Annual Financial Report - 9 of 48

RNS Number : 3623B

HSBC Holdings PLC

03 April 2013

 



Global businesses

Summary ................................................................	58
Products and services ..............................................	60
Retail Banking and Wealth Management .................	62
Commercial Banking ..............................................	65
Global Banking and Markets ...................................	68
Global Private Banking ...........................................	72
Other ......................................................................	74
Analysis by global business ......................................	76
Disposals, held for sale and run-off portfolios .........	78

Summary

HSBC reviews operating activity on a number of bases, including by geographical region and by global business.

The commentaries below present global businesses followed by geographical regions (page 79). Performance is discussed in this order because certain strategic themes, business initiatives and trends affect more than one geographical region. All commentaries are on a constant currency basis (page 25) unless stated otherwise.

Basis of preparation

The results of global businesses are presented in accordance with the accounting policies used in the preparation of HSBC's consolidated financial statements. Our operations are closely integrated and, accordingly, the presentation of global business data includes internal allocations of certain items of income and expense. These allocations include the costs of certain support services and global functions, to the extent that these can be meaningfully attributed to operational business lines. While such allocations have been made on a systematic and consistent basis, they necessarily involve some subjectivity.

Where relevant, income and expense amounts presented include the results of inter-segment funding as well as inter-company and inter-business line transactions. All such transactions are undertaken on arm's length terms.

The expense of the UK bank levy is included in the Europe geographical region as HSBC regards the levy as a cost of being headquartered in the UK. For the purposes of the segmentation by global business, the cost of the levy is included in 'Other'.

The 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 are included in the North America (US$1.5bn) and Europe (US$0.4bn) geographical regions, and in 'Other' for the purposes of the segmentation by global business.

 

Profit/(loss) before tax

	2012				2011				2010
	US$m		%		US$m		%		US$m		%
Retail Banking and Wealth Management .........	9,575		46.4		4,270		19.6		3,839		20.2
Commercial Banking .......................................	8,535		41.3		7,947		36.3		6,090		32.0
Global Banking and Markets ............................	8,520		41.3		7,049		32.2		9,215		48.4
Global Private Banking ...................................	1,009		4.9		944		4.3		1,054		5.5
Other73 ...........................................................	(6,990)		(33.9)		1,662		7.6		(1,161)		(6.1)
	20,649		100.0		21,872		100.0		19,037		100.0

Total assets⁷⁴

	At 31 December
	2012				2011
	US$m		%		US$m		%
Retail Banking and Wealth Management ...................................................	536,244		19.9		540,548		21.2
Commercial Banking ................................................................................	363,659		13.5		334,966		13.1
Global Banking and Markets .....................................................................	1,942,470		72.1		1,877,627		73.5
Global Private Banking .............................................................................	118,440		4.4		119,839		4.7
Other ........................................................................................................	201,741		7.5		180,126		7.0
Intra-HSBC items .....................................................................................	(470,016)		(17.4)		(497,527)		(19.5)
	2,692,538		100.0		2,555,579		100.0

For footnotes, see page 120.

Risk-weighted assets

	At 31 December
	2012				2011
	US$bn		%		US$bn		%
Retail Banking and Wealth Management ........................................	276.6		24.6		351.2		29.0
Commercial Banking ......................................................................	397.0		35.3		382.9		31.7
Global Banking and Markets ...........................................................	403.1		35.9		423.0		35.0
Global Private Banking ...................................................................	21.7		1.9		22.5		1.9
Other .............................................................................................	25.5		2.3		29.9		2.4
	1,123.9		100.0		1,209.5		100.0

Selected items included in profit before tax by global business

Acquisitions, disposals and dilutions⁷⁵

	2012		2011		2010
	US$m		US$m		US$m
Retail Banking and Wealth Management ......................................................	5,574		3,328		3
Commercial Banking ....................................................................................	594		76		119
Global Banking and Markets .........................................................................	149		114		262
Global Private Banking .................................................................................	55		(9)		-
Other73 .........................................................................................................	3,107		141		250
	9,479		3,650		634

For footnotes, see page 120.

Products and services

Retail Banking and Wealth Management RBWM serves over 54 million personal customers. We take deposits and provide transactional banking services to enable customers to manage their day-to-day finances and save for the future. We selectively offer credit facilities to assist customers in their short or longer-term borrowing requirements; and we provide financial advisory, broking, insurance and investment services to help them to manage and protect their financial futures. We develop products designed to meet the needs of specific customer segments, which may include a range of different services and delivery channels. Typically, customer offerings include: ·      liability-driven services: deposits and account services; ·      asset-driven services: credit and lending, both secured and unsecured; and ·      fee-driven and other services: financial advisory, broking, life insurance manufacturing and asset management.

We deliver services through four principal channels: branches, self-service terminals, telephone service centres and digital (internet and mobile). Customers can transact with the bank via a combination of these channels, through the following offerings: ·  HSBC Premier: we provide preferential banking services and global recognition to our mass affluent customers and their immediate families with a dedicated relationship manager, specialist wealth advice and tailored solutions. Customers can access emergency travel assistance, priority telephone banking and an online 'global view' of their Premier accounts around the world. ·  HSBC Advance: we provide a range of preferential products and services to simplify the banking needs of customers and to help them manage and plan their money to achieve their financial goals and ambitions. ·  Wealth Solutions & Financial Planning: a financial planning process designed around individual customer needs to help our clients to protect, grow and manage their wealth through investment and wealth insurance products manufactured by Global Asset Management, Global Markets and HSBC Insurance and by selected third-party providers. ·   Basic Banking: we increasingly provide globally standardised but locally delivered, reliable, easy to understand, good-value banking products and services using global product platforms and globally set service standards.

Commercial Banking We segment our CMB business into Corporate, to serve both corporate and mid-market companies with more sophisticated financial needs, and Business Banking, to serve SMEs, enabling differentiated coverage of our target customers. This allows us to provide continuous support to companies as they grow both domestically and internationally, and ensures a clear focus on internationally aspirant customers. We place particular emphasis on international connectivity to meet the needs of our business customers. We aim to be recognised as the leading international trade and business bank by focusing on faster-growing markets, repositioning towards international business and enhancing collaboration across the Group. This will be underpinned by reducing complexity and operational risk and driving efficiency gains through adopting a global operating model.

·  Credit and Lending: we offer a broad range of domestic and cross-border financing, including overdrafts, corporate cards, term loans and syndicated, leveraged, acquisition and project finance. Asset finance is also offered in selected countries. ·  International trade and receivables finance: we provide the services and finance our clients need throughout the trade cycle including; letters of credit, collections, guarantees; receivables finance; supply chain solutions; commodity and structured finance; and risk distribution. HSBC is supporting the development of renminbi as a trade currency, with renminbi capabilities in more than 50 markets. ·  Payments and Cash Management: we are a leading provider of domestic and cross-border payments, collections, liquidity management and account services offering local, regional and global solutions delivered via e‑enabled platforms designed to address the current and future needs of our clients. ·  Insurance and Investments: we offer business and financial protection, trade insurance, employee benefits, corporate wealth management and a variety of other commercial risk insurance products in selected countries. ·  GB&M: our CMB franchise represents a key client base for GB&M products and services, including foreign exchange and interest rate products, together with capital raising on debt and equity markets and advisory services.

Global Banking and Markets GB&M provides tailored financial solutions to major government, corporate and institutional clients and private investors worldwide. Managed as a global business, GB&M operates a long-term relationship management approach to build a full understanding of clients' financial requirements. Sector-focused client service teams comprising relationship managers and product specialists develop financial solutions to meet individual client needs. With a presence in over 60 countries/territories and access to HSBC's worldwide presence and capabilities, this business serves subsidiaries and offices of our clients on a global basis. GB&M is managed as two principal business lines: Global Markets and Global Banking. This structure allows us to focus on relationships and sectors that best fit the Group's geographic reach and facilitate seamless delivery of our products and services to clients. In addition, Balance Sheet Management is responsible for the management of liquidity and funding. It also manages structural interest rate positions within the Global Markets limit structure.

·  Global Markets operations consist of treasury and capital markets services. Products include foreign exchange; currency, interest rate, bond, credit, equity and other derivatives; government and non-government fixed income and money market instruments; precious metals and exchange-traded futures; equity services; distribution of capital markets instruments; and securities services, including custody and clearing services and funds administration to both domestic and cross-border investors. ·  Global Banking offers financing, advisory and transaction services. Products include: - capital raising, advisory services, bilateral and syndicated lending, leveraged and acquisition finance, structured and project finance, lease finance and non-retail deposit taking; - international, regional and domestic payments and cash management services; and trade services for large corporate clients.

Global Private Banking GPB provides investment management and trustee solutions to high net worth individuals and their families globally. We aim to meet the needs of our clients by providing excellent customer service, utilising our global reach and offering a comprehensive suite of solutions. Drawing on the strength of the HSBC Group and the most suitable products from the marketplace, we work with our clients to provide solutions to grow, manage, and preserve wealth for today and for the future.

·  Private Banking services comprise multicurrency and fiduciary deposits, account services, and credit and specialist lending. GPB also accesses HSBC's universal banking capabilities to offer products and services such as credit cards, internet banking, and corporate and investment banking solutions. ·  Investment Management comprises advisory and discretionary investment services, as well as brokerage across asset classes. This includes a complete range of investment vehicles, portfolio management, security services and alternatives. ·  Private Trust Solutions comprise trusts and estate planning, designed to protect wealth and preserve it for future generations through structures tailored to meet the individual needs of each client.

Retail Banking and Wealth Management

RBWM provides banking and wealth management services for our personal customers to help them to manage their finances and protect and build their financial futures.
	2012		2011		2010
	US$m		US$m		US$m
Net interest income .....	20,298		24,101		24,166
Net fee income ............	7,205		8,226		8,397
Other income ..............	6,358		1,206		1,048
Net operating income21 ..................................	33,861		33,533		33,611
LICs76 ..........................	(5,515)		(9,319)		(11,259)
Net operating income ..................................	28,346		24,214		22,352
Total operating expenses..................................	(19,769)		(21,202)		(19,539)
Operating profit .......	8,577		3,012		2,813
Income from associates77 ..................................	998		1,258		1,026
Profit before tax .......	9,575		4,270		3,839
RoRWA66 ....................	3.1%		1.2%		1.1%
Underlying revenue growth in all faster-growing regions
Announced 34 disposals or closures since  the start of 2011 and completed 12 in 2012
Best in Wealth Management in Hong Kong (The Asian Banker, March 2012)
Strategic direction RBWM provides retail banking and wealth management services for personal customers in markets where we have, or can build, the scale to do so cost effectively. We focus on three strategic imperatives: ·  building a consistent, high standard, customer needs-driven wealth management service for retail customers drawing on our Insurance and Asset Management businesses; ·  leveraging global expertise to improve customer service and productivity, to provide a high standard of banking solutions and service to our customers efficiently; and ·  simplifying and re-shaping the RBWM portfolio of businesses globally, to focus our capital and resources on key markets.
For footnotes, see page 120.
The commentary is on a constant currency basis unless stated otherwise.

Review of performance

·     RBWM reported profit before tax of US$9.6bn compared with US$4.3bn in 2011 (US$4.2bn on a constant currency basis). This included net gains resulting from a number of strategic transactions, including US$3.7bn from the disposals of the Card and Retail Services ('CRS') business and non-strategic branches in the US.

·     On an underlying basis, profit before tax increased by US$3.1bn, largely driven by lower loan impairment charges in the US run-off portfolio and higher insurance profits in Hong Kong and Brazil. These were partly offset by charges relating to the customer redress programmes in the UK of US$1.8bn, compared with US$868m in 2011 (US$875m as reported).

RBWM - profit/(loss) before tax

	2012		2011		2010
	US$m		US$m		US$m
RBWM excluding US CRS and US run-off portfolio .....................................	7,083		6,681		5,936
US CRS ...........................	3,766		2,061		1,979
US run-off portfolio .......	(1,274)		(4,472)		(4,076)
	9,575		4,270		3,839

·     Loss before tax in the US run-off portfolio declined significantly, mainly due to lower loan impairment charges reflecting the decline in average lending balances. In addition, revenue benefited from lower adverse movements on the fair value of non-qualifying hedges in HSBC Finance of US$227m, compared with US$1.2bn in 2011. This was partly offset by a fall in net interest income largely driven by the continued reduction in lending balances.

·     Profit before tax for RBWM excluding US CRS and the US run-off portfolio increased by US$472m, with revenue growth in Hong Kong, Latin America and Rest of Asia-Pacific partly offset by a fall in profit in the UK due to a US$883m increase in customer redress provisions and the non-recurrence of a credit of US$256m (US$264m as reported) relating to defined benefit pension obligations.

·     Revenuegrew by 13% in Hong Kong reflecting wider deposit spreads, higher lending and deposit balances and the gains on sale of the general insurance businesses and our shares in Global Payments Asia-Pacific Ltd. Insurance income also increased due to higher investment returns and strong sales and renewals of life insurance products. This was partly offset by the non-recurrence of the implementation benefit from refining the PVIF asset calculation in 2011.

·     Revenue in Rest of Asia-Pacific increased by 3% due to the gain on sale of our operations in Thailand, partly offset by the loss of operating revenues associated with this disposal and the discontinuation of our HSBC Premier ('Premier') service in Japan. Net interest income remained broadly in line with 2011. Mortgage and deposit balances grew, primarily in Singapore, mainland China, Australia and Malaysia, although the effect was offset by narrower asset and deposit spreads.

·     In Latin America, revenue grew by 6%, driven by higher insurance revenues from strong sales of unit-linked pension and term life products and the favourable effect of the recognition of a PVIF asset (US$144m) in Brazil. In addition, we reported a gain on sale of the general insurance business in Argentina. Net interest income increased due to growth in personal loans and deposit balances. Growth was partly offset by the loss on sale of certain businesses as well as the non-recurrence of gains on the sale and leaseback of branches and the sale of HSBC Afore, both in Mexico during 2011.

·     In Europe, revenue remained broadly in line with 2011. Revenue decreased in the UK, largely driven by deposit spread compression. This was partly offset by higher mortgage spreads and average balances in the UK and business expansion in Turkey, which led to higher net interest income following growth in personal lending and mortgage balances.

·     Loan impairment charges in RBWM excluding US CRS and the US run-off portfolio were broadly in line with 2011. Reductions in Europe, driven by lower delinquencies across both the secured and unsecured lending portfolios, particularly in the UK, were offset by higher impairments in Brazil, where delinquency rates increased as economic growth slowed in 2012.

·     Operating expenses in RBWM excluding US CRS and the US run-off portfolio increased only modestly, despite significantly higher customer redress provisions and the non-recurrence of a pension credit in the UK. Excluding these items, expenses decreased through both our organisational effectiveness programmes and the transactions undertaken

as part of our portfolio management activities, detailed below. These led to a reduction of more than 13,500 FTEs, with all regions contributing to sustainable cost savings of more than US$350m.

·     Share of profit from associates and joint ventures decreased by 22%, mainly from Ping An due to market valuation losses on equity securities held by their insurance business, reflecting volatile domestic equity markets. Following the disposal of our associate, Ping An, our remaining shareholding has been classified as a financial investment.

Strategic imperatives

Developing a high standard of wealth management for retail customers

·     In 2012, we accelerated the transformation of the Wealth Management business in HSBC, investing significantly in infrastructure to improve customer experience and revenue generation, although further progress is required to achieve our strategic goals.

·     Wealth Management revenues increased by over US$550m in 2012 to US$6.4bn, primarily due to growth from insurance, mutual funds and foreign exchange. Wealth insurance revenues improved, driven by higher investment returns, notably in Hong Kong and France and strong sales of life insurance products in Hong Kong and Brazil. Mutual funds sales grew, with revenues increasing by 17% to US$935m. Revenues from foreign exchange transactions benefited from infrastructure investments, including the successful deployment of our web-enabled foreign currency 'Get Rate' system across key markets in Europe and Asia towards the end of 2011.

·     Foreign exchange services are a core component of our wealth strategy, and we continue to invest in order to further enhance our customer offering. By 31 December 2012, over 220,000 of our customers were using our Global View and Global Transfer products, making cross-border transfers amounting to more than US$13bn in the year. We enhanced our international wire services by improving limits and pricing. We also completed the online launch of dual-currency deposits in Asian markets, and improved market access for foreign exchange trading.

·    

·     Sales of our long-term fund products, including our managed solutions, continued to grow. We launched the HSBC Asia Focused Income Fund in May which grew to US$1bn by the end of 2012. World Selection and Premier Investment Management Services for retail customers continued to grow, with total net sales amounting to US$2bn during the year, resulting in a 20% increase to US$19bn in FuM related to these portfolios.

·     HSBC Global Asset Management's investment performance was strong in 2012, with over 70% of its Equity, Multi-Asset and Fixed Income funds by value ranking above median. As a result, 71% of eligible funds were in the top two quartiles over the three-year period to 31 December 2012.

·     We made significant investments to reinforce the wealth risk management framework, introducing enhanced risk profiling and strategic financial planning tools to enable more effective control of compliance and regulatory risks.

·     As part of the drive to enhance customer experience, we started the global roll-out of a new Wealth Dashboard, which allows customers easy access and analysis of personal holdings and enables ongoing comparison with reference portfolios. Additionally, in a number of markets we introduced a global insurance point-of-sale system which offers customers a faster, more integrated service.

Leveraging global expertise in retail banking

·     We continued to enhance our digital banking capabilities with the launch of the first mobile payment solution in Hong Kong enabling contactless credit card transactions through Visa payWave terminals, the first deployment of a global application platform in the US, and the roll-out of mortgage digital sales tools in the UK, India, UAE and Malaysia.

·     Our business re-engineering programme is driving cost reduction and efficiency improvements through standardisation. We used our global scale to improve cost controls and progressively standardised the design of our Contact Centres. In addition, we are successfully deploying enhanced analytical capabilities to improve customer experience.

Portfolio management to drive superior returns

·     Good progress was made in portfolio management activities with 17 disposals or

closures announced in 2012 and a further four in 2013, following the 13 announced in 2011, and 12 transactions completed in 2012. During 2012, we completed the sale or closure of our retail businesses in Thailand, Honduras, El Salvador and Costa Rica, disposed of the Card and Retail Services business and upstate New York branches in the US and the full service retail brokerage business in Canada and recorded an investment loss on a subsidiary. Additionally, we announced the sale of our retail banking operations in Colombia, Peru, Uruguay, Paraguay and Pakistan and the closure of the consumer finance business in Canada. In December 2012 we disposed of our associate, Ping An, with our remaining shareholding classified as a financial investment, and also completed the sale of our shares in Global Payments Asia-Pacific Ltd. Following completion of all the announced transactions we will have refocused our business to 20 home and priority markets (representing 98% of 2012 profit before tax) and a limited number of network and small markets.

·     We are exiting the general insurance manufacturing business and focusing on life insurance manufacturing where we have scale. In 2012, we completed the sale of our general insurance businesses in Hong Kong, Singapore, Argentina and Ireland, announced the sale of our insurance manufacturing businesses in the US and Taiwan and reached an agreement to sell a portfolio of general insurance assets and liabilities in Mexico.

·     In October 2012, we completed the acquisition of the onshore retail banking business of Lloyds Banking Group in the UAE, following the merger in the second quarter of our Omani operations with OIB.

·     We remained focused on managing the run-off of balances in our CML portfolio, with year-end lending balances, including loans held for sale, declining by 14% from December 2011 to US$43bn. In the third quarter of 2012, we reclassified US$3.7bn of non-real estate personal loan balances, net of impairment allowances, from our consumer finance portfolio to 'Assets held for sale' as we actively marketed the portfolio. We also identified real estate secured loan balances which we plan to actively market in multiple transactions over the next two years.

Commercial Banking

CMB offers a full range of commercial financial services and tailored solutions to more than three million customers ranging from small and medium-sized enterprises to publicly quoted companies in more than 60 countries.
	2012		2011		2010
	US$m		US$m		US$m
Net interest income .....	10,361		9,931		8,487
Net fee income ............	4,470		4,291		3,964
Other income ..............	1,720		1,389		1,383
Net operating income21 ..................................	16,551		15,611		13,834
LICs76 ..........................	(2,099)		(1,738)		(1,805)
Net operating income ..................................	14,452		13,873		12,029
Total operating expenses..................................	(7,598)		(7,221)		(6,831)
Operating profit/(loss) ..................................	6,854		6,652		5,198
Income from associates77 ..................................	1,681		1,295		892
Profit/(loss) before tax ..................................	8,535		7,947		6,090
RoRWA66 ....................	2.2%		2.2%		2.0%
Record reported profit before tax US$8.5bn
9% increase in customer deposits, driven by Payments and Cash Management
Number one global trade finance bank in the world (Oliver Wyman Global Transaction Banking Survey 2012)
Strategic direction CMB aims to be the banking partner of choice for international businesses by building on our rich heritage, international capabilities and relationships to enable connectivity and support trade and capital flows around the world, thereby strengthening our leading position in international business and trade. We have four strategic imperatives: ·  focus on faster-growing markets while connecting revenue and investment flows with developed markets; ·  capture growth in international SMEs and corporate businesses; ·  enhance collaboration across all global businesses to provide our customers with access to the full range of the Group's services; and ·  simplify processes and enhance risk management controls by adopting a global operating model.
For footnotes, see page 120.
The commentary is on a constant currency basis unless stated otherwise.

Review of performance

·     CMB reported a record profit before tax of US$8.5bn in 2012, 7% higher than in 2011. On a constant currency basis, profit before tax increased by 10%. This included gains totalling US$468m mainly from the sale of branches in the US, the disposal of general insurance businesses in Argentina and Hong Kong and the sale of our shares in Global Payments Asia-Pacific Ltd in Hong Kong.

·     On an underlying basis, profit before tax increased by 3%. This was driven by strong revenue growth and higher income from our associates, substantially offset by a rise in operating expenses which reflected the effect of notable cost items that included a customer redress provision of US$268m relating to interest rate protection products in the UK. Loan impairment charges also rose, driven by higher individually assessed provisions in Europe and Rest of Asia-Pacific, and a rise in collective charges in Latin America.

·     Revenue grew by 10% in the year, with increases in all regions. This reflected strong net interest income growth, higher net fee income and a rise in other income driven by the gains on disposals.

·     Net interest income increased by 8% as a result of average balance sheet growth. Customer loans and advances rose 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 higher trade-related lending as demand for export finance increased. In Europe, despite muted demand for credit, net interest income from lending activities also rose as a result of growth in average lending balances, notably in the UK. Net interest income from customer accounts rose as we continued to attract deposits through our Payments and Cash Management products. Net interest income from deposits also benefited from higher liability spreads in Hong Kong, reflecting an increase in short-term interest rates.

·     Net fee income benefited from higher transaction volumes of Payments and Cash Management products, mainly in Europe, Latin America and Hong Kong. Net fee income from Global Trade and Receivables Finance products also rose in Hong Kong, due to continued demand for export finance as we captured international trade and capital flows, and in Europe as we continued to expand our Trade and Commodity and Structured Trade Finance offerings. In addition, our collaboration with GB&M led to higher revenues generated primarily from sales of foreign exchange products.

·     Loan impairment charges and other credit risk provisions increased by US$442m, driven by higher individually assessed loan impairments in Europe, reflecting the challenging economic conditions in the UK, Greece, Spain and Turkey, and in Rest of Asia‑Pacific in respect of a small number of customers in our Corporate segment. Collective impairment provisions also rose in Latin America, mainly in Brazil from increased delinquency in the Business Banking portfolio.

·     Operating expenses increased by 10%, primarily due to a US$268m customer redress provision relating to interest rate protection products in the UK (see page 32). The rise in costs also reflected the non-recurrence of a credit in 2011 of US$206m (US$212m as reported), arising from a change in the measurement of defined benefit pension obligations in the UK. In addition, we continued to invest in and strengthen our Risk and Compliance function as part of our global operating model. Operating expenses also increased in our faster-growing regions of Latin America and Rest of Asia-Pacific due to inflationary pressures and continued investment in front line and support staff.

·     Income from associates grew by 28% as our associates in mainland China benefited from a rise in lending and associated fee income, reflecting continued economic growth.

Strategic imperatives

Focus on faster-growing markets while connecting with developed markets

·     We continued to position the business for growth, maintaining our investment in our faster-growing regions, where revenues rose by 12 percentage points from 2011 and represented over 54% of our revenues. Our top 20 markets contributed over 90% of our profit before tax in 2012, with 14 of these countries located in the faster-growing regions.

·     Our strong network helps connect customers with both developed and developing markets as they expand internationally. During 2012, we were the first bank to settle cross-border renminbi trade across six continents with our ability to provide related services in over 50 countries offering a competitive advantage to our customers as the renminbi is positioned as a major global trade and investment currency. We have expanded our global network of dedicated China desks to cover our top markets, representing about half of the world's GDP. These are staffed by Mandarin-speaking experts who support mainland Chinese businesses to identify new opportunities to expand overseas.

·     As reported in the Oliver Wyman Global Transaction Banking Survey 2012, we maintained our position as the world's largest global trade finance bank with a market share of global trade finance revenue that increased from 9% in 2011 to 10% in the first half of 2012, in spite of a slowdown in world trade growth. Our Global Trade and Receivables Finance revenues increased by 11%  as our network provided customers with access to over 75% of world trade flows. In addition, we continued to expand our Commodity and Structured Trade Finance offering across CMB and GB&M, establishing new teams in four countries, which brought the total to seven by the end of 2012. Our team of product specialists more than doubled from 31 at the end of 2011 to 78 across Europe, Hong Kong and Rest of Asia-Pacific, with plans for further expansion in Latin America, Middle East and North Africa, North America and additional countries in Rest of Asia-Pacific by the end of 2013.

·     International payments volumes in Payments and Cash Management have grown at twice the rate of the market globally since 2010 with year-on-year revenue increasing by 15% in 2012. This growth reflected new mandates and investments in new products such as HSBCnet mobile to improve our customers' experience. Double digit revenue growth was reported in the UK, Brazil and Hong Kong, all of which are top markets for CMB, reflecting the strength of the franchise in both developed and developing markets. In 2012, HSBC was the first bank to be named 'Best Cash Management Bank' globally for both 'Financial Institutions' and 'Non-Financial Institutions' in the same year by Euromoney's customer survey. Also in this poll, we were named 'Best Domestic Cash Management Provider' in over 20 countries.

Capture growth in international businesses

·     Our strong international network offers a distinctive presence in key markets with major trade flows, facilitating growth for international businesses. Our international customer base generated around 40% of our revenues.

·     In Business Banking, we continued to attract and serve an increasing number of international SMEs and further differentiated our service offering to them by extending our global network of specialist International Relationship Managers ('IRM's) who focus on high value international clients. During 2012, we added over 165 IRMs in France, Brazil and the UK and plan to expand the model into other key Business Banking markets in 2013.

·     We continued to support SMEs through the economic recovery, with a particular focus on those with international aspirations. In the first half of 2012, we launched an international SME fund in the UK to support UK businesses that trade, or aspire to trade, internationally. By the end of 2012, we had approved lending through the fund of £5.1bn (US$8.2bn), exceeding our original target of £4.0bn (US$6.5bn), and provided £12bn (US$20bn) of gross new lending to UK SMEs, including the renewal of overdraft and other lending facilities. Over 80% of small business lending applications received during the year were approved. Similarly, in the UAE, we launched our third SME fund of AED1bn (US$272m) targeted at international trade customers.

·     Our global expertise helped connect our customers with new market opportunities. We held three 'Global Connections International Exchanges' in Brazil, mainland China and Dubai in 2012, where we were joined by clients from all of our top 20 markets who were able to make contacts, share their specialist market knowledge and identify new business opportunities.

Strong partnership with global businesses 

·     Our collaboration with GB&M has delivered nearly US$0.7bn in incremental gross revenue since 2010. Gross revenues from sales of GB&M products to CMB customers which are shared across the two global businesses grew by over US$0.1bn in 2012 or by 5%, mainly driven by sales of foreign exchange products.

·     We continued to benefit from GB&M's e‑FX platform to deliver our standard foreign exchange products to customers more efficiently. We also addressed demand for

alternative sources of finance, providing our customers with access to debt and equity capital markets and offering specialised financing, such as Project and Export Finance, via GB&M.

·     Dedicated executives are now in place in both CMB and GPB to promote cross-business referral activities and support the collaboration between the businesses. For example, the Global Priority Clients initiative was launched in 2012 to service the Group's largest ultra-high net worth clients' corporate and personal needs jointly.

·     In 2012, we launched our trade credit insurance offering in Hong Kong, Brazil and the UK. It will be rolled out to further markets in the first half of 2013, including Turkey, France, Singapore and Malaysia.

Simplify processes and enhance risk management controls by adopting a global operating model

·     The successful adoption of a global model has enabled us to deliver a number of benefits, notably simplified processes for our customers, enhanced governance and compliance oversight, and sustainable cost savings across the business.

·     We have made significant progress in simplifying and reducing the time to complete our credit renewal process, implementing improvements in 17 key markets with further countries in scope for the first quarter of 2013. In addition, we have deployed a consistent model for cross-border account opening to facilitate the on-boarding of new international customers.

·     The sustainable cost savings of over US$100m achieved through process re-engineering and organisational effectiveness have been reinvested in both front line staff and our Risk and Compliance function. We introduced enhanced consistent Know Your Customer procedures, a global product governance board and dedicated resources to improve governance oversight. This investment, combined with our values-based approach to relationship management, is helping to foster a disciplined and constructive culture of risk management in CMB while encouraging balanced and sustainable growth.

·    

Global Banking and Markets

GB&M provides tailored financial solutions to major government, corporate and institutional clients worldwide.
	2012		2011		2010
	US$m		US$m		US$m
Net interest income .....	6,960		7,263		7,343
Net fee income ............	3,329		3,227		3,664
Net trading income78 ...	5,690		5,204		5,830
Other income ...............	2,294		1,363		2,075
Net operating income21 ..................................	18,273		17,057		18,912
LICs76 ..........................	(670)		(984)		(990)
Net operating income ..................................	17,603		16,073		17,922
Total operating expenses..................................	(9,907)		(9,722)		(9,228)
Operating profit .......	7,696		6,351		8,694
Income from associates77..................................	824		698		521
Profit before tax .......	8,520		7,049		9,215
RoRWA66 ....................	2.1%		1.8%		2.5%

Record reported revenues from corporate and institutional debt issuance
77% of profit before tax from faster-growing regions
Most Innovative Investment Bank of the Year (The Banker Investment Banking Awards 2012)
Strategic direction GB&M continues to pursue its well-established 'emerging markets-led and financing-focused' strategy, with the objective of being a leading international wholesale bank. This strategy has evolved to include a greater emphasis on connectivity between the global businesses, across the regions and within GB&M, leveraging the Group's extensive distribution network. We focus on four strategic imperatives: ·  reinforce client coverage and client-led solutions for major government, corporate and institutional clients; ·  continue to selectively invest in the business to support the delivery of an integrated suite of products and services; ·  enhance collaboration with other global businesses, particularly CMB, to appropriately service the needs of our international client base; and ·  focus on business re-engineering to optimise operational efficiency and reduce costs.
For footnotes, see page 120. The commentary is on a constant currency basis unless stated otherwise.

Review of performance

·     GB&M reported profit before tax of US$8.5bn, 21% higher than in 2011. On a constant currency basis, profit before tax increased by 24% despite a significant net charge relating to credit and debit derivative valuation adjustments. The rise in profit before tax was driven by strong revenue growth, notably in Rates and Credit, together with significantly lower credit risk provisions than in 2011, partly offset by higher operating expenses. GB&M is well positioned for growth in faster-growing regions with record reported revenues in Hong Kong (US$2.8bn), Rest of Asia-Pacific (US$4.0bn) and Latin America (US$1.8bn). 

·     In the fourth quarter a net charge of US$385m was reported in net trading income as a result of a change in estimation methodology in respect of credit valuation adjustments on derivative assets of US$903m and debit valuation adjustments on derivative liabilities of US$518m to reflect evolving market practices (see Note 15 on the Financial Statements).

·     Notwithstanding the charge noted above, revenues rose by 10%, primarily due to significantly higher trading revenues in Rates and Credit, notably in Europe, as spreads tightened and investor sentiment improved following stimuli by central banks globally. Balance Sheet Management reported higher gains on the disposal of available-for-sale debt securities, largely in the UK, while Payments and Cash Management benefited from growth in average liability balances, increased transaction volumes and new mandates. These increases were partly offset by a fall in revenues from our Equities business due to lower client activity as market volumes declined. Revenues in 2012 also included adverse fair value movements from own credit spreads on structured liabilities of US$629m compared with a favourable fair value movement of US$458m reported in 2011.

·     Loan impairment charges and other credit risk provisions decreased by US$300m compared with 2011. Credit risk provisions declined significantly, from US$515m in 2011 to US$117m in 2012, driven by lower impairment charges on Greek sovereign debt, and on available-for-sale ABSs in our legacy portfolio reflecting an improvement in underlying asset prices. This was partly offset by a US$97m increase in loan impairment charges as a result of a small number of specific impairments in

Global Banking and on the legacy credit loans and receivables portfolio.

·     Operating expenses increased by US$393m to US$9.9bn, predominantly due to a customer redress provision of US$330m relating to interest rate protection products in the UK (see page 32). Performance costs rose, albeit at a lower rate of growth than net operating income, which resulted in a lower total compensation ratio than in 2011. 2011 also included a credit of US$108m (US$111m as reported) relating to defined benefit pension obligations in the UK, which did not recur.

Management view of total operating income

	2012 US$m		2011 US$m		2010 US$m
Global Markets79 .....	8,733		8,098		9,173
Credit ..................	779		335		1,649
Rates ...................	1,771		1,341		2,052
Foreign Exchange .........................	3,215		3,272		2,752
Equities ...............	679		961		755
Securities Services .........................	1,663		1,673		1,511
Asset and Structured Finance ............	626		516		454
Global Banking .......	5,568		5,401		4,621
Financing and Equity Capital Markets ............	3,071		3,233		2,852
Payments and Cash Management80 ..	1,744		1,534		1,133
Other transaction services81 ..........	753		634		636
Balance Sheet Management82 ....	3,738		3,488		4,102
Principal Investments ............................	125		209		319
Debit valuation adjustment...........	518		-		-
Other83 ...................	(409)		(139)		697
Total operating income..................	18,273		17,057		18,912

Balance Sheet Management revenues included a notional tax credit on income earned from tax-exempt investments of US$116m in 2012 (2011: US$85m; 2010: US$50m), which is offset above within 'Other.'

For footnotes, see page 120.

·     Included in the table above are the following amounts in relation to the change in credit valuation adjustment estimation methodology:

	2012 US$m
Credit ...........................................................	(52)
Rates ............................................................	(837)
Foreign Exchange .........................................	(7)
Equities ........................................................	(7)
Total ............................................................	(903)

·    
Global Markets delivered a strong performance in an uncertain financial and economic environment, in part due to a US$444m increase in Rates revenues. This was despite significant adverse fair value movements from own credit spreads on structured liabilities as spreads tightened, compared with favourable movements reported in 2011, together with a credit valuation adjustment of US$837m in 2012. Revenues in Credit increased by US$453m due to strong trading income, mainly in Europe, as spreads tightened on corporate debt securities. Additionally, we achieved record reported revenues from primary market issuance, mainly within Credit, with revenues in Europe, Hong Kong and North America increasing as we enhanced regional coverage and actively captured growth in client demand for debt capital financing.

·     Foreign Exchange income was broadly in line with 2011, as higher revenues from enhanced collaboration between GB&M and CMB, and increased volumes from the improvement in our electronic pricing and distribution capabilities, offset the effect of less volatile markets in 2012. Notwithstanding the capture of higher market share within a number of our target emerging markets, Equities revenues decreased by 27%, driven by lower client activity as market volumes declined against the backdrop of economic and fiscal uncertainty in Europe and North America. This was coupled with adverse fair value movements on structured liabilities compared with favourable movements in 2011.

·     In Global Banking, Financing and Equity Capital Markets revenues were broadly unchanged compared with 2011 as lower advisory and underwriting fees, mainly in Europe, reflecting the challenging market environment, were partly offset by higher Project and Export Finance revenues, as deal volumes increased, and as we captured a higher market share of public and private sector investment in infrastructure development in emerging markets. Payments and Cash Management revenues increased by 15% due to higher average liability balances and an increase in transaction volumes. We increased our focus on cross-selling Payments and Cash Management products to selected international customers and saw a rise in new mandates.

·     In 'Other transaction services', revenues increased by 24% as the Global Trade and Receivables Finance business benefited from enhanced collaboration between Global Banking relationship managers and specialist sales teams and the expansion of the Commodity and Structured Trade Finance offering leading to higher revenues in Europe and Rest of Asia-Pacific. Revenues in Rest of Asia-Pacific also increased as a result of growth in export lending and improved spreads.

·     Balance Sheet Management revenues rose by US$324m due to higher gains on the disposal of available-for-sale debt securities as part of structural interest rate risk management of the balance sheet, notably in Europe. Net interest income declined in Europe, however, as yield curves continued to flatten and liquidity 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. Higher net interest income was reported in Rest of Asia-Pacific due to higher yields and portfolio growth in mainland China, and in Latin America due to lower funding costs in Brazil as interest rates declined.

·     Principal Investments revenue declined by US$76m compared with 2011 owing to higher impairments, mainly on three available-for-sale equity securities, two of which were in our direct investment business in run-off. This was offset in part by higher realised gains on disposals.

Strategic imperatives

Reinforce client coverage and client-led solutions

·     Our multinational coverage teams continued to expand our offerings of cross-productsolutions for our clients and delivered revenue growth, particularly in faster-growing regions as we successfully executed a number of notable cross-border transactions. This included providing financing and advisory services to clients through our Project and Export Financing business, which resulted in HSBC being awarded 'Best Project Finance House' in Asia, the Middle East and Latin America in the Euromoney Awards for Excellence 2012.

·     To further strengthen client coverage and product expertise, we invested in selective recruitment in key strategic markets. In Rest of Asia-Pacific, we enhanced our advisory, debt capital markets and credit and lending businesses through a number of senior appointments in the Resources and Energy and the Financial Institutions groups. We also appointed a Co-Head of Global Banking in Brazil to drive strategic dialogue with key clients and develop our advisory business in Latin America.

·     We continued to develop our distinctive geographical franchise to enhance client coverage, particularly within debt capital markets. A number of successfully executed transactions, notably in emerging markets, demonstrated the benefit of partnering between regional and global product teams. These partnerships facilitated the delivery of innovative solutions and alternative funding opportunities for our clients. As a result, HSBC was awarded 'Best Global Emerging Market Debt House' in the Euromoney Awards for Excellence 2012. Additionally, we increased our market share of, and maintained our leading position in, emerging markets debt issuance. 

Enhance core product strengths and selectively develop new capabilities

·     We continued to develop cross-product capabilities in the growing renminbi market. Earlier in the year, we issued the first international renminbi bond outside Chinese sovereign territory. Since then, a number of significant transactions were supported by in-depth collaboration between regional teams, reinforcing HSBC's position as the leading house for international renminbi issuance. In recognition of these achievements, HSBC was awarded 'RMB House of the Year' in the 2012 Asia Risk Awards, along with 'Best for overall products/services' and 'Most likely RMB products/services provider' in the 2012 Asiamoney Offshore RMB Services survey.

·     In Foreign Exchange, we remained focused on enhancing product offerings in our e-FX platforms for a broader client base, particularly for CMB and RBWM customers. This included the launch of our 'Dynamic Currency Conversion' product within our transactional Foreign Exchange business in the UK in time for the Olympics, along with a real-time online foreign currency margin trading product in Hong Kong. Our strength in foreign exchange capabilities, particularly in emerging markets, was recognised by several awards during the year including 'Best Bank for Foreign Exchange' in Asia-Pacific and 'Best Bank for Emerging Asian currencies' in the 2012 FX Week Best Banks Awards. Our innovation and achievements in the renminbi market contributed to HSBC also being awarded 'Foreign Exchange House of the Year' in the 2012 Structured Products Asia Awards.

·    

·     As a result of recent investment in our equity execution platform and research capabilities in emerging markets, we progressed in repositioning the business for future growth and enhanced our ability to respond to client needs. We are now ranked in the top five of equities brokers in Hong Kong, while our ranking in the Asiamoney 2012 Brokers Poll for Asian Equity Research and Sales rose from fifth in 2011 to second in 2012.

·     In a challenging economic environment, our clients demand visibility and control of their intra-day cash positions. To facilitate this, we expanded the Global Liquidity Solutions platform within Payments and Cash Management, and it is now live in 27 countries. We were also the first foreign bank to gain approval to establish an automated, cross-border pooling structure in mainland China. The pilot scheme, which aims to centralise foreign currency management for multinational companies by connecting their onshore and offshore cash management structures, will enable our clients to manage their cash positions more efficiently.

·     We are actively managing our legacy credit exposures and exited from certain positions, including ABSs in the UK and certain structured credit positions and related hedges in the US during 2012. We will look to reduce the size of this portfolio further as opportunities arise, using the economic framework put in place in 2011 (see page 18).

Collaborate with other global businesses to deliver incremental revenues

·     We have worked closely with CMB to provide their clients with appropriate GB&M products and this has delivered nearly US$0.7bn in incremental gross revenue since 2010. Gross revenues, which are shared across the two global businesses, grew by over US$0.1bn in 2012, or by 5%, mainly driven by sales of foreign exchange products. A number of appointments during the year, including a new Head of Commercial Banking Coverage for Asia-Pacific in Global Banking, further strengthened collaboration efforts and enhanced our ability to meet the financing needs of our clients.

·     We continued to enhance collaboration across the Group through the Institutional Private Clients ('IPC') initiative with GPB and the Premier referrals initiative with RBWM, leading to higher revenues and increased Premier account openings respectively, compared with 2011. We also appointed a Head of Coverage in Hong Kong to strengthen our Global Banking franchise and deliver on IPC initiatives in the region.

Strategic re-engineering to deliver sustainable cost savings

·     The successful implementation of the organisational design we announced in 2011, and our continued resource optimisation through re-engineering, delivered over US$200m of sustainable savings in 2012.

·    

Global Private Banking

GPB serves high net worth individuals and families with complex and international needs.
	2012		2011		2010
	US$m		US$m		US$m
Net interest income .....	1,294		1,439		1,345
Net fee income ............	1,232		1,382		1,299
Other income ..............	646		471		449
Net operating income21 ..................................	3,172		3,292		3,093
LIC (charges)/ recoveries76 ...............	(27)		(86)		12
Net operating income ..................................	3,145		3,206		3,105
Total operating expenses..................................	(2,143)		(2,266)		(2,035)
Operating profit .......	1,002		940		1,070
Income/(expense) from associates77 ................	7		4		(16)
Profit before tax .......	1,009		944		1,054
RoRWA66 ....................	4.6%		3.9%		4.1%
Significant progress towards rationalising and repositioning our business
Over US$70m  of sustainable cost savings
Outstanding Private Bank in Asia-Pacific and in the Middle East (Private Banker International Awards, 2012)
Strategic direction GPB works with high net worth clients to manage and preserve their wealth while connecting them to global opportunities. We focus on three strategic imperatives: ·  implementing a new operating model to manage the business globally and better service client needs, with an enhanced systems platform and adherence to the highest risk and compliance standards in the industry; ·  intensifying collaboration within the Group, particularly with CMB, to access entrepreneur wealth creation; and ·  capturing growth by focusing investment on the most attractive developed and faster-growing wealth markets, where GPB can access the Group's client franchise and its strong local and international product capabilities.
For footnotes, see page 120. The commentary is on a constant currency basis unless stated otherwise.

Review of performance

·     Reported profit before tax of US$1.0bn was 7% higher than in 2011 on a reported basis and 8% higher on a constant currency basis.

·     On an underlying basis, which excludes the gain on the sale of our operations in Japan (US$67m) and associated operating results, profit before tax was broadly unchanged as lower operating expenses and decreased loan impairment charges and other credit risk provisions were largely offset by reduced revenues.

·     Revenue declined by 3%, primarily due to lower fee income. Brokerage fees fell, reflecting a reduction in client transaction volumes due, in part, to lower volatility. Fees from assets under management and account service fees also declined as challenging market conditions in the latter half of 2011 led to a fall in average client assets in 2012, coupled with a reduction in client numbers as we repositioned our target client base. Net interest income was lower as higher yielding positions matured, opportunities for reinvestment were limited by lower prevailing yields and we selectively managed our exposures to eurozone sovereign debt. Narrower liability spreads and lower deposit balances in Switzerland and the sale of our operations in Japan also contributed to the fall in net interest income. These factors were partly offset by gains on the sale of our operations in Japan and our headquarters building in Switzerland of US$67m and US$53m, respectively.

·     Loan impairment charges and other credit risk provisions reduced by 68% as a result of the non-recurrence of charges relating to available-for-sale Greek sovereign debt securities and lower individually assessed and collective impairments in the UK. These factors were partly offset by lower recoveries in the US.

·     Operating expenses decreased by 4%, primarily due to a managed reduction in average staff numbers and lower performance costs. The decrease in staff costs was partly offset by higher customer redress provisions, costs relating to the merger of pension funds in Switzerland, and increased restructuring and other related costs.

Client assets84
	2012		2011
	US$bn		US$bn
At 1 January ...............................	377		390
Net new money ...........................	(7)		13
Value change ...............................	17		(20)
Exchange and other ....................	11		(6)
At 31 December ..........................	398		377

·     Client assets, which include FuM and cash deposits, increased by US$21bn, driven by the inclusion of custody assets in client assets and favourable market and foreign exchange movements, partly offset by negative net new money and the disposal of our operations in Japan. Negative net new money included a small number of large client withdrawals and reflected lower inflows as we became more selective in establishing new client relationships, as well as the adoption of more stringent compliance and tax transparency standards. We also stopped marketing in certain non-strategic countries. In addition, we implemented a redefined segmentation model to reposition our client base towards higher net worth international and domestic relationships. This programme, along with a review of certain client relationships with a view to reducing control risk, resulted in a reduction of around US$4.5bn of client assets in 2012.

·     'Total client assets', which also include some non-financial assets held in client trusts, increased from US$496bn at 31 December 2011 to US$517bn at 31 December 2012 largely due to market movements partly offset by negative net new money as noted above.

·     Our return on assets, defined as the percentage of our revenues to our average client assets, was unchanged as the reduction in revenues corresponded with the fall in average client assets.

Strategic imperatives

·     2012 was a year of transition for GPB as we repositioned our business model and target client base to focus investment in selected priority markets, enhance our compliance and risk frameworks and encourage better alignment with the other global businesses. We are targeting higher net worth international and domestic customers and have built on existing product strengths and leveraged Group capabilities to meet their needs. We expect this period of transition and implementation to continue throughout 2013.

Implementing a more focused business model that better services client needs

·     We implemented a new target operating model based on six 'global markets' (North Asia; South East Asia; North America; Latin America; Europe; and Middle East, North Africa and Turkey). This enables us to operate as an integrated global business rather than a federation of private banks and to provide our clients with globally consistent products and services and improved co-ordination of marketing and servicing activity.

·     We sold or closed a number of non-strategic, underperforming businesses in order to rationalise our business and focus on priority markets. Disposals included our operations in Japan, our UK property advisory business, a portfolio of non-strategic clients in Monaco, our domestic trust business in Malaysia and a branch of our UK business in Ireland.

·     Our compliance and risk framework was strengthened by the establishment of a GPB Global Standards Committee and a revised risk appetite framework. The implementation of ongoing workstreams including tax transparency and cross-border marketing will be accelerated in 2013.

·     We enhanced our global front office systems with the roll out of Global Vision in Switzerland, Global Client Relationship Management in the US and Global Private Wealth Solutions in the Channel Islands, which provide integrated databases to support effective client management. We will continue to roll these systems out to other locations during 2013.

Developing closer collaboration across the Group

·     We leveraged existing relationships across the Group in order to access wealth created by entrepreneurs who already bank with HSBC on the business side. Referral flows from other global businesses generated net new money of US$5.4bn. To further support referrals with CMB, a collaboration framework was put in place, dedicated executives appointed and referral targets agreed.

·     We worked with RBWM to define and promote a Group-wide wealth offering. GPB and RBWM now operate a systematic process for the review and referral of clients to ensure they receive the service most appropriate to their needs.

·    

·     The Global Priority Clients initiative was launched with GB&M and CMB to service jointly the Group's largest ultra-high net worth clients with corporate and personal needs through a dedicated single point of contact. The framework has been defined, clients identified for joint coverage and investment specialists assigned, and we have begun to roll out a new credit advisory model to fund credit transactions.

Capturing growth in faster-growing and domestic markets

·     We continued to focus on faster-growing markets, and attracted positive net new money of US$1.9bn and US$0.5bn from clients in Asia and the Middle East, respectively.

·     Our product range was further developed during 2012; in particular, we made progress in strengthening our Alternatives platform, with four new real estate 'club deals' and two private equity launches in the year raising more than US$1.3bn. Further launches are expected in 2013.

Other⁷³

'Other' contains the results of certain property transactions, unallocated investment activities, centrally held investment companies, movements in fair value of own debt, central support and functional costs with associated recoveries, HSBC's holding company and financing operations.
	2012		2011		2010
	US$m		US$m		US$m
Net interest expense ....	(730)		(911)		(998)
Net fee income ............	194		34		32
Net trading expense .....	(537)		(355)		(311)
Change in credit spread on long-term debt .....	(4,327)		4,161		(258)
Other changes in fair value .........................	(1,136)		78		42
Net income/(expense) from financial instruments designated at fair value ...............	(5,463)		4,239		(216)
Other income ..............	8,868		6,138		6,153
Net operating income21 ..................................	2,332		9,145		4,660
LIC recoveries76 ..........	-		-		3
Net operating income ..................................	2,332		9,145		4,663
Total operating expenses ..................................	(9,369)		(7,492)		(5,918)
Operating profit/(loss) ..................................	(7,037)		1,653		(1,255)
Income from associates77 ..................................	47		9		94
Profit/(loss) before tax ..................................	(6,990)		1,662		(1,161)
For footnotes, see page 120. The commentary is on a constant currency basis unless stated otherwise.

Notes

·     The reported loss before tax of US$7.0bn in 2012 compared with reported profit before tax of US$1.7bn in 2011. On a constant currency basis, pre-tax loss increased by US$8.7bn.

·     These results included adverse movements of US$5.2bn on the fair value of our own debt attributable to a tightening of our own credit spreads in 2012, notably in Europe and North America, compared with favourable movements of US$3.9bn in 2011. Reported results also included a number of gains and losses on disposal (see page 27). These included a gain of US$3.0bn on the disposal of our associate, Ping An. Our remaining shareholding has been classified as a financial investment (see Note 26 on the Financial Statements). In addition, we reported a gain on disposal of US$130m from the sale of our shareholding in a property company in the Philippines. Reported profits in 2011 included accounting gains of US$181m relating to the dilution of our shareholding in Ping An, partly offset by a remeasurement loss of US$48m relating to Ping An's consolidation of Ping An Bank (formerly known as Shenzhen Development Bank).

·     On an underlying basis, excluding the items noted above, the pre-tax loss increased by US$2.5bn, driven by higher operating expenses, notably the charge of US$1.9bn relating to US fines and penalties paid as part of the settlement of investigations into past inadequate compliance with anti-money laundering and sanctions laws. In addition, revenues declined due to adverse fair value movements of US$553m on the contingent forward sale contract relating to Ping An.

·     Net fee income increased by US$166m, due in part to fees received under the transition services agreement entered into following the sale of the Card and Retail Services business in North America.

·     Net trading expense increased from US$353m to US$537m, driven by adverse fair value movements on the contingent forward sale contract relating to Ping An. This was partly offset by lower adverse fair value movements on non-qualifying hedges in 2012. This was driven by non-qualifying hedges in HSBC Holdings, mainly related to cross-currency swaps used to
economically hedge fixed rate long-term debt, on which there were favourable movements of US$122m in 2012 compared with adverse fair value movements of US$276m in 2011.

·     Gains less losses from financial investments included gains of US$314m on the sale of our non-strategic investments in four Indian banks.

·     Excluding the movements in the fair value of our own debt, Net expense from financial instruments designated at fair value of US$248m compared with net income of US$293m in 2011. This was due to adverse fair value movements in 2012 from interest and exchange rate ineffectiveness in the hedging of long-term debt designated at fair value, issued principally by HSBC Holdings and its European and North American subsidiaries, compared with favourable fair value movements in 2011.

·     We reported a gain of US$3.0bn on the disposal of our associate, Ping An. Our remaining shareholding has been classified as a financial investment.

·     Other operating income decreased by 9%, due to lower intra-group recharges from centralised operational activities due to divestments and on-going cost savings, notably in North America. This was partly offset by a gain of US$130m from the sale of our shareholding in a property company in the Philippines.

·     Operating expenses increased by 27% to US$9.4bn, primarily due to 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, of which US$1.5bn was attributed to and paid by HNAH and its subsidiaries and US$375m was paid by HSBC Holdings. In addition, there were inflationary pressures in certain of our Latin American and Asian markets. However, the charge relating to the UK bank levy declined as the current year charge of US$571m was partly offset by an adjustment of US$99m in the 2011 bank levy charge of US$570m as the basis of calculation was clarified. Costs related to operational activities also fell due to divestments and on-going cost savings, notably in North America. These costs are recorded in 'Other' and charged to global businesses through a recharge mechanism, with income reported in 'Other operating income'.

 

END

 

 

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