use of non-GAAP financial measures and “Reconciliations to GAAP Financial Measures” for quantitative reconciliations to the equivalent GAAP basis financial measure.

In 2006, Standard & Poor’s Corporation raised the senior debt rating for HSBC Finance Corporation from A to AA-, raised the senior subordinated debt rating from A- to A+, raised the commercial paper rating from A-1 to A-1+, and raised the Series B preferred stock rating from BBB+ to A. Also during 2006, Moody’s Investors Service raised the rating for all of our debt with the Senior Debt Rating for HSBC Finance Corporation raised from A1 to Aa3 and the Series B preferred stock rating for HSBC Finance Corporation from A3 to A2. Our short-term rating was also affirmed at Prime-1.

Securitizations and secured financings Securitizations (collateralized funding transactions structured to receive sale treatment under Statement of Financial Accounting Standards No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, a Replacement of FASB Statement No. 125,” (“SFAS No. 140”)) and secured financings (collateralized funding transactions which do not receive sale treatment under SFAS No. 140) of consumer receivables have been a source of funding

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and liquidity for us. Securitizations and secured financings have been used to limit our reliance on the unsecured debt markets.

In a securitization, a designated pool of non-real estate secured consumer receivables is removed from the balance sheet and transferred through a limited purpose financing subsidiary to an unaffiliated trust. This unaffiliated trust is a qualifying special purpose entity (“QSPE”) as defined by SFAS No. 140 and, therefore, is not consolidated. The QSPE funds its receivable purchase through the issuance of securities to investors, entitling them to receive specified cash flows during the life of the securities. The receivables transferred to the QSPE serve as collateral for the securities. At the time of sale, an interest-only strip receivable is recorded, representing the present value of the cash flows we expect to receive over the life of the securitized receivables, net of estimated credit losses and debt service. Under the terms of the securitizations, we receive annual servicing fees on the outstanding balance of the securitized receivables and the rights to future residual cash flows on the sold receivables after the investors receive their contractual return. Cash flows related to the interest-only strip receivables and servicing the receivables are collected over the life of the underlying securitized receivables.

In a secured financing, a designated pool of receivables is conveyed to a wholly owned limited purpose subsidiary which in turn transfers the receivables to a trust which sells interests to investors. Repayment of the debt issued by the trust is secured by the receivables transferred. The transactions are structured as secured financings under SFAS No. 140. Therefore, the receivables and the underlying debt of the trust remain on our balance sheet. We do not recognize a gain in a secured financing transaction. Because the receivables and the debt remain on our balance sheet, revenues and expenses are reported consistently with our owned balance sheet portfolio. Using this source of funding results in similar cash flows as issuing debt through alternative funding sources.

Securitizations are treated as secured financings under IFRSs and previously under U.K. GAAP. In order to align our accounting treatment with that of HSBC initially under U.K. GAAP and now under IFRSs, we began to structure all new collateralized funding transactions as secured financings in the third quarter of 2004. However, because existing public MasterCard and Visa credit card transactions were structured as sales to revolving trusts that require replenishments of receivables to support previously issued securities, receivables will continue to be sold to these trusts and the resulting replenishment gains recorded until the revolving periods end, the last of which is currently projected to occur in the fourth quarter of 2007. We will continue to replenish at reduced levels, certain personal non-credit card and MasterCard/ Visa securities privately issued to conduits and record the resulting replenishment gains for a period of time in order to manage liquidity. Since our securitized receivables have varying lives, it will take time for these receivables to pay-off and the related interest-only strip receivables to be reduced to zero. The termination of sale treatment on new collateralized funding activity reduced our reported net income under U.S. GAAP. There was no impact, however, on cash received. Because we believe the market for securities backed by receivables is a reliable, efficient and cost-effective source of funds, we will continue to use secured financings of consumer receivables as a source of our funding and liquidity.

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There were no securitizations (excluding replenishments of certificateholder interests) during the three or six months ended June 30, 2006 or June 30, 2005. Secured financings are summarized in the following table:

Three months ended June 30,	2006		2005
	(in millions)
Secured financings:
Real estate secured	$	-	$	919
Auto finance		944		998
MasterCard/Visa		985		500
Personal non-credit card		2,500		-
Total	$	4,429	$	2,417

Six months ended June 30,	2006		2005
	(in millions)
Secured financings:
Real estate secured	$	350	$	919
Auto finance		944		998
MasterCard/Visa		2,105		500
Personal non-credit card		2,500		-
Total	$	5,899	$	2,417

Our securitized receivables totaled $1.9 billion at June 30, 2006 compared to $4.1 billion at December 31, 2005. As of June 30, 2006, outstanding secured financings of $17.3 billion were secured by $27.2 billion of real estate secured, auto finance, MasterCard/ Visa and personal non-credit card receivables. Secured financings of $15.1 billion at December 31, 2005 were secured by $21.8 billion of real estate secured, auto finance and MasterCard/Visa receivables. At June 30, 2006, securitizations structured as sales represented 1 percent and secured financings represented 12 percent of the funding associated with our managed funding portfolio. At December 31, 2005, securitizations structured as sales represented 3 percent and secured financings represented 11 percent of the funding associated with our managed funding portfolio.

Commitments We also enter into commitments to meet the financing needs of our customers. In most cases, we have the ability to reduce or eliminate these open lines of credit. As a result, the amounts below do not necessarily represent future cash requirements:

	June 30,		December 31,
	2006		2005
	(in billions)
Private label, MasterCard and Visa credit cards	$	180.7	$	176.2
Other consumer lines of credit		7.1		15.0
Open lines of credit(1)	$	187.8		191.2

⁽¹⁾  Includes an estimate for acceptance of credit offers mailed to potential customers prior to June 30, 2006 and December 31, 2005.

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2006 funding strategy Our current estimated domestic funding needs and sources for 2006 are summarized in the table that follows:

		Actual		Estimated
		January 1		July 1
		through		through		Estimated
		June 30,		December 31,		Full Year
		2006		2006		2006
		(in billions)
Funding needs:
	Net asset growth	$	12	$	1 - 11	$	13 - 23
	Commercial paper, term debt and securitization maturities		21		9 - 15		30 - 36
	Other		0		1 - 3		1 - 3
	Total funding needs	$	33	$	11 - 29	$	44 - 62
Funding sources:
	External funding, including commercial paper	$	32	$	11 - 25	$	43 - 57
	HSBC and HSBC subsidiaries		1		0 - 4		1 - 5
	Total funding sources	$	33	$	11 - 29	$	44 - 62

Risk Management

Credit Risk There have been no significant changes in our approach to credit risk management since December 31, 2005.

At June 30, 2006, we had derivative contracts with a notional value of approximately $103.6 billion, including $94.9 billion outstanding with HSBC affiliates. Most swap agreements, both with unaffiliated and affiliated third parties, require that payments be made to, or received from, the counterparty when the fair value of the agreement reaches a certain level. Generally, third-party swap counterparties provide collateral in the form of cash which is recorded in our balance sheet as other assets or derivative related liabilities and totaled $110 million at June 30, 2006 and $91 million at December 31, 2005. When the fair value of our agreements with affiliate counterparties requires us to post collateral, it is provided in the form of cash which is recorded on our balance sheet in other assets. Beginning in the second quarter of 2006, when the fair value of our agreements with affiliate counterparties requires the posting of collateral by the affiliate, it is provided in the form of cash. Previously, the posting of collateral by affiliates was provided in the form of securities, which were not recorded on our balance sheet. At June 30, 2006 and December 31, 2005, the fair value of our agreements with affiliate counterparties was below the level requiring the posting of collateral.

Liquidity Risk There have been no significant changes in our approach to liquidity risk since December 31, 2005.

Market Risk HSBC Group has certain limits and benchmarks that serve as guidelines in determining the appropriate levels of interest rate risk. One such limit is expressed in terms of the Present Value of a Basis Point (“PVBP”), which reflects the change in value of the balance sheet for a one basis point movement in all interest rates. Our PVBP limit as of June 30, 2006 was $2 million, which includes the risk associated with hedging instruments. Thus, for a one basis point change in interest rates, the policy dictates that the value of the balance sheet shall not increase or decrease by more than $2 million. As of June 30, 2006 we had a PVBP position of $1.3 million reflecting the impact of a one basis point increase in interest rates. At December 31, 2005, we had a PVBP position of less than $1 million reflecting the impact of a one basis point increase in interest rates.

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While the total PVBP position will not change as a result of the loss of hedge accounting following our acquisition by HSBC, the following table shows the components of PVBP:

	June 30,			December 31,
	2006			2005
	(in millions)
Risk related to our portfolio of ineffective hedges	$	(1.9	)	$	(1.4	)
Risk for all other remaining assets and liabilities		3.2			2.3
Total PVBP risk	$	1.3		$	.9

We also monitor the impact that an immediate hypothetical increase or decrease in interest rates of 25 basis points applied at the beginning of each quarter over a 12 month period would have on our net interest income assuming a growing balance sheet and the current interest rate risk profile. The following table summarizes such estimated impact:

	June 30,		December 31,
	2006		2005
	(in millions)
Decrease in net interest income following a hypothetical 25 basis points rise in interest rates applied at the beginning of each quarter over the next 12 months	$	201	$	213
Increase in net interest income following a hypothetical 25 basis points fall in interest rates applied at the beginning of each quarter over the next 12 months	$	80	$	120

These estimates include both the net interest income impact of the derivative positions we have entered into which are considered to be effective hedges under SFAS No. 133 and the impact of economic hedges of certain underlying debt instruments which do not qualify for hedge accounting as previously discussed, as if they were effective hedges under SFAS No. 133. These estimates also assume we would not take any corrective actions in response to interest rate movements and, therefore, exceed what most likely would occur if rates were to change by the amount indicated.

As part of our overall risk management strategy to reduce earnings volatility, in 2005 a significant number of our derivatives which had not previously qualified for hedge accounting under SFAS No. 133, have been designated as effective hedges using the long-haul method of accounting, and certain other interest rate swaps were terminated. This will significantly reduce the volatility of the mark-to-market on the previously non-qualifying derivatives which have been designated as effective hedges going forward, but will result in the recording of ineffectiveness under the long-haul method of accounting under SFAS No. 133. In order to further reduce earnings volatility that would otherwise result from changes in interest rates, we continue to evaluate the steps required to regain hedge accounting treatment under SFAS No. 133 for the remaining swaps which do not currently qualify for hedge accounting. These derivatives remain economic hedges of the underlying debt instruments. We will continue to manage our total interest rate risk on a basis consistent with the risk management process employed since the acquisition.

Insurance Risk The principal insurance risk we face is that the cost of claims combined with acquisition and administration costs may exceed the aggregate amount of premiums received and investment income earned. We manage our insurance risks through the application of formal pricing, underwriting, and claims procedures. These procedures are also designed to ensure compliance with regulations.

Operational Risk There has been no significant change in our approach to operational risk management since December 31, 2005.

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RECONCILIATIONS TO GAAP FINANCIAL MEASURES

		Three months ended						Six months ended
		June 30,			June 30,			June 30,			June 30,
		2006			2005			2006			2005
		(dollars are in millions)
Return on Average Assets:
Net income		$	568		$	472		$	1,456		$	1,098
Average assets:
	Owned basis	$	167,505		$	134,834		$	165,097		$	133,394
	Serviced with limited recourse		2,620			10,203			3,062			11,543
	Managed basis	$	170,125		$	145,037		$	168,159		$	144,937
Return on average owned assets			1.36	%		1.40	%		1.76	%		1.65	%
Return on average managed assets			1.34			1.30			1.73			1.52
Return on Average Common Shareholder’s Equity:
Net income		$	568		$	472		$	1,456		$	1,098
Dividends on preferred stock			(9	)		(19	)		(18	)		(37	)
Net income available to common shareholders		$	559		$	453		$	1,438		$	1,061
Average common shareholder’s equity		$	19,975		$	16,671		$	19,677		$	16,421
Return on average common shareholder’s equity			11.19	%		10.87	%		14.62	%		12.92	%
Net Interest Income:
Net interest income:
	Owned basis	$	2,549		$	2,035		$	5,013		$	3,923
	Serviced with limited recourse		67			249			170			581
	Managed basis	$	2,616		$	2,284		$	5,183		$	4,504
Average interest-earning assets:
	Owned basis	$	153,021		$	119,523		$	150,144		$	116,254
	Serviced with limited recourse		2,620			10,203			3,062			11,543
	Managed basis	$	155,641		$	129,726		$	153,206		$	127,797
Owned basis net interest margin			6.66	%		6.81	%		6.68	%		6.75	%
Managed basis net interest margin			6.72			7.04			6.77			7.05
Managed Basis Risk Adjusted Revenue:
Net interest income		$	2,616		$	2,284		$	5,183		$	4,504
Other revenues			1,103			976			2,459			2,172
Excluding:
	Securitization related revenue		71			217			125			525
	Mark-to-market on derivatives which do not qualify as effective hedges and ineffectiveness associated with qualifying hedges under SFAS No. 133		9			(58	)		(44	)		(303	)
	Net charge-offs		(1,121	)		(1,028	)		(2,111	)		(2,146	)
Risk adjusted revenue		$	2,678		$	2,391		$	5,612		$	4,752
Average interest-earning assets		$	155,641		$	129,726		$	153,206		$	127,797
Managed basis risk adjusted revenue			6.88	%		7.37			7.33	%		7.44

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RECONCILIATIONS TO GAAP FINANCIAL MEASURES

		Three months ended									Six months ended
		June 30,			March 31,			June 30,			June 30,			June 30,
		2006			2006			2005			2006			2005
		(dollars are in millions)
Consumer Net Charge-off Ratio:
Consumer net charge-offs:
	Owned basis	$	1,079		$	928		$	844		$	2,007		$	1,700
	Serviced with limited recourse		41			62			184			103			439
	Managed basis	$	1,120		$	990		$	1,028		$	2,110		$	2,139
Average consumer receivables:
	Owned basis	$	149,933		$	143,893		$	115,354		$	146,913		$	112,141
	Serviced with limited recourse		2,620			3,505			10,203			3,062			11,543
	Managed basis	$	152,553		$	147,398		$	125,557		$	149,975		$	123,684
Owned basis consumer net charge-off ratio			2.88	%		2.58	%		2.93	%		2.73	%		3.03	%
Managed basis consumer net charge-off ratio			2.94			2.69			3.28			2.81			3.46
Reserves as a Percent of Net Charge-offs
Loss reserves:
	Owned basis	$	4,649		$	4,468		$	3,756		$	4,649		$	3,756
	Serviced with limited recourse		91			161			525			91			525
	Managed basis	$	4,740		$	4,629		$	4,281		$	4,740		$	4,281
Net charge-offs:
	Owned basis	$	1,080		$	928		$	844		$	2,008		$	1,707
	Serviced with limited recourse		41			62			184			103			439
	Managed basis	$	1,121		$	990		$	1,028		$	2,111		$	2,146
Owned basis reserves as a percent of net charge-offs			107.6	%		120.4	%		111.3	%		115.8	%		110.0	%
Managed basis reserves as a percent of net charge-offs			105.7			116.9			104.1			112.3			99.7
Efficiency Ratio:
Total costs and expenses less policyholders’ benefits		$	1,496		$	1,532		$	1,375		$	3,028		$	2,831
Net interest income and other revenues less policyholders’ benefits:
	Owned basis	$	3,641		$	3,797		$	3,092		$	7,438		$	6,356
	Serviced with limited recourse		(29	)		8			52			(21	)		82
	Managed basis	$	3,612		$	3,805		$	3,144		$	7,417		$	6,438
Owned basis efficiency ratio			41.09	%		40.35	%		44.47	%		40.71	%		44.54	%
Managed basis efficiency ratio			41.42			40.26			43.73			40.83			43.97

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RECONCILIATIONS TO GAAP FINANCIAL MEASURES

		June 30,			March 31,			June 30,
		2006			2006			2005
		(dollar amounts are in millions)
Two-Months-and-Over-Contractual Delinquency:
Consumer two-months-and-over-contractual delinquency:
	Owned basis	$	5,652		$	5,312		$	4,419
	Serviced with limited recourse		110			153			484
	Managed basis	$	5,762		$	5,465		$	4,903
Consumer receivables:
	Owned basis	$	153,779		$	146,580		$	118,532
	Serviced with limited recourse		1,911			3,109			8,980
	Managed basis	$	155,690		$	149,689		$	127,512
Consumer two-months-and-over-contractual delinquency:
	Owned basis		3.68	%		3.62	%		3.73	%
	Managed basis		3.70			3.65			3.85
Reserves as a Percentage of Receivables:
Loss reserves:
	Owned basis	$	4,649		$	4,468		$	3,756
	Serviced with limited recourse		91			161			525
	Managed basis	$	4,740		$	4,629		$	4,281
Receivables:
	Owned basis	$	153,959		$	146,767		$	118,761
	Serviced with limited recourse		1,911			3,109			8,980
	Managed basis	$	155,870		$	149,876		$	127,741
Reserves as a percentage of receivables:
	Owned basis		3.02	%		3.04	%		3.16	%
	Managed basis		3.04			3.09			3.35
Reserves as a Percentage of Nonperforming Loans:
Loss reserves:
	Owned basis	$	4,649		$	4,468		$	3,756
	Serviced with limited recourse		91			161			525
	Managed basis	$	4,740		$	4,629		$	4,281
Nonperforming loans:
	Owned basis	$	4,354		$	4,266		$	3,491
	Serviced with limited recourse		92			126			395
	Managed basis	$	4,446		$	4,392		$	3,886
Reserves as a percentage of nonperforming loans:
	Owned basis		106.8	%		104.7	%		107.6	%
	Managed basis		106.6			105.4			110.2

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RECONCILIATIONS TO GAAP FINANCIAL MEASURES

		June 30,			December 31,
		2006			2005
		(dollars are in millions)
Tangible common equity:
Common shareholder’s equity		$	20,085		$	18,904
Exclude:
	Unrealized (gains) losses on cash flow hedging instruments		(361	)		(260	)
	Minimum pension liability		-			-
	Unrealized gains on investments and interest-only strip receivables		62			3
	Intangible assets		(2,337	)		(2,480	)
	Goodwill		(7,023	)		(7,003	)
Tangible common equity			10,426			9,164
HSBC acquisition purchase accounting adjustments			1,302			1,441
Tangible common equity, excluding HSBC acquisition purchase accounting adjustments		$	11,728		$	10,605
Tangible shareholder’s(s’) equity:
Tangible common equity		$	10,426		$	9,164
Preferred stock			575			575
Mandatorily redeemable preferred securities of Household Capital Trusts			1,477			1,679
Tangible shareholder’s(s’) equity			12,478			11,418
HSBC acquisition purchase accounting adjustments			1,301			1,438
Tangible shareholder’s(s’) equity, excluding HSBC acquisition purchase accounting adjustments		$	13,779		$	12,856
Tangible shareholder’s(s’) equity plus owned loss reserves:
Tangible shareholder’s(s’) equity		$	12,478		$	11,418
Owned loss reserves			4,649			4,521
Tangible shareholder’s(s’) equity plus owned loss reserves			17,127			15,939
HSBC acquisition purchase accounting adjustments			1,301			1,438
Tangible shareholder’s(s’) equity plus owned loss reserves, excluding HSBC acquisition purchase accounting adjustments		$	18,428		$	17,377
Tangible managed assets:
Owned assets		$	170,694		$	156,669
Receivables serviced with limited recourse			1,911			4,074
Managed assets			172,605			160,743
Exclude:
	Intangible assets		(2,337	)		(2,480	)
	Goodwill		(7,023	)		(7,003	)
	Derivative financial assets		(573	)		(234	)
Tangible managed assets			162,672			151,026
HSBC acquisition purchase accounting adjustments			16			(52	)
Tangible managed assets, excluding HSBC acquisition purchase accounting adjustments		$	162,688		$	150,974
Equity ratios:
Common and preferred equity to owned assets			12.10	%		12.43	%
Tangible common equity to tangible managed assets			6.41			6.07
Tangible shareholder’s(s’) equity to tangible managed assets (“TETMA”)			7.67			7.56
Tangible shareholder’s(s’) equity plus owned loss reserves to tangible managed assets (“TETMA + Owned Reserves”)			10.53			10.55
Excluding HSBC acquisition purchase accounting adjustments:
	Tangible common equity to tangible managed assets		7.21			7.02
	TETMA		8.47			8.52
	TETMA + Owned Reserves		11.33			11.51

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Item 4.  Controls and Procedures

We maintain a system of internal and disclosure controls and procedures designed to ensure that information required to be disclosed by HSBC Finance Corporation in the reports we file or submit under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”), is recorded, processed, summarized and reported on a timely basis. Our Board of Directors, operating through its audit committee, which is composed entirely of independent outside directors, provides oversight to our financial reporting process.

We conducted an evaluation, with the participation of the Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report so as to alert them in a timely fashion to material information required to be disclosed in reports we file under the Exchange Act.

There were no changes in our internal controls over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

HSBC Finance Corporation continues the process to complete a thorough review of its internal controls as part of its preparation for compliance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002. Section 404 requires our management to report on, and our external auditors to attest to, the effectiveness of our internal control structure and procedures for financial reporting. As a non-accelerated filer under Rule 12b-2 of the Exchange Act, our first report under Section 404 will be contained in our Form 10-K for the period ended December 31, 2007.

Part II. OTHER INFORMATION

Item 1.  Legal Proceedings

GENERAL

We are parties to various legal proceedings resulting from ordinary business activities relating to our current and/or former operations. Certain of these actions are or purport to be class actions seeking damages in very large amounts. These actions assert violations of laws and/or unfair treatment of consumers. Due to the uncertainties in litigation and other factors, we cannot be certain that we will ultimately prevail in each instance. We believe that our defenses to these actions have merit and any adverse decision should not materially affect our consolidated financial condition.

CONSUMER LITIGATION

During the past several years, the press has widely reported certain industry related concerns that may impact us. Some of these involve the amount of litigation instituted against lenders and insurance companies operating in certain states and the large awards obtained from juries in those states. Like other companies in this industry, some of our subsidiaries are involved in a number of lawsuits pending against them in these states. The cases, in particular, generally allege inadequate disclosure or misrepresentation of financing terms. In some suits, other parties are also named as defendants. Unspecified compensatory and punitive damages are sought. Several of these suits purport to be class actions or have multiple plaintiffs. The judicial climate in these states is such that the outcome of all of these cases is unpredictable. Although our subsidiaries believe they have substantive legal defenses to these claims and are prepared to defend each case vigorously, a number of such cases have been settled or otherwise resolved for amounts that in the aggregate are not material to our operations. Appropriate insurance carriers have been notified as appropriate, and a number of reservations of rights letters have been received.

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CREDIT CARD SERVICES LITIGATION

Since June 2005, HSBC Finance Corporation, HSBC North America Holdings Inc., and HSBC Holdings plc., as well as other banks and the Visa and Master Card associations, were named as defendants in four class actions filed in Connecticut and the Eastern District of New York; Photos Etc. Corp. et al. v. Visa U.S.A., Inc., et al. (D. Conn. No. 3:05-CV-01007 (WWE)): National Association of Convenience Stores, et al. v. Visa U.S.A., Inc., et al. (E.D.N.Y. No. 05-CV 4520 (JG)); Jethro Holdings, Inc., et al. v. Visa U.S.A., Inc. et al. (E.D.N.Y. No. 05-CV-4521 (JG)); and American Booksellers Ass’n v. Visa U.S.A., Inc. et al. (E.D.N.Y. No. 05-CV-5391 (JG)). Numerous other complaints containing similar allegations (in which no HSBC entity is named) were filed across the country against Visa, MasterCard and other banks. These actions principally allege that the imposition of a no-surcharge rule by the associations and/or the establishment of the interchange fee charged for credit card transactions causes the merchant discount fee paid by retailers to be set at supracompetitive levels in violation of the Federal antitrust laws. In response to motions of the plaintiffs on October 19, 2005, the Judicial Panel on Multidistrict Litigation (the “MDL Panel”) issued an order consolidating these suits and transferred all of the cases to the Eastern District of New York. The consolidated case is: In re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation, MDL 1720, E.D.N.Y. A consolidated, amended complaint was filed by the plaintiffs on April 24, 2006. At this time, we are unable to quantify the potential impact from this action, if any.

SECURITIES LITIGATION

In August 2002, we restated previously reported consolidated financial statements. The restatement related to certain MasterCard and Visa co-branding and affinity credit card relationships and a third party marketing agreement, which were entered into between 1992 and 1999. All were part of our Credit Card Services segment. In consultation with our prior auditors, Arthur Andersen LLP, we treated payments made in connection with these agreements as prepaid assets and amortized them in accordance with the underlying economics of the agreements. Our current auditor, KPMG LLP, advised us that, in its view, these payments should have either been charged against earnings at the time they were made or amortized over a shorter period of time. The restatement resulted in a $155.8 million, after-tax, retroactive reduction to retained earnings at December 31, 1998. As a result of the restatement, and other corporate events, including, e.g., the 2002 settlement with 50 states and the District of Columbia relating to real estate lending practices, HSBC Finance Corporation, and its directors, certain officers and former auditors, have been involved in various legal proceedings, some of which purport to be class actions. A number of these actions allege violations of Federal securities laws, were filed between August and October 2002, and seek to recover damages in respect of allegedly false and misleading statements about our common stock. These legal actions have been consolidated into a single purported class action, Jaffe v. Household International, Inc., et al., No. 02 C 5893 (N.D. Ill., filed August 19, 2002), and a consolidated and amended complaint was filed on March 7, 2003. On December 3, 2004, the court signed the parties’ stipulation to certify a class with respect to the claims brought under §10 and §20 of the Securities Exchange Act of 1934. The parties stipulated that plaintiffs will not seek to certify a class with respect to the claims brought under §11 and §15 of the Securities Act of 1933 in this action or otherwise.

The amended complaint purports to assert claims under the Federal securities laws, on behalf of all persons who purchased or otherwise acquired our securities between October 23, 1997 and October 11, 2002, arising out of alleged false and misleading statements in connection with our sales and lending practices, the 2002 state settlement agreement referred to above, the restatement and the HSBC merger. The amended complaint, which also names as defendants Arthur Andersen LLP, Goldman, Sachs & Co., and Merrill Lynch, Pierce, Fenner & Smith, Inc., fails to specify the amount of damages sought. In May 2003, we, and other defendants, filed a motion to dismiss the complaint. On March 19, 2004, the Court granted in part, and denied in part the defendants’ motion to dismiss the complaint. The Court dismissed all claims against Merrill Lynch, Pierce, Fenner & Smith, Inc. and Goldman Sachs & Co. The Court also dismissed certain claims alleging strict liability for alleged misrepresentation of material facts based on statute of limitations grounds. The claims that remain against some or all of the defendants essentially allege the defendants knowingly made

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a false statement of a material fact in conjunction with the purchase or sale of securities, that the plaintiffs justifiably relied on such statement, the false statement(s) caused the plaintiffs’ damages, and that some or all of the defendants should be liable for those alleged statements. On February 28, 2006, the Court has also dismissed all alleged §10 claims that arose prior to July 30, 1999, shortening the class period by 22 months. The discovery schedule has been extended and no final cut-off has been established at this time. Separately, one of the defendants, Arthur Andersen, entered into a settlement of the claims against Andersen. This settlement received Court approval in April 2006. At this time, we are unable to quantify the potential impact from this action, if any.

With respect to this securities litigation, we believe that we have not, and our officers and directors have not, committed any wrongdoing and in each instance there will be no finding of improper activities that may result in a material liability to us or any of our officers or directors.

Item 1A.  Risk Factors

Risk factors were set forth in the Form 10-Q for the period ended March 31, 2006. There have been no material changes from the risk factors disclosed in that Form 10-Q.

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Item 6.  Exhibits

Exhibits included in this Report:

12	Statement of Computation of Ratio of Earnings to Fixed Charges and to Combined Fixed Charges and Preferred Stock Dividends
31	Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32	Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.1	Debt and Preferred Stock Securities Ratings

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Signature

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

HSBC Finance Corporation

(Registrant)

/s/ Beverley A. Sibblies

Beverley A. Sibblies

Senior Vice President and

Chief Financial Officer

Date: July 31, 2006

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Exhibit Index

12	Statement of Computation of Ratio of Earnings to Fixed Charges and to Combined Fixed Charges and Preferred Stock Dividends
31	Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32	Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.1	Debt and Preferred Stock Securities Ratings

68