Annual Financial Report - 20x of 44

RNS Number : 1113A

HSBC Holdings PLC

27 March 2012

 



Accounting for deferred bonus arrangements

Recent regulatory and best practice guidance has clarified the required structure and terms of deferred bonus arrangements awarded to employees, who now have a better understanding of the likely nature of awards to be granted in respect of a particular financial year. As a result, the vesting period in respect of deferred awards expected to be granted in March 2012 is therefore determined to have started on 1 January 2011. An additional expense of US$163m in respect of these deferred awards was recognised in 'Operating expenses' during 2011.

Footnotes to pages 2 to 93

Financial highlights

  1 Dividends recorded in the financial statements are dividends per ordinary share declared in a year and are not dividends in respect of, or for, that year. The third interim dividend for 2010 of US$0.08 was paid on 12 January 2011. The fourth interim dividend for 2010 of US$0.12 was paid on 5 May 2011. First, second and third interim dividends for 2011, each of US$0.09 per ordinary share, were paid on 6 July 2011, 6 October 2011 and 18 January 2012, respectively. Note 11 on the Financial Statements provides more information on the dividends declared in 2011. On 27 February 2012 the Directors declared a fourth interim dividend for 2011 of US$0.14 per ordinary share in lieu of a final dividend, which will be payable to ordinary shareholders on 2 May 2012 in cash in US dollars, or in pounds sterling or Hong Kong dollars at exchange rates to be determined on 23 April 2012, with a scrip dividend alternative. The reserves available for distribution at 31 December 2011 were US$34,621m.

     Quarterly dividends of US$15.50 per 6.2% non-cumulative Series A US dollar preference share, equivalent to a dividend of US$0.3875 per Series A ADS, each of which represents one-fortieth of a Series A US dollar preference share, were paid on 15 March 2011, 15 June 2011, 15 September 2011 and 15 December 2011.

     Quarterly coupons of US$0.508 per security were paid with respect to 8.125% capital securities on 18 January 2011, 15 April 2011, 15 July 2011 and 15 October 2011.

     Quarterly coupons of US$0.50 per security were paid with respect to 8% capital securities on 15 March, 15 June, 15 September and 15 December 2011.

  2 Return on average invested capital is based on the profit attributable to ordinary shareholders. Average invested capital is measured as average total shareholders' equity after adding back goodwill previously amortised or written-off directly to reserves, deducting average equity preference shares issued by HSBC Holdings and deducting/(adding) average reserves for unrealised gains/(losses) on effective cash flow hedges and available-for-sale securities and property revaluation reserves. This measure reflects capital initially invested and subsequent profit.

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

  4 The cost efficiency ratio is defined as total operating expenses divided by net operating income before loan impairment charges and other credit risk provisions.

  5 Each American Depositary Share represents five ordinary shares.

  6 Total shareholder return is defined as the growth in share value and declared dividend income during the relevant period.

  7 The Financial Times Stock Exchange 100 Index, the Morgan Stanley Capital International World Index and the Morgan Stanley Capital International World Bank Index.

  8 The core tier 1 capital ratio in 2011 includes the effect of the Basel 2.5 rules.

  9 HBEU is HSBC Bank plc; HBAP is The Hongkong and Shanghai Banking Corporation; and HBUS is HSBC Bank USA. Figures provided for HSBC Bank plc and The Hongkong and Shanghai Banking Corporation incorporate the major overseas branches of these entities. Subsidiaries of these entities are not included unless there is unrestricted transferability of liquidity between the subsidiaries and the parent. 'Other entities' comprise our other main banking subsidiaries and, as such, includes businesses spread across a range of locations, in many of which we may require a higher ratio of net liquid assets to customer liabilities to reflect local market conditions.

Reconciliations of reported and underlying profit/(loss) before tax 

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 gains on the dilution of interests in associates and/or movements in fair value of own debt attributable to credit spread. 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 2010.

13 Positive numbers are favourable: negative numbers are unfavourable.

14 Changes in fair value due to movements in own credit spread on long-term debt issued. This does not include the fair value changes due to own credit spread on structured notes issued and other hybrid instruments included within trading liabilities.

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, 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 With effect from 1 March 2011, our Global Asset Management business was moved from GB&M to RBWM. Comparative data have been adjusted accordingly.

18 Excluding adjustments in 2009.

Financial summary

19 In 2008, an impairment charge of US$10,564m to fully write off goodwill in PFS in North America was reported in 'Total operating expenses'. This amount is excluded from 'Total operating expenses' in calculating the ratio.

20 The effect of the bonus element of the rights issue in 2009 has been included within the basic and diluted earnings per share.

21 Dividends per ordinary share expressed as a percentage of basic earnings per share.

22 Net interest income includes the cost of funding trading assets, while the related external revenues are reported in 'Trading income'. In our global business results, the cost of funding trading assets is included with GB&M's net trading income as interest expense.

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

24 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.

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

26 In 2011, 'other interest-earning assets' includes the average assets of disposal groups held for sale. In prior years other interest-earning assets included intercompany eliminations. In 2011, intercompany eliminations have been included in the relevant line item.

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

28 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.

29 This includes interest-bearing bank deposits only.

30 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 which is reported in 'Interest expense'.

31 This includes interest-bearing customer accounts only.

32 The cost of internal funding of trading assets was US$1,161m (2010: US$902m; 2009: US$1,309m) 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 our global business reporting.

33 Net trading income includes income of US$458m (2010: income of US$23m; 2009: expense of US$444m), associated with changes in the fair value of issued structured notes and other hybrid instrument liabilities derived from movements in HSBC issuance spreads.

34 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.

35 Discretionary participation features.

36 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.

Consolidated balance sheet 

37 Net of impairment allowances.

38 The calculation of capital resources, capital ratios and risk-weighted assets for 2008 to 2010 is on a Basel II basis. 2011 includes the effect of rule changes under Basel 2.5.

39 2007 comparatives are on a Basel I basis.

40 Capital resources are total regulatory capital, the calculation of which is set out on page 214.

41 Includes perpetual preferred securities, details of which can be found in Note 34 on the Financial Statements.

42 The definition of net asset value per share is total shareholders' equity, less non-cumulative preference shares and capital securities, divided by the number of ordinary shares in issue.

43 '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.

44 France primarily comprises the domestic operations of HSBC France, HSBC Assurances Vie and the Paris branch of HSBC Bank plc.

Economic profit

45 Expressed as a percentage of average invested capital.

46 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.

47 Return on invested capital is profit attributable to ordinary shareholders of the parent company, which can be found in Note 12 on the Financial Statements on page 335.

Global businesses and geographical regions

48 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 and joint ventures, 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 GB&M) 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 2011, there was a US$208m gain arising from the dilution of interests in associates and joint ventures (2010: US$188m gain; 2009: nil) and favourable fair value movements on HSBC's own debt designated at fair value were US$3.9bn (2010: US$0.1bn adverse; 2009: US$6.5bn adverse).

49 Assets by geographical region and global businesses include intra-HSBC items. These items are eliminated, where appropriate, under the heading 'Intra-HSBC items' or 'inter-segment elimination', as appropriate.

50 RWAs from associates have been reallocated in order to properly align with the classification of income. RWAs from Global Asset Management have been reallocated to RBWM, principally from GB&M. Both items represent a reclassification from the basis used in HSBC's 2010 Pillar 3 disclosures. Comparative data have been adjusted accordingly.

51 The movement includes the impact of the rule changes under Basel 2.5.

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

53 Loan impairment charges and other credit risk provisions.

54 Share of profit in associates and joint ventures.

55 Pre-tax return on average risk-weighted assets. The 2009 RoRWA is based on the 2009 period end risk-weighted assets.

56 In the analysis of 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.

57 In 2011, Global Markets included a favourable fair value movement of US$458m on the widening of credit spreads on structured liabilities (2010: favourable fair value movement of US$23m; 2009: adverse fair value movement of US$444m).

58 Total income earned on payments and cash management products in the Group amounted to US$5.6bn (2010: US$4.4bn; 2009: US$4.1bn), of which US$4.0bn was in CMB (2010: US$3.3bn; 2009: US$3.1bn) and US$1.5bn was in GB&M (2010: US$1.1bn; 2009: US$1.1bn).

59 Total income earned on other transaction services in the Group amounted to US$3.2bn (2010: US$2.7bn; 2009: US$2.2bn), of which US$2.6bn was in CMB relating to trade and receivables finance (2010: US$2.1bn; 2009: US$1.7bn) and US$634m was in GB&M of which US$601m related to trade and receivables finance (2010: US$523m; 2009: US$382m) and US$33m related to banknotes and other (2010: US$113m; 2009: US$125m).

60 In each Group entity, Balance Sheet Management is responsible for managing liquidity and funding under the supervision of the local Asset and Liability Management Committee ('ALCO'). Balance Sheet Management also manages the structural interest rate position of the entity within a Global Markets limit structure.

61 'Other' in GB&M includes net interest earned on free capital held in the global business not assigned to products.

62 The foreign exchange effect is not eliminated on an underlying basis as the reporting currency of the principal business within GPB is US dollars.

63 'Client assets' are translated at the rates of exchange applicable for their respective period-ends, with the effects of currency translation reported separately. The main components of client assets are funds under management, which are not reported on the Group's balance sheet, and customer deposits, which are reported on the Group's balance sheet.

64 Inter-segment elimination comprises (i) the costs of shared services and Group Service Centres included within 'Other' which are recovered from global businesses, and (ii) the intra-segment funding costs of trading activities undertaken within GB&M. HSBC's Balance Sheet Management business, reported within GB&M, provides funding to the trading businesses. To report GB&M's '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.

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

66 'Employee expenses' comprise costs directly incurred by each global business. The reallocation and recharging of employee and other expenses directly incurred in the 'Other' category are shown in 'Other operating expenses'.

67 RWAs are non-additive across geographical regions due to market risk diversification effects within the Group.

68 Hong Kong Government certificates of indebtedness were reclassified from RBWM to 'Other' at 1 January 2010.

69 US includes the impairment of goodwill in respect of RBWM - North America.

 

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