Annual Financial Report - 14

RNS Number : 4064J

HSBC Holdings PLC

30 March 2010

 



Products and services

Personal Financial Services

Personal Financial Services provides 98 million individual and self-employed customers with financial services in over 60 markets worldwide.

In markets where HSBC already has scale or, in emerging markets where scale can be built over time, HSBC offers its range of personal financial products and services to all customer segments. In other markets, HSBC participates more selectively, targeting only those customer segments which have strong international connectivity or where HSBC's global scale is crucial.

Typically, offerings include personal banking products (current and savings accounts, mortgages and personal loans, credit cards, and local and international payment services) and wealth management services (insurance and investment products and financial planning services).

HSBC Premier ('Premier') provides premium banking services to its customers including personalised relationship management, a single online view of all international accounts, free international funds transfer between HSBC accounts, 24-hour priority telephone access, global travel assistance and wealth management services. There are now over 3.4 million Premier customers, who can use more than 370 specially designated Premier branches and centres in 43 markets.

HSBC Advance offers a range of premium services including preferential day-to-day and international banking while allowing solutions to be customised to meet local requirements.

Wealth management services play an important part in meeting the needs of customers. Insurance products distributed by HSBC through its direct channels and branch networks include life, property and health insurance as well as pensions and credit protection. HSBC also makes available a wide range of investment products. A choice of third-party and proprietary funds offer customers the ability to diversify their investments across a range of best-in- class fund managers chosen after a rigorous and objective selection process. Comprehensive financial planning services covering customers' investment, retirement, personal and asset protection needs are offered through qualified financial planning managers.

Personal customers prefer to conduct their financial business at times convenient to them, using the sales and service channels of their choice. This demand for flexibility is met through the increased provision of direct channels such as the internet and self-service terminals, in addition to traditional and automated branches and service centres accessed by telephone.

HSBC is a major global credit card issuer with over 100 million credit cards in force in over 50 markets. In addition to HSBC branded cards, a number of markets offer co-branded credit cards and third-party private label cards (or store cards) through merchant relationships.

High net worth individuals and their families who choose the differentiated services offered within Private Banking are not included in this customer group.

Commercial Banking

HSBC is one of the world's leading and most international banks, with over 3 million Commercial Banking customers in 63 countries and territories, including sole proprietors, partnerships, clubs and associations, incorporated businesses and publicly quoted companies.

HSBC divides its Commercial Banking business into corporate, mid-market, business banking upper and business banking mass segments, allowing the development of tailored customer propositions while adopting a broader view of the entire commercial banking sector, from sole traders to top-end
mid-market corporations. This allows HSBC to provide continuous support to companies as they grow in size both domestically and internationally, and ensures a clear focus on the business banking sectors, which are typically the key to innovation and growth in market economies.

HSBC places particular emphasis on geographical collaboration to meet its business customers' needs and aims to be recognised as the leading international business bank and the best bank for business in target markets. The range of products and services includes:

Financing: HSBC provides a range of short and longer-term financing options for Commercial Banking customers, both domestically and cross-border, including overdrafts, receivables finance, term loans and property finance. The Group offers forms of asset finance in selected sites and has established specialised divisions providing leasing and instalment finance for vehicles, plant and equipment.

Payments and cash management: HSBC is a leading provider of domestic and cross-border payments, collections, liquidity management and account services worldwide. The Group's extensive network of offices and direct access to numerous local clearing systems enhances its customers' ability to manage their cash efficiently on a global basis. Deposits are attracted through current accounts and savings products, in local and foreign currencies.

International trade: HSBC finances and facilitates significant volumes of international trade, under both open account terms and traditional trade finance instruments. HSBC also provides international factoring, commodity and insured export finance, and forfaiting services. The Group utilises its extensive international network to build customer relationships at both ends of trade flows, and maximises efficiency through expertise in document checking and processing, and highly automated systems.

Treasury and capital markets: Commercial Banking customers are volume users of the Group's foreign exchange, derivatives and structured product capabilities, including sophisticated currency and interest rate options.

Commercial cards: HSBC offers commercial card issuing and acquiring services. Commercial card issuing helps customers enhance cash management, improve cost control and streamline purchasing processes. HSBC's card acquiring services enable merchants to accept credit and debit card payments either in person or when the cardholder is not present (e.g. over the internet or by telephone).

Insurance: Through its bancassurance model, HSBC offers a full range of commercial insurance products and services to enable customers and company owners to trade and grow safely. Products include key person and life insurance, employee benefits and a variety of commercial risks such as property, liability, cargo and trade credit insurance. These products are provided by HSBC as a manufacturer or an intermediary utilising preferred strategic partners. Upon the completion of the sale of HSBC Insurance Brokers in 2010 a new partnership will be launched with Marsh, the global insurance broker, to provide intermediary services to HSBC's corporate customers.

Wealth management services: These include advice and products related to savings and investments provided to Commercial Banking customers and their employees through HSBC's worldwide network, with clients being referred to Premier and Private Banking where appropriate.

Investment banking: A small number of Commercial Banking customers need corporate finance and advisory support. These requirements are serviced by the Group on a client-specific basis.

Delivery channels: HSBC deploys a full range of delivery channels, including specific online and direct banking offerings such as HSBCnet and Business Internet Banking.

Global Banking and Markets

Global Banking and Markets provides tailored financial solutions to major government, corporate and institutional clients worldwide. Managed as a global business, Global Banking and Markets operates a long-term relationship management approach to build a full understanding of clients' financial requirements. Sectoral client service teams comprising relationship managers and product specialists develop financial solutions to meet individual client needs. With dedicated offices in over 62 countries and access to HSBC's worldwide presence and capabilities, this business serves subsidiaries and offices of its clients on a global basis.

Global Banking and Markets is managed as four principal business lines: Global Markets, Global Banking, Global Asset Management and Principal Investments. This structure allows HSBC to focus on relationships and sectors that best fit the Group's footprint and facilitates seamless delivery of HSBC's products and services to clients.

Global Markets

HSBC's operations in Global Markets consist of treasury and capital markets services for supranationals, central banks, corporations, institutional and private investors, financial institutions and other market participants. Products include:

·     foreign exchange;

·     currency, interest rate, bond, credit, equity and other derivatives;

·     government and non-government fixed income and money market instruments;

·     precious metals and exchange traded futures;

·     equity services, including research, sales and trading for institutional, corporate and private clients and asset management services;

·     distribution of capital markets instruments, including debt, equity and structured products, utilising HSBC's global network; and

·     securities services, where HSBC is one of the world's leading custodians providing custody and clearing services and funds administration to both domestic and cross-border investors.

Global Banking

HSBC's operations in Global Banking consist of financing, advisory and transaction services for corporations, institutional and private investors, financial institutions, and governments and their agencies. Products include:

·     financing and capital markets, which comprises capital raising, including debt and equity capital, corporate finance and advisory services, bilateral and syndicated lending, leveraged and acquisition finance, structured and project finance, lease finance, and non-retail deposit-taking;

·     international, regional and domestic payments and cash management services; and

·     other transaction services, including trade services, factoring and banknotes.

Global Asset Management

HSBC's operations in asset management consist of products and services for institutional investors, intermediaries and individual investors and their advisers.

Principal Investments

This includes private equity, which comprises HSBC's captive private equity funds, strategic relationships with third-party private equity managers and other investments.

Private Banking

HSBC's presence in all the major wealth-creating regions has enabled it to build one of the world's leading private banking groups, providing private banking and trustee services to high net worth individuals and their families from over 90 locations in 42 countries and territories, with client assets of US$367 billion at 31 December 2009.

HSBC Private Bank is the principal marketing name of the HSBC Group's international private banking business. Utilising the most suitable products from the marketplace, HSBC Private Bank works with its clients to offer both traditional and innovative ways to manage and preserve wealth while optimising returns. Products and services offered include:

Private Banking Services: These comprise multi-currency deposit accounts and fiduciary deposits, credit and specialist lending, treasury trading services, cash management, securities custody and clearing. In addition, HSBC Private Bank works to ensure that its clients have full access to other products and services available throughout HSBC such as credit cards, internet banking, corporate banking, and investment banking.

Private Wealth Management: This comprises both advisory and discretionary investment services. A wide range of investment vehicles is covered, including bonds, equities, derivatives, options, futures, structured products, mutual funds and alternatives (hedge funds, private equity and real estate). By accessing regional expertise in six major advisory centres in Hong Kong, Singapore, Geneva, New York, Paris and London, Private Banking seeks to identify the most suitable investments for clients' needs and investment strategies. Corporate Finance Solutions helps provide clients with cross-border solutions for their companies, working in conjunction with Global Banking & Markets.

Private Wealth Solutions: These comprise inheritance planning, trustee and other fiduciary services designed to protect wealth and preserve it for future generations through structures tailored to meet the individual needs of each family. Areas of expertise include trusts, foundation and company administration, charitable trusts and foundations, insurance, family office advisory and philanthropy.

Other information

Funds under management

	2009		2008
	US$bn		US$bn
Funds under management
At 1 January ..........................	735		844
Net new money .....................	36		(1)
Value change .........................	76		(159)
Exchange and other ...............	10		51
At 31 December ....................	857		735

	At 31 December
	2009		2008
	US$bn		US$bn
Funds under management by business
Global Asset Management .....	423		370
Private Banking ....................	251		219
Affiliates ...............................	3		2
Other ....................................	180		144
	857		735

Funds under management at 31 December 2009 were US$857 billion, an increase of 17 per cent when compared with 2008. Both Global Asset Management and Private Banking fund holdings

increased, primarily as a result of the improvement in global equity markets during the year.

Global Asset Management funds increased by 14 per cent compared with 2008 to US$423 billion as a result of market performance, strong net flows, particularly in Asia, and favourable foreign exchange movements. Emerging markets funds increased during 2009, driven by market performance gains and net flows. HSBC remains one of the world's largest emerging market asset managers with funds under management of US$90 billion at 31 December 2009. 

Private Banking funds under management increased by 15 per cent to US$251 billion at 31 December 2009, driven by strengthening equity markets, mainly in Europe and Hong Kong.

Client assets, which provide an indicator of overall Private Banking volumes and include funds under management, were US$367 billion, up by US$15 billion compared with 2008.

Other funds under management, which are mainly held by a corporate trust business in Asia, increased to US$180 billion.

Assets held in custody and under administration

Custody is the safekeeping and servicing of securities and other financial assets on behalf of clients. At 31 December 2009, assets held by HSBC as custodian amounted to US$5.2 trillion, 45 per cent higher than the US$3.6 trillion held at 31 December 2008. This was mainly driven by an increase in the market value of assets.

HSBC's assets under administration business, which includes the provision of various support function activities including the valuation of portfolios of securities and other financial assets on behalf of clients, complements the custody business. At 31 December 2009, the value of assets held under administration by the Group amounted to US$2.8 trillion.

Property

At 31 December 2009, HSBC operated from some 10,100 operational properties worldwide, of which approximately 2,600 were located in Europe, 2,900 in Hong Kong and Rest of Asia-Pacific, 800 in North America, 3,500 in Latin America and 300 in the Middle East. These properties had an area of approximately 70.8 million square feet (2008: 73.6 million square feet).

A gain of US$576 million was recognised in respect of the sale and leaseback of HSBC's headquarters building at 8 Canada Square, London which was effected through the disposal of the Group's entire shareholding in Project Maple II B.V. ('PMII') to the National Pension Service of Korea. Gains were also realised on the sale of the head office building in Argentina.

HSBC's freehold and long leasehold properties, together with all leasehold properties in Hong Kong, were valued in 2009. The value of these properties was US$4.1 billion (2008: US$3.3 billion) in excess of their carrying amount in the consolidated balance sheet. In addition, properties with a net book value of US$1,061 million were held for investment purposes.

HSBC's operational properties are stated at cost, being historical cost or fair value at the date of transition to IFRSs (their deemed cost) less any impairment losses, and are depreciated on a basis calculated to write off the assets over their estimated useful lives. Properties owned as a consequence of an acquisition are recognised initially at fair value.

Further details are included in Note 23 on the Financial Statements.

Legal proceedings

On 27 July 2007, the UK Office of Fair Trading ('OFT') issued High Court legal proceedings against a number of UK financial institutions, including HSBC Bank, to determine the legal status and enforceability of certain charges applied to their personal customers in relation to unauthorised overdrafts. In a judgement given on 25 November 2009, the Supreme Court held that provided the relevant charges were in plain and intelligible language, the amount of those charges could not be assessed for fairness by either the OFT or the courts. On 22 December 2009, the OFT announced that it would not be continuing the investigation it began in March 2007 into the fairness of unauthorised overdraft charges following detailed consideration of the Supreme Court judgement.

In December 2008, in the US, Bernard L Madoff ('Madoff') was arrested and charged with securities fraud and the US Securities and Exchange Commission filed securities fraud charges against Madoff and Madoff Securities. On 29 March 2009, Madoff pleaded guilty to 11 felony cases and was subsequently sentenced to 150 years in prison. Various non-US HSBC group companies provide custodial, administration and similar services to a

number of funds incorporated outside the US whose assets were invested with Madoff Securities and have been named as defendants in suits in the US, Ireland, Luxembourg and other jurisdictions. HSBC considers that it has good defences to these claims and will continue to defend them vigorously. HSBC is unable reliably to estimate the liability, if any, that might arise as a result of such claims.

Full details are provided in Note 42 on the Financial Statements.

Data security

HSBC Private Bank (Suisse) is currently continuing to investigate a theft of client data which was widely reported in December 2009 as having been supplied to the French authorities. The theft appears to have taken place during a period preceding March 2007. The bank is working closely with the Swiss authorities and its regulator to establish the extent of data involved in the theft in order to protect the interests and rights of its clients and of the Group and to further enhance its security policies and data protection practices.

Footnotes to the Operating and Financial Review

Key performance indicators (page 18)

  1 The percentage increase in net operating income before loan impairment and other credit risk charges since the previous year.

  2 As a percentage of net operating income before loan impairment charges and other credit risk provisions.

  3 Other income comprises net operating income before loan impairment charges and other credit risk provisions less net interest income and net fee income.

  4 Total operating expenses divided by net operating income before loan impairment and other credit risk charges.

  5 Net operating income divided by average risk-weighted assets.

  6 Profit attributable to ordinary shareholders divided by average invested capital.

  7 The return on average total shareholders' equity is defined as profit attributable to shareholders of the parent company divided by the average total shareholders' equity.

  8 The percentage increase in dividends per share since the previous year, based on the dividends paid in respect of the year to which the dividend relates.

  9 Basic earnings per ordinary share is defined in Note 13 on the Financial Statements.

Reconciliations of reported and underlying profit/(loss) before tax (pages 21 to 22)

10 These columns comprise the net increments or decrements in profits in the current year compared with the previous year which are attributable to acquisitions or disposals of subsidiaries and/or movements in fair value of own debt attributable to credit spread (together referred to as 'adjustments' in the tables for HSBC, the 'Other' customer group and certain geographical regions). Comparatives for 2007 include gains arising on the dilution of interests in associates, where relevant. The inclusion of acquisitions and disposals is determined in the light of events each year.

11 'Currency translation' is the effect of translating the results of subsidiaries and associates for the previous year at the average rates of exchange applicable in the current year.

12 Excluding adjustments in 2008.

13 Positive numbers are favourable: negative numbers are unfavourable.

14 Changes in fair value of long-term debt issued.

15 'Other income' in this context comprises net trading income, net income/(expense) from other financial instruments designated at fair value, gains less losses from financial investments, gains arising from dilution of interests in associates, dividend income, net earned insurance premiums and other operating income less net insurance claims incurred and movement in liabilities to policyholders.

16 Net operating income before loan impairment charges and other credit risk provisions.

17 Excluding adjustments in 2007.

Financial summary (pages 23 to 60)

18 The change in fair value related to movements in the Group's credit spread on long-term debt resulted in an expense of US$6.5 billion in 2009 (2008: income of US$6.6 billion; 2007: income of US$3.1 billion).

19 Net interest income includes the cost of funding trading assets, while the related external revenues are reported in trading income. In HSBC's customer group results, the cost of funding trading assets is included with Global Banking and Markets' net trading income as an interest expense.

20 Gross interest yield is the average annualised interest rate earned on average interest-earning assets ('AIEA').

21 Net interest spread is the difference between the average annualised interest rate earned on AIEA, net of amortised premiums and loan fees, and the average annualised interest rate paid on average interest-bearing funds.

22 Net interest margin is net interest income expressed as an annualised percentage of AIEA.

23 The cost of internal funding of trading assets was US$1,309 million (2008: US$5,547 million; 2007: US$5,433 million) and is excluded from the reported 'Net trading income' line and included in 'Net interest income'. However, this cost is reinstated in 'Net trading income' in HSBC's customer group and global business reporting.

24 Net trading income includes an expense of US$444 million (2008: income of US$529 million; 2007: income of US$34 million), associated with changes in the fair value of issued structured notes and other hybrid instrument liabilities derived from movements in HSBC issuance spreads.

25 Other changes in fair value include gains and losses arising from changes in the fair value of derivatives that are managed in conjunction with HSBC's long-term debt issued.

26 Net insurance claims incurred and movement in liabilities to policyholders arise from both life and non-life insurance business. For non-life business, amounts reported represent the cost of claims paid during the year and the estimated cost of notified claims. For life business, the main element of claims is the liability to policyholders created on the initial underwriting of the policy and any subsequent movement in the liability that arises, primarily from the attribution of investment performance to savings-related policies. Consequently, claims rise in line with increases in sales of savings-related business and with investment market growth.

27 The Middle East is disclosed as a separate geographical region with effect from 1 January 2009. Previously, it formed part of Rest of Asia-Pacific. Comparative data have been restated accordingly.

28 Expressed as a percentage of average invested capital.

29 Average invested capital is measured as average total shareholders' equity after:

-       adding back the average balance of goodwill amortised pre-transition to IFRSs or subsequently written-off, directly to reserves (less goodwill previously amortised in respect of the French regional banks sold in 2008);

-       deducting the average balance of HSBC's revaluation surplus relating to property held for own use. This reserve was generated when determining the deemed carrying cost of such properties on transition to IFRSs and will run down over time as the properties are sold;

-       deducting average preference shares and other equity instruments issued by HSBC Holdings; and

-       deducting average reserves for unrealised gains/(losses) on effective cash flow hedges and available-for-sale securities.

30 Return on invested capital is based on the profit attributable to ordinary shareholders of the parent company less goodwill previously amortised in respect of the French regional banks sold in 2008.

31 'Currency translation' is the effect of translating the assets and liabilities of subsidiaries and associates for the previous year-end at the rates of exchange applicable at the current year-end.

32 Interest income on trading assets is reported as 'Net trading income' in the consolidated income statement.

33 Interest income on financial assets designated at fair value is reported as 'Net income from financial instruments designated at fair value' in the consolidated income statement.

34 Brazilian operations comprise HSBC Bank Brasil S.A.-Banco Múltiplo and subsidiaries, plus HSBC Serviços e Participações Limitada.

35 This table analyses interest-bearing bank deposits only. See page 58 for an analysis of all bank deposits.

36 Interest expense on financial liabilities designated at fair value is reported as 'Net income on financial instruments designated at fair value' in the consolidated income statement, other than interest on own debt.

37 This table analyses interest-bearing customer accounts only. See page 59 for an analysis of all customer accounts.

38 For the purpose of calculating the ratios, earnings consist of income from continuing operations before taxation and minority interests, plus fixed charges, and after deduction of the unremitted pre-tax income of associated undertakings. Fixed charges consist of total interest expense, including or excluding interest on deposits, as appropriate, dividends on preference shares and other equity instruments, as applicable, and the proportion of rental expense deemed representative of the interest factor.

39 Net interest margin is calculated as net interest income divided by average interest earning assets.

40 The main items reported under 'Other' are certain property activities, unallocated investment activities, centrally held investment companies, gains arising from the dilution of interests in associates, movements in the fair value of own debt designated at fair value (the remainder of the Group's gain on own debt is included in Global Banking and Markets), and HSBC's holding company and financing operations. The results also include net interest earned on free capital held centrally, operating costs incurred by the head office operations in providing stewardship and central management services to HSBC, and costs incurred by the Group Service Centres and Shared Service Organisations and associated recoveries. At 31 December 2009, there were no gains arising from the dilution of interests in associates (2008: nil; 2007: US$1.1 billion) and fair value gains on HSBC's own debt designated at fair value were US$6.2 billion (2008: US$6.7 billion income; 2007: US$2.8 billion expense).

41 Assets by geographical region and customer group include intra-HSBC items. These items are eliminated, where appropriate, under the heading 'Intra-HSBC items'.

42 In the analyses of customer groups and global businesses, net trading income comprises all gains and losses from changes in the fair value of financial assets and financial liabilities classified as held for trading, together with related external and internal interest income and interest expense, and dividends received; in the statutory presentation internal interest income and expense are eliminated.

43 Net insurance claims incurred and movement in liabilities to policyholders.

44 In 2009, Global Markets included a US$444 million expense on the widening of credit spreads on structured liabilities (2008: income of US$529 million; 2007: income of US$34 million).

45 Total income earned on securities services products in the Group amounted to US$1.4 billion (2008: US$2.2 billion; 2007: US$2.0 billion), of which US$1.4 billion was in Global Banking and Markets (2008: US$2.1 billion; 2007: US$1.9 billion) and US$19 million was in Commercial Banking (2008: US$45 million; 2007: US$33 million).

46   Total income earned on payments and cash management products in the Group amounted to US$3.8 billion (2008: US$5.2 billion; 2007: US$5.2 billion), of which US$2.8 billion was in Commercial Banking (2008: US$3.5 billion; 2007: US$3.5 billion) and US$1.1 billion was in Global Banking and Markets (2008: US$1.7 billion; 2007: US$1.6 billion).

47   Total income earned on other transaction services in the Group amounted to US$1.8 billion (2008: US$1.8 billion; 2007: US$1.4 billion), of which US$1.3 billion was in Commercial Banking relating to trade and supply chain (2008: US$1.3 billion; 2007: US$1.0 billion) and US$507 million was in Global Banking and Markets of which US$382 million related to trade and supply chain (2008: US$355 million; 2007: US$270 million) and US$125 million related to banknotes and other (2008: US$126 million; 2007: US$102 million)

48 'Other' in Global Banking and Markets includes net interest earned on free capital held in the global business not assigned to products.

49 Trading assets and financial investments held in Europe, and by Global Banking and Markets in North America, include financial assets which may be repledged or resold by counterparties.

50 Inter-segment elimination comprises (i) the costs of shared services and Group Service Centres included within 'Other' which are recovered from customer groups, and (ii) the intra-segment funding costs of trading activities undertaken within Global Banking and Markets. HSBC's Balance Sheet Management business, reported within Global Banking and Markets, provides funding to the trading businesses. To report Global Banking and Markets' 'Net trading income' on a fully funded basis, 'Net interest income' and 'Net interest income/(expense) on trading activities' are grossed up to reflect internal funding transactions prior to their elimination in the inter-segment column.

51 France primarily comprises the domestic operations of HSBC France, HSBC Assurances and the Paris branch of HSBC Bank.

52 US includes the impairment of goodwill in respect of Personal Financial Services - North America as described in Note 22 on the Financial Statements.

 

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