Discontinued Operations

6 Months Ended

Jun. 30, 2012

Discontinued Operations [Abstract]

Discontinued Operations

2.    Discontinued Operations

2012 Discontinued Operations:

Insurance As discussed in prior filings, our Insurance business has been under a strategic review since the second half of 2011. As part of this review, we previously decided to cease issuing new term life insurance in the United States effective January 2012. During the second quarter of 2012, we completed our strategic review of this business. We decided to exit the manufacturing of all insurance products through the sale of our interest in substantially all of our insurance subsidiaries as this business did not fit with our core strategy in the United States and Canada. Insurance products will continue to be offered to HSBC customers through non-affiliate providers. As a result, our Insurance operations are now part of a disposal group held for sale and we have reported this business as discontinued operations beginning in the second quarter of 2012. At June 30, 2012, disposal group assets consisted primarily of available-for-sale securities totaling $1.7 billion and disposal group liabilities consisted primarily of insurance policy and claim reserves totaling $1.0 billion. Upon classification as held for sale, we recognized other-than-temporary impairment on the unrealized loss associated with these securities totaling $1 million as we no longer have the intent to hold these securities until recovery of the unrealized loss. Our Insurance business was previously included in the “All Other” caption in our segment reporting. Since the carrying value of the disposal group is greater than its estimated fair value less estimated costs to sell, we recorded an after-tax impairment loss of $164 million in the second quarter of 2012 to reflect the disposal group at its estimated fair value less estimated costs to sell on our balance sheet at June 30, 2012. Because our estimate of fair value involves judgment and is influenced by factors outside of our control, there is uncertainty inherent in such estimate, making it reasonably possible such estimate could change.

The following summarizes the operating results of our discontinued Insurance business for the periods presented:

	Three Months  Ended June 30,					Six Months Ended June 30,
	2012			2011		2012			2011
	(in millions)
Net interest income and other revenues (1)	$	(13	)	$	97	$	64		$	182
Income from discontinued operations before income tax		(89	)		13		(100	)		16

⁽¹⁾ Interest expense, which is included as a component of net interest income, was allocated to discontinued operations in accordance with our existing internal transfer pricing policy. This policy uses match funding based on the expected lives of the assets and liabilities of the business at the time of origination, subject to periodic review, as demonstrated by the expected cash flows and re-pricing characteristics of the underlying assets.

The following summarizes the assets and liabilities of which are part of the disposal group held for sale related to our Insurance operations at June 30, 2012 and December 31, 2011 which are reported as a component of Assets of discontinued operations and Liabilities of discontinued operations in our consolidated balance sheet.

	June 30, 2012		December 31, 2011
	(in millions)
Cash	$	3	$	5
Interest bearing deposit with bank		121		3
Available-for-sale securities		1,717		1,851
Other assets		128		143
Assets of discontinued operations	$	1,969	$	2,002
Insurance policy and claim reserves	$	1,012	$	1,049
Other liabilities		208		43
Liabilities of discontinued operations	$	1,220	$	1,092

Commercial Our Commercial business has been in run-off since 1994, with portions of the Commercial business placed in run-off beginning in 1992. Prior to the second quarter of 2012, this business continued to be reported within continuing operations as we continued to generate cash flow from the ongoing collection of the receivables, including interest and fees. Beginning in the second quarter of 2012, we are now reporting our Commercial business in discontinued operations as there are no longer any outstanding receivable balances or any remaining significant cash flows generated from this business. Our Commercial business was previously included in the “All Other” caption in our segment reporting. The following summarizes the operating results of our discontinued Commercial business for the periods presented:

	Three Months Ended June 30,				Six Months Ended June 30,
	2012		2011		2012		2011
	(in millions)
Net interest income and other revenues (1)	$	1	$	2	$	22	$	3
Income from discontinued operations before income tax		-		1		20		2

⁽¹⁾ Interest expense, which is included as a component of net interest income, was allocated to discontinued operations in accordance with our existing internal transfer pricing policy. This policy uses match funding based on the expected lives of the assets and liabilities of the business at the time of origination, subject to periodic review, as demonstrated by the expected cash flows and re-pricing characteristics of the underlying assets.

2011 Discontinued Operations:

Card and Retail Services On May 1, 2012, HSBC, through its wholly-owned subsidiaries HSBC Finance Corporation, HSBC USA Inc and other wholly-owned affiliates, sold its Card and Retail Services business to Capital One Financial Corporation (“Capital One”) for a premium of 8.75 percent of receivables. In addition to receivables, the sale included real estate and certain other assets and liabilities which were sold at book value or, in the case of real estate, appraised value. Under the terms of the agreement, facilities in Chesapeake, Virginia; Las Vegas, Nevada; Mettawa, Illinois; Volo, Illinois; Hanover, Maryland; Salinas, California; Sioux Falls, South Dakota and Tigard, Oregon were sold or transferred to Capital One, although we have entered into site-sharing arrangements for certain of these locations for a period of time. The total cash consideration was $11.8 billion which resulted in a pre-tax gain of $2.2 billion ($1.4 billion after-tax) being recorded during the second quarter of 2012. The majority of the employees in our Card and Retail Services business transferred to Capital One. As such, no significant one-time closure or severance costs were incurred as a result of this transaction. Our Card and Retail Services business is reported in discontinued operations.

The receivables and other assets sold to Capital One were transferred to held for sale during the third quarter of 2011. As a result, we stopped recording provisions for credit losses, including charge-offs, at that time.

The following summarizes the operating results of our discontinued Card and Retail Services business for the periods presented:

	Three Months Ended June 30,				Six Months Ended June 30,
	2012(2)		2011		2012(2)		2011
	(in millions)
Net interest income and other revenues (1)	$	2,431	$	935	$	3,356	$	1,826
Income from discontinued operations before income tax		2,253		186		2,801		497

⁽¹⁾ Interest expense, which is included as a component of net interest income, was allocated to discontinued operations in accordance with our existing internal transfer pricing policy. This policy uses match funding based on the expected lives of the assets and liabilities of the business at the time of origination, subject to periodic review, as demonstrated by the expected cash flows and re-pricing characteristics of the underlying assets.

⁽²⁾ Includes the gain on sale to Capital One of $2.2 billion in the three and six months ended June 30, 2012.

The following summarizes the assets and liabilities of our discontinued Card and Retail Services business at June 30, 2012 and December 31, 2011 which are reported as a component of Assets of discontinued operations and Liabilities of discontinued operations in our consolidated balance sheet.

	June 30, 2012		December 31, 2011
	(in millions)
Cash	$	181	$	96
Receivables		-		9,001
Intangible assets		-		514
Properties and equipment, net		-		95
Deferred income taxes, net		25		-
Other assets		50		1,102
Assets of discontinued operations	$	256	$	10,808
Long-term debt	$	-	$	211
Other liabilities		393		1,257
Liabilities of discontinued operations	$	393	$	1,468

Intangible assets at December 31, 2011 included $29 million, net, that related to account relationships we purchased from HSBC Bank USA, N.A. (“HSBC Bank USA”) in July 2004. All new receivable originations on these account relationships were sold on a daily basis to HSBC Bank USA and we serviced the receivables for a fee. In March 2012, we sold these account relationships to HSBC Bank USA resulting in a gain of $79 million being recorded during the first quarter of 2012 which is included as a component of income from discontinued operations. All remaining intangible assets at December 31, 2011 relate to cardholder relationships which were sold to Capital One on May 1, 2012.

We had secured conduit credit facilities with commercial banks which provided for secured financings of credit card receivables on a revolving basis totaling $650 million at December 31, 2011. At December 31, 2011, secured financings with a balance of $195 million were secured by $355 million of credit card receivables. These secured financings were paid in full on April 30, 2012.

We previously entered into commitments to meet the financing needs of our credit card customers. At December 31, 2011, we had $105.0 billion of open consumer lines of credit. As a result of the sale of the Card and Retail Services business, the open line of credit commitments were transferred to Capital One on May 1, 2012.

2010 Discontinued Operations:

Taxpayer Financial Services (“TFS”) In December 2010, it was determined that we would not offer any tax refund anticipation loans or related products for the 2011 tax season and we exited the TFS business. As a result of this decision, our TFS business is reported in discontinued operations. The assets and liabilities of our TFS business as of June 30, 2012 and December 31, 2011 were not significant.

The following summarizes the operating results of our TFS business for the periods presented:

	Three Months Ended June 30,					Six Months Ended June 30,
	2012		2011			2012		2011
	(in millions)
Net interest income and other revenues (1)	$	-	$	-		$	-	$	1
Income from discontinued operations before income tax		-		(3	)		-		(4	)

⁽¹⁾ Interest expense, which is included as a component of net interest income, was allocated to discontinued operations in accordance with our existing internal transfer pricing policy. This policy uses match funding based on the expected lives of the assets and liabilities of the business at the time of origination, subject to periodic review, as demonstrated by the expected cash flows and re-pricing characteristics of the underlying assets.

Auto Finance In August 2010, we sold the remainder of our auto finance receivable portfolio with an outstanding principal balance of $2.6 billion at the time of sale and other related assets to Santander Consumer USA Inc. The aggregate sales price for the auto finance receivables and other related assets was $2.5 billion which included the transfer of $431 million of indebtedness secured by auto finance receivables, resulting in net cash proceeds of $2.1 billion. As a result of this transaction, our Auto Finance business is reported as discontinued operations. The assets and liabilities of our Auto Finance business as of June 30, 2012 and December 31, 2011 were not significant.

The following summarizes the operating results of our Auto Finance business for the periods presented:

	Three Months Ended June 30,					Six Months Ended June 30,
	2012		2011			2012		2011
	(in millions)
Net interest income and other revenues (1)	$	-	$	-		$	-	$	-
Income from discontinued operations before income tax		-		(2	)		-		(4	)

⁽¹⁾ Interest expense, which is included as a component of net interest income, was allocated to discontinued operations in accordance with our existing internal transfer pricing policy. This policy uses match funding based on the expected lives of the assets and liabilities of the business at the time of origination, subject to periodic review, as demonstrated by the expected cash flows and re-pricing characteristics of the underlying assets.