Annual Financial Report - 2 of 7

RNS Number : 9095Y

HSBC Holdings PLC

08 March 2017

 

Report of the Directors | Financial summary

Financial summary
	Page
Use of non-GAAP financial measures	30
Critical accounting estimates and judgements	30
Consolidated income statement	31
Group performance by income and expense item	32
Net interest income	32
Net fee income	34
Net trading income	34
Net income/(expense) from financial instruments designated at fair value	35
Gains less losses from financial investments	36
Net insurance premium income	36
Other operating income	36
Net insurance claims and benefits paid and movement in liabilities to policyholders	37
Loan impairment charges and other credit risk provisions	38
Operating expenses	38
Share of profit in associates and joint ventures	40
Tax expense	40
Consolidated balance sheet	41
Movement in 2016	42

The management commentary included in the Strategic Report, the Report of the Directors: 'Financial Review', together with the 'Employees' and 'Corporate sustainability' sections of 'Corporate Governance' and the 'Directors' Remuneration Report' is presented in compliance with the IFRSs Practice Statement 'Management Commentary' issued by the IASB.

Use of non-GAAP financial measures

Our reported results are prepared in accordance with IFRSs as detailed in the Financial Statements starting on page 183. In measuring our performance, the financial measures that we use include those derived from our reported results in order to eliminate factors that distort period-on-period comparisons. These are considered non-GAAP financial measures.

Non-GAAP financial measures that we use throughout the Annual Report and Accounts 2016 are described below. Non-GAAP financial measures are described and reconciled to the closest reported financial measure when used.

The global business segmental results on pages 45 to 60 are presented on an adjusted basis in accordance with IFRS 8 'Operating Segments' as detailed in 'Basis of preparation' on page 44.

Adjusted performance

Adjusted performance is computed by adjusting reported results for the year-on-year effects of foreign currency translation differences and significant items, which distort year-on-year comparisons.

We use 'significant items' to describe collectively the group of individual adjustments excluded from reported results when arriving at adjusted performance. These items, which are detailed below, are ones that management and investors would ordinarily identify and consider separately when assessing performance to understand better the underlying trends in the business.

These items include the operating results for our Brazil operations sold to Banco Bradesco S.A. on 1 July 2016, as well as the loss recognised on disposal.

We consider adjusted performance provides useful information for investors by aligning internal and external reporting, identifying and quantifying items management believes to be significant and providing insight into how management assesses year-on-year performance.

 

Foreign currency translation differences

Foreign currency translation differences reflect the movements of the US dollar against most major currencies during 2016. We exclude our reporting currency translation differences when deriving constant currency data because using these data allows us to assess balance sheet and income statement performance on a like-for-like basis to understand better the underlying trends in the business.

Foreign currency translation differences Foreign currency translation differences for 2016 are computed by retranslating into US dollars for non-US dollar branches, subsidiaries, joint ventures and associates: • the income statements for 2015 and 2014 at the average rates of exchange for 2016; and • the balance sheets at 31 December 2015 and 31 December 2014 at the prevailing rates of exchange on 31 December 2016. No adjustment has been made to the exchange rates used to translate foreign currency denominated assets and liabilities into the functional currencies of any HSBC branches, subsidiaries, joint ventures or associates. When reference is made to foreign currency translation differences in tables or commentaries, comparative data reported in the functional currencies of HSBC's operations have been translated at the appropriate exchange rates applied in the current period on the basis described above.

Significant items

The tables on pages 54 to 60 detail the effects of significant items on each of our global business segments and geographical regions in 2016, 2015 and 2014.

Critical accounting estimates and judgements

The results of HSBC reflect the choice of accounting policies, assumptions and estimates that underlie the preparation of HSBC's consolidated financial statements. The significant accounting policies, including the policies which include critical accounting estimates and judgements, are described in Note 1.2 on the Financial Statements. The accounting policies listed below are highlighted as they involve a high degree of uncertainty and have a material impact on the financial statements:

•

Impairment of loans and advances: For collective impairment allowances, estimation methods include the use of historical information supplemented by significant management judgement about whether current economic and credit conditions are such that actual incurred losses are likely to be greater or less than experienced in the past. For individually assessed loans, judgements are made about the financial condition of individual borrowers, which can involve a wide range of factors relating to their business and the value of any security. The exercise of judgement requires the use of assumptions that are highly subjective and sensitive, in particular to changes in economic and credit conditions across a large number of geographical areas. See Note 1.2(d) on page 198.

•	Deferred tax assets: The most significant judgements relate to those made in respect of expected future profitability. See Note 1.2(h) on page 202.

•	Valuation of financial instruments: In determining the fair value of financial instruments a variety of valuation techniques are used, some of which feature significant unobservable inputs and are subject to substantial uncertainty. See Note 1.2(c) on page 197.

•	Impairment of interests in associates: Impairment testing involves significant judgement in determining the value in use, and in particular estimating the present values of cash flows expected to arise from continuing to hold the investment, based on a number of management assumptions. See Note 1.2(a) on page 196.

30	HSBC Holdings plc Annual Report and Accounts 2016

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•	Goodwill impairment: A high degree of uncertainty is involved in estimating the future cash flows of the cash generating units ('CGUs') and the rates used to discount these cash flows. See Note 1.2(a) on page 196.

•	Provisions: A high degree of judgement may be required due to the high degree of uncertainty associated with determining whether a present obligation exists, and estimating the probability and amount of any outflows that may arise. See Note 1.2(i) on page 202.

 

Given the inherent uncertainties and the high level of subjectivity involved in the recognition or measurement of the items above, it is possible that the outcomes in the next financial year could differ from the expectations on which management's estimates are based, resulting in the recognition and measurement of materially different amounts from those estimated by management in these Financial Statements.

Consolidated income statement

Summary consolidated income statement
	2016		2015		2014		2013		2012
	$m		$m		$m		$m		$m
Net interest income	29,813		32,531		34,705		35,539		37,672
Net fee income	12,777		14,705		15,957		16,434		16,430
Net trading income	9,452		8,723		6,760		8,690		7,091
Net income/(expense) from financial instruments designated at fair value	(2,666	)	1,532		2,473		768		(2,226	)
Gains less losses from financial investments	1,385		2,068		1,335		2,012		1,189
Dividend income	95		123		311		322		221
Net insurance premium income	9,951		10,355		11,921		11,940		13,044
Gains on disposal of US branch network, US cards business and Ping An Insurance (Group) Company of China, Ltd	-		-		-		-		7,024
Other operating income/(expense)	(971	)	1,055		1,131		2,632		2,100
Total operating income	59,836		71,092		74,593		78,337		82,545
Net insurance claims and benefits paid and movement in liabilities to policyholders	(11,870	)	(11,292	)	(13,345	)	(13,692	)	(14,215	)
Net operating income before loan impairment charges and other credit risk provisions	47,966		59,800		61,248		64,645		68,330
Loan impairment charges and other credit risk provisions	(3,400	)	(3,721	)	(3,851	)	(5,849	)	(8,311	)
Net operating income	44,566		56,079		57,397		58,796		60,019
Total operating expenses	(39,808	)	(39,768	)	(41,249	)	(38,556	)	(42,927	)
Operating profit	4,758		16,311		16,148		20,240		17,092
Share of profit in associates and joint ventures	2,354		2,556		2,532		2,325		3,557
Profit before tax	7,112		18,867		18,680		22,565		20,649
Tax expense	(3,666	)	(3,771	)	(3,975	)	(4,765	)	(5,315	)
Profit for the year	3,446		15,096		14,705		17,800		15,334
Attributable to:
- ordinary shareholders of the parent company	1,299		12,572		13,115		15,631		13,454
- preference shareholders of the parent company	90		90		90		90		90
- other equity holders	1,090		860		483		483		483
- non-controlling interests	967		1,574		1,017		1,596		1,307
Profit for the year	3,446		15,096		14,705		17,800		15,334

Five-year financial information
		2016		2015		2014		2013		2012
	Footnotes	$		$		$		$		$
Basic earnings per share		0.07		0.65		0.69		0.84		0.74
Diluted earnings per share		0.07		0.64		0.69		0.84		0.74
Dividends per ordinary share	1	0.51		0.50		0.49		0.48		0.41
		%		%		%		%		%
Dividend payout ratio	2	728.6		76.5		71.0		57.1		55.4
Post-tax return on average total assets		0.1		0.6		0.5		0.7		0.6
Return on risk-weighted assets	3	0.7		1.6		1.5		2.0		1.8
Return on average ordinary shareholders' equity		0.8		7.2		7.3		9.2		8.4
Average foreign exchange translation rates to $:
$1: £		0.741		0.654		0.607		0.639		0.631
$1: €		0.904		0.902		0.754		0.753		0.778

For footnotes, see page 63.

Unless stated otherwise, all tables in the Annual Report and Accounts 2016 are presented on a reported basis.

For a summary of our financial performance in 2016, see page 14.

For further financial performance data for each global business and geographical region, see pages 45 to 51 and 54 to 60, respectively.

HSBC Holdings plc Annual Report and Accounts 2016	31

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Report of the Directors | Financial summary

Group performance by income and expense item

Net interest income

		2016		2015		2014
	Footnotes	$m		$m		$m
Interest income		42,414		47,189		50,955
Interest expense		(12,601	)	(14,658	)	(16,250	)
Net interest income	4	29,813		32,531		34,705
Average interest-earning assets		1,723,702		1,726,949		1,786,536
		%		%		%
Gross interest yield	5	2.46		2.73		2.85
Less: cost of funds		(0.87	)	(1.00	)	(1.05	)
Net interest spread	6	1.59		1.73		1.80
Net interest margin	7	1.73		1.88		1.94

For footnotes, see page 63.

In 2016, we earned net interest income of $0.9bn in Brazil (2015: $2.1bn) from average interest earning assets in Brazil of

 

$25.8bn (2015: $40.0bn). Our net interest margin excluding Brazil was 1.70% (2015: 1.79%).

Summary of interest income by type of asset
		2016					2015					2014
		Average balance		Interest income		Yield	Average balance		Interest income		Yield	Average balance		Interest income		Yield
	Footnotes	$m		$m		%	$m		$m		%	$m		$m		%
Short-term funds and loans and advances to banks		203,799		1,510		0.74	221,924		2,277		1.03	237,148		3,068		1.29
Loans and advances to customers		865,356		29,272		3.38	909,707		33,104		3.64	931,311		37,429		4.02
Reverse repurchase agreements - non-trading		168,207		1,227		0.73	162,308		1,301		0.80	198,273		1,800		0.91
Financial investments		430,775		7,248		1.68	396,113		7,508		1.90	399,816		8,323		2.08
Other interest-earning assets		55,565		3,157		5.68	36,897		2,999		8.13	19,988		335		1.68
Total interest-earning assets		1,723,702		42,414		2.46	1,726,949		47,189		2.73	1,786,536		50,955		2.85
Trading assets and financial assets designated at fair value	8, 9	179,780		3,897		2.17	195,285		4,626		2.37	238,958		5,596		2.34
Impairment allowances		(9,127	)				(10,606	)				(14,015	)
Non-interest-earning assets		653,115					682,143					668,564
Year ended 31 Dec		2,547,470		46,311		1.82	2,593,771		51,815		2.00	2,680,043		56,551		2.11

For footnotes, see page 63.

Summary of interest expense by type of liability and equity
		2016					2015					2014
		Average balance		Interest expense		Cost	Average balance		Interest expense		Cost	Average balance		Interest expense		Cost
	Footnotes	$m		$m		%	$m		$m		%	$m		$m		%
Deposits by banks	10	49,782		342		0.69	55,863		378		0.68	61,217		481		0.79
Financial liabilities designated at fair value - own debt issued	11	62,042		942		1.52	58,489		717		1.23	66,374		837		1.26
Customer accounts	12	1,074,661		5,492		0.51	1,075,901		7,401		0.69	1,088,493		9,131		0.84
Repurchase agreements - non-trading		118,789		626		0.53	117,947		355		0.30	190,705		652		0.34
Debt securities in issue		114,343		2,807		2.45	129,039		3,521		2.73	129,724		4,554		3.51
Other interest-bearing liabilities		22,387		2,392		10.68	28,396		2,286		8.05	10,120		595		5.88
Total interest-bearing liabilities		1,442,004		12,601		0.87	1,465,635		14,658		1.00	1,546,633		16,250		1.05
Trading liabilities and financial liabilities designated at fair value (excluding own debt issued)		138,486		1,986		1.43	151,294		2,071		1.37	178,518		2,856		1.60
Non-interest bearing current accounts		184,016					190,914					185,990
Total equity and other non-interest bearing liabilities		782,964					785,928					768,902
Year ended 31 Dec		2,547,470		14,587		0.57	2,593,771		16,729		0.64	2,680,043		19,106		0.71

For footnotes, see page 63.

32	HSBC Holdings plc Annual Report and Accounts 2016

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Significant items and currency translation
	2016		2015
	$m		$m
Significant items	951		2,104
- releases/(provisions) arising from the ongoing review of compliance with the UK Consumer Credit Act	2		(10	)
- acquisitions, disposals and dilutions	949		2,114
Currency translation			1,808
Year ended 31 Dec	951		3,912

Net interest income of $29.8bn decreased by $2.7bn or 8% compared with 2015. This was partly the impact of the disposal of our operations in Brazil on 1 July 2016, which reduced net interest income by ($1.2bn), and adverse effects of currency translation differences. These decreases were partly offset by growth in net interest income in Asia, notably in Hong Kong, and in Mexico, partly offset by a decrease in the UK and the US.

Net interest margin in 2016 of 1.73% was 15 basis points ('bps') lower than 2015. This reflected the effects of the disposal and currency translation noted above, which had an adverse effect of 8bps. The remainder of the decrease was primarily as a result of lower yields on customer lending, which had an adverse effect of 9bps on our net interest margin, partly reflecting the continuing run-off of our US CML portfolio. In addition, we recorded an increase in the cost of debt, partly offset by a lower cost of funds on customer accounts, notably in Hong Kong.

Interest income

Interest income decreased by $4.8bn compared with 2015, notably driven by our sale of Brazil operations ($3.1bn) and currency translation. Excluding these factors, total interest income increased marginally.

Interest income on loans and advances to customers decreased by $3.8bn, driven by a reduction of $1.9bn relating to our operations in Brazil, and the adverse effects of currency translation. Excluding these factors, interest income on customer lending was broadly unchanged. The effects of growth in balances in Europe and Mexico, together with central bank rate rises in Mexico and Argentina, were broadly offset by the run-off of our US CML portfolio and the effect of lower average balances in Asia.

Income growth in Mexico was driven by growth in average balances, reflecting gains in market share and higher yields, notably on term lending due to central bank rate increases. Income increased in Europe as the effect of growth in average balances, primarily an increase in term lending volumes, more than offset the effect of lower yields on both term lending and mortgages, reflecting competitive pricing in the market and lower interest rates in the eurozone. By contrast, interest income decreased in Asia, as a result of lower average balances in term lending, despite increased mortgage balances, notably in Hong Kong. Yields in Asia also decreased marginally as a result of central bank rate cuts in China during 2015, although these were partly offset by rate rises in Hong Kong.

Interest income on short-term funds and financial investments decreased by $1.0bn in 2016, including a decrease of $0.7bn relating to Brazil. Excluding the effect of currency translation and Brazil, interest income on short-term funds and financial investments increased by $0.2bn. The movement predominantly reflected increases in available-for-sale debt securities in Asia, reflecting growth in our surplus liquidity. In North America income increased, driven by higher balances primarily due to net purchase of US Treasury securities, and a higher yield, following the US rate rise at the end of 2015.

Interest income on reverse repurchase agreements - non-trading was $0.1bn lower, including a decrease relating to Brazil ($0.4bn). Excluding currency translation and Brazil, income increased primarily in North America, reflecting higher balances and improved market rates.

 

Interest expense

Reported interest expense decreased by $2.1bn, driven by the reductions relating to Brazil ($1.8bn) and currency translation. Excluding these factors, interest expense rose by $0.4bn, as increases in the cost of debt and repurchase agreements were partly offset by decreases in interest expense on customer accounts.

Interest expense on customer accounts decreased by $1.9bn, including amounts relating to Brazil ($0.8bn) and currency translation. Excluding these factors, interest expense on customer accounts decreased by $0.5bn, driven by Asia and Europe, partly offset by Mexico, Argentina and North America. In Asia, the effect of an increase in balances was more than offset by a lower cost of funds, partly a change in portfolio mix towards lower-cost accounts in Hong Kong, which more than offset the effect of central bank rate rises. In addition to these factors, the central bank rate cuts in a number of markets, including mainland China, Australia and India, further lowered our cost of funds. In Europe, interest expense decreased as a result of a reduction in the cost of funds, partly due to a negative rate environment, although the average balances increased, notably in the UK. These decreases were partly offset by higher interest expense on customer accounts in the US, Mexico and Argentina, reflecting promotional deposit offerings and the central bank rate rises.

Interest expense on debt securities in issue and own debt designated at fair value decreased by $0.5bn, including the impact of Brazil ($0.8bn). Excluding currency translation and the effect of Brazil, interest expense increased by $0.4bn. This was driven by an increase in the cost of funds and an increase in average balances, as redemptions across the Group were more than offset by issuances of senior debt from HSBC Holdings plc ('HSBC Holdings'). The increase in the cost of debt designated at fair value was as a result of longer maturities and the structural subordination of our new issuances from HSBC Holdings.

Interest expense increased on repurchase agreements by $0.3bn, notably in North America, reflecting higher balances and market rates.

HSBC Holdings plc Annual Report and Accounts 2016	33

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Report of the Directors | Financial summary

Net fee income

	2016		2015		2014
	$m		$m		$m
Account services	2,417		2,745		3,407
Funds under management	2,076		2,570		2,658
Cards	1,970		2,281		2,460
Credit facilities	1,795		1,919		1,890
Broking income	1,060		1,441		1,371
Unit trusts	863		1,007		1,005
Imports/exports	820		971		1,115
Remittances	766		772		833
Underwriting	705		762		872
Global custody	662		721		726
Insurance agency commission	419		519		516
Other	2,116		2,308		2,692
Fee income	15,669		18,016		19,545
Less: fee expense	(2,892	)	(3,311	)	(3,588	)
Year ended 31 Dec	12,777		14,705		15,957

Significant items and currency translation
	2016		2015
	$m		$m
Significant items
- acquisitions, disposals and dilutions	233		533
Currency translation			574
Year ended 31 Dec	233		1,107

Net fee income fell by $1.9bn compared with 2015, partly as a result of the adverse effects of currency translation of $0.6bn, primarily in the UK, Argentina and Mexico, which notably affected account services, cards and fee expense. The sale of our operations in Brazil to Banco Bradesco S.A. reduced net fee income by a further $0.3bn. In addition, the decrease was driven by RBWM in Hong Kong, reflecting risk-averse retail investor sentiment in Asia.

Fee income from broking and unit trusts decreased by $525m, largely due to a strong performance in Hong Kong in the first half of 2015. The decrease was mainly in RBWM in Hong Kong, from lower securities broking income resulting from a reduction in stock market turnover.

In addition, fee income from cards decreased by $311m, primarily reflecting lower interchange fees in the UK, following regulatory change in late 2015.

 

Fee income from funds under management decreased by $0.5bn, partly driven by a reclassification between fee income from funds under management and fee expense in Germany ($0.2bn). In addition, fee income from funds under management decreased in RBWM's Global Asset Management business, driven by a change in the product mix towards lower margin fixed income products, as well as in GPB in Switzerland.

The reduction in fee income from funds under management was partly offset by a fall in fee expense of $419m, primarily reflecting lower brokerage fees, and the reclassification noted above.

Net trading income

		2016		2015		2014
	Footnote	$m		$m		$m
Trading activities		8,702		7,285		5,419
Net interest income on trading activities		1,386		1,775		1,907
Gain/(loss) on termination of hedges		1		(11	)	1
Other trading income - hedge ineffectiveness
- on cash flow hedges		(5	)	15		34
- on fair value hedges		23		(11	)	19
Fair value movement on non-qualifying hedges	13	(655	)	(330	)	(620	)
Year ended 31 Dec		9,452		8,723		6,760

For footnote, see page 63.

34	HSBC Holdings plc Annual Report and Accounts 2016

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Significant items and currency translation
		2016		2015
	Footnote	$m		$m
Significant items
Included within trading activities		26		230
- favourable debit valuation adjustment on derivative contracts		26		230
Included in other net trading income		(508	)	(42	)
- fair value movement on non-qualifying hedges	13	(687	)	(327	)
- acquisitions, disposals and dilutions		179		285
Total significant items		(482	)	188
Currency translation				596
Year ended 31 Dec		(482	)	784

For footnote, see page 63.

Net trading income of $9.5bn was $0.7bn higher than in 2015, despite the net adverse effects of $1.3bn of significant items and currency translation summarised in the table above. The increase (excluding the movements tabulated above) was driven by:

•	favourable movements on assets held as economic hedges of foreign currency debt designated at fair value of $1.7bn in 2016 compared to minimal movements in 2015. These movements were offset by adverse movements in foreign

 

currency debt designated at fair value in 'Net income/(expense) from financial instruments designated at fair value'; and

•

increases in GB&M ($0.2bn), notably in Rates and in Credit, as we gained market share in Europe, partly offset by a decrease in Equities, reflecting lower trading volumes in Europe and Asia. In addition, we recorded adverse movements of $70m in credit and funding valuation adjustments compared with favourable movements of $227m in the prior year, primarily relating to movements in our own credit spread on structured liabilities.

Net income/(expense) from financial instruments designated at fair value

	2016		2015		2014
	$m		$m		$m
Net income/(expense) arising from:
Financial assets held to meet liabilities under insurance and investment contracts	1,480		531		2,300
Liabilities to customers under investment contracts	(218	)	34		(435	)
HSBC's long-term debt issued and related derivatives	(3,975	)	863		508
- change in own credit spread on long-term debt (significant item)	(1,792	)	1,002		417
- other changes in fair value	(2,183	)	(139	)	91
Other instruments designated at fair value and related derivatives	47		104		100
Year ended 31 Dec	(2,666	)	1,532		2,473

The majority of our financial liabilities designated at fair value are fixed-rate, long-term debt issuances, and are managed in conjunction with interest rate swaps as part of our interest rate management strategy.

 

These liabilities are discussed further on page 242.

Significant items and currency translation
	2016		2015
	$m		$m
Significant items	(1,488	)	1,426
- own credit spread	(1,792	)	1,002
- acquisitions, disposals and dilutions	304		424
Currency translation			24
Year ended 31 Dec	(1,488	)	1,450

We recorded a net expense from financial instruments designated at fair value of $2.7bn in 2016, compared with net income of $1.5bn in 2015. In 2016, there were unfavourable movements of $1.8bn in the fair value of our own long-term debt reflecting changes in credit spread, compared with favourable movements of $1.0bn in 2015.

The decrease was also as a result of 'Other changes in fair value' on our long-term debt and related derivatives, which reflected:

•	higher adverse movements of $1.7bn in 2016 compared with minimal movements in 2015 on foreign currency debt designated at fair value and issued as part of our overall funding strategy (offset by assets held as economic hedges in 'Net trading income'); and

 

•	higher adverse movements of $0.2bn relating to the economic hedging of interest and exchange rate risk on our long-term debt.

By contrast, net income from financial assets held to meet liabilities under insurance and investment contracts of $1.5bn was $0.9bn higher than in 2015. This was primarily driven by improved equity market performance in Asia and Europe in 2016, partly offset by the disposal of our operations in Brazil in July 2016.

Net income arising from financial assets held to meet liabilities under insurance and investment contracts results in a corresponding movement in liabilities to customers, reflecting the extent to which they participate in the investment performance of the associated asset portfolio. These offsetting movements are recorded in 'Net income/(expense) arising from liabilities to customers under investment contracts' and 'Net

HSBC Holdings plc Annual Report and Accounts 2016	35

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Report of the Directors | Financial summary

insurance claims and benefits paid and movement in liabilities to policyholders'.

 

In 2016, the majority of the variance arose in unit-linked contracts where the policyholder bears the investment risk, and was therefore offset by movements in liabilities to customers.

Gains less losses from financial investments

	2016		2015		2014
	$m		$m		$m
Net gains from disposal	1,421		2,179		1,708
- debt securities	357		345		665
- equity securities	1,058		1,829		1,037
- other financial investments	6		5		6
Impairment of available-for-sale equity securities	(36	)	(111	)	(373	)
Year ended 31 Dec	1,385		2,068		1,335

Significant items and currency translation
	2016		2015
	$m		$m
Significant items	701		1,385
- gain on disposal of our membership interest in Visa - Europe	584		-
- gain on disposal of our membership interest in Visa - US	116		-
- gain on the partial sale of shareholding in Industrial Bank	-		1,372
- acquisitions, disposals and dilutions	1		13
Currency translation			34
Year ended 31 Dec	701		1,419

In 2016, gains less losses from financial investments decreased by $0.7bn compared with 2015. This was largely due to the significant items and currency translation tabulated above, notably the non-recurrence of the gain on the partial sale of

 

our shareholding in Industrial Bank of $1.4bn in 2015, partly offset by gains on disposal of our membership interests in Visa Europe of $0.6bn and in Visa US of $0.1bn in 2016.

Net insurance premium income

	2016		2015		2014
	$m		$m		$m
Gross insurance premium income	10,588		11,012		12,370
Reinsurance premiums	(637	)	(657	)	(449	)
Year ended 31 Dec	9,951		10,355		11,921

Significant items and currency translation
	2016		2015
	$m		$m
Significant items
- acquisitions, disposals and dilutions	362		764
Currency translation			169
Year ended 31 Dec	362		933

Net insurance premium income was $0.4bn lower than in 2015, and included reductions due to the disposal of our operations in Brazil ($0.4bn) and currency translation movements of $0.2bn. Net insurance premium income increased in Hong Kong, partly offset by reductions in France in response to low interest rates

 

and market volatility, and in the UK, following the disposal of our pension business in 2015.

Other operating income

	2016		2015		2014
	$m		$m		$m
Rent received	157		171		162
Gains/(losses) recognised on assets held for sale	(1,949	)	(244	)	220
Gains on investment properties	4		61		120
Gain on disposal of property, plant and equipment, intangible assets and non-financial investments	35		53		32
Losses arising from dilution of interest in Industrial Bank and other associates and joint ventures	-		-		(32	)
Change in present value of in-force long-term insurance business	902		799		261
Other	(120	)	215		368
Year ended 31 Dec	(971	)	1,055		1,131

36	HSBC Holdings plc Annual Report and Accounts 2016

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Change in present value of in-force long-term insurance business
	2016		2015		2014
	$m		$m		$m
Value of new business	900		809		870
Expected return	(532	)	(552	)	(545	)
Assumption changes and experience variances	513		504		(116	)
Other adjustments	21		38		52
Year ended 31 Dec	902		799		261

Significant items and currency translation
	2016		2015
	$m		$m
Significant items
Included within gains/(losses) recognised on assets held for sale:	(163	)	(214	)
- portfolio disposals	(163	)	(214	)
Included within the remaining line items:	(1,763	)	157
- acquisitions, disposals and dilutions	(1,763	)	157
Total significant items	(1,926	)	(57	)
Currency translation			71
Year ended 31 Dec	(1,926	)	14

Other operating income decreased by $2.0bn from 2015. This was as a result of the loss on the sale of our operations in Brazil of $1.7bn and the effects of the other significant items recorded in the table above. In addition, we recorded lower revaluation gains on investment properties.

These decreases were partly offset by higher favourable movements of $0.1bn in present value of in-force ('PVIF') long-term insurance business, which was primarily driven by an

 

increase in the value of new business written in Hong Kong, partly offset by a reduction in France and the impact of the disposal of our operations in Brazil.

In 2016, we recognised $513m of income in 'Assumption changes and experience variances', which was broadly unchanged from the $504m recognised in 2015. For further details, please see Note 20.

Net insurance claims and benefits paid and movement in liabilities to policyholders

		2016		2015		2014
	Footnote	$m		$m		$m
Net insurance claims and benefits paid and movement in liabilities to policyholders:
- gross		12,508		11,872		13,723
- less reinsurers' share		(638	)	(580	)	(378	)
Year ended 31 Dec	14	11,870		11,292		13,345

For footnote, see page 63.

Significant items and currency translation
	2016		2015
	$m		$m
Significant items
- acquisitions, disposals and dilutions	538		962
Currency translation			246
Year ended 31 Dec	538		1,208

Net insurance claims and benefits paid and movement in liabilities to policyholders were $0.6bn higher compared with 2015, and included reductions due to the disposal of our operations in Brazil ($0.4bn) and currency translation movements of $0.2bn.

This increase was primarily due to improved returns on financial assets supporting unit-linked contracts, where the policyholder bears the investment risk, reflecting improved equity market performance in Hong Kong compared to 2015. In addition, movements in liabilities to policyholders were higher due to

 

increased premium income, and interest rate-driven changes to liability valuations in Hong Kong.

These increases were partly offset by decreased premiums and reducing investment returns in France.

The gains or losses recognised on the financial assets designated at fair value that are held to support these insurance contract liabilities are reported in 'Net income/(expense) from financial instruments designated at fair value' on page 203.

HSBC Holdings plc Annual Report and Accounts 2016	37

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Report of the Directors | Financial summary

Loan impairment charges and other credit risk provisions

	2016		2015		2014
	$m		$m		$m
New allowances net of allowance releases	3,977		4,400		5,010
Recoveries of amounts previously written off	(627	)	(808	)	(955	)
Loan impairment charges:	3,350		3,592		4,055
- individually assessed allowances	1,831		1,505		1,780
- collectively assessed allowances	1,519		2,087		2,275
Releases of impairment on available-for-sale debt securities	(63	)	(17	)	(319	)
Other credit risk provisions	113		146		115
Year ended 31 Dec	3,400		3,721		3,851
Impairment charges on loans and advances to customers as a percentage of average gross loans and advances to customers	0.39	%	0.39	%	0.43	%

Significant items and currency translation
	2016		2015
	$m		$m
Significant items	748		933
- acquisitions, disposals and dilutions	748		933
Currency translation			184
Year ended 31 Dec	748		1,117

Loan impairment charges and other credit risk provisions ('LICs') of $3.4bn were $0.3bn lower than in 2015. This was partly as a result of favourable currency translation differences of $0.2bn, notably in Mexico and the UK. In addition, our sale of operations in Brazil resulted in a $0.2bn reduction.

Collectively assessed LICs of $1.5bn were down $568m compared with 2015. This reduction included the net favourable effect of $230m as a result of our sale of operations in Brazil and favourable currency translation of $95m. The remaining variance reflected the following:

•

In CMB (down $226m), a net release of collectively assessed LICs compared with a net charge in 2015. The net release of allowances in 2016 was primarily on exposures related to the oil and gas sector, notably in the US and Canada, the UAE and Asia. This reflected a more positive outlook for this sector. By contrast, in 2015 we increased our collective allowances on exposures related to the oil and gas sector. The reduction in collectively assessed LICs was partly offset by an increase in the UK, primarily reflecting new allowances against exposures in the oil and gas sector.

•	In GB&M, a net release of collectively assessed LICs, notably in the UK and US, compared with a net charge in 2015.

This was partly offset:

•	In RBWM, where collectively assessed LICs rose by $75m. The increase was mainly in Mexico reflecting our strategic focus on growing unsecured lending, as well as an increase in delinquency rates. By contrast, collectively assessed LICs decreased in a small number of markets in the Middle East and North Africa and Asia.

•	In Corporate Centre, LICs increased in our US CML run-off portfolio by $67m.

 

Individually assessed LICs of $1.8bn increased by $326m compared with 2015. Higher charges in GB&M were partly offset by a reduction in CMB and favourable currency translation of $79m. This primarily reflected the following:

•	In GB&M (up $0.6bn), the increase was primarily in the US related to a significant specific charge against a mining-related corporate exposure, as well as charges relating to exposures in the oil and gas sector. Additionally, in Hong Kong, individually assessed LICs in 2016 largely related to a single corporate exposure. This compared with a net release of LICs in 2015.

This was partly offset:

•

In CMB, lower individually assessed LICs (down $261m), included favourable currency translation of $70m and a net favourable effect of $45m attributable to our sale of operations in Brazil. The decrease also reflected lower individually assessed LICs in Indonesia, where charges in 2015 related to a small number of exposures across multiple sectors. Lower charges in both the UK and the UAE also contributed to the reduction. These decreases were partly offset by higher LICs in Hong Kong, related to various sectors, including manufacturing, and in Canada due to a rise in the number of exposures in the oil and gas sector migrating to default. Notably, the increase in individually assessed LICs in Canada was more than offset by the movement in collective allowances related to the oil and gas sector, discussed above.

In 2016, we recorded higher net releases of impairment allowances against available for sale debt securities. These were primarily related to asset-backed securities ('ABSs') in our Legacy Credit business in Corporate Centre.

Operating expenses

In addition to detailing operating expense items by category, as set out in the table below, we also categorise adjusted expenses as follows:
• 'Run-the-bank' costs comprise business-as-usual running costs that keep operations functioning at the required quality and standard year on year, maintain IT infrastructure and support revenue growth. Run-the-bank costs are split between front office and back office, reflecting the way the Group is organised into four global businesses ('front office') supported by global functions ('back office'). • 'Change-the-bank' costs comprise expenses relating to the implementation of mandatory regulatory changes and other investment costs incurred relating to projects to change business-as‑usual activity to enhance future operating capabilities.	• 'Costs to achieve' comprise those specific costs relating to the achievement of the strategic actions set out in the Investor Update in June 2015. They comprise costs incurred between 1 July 2015 and 31 December 2017, and do not include ongoing initiatives such as Global Standards. Any costs arising within this category have been incurred as part of a significant transformation programme. Costs to achieve are included within significant items and incorporate restructuring costs that were identified as a separate significant item prior to 1 July 2015. • The UK bank levy is reported as a separate category.

38	HSBC Holdings plc Annual Report and Accounts 2016

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Operating expenses
	2016		2015		2014
	$m		$m		$m
By expense category
Employee compensation and benefits	18,089		19,900		20,366
Premises and equipment (excluding depreciation and impairment)	3,758		3,830		4,204
General and administrative expenses	12,715		13,832		14,361
Administrative expenses	34,562		37,562		38,931
Depreciation and impairment of property, plant and equipment	1,229		1,269		1,382
Amortisation and impairment of intangible assets	777		937		936
Goodwill impairment	3,240		-		-
Year ended 31 Dec	39,808		39,768		41,249

	2016		2015
	$m		$m
By expense group
Run-the-bank - front office	13,612		13,711
Run-the-bank - back office	13,275		13,437
Change-the-bank	2,746		3,161
Bank levy	922		1,421
Significant items	9,253		5,947
Currency translation			2,091
Year ended 31 Dec	39,808		39,768

Staff numbers (full-time equivalents)
	2016		2015		2014
Global businesses
Retail Banking and Wealth Management	124,810		145,868		151,802
Commercial Banking	44,712		48,651		48,650
Global Banking and Markets	46,659		47,894		46,605
Global Private Banking	8,054		8,513		8,775
Corporate Centre	10,940		4,277		1,771
At 31 Dec	235,175		255,203		257,603

Reported operating expenses of $39.8bn were $40m higher than in 2015. This reflected an increase in significant items of $3.3bn which included:

•	a $3.2bn write-off of the goodwill in our GPB business in Europe (please see Note 20 for further details);

•	costs to achieve of $3.1bn, compared with $0.9bn in 2015; partly offset by

 

•	the operating expenses incurred in our Brazil business of $1.1bn in 2016, compared with $2.5bn in 2015; and

•	a reduction of $1.0bn in settlements and provisions in connection with legal matters.

The increase in significant items was partly offset by the favourable effects of currency translation of $2.1bn.

Significant items and currency translation
	2016		2015
	$m		$m
Significant items	9,252		5,947
- costs associated with portfolio disposals	28		-
- costs to achieve	3,118		908
- cost to establish UK ring-fenced bank	223		89
- impairment of GPB - Europe goodwill	3,240		-
- regulatory provisions in GPB	344		172
- restructuring and other related costs	-		117
- settlements and provisions in connection with legal matters	681		1,649
- UK customer redress programmes	559		541
- acquisitions, disposals and dilutions	1,059		2,471
Currency translation	-		2,091
Year ended 31 Dec	9,252		8,038

Excluding the significant items and currency translation tabulated above, operating expenses of $30.6bn were $1.2bn lower than in 2015. This primarily reflected cost savings of $2.2bn achieved in 2016 and a reduction in the UK bank levy of $0.5bn. This was partly offset by the impact of inflation and continued investment in regulatory programmes and compliance.

 

Run-the-bank costs of $26.9bn were $0.3bn lower than in 2015 and change-the-bank costs of $2.7bn were $0.4bn lower than in 2015.

Our total investment in regulatory programmes and compliance, comprising both run‑the-bank and change-the-bank elements, was $3.0bn, up $0.4bn or 14% from 2015. This reflected the ongoing implementation of our Global Standards programme to enhance our financial crime risk controls and capabilities, and to meet our external commitments.

HSBC Holdings plc Annual Report and Accounts 2016	39

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Report of the Directors | Financial summary

We have maintained our transformational efforts and continue to realise the benefit of our cost-saving programme.

•	Within RBWM, savings of $0.4bn reflected the impact of our branch optimisation programme enabled by our digital initiatives.

•	Within Operations and Technology, savings of $1.2bn reflected migrations to lower cost locations, the simplification of our IT structure and the implementation of target operating models.

•	Within our back office functions, savings of $0.4bn were realised as a result of the re-engineering and simplification of processes and the implementation of global operating models.

 

Taking the 2016 savings into account, our run rate savings are now $3.7bn since the start of our initiatives.

The number of employees expressed in FTEs at 31 December 2016 was 235,175, a decrease of 20,028 since 31 December 2015. This included a 19,145 reduction following our disposal of operations in Brazil. Excluding Brazil, the decrease in FTE was 883 as a reduction of 17,855 FTEs realised across global businesses and global functions was partly offset by investment in our Global Standards Programme of 5,694 FTEs, costs to achieve FTEs of 8,073 and investment for growth.

Share of profit in associates and joint ventures
	2016		2015		2014
	$m		$m		$m
Share of profit in associates	2,326		2,518		2,493
- Bank of Communications Co., Limited	1,892		2,011		1,974
- The Saudi British Bank	415		462		455
- other	19		45		64
Share of profit in joint ventures	28		38		39
Year ended 31 Dec	2,354		2,556		2,532

Our share of profit in associates and joint ventures was $2.4bn, a decrease of $0.2bn or 8%, which included the adverse effects of currency translation of $0.1bn, notably affecting our share of profit in BoCom.

Excluding the impact of currency translation, our share of profit in associates and joint ventures fell by $0.1bn or 4%, relating to higher impairment charges in the Saudi British Bank and lower revenue in HSBC Saudi Arabia, reflecting lower asset management and investment banking revenue. This was partly offset by revenue growth in Saudi British Bank and well-managed costs in both associates.

Our share of profit in BoCom for the year was $1.9bn. At 31 December 2016, we performed an impairment review

 

of our investment in BoCom and concluded that it was not impaired, based on our value in use calculation (see Note 20 on the Financial Statements for further details).

In future periods, the value in use may increase or decrease depending on the effect of changes to model inputs. It is expected that the carrying amount will increase in 2017 due to retained profits earned by BoCom. At the point where the carrying amount exceeds the value in use, HSBC would continue to recognise its share of BoCom's profit or loss, but the carrying amount would be reduced to equal the value in use, with a corresponding reduction in income, unless the market value has increased to a level above the carrying amount.

Tax expense
	2016		2015		2014
	$m		$m		$m
Profit before tax	7,112		18,867		18,680
Tax expense	(3,666	)	(3,771	)	(3,975	)
Profit after tax for the year ended 31 Dec	3,446		15,096		14,705
Effective tax rate	51.55	%	19.99	%	21.28	%

The effective tax rate for 2016 of 51.6% was higher than the 20.0% in 2015, reflecting events that occurred in 2016 that reduced the reported profit before tax but not taxable profits. These included the non-deductible goodwill impairment and the non-deductible loss on our disposal of operations in Brazil. The

 

2016 tax charge includes tax losses not recognised, prior year adjustments and the impact of the 8% bank corporation tax surcharge applicable in the UK from 1 January 2016. Further detail is provided in Note 7 of the Financial Statements.

40	HSBC Holdings plc Annual Report and Accounts 2016

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Consolidated balance sheet

Five-year summary consolidated balance sheet
		2016		2015		2014		2013		2012
	Footnote	$m		$m		$m		$m		$m
Assets
Cash and balances at central banks		128,009		98,934		129,957		166,599		141,532
Trading assets		235,125		224,837		304,193		303,192		408,811
Financial assets designated at fair value		24,756		23,852		29,037		38,430		33,582
Derivatives		290,872		288,476		345,008		282,265		357,450
Loans and advances to banks		88,126		90,401		112,149		120,046		117,085
Loans and advances to customers	15	861,504		924,454		974,660		992,089		962,972
Reverse repurchase agreements - non-trading		160,974		146,255		161,713		179,690		70,112
Financial investments		436,797		428,955		415,467		425,925		421,101
Assets held for sale		4,389		43,900		7,647		4,050		19,269
Other assets		144,434		139,592		154,308		159,032		160,624
Total assets at 31 Dec		2,374,986		2,409,656		2,634,139		2,671,318		2,692,538
Liabilities and equity
Liabilities
Deposits by banks		59,939		54,371		77,426		86,507		95,480
Customer accounts		1,272,386		1,289,586		1,350,642		1,361,297		1,311,396
Repurchase agreements - non-trading		88,958		80,400		107,432		164,220		40,567
Trading liabilities		153,691		141,614		190,572		207,025		304,563
Financial liabilities designated at fair value		86,832		66,408		76,153		89,084		87,720
Derivatives		279,819		281,071		340,669		274,284		358,886
Debt securities in issue		65,915		88,949		95,947		104,080		119,461
Liabilities of disposal groups held for sale		2,790		36,840		6,934		2,804		5,018
Liabilities under insurance contracts		75,273		69,938		73,861		74,181		68,195
Other liabilities		106,805		102,961		114,525		117,377		118,123
Total liabilities at 31 Dec		2,192,408		2,212,138		2,434,161		2,480,859		2,509,409
Equity
Total shareholders' equity		175,386		188,460		190,447		181,871		175,242
Non-controlling interests		7,192		9,058		9,531		8,588		7,887
Total equity at 31 Dec		182,578		197,518		199,978		190,459		183,129
Total liabilities and equity at 31 Dec		2,374,986		2,409,656		2,634,139		2,671,318		2,692,538

For footnote, see page 63.

Five-year selected financial information
		2016		2015		2014		2013		2012
	Footnotes	$m		$m		$m		$m		$m
Called up share capital		10,096		9,842		9,609		9,415		9,238
Capital resources	16, 17	172,358		189,833		190,730		194,009		180,806
Undated subordinated loan capital		1,967		2,368		2,773		2,777		2,778
Preferred securities and dated subordinated loan capital	18	42,600		42,844		47,208		48,114		48,260
Risk-weighted assets	16	857,181		1,102,995		1,219,765		1,092,653		1,123,943
Financial statistics
Loans and advances to customers as a percentage of customer accounts		67.7		71.7		72.2		72.9		73.4
Average total shareholders' equity to average total assets		7.37		7.31		7.01		6.55		6.16
Net asset value per ordinary share at year-end ($)	19	7.91		8.73		9.28		9.27		9.09
Number of $0.50 ordinary shares in issue (millions)		20,192		19,685		19,218		18,830		18,476
Closing foreign exchange translation rates to $:
$1: £		0.811		0.675		0.642		0.605		0.619
$1: €		0.949		0.919		0.823		0.726		0.758

For footnotes, see page 63.

A more detailed consolidated balance sheet is contained in the Financial Statements on page 186.

HSBC Holdings plc Annual Report and Accounts 2016	41

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Report of the Directors HTMLPIPESYMBOL Financial summary

Combined view of customer lending and customer deposits
		2016		2015
	Footnote	$m		$m
Combined customer lending
Loans and advances to customers		861,504		924,454
Loans and advances to customers reported in 'Assets held for sale'		3,623		19,021
- Brazil	20	-		17,001
- other		3,623		2,020
At 31 Dec		865,127		943,475
Combined customer deposits
Customer accounts		1,272,386		1,289,586
Customer accounts reported in 'Liabilities of disposal groups held for sale'		2,713		16,682
- Brazil	20	-		15,094
- other		2,713		1,588
At 31 Dec		1,275,099		1,306,268

For footnote, see page 63.

Movement in 2016

Total reported assets of $2.4tn were 1% lower than at 31 December 2015 on a reported basis, and 5% higher on a constant currency basis.

We have maintained the strength of our balance sheet, as targeted asset growth was partly offset by reductions in our legacy portfolios and the completion of our sale of operations in Brazil to Banco Bradesco S.A. We also issued more than $30bn of senior debt during the year from HSBC Holdings to build up the Group's total loss-absorbing capacity in line with anticipated regulatory requirements.

Our ratio of customer advances to customer accounts was 68%. Loans and advances to customers fell on a reported basis by $63bn and customer accounts fell on a reported basis by $17bn. These changes included:

•	adverse currency translation movements of $62bn on loans and advances to customers and $81bn on customer accounts;

•	a $9bn reduction in corporate overdraft and current account balances relating to a small number of clients in our Global Liquidity and Cash Management business in the UK that settled their overdraft and deposit balances on a net basis; and

•	an $11bn transfer to 'Assets held for sale' of US first lien mortgage balances in Corporate Centre.

Excluding these movements, customer lending increased by $19bn, as a result of strong fourth-quarter growth in Asia and increases in Europe throughout the year.

Assets

Cash and balances at central banks increased by $29bn or 29%, primarily from higher euro denominated balances in continental Europe, and in the US.

Trading assets increased by $10bn, mainly in Hong Kong and the US. This included higher balances in settlement accounts and an increase in debt and equity securities.

Reverse repurchase agreements - non-trading increased by $15bn, primarily in the US, as we managed our surplus liquidity to maximise returns.

Assets held for sale reduced by $40bn, of which $42bn related to our disposal of operations in Brazil.

Loans and advances to customers decreased by $63bn on a reported basis, primarily in Europe (down $48bn) and North America (down $17bn), partly offset by Asia (up $9bn). This included:

•	adverse currency translation movements of $62bn;

 

•	a $9bn reduction in corporate overdraft balances in Europe, with a corresponding fall in corporate customer accounts; and

•	an $11bn transfer to 'Assets held for sale' of US first lien mortgage balances in Corporate Centre, reflecting our strategic focus on reducing our legacy portfolios. (We sold most of these loans during 2016).

Excluding these factors, customer lending balances increased by $19bn or 2%. We grew balances in Asia by $13bn, notably in Hong Kong in both GB&M ($8bn) and CMB ($4bn) in term lending, although trade lending remained broadly unchanged. We also grew RBWM balances ($4bn), particularly in mortgages in Hong Kong. We recorded particularly strong growth in the fourth quarter ($20bn) in the region. In addition, we increased balances in Europe by $15bn as a result of higher term lending in CMB and mortgages in RBWM, both mainly in the UK. By contrast, US GB&M balances fell, reflecting our active management of overall client returns.

Liabilities

Customer accounts at 31 December 2016 were $17bn lower than at 31 December 2015 and included:

•	adverse currency translation movements of $81bn; and

•	a $9bn reduction in corporate current account balances, in line with a fall in corporate overdraft positions.

Excluding these factors, customer accounts grew by $73bn, primarily in RBWM and in GLCM in Hong Kong and the UK, with the latter driven by targeted customer mandate acquisition.

Trading liabilities increased by $12bn, mainly in the US, reflecting an increase in settlement accounts and net short positions from increased trading activity at the end of 2016, compared with the same period in 2015.

Financial liabilities designated at fair value increased by $20bn, reflecting new issuances of senior debt by HSBC Holdings.

Debt securities in issue fell by $23bn, mainly in HSBC Bank plc., following reductions in commercial paper issuances. These have been replaced by intra-group funding from HSBC Holdings from total loss-absorbing capacity resources. In the US, balances also fell, reflecting a lower funding requirement as we continued to run off legacy portfolios.

Liabilities of disposal groups held for sale decreased by $34bn, reflecting the completion of our sale of operations in Brazil.

Equity

Total shareholders' equity fell by $13.1bn or 7%. The effects of profits generated in the year were more than offset by dividends paid and an increase in accumulated foreign exchange losses, reflecting the significant appreciation of the US dollar against the British pound and the euro. The net increase in treasury shares, principally reflecting our share buy-back initiative, also reduced shareholders' equity by $2.5bn.

Risk-weighted assets

Risk-weighted assets ('RWAs') were $857.2bn at 31 December 2016, a decrease of $245.8bn compared with 31 December 2015. After foreign currency translation differences, RWAs reduced by $207.7bn in 2016. This reflected targeted RWA-reduction initiatives of $143.2bn and the change of regulatory treatment of our investment in BoCom reducing RWAs by $120.9bn. This was partly offset by book size increases of $38.7bn.

The RWA initiatives included:

•	exposure reductions, process improvements and refined calculations, which reduced RWAs by $69.8bn, 55% of which were in GB&M;

•	the disposal of our activities in Brazil, which reduced RWAs by $41.8bn; and

42	HSBC Holdings plc Annual Report and Accounts 2016

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•	an accelerated sell-down of our consumer mortgage portfolio in the US and our Legacy Credit book, together contributing $31.6bn to the reduction

 

The book size increase of $38.7bn primarily came from higher term lending to corporate customers in CMB and higher general lending to customers in GB&M, both mainly in Europe and Asia.

Customer accounts by country
	2016		2015
	$m		$m
Europe	446,615		491,520
- UK	361,278		404,084
- France	35,996		35,635
- Germany	13,925		13,873
- Switzerland	9,474		10,448
- other	25,942		27,480
Asia	631,723		598,620
- Hong Kong	461,626		421,538
- Mainland China	46,576		46,177
- Singapore	39,062		41,307
- Australia	18,030		17,703
- Malaysia	12,904		14,114
- Taiwan	11,731		11,812
- India	11,289		11,795
- Indonesia	5,092		5,366
- other	25,413		28,808
Middle East and North Africa (excluding Saudi Arabia)	34,766		42,824
- United Arab Emirates	16,532		18,281
- Turkey	4,122		6,356
- Egypt	3,790		6,602
- other	10,322		11,585
North America	138,790		135,152
- US	88,751		86,322
- Canada	42,096		39,727
- other	7,943		9,103
Latin America	20,492		21,470
- Mexico	14,423		15,798
- other	6,069		5,672
At 31 Dec	1,272,386		1,289,586

HSBC Holdings plc Annual Report and Accounts 2016	43

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Report of the Directors | Finan cial summary / Global businesses

Global businesses and geographical regions
	Page
Change in reportable segments	44
Analysis of adjusted results by global business	45
Reconciliation of reported and adjusted items	47
Reconciliation of reported and adjusted items - global businesses	48
Retail Banking and Wealth Management	51
Commercial Banking	52
Global Banking and Markets	52
Global Private Banking	53
Corporate Centre	53
Analysis of reported results by geographical regions	54
Reconciliation of reported and adjusted items - geographical regions	56
Analysis of reported results by country	59

Change in reportable segments

(Audited)

The Group Chief Executive as supported by the GMB is considered to be the CODM for the purposes of identifying the Group's reportable segments.

They review operating activity on a number of bases, including by global business and geographical region. While in 2015 we considered the reportable segments to be the geographical regions, over time the focus of internal management reporting provided to the GMB and CODM has moved towards global business. The shift in internal reporting was further augmented in 2016 to include financial information and metrics on the consumption of, and returns on, capital by global business to support the GMB assessment of business performance and the allocation of capital resources. As a result global business is now the most prominent view used by management to allocate resources and assess performance, and is considered to be the Group's reportable segment.

In addition, we made the following realignments within our internal reporting to the GMB and CODM:

•	Creation of a Corporate Centre: Certain functions were combined to create a Corporate Centre. These include Balance Sheet Management, legacy businesses and interests in associates and joint ventures. The Corporate Centre also includes the results of our financing operations, central support costs with associated recoveries and the UK bank levy, previously reported within Other.

•	Reallocation of Head Office costs: We have reviewed central costs previously reported in Other and reallocated them to

 

the global businesses where appropriate. Residual costs are reported within the Corporate Centre.

•	Customer realignment: We conducted a number of internal reviews aligning customer requirements to those global businesses best suited to service their respective needs, resulting in the transfer of a portfolio of customers from CMB to GB&M and the transfer of certain policyholders in Asia from CMB to RBWM during the year.

Comparative data have been represented accordingly.

In addition, geographical comparative data for Europe and Middle East and North Africa have been re-presented to reflect the management oversight provided by our Middle East and North Africa region following the management services agreement entered between HSBC Bank plc and HSBC Bank Middle East Limited in 2016 in respect of HSBC Bank A.S. (Turkey).

Basis of preparation Following the changes in internal reporting to the CODM, analysis by global business is considered more prominent than the geographical region view in the way the CODM assesses performance and allocates resources. The global businesses are therefore considered our reportable segments under IFRS 8. Global business results are assessed by the CODM on the basis of adjusted performance that removes the effects of significant items and currency translation from reported results. We therefore present these results on an adjusted basis as required by IFRSs. The 2015 and 2014 adjusted performance comparative information is presented on a constant currency basis as described on page 45. As required by IFRS 8, reconciliations of the total adjusted global business results of the Group reported results are presented on page 46. Supplementary reconciliations from reported to adjusted results by global business are presented on pages 47 to 51 for information purposes. Our operations are closely integrated and, accordingly, the presentation of data includes internal allocations of certain items of income and expense. These allocations include the costs of certain support services and global functions to the extent that they can be meaningfully attributed to operational business lines and geographical regions. While such allocations have been made on a systematic and consistent basis, they necessarily involve a degree of subjectivity. Costs which are not allocated to global businesses are included in the Corporate Centre. Where relevant, income and expense amounts presented include the results of inter-segment funding along with inter-company and inter-business line transactions. All such transactions are undertaken on arm's length terms. The intra-Group elimination items for the global businesses are presented in the Corporate Centre.  The expense of the UK bank levy is included in the Europe geographical region as HSBC regards the levy as a cost of being headquartered in the UK. For the purposes of the presentation by global business, the cost of the levy is included in the Corporate Centre. The results of geographical regions are presented on a reported basis.

A description of the global businesses is provided in the Strategic Report, pages 3, 18 and 19.

44	HSBC Holdings plc Annual Report and Accounts 2016

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Analysis of adjusted results by global business

(Audited)

HSBC adjusted profit before tax and balance sheet data
		2016
		Retail Banking and Wealth Management		Commercial Banking		Global Banking and Markets		Global Private Banking		Corporate Centre		Total
	Footnotes	$m		$m		$m		$m		$m		$m
Profit before tax
Net interest income		13,198		8,689		4,923		809		1,243		28,862
Net fee income/(expense)		4,839		3,627		3,392		749		(63	)	12,544
Net trading income	21	435		447		6,327		183		2,542		9,934
Other income/(expenses)	34	453		124		277		16		(2,057	)	(1,187	)
Net operating income before loan impairment charges and other credit risk provisions	22	18,925		12,887		14,919		1,757		1,665		50,153
- external		16,319		12,953		17,798		1,498		1,585		50,153
- inter-segment		2,606		(66	)	(2,879	)	259		80		-
Loan impairment (charges)/recoveries and other credit risk provisions		(1,171	)	(1,000	)	(457	)	1		(25	)	(2,652	)
Net operating income		17,754		11,887		14,462		1,758		1,640		47,501
Total operating expenses		(12,441	)	(5,835	)	(8,865	)	(1,469	)	(1,946	)	(30,556	)
Operating profit/(loss)		5,313		6,052		5,597		289		(306	)	16,945
Share of profit in associates and joint ventures		20		-		-		-		2,335		2,355
Adjusted profit before tax		5,333		6,052		5,597		289		2,029		19,300
		%		%		%		%		%		%
Share of HSBC's adjusted profit before tax		27.6		31.4		29.0		1.5		10.5		100.0
Adjusted cost efficiency ratio		65.7		45.3		59.4		83.6		116.9		60.9
Adjusted balance sheet data		$m		$m		$m		$m		$m		$m
Loans and advances to customers (net)		306,056		281,930		225,855		35,456		12,207		861,504
Interests in associates and joint ventures		395		-		-		-		19,634		20,029
Total external assets		413,287		306,256		925,187		41,459		688,797		2,374,986
Customer accounts		590,502		341,729		256,095		69,850		14,210		1,272,386
Adjusted risk-weighted assets (unaudited)	37	111,899		274,893		299,629		15,213		150,327		851,961

		201535
Profit before tax
Net interest income		12,579		8,461		4,514		824		2,241		28,619
Net fee income/(expense)		5,545		3,739		3,500		933		(119	)	13,598
Net trading income	21	443		462		6,175		204		655		7,939
Other income	34	675		91		377		4		116		1,263
Net operating income before loan impairment charges and other credit risk provisions	22	19,242		12,753		14,566		1,965		2,893		51,419
- external		16,763		12,863		17,055		1,690		3,048		51,419
- inter-segment		2,479		(110	)	(2,489	)	275		(155	)	-
Loan impairment charges and other credit risk provisions		(1,060	)	(1,434	)	(74	)	(11	)	(25	)	(2,604	)
Net operating income		18,182		11,319		14,492		1,954		2,868		48,815
Total operating expenses		(12,514	)	(5,896	)	(8,958	)	(1,567	)	(2,795	)	(31,730	)
Operating profit		5,668		5,423		5,534		387		73		17,085
Share of profit in associates and joint ventures		22		-		-		-		2,421		2,443
Adjusted profit before tax		5,690		5,423		5,534		387		2,494		19,528
		%		%		%		%		%		%
Share of HSBC's adjusted profit before tax		29.1		27.8		28.3		2.0		12.8		100.0
Adjusted cost efficiency ratio		65.0		46.2		61.5		79.7		96.6		61.7
Adjusted balance sheet data		$m		$m		$m		$m		$m		$m
Loans and advances to customers (net)		296,607		269,758		231,215		41,161		23,451		862,192
Interests in associates and joint ventures		393		-		-		-		18,080		18,473
Total external assets		399,866		296,380		842,437		49,241		625,813		2,213,737
Customer accounts		548,835		327,285		240,971		78,318		13,337		1,208,746
Adjusted risk-weighted assets (unaudited)	37	113,268		270,915		308,189		17,121		305,691		1,015,184

HSBC Holdings plc Annual Report and Accounts 2016	45

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Report of the Directors | Global businesse s

HSBC adjusted profit before tax and balance sheet data (continued)
		201435
		Retail Banking and Wealth Management		Commercial Banking		Global Banking and Markets		Global Private Banking		Corporate Centre		Total
	Footnotes	$m		$m		$m		$m		$m		$m
Profit before tax
Net interest income		12,400		8,094		4,148		861		3,103		28,606
Net fee income/(expense)		5,572		3,809		3,412		971		(115	)	13,649
Net trading income/(expense)	21	380		479		5,261		243		(18	)	6,345
Other income	34	623		216		757		4		929		2,529
Net operating income before loan impairment charges and other credit risk provisions	22	18,975		12,598		13,578		2,079		3,899		51,129
- external		17,050		13,103		15,406		1,799		3,771		51,129
- inter-segment		1,925		(505	)	(1,828	)	280		128		-
Loan impairment (charges)/recoveries and other credit risk provisions		(901	)	(894	)	(408	)	11		291		(1,901	)
Net operating income		18,074		11,704		13,170		2,090		4,190		49,228
Total operating expenses		(11,964	)	(5,576	)	(8,246	)	(1,551	)	(2,723	)	(30,060	)
Operating profit		6,110		6,128		4,924		539		1,467		19,168
Share of profit in associates and joint ventures		40		-		-		-		2,342		2,382
Adjusted profit before tax		6,150		6,128		4,924		539		3,809		21,550
		%		%		%		%		%		%
Share of HSBC's adjusted profit before tax		28.6		28.4		22.8		2.5		17.7		100.0
Adjusted cost efficiency ratio		63.1		44.3		60.7		74.6		69.8		58.8
Adjusted balance sheet data		$m		$m		$m		$m		$m		$m
Loans and advances to customers (net)		287,496		259,053		228,323		40,928		28,844		844,644
Interests in associates and joint ventures		383		-		-		-		16,801		17,184
Total external assets		385,926		288,755		928,215		51,283		640,404		2,294,583
Customer accounts		514,074		309,152		261,110		78,592		23,681		1,186,609
Adjusted risk-weighted assets (unaudited)	37	109,526		262,634		349,661		17,660		343,882		1,083,363

For footnotes, see page 63.

46	HSBC Holdings plc Annual Report and Accounts 2016

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Reconciliation of reported and adjusted items

(Audited)

Adjusted results reconciliation
		2016						2015								2014
		Adjusted		Significant items		Reported		Adjusted		Currency translation		Significant items		Reported		Adjusted		Currency translation		Significant items		Reported
	Footnote	$m		$m		$m		$m		$m		$m		$m		$m		$m		$m		$m
Revenue	22	50,153		(2,187	)	47,966		51,419		3,001		5,380		59,800		51,129		7,612		2,507		61,248
LICs		(2,652	)	(748	)	(3,400	)	(2,604	)	(184	)	(933	)	(3,721	)	(1,901	)	(918	)	(1,032	)	(3,851	)
Operating expenses		(30,556	)	(9,252	)	(39,808	)	(31,730	)	(2,091	)	(5,947	)	(39,768	)	(30,060	)	(5,433	)	(5,756	)	(41,249	)
Share of profit in associates and joint ventures		2,355		(1	)	2,354		2,443		114		(1	)	2,556		2,382		150		-		2,532
Profit/(loss) before tax		19,300		(12,188	)	7,112		19,528		840		(1,501	)	18,867		21,550		1,411		(4,281	)	18,680

Adjusted balance sheet reconciliation
	2016						2015								2014
	Adjusted		Brazil operations		Reported		Adjusted		Currency translation		Brazil operations		Reported		Adjusted		Currency translation		Brazil operations		Reported
	$m		$m		$m		$m		$m		$m		$m		$m		$m		$m		$m
Loans and advances to customers (net)	861,504		-		861,504		862,192		62,262		-		924,454		844,644		110,001		20,015		974,660
Interests in associates and joint ventures	20,029		-		20,029		18,473		666		-		19,139		17,184		990		7		18,181
Total external assets	2,374,986		-		2,374,986		2,213,737		145,747		50,172		2,409,656		2,294,583		289,936		49,620		2,634,139
Customer accounts	1,272,386		-		1,272,386		1,208,746		80,840		-		1,289,586		1,186,609		145,084		18,949		1,350,642

Adjusted profit reconciliation
		2016		2015		2014
	Footnotes	$m		$m		$m
For the year ended 31 Dec
Adjusted profit before tax		19,300		19,528		21,550
DVA on derivative contracts		26		230		(332	)
Fair value movements on non-qualifying hedges	23	(687	)	(327	)	(541	)
Gain on disposal of our membership interest in Visa - Europe		584		-		-
Gain on disposal of our membership interest in Visa - US		116		-		-
Gain on sale of shareholding in Bank of Shanghai		-		-		428
Gain on the partial sale of shareholding in Industrial Bank		-		1,372		-
(Loss)/gain and trading results from disposals and changes in ownership levels		(2,081	)	(78	)	(163	)
Impairment of our investment in Industrial Bank		-		-		(271	)
Own credit spread	24	(1,792	)	1,002		417
Portfolio disposals		(163	)	(214	)	168
Releases/(provisions) arising from the ongoing review of compliance with the UK Consumer Credit Act		2		(10	)	(632	)
Charge in relation to the settlement agreement with the Federal Housing Finance Authority		-		-		(550	)
Costs associated with portfolio disposals		(28	)	-		-
Costs to achieve		(3,118	)	(908	)	-
Costs to establish UK ring-fenced bank		(223	)	(89	)	-
Impairment of GPB - Europe goodwill		(3,240	)	-		-
Regulatory provisions in GPB		(344	)	(172	)	(65	)
Restructuring and other related costs		-		(117	)	(278	)
Settlements and provisions in connection with legal matters		(681	)	(1,649	)	(1,187	)
UK customer redress programmes		(559	)	(541	)	(1,275	)
Currency translation				840		1,411
Reported profit before tax		7,112		18,867		18,680

For footnotes, see page 63.

HSBC Holdings plc Annual Report and Accounts 2016	47

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Report of the Directors | Global businesses

Reconciliation of reported and adjusted items - global businesses

Supplementary unaudited analysis of significant items by global business is presented below.