Annual Financial Report - 3 of 44

RNS Number : 1048A

HSBC Holdings PLC

27 March 2012

 



Report of the Directors: Operating and Financial Review

Financial summary > Reconciliation of reported and underlying profit before tax

Financial summary

Reconciliation of reported and underlying profit before tax .........................................................	16
Consolidated income statement ............................	18
Group performance by income and expense item .	20
Net interest income ...........................................	20
Net fee income ..................................................	22
Net trading income ...........................................	23
Net income/(expense) from financial instruments designated at fair value ................................	24
Gains less losses from financial investments ......	25
Net earned insurance premiums .......................	26
Other operating income ...................................	26

Net insurance claims incurred and movement in liabilities to policyholders .............................	27
Loan impairment charges and other credit risk provisions .....................................................	27
Operating expenses ..........................................	29
Share of profit in associates and joint ventures .	31
Tax expense ......................................................	31
Consolidated balance sheet ...................................	32
Movement in 2011 ...........................................	33
Economic profit/(loss) .........................................	37
Reconciliation of RoRWA measures......................	37
Critical accounting policies ..................................	38

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

Reconciliation of reported and underlying profit before tax

In addition to results reported on an IFRSs basis, we measure our performance internally on a like-for-like basis by eliminating the effects of foreign currency translation differences, acquisitions and disposals of subsidiaries and businesses, and fair value movements on own debt attributable to credit spread where the net result of such movements will be zero upon maturity of the debt; all of which distort year-on-year comparisons. We refer to this as our underlying performance.

Reported results include the effects of the above items. They are excluded when monitoring progress against operating plans and past results because management believes that the underlying basis more accurately reflects operating performance.

Constant currency

Constant currency comparatives for 2010 referred to in the commentaries are computed by retranslating into US dollars for non-US dollar branches, subsidiaries, joint ventures and associates:

·  the income statements for 2010 at the average rates of exchange for 2011; and

·  the balance sheet at 31 December 2010 at the prevailing rates of exchange on 31 December 2011.

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 'constant currency' 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.

Underlying performance

The following tables compare our underlying performance in 2011 and 2010 with reported profits in those years. Equivalent tables are provided for each of HSBC's global businesses and geographical segments in the Form 20-F filed with the SEC, which is available on www.hsbc.com.

The foreign currency translation differences reflect the relative weakening of the US dollar against most major currencies during 2011.

The following acquisitions and disposals affected both comparisons:

·     the gain of US$62m on reclassification of Bao Viet Holdings ('Bao Viet') from an available-for-sale asset to an associate in January 2010;

·     the gain of US$66m on sale of our stake in Wells Fargo HSBC Trade Bank in March 2010;

·     the gain of US$107m on disposal of HSBC Insurance Brokers Limited in April 2010;

·     the dilution gains which arose on our holding in Ping An Insurance (Group) Company of China, Limited ('Ping An') following the issue of share capital to third parties in May 2010 and June 2011 of US$188m and US$181m, respectively;

·     the loss of US$42m on the sale of our investment in British Arab Commercial Bank plc in October 2010;

·     the gain of US$74m on the deconsolidation of private equity funds following the management buy-out of Headland Capital Partners Ltd (formerly known as HSBC Private Equity (Asia) Ltd) in November 2010;

·     the gain of US$255m on the sale of Eversholt Rail Group in December 2010;

·     the gain of US$83m on the sale of HSBC Afore S.A. de C.V. ('HSBC Afore') in August 2011;

·     a loss of US$48m being our share of the loss recorded by Ping An on remeasurement of its previously held equity interest in Shenzen Development Bank ('SDB') when Ping An took control and fully consolidated SDB in July 2011; and

·     the dilution gain of US$27m in December 2011 as a result of the merger between HSBC Saudi Arabia Limited and SABB Securities Limited.

Reconciliation of reported and underlying profit before tax

	2011 compared with 2010
HSBC	2010            as reported     US$m	2010       adjust-       ments10        US$m			Currency translation11       US$m		2010    at 2011 exchange       rates12      US$m	2011               as    reported        US$m			2011    adjust-    ments10      US$m		2011    under-      lying     US$m	Re- ported change13         %		Under-  lying change13         %
Net interest income .........	39,441		48		781		40,270		40,662		-		40,662		3		1
Net fee income .	17,355		(55)		349		17,649		17,160		-		17,160		(1)		(3)
Changes in fair value14 ..........	(63)		63		-		-		3,933		(3,933)		-
Other income15	11,514		(847)		284		10,951		10,525		(291)		10,234		(9)		(7)
Net operating income16 .....	68,247		(791)		1,414		68,870		72,280		(4,224)		68,056		6		(1)
Loan impairment charges and other credit risk provisions ......................	(14,039)		-		(206)		(14,245)		(12,127)		-		(12,127)		14		15
Net operating income ........	54,208		(791)		1,208		54,625		60,153		(4,224)		55,929		11		2
Operating expenses .......	(37,688)		220		(842)		(38,310)		(41,545)		-		(41,545)		(10)		(8)
Operating profit ...........	16,520		(571)		366		16,315		18,608		(4,224)		14,384		13		(12)
Income from associates ......	2,517		-		93		2,610		3,264		48		3,312		30		27
Profit before tax ...............	19,037		(571)		459		18,925		21,872		(4,176)		17,696		15		(6)
By geographical region
Europe .............	4,302		(88)		167		4,381		4,671		(2,947)		1,724		9		(61)
Hong Kong .......	5,692		(130)		(10)		5,552		5,823		-		5,823		2		5
Rest of Asia-Pacific ..........	5,902		(187)		227		5,942		7,471		(135)		7,336		27		23
Middle East and North Africa .	892		42		(10)		924		1,492		(41)		1,451		67		57
North America .	454		(208)		39		285		100		(970)		(870)		(78)
Latin America ..	1,795		-		46		1,841		2,315		(83)		2,232		29		21
Profit before tax ......................	19,037		(571)		459		18,925		21,872		(4,176)		17,696		15		(6)
By global business
Retail Banking and Wealth Management17 ......................	3,839		(3)		126		3,962		4,270		(83)		4,187		11		6
Commercial Banking ........	6,090		(119)		126		6,097		7,947		-		7,947		30		30
Global Banking and Markets17	9,215		(262)		198		9,151		7,049		-		7,049		(24)		(23)
Global Private Banking ........	1,054		-		6		1,060		944		-		944		(10)		(11)
Other ...............	(1,161)		(187)		3		(1,345)		1,662		(4,093)		(2,431)				(81)
Profit before tax ......................	19,037		(571)		459		18,925		21,872		(4,176)		17,696		15		(6)

For footnotes, see page 95.

Additional information is available on the HSBC website www.hsbc.com.

Consolidated income statement

Five-year summary consolidated income statement

	2011 US$m		2010 US$m		2009 US$m		2008 US$m		2007 US$m
Net interest income ..........................................................	40,662		39,441		40,730		42,563		37,795
Net fee income .................................................................	17,160		17,355		17,664		20,024		22,002
Net trading income ...........................................................	6,506		7,210		9,863		6,560		9,834
Net income/(expense) from financial instruments designated at fair value .................................................	3,439		1,220		(3,531)		3,852		4,083
Gains less losses from financial investments ......................	907		968		520		197		1,956
Dividend income ...............................................................	149		112		126		272		324
Net earned insurance premiums .........................................	12,872		11,146		10,471		10,850		9,076
Gains on disposal of French regional banks .......................	-		-		-		2,445		-
Other operating income ....................................................	1,766		2,562		2,788		1,808		2,531
Gains arising from dilution of interests in associates and joint ventures .....................................................	208		188		-		-		1,092
Other ............................................................................	1,558		2,374		2,788		1,808		1,439
Total operating income .................................................	83,461		80,014		78,631		88,571		87,601
Net insurance claims incurred and movement in liabilities to policyholders ................................................................	(11,181)		(11,767)		(12,450)		(6,889)		(8,608)
Net operating income before loan impairment charges and other credit risk provisions ..............................	72,280		68,247		66,181		81,682		78,993
Loan impairment charges and other credit risk provisions	(12,127)		(14,039)		(26,488)		(24,937)		(17,242)
Net operating income ...................................................	60,153		54,208		39,693		56,745		61,751
Total operating expenses19 ...............................................	(41,545)		(37,688)		(34,395)		(49,099)		(39,042)
Operating profit ............................................................	18,608		16,520		5,298		7,646		22,709
Share of profit in associates and joint ventures .................	3,264		2,517		1,781		1,661		1,503
Profit before tax ............................................................	21,872		19,037		7,079		9,307		24,212
Tax expense .....................................................................	(3,928)		(4,846)		(385)		(2,809)		(3,757)
Profit for the year .........................................................	17,944		14,191		6,694		6,498		20,455
Profit attributable to shareholders of the parent company	16,797		13,159		5,834		5,728		19,133
Profit attributable to non-controlling interests .................	1,147		1,032		860		770		1,322
Five-year financial information
	US$		US$		US$		US$		US$
Basic earnings per share20 ..................................................	0.92		0.73		0.34		0.41		1.44
Diluted earnings per share20 ...............................................	0.91		0.72		0.34		0.41		1.42
Basic earnings excluding goodwill impairment per share19,20	0.92		0.73		0.34		1.19		1.44
Dividends per ordinary share1 ...........................................	0.39		0.34		0.34		0.93		0.87
	%		%		%		%		%
Dividend payout ratio21 ....................................................
- reported .........................................................................	42.4		46.6		100.0		226.8		60.4
- excluding goodwill impairment19 ....................................	42.4		46.6		100.0		78.2		60.4
Post-tax return on average total assets .............................	0.65		0.57		0.27		0.26		0.97
Return on average ordinary shareholders' equity ...............	10.9		9.5		5.1		4.7		15.9
Average foreign exchange translation rates to US$:
US$1: £ ............................................................................	0.624		0.648		0.641		0.545		0.500
US$1: € ............................................................................	0.719		0.755		0.719		0.684		0.731

For footnotes, see page 95.

Reported profit before tax of US$21.9bn in 2011 was US$2.8bn higher than in 2010, primarily due to US$3.9bn of favourable fair value movements on own debt attributable to credit spreads compared with a negative movement of US$63m in 2010. On an underlying basis, profit before tax was 6% lower than in 2010 due to increased operating expenses which were partly offset by lower loan impairment charges and other credit risk provisions.

The results of the Group continued to be adversely affected by the losses in the US consumer finance business, which were US$2.4bn in 2011 and US$2.2bn in 2010. We have agreed to sell the profitable US Card and Retail Services portfolio, with the remainder of the loss-making US consumer finance business being run down. We expect the sale of this business to have a significant impact on both revenue and profitability in North America for the foreseeable future.

The difference between reported and underlying results is explained on page 16. Except where stated otherwise, the commentaries in the Financial Summary are on an underlying basis and references to HSBC Finance Corporation ('HSBC Finance') and HSBC Bank USA N.A. ('HSBC Bank USA') are on a management basis, rather than a legal entity basis.

Net operating income before loan impairment charges and other credit risk provisions ('revenue') was broadly in line with 2010, due to the adverse effect on GB&M revenue in Europe of the turmoil in the eurozone sovereign debt market and a decline in lending balances in RBWM in North America being offset by revenue growth in faster-growing regions. The eurozone turmoil resulted in lower trading income from our Credit and Rates businesses as problems escalated, particularly in the second half of 2011. Our GB&M performance was also affected by lower revenues in Balance Sheet Management, as higher yielding positions matured and interest rates remained low, and in our legacy credit portfolio (see page 23). In North America, we continued to reposition our business and we remained focused on managing down our run-off portfolios. As a consequence, revenue fell, reflecting declining customer loan balances in the run-off portfolios and in the Card and Retail Services businesses.

These factors were broadly offset by increased net interest income in CMB as a result of strong balance sheet growth in 2010 which continued into 2011, albeit at a slower pace during the latter part of the year. Revenue also benefited from balance sheet growth in RBWM in Rest of Asia-Pacific and Latin America. There were also strong performances in over half of our business lines in GB&M, including Global Banking, Foreign Exchange and Equities, particularly in the faster growing regions of Rest of Asia-Pacific and Latin America.

Loan impairment charges and other credit risk provisions were considerably lower than in 2010, with decreases across all regions except Latin America and Hong Kong. The most significant decline in loan impairment charges was in RBWM in North America, reflecting lower balances in our consumer finance portfolios and lower lending balances and improved credit quality in Card and Retail Services. There was also a notable decline in loan impairment charges in Europe, due to successful initiatives taken to mitigate risk within RBWM which resulted in a reduction in delinquency rates in personal lending in the UK. Loan impairment charges and other credit risk provisions fell in the Middle East in GB&M due to the non-recurrence of restructuring activity for a small number of large customers. In Latin America, loan impairment charges and other credit risk provisions increased as a result of strong lending growth in RBWM and CMB, along with a rise in delinquency rates in Brazil during the second half of 2011.

Operating expenses were higher than in 2010, reflecting an increase in notable items and higher staff costs in faster-growing regions. Notable items included restructuring costs of US$1.1bn, a bank levy introduced by the UK government of US$570m, higher provisions relating to customer redress programmes of US$898m and US mortgage servicing costs of US$257m. The restructuring costs were incurred as a result of actions taken following the review of our capital deployment and operational effectiveness. This led to a reduction of more than 7,600 FTEs during the second half of 2011 and sustainable savings of US$0.9bn. These notable items were partially offset by a credit of US$587m resulting from a change in the inflation measure used to calculate the defined benefit obligation of the HSBC Bank plc ('HSBC Bank') UK defined benefit plan for deferred pensions.

Income from associates increased, mainly driven by strong results in our mainland China associates. The contribution from Bank of Communications Co., Limited ('BoCom') rose due to loan growth, wider deposit spreads and higher fee income. Our share of profits from Industrial Bank Co. Limited ('Industrial Bank') rose due to strong growth in customer lending and an increase in fee-based revenue.

The reported profit after tax was US$3.8bn or 26% higher, due to the increase in taxable profits, primarily from movements on the fair value of own debt and a lower tax expense. This reflected the inclusion in 2011 of a deferred tax benefit now eligible to be recognised in respect of foreign tax credits. In addition, the tax charge in 2010 included US$1.2bn attributable to a taxable gain from an internal reorganisation in North America. As a result of these factors, the effective tax rate for 2011 was 18% compared with 25.5% in 2010.

Group performance by income and expense item

Net interest income

	2011		2010		2009
	US$m		US$m		US$m
Interest income ............................................................................................	63,005		58,345		62,096
Interest expense ...........................................................................................	(22,343)		(18,904)		(21,366)
Net interest income22 ...................................................................................	40,662		39,441		40,730
Average interest-earning assets .....................................................................	1,622,658		1,472,294		1,384,705
Gross interest yield23 ....................................................................................	3.88%		3.96%		4.48%
Less: cost of funds ........................................................................................	(1.56%)		(1.41%)		(1.58%)
Net interest spread24 .....................................................................................	2.32%		2.55%		2.90%
Net interest margin25 ....................................................................................	2.51%		2.68%		2.94%

Summary of interest income by type of asset

	2011						2010						2009
	Average balance		Interest income		Yield		Average     balance		Interest income		Yield		Average     balance		Interest income		Yield
	US$m		US$m		%		US$m		US$m		%		US$m		US$m		%
Short-term funds and loans and advances to banks ...........................................	261,749		5,860		2.24		236,742		4,555		1.92		192,578		4,199		2.18
Loans and advances to customers .........	945,288		45,250		4.79		858,499		44,186		5.15		870,057		48,301		5.55
Financial investments ..........................	384,059		10,229		2.66		378,971		9,375		2.47		322,880		9,425		2.92
Other interest-earning assets26 .............	31,562		1,666		5.28		(1,918)		229		(11.94)		(810)		171		(21.11)
Total interest-earning assets ................	1,622,658		63,005		3.88		1,472,294		58,345		3.96		1,384,705		62,096		4.48
Trading assets and financial assets designated at fair value 27, 28 ..............	410,038		8,671		2.11		385,203		7,060		1.83		419,647		8,646		2.06
Impairment provisions ........................	(18,738)						(22,905)						(26,308)
Non-interest-earning assets ..................	752,965						664,308						667,942
Total assets and interest income ..........	2,766,923		71,676		2.59		2,498,900		65,405		2.62		2,445,986		70,742		2.89

Summary of interest expense by type of liability and equity

	2011						2010						2009
	Average balance		Interest expense		Cost		Average     balance		Interest expense		Cost		Average     balance		Interest expense		Cost
	US$m		US$m		%		US$m		US$m		%		US$m		US$m		%
Deposits by banks29 .............................	106,099		1,591		1.50		111,443		1,136		1.02		117,847		1,659		1.41
Financial liabilities designated at fair value - own debt issued30 ..................	73,635		1,313		1.78		66,706		1,271		1.91		60,221		1,558		2.59
Customer accounts31 ............................	1,058,326		13,456		1.27		962,613		10,778		1.12		940,918		11,346		1.21
Debt securities in issue .........................	181,482		5,260		2.90		189,898		4,931		2.60		225,657		5,901		2.62
Other interest-bearing liabilities ...........	14,024		723		5.16		8,730		788		9.03		8,640		902		10.44
Total interest-bearing liabilities ...........	1,433,566		22,343		1.56		1,339,390		18,904		1.41		1,353,283		21,366		1.58
Trading liabilities and financial liabilities designated at fair value (excluding own debt issued) .......................................	355,345		4,564		1.28		275,804		3,780		1.37		221,358		4,280		1.93
Non-interest bearing current accounts ..	162,369						142,579						123,271
Total equity and other non-interest bearing liabilities ..............................	815,643						741,127						748,074
Total equity and liabilities ....................	2,766,923		26,907		0.97		2,498,900		22,684		0.91		2,445,986		25,646		1.05

For footnotes, see page 95.

Net interest income was US$40.7bn, 3% higher than in 2010. On an underlying basis, net interest income was broadly in line with the previous year, as the benefit to income from continued strong growth in average interest-earning balances was largely offset by a decline in spreads.

Average loans and advances to customers grew strongly in 2011, reflecting targeted lending growth during 2010 and the first half of 2011 in CMB and GB&M, as well as strong mortgage lending growth in our RBWM businesses in the UK, Hong Kong and Rest of Asia-Pacific throughout both years. During the year, we announced the sale of 195 non-strategic branches and our Cards and Retail Services business in the US, and reclassified the related loans and advances to customers to other assets held for sale, reported within 'Other interest-earning assets'. This, together with the continued decline in the consumer finance portfolios in run-off, partly offset the rise in average lending balances in other regions. 

The benefit to interest income of the strong customer lending volume growth was offset in part by a reduction in gross yields from loans and advances to customers. This reflected the transfer of balances to assets held for sale, including higher yielding unsecured lending, the continued decline within the US consumer finance portfolios and the repositioning of RBWM towards higher quality secured lending, particularly mortgages, together with intense competition in certain markets.

Interest income from short-term funds and loans and advances to banks also increased, attributable to higher average balances with central banks. This reflected higher deposit requirements by central banks in certain markets, together with the placement of excess liquidity in Asia with central banks. Interest income from short-term funds and loans and advances to banks, as well as financial investments, also benefited from higher yields as interest rates rose, particularly in mainland China, India and Brazil.

Interest income from other interest earning assets rose as a result of the reclassification of assets held for sale and the related income.

The rise in interest income was largely offset by higher interest expense. This was driven by a significant increase in average customer account balances in Hong Kong, Rest of Asia-Pacific and Europe as a result of targeted deposit campaigns. The cost of funds also rose as a result of base rate increases, notably in mainland China, India and Brazil, and competitive pricing to attract and retain deposits in many markets.

The increase in interest expense on deposits by banks was driven by a rise in the cost of funds in Europe, reflecting the maturity of derivatives used to hedge interest rate risk and their replacement at lower prevailing interest rates.

The interest expense on own debt designated at fair value also rose, reflecting the volume of new issuances during the year. Although the average balance of debt securities in issue declined due to maturities not being replaced in North America and Europe, the related interest expense increased as a result of a general widening of credit spreads in the financial sector.

'Net interest income' includes the expense of internally funding trading assets, while related revenue is reported in 'Net trading income'. The internal cost of funding these assets rose due to the increase in average trading assets during the year. In reporting our global business results, this cost is included within 'Net trading income'.

The decrease in the net interest spread compared with 2010 was attributable to lower yields on loans and advances to customers as we continued to target higher quality assets, coupled with a rising cost of funds on customer accounts. Our net interest margin also fell, but by a lesser amount, due to the benefit from net free funds. This benefit rose as a result of the increase in the Group's cost of funds, coupled with higher third party funding of our trading book, in line with the growth of trading assets.

Net fee income

	2011 US$m		2010 US$m		2009 US$m
Cards ............................................................................................................	3,955		3,801		4,625
Account services ..........................................................................................	3,670		3,632		3,592
Funds under management ..............................................................................	2,753		2,511		2,172
Credit facilities .............................................................................................	1,749		1,635		1,479
Broking income ............................................................................................	1,711		1,789		1,617
Imports/exports ...........................................................................................	1,103		991		897
Insurance ......................................................................................................	1,052		1,147		1,421
Remittances .................................................................................................	770		680		613
Global custody ..............................................................................................	751		700		988
Unit trusts ....................................................................................................	657		560		363
Underwriting ................................................................................................	578		623		746
Corporate finance ........................................................................................	441		440		396
Trust income ................................................................................................	294		291		278
Investment contracts....................................................................................	136		109		97
Mortgage servicing .......................................................................................	109		118		124
Taxpayer financial services ..........................................................................	2		73		87
Maintenance income on operating leases ......................................................	-		99		111
Other ...........................................................................................................	1,766		1,918		1,797
Fee income ...................................................................................................	21,497		21,117		21,403
Less: fee expense ..........................................................................................	(4,337)		(3,762)		(3,739)
Net fee income .............................................................................................	17,160		17,355		17,664

Reported net fee income was broadly in line with 2010. Reported results in 2010 included revenue from Eversholt Rail Group and HSBC Insurance Brokers Ltd. These items are excluded from our underlying results which declined by 3%. This was mainly due to increased fee expenses in North America and the impact of discontinuing certain business operations.

Fee expenses increased in North America, reflecting higher 'revenue-share' payments to our credit card partners as improved portfolio performance resulted in increased cash flows. Fee expenses also rose in Latin America, reflecting increased transaction volumes, and in Europe, notably in GB&M, which benefited from higher recoveries from the securities investment conduits in 2010.

Card-related income was higher, led by growth in Hong Kong due to higher transaction volumes, driven by increased retail spending and customer promotions, and in Europe due to increased interchange commissions from higher volumes and rates.

Fee income from unit trusts increased due to higher transaction volumes, notably in Hong Kong, reflecting increased product offerings, competitive pricing and successful sales activity as clients sought to maximise returns in the low interest rate environment. However, broking income was lower, primarily in Hong Kong due to increased competition in the territory during the second half of the year.

Remittances and trade-related fee income increased, notably in the Rest of Asia-Pacific region, due to higher trade and transaction volumes as we targeted asset growth and trade activity in the region,supported by marketing activities, customer acquisition and a rise in transactions from existing customers.

The negligible income from Taxpayer Financial Services in the US during 2011 resulted from the decision to exit the business.

We expect the sale of the Card and Retail Services business to have a significant impact on both fee income related to cards and insurance, and fee expenses.

Net trading income

	2011 US$m		2010 US$m		2009 US$m
Trading activities .........................................................................................	4,873		5,708		5,312
Net interest income on trading activities ......................................................	3,223		2,530		3,627
Other trading income - hedge ineffectiveness:
- on cash flow hedges ...............................................................................	26		(9)		90
- on fair value hedges ...............................................................................	(224)		38		(45)
Non-qualifying hedges ..................................................................................	(1,392)		(1,057)		951
Losses on Bernard L Madoff Investment Securities LLC fraud ......................	-		-		(72)
Net trading income32,33 .................................................................................	6,506		7,210		9,863

For footnotes, see page 95.

Reported net trading income was US$6.5bn, 10% lower than in 2010. On an underlying basis, net trading income declined by 15%, driven by significantly lower net income from trading activities in GB&M as turmoil in eurozone sovereign debt markets escalated, particularly in the second half of 2011. Increased risk aversion and limited client activity led to a significant widening of spreads on certain eurozone sovereign and corporate bonds, resulting in trading losses in our European Credit and Rates businesses.

Net trading income also declined from our legacy credit portfolio, a separately identifiable, discretely managed business comprising Solitaire Funding Limited, the securities investment conduits, the asset-backed securities trading portfolios and credit correlation portfolios, derivative transactions entered into directly with monoline insurers, and certain other structured credit transactions. This reflected the non-recurrence of the price appreciation during the previous year and lower holdings as a result of maturities and disposals aimed at reducing capital consumption, coupled with the non-recurrence of an US$89m gain from a 2010 legal settlement relating to certain loans previously purchased for resale from a third party.

In addition, lower favourable foreign exchange movements were reported on trading assets held as economic hedges of foreign currency debt designated at fair value. These offset lower adverse foreign exchange movements on the foreign currency debt which are reported in 'Net expense from financial instruments designated at fair value'.

Notwithstanding the difficult trading conditions, there were strong performances across other parts of GB&M. Rates trading revenues in Hong Kong, North America and Latin America remained resilient as client flows increased. Fair value gains on structured liabilities also increased, mainly in Rates, as credit spreads widened more significantly than in 2010, resulting in a gain of US$458m compared with US$23m in 2010.

Our Foreign Exchange business benefited from increased activity from both Global Banking and CMB customers, particularly in Hong Kong, Rest of Asia-Pacific, North America and Latin America, coupled with an improved trading environment compared with 2010. The latter reflected market volatility caused by geopolitical tensions, ongoing eurozone sovereign debt concerns and interventions by central banks. Equities revenues also rose as investment in platforms improved our competitive positioning and helped capture increased client flows, notably in the first half of the year in Europe and Hong Kong.

In addition to the decline in net income from trading activities in GB&M, we reported adverse fair value movements on derivatives relating to certain legacy provident funds in Hong Kong as long-term investment returns fell. This was offset in part by a reduction in the loss provisions for mortgage loan repurchase obligations associated with loans previously sold in RBWM in North America, which decreased by US$341m to US$92m.

There were adverse fair value movements on non-qualifying hedges. These are derivatives entered into as part of a documented interest rate management strategy for which hedge accounting was not, or could not be, applied. They are principally cross-currency and interest rate swaps used to economically hedge fixed rate debt issued by HSBC Holdings and floating rate debt issued by HSBC Finance. The size and direction of the changes in fair value of non-qualifying hedges that are recognised in the income statement can be volatile from year to year, but do not alter the cash flows expected as part of the documented interest rate management strategy for both the instruments and the underlying economically hedged assets and liabilities. The adverse fair value movement on non-qualifying hedges in North America was higher in 2011 as long-term US interest rates declined to a greater extent than in 2010. This was partly offset by

lower adverse fair value movements on these instruments in Europe.

Ineffectiveness in the hedging of available-for-sale investment portfolios resulted in adverse movements on fair value hedges. This was due to growth in the underlying investment portfolio in Europe as a result of new purchases and a more pronounced decline in yield curves in North America than in 2010.

Net interest income earned on trading activities rose by 23%, driven by an increase in average holdings and higher yields on our trading portfolio. This was partly offset by higher interest expense on trading liabilities reflecting an increase in funding requirements in line with the growth in average trading assets. The cost of internally funding these assets also rose, but this interest expense is reported within 'Net interest income'.

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

	2011 US$m		2010 US$m		2009 US$m
Net income/(expense) arising from:
- financial assets held to meet liabilities under insurance and investment contracts .............................................................................	(933)		2,349		3,793
- liabilities to customers under investment contracts ................................	231		(946)		(1,329)
- HSBC's long-term debt issued and related derivatives ............................	4,161		(258)		(6,247)
Change in own credit spread on long-term debt .................................	3,933		(63)		(6,533)
Other changes in fair value34 .............................................................	228		(195)		286
- other instruments designated at fair value and related derivatives ..........	(20)		75		252
Net income/(expense) from financial instruments designated at fair value ....	3,439		1,220		(3,531)

Assets and liabilities from which net income/(expense) from financial instruments designated at fair value arose

	2011 US$m		2010 US$m		2009 US$m
Financial assets designated at fair value at 31 December ...............................	30,856		37,011		37,181
Financial liabilities designated at fair value at 31 December ..........................	85,724		88,133		80,092
Including:
Financial assets held to meet liabilities under:
- insurance contracts and investment contracts with DPF35 ......................	7,221		7,167		6,097
- unit-linked insurance and other insurance and investment contracts .......	20,033		19,725		16,982
Long-term debt issues designated at fair value ...............................................	73,808		69,906		62,641

For footnotes, see page 95.

The accounting policies for the designation of financial instruments at fair value and the treatment of the associated income and expenses are described in Notes 2i and 2b on the Financial Statements, respectively.

The majority of the financial liabilities designated at fair value relate to certain fixed-rate long-term debt issues whose rate profile has been changed to floating through interest rate swaps as part of a documented interest rate management strategy. The movement in fair value of these long-term debt issues includes the effect of our credit spread changes and any ineffectiveness in the economic relationship between the related swaps and own debt. As credit spreads widen or narrow, accounting profits or losses, respectively, are booked. The size and direction of the changes in the credit spread on our debt and ineffectiveness, which are recognised in the income statement, can be volatile from year to year, but do not alter the cash flows envisaged as part of the documented interest rate management strategy. As a consequence, fair value movements arising from changes in our own credit spread on long-term debt and other fair value movements on the debt and related derivatives are not regarded internally as part of managed performance and are therefore not allocated to customer groups, but are reported in 'Other'. Credit spread movements on own debt are excluded from underlying results, and related fair value movements are not included in the calculation of regulatory capital.

We reported net income from financial instruments designated at fair value of US$3.4bn in 2011 compared with US$1.2bn in 2010. This included the credit spread-related movements in the fair value of our own long-term debt, on which we reported favourable fair value movements of US$3.9bn in 2011 and adverse movements of US$63m in 2010. These favourable fair value movements arose in 2011 as credit spreads widened, in comparison with smaller favourable fair value movements in North America and adverse fair value movements in Europe, both in 2010.

On an underlying basis, which excludes credit spread-related movements in the fair value of our own long-term debt, the equivalent figures were net expense of US$494m in 2011 and net income of US$1.3bn in 2010. Net expense arising from financial assets held to meet liabilities under insurance and investment contracts reflected net investment losses in 2011 as a result of adverse movements in equity markets, primarily in Europe and Hong Kong, compared with net investment gains experienced during 2010. This predominantly affected the value of assets held to support unit-linked contracts in the UK and Hong Kong, insurance contracts with discretionary participation features ('DPF') in Hong Kong, and investment contracts with DPF in France.

The investment gains or losses arising from equity markets resulted in a corresponding movement in liabilities to customers, reflecting the extent to which unit-linked policyholders, in particular, participate in the investment performance of the associated asset portfolio. Where these relate to assets held to back investment contracts, the corresponding movement in liabilities to customers is also recorded under 'Net income from financial instruments designated at fair value'. This is in contrast to gains or losses related to assets held to back insurance contracts or investment contracts with DPF, where the corresponding movement in liabilities to customers is recorded under 'Net insurance claims incurred and movement in liabilities to policyholders'.

Within net income from financial instruments designated at fair value were lower adverse foreign exchange movements than in 2010 on foreign currency debt designated at fair value issued as part of our overall funding strategy, with an offset from trading assets held as economic hedges reported in 'Net trading income'.

Gains less losses from financial investments

	2011 US$m		2010 US$m		2009 US$m
Net gains/(losses) from disposal of:
- debt securities ........................................................................................	712		564		463
- equity securities .....................................................................................	360		516		407
- other financial investments ...................................................................	12		(7)		8
	1,084		1,073		878
Impairment of available-for-sale equity securities .........................................	(177)		(105)		(358)
Gains less losses from financial investments .................................................	907		968		520

Reported gains less losses from financial investments decreased by US$61m to US$907m. On an underlying basis, excluding an accounting gain of US$62m arising from the reclassification of Bao Viet as an associate in 2010, they declined by 4%.

The reduction was principally driven by lower net gains from the disposal of available-for-sale equity securities, as deterioration in market confidence resulted in fewer disposal opportunities and lower gains from the sale of private equity investments, notably in Europe. We also recognised a gain on disposal in 2010 of an equity investment in a Singaporean property company which did not recur. This was partly offset by a gain on sale of shares in a Mexican listed company.

Impairments of available-for-sale equity securities rose, due to write downs of our equity investments in real estate companies, reflecting a decline in property values in 2011.

Net gains from the disposal of available-for-sale debt securities increased in Europe and North America following sales of government bonds and mortgage-backed securities by Balance Sheet Management as part of normal portfolio management activities. However, this was offset in part by lower net gains in Hong Kong and Rest of Asia-Pacific on the disposal of government debt securities in 2011.

Net earned insurance premiums

	2011 US$m		2010 US$m		2009 US$m
Gross insurance premium income ..................................................................	13,338		11,609		10,991
Reinsurance premiums ..................................................................................	(466)		(463)		(520)
Net earned insurance premiums ....................................................................	12,872		11,146		10,471

Net earned insurance premiums which relate to insurance and investment contracts with DPF increased by 15% on a reported basis and by 13% on an underlying basis, primarily driven by strong sales in the Hong Kong life insurance business and also in Latin America. This reflected the strategic focus of the Group on wealth management, of which insurance is a key part.

In Hong Kong, sales of deferred annuities, unit-linked products and a universal life product targeted at high net worth individuals all rose, coupled with higher levels of renewals from a larger in-force book of business due to an increased demand for wealth products. Sales of a universal life insurance product targeted at high net worth individuals were also higher in Rest of Asia-Pacific, notably in Singapore, driven by successful sales initiatives.

In Latin America, net earned premiums also grew strongly due to a rise in contributions from unit-linked, life and credit protection products in Brazil, reflecting investment in the distribution network. This was supported by higher premiums from the motor insurance business in Argentina as a result of volume growth and repricing initiatives.

In Europe, net earned premiums decreased resulting from the non-renewal and transfer to third parties of certain contracts in our Irish business as well as the continued run-off and subsequent disposal of the motor business in the UK during 2011.

This was partly offset by premium growth in both France, on investment contracts with DPF as a result of targeted sales campaigns aimed at high net worth clients, and the UK, on unit-linked products due to increased distribution channels.

Other operating income

	2011 US$m		2010 US$m		2009 US$m
Rent received ...............................................................................................	217		535		547
Gains/(losses) recognised on assets held for sale ............................................	55		(263)		(115)
Valuation gains/(losses) on investment properties .........................................	118		93		(24)
Gain on disposal of property, plant and equipment, intangible assets and non-financial investments ........................................................................	57		701		1,033
Gains arising from dilution of interests in associates and joint ventures .........	208		188		-
Change in present value of in-force long-term insurance business .................	726		705		605
Other ...........................................................................................................	385		603		742
Other operating income ...............................................................................	1,766		2,562		2,788

Reported other operating income of US$1.8bn decreased by US$796m in 2011. Reported results in 2011 included a gain of US$181m arising from a dilution of our holding in Ping An following its issue of share capital to a third party and a gain of US$83m from the sale of HSBC Afore, our Mexican pension administration business. We also reported a dilution gain of US$27m as a result of the reduction in our holding in HSBC Saudi Arabia Limited following its merger with SABB Securities Limited. Income in 2010 included a gain of US$188m following the dilution of our holding in Ping An along with gains from the sale of HSBC Insurance Brokers (US$107m), the Wells Fargo HSBC Trade Bank (US$66m), Eversholt Rail Group (US$255m) and HSBC Private Equity (Asia) Ltd (US$74m), partly offset by a loss of US$42m on the disposal of our shareholding in British Arab Commercial Bank plc.

On an underlying basis, excluding the items referred to above, other operating income decreased by US$71m compared with 2010. Lower losses on assets held for sale driven by the non-recurrence of the US$207m loss on the sale of the US vehicle finance servicing operation in 2010 and associated loan portfolio were more than offset by the non-recurrence of gains of US$250m on the sale and leaseback of our Paris and New York headquarters in 2010, which exceeded gains recorded in 2011 on the sale of buildings including US$61m from the sale and leaseback of branches in Mexico.

Favourable net movements in the present value of in-force ('PVIF') long-term insurance business compared with 2010 were driven by a one-off gain of US$243m recognised upon the refinement of the calculation of the PVIF asset to bring greater comparability and consistency across our insurance operations, and strong sales of life insurance products, notably in Hong Kong and Singapore. Largely offsetting this was a net decrease from experience and assumption updates and a higher unwind of cash flows from the growing in-force book.

Net insurance claims incurred and movement in liabilities to policyholders

	2011 US$m		2010 US$m		2009 US$m
Insurance claims incurred and movement in liabilities to policyholders:
-  gross .....................................................................................................	11,631		11,969		12,560
-  reinsurers' share ....................................................................................	(450)		(202)		(110)
-  net36 .....................................................................................................	11,181		11,767		12,450

For footnote, see page 95.

Net insurance claims incurred and movement in liabilities to policyholders decreased by 5% on a reported basis and by 7% on an underlying basis, driven by investment losses on insurance assets, notably in Europe and Hong Kong.

In France, the UK and Hong Kong we experienced a reduction in the movement in liabilities to policyholders resulting from a fall in fair value of the assets held to support policyholder funds, particularly in relation to unit-linked insurance contracts and investment and insurance contracts with DPF, as a result of equity market falls.

The gains or losses experienced on the financial assets designated at fair value held to support insurance contract liabilities and investment contracts with DPF are reported in 'Net income from financial instruments designated at fair value'.

Further declines in the movement in liabilities to policyholders resulted from the non-renewal and transfer to third parties of certain contracts in our Irish businesses as well as the continued run-off and subsequent sale of the motor business in the UK during 2011.

Reductions in the movement in liabilities to policyholders were partly offset by additional liabilities established for new business premiums written, notably in Hong Kong, Brazil, France, the UK and Singapore, which are consistent with increases in net earned premiums.

Loan impairment charges and other credit risk provisions

	2011 US$m		2010 US$m		2009 US$m
Loan impairment charges
New allowances net of allowance releases ..................................................	12,931		14,568		25,832
Recoveries of amounts previously written off ...........................................	(1,426)		(1,020)		(890)
	11,505		13,548		24,942
Individually assessed allowances ....................................................................	1,915		2,625		4,458
Collectively assessed allowances ...................................................................	9,590		10,923		20,484
Impairment of available-for-sale debt securities ............................................	631		472		1,474
Other credit risk provisions/(recoveries) .......................................................	(9)		19		72
Loan impairment charges and other credit risk provisions ............................	12,127		14,039		26,488
	%		%		%
-  as a percentage of net operating income excluding the effect of fair value movements in respect of credit spread on own debt and before loan impairment charges and other credit risk provisions .................................	17.7		20.6		36.4
Impairment charges on loans and advances to customers as a percentage of gross average loans and advances to customers ..........................................	1.2		1.5		2.8

Loan impairment charges and other credit risk provisions were US$12.1bn, a decline of 14% compared with 2010 on a reported basis and 15% on an underlying basis.

At 31 December 2011, the aggregate balance of customer loan impairment allowances was US$17.5bn, representing 1.9% of gross loans and advances to customers (net of reverse repos and settlement accounts) compared with 2.2% at 31 December 2010.

In 2011, loan impairment charges and other credit risk provisions declined in all regions except Latin America and Hong Kong. The reduction was most significant in our consumer finance portfolios in HSBC Finance in North America, which contributed 66% of the reduction, reflecting lower lending balances in the run-off portfolio along with a reduction in lending balances and lower delinquency rates as our Card and Retail Services customers focused on repayments. In Latin America, principally Brazil, and also in Hong Kong, collective loan impairment allowances rose as we grew our lending book on the back of strong economic growth and increased customer demand.

During 2011, we reported US$631m of impairments related to available-for-sale debt securities, compared with US$472m in 2010. In 2011, we recognised a charge of US$212m to write down to market value available-for-sale Greek sovereign debt now judged to be impaired following the deterioration in Greece's fiscal position. This was partly offset as losses arising in underlying collateral pools generated lower charges on asset-backed securities.

In our US run-off portfolios, loan impairment charges of US$5.0bn were 14% lower than in 2010. The decline was mainly in our Consumer and Mortgage Lending ('CML') portfolio, driven by the reduction in customer lending balances, in part offset by higher loan impairment allowances reflecting a rise in the estimated cost to obtain collateral as well as delays in the timing of expected cash flows, both the result of the industry-wide delays in foreclosure processing.

In the third quarter of 2011, loan impairment charges in the CML portfolio increased markedly as delinquency worsened compared with the first half of 2011. In addition, we increased our loan impairment allowances to reflect a rise in the expected cost to obtain and realise collateral following delays in foreclosure processing. Despite a decline in loan impairment charges in the fourth quarter, these factors contributed significantly to a rise in the Group's loan impairment charges in the second half of 2011 compared with the first half of the year.

In Card and Retail Services, loan impairment charges fell by 26% to US$1.6bn reflecting lower lending balances and improved delinquency rates as customer repayment rates remained strong during 2011.

In CMB, loan impairment charges and other credit risk provisions in North America declined in both Canada and the US reflecting improved credit quality, and in Canada this was also due to lower lending balances. These declines were partly offset by a loan impairment charge on a commercial real estate lending exposure.

The reduction in loan impairment charges and other credit risk provisions in North America was partly offset by an increase in GB&M, reflecting lower releases of collective loan impairment allowances compared with 2010. In addition, 2011 included a loan impairment charge associated with a corporate lending relationship.

Loan impairment charges and other credit risk provisions in Europe fell by 20% to US$2.5bn, notably in the UK. The reduction was mainly in our RBWM business where loan impairment charges declined by 53% to US$596m despite the difficult economic climate and continued pressures on households' finances. Delinquency rates declined across both the secured and unsecured lending portfolios, reflecting improvement in portfolio quality and the continued low interest rate environment as well as successful actions taken to mitigate credit risk and proactive account management. In CMB, loan impairment charges and other credit risk provisions were 7% lower, mainly in the UK. This was partly offset by an increase in individually assessed loan impairment charges in Greece as economic conditions worsened.

In GB&M in Europe, loan impairment charges and other credit risk provisions increased by 8% as we recorded an impairment of US$145m to write down to market value available-for-sale Greek sovereign debt now judged to be impaired following the deterioration in Greece's fiscal position. Further information on our exposures to countries in the eurozone is provided in 'Areas of special interest - wholesale lending' on page 112.

In the Middle East and North Africa, loan impairment charges and other credit risk provisions fell by 53% to US$293m, primarily due to a marked decline in loan impairment charges and other credit risk provisions in our GB&M business. This reflected the non-recurrence of individually assessed loan impairment charges recorded in the first half of 2010 related to restructuring activity for a small number of large corporate customers in the United Arab Emirates ('UAE'). In RBWM, loan impairment charges declined by 45%, due to significantly improved delinquency rates reflecting a repositioning of the loan book towards higher quality lending as we continued to manage down unsecured lending, together with impaired collections practices.

In Rest of Asia-Pacific, loan impairment charges and other credit risk provisions declined by 42% to US$267m, driven by reductions in India and Singapore. The marked decline in India reflected an improvement in delinquency, particularly in the unsecured portfolios as lending balances were managed down. In GB&M, loan impairment charges and other credit risk provisions declined by 58%, mainly in Singapore, due to a reduction in individually assessed loan impairment charges.

In Latin America, loan impairment charges increased by 17% to US$1.9bn. In Brazil, loan impairment charges and other credit risk provisions rose by 43% to US$1.4bn due to a rise in collective loan impairment allowances in both RBWM and CMB following the strong growth in our customer lending balances and a rise in delinquency rates in the second half of 2011. In addition, we recognised a significant individually assessed loan impairment charge related to a commercial customer. The increase in Brazil was partly offset by a 28% decline in loan impairment charges and other credit risk provisions in Mexico. This was mainly in our RBWM business due to lower balances in our credit card portfolio as certain higher risk portfolios were run-down and both credit quality and collections improved.

In Hong Kong, loan impairment charges and other credit risk provisions increased by 36% to US$156m. In CMB, higher loan impairment charges included a specific impairment charge related to a single customer, as well as higher collectively assessed charges reflecting growth in lending balances. In GPB, loan impairment charges and other credit risk provisions also increased, reflecting an impairment of available-for-sale Greek sovereign debt.

Operating expenses

	2011		2010		2009
	US$m		US$m		US$m
By expense category
Employee compensation and benefits ...........................................................	21,166		19,836		18,468
Premises and equipment (excluding depreciation and impairment) ................	4,503		4,348		4,099
General and administrative expenses .............................................................	12,956		10,808		9,293
Administrative expenses ...............................................................................	38,625		34,992		31,860
Depreciation and impairment of property, plant and equipment ...................	1,570		1,713		1,725
Amortisation and impairment of intangible assets ........................................	1,350		983		810
Operating expenses ......................................................................................	41,545		37,688		34,395
Included in the above are the following notable cost items:
Restructuring costs (including impairment of assets)......................................	1,122		154		301
UK customer redress programmes .................................................................	898		78		-
UK bank levy ...............................................................................................	570		-		-
Payroll tax ...................................................................................................	(13)		324		-
US mortgage foreclosure and servicing costs..................................................	257		-		-
UK pension credit ........................................................................................	(587)		-		(499)
US accounting gain on change in staff benefits .............................................	-		(148)		-
Deferred variable compensation awards - accelerated amortisation ...............	163		-		-

Staff numbers (full-time equivalents)

	At 31 December
	2011		2010		2009
Europe .........................................................................................................	74,892		75,698		76,703
Hong Kong ...................................................................................................	28,984		29,171		27,614
Rest of Asia-Pacific ......................................................................................	91,051		91,607		87,141
Middle East and North Africa .......................................................................	8,373		8,676		8,281
North America .............................................................................................	30,981		33,865		35,458
Latin America ..............................................................................................	54,035		56,044		54,288
Staff numbers ...............................................................................................	288,316		295,061		289,485

Operating expenses increased by 10% to US$41.5bn on a reported basis. On an underlying basis, costs increased by 8% compared with 2010, driven by a higher amount of notable items in 2011 as listed in the table above and a rise in staff costs, primarily in faster growing regions. Notable items included restructuring costs, provisions relating to customer redress programmes in the UK, including a charge in respect of the possible mis-selling of Payment Protection Insurance ('PPI') in previous years, the UK bank levy and a new provision for US mortgage foreclosure and servicing costs. These were partially offset by a credit resulting from a change in the inflation measure used to calculate the defined benefit obligation in the UK for deferred pensions and the non-recurrence of the 2010 payroll and bonus taxes in the UK and France.

Salaries and wages rose, primarily driven by wage inflation in Rest of Asia-Pacific and Hong Kong and union-agreed salary increases in Latin America.

The growth in business volumes, primarily in Hong Kong, Rest of Asia-Pacific and Latin America, was supported by a small rise in average staff numbers (expressed as FTEs) which grew marginally in 2011. Staff costs also rose due to higher amortisation charges for previous years' restricted and performance share awards and an acceleration in the expense recognition for deferred bonus awards of US$163m, in line with regulatory and best practice guidance (see page 95). Otherwise, performance-related costs were lower than in 2010, primarily in GB&M where net operating income declined.

During the year, we incurred US$1.1bn of restructuring costs including US$542m which were staff related and US$325m of impairment of certain software projects now deferred or cancelled.

During 2011, we began a Group-wide review of our organisational effectiveness. We achieved US$0.9bn of sustainable savings in 2011, approximately one third of our objective of US$2.5bn to US$3.5bn over three years. We started implementing consistent business models in RBWM and CMB and undertook a detailed review of our head offices. In addition, we began the re-engineering of our global functions, we commenced the streamlining of our IT function including the consolidation of some data centres and other services, and we re-engineered a number of customer-facing and back-office processes leading to a more efficient use of our corporate real estate.

This resulted in a net reduction of staff numbers of more than 7,600 during the second half of 2011 despite continuing to recruit selectively in our target growth areas.

The savings achieved by delivering on these programmes enabled the funding of investment in strategic initiatives, including the development of Prime Services and equity market capabilities and the expansion of the Rates and Foreign Exchange e‑commerce platforms in Europe, and the recruitment of additional front office staff in selected markets.

Costs increased due to a rise in compliance costs in GB&M and litigation expenses in RBWM, both predominantly in the US. However, marketing costs fell in North America and Latin America as discretionary costs were tightly controlled.

Cost efficiency ratios⁴

	2011 %		2010 %		2009 %
HSBC .........................................................................................................	57.5		55.2		52.0
Geographical regions
Europe .........................................................................................................	70.4		67.9		59.4
Hong Kong ...................................................................................................	44.5		43.4		41.7
Rest of Asia-Pacific ......................................................................................	54.2		55.7		55.6
Middle East and North Africa .......................................................................	44.5		44.7		38.6
North America .............................................................................................	55.7		48.8		51.5
Latin America ..............................................................................................	63.3		65.7		59.6
Global businesses
Retail Banking and Wealth Management17 ...................................................	63.2		58.1		52.3
Commercial Banking ....................................................................................	46.3		49.4		46.4
Global Banking and Markets17 ......................................................................	57.0		48.8		37.5
Global Private Banking .................................................................................	68.8		65.8		60.5

For footnote, see page 95.

Share of profit in associates and joint ventures

	2011 US$m		2010 US$m		2009 US$m
Associates
Bank of Communications Co., Limited .....................................................	1,370		987		754
Ping An Insurance (Group) Company of China, Limited ...........................	946		848		551
Industrial Bank Co., Limited .....................................................................	471		327		216
The Saudi British Bank .............................................................................	308		161		172
Other ........................................................................................................	126		156		42
Share of profit in associates ..........................................................................	3,221		2,479		1,735
Share of profit in joint ventures ...................................................................	43		38		46
Share of profit in associates and joint ventures .............................................	3,264		2,517		1,781

The reported share of profit in associates and joint ventures was US$3.3bn, an increase of 30% compared with 2010. On an underlying basis, which excludes the re-measurement loss relating to Ping An's acquisition of Shenzhen Development Bank, the share of profits from associates increased by 27%. This was driven mainly by higher contributions from our mainland China associates.

Our share of profits from BoCom rose, driven by strong loan growth, wider spreads following benchmark interest rate rises by the People's Bank of China and effective re-pricing. Fee-based income also increased due to the continued development of investment banking services as well as increased credit card spending. The contribution from Industrial Bank rose as a result of continued growth in customer lending, higher fee income and a fall in loan impairment charges.

Profits from Saudi British Bank increased, driven by a decline in loan impairment charges as the credit environment improved in Saudi Arabia and due to good cost control.

Higher profits from Ping An resulted from strong growth in sales in the insurance business and higher income from the banking business following the acquisition of Shenzhen Development Bank in July 2011.

Tax expense

	2011 US$m		2010 US$m		2009 US$m
Profit before tax ..........................................................................................	21,872		19,037		7,079
Tax expense .................................................................................................	(3,928)		(4,846)		(385)
Profit after tax .............................................................................................	17,944		14,191		6,694
Effective tax rate .........................................................................................	18.0%		25.5%		5.4%

Our reported tax expense decreased by US$0.9bn compared with 2010. The lower tax charge reflected the benefit of a deferred tax credit of US$0.9bn now eligible to be recognised in respect of foreign tax credits in the US. In addition, the tax charge in

2010 included US$1.2bn attributable to a taxable gain from an internal reorganisation in our North American operations. The resulting reported effective tax rate for 2011 was 18% compared with 25.5% in 2010.

 

END

 

 

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