Interim Report - 11 of 28

RNS Number : 1985P

HSBC Holdings PLC

15 August 2014

 



North America

Our North American businesses are located in the US, Canada and Bermuda. Operations in the US are primarily conducted through HSBC Bank USA, N.A. and HSBC Finance Corporation, a national consumer finance company. HSBC Markets (USA) Inc. is the intermediate holding company of, inter alia, HSBC Securities (USA) Inc. HSBC Bank Canada and HSBC Bank Bermuda operate in their respective countries.
	Half-year to
	30 Jun		30 Jun		31 Dec
	2014		2013		2013
	US$m		US$m		US$m
Net interest income .....	2,635		3,030		2,712
Net fee income ............	991		1,138		1,005
Net trading income ......	228		505		443
Other income/(expense)	213		(41)		11
Net operating income13 ..................................	4,067		4,632		4,171
LICs53 ..........................	(411)		(696)		(501)
Net operating income	3,656		3,936		3,670
Total operating expenses ..................................	(2,837)		(3,276)		(3,140)
Operating profit .......	819		660		530
Income from associates54 ..................................	6		6		25
Profit before tax .......	825		666		555
Cost efficiency ratio ....	69.8%		70.7%		75.3%
RoRWA47 ....................	0.7%		0.5%		0.5%
Period-end staff numbers	20,649		21,454		20,871
10% growth in CMB lending balances since 31 December 2013 on a constant currency basis
Gross balances in the CML portfolio, including loans held for sale, down since 31 December 2013 by US$2.9bn to US$27.5bn
Global Lender of the Year (awarded to GB&M by the Export-Import Bank of the United States)
For footnotes, see page 96. The following commentary is on a constant currency basis and comparisons are with the first half of 2013, unless stated otherwise. Tables are on a reported basis.

Economic background 

In the US, severe winter weather, a drop in net exports and a slowdown in inventory investment led to a 2.1% (annualised) decline in real GDP in the first half of 2014. However, a number of monthly economic indicators suggested that overall economic activity rebounded during the second quarter. Higher mortgage rates and stricter regulations regarding mortgage credit restricted the growth of housing construction in early 2014. Government fiscal contraction, which had been a major drag on activity throughout 2013, was eased in the first half of 2014 and should allow the economy to grow at a faster pace. CPI inflation remained benign as subdued growth in hourly wages continued to restrain labour costs. The Federal Reserve began to scale back its programme of quantitative easing at the start of 2014 and is on course to gradually eliminate the asset purchase programme by the fourth quarter of the year. The Federal Open Market Committee has, however, kept the federal funds rate in the range of 0.0% and 0.25%, and has indicated that this will probably be warranted for a considerable time after the purchase programme ends in late 2014.

The Canadian economy grew by 2.2% in the first quarter of 2014. Consumption and net exports were the main contributors to growth. Gross fixed capital formation weighed on the economy as both residential investment and business investment contracted. Lifted by rising energy costs and a weaker Canadian dollar, the rate of CPI inflation rose to 2.4% in June, above the Bank of Canada's target rate. Its policy rate remained unchanged at 1.0%, a level it has been at since September 2010.

Financial overview

North America's reported profit before tax of US$825m was US$159m higher, and US$192m higher on a constant currency basis.

On an underlying basis, profit before tax of US$870m was US$95m higher, reflecting lower operating expenses as the first half of 2013 included US$100m in customer remediation provisions related to enhancement services products sold by our former CRS business, and lower loan impairment charges in the US, primarily in the CML portfolio due to reduced levels of new impaired loans and delinquency. These were partly offset by lower revenue, mainly reflecting adverse movements on non-qualifying hedges, lower average balances from CML run-off and lower net trading income in GB&M.

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

	Retail       Banking and Wealth Management           US$m		Commercial      Banking          US$m	Global       Banking               and       Markets           US$m			Global        Private      Banking          US$m		Other          US$m		Total          US$m
Half-year to 30 June 2014
US ......................................................	80		110		162		50		(50)		352
Canada ...............................................	35		280		130		-		(6)		439
Bermuda .............................................	15		(4)		22		1		-		34
	130		386		314		51		(56)		825
Half-year to 30 June 2013
US ......................................................	(267)		144		500		31		(217)		191
Canada ...............................................	90		194		169		−		(4)		449
Bermuda .............................................	7		(21)		26		1		14		27
Other .................................................	−		−		(1)		−		−		(1)
	(170)		317		694		32		(207)		666
Half-year to 31 December 2013
US ......................................................	(91)		152		133		22		(133)		83
Canada ...............................................	41		312		111		−		1		465
Bermuda .............................................	13		5		(10)		3		(5)		6
Other .................................................	−		−		1		−		−		1
	(37)		469		235		25		(137)		555

In Canada, underlying profit before tax increased due to a decline in CMB individually assessed loan impairment charges, and an increase in other income due to a reduction in the fair value of an investment property held for sale recognised in the second half of 2013. This was partly offset by lower revenue, reflecting the run-off of the Canadian consumer finance business, a fall in trading income from foreign exchange, and higher operating expenses, primarily from our continued investment in Global Standards and the Risk and Compliance functions.

Country business highlights

In the US we made further progress on executing our key priorities. In RBWM, we continued to focus on meeting the evolving needs of our customers. We have added approximately 11,000 new Premier customers since December 2013, an increase of 24% compared with the first half of 2013, driven by the re-launch of our Global Premier programme along with other Premier campaigns. In addition, the focus on growing high quality customer relationships led to an improvement in the credit quality of our customer base. In the first quarter, CMB launched another US$1.0bn SME fund, doubling the loan programme, to support those businesses that trade or aspire to trade internationally. Loan balances and revenue growth in expansion markets continued, most notably in the Midwest and Southeast, where corporate loans grew by 44% and 15%, respectively in the first half of 2014. Despite lower revenue in GB&M, further progress on executing against strategy led to market share gains in several product categories, including equity and debt capital markets and lending, while revenue from CMB clients was up by 38%.

In Canada, our focus in RBWM continued to be on developing the Premier customer base and we grew assets under management by US$1.3bn in the period. In CMB, we continued to focus on Payments and Cash Management, where we took part in a pilot launch of Global Liquidity Solutions, a service that enables our clients to manage their liquidity globally. In our international trade business, we earmarked an additional US$1.0bn for our SME fund, bringing the total offered to US$2.0bn, to support businesses with their international expansion. GB&M focused on increasing its multinationals client base and, with the Project and Export Finance business, closed three arranging mandates with two ongoing advisory mandates since the business was established in Canada.

We continued to make progress in our strategy to accelerate the run-off and sales of our CML portfolio. On 1 May 2014 we completed the sale of a tranche of CML real estate secured loans with an unpaid principal balance of US$1.3bn and recognised a gain on sale of US$15m, in addition to a further sale on 1 July 2014 with an unpaid principal balance of US$289m, for which we expect to recognise a gain on sale of US$94m.

We identified real estate secured loan balances with unpaid principal of US$2.4bn that we plan to actively market in multiple transactions over the next 15 months. The estimated fair value of these loans was approximately US$5m greater than their carrying value at 30 June 2014. During July 2014, we commenced active marketing to sell a portion of our real estate secured loans with an unpaid principal balance of US$1.1bn, and expect to complete the sale of these loans in the fourth quarter of 2014.

Review of performance

The following commentary is on a constant currency basis and comparisons are with the first half of 2013, unless stated otherwise.

Net interest income decreased by 12% to US$2.6bn, reflecting portfolio disposals including the sale of the CML non-real estate personal loan portfolio in April 2013, and lower average lending balances from the continued run-off of the CML portfolio and the Consumer Finance business in Canada. This was partly offset by a release of accrued interest associated with uncertain tax positions, and growth in CMB driven by increased lending balances in expansion markets.

Net fee income decreased by 11% to US$1.0bn, primarily due to adverse adjustments to mortgage servicing rights valuations due to mortgage interest rate decreases compared with increases in the same period in 2013, and the expiry of the Transition Servicing Agreements with the buyer of the CRS business.

Net trading income was US$270m or 54% lower, primarily due to adverse fair value movements on non-qualifying hedges in HSBC Finance of US$188m following a decrease in long‑term interest rates, compared with favourable movements of US$263m in the first half of 2013. The decrease was partly offset by the non-recurrence of a loss of US$199m in the first half of 2013 related to the early termination of qualifying accounting hedges as a result of changes in funding, and lower provisions for mortgage loan repurchase obligations related to loans previously sold.

Net trading income decreased in GB&M as a result of unfavourable fair value movements on structured liabilities, lower foreign exchange and metals revenue as a result of reduced trading volume and low volatility, a fall in Credit trading revenue driven by lower monoline reserve releases in the legacy portfolio, and the non-recurrence of revaluation gains on securities in the first half of
2013. Net trading income was also negatively affected by the performance of economic hedges used to manage interest rate risk, reflecting unfavourable interest rate movements.

Gains less losses from financial investments were US$118m, a decrease of 46% as Balance Sheet Management reported lower gains on sales of available-for-sale debt securities as a result of our ongoing portfolio repositioning for risk management purposes. This was partly offset by gains on the sale of private equity investments.

Other operating income was US$170m compared with an expense of US$224m in the first half of 2013. The movement reflected the non‑recurrence of the US$370m loss on sales of the CML non-real estate personal loan portfolio and our US insurance business in the first half of 2013.

LICs decreased by US$275m to US$411m, mainly in the US, due to reduced levels of delinquency and new impaired loans in the CML portfolio and a fall in lending balances from continued run-off and loan sales, partly offset by lower favourable market value adjustments of underlying properties as improvements in housing market conditions were less pronounced in the first half of 2014. In Canada, loan impairment charges decreased by US$80m, mainly in CMB reflecting lower individually assessed charges. These factors were partly offset by an increase in the US of US$93m, including US$72m in CMB and US$20m in GB&M, as we revised certain estimates used in our corporate loan impairment calculation. In addition, GB&M recorded a rise in loan impairment charges due to higher individually assessed charges on a specific exposure reflecting a deterioration in the underlying asset values and, to a lesser extent, the revaluation of a loan held for sale.

Operating expensesdecreased by 12% to US$2.8bn, reflecting the non-recurrence of US$100m in customer remediation provisions in the first half of 2013 related to enhancement services products sold by our former CRS business, reduced average staff numbers and costs resulting from the continued run-off and sales of our CML portfolio, and lower divestiture costs related to the sale in 2012 of our CRS business. Costs also declined as the former Cards business reached the end of the Transition Servicing Agreements, and mortgage foreclosure remediation costs reduced following the 2013 Independent Foreclosure Review Settlement Agreement. We also achieved over US$90m of sustainable cost savings, primarily reflecting organisational effectiveness initiatives.

Profit/(loss) before tax and balance sheet data - North America

	Half-year to 30 June 2014
	Retail       Banking and Wealth Management           US$m		Commercial       Banking          US$m		Global       Banking and        Markets          US$m		Global Private       Banking          US$m		Other           US$m		Inter-       segment elimination65          US$m		Total          US$m
Profit/(loss) before tax
Net interest income ...............	1,385		724		307		107		134		(22)		2,635
Net fee income/(expense) ......	243		281		408		63		(4)		-		991
Trading income/(expense) excluding net interest income	(103)		17		227		8		(10)		-		139
Net interest income on trading activities .............................	3		-		62		-		1		23		89
Net trading income/ (expense)59 ..........................	(100)		17		289		8		(9)		23		228
Changes in fair value of long- term debt issued and related derivatives ...........................	-		-		-		-		(99)		-		(99)
Net expense from other financial instruments designated at fair value ........	-		-		-		-		-		-		-
Net expense from financial instruments designated at fair value .............................	-		-		-		-		(99)		-		(99)
Gains less losses from financial investments ..........	-		15		101		-		2		-		118
Dividend income ....................	7		4		9		1		3		-		24
Net earned insurance premiums	-		-		-		-		-		-		-
Other operating income/(expense) ................	37		17		53		1		883		(821)		170
Total operating income ......	1,572		1,058		1,167		180		910		(820)		4,067
Net insurance claims66 ............	-		-		-		-		-		-		-
Net operating income13 ......	1,572		1,058		1,167		180		910		(820)		4,067
Loan impairment (charges)/ recoveries and other credit risk provisions .....................	(226)		(136)		(54)		5		-		-		(411)
Net operating income .........	1,346		922		1,113		185		910		(820)		3,656
Operating expenses ................	(1,216)		(542)		(799)		(134)		(966)		820		(2,837)
Operating profit/(loss) .......	130		380		314		51		(56)		-		819
Share of profit in associates and joint ventures ................	-		6		-		-		-		-		6
Profit/(loss) before tax .......	130		386		314		51		(56)		-		825
	%		%		%		%		%				%
Share of HSBC's profit before tax ............................	1.1		3.1		2.5		0.4		(0.4)				6.7
Cost efficiency ratio ..............	77.4		51.2		68.5		74.4		106.2				69.8
Balance sheet data51
	US$m		US$m		US$m		US$m		US$m				US$m
Loans and advances to customers (net)3 .................	63,733		41,454		18,566		5,867		-				129,620
Total assets ............................	77,978		49,263		314,397		8,461		14,949		(27,342)		437,706
Customer accounts3 ................	53,055		47,475		23,044		13,200		-				136,774

	Half-year to 30 June 2013
	Retail        Banking    and Wealth Management           US$m		Commercial        Banking           US$m		Global        Banking and         Markets           US$m		Global Private        Banking           US$m		Other           US$m		Inter-        segment   elimination65          US$m		Total           US$m
Profit/(loss) before tax
Net interest income ...............	1,888		706		321		97		49		(31)		3,030
Net fee income ......................	335		288		384		63		68		−		1,138
Trading income/(expense) excluding net interest income	(18)		23		375		11		(6)		−		385
Net interest income on trading activities .............................	8		−		81		−		−		31		120
Net trading income/ (expense)59 ..........................	(10)		23		456		11		(6)		31		505
Changes in fair value of long- term debt issued and related derivatives ...........................	−		-		-		-		(72)		-		(72)
Net expense from other financial instruments designated at fair value ........	−		−		−		−		−		−		−
Net expense from financial instruments designated at fair value .............................	−		−		−		−		(72)		−		(72)
Gains less losses from financial investments ..........	4		−		212		−		7		−		223
Dividend income ....................	7		5		25		2		2		−		41
Net earned insurance premiums	34		−		−		−		−		−		34
Other operating income/(expense) ................	(352)		(16)		122		2		847		(831)		(228)
Total operating income .........	1,906		1,006		1,520		175		895		(831)		4,671
Net insurance claims66 ............	(39)		−		−		−		−		−		(39)
Net operating income13 ..........	1,867		1,006		1,520		175		895		(831)		4,632
Loan impairment charges and other credit risk provisions ..	(532)		(155)		(8)		(1)		−		−		(696)
Net operating income ............	1,335		851		1,512		174		895		(831)		3,936
Operating expenses ................	(1,504)		(540)		(818)		(143)		(1,102)		831		(3,276)
Operating profit/(loss) ...........	(169)		311		694		31		(207)		−		660
Share of profit/(loss) in associates and joint ventures	(1)		6		−		1		−		−		6
Profit/(loss) before tax ...........	(170)		317		694		32		(207)		−		666
	%		%		%		%		%				%
Share of HSBC's profit before tax ............................	(1.2)		2.3		4.9		0.2		(1.5)				4.7
Cost efficiency ratio ..............	80.6		53.7		53.8		81.7		123.1				70.7
Balance sheet data51
	US$m		US$m		US$m		US$m		US$m				US$m
Loans and advances to customers (net)3 ..................	71,547		35,367		17,323		5,624		-				129,861
Total assets ............................	88,313		42,820		350,497		7,715		15,269		(31,396)		473,218
Customer accounts3 ................	54,159		46,455		22,582		13,432		65				136,693

Profit/(loss) before tax and balance sheet data - North America (continued)

	Half-year to 31 December 2013
	Retail        Banking    and Wealth Management           US$m		Commercial        Banking          US$m		Global        Banking and        Markets          US$m		Global Private        Banking          US$m		Other           US$m		Inter-       segment   elimination65         US$m		Total          US$m
Profit/(loss) before tax
Net interest income ...............	1,595		724		261		98		40		(6)		2,712
Net fee income ......................	270		305		357		62		11		−		1,005
Trading income excluding net interest income ............	66		17		238		8		13		−		342
Net interest income on trading activities .................	3		1		91		−		−		6		101
Net trading income59 ..............	69		18		329		8		13		6		443
Changes in fair value of long-term debt issued and related derivatives ........	−		−		−		−		(216)		−		(216)
Net income from other financial instruments designated at fair value ..................................	−		−		−		−		−		−		−
Net expense from financial instruments designated at fair value ........................	−		−		−		−		(216)		−		(216)
Gains less losses from financial investments .........	−		−		70		−		1		−		71
Dividend income ....................	5		4		23		2		2		−		36
Net earned insurance premiums	−		−		−		−		−		−		−
Other operating income/ (expense) ...........................	(102)		16		107		(1)		982		(882)		120
Total operating income .........	1,837		1,067		1,147		169		833		(882)		4,171
Net insurance claims66 ............	−		−		−		−		−		−		−
Net operating income13 ..........	1,837		1,067		1,147		169		833		(882)		4,171
Loan impairment charges and other credit risk provisions .	(418)		(68)		(12)		(3)		−		−		(501)
Net operating income ............	1,419		999		1,135		166		833		(882)		3,670
Operating expenses ................	(1,456)		(556)		(900)		(140)		(970)		882		(3,140)
Operating profit/(loss) ...........	(37)		443		235		26		(137)		−		530
Share of profit/(loss) in associates and joint ventures	−		26		−		(1)		−		−		25
Profit/(loss) before tax ...........	(37)		469		235		25		(137)		−		555
	%		%		%		%		%				%
Share of HSBC's profit before tax ...........................	(0.5)		5.5		2.8		0.3		(1.6)				6.5
Cost efficiency ratio ..............	79.3		52.1		78.5		82.8		116.4				75.3
Balance sheet data51
	US$m		US$m		US$m		US$m		US$m				US$m
Loans and advances to customers (net)3 .................	66,192		37,735		18,070		5,956		−				127,953
Total assets ............................	82,530		45,706		313,701		8,542		13,211		(31,655)		432,035
Customer accounts3 ................	53,600		49,225		24,113		13,871		−				140,809

For footnotes, see page 96.

 

END

 

 

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