Annual Financial Report - 5 of 48

RNS Number : 3476B

HSBC Holdings PLC

03 April 2013

Financial summary

Use of non-GAAP financial measures ...........	25
Constant currency ................................................	25
Underlying performance ......................................	26

Consolidated income statement .....................	29

Group performance by income and expense item ................................................................	33
Net interest income .............................................	33
Net fee income ....................................................	35
Net trading income ..............................................	36
Net income/(expense) from financial instruments designated at fair value .....................................	37
Gains less losses from financial investments .........	38
Net earned insurance premiums ............................	38
Gains on disposal of US branch network, US cards business and Ping An ................................	39
Other operating income .......................................	39
Net insurance claims incurred and movement in liabilities to policyholders .................................	40
Loan impairment charges and other credit risk provisions ........................................................	41
Operating expenses ..............................................	42
Share of profit in associates and joint ventures .....	43
Tax expense ........................................................	44

Consolidated balance sheet ............................	45
Movement in 2012 ..............................................	46

Economic loss ....................................................	51
Reconciliation of RoRWA measures ..............	52
Disposals, held for sale and run-off portfolios .........................................................................	52
Critical accounting policies ............................	54

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.

Use of non-GAAP financial measures

Our reported results are prepared in accordance with IFRSs as detailed in the Financial Statements starting on page 372. There are times when we measure our performance internally, using financial measures which have been derived from our reported results, in order to eliminate factors which distort year-on-year comparisons so we can view our results on a more like-for-like basis; these are considered non-GAAP measures. 'Constant currency' and 'underlying' performance are non-GAAP measures that we use throughout our Operating and Financial Review and are described below. Other non-GAAP financial measures are described and reconciled to the closest reported financial measure when used.

Constant currency

The constant currency measure adjusts for the year-on-year effects of foreign currency translation differences by comparing reported results for 2012 with reported results for 2011 retranslated at 2012 exchange rates. Except where stated otherwise, commentaries are on a constant currency basis, as reconciled in the table overleaf.

The foreign currency translation differences reflect the movements of the US dollar against most major currencies during 2012.

We exclude the translation differences when monitoring progress against operating plans and past results because management believes the like-for-like basis of constant currency financial measures more appropriately reflects changes due to operating performance.

Constant currency

Constant currency comparatives for 2011 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 2011 at the average rates of exchange for 2012; and

· the balance sheet at 31 December 2011 at the prevailing rates of exchange on 31 December 2012.

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.

Reconciliation of reported and constant currency profit before tax

	2012 compared with 2011
HSBC	2011 as reported US$m	Currency translation adjustment²⁴ US$m	2011 at 2012 exchange rates US$m	2012 as reported US$m	Reported change²⁵ %	Constant currency change²⁵ %

Net interest income ......................	40,662	(1,151)	39,511	37,672	(7)	(5)
Net fee income .............................	17,160	(436)	16,724	16,430	(4)	(2)
Own credit spread²⁶ ......................	3,933	(35)	3,898	(5,215)
Gains on disposal of US branch network, US cards business and Ping An ....................................	-	-	-	7,024
Other income²⁷ ............................	10,525	(446)	10,079	12,419	18	23

Net operating income²¹ ............	72,280	(2,068)	70,212	68,330	(5)	(3)

Loan impairment charges and other credit risk provisions .......	(12,127)	277	(11,850)	(8,311)	31	30

Net operating income ...............	60,153	(1,791)	58,362	60,019	−	3

Operating expenses ......................	(41,545)	1,273	(40,272)	(42,927)	(3)	(7)

Operating profit ........................	18,608	(518)	18,090	17,092	(8)	(6)

Share of profit in associates and joint ventures .....................	3,264	55	3,319	3,557	9	7

Profit before tax ........................	21,872	(463)	21,409	20,649	(6)	(4)

By global business²⁸
Retail Banking and Wealth Management .............................	4,270	(71)	4,199	9,575	124	128
Commercial Banking ....................	7,947	(180)	7,767	8,535	7	10
Global Banking and Markets .........	7,049	(200)	6,849	8,520	21	24
Global Private Banking .................	944	(8)	936	1,009	7	8
Other ...........................................	1,662	(4)	1,658	(6,990)

Profit before tax ..........................	21,872	(463)	21,409	20,649	(6)	(4)

By geographical region²⁸
Europe .........................................	4,671	(130)	4,541	(3,414)
Hong Kong ...................................	5,823	20	5,843	7,582	30	30
Rest of Asia-Pacific ......................	7,471	(79)	7,392	10,448	40	41
Middle East and North Africa .......	1,492	(7)	1,485	1,350	(10)	(9)
North America .............................	100	(14)	86	2,299	2,199	2,573
Latin America ..............................	2,315	(253)	2,062	2,384	3	16

Profit before tax ..........................	21,872	(463)	21,409	20,649	(6)	(4)

For footnotes, see page 120.

Underlying performance

Underlying performance:

· adjusts for the year-on-year effects of foreign currency translation;

· eliminates the fair value movements on our long-term debt attributable to credit spread ('own credit spread') where the net result of such movements will be zero upon maturity of the debt (see footnote 26 on page 120); and

· adjusts for acquisitions, disposals and changes of ownership levels of subsidiaries, associates and businesses (see footnote 29 on page 120).

For disposals, acquisitions and changes of ownership levels of subsidiaries, associates and businesses, we eliminate the gain or loss on disposal in the period incurred and remove the operating profit or loss of the acquired and disposed of businesses from all periods presented. Previously, this adjustment for the results of operations was effected by removing the time-equivalent component of operating profit or loss from the comparative period. During 2012 we changed this adjustment to better reflect the results of the ongoing business. Had we maintained our previous approach, underlying profit before tax would have been US$1.7bn higher in 2012. This was mainly due to the elimination of the US Card and Retail Services business.

We use underlying performance when monitoring progress against operating plans and past results because we believe that this basis more appropriately reflects operating performance. We use underlying performance in our commentaries to explain year-on-year changes when the effect of fair value movements on own debt, acquisitions, disposals or dilution is significant.

The following acquisitions, disposals and changes to ownership levels affected the underlying performance:

Disposal gains/(losses) affecting underlying performance

	Date	Disposal gain/(loss)
		US$m

HSBC Financial Services (Middle East) Limited's disposal of majority stake in HSBC Private Equity Middle East Limited....................................................................................................................	Jun 2011	(7)
Dilution gain on our holding in Ping An following the issue of share capital to a third party ..........	Jun 2011	181
Grupo Financiero HSBC, S.A. de C.V.'s disposal of HSBC Afore S.A. de C.V.³⁰ ..............................	Aug 2011	83
Dilution gain as a result of the merger between HSBC Saudi Arabia Limited and SABB Securities Limited ......................................................................................................................................	Dec 2011	27

HSBC Bank Canada's disposal of HSBC Securities (Canada) Inc's full service retail brokerage business³⁰ ...................................................................................................................................	Jan 2012	83

The Hongkong and Shanghai Banking Corporation Limited's disposal of RBWM operations in Thailand³⁰ ..................................................................................................................................	Mar 2012	108

HSBC Finance Corporation, HSBC USA Inc. and HSBC Technology and Services (USA) Inc.'s disposal of US Card and Retail Services business³⁰ .......................................................................	May 2012	3,148
HSBC Bank USA, N.A.'s disposal of 138 non-strategic branches³⁰ .................................................	May 2012	661
HSBC Argentina Holdings S.A.'s disposal of its general insurance manufacturing subsidiary³⁰ .........	May 2012	102

The Hongkong and Shanghai Banking Corporation Limited's disposal of its private banking business in Japan³⁰ ..................................................................................................................................	Jun 2012	67
The Hongkong and Shanghai Banking Corporation Limited's disposal of its shareholding in a property company in the Philippines ........................................................................................	Jun 2012	130

HSBC Bank USA, N.A.'s disposal of 57 non-strategic branches³⁰ ...................................................	Aug 2012	203
Hang Seng Bank Limited's disposal of its general insurance manufacturing subsidiary³⁰ ..................	Jul 2012	46
HSBC Asia Holdings B.V.'s investment loss on a subsidiary³⁰ .........................................................	Aug 2012	(85)
HSBC Bank plc's disposal of HSBC Securities SA ...........................................................................	Aug 2012	(11)
HSBC Europe ( Netherlands) B.V.'s disposal of HSBC Credit Zrt ...................................................	Aug 2012	(2)

HSBC Europe ( Netherlands) B.V.'s disposal of HSBC Insurance (Ireland) Limited .........................	Oct 2012	(12)
HSBC Europe ( Netherlands) B.V.'s disposal of HSBC Reinsurance Limited ..................................	Oct 2012	7
HSBC Private Bank (UK) Limited's disposal of Property Vision Holdings Limited ........................	Oct 2012	(1)
HSBC Investment Bank Holdings Limited's disposal of its stake in Havas Havalimanlari Yer Hizmetleri Yatirim Holding Anonim Sirketi ................................................................................................	Oct 2012	18

HSBC Insurance (Asia) Limited's disposal of its general insurance portfolios³⁰ ..............................	Nov 2012	117
HSBC Bank plc's disposal of HSBC Shipping Services Limited .......................................................	Nov 2012	(2)

HSBC Bank (Panama) S.A.'s disposal of its operations in Costa Rica, El Salvador and Honduras³⁰ .	Dec 2012	(62)
HSBC Insurance Holdings Limited and The Hongkong and Shanghai Banking Corporation Limited's disposal of their shares in Ping An³⁰ ..........................................................................................	Dec 2012	3,012
The Hongkong and Shanghai Banking Corporation Limited's disposal of its shareholding in Global Payments Asia-Pacific Limited³⁰ ...............................................................................................	Dec 2012	212

For footnote, see page 120.

Acquisition gains/(losses) affecting the underlying performance

	Date	Fair value gain on acquisition
		US$m
Our share of the loss recorded by Ping An on re-measurement of its previously held equity interest in Ping An bank (formerly known as Shenzhen Development Bank) when Ping An took control and fully consolidated Ping An Bank ..........................................................................................	Jul 2011	(48)
Gain on the merger of Oman International Bank S.A.O.G. and the Omani operations of HSBC Bank Middle East Limited ................................................................................................	Jun 2012	3
Gain on the acquisition of the onshore retail and commercial banking business of Lloyds Banking Group in the UAE by HSBC Bank Middle East Limited ..............................................................	Oct 2012	18

The following table reconciles our reported revenue, loan impairment charges, operating expenses and profit before tax for 2012 and 2011 to an underlying basis. Throughout this Annual Report and Accounts, we reconcile other reported results to underlying results when doing so results in a more useful discussion of operating performance. Equivalent tables are provided for each of our global businesses and geographical segments in the Form 20-F filed with the Securities and Exchange Commission ('SEC'), which is available on www.hsbc.com.

Reconciliation of reported and underlying items

	2012	2011	Change²⁵
	US$m	US$m	%
Revenue²¹
Reported revenue ................................................................................................	68,330	72,280	(5)
Currency translation adjustment²⁴ .......................................................................		(2,033)
Own credit spread²⁶ .............................................................................................	5,215	(3,933)
Acquisitions, disposals and dilutions ....................................................................	(10,048)	(6,976)

Underlying revenue .............................................................................................	63,497	59,338	7

Loan impairment charges and other credit risk provisions ('LIC's)
Reported LICs ....................................................................................................	(8,311)	(12,127)	31
Currency translation adjustment²⁴ .......................................................................		277
Acquisitions, disposals and dilutions ....................................................................	338	1,619

Underlying LICs .................................................................................................	(7,973)	(10,231)	22

Operating expenses
Reported operating expenses ..............................................................................	(42,927)	(41,545)	(3)
Currency translation adjustment²⁴ .......................................................................		1,273
Acquisitions, disposals and dilutions ....................................................................	1,004	2,666

Underlying operating expenses ...........................................................................	(41,923)	(37,606)	(11)

Underlying cost efficiency ratio ..........................................................................	66.0%	63.4%

Profit before tax
Reported profit before tax ..................................................................................	20,649	21,872	(6)
Currency translation adjustment²⁴ .......................................................................		(428)
Own credit spread²⁶ .............................................................................................	5,215	(3,933)
Acquisitions, disposals and dilutions ....................................................................	(9,479)	(3,650)

Underlying profit before tax ...............................................................................	16,385	13,861	18

By global business²⁸
Retail Banking and Wealth Management ..........................................................	4,001	871	359
Commercial Banking ........................................................................................	7,941	7,691	3
Global Banking and Markets .............................................................................	8,371	6,735	24
Global Private Banking ....................................................................................	954	945	1
Other ...............................................................................................................	(4,882)	(2,381)	(105)

Underlying profit before tax ...............................................................................	16,385	13,861	18

By geographical region²⁸
Europe .............................................................................................................	699	1,629	(57)
Hong Kong ......................................................................................................	7,162	5,761	24
Rest of Asia-Pacific .........................................................................................	6,403	6,249	2
Middle East and North Africa ...........................................................................	1,380	1,417	(3)
North America .................................................................................................	(1,499)	(3,076)	51
Latin America ..................................................................................................	2,240	1,881	19

Underlying profit before tax ...............................................................................	16,385	13,861	18

For footnotes, see page 120.

Consolidated income statement

Five-year summary consolidated income statement

	2012 US$m	2011 US$m	2010 US$m	2009 US$m	2008 US$m

Net interest income ..........................................................	37,672	40,662	39,441	40,730	42,563
Net fee income .................................................................	16,430	17,160	17,355	17,664	20,024
Net trading income ...........................................................	7,091	6,506	7,210	9,863	6,560
Net income/(expense) from financial instruments designated at fair value .................................................	(2,226)	3,439	1,220	(3,531)	3,852
Gains less losses from financial investments ......................	1,189	907	968	520	197
Dividend income ...............................................................	221	149	112	126	272
Net earned insurance premiums .........................................	13,044	12,872	11,146	10,471	10,850
Gains on disposal of French regional banks .......................	-	-	-	-	2,445
Gains on disposal of US branch network, US cards business and Ping An ......................................	7,024	-	-	-	-
Other operating income ....................................................	2,100	1,766	2,562	2,788	1,808
Gains arising from dilution of interests in associates and joint ventures .....................................................	-	208	188	-	-
Other ............................................................................	2,100	1,558	2,374	2,788	1,808


Total operating income .................................................	82,545	83,461	80,014	78,631	88,571

Net insurance claims incurred and movement in liabilities to policyholders ................................................................	(14,215)	(11,181)	(11,767)	(12,450)	(6,889)

Net operating income before loan impairment charges and other credit risk provisions ..............................	68,330	72,280	68,247	66,181	81,682

Loan impairment charges and other credit risk provisions	(8,311)	(12,127)	(14,039)	(26,488)	(24,937)

Net operating income ...................................................	60,019	60,153	54,208	39,693	56,745

Total operating expenses³⁴ ...............................................	(42,927)	(41,545)	(37,688)	(34,395)	(49,099)

Operating profit ............................................................	17,092	18,608	16,520	5,298	7,646

Share of profit in associates and joint ventures .................	3,557	3,264	2,517	1,781	1,661

Profit before tax ............................................................	20,649	21,872	19,037	7,079	9,307

Tax expense .....................................................................	(5,315)	(3,928)	(4,846)	(385)	(2,809)

Profit for the year .........................................................	15,334	17,944	14,191	6,694	6,498

Profit attributable to shareholders of the parent company	14,027	16,797	13,159	5,834	5,728
Profit attributable to non-controlling interests .................	1,307	1,147	1,032	860	770

Five-year financial information
	US$	US$	US$	US$	US$

Basic earnings per share³⁵ ..................................................	0.74	0.92	0.73	0.34	0.41
Diluted earnings per share³⁵ ...............................................	0.74	0.91	0.72	0.34	0.41
Basic earnings excluding goodwill impairment per share^34,35	0.74	0.92	0.73	0.34	1.19
Dividends per ordinary share¹ ...........................................	0.41	0.39	0.34	0.34	0.93

	%	%	%	%	%
Dividend payout ratio³⁶ ....................................................
- reported .........................................................................	55.4	42.4	46.6	100.0	226.8
- excluding goodwill impairment³⁴ ....................................	55.4	42.4	46.6	100.0	78.2
Post-tax return on average total assets .............................	0.6	0.65	0.57	0.27	0.26
Return on average ordinary shareholders' equity ...............	8.4	10.9	9.5	5.1	4.7

Average foreign exchange translation rates to US$:
US$1: £ ............................................................................	0.631	0.624	0.648	0.641	0.545
US$1: € ............................................................................	0.778	0.719	0.755	0.719	0.684

For footnotes, see page 120.

Reported profit before tax of US$20.6bn in 2012 was US$1.2bn, or 6%, lower than in 2011. This was primarily due to adverse fair value movements on own debt attributable to credit spreads of US$5.2bn, compared with favourable movements of US$3.9bn in 2011. The variance was partially offset by US$7.5bn of gains (net of losses) on disposals, in particular in respect of the US Card and Retail Services business and our associate, Ping An. Our remaining shareholding in Ping An has been reclassified as a financial investment (see Note 26 on the Financial Statements), the sale of which was completed on 6 February 2013.

We expect disposal of the Card and Retail Services business in North America and of our associate shares in Ping An in Rest of Asia-Pacific to have a significant impact on our profits in each of these regions for the foreseeable future. In addition, future profits in Rest of Asia-Pacific are expected to be affected by the dilution of our shareholding in Industrial Bank Co. Limited ('Industrial Bank'), following its issue of additional share capital to third parties on 7 January 2013. Our shareholding in Industrial Bank has now been classified as a financial investment.

On an underlying basis, profit before tax rose by 18%, primarily due to higher net operating income before loan impairment charges and other credit risk provisions ('revenue') and lower loan impairment charges and other credit risk provisions, which were partially offset by an increase in operating expenses. The latter was primarily driven by fines and penalties paid as part of the settlement of investigations into past inadequate compliance with anti-money laundering and sanctions laws of US$1.9bn, and a higher provision for UK customer redress programmes of US$1.4bn.

The following commentary is on an underlying basis, except where otherwise stated. The difference between reported and underlying results is explained and reconciled on page 26.

Revenue of US$63.5bn was US$4.2bn, or 7%, higher than in 2011, primarily due to lower adverse movements on non-qualifying hedges which accounted for US$1.1bn of the increase, and revenue growth in GB&M and CMB.

Revenue growth in GB&M mainly reflected higher Rates and Credit income, notably in Europe, as spreads tightened and investor sentiment improved following stimuli by central banks globally.

In CMB, revenue growth primarily reflected increased net interest income as a result of average balance sheet growth. Customer loans and advances grew in all regions, with over half this growth coming from our faster-growing regions of Hong Kong, Rest of Asia-Pacific and Latin America, driven by trade-related lending. In Europe, lending balances increased, notably in the UK, despite muted demand for credit. Customer deposits also rose as we continued to attract deposits through our Payments and Cash Management products.

Revenue growth in RBWM reflected increased insurance income, mainly in Hong Kong and Latin America, which benefited from higher investment returns and increased sales of life insurance products. In addition, net interest income grew, mainly in Hong Kong and Latin America, reflecting higher average lending and deposit balances. These factors were partially offset by the continued run-off of our Consumer and Mortgage Lending ('CML') portfolio in the US.

Loan impairment charges and other credit risk provisions were US$2.3bn lower than in 2011. This primarily reflected a decrease in North America, mainly due to the continued decline in lending balances and lower delinquency rates in the CML portfolio. In addition, in Europe there were lower credit risk provisions on available-for-sale asset-backed securities ('ABS's) driven by an improvement in underlying asset prices, and lower loan impairment charges in RBWM, most notably in the UK, as delinquency rates improved across both unsecured and secured lending portfolios. These factors were partially offset by increased loan impairment charges and other credit risk provisions in Latin America, particularly in Brazil, which were primarily due to higher delinquency rates in RBWM and in Business Banking in CMB. In Rest of Asia-Pacific, there were also higher individually assessed loan impairments on a small number of customers in CMB.

Operating expenses were higher than in 2011, primarily from fines and penalties paid as part of the settlement of investigations into past inadequate compliance with anti-money laundering and sanctions laws of US$1.9bn, as well as an increase in provisions relating to UK customer redress programmes of US$1.4bn. In addition, in 2011 operating expenses included a credit of US$570m relating to defined benefit pension obligations in the UK, which did not recur.

The charges for UK customer redress programmes include estimates in respect of possible mis-selling in previous years of payment protection insurance ('PPI') policies of US$1.7bn and interest rate protection products of US$598m. The additional provision relating to PPI reflects our recent claims experience. The provision in relation to interest rate protection products reflects an estimate of possible customer redress requirements following an independent review carried out at the request of the Financial Services Authority ('FSA'). There are many factors which affect these estimated liabilities and there remains a high degree of uncertainty as to the eventual cost of redress for these matters.

Operating expenses also increased due to inflationary pressures, for example, on wages and salaries, in certain of our Latin American and Asian markets. Other increases arose from investment in strategic initiatives including certain business expansion projects, enhanced processes and technology capabilities, and increased investment in regulatory and compliance infrastructure, primarily in the US. These factors were partly offset by US$2.0bn of sustainable cost savings achieved across all regions, as we continued with our organisational effectiveness programmes during 2012. The number of full time equivalent staff numbers ('FTEs') fell by more than 27,700, reflecting the planned net reduction of staff numbers across the Group from organisational effectiveness initiatives and business disposals.

On a constant currency basis, income from associates increased, mainly driven by strong results in our mainland China associates. The contribution from Bank of Communications Co., Limited ('BoCom') and Industrial Bank rose due to loan growth and higher fee income. These factors were partially offset by a decline in income from Ping An due to market valuation losses on equity securities held by their insurance business, reflecting volatile domestic equity markets.

The reported profit after tax was US$2.6bn or 15% lower than in 2011, reflecting a decrease in taxable profits, and a higher tax charge in 2012. The increased tax charge included the effect of the non-tax deductible charge for fines and penalties paid as part of the settlement of investigations into past inadequate compliance with anti-money laundering and sanctions laws, together with the non-recognition of the tax benefit in respect of the accounting charge associated with negative fair value movements on own debt. The lower tax charge in 2011 included the benefit of US foreign tax credits. The effective tax rate in 2012 was 26% compared with 18% in 2011.

Notable revenue items by geographical region

	Europe	Hong Kong	Rest of Asia- Pacific	MENA	North America	Latin America	Total
	US$m	US$m	US$m	US$m	US$m	US$m	US$m
2012
Non-qualifying hedges ..............................	(51)	(31)	(20)	-	(194)	-	(296)
Ping An contingent forward sale contract³⁷	-	-	(553)	-	-	-	(553)
Gain on sale of non-core investments in India.........................................................	-	314	-	-	-	-	314
Loss recognised following the classification of businesses to held for sale .................	-	-	-	-	-	(96)	(96)

2011
Non-qualifying hedges ..............................	(291)	(14)	(20)	-	(1,067)	-	(1,392)
Refinement of PVIF calculation ...............	95	135	11	-	-	2	243

2010
Non-qualifying hedges ..............................	(691)	(17)	4	-	(353)	-	(1,057)

Notable revenue items by global business

	Retail Banking and Wealth Management	Commercial Banking		Global Banking and Markets	Global Private Banking	Other	Total
	US$m		US$m	US$m	US$m	US$m	US$m
2012
Non-qualifying hedges .................................	(193)		-	(42)	4	(65)	(296)
Ping An contingent forward sale contract³⁷ .	-		-	-	-	(553)	(553)
Gain on sale of non-core investments in India .................................................................	-		-	-	-	314	314
Loss recognised following the classification of businesses to held for sale ....................	(26)		(35)	(27)	-	(8)	(96)

2011
Non-qualifying hedges .................................	(1,038)		-	90	(5)	(439)	(1,392)
Refinement of PVIF calculation ..................	181		62	-	-	-	243

2010
Non-qualifying hedges .................................	(310)		-	(309)	1	(439)	(1,057)

For footnote, see page 120.

Notable cost items by geographical region³⁸

	Europe	Hong Kong	Rest of Asia- Pacific	MENA	North America	Latin America	Total
	US$m	US$m	US$m	US$m	US$m	US$m	US$m
2012
Restructuring and other related costs ........	299	31	131	27	221	167	876
UK customer redress programmes ............	2,338	-	-	-	-	-	2,338
UK bank levy ..........................................	472	-	-	-	-	-	472
Fines and penalties for inadequate compliance with anti-money laundering and sanction laws .................................	375	-	-	-	1,546	-	1,921
US mortgage foreclosure and servicing costs .............................................................	-	-	-	-	104	-	104

2011
Restructuring and other related costs ........	404	68	45	31	236	338	1,122
UK customer redress programmes ............	898	-	-	-	-	-	898
UK bank levy ..........................................	570	-	-	-	-	-	570
UK pension credit ....................................	(587)	-	-	-	-	-	(587)
Payroll tax ..............................................	(13)	-	-	-	-	-	(13)
US mortgage foreclosure and servicing costs .............................................................	-	-	-	-	257	-	257

2010
Restructuring and other related costs ........	87	15	36	-	13	3	154
UK customer redress programmes ............	78	-	-	-	-	-	78
US accounting gain on change in staff benefits ................................................	-	-	-	-	(148)	-	(148)
Payroll tax ..............................................	324	-	-	-	-	-	324

Notable cost items by global business³⁸

	Retail Banking and Wealth Management	Commercial Banking		Global Banking and Markets	Global Private Banking	Other	Total
	US$m		US$m	US$m	US$m	US$m	US$m
2012
Restructuring and other related costs ...........	266		62	63	58	427	876
UK customer redress programmes ................	1,751		258	331	(2)	-	2,338
UK bank levy ..............................................	-		-	-	-	472	472
Fines and penalties for inadequate compliance with anti-money laundering and sanction laws .........................................................	-		-	-	-	1,921	1,921
US mortgage foreclosure and servicing costs	104		-	-	-	-	104

2011
Restructuring and other related costs ...........	405		122	158	38	399	1,122
UK customer redress programmes ................	875		23	-	-	-	898
UK bank levy ..............................................	-		-	-	-	570	570
UK pension credit .......................................	(264)		(212)	(111)	-	-	(587)
Payroll tax ..................................................	-		-	(13)	-	-	(13)
US mortgage foreclosure and servicing costs	257		-	-	-	-	257

2010
Restructuring and other related costs ...........	22		1	4	-	127	154
UK customer redress programmes ................	78		-	-	-	-	78
US accounting gain on change in staff benefits ....................................................	(99)		(16)	(19)	(5)	(9)	(148)
Payroll tax ..................................................	5		3	307	9	-	324

For footnote, see page 120.

Group performance by income and expense item

Net interest income

	2012	2011	2010
	US$m	US$m	US$m

Interest income ............................................................................................	56,702	63,005	58,345
Interest expense ...........................................................................................	(19,030)	(22,343)	(18,904)

Net interest income³⁹ ...................................................................................	37,672	40,662	39,441

Average interest-earning assets .....................................................................	1,625,068	1,622,658	1,472,294

Gross interest yield⁴⁰ ....................................................................................	3.49%	3.88%	3.96%
Less: cost of funds ........................................................................................	(1.36%)	(1.56%)	(1.41%)
Net interest spread⁴¹ .....................................................................................	2.13%	2.32%	2.55%
Net interest margin⁴² ....................................................................................	2.32%	2.51%	2.68%

Summary of interest income by type of asset

	2012			2011			2010
	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 ...........................................	275,979	4,307	1.56	261,749	5,860	2.24	236,742	4,555	1.92
Loans and advances to customers .........	934,656	41,043	4.39	945,288	45,250	4.79	858,499	44,186	5.15
Financial investments ..........................	387,329	9,078	2.34	384,059	10,229	2.66	378,971	9,375	2.47
Other interest-earning assets⁴³ .............	27,104	2,274	8.39	31,562	1,666	5.28	(1,918)	229	(11.94)

Total interest-earning assets ................	1,625,068	56,702	3.49	1,622,658	63,005	3.88	1,472,294	58,345	3.96
Trading assets and financial assets designated at fair value^44,45 ...............	368,406	6,931	1.88	410,038	8,671	2.11	385,203	7,060	1.83
Impairment provisions ........................	(17,421)			(18,738)			(22,905)
Non-interest-earning assets ..................	730,901			752,965			664,308

Total assets and interest income ..........	2,706,954	63,633	2.35	2,766,923	71,676	2.59	2,498,900	65,405	2.62

Summary of interest expense by type of liability and equity

	2012			2011			2010
	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 banks⁴⁶ .............................	92,803	1,160	1.25	106,099	1,591	1.50	111,443	1,136	1.02
Financial liabilities designated at fair value - own debt issued⁴⁷ ..................	75,016	1,325	1.77	73,635	1,313	1.78	66,706	1,271	1.91
Customer accounts⁴⁸ ............................	1,052,812	10,878	1.03	1,058,326	13,456	1.27	962,613	10,778	1.12
Debt securities in issue .........................	161,348	4,755	2.95	181,482	5,260	2.90	189,898	4,931	2.60
Other interest-bearing liabilities ...........	19,275	912	4.73	14,024	723	5.16	8,730	788	9.03

Total interest-bearing liabilities ...........	1,401,254	19,030	1.36	1,433,566	22,343	1.56	1,339,390	18,904	1.41
Trading liabilities and financial liabilities designated at fair value (excluding own debt issued) ...............................	318,883	3,445	1.08	355,345	4,564	1.28	275,804	3,780	1.37
Non-interest bearing current accounts ..	177,085			162,369			142,579
Total equity and other non-interest bearing liabilities ..............................	809,732			815,643			741,127

Total equity and liabilities ....................	2,706,954	22,475	0.83	2,766,923	26,907	0.97	2,498,900	22,684	0.91

For footnotes, see page 120.

The commentary in the following sections is on a constant currency basis unless otherwise stated.

Reported net interest income decreased by 7%. On a constant currency basis, it declined by 5%.

On an underlying basis, excluding net interest income earned by the businesses sold during 2012 (see page 29) from all periods presented (2012: US$1.6bn; 2011: US$4.8bn) and currency translation movements of US$1.2bn, net interest income rose by 4%. This reflected strong balance sheet growth in Hong Kong and Rest of Asia-Pacific, together with a lower cost of funds in Latin America driven by a decline in interest rates in Brazil.

The decrease in both net interest spread and net interest margin compared with 2011 was attributable to significantly lower yields on customer lending and on our surplus liquidity, partly offset by a reduction in our cost of funds, notably on customer accounts.

Interest income was lower than in 2011. This was driven by lower interest income on customer lending, including loans classified within 'Assets held for sale', due in part to the loss of interest income from disposals during 2012, principally in the US. These disposals also led to a change in the composition of our lending book as the decline in higher yielding card balances was replaced by volume growth in relatively lower yielding products, mainly residential mortgages and term lending, in Hong Kong, Rest of Asia-Pacific and Europe. Growth in average residential mortgage balances reflected the success of marketing campaigns and competitive pricing in the UK, the continued strength in the property market in Hong Kong and the expansion of our distribution network in Rest of Asia-Pacific. Average term lending balances increased in Hong Kong and Rest of Asia-Pacific as we capitalised on trade and capital flows, while the rise in Europe was in spite of muted demand for credit. As a result of the change in composition of the lending book, the gross yield on customer lending fell.

Revenue in Balance Sheet Management also decreased, principally in Europe as yield curves continued to flatten and liquidity arising from maturities and sales of available-for-sale debt securities was re-invested at lower prevailing rates. In addition, we placed a greater portion of our liquidity with central banks. This was partly offset by higher revenue in Rest of Asia-Pacific, notably mainland China, as strong customer deposit growth led to a rise in the size of the available-for-sale debt securities portfolio.

The decline in interest income was partly offset by lower interest expense, notably on customer accounts. This was driven by a reduction in the cost of funds on customer accounts in Latin America, notably in Brazil, and in Europe due to the downward movement in interest rates during the year, together with deposit repricing initiatives in the US and Europe. The reduction in average customer account balances due to the disposal of non-strategic branches in the US was largely offset by significant volume growth in other parts of the business, notably in Hong Kong, reflecting more conservative customer behaviour during the year in RBWM, and in Rest of Asia-Pacific, as a result of new mandates and deposit acquisition in Payments and Cash Management in CMB and GB&M.

Interest expense on deposits by banks decreased, mainly in Europe. This was due to lower placements by other financial institutions with HSBC, in part due to lower interest rates offered, together with a reduction in the cost of sale and repurchase ('repo') funding as market rates fell. Lower average balances and interest rates in Brazil also contributed to the decline.

There was also a decrease in interest expense on debt securities issued by the Group, driven by a net reduction in average balances outstanding, mainly in North America and, to a lesser extent, in Europe. Funding requirements in the US fell as a result of the business disposals and continued reduction of the CML portfolio in run-off and, as a consequence, maturing debt was not replaced and some of the outstanding debt was repaid with the proceeds from the sales. In addition, maturing debt was not replaced in Europe. These decreases were partly offset by higher interest expense in Latin America, as a result of new debt issued, principally in 2011. The Group's cost of funds on debt securities rose as the new issuances in Latin America were at a higher effective interest rate than that paid in other parts of the Group. The replacement of short-term debt by the issuance of medium-term notes in Europe also contributed to the rise in the cost of funds of debt securities in issue.

'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 of these assets declined, reflecting the reduction in average trading assets during the year. In reporting our global business results, this cost is included within 'Net trading income'.

Net fee income

	2012 US$m	2011 US$m	2010 US$m

Account services ..........................................................................................	3,563	3,670	3,632
Cards ............................................................................................................	3,030	3,955	3,801
Funds under management ..............................................................................	2,561	2,753	2,511
Credit facilities .............................................................................................	1,761	1,749	1,635
Broking income ............................................................................................	1,350	1,711	1,789
Imports/exports ...........................................................................................	1,196	1,103	991
Remittances .................................................................................................	819	770	680
Unit trusts ....................................................................................................	739	657	560
Underwriting ................................................................................................	739	578	623
Global custody ..............................................................................................	737	751	700
Insurance ......................................................................................................	696	1,052	1,147
Corporate finance ........................................................................................	370	441	440
Trust income ................................................................................................	283	294	291
Investment contracts....................................................................................	141	136	109
Mortgage servicing .......................................................................................	86	109	118
Taxpayer financial services ..........................................................................	-	2	73
Maintenance income on operating leases ......................................................	-	-	99
Other ...........................................................................................................	2,078	1,766	1,918

Fee income ...................................................................................................	20,149	21,497	21,117

Less: fee expense ..........................................................................................	(3,719)	(4,337)	(3,762)

Net fee income .............................................................................................	16,430	17,160	17,355

Net fee income decreased by US$730m on a reported basis, and by US$294m on a constant currency basis.

On an underlying basis, which excludes the net fee income relating to the business disposals listed on page 29 (2012: US$401m and 2011:US$1.41bn) and currency translation movements of US$436m, net fee income rose by US$726m, or 5%.

The reduction on a constant currency basis was primarily due to the sale of the Card and Retail Services business, which led to a reduction in cards and insurance fee income and fee expenses. As part of that transaction, we entered into a transition service agreement with the purchaser to support certain account servicing operations until they are integrated into the purchaser's infrastructure. We receive fees for providing these services, which are reported in 'Other fee income'. The associated costs are reported in 'Operating expenses'.

Broking income fell, most notably in Hong Kong and Europe, due to reduced transaction volumes reflecting investor sentiment. Income from funds under management ('FuM') fell, mainly in Rest of Asia-Pacific, as customers invested in lower yielding products reflecting their lower risk appetite. Income from FuM was also lower in North America, due to the sale of the full service retail brokerage business in Canada. In Europe, the decline was mainly due to challenging market conditions in the latter half of 2011 which led to a fall in average client assets in 2012 as well as net new money outflows and a fall in client numbers within GPB.

Partly offsetting these reductions was growth in underwriting fees as we actively captured increased client demand for debt capital financing in North America, Hong Kong and Europe in 2012, in part, reflecting the enhanced collaboration between CMB and GB&M. Trade-related income also increased, most notably in Europe and Hong Kong, reflecting increased transaction volumes as we capitalised on our global network to capture cross-border trade flows.

Fees from unit trusts also rose in Hong Kong, reflecting higher sales volumes.

Net trading income

	2012 US$m	2011 US$m	2010 US$m

Trading activities .........................................................................................	5,249	4,873	5,708
Ping An contingent forward sale contract³⁷ ..................................................	(553)	-	-
Net interest income on trading activities ......................................................	2,683	3,223	2,530
Other trading income - hedge ineffectiveness:
- on cash flow hedges ...............................................................................	35	26	(9)
- on fair value hedges ...............................................................................	(27)	(224)	38
Non-qualifying hedges ..................................................................................	(296)	(1,392)	(1,057)

Net trading income^49,50 .................................................................................	7,091	6,506	7,210

For footnotes, see page 120.

Reported net trading income of US$7.1bn was US$585m higher than in 2011. On a constant currency basis, net trading income rose by US$849m, driven by lower adverse fair value movements on non-qualifying hedges. Net income from trading activities rose in GB&M, but this was more than offset by lower net interest income on trading activities and adverse fair value movements on the contingent forward sale contract relating to Ping An.

There were lower adverse fair value movements on non-qualifying hedges. These hedges are derivatives entered into as part of a documented interest rate management strategy for which hedge accounting was not, nor could 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 Corporation ('HSBC Finance'). The size and direction of the changes in the 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 if the derivative is held to maturity. In North America, there were lower adverse fair value movements on non-qualifying hedges as US long-term interest rates declined to a lesser extent than in 2011. There were also lower adverse fair value movements on non-qualifying hedges in Europe. This was driven by favourable fair value movements in HSBC Holdings, compared with adverse fair value movements in 2011, reflecting the less pronounced decline in long-term US interest rates relative to sterling and euro interest rates compared with 2011. This was partly offset by adverse movements in European operating entities as interest rates fell.

During 2012, HSBC Finance terminated approximately US$3.0bn of non-qualifying hedges. A further US$2.4bn of non-qualifying hedges were terminated in January 2013 to better align our hedges with the overall interest rate position in HSBC Finance. The losses on these economic hedges reported in previous years were therefore crystallised.

Net income from trading activities increased compared with 2011, driven by a strong performance in GB&M. This was after taking into account a net charge of US$385m in the fourth quarter of 2012 as a result of a change in estimation methodology in respect of credit valuation adjustments on derivative assets and debit valuation adjustments on derivative liabilities to reflect evolving market practices (see page 441).

Rates revenue was significantly higher, notably in Europe, as spreads on government debt securities tightened and investor sentiment improved following stimuli by central banks. This was despite significant adverse fair value movements due to own credit spreads on structured liabilities as spreads tightened, compared with a gain reported in 2011, together with a credit valuation adjustment charge of US$837m. The improvement in market sentiment also led to tighter spreads on corporate debt securities, resulting in strong growth in Credit revenue. Foreign Exchange revenue was broadly in line with 2011, as higher income resulting from enhanced collaboration between GB&M and CMB, and increased volumes from improvements in our electronic pricing and distribution capabilities, offset the effect of less volatile markets in 2012. These favourable movements were partly offset by a reduction in Equities trading revenue, reflecting a decline in market volumes together with adverse fair value movements on structured liabilities as own credit spreads tightened in 2012, compared with favourable movements in 2011.

These factors were partly offset by unfavourable fair value movements on assets held as economic hedges of foreign currency debt at fair value compared with favourable movements in 2011, due to movements in the underlying currencies. These offset favourable foreign exchange movements on foreign currency debt which are reported in 'Net expense from financial instruments designated at fair value'.

Net interest income on trading activities also declined. This was driven by a significant reduction in average trading assets, notably holdings of debt securities in Europe, in the latter part of 2011 and the first quarter of 2012 as eurozone sovereign debt concerns dominated the market. In addition, yields fell as a result of both price appreciation in a low interest rate environment and an increase in the proportion of the portfolio invested in relatively lower-yielding treasury bills and government debt securities. This was partly offset by a reduction in funding costs, reflecting both the decline in the size of the portfolio and the low rate environment.

There were also adverse fair value movements of US$553m on the contingent forward sale contract relating to Ping An (see page 472).

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

	2012 US$m	2011 US$m	2010 US$m
Net income/(expense) arising from:
- financial assets held to meet liabilities under insurance and investment contracts .............................................................................	2,980	(933)	2,349
- liabilities to customers under investment contracts ................................	(996)	231	(946)
- HSBC's long-term debt issued and related derivatives ............................	(4,327)	4,161	(258)
Change in own credit spread on long-term debt .................................	(5,215)	3,933	(63)
Other changes in fair value⁵¹ .............................................................	888	228	(195)

- other instruments designated at fair value and related derivatives ..........	117	(20)	75

Net income/(expense) from financial instruments designated at fair value ....	(2,226)	3,439	1,220

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

	2012 US$m	2011 US$m	2010 US$m

Financial assets designated at fair value at 31 December ...............................	33,582	30,856	37,011
Financial liabilities designated at fair value at 31 December ..........................	87,720	85,724	88,133

Including:
Financial assets held to meet liabilities under:
- insurance contracts and investment contracts with DPF⁵² ......................	8,376	7,221	7,167
- unit-linked insurance and other insurance and investment contracts .......	23,655	20,033	19,725
Long-term debt issues designated at fair value ...............................................	74,768	73,808	69,906

For footnotes, see page 120.

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 are fixed-rate long-term debt issues, the rate profile of which 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 and the related hedges 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 expected 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 global businesses, but are reported in 'Other'. Credit spread movements on own debt designated at fair value are excluded from underlying results, and related fair value movements are not included in the calculation of regulatory capital.

We reported net expense from financial instruments designated at fair value of US$2.2bn in 2012 compared with net income of US$3.4bn in 2011. This included the credit spread-related movements in the fair value of our own long-term debt, on which we reported adverse fair value movements of US$5.2bn in 2012 and favourable movements of US$3.9bn in 2011. The adverse fair value movements arose in 2012 as credit spreads tightened in Europe and North America, having widened during 2011.

Net income arising from financial assets held to meet liabilities under insurance and investment contracts reflected net investment gains in 2012 as global equity market conditions improved, compared with net investment losses in 2011. 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 result 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/(expense) 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 favourable foreign exchange movements in 2012, compared with adverse movements in 2011, on foreign currency debt designated at fair value issued as part of our overall funding strategy. An offset from assets held as economic hedges was reported in 'Net trading income'.

Gains less losses from financial investments

	2012 US$m	2011 US$m	2010 US$m
Net gains/(losses) from disposal of:
- debt securities ........................................................................................	781	712	564
- equity securities .....................................................................................	823	360	516
- other financial investments ...................................................................	5	12	(7)

	1,609	1,084	1,073
Impairment of available-for-sale equity securities .........................................	(420)	(177)	(105)

Gains less losses from financial investments .................................................	1,189	907	968

Gains less losses from financial investments increased by US$282m on a reported basis and US$310m on a constant currency basis.

The increase was driven by higher net gains from the disposal of available-for-sale equity securities, notably in Hong Kong as a result of the sale of our shares in four Indian banks. In addition, we reported a rise in disposal gains in Principal Investments in GB&M.

Higher gains were also reported on the disposal of available-for-sale government debt securities, principally in the UK as part of Balance Sheet
Management's structural interest rate risk management activities. This was partly offset by losses on the disposal of legacy assets in GB&M in the UK (see page 18), together with the non-recurrence of gains in 2011 on the disposal of available-for-sale debt securities in our Insurance business in RBWM, also in Europe.

There were higher impairments of available-for-sale equity securities due to significant write-downs in 2012 on three holdings, two of which were in our direct investment business, which is in run-off.

Net earned insurance premiums

	2012 US$m	2011 US$m	2010 US$m

Gross insurance premium income ..................................................................	13,602	13,338	11,609
Reinsurance premiums ..................................................................................	(558)	(466)	(463)

Net earned insurance premiums ....................................................................	13,044	12,872	11,146

Net earned insurance premiums were broadly in line with 2011 on a reported basis. On a constant currency basis net earned premiums increased by 6%.

The rise in net earned premium income was driven by Hong Kong and Latin America. In Hong Kong, sales of insurance contracts increased, in particular deferred annuity products, as we widened our product offerings to fulfil customers' long-term savings and retirement needs, supported by successful marketing campaigns. Renewal premiums from both unit-linked and insurance contracts with DPF also increased reflecting strong sales in previous years. The increase in net earned premiums in Latin America was due to higher sales of unit-linked and term life products in Brazil, reflecting customer appetite for life insurance products. It was partly offset by a decrease in net earned premiums following the sale of the general insurance business in Argentina in May 2012. In Europe, net earned premiums decreased, mainly on investment contracts with DPF in France, as a result of the uncertain economic and political environment in the election year and increased product competition. The non-renewal and transfer to third parties of certain contracts in our Irish business during 2011 also contributed to the decline. This was partly offset by a rise in net earned premiums in the UK due, in part, to the sale of a unit-linked insurance product through two new third party platforms.

Gains on disposal of US branch network, US cards business and Ping An

	2012 US$m	2011 US$m	2010 US$m

Gains on disposal of US branch network .......................................................	864	-	-
Gains on disposal of US cards business ...........................................................	3,148	-	-
Gains on disposal of Ping An ........................................................................	3,012	-	-

Total ............................................................................................................	7,024	-	-

Significant progress was made in 2012 in exiting non-strategic markets and disposing of businesses and investments not aligned with the Group's long-term strategy. These included three major disposals:

· In May 2012, HSBC USA Inc., HSBC Finance and HSBC Technology and Services (USA) Inc. sold their US Card and Retail Services business to Capital One Financial Corporation, realising a gain on sale of US$3.1bn.

· In May 2012, HSBC Bank USA, N.A. ('HSBC Bank USA') sold 138 out of 195 branches primarily in upstate New York to First Niagara Bank, realising a gain of US$661m. In August 2012, it sold the remaining 57 branches to the same purchaser, realisinga gain of US$203m.

· In December 2012, HSBC Insurance Holdings Limited and The Hongkong and Shanghai Banking Corporation agreed to sell to indirect wholly-owned subsidiaries of Charoen Pokphand Group Company Limited their entire shareholdings in Ping An, representing 15.57% of the issued share capital of Ping An, in two tranches. The first tranche was completed on 7 December 2012. The completion of the second tranche took place on 6 February 2013. The disposal of this associate resulted in a gain of US$3.0bn in 2012 (see page 472). Our remaining shareholding has been classified as a financial investment.

Other operating income

	2012 US$m	2011 US$m	2010 US$m

Rent received ...............................................................................................	210	217	535
Gains/(losses) recognised on assets held for sale ............................................	485	55	(263)
Valuation gains on investment properties .....................................................	72	118	93
Gain on disposal of property, plant and equipment, intangible assets and non-financial investments ........................................................................	187	57	701
Gains arising from dilution of interests in associates and joint ventures .........	-	208	188
Change in present value of in-force long-term insurance business .................	737	726	705
Other ...........................................................................................................	409	385	603

Other operating income ...............................................................................	2,100	1,766	2,562

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

	2012 US$m	2011 US$m	2010 US$m

Value of new business ....................................................................................	1,027	943	737
Expected return ............................................................................................	(420)	(428)	(85)
Assumption changes and experience variances ..............................................	69	(30)	59
Other adjustments ........................................................................................	61	241	(6)

Change in present value of in-force long-term insurance business .................	737	726	705

Reported other operating income of US$2.1bn increased by 19% in 2012. On a constant currency basis, it rose by 25% as a result of business disposals during the year.

We continued to rationalise our portfolio in non-strategic markets, resulting in a number of gains and losses on disposal which are excluded from our underlying results (see page 28). These included gains of US$108m on the sale of our RBWM operations in Thailand, US$130m on the sale of our shareholding in a property company in the Philippines, US$163m on the sales of the HSBC and Hang Seng general insurance businesses in Hong Kong, US$102m following the completion of the sale of our general insurance manufacturing business in Argentina, and US$212m following the sale of our shares in Global Payments Asia-Pacific Ltd. The gains on disposal were partly offset by an investment loss on a subsidiary of US$85m in the Middle East and North Africa and a loss of US$62m on the sale of our operations in Costa Rica, Honduras and El Salvador.

Reported other operating income 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 S.A. de C.V. ('HSBC Afore'), our Mexican pension business.

On an underlying basis, excluding the gains and losses on disposal totalling US$747m in 2012 and US$354m in 2011, other operating income rose.

This was due to lower losses on foreclosed properties due to the reduction in foreclosure activity in the US, less deterioration in housing prices during 2012 and, in some markets, improvements in pricing compared with 2011 in the US.

The present value of in-force ('PVIF') long-term insurance business asset was broadly in line with 2011. The value of new business from the sale of life insurance products, favourable investment returns, together with the recognition of a PVIF asset relating to the unit-linked pension products in Brazil contributed to a rise. In addition, there were lower adverse changes to non-economic assumptions, including mortality and lapse rates in Hong Kong and North America in 2012. These factors were substantially offset by adverse assumption changes in 2012, principally relating to the valuation of policyholder options and guarantees in Hong Kong, along with the non-recurrence of a gain of US$237m (US$243m as reported) recognised upon refinement of the PVIF asset in 2011.

The increase in other operating income was partly offset by losses recognised on the sale of syndicated loans in Europe and on the reclassification of certain businesses to held for sale in South America. In addition, a gain on sale and leaseback of branches in Mexico recognised in 2011 did not recur.

Net insurance claims incurred and movement in liabilities to policyholders

	2012 US$m	2011 US$m	2010 US$m
Insurance claims incurred and movement in liabilities to policyholders:
- gross .....................................................................................................	14,529	11,631	11,969
- reinsurers' share ....................................................................................	(314)	(450)	(202)

- net⁵³ .....................................................................................................	14,215	11,181	11,767

For footnote, see page 120.

Net insurance claims incurred and movement in liabilities to policyholders increased by 27% on a reported basis, and by 33% on a constant currency basis.

The increase in liabilities to policyholders largely resulted from gains in the fair value of the assets where the policyholders bear the investment risk, particularly in relation to unit-linked insurance contracts and investment and insurance contracts with DPF.

The higher investment returns were largely the result of positive equity market movements in 2012 compared with losses experienced during 2011 notably in Hong Kong, France and the UK. The gains or losses on the financial assets designated at fair value held to support these insurance and investment contract liabilities are reported in 'Net income from financial instruments designated at fair value'.

The increase in liabilities to policyholders also reflected the increase in new business written, notably in Hong Kong and Brazil as explained under 'Net earned insurance premiums'. This was partly offset by a lower increase in reserves in France attributable to the decline in net earned premiums, and a decrease in Argentina due to the sale of the general insurance business in May 2012.

Loan impairment charges and other credit risk provisions

	2012 US$m	2011 US$m	2010 US$m
Loan impairment charges
New allowances net of allowance releases ..................................................	9,306	12,931	14,568
Recoveries of amounts previously written off ...........................................	(1,146)	(1,426)	(1,020)

	8,160	11,505	13,548

Individually assessed allowances ....................................................................	2,139	1,915	2,625
Collectively assessed allowances ...................................................................	6,021	9,590	10,923

Impairment of available-for-sale debt securities ............................................	99	631	472
Other credit risk provisions/(recoveries) .......................................................	52	(9)	19

Loan impairment charges and other credit risk provisions ............................	8,311	12,127	14,039

Reported loan impairment charges and other credit risk provisions ('LIC's) fell from US$12bn to US$8.3bn, a decrease of 31% compared with 2011. On an underlying basis they reduced from US$10bn to US$8.0bn.

On a constant currency basis, they declined by US$3.5bn or 30% compared with 2011. Collectively assessed allowances were down by US$3.3bn and credit risk provisions fell by US$456m, partly offset by higher individually assessed impairment charges of US$258m.

At 31 December 2012, the aggregate balance of customer loan impairment allowances was US$16bn. This represented 2% of gross loans and advances to customers (net of reverse repos and settlement accounts) in line with 31 December 2011.

The fall in collectively assessed impairment allowances was most significant in RBWM in North America due to the continued reduction in the CML portfolios in run-off, and the sale of the Card and Retail Services business. In addition, lower loan impairment charges in Europe in RBWM were due to improved credit quality as we continued to pro-actively identify and monitor customers facing financial hardship and focused our lending growth on higher quality assets, notably in the UK. These factors were partly offset by higher loan impairment charges and other credit risk provisions in Latin America which were driven by increased delinquency rates in RBWM and CMB, mainly in Brazil.

Impairment of available-for-sale debt securities reduced, mainly in Europe, due to lower charges on available-for-sale ABSs and on Greek sovereign debt, partly offset by an increase in Rest of Asia-Pacific due to a charge on an available-for-sale debt security in GB&M.

Individually assessed impairment allowances increased by 14%, primarily in Europe in CMB, reflecting challenging economic conditions in the UK, Greece, Spain and Turkey. In addition, higher individually assessed impairments in Latin America mainly related to a single exposure in Brazil.

LICs declined in North America, primarily in the CML portfolio, as well as in Europe, Hong Kong and the Middle East and North Africa. The decrease was partly offset by an increase in Latin America and Rest of Asia-Pacific.

In North America, LICs fell by 51% to US$3.5bn. Within this, loan impairment charges fell by US$1.3bn following the sale of the Card and Retail Services business. Loan impairment charges in our CML business in the US fell by 48% to US$2.6bn, driven by lower lending balances, as we continued to run off the portfolio, and lower delinquency levels. Loan impairment charges continued to be adversely affected by delays in expected cash flows from mortgage loans due, in part, to delays in foreclosure processing, although the effects were less pronounced than in 2011. These decreases were partly offset by an adjustment made following a review completed in the fourth quarter of 2012 which concluded that the estimated average period of time from current status to write-off was ten months for real estate loans. In CMB and GB&M, loan impairment charges increased, mainly in Bermuda, due to individually assessed impairments on a small number of exposures.

In Europe, LICs decreased by 22% to US$1.9bn. This was mainly in GB&M due to lower credit risk provisions on available-for-sale ABSs as a result of an improvement in underlying asset prices, as well as lower charges on Greek sovereign debt. Further information on our exposures to countries in the eurozone is provided on page 192. This was partly offset by increased impairment charges on the legacy credit loans and receivables portfolio. In RBWM, loan impairment charges continued to decline, primarily in the UK, as we focused our lending growth on higher quality assets and continued to pro-actively identify and monitor customers facing financial hardship. As a result, delinquency rates improved across both the secured and unsecured lending portfolios. This was partly offset by an increase in impairments in Turkey due to strong growth in previous years in our RBWM customer loans and advances. In addition, there were higher individually assessed provisions in CMB across a range of sectors, reflecting increased stress on the financial status of certain customers in the challenging economic conditions in certain eurozone countries.

In Hong Kong, LICs fell by 53% to US$74m, largely due to lower specific impairment charges in CMB and the non-recurrence of charges relating to available-for-sale Greek sovereign debt securities.

In the Middle East and North Africa, LICs decreased by US$6m to US$286m. Lower loan impairment charges in RBWM reflected repositioning of the book towards higher quality secured lending in previous years. This was largely offset by higher LICs recorded for a small number of large exposures in GB&M.

LICs in Latin America and Rest of Asia-Pacific increased compared with 2011. In Latin America, they increased by 29% to US$2.1bn. This was mainly in Brazil, driven by increased delinquency rates in RBWM and CMB, particularly in the Business Banking portfolio reflecting lower economic growth in 2012. We took a number of steps to reposition the portfolios in RBWM and CMB including improving our collections capabilities, reducing third-party originations and lowering credit limits where appropriate. Loan impairment charges fell in Brazil during the second half of 2012, mainly due to lower collective portfolio provisions.

In Rest of Asia-Pacific, LICs increased by 64% to US$436m, notably in CMB as a result of the impairment of a corporate exposure in Australia and a small number of corporate exposures in India, as well as a credit risk provision on an available-for-sale debt security in GB&M.

Operating expenses

	2012	2011	2010
	US$m	US$m	US$m
By expense category
Employee compensation and benefits ...........................................................	20,491	21,166	19,836
Premises and equipment (excluding depreciation and impairment) ................	4,326	4,503	4,348
General and administrative expenses .............................................................	15,657	12,956	10,808

Administrative expenses ...............................................................................	40,474	38,625	34,992
Depreciation and impairment of property, plant and equipment ...................	1,484	1,570	1,713
Amortisation and impairment of intangible assets ........................................	969	1,350	983

Operating expenses ......................................................................................	42,927	41,545	37,688

Staff numbers (full-time equivalents)

	At 31 December
	2012	2011	2010

Europe .........................................................................................................	70,061	74,892	75,698
Hong Kong ...................................................................................................	27,742	28,984	29,171
Rest of Asia-Pacific ......................................................................................	85,024	91,051	91,607
Middle East and North Africa .......................................................................	8,765	8,373	8,676
North America .............................................................................................	22,443	30,981	33,865
Latin America ..............................................................................................	46,556	54,035	56,044

Staff numbers ...............................................................................................	260,591	288,316	295,061

Reported operating expenses of US$42.9bn were US$1.4bn or 3% higher than in 2011. On an underlying basis, costs increased by 11%.

On a constant currency basis, operating expenses in 2012 were US$2.7bn or 7% higher than in 2011, primarily driven by fines and penalties paid as part of the settlement of investigations into past inadequate compliance with anti-money laundering and sanction laws of US$1.9bn, of which US$1.5bn was attributed to, and paid by, HSBC North America Holdings Inc. ('HNAH') and its subsidiaries and US$375m was paid by HSBC Holdings. Further provisions for the UK customer redress programmes of US$2.3bn were raised during 2012 compared with a charge of US$890m in 2011 (US$898m as reported). This included a charge for additional estimated redress for possible mis-selling in previous years of PPI policies US$1.7bn (2011: US$713m) and interest rate protection products (US$598m), which took the balance sheet provision for the UK customer redress programmes at 31 December 2012 to US$2.2bn.

In 2011 we recorded a credit of US$570m (US$587m as reported) following a change in the inflation measure used to calculate the defined benefit obligation in the UK for deferred pensions which did not recur in 2012.

Costs also rose due to inflationary pressures in certain of our Latin American and Asian markets and increased investment costs in strategic initiatives, including certain business expansion projects, and in enhanced processes and technology capabilities. We also increased investment in our regulatory and compliance infrastructure primarily in the US.

The above increases in costs were mitigated by strict cost control and the continued delivery of our organisational effectiveness programmes, which resulted in sustainable cost savings of US$2.0bn. The number of employees (expressed in FTEs) at the end of the 2012 was 10% lower than at the end of 2011. This reflected the planned net reduction of staff numbers across the Group from organisational effectiveness initiatives and business disposals. In 2012, average FTEs fell by 7%.

Business disposals in 2011 and 2012 resulted in a lower cost base, most significantly from the sale of the Card and Retail Services business and the 195 branches in the US.

Restructuring and other related costs were US$876m in 2012 compared with US$1.1bn in 2011 (US$1.1bn as reported).

Cost efficiency ratios⁴

	2012 %	2011 %	2010 %

HSBC .........................................................................................................	62.8	57.5	55.2

Geographical regions
Europe .........................................................................................................	108.4	70.4	67.9
Hong Kong ...................................................................................................	39.0	44.5	43.4
Rest of Asia-Pacific ......................................................................................	42.7	54.2	55.7
Middle East and North Africa .......................................................................	48.0	44.5	44.7
North America .............................................................................................	60.8	55.7	48.8
Latin America ..............................................................................................	58.7	63.3	65.7

Global businesses
Retail Banking and Wealth Management ......................................................	58.4	63.2	58.1
Commercial Banking ....................................................................................	45.9	46.3	49.4
Global Banking and Markets .........................................................................	54.2	57.0	48.8
Global Private Banking .................................................................................	67.6	68.8	65.8

For footnote, see page 120.

Share of profit in associates and joint ventures

	2012 US$m	2011 US$m	2010 US$m
Associates
Bank of Communications Co., Limited .....................................................	1,670	1,370	987
Ping An Insurance (Group) Company of China, Ltd ..................................	763	946	848
Industrial Bank Co., Limited .....................................................................	670	471	327
The Saudi British Bank .............................................................................	346	308	161
Other ........................................................................................................	72	126	156

Share of profit in associates ..........................................................................	3,521	3,221	2,479
Share of profit in joint ventures ...................................................................	36	43	38

Share of profit in associates and joint ventures .............................................	3,557	3,264	2,517

The reported share of profit in associates and joint ventures was US$3.6bn, an increase of 9% compared with 2011. On a constant currency basis, it increased by 7%, driven by higher contributions from our associates in mainland China.

Our share of profits from BoCom rose, as a result of loan growth and higher fee income from cards, management service and guarantees and commitments. This was partly offset by increased operating expenses reflecting investment in staff and technology, and higher loan impairment charges. Profits from Industrial Bank also increased, reflecting continued growth in lending balances and a rise in associated fee income, partly offset by higher operating expenses in line with business expansion, as well as increased loan impairment charges. On 7 January 2013, our holding in Industrial Bank was diluted following its issue of additional share capital to third parties. Our shareholding has now been classified as a financial investment.

Profits from The Saudi British Bank rose, driven by higher revenues reflecting strong balance sheet growth and lower costs resulting from effective control and monitoring.

Profits from Ping An were lower due to market valuation losses on equity securities held by their insurance business, reflecting volatile domestic equity markets, partly offset by increased income from the banking business reflecting the contribution of Ping An Bank (formerly Shenzhen Development Bank). On 5 December 2012, we agreed to sell our entire shareholding in Ping An and recognised a gain on the disposal of the associate. Our remaining shareholding has been classified as a financial investment (see page 39 for details of this transaction).

Tax expense

	2012 US$m	2011 US$m	2010 US$m

Profit before tax ..........................................................................................	20,649	21,872	19,037
Tax expense .................................................................................................	(5,315)	(3,928)	(4,846)

Profit after tax .............................................................................................	15,334	17,944	14,191

Effective tax rate .........................................................................................	25.7%	18.0%	25.5%

The tax charge in 2012 was US$1.4bn or 35% higher than in 2011 on a reported basis.

The higher tax charge in 2012 reflected the non-tax deductible effect of fines and penalties paid as part of the settlement of investigations into past inadequate compliance with anti-money laundering and sanctions laws, together with the non-recognition of the tax benefit in respect of the accounting charge associated with negative fair value movements on own debt. The lower tax charge in 2011 included the benefit of US deferred tax recognised in 2011 in respect of foreign tax credits.

As a result of these factors, the reported effective tax rate for 2012 was 25.7 % compared with 18.0% for 2011.

In 2012, the tax paid by the Group was US$9.3bn (2011: US$8.0bn). The amount differs from the tax charge reported in the income statement due to indirect taxes such as VAT and the bank levy included in the pre-tax profit and the timing of payments.

The Group also plays a major role as tax collector for governments in the jurisdictions in which we operate. In 2012, the Group collected US$8.5bn (2011: US$8.7bn).

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