Annual Financial Report - 14 of 54

RNS Number : 0713I

HSBC Holdings PLC

20 March 2015

 



Asia⁸

HSBC's principal banking subsidiaries in Hong Kong are The Hongkong and Shanghai Banking Corporation Limited and Hang Seng Bank Limited. The former is the largest bank incorporated in Hong Kong and is our flagship bank in Asia. We offer a wide range of banking and financial services in mainland China, through our local subsidiaries HSBC Bank (China) Company Limited and Hang Seng Bank (China) Limited. We also participate indirectly in mainland China through our associate, Bank of Communications. Outside Hong Kong and mainland China, we conduct business in 18 countries and territories in Asia, with particularly strong coverage in Australia, India, Indonesia, Malaysia and Singapore.
		2014		2013		2012
		US$m		US$m		US$m
Net interest income		12,273		11,432		10,707
Net fee income		5,910		5,936		5,418
Net trading income		2,622		2,026		2,516
Other income		2,872		5,038		6,691
Net operating income4		23,677		24,432		25,332
LICs43		(647)		(498)		(510)
Net operating income		23,030		23,934		24,822
Total operating expenses		(10,427)		(9,936)		(9,980)
Operating profit		12,603		13,998		14,842
Income from associates44		2,022		1,855		3,188
Profit before tax		14,625		15,853		18,030
Cost efficiency ratio		44.0%		40.7%		39.4%
RoRWA36		3.1%		3.8%		4.4%
Year-end staff numbers		118,322		113,701		112,766
10% Growth in customer lending balances excluding the effect of currency translation
Market leader for Asia ex-Japan Bonds (Bloomberg)
Best Bank in Asia (The Euromoney Awards of Excellence 2014)
For footnotes, see page 109.

Economic background

Hong Kong's real GDP growth slowed in 2014 relative to 2013 due to weaker domestic demand, partly attributable to the slowdown in the annual growth of retail sales. Labour market conditions softened with unemployment rising, albeit from historically low levels. Tourism arrivals to Hong Kong held up overall, up by 16% in the year compared with 2013, driven by the growth of visitors from mainland China. Headline CPI inflation averaged just over 4% for 2014, with a number of expiring government subsidies offsetting lower inflation in fuel and food prices.

In mainland China, real GDP growth slowed from 7.7% in 2013 to 7.4% in 2014, largely due to a slowdown in activity in construction and manufacturing investment which was only partially offset by resilient infrastructure investment. Headline annual CPI inflation fell steadily to 1.5% in December, significantly below the government's target of 3.5%. The People's Bank of China eased monetary policy in November by cutting policy interest rates for the first time since July 2012. The one-year deposit rate was lowered by 25bps to 2.75% and the one-year lending rate by 40bps to 5.6%. Further measures were announced in December to support bank lending and spur economic activity.

Japan experienced significant economic volatility during 2014 from the imposition of a 3 percentage point consumption tax increase, which took effect on 1 April. The economy recorded annualised GDP growth of 5.8% in the first quarter of 2014, but growth slowed sharply after the tax rise, as government stimuli and exports were unable to offset the decline in private consumption. GDP grew at an annualised rate of 2.2% in the fourth quarter after falls of 6.7% and 1.9% in the preceding quarters. The Bank of Japan announced another round of quantitative easing on 31 October 2014, prompting further depreciation of the yen.

In India, a new government with a strong mandate for reform boosted market sentiment regarding the long-term prospects for the country's economy. However, the recovery remained constrained in 2014 with many infrastructure projects delayed pending government clearance. The steep decline in international commodity prices during the second half of the year helped push down goods price inflation and reduce the current account deficit. Following an interest rate rise early in 2014, the central bank kept monetary policy stable throughout the year.

The downward trend in global commodity prices permitted Indonesia and Malaysia to cut costly fuel subsidies, which is expected to reduce external imbalances and improve their fiscal position. Domestic demand in these countries remained relatively robust throughout 2014, supporting economic growth. In Singapore, GDP growth slowed in 2014 from weaker export growth and domestic economic restructuring. The Monetary Authority maintained its policy of gradual currency appreciation.

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
Hong Kong		3,727		2,264		1,807		146		198		8,142
Australia		78		126		232		−		(4)		432
India		4		121		442		11		122		700
Indonesia		10		53		110		−		25		198
Mainland China		292		1,533		954		(3)		175		2,951
Malaysia		156		122		190		−		28		496
Singapore		129		168		243		57		(8)		589
Taiwan		19		35		166		−		1		221
Other		57		320		432		−		87		896
Year ended 31 December 2014		4,472		4,742		4,576		211		624		14,625
Hong Kong		3,742		2,110		1,971		208		58		8,089
Australia		100		131		189		−		26		446
India		(21)		113		418		7		136		653
Indonesia		12		106		126		−		36		280
Mainland China		223		1,536		842		(4)		1,644		4,241
Malaysia		148		105		236		−		25		514
Singapore		147		120		262		74		22		625
Taiwan		7		30		158		−		5		200
Other		61		207		473		(1)		65		805
Year ended 31 December 2013		4,419		4,458		4,675		284		2,017		15,853
Hong Kong		3,694		2,188		1,518		249		(67)		7,582
Australia		97		38		184		-		(44)		275
India		41		89		497		7		175		809
Indonesia		29		124		146		-		7		306
Mainland China		838		1,724		1,257		(4)		2,525		6,340
Malaysia		183		131		242		-		8		564
Singapore		201		139		296		97		(65)		668
Taiwan		62		36		136		-		-		234
Other		66		321		567		59		239		1,252
Year ended 31 December 2012		5,211		4,790		4,843		408		2,778		18,030

In Australia, real GDP growth rose to an annual rate of around 2.8% in 2014 and unemployment remained roughly unchanged at 6.1%. Mining investment fell sharply and was only partly offset by an improvement in other sectors of the economy. Low interest rates continued to drive an increase in housing market activity and credit growth picked up modestly. The Australian dollar weakened during the year but remained well above its long-run average level.

In Taiwan, economic activity accelerated with the level of GDP in 2014 rising 3.5% in the year as a whole. This was the strongest annual rate of growth since 2011 and an improvement on the 2.1% growth seen in 2013. Growth was driven by a combination of strong exports and domestic consumption thanks to low unemployment and rising wage growth. The central bank in Taiwan kept its key policy rate unchanged throughout 2014 at 1.875%, which is the level it has been since 2011.

Financial overview

Profit before tax (US$m)

Our operations in Asia reported a profit before tax of US$14.6bn in 2014 compared with US$15.9bn in 2013, a decrease of 8%. The reduction reflected a decrease in revenue and an increase in costs and LICs, partly offset by a higher share of profits from associates. Revenue included the effect of a number of significant items, notably in 2013, an accounting gain arising from the reclassification of Industrial Bank as a financial investment (US$1.1bn) and the net gain on completion of the Ping An disposal (US$553m).

Analysis of mainland China profit/(loss) before tax

		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
BoCom and other associates		255		1,421		296		-		1		1,973
Mainland China operations		37		112		658		(3)		174		978
Industrial Bank		-		-		-		-		-		-
Ping An		-		-		-		-		-		-
Year ended 31 December 2014		292		1,533		954		(3)		175		2,951
BoCom and other associates		247		1,360		284		-		(38)		1,853
Mainland China operations		(24)		176		558		(4)		40		746
Industrial Bank		-		-		-		-		1,089		1,089
Ping An		-		-		-		-		553		553
Year ended 31 December 2013		223		1,536		842		(4)		1,644		4,241
BoCom and other associates		214		1,193		248		-		-		1,655
Mainland China operations		(52)		176		606		(4)		66		792
Industrial Bank		54		273		343		-		-		670
Ping An		622		82		60		-		2,459		3,223
Year ended 31 December 2012		838		1,724		1,257		(4)		2,525		6,340

 

In 2014, significant items included the gain on sale of our investment in Bank of Shanghai (US$428m) and an impairment of our investment in Industrial Bank (US$271m). See page 42 for further details of significant items.

On an adjusted basis, profit before tax rose by US$326m or 2%, driven by higher revenue partly offset by increased operating expenses and LICs.

Country business highlights

We continued to focus on our strategic priorities for Asia, using our international network to drive organic growth and connect customers across borders. We completed the sale of our investment in Bank of Shanghai and implemented a discretionary incentive framework that removes the formulaic link between product sales and remuneration. We also saw continued adoption of our mobile banking applications, extended the contact-less payment systems to Android phones and enhanced our digital banking capabilities.

In Hong Kong, average mortgage balances in RBWM increased by 7%, with average LTV ratios of 47% on new mortgage drawdowns and an estimated 29% on the portfolio as a whole. In November 2014, to coincide with the launch of the Hong Kong-Shanghai Stock Connect platform, we rolled out new services allowing retail customers to trade and invest in eligible shares that are listed on the Shanghai Stock Exchange. We strengthened our cards offering with the launch of the 'Visa Signature' card product in Hong Kong and continued building new merchant partnerships across the region. We also re-launched our Advance offering to emerging affluent customers in Hong Kong and nine other regional markets. We were awarded 'International Retail Bank of the Year' by Asian Banking and Finance.

In CMB, we were one of the first foreign banks to announce renminbi cross-border pooling capability in the Shanghai Free Trade Zone. The collaboration between CMB and GB&M continued throughout the year, as a consequence of which 157 primary markets transactions were completed in 2014, up from 122 in 2013, primarily for debt capital market issuances and leveraged asset finance mandates. In addition, we were named 'Best Commercial Bank' by FinanceAsia Achievement Awards 2014.

In GB&M, we maintained our market leadership in Asia ex-Japan G3 currency and investment grade bonds, and led the market in Hong Kong dollar bond issuances. We were involved in three of the five largest equity capital market transactions during 2014, as well as the first Sukuk sovereign bond issuance in Hong Kong. Furthermore, we continued to lead the market in offshore renminbi bond issuance in Hong Kong, becoming one of the Hong Kong Monetary Authority's primary liquidity providers for offshore renminbi. We also acted as a joint book runner for an offshore preference share issuance for a mainland Chinese bank, the first mainland Chinese Basel III compliant additional tier-1 capital offering. We remain well-positioned to service our institutional investors using Stock Connect through our integrated Custody Plus platform.

In mainland China, we continued to develop our branch network, which comprised 173 HSBC outlets, 25 HSBC rural bank outlets and 50 Hang Seng Bank outlets at the end of the year. In RBWM, we were one of the first foreign banks to launch renminbi derivative products linked to the US dollar/renminbi rate and were awarded 'Best Foreign Retail Bank' by The Asian Banker for the sixth consecutive year. During 2014, we were the first foreign custodian bank to service renminbi qualified foreign institutional investors based in Singapore and South Korea. We also became a member of the Shanghai Gold Exchange's international board, a newly established trading platform connecting mainland China's gold market to global investors. In addition, we received regulatory approval to be one of the first market makers to directly trade renminbi, euro and Singaporean dollars in mainland China's interbank foreign exchange market.

In Payments and Cash Management, we launched the Global Payments System which supports all cross-border payments in and out of mainland China in all currencies, including renminbi. In Global Trade and Receivables Finance, we launched trade link initiatives to connect mainland China with the rest of Asia, Germany and the US, to enhance international connectivity and promote activity between key trade routes. In mergers and acquisitions ('M&A'), we were adviser to a number of state owned enterprises on significant overseas investments and acquisitions.

Elsewhere in Asia, in India, we continued to grow our balance sheet in CMB, including term lending and Payments and Cash Management deposits, particularly helping UK corporations to invest in India. In GB&M, we were adviser on two of the largest M&A transactions in 2014, and in Wealth Management we launched Managed Solutions, a multi-asset fund series. In Australia, we were a mandated lead arranger for the largest mining project financing deal and for the largest transport infrastructure project during 2014. In CMB, we also announced an A$250m (US$225m) International Growth Fund, providing credit facilities to local SMEs to explore business opportunities abroad.

Review of adjusted performance⁴⁵

Revenue (US$m)

Revenue was US$1.2bn or 5% higher, driven by Hong Kong and mainland China, mainly in CMB and RBWM from balance sheet growth, as well as in GB&M from portfolio growth in Balance Sheet Management and increased term lending. Revenue was also higher in India and Australia.

Country view of adjusted revenue

		2014		2013
		US$m		US$m
Hong Kong		13,725		13,211
Australia		975		898
India		1,826		1,666
Indonesia		561		559
Mainland China		2,463		1,948
Malaysia		1,066		1,063
Singapore		1,339		1,319
Taiwan		491		501
Other		1,183		1,289
Year ended 31 December		23,629		22,454

In Hong Kong, revenue increased by 4%, primarily in CMB and RBWM and, to a lesser extent, in GB&M. Higher revenue in CMB was due to increased net interest income from growth in term lending across a range of sectors, higher average Payments and Cash Management deposit balances and higher fees from remittance volumes, as well as improved lending spreads.

In RBWM, revenue growth was driven by higher net interest income from increased average lending balances, mainly credit cards and other personal lending, and from growth in average deposit balances, though the benefit of higher volumes was partly offset by spread compression. Net fee income also increased, principally from volume growth in unit trusts, credit card transactions and securities brokerage. In our insurance operations, revenue growth reflected higher premium income, which also contributed to growth in the debt securities portfolio, although this was partly offset by less favourable movements in the PVIF asset from annual actuarial assumption updates.

Revenue in GB&M also increased, mainly in Balance Sheet Management due to portfolio growth, and in Capital Financing from higher average term lending balances. This was partly offset by lower net fee income in Markets due to reduced client flows and in Capital Financing reflecting fee compression.

In mainland China, revenue increased by 26% compared with 2013. In GB&M, we reported greater net interest income from Balance Sheet Management due to portfolio growth and higher reinvestment rates, and a rise in average term lending balances. Additionally, trading income improved in Rates from higher interest income on debt securities and revaluation gains on trading bonds as yields fell, and in Foreign Exchange from increased client flows. Revenue in RBWM increased, mainly from wider deposit spreads as market interest rates rose in the first half of 2014, while in CMB revenue growth was driven by higher average deposit and lending balances.

Elsewhere in Asia, revenue in India rose by 10%, primarily in GB&M from higher Rates trading income due to favourable credit valuation adjustments ('CVA's) on derivatives, coupled with higher net interest income from portfolio growth in Balance Sheet Management. In Australia, we reported an increase in revenue of 9%, predominantly in GB&M from higher trading income in Rates and Foreign Exchange. This was partly offset by lower revenue in South Korea following the run-off of our RBWM operations in 2013.

LICs rose by US$167m or 35%, principally in GB&M and CMB from a rise in a small number of individually assessed impairment charges in Hong Kong and mainland China. This was partly offset by a reduction in individually assessed impairment charges in CMB in New Zealand, Malaysia and Vietnam.

Operating expenses (US$m)

Operating expenses rose by US$753m following investment in the region, notably in Regulatory Programmes and Compliance, and increased use of our Global Services Centres across the Group. Cost growth also reflected wage inflation and additional headcount, notably in Hong Kong and mainland China to support business growth, mainly in CMB, as well as increased marketing activity. These factors were partly offset by around US$270m of sustainable cost savings achieved in 2014.

Share of profit from associates and joint ventures rose by US$71m, mainly from BoCom, reflecting higher revenue from balance sheet growth and trading income, partly offset by increases in operating expenses and LICs.

 

END

 

 

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