Annual Financial Report - 24 of 48

RNS Number : 3795B

HSBC Holdings PLC

03 April 2013

 



Footnotes to pages 3 to 119

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 2011 of US$0.09 was paid on 18 January 2012. The fourth interim dividend for 2011 of US$0.14 was paid on 2 May 2012. First, second and third interim dividends for 2012, each of US$0.09 per ordinary share, were paid on 5 July 2012, 4 October 2012 and 12 December 2012, respectively. Note 10 on the Financial Statements provides more information on the dividends declared in 2012. On 4 March 2013 the Directors declared a fourth interim dividend for 2012 of US$0.18 per ordinary share in lieu of a final dividend, which will be payable to ordinary shareholders on 8 May 2013 in cash in US dollars, or in pounds sterling or Hong Kong dollars at exchange rates to be determined on 29 April 2013, with a scrip dividend alternative. The reserves available for distribution at 31 December 2012 were US$38,175m.

     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 American Depositary Share, each of which represents one-fortieth of a Series A US dollar preference share, were paid on 15 March 2012, 15 June 2012, 17 September 2012 and 17 December 2012.

     Quarterly coupons of US$0.508 per security were paid with respect to 8.125% capital securities on 17 January 2012, 16 April 2012, 16 July 2012 and 15 October 2012.

     Quarterly coupons of US$0.50 per security were paid with respect to 8% capital securities on 15 March 2012, 15 June 2012, 17 September 2012 and 17 December 2012.

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

  3 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.

  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.

  8 The Morgan Stanley Capital International World Index.

  9 The Morgan Stanley Capital International World Bank Index.

10 The core tier 1 capital ratio for 2012 and 2011 includes the effect of the Basel 2.5 rules.

Business and operating models and KPIs

11 Based upon pro forma post-tax profits allocation. See page 349 for details.

12 Intermediation of securities, funds and insurance products, including Securities Services in GB&M.

13 Merger and acquisition, ECM, event and project financing, and co-investments in GPB.

14 Including Foreign Exchange, Rates, Credit and Equities.

15 Including portfolio management.

16 Including private trust and estate planning (for financial and non-financial assets).

17 Including hedge funds, real estate and private equity.

18 Vehicle Finance was sold in 2010.

19 'Transactions' refers to the sale or closure of non-strategic businesses or non-core investment.

20 Hong Kong, Rest of Asia-Pacific, Middle East and North Africa, and Latin America.

21 Net operating income before loan impairment charges and other credit risk provisions, also referred to as 'revenue.'

22 The sum of balances presented does not agree to consolidated amounts because inter-company eliminations are not presented here.

23 For definitions of HSBC UK, HBAP and HSBC US, see footnotes 40 to 42, respectively, on page 249. Subsidiaries of these entities are not included unless there is unrestricted transferability of liquidity between the subsidiaries and the parent. 'Other entities' (footnote 43 on page 249) 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 

24 'Currency translation adjustment' 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.

25 Positive numbers are favourable: negative numbers are unfavourable.

26 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, derivatives and other hybrid instruments included within trading liabilities.

27 Other income in this context comprises where applicable 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.

28 Individual reconciliations by global businesses and geographical regions are available on www.hsbc.com.

29 Underlying performance eliminates the effects of acquisitions, disposals and changes of ownership levels of subsidiaries, associates and businesses so we can view results on a like-for-like basis. We achieve this by eliminating gains and losses on disposal or dilution in the year incurred and by removing material results of operations from all the years presented. For example, if a disposal was made in the current year after four months of operations, the results of the disposed of business would be removed from the results of the current year and the previous year as if the disposed of business did not exist in those years.

30 In addition, the operating results of these disposals were removed from underlying results.

31 The presentation of the 'Reconciliation of reported and underlying profit/(loss) before tax' for 2011 compared with 2010 has not been updated to reflect the change in presentation in 2012 splitting underlying reconciliations from the constant currency reconciliations. The presentational change had no material impact on results.

32 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.

33 Excluding adjustments in 2010.

Financial summary

34 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.

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

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

37 For full description of the Ping An forward contract, see page 470.

38 In 2011, 'Deferred variable compensation awards-accelerated amortisation' was included as a notable cost item. In 2012, this item recurs but is now considered part of our operating cost base and therefore has been excluded from notable items in both years.

39 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.

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

41 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.

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

43 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 2012, intercompany eliminations have been included in the relevant line item.

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

45 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.

46 Including interest-bearing bank deposits only.

47 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'.

48 Including interest-bearing customer accounts only.

49 The cost of internal funding of trading assets was US$511m (2011: US$1,161m; 2010: US$902m) 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.

50 Net trading income includes a charge of US$629m (2011: income of US$458m; 2010: income of US$23m), associated with changes in the fair value of issued structured notes and other hybrid instrument liabilities derived from movements in HSBC issuance spreads.

51 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.

52 Discretionary participation features.

53 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

54 Net of impairment allowances.

55 The calculation of capital resources, capital ratios and risk-weighted assets for 2012 and 2011 is on a Basel 2.5 basis. All other comparatives are on a Basel II basis.

56 Capital resources are total regulatory capital, the calculation of which is set out on page 286.

57 Including perpetual preferred securities, details of which can be found in Note 33 on the Financial Statements.

58 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.

59 'Currency translation adjustment' 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.

60 See Note 26 on the Financial Statements.

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

62 The classification of customer accounts by country within Europe has changed from amounts formerly disclosed. Certain balances which were previously presented within the country of domicile of the consolidating legal entity are now presented on the basis of the country of account origination. The most significant effect of this change is on Switzerland, where the balance of US$45,283m previously disclosed at 31 December 2011 has been restated as US$19,888m on the new basis.

Economic profit

63 Expressed as a percentage of average invested capital.

64 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.

65 Return on invested capital is profit attributable to ordinary shareholders of the parent company, which can be found in Note 11 on the Financial Statements on page 426.

Reconciliation of RoRWA measures

66 Risk-weighted assets ('RWA's) and pre-tax return on average risk-weighted assets ('RoRWA').

67 Underlying RoRWA is calculated using underlying pre-tax return and reported average RWAs at constant currency and adjusted for the effects of business disposals.

68 'Other' includes treasury services related to the US Consumer and Mortgage Lending business and commercial operations in run-off. US CML includes loan portfolios within the run-off business that are designated held for sale.

Disposals, held for sale and run-off portfolios

69 The results of operations of disposed businesses are stated up to and including the date of disposal. The results of operations of businesses held for sale and run-off portfolios are for 2012.

70 The summary income statements present the historical results of disposals, held-for-sale and run-off portfolios to provide information on trends. The historical results are those which appear in the Group IFRS income statement and include fixed allocated costs which will not necessarily be removed or reduced upon disposal or run-off. Fixed allocated costs included in total operating expenses are disclosed separately on page 38. The results of disposed businesses exclude gains on sale and post disposal income and expenditure items; for example, restructuring costs. The results of businesses held for sale exclude losses recognised upon reclassification to the held-for-sale category. These losses are disclosed in Note 26 on the Financial Statements.

71 'US CML' includes non-real estate personal loans that were reclassified to 'Assets held for sale' during 2012. At 31 December 2012, the carrying value of this portfolio, net of transferred impairment allowances, was US$3.4bn. The portfolio contributed interest income of US$813m and loan impairment charges of US$347m to profit before tax in 2012. 'Other' includes treasury services related to the US Consumer and Mortgage Lending business and commercial operations in run-off.

72 'Reduction in RWAs on disposal' for disposal and held-for-sale portfolios are shown exclusive of operational risk RWAs as these are not immediately released on disposal. RWAs for held-for-sale and run-off portfolios are shown inclusive of operational risk RWAs.

Global businesses and geographical regions

73 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, part of the movement in the fair value of our long-term debt designated at fair value (the remainder of the Group's movement 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. In addition, fines and penalties as part of the settlement of investigations into past inadequate compliance with anti-money laundering and sanctions laws together with the UK bank levy are recorded in 'Other'.

74 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.

75 For divested businesses, this includes the gain or loss on disposal and material results of operations as described on page 26.

76 Loan impairment charges and other credit risk provisions.

77 Share of profit in associates and joint ventures.

78 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.

79 In 2012, Global Markets included an adverse fair value movement of US$629m on the widening of credit spreads on structured liabilities (2011: favourable fair value movement of US$458m; 2010: favourable fair value movement of US$23m).

80 Total income earned on payments and cash management products in the Group amounted to US$6.2bn (2011: US$5.6bn; 2010: US$4.4bn), of which US$4.5bn was in CMB (2011: US$4.0bn; 2010: US$3.3bn) and US$1.7bn was in GB&M (2011: US$1.5bn; 2010: US$1.1bn).

81 Total income earned on other transaction services in the Group amounted to US$3.6bn (2011: US$3.2bn; 2010: US$2.7bn), of which US$2.8bn was in CMB relating to trade and receivables finance (2011: US$2.6bn; 2010: US$2.1bn) and US$753m was in GB&M of which US$738m related to trade and receivables finance (2011: US$601m; 2010: US$523m) and US$15m related to banknotes and other (2011: US$33m; 2010: US$113m).

82 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. Balance Sheet Management also manages the non-trading interest rate positions of the entity transferred to it within a Global Markets limit structure. Balance Sheet Management revenues include notional tax credits on income earned from tax-exempt investments of US$116m in 2012, US$85m in 2011 and US$50m in 2010, which are offset within 'Other'.

83 'Other' in GB&M includes net interest earned on free capital held in the global business not assigned to products, allocated funding costs and gains resulting from business disposals. Within the management view of total operating income, notional tax credits are allocated to the businesses to reflect the economic benefit generated by certain activities which is not reflected within operating income, for example notional credits on income earned from tax-exempt investments where the economic benefit of the activity is reflected in tax expense. In order to reflect the total operating income on an IFRS basis, the offset to these tax credits are included within 'Other'.

84 '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.

85 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.

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

87 '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'.

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

89 CMB results include US$128m (2011: US$110m) of net operating income and US$43m (2011: US$23m) of profit before tax, related to low income housing tax credit investments in the US which are offset within the 'Other' segment.

 

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