Annual Financial Report - 11 of 48

RNS Number : 3646B

HSBC Holdings PLC

03 April 2013

 



Disposals, held for sale and run-off portfolios

In implementing our strategy, we have sold or agreed to sell a number of businesses and investments across the Group. We expect these disposals to have a significant effect on both the revenue and the profitability of the global businesses in the future. In addition, significant portfolios are being run down. We expect the losses on these portfolios to continue to affect the global businesses in the future.

The table below presents the contribution of these businesses and investments to the historical results of global businesses. We do not expect the historical results to be indicative of future results because of disposal or run-off. Fixed allocated costs, included in total operating costs, will not necessarily be removed upon disposal and have been separately identified on page 53.

Summary income statements for disposals, held for sale and run-off portfolios^69,70

	2012
	Retail       Banking and Wealth Management           US$m		Commercial       Banking           US$m		Global      Banking               and       Markets           US$m		Global Private      Banking           US$m		Other           US$m
Net interest income/(expense) .............................	4,281		133		35		8		(2)
Net fee income ....................................................	380		-		1		8		-
Net trading income/(expense)78 ............................	(204)		4		160		-		2
Net income/(expense) from financial instruments designated at fair value ..................................... .........................................................................	6		2		10		-		(785)
Gains less losses from financial investments .........	32		1		(70)		-		-
Dividend income ..................................................	3		-		-		-		-
Net earned insurance premiums ............................	518		203		25		-		(1)
Other operating income/(expense) .......................	40		20		(3)		(1)		-
Total operating income/(expense) ..................	5,056		363		158		15		(786)
Net insurance claims incurred and movement in liabilities to policyholders .................................	(297)		(129)		(17)		-		-
Net operating income/(expense)21 ..................	4,759		234		141		15		(786)
Loan impairment charges and other credit risk provisions .................................................	(2,980)		(4)		(168)		-		-
Net operating income/(expense) .....................	1,779		230		(27)		15		(786)
Total operating expenses .....................................	(2,376)		(164)		(165)		(24)		(18)
Operating profit/(loss) .....................................	(597)		66		(192)		(9)		(804)
Share of profit in associates and joint ventures .....	633		89		64		-		-
Profit/(loss) before tax .....................................	36		155		(128)		(9)		(804)
By geographical region
Europe .................................................................	2		-		(283)		(1)		-
Hong Kong ..........................................................	27		13		6		-		-
Rest of Asia-Pacific .............................................	612		91		57		(8)		-
Middle East and North Africa ...............................	10		-		36		-		-
North America .....................................................	(656)		9		2		-		(785)
Latin America ......................................................	41		42		54		-		(19)
Profit/(loss) before tax .........................................	36		155		(128)		(9)		(804)
Gain on sale .........................................................	4,074		476		22		64		3,103

For footnotes, see page 120.

Geographical regions

Summary ............................................................	79
Europe ................................................................	81
Hong Kong .........................................................	88
Rest of Asia-Pacific ............................................	93
Middle East and North Africa .............................	99
North America ...................................................	104
Latin America ....................................................	111
Disposals, held for sale and run-off portfolios .....	117

Summary

Additional information on results in 2012 may be found in the 'Financial Summary' on pages 25 to 54.

In the analysis of profit by geographical regions that follows, operating income and operating expenses include intra‑HSBC items of US$3,358m (2011: US$3,421m; 2010: US$3,125m).

Profit/(loss) before tax

	2012				2011				2010
	US$m		%		US$m		%		US$m		%
Europe .............................................................	(3,414)		(16.5)		4,671		21.3		4,302		22.6
Hong Kong .......................................................	7,582		36.7		5,823		26.6		5,692		29.9
Rest of Asia-Pacific ..........................................	10,448		50.6		7,471		34.2		5,902		31.0
Middle East and North Africa ...........................	1,350		6.5		1,492		6.8		892		4.7
North America .................................................	2,299		11.1		100		0.5		454		2.4
Latin America .................................................. .........................................................................	2,384		11.6		2,315		10.6		1,795		9.4
	20,649		100.0		21,872		100.0		19,037		100.0

Total assets⁷⁴

	At 31 December
	2012				2011
	US$m		%		US$m		%
Europe .......................................................................................................	1,389,240		51.6		1,281,945		50.3
Hong Kong ................................................................................................	518,334		19.3		473,024		18.5
Rest of Asia-Pacific ...................................................................................	342,269		12.7		317,816		12.4
Middle East and North Africa .....................................................................	62,605		2.3		57,464		2.2
North America ...........................................................................................	490,247		18.2		504,302		19.7
Latin America ............................................................................................	131,277		4.9		144,889		5.7
Intra-HSBC items .......................................................................................	(241,434)		(9.0)		(223,861)		(8.8)
	2,692,538		100.0		2,555,579		100.0

Risk-weighted assets⁸⁸

	At 31 December
	2012				2011
	US$bn		%		US$bn		%
Total ...............................................................................................	1,123.9				1,209.5
Europe .............................................................................................	314.7		27.6		340.2		27.8
Hong Kong ......................................................................................	111.9		9.8		105.7		8.6
Rest of Asia-Pacific .........................................................................	302.2		26.4		279.3		22.8
Middle East and North Africa ...........................................................	62.2		5.4		58.9		4.8
North America .................................................................................	253.0		22.2		337.3		27.6
Latin America .................................................................................. .........................................................................................................	97.9		8.6		102.3		8.4

For footnotes, see page 120.

Selected items included in profit before tax by geographical region

Fair value movements arising from changes in own credit spreads²⁶

	2012		2011		2010
	US$m		US$m		US$m
Europe .........................................................................................................	(4,110)		2,947		(198)
Hong Kong ...................................................................................................	-		-		(6)
Rest of Asia-Pacific ......................................................................................	(3)		2		(1)
Middle East and North Africa .......................................................................	(12)		14		-
North America .............................................................................................	(1,090)		970		142
	(5,215)		3,933		(63)

Acquisitions, disposals and dilutions⁷⁵

	2012		2011		2010
	US$m		US$m		US$m
Europe .........................................................................................................	(3)		-		286
Hong Kong ...................................................................................................	420		82		136
Rest of Asia-Pacific ......................................................................................	4,048		1,141		188
Middle East and North Africa .......................................................................	(18)		54		(42)
North America .............................................................................................	4,888		2,192		66
Latin America ..............................................................................................	144		181		-
	9,479		3,650		634

For footnotes, see page 120.

Europe

Our principal banking operations in Europe are HSBC Bank plc in the UK, HSBC France, HSBC Bank A.S. in Turkey, HSBC Bank Malta p.l.c., HSBC Private Bank (Suisse) SA and HSBC Trinkaus & Burkhardt AG. Through these subsidiaries we provide a wide range of banking, treasury and financial services to personal, commercial and corporate customers across Europe.
	2012		2011		2010
	US$m		US$m		US$m
Net interest income .....	10,394		11,001		11,250
Net fee income ............	6,169		6,236		6,371
Net trading income ......	2,707		2,161		2,863
Other income/(expense)	(1,662)		4,848		2,266
Net operating income21 ..................................	17,608		24,246		22,750
LICs76 ..........................	(1,921)		(2,512)		(3,020)
Net operating income	15,687		21,734		19,730
Total operating expenses ..................................	(19,095)		(17,069)		(15,445)
Operating profit/(loss) ..................................	(3,408)		4,665		4,285
Income/(expense) from associates77 ...............	(6)		6		17
Profit/(loss) before tax	(3,414)		4,671		4,302
Cost efficiency ratio ....	108.4%		70.4%		67.9%
RoRWA66 ....................	(1.0%)		1.5%		1.3%
Year-end staff numbers	70,061		74,892		75,698
Strong Rates and Credit performance as investor sentiment improved
40% reduction in RBWM loan impairment charges
US$2.3bn of customer redress provisions in the UK
For footnotes, see page 120.

Economic background 

The UK economy remained weak in 2012, with little growth in underlying activity. Preliminary data showed that the level of real Gross Domestic Product ('GDP') contracted by 0.3% in the fourth quarter, as economic activity fell back after a boost related to the Olympic Games. Despite the lacklustre economy, the labour market remained fairly resilient, with the unemployment rate in the three months to December down to 7.8% from 8.4% in the same period in 2011. In response to the stagnating economy, the Bank of England ('BoE') increased the size of its Asset Purchase Facility to £375bn (US$606bn) and launched a new scheme, Funding for Lending, aimed at increasing the supply of credit. Consumer Prices Index ('CPI') inflation fell during the first half of the year but remained above the BoE's 2% target. In the fourth quarter, it rose back to 2.7%, partly due to increases in tuition fees and energy prices.

The eurozone returned to recession in 2012 as the initial resilience in France and Germany was more than offset by deepening contractions in the periphery, where domestic demand was dragged down by austerity and private sector deleveraging. Inflation slowed from 2.7% at the end of 2011 to 2.2% in 2012 and the European Central Bank ('ECB') cut the refinance ('refi') rate by 0.25% to 0.75% in July. The sovereign crisis worsened again in the first half of 2012 but early signs of a roadmap for future integration of the economic and monetary union, additional support for Greece and, most importantly, the ECB's commitment to supporting the euro through its Outright Monetary Transactions bond-buying programme succeeded in lowering peripheral government bond spreads to their lowest level since March 2012.

Review of performance

Our operations in Europe reported a pre-tax loss of US$3.4bn, compared with a profit of US$4.7bn in 2011. On a constant currency basis, pre-tax profits declined by US$8.0bn.

In 2012, there were adverse movements of US$4.1bn on our own debt designated at fair value, resulting from changes in credit spreads, compared with favourable movements of US$2.9bn in 2011. On an underlying basis, pre-tax profits decreased by US$930m due to higher operating expenses reflecting a US$1.4bn increase in the provision for customer redress programmes in the UK, in particular relating to the possible mis-selling of PPI and interest rate protection products. This was partly offset by higher GB&M revenues, notably in the Rates and Credit businesses as spreads on eurozone

Profit/(loss) before tax by country within global businesses

	Retail      Banking and Wealth Management          US$m		Commercial       Banking           US$m		Global      Banking               and       Markets           US$m		Global         Private       Banking           US$m		Other           US$m		Total           US$m
2012
UK ................................................	343		832		(111)		235		(6,355)		(5,056)
France60 ........................................	135		203		514		(11)		(263)		578
Germany .......................................	29		64		283		40		(72)		344
Malta ............................................	39		52		31		-		-		122
Switzerland ....................................	-		2		1		133		-		136
Turkey ..........................................	(32)		71		104		-		1		144
Other ............................................	(5)		(16)		164		102		73		318
	509		1,208		986		499		(6,616)		(3,414)
2011
UK ................................................	1,330		1,227		(265)		192		1,037		3,521
France60 ........................................	69		192		(194)		16		18		101
Germany .......................................	36		69		203		28		16		352
Malta ............................................	31		72		21		-		-		124
Switzerland ....................................	-		(8)		-		225		-		217
Turkey ..........................................	7		62		87		2		-		158
Other ............................................	(151)		73		225		94		(43)		198
	1,322		1,687		77		557		1,028		4,671
2010
UK ................................................	1,181		827		1,772		223		(1,605)		2,398
France60 ........................................	138		135		376		18		26		693
Germany .......................................	36		32		231		30		4		333
Malta ............................................	37		56		17		-		-		110
Switzerland ....................................	-		(5)		-		265		-		260
Turkey ..........................................	64		80		105		1		-		250
Other ............................................	(144)		80		202		103		17		258
	1,312		1,205		2,703		640		(1,558)		4,302

For footnote, see page 120.

bonds tightened and investor sentiment improved. In addition, impairment charges fell due to lower credit risk provisions in GB&M, notably in the legacy credit portfolio, and improved delinquency rates in RBWM in the UK as we continued to improve the quality of these portfolios with a higher proportion of secured lending.

We made significant progress in reshaping our business in Europe. The disposal of non-core businesses simplified our European portfolio, allowing us to concentrate resources on businesses where we can deliver sustainable profits and growth while managing risks effectively. We exited from Hungary, Georgia, Slovakia, and RBWM in Russia and Poland, and sold Property Vision in the UK, our insurance and reinsurance businesses in Ireland and the retail equities brokerage in Greece.

During 2012, we made progress with our restructuring programme to align our businesses in each country to their respective global business operating models in order to reduce complexity and lower our costs in a sustainable way. Total restructuring costs (including impairment of assets) of US$299m were incurred across Europe as a result of    organisational effectiveness and other initiatives, which delivered sustainable cost savings of approximately US$770m.

In RBWM, we continued to drive strong growth in mortgage lending in the UK through the success of our competitive offerings and marketing campaigns. Our share of new UK mortgage lending in 2012 was 12%, up from the 10% share of new lending in 2011, while maintaining a loan-to-value ratio of 58%. We have approved new mortgage lending of £19bn (US$32bn) during 2012, compared with our original lending commitment of £15bn (US$24bn), with £5bn (US$8bn) approved for first time buyers. Wealth Management revenue was marginally lower during the year reflecting the challenging economic environment. Our Wealth Management products and services were redesigned in accordance with the FSA's Retail Distribution Review, which was introduced on 1 January 2013, and we continue to offer a competitive fee-based financial advice service to Premier customers. The expansion of the RBWM business continued in Turkey, where we are targeting mass affluent customers.

In CMB, we continued to invest in the UK, and have increased the number of International Relationship Managers to over 200 during the year. In the first half of 2012, we launched an International SME fund in the UK to support UK businesses that trade, or aspire to trade, internationally. By the end of 2012, we had approved lending through the fund of £5.1bn (US$8.2bn), exceeding the original target of £4.0bn (US$6.5bn), and provided £12bn (US$20bn) of gross new lending to UK SMEs, including the renewal of overdraft and other lending facilities. Over 80% of small business lending applications received during the year were approved. Revenue from international customers increased and our focus on this client base, together with targeted growth initiatives such as deposit acquisition and regional pricing strategies, led to a rise in Payments and Cash Management and Global Trade and Receivable Finance income.

Revenues from CMB's collaboration with GB&M increased primarily from sales of foreign exchange products. During the year, we made a provision for the possible mis-selling of interest rate protection products and the sale of these products to customers in our Business Banking segment, which serves SMEs, was withdrawn.

GB&M continued to develop cross-product capabilities in the growing renminbi market. Early in the year, we issued the first international renminbi bond outside sovereign Chinese territory. Since then, a number of significant transactions were supported by in-depth collaboration between European and other regional teams which reinforced our position as the leading house for international renminbi issuance. In Foreign Exchange, the focus remained on enhancing product offerings in our e-FX platforms for a broader client base, particularly to RBWM and CMB customers. This included the launch of a 'Dynamic Currency Conversion' product within the transactional Foreign Exchange business. To enhance coverage efforts in Global Banking, the Corporate Finance Group was established to strengthen the financial advisory and event financing business. Payments and Cash Management won a number of mandates and implemented the Global Liquidity Solutions platform to provide advanced liquidity management functionality for its clients. In addition, our legacy credit exposure was reduced in Europe by exiting from certain positions and the business will reduce the size of this portfolio further as opportunities arise.

In GPB, we revised our medium-term strategic plan to focus the business on investing in priority markets with a redefined client offering that builds on product strengths and leverages Group capabilities. We concentrated on higher net worth international and domestic customers, enhancing our compliance and risk framework and improving alignment with the other global businesses.

Our activities are likely to be affected by proposed legislation in the UK arising from the recommendations of the UK Independent Commission on Banking ('ICB') to ring-fence the retail bank from wholesale operations and to require the retail bank to have a greater primary loss absorbing capacity. Proposed changes in regulations are likely to affect how we conduct activities, with the potential to curtail the types of business we carry out and increase the costs of doing business. The implementation of any proposed changes will take a considerable amount of time and involve significant cost (see page 132).

The following commentary is on a constant currency basis.

Net interest income decreased by 3%. Balance Sheet Management revenues declined, principally in the UK, as yield curves continued to flatten and liquidity arising from maturities and sales of available-for-sale debt securities was re-invested at lower prevailing rates. In addition we placed a greater portion of our liquidity with central banks. GPB was similarly affected as higher yielding positions matured and as we managed selectively our exposures to eurozone sovereign debt. Legacy credit revenues in the UK also fell as a result of higher interest expense on structured debt issued at the end of 2011, coupled with lower effective yields on assets. RBWM net interest income declined mainly in the UK due to lower deposit spreads reflecting strong competition in the low interest rate environment. This was partly offset by strong growth in average residential mortgage balances and improved lending spreads in the UK, along with higher personal lending and cards balances in Turkey as the business expanded. In addition, net interest income in CMB benefited from higher average customer account balances as we continued to attract deposits through our Payments and Cash Management products as a result of competitive pricing, while average lending balances also rose, mainly in the UK, despite muted demand for credit.

Net fee income increased by 2%. CMB fee income rose due to higher transaction volumes reflecting new mandates in Payments and Cash Management. RBWM fee income also increased due to lower commissions paid as a result of the run-off and subsequent disposal of the insurance businesses in Ireland. These increases were partly offset by a fall in brokerage fees in GPB, reflecting a reduction in client transaction volumes, due in part to lower market volatility. Fees from assets under management and account services also declined, as challenging market conditions in the latter half of 2011 led to a fall in average client assets in 2012, coupled with a reduction in client numbers as we repositioned our target client base.

Net trading income increased by 27%, primarily due to significantly higher Rates trading revenues in the UK and France, and higher Credit trading revenues, mainly in the UK, as spreads tightened and investor sentiment improved following stimuli by central banks. This was despite significant adverse fair value movements in Rates, including a charge from own credit spreads on structured liabilities as spreads tightened which compared with a gain reported in 2011, together with a charge as a result of a change in estimation methodology in respect of credit valuation adjustments on derivative assets (see Note 15 on the Financial Statements). Revenues in our legacy credit portfolio increased due to price appreciation and redemption at par of certain assets. Foreign Exchange income was also stronger due to higher income from GB&M's ongoing collaboration with CMB, and increased volumes from improvements in our electronic pricing and distribution capabilities, although this was partly offset by the effect of less volatile markets in 2012. In addition, trading income benefited from the change in estimation methodology for debit valuation adjustments on derivative liabilities (see Note 15 on the Financial Statements).

There were lower adverse fair value movements on non-qualifying hedges, driven by favourable fair value movements on non-qualifying hedges in HSBC Holdings, compared with adverse fair value movements in 2011, reflecting the less pronounced decline in long-term US interest rates relative to sterling and euro interest rates than in 2011. This was partly offset by higher adverse movements on non-qualifying hedges in European operating entities as interest rates fell.

Adverse foreign exchange movements were reported on assets held as economic hedges of foreign currency debt designated at fair value compared with favourable movements in 2011. These offset favourable foreign exchange movements on the foreign currency debt which are reported in 'Net expense from financial instruments designated at fair value'.

Net expense from financial instruments designated at fair value increased by US$4.8bn. Excluding adverse fair value movements due to the change in credit spreads on our own debt held at fair value, net income from financial instruments designated at fair value of US$1.9bn in 2012 compared with a net expense of US$374m in 2011. This reflected favourable foreign exchange movements on foreign currency debt designated at fair value issued as part of our overall funding strategy compared with adverse movements in 2011, with an offset reported in 'Net trading income'. In addition, net investment gains were recognised on the fair value of assets held to meet liabilities under insurance and investment contracts as market conditions improved, compared with net investment losses in 2011. The corresponding movement in liabilities to customers is recorded under 'Net insurance claims incurred and movement in liabilities to policyholders' to the extent that these investment gains or losses are attributable to policyholders holding unit-linked insurance policies and insurance or investment contracts with DPF.

Gains less losses from financial investments decreased by US$133m. This was driven by higher impairments in GB&M in the UK of available-for-sale equity securities due to significant write-downs in 2012 on three holdings, two of which were in our direct investment business in run-off. The decline was also driven by losses on the disposal of legacy assets, also in GB&M in the UK (see page 27), together with the non-recurrence of gains in 2011 on the disposal of available-for-sale debt securities in our Insurance business in RBWM. These factors were partly offset by higher gains on the disposal of available-for-sale debt securities in Balance Sheet Management, mainly in the UK, as part of structural interest rate risk management activities, coupled with a rise in disposal gains in Principal Investments in GB&M.

Net earned insurance premiums decreased by 6%. This mainly reflected lower life insurance sales in RBWM in France as a result of the adverse economic environment and increased competition from other banking products. The run-off and subsequent disposal of the insurance businesses in Ireland in 2012 also contributed to the decline. This was partly offset by a rise in net earned premiums in the UK due, in part, to the sale of a unit-linked insurance product through two new third party platforms.

Other operating income decreased by US$95m. GB&M incurred losses on the sale of certain syndicated loans in the UK. In addition, gains in 2011 on the disposal of a property fund did not recur.

Net insurance claims incurred and movement in liabilities to policyholders increased by 40%, driven by net investment gains on the fair value of the assets held to support policyholder contracts, compared with net losses in 2011. This was partly offset by lower reserves established for new business, reflecting the decline in premiums in France.

Loan impairment charges and other credit risk provisions decreased by 22% to US$1.9bn. GB&M reported lower credit risk provisions, mainly in the UK, on available-for-sale ABSs, driven by an improvement in underlying asset prices, as well as lower charges on Greek sovereign debt. These were coupled with a reduction in loan impairment charges in RBWM, notably in the UK, as we continued to pro-actively identify and monitor customers facing financial hardship and focused on growing higher quality lending. As a result, delinquency rates improved across both the secured and unsecured lending portfolios. This was partly offset by an increase in loan impairment charges in RBWM in Turkey, reflecting business expansion. In addition, there were higher individually assessed provisions in CMB reflecting, mainly, the challenging economic conditions in the UK, Greece, Spain and Turkey.

Operating expenses increased by 15%, driven by higher charges relating to UK customer redress programmes with US$2.3bn reported in 2012, compared with a charge of US$890m (US$898m as reported) in 2011. In 2012 we included an additional charge of US$1.7bn for estimated redress for the possible mis-selling of PPI policies and US$598m in relation to the possible mis-selling of interest rate protection products in previous years, of which US$268m related to the estimated redress to be paid to customers and the remainder to costs of closing out these positions and related administration costs. A charge relating to the US Office of Foreign Asset Control ('OFAC') investigation of US$375m was also incurred in HSBC Holdings, along with the UK bank levy of US$571m. This was partly offset by an adjustment of US$99m in the 2011 bank levy charge of US$570m as the basis of calculation was clarified. In addition, 2011 included a credit of US$570m (US$587m as reported) arising from the defined benefit pension obligations in the UK which did not recur. Restructuring costs of US$299m were US$92m lower than in 2011, as the review initiated in 2011 to improve cost efficiency continued to be implemented and we completed disposals and exits in Europe.

Excluding these items, operating expenses marginally increased compared with 2011. Our organisational effectiveness initiatives progressed, delivering sustainable cost savings of approximately US$770m in 2012. This enabled us to reinvest in, and reallocate capital, to our designated growth businesses such as our mortgage offering, our international CMB business and our home and priority growth markets (UK, France, Germany and Turkey), as well as launching the M&S Bank in the UK.

Operating expenses in Europe

	2012		2011
	US$m		US$m
HSBC Holdings ..................	2,063		1,664
UK ....................................	11,993		9,989
Continental Europe ...........	5,237		5,563
Intra-region eliminations ..	(198)		(147)
Total operating expenses ..	19,095		17,069

 

END

 

 

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