Half-year Report 1 of 2

RNS Number : 4559K

HSBC Holdings PLC

28 August 2019

 

HSBC Holdings plc

Interim Report 2019

Connecting customers to opportunities

HSBC aims to be where the growth is, enabling businesses to thrive and economies to prosper, and ultimately helping people to fulfil their hopes and realise their ambitions.

[None of the websites referred to in this Interim Report on Form 6-K for the half-year ended June 30, 2019 (the 'Form 6-K'), including where a link is provided, nor any of the information contained on such websites is incorporated by reference in the Form 6-K.]

Cover image

Our global marketing campaign explores how HSBC helps people prosper. The Group's iconic hexagon becomes a lens through which to look at the world, showing how we help individuals, businesses and communities to grow and flourish. This includes our commitment to the development of renewable energy sources that can support the global transition to a low-carbon economy. We have pledged to provide $100 billion in sustainable financing and investments by 2025.

Inside front cover image

We are investing in digital technology to improve the service we provide to our customers. Our award-winning mobile apps are one of the ways we help them manage their money more quickly, conveniently and safely. This picture was taken by Terry Tam, who works for HSBC as an IT developer.

Employee photos

All the photos on the inside pages of this report were taken by people working for HSBC in locations including the UK, China, India and Bangladesh. Many more employees across the Group's international network have contributed to HSBC Now Photo, an ongoing project that allows them to demonstrate their talent as photographers and show the diversity of the world around them.

Our values

Our values define who we are as an organisation and make us distinctive.

Dependable

We are dependable, standing firm for what is right and delivering on commitments.

Open

We are open to different ideas and cultures, and value diverse perspectives.

Connected

We are connected to our customers, communities, regulators and each other, caring about individuals and their progress.

As a reminder

Reporting currency

We use US dollars.

Adjusted measures

We supplement our IFRS figures with adjusted measures used by management internally. These measures are highlighted with the following symbol: <>

Further explanation may be found on page 18.

In this document we use the following abbreviations to refer to reporting periods.

1H19          First half of 2019

2H18      Second half of 2018

1H18          First half of 2018

For a full list of abbreviations see page 118.

Unless stated otherwise, risk-weighted assets ('RWAs') and capital are calculated and presented on a transitional basis in accordance with the Capital Requirements Regulation.

Contents

Overview

2              Highlights

4              Our strategy

6              Financial overview

10           Global businesses

15           How we do business

16           Risk overview

Interim Management Report

18           Financial summary

29           Global businesses

38           Geographical regions

49           Risk

49           Areas of special interest

49           Key developments in the first half of 2019

49           Credit risk profile

68           Liquidity and funding risk profile

70           Market risk profile

73           Operational risk profile

73           Insurance manufacturing operations risk profile

76           Capital

76           Capital overview

76           Capital management

77           Own funds

78           Risk-weighted assets

79           Leverage ratio

79           Regulatory disclosures

Financial Statements

80           Directors' responsibility statement

81           Independent review report by PricewaterhouseCoopers LLP to HSBC Holdings plc

82           Financial statements

89           Notes on the financial statements

Additional Information

110         Shareholder information  

117         Cautionary statement regarding forward-looking statements

117         Certain defined terms

118         Abbreviations

HSBC Holdings plc Interim Report 2019

1

Highlights

Our international network, access to high-growth markets, and balance sheet strength deliver long-term value for customers and shareholders.

•      Strong revenue momentum in 1H19 in Retail Banking and Wealth Management ('RBWM'), as we won new customers and increased lending, and in Commercial Banking ('CMB'), with growth in all major products and all regions. Global Banking and Markets ('GB&M') revenue lower.

•      Continuing growth in Asia, although outlook is less certain. Reported revenue in Asia up 7% compared with 1H18. Reported lending in Asia up $23bn or 5% compared with the end of 2018.

•      Investments of $2.2bn in 1H19, up 17% compared with 1H18, on near- and medium-term initiatives to grow the business and enhance digital capabilities.

•      Improved customer satisfaction in scale markets in RBWM and CMB.

Group Chief Executive

•      On 5 August 2019, John Flint stepped down as Group Chief Executive and as a Director of HSBC Holdings. Noel Quinn was appointed as interim Group Chief Executive and as a Director of HSBC Holdings.

Financial performance (vs 1H18)

•      Reported profit after tax up 18.1% to $9.9bn.

•      Reported profit before tax up 15.8% to $12.4bn, including an $828m dilution gain recognised on the completion of the merger of our associate The Saudi British Bank ('SABB') with Alawwal bank in Saudi Arabia. It also included a provision of $615m in respect of the mis-selling of payment protection insurance ('PPI'), and $248m of severance costs arising from cost efficiency measures across our global businesses and functions. Adjusted profit before tax up 6.8% to $12.5bn.

•      Reported revenue up 7.6%. Adjusted revenue up 8.0%, with strong performances in RBWM and CMB. Adjusted revenue down 3% in GB&M, which suffered from lower market activity due to ongoing economic uncertainty, and spread compression.

•      Reported operating expenses down 2.3%. Adjusted operating expenses up 3.5%, with significant work undertaken in 1H19 to reduce 2020 run-rate. Positive adjusted jaws of 4.5%, supported by favourable market impacts in insurance manufacturing, the non-recurrence of a 1H18 adverse swap mark-to-market loss in Corporate Centre and disposal gains in Latin America.

•      Earnings per share of $0.42. Return on average tangible equity (annualised) ('RoTE') up 150 basis points ('bps') to 11.2%, including c.120bps favourable impact of the SABB dilution gain.

•      Common equity tier 1 ('CET1') ratio up 30bps from 31 December 2018 to 14.3%.

•      We intend to initiate a share buy-back of up to $1bn, which we expect to commence shortly.

Progress on 2020 financial targets

•      The outlook has changed. Interest rates in the US dollar bloc are now expected to fall rather than rise, and geopolitical issues could impact a significant number of our major markets. In the near term, the nature and impact of the UK's departure from the European Union remain highly uncertain. Given the prevailing outlook for interest rates and revenue headwinds in GB&M and RBWM, we do not expect to achieve our 6% RoTE target in the US by 2020.

•      We are managing operating expenses and investment spending in line with the increased risks to revenue.

•      We expect some recovery from first-half market conditions in GB&M in the second half of 2019 and into next year, and continue to target a RoTE above 11% in 2020, but we will not take short-term decisions that could jeopardise the long-term health of the business.

About HSBC

With assets of $2.8tn at 30 June 2019, HSBC is one of the world's largest banking and financial services organisations.

More than

40 million

customers bank with us

We employ around

238,000

people around the world (full-time equivalent staff)

We have around

200,000

shareholders in 129 countries and territories

HSBC Holdings plc Interim Report 2019

2

Key financial metrics

	Half-year to
Reported results	30 June 2019		30 June 2018		31 December 2018
Reported revenue ($m)	29,372		27,287		26,493
Reported profit before tax ($m)	12,407		10,712		9,178
Reported profit after tax ($m)	9,937		8,416		6,609
Profit attributable to the ordinary shareholders of the parent company ($m)	8,507		7,173		5,435
Basic earnings per share ($)	0.42		0.36		0.27
Diluted earnings per share ($)	0.42		0.36		0.27
Return on average ordinary shareholders' equity (annualised) (%)	10.4		8.7		6.7
Return on average tangible equity (annualised) (%)1	11.2		9.7		8.6
Net interest margin (%)1	1.61		1.66		1.66
Adjusted results
Adjusted revenue ($m)	28,495		26,381		26,333
Adjusted profit before tax ($m)	12,516		11,723		9,593
Adjusted jaws (%)	4.5
Cost efficiency ratio (%)	56.7		59.2		62.8
Expected credit losses and other credit impairment charges ('ECL') as % of average gross loans and advances to customers (%)	0.23		0.08		0.27
			At
Balance sheet	30 June 2019		30 June 2018		31 December 2018
Total assets ($m)	2,751,273		2,607,314		2,558,124
Net loans and advances to customers ($m)	1,021,632		973,443		981,696
Customer accounts ($m)	1,380,124		1,356,307		1,362,643
Average interest-earning assets ($m)1	1,912,708		1,839,603		1,839,346
Loans and advances to customers as % of customer accounts (%)	74.0		71.8		72.0
Total shareholders' equity ($m)	192,676		183,607		186,253
Tangible ordinary shareholders' equity ($m)	145,441		139,754		140,056
Net asset value per ordinary share at period end ($)2,3	8.35		8.10		8.13
Tangible net asset value per ordinary share at period end ($)3	7.19		7.00		7.01
Capital, leverage and liquidity
Common equity tier 1 capital ratio (%)	14.3		14.2		14.0
Risk-weighted assets ($m)	885,971		865,467		865,318
Total capital ratio (%)4	20.1		20.4		20.0
Leverage ratio (%)	5.4		5.4		5.5
High-quality liquid assets (liquidity value) ($bn)	533		540		567
Liquidity coverage ratio (%)	136		158		154
Share count
Period end basic number of $0.50 ordinary shares outstanding (millions)	20,221		19,963		19,981
Period end basic number of $0.50 ordinary shares outstanding and dilutive potential ordinary shares (millions)	20,286		20,045		20,059
Average basic number of $0.50 ordinary shares outstanding (millions)	20,124		19,998		19,786
Dividend per ordinary share (declared in the period) ($)	0.31		0.31		0.20

1                     For these metrics, half-year to 31 December 2018 is calculated on a full-year basis and not a 2H18 basis.

2                     The definition of net asset value per ordinary share is total shareholders' equity less non-cumulative preference shares and capital securities, divided by the number of ordinary shares in issue excluding shares the company has purchased and are held in treasury.

3                     Excludes impact of $0.10 per share 1Q19 dividend, following a June 2019 change in accounting practice on the recognition of interim dividends, from the date of declaration to the date of payment.

4                     Total capital ratio at 30 June 2019 was calculated in accordance with the revisions to the Capital Requirements Regulation ('CRR II') on a transitional basis. Prior period ratios were calculated under the Capital Requirements Regulation and Directive ('CRD IV') on a transitional basis.

HSBC Holdings plc Interim Report 2019

3

Our strategy

Our strategy enables us to connect customers to opportunities. It is supported by our distinct combination of strategic advantages.

Strategic advantages

Leading international bank

More than half of Group client revenue linked to international clients; global leader in transaction banking.

Broad access to high-growth markets

Exceptional access to high-growth developing markets in Asia, the Middle East and Latin America.

Balance sheet strength

Strong capital, funding and liquidity position with a diversified business model.

Progress on our strategic priorities

At our June 2018 Strategy Update, we outlined eight strategic priorities to deliver growth from areas of strength, turn around low-returning businesses, enhance our customer experience, and empower our people. The table opposite contains a summary of our progress, with additional details provided below.

Growth from areas of strength

Our Asia franchise grew adjusted revenue 9% compared with 1H18, driven by strong performance in Hong Kong, the Pearl River Delta and Singapore. In the Greater Bay Area, we launched our GBA+ Technology Fund, which will provide nearly $1bn of debt financing to high-growth, early stage companies. In sustainable finance, we were awarded 'World's Best Bank for Sustainable Finance' by Euromoney.  Our UK ring-fenced bank, HSBC UK, grew adjusted revenue by 7% compared with 1H18, supported by 8% growth in the lending book. We released our first HSBC UK Community Report, which outlined our approach to building a sustainable business model. For clients in our international network, Global Liquidity and Cash Management ('GLCM') enhanced digital capabilities and customer journeys by improving real-time payment capabilities; Global Trade and Receivables Finance ('GTRF') improved its net promoter score to its highest recorded level; and Securities Services enhanced client experience through, for example, robotic process automation of 33,000 transactions a month, thereby increasing processing speeds for our clients.

Turnaround of low-return businesses

Our US turnaround continues to be our most challenging strategic priority. Adjusted revenue was down 5% compared with 1H18, primarily due to unfavourable changes in the interest rate environment and revenue headwinds in GB&M and RBWM. The business responded by taking action in areas within our control, but we do not expect to achieve our 6% US RoTE target by 2020.

Putting the customer at the centre

Customer centricity and customer service is fundamental to our return to growth and value creation. In our eight scale markets, we achieved a top three ranking and/or improved by two ranks in customer satisfaction in six of our RBWM markets and five of our CMB markets compared with 2017. In RBWM, 84% of customer accounts in the UK, US, UAE and Malaysia are opened within the same day, and 76% of customers are able to open their accounts digitally. In Hong Kong, we have partnered with BlackRock to launch 'Aladdin', a platform that allows our wealth customers to manage their portfolios more effectively.

Empowering our people

We are making progress with simplifying the organisation and investing in future skills. Employee engagement, which measures  the number of employees who recommend HSBC as a great place to work, remained at 66% in 1H19 compared with our 4Q18 survey.

We are on track with our commitment to reach 30% women in senior leadership roles, defined as positions within HSBC's global career bands of 0 to 3, by 2020.

We are reviewing how to best report our environmental, social and governance ('ESG') target as our ratings provider, Sustainalytics, has introduced a new rating methodology, which will replace its previous methodology.

HSBC Holdings plc Interim Report 2019

4

Strategic priorities			Targeted outcome by 2020	Performance for 1H19 (vs 1H18 unless otherwise noted)
Deliver growth from areas of strength	1	Accelerate growth from our Asia franchise; be the leading bank to support drivers of global investment: China-led Belt and Road Initiative and the transition to a low-carbon economy	High single-digit revenue growth per annum from Asia franchise Market share gains in eight scale markets1 $100bn in sustainable financing and investment by 2025 No. 1 international bank for Belt and Road Initiative	+9% Asia adjusted revenue   +7% Wealth in Asia2 adjusted revenue*   5 out of 8 scale markets gained market share in loans and/or deposits vs 20173       $36.7bn cumulative (+$8.2bn in 1H19)
	2	Complete the establishment of UK ring-fenced bank and grow market share	Market share gains	6.7% mortgage market share in May 2019 (+0.6 percentage points vs 2017)
	3	Gain market share and deliver growth from our international network	Mid to high single-digit revenue growth per annum from international network4 Market share gains in transaction banking5	+2% international client revenue +6% transaction banking revenue GTRF, GLCM market share gains (1Q19 vs 2017)
Turnaround of low-return businesses	4	Turn around our US business	US return on tangible equity >6%	2.5% US RoTE annualised (-0.2 percentage points vs 2018)
	5	Improve capital efficiency	Increase in asset productivity	6.8% Reported revenue/average RWA (+48 basis points vs 1H18)
Build a bank for the future that puts the customer at the centre	6	Create capacity for increasing investments in growth and technology through efficiency gains	Positive adjusted jaws, on an annual basis, each financial year	+4.5% Adjusted jaws Adjusted revenue +8.0% Adjusted costs +3.5%
	7	Enhance customer centricity and customer service	Improve customer satisfaction in eight scale markets	6 out of 8 RBWM markets6 had top three rank and/or improved by two ranks: Hong Kong, Pearl River Delta, Singapore, Mexico, UAE, Saudi Arabia7 5 out of 8 CMB markets8 had top three rank and/or improved by two ranks: UK, Pearl River Delta, Singapore, Malaysia, Saudi Arabia7
Empower our people	8	Simplify the organisation and invest in future skills	Improved employee engagement ESG rating: 'Outperformer' (target metric under review)9	66% Employee engagement (unchanged vs 4Q18) 'Average performer' ESG rating10

*Wealth in Asia adjusted revenue, excluding market impacts in Insurance, declined 1%. Market impact in Insurance constitutes profit and loss impacts resulting from changes in financial market factors.

For other footnotes, see page 48.

HSBC Holdings plc Interim Report 2019

5

Financial overview

Reported results

	Half-year to
Reported results	30 Jun 2019 $m		30 Jun 2018  $m		31 Dec 2018 $m
Net operating income before change in expected credit losses and other credit impairment charges ('revenue')	29,372		27,287		26,493
ECL	(1,140	)	(407	)	(1,360	)
Net operating income	28,232		26,880		25,133
Total operating expenses	(17,149	)	(17,549	)	(17,110	)
Operating profit	11,083		9,331		8,023
Share of profit in associates and joint ventures	1,324		1,381		1,155
Profit before tax	12,407		10,712		9,178
Tax expense	(2,470	)	(2,296	)	(2,569	)
Profit after tax	9,937		8,416		6,609

This table shows our reported results for the last three half-years, ended 30 June 2019 ('1H19'), 31 December 2018 ('2H18') and 30 June 2018 ('1H18').

Reported profit

Reported profit after tax of $9.9bn in 1H19 was $1.5bn or 18% higher than in 1H18.

Reported profit before tax of $12.4bn was $1.7bn or 16% higher. This increase reflected a rise in revenue of $2.1bn, primarily in RBWM from balance sheet growth and wider margins in Retail Banking, and in CMB from growth in all our major products, although revenue in GB&M fell. Revenue growth included an $828m dilution gain recognised on the completion of the merger of our associate The Saudi British Bank ('SABB') with Alawwal bank in Saudi Arabia. It also included the favourable effects of market impacts in 1H19 of $152m in insurance manufacturing in RBWM (1H18: $92m adverse), the non-recurrence of a 1H18 adverse swap mark-to-market loss of $177m on a bond reclassification in Corporate Centre, and 1H19 disposal gains in RBWM and CMB of $157m.

Reported operating expenses were $0.4bn lower, including favourable foreign currency translation differences of $0.8bn and net favourable movements in significant items of $0.2bn, which included higher charges related to the mis-selling of payment protection insurance ('PPI'). Significant items also included higher restructuring and other related costs, primarily $248m of severance costs arising from cost efficiency measures across our global businesses and functions. Excluding significant items and foreign currency translation differences, operating expenses increased. This reflected higher expenditure on investments to grow the business, including the enhancement of our digital capabilities, inflation and higher staff costs. Expected credit losses and other credit impairment charges ('ECL') increased by $0.7bn, largely from charges against a small number of wholesale exposures in 1H19.

Excluding net favourable movements in significant items of $1.3bn and adverse foreign currency translation differences of $0.4bn, profit before tax increased by $0.8bn or 7%.

Reported revenue

Reported revenue of $29.4bn was $2.1bn or 8% higher than in 1H18, reflecting growth in RBWM and CMB, as discussed above, partly offset by lower revenue from GB&M.

Net favourable movements in significant items of $1.1bn, which largely comprised the $828m dilution gain recognised on the merger of SABB with Alawwal bank, were broadly offset by adverse foreign currency translation differences of $1.2bn.

Excluding foreign currency translation differences and significant items, revenue increased by $2.1bn or 8%.

Reported ECL

Reported ECL of $1.1bn were $0.7bn higher than in 1H18, mainly in CMB, driven by increased charges in HSBC UK. There were also increases in Asia, notably in Hong Kong and mainland China. ECL increased in GB&M, reflecting charges in 1H19 compared with net releases in 1H18.

The effect of foreign currency translation differences between the periods was minimal.

Reported operating expenses

Reported operating expenses of $17.1bn were $0.4bn or 2% lower than in 1H18 and included favourable foreign currency translation differences of $0.8bn and net favourable movements in significant items of $0.2bn, which included:

•      the non-recurrence of settlements and provisions in connection with legal and regulatory matters of $0.8bn in 1H18; and

•      structural reform costs of $0.1bn in 1H19, compared with $0.2bn in 1H18.

These were partly offset by:

•      customer redress programme costs in respect of PPI of $0.6bn in 1H19, compared with $0.1bn in 1H18; and

•      restructuring and other related costs of $0.3bn in 1H19, which included $248m of severance costs arising from cost efficiency measures across our global businesses and functions.

Excluding significant items and foreign currency translation differences, operating expenses increased by $0.5bn or 3.5%. This growth rate slowed from 5.6% for the year ended 31 December 2018 as compared with the year ended 31 December 2017.

Reported share of profit in associates and joint ventures

Reported share of profit in associates of $1.3bn was $57m or 4% lower, driven by adverse foreign currency translation differences of $67m. Excluding these differences, our share of profit in associates and joint ventures increased by $10m.

Tax expense

The effective tax rate for 1H19 of 19.9% was lower than the 21.4% for 1H18, primarily due to the non-taxable dilution gain in 1H19.

6	HSBC Holdings plc Interim Report 2019

Adjusted performance

Our reported results are prepared in accordance with International Financial Reporting Standards ('IFRSs') as detailed in the financial statements on page 224 of the Annual Report and Accounts 2018.

We also present alternative performance measures. Adjusted performance is an alternative performance measure used to align internal and external reporting, identify and quantify items management believes to be significant, and provide insight into how management assesses period-on-period performance. Alternative performance measures are highlighted with the following symbol: <>

To derive adjusted performance, we adjust for:

- the year-on-year effects of foreign currency translation differences; and

- the effect of significant items that distort year-on-year comparisons, which are excluded in order to improve understanding of the underlying trends in the business.

 
For reconciliations of our reported results to an adjusted basis, including lists of significant items, see page 31.

Adjusted results <>

This table summarises our adjusted results for 1H19 and 1H18. These are discussed in more detail on the following pages.

Adjusted results <>	Half-year to					Movements compared with 1H18
	30 Jun 2019 $m		30 Jun 2018  $m			Adverse $m		Favourable $m		%
Revenue	28,495		26,381					2,114		8
ECL	(1,140	)	(357	)		(783	)			>(100)
Total operating expenses	(16,163	)	(15,615	)		(548	)			(4	)
Operating profit	11,192		10,409					783		8
Share of profit in associates and joint ventures	1,324		1,314					10		1
Profit before tax	12,516		11,723					793		7

Adjusted profit before tax <>

Adjusted profit before tax of $12.5bn was $0.8bn or 7% higher than in 1H18. Adjusted revenue increased by $2.1bn, primarily reflecting continued growth momentum in RBWM and CMB, notably in Asia, although revenue in GB&M fell, reflecting lower market activity due to ongoing economic uncertainty, and spread compression. The increase in revenue was partly offset by higher adjusted ECL (up $0.8bn) and an increase in adjusted operating expenses of $0.5bn, which included investments to grow the business and investments in digital capabilities.

From 1 July 2018, Argentina was deemed a hyperinflationary economy for accounting purposes. The impact of applying IAS 29 'Financial Reporting in Hyperinflationary Economies' from 1 July 2018 and presenting in accordance with IAS 21 'The Effects of Changes in Foreign Exchange Rates' resulted in a $62m decrease in profit before tax in 1H19. The effects of hyperinflation accounting in Argentina have not been deemed a significant item and are therefore included within adjusted results.

Reconciliation of reported to adjusted profit before tax

	Half-year to
	30 Jun 2019 $m		30 Jun 2018 $m
Adjusted profit before tax	12,516		11,723
Currency translation			407
Significant items:	(109	)	(1,418	)
-  customer redress programmes	(610	)	(54	)
-  disposals, acquisitions and investment in new businesses	827		(145	)
-  fair value movements on financial instruments	50		(152	)
-  costs of structural reform	(91	)	(211	)
-  restructuring and other related costs	(287	)	(24	)
- settlements and provisions in connection with legal and regulatory matters	2		(841	)
- currency translation on significant items			9
Reported profit before tax	12,407		10,712

HSBC Holdings plc Interim Report 2019

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Adjusted revenue <>

Adjusted revenue of $28.5bn was $2.1bn or 8% higher than in 1H18, reflecting continued growth momentum in RBWM and CMB, notably in Asia. Adjusted revenue also increased in Global Private Banking ('GPB') and Corporate Centre. These increases were partly offset by lower revenue in GB&M.

•      In RBWM, revenue increased by $1.3bn or 12%, mainly in Retail Banking, reflecting growth in deposit and lending balances, primarily in Hong Kong and the UK. We also benefited from wider margins due to interest rate rises. In Wealth Management, revenue growth reflected higher insurance manufacturing revenue, which included favourable market impacts in 1H19 of $152m (1H18: $92m adverse). This increase was partly offset by lower investment distribution revenue.

•      In CMB, revenue increased by $0.7bn or 9%, with growth in all major products and regions. Growth was primarily in Global Liquidity and Cash Management ('GLCM'), arising from wider deposit margins, notably in Hong Kong and the UK, and higher average balances in the UK. Revenue increased in Credit and Lending ('C&L') due to balance sheet growth in most markets, partly offset by margin compression. Revenue also grew in Global Trade and Receivables Finance ('GTRF').

•      In GB&M, revenue decreased by $0.2bn or 3%. Global Markets revenue was lower due to historically low volatility and spread compression in Foreign Exchange ('FX') and Equities. Lower revenue in Global Banking was largely due to 1H18 gains on corporate lending restructuring, and lower event-driven activity in 1H19. These decreases were partly offset by strong performances in transaction banking products, notably in GLCM and Securities Services.

•      In GPB, revenue increased by $17m or 2%, mainly reflecting growth in Asia and income related to our Monaco business, which we wound down in 1H19. These increases were partly offset by lower revenue in the US following repositioning actions.

•      In Corporate Centre, revenue increased by $0.4bn. This was mainly in Central Treasury from favourable fair value movements in 1H19 of $0.1bn relating to the economic hedging of interest rate and exchange rate risk on our long-term debt with long-term derivatives (1H18: $0.2bn adverse), and from a 1H18 swap mark-to-market loss on a bond reclassification of $177m.

Adjusted revenue <>	Half-year to
	30 Jun 2019 $m		30 Jun 2018 $m		Variance $m		%
RBWM	11,919		10,668		1,251		12
CMB	7,816		7,140		676		9
GB&M	7,706		7,916		(210	)	(3	)
GPB	924		907		17		2
Corporate Centre	130		(250	)	380		>100
Total	28,495		26,381		2,114		8

Adjusted ECL <>

Adjusted ECL of $1.1bn were $0.8bn higher than in 1H18. This increase was largely related to charges against a small number of wholesale exposures in 1H19.

•      In CMB, ECL increased by $0.5bn. This increase was mainly in HSBC UK relating to a small number of exposures. In addition, there were ECL charges in 1H19 compared with net releases in 1H18, in both Asia and North America.

•      In GB&M, ECL of $0.1bn in 1H19 related to specific corporate exposures, notably in Europe. This compared with net releases of $0.1bn in 1H18, mainly in the US against the oil and gas sector.

•      In Corporate Centre, ECL rose by $0.1bn, reflecting lower net releases related to our legacy credit portfolio.

Adjusted ECL as a percentage of average gross loans and advances to customers was 0.23%, compared with 0.08% at 1H18.

Adjusted operating expenses <>

Adjusted operating expenses of $16.2bn were $0.5bn or 4% higher than in 1H18. This increase included higher expenditure on investments (up $0.3bn), notably investments to grow the business, mainly in RBWM and CMB, as well as continued investment in our digital capabilities across all global businesses. In addition, performance-related pay increased by $0.1bn and volume-related growth increased by $0.1bn. Cost inflation was broadly offset by the impact of our cost-saving efficiencies.

The number of employees expressed in full-time equivalent staff ('FTE') at 30 June 2019 was 237,685, an increase of 2,468 compared with 31 December 2018. This was driven by investments in business growth programmes, notably in RBWM and CMB.

Adjusted share of profit in associates and joint ventures<>

Adjusted share of profit from associates of $1.3bn was $10m or 1% higher than in 1H18.

* 1Q18 and 1H18 include a charge of $41m in respect of the UK bank levy

^ Quarterly adjusted operating expenses are presented at average 2Q19 exchange rates

HSBC Holdings plc Interim Report 2019

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Balance sheet and capital

 Balance sheet strength

 Total assets of $2.8tn were $193bn or 8% higher than at 31 December 2018 on a reported basis, and 7% higher on a constant currency basis. We continued our targeted asset growth, notably in Asia.

Distributable reserves

The distributable reserves of HSBC Holdings at 30 June 2019 were $33.5bn, compared with $30.7bn at 31 December 2018. The increase was primarily driven by profits generated of $7.2bn net of distributions to shareholders of $4.9bn. Distributions to shareholders excluded the first interim dividend following the change in accounting practice on the recognition of interim dividends.

Capital position

We actively manage the Group's capital position to support our business strategy and meet our regulatory requirements at all times, including under stress, while optimising our capital efficiency.  To do this, we monitor our capital position using a number of measures, including capital ratios.

Our common equity tier 1 ('CET1') ratio at 30 June 2019 was 14.3%, up from 14.0% at 31 December 2018. This increase was primarily driven by capital generation.

Liquidity position

We also actively manage the Group's liquidity and funding to support our business strategy and meet regulatory requirements at all times, including under stress. To do this, we monitor our position using a number of risk appetite measures, including the liquidity cover ratio ('LCR') and the net stable funding ratio ('NSFR'). At 30 June 2019, we held high-quality liquid assets of $533bn.

Delivery against Group financial targets

Return on tangible equity  <>

Our target is to achieve a reported return on tangible equity ('RoTE') of more than 11% by the end of 2020, which is broadly equivalent to a reported return on equity ('RoE') of 10%. We intend to do this while maintaining a CET1 ratio of greater than 14%.

In 1H19, we achieved a RoTE (annualised) of 11.2% compared with 9.7% in 1H18. This included the c.120bps favourable impact of an $828m dilution gain recognised on the completion of the merger of our associate SABB with Alawwal bank in Saudi Arabia.

The outlook for the rest of 2019 has changed. Interest rates in the US dollar bloc are now expected to fall rather than rise, and geopolitical issues could impact a significant number of our major markets. In the near term, the nature and impact of the UK's departure from the European Union remain highly uncertain. We are managing operating expenses and investment spending in line with the increased risks to revenue.

We expect some recovery from first-half market conditions in GB&M in the second half of 2019 and into next year, and continue to target a RoTE above 11% in 2020.

Adjusted jaws <>

Our target is to maintain positive adjusted jaws on an annual basis, while noting the sensitivity of the metric to unexpected movements in revenue or operating expenses growth.

Positive adjusted jaws occurs when the percentage change in adjusted revenue is higher than, or less negative than, the corresponding rate for adjusted operating expenses.

In 1H19, adjusted revenue increased by 8.0% and adjusted operating expenses increased by 3.5%. Adjusted jaws was therefore positive 4.5%.

Adjusted jaws in 1H19 was supported by favourable market impacts in life insurance manufacturing, the non-recurrence of a 1H18 swap mark-to-market loss on a bond reclassification and 1H19 disposal gains in Latin America.

Adjusted revenue up  8.0%

Adjusted jaws 4.5%

Adjusted operating expenses up 3.5%

Dividends

We plan to sustain the annual dividend in respect of the year at its current level for the foreseeable future. Growing our dividend will depend on the overall profitability of the Group, delivering further release of less efficiently deployed capital and meeting regulatory capital requirements in a timely manner.

HSBC Holdings plc Interim Report 2019

9

Global businesses

We manage our products and services globally through our global businesses.

Our operating model consists of four global businesses and a Corporate Centre, supported by HSBC Operations, Services and Technology, and 11 global functions, including risk, finance, compliance, legal, marketing and human resources.

Corporate Centre comprises Central Treasury, including Balance Sheet Management ('BSM'), our legacy businesses, interests in our associates and joint ventures, central stewardship costs and the UK bank levy.

Retail Banking and Wealth Management ('RBWM')	Commercial Banking ('CMB')	Global Banking and Markets ('GB&M')	Global Private Banking ('GPB')
We help more than 38 million customers across the world to manage their finances, buy their homes, and save and invest for the future. Our HSBC Premier and Advance propositions are aimed at mass affluent and emerging affluent customers who value international connectivity. For customers with simpler banking needs, we offer a full range of products and services reflecting local requirements.	We support approximately 1.5 million business customers in 53 countries and territories, ranging from small enterprises focused primarily on their domestic markets, through to large companies operating globally. Our services include working capital, term loans, payment services and international trade facilitation, as well as expertise in mergers and acquisitions, and access to financial markets.	We serve approximately 4,400 clients in more than 50 countries and territories. We support major government, corporate and institutional clients worldwide. Our product specialists continue to deliver a comprehensive range of transaction banking, financing, advisory, capital markets and risk management services.	We serve high net worth and ultra high net worth individuals and families, including those with international banking needs. Services provided include Investment Management, which includes advisory and brokerage services, and Private Wealth Solutions, which comprises trusts and estate planning, to protect and preserve wealth for future generations.
Adjusted profit before tax <>
$4.4bn	$4.0bn	$2.8bn	$0.2bn
(1H18: $3.6bn)	(1H18: $4.0bn)	(1H18: $3.4bn)	(1H18: $0.2bn)
Adjusted risk-weighted assets <>
$129.0bn	$327.6bn	$284.5bn	$16.5bn
(31 Dec 2018: $126.9bn)	(31 Dec 2018: $321.7bn)	(31 Dec 2018: $281.3bn)	(31 Dec 2018: $16.8bn)

 <>    
Our global businesses are presented on an adjusted basis, which is consistent with the way in which we manage and assess the performance of our global businesses.  The 'Management view of adjusted revenue' tables provide a breakdown of adjusted revenue by major products, and reflect the basis on which each business is managed and assessed.

HSBC Holdings plc Interim Report 2019

10

Retail Banking and Wealth Management

Key events

•      In RBWM, we grew the number of active customers by more than 700,000 in 1H19 through targeted acquisition in key markets and continued improvements to customer service and onboarding journeys. The largest growth was seen in Mexico, the UK and Hong Kong.

•      In the UK and Hong Kong, we increased our lending by $10bn and customer deposits by $11bn in 1H19 compared with the end of 2018, further strengthening our competitive positions in these markets.

•      We continued to invest in improving our digital banking offerings. In 1H19, we introduced over 90 new features to improve our customers' online and mobile banking experience. We accelerated the deployment of the improved mobile banking app with launches in three new markets, bringing improvements to eight markets. The PayMe app in Hong Kong continued to attract new users. In 1H19, it had 1.6 million accounts and around 23 million peer-to-peer transactions.

•      Our Wealth business in Asia focused on enhancing our products, and improving our customer service and channels. We increased Jade active customers by more than 6% since December 2018. In insurance manufacturing, annualised new premiums grew 10% compared with 1H18 to $1.7bn. Global Asset Management in Asia increased funds under management by 7% compared with 1H18.

Financial performance

Adjusted profit before tax of $4.4bn in 1H19 was $0.9bn or 24% higher than in 1H18. This increase reflected strong balance sheet growth and the impact of higher interest rates on margins in Retail Banking, favourable market impacts in life insurance manufacturing, and disposal gains in Argentina and Mexico. This was partly offset by higher adjusted operating expenses as we invested in the business.

Adjusted revenue of $11.9bn was $1.3bn or 12% higher.

In Retail Banking, revenue of $7.9bn was up $0.7bn or 10%. The increase reflected deposit balance growth of $32bn or 5%, particularly in Hong Kong and the UK, and lending balance growth of $31bn or 9% compared with 1H18, notably in mortgages in the UK and Hong Kong. In addition, margins improved from higher interest rates.

In Wealth Management, revenue of $3.6bn was up $0.3bn or 10%, reflecting:

•      higher life insurance manufacturing revenue (up $0.5bn or 54%), mostly from net favourable market impacts of $0.2bn (a favourable movement of $152m in 1H19, compared with an adverse movement of $92m in 1H18) and the growth in value of new business written (up 21% to $0.7bn).

This was partly offset by:

•      lower investment distribution revenue (down $0.2bn or 8%), driven by less favourable market conditions in Hong Kong compared with 1H18. This was partly offset by growth in mainland China and Mexico.

Revenue in 1H19 also included disposal gains in Argentina and Mexico of $133m.

Adjusted ECL of $0.5bn were 5% higher than in 1H18, primarily driven by unsecured lending growth, notably in the UK and US, and economic uncertainty in the UK. The ECL charge in 1H19 remained low compared with historical levels, with ECL as a percentage of average gross loans of 29bps.

Adjusted operating expenses of $7.0bn were $0.4bn or 6% higher. This was mainly driven by higher staff costs and inflation (up $0.2bn), particularly in Asia, and the impact of investment (up $0.1bn) in technology and digital capabilities, and in strategic initiatives to grow the Wealth Management business in Asia.

Management view of adjusted revenue <>	Half-year to							1H19 vs 1H18
	30 Jun 2019 $m		30 Jun 2018 $m		31 Dec 2018 $m			$m		%
Retail Banking	7,871		7,130		7,829			741		10
Current accounts, savings and deposits	4,646		3,763		4,634			883		23
Personal lending	3,225		3,367		3,195			(142	)	(4	)
- mortgages	840		1,046		837			(206	)	(20	)
- credit cards	1,476		1,396		1,426			80		6
- other personal lending	909		925		932			(16	)	(2	)
Wealth Management	3,613		3,297		2,711			316		10
- investment distribution	1,709		1,864		1,471			(155	)	(8	)
- life insurance manufacturing	1,383		899		732			484		54
- asset management	521		534		508			(13	)	(2	)
Other11	435		241		294			194		80
Net operating income 12	11,919		10,668		10,834			1,251		12
RoTE excluding significant items and UK bank levy (%)	23.5		21.3		21.0

For footnotes, see page 48.

Change in adjusted profit before tax

+24%

The reported results of our RBWM business include customer redress programme costs in respect of the mis-selling of payment protection insurance ('PPI'). This is excluded from our adjusted performance. For further details, see Note 10 on the financial statements.

11	HSBC Holdings plc Interim Report 2019

Commercial Banking

Key events

•      In CMB, we continued to improve customer journeys and develop digital solutions to make banking with us easier. We reduced the average onboarding time for our relationship-managed customers by nearly two-thirds from 23 days in January 2018 to eight days in June 2019. Improvement of cross-border onboarding times has been a key area of focus with a 27% reduction during 1H19.

•      In Hong Kong, we migrated over 360,000 customers onto a new digital business banking platform and our new Business Express app now allows mobile push authentication, removing the need for a physical security device, as well as in-app chat to provide customer support. At June 2019, the Apple App Store rating was 4.0 out of 5 stars. In the UK, we launched our new HSBC UK Business Banking app, introducing new features such as biometric logins and the ability to create a new payee. The Apple App Store rating increased from 1.4 for the previous app to 4.6 out of 5 stars for the new app in June 2019.

•      We launched the PayMe for Business app in Hong Kong in March 2019, and have since onboarded more than 3,000 merchants, allowing them to connect with 1.6 million PayMe users.

•      We announced with Walmart the roll-out of a sustainable supply chain finance programme that pegs a supplier's financing rate to its sustainability performance. Under this scheme, Walmart's suppliers who demonstrate progress in their sustainability credentials will be able to apply for improved financing terms from HSBC.

Financial performance

Adjusted profit before tax of $4.0bn was $50m or 1% higher than in 1H18. Broad-based adjusted revenue growth in GLCM, C&L and GTRF was partly offset by higher adjusted ECL charges and higher adjusted operating expenses, notably as we continued to invest.

We grew our loans and advances to customers by 4% during 1H19, while risk-weighted assets ('RWAs') increased by 2%. Customer accounts were flat compared with 31 December 2018, although balances increased by 2% compared with 30 June 2018.

Adjusted revenue of $7.8bn was $0.7bn or 9% higher, with growth in all major products and regions.

•      In GLCM, revenue was $0.4bn or 14% higher, with growth in all regions. The increase was mainly in Hong Kong from wider margins, and in the UK reflecting wider margins and higher average deposit balances from growth campaigns.

•      In C&L, revenue growth of $0.2bn or 8% reflected continued balance sheet growth in most countries, partly offset by the effects of margin compression.

•      GTRF revenue increased by $37m or 4%, which included fee growth in MENA from higher customer transactions and balance growth in the UK from asset growth initiatives.

•      Revenue was $79m higher in 'Other' products, and included a disposal gain of $24m in Latin America.

•      Corporate customer value from our international subsidiary banking proposition grew by 8%.

(This relates to corporate client income, which includes total income from GB&M synergy products, including FX and debt capital markets. This measure differs from reported revenue in that it excludes Business Banking and Other and internal cost of funds.)

CMB revenue growth continued to be broadly based, with increases in all regions, and particularly in our largest markets, Hong Kong (up 9%) and the UK (up 8%).

Adjusted ECL of $0.5bn were $0.5bn higher than in 1H18. The increase was driven by higher ECL in HSBC UK relating to a small number of exposures. In addition, there were ECL charges in 1H19 compared with net releases in 1H18 in both Asia and North America.

Adjusted operating expenses of $3.3bn were $0.2bn or 5% higher, reflecting increased staff costs and investment-related expenditure. This included an increase in our investment in digital capabilities (up $0.2bn), designed to enable us to provide simpler and faster customer experience.

Management view of adjusted revenue <>	Half-year to							1H19 vs 1H18
	30 Jun 2019 $m		30 Jun 2018 $m		31 Dec 2018 $m			$m		%
Global Trade and Receivables Finance	948		911		921			37		4
Credit and Lending	2,746		2,550		2,654			196		8
Global Liquidity and Cash Management	3,048		2,684		2,998			364		14
Markets products, Insurance and Investments, and Other13	1,074		995		847			79		8
Net operating income 12	7,816		7,140		7,420			676		9
RoTE excluding significant items and UK bank levy (%)	14.0		15.1		14.0

For footnotes, see page 48.

Change in adjusted profit before tax

+1%

HSBC Holdings plc Interim Report 2019

12

Global Banking and Markets

Key events

•      In GB&M, we continued to drive our sustainable finance agenda. We acted as joint bookrunner for Latin America's first sovereign green bond, were the sole green structuring adviser on the first green convertible bond in the real estate sector, and were joint bookrunner for the world's first green bond in the telecommunications sector.

•      We continued to invest in digital to enhance and personalise our client experience. We are building digital capabilities and tools to improve efficiency and provide value to our clients.

Financial performance

Adjusted profit before tax of $2.8bn was $0.6bn lower than in 1H18. Adjusted revenue fell in Global Markets and Global Banking as economic uncertainty resulted in lower market activity, compared with continued revenue growth in our transaction banking products. The fall in adjusted profit before tax also reflected higher adjusted ECL from charges relating to specific exposures compared with releases in 1H18, and from higher adjusted operating expenses due to continued investment to protect and grow our businesses.

Adjusted revenue of $7.7bn fell by $0.2bn compared with 1H18.

•      Global Markets revenue decreased by $0.3bn or 8% due to historically low volatility and spread compression in Foreign Exchange and Equities, partly offset by increased flow in Rates.

•      Global Banking revenue fell $0.2bn or 8%, reflecting gains in 1H18 on corporate lending restructuring, lower event-driven activity and the impact of tightening credit spreads on portfolio hedges.

•      We grew revenue in our transaction banking products. GLCM rose by $0.2bn or 12%, primarily from the impact of higher interest rates, notably in the UK and Hong Kong, and higher average deposit balances. Securities Services revenue increased by $54m or 6% from continued growth in average assets under custody and average assets under administration (both up 4%), as well as higher interest rates. GTRF revenue increased by $31m or 8% from growth in lending and higher fees from commodity and structured trade deals, particularly in MENA, while we continued to reduce RWAs.

Adjusted ECL were $95m, up $198m compared with 1H18. The charges in 1H19 primarily related to specific corporate exposures, notably in Europe. Net releases in 1H18 largely related to the US against the oil and gas sector, partly offset by charges in the UK against exposures in the retail and construction sectors.

Adjusted operating expenses of $4.8bn were $0.2bn or 4% higher, driven by investments in people to support growth across our businesses, regulatory programmes and technology platforms to improve client experience.

Management view of adjusted revenue <>	Half-year to							1H19 vs 1H18
	30 Jun 2019 $m		30 Jun 2018 $m		31 Dec 2018 $m			$m		%
Global Markets	3,164		3,435		2,895			(271	)	(8	)
- FICC	2,552		2,750		2,392			(198	)	(7	)
Foreign Exchange	1,308		1,506		1,439			(198	)	(13	)
Rates	889		822		622			67		8
Credit	355		422		331			(67	)	(16	)
- Equities	612		685		503			(73	)	(11	)
Securities Services	1,002		948		985			54		6
Global Banking	1,931		2,110		1,920			(179	)	(8	)
Global Liquidity and Cash Management	1,387		1,234		1,363			153		12
Global Trade and Receivables Finance	413		382		415			31		8
Principal Investments	122		170		50			(48	)	(28	)
Credit and funding valuation adjustments	14		(40	)	(139	)		54		135
Other14	(327	)	(323	)	(259	)		(4	)	(1	)
Net operating income12	7,706		7,916		7,230			(210	)	(3	)
RoTE excluding significant items and UK bank levy (%)	9.9		12.3		10.5

For footnotes, see page 48.

Change in adjusted profit before tax

-18%

13	HSBC Holdings plc Interim Report 2019

Global Private Banking

Key events

•      In GPB, we were named 'Best Asia Private Bank' at the WealthBriefingAsia Awards 2019.

•      We had net new money inflows of $14bn in 1H19, the highest half-year net inflow since 2008.

•      More than 60% of our 1H19 net new money inflows came from collaboration with our other global businesses. The number of clients referred from other global businesses increased by more than 30% compared with 1H18, demonstrating increased engagement and focus on collaboration.

Financial performance

Adjusted profit before tax of $196m increased by $9m or 5% compared with 1H18, from lower adjusted operating expenses and adjusted revenue growth, mainly in Asia where we continued to invest in business growth initiatives.

Adjusted revenue of $924m increased by $17m or 2%, mainly reflecting growth in Asia and income related to our Monaco business, which we wound down in 1H19. These increases were partly offset by lower revenue in the US following repositioning actions.

Lending revenue increased by $8m, notably in Asia due to balance growth. Lending revenue also increased in most markets in Europe, with the exception of the UK, which suffered from margin compression. Investment revenue increased by $2m, as higher annuity fee income in Asia, following an increase in discretionary client mandates, was partly offset by lower client activity in Switzerland. Deposit revenue was broadly unchanged as growth in Asia from wider margins and balance growth was  offset by lower revenue in the US, notably following repositioning actions.

Adjusted ECL were $19m, mainly in the UK. This compared with a net release of $4m in 1H18, mainly in the US.

Adjusted operating expenses of $709m were $15m or 2% lower. This was mainly due to the partial release of a provision associated with the wind-down of our operations in Monaco, savings in the US to mitigate lower revenue, and lower operations and compliance costs. These reductions were partly offset by an increase in Asia, driven by investments to support business growth.

Management view of adjusted revenue <>	Half-year to							1H19 vs 1H18
	30 Jun 2019 $m		30 Jun 2018 $m		31 Dec 2018 $m			$m		%
Investment revenue	382		380		327			2		1
Lending	204		196		188			8		4
Deposit	240		241		251			(1	)	-
Other	98		90		88			8		9
Net operating income12	924		907		854			17		2
RoTE excluding significant items and UK bank levy (%)	11.2		11.2		9.9

For footnotes, see page 48.

Change in adjusted profit before tax

+5% 

Corporate Centre

Financial performance

Adjusted profit before tax of $1.0bn was $0.5bn higher than in 1H18.

Adjusted revenue of $0.1bn compared with negative adjusted revenue of $0.3bn in 1H18, largely reflecting higher revenue in Central Treasury.

Central Treasury revenue of $0.6bn was $0.4bn higher than in 1H18 and included:

•      favourable fair value movements of $0.1bn in 1H19, compared with adverse movements of $0.2bn in 1H18, relating to the economic hedging of interest rate and exchange rate risk on our long-term debt with long-term derivatives; and

•      the non-recurrence of a $177m loss arising from adverse swap mark-to-market movements following a bond reclassification under IFRS 9 'Financial Instruments' in 1H18.

These increases were partly offset by higher interest expense on debt issued by HSBC Holdings, as the average cost of debt issued increased.

Other income decreased by $61m. This included lease expenses of $85m following the adoption of IFRS 16 'Leases' from 1 January 2019. In 1H18, lease expenses were recorded within operating expenses.

A net release of adjusted ECL of $8m compared with a net release of $87m in 1H18, both relating to our legacy portfolios.

Adjusted operating expenses of $0.4bn decreased by $0.2bn or 34%, partly reflecting a change in the allocation of certain costs to global businesses, which reduced costs retained in Corporate Centre. In addition, costs relating to our legacy portfolios reduced, while 1H18 also included a $41m charge in relation to the 2017 UK bank levy.

Adjusted income from associates of $1.3bn decreased by $16m or 1%.

Management view of adjusted revenue <>	Half-year to							1H19 vs 1H18
	30 Jun 2019 $m		30 Jun 2018 $m		31 Dec 2018 $m			$m		%
Central Treasury15	605		183		404			422		231
Legacy portfolios	(84	)	(103	)	13			19		18
Other	(391	)	(330	)	(422	)		(61	)	(18	)
Net operating income12	130		(250	)	(5	)		380		>100
RoTE excluding significant items and UK bank levy (%)	(4.1	)	(3.9	)	(5.7	)

For footnotes, see page 48.

HSBC Holdings plc Interim Report 2019

14

How we do business

Supporting sustainable growth
We conduct our business intent on supporting the sustained success of our customers, people and communities.

Overview
 
Our purpose is to be where the growth is, connecting customers to opportunities. We help businesses to thrive and economies to prosper, helping people fulfil their hopes and dreams and realise their ambitions. 
To achieve our purpose, we need to build strong relationships with all of our stakeholders. This will help enable us to deliver our strategy and operate in a way that is sustainable.
Our latest Environmental, Social and Governance Update, published in April 2019, provided an update on how we are supporting the global transition to a low-carbon economy, while putting the customer at the centre and maintaining high standards of governance. 
It forms part of our strategic priority to achieve an ESG rating of 'outperformer' based on Sustainalytics methodology. Sustainalytics is replacing its ESG rating with a new risk rating methodology. We intend to  update our strategic priority accordingly by the year-end.
 
The ESG Update is available on our website at www.hsbc.com/our-approach/esg-information/esg-reporting-and-policies.

Customers

We create value by providing the products and services our customers need, and aim to do so in a way that fits seamlessly into their lives. This helps us to build long-lasting relationships with our customers. We maintain trust by striving to protect our customers' data and information, and delivering fair outcomes for them - and if things go wrong, we need to address complaints in a timely way.

Our approach to our customers links to our strategic priority to enhance customer centricity and customer service.

Employees

Our people span many cultures, communities and continents. We want to build trusted relationships, where our people feel empowered in their roles and inspired to grow.

We understand the importance of building a diverse and inclusive workforce, valuing individuals and their contribution.

We published our latest UK Gender Pay Gap Report in June 2019. The biggest driver of our UK gender pay gap is the shape of our workforce. We have a predominance of women at the more junior levels with fewer women in senior leadership roles. We are committed to improving gender balance and are taking a number of specific steps to have a positive impact in the UK over time.

> For the full report, see www.hsbc.com/our-approach/esg-information/esg-reporting-and-policies.

Supporting sustainable growth

Our actions have an impact on the communities where we do business and the wider environment.

Since the start of 2017, we have achieved $36.7bn of our commitment to provide and facilitate $100bn of sustainable financing and investment by 2025. This figure is based on our progress reported at the end of 2018, in addition to green, social and sustainability bonds recorded by Dealogic in 1H19.

We were recognised as the 'World's Best Bank for Sustainable Finance' in the Euromoney Awards for Excellence 2019. HSBC Asset Management was awarded an A+, the highest possible rating, for all categories except one in the latest Principles for Responsible Investment annual assessment.

Our second Task Force for Climate-related Financial Disclosures ('TCFD') disclosure was published on page 29 of the Annual Report and Accounts 2018.

A responsible business culture

Our purpose is to connect people with opportunities. With this purpose comes the responsibility to protect our customers, our communities and the integrity of the financial system.

We seek to pay our fair share of tax in the jurisdictions in which we operate and to minimise the likelihood of customers using our products to avoid or evade tax.

HSBC Holdings plc Interim Report 2019

15

Risk overview

We actively manage risk to help protect and enable the business.

Managing risk

We have maintained a conservative and consistent approach to risk throughout our history, helping to ensure we protect customers' funds, lend responsibly and support economies. By carefully aligning our risk appetite to our strategy, we aim to deliver sustainable long-term shareholder returns.

All employees are responsible for the management of risk, with the ultimate accountability residing with the Board. We have a strong risk culture, which is embedded through clear and consistent communication and appropriate training for all employees. A comprehensive risk management framework is applied throughout the Group, with governance and corresponding risk management tools. This framework is underpinned by our risk culture and reinforced by the HSBC Values.

Our Global Risk function oversees the framework and is led by the Group Chief Risk Officer, an executive Director. It is independent from the global businesses, including our sales and trading functions, to provide challenge, appropriate oversight and balance in risk/reward decisions.

Our risk appetite defines our desired forward-looking risk profile, and informs the strategic and financial planning process. It is articulated in our risk appetite statement, which is approved by the Board. Key elements include:

- risks that we accept as part of doing business, such as credit risk and market risk;

- risks that we incur as part of doing business, such as operational risk, which are actively managed to remain below an acceptable tolerance; and

- risks for which we have zero tolerance, such as knowingly engaging in activities where foreseeable reputational risk has not been considered.

We operate a wide-ranging stress testing programme undertaking both internal and regulatory stress tests. In 2018, we participated in the Bank of England's ('BoE') annual stress test, which showed that our capital ratios, after taking account of CRD IV restrictions and strategic management actions, exceeded the BoE's requirements. We also participated in the 2019 BoE stress test. The result of that test is due to be published in December.

Internal stress tests are an important element in our risk management and capital management frameworks. They assess the impacts of potential adverse macroeconomic, geopolitical and other HSBC-specific events. The selection of scenarios reflects our top and emerging risks identification process and our risk appetite. Stress testing analysis helps management understand the nature and extent of vulnerabilities to which the Group is exposed.

 
Our risk management framework and risks associated with our banking and insurance manufacturing operations are described on pages 73 and 77 of the Annual Report and Accounts 2018, respectively.

Top and emerging risks

Our top and emerging risks framework helps enable us to identify forward-looking risks so that we may take action either to prevent them materialising or limit their effect.

Top risks are those that may have a material impact on the financial results, reputation or business model of the Group in the year ahead. Emerging risks are those that have large unknown components and may form beyond a one-year horizon. If any of these risks were to occur, they could have a material effect on HSBC.

During 1H19, we made no changes to our top and emerging risks, although continue to monitor existing risks closely and assess their potential impacts on the Group.

Update on Ibor risks

The impact of the replacement of interbank offered rates ('Ibors') with alternative risk-free rates on our products and services remains a key area of focus. We have a significant and growing volume of contracts referencing Ibors, such as Libor and Eonia, extending past 2021 when it is likely that these Ibors will cease being published. The global programme to coordinate our transition activities aims to minimise the volume of such contracts outstanding upon the cessation of these Ibors, and therefore the associated disruption to financial flows and potential economic losses. The programme is significant in terms of scale and complexity and will impact all global businesses and jurisdictions as well as multiple products, currencies, systems and processes. In addition to the consequent execution risks, the process of adopting new reference rates exposes the Group to a wide range of material conduct, operational and financial risks, such as earnings volatility resulting from contract modifications and changes in hedge accounting. We continue to engage with industry participants, the official sector and our clients to support an orderly transition and the mitigation of the risks resulting from the transition.

 
Our current top and emerging risks are summarised on the next page and discussed in more detail on page 69 of the Annual Report and Accounts 2018.

Our approach to identifying and monitoring top and emerging risks is described on page 75 of the Annual Report and Accounts 2018.

16	HSBC Holdings plc Interim Report 2019

	Risk	Trend	Mitigants
	Externally driven
	Economic outlook and capital flows	^	We actively monitor our credit and trading portfolios, including undertaking stress tests, to identify sectors and clients that may come under stress due to: escalating tariffs and other trade restrictions; an economic slowdown in the eurozone and mainland China; and adverse outcomes of negotiations concerning the UK's exit from the EU.
	Geopolitical risk	^	We continually assess the impact of geopolitical events on our businesses and exposures, and take steps to mitigate them, where required, to help ensure we remain within our risk appetite. We have also strengthened physical security at our premises where the risk of terrorism is heightened. In the first half of 2019, we closely monitored the potential impact of geopolitical risks relating to, among others, the impact of the UK's exit from the EU, tensions between the US and China in trade and other areas, and the current situation in Hong Kong.
	The credit cycle	>	We undertake detailed reviews of our portfolios and are assessing proactively customers and sectors likely to come under stress as a result of geopolitical or macroeconomic events, reducing limits where appropriate.
	Cyber threat and unauthorised access to systems	>	We continue to further strengthen our controls to prevent, detect and respond to increasingly sophisticated cybersecurity threats. This includes threat detection, systems and network access controls, payment systems controls, data protection, and back-up and recovery.
	Regulatory developments including conduct, with adverse impact on business model and profitability	>	We engage with regulators to help ensure new regulatory requirements are effectively implemented, and work with them in relation to their investigations into historical activities.
	Financial crime risk environment	>	In the first half of 2019, we continued to implement the final elements of our Global Standards programme to integrate our anti-money laundering and sanctions capabilities into our day-to-day operations. We continue to enhance our financial crime risk management capabilities and the effectiveness of our financial crime controls, and we are maintaining our investment in the next generation of tools to fight financial crime through the application of advanced analytics and artificial intelligence.
	Ibor transition	>	We continue to engage with industry participants, the official sector and our clients to support an orderly transition and the mitigation of the risks resulting from the transition.
	Climate-related risks	^	We are committed to supporting our customers in the transition to a low-carbon economy and have pledged to provide $100bn of sustainable financing, facilitation and investment by 2025. We continue to assess the impact of physical and transition risk on our clients, embed climate-related risks in risk management processes, enhance our climate-related disclosures and develop scenario analysis.
	Internally driven
	IT systems infrastructure and resilience	>	We continue to monitor and improve service resilience across our technology infrastructure, enhancing our problem diagnosis/resolution and change execution capabilities to reduce service disruption to our customers.
	Risks associated with workforce capability, capacity and environmental factors with potential impact on growth	>	We are monitoring the health of our organisation and the workforce capacity and capability requirements in line with our growth strategy. We horizon-scan for emerging issues that could impact our workforce such as immigration or tax rules as well as industry-wide regulatory changes.
	Risks arising from the receipt of services from third parties	>	We continue to strengthen and embed third-party risk management governance and oversight processes on how we actively identify, assess, mitigate and manage risks across the range of third parties with which we do business.
	Enhanced model risk management expectations	^	We continue to evolve our capability and practice with regard to the risk management of our model risk governance framework in line with regulatory expectations and industry best practice.
	Data management	^	We continue to improve our insights, data aggregation, reporting and decisions through ongoing improvement of our data governance, data quality, data privacy, data infrastructure and architecture framework.

 ^ Risk heightened during 2019

 > Risk remained at the same level as 2018

UK withdrawal from the European Union

The UK was due to leave the European Union ('EU') in March 2019, but after agreeing an extension with the EU it is now due to leave in October 2019. There is no certainty on the future relationship between the UK and the EU or indeed an implementation period. The terms of the UK's departure will be negotiated by the new prime minister, Boris Johnson, after Theresa May announced her resignation in May 2019. This creates market volatility and economic risk, particularly in the UK. Our Group's global presence and diversified client base should help to mitigate the impact of the UK's withdrawal from the EU. While there may be some changes to the provision of products and services for our clients and employees based in the UK and EU, we are taking mitigating actions to help minimise any potential disruption. These include expanding our product offerings available in our European entities, migrating customers where necessary and transferring some of our European branch network from HSBC Bank plc to our subsidiary in France. Our programme to manage the impact of the UK leaving the EU was set up in 2017 and has now been broadly completed. Our existing footprint in the EU, and in particular our subsidiary in France, has provided a strong foundation for us to build upon. As part of our 2018 stress testing programme, a number of internal macroeconomic and event-driven scenarios were considered alongside a scenario set by the Bank of England to support our planning for, and assessment of, the impact of the UK's withdrawal from the EU. The results confirmed that we are well positioned in the event of potential shocks.

 
Our approach to the UK's withdrawal from the EU is described in more detail in 'Areas of special interest' on page 49.

HSBC Holdings plc Interim Report 2019

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