----------------------- Page 1----------------------HSBC, Bangladesh Disclosure on Risk Based Capital requirement under Pillar III of Basel II for the

e year ended 31 December 2011 ----------------------- Page 2----------------------The Hongkong and Shanghai Banking Corpora tion Limited Bangladesh Branc hes Disclosures on Risk Based Capital requirement under Pillar - III of Basel II for the year ended 31 Dece mber 2011 1 Disclosure Policy

The following detailed qualitative and quantitative disclosures are provi ded in accordance with Bangladesh Bank rules and regulations on capital adequacy under Basel II issued through BRPD Circular 10 (10 March 2010 and BRPD Circular 24 (03 August 2010). The purpose of these requirements is to complement the capital adequacy requirements and the Pillar II Supervisory review process. These disclosures are intended for market participants to assess key information about the Banks exposure to various risks and to provide a consistent and understandable disclosure framework as per regulatory requirement. The Ba nk has an approved disclosure policy to observe the disclosure requirements set out by the Bangladesh Bank and International Financial Reporting Standards (IFRS) and International Accounting Standards (IAS) as adopted by the Institute of Chartered Accountants of B angladesh (ICAB) into Bangladesh Accounting Standards (BAS) and Bangladesh Financial Reporting Standards (BFRS) where relevant to the Bank. The major highlights of the Bangladesh Bank regulations are: To maintain capital adequacy ratio (CAR) at a minimum of 10% of Risk We ighted Assets; To adopt the standardised approach for credit risk for implementing Bas el II, using national discretion for: - adopting the credit rating agencies as external credit asse ssment institutions (ECAI) for claims on sovereigns and banks; - adopting simple/comprehensive approach for Credit Risk Miti gation (CRM). - all unrated corporate exposures are risk weighted by assign ing 125% of risk weight. To adopt standardized approach for market risk and basic indicator appr oach for operational risk. Capital adequacy returns must be submitted to Bangladesh Bank on a quar terly basis. 2 Scope of Application

The Bank has no subsidiaries or significant investments and Basel II is a pplied at the Bank level only.

Disclosure framework The disclosure requirements as per the Bangladesh Bank Basel II Guideline are described below.

Assets The assets of HSBC Bangaldesh are categorised as follows: Banking book assets Trading book assets

Assets in Held for Trading (HFT) portfolios are generally treated as part of the trading book. All others assets of the balance sheet are treated as part of the banking book. The following are the components of the earning assets and non-earning as sets of HSBC Bangladesh Earning assets Loans and advances to customers Investments in securities Money at call & short notice Balances with other banks and financial institutions Income generating other assets receivable from offshore on an arm lengt h basis Page 1 ----------------------- Page 3----------------------Non -earning assets Balance with Bangladesh Bank for maintaining cash reserve ratio Cash Fixed assets Other assets The balance sheet size of HSBC Bangladesh expanded by 24% compared to tha t at December 2010. The balance sheet expansion was mainly funded by a growth of 22% in customer deposits as the bank had initiated various deposit campaigns to attract and retain customer deposits. The Bank has invested this fund in Loans & Advances to cust omer. Fund based Advances increased by approximately 27% compared to that on 31 December 2010. Assets are monitored on a regular basis to cope with unexpected risk. Assets Liability Committee (ALCO) monitors and reviews the behavior patterns of the assets. Assets are classified as per the directive of the Bangladesh Bank. Classified assets are mainly a portion of loans and advances (i.e. 1.34% of Tota l loans and advances) which are calculated on a formulaic approach as per directive of Bangladesh Bank. Classified assets has increased by 49% compared to that on 31 December 2010. The ALCO regularly reviews the Bank s overall asset and liability position, over

all economic position, the Bank s liquidity position, capital adequacy, balance sheet risk , Interest risk and makes necessary changes in its mix as and when required. The Bank has a Risk Management Committee (RMC) comprising all the members of the ALCO and other risk related fu nction heads to manage various risks within the Bank including the credit risk. As per the Bangladesh Bank guideline, implementation of core risk management guideline are in place. Banking book assets 2011 BDT Cash and cash equivalents Cash in hand Balance with 1,287,490,412 Bangladesh 10,068,475,292 11,355,965,704 Investment Government Securities 4,066,669,343 Prize Bond 1,604,400 4,068,273,743 1,965,200 1,074,963,840 1,072,998,640 1,091,589,160 8,523,651,265 9,615,240,425 2010 BDT

Claims on Banks Balance with other bank and FI-in Bangladesh 197,152,351 215,181,465 Balance with other bank and FI-outside 1,863,217,960 1,185,436,381 Money at call and short 2,858,232,500 3,035,000,000 4,918,602,811 Loans & advances Past due claims Corporate 825,388,492 Consumer 297,486,837 1,122,875,329 Unclassified Corporate 40,548,441,966 Consumer 19,084,569,748 59,633,011,714 15,350,849,692 46,949,502,378 Page 2 ----------------------- Page 4----------------------Other assets (including fixed assets) BDT Fixed assets BDT 31,598,652,686 318,606,202 827,960,006 509,353,804 4,435,617,846

485,133,075 Intangible assets 14,784,461 3 Offshore Banking Unit 12,417,685,267 Item in Course of collection from Bangladesh Bank 411,948,167 Item in Course of collection from other banks 666,658 3

348,138,726 12,036,28 9,922,027,978 619,685,988 13,102,14

Encashment of BSP awaiting for reimbursement from Bangladesh Bank 625,198,420 917,488,472 Accrued coupon interest on Bangladesh Government treasury bond 72,805,695 56,742,74 6 CDBL shares 6,000,000 00 Staff Loans secured by Residential Property 510,602,808 Other assets 811,883,264 15,356,707,815 Total assets 96,455,437,116 Trading book assets HFT securities 4,541,864,778 Total assets 100,997,301,894 5 Credit Risk 81,538,347,419 5,698,094,871 75,840,252,548 612,119,152 12,936,968,053 429,626,565 6,000,0

Credit risk is the risk of financial loss if a customer or counterparty f ails to meet a payment obligation under a contract. It arises principally from direct lending, trade finance and leasing business, but also from of f-balance sheet products such as guarantees and credit derivatives, and from the holdings of debt securities. HSBC Bangladesh has standards, policies and procedures dedicated to controlling and monitoring risk from all such activities. Among the risks the HSBC Banglad esh engages in, credit risk generates the largest regulatory cap ital requirement. The aims of credit risk management, underpinning sustainably profitable b usiness, are principally

to maintain a strong culture of responsible lending, supported by a robus t risk policy and control framework; to both partner and challenge business originators effectively in definin g and implementing risk appetite, and its re-evaluation under under actual and scenario conditions; and to ensure independent, expert scrutiny and approval of credit risks, thei r costs and their mitigation The standardised approach is applied for risk weighting of exposure as per directive of Bangladesh Bank. It requires banks to use risk assessments prepared by External Credit Assessment Institutions (ECAIs) t o determine the risk weightings applied to rated counterparties. The bank have used some of customer rating based on their entity rating a s assigned by the approved ECAIs of Bangladesh Bank. It is HSBCs policy to establish that loans are within the customers capacit y to repay, rather than to rely excessively on security. Depending on the customers standing and the type of product, facilities may be unsec ured. Nevertheless, collateral can be an important mitigant of credit risk. The bank has the guidelines on the acceptability of specific classes of c ollateral or credit risk mitigation, and determines suitable valuation parameters. Such parameters are expected to be conservative, reviewed reg ularly and supported by empirical evidence. Security structures and legal covenants are required to be subject to regular review to ensur e that they continue to fulfill their intended purpose and remain in line with local market practice. The principal collateral types are as fo llows: Cash collateral In the personal sector, mortgages over residential properties In the commercial and industrial sector, charges over business assets suc h as premises, stock and debtors Pa ge 3 ----------------------- Page 5----------------------Special attention is paid to problem loans and appropriate action is initiated t o protect the Bank s position on a timely basis and to ensure that loan impairment methodologies result in losses being recognised when they ar e incurred. The objective of credit risk management is to minimize the probable losses and maintaining credit risk exposure within accepta ble parameters. HSBC has historically sought to maintain a conservative, yet constructive and co mpetitive credit risk culture. This has served the Group well, through successive economic cycles and remains valid today. This culture i s determined and underpinned by the disciplined credit risk control environment which the Group has put in place to govern and manage credit risk, and which is embodied in the formal policies and procedures adopted by HSBC Bangladesh. These are articulated through Group Credi t Policies supplemented by Regional and Local Area Lending Guidelines, backed up by the Bangladesh Banks Managing Core Risks in Bank ing - Credit Risk Management - Industry Best Practices". Formal policies and procedures cover all areas of credit lending and monitoring processes including:

The Group Credit Risk Policy Framework Risk appetite and evaluation of facilities Key lending constraints and higher-risk sectors Risk rating systems Facility structures Lending to banks, non-banks and sovereigns Personal lending Corporate and commercial lending Portfolio management and stress testing Monitoring, control and the management of problem exposures Impairments and allowances At the heart of these processes is a robust framework of accountability. HSBC op erates a system of personal credit authorities, not credit committee structures. Relationship Managers are held accountable for both the pr ofitability and growth of their loan portfolios as well as the losses that may arise within them. Bank also has established separate Risk and Credit Control Department which looks after Loan Review Mechanism and also helps in ensuring credit compliance with the post-sanction processes/ procedures laid down by the Bank from time to time. It involves taking up independent account-specific reviews of individual credit exposures as per the a pproved lending guideline. Risk department also monitors various credit concentration limits. Bank has in place a risk grading system for analysing the risk associated with credit. The parameters, while risk grading the customers, include financial condition and performance, q uality of disclosures and management, facility structure, collateral and country risk assessment where necessary. Maximum counterparty/gro up exposures are limited to 15% (funded) of the banks capital base as stipulated by Bangladesh Bank where a higher limit is required for projects of national importance prior approval of Bangladesh Bank is obtained. Past dues and impaired exposures are defined in accordance with the relevant Ban gladesh Bank regulations. Specific and general provisions are computed periodically in accordance with the Bangladesh Bank regulations. Gross Credit Risk Exposure 2011 BDT Claims on sovereigns and central banks 11,355,965,704 Claims on banks 4,918,602,811 Investments 4,068,273,743 Claims on corporate 41,373,830,458 Claims on consumer 19,382,056,585 Fixed assets 485,133,075 All other assets 14,871,574,740 Total on-balance sheet items 96,455,437,116 2010 BDT 9,615,240,425 4,435,617,846 1,074,963,840 32,108,006,490 15,669,455,894 348,138,726 12,588,829,327 75,840,252,548

Off-balance sheet items 19,892,010,016 Total 116,347,447,132 90,880,068,788 Page 4 ----------------------- Page 6----------------------Geographical Distribution of Credit Exposure Total 2011 Chittagong Sylhet BDT Claims on sovereigns and central banks 475,077,406 181,229,425 11,355,965,704 Claims on banks 4,918,602,811 Investments 1,249,700 280,000 4,068,273,743 Claims on corporate 4,833,448,566 14,430,599 41,373,830,458 Claims on consumer 3,415,591,350 947,516,891 19,382,056,585 Fixed assets 24,531,331 3,308,302 485,133,075 All other assets 253,641,613 23,730,636 14,871,574,740 Total on-balance sheet items 9,003,539,966 1,170,495,853 96,455,437,116 Off-balance sheet items 1,984,471,344 19,892,010,016 Total 10,988,011,310 1,170,495,853 116,347,447,132 Total Geographical Distribution of Credit Exposure Chittagong Sylhet BDT 2010 Claims on sovereigns and central banks 271,995,426 105,073,784 9,615,240,425 Claims on banks 4,435,617,846 Investments 765,500 210,000 1,074,963,840 Claims on corporate 3,391,476,850 13,175,620 32,108,006,490 Claims on consumer 3,107,113,779 895,080,779 15,669,455,894 Fixed assets 31,769,152 5,307,849 348,138,726 All other assets 458,165,273 16,625,547 12,588,829,327 Total on-balance sheet items 7,261,285,980 1,035,473,579 75,840,252,548 Off-balance sheet items 875,701,218 15,039,816,240 Total 8,136,987,198 1,035,473,579 90,880,068,788 15,039,816,240

Dhaka 10,699,658,873 4,918,602,811 4,066,744,043 36,525,951,293 15,018,948,344 457,293,442 14,594,202,491 86,281,401,297 17,907,538,672 104,188,939,969

Dhaka 9,238,171,215 4,435,617,846 1,073,988,340 28,703,354,020 11,667,261,336 311,061,725 12,114,038,507 67,543,492,989 14,164,115,022 81,707,608,011

Page 5 ----------------------- Page 7----------------------Industry Distribution of exposures Total 2011 ndustry Retail Banks & FIs Others Manufacturing BDT I

Claims on sovereigns and central banks 11,355,965,704 Claims on banks Investments 4,068,273,743 Claims on corporate 86,051,698 17,026,443,598 485,133,075 12,417,685,267 2,453,889,473 28,692,253,782 24,033,739,889 8,135,910,840 11,756,099,176 36,828,164,622 35,789,839,065 4,068,273,743 14,561,335,162 41,373,830,458 19,382,056,585 485,133,075 14,871,574,740 14,561,335,162 96,455,437,116 19,892,010,016 14,561,335,162 116,347,447,132 9, 9, 9,7 4,918,602,811 11,355,965,704 4,918,602,811

Claims on consumer 19,382,056,585 Fixed assets All other assets -

Total on-balance sheet items 786,051,698 19,382,056,585 Off-balance sheet items Total 786,051,698 -

19,382,056,585

Industry Distribution of exposures Total 2010 ndustry Retail Banks & FIs Others Manufacturing BDT I

Claims on sovereigns and central banks 9,615,240,425 Claims on banks Investments 4,435,617,846 9,615,240,425 4,435,617,846

1,074,963,840 Claims on corporate 38,241,003 7,970,782,125 348,138,726 9,922,027,978 2,666,801,349 23,972,886,249 12,060,686,040 3,871,729,746 11,168,086,494 27,844,615,995 23,228,772,534

1,074,963,840 17,698,983,362 32,108,006,490 15,669,455,894 348,138,726 12,588,829,327 17,698,983,362 75,840,252,548 15,039,816,240 17,698,983,362 90,880,068,788 Page 6 6, 6, 6,4

Claims on consumer 15,669,455,894 Fixed assets All other assets -

Total on-balance sheet items 438,241,003 15,669,455,894 Off-balance sheet items Total 438,241,003 -

15,669,455,894

----------------------- Page 8----------------------Maturity breakdown of credit exposures in 3 to 12 2011 onths Within 1 to 5 years Within 1 month Over 5 years Within 1 to 3 Total months BDT With m

Claims on sovereigns and central banks Claims on banks Investments 4,521,702,758 6,834,262,946 4,918,602,811 1,604,400 4,066,669,343 13,594,136,968 1,041,357,441 5,945,679,799 103,166 144,399,696 13,056,303,619 522,935,614 37,133,811,163 17,513,947,398 11,355,965,704 4,918,602,811 4,068,273,743 14,476,528,957 41,373,830,458 202,404,168 19,382,056,585 2,517,430 485,133,075 710,993,097 14,871,574,740 15,392,443,652 96,455,437,116 1 10,0 9,4 3

Claims on corporate 33,380,300 3,869,784,233 Claims on consumer 74,816,403 11,817,798,774 Fixed assets 5,372,814 All other assets 90,148,661 332,739,969 391,193,749

Total on-balance sheet items 03,718,178 16,411,516,725

Off-balance sheet items 25,865,130 6,293,415,455 Total 29,583,308 22,704,932,180

3,928,334,945 41,062,146,108 17,513,947,398

5,044,394,486 19,892,010,016 20,436,838,138 116,347,447,132

4,6 14,6

Maturity breakdown of credit exposures 2010 in 3 to 12 onths Within 1 to 5 years BDT Claims on sovereigns and central banks Claims on banks Investments 3,470,067,002 6,145,173,423 4,185,617,846 1,965,200 1,072,998,640 9,451,790,033 821,697,358 3,459,814,435 84,168,339 10,742,121,193 463,389,203 28,673,258,632 10,152,545,400 2,484,044,165 31,157,302,797 10,152,545,400 9,615,240,425 250,000,000 4,435,617,846 1,074,963,840 11,338,294,194 32,108,006,490 176,930,556 15,669,455,894 348,138,726 989,870,473 12,588,829,327 12,755,095,223 75,840,252,548 5,712,157,901 15,039,816,240 18,467,253,124 90,880,068,788 Page 7 ----------------------- Page 9----------------------Credit Risk Mitigation The Bank has adopted the simple approach for credit risk mitigatio n under the Standardised Approach where only considered the cash collaterals against the exposures to calculate the net exposure with appl icable hair cut. 2011 2010 9, 3,2 12, 8,7 3 Within 1 month Over 5 years Within 1 to 3 Total months With m

Claims on corporate 98,509,132 2,519,413,131 Claims on consumer 09,863,030 10,901,150,515 Fixed assets All other assets 52,180,071 263,970,387 341,268,387

Total on-balance sheet items 160,552,233 15,098,801,060 Off-balance sheet items 65,350,350 3,578,263,824 Total 425,902,583 18,677,064,884

BDT Credit secured by financial collateral 9,700,294,414 Net exposure after the application of haircut 3,396,212,430 Specific Provision

BDT 7,802,769,577 2,789,816,497

The Bank follows Bangladesh Bank guidelines regarding loan classification s, provisioning and any other issues related to Non Performing Loan (NPL). Banks internal credit guidelines also directs on managing of NPL, loan provisioning review procedure, debt write off, facility grading, reporting requirements, interest recognitions. However, Banks guidelines will not supersede local regulations. Thus, while dealing with NPL, the Bank s decision is always complied by loc al rules and regulations as well as group guidelines which are more conservative than the local regulations. Throughout the year the Bank reviews loans and advances to assess whether objective evidence that impairment of a loan or portfolio of loans has arisen supporting a change in the classification of loans and a dvances which may result in a change in the provision required in accordance with BRPD Circular No.5 (5 June 2006). The guidance in the cir cular follows a formulaic approach whereby specified rates are applied to the various categories of loans as defined in the circular. The provisioning rates required, as updated by BRPD Circular No. 05 (29 April 2008) are as follows: Specific provision on loans and advances Specific provision on substandard loans and advances / 20% Specific provision on doubtful loans and advances / 50% Specific provision on bad / loss and advances 100% BRPD Circular No.5 (5 June 2006) also provides scope for further provisi oning based on qualitative judgments. In these circumstances impairment losses are calculated on individual loans considered individua lly significant based on which specific provisions are raised. If the specific provisions assessed under the qualitative methodology are higher than the specific provisions assessed under the formulaic approach above, the higher of the two is recognised in liabilities und er Provisions for loans and advances with any movement in the provision charged/released in the profit and loss account. 2011 Gross non performing assets (NPAs) BDT BDT Non performing asset (NPAs) to outstanding loans and advances 821,775,709 551,446,240 Movement of NPAs Opening Balance 551,446,240 Written off during the period (110,601,948) Recoveries during the period (116,040,888) 463,089,516 2010

(87,874,044) Provision made during the 468,805,461 Closing Balance 821,775,709 Movement of specific provision for NPAs Opening Balance 454,293,153 Written off during the period (110,601,948) Recoveries during the period (87,874,044) Provision made during the 250,027,595 Closing Balance 505,844,756 6 Market Risk

(95,992,739) 300,390,351 551,446,240

353,937,123 (116,040,888) (95,992,739) 312,389,657 454,293,153

Page 8 ----------------------- Page 10----------------------Market Risk is the risk to the banks earnings and capital due to changes in the m arket level of interest rates or prices of securities, foreign exchange and equities, as well as the volatilities of those changes. The Bank uses the standardised (market risk) approach to calculate mar ket risk for trading book exposures. Trading book consists of positions in financial instruments held with trading intent or in order to hedge other elements of the Trading Book. A capital charge will be applicable for financial instruments which are free from any restrictive covenan ts on tradability, or able to be hedged completely. Generally, investments in Held for Trading portfolios are focal parts of the Trading Book. Capital charge means an amount of regulatory capital which the bank is required to hold for an exposure to a relevant risk which, if multiplied by 11.11, becomes the risk-weighted amount of that exposure for that risk. Bank has a comprehensive Treasury Risk Policy which inter alia covers assessment , monitoring and management of all the above market risks. Bank has defined various internal limits to monitor market risk and is co mputing the capital requirement as per standardised approach of Basel II. Details of various market risks faced by the Bank are set out below: Interest rate exposures Bank adopts maturity method in measuring interest rate risk in respect of securi ties in trading book. The capital charge for entire market risk exposure is computed under the standardised approach using the ma turity method and in accordance with the guideline issued by Bangladesh Bank. Interest rate exposures in the banking book Interest rate risk is the risk where changes in market interest rates might adve

rsely affect a banks financial condition. The immediate impact of changes in interest rates is on the Net Interest Income (NII). A long term im pact of changing interest rates is on the Banks net worth since the economic value of a Banks assets, liabilities and off-balance sheet pos itions get affected due to variation in market interest rates. The responsibility of interest rate risk management rests with the Banks Asset an d Liability Management Committee (ALCO) and Global Markets (GM) department. Bank periodically computes the interest rate risk on th e banking book that arises due to re-pricing mismatches in interest rate sensitive assets and liabilities. For the purpose of monitoring su ch interest rate risk, the Bank has in place a system that tracks the re-pricing mismatches in interest bearing assets and liabilities. F or computation of the interest rate mismatches the guidelines of Bangladesh Bank are followed. Details relating to re-pricing mismatches and the interest rate risk thereon are placed to the ALCO regularly. In addition, scenario analysis assuming a 100 basis point parallel shift in interest rates and their impact on the interest income and net profit of the Bank are assessed on a quarterly basis and placed to ALCO with proposals for corrective action if neces sary. Foreign Exchange Risk Foreign Exchange Risk is defined as the risk that a bank may suffer losses as a result of adverse exchange rate movements during a period in which it has an open position, either spot or forward, or a combination of th e two, in an individual foreign currency. The responsibility of management of foreign exchange risk rests with the Global Markets of the Bank. The Bank has set up internal limit to monitor foreign exchange open positions. Foreign exchange risk is computed on the sum of net sho rt positions or net long positions, whichever is higher of the foreign currency positions held by the Bank. Page 9 ----------------------- Page 11----------------------Equity Position Risk The Bank does not hold trading position in equities. The capital charge for various components of market risk is presented bel ow: The capital requirement for: 2011 BDT Interest rate risk 12,246,895 Equity position risk Foreign exchange risk 21,212,530 Commodity risk 89,576,828 23,757,574 2010 BDT

33,459,425 7 Operational Risk

113,334,402

Operational risk is the risk of loss arising from fraud, unauth orised activities, error, omission, inefficiency, systems failure or extern al events. It is inherent in every business organisation and covers a wide s pectrum of issues. The HSBC group manages this risk through a control based environment in which processes are documented, authorisatio n is independent and transactions are reconciled and monitored. This is supported by an independent programme of periodic reviews underta ken by internal audit, and by monitoring external operational risk events, which ensure that the group stays in line with indus try best practice and takes account of lessons learned from publicised operational failures within the financial services industry. The HSBC Group has codified its operational risk management process by is suing a high level standard, supplemented by more detailed formal guidance. This explains how the Group manages operational risk by identifying, assessing, monitoring, controlling and mitigating the risk, rectifying operational risk events, and implementing any additional procedures required for compliance with local regulator y requirements. The standard covers the following: Operational risk management responsibility is assigned to senior managem ent within the business operation; Information systems are used to record the identification and as sessment of operational risks and to generate appropriate, regular management reporting; Assessments are undertaken of the operational risks facing each business and the risks inherent in its processes, activities and products. Risk assessment incorporates a regular review of identified risks to mo nitor significant changes; Operational risk loss data is collected and reported to senior managemen t. Aggregate operational risk losses are recorded and details of incidents above a materiality threshold are reported to the Groups Audit Committee; and Risk mitigation, including insurance, is considered where this is cost-e ffective. The group maintains and tests contingency facilities to support operations in the event of disasters. Additional reviews and tests are conducted in the event that any HSBC office is affected by a business dis ruption event, to incorporate lessons learned in the operational recovery from those circumstances. Plans have been prepared for the conti nued operation of the Groups business, with reduced staffing levels. In line with the instructions from the Bangladesh Bank the Bank uses the basic indicator approach to calculate its operational risk. 2011 BDT 2010 BDT

Capital Charge for operational risk 898,168,105 772,039,599 Capital charge means an amount of regulatory capital which the ban k is required to hold for an exposure to a relevant risk which, if multiplied by 10% becomes the risk weighted amount of that exposure for th at risk. Page 10 ----------------------- Page 12----------------------8 8.1 Capital Regulatory Capital

HSBC Bangladesh capital structure consists of Tier I capital and Tier II capital. The regulatory capital is broadly classified into three categories Tier I, Tier II and Tier III. The computation of the amount of core (Tier I) and supplementary (Tier II and Tier III) capitals shall be subject to the following conditions: Bank have to maintain at least 50% required capital as Tier I capital. The amount of Tier II capital will be limited to 100% of the amount of T ier I capital. Fifty percent (50%) of asset revaluation reserves shall be eligible for Tier II i.e Supplementary Capital. A minimum of about 28.5% of market risk needs to be supported by Tier I capital. Supporting of Market Risk from Tier III capital shall be limited up to a maximum of 250% of a Banks Tier I capital that is availab le after meeting credit risk capital requirement. Up to 50% of Revaluation Reserves for Securities shall be eligible for T ier II i.e supplementary capital. Subordinated debt shall be limited to a maximum of 30% of the amount of Tier I capital. Tier I capital of the Bank includes fund deposited with Bangladesh Bank, actuarial gain/ (loss) and retained earnings. Tier 1 capital, also called Core Capital of the Bank. According to BRPD Circular No. 11 (12 Dece mber 2011) deferred tax recognition on specific provision shall be deducted from the retained earnings when calculating the capital adequacy ratio. Tier II (supplementary capital) consists of general provision and 50% of revaluation reserve for Held to Maturity (HTM) and Held for Trade (HFT) securities. The use of Tier III (short term subordinated debt) is limited only for pa rt of the requirements of the explicit capital charge for market risks. The Bank does not have any Tier III capital. The details of capital structure are provided as under: 2011 Tier I BDT Fund deposited with Bangladesh Bank 3,034,975,590 BDT 2,645,886,067 2010

Retained earnings 10,500,010,107 Actuarial loss (39,472,681) Deferred Tax Asset on Specific Provision (146,212,070) 13,349,300,946 Tier II General provision 2,004,061,387 1,659,323,540 Unrealized surplus on amortization of HTM securities 19,872,961 8,144,399 Unrealized surplus on revaluation of HFT securities 2,302,751 2,026,237,099 15,375,538,045 8.2 Capital Adequacy 1,667,467,939 10,475,862,043 (57,440,555) 8,808,394,104 6,219,948,592

The Bank has adopted Standardised Approach (SA) for computation of capita l charge for credit risk and market risk, and Basic Indicator Approach (BIA) for operational risk. Assessment of capital adequacy is ca rried out in conjunction with the capital adequacy reporting to the Bangladesh Bank. Page 11 ----------------------- Page 13----------------------The Bank has capital adequacy ratio of 15.89% as against the minimum regulatory requirement of 10%. Tier I capital adequacy ratio is 13.80% against the minimum regulatory requirement of 5%. The Banks policy is to m anage and maintain its capital with the objective of maintaining strong capital ratio and high rating. Bank maintains capital levels that are sufficient to absorb all material risks. The Bank also ensures that the capital levels comply with regulatory requirements and satisfy the external rating agencies and other stakeholders including depositors. The whole objective of the capital management process in the Bank is to ensure that the Bank remains adequately capitalized at all times. The Bank has in place a capital adequacy framework by which the Banks annual budg et projections and the capital required to achieve the business objectives are linked in a cohesive way. Capital requirements are asses sed for credit, market and operational risks. The Banks capital adequacy ratio is periodically assessed and reviewed by the ALCO and rep orted to head office. The composition of capital in terms of Tier I, II and III are also analysed to ensure capital stability and t o reduce volatility in the capital structure. The Bank has a profit remittance policy to ensure first that the Bank has enough capital to com ply with regulatory requirement. The Bank s capital plan also ensures that adequate levels of capital considering the planned organic growth o f the business. Position of various risk weighted assets are presented below: 2011 2010

BDT sure Risk Weighted On balance sheet items ,114 72,620,186,170 Off balance sheet items ,016 14,807,201,237 Total credit risk ,130 87,427,387,407 Market risk 25.00 334,594,249 Total Exposure 75,840,252,548 15,039,816,240 90,880,068,788 113,334,402.00 772,039,599 91,765,442,789 2011 Detail of capital adequacy BDT Capital requirement for credit risk 8,742,738,740 Capital requirement for market risk 33,459,425 Capital requirement for operational risk 898,168,105 Total required capital 9,674,366,270 Total tier I capital 13,349,300,946 Total tier II capital 2,026,237,099 Total tier III capital Total regulatory capital 15,375,538,045 Surplus 5,701,171,775 % of Capital adequacy required Tier I 5% Total 10% % of Capital adequacy maintained Tier I 13.80% Total 15.89%

BDT Total Expo Risk Weighted 96,455,437 59,001,349,455 19,892,010 12,425,409,702 116,347,447 71,426,759,157 33,459,4 1,259,145,212 898,16 8,577,359,946 117,279,074 81,263,264,315 2010 BDT 6,428,408,324 113,323,069 771,962,395 7,313,693,788 8,808,394,104 1,667,467,939 10,475,862,043 3,162,168,255

Operational risk 8,105 8,981,681,046 Total risk weighted assets ,660 96,743,662,702

4.5% 9%

10.84% 12.89% Page 12

----------------------- Page 14-----------------------

8.3

Internal Capital Adequacy Assessment Process (ICAAP)

HSBC defines capital as the resources necessary to cover unexpected losse s arising from discretionary risks, being those which it accepts such as credit risk and market risk, or non-discretionary risks, being th ose which arise by virtue of its operations, such as operational risk and reputational risk. The supervisory review process team define the Int ernal Capital Adequacy Assessment Process (ICAAP). The ICAAP is an integral part of bank s capital planning and risk assessm ent infrastructure. The purpose of the ICAAP framework is to provide guidance of the risk assessment and reporting process to be followed when considering the amount and type of capital the bank should maintain to support its business strategy. ICAAP is a key compo nent of BASEL II s Pillar 2 supervisory review process by which supervisory review process team examine the both regulatory and economic capital viewpoints on a forward looking basis, and ensure the following: remains sufficient to support the projected risk profile; exceeds formal, minimum regulatory requirements; would remain sufficient in a projected economic downturn that is more s evere than the current economic condition. Based on the above approach the bank has developed ICAAP, a key comp onent of risk and capital management framework using risk appetite and stress testing matrices. The ICAAP has already been submitte d to the Bangladesh Bank. HSBC indentifies and manages the risks it faces through defined internal control procedures and stress testing. It assesses and manages certain of these risks via the capital planning process. Risks assessed v ia capital and those that are not, are compared in the table below: Risk assessed via capital ssed via capital Credit risk Market risk Operational risk Interest rate risk in the banking book Pension risk Risk not explicitly asse Liquidity risk Reputational risk Sustainability risk Concentration risk Strategic risk

As part of the Basel II implementation, Bangladesh bank had launched the mandatory stress testing on banks from June 2010 to determine the condition of overall financial position of each bank under diffic ult circumstances. As per directive of Central Bank, the bank conducted stress testing based on Simple Sensitivity and Scenario Analysis in which t he bank analysed the balance sheet duration gap and several type of risk such as interest rate risk, exchange rate risk, credit risk, equity price risk, liquidity shock etc. Page 13 ----------------------- Page 15----------------------Issued by the Hongkong and Shanghai banking Corporation Limited in Bangladesh