Interim Report - 3 of 25

RNS Number : 4069J

HSBC Holdings PLC

10 August 2012

 



Principal activities

HSBC is one of the largest banking and financial services organisations in the world, with a market capitalisation of US$160bn at 30 June 2012.

Through our subsidiaries and associates, we provide a comprehensive range of banking and related financial services. Headquartered in London, we operate through long-established businesses and have an international network of around 6,900 offices in 84 countries and territories in six geographical regions: Europe, Hong Kong, Rest of Asia-Pacific, Middle East and North Africa ('MENA'), North America and Latin America. Within these regions, a comprehensive range of financial services is offered to personal, commercial, corporate, institutional, investment and private banking clients. Services are delivered primarily by domestic banks, typically with large retail deposit bases.

Business and operating models

Business model

We accept deposits and channel these deposits into lending activities, either directly or through the capital markets. We also offer a range of products and financial services including broking, underwriting and credit facilities, trade finance, credit cards, sales of insurance and investment products and fund management. These banking and financial services are provided to a wide range of clients including governments, large and mid-market corporates, small and medium-sized enterprises ('SME's), high net worth individuals, and mass affluent and retail customers.

Our operating income is primarily derived from:

·      net interest income - interest income on customer loans and advances, less interest expense on interest-bearing customer accounts and debt securities in issue;

·      net fee income - fee income earned from the provision of financial services and products to customers of our global businesses; and

·      net trading income - income from trading activities primarily conducted in Global Markets, including Foreign Exchange, Credit, Rates and Equities trading.

Operating model

HSBC has a matrix management structure which includes global businesses, geographical regions and global functions.

Holding company

HSBC Holdings plc, the holding company of the Group, is listed in London, Hong Kong, New York, Paris and Bermuda. HSBC Holdings is the primary provider of equity capital to its subsidiaries and provides non-equity capital to them where necessary.

Under authority delegated by the Board of HSBC Holdings, the Group Management Board ('GMB') is responsible for management and day-to-day running of the Group. The Board, together with GMB, ensures that there are sufficient cash resources to pay dividends to shareholders, interest to bondholders, expenses and taxes.

HSBC Holdings does not provide core funding to any subsidiary, is not a lender of last resort and does not carry out any banking business in its own right. HSBC has a legal entity-based Group structure, sometimes referred to as subsidiarisation, which underpins our strong balance sheet and helps generate a resilient stream of earnings.

Global businesses

Our four global businesses are responsible for developing, implementing and managing their business propositions consistently across the Group, focusing on profitability and efficiency. They set their strategies within the confines of the Group strategy in liaison with the geographical regions, are responsible for issuing planning guidance regarding their businesses, are accountable for their profit and loss performance and manage their headcount.

Geographical regions

The geographical regions share responsibility for executing the strategies set by the global businesses. They represent the Group to clients, regulators, employee groups and other stakeholders, allocate capital, manage risk appetite, liquidity and funding by legal entity and are accountable for profit and loss performance in line with the global business plans.

Within the geographical regions, the Group is structured as a network of regional banks and locally incorporated regulated banking entities. Each bank is separately capitalised in accordance with applicable prudential reporting requirements and maintains a capital buffer consistent with the Group's appetite for risk in its country or region. Each bank manages its own funding and liquidity within parameters set centrally, and is required to consider its risk appetite, consistent with the Group's risk appetite for the relevant country or region.

Global functions

Our global functions are Communications, Company Secretary, Corporate Sustainability, Finance, Human Resources, Internal Audit, Legal, Marketing, Risk (including Compliance) and Strategy and Planning. The global functions, along with HSBC Technology and Services, our global service delivery organisation, establish and manage all policies, processes and delivery platforms relevant to their activities, are fully accountable for their costs globally and are responsible for managing their headcount.

Strategic direction

Our strategy is aligned to two long-term trends:

·     Financial flows - the world economy is becoming ever-more connected. Growth in world trade and cross-border capital flows continues to outstrip growth of gross domestic product. Financial flows between countries and regions are highly concentrated. Over the next decade we expect 35 markets to represent 90% of world trade growth and a similar degree of concentration in cross-border capital flows.

·     Economic development - by 2050, we expect economies currently deemed 'emerging' to have increased five-fold in size, benefiting from demographics and urbanisation, and they will be larger than the developed world. By then, we expect 19 of the 30 largest economies will be markets that are currently described as emerging.

HSBC is one of the few truly international banks and our advantages lie in our network of markets relevant for international financial flows, our access and exposure to high growth markets and businesses, and our strong balance sheet generating a resilient stream of earnings.

Based on these long-term trends and our competitive position, our strategy has two parts:

·     Network of businesses connecting the world - HSBC is ideally positioned to capture the growing international financial flows. Our franchise puts us in a privileged position to serve corporate clients as they grow from small enterprises into large and international corporates, and personal clients as they become more affluent. Access to local retail funding and our international product capabilities allows us to offer distinctive solutions to these clients in a profitable manner.

·     Wealth management and retail with local scale - we will leverage our position in faster-growing markets to capture social mobility and wealth creation through our Wealth Management and Global Private Banking businesses. We will only invest in retail businesses in markets where we can achieve profitable scale.

To implement this strategy we have defined priorities across three areas:

·     Simplify - we will continue to make HSBC easier to manage and control. This includes, (i) running off legacy assets in the US and in Global Banking and Markets ('GB&M'), (ii) addressing fragmentation in our business portfolio through five filters and the disposal of non-strategic businesses, and (iii) improving organisational efficiency.

·     Restructure - we will restructure certain businesses to adapt to the new environment, including GB&M, our US franchise and Global Private Banking ('GPB').

·     Grow - we continue to position HSBC for growth. We will deploy our capital more actively into priority growth markets. Also, we will continue to benefit from the coordination within our global businesses to capture significant revenue opportunities.

If we are successful in executing this strategy, we will be regarded as 'The world's leading international bank'. We have defined financial targets to achieve a return on equity of between 12% and 15% with a core tier 1 ratio of between 9.5% and 10.5%, and achieve a cost efficiency ratio of between 48% and 52%. We have also defined Key Performance Indicators to monitor the outcomes of actions across the three areas of capital deployment, cost efficiency and growth.

Risk

As a provider of banking and financial services, risk is at the core of our day-to-day activities.

We have identified a comprehensive suite of risk factors which informs our assessment of our top and emerging risks. This assessment may result in our risk appetite being revised.

Risk factors

Our businesses are exposed to a variety of risk factors that could potentially affect our results of operations or financial condition. These are summarised on page 12 of the Annual Report and Accounts 2011. 

Top and emerging risks

We classify certain risks as 'top' or 'emerging'. We define a 'top risk' as being a current, emerged risk which has arisen across any of our risk categories, regions or global businesses and has the potential to have a material impact on our financial results or our reputation and the sustainability of our long-term business model, and which may form and crystallise within a one-year horizon. We consider an 'emerging risk' to be one which has large uncertain outcomes which may form and crystallise beyond a one-year horizon and, if it were to crystallise, could have a material effect on our long-term strategy.

Our approach to identifying and monitoring top and emerging risks is informed by the risk factors.

All of our activities involve, to varying degrees, the measurement, evaluation, acceptance and management of risk or combinations of risks which we assess on a Group-wide basis. Top and emerging risks fall under the following three broad categories:

·     macroeconomic and geopolitical risk;

·     macro-prudential, regulatory and legal risks to our business model;

·     risks related to our business operations, governance and internal control systems.

During the first half of 2012 our senior management paid particular attention to a number of top and emerging risks which are summarised below:

Macroeconomic and geopolitical risk

·  Severe economic slowdown in mature economies impacting global growth

·  Eurozone member departing from the currency union

·  Increased geopolitical risk in certain regions

Macro-prudential, regulatory and legal risks to our business model

·  Regulatory developments affecting our business model and Group profitability

·  Regulatory investigations, fines, sanctions and requirements relating to conduct of business and financial crime negatively affecting our results and brand

·  Dispute risk

Risks related to our business operations, governance and internal control systems

·  Challenges to achieving our strategy in a downturn

·  Internet crime and fraud

·  Social media risk

·  Level of change creating operational complexity and heightened operational risk

·  Information security risk

·  Model risk

All of the above risks are regarded as top risks with the exception of social media risk which is an emerging risk.

A detailed account of these risks is provided on page 104. Further comments on expected risks and uncertainties are made throughout the Annual Report and Accounts 2011, particularly in the section on Risk, pages 98 to 210.

Risk appetite

Risk appetite is a key component of our management of risk and describes the types and level of risk we are prepared to accept in delivering our strategy. It is discussed further on page 234 of the Annual Report and Accounts 2011.

Our risk appetite may be revised in response to the top and emerging risks we have identified.

HSBC Values

The role of HSBC Values in daily operating practice is significant in the context of the financial services sector and the wider economy, particularly in the light of developments and changes in regulatory policy, investor confidence and society's view of the role of banks. We expect our executives and employees to act with courageous integrity in the execution of their duties by being:

·     dependable and doing the right thing;

·     open to different ideas and cultures; and

·     connected with our customers, communities, regulators and each other.

We continue to enhance our values-led culture by embedding HSBC Values into how we conduct our business and through the personal sponsorship of the Group Chief Executive and senior executives. These initiatives will continue in 2012 and beyond.

Financial summary

Use of non-GAAP financial measures ....................	13
Constant currency ..............................................	13
Underlying performance ....................................	15
Consolidated income statement .............................	18
Group performance by income and expense item ...	20
Net interest income ............................................	20
Net fee income ...................................................	21
Net trading income ............................................	22
Net income/(expense) from financial instruments designated at fair value .................................	23
Gains less losses from financial investments .......	24
Net earned insurance premiums .........................	24
Other operating income .....................................	25

Net insurance claims incurred and movement in liabilities to policyholders ..............................	26
Loan impairment charges and other credit risk provisions ......................................................	26
Operating expenses ............................................	28
Share of profit in associates and joint ventures ..	29
Tax expense .......................................................	30
Consolidated balance sheet ....................................	31
Movement from 31 December 2011 to 30 June 2012 ................................................	32
Economic profit/(loss) ..........................................	36
Reconciliations of RoRWA measures .....................	37
Disposals, held for sale and run-off portfolios ........	37

Use of non-GAAP financial measures

Our reported results are prepared in accordance with IFRSs as detailed in the Financial Statements starting on page 211. When we measure our performance internally we use financial measures such as 'constant currency' and 'underlying performance' in order to eliminate factors which distort period-on-period comparisons so we can view our results on a more like-for-like basis.

Constant currency

Constant currency eliminates the period-on-period effects of foreign currency translation differences on performance by comparing reported results for the half-year to 30 June 2012 with reported results for the half-years to 30 June 2011 and 31 December 2011 retranslated at average exchange rates for the half-year to 30 June 2012. Except where stated otherwise, commentaries are on a constant currency basis, as reconciled in the table overleaf.

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

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

Constant currency

Constant currency comparatives for the half-year to 30 June 2011 and 31 December 2011 referred to in the commentaries are computed by retranslating into US dollars for non-US dollar branches, subsidiaries, joint ventures and associates:

·  the income statements for the half-year to 30 June 2011 and 31 December 2011 at the average rates of exchange for the half-year to 30 June 2012; and

·  the balance sheets at 30 June 2011 and 31 December 2011 at the prevailing rates of exchange ruling at 30 June 2012.

No adjustment has been made to the exchange rates used to translate foreign currency denominated assets and liabilities into the functional currencies of any HSBC branches, subsidiaries, joint ventures or associates.

When reference is made to 'constant currency' in tables or commentaries, comparative data reported in the functional currencies of HSBC's operations have been translated at the appropriate exchange rates applied in the current period on the basis described above.

Reconciliation of reported and constant currency profit before tax

	Half-year to 30 June 2012 ('1H12') compared with half-year to 30 June 2011 ('1H11')
HSBC	1H11 as          reported             US$m		Currency     translation10            US$m		1H11          at 1H12        exchange               rates             US$m		1H12 as          reported             US$m		Reported           change11                 %		Constant      currency           change11                          %
Net interest income ......................	20,235		(669)		19,566		19,376		(4)		(1)
Net fee income .............................	8,807		(265)		8,542		8,307		(6)		(3)
Changes in fair value12 ..................	(143)		−		(143)		(2,170)		(1,417)		(1,417)
Gains on disposal of US branch network and cards business ........	−		−		−		3,809
Other income13 ............................	6,795		(268)		6,527		7,575		11		16
Net operating income14 ............	35,694		(1,202)		34,492		36,897		3		7
Loan impairment charges and other credit risk provisions .......	(5,266)		138		(5,128)		(4,799)		9		6
Net operating income ...............	30,428		(1,064)		29,364		32,098		5		9
Operating expenses ......................	(20,510)		746		(19,764)		(21,204)		(3)		(7)
Operating profit ........................	9,918		(318)		9,600		10,894		10		13
Share of profit in associates and joint ventures .....................	1,556		40		1,596		1,843		18		15
Profit before tax ........................	11,474		(278)		11,196		12,737		11		14
By global business
Retail Banking and Wealth Management .............................	3,126		(55)		3,071		6,410		105		109
Commercial Banking ....................	4,189		(105)		4,084		4,429		6		8
Global Banking and Markets .........	4,811		(131)		4,680		5,047		5		8
Global Private Banking .................	552		(5)		547		527		(5)		(4)
Other ...........................................	(1,204)		18		(1,186)		(3,676)		(205)		(210)
Profit before tax ..........................	11,474		(278)		11,196		12,737		11		14
By geographical region
Europe .........................................	2,147		(111)		2,036		(667)
Hong Kong ...................................	3,081		9		3,090		3,761		22		22
Rest of Asia-Pacific ......................	3,742		(38)		3,704		4,372		17		18
Middle East and North Africa .......	747		(3)		744		772		3		4
North America .............................	606		(16)		590		3,354		453		468
Latin America ..............................	1,151		(119)		1,032		1,145		(1)		11
Profit before tax ..........................	11,474		(278)		11,196		12,737		11		14

	Half-year to 30 June 2012 ('1H12') compared with half-year to 31 December 2011 ('2H11')
HSBC	2H11 as           reported             US$m		Currency       translation10            US$m		2H11           at 1H12          exchange                rates             US$m		1H12 as           reported             US$m		Reported            change11                  %		Constant        currency            change11                  %
Net interest income ......................	20,427		(334)		20,093		19,376		(5)		(4)
Net fee income .............................	8,353		(134)		8,219		8,307		(1)		1
Changes in fair value12 ..................	4,076		(38)		4,038		(2,170)
Gains on disposal of US branch network and cards business ........	-		-		-		3,809
Other income13 ............................	3,730		(91)		3,639		7,575		103		108
Net operating income14 ................	36,586		(597)		35,989		36,897		1		3
Loan impairment charges and other credit risk provisions .......	(6,861)		95		(6,766)		(4,799)		30		29
Net operating income ...................	29,725		(502)		29,223		32,098		8		10
Operating expenses ......................	(21,035)		372		(20,663)		(21,204)		(1)		(3)
Operating profit ...........................	8,690		(130)		8,560		10,894		25		27
Share of profit in associates and joint ventures .....................	1,708		17		1,725		1,843		8		7
Profit before tax ..........................	10,398		(113)		10,285		12,737		22		24
By global business
Retail Banking and Wealth Management .............................	1,144		(17)		1,127		6,410		460		469
Commercial Banking ....................	3,758		(47)		3,711		4,429		18		19
Global Banking and Markets .........	2,238		(29)		2,209		5,047		126		128
Global Private Banking .................	392		(3)		389		527		34		35
Other ...........................................	2,866		(17)		2,849		(3,676)
Profit before tax ..........................	10,398		(113)		10,285		12,737		22		24
By geographical region
Europe .........................................	2,524		(23)		2,501		(667)
Hong Kong ...................................	2,742		9		2,751		3,761		37		37
Rest of Asia-Pacific ......................	3,729		(26)		3,703		4,372		17		18
Middle East and North Africa .......	745		(2)		743		772		4		4
North America .............................	(506)		(3)		(509)		3,354
Latin America ..............................	1,164		(68)		1,096		1,145		(2)		4
Profit before tax ..........................	10,398		(113)		10,285		12,737		22		24

For footnotes, see page 100. 

Additional information is available on the HSBC website www.hsbc.com.

Underlying performance

Underlying performance:

·     eliminates the period-on-period effects of foreign currency translation;

·     eliminates the fair value movements on own debt attributable to credit spread ('own credit spread') where the net result of such movements will be zero upon maturity of the debt (see footnote 12 on page 100); and

·     adjusts for acquisitions, disposals and changes of ownership levels of subsidiaries, associates and businesses (see footnote 15 on page 100).

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

The following tables reconcile our reported revenue, loan impairment charges, operating expenses and profit before tax for the half-years to 30 June 2012, 30 June 2011 and 31 December 2011 to an underlying basis. Throughout this Interim Report, we may reconcile other reported results to underlying results when management believes that doing so results in a more useful discussion of operating performance. Equivalent tables are provided for each of our global businesses and geographical segments in the Form 6-K filed with the Securities and Exchange Commission ('SEC'), which is available on www.hsbc.com.

The following deductions were made from reported results in respect of disposals and dilutions which affected the underlying comparison:

·     the dilution gain of US$181m which arose on our holding in Ping An Insurance (Group) Company of China, Limited ('Ping An') following the issue of share capital to a third party in June 2011;

·     a loss of US$48m, being our share of the loss recorded by Ping An on re‑measurement of its previously held equity interest in Shenzen Development Bank ('SDB') when Ping An took control and fully consolidated SDB in July 2011;

·     the gain of US$83m on the sale of HSBC Afore S.A. de C.V. ('HSBC Afore') in August 2011 and the operating results for each of the comparative periods;

·     the dilution gain of US$27m in December 2011 as a result of the merger between HSBC Saudi Arabia Limited and SABB Securities Limited;

·     the gain of US$83m on disposal of HSBC Securities (Canada) Inc's private client services business in January 2012 and the operating results for each of the comparative periods;

·     the gain of US$108m on the sale of our Retail Banking and Wealth Management ('RBWM') operations in Thailand in March 2012;

·     the gain of US$3.1bn on the sale of the US Card and Retail Services business in May 2012 and the operating results for the last two months of each of the comparative periods;

·     the gain of US$661m on the disposal of 138 non-strategic branches in the US in May 2012 and the operating results for the last 43 days of each of the comparative periods;

·     the gain of US$102m on the sale of HSBC Argentina Holdings S.A.'s general insurance manufacturing subsidiary in Argentina in May 2012;

·     the gain of US$67m on the sale of our private banking business in Japan in June 2012 and the operating results for the last month of each of the comparative periods; and

·     the gain of US$130m on the sale of our shareholding in a property company in the Philippines in June 2012.

Reconciliation of reported and underlying revenue¹⁴

	Half-year to
	30 June              2012		30 June              2011		Change		30 June              2012		31 December              2011		Change
	US$m		US$m		%		US$m		US$m		%
Reported revenue .........................	36,897		35,694		3		36,897		36,586		1
Constant currency ........................			(1,202)						(559)
Own credit spread .........................	2,170		143				2,170		(4,076)
Acquisitions, disposals and dilutions	(4,299)		(1,220)				(4,299)		(1,095)
Underlying revenue ......................	34,768		33,415		4		34,768		30,856		13

For footnote, see page 100.

Reconciliation of reported and underlying loan impairment charges and other credit risk provisions ('LIC's)

	Half-year to
	30 June              2012		30 June              2011		Change		30 June              2012		31 December              2011		Change
	US$m		US$m		%		US$m		US$m		%
Reported LICs ..............................	(4,799)		(5,266)		9		(4,799)		(6,861)		30
Constant currency ........................			138						95
Acquisitions, disposals and dilutions	−		369				−		304
Underlying LICs ...........................	(4,799)		(4,759)		(1)		(4,799)		(6,462)		26

Reconciliation of reported and underlying operating expenses

	Half-year to
	30 June              2012		30 June              2011		Change		30 June              2012		31 December              2011		Change
	US$m		US$m		%		US$m		US$m		%
Reported operating expenses ........	(21,204)		(20,510)		(3)		(21,204)		(21,035)		(1)
Constant currency ........................			746						372
Acquisitions, disposals and dilutions	−		480				−		302
Underlying operating expenses .....	(21,204)		(19,284)		(10)		(21,204)		(20,361)		(4)
Underlying cost efficiency ratio ...	61.0%		57.7%				61.0%		66.0%

Reconciliation of reported and underlying profit before tax

	Half-year to
	30 June              2012		30 June              2011		Change		30 June              2012		31 December              2011		Change
	US$m		US$m		%		US$m		US$m		%
Reported profit before tax ...........	12,737		11,474		11		12,737		10,398		22
Constant currency ........................			(278)						(75)
Own credit spread .........................	2,170		143				2,170		(4,076)
Acquisitions, disposals and dilutions .................................................	(4,299)		(371)				(4,299)		(441)
Underlying profit before tax ........	10,608		10,968		(3)		10,608		5,806		83
By global business16
Retail Banking and Wealth Management ............................	2,573		2,886		(11)		2,573		657		292
Commercial Banking ....................	4,182		4,080		3		4,182		3,708		13
Global Banking and Markets .........	5,029		4,680		7		5,029		2,209		128
Global Private Banking ................	460		546		(16)		460		400		15
Other ...........................................	(1,636)		(1,224)		(34)		(1,636)		(1,168)		(40)
Underlying profit before tax ........	10,608		10,968		(3)		10,608		5,806		83
By geographical region17
Europe .........................................	938		2,107		(55)		938		(480)
Hong Kong ..................................	3,761		3,090		22		3,761		2,751		37
Rest of Asia-Pacific .....................	4,069		3,524		15		4,069		3,758		8
Middle East and North Africa .......	776		748		4		776		698		11
North America .............................	21		483		(96)		21		(1,930)
Latin America ..............................	1,043		1,016		3		1,043		1,009		3
Underlying profit before tax ........	10,608		10,968		(3)		10,608		5,806		83

For footnotes, see page 100.

 

END

 

 

IR UNASRUOAWRAR