Annual Financial Report - 4 of 48

RNS Number : 3311B

HSBC Holdings PLC

03 April 2013

 



Top and emerging risks

We classify certain risks as 'top' or 'emerging'. We define a 'top risk' as being a current, emerged risk which has arisen across any of our risk categories, regions or global businesses and has the potential to have a material impact on our financial results or our reputation and the sustainability of our long-term business model, and which may form and crystallise within a one-year horizon. We consider an 'emerging risk' to be one which has large uncertain outcomes which may form and crystallise beyond a one-year horizon and, if it were to crystallise, could have a material effect on our long-term strategy.

Our approach to identifying and monitoring top and emerging risks is informed by the risk factors.

All of our activities involve, to varying degrees, the measurement, evaluation, acceptance and management of risk or combinations of risks which we assess on a Group-wide basis. Top and emerging risks fall under the following three broad categories:

·     macroeconomic and geopolitical risk;

·     macro-prudential, regulatory and legal risks to our business model; and

·     risks related to our business operations, governance and internal control systems.

During 2012, our senior management paid particular attention to a number of top and emerging risks. The current list is summarised below:

Macroeconomic and geopolitical risk

·  Emerging markets slow down.

·  Macroeconomic risks within developed economies.

·  Increased geopolitical risk in certain regions.

Macro-prudential, regulatory and legal risks to our business model

·  Regulatory developments affecting our business model and Group profitability.

·  Regulatory investigations, fines, sanctions and requirements relating to conduct of business and financial crime negatively affecting our results and brand.

·  Dispute risk.

Risks related to our business operations, governance and internal control systems

·  Regulatory commitments and consent orders including under the Deferred Prosecution Agreements.

·  Challenges to achieving our strategy in a downturn.

·  Internet crime and fraud.

·  Level of change creating operational complexity and heightened operational risk.

·  Information security risk.

·  Model risk.

 

A detailed account of these risks is provided on page 131. All of them are regarded as top risks. Further comments on expected risks and uncertainties are made throughout the Annual Report and Accounts 2012, particularly in the section on Risk, pages 123 to 249.

Risk appetite

Risk appetite is a key component of our management of risk and describes the types and level of risk we are prepared to accept in delivering our strategy. Our risk appetite is set out in the Group's Risk Appetite Statement and is central to the annual planning process. Global businesses, geographical regions and global functions are required to articulate their risk appetite statements. They are discussed further on page 126.

Our risk appetite may be revised in response to the top and emerging risks we have identified.

Key performance indicators

The Board of Directors and the GMB monitor HSBC's progress against its strategic objectives. Progress is assessed by comparison with our strategy, our operating plan and our historical performance using both financial and non-financial measures.

From time to time the Group reviews its key performance indicators ('KPIs') in light of its strategic objectives and may in the future adopt new or refined measures, or modify or adjust existing targets, to better align the KPIs to our strategic objectives.

The GMB remains focused on improving our capital deployment to support the achievement of our medium-term target for return on equity of between 12% and 15%, utilising the six filter analysis across our portfolio of businesses. We will continue to evaluate our businesses in 2013 using this methodology.

Employee engagement has been monitored through annual Global People Surveys. In 2012, quarterly Pulse Surveys were introduced, and the Global People Surveys scheduled biennially. The next Global People Survey will be in 2013. As the Pulse Surveys were not designed to report employee engagement information comparable with that derived from the Global People Surveys, we have not disclosed this KPI in 2012.

Strategy		Restructuring HSBC - improving the way we deploy capital
		Return on average ordinary shareholders' equity2		Core tier 1 capital ratio10				Advances to core funding ratio23
Key Performance Indicators
		Measure: (percentage) profit attributable to ordinary shareholders divided by average ordinary shareholders' equity.		Measure: (percentage) ratio of core tier 1 capital comprising shareholders' equity and related non-controlling interests less regulatory deductions and adjustments to total risk-weighted assets.				Measure: loans and advances to customers as a percentage of the total of core customer deposits and term funding with a remaining term to maturity in excess of one year.
		Target: to maintain a return in the medium term of between 12% and 15%.		Target: to maintain a strong capital base to support the development of the business and meet regulatory capital requirements at all times.				Target: to maintain an advances to core funding ratio below limits set for each entity.
		Outcome: return on average ordinary shareholders' equity remained outside our target range and was 2.5 percentage points below 2011. The latter primarily reflected adverse fair value movements on own debt attributable to credit spreads, compared with favourable movements in 2011, a higher tax charge and higher average shareholders' equity.		Outcome: the increase in core tier 1 capital ratio to 12.3% was driven by capital generation and a reduction in RWAs following business disposals, notably the disposal of the US Card and Retail Services business and derecognition of Ping An as an associate.				Outcome: the operating entities reported remained inside their advances to core funding limits of between 70% and 115% during 2012, except for one operating entity reported within the total of HSBC's other principal entities which operated with a limit of 125% during the year. This limit has been reduced to 115% for 2013.
Strategy		Simplifying HSBC - a lean and values-driven organisation
Key Performance Indicators		Cost efficiency (2012: underlying cost efficiency 66.0%)				Basic earnings per ordinary share
		Measure: (percentage) total operating expenses divided by net operating income before loan impairment and other credit risk provisions.				Measure: (US$) level of basic earnings generated per ordinary share.
		Target: to be between 48% and 52%, a range within which business is expected to remain to accommodate both returns to shareholders and the need for continued investment in support of future business growth.				Target: to deliver consistent growth in basic earnings per share.
		Outcome: the ratio remained outside the target range. On a reported basis, revenues decreased primarily due to adverse fair value movements on own debt attributable to credit spreads, coupled with higher costs in part reflecting a charge in respect of fines and penalties as part of the settlement of investigations into HSBC's past inadequate compliance with anti-money laundering and sanctions laws as well as an increase in provisions relating to UK customer redress programmes. On an underlying basis, revenue growth was more than offset by the increase in costs.				Outcome: earnings per share decreased in 2012 reflecting adverse fair value movements on own debt attributable to credit spreads, compared with favourable movements in 2011, and a higher tax charge which resulted in a decrease in reported profits.

Growing HSBC - continuing to position ourselves for growth				Strategy
Risk-adjusted revenue growth (2012: underlying growth 13%)		Dividends per ordinary share growth
				Key Performance Indicators
Measure: (percentage) increase in reported net operating income after loan impairment and other credit risk charges since last year.		Measure: (percentage) increase in dividends per share since last year, based on dividends paid in respect of the year to which the dividend relates.
Target: to deliver consistent growth in risk adjusted revenues.		Target: to deliver sustained dividend per share growth.
Outcome: reported risk-adjusted revenue was broadly in line with 2011. On an underlying basis, there was an increase due to revenue growth, notably in GB&M and CMB, and lower loan impairment charges, notably in North America.		Outcome: dividends per share increased by 10%.
Customer recommendation		Brand value
Measure: we measure our customer satisfaction through an independent market research survey of retail banking customers in selected countries, using a specific customer recommendation index ('CRI') to score performance. We benchmark our performance against key competitors in each market and set targets relative to our peer group of banks. Target: the Group target is for 75% of all the markets (based on their weighted revenue) to meet their CRI targets. Outcome: RBWM failed to make its target of 75% as a consequence of reputational issues in certain of our major developed markets that adversely affected customers' perception of the bank in the third quarter of 2012. We saw a good recovery in the fourth quarter but, taking the overall averaged annual position into account, we only met our target in 38% of our weighted revenue. 55% of the weighted revenue target was within two points (from a 100-point scale). For CMB, we changed our measures in 2012 for customer satisfaction to reflect the strategic focus of the business. Previously, we only surveyed small business customers in a limited number of markets and measured customer recommendation. For 2012, we introduced a new measure of our performance through a 'client engagement' survey conducted for us by a third party. This provides a more complete perspective for our performance across all our CMB segments and will give us a competitive benchmark in 13 of our top markets. In 2012, therefore, we set benchmarks but not targets. We will set targets for 2013 and report results in the future.				Key Performance Indicators
		Measure: in 2011, we moved our brand measure to the Brand Finance valuation method as reported in The Banker Magazine. This is our second year of using this benchmark. The Brand Finance methodology gives us a more complete measure of the strength of the brand and its impact across all business lines and customer groups. It is a wholly independent measure and is publicly reported. Target: a top three position in the banking peer group. Outcome: The HSBC brand moved from first to third in the Brand Finance ranking and suffered a substantial reduction in value. We achieved our target of a top three position but, in consultation with the Brand Finance organisation, we have seen reputational issues cited as a major factor in our reduced performance in 2012.

For footnotes, see page 120.

 

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