Interim Report - 4 of 28

RNS Number : 8807L

HSBC Holdings PLC

16 August 2013

Consolidated income statement

Summary income statement

	Half-year to
	30 June 2013	30 June 2012	31 December 2012
	US$m	US$m	US$m

Net interest income ........................................................................	17,819	19,376	18,296
Net fee income ...............................................................................	8,404	8,307	8,123
Net trading income .........................................................................	6,362	4,519	2,572
Net expense from financial instruments designated at fair value ......	(1,197)	(1,183)	(1,043)
Gains less losses from financial investments ....................................	1,856	1,023	166
Dividend income .............................................................................	107	103	118
Net earned insurance premiums .......................................................	6,226	6,696	6,348
Gains on disposal of US branch network, US cards business and Ping An ..............................................................................................	-	3,809	3,215
Other operating income ..................................................................	946	1,022	1,078

Total operating income ...............................................................	40,523	43,672	38,873

Net insurance claims incurred and movement in liabilities to policyholders ..............................................................................	(6,151)	(6,775)	(7,440)

Net operating income before loan impairment charges and other credit risk provisions .........................................................................	34,372	36,897	31,433

Loan impairment charges and other credit risk provisions ..............	(3,116)	(4,799)	(3,512)

Net operating income .................................................................	31,256	32,098	27,921

Total operating expenses ................................................................	(18,399)	(21,204)	(21,723)

Operating profit ..........................................................................	12,857	10,894	6,198

Share of profit in associates and joint ventures ...............................	1,214	1,843	1,714

Profit before tax ..........................................................................	14,071	12,737	7,912

Tax expense ...................................................................................	(2,725)	(3,629)	(1,686)

Profit for the period ....................................................................	11,346	9,108	6,226

Profit attributable to shareholders of the parent company ..............	10,284	8,438	5,589
Profit attributable to non-controlling interests ...............................	1,062	670	637

Average foreign exchange translation rates to US$:
US$1: £ ..........................................................................................	0.648	0.634	0.628
US$1: € ..........................................................................................	0.761	0.771	0.786

Reported profit before tax of US$14.1bn in the first half of 2013 was US$1.3bn or 10% higher than in the first half of 2012, primarily due to minimal fair value movements on our own debt compared with adverse movements of US$2.2bn in the comparative period, and lower operating expenses. These factors were partially offset by lower gains (net of losses) from disposals and reclassifications of US$1.1bn compared with US$4.3bn in the first half of 2012. This mainly reflected the gain on disposal of the Card and Retail Services ('CRS') business in North America in May 2012, which more than offset the accounting gain arising in the first quarter of 2013 from the reclassification of Industrial Bank Co., Ltd ('Industrial Bank') as a financial investment following its issue of additional share capital to third parties.

On an underlying basis, profit before tax rose by 47%, primarily due to higher net operating income before loan impairment charges and other credit risk provisions ('revenue'), lower loan impairment charges and other credit risk provisions ('LIC's), and lower operating expenses.

The following commentary is on an underlying basis, except where otherwise stated. The difference between reported and underlying results is explained and reconciled on page 21.

Revenue of US$33.3bn was US$1.2bn or 4% higher than in the first half of 2012, reflecting:

· favourable fair value movements on non-qualifying hedges of US$293m compared with adverse movements of US$462m in the first half of 2012;

· a net gain recognised on completion of the disposal of our investment in Ping An Insurance (Group) Company of China, Ltd. ('Ping An') of US$553m;

· a favourable debit valuation adjustment ('DVA') of US$451m in GB&M on derivative contracts (see page 28);

· foreign exchange gains on sterling debt issued by HSBC Holdings of US$442m;

· a loss following the reclassification of the Monaco business in GPB to 'held for sale' of US$279m (see also Note 25 on the Financial statements); and

· a loss of US$138m on the sale of an HFC Bank UK secured loan portfolio.

Excluding these items, the main drivers of revenue movements in our global businesses were as follows:

· in GB&M, revenue increased in most of the businesses. Notably, there was a strong performance from Credit as clients sought funding from the debt capital markets, along with reserve releases compared with charges in the first half of 2012 and revaluation gains on assets in the legacy portfolio. In addition, income from Credit and Lending within Financing and Equity Capital Markets increased, benefiting from a rise in lending spreads and lower cost of funds compared with the same period last year. These factors were partly offset by a decline in revenue from Balance Sheet Management as expected due to reduced net interest income as proceeds from the sale and maturing of investments were reinvested at lower prevailing rates, coupled with a reduction in gains on the disposal of available-for-sale debt securities. In addition, revenue from Rates decreased as the first half of 2012 benefited from the significant tightening of spreads on eurozone bonds following the European Central Bank's announcement of the Long-Term Refinancing Operation, although this reduction in revenue was partly offset by minimal fair value movements on structured liabilities compared with adverse movements in the first half of 2012;

· in CMB, net interest income increased marginally, with growth in average customer loans and deposits largely offset by spread compression. Revenue also benefited from collaboration with other global businesses, particularly GB&M in Hong Kong, and a rise in lending fees;

· in RBWM, revenue decreased, primarily reflecting losses on the sale of the non-real estate portfolio and the early termination of cash flow hedges, both in the US run-off portfolio. These factors were partly offset by higher net interest income from improved mortgage spreads and an increase in average mortgage balances, primarily in Hong Kong and the UK. In addition, net fee income increased reflecting higher investment product sales in Hong Kong, notably from unit trusts and retail brokerage; and

· in GPB, revenue decreased as higher yielding positions matured and opportunities for reinvestment were limited by prevailing rates, lending and deposit spreads narrowed and average deposit balances fell.

LICs were US$1.3bn lower than in the first half of 2012, decreasing in the majority of our regions, notably North America, where the decrease primarily reflected improvements in housing market conditions, the continued reduction in the Consumer Mortgage and Lending ('CML') portfolio and lower delinquency levels. In Middle East and North Africa, we benefited from net releases of impairment charges, reflecting the improvement in the financial position of certain customers. In Europe, GB&M reported lower credit risk provisions following net releases on available-for-sale asset backed securities ('ABS's), compared with charges in the first half of 2012. In Rest of Asia‑Pacific, LICs were lower as the first half of 2012 included a large individually assessed impairment charge on a corporate exposure in CMB and a credit risk provision on an available-for-sale debt security in GB&M. By contrast, LICs were higher in Latin America, notably in Mexico reflecting an increase in collective impairments in RBWM and an increase in individually assessed provisions in CMB. In Brazil, higher LICs included charges mainly relating to impairment model changes and assumption revisions for restructured loan accounts in portfolios in RBWM and Business Banking in CMB (see page 113), although this was in part offset by an improvement in the quality of the portfolio.

Operating expenses were lower than in the first half of 2012. This primarily arose from the non-recurrence of a provision for US anti-money laundering, Bank Secrecy Act ('BSA') and Office of Foreign Asset Control ('OFAC') investigations, and lower charges relating to UK customer redress programmes, restructuring and related costs.

The charges for UK customer redress programmes include estimates in respect of possible mis-selling in previous years of payment protection insurance ('PPI') policies of US$367m compared with US$1.0bn in the first half of 2012. The additional provision relating to PPI mainly reflects higher response rates than forecast as we progressed with our customer contact programmes. There are many factors which could affect these estimated
liabilities and there remains a high degree of uncertainty as to the eventual cost of redress for these matters.

Excluding these items, operating expenses were US$298m higher than in the first half of 2012, primarily due to increased litigation-related costs in GB&M and in GPB in Europe, and a customer remediation provision connected to our former CRS business. We increased investment costs in strategic initiatives and infrastructure, while we continued to invest in our Global Standards governance and programmes. In addition, other costs rose due to higher third party service costs, marketing expenses, credit card related costs and general inflationary pressures. These factors were partly offset by sustainable cost savings of around US$800m, as we maintained our strict cost control. Staff costs fell due to an accounting gain arising from a change in the basis of delivering ill-health benefits to certain employees in the UK of US$430m, and lower performance-related costs, although these reductions were in part offset by wage inflation.

On a constant currency basis, income from associates decreased, driven by the disposal of our investment in Ping An and the reclassification of Industrial Bank as a financial investment. These factors were partly offset by higher income from Bank of Communications Co., Limited ('BoCom') due to balance sheet growth and higher fee income.

The reported profit after tax was US$11.3bn or 25% higher than in the first half of 2012, reflecting in part a lower tax charge in the first half of 2013. This was driven by the benefits arising from the non‑taxable gains on profits associated with the reclassification of Industrial Bank as a financial investment and the disposal of our investment in Ping An, offset in part by the reduction in deferred tax assets recognised in Mexico following clarification of the tax law by the Mexican fiscal authority.

Notable revenue items by geographical region

	Europe	Hong Kong	Rest of Asia- Pacific	MENA	North America	Latin America	Total
	US$m	US$m	US$m	US$m	US$m	US$m	US$m
Half-year to 30 June 2013
Net gain on completion of Ping An disposal²⁶ .................................................	-	-	553	-	-	-	553

Half-year to 31 December 2012
Ping An contingent forward sale contract²⁷ .................................................................	-	-	(553)	-	-	-	(553)

Notable revenue items by global business

	Retail Banking and Wealth Management	Commercial Banking		Global Banking and Markets	Global Private Banking	Other	Total
	US$m		US$m	US$m	US$m	US$m	US$m
Half-year to 30 June 2013
Net gain on completion of Ping An disposal²⁶ ...........................................	-		-	-	-	553	553

Half-year to 31 December 2012
Ping An contingent forward sale contract²⁷ ..........................................	-		-	-	-	(553)	(553)

For footnotes, see page 100.

Notable cost items by geographical region

	Europe	Hong Kong	Rest of Asia- Pacific	MENA	North America	Latin America	Total
	US$m	US$m	US$m	US$m	US$m	US$m	US$m
Half-year to 30 June 2013
Restructuring and other related costs ........	103	2	10	3	78	42	238
UK customer redress programmes ............	412	-	-	-	-	-	412

Half-year to 30 June 2012
Restructuring and other related costs ........	201	23	113	3	151	72	563
UK customer redress programmes ............	1,345	-	-	-	-	-	1,345
Fines and penalties for inadequate compliance with anti-money laundering and sanction laws .................................	-	-	-	-	700	-	700

Half-year to 31 December 2012
Restructuring and other related costs ........	98	8	18	24	70	95	313
UK customer redress programmes ............	993	-	-	-	-	-	993
Fines and penalties for inadequate compliance with anti-money laundering and sanction laws .................................	375	-	-	-	846	-	1,221

Notable cost items by global business

	Retail Banking and Wealth Management	Commercial Banking		Global Banking and Markets	Global Private Banking	Other	Total
	US$m		US$m	US$m	US$m	US$m	US$m
Half-year to 30 June 2013
Restructuring and other related costs ...........	85		22	9	6	116	238
UK customer redress programmes ................	412		-	-	-	-	412

Half-year to 30 June 2012
Restructuring and other related costs ...........	183		42	32	37	269	563
UK customer redress programmes ................	1,107		119	119	-	-	1,345
Fines and penalties for inadequate compliance with anti-money laundering and sanction laws .....................................	-		-	-	-	700	700

Half-year to 31 December 2012
Restructuring and other related costs ...........	83		20	31	21	158	313
UK customer redress programmes ................	644		139	212	(2)	-	993
Fines and penalties for inadequate compliance with anti-money laundering and sanction laws .....................................	-		-	-	-	1,221	1,221

Group performance by income and expense item

Net interest income

	Half-year to
	30 June 2013	30 June 2012	31 December 2012
	US$m	US$m	US$m

Interest income ............................................................................................	25,740	29,549	27,153
Interest expense ...........................................................................................	(7,921)	(10,173)	(8,857)

Net interest income²⁸ ...................................................................................	17,819	19,376	18,296

Average interest-earning assets .....................................................................	1,657,555	1,645,410	1,604,947

Gross interest yield²⁹ .....................................................................................	3.13%	3.61%	3.37%
Cost of funds ................................................................................................	(1.15%)	(1.45%)	(1.27%)
Net interest spread³⁰ .....................................................................................	1.99%	2.16%	2.10%
Net interest margin³¹ ....................................................................................	2.17%	2.37%	2.27%

For footnotes, see page 100.

The commentary in the following sections is on a constant currency basis unless otherwise stated.

Reported net interest income of US$17.8bn decreased by 8% compared with the first half of 2012. On a constant currency basis, it fell by 7%.

On an underlying basis, which excludes the net interest income earned by the businesses sold during 2012 and the first half of 2013 (see page 20) from all periods presented (first half of 2013: US$14m; first half of 2012: US$1.6bn) and currency translation movements of US$278m, net interest income rose by 2%. This reflected balance sheet growth in Hong Kong together with higher yields on lending and lower cost of funds in Europe, partly offset by lower net interest income earned in North America as a result of the run-off of the CML portfolio in the US and the consumer finance business in Canada.

The fall in both net interest spread and net interest margin compared with the first half of 2012 was attributable to significantly lower yields on customer lending, reflecting the sale of the higher yielding CRS business, and lower yields on our surplus liquidity. This was partly offset by a reduction in our cost of funds, notably on customer accounts and debt issued by the Group.

On a constant currency basis, interest income earned in the first half of 2013 on interest-earning assets fell. This was driven by lower interest income from customer lending, including loans classified within 'Assets held for sale', as a consequence of business disposals, principally the CRS business in the US in 2012. Interest income from customer lending also declined in Latin America, as a result of lower yields in Brazil following the reduction in interest rates since the start of 2012. By contrast, interest income on customer lending in Hong Kong rose, driven by growth in residential mortgages in RBWM, and term and trade-related lending in CMB from continued client demand. However, the benefit to interest income of this volume growth was partly offset by lower yields as interest rates declined in a number of countries in Asia.

Revenue in Balance Sheet Management also decreased. Yields on financial investments and cash placed with banks and central banks declined as the proceeds from maturities and sales of available-for-sale debt securities were reinvested at lower prevailing rates. This was partly offset by a rise in the size of the Balance Sheet Management portfolio, reflecting growth in customer deposits.

The decrease in interest income was offset in part by a reduction in interest expense. This was driven by a lower cost of funds on customer accounts, as the growth in average balances, notably in Europe, Hong Kong and Rest of Asia-Pacific, was more than offset by a reduction in the interest rate paid to customers. There was also a decline in the interest expense on customer accounts in Latin America, principally in Brazil, reflecting the managed reduction in term deposits and the transformation of the funding base, substituting wholesale customer deposits for medium‑term notes, together with the decline in average interest rates.

Interest expense on debt issued by the Group also decreased. Average balances outstanding fell, mainly in North America, where funding requirements declined as a result of business disposals and the run-off of the CML portfolio, and in Europe, as a result of net redemptions. The effective interest rate also declined as new issuances were at lower prevailing rates.

'Net interest income' includes the expense of internally funding trading assets, while related revenue is reported in 'Net trading income'. The internal cost of funding of these assets declined, reflecting a rise in third party funding of our trading book, together with a fall in average trading assets in Latin America, and interest rate reductions in a number of countries. In reporting our global business results, this cost is included within 'Net trading income'.

Net fee income

	Half-year to
	30 June 2013 US$m	30 June 2012 US$m	31 December 2012 US$m

Account services ..........................................................................................	1,701	1,755	1,808
Funds under management ..............................................................................	1,347	1,242	1,319
Cards ............................................................................................................	1,304	1,716	1,314
Credit facilities .............................................................................................	930	867	894
Broking income ............................................................................................	734	707	643
Imports/exports ...........................................................................................	580	606	590
Underwriting ................................................................................................	518	377	362
Unit trusts ....................................................................................................	481	344	395
Remittances .................................................................................................	415	399	420
Global custody ..............................................................................................	364	375	362
Insurance ......................................................................................................	280	425	271
Corporate finance ........................................................................................	171	230	140
Trust income ................................................................................................	143	141	142
Investment contracts ...................................................................................	66	71	70
Mortgage servicing .......................................................................................	42	47	39
Other ...........................................................................................................	1,072	979	1,099

Fee income ...................................................................................................	10,148	10,281	9,868

Less: fee expense ..........................................................................................	(1,744)	(1,974)	(1,745)

Net fee income .............................................................................................	8,404	8,307	8,123

Net fee income increased by US$97m on a reported basis, and by US$182m on a constant currency basis. This growth was mainly due to a rise in underwriting and wealth management activities.

On an underlying basis, which excludes the net fee income relating to the business disposals listed on page 20 (first half of 2013: expense of US$4m; first half of 2012: income of US$364m) and currency translation movements of US$85m, net fee income rose by US$550m, or 7%.

Underwriting fees rose as we captured increased client demand for equity and debt capital financing in Europe and Hong Kong and, in part, from the enhanced collaboration between CMB and GB&M.

Fees from unit trusts and funds under management grew, notably in Hong Kong, reflecting improved market sentiment and strong customer demand. Fee income from Credit facilities also rose, most notably in Europe in CMB.

These factors were partly offset by the sale of the CRS business, which led to a reduction in cards and insurance fee income as well as fee expenses. As part of that transaction, we receive fee income relating to a transition service agreement made with the purchaser, this is reported in 'Other fee income' while associated costs are reported in 'Operating expenses'.

Net trading income

	Half-year to
	30 June 2013 US$m	30 June 2012 US$m	31 December 2012 US$m

Trading activities .........................................................................................	5,766	3,622	1,627
Ping An contingent forward sale contract²⁶ ..................................................	(682)	-	(553)
Net interest income on trading activities ......................................................	1,132	1,385	1,298
Gain/(loss) on termination of hedges ............................................................	(200)	3	(3)
Other trading income/(expense) - hedge ineffectiveness:
- on cash flow hedges ...............................................................................	7	3	32
- on fair value hedges ...............................................................................	46	(32)	5
Non-qualifying hedges ..................................................................................	293	(462)	166

Net trading income^32,33 .................................................................................	6,362	4,519	2,572

For footnotes, see page 100.

Reported net trading income of US$6.4bn was US$1.8bn higher than in the first half of 2012. On a constant currency basis, it was US$1.9bn higher, notably in Europe.

The rise in net income from trading activities was due in part to favourable foreign exchange movements on assets held as economic hedges of foreign currency debt designated at fair value of US$1.1bn, compared with adverse movements of US$454m reported in the first half of 2012. These offset adverse foreign exchange movements on the foreign currency debt which are reported in 'Net expense from financial instruments designated at fair value'. In addition, we reported foreign exchange gains of US$442m on sterling debt issued by HSBC Holdings, together with a favourable DVA of US$451m on derivative contracts reflecting a widening of spreads on HSBC credit default swaps and refinement of the calculation.

In addition, revenue from trading activities in Global Markets rose. Credit trading revenue increased as a result of reserve releases compared with charges in the first half of 2012, and revaluation gains on assets in the legacy portfolio. Foreign Exchange trading revenue rose as a result of higher client volumes reflecting improved electronic pricing and distribution capabilities, although this was offset in part by margin compression resulting from increased competition. Equities trading revenue also grew, reflecting fair value movements on assets in Europe together with minimal fair value movements on structured liabilities which contrasted with adverse fair value movements in the first half of 2012. These factors were partly offset by a fall in Rates revenue. Our Rates business benefited from a significant tightening of spreads on eurozone bonds in the first half of 2012 following the European Central Bank's Long-Term Refinancing Operation. Although performance in the first quarter of 2013 was resilient, the second quarter was adversely affected by more volatile market conditions as a result of expectations that the scale of government repurchase schemes and quantitative easing measures may be reduced. We reported favourable fair value movements on structured liabilities totalling US$4m, compared with adverse fair value movements of US$330m, as reported in the first half of 2012.

In the first half of 2013, there were favourable movements on non-qualifying hedges compared with adverse movements in the comparable period. These types of hedges are discussed further on page 36 of the Annual Report and Accounts 2012. In North America, we reported favourable fair value movements on non-qualifying hedges as US long-term interest rates increased, compared with adverse fair value movements in the first half of 2012. There were also favourable fair value movements on non-qualifying hedges in Europe, driven by HSBC Holdings, as long‑term sterling and euro interest rates rose to a lesser extent than US interest rates, compared with adverse movements in the first half of 2012.

In addition, net trading income was adversely affected by a loss of US$199m relating to the early termination of qualifying accounting hedges in HSBC Finance Corporation ('HSBC Finance') as a result of anticipated changes in funding.

During the first half of 2013, we reported adverse fair value movements of US$682m on the contingent forward sale contract relating to Ping An in Rest of Asia-Pacific (see page 76). See footnote 26 on page 100 for a description of the overall effect of the transaction in the first half of 2013.

Net interest income from trading activities also declined. This was driven by significantly lower yields on debt securities and reverse repos held for trading, reflecting the downward movement in interest rates, partly offset by a reduction in funding costs.

Net expense from financial instruments designated at fair value

	Half-year to
	30 June 2013 US$m	30 June 2012 US$m	31 December 2012 US$m
Net income/(expense) arising from:
-. financial assets held to meet liabilities under insurance and investment contracts ............................................................................	717	811	2,169
-. liabilities to customers under investment contracts ...............................	(506)	(260)	(736)

-. HSBC's long-term debt issued and related derivatives ............................	(1,419)	(1,810)	(2,517)
Change in own credit spread on long-term debt³⁴ ...............................	(19)	(2,170)	(3,045)
Other changes in fair value³⁵ .............................................................	(1,400)	360	528

-. other instruments designated at fair value and related derivatives ..........	11	76	41

Net expense from financial instruments designated at fair value ...................	(1,197)	(1,183)	(1,043)

Assets and liabilities from which net income/(expense) from financial instruments designated at fair value arose

	At
	30 June	30 June	31 December
	2013 US$m	2012 US$m	2012 US$m

Financial assets designated at fair value at period-end ...................................	35,318	32,310	33,582
Financial liabilities designated at fair value at period-end ..............................	84,254	87,593	87,720

Including:
Financial assets held to meet liabilities under:
- insurance contracts and investment contracts with DPF³⁶ ......................	10,017	7,884	8,376
- unit-linked insurance and other insurance and investment contracts .......	23,365	20,968	23,655
Long-term debt issues designated at fair value ...............................................	71,456	75,357	74,768

For footnotes, see page 100.

The majority of the financial liabilities designated at fair value relate to fixed-rate long-term debt issued and managed in conjunction with interest rate swaps as part of our interest rate management strategy. These liabilities are discussed further on page 37 of the Annual Report and Accounts 2012.

Net expense from financial instruments designated at fair value was US$1.2bn in the first half of 2013, in line with the same period in 2012. This included the credit spread-related movements in the fair value of our own long-term debt, which was broadly unchanged compared with an adverse movement of US$2.2bn in the first half of 2012.

Net income arising from financial assets held to meet liabilities under insurance and investment contracts was lower in the first half of 2013 than in the first half of 2012. This was driven by falling equity markets and bond prices in Hong Kong and lower net income on the bond portfolio in Brazil, partly offset by improved market conditions in the UK.

The investment gains or losses arising from equity markets result in a corresponding movement in liabilities to customers (see page 38 of the Annual Report and Accounts 2012 for details of the treatment of the movement in these liabilities).

Other changes in fair value included adverse foreign exchange movements in the first half of the year compared with favourable movements in the same period in 2012 on foreign currency debt designated at fair value issued as part of our overall funding strategy. An offset from assets held as economic hedges was reported in 'Net trading income'.

Gains less losses from financial investments

	Half-year to
	30 June 2013 US$m	30 June 2012 US$m	31 December 2012 US$m
Net gains/(losses) from disposal of:
-. debt securities .......................................................................................	416	672	109
-. Ping An equity securities classified as available-for-sale²⁶ ......................	1,235	-	-
-. other equity securities ...........................................................................	253	456	367
-. other financial investments ..................................................................	(2)	5	-

	1,902	1,133	476
Impairment of available-for-sale equity securities .........................................	(46)	(110)	(310)

Gains less losses from financial investments .................................................	1,856	1,023	166

In the first half of 2013, gains less losses from financial investments rose by US$833m on a reported basis and US$843m on a constant currency basis, driven by a significant increase in net gains from the disposal of available-for-sale equity securities in Rest of Asia-Pacific following the disposal of our investment in Ping An (see footnote 26 on page 100 for a description of the overall effect of the transaction in the first half of 2013). This was partly offset by the non-recurrence of gains in Hong Kong from the sale of our shares in two Indian banks in the first half of 2012.

The decline in impairments on available-for-sale equity securities also contributed to the rise in gains
less losses from financial investments. This reflected a write-down of a holding in the first half of 2012 within our direct investment business which is in run-off.

Net gains on the disposal of debt securities fell as the first half of 2012 included significant gains on the sale of available-for-sale government debt securities, notably in the UK, as part of Balance Sheet Management's structural interest rate risk management activities. The fall was partly offset by higher gains on disposal of available‑for‑sale debt securities in North America in the first half of 2013.

Net earned insurance premiums

	Half-year to
	30 June 2013 US$m	30 June 2012 US$m	31 December 2012 US$m

Gross insurance premium income ..................................................................	6,451	6,929	6,673
Reinsurance premiums ..................................................................................	(225)	(233)	(325)

Net earned insurance premiums ....................................................................	6,226	6,696	6,348

In the first half of 2013, net earned insurance premiums decreased by US$470m and US$394m on a reported and constant currency basis, respectively.

This reduction was primarily driven by lower premiums in Latin America, Europe and North America, partly offset by an increase in Hong Kong.

In Latin America, net earned premiums decreased in Brazil due to lower sales of unit-linked pension products, primarily as a result of the restructuring of the distribution channel and the sale of the non-life business in Argentina in the first half of 2012.

The reduction in net earned premiums in North America was due to the sale of our life insurance business in the first half of 2013.

In Europe, net earned premiums decreased, mainly in France, as a result of lower sales of investments contracts with DPF. In addition, the first half of 2012 benefited from a number of large sales via independent financial advisers.

In Hong Kong, premium income increased compared with the first half of 2012 as a result of increased renewals of insurance contracts with DPF and unit‑linked insurance contracts, partly offset by the disposal of the non-life business in the second half of 2012.

Gains on disposal of US branch network, US cards business and Ping An

	Half-year to
	30 June 2013	30 June 2012	31 December 2012
	US$m	US$m	US$m

Gains on disposal of US branch network .......................................................	-	661	203
Gains on disposal of US cards business ...........................................................	-	3,148	-
Gains on disposal of Ping An³⁷ .....................................................................	-	-	3,012

Total.............................................................................................................	-	3,809	3,215

For footnote, see page 100.

In the second half of 2012, we entered into an agreement to dispose of our entire shareholding in Ping An in two tranches, details of which are described on page 472 of the Annual Report and Accounts 2012. The first tranche was completed on 7 December 2012 at which point we ceased to account for Ping An as an associate and recognised a gain on disposal of US$3.0bn. The remaining shareholding in respect of the second tranche was recognised as a financial investment. The fixing of the sale price in respect of the second tranche gave rise to a contingent forward sale contract, for which there was an adverse fair value movement of US$553m recorded in 'Net trading income'.

In the first half of 2013, we completed the disposal of our investment in Ping An realising a gain of US$1.2bn recorded in 'Gains less losses from financial investments'. This was partly offset by the adverse fair value movement of US$682m on the contingent forward sale contract recorded in 'Net trading income', leading to a net gain in the period of US$553m.

Other operating income

	Half-year to
	30 June 2013 US$m	30 June 2012 US$m	31 December 2012 US$m

Rent received ...............................................................................................	77	100	110
Gains/(losses) recognised on assets held for sale ............................................	(481)	202	283
Valuation gains on investment properties .....................................................	110	43	29
Gains on disposal of property, plant and equipment, intangible assets and non-financial investments ..................................................................	14	146	41
Gains arising from dilution of interest in Industrial Bank ..............................	1,089	-	-
Change in present value of in-force long-term insurance business .................	100	401	336
Other ...........................................................................................................	37	130	279

Other operating income ...............................................................................	946	1,022	1,078

Change in present value of in-force long-term insurance business

	Half-year to
	30 June 2013 US$m	30 June 2012 US$m	31 December 2012 US$m

Value of new business ....................................................................................	517	530	497
Expected return ............................................................................................	(249)	(216)	(204)
Assumption changes and experience variances ..............................................	(127)	87	(18)
Other adjustments ........................................................................................	(41)	-	61

Change in present value of in-force long-term insurance business .................	100	401	336

Reported other operating income of US$946m decreased by US$76m in the first half of 2013 and by US$45m on a constant currency basis.

Reported other operating income included net gains on the disposals and the reclassifications listed on page 20 of US$1.1bn in the first half of 2013, largely relating to an accounting gain arising from the reclassification of Industrial Bank as a financial investment following its issue of additional share capital to third parties, compared with net gains of US$484m in the comparable period of 2012.

On an underlying basis, which excludes the net gains above and currency translation of US$30m, other operating income decreased, driven by a loss of US$271m following the sale of our CML non-real estate personal loan portfolio in April 2013, together with a loss of US$279m relating to the reclassification of our Monaco business to held for sale (see also Note 25 on the Financial Statements). In addition, we recognised a loss of US$138m on the sale of an HFC Bank UK secured loan portfolio in RBWM in Europe.

There were lower favourable movements in the present value of in-force ('PVIF') long-term insurance business. This was largely due to favourable valuation of policyholder options and guarantees in Hong Kong in the first half of 2012, together with an increase in lapse rates and interest rate movements in Latin America in the first half of 2013.

Net insurance claims incurred and movement in liabilities to policyholders

	Half-year to
	30 June 2013 US$m	30 June 2012 US$m	31 December 2012 US$m

Insurance claims incurred and movement in liabilities to policyholders:
- gross .....................................................................................................	6,239	6,869	7,660
- reinsurers' share ....................................................................................	(88)	(94)	(220)

- net³⁸ .....................................................................................................	6,151	6,775	7,440

For footnote, see page 100.

Net insurance claims incurred and movement in liabilities to policyholders decreased by 9% on a reported basis, and by 8% on a constant currency basis.

The reduction in claims was primarily due to a decrease in new business written, notably in Latin America and North America, and includes the effect of business disposals partly offset by increased renewals in Hong Kong as explained under 'Net earned insurance premiums'.

Further reductions in claims resulted from lower investment returns on the assets held to support policyholder contracts where the policyholder bears investment risk. This reflected adverse equity market movements in Hong Kong and lower investment gains in Brazil as a result of market movements, partly offset by favourable equity market movements in the UK and France. The gains or losses recognised on the financial assets designated at fair value held to support these insurance and investment contract liabilities are reported in 'Net income from financial instruments designated at fair value'.

Loan impairment charges and other credit risk provisions

	Half-year to
	30 June 2013 US$m	30 June 2012 US$m	31 December 2012 US$m
Loan impairment charges
New allowances net of allowance releases ..................................................	3,828	5,093	4,213
Recoveries of amounts previously written off ...........................................	(639)	(568)	(578)

	3,189	4,525	3,635

Individually assessed allowances ....................................................................	1,121	1,103	1,036
Collectively assessed allowances ...................................................................	2,068	3,422	2,599

Impairment/(releases of impairment) of available-for-sale debt securities .....	(82)	243	(144)

Other credit risk provisions ..........................................................................	9	31	21

Loan impairment charges and other credit risk provisions ............................	3,116	4,799	3,512

	%	%	%
-. as a percentage of underlying revenue ...................................................	9.4	13.8	12.2

Impairment charges on loans and advances to customers as a percentage of average gross loans and advances to customers (annualised) ..................	0.7	1.0	0.9

On a reported basis, LICs reduced from US$4.8bn to US$3.1bn, a decrease of 35%. The percentage of impairment charges to average gross loans and advances in the first half of 2013 was 0.7% compared with 1.0% at 30 June 2012 and 0.9% at 31 December 2012. This improvement was due to decreases in North America and the Middle East and North Africa partly offset by increases in Latin America as a result of the movements described below.

On a constant currency basis, LICs fell by US$1.6bn, a reduction of 34%.

Collectively assessed charges decreased by US$1.3bn while individually assessed impairment charges increased by 3%. Credit risk provisions on available-for-sale debt securities fell by US$322m.

The fall in collectively assessed charges was driven in North America by improvements in housing market conditions, the continuing run-off of the CML portfolio in the first half of 2013 and lower delinquency levels. This was partially offset by increases in Latin America as a result of higher collective provisions mainly relating to impairment model changes and assumption revisions in Brazil for restructured loans in portfolios in RBWM and Business Banking in CMB.

The increase in individually assessed loan impairment charges was due to higher levels of impairment in Latin America, mainly on exposures to homebuilders in Mexico, and higher individually assessed provisions in CMB in the UK. These were partly offset by decreases in the Middle East and North Africa in GB&M, RBWM and CMB.

The reduction in credit risk provisions on available-for-sale debt securities was driven by GB&M as a result of net releases in Europe and, in Rest of Asia-Pacific, the non-recurrence of a credit risk provision on an available-for-sale debt security in GB&M in the first half of 2012.

In North America, LICs decreased by 68% to US$696m, mainly in the US, driven by significant favourable market value adjustments in the value of underlying properties of US$603m reflecting improvements in housing market conditions, a reduction in CML lending balances as the portfolio continued to run off and lower delinquency levels. In addition, loan impairment charges declined by US$323m due to the sale of the CRS business in 2012. Partially offsetting these declines was an increase of US$130m related to a rise in the estimated average period of time from current status to write-off for real estate loans to 12 months (previously a period of 10 months was used). In CMB, loan impairment charges increased by US$105m due to individually assessed impairments on a small number of exposures in Canada and, in the US, due to higher provisions as a result of an increase in loans in key growth markets and a lower level of recoveries compared with the first half of 2012.

In the Middle East and North Africa, LICs decreased to a net credit of US$47m compared with a charge of US$134m in the first half of 2012. GB&M recorded a net release of impairment charges, compared with a charge in the first half of 2012, reflecting the improvement in the financial position of certain customers. CMB also recorded a net release in loan impairment charges due to a limited number of specific customer recoveries, fewer individually assessed loan impairments and lower collective impairment charges, reflecting an improvement in the credit portfolio. Lower impairments in RBWM were attributable to a combination of the repositioning of the book towards higher quality lending in previous periods and improved property prices in the United Arab Emirates ('UAE').

LICs in Europe decreased by 17% to US$846m. This was driven by net releases on available-for-sale ABSs within GB&M in the UK, compared with charges in the first half of 2012. RBWM in the UK also experienced a reduction in loan impairment charges as a result of improved delinquency rates and reductions in the size of the unsecured portfolio. This was partially offset by increases in collectively assessed provisions in RBWM in Turkey, mainly as a result of higher credit card balances reflecting business expansion. In addition, higher individually assessed provisions in CMB were driven by a small number of customers in the UK, and the challenging economic conditions in Spain.

In Rest of Asia-Pacific, LICs decreased by 49% to US$152m following a large individually assessed impairment charge on a corporate exposure in Australia and a credit risk provision on an available-for-sale debt security in GB&M in the first half of 2012.

In Latin America, LICs increased by 34% to US$1.4bn, driven by higher collective provisions in RBWM and CMB and higher individually assessed provisions. This included charges mainly relating to impairment model changes and assumption revisions in Brazil for restructured loans in portfolios in RBWM and Business Banking in CMB, although this was offset in part by an improvement in the quality of the portfolio following the modification of credit strategies in previous periods to mitigate rising delinquency rates. Collective impairments also rose in RBWM in Mexico reflecting the non-recurrence of a provision release in the first half of 2012, higher lending balances and a revision to the assumptions used in our collective assessment models in the first half of 2013. In addition, individually assessed provisions increased, in particular on exposures to homebuilders in CMB due to a change in external housing policy together with a specific exposure in GB&M, both in Mexico.

LICs in Hong Kong of US$46m were higher due to an increase in RBWM from a revision to the collective assessment model, partly offset by collective impairment releases in CMB due to changes in assumptions in respect of loss rates.

Operating expenses

	Half-year to
	30 June 2013	30 June 2012	31 December 2012
	US$m	US$m	US$m

Employee compensation and benefits ...........................................................	9,496	10,905	9,586
Premises and equipment (excluding depreciation and impairment) ................	2,008	2,086	2,240
General and administrative expenses .............................................................	5,719	7,039	8,618

Administrative expenses ...............................................................................	17,223	20,030	20,444
Depreciation and impairment of property, plant and equipment ...................	699	706	778
Amortisation and impairment of intangible assets ........................................	477	468	501

Operating expenses ......................................................................................	18,399	21,204	21,723

Staff numbers (full-time equivalent)

	At
	30 June 2013	30 June 2012	31 December 2012

Europe .........................................................................................................	69,599	73,143	70,061
Hong Kong ...................................................................................................	27,966	27,976	27,742
Rest of Asia-Pacific ......................................................................................	85,665	86,207	85,024
Middle East and North Africa .......................................................................	8,667	9,195	8,765
North America .............................................................................................	21,454	23,341	22,443
Latin America ..............................................................................................	46,046	51,667	46,556

Staff numbers ...............................................................................................	259,397	271,529	260,591

Reported operating expenses of US$18.4bn were US$2.8bn or 13% lower than in the first half of 2012. On an underlying basis, costs fell by 8%.

On a constant currency basis, operating expenses in the first half of 2013 were US$2.5bn or 12% lower than in the comparable period in 2012, primarily resulting from the business disposals during 2012, including the CRS business and the non-strategic branches in the US. Costs also fell due to the non-recurrence of a provision for US anti-money laundering, BSA and OFAC investigations and a reduction of US$901m in UK customer redress programmes. The latter included a charge for additional estimated redress for possible mis-selling in previous years of PPI policies of US$367m (US$1.0bn in the first half of 2012), which increased the provision for the UK customer redress programmes at 30 June 2013 to US$1.8bn. Restructuring and other related costs of US$238m reduced by US$311m compared with the first half of 2012.

Excluding the above, expenses were US$298m higher than in the comparable period. Litigation-related expenses increased by US$0.6bn, primarily due to higher costs in GB&M and GPB in Europe and a customer remediation provision connected to our former CRS business. We increased investment costs in strategic initiatives and infrastructure, while we continued to invest in our Global Standards governance and programmes. In addition, other costs increased due to higher third party service costs, marketing expenses, credit card related costs and general inflationary pressures.

These increases were partly offset by further sustainable cost savings of US$0.8bn from our on‑going organisational effectiveness programmes. These, together with business disposals, resulted in a fall of 8% in average staff numbers compared with the first half of 2012.

Staff costs also fell due to an accounting gain arising from a change in the basis of delivering ill-health benefits to certain employees in the UK of US$430m (see Note 5 on the Financial Statements). In addition, performance-related costs fell by US$299m, primarily in GB&M. These reductions in staff costs were in part offset by wage inflation.

Cost efficiency ratios⁵

	Half-year to
	30 June 2013	30 June 2012	31 December 2012
	%	%	%

HSBC .........................................................................................................	53.5	57.5	69.1

Geographical regions
Europe .........................................................................................................	68.5	96.1	123.5
Hong Kong ...................................................................................................	36.4	39.1	39.0
Rest of Asia-Pacific ......................................................................................	39.3	48.2	38.5
Middle East and North Africa .......................................................................	49.2	43.4	52.7
North America .............................................................................................	70.7	44.7	95.0
Latin America ..............................................................................................	61.9	59.0	58.4

Global businesses
Retail Banking and Wealth Management ......................................................	63.6	52.9	65.7
Commercial Banking ....................................................................................	42.4	45.3	46.5
Global Banking and Markets .........................................................................	47.0	49.1	60.9
Global Private Banking .................................................................................	89.9	67.8	67.3

Share of profit in associates and joint ventures

	Half-year to
	30 June 2013 US$m	30 June 2012 US$m	31 December 2012 US$m

Associates
Bank of Communications Co., Limited .....................................................	941	829	841
Ping An Insurance (Group) Company of China, Ltd. .................................	-	447	316
Industrial Bank Co., Limited .....................................................................	-	305	365
The Saudi British Bank .............................................................................	208	189	157
Other ........................................................................................................	43	41	31

Share of profit in associates ..........................................................................	1,192	1,811	1,710
Share of profit in joint ventures ...................................................................	22	32	4

Share of profit in associates and joint ventures .............................................	1,214	1,843	1,714

The reported share of profit in associates and joint ventures was US$1.2bn, a decrease of 34% compared with the first half of 2012. On a constant currency basis, it decreased by 35%, driven by the non-recurrence of profits from our then associate, Ping An, in the first half of 2012 and the reclassification in the first half of 2013 of Industrial Bank as a financial investment.

The recognition of profits from Ping An ceased following the agreement to sell our shareholding on 5 December 2012 and from Industrial Bank following the issuance of additional share capital to third parties on 7 January 2013 which resulted in our diluted shareholding being classified as a financial investment.

Our share of profit from BoCom rose as a result of balance sheet growth and increased fee income, partly offset by higher operating expenses and a rise in loan impairment charges.

Profits from The Saudi British Bank rose, reflecting strong balance sheet growth and effective cost management.

Tax expense

	Half-year to
	30 June	30 June	31 December
	2013 US$m	2012 US$m	2012 US$m

Profit before tax ..........................................................................................	14,071	12,737	7,912
Tax expense .................................................................................................	(2,725)	(3,629)	(1,686)

Profit after tax .............................................................................................	11,346	9,108	6,226

Effective tax rate .........................................................................................	19.4%	28.5%	21.3%

The effective tax rate for the first half of 2013 of 19.4% was lower than the UK corporation tax rate of 23.25%.

The lower tax rate reflected the benefits arising from the non-taxable gain on profits resulting from the reclassification of our shareholding in Industrial Bank as a financial investment and the disposal of
our investment in Ping An, and tax charged at different local statutory rates such as in Hong Kong. These factors were partly offset by a write-down of US$256m of deferred tax assets recognised in Mexico following clarification of the tax law by the Mexican fiscal authority.

Consolidated balance sheet

Summary consolidated balance sheet

	At 30 June 2013 US$m	At 30 June 2012 US$m	At 31 December 2012 US$m
ASSETS
Cash and balances at central banks ................................................................	148,285	147,911	141,532
Trading assets ...............................................................................................	432,601	391,371	408,811
Financial assets designated at fair value .........................................................	35,318	32,310	33,582
Derivatives ...................................................................................................	299,213	355,934	357,450
Loans and advances to banks ........................................................................	185,122	182,191	152,546
Loans and advances to customers³⁹ ...............................................................	969,382	974,985	997,623
Financial investments ...................................................................................	404,214	393,736	421,101
Assets held for sale .......................................................................................	20,377	12,383	19,269
Other assets ..................................................................................................	150,804	161,513	160,624

Total assets ..................................................................................................	2,645,316	2,652,334	2,692,538

LIABILITIES AND EQUITY
Liabilities
Deposits by banks .........................................................................................	110,023	123,553	107,429
Customer accounts .......................................................................................	1,316,182	1,278,489	1,340,014
Trading liabilities ..........................................................................................	342,432	308,564	304,563
Financial liabilities designated at fair value ....................................................	84,254	87,593	87,720
Derivatives ...................................................................................................	293,669	355,952	358,886
Debt securities in issue ..................................................................................	109,389	125,543	119,461
Liabilities under insurance contracts .............................................................	69,771	62,861	68,195
Liabilities of disposal groups held for sale .....................................................	19,519	12,599	5,018
Other liabilities .............................................................................................	117,716	123,414	118,123

Total liabilities .............................................................................................	2,462,955	2,478,568	2,509,409

Equity
Total shareholders' equity ............................................................................	174,070	165,845	175,242
Non-controlling interests .............................................................................	8,291	7,921	7,887

Total equity .................................................................................................	182,361	173,766	183,129

Total equity and liabilities ............................................................................	2,645,316	2,652,334	2,692,538

Selected financial information
Called up share capital ..................................................................................	9,313	9,081	9,238
Capital resources^40,41 .....................................................................................	183,450	175,724	180,806
Undated subordinated loan capital .................................................................	2,777	2,778	2,778
Preferred securities and dated subordinated loan capital⁴² ..............................	44,539	48,815	48,260

Risk-weighted assets and capital ratios⁴⁰
Risk-weighted assets .....................................................................................	1,104,764	1,159,896	1,123,943

	%	%	%

Core tier 1 ratio ...........................................................................................	12.7	11.3	12.3
Total capital ratio ........................................................................................	16.6	15.1	16.1

Financial statistics
Loans and advances to customers as a percentage of customer accounts .......	73.7	76.3	74.4
Average total shareholders' equity to average total assets .............................	6.4	5.9	6.4

Net asset value per ordinary share at period-end⁴³ (US$) ..............................	8.96	8.73	9.09
Number of US$0.50 ordinary shares in issue (millions) .................................	18,541	18,164	18,476

Closing foreign exchange translation rates to US$:
US$1: £ ........................................................................................................	0.657	0.638	0.619
US$1: € ........................................................................................................	0.767	0.790	0.758

For footnotes, see page 100.

A more detailed consolidated balance sheet is contained in the Financial Statements on page 208.

Movement from 31 December 2012 to 30 June 2013

Total reported assets were US$2.6 trillion, 2% lower than at 31 December 2012. On a constant currency basis, total assets remained broadly unchanged as shown on page 39.

The following commentary is on a constant currency basis.

Assets

Cash and balances at central banks increased by 9%, driven by the placement of surplus liquidity in Europe, arising from deposit growth in excess of lending growth and in North America from sales and maturities of available-for-sale government debt securities. This was partly offset by reductions in Hong Kong and Rest of Asia-Pacific as liquidity was redeployed to support growth in lending.

Trading assets increased by 9%, driven by a rise in settlement accounts. These balances vary according to customer trading activity, which is typically lower at the end of the year.

Financial assets designated at fair value increased by 9%, in part due to the investment of net premiums received during the period in our insurance businesses, notably in Hong Kong and Europe. Favourable market movements in our European insurance operations also contributed to the rise.

Derivative assets decreased by 13%. Upward movements in yield curves in major currencies led to a decline in the fair value of interest rate contracts, although this was partly offset by a reduction in netting reflecting lower fair values.

Loans and advances to banks rose by 24% from the relatively low level seen in December 2012. This was driven by higher demand for reverse repo funding in Europe, and higher placements with financial institutions in Hong Kong and Rest of Asia-Pacific.

Loans and advances to customers remained broadly in line with December 2012 levels. During the first half of 2013, we reclassified customer lending balances of over US$10bn relating to the planned disposals of non-strategic businesses, notably in Latin America and Europe, to 'Assets held for sale'.

Excluding this, customer lending balances grew by over US$15bn as continued demand for financing led to a rise in trade-related and term lending to CMB and GB&M customers in Hong Kong and CMB customers in Rest of Asia-Pacific. Residential mortgage lending remained broadly in line with December 2012 levels as growth the UK, Hong Kong and Rest of Asia-Pacific was largely offset by the continued reduction in the US run-off portfolio.

Financial investments declined by 2%. This was driven by sales and maturities of available-for-sale government debt securities in North America as part of Balance Sheet Management's structural interest rate risk management activities, partly offset by net new purchases as surplus liquidity was deployed in Europe. The re-classification of our shareholding in Industrial Bank led to an increase in financial investments in Hong Kong.

Assets held for sale increased by 9%, driven by the re-classification of assets relating to the planned disposals of non-strategic businesses, notably in Latin America and Europe, to 'Assets held for sale'. This was partly offset by the completion of the sales of our investment in Ping An and of the non-real estate personal lending portfolio in the US.

Other assets declined by 7%, driven in part by a reduction in the value of precious metals holdings in Europe, Hong Kong and North America reflecting a fall in commodity prices and withdrawals by customers.

Liabilities

Deposits by banksrose by 5% from the low levels seen in December 2012 due to a rise in repo balances in Europe to fund the increase in reverse repo activity.

Customer accounts increased by over US$15bn, a 1% rise. During the first half of 2013 we reclassified deposit balances of US$14bn relating to non-strategic businesses, notably in Europe and Latin America, to 'Liabilities of disposal groups held for sale'.

Excluding this, customer accounts increased by US$29bn, driven by a rise in Europe, as customers in RBWM held higher balances in readily-accessible current and savings accounts in the uncertain economic environment, together with higher balances in our Payments & Cash Management business in GB&M and CMB. Repo balances also rose, largely in Europe, as a result of a significant short-term placement at the end of June. However, these factors were partly offset by declines in other parts of the Group, notably in Hong Kong and Latin America as customers in RBWM placed their cash in investments. Customer account balances in Latin America were also adversely affected by the withdrawal of short‑term balances placed at the end of 2012 in RBWM, while in CMB balances declined due to re-pricing strategies as interest rates fell. Maturing term deposits that were not replaced led to a decline in Rest of Asia-Pacific.

Trading liabilities increased by 16% largely due to higher settlement account balances, which vary according to customer trading activity.

Financial liabilities designated at fair value remained broadly unchanged since December 2012.

The reduction in the value of derivative liabilities was in line with that of 'Derivative assets' as the underlying risk is broadly matched.

Debt securities in issue fell by 5%. This was driven by maturing debt that was not replaced in the US as funding requirements declined, together with a net reduction in debt securities in issue in Europe.

Liabilities under insurance contracts rose by 4% as a result of liabilities to policyholders established for new business written, largely in Hong Kong.

Liabilities of disposal groups held for sale increased by 310%, or US$14.8bn, driven by the transfer of non-strategic businesses to this classification.

Equity

Total shareholders' equity rose by 2%, driven by profits generated in the period, partly offset by dividends paid.

Reconciliation of reported and constant currency assets and liabilities

	30 June 2013 compared with 31 December 2012
	31 Dec 12 as reported US$m	Currency translation⁴⁴ US$m	31 Dec 12 at 30 Jun 13 exchange rates US$m	30 Jun 13 as reported US$m	Reported change %	Constant currency change %
HSBC
Cash and balances at central banks	141,532	(5,122)	136,410	148,285	5	9
Trading assets ...............................	408,811	(13,513)	395,298	432,601	6	9
Financial assets designated at fair value ..................................	33,582	(1,232)	32,350	35,318	5	9
Derivative assets ..........................	357,450	(13,357)	344,093	299,213	(16)	(13)
Loans and advances to banks ........	152,546	(3,764)	148,782	185,122	21	24
Loans and advances to customers .	997,623	(33,057)	964,566	969,382	(3)	0
Financial investments ...................	421,101	(9,326)	411,775	404,214	(4)	(2)
Assets held for sale .......................	19,269	(521)	18,748	20,377	6	9
Other assets ..................................	160,624	1,054	161,678	150,804	(6)	(7)

Total assets ..................................	2,692,538	(78,838)	2,613,700	2,645,316	(2)	1

Deposits by banks .........................	107,429	(2,518)	104,911	110,023	2	5
Customer accounts .......................	1,340,014	(39,118)	1,300,896	1,316,182	(2)	1
Trading liabilities ..........................	304,563	(8,517)	296,046	342,432	12	16
Financial liabilities designated at fair value ..................................	87,720	(2,531)	85,189	84,254	(4)	(1)
Derivative liabilities .....................	358,886	(13,715)	345,171	293,669	(18)	(15)
Debt securities in issue ..................	119,461	(4,363)	115,098	109,389	(8)	(5)
Liabilities under insurance contracts ..................................	68,195	(1,148)	67,047	69,771	2	4
Liabilities of disposal groups held for sale ..............................	5,018	(257)	4,761	19,519	289	310
Other liabilities .............................	118,123	(2,604)	115,519	117,716	-	2

Total liabilities .............................	2,509,409	(74,771)	2,434,638	2,462,955	(2)	1

Total shareholders' equity ............	175,242	(3,984)	171,258	174,070	(1)	2
Non-controlling interests .............	7,887	(83)	7,804	8,291	5	6

Total equity .................................	183,129	(4,067)	179,062	182,361	-	2
				-
Total equity and liabilities ............	2,692,538	(78,838)	2,613,700	2,645,316	(2)	1

For footnote, see page 100.

In implementing our strategy, we have agreed to sell a number of businesses across the Group. Assets and liabilities of businesses, the sale of which is highly probable, are reported in held-for-sale categories on the balance sheet until the sale is closed.

We include loans and advances to customers

and customer account balances reported in held-for-sale categories in our combined view of customer lending and customer accounts. We consider the combined view more accurately reflects the size of our lending and deposit books and growth thereof.

Combined view of customer lending and customer deposits

	At 30 June 2013	At 30 June 2012	Change	At 30 June 2013	At 31 December 2012	Change
	US$m	US$m	%	US$m	US$m	%

Loans and advances to customers .	969,382	974,985	(1)	969,382	997,623	(3)
Loans and advances to customers reported as held for sale⁴⁵ ..........	13,808	5,496	151	13,808	6,124	125
- US branches ...........................	-	528		-	-
- other .....................................	13,808	4,968	178	13,808	6,124	125


Combined customer lending ..........	983,190	980,481	-	983,190	1,003,747	(2)

Customer accounts .......................	1,316,182	1,278,489	3	1,316,182	1,340,014	(2)
Customer accounts reported as held for sale⁴⁵ ............................	17,280	9,668	79	17,280	2,990	478
- US branches ...........................	-	3,633		-	-
- other .....................................	17,280	6,035	186	17,280	2,990	478


Combined customer deposits .........	1,333,462	1,288,157	4	1,333,462	1,343,004	(1)

For footnote, see page 100.

Financial investments

	At 30 June 2013			At 31 December 2012
	Equity securities	Debt securities	Total	Equity securities	Debt securities	Total
	US$bn	US$bn	US$bn	US$bn	US$bn	US$bn
-
Balance Sheet Management ..........	-	279.1	279.1	-	293.4	293.4
Insurance entities .........................	-	44.0	44.0	-	43.4	43.4
Structured entities .........................	0.1	23.5	23.6	-	24.7	24.7
Principal Investments ..................	2.9	-	2.9	2.9	−	2.9
Other ...........................................	6.4	48.2	54.6	2.9	53.8	56.7
-
	9.4	394.8	404.2	5.8	415.3	421.1

The table above analyses the Group's holdings of financial investments by business activity. Further information can be found in the following sections:

· 'Balance Sheet Management' (page 169) for a description of the activities and an analysis of third-party assets in balance sheet management.

· 'Risk management of insurance operations' (page 175) includes an analysis of the financial investments within our insurance operations by the type of contractual liabilities that they back.

·
'Structured entities' (page 502 of the Annual Report and Accounts 2012) for further information about the nature of securities investment conduits in which the above financial investments are held.

· 'Equity securities classified as available for sale' (page 168) includes private equity holdings and other strategic investments.

· 'Other' represents financial investments held in certain locally managed treasury portfolios and other GB&M portfolios held for specific business activities.

Customer accounts by country

	At 30 June 2013 US$m	At 30 June 2012 US$m	At 31 December 2012 US$m

Europe ........................................................................................................	555,649	529,529	555,009
UK ...............................................................................................................	412,161	382,945	426,144
France⁴⁶ ........................................................................................................	76,669	62,891	55,578
Germany ......................................................................................................	17,251	14,935	15,611
Malta ...........................................................................................................	5,797	5,899	5,957
Switzerland⁴⁷ ................................................................................................	18,779	21,401	20,211
Turkey .........................................................................................................	7,537	7,171	7,629
Other ...........................................................................................................	17,455	34,287	23,879

Hong Kong .................................................................................................	342,664	318,820	346,208

Rest of Asia-Pacific ...................................................................................	174,050	173,157	183,621
Australia .......................................................................................................	18,240	19,560	20,430
India .............................................................................................................	9,852	10,315	10,415
Indonesia ......................................................................................................	6,559	6,382	6,512
Mainland China ............................................................................................	37,843	32,183	35,572
Malaysia .......................................................................................................	16,965	16,523	17,641
Singapore .....................................................................................................	44,145	46,560	47,862
Taiwan .........................................................................................................	12,053	11,822	12,497
Vietnam .......................................................................................................	2,191	1,870	2,147
Other ...........................................................................................................	26,202	27,942	30,545

Middle East and North Africa
(excluding Saudi Arabia) ................................................................................	41,142	39,029	39,583
Egypt ...........................................................................................................	7,158	7,444	7,548
Qatar ............................................................................................................	4,065	3,031	2,704
UAE .............................................................................................................	18,822	17,727	18,448
Other ...........................................................................................................	11,097	10,827	10,883

North America ...........................................................................................	149,053	148,360	149,037
US ................................................................................................................	92,572	91,525	90,627
Canada .........................................................................................................	45,583	46,113	47,049
Bermuda .......................................................................................................	10,898	10,722	11,361

Latin America ...........................................................................................	53,624	69,594	66,556
Argentina .....................................................................................................	4,940	4,862	5,351
Brazil ...........................................................................................................	26,251	34,022	30,144
Mexico .........................................................................................................	20,744	22,491	22,724
Panama ........................................................................................................	−	5,696	5,940
Other ...........................................................................................................	1,689	2,523	2,397


	1,316,182	1,278,489	1,340,014

For footnotes, see page 100.

Economic profit/(loss)

Our internal performance measures include economic profit/(loss), a calculation which compares the return on financial capital invested in HSBC by our shareholders with the cost of that capital. We price our cost of capital internally and the difference between that cost and the post-tax profit attributable to ordinary shareholders represents the amount of economic profit/(loss) generated.

Our long-term cost of capital is reviewed annually and is 10% for 2013; this has been revised from 11% in 2012, primarily due to a reduction in the risk-free rate, reflecting the continued intervention of central banks and quantitative easing, and greater banking sector stability through higher levels of capital and liquidity.

The following commentary is on a reported basis.

The return on invested capital increased by 1.7 percentage points to 11.6%, which was 1.6 percentage points higher than our benchmark cost of capital. Our economic profit was US$1.4bn, an increase of US$2.3bn compared with the loss for the first half of 2012. This reflected a decrease in the long-term cost of capital and an increase in profits attributable to ordinary shareholders, primarily due to minimal fair value movements on our own debt, compared with adverse movements of US$2.2bn in the first half of 2012, lower operating expenses and a lower tax charge. These factors were partially offset by higher average invested capital.

Economic profit/(loss)

	Half-year to
	30 June 2013		30 June 2012		31 December 2012
	US$m	%⁴⁸	US$m	%⁴⁸	US$m	%⁴⁸

Average total shareholders' equity ..................................	175,024		163,030		170,611
Adjusted by:
Goodwill previously amortised or written off ..............	8,399		8,123		8,399
Property revaluation reserves .....................................	(916)		(901)		(891)
Reserves representing unrealised (gains)/losses on effective cash flow hedges .......................................	(6)		85		26
Reserves representing unrealised (gains)/losses on available-for-sale securities .....................................	(1,346)		2,441		(71)
Preference shares and other equity instruments ...........	(7,256)		(7,256)		(7,256)

Average invested capital⁴ ................................................	173,899		165,522		170,818

Return on invested capital⁴ .............................................	9,998	11.6	8,152	9.9	5,302	6.2

Benchmark cost of capital ..............................................	(8,623)	(10.0)	(9,054)	(11.0)	(9,446)	(11.0)

Economic profit/(loss) and spread ..................................	1,375	1.6	(902)	(1.1)	(4,144)	(4.8)

For footnotes, see page 100.

Reconciliation of RoRWA measures

Performance Management

We target a return on average ordinary shareholders' equity of 12% to 15%. For internal management purposes we monitor global businesses and geographical regions by pre-tax return on RWAs, a metric which combines return on equity and regulatory capital efficiency objectives.

In addition to measuring return on average risk- weighted assets ('RoRWA'), we measure our performance internally using underlying RoRWA, which is underlying pre-tax return and reported average RWAs at constant currency and adjusted for the effects of business disposals. Underlying RoRWA adjusts performance for certain items which distort year-on-year performance as explained on page 19.

We also present underlying RoRWA adjusted for the effect of operations which are not regarded as contributing to the longer-term performance of the Group. These include the run-off portfolios and the CRS business which was sold in May 2012.

The CRS average RWAs in the table below represent the average of the associated operational risk RWAs that were not immediately released on disposal and have not already been adjusted as part of the underlying RoRWA calculation. The pre-tax loss for CRS in the table below relates to litigation expenses that occurred after the sale of the business that have not been adjusted as part of the underlying RoRWA calculation.

Reconciliation of underlying RoRWA (excluding run-off portfolios and Card and Retail Services)

	Half-year to 30 June 2013
	Pre-tax return	Average RWAs⁴⁹	RoRWA ^49,50
	US$m	US$bn	%

Reported ...................................................................................................................	14,071	1,109	2.6

Underlying⁵⁰ ..............................................................................................................	13,078	1,095	2.4
Run-off portfolios .....................................................................................................	3	135	-
Legacy credit in GB&M .........................................................................................	153	36	0.9
US CML and other⁵¹ ..............................................................................................	(150)	99	(0.3)

Card and Retail Services ............................................................................................	-	5	-

Underlying (excluding run-off portfolios and Card and Retail Services) ......................	13,075	955	2.8

	Half-year to 30 June 2012			Half-year to 31 December 2012
	Pre-tax return	Average RWAs⁴⁹	RoRWA ^49,50	Pre-tax return	Average RWAs⁴⁹	RoRWA ^49,50
	US$m	US$bn	%	US$m	US$bn	%

Reported ...................................................	12,737	1,194	2.1	7,912	1,146	1.4

Underlying⁵⁰ .............................................	8,896	1,093	1.6	6,546	1,083	1.2
Run-off portfolios ....................................	(1,386)	175	(1.6)	(239)	159	(0.3)
Legacy credit in GB&M ........................	(371)	48	(1.6)	96	43	0.4
US CML and other⁵¹ ..............................	(1,015)	127	(1.6)	(335)	116	(0.6)

Card and Retail Services ............................	-	3	-	(150)	9	(3.4)

Underlying (excluding run-off portfolios and Card and Retail Services) .................	10,282	915	2.3	6,935	915	1.5

For footnotes, see page 100.

Reconciliation of reported and underlying average risk-weighted assets

	Half-year to
	30 Jun 2013	30 Jun 2012	Change	30 Jun 2013	31 Dec 2012	Change
	US$bn	US$bn	%	US$bn	US$bn	%

Average reported RWAs⁴⁹ .........................	1,109	1,194	(7)	1,109	1,146	(3)
Currency translation adjustment¹⁸ .............	-	(5)		-	(6)
Acquisitions, disposals and dilutions ..........	(14)	(96)		(14)	(57)

Average underlying RWAs ........................	1,095	1,093	-	1,095	1,083	1

For footnotes, see page 100.

This information is provided by RNS

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