Annual Financial Report - 3 of 56

RNS Number : 5969S

HSBC Holdings PLC

18 March 2016

Consolidated income statement

Five-year summary consolidated income statement

	2015 $m	2014 $m	2013 $m	2012 $m	2011 $m

Net interest income	32,531	34,705	35,539	37,672	40,662
Net fee income	14,705	15,957	16,434	16,430	17,160
Net trading income	8,723	6,760	8,690	7,091	6,506
Net income/(expense) from financial instruments designated at fair value	1,532	2,473	768	(2,226)	3,439
Gains less losses from financial investments	2,068	1,335	2,012	1,189	907
Dividend income	123	311	322	221	149
Net insurance premium income	10,355	11,921	11,940	13,044	12,872
Gains on disposal of US branch network, US cards business and Ping An Insurance (Group) Company of China, Ltd	-	-	-	7,024	-
Other operating income	1,055	1,131	2,632	2,100	1,766

Total operating income	71,092	74,593	78,337	82,545	83,461

Net insurance claims and benefits paid and movement in liabilities to policyholders	(11,292)	(13,345)	(13,692)	(14,215)	(11,181)

Net operating income before loan impairment charges and other credit risk provisions	59,800	61,248	64,645	68,330	72,280

Loan impairment charges and other credit risk provisions	(3,721)	(3,851)	(5,849)	(8,311)	(12,127)

Net operating income	56,079	57,397	58,796	60,019	60,153

Total operating expenses	(39,768)	(41,249)	(38,556)	(42,927)	(41,545)

Operating profit	16,311	16,148	20,240	17,092	18,608

Share of profit in associates and joint ventures	2,556	2,532	2,325	3,557	3,264

Profit before tax	18,867	18,680	22,565	20,649	21,872

Tax expense	(3,771)	(3,975)	(4,765)	(5,315)	(3,928)

Profit for the year	15,096	14,705	17,800	15,334	17,944

Profit attributable to shareholders of the parent company	13,522	13,688	16,204	14,027	16,797
Profit attributable to non-controlling interests	1,574	1,017	1,596	1,307	1,147

Five-year financial information

	2015 $	2014 $	2013 $	2012 $	2011 $

Basic earnings per share	0.65	0.69	0.84	0.74	0.92
Diluted earnings per share	0.64	0.69	0.84	0.74	0.91
Dividends per ordinary share³	0.50	0.49	0.48	0.41	0.39

	%	%	%	%	%

Dividend payout ratio⁴	76.5	71.0	57.1	55.4	42.4
Post-tax return on average total assets	0.6	0.5	0.7	0.6	0.6
Return on average ordinary shareholders' equity	7.2	7.3	9.2	8.4	10.9

Average foreign exchange translation rates to $:
$1: £	0.654	0.607	0.639	0.631	0.624
$1: €	0.902	0.754	0.753	0.778	0.719

For footnotes, see page 99.

Unless stated otherwise, all tables in the Annual Report and Accounts 2015 are presented on a reported basis.

For a summary of our financial performance in 2015, see page 22.

Group performance by income and expense item

Net interest income

	2015	2014	2013
	$m	$m	$m

Interest income	47,189	50,955	51,192
Interest expense	(14,658)	(16,250)	(15,653)

Net interest income⁵	32,531	34,705	35,539

Average interest-earning assets	1,726,949	1,786,536	1,669,368

Gross interest yield⁶	2.73%	2.85%	3.07%
Less: cost of funds	(1.00%)	(1.05%)	(1.10%)

Net interest spread⁷	1.73%	1.80%	1.97%

Net interest margin⁸	1.88%	1.94%	2.13%

For footnotes, see page 99.

Summary of interest income by type of asset

	2015			2014			2013
	Average balance	Interest income	Yield	Average balance	Interest income	Yield	Average balance	Interest income	Yield
	$m	$m	%	$m	$m	%	$m	$m	%
Short-term funds and loans and advances to banks	221,924	2,277	1.03	237,148	3,068	1.29	236,377	2,851	1.21
Loans and advances to customers	909,707	33,104	3.64	931,311	37,429	4.02	897,322	38,529	4.29
Reverse repurchase agreements - non-trading	162,308	1,301	0.80	198,273	1,800	0.91	114,324	995	0.87
Financial investments	396,113	7,508	1.90	399,816	8,323	2.08	393,309	8,002	2.03
Other interest-earning assets	36,897	2,999	8.13	19,988	335	1.68	28,036	815	2.91

Total interest-earning assets	1,726,949	47,189	2.73	1,786,536	50,955	2.85	1,669,368	51,192	3.07
Trading assets and financial assets designated at fair value^9,10	195,285	4,626	2.37	238,958	5,596	2.34	354,817	5,763	1.62
Impairment allowances	(10,606)			(14,015)			(15,954)
Non-interest-earning assets	682,143			668,564			683,785

Year ended 31 December	2,593,771	51,815	2.00	2,680,043	56,551	2.11	2,692,016	56,955	2.12

For footnotes, see page 99.

Summary of interest expense by type of liability and equity

	2015			2014				2013
	Average balance	Interest expense	Cost		Average balance	Interest expense	Cost		Average balance	Interest expense	Cost
	$m	$m	%		$m	$m	%		$m	$m	%

Deposits by banks¹¹	55,863	378	0.68		61,217	481	0.79		61,616	555	0.90
Financial liabilities designated at fair value - own debt issued¹²	58,489	717	1.23		66,374	837	1.26		72,333	967	1.34
Customer accounts¹³	1,075,901	7,401	0.69		1,088,493	9,131	0.84		1,035,500	8,794	0.85
Repurchase agreements - non-trading	117,947	355	0.30		190,705	652	0.34		94,410	405	0.43
Debt securities in issue	129,039	3,521	2.73		129,724	4,554	3.51		150,976	4,182	2.77
Other interest-bearing liabilities	28,396	2,286	8.05		10,120	595	5.88		11,345	750	6.61

Total interest-bearing liabilities	1,465,635	14,658	1.00		1,546,633	16,250	1.05		1,426,180	15,653	1.10
Trading liabilities and financial liabilities designated at fair value (excluding own debt issued)	151,294	2,071	1.37		178,518	2,856	1.60		301,353	3,027	1.00
Non-interest bearing current accounts	190,914				185,990				184,370
Total equity and other non-interest bearing liabilities	785,928				768,902				780,113

Year ended 31 December	2,593,771	16,729	0.64		2,680,043	19,106	0.71		2,692,016	18,680	0.69

For footnotes, see page 99.

Reported net interest income of $32.5bn decreased by $2.2bn or 6% compared with 2014. This included the significant items and currency translation summarised in the table below.

Significant items and currency translation

	2015	2014
	$m	$m
Significant items
Provisions arising from the ongoing review of compliance with the Consumer Credit Act in the UK	(10)	(632)
Acquisitions, disposals and dilutions	-	38

	(10)	(594)
Currency translation		2,890

Year ended 31 December	(10)	2,296

Excluding the significant items and currency translation tabulated above, net interest income was broadly unchanged compared with 2014, as increases in Asia and Latin America were offset by a reduction in North America.

On a reported basis, net interest spread and margin both fell, mainly due to adverse foreign exchange movements in Latin America and Europe, partly offset by a reduction in significant items, namely lower provisions arising from the ongoing review of compliance with the Consumer Credit Act ('CCA') in the UK. Excluding these factors, net interest spread and margin were marginally lower due to reduced yields on customer lending in Europe and North America. However, during the year, we changed the mix of our overall portfolio towards higher yielding customer lending balances. This was through a managed reduction in the average balances of lower yielding short-term funds, reverse repos and financial investments, notably in Europe, reflecting our continued focus on the efficient use of our balance sheet.

Interest income by type of asset and interest expense by type of liability, and the associated average balances as set out in the summary tables above, were affected by the reclassification in June 2015, of our operations in Brazil to 'Assets held for sale' in 'Other interest-earning assets' and liabilities of disposal groups held for sale in 'Other interest-bearing liabilities', respectively.

Interest income

Reported interest income decreased by $3.8bn compared with 2014 driven by currency translation, notably in Latin America and Europe, although this was partly offset in Europe as 2014 included higher provisions arising from the on-going review of compliance with the CCA.

Excluding these factors, interest income was broadly unchanged compared with 2014.

Interest income on loans and advances to customers was broadly unchanged as lower interest income in Europe and North America was offset by increases in Asia and Latin America.

In Europe, the reduction in interest income was driven by lower yields on mortgages in the UK in line with competitive pricing, and the effect of downward movements in market interest rates in the eurozone. Interest income also fell in North America as the CML portfolio continued to decrease from run-off and sales. In addition, new lending to customers in RBWM and CMB was at reduced yields in the current low interest rate environment, although the effect of this was partly offset by an increase in average term lending balances.

By contrast, in Asia, the rise in interest income was driven by growth in average term lending balances, primarily in Hong Kong and mainland China. This was partly offset by compressed yields on customer lending, notably in mainland China and Australia due to central bank rate reductions, although yields in Hong Kong marginally increased. In Latin America, the increase was primarily in Argentina, driven by growth in average balances.

Interest income on short-term funds and financial investments in Balance Sheet Management marginally decreased. This was driven by lower interest income in Europe, due to a managed reduction in average balances, and in Asia, reflecting movement in central bank interest rates in mainland China and India. These factors were partly offset in North America by a change in product mix towards higher yielding mortgage backed securities in order to maximise the effectiveness of the portfolio.

Interest income from other interest-earning assets rose due to the reclassification of our operations in Brazil to 'Assets held for sale' in June 2015. In Brazil, excluding the impact of currency translation, interest income rose due to growth in average term lending balances and financial investments, together with higher yields reflecting successive increases in central bank interest rates in 2014 and 2015.

Interest expense

Reported interest expense decreased by $1.6bn compared with 2014 driven by currency translation, primarily in Latin America and Europe.

Excluding this, interest expense fell driven by a lower cost of customer accounts, debt issued and repos.

Interest expense on customer accounts fell marginally despite growth in average balances. This reflected central bank rate reductions in a number of markets, notably Mexico, mainland China, Australia and India. Europe was affected by downward movements in market rates in the eurozone. This was partly offset by rising costs in North America, in line with promotional deposit offerings.

Interest expense on debt issued also fell, primarily in Europe as new debt was issued at lower prevailing rates and average outstanding balances fell as a result of net redemptions. Interest expense also fell on repos, notably in Europe, reflecting the managed reduction in average balances.

Interest expense on other interest-bearing liabilities increased due to the reclassification of our operations in Brazil. In Brazil, excluding currency translation, interest expense rose, primarily on debt securities in issue and also on customer accounts driven by successive increases in central bank rates. Other interest expense also increased in North America, as 2014 benefited from the release of accrued interest associated with uncertain tax positions.

Net fee income

	2015 $m	2014 $m	2013 $m

Account services	2,745	3,407	3,581
Funds under management	2,570	2,658	2,673
Cards	2,281	2,460	2,455
Credit facilities	1,919	1,890	1,907
Broking income	1,441	1,371	1,388
Unit trusts	1,007	1,005	891
Imports/exports	971	1,115	1,157
Remittances	772	833	849
Underwriting	762	872	866
Global custody	721	726	698
Insurance agency commission	519	516	551
Other	2,308	2,692	2,957

Fee income	18,016	19,545	19,973

Less: fee expense	(3,311)	(3,588)	(3,539)

Year ended 31 December	14,705	15,957	16,434

Reported net fee income fell by $1.3bn compared with 2014, primarily reflecting the adverse effects of currency translation between the years of $1.2bn, notably in Europe and Latin America, as tabulated below.

Significant items and currency translation

	2015	2014
	$m	$m
Significant items
Acquisitions, disposals and dilutions	-	10
Currency translation		1,204

Year ended 31 December	-	1,214

On an adjusted basis, net fee income decreased by $38m. This reflected a reduction in Europe, primarily within RBWM and GB&M, largely offset by increases in Asia in RBWM and North America in GB&M.

Account services fee income fell significantly by $348m, mainly in the UK in RBWM where lower overdraft fees reflected re-pricing and fewer overdrawn balances following the introduction in November 2014 of a text-alert service for customers. Account services fees also fell in Switzerland due to the continuing repositioning of our GPB business.

Import and export fees fell too (by $79m), mainly in Asia reflecting a reduction in trade activity. In addition, our underwriting fee income fell by $65m, mainly in Hong Kong in GB&M, where there was reduced activity in equity capital markets, although this was partly offset by higher debt issuances in the US.

By contrast, our credit facilities fee income grew strongly (by $190m) in North America and, to a lesser extent, in Asia, reflecting continued growth in average lending balances, although balances were broadly unchanged in Asia in the second half of the year.

Our fee income from broking and unit trusts also grew (up by $182m), mainly in Hong Kong, driven by higher sales of equities and mutual funds in RBWM. This was from increased stock market turnover, in part facilitated by the Shanghai-Hong Kong Stock Connect platform and greater investor appetite following improvements in Asian equity markets in the first half of the year, however there was weaker investor sentiment in the second half of the year.

Fees from funds under management increased by $157m. In our Global Asset Management business, this was notably in France and the US due to volume growth from fixed income products. In addition, fee income from funds under management also increased in Germany from growth in Securities Services in GB&M, and in Hong Kong from increased funds under management in GPB.

Fee expenses were marginally higher by $101m due to a rise in brokerage fees, notably in Germany.

Net trading income

	2015 $m	2014 $m	2013 $m

Trading activities	7,285	5,419	6,921
Ping An contingent forward sale contract	-	-	(682)
Net interest income on trading activities	1,775	1,907	2,047
Gain/(loss) on termination of hedges	(11)	1	(194)
Other trading income - hedge ineffectiveness:
- on cash flow hedges	15	34	22
- on fair value hedges	(11)	19	65
Fair value movement on non-qualifying hedges¹⁴	(330)	(620)	511

Year ended 31 December	8,723	6,760	8,690

For footnote, see page 99.

Reported net trading income of $8.7bn was $2.0bn higher than in 2014, predominantly in Europe. The movement in net trading income in part reflected the favourable significant items and currency translation summarised in the table below.

Significant items and currency translation

	2015 $m	2014 $m
Significant items
Included within trading activities:	230	(332)
- favourable/(adverse) debit valuation adjustment on derivative contracts	230	(332)

Included in other net trading income:	(327)	(539)
- fair value movement on non-qualifying hedges	(327)	(541)
- acquisitions, disposals and dilutions	-	2

	(97)	(871)
Currency translation		520

Year ended 31 December	(97)	(351)

On an adjusted basis, net trading income from trading activities increased by $1.7bn compared with 2014, driven by our client-facing GB&M businesses, notably Equities, Foreign Exchange and Credit. This was primarily in the UK following an increase in volatility and client activity.

Net trading income from trading activities also rose due to a number of other valuation movements. In 2014, we revised our estimation methodology for valuing uncollateralised derivative portfolios by introducing the funding fair value adjustment ('FFVA') which resulted in a charge of $263m. In addition, the Equities and Rates businesses benefited from favourable movements on own credit spreads compared with minimal movements in 2014.

These movements contributed to an increase in net trading income from trading activities in Rates, although client activity remained subdued.

Net income from financial instruments designated at fair value

	2015 $m	2014 $m	2013 $m
Net income/(expense) arising from:
- financial assets held to meet liabilities under insurance and investment contracts	531	2,300	3,170
- liabilities to customers under investment contracts	34	(435)	(1,237)
- HSBC's long-term debt issued and related derivatives	863	508	(1,228)
- change in own credit spread on long-term debt (significant item)	1,002	417	(1,246)
- other changes in fair value	(139)	91	18

- other instruments designated at fair value and related derivatives	104	100	63

Year ended 31 December	1,532	2,473	768

Assets and liabilities from which net income from financial instruments designated at fair value arose

	2015 $m	2014 $m	2013 $m

Financial assets designated at fair value at 31 December	23,852	29,037	38,430
Financial liabilities designated at fair value at 31 December	66,408	76,153	89,084

Including:
Financial assets held to meet liabilities under:
- insurance and investment contracts with DPF	11,119	10,650	10,717
- unit-linked insurance and other insurance and investment contracts	11,153	16,333	25,423
Long-term debt issues designated at fair value	60,188	69,681	75,278

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

Reported net income from financial instruments designated at fair value was $1.5bn in 2015, compared with $2.5bn in 2014. The former included favourable movements in the fair value of our own long-term debt of $1.0bn due to changes in credit spread, compared with favourable movements of $417m in 2014.

Significant items and currency translation

	2015	2014
	$m	$m
Significant items
Own credit spread	1,002	417
Currency translation		303

Year ended 31 December	1,002	720

On an adjusted basis, which excludes changes in our own credit spread and the net adverse effect of currency translation shown above, net income from financial instruments at fair value decreased by $1.2bn.

Net income from financial assets held to meet liabilities under insurance and investment contracts of $531m was $1.8bn lower than in 2014. This was primarily driven by weaker equity markets in Hong Kong and the UK, notably in the second half of the year. The fair value movement in 2015 included gains in Brazil and France, partly offset by losses in Hong Kong. These gains and losses are broadly offset by 'Net insurance claims and benefits paid and movements in liabilities to policyholders' and 'Liabilities to customers under investment contracts'.

Other changes in fair value reflected a net adverse movement due to interest and exchange rate hedging ineffectiveness.

Gains less losses from financial investments

	2015 $m	2014 $m	2013 $m
Net gains/(losses) from disposal of:
- debt securities	345	665	491
- equity securities	1,829	1,037	1,697
- other financial investments	5	6	(1)

	2,179	1,708	2,187
Impairment of available-for-sale equity securities	(111)	(373)	(175)

Year ended 31 December	2,068	1,335	2,012

In 2015, gains less losses from financial investments increased by $733m on a reported basis compared with 2014. This was driven by the significant items and currency translation tabulated below, notably the gain on the partial sale of our shareholding in Industrial Bank Co. Ltd ('Industrial Bank') of $1.4bn.

Significant items and currency translation

	2015	2014
	$m	$m
Significant items
Gain on sale of shareholding in Bank of Shanghai	-	428
Gain on the partial sale of shareholding in Industrial Bank	1,372	−
Impairment of our investment in Industrial Bank	-	(271)

	1,372	157
Currency translation		95

Year ended 31 December	1,372	252

On an adjusted basis, excluding all significant items and currency translation tabulated above, gains less losses from financial investments decreased by $387m. This was primarily in our GB&M business, driven by lower gains on disposals of available-for-sale debt securities, notably in the UK and US and lower gains on equity securities in Principal Investments in the UK.

In addition, we recorded minor losses on disposals from our legacy credit portfolio compared with gains in 2014. The disposal of these assets reflects our continued efforts to manage down low-returning assets to maximise returns.

Net insurance premium income

	2015 $m	2014 $m	2013 $m

Gross insurance premium income	11,012	12,370	12,398
Reinsurance premiums	(657)	(449)	(458)

Year ended 31 December	10,355	11,921	11,940

Reported net insurance premium income was $1.6bn lower, largely from the adverse effects of currency translation of $930m.

Significant items and currency translation

	2015 $m	2014 $m

Significant items	-	-
Currency translation		930

Year ended 31 December	-	930

On an adjusted basis, excluding the effect of currency translation, net insurance premium income fell by $636m or 6%, driven by Asia, primarily in Hong Kong where it declined because of lower unit-linked contract premiums and new reinsurance agreements.

In Europe, premium income fell mainly in the UK, reflecting a decision to exit the commercial pensions market in 2014.

Other operating income

	2015 $m	2014 $m	2013 $m

Rent received	171	162	155
Gains/(losses) recognised on assets held for sale	(244)	220	(729)
Gains on investment properties	61	120	113
Gain on disposal of property, plant and equipment, intangible assets and non-financial investments	53	32	178
Gains/(losses) arising from dilution of interest in Industrial Bank and other associates and joint ventures	-	(32)	1,051
Gain on disposal of HSBC Bank (Panama) S.A.	-	-	1,107
Change in present value of in-force long-term insurance business	799	261	525
Other	215	368	232

Year ended 31 December	1,055	1,131	2,632

Change in present value of in-force long-term insurance business

	2015 $m	2014 $m	2013 $m

Value of new business	809	870	924
Expected return	(552)	(545)	(505)
Assumption changes and experience variances	504	(116)	88
Other adjustments	38	52	18

Year ended 31 December	799	261	525

Reported other operating income decreased by $76m from 2014. This was partly due to the significant items recorded in the table below.

Significant items and currency translation

	2015 $m	2014 $m
Significant items
Included within gains/(losses) recognised on assets held for sale:	(232)	168
- disposal costs of our Brazilian operation	(18)	-
- gain/(loss) on sale of several tranches of real estate secured accounts in the US	(214)	168

Included within the remaining line items:	-	(41)
- acquisitions, disposals and dilutions	-	(41)

Currency translation		(64)

Year ended 31 December	(232)	63

Excluding the significant items and currency translation tabulated above, other operating income increased by $219m compared with 2014. This was primarily from higher favourable movements in present value of in-force ('PVIF') long-term insurance business, partly offset by lower disposal and revaluation gains on investment properties, mainly in Asia.

The higher favourable movement in the PVIF balance was driven by changes in interest rates and investment return assumptions, notably in France and Hong Kong.

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

	2015 $m	2014 $m	2013 $m
Net insurance claims and benefits paid and movement in liabilities to policyholders:
- gross	11,872	13,723	13,948
- less reinsurers' share	(580)	(378)	(256)

Year ended 31 December¹⁵	11,292	13,345	13,692

For footnote, see page 99.

Reported net insurance claims and benefits paid and movement in liabilities to policyholders were $2.1bn lower
than in 2014, in part reflecting the effect of currency translation of $1.1bn.

Significant items and currency translation

	2015	2014
	$m	$m

Significant items	-	-
Currency translation		1,109

Year ended 31 December	-	1,109

Excluding the effects of currency translation, net insurance claims and benefits paid and movements in liabilities to policyholders were $0.9bn lower.

This was primarily driven by a decrease in returns on financial assets supporting liabilities to policyholders, where the policyholder shares in the investment risk. This decrease in returns reflected a weaker equity market performance in Hong Kong in the second half of the year.

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

In addition, movements in liabilities to policyholders were lower due to a decrease in premiums written in Asia, as explained in 'Net earned insurance premiums'.

Loan impairment charges and other credit risk provisions

	2015 $m	2014 $m	2013 $m
Loan impairment charges:
- new allowances net of allowance releases	4,400	5,010	7,344
- recoveries of amounts previously written off	(808)	(955)	(1,296)

	3,592	4,055	6,048

Individually assessed allowances	1,505	1,780	2,320
Collectively assessed allowances	2,087	2,275	3,728

Releases of impairment on available-for-sale debt securities	(17)	(319)	(211)
Other credit risk provisions	146	115	12

Year ended 31 December	3,721	3,851	5,849

Impairment charges on loans and advances to customers as a percentage of average gross loans and advances to customers	0.39%	0.43%	0.67%

Reported loan impairment charges and other credit risk provisions ('LICs') of $3.7bn were $0.1bn lower than in 2014, primarily due to favourable currency translation of $683m.

Excluding the effects of currency translation, LICs were $0.6bn higher than in 2014.

Significant items and currency translation

	2015	2014
	$m	$m

Significant items	-	-
Currency translation		683

Year ended 31 December	-	683

In the fourth quarter of 2015, our LICs increased compared with the third quarter following a rise in individually assessed LICs in a small number of countries. This was reflective of specific circumstances associated with those countries with no common underlying theme. In addition, we increased our collectively assessed LICs on exposures related to the oil and gas industry by $0.2bn, notably in North America, Middle East and North Africa, and Asia. For more information on our exposure to the oil and gas sector, see page 117.

The following paragraphs set out in more detail the factors that have contributed to movements in our collectively and individually assessed LICs compared with 2014.

On an adjusted basis, collectively assessed LICs rose by $221m, mainly in Middle East and North Africa, North America and Asia, partly offset in Europe. It arose from the following:

· in Middle East and North Africa (up by $167m), this was mainly in the UAE in RBWM, where we increased the impairment allowances on our mortgage book following a review of the quality and value of collateral. In addition, LICs grew in our CMB business, notably relating to the oil and foodstuffs industries;

· in North America (up by $132m) and Asia (up by $108m), this reflected an increase in allowances against our oil and gas exposures. In our US CML portfolio, LICs were higher than in 2014 reflecting lower favourable market value adjustments of underlying properties as improvements in the housing market conditions were less pronounced in 2015. This was partly offset by a fall in LICs from lower levels of newly impaired loans and reduced lending balances from continued run-off and sales. Additionally, collectively assessed LICs rose in Indonesia following credit deterioration; and

· in Europe, collectively assessed LICs were $192m lower, most notably in our GB&M business in the UK, as 2014 included additional impairment charges from revisions to certain estimates used in our corporate collective loan impairment calculation.

Individually assessed LICs were broadly unchanged from 2014 on an adjusted basis. This reflected decreases in Latin America, Europe and Asia which were offset by increases in Middle East and North Africa and in North America. This included the following:

· in Latin America (down by $95m), Europe (down by $44m) and Asia (down by $44m), we saw reductions in individually assessed LICs in our GB&M business as 2014 included significant impairment charges related to corporate clients in our respective regions. In Asia, the reduction was partly offset by an increase in LICs against a small number of CMB customers in Indonesia; and

· in Middle East and North Africa (up by $134m) and North America (up by $47m), individually assessed LICs increased in our CMB business. In the former, this primarily related to higher LICs on food wholesalers, while in North America LICs rose in the oil and gas sector.

In 2015, there were lower net releases of credit risk provisions than in 2014, down by $0.3bn, mainly on available-for-sale asset-backed securities ('ABS's) in our UK GB&M business.

Operating expenses

In addition to detailing operating expense items by category, as set out in the table below, we also categorise adjusted expenses as follows:

· 'run-the-bank' costs comprise business-as-usual running costs that keep operations functioning at the required quality and standard year-on-year, maintain IT infrastructure and support revenue growth. Run-the-bank costs are split between front office and back office, reflecting the way the Group is organised into four global businesses ('front office') supported by global functions ('back office');

· 'change-the-bank' costs comprise expenses relating to the implementation of mandatory regulatory changes and other

investment costs incurred relating to projects to change business-as-usual activity to enhance future operating capabilities;

· 'costs-to-achieve' comprise those specific costs relating to the achievement of the strategic actions set out in the Investor Update in June 2015. They comprise costs incurred between 1 July 2015 and 31 December 2017 and do not include ongoing initiatives such as Global Standards. Any costs arising within this category have been incurred as part of a significant transformation programme. Costs-to-achieve are included within significant items and incorporate restructuring costs which were identified as a separate significant item prior to 1 July 2015; and

· the UK bank levy is reported as a separate category.

Operating expenses

	2015	2014	2013
	$m	$m	$m
By expense category
Employee compensation and benefits	19,900	20,366	19,196
Premises and equipment (excluding depreciation and impairment)	3,830	4,204	4,183
General and administrative expenses	13,832	14,361	12,882

Administrative expenses	37,562	38,931	36,261
Depreciation and impairment of property, plant and equipment	1,269	1,382	1,364
Amortisation and impairment of intangible assets	937	936	931

Year ended 31 December	39,768	41,249	38,556

	2015	2014
	$m	$m
By expense group
Run-the-bank - front office	15,482	14,879
Run-the-bank - back office	15,784	15,631
Change-the-bank	3,494	3,002
Bank levy	1,421	1,063
Significant items	3,586	3,396
Currency translation	-	3,278

Year ended 31 December	39,768	41,249

Reported operating expenses for 2015 of $39.8bn were $1.5bn or 4% lower than in 2014. The reduction in reported expenses was driven by the favourable effects of currency translation between the years. Significant items increased by $0.2bn, with a reduction in fines, penalties, redress and associated provisions of $0.7bn, more than offset by transformation costs (costs-to-achieve) of $0.9bn.

Costs-to-achieve, which relate to specific programmes
aimed at achieving the cost reduction and productivity outcomes outlined in the Investor Update, comprise:

· severance costs of $0.4bn across a number of areas including CMB ($147m), RBWM ($49m), Risk ($44m) and GB&M ($45m);

· staff costs for the transformation programme in progress of $0.1bn in the second half of 2015; and

· other costs of $0.4bn, including software write-offs, US portfolio run-off costs and consultancy costs.

Significant items and currency translation

	2015	2014
	$m	$m
Significant items
Disposal costs of our Brazilian operations	110	-
Charge in relation to settlement agreement with Federal Housing Finance Authority	-	550
Costs-to-achieve	908	-
Cost to establish UK ring-fenced bank	89	-
Regulatory provisions in GPB	172	65
Restructuring and other related costs	117	278
Settlements and provisions in connection with legal matters	1,649	1,187
UK customer redress programmes	541	1,275
Acquisitions, disposals and dilutions	-	40

	3,586	3,395
Currency translation		3,278

Year ended 31 December	3,586	6,673

On an adjusted basis, operating expenses of $36.2bn were $1.6bn or 5% higher than in 2014, reflecting increases in both run-the-bank and change-the-bank costs.

Run-the-bank costs totalled $31.3bn for 2015, an increase of $0.8bn or 2% on 2014. This was primarily driven by targeted investment in Latin America, Asia and Europe. We recruited new staff to support growth in targeted areas as follows:

· in GB&M we invested in Payments and Cash Management ('PCM') mainly in Europe;

· in CMB, we invested in PCM revenue-generating full time equivalent staff ('FTEs') in North America and Asia; and

· in RBWM, we invested in additional FTEs in Asia in our branch network to support revenue growth.

Our total expenditure on regulatory programmes and compliance in 2015, including both run-the-bank and change‑the-bank elements, was $2.9bn, up by $0.7bn or 33% from 2014.

Run-the-bank costs associated with regulatory programmes and compliance increased by $0.2bn reflecting the continued implementation of our Global Standards programme to enhance our financial crime risk controls and capabilities, and to meet our external commitments.

Change-the-bank costs totalled $3.5bn in 2015, an increase of $0.5bn or 16% on 2014, primarily driven by regulatory programmes and compliance costs. This reflected investment in strategic IT infrastructure including systems enhancements for customer due diligence, transaction monitoring and sanctions screening as part of the Global Standards programme. These actions were in line with our strategic target to complete the implementation of Global Standards in 2017. There was also further investment in stress testing and other programmes to meet legal and regulatory requirements.

The bank levy totalled $1.4bn, up by $0.4bn or 34% from 2014. Excluding the bank levy, operating expenses in the second half of 2015 were broadly in line with the first half of the year. Investment in regulatory programmes and compliance and inflationary pressures were offset by cost saving initiatives mainly driven by reduced staff costs. This reflected a reduction in FTEs of 4,585 from 30 June 2015 to 31 December 2015. In addition we reduced travel and entertainment costs through a strong focus on cost management.

Excluding investment in regulatory programmes and compliance, and the bank levy, adjusted operating expenses grew by 2% compared with 2014.

Staff numbers (full-time equivalents)

	2015	2014	2013
Geographical regions
Europe	67,509	69,363	68,334
Asia	120,144	118,322	113,701
Middle East and North Africa	8,066	8,305	8,618
North America	19,656	20,412	20,871
Latin America	39,828	41,201	42,542

At 31 December	255,203	257,603	254,066

The number of employees, expressed in FTEs, at 31 December 2015 was 255,203, a decrease of 4,585 from 30 June 2015 reflecting the initial impact of cost saving initiatives. Compared with 31 December 2014, FTEs decreased by 2,400. This was driven by reductions in global businesses and global functions, offset by an increase in compliance of 2,419 FTEs.

The average number of FTEs adjusted for business disposals increased by 1.2% compared with 2014 due to additional FTE requirements for regulatory programmes and compliance, and investment in growth areas.

Reported cost efficiency ratios¹⁶

	2015 %	2014 %	2013 %

HSBC	66.5	67.3	59.6

Geographical regions
Europe	93.7	93.7	84.0
Asia	43.0	44.0	40.7
Middle East and North Africa	48.1	47.7	51.5
North America	84.9	78.9	72.9
Latin America	72.6	71.7	56.1

Global businesses
Retail Banking and Wealth Management	72.4	71.7	64.7
Commercial Banking	45.4	44.3	41.7
Global Banking and Markets	59.4	67.7	51.9
Global Private Banking	84.3	74.8	91.4

For footnote, see page 99.

Share of profit in associates and joint ventures

	2015 $m	2014 $m	2013 $m
Associates
Bank of Communications Co., Limited	2,011	1,974	1,878
The Saudi British Bank	462	455	403
Other	45	64	5

Share of profit in associates	2,518	2,493	2,286
Share of profit in joint ventures	38	39	39

Year ended 31 December	2,556	2,532	2,325

Our reported share of profit in associates and joint ventures was $2.6bn, an increase of $24m or 1%, driven by higher contributions from Bank of Communications Co., Limited ('BoCom') and The Saudi British Bank.
Our share of profit from BoCom rose as a result of balance sheet growth, partly offset by higher operating expenses.

Profits from The Saudi British Bank also rose, by $7m, reflecting strong balance sheet growth.

Tax expense

	2015 $m	2014 $m	2013 $m

Profit before tax	18,867	18,680	22,565
Tax expense	(3,771)	(3,975)	(4,765)

Profit after tax for the year ended 31 December	15,096	14,705	17,800

Effective tax rate	20.0%	21.3%	21.1%