Annual Financial Report - 8 of 41

RNS Number : 8245D

HSBC Holdings PLC

30 March 2011

 



Geographical regions

	Page
Summary ..............................................................	50
Europe .................................................................	51
Hong Kong ..........................................................	56
Rest of Asia-Pacific .............................................	60
Middle East ..........................................................	66
North America .....................................................	71
Latin America ......................................................	76

Summary

Additional information on results in 2010 may be found in the 'Financial Summary' on pages 14 to 36.

In the analysis of profit by geographical regions that follows, operating income and operating expenses include intra‑HSBC items of US$3,125m (2009: US$2,756m; 2008: US$2,492m).

Profit/(loss) before tax

	2010				2009				2008
	US$m		%		US$m		%		US$m		%
Europe ...........................................................	4,302		22.6		4,009		56.7		10,869		116.7
Hong Kong ....................................................	5,692		29.9		5,029		71.0		5,461		58.7
Rest of Asia-Pacific .......................................	5,902		31.0		4,200		59.3		4,722		50.7
Middle East ....................................................	892		4.7		455		6.4		1,746		18.8
North America ..............................................	454		2.4		(7,738)		(109.3)		(15,528)		(166.8)
Latin America ................................................	1,795		9.4		1,124		15.9		2,037		21.9
	19,037		100.0		7,079		100.0		9,307		100.0

Total assets⁴⁵

	At 31 December
	2010				2009
	US$m		%		US$m		%
Europe ......................................................................................................	1,249,527		50.9		1,268,600		53.7
Hong Kong ...............................................................................................	429,565		17.5		399,243		16.9
Rest of Asia-Pacific ..................................................................................	278,062		11.3		222,139		9.4
Middle East ...............................................................................................	52,757		2.1		48,107		2.0
North America .........................................................................................	492,487		20.1		475,014		20.1
Latin America ..........................................................................................	139,938		5.7		115,967		4.9
Intra-HSBC items .....................................................................................	(187,647)		(7.6)		(164,618)		(7.0)
	2,454,689		100.0		2,364,452		100.0

Risk-weighted assets⁵⁹

	At 31 December
	2010				2009
	US$bn		%		US$bn		%
Total ........................................................................................................	1,103.1				1,133.2
Europe ......................................................................................................	301.6		27.2		339.7		29.8
Hong Kong ...............................................................................................	106.9		9.7		119.5		10.5
Rest of Asia-Pacific ..................................................................................	217.5		19.6		173.9		15.3
Middle East ...............................................................................................	54.1		4.9		54.3		4.8
North America .........................................................................................	330.7		29.9		369.2		32.4
Latin America ..........................................................................................	95.9		8.7		81.7		7.2

For footnotes, see page 83.

Europe

Our principal banking operations in Europe are HSBC Bank plc in the UK, HSBC France, HSBC Bank A.S. in Turkey, HSBC Bank Malta p.l.c., HSBC Private Bank (Suisse) S.A. and HSBC Trinkaus & Burkhardt AG. Through these operations we provide a wide range of banking, treasury and financial services to personal, commercial and corporate customers across Europe.
	2010		2009		2008
	US$m		US$m		US$m
Net interest income ......	11,250		12,268		9,696
Net fee income .............	6,371		6,267		7,492
Net trading income .......	2,863		5,459		5,357
Other income/(expense)	2,266		(450)		8,134
Net operating income46 ...................................	22,750		23,544		30,679
Impairment charges47 ....	(3,020)		(5,568)		(3,754)
Net operating income	19,730		17,976		26,925
Total operating expenses ...................................	(15,445)		(13,988)		(16,072)
Operating profit ........	4,285		3,988		10,853
Income from associates48	17		21		16
Profit before tax .........	4,302		4,009		10,869
Cost efficiency ratio .....	67.9%		59.4%		52.4%
Year-end staff numbers .	75,698		76,703		82,093
Reduction in underlying impairment charges47 45%
Total UK mortgage market share 5.2% 2009: 4.8%
Strong trade revenue growth
For footnotes, see page 83. The commentary on Europe is on an underlying basis unless stated otherwise.

Economic background 

After falling by 4.9% in 2009, UK Gross Domestic Product ('GDP') only partially recovered in 2010, rising 1.4%. This revival in activity was not reflected in a corresponding rise in employment, and the unemployment rate remained at 7.9% in the three months to November. Despite the general economic weakness, the annual rate of Consumer Price Index ('CPI') inflation rose during 2010, reaching 3.7% in December, partly because of the rise in value added tax to 17.5% in January, and increases in the price of food and energy following rapid gains in global commodity prices. Wage growth remained subdued, however, with average earnings rising just 2.0% in the year to December. The Bank of England chose to maintain Bank Rate at 0.5% throughout 2010.

The eurozone economy also partially recovered during the year, with GDP rising 1.7% in 2010 compared to 2009. The region benefited from the pick-up in the world economy and some improvement in domestic demand. Within the region, Germany recorded the strongest growth rate with its GDP rising 3.5% in the year as a whole. The unemployment rate in the eurozone increased slightly to 10.0% by the end of 2010. The large increases in government debt that emerged in certain parts of the region in recent years began to put upward pressure on government bond yields during 2010, and some governments encountered funding difficulties. In response, a temporary European support fund, the €440bn European Financial Stability Facility was created, and the EU set aside €60bn in a package named the European Financial Stabilisation Mechanism. Greece received a €110bn aid package provided jointly by the International Monetary Fund and eurozone governments. Ireland also drew on international assistance in December. The European Central Bank left its key interest rate at 1.0% throughout the year.

Review of performance

Our European operations reported a pre-tax profit of US$4.3bn, compared with US$4.0bn in 2009, an increase of 7%. In 2010, this included adverse fair value movements of US$198m due to the change in credit spreads on the Group's own debt held at fair value, compared with adverse fair value movements of US$2.8bn in 2009. In addition, we made gains of US$107m on the disposal of the HSBC Insurance Brokers business and US$255m on the sale of Eversholt Rail Group. In 2009, we recorded a gain on the sale of the residual stake in our UK card merchant acquiring business. Excluding these items, underlying pre-tax profits decreased by 35%,

Profit/(loss) before tax by country within customer groups and global businesses

	Personal   Financial     Services         US$m		Commercial     Banking         US$m		Global Banking &    Markets         US$m		Global       Private     Banking         US$m		Other         US$m		Total         US$m
2010
UK ............................................................	1,223		827		1,730		223		(1,605)		2,398
France60 ....................................................	109		135		405		18		26		693
Germany ...................................................	-		32		267		30		4		333
Malta ........................................................	35		56		19		-		-		110
Switzerland ................................................	-		(5)		-		265		-		260
Turkey ......................................................	64		80		105		1		-		250
Other ........................................................	(142)		80		200		103		17		258
	1,289		1,205		2,726		640		(1,558)		4,302
2009
UK ............................................................	364		1,026		3,045		252		(2,561)		2,126
France60 ....................................................	54		102		894		3		(429)		624
Germany ...................................................	-		21		255		32		(18)		290
Malta ........................................................	33		58		9		-		-		100
Switzerland ................................................	-		-		5		448		(3)		450
Turkey ......................................................	43		97		119		2		-		261
Other ........................................................	(182)		(12)		218		117		17		158
	312		1,292		4,545		854		(2,994)		4,009
2008
UK ............................................................	1,546		2,361		(469)		250		2,997		6,685
France60 ....................................................	139		176		273		10		2,242		2,840
Germany ...................................................	-		31		184		32		(22)		225
Malta ........................................................	59		67		16		-		-		142
Switzerland ................................................	-		-		-		553		-		553
Turkey ......................................................	3		91		130		-		-		224
Other ........................................................	(89)		(4)		61		153		79		200
	1,658		2,722		195		998		5,296		10,869

For footnote, see page 83.

largely due to lower income from GB&M, whose exceptional results of 2009 were not repeated, and an unfavourable year on year movement in certain non-qualifying hedges of US$1.1bn.

GB&M results remained strong by historical standards. However, revenues decreased in 2010 due to less favourable market conditions caused by the impact of the European sovereign debt crisis, particularly in the second half of the year, and lower revenues, as forecast, in Balance Sheet Management.

In PFS, we continued to build long-term relationships through our Premier and Advance offerings, focusing on wealth management and secured lending. We increased our total UK mortgage market share to 5.2%, while maintaining a conservative new lending loan to value ratio of 54%.

In CMB, we made further progress on our strategy of becoming the leading international business bank. We also expanded our business in Germany and launched in Switzerland. In the UK, we increased new lending to SMEs by 19% in 2010.

Net interest income decreased by 7%. Balance Sheet Management revenues declined, as higher-yielding positions matured, interest rates remained low and yield curves flattened in 2010. In Global Banking, tighter spreads in the lending business and lower average lending balances as customers reduced their debt also contributed to the decrease. Customer deposit spreads were adversely affected by the low interest rate environment and competition for deposits. These reductions were offset in part by growth in mortgage lending in the UK and improved asset spreads in both PFS and CMB.

Net fee income increased by 7%, reflecting higher management fees due to an increase in the average value of funds under management, which arose from net inflows and higher market performance. Fees were also received for management services we provided to certain of our Structured Investment Conduits. Partly offsetting these increases were reductions in the levels of debt and equity issuance in the market, compared with the significant volumes seen in 2009.

Net trading income decreased by 47% to US$2.9bn. Less favourable market conditions caused by the impact of the European sovereign debt crisis adversely affected Credit and Rates income. Spread compression from increased competition similarly affected foreign exchange revenues. In addition, net interest income earned on trading activities decreased, driven by reduced holdings of debt securities. These decreases were offset in part by lower net adverse fair value movements on structured liabilities.

Net trading income also included adverse fair value movements of US$304m on non-qualifying hedges used to economically hedge fixed-rate long‑term debt issued by HSBC Holdings. These movements were driven by the decline in long-term US dollar interest rates relative to sterling and euro rates in 2010, and compared with favourable fair value movements of US$748m on these instruments in 2009.

Within our legacy Credit book, a net release of previous write-downs on ABSs and monoline exposures as asset prices improved was more than offset by the non-recurrence of gains in other parts of the business.

Net income from financial instruments designated at fair value fell by US$808m. The growth in equity markets in 2010 was lower than in 2009, resulting in lower investment gains recognised on the fair value of assets held to meet liabilities under insurance and investment contracts. To the extent that these gains accrued to policyholders holding unit-linked insurance policies and insurance or investment contracts with DPF, there was a corresponding decrease in 'Net insurance claims incurred and movement in liabilities to policyholders'. In addition, adverse foreign exchange movements were reported in the year on foreign currency debt designated at fair value, issued as part of our overall funding strategy with an offset from trading assets held as economic hedges reported in 'Net trading income'.

Gains less losses from financial investmentsincreased by US$455m as improved market conditions led to gains on sale of private equity investments and lower impairment charges on certain available-for-sale investments.

Net earned insurance premiums were in line with 2009. The decision in 2009 to place our UK motor insurance business into run-off resulted in no new premiums being written in 2010. In addition, a decision was taken during 2010 not to renew certain contracts in the Irish business. By contrast, we generated strong sales activity in the UK life and French insurance businesses.

Other operating income decreased by US$193m because the gain on the sale and leaseback of our Paris headquarters building in 2010 was exceeded by the gain on the sale and leaseback of the Group's London headquarters building in 2009.

Net insurance claims incurred and movement in liabilities to policyholders decreased by 11%. This was driven by lower investment gains compared with 2009 and by the non-recurrence of the strengthening of reserves in 2009 on the now-closed UK motor insurance book which reflected the rising incidence and severity of claims at that time. The decision not to renew certain contracts in the Irish business resulted in a further decrease in claims.

Loan impairment charges and other credit risk provisions decreased by 45% to US$3.0bn, reflecting the more stable credit environment and helped by mitigating actions taken by management. In GB&M, the improved credit outlook, loan restructuring activity, a release of previous collective impairments and lower specific impairment charges in 2010 contributed to a decline in loan impairment charges and other credit risk provisions. Credit risk provisions on certain available-for-sale ABSs also reduced due to a slowing in the rate of anticipated losses in the underlying collateral pools.

In CMB, the reduction in loan impairment charges and other credit risk provisions was largely due to an improvement in the UK property, retail and services sectors, with reductions also seen in our Continental European businesses. The improvement in economic conditions across the region and the effect of low interest rates also resulted in lower delinquencies in the PFS portfolios.

Operating expenses in 2010 included one-off payroll and bonus taxes in the UK and France on certain bonuses paid in respect of 2009 totalling US$324m, primarily in GB&M. Operating expenses in 2009 included an accounting gain of US$480m (US$499m as reported) related to a change in the delivery of certain staff benefits in the main UK pension scheme. Excluding these items, operating expenses were 8% higher than in 2009. This was driven by continued strategic investments in people and infrastructure to support our customers, drive future growth and deliver sustainable long-term reductions in our cost base by re-engineering business processes. In addition, rental expenses increased following the sale and leaseback of our headquarters buildings in London and Paris.

 

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