Interim Report - 5 of 28

RNS Number : 1876P

HSBC Holdings PLC

15 August 2014

 



Global businesses

Summary .................................................................	45		Profit/(loss) before tax .................................................	46
			Total assets ..................................................................	46
			Risk-weighted assets .....................................................	46
Selected items included in profit before tax by global business ...................................................................	46		Acquisitions, disposals and dilutions ............................	46
Retail Banking and Wealth Management ...........	47
Review of performance ..............................................	47		Principal RBWM: management view of revenue ...........	48
Growth priorities ........................................................	48
Commercial Banking .............................................	50
Review of performance ..............................................	50		Management view of revenue .......................................	50
Growth priorities ........................................................	51
Global Banking and Markets ................................	52
Review of performance ..............................................	53		Management view of revenue .......................................	53
Growth priorities ........................................................	54
Global Private Banking .........................................	55
Review of performance ..............................................	55		Client assets .................................................................	55
Growth priorities ........................................................	56
Other ........................................................................	57
Notes .........................................................................	57
Analysis by global business ...................................	58		HSBC profit/(loss) before tax and balance sheet data ..	58

Summary

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

The commentaries below present global businesses followed by geographical regions (page 61).

Performance is discussed in this order because certain strategic themes, business initiatives and trends affect more than one geographical region. All commentaries are on a constant currency basis (see page 19) unless stated otherwise.

Basis of preparation

The results of global businesses are presented in accordance with the accounting policies used in the preparation of HSBC's consolidated financial statements. Our operations are closely integrated and, accordingly, the presentation of global business data includes internal allocations of certain items of income and expense. These allocations include the costs of certain support services and global functions to the extent that these can be meaningfully attributed to operational business lines. While such allocations have been made on a systematic and consistent basis, they necessarily involve a degree of subjectivity. Those costs which are not allocated to global businesses are included in 'Other'.

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

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

Profit/(loss) before tax

					Half-year to
	30 June 2014				30 June 2013				31 December 2013
	US$m		%		US$m		%		US$m		%
Retail Banking and Wealth Management .....................	3,045		24.7		3,267		23.2		3,382		39.8
Commercial Banking ...................................................	4,771		38.7		4,133		29.4		4,308		50.7
Global Banking and Markets ........................................	5,033		40.8		5,723		40.7		3,718		43.8
Global Private Banking ................................................	364		2.9		108		0.8		85		1.0
Other50 ........................................................................	(873)		(7.1)		840		5.9		(2,999)		(35.3)
	12,340		100.0		14,071		100.0		8,494		100.0

Total assets⁵¹

	At 30 June 2014				At 30 June 2013				At 31 December 2013
	US$m		%		US$m		%		US$m		%
Retail Banking and Wealth Management .....................	523,729		19.0		504,205		19.1		517,085		19.4
Commercial Banking ...................................................	377,374		13.7		350,503		13.2		360,623		13.5
Global Banking and Markets ........................................	2,043,767		74.2		1,992,770		75.3		1,975,509		74.0
Global Private Banking ................................................	99,379		3.6		114,883		4.3		97,655		3.7
Other ...........................................................................	170,802		6.2		176,122		6.7		171,812		6.4
Intra-HSBC items ........................................................	(461,458)		(16.7)		(493,167)		(18.6)		(451,366)		(17.0)
	2,753,593		100.0		2,645,316		100.0		2,671,318		100.0

Risk-weighted assets

	At 30 June 2014				At 30 June 2013				At 31 December 2013
	US$bn		%		US$bn		%		US$bn		%
Retail Banking and Wealth Management .....................	223.0		17.9		243.4		22.0		233.5		21.4
Commercial Banking ...................................................	424.9		34.0		385.9		34.9		391.7		35.8
Global Banking and Markets ........................................	537.3		43.0		429.2		38.9		422.3		38.6
Global Private Banking ................................................	22.1		1.8		21.8		2.0		21.7		2.0
Other ...........................................................................	41.3		3.3		24.5		2.2		23.5		2.2
	1,248.6		100.0		1,104.8		100.0		1,092.7		100.0

 

Selected items included in profit before tax by global business

Acquisitions, disposals and dilutions⁵²

	Half-year to
	30 June		30 June		31 December
	2014		2013		2013
	US$m		US$m		US$m
Retail Banking and Wealth Management ......................................................	6		(72)		298
Commercial Banking ....................................................................................	13		51		479
Global Banking and Markets .........................................................................	9		15		366
Global Private Banking .................................................................................	-		-		1
Other ...........................................................................................................	(33)		1,067		(77)
	(5)		1,061		1,067

For footnotes, see page 96.

Retail Banking and Wealth Management

RBWM provides banking and wealth management services for our personal customers to help them secure their future prosperity and realise their ambitions.
	Total RBWM		US run-off portfolio		Principal RBWM
	US$m		US$m		US$m
Half-year to 30 June 2014
Net interest income ......	8,427		750		7,677
Net fee income/(expense) ...................................	3,291		(1)		3,292
Other income/(expense)	605		(149)		754
Net operating income13 ...................................	12,323		600		11,723
LICs53 ...........................	(1,225)		(180)		(1,045)
Net operating income	11,098		420		10,678
Total operating expenses ...................................	(8,269)		(361)		(7,908)
Operating profit ........	2,829		59		2,770
Income from associates54	216		-		216
Profit before tax .........	3,045		59		2,986
RoRWA47 ......................	2.7%		0.2%		3.9%
Half-year to 30 June 2013
Net interest income ......	9,310		1,151		8,159
Net fee income/(expense) ...................................	3,586		(3)		3,589
Other income/(expense)	393		(355)		748
Net operating income13 .	13,289		793		12,496
LICs53 ...........................	(1,768)		(396)		(1,372)
Net operating income ...	11,521		397		11,124
Total operating expenses ...................................	(8,451)		(631)		(7,820)
Operating profit/(loss) ..	3,070		(234)		3,304
Income from associates54 ...................................	197		-		197
Profit/(loss) before tax ..	3,267		(234)		3,501
RoRWA47 ......................	2.5%		(0.5%)		4.5%
Half-year to 31 December 2013
Net interest income ......	9,029		910		8,119
Net fee income .............	3,435		14		3,421
Other income/(expense)	987		(45)		1,032
Net operating income13 .	13,451		879		12,572
LICs53 ...........................	(1,459)		(309)		(1,150)
Net operating income ...	11,992		570		11,422
Total operating expenses ...................................	(8,797)		(535)		(8,262)
Operating profit ............	3,195		35		3,160
Income from associates54 ...................................	187		(1)		188
Profit before tax ...........	3,382		34		3,348
RoRWA47 ......................	2.8%		0.1%		4.3%

For footnotes, see page 96.

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

Principal RBWM RoRWA 3.9%

Global mobile application downloads surpass 4 million

Best Regional Retail Business 2014 - Asia Pacific ( The Asian Banker)

Review of performance

·     RBWM profit before tax of US$3.0bn was lower by US$0.2bn on a reported basis and by US$0.3bn on constant currency and underlying bases. This reflected lower revenue, partly offset by reduced LICs.

·     In the US run-off portfolio, a profit before tax was recorded compared with a loss in 2013. This was due to a fall in operating expenses, mainly from the non-recurrence of a CRS customer redress provision and lower LICs reflecting decreased lending balances, reduced new impaired loans and lower delinquency levels, partly offset by a decline in revenue.

The commentary that follows reflects performance in our Principal RBWM business (see footnote 55).

·     Profit before tax fell by US$558m to US$3.0bn on a constant currency basis. Excluding disposals and items noted below, it decreased by US$386m as higher operating expenses were partly offset by lower LICs, with revenue broadly unchanged.

·     Significant items in reported revenue included a US$353m provision arising from a review of compliance with the Consumer Credit Act in the UK, adverse movements in non-qualifying hedges of US$47m in the first half of both 2014 and 2013, and a US$138m loss on disposal in the first half of 2013 of an HFC UK Bank secured lending portfolio. Reported operating expenses included UK customer redress provisions of US$194m compared with US$412m in the first half of 2013, in addition to restructuring costs of US$18m compared with US$74m in the prior year. The first half of 2013 also included a gain of US$189m relating to changes in delivering ill-health benefits.

·     Revenue declined by 5%, reflecting the effect of disposals and the items referred to above. Excluding these, revenue was broadly unchanged, with a reduction in personal lending revenue mostly offset by higher income from current accounts, savings and deposits.

Principal RBWM⁵⁵: management view of revenue¹³

	Half-year to
	30 Jun		30 Jun		31 Dec
	2014		2013		2013
	US$m		US$m		US$m
Current accounts, savings and deposits .............	2,914		2,785		2,928
Wealth products .........	3,196		3,187		3,145
Investment distribution56 ..........	1,721		1,852		1,733
Life insurance manufacturing ........	908		760		888
Asset Management ...	567		575		524
Personal lending .........	5,712		6,034		5,803
Mortgages ................	1,604		1,610		1,584
Credit cards ..............	2,168		2,244		2,206
Other personal lending57 ................	1,940		2,180		2,013
Other58 .......................	(99)		490		696
Net operating income13 .................................	11,723		12,496		12,572

For footnotes, see page 96.

Strategic direction RBWM provides retail banking and wealth management services for personal customers in markets where we have, or can build cost effectively, scale in our target customer segments. We focus on three strategic imperatives: ·  building a consistent, high standard, customer needs-driven wealth management service for retail customers drawing on our Insurance and Asset Management businesses; ·  leveraging global expertise to improve customer service and productivity, to provide a high standard of banking solutions and service to our customers efficiently; and ·  simplifying and re-shaping the RBWM portfolio of businesses globally, to focus our capital and resources on key markets. Our three growth priorities are customer growth in target segments, deepening customer relationships through wealth management and relationship-led lending, and enhancing distribution capabilities, including digital. Implementing Global Standards, enhancing risk management control models and simplifying processes also remain top priorities for RBWM.

·     Current accounts, savings and deposits revenue increased. Spreads improved, mainly in the UK due to re-pricing activity and, to a lesser extent, in mainland China, partly offset by spread compression in Hong Kong. Balances increased, mainly in the UK and Hong Kong.

·     Wealth products revenue increased by 1% from higher life insurance manufacturing income, most notably in Hong Kong reflecting improved sales and favourable market movements. This was partially offset by a decline in investment distribution income, mainly as a result of lower fees from mutual funds in part reflecting the Retail Distribution Review in the UK, and from reduced volumes in Hong Kong.

·    
Personal lending revenue fell by 3% on a constant currency basis. All products were adversely affected by business disposals and the run-off of our Canadian consumer finance business. Excluding these, mortgages and credit card revenue was broadly unchanged. Other personal lending declined, notably in the UK due to cessation of certain overdraft fees, and in Brazil as the rebalancing of the portfolio towards secured lending continued.

·     LICs decreased by 18%, mainly in the US and the UK due to lower delinquency levels. In Brazil, LICs also reduced as impairment model changes and assumption revisions for restructured loans in 2013 were partly offset by refinements to the impairment model for non-restructured portfolios in the first half of 2014.

·     Operating expensesincreased by 3%. Excluding the effect of disposals, items referred to above and higher costs of US$111m as a result of the timing of the recognition of the FSCS levy, operating expenses increased by 5%, driven by the effect of inflation in Latin America and Asia, together with higher investment in the Risk and Compliance functions across all regions.

Growth priorities

Focus on relationship-led personal lending to drive balance sheet growth

·     We aim to deepen the relationships with our existing customers by providing them with borrowing products that fit their needs, ranging from cards and other unsecured loans to longer-term facilities like mortgages. We also use personal lending to generate new relationships, targeted carefully by segment and offerings in each market.

·     To achieve this we continue to use our improved analytics to better support product decisions in line with regulatory changes and customer fairness principles. Based on pricing and customer response measures, we enhanced revenue and grew participation in target segments, including double digit mortgage growth in mainland China. Repricing initiatives are reflected in lending spreads, which have stabilised over the past four quarters following 10 quarters of steady decline.

·     We maintained discipline around lending within our risk appetite. Since the fourth quarter of 2013, other personal loan average balances in our home markets increased by 6%. In other priority markets, we also managed growth and rebalanced portfolios towards secured loans, increasing mortgage average balances by 2%. This was achieved with lower LICs in the first half of 2014 than in the second half of 2013.

·     In January 2014, we introduced a new discretionary incentive framework for our Retail Banking front-line staff. Similar to the framework launched for Wealth Management relationship managers ('RM's) in 2013, this new plan removes the formulaic link between product sales and variable pay for a further 50,000 front-line staff. Implementation contributed to a slowdown in revenue growth, though we expect it to enhance the quality of revenue ultimately. Customer recommendation levels improved in several markets in the first half of 2014, with the volume of complaints related to products and services decreasing by more than 10% globally compared with the second half of 2013.

Continue to develop Wealth Management with focus on growing customer balances

·     We remain committed to capturing opportunities from wealth creation, primarily through our Premier offering. Our approach has been informed by the emerging conduct risk agenda, and we have taken proactive measures, including the implementation of our Wealth incentive framework, to reposition the business.

·    
We continued to invest in our Premier offering and delivered new platforms and digital capabilities to enhance the end-to-end delivery process and customer experience. In addition, we improved RM productivity through new training programmes and development tools. Client contact and coverage rates increased since the beginning of the year with higher numbers of client appointments, financial reviews and needs fulfilled per RM.

Develop digital capabilities to support customers and reduce cost

·     At June 2014, worldwide downloads of our global mobile application, now with enriched functionality, reached 4.3m with almost 2m in the first half of the year.

·     The migration of customers to digital channels continued to progress. In the UK, we launched 'Paym', a service which provides customers with the ability to register and make payments using a mobile phone number as a proxy for their bank account. In the US, we launched 'Mobile Check Deposit' which allows customers to deposit a cheque by taking a picture of it with their phone. These enhancements reflect our continued commitment to improving the customer experience while streamlining processes.

·     Across our priority markets, between December 2013 and May 2014, the monthly average sales and transaction revenue through digital channels increased by 12%.

Commercial Banking

CMB offers a full range of financial services and tailored solutions to almost three million customers ranging from small and medium-sized enterprises to publicly quoted companies in around 60 countries.
	Half-year to
	30 Jun		30 Jun		31 Dec
	2014		2013		2013
	US$m		US$m		US$m
Net interest income ......	5,184		5,050		5,150
Net fee income .............	2,413		2,337		2,380
Other income ................	519		476		972
Net operating income13 ...................................	8,116		7,863		8,502
LICs53 ...........................	(562)		(1,160)		(1,224)
Net operating income	7,554		6,703		7,278
Total operating expenses ...................................	(3,588)		(3,337)		(3,712)
Operating profit ........	3,966		3,366		3,566
Income from associates54 ...................................	805		767		742
Profit before tax .........	4,771		4,133		4,308
RoRWA47 .....................	2.3%		2.2%		2.2%
7% growth in customer lending balances since June 2013 on a constant currency basis
8% growth in deposit balances since June 2013 on a constant currency basis
Best Trade Bank in the World (Trade & Forfaiting Review)
Strategic direction CMB aims to be the banking partner of choice for international businesses by building on our rich heritage, international capabilities and relationships to enable global connectivity. We have four growth priorities: ·  providing consistency and efficiency for our customers through a business model organised around global customer segments and products; ·  utilising our distinctive geographical network to support and facilitate global trade and capital flows; ·  delivering excellence in our core flow products - specifically in Trade and Payments and Cash Management; and ·  enhancing collaboration with other global businesses. Implementing Global Standards, enhancing risk management controls and simplifying processes remain top priorities for CMB.
For footnotes, see page 96. The following commentary is on a constant currency basis and comparisons are with the first half of 2013, unless stated otherwise.

Review of performance

·     CMB reported profit before tax of US$4.8bn in the first half of 2014, 15% higher on both reported and constant currency bases. On an underlying basis, profit before tax increased by 16%. This was driven by a reduction in LICs and increased revenues, partly offset by a rise in operating expenses.

·     Revenueincreased by 5% on a constant currency basis and by 6% on an underlying basis. This was due to higher net interest income driven by growth in average lending and deposit balances in Asia and rising average deposit balances and wider lending spreads in the UK. Higher net fee income was mainly driven by an increase in term lending fees in the UK.

·     Despite lending spread compression compared with the first half of 2013, spreads in the first half of 2014 were broadly unchanged from the end of 2013.

Management view of revenue¹³

	Half-year to
	30 Jun       2014		30 Jun       2013		31 Dec       2013
	US$m		US$m		US$m
Global Trade and Receivables Finance	1,429		1,459		1,470
Credit and Lending ......	3,108		3,008		3,095
Payments and Cash Management, current accounts and savings deposits ...................	2,738		2,579		2,708
Other ..........................	841		817		1,229
Net operating income13 ................................	8,116		7,863		8,502

·     Global Trade and Receivables Finance revenue decreased by 2%, but was broadly unchanged on a constant currency basis. It reflected the effect of a significant increase in average balances, with growth in Asia and Europe, which was largely offset by spread compression in Latin America and Asia despite spreads in the first half of 2014 being broadly unchanged. In Latin America, spreads narrowed in Brazil due to a portfolio shift towards lower-yielding middle market enterprises ('MME's), while in Asia spread compression reflected increased competition.

·     Credit and Lending revenue increased, reflecting higher average balances in Hong Kong and increased fee income in the UK due to a rise in term lending fees from higher new business

·    

volumes. This was partly offset by spread compression in Latin America, in Brazil, as discussed above and in Mexico due to the repositioning of the business.

·     Payments and Cash Management revenue also increased. This reflected strong deposit growth, notably in the UK and Hong Kong, which was driven by increased transaction volumes supported by our focus on international customers. Deposit spreads remained broadly unchanged.

·     LICs decreased by US$580m, mainly in Europe and Latin America. Lower LICs in Europe reflected a reduction in individually assessed loan impairment charges, mainly in the UK and Spain. In Latin America, a reduction in LICs was driven by lower collectively assessed impairments in Brazil, mainly due to impairment model changes and assumption revisions for restructured loans in the Business Banking portfolios in 2013, while, in Mexico, individually assessed charges reduced, in particular relating to homebuilders. Additionally, in North America, lower LICs were due to lower individually assessed impairment charges in Canada, partly offset by a rise in LICs in the US as we revised certain estimates used in our corporate loan impairment calculation.

·     Operating expenses increased by 10%, including the non-recurrence of an accounting gain of US$160m arising from a change in the basis of delivering ill health benefits in the first half of 2013. Excluding this gain, operating expenses were higher, mainly due to inflationary pressures in Asia and Latin America, the latter largely attributable to union-agreed salary increases in Brazil. Higher costs in Asia also reflected business growth, including increased staff numbers.

·     Income from associates increased by 4%, as we benefited from the improved performance of The Saudi British Bank and BoCom due to balance sheet growth.

Growth priorities

Providing consistency through a globally led business model

·     We continued to invest in providing global product coverage for our business segments. This will enable us to achieve greater consistency and transparency in servicing our customers' needs while managing risk more efficiently.

·    
New leadership and a more defined global strategy within our large corporate and MME segments enabled us to improve client coverage. We appointed a new Global Head of International Subsidiary Banking to drive investment in supporting our international customers across our network. In addition, we redefined our large corporate segment, focusing on a smaller number of higher value clients in 14 priority markets, and accelerated market penetration in our six key MME markets (Hong Kong, the UK, Canada, the US, Mexico and Brazil).

·     In conjunction with GB&M, we acted as sole financial adviser for an Asian client's first strategic acquisition outside their home market. This demonstrated our ability to meet the needs of a large corporate client by executing a substantial and complex multi-jurisdictional transaction.

·     In Business Banking, we launched the international RMs' model into more of our priority markets in the first half of this year. We expect the number of international RMs to increase by approximately 20% in 2014, supporting small and medium-sized enterprise ('SME') clients with their international growth aspirations. We launched five major campaigns in the first half of 2014 to help SME customers achieve their growth ambitions and assist businesses looking to expand overseas, including funds in the UK, France, the US, Canada and Australia totalling US$14bn.

Utilising our geographical network to support our customers' international growth ambitions

·     HSBC's geographical reach at either end of the top 20 global trade corridors has helped us win a number of high profile deals, including a mandate to provide supply chain finance across nine countries for a large consumer brands client.

·     Our operating platforms for Receivables Finance are being consolidated into regional hubs, with Europe and Asia completed in the first half of 2014. This offers us the ability to deploy these capabilities rapidly into new markets, providing better risk management and lower operating costs.

Delivering excellence in our core products

·     HSBC is one of the largest trade finance banks in the world with access to more than 70% of

the world's trade flows. We currently support clients from 32 different countries utilising 19 different currencies. We continued to enhance our open account financing capabilities in key hubs for our clients, with our new Supply Chain Solutions platform which has generated over US$0.7m of revenue.

·     Commodity and Structured Trade Finance saw double-digit asset balance growth in the first half of 2014. We expanded these products into Indonesia, India and Malaysia.

·     In Payments and Cash Management, CMB remains well positioned to benefit from global trends such as increasing cross-border payment flows, given HSBC is strategically located where over 90% of the world's payment activity originates. New customer mandates increased by 19% compared with the first half of 2013. We made progress in the digital space, and have migrated around 80,000 customers from legacy platforms to core electronic banking channels and developed innovative solutions for our customers. Most recently, we provided end-of-day renminbi cross-border pooling capability from the Shanghai free trade zone.

Enhancing collaboration with other global businesses

·     We continued to strengthen CMB's collaboration with GB&M and GPB by increasing product coverage across the Group to our customers. Revenue remained broadly unchanged with lower sales of Markets products mostly offset by growth in the sale of Capital Financing products.

Global Banking and Markets

GB&M provides tailored financial solutions to major government, corporate and institutional clients worldwide.
	Half-year to
	30 Jun		30 Jun		31 Dec
	2014		2013		2013
	US$m		US$m		US$m
Net interest income ......	3,602		3,334		3,432
Net fee income .............	1,939		1,818		1,664
Net trading income59 .....	2,790		5,606		1,174
Other income/(expense)	1,460		(96)		2,244
Net operating income13 ...................................	9,791		10,662		8,514
LICs53 ...........................	(49)		(174)		(33)
Net operating income	9,742		10,488		8,481
Total operating expenses ...................................	(4,958)		(5,007)		(4,953)
Operating profit ........	4,784		5,481		3,528
Income from associates54 ...................................	249		242		190
Profit before tax .........	5,033		5,723		3,718
RoRWA47 .....................	2.0%		2.8%		1.7%
Increased market share in debt and equity capital markets, M&A and lending
Best Overall Primary Debt House (Euromoney Primary Debt Survey 2014)
Best Overall Offshore RMB Products/Services, for the 3rd consecutive year (Asiamoney Offshore RMB Poll 2014)
Strategic direction GB&M is delivering on its well-established 'emerging markets-led and financing-focused' strategy, with the objective of being a 'top 5' bank to our priority clients. This strategy has evolved to include a greater emphasis on connectivity between the global businesses across the regions and within GB&M, utilising the Group's extensive distribution network. We focus on the following growth priorities: ·  leveraging our distinctive geographical network, which connects developed and faster-growing regions; ·  connecting clients to global growth opportunities; and ·  continuing to be well-positioned in products that will benefit from global trends; Collaborating with other global businesses, implementing Global Standards, enhancing risk management controls and simplifying processes remain top priorities for GB&M.

For footnotes, see page 96.

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

Review of performance

·     GB&M reported profit before tax of US$5.0bn, 12% lower than in the first half of 2013. On a constant currency and underlying basis, profit before tax decreased by 11%, driven by lower revenue due to an adverse DVA movement partly offset by a reduction in loan impairment charges and lower operating expenses.

·     Revenue fell by 9%. In the first half of 2014, revenue included an adverse DVA of US$155m, compared with a favourable DVA of US$451m. Excluding this, revenue decreased by 3%, mainly driven by a reduction in Foreign Exchange. In addition, in line with expectations, Balance Sheet Management revenue of US$1.5bn declined by US$153m. These factors were partly offset by an increase in our Credit, Payments and Cash Management and Principal Investments businesses. Despite this decline in overall revenue, we captured increased market share in debt and equity capital markets, M&A and lending.

·     Markets revenue of US$3.8bn was 7% lower. This was primarily driven by a fall in revenue from our Foreign Exchange business, which reflected lower market volatility and reduced client flows. By contrast, Rates revenue was broadly in line as higher revenue in Latin America, in part driven by increased client activity, was offset by the effect of subdued client flows and lower market volatility, mainly in Europe. However, we reported higher revenue in secondary Credit and strong revenue growth in our Equities business, notwithstanding the non-recurrence of revaluation gains reported in the first half of 2013. The growth in our Equities business was driven by successful positioning to capture increased client activity, notably in Europe. In addition, revenue in legacy credit increased, reflecting price appreciation across certain asset classes in the ABS market.

·     Revenue in Capital Financing was broadly unchanged. Volumes and market share increased globally across debt and equity capital market issuance, advisory and lending. In our Credit and Lending business, volumes grew by 11%. These factors were, however, largely offset by spread and fee compression.

Management view of revenue^13,60,61

	Half-year to
	30 Jun       2014		30 Jun       2013		31 Dec       2013
	US$m		US$m		US$m
Markets62 ......................	3,845		4,070		2,865
Credit ........................	593		488		308
Rates .........................	1,127		1,106		547
Foreign Exchange ......	1,434		1,833		1,353
Equities .....................	691		643		657
Capital Financing ..........	2,075		2,042		1,952
Payments and Cash Management .............	904		862		908
Securities Services .........	846		847		815
Global Trade and Receivables Finance ...	389		371		370
Balance Sheet Management .............	1,502		1,680		1,430
Principal Investments ...	342		205		307
Debit valuation adjustment .................	(155)		451		(346)
Other63 .........................	43		134		213
Net operating income13 .	9,791		10,662		8,514

For footnotes, see page 96.

·     Payments and Cash Management revenue rose, driven by growth in deposit balances and an increase in transaction volumes.

·     Balance Sheet Management revenue declined by US$153m, driven by lower gains on the disposal of available-for-sale debt securities, notably in Europe and North America.

·     Principal Investments revenue increased, in part due to foreign exchange revaluation gains, disposal gains and lower impairments.

·     LICs decreased by US$141m, primarily due to higher net releases of credit risk provisions on available-for-sale ABSs in our legacy portfolio, reflecting price appreciation.

·     Operating expenses were US$123m or 2% lower. The first half of 2013 included a Madoff-related litigation charge of US$298m and an accounting gain of US$81m relating to changes in delivering ill-health benefits to certain employees in the UK. Excluding these items, and despite a reduction in performance costs, expenses increased as we continued to invest in our regulatory resources. In addition, expenses relating to risk and compliance rose.

Growth priorities

Leveraging our distinctive geographical network which connects developed and faster-growing regions

·     We remain strongly positioned to service the needs of our multinational clients. We were recently successful in a competitive pan-Asian tender and we now serve as universal bank for the production and distribution hub in mainland China of a new European corporate client, with opportunities for further expansion in Asia and into Latin America. Our ability to win mandates like this demonstrates the value of our distinctive geographical network to our clients.

·     Our long-standing cross-border coverage and our ability to execute multi-faceted transactions also attracted new financing and advisory mandates, including those won through collaboration with CMB. This helped clients to grow their business activities, and contributed to increasing our market share in several product categories including mergers and acquisitions and debt and equity capital markets.

Connecting clients to global growth opportunities

·     Our Payments and Cash Management business benefited from volume growth and delivered improved client coverage. During the first half of 2014, the business expanded its Global Liquidity Solutions offering into the US, mainland China and certain European countries and is now active in 50 markets.

·     We remain focused on our Foreign Exchange business and continue to improve our distribution platforms, electronic pricing and risk management capabilities, to ensure that we remain well positioned to capture increases in market share and volume growth.

Continuing to be well positioned in products that will benefit from global trends

·     Capturing new opportunities arising from the internationalisation of the renminbi remains a key growth priority for GB&M, as demand for the currency outside Asia-Pacific grows. We are investing to build on the strength of our offering and to maintain our global leadership position. In April 2014, we announced the appointment of a new Global Head of Renminbi Business Development to deliver our strategic priorities in this growing market.

·     Our Securities Services business became the first custodian to service London-based renminbi-qualified institutional investors, following regulatory approval to open up mainland China's securities markets to overseas investors.

·     We are well placed to benefit from companies increasingly looking to raise finance directly from the debt capital markets. In March 2014, for the first time, we were recognised by Bloomberg as the top international bond provider and also maintained leading positions in euro market and emerging market debt issuance, with market share increases in the noted categories.

·     With governments increasingly requiring financing solutions for infrastructure development and institutional investors seeking long-term real assets, infrastructure finance continues to migrate from banks to capital markets. Our project finance team is actively capturing opportunities and delivered several successful transactions including arranging financing for a UK-based infrastructure project which also featured a direct investment by a UK pension fund.

·    

Global Private Banking

GPB serves high net worth individuals and families with complex and international financial needs within the Group's priority markets.
	Half-year to
	30 Jun		30 Jun		31 Dec
	2014		2013		2013
	US$m		US$m		US$m
Net interest income ......	536		575		571
Net fee income .............	533		602		548
Other income/(expense)	161		(26)		169
Net operating income13 ...................................	1,230		1,151		1,288
LICs53 ...........................	(6)		(14)		(17)
Net operating income	1,224		1,137		1,271
Total operating expenses ...................................	(868)		(1,035)		(1,194)
Operating profit ........	356		102		77
Income from associates54 ...................................	8		6		8
Profit before tax .........	364		108		85
RoRWA47 .....................	3.3%		1.0%		0.8%
Profit before tax continued to be affected by actions taken to reposition the customer base
Net new money from CMB referrals tripled compared with the first half of 2013
Outstanding Private Bank in South East Asia Private Banker International Global Wealth Awards
Strategic direction GPB aims to build on HSBC's commercial banking heritage to be the leading private bank for high net worth business owners. We have two growth priorities: ·  capturing growth opportunities in home and priority markets, particularly from Group collaboration by accessing owners and principals of CMB and GB&M clients; and ·  repositioning the business to concentrate on onshore markets, aligned with Group priorities. Implementing Global Standards, enhancing risk management controls, tax transparency and simplifying processes remain top priorities for GPB.

For footnotes, see page 96.

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

Review of performance

·     Reported profit before tax of US$364m was US$256m higher, and US$245m higher on constant currency and underlying bases. This was primarily because the first half of 2013 included the loss on write-off of allocated goodwill relating to our Monaco business of US$279m and a regulatory investigation provision of US$119m. Excluding these items, profit before tax was lower, primarily due to actions taken to reposition the business.

·     Revenueincreased by 5%, primarily due to the non-recurrence of the loss related to the write-off of goodwill noted above. Excluding this, revenue declined as trading income and net fee income decreased, reflecting lower market volatility, and a managed reduction in client assets. Net interest income also decreased, mainly due to lower treasury revenue in Asia following actions taken to reposition the business, lower average deposit balances and a narrowing of lending spreads.

·     Operating expenses decreased by 17%, primarily due to the non-recurrence of the regulatory investigation provision noted above, and the non-recurrence of a provision relating to the UK Rubik agreement, a bilateral tax agreement between the UK and Swiss governments, as well as the partial release of a customer redress provision. Excluding these items, operating expenses were broadly unchanged as lower staff costs from a managed reduction in average staff numbers and lower performance-related costs were offset by increased IT costs, primarily to support the implementation of the new global banking platform.

Client assets⁶⁴

	Half-year to
	30 Jun         2014		30 Jun         2013		31 Dec         2013
	US$bn		US$bn		US$bn
At beginning of period.............................	382		398		386
Net new money ......	(3)		(10)		(16)
Of which: areas targeted for growth	5		(3)		(3)
Value change………..	6		-		12
Exchange and other	(1)		(2)		-
At end of period .....	384		386		382

·     Client assets, which include funds under management and cash deposits, increased on a reported basis compared with 31 December 2013 due to favourable market and foreign

exchange movements, partly offset by negative net new money and the effect of the disposal of our HSBC Trinkaus & Burkhardt AG business in Luxembourg. Negative net new money of US$3bn was mainly driven by the continued repositioning of our business. However, we attracted positive net new money of US$5bn in areas that we have targeted for growth, including our home and priority markets and the high net worth client segment.

·     Our return on assets, defined as the percentage of revenue to average client assets, was 65bps in the first half of 2014 compared with 59bps. The increase was primarily due to the non-recurrence of the write-off relating to goodwill noted above. Excluding the effect of this item, our return on assets was 8bps lower in the first half of 2014, reflecting the fall in revenue. Our client return on assets, which excludes treasury and capital revenue, was 4bps lower in the first half of 2013 at 60bps.

Growth priorities

Capturing growth in our home and priority markets and focusing on collaboration revenues

·     We enhanced our approach to collaborating with other global businesses in line with our aspiration to be the preferred private bank for the owners and principals of our CMB and GB&M clients. We are moving away from a traditional 'referral' model, adopting a more coordinated and systematic approach for clients who need both private and corporate coverage, supported by more effective marketing, communications, awareness and training. This resulted in net new money from CMB referrals more than tripling compared with the first half of 2013.

·     In addition, we formalised and implemented the Global Priority Clients initiative, a collaborative venture between GPB, GB&M and CMB for the Group's most significant dual banked clients. This gathered momentum in the first half of 2014 as we identified over 60
large relationships that could benefit from an enhanced coverage, creating significant incremental revenue opportunities.

·     We expanded our product offering with investment opportunities in three new Alternatives products, comprising two private equity funds and a real estate portfolio. In addition, we strengthened our investment group with the implementation of Global Product Lines, which allow us to offer a consistent global proposition for key products and utilise more efficiently GB&M and Global Asset Management services and products.

Repositioning the business

·     We continued to reposition the GPB business model and client base in the first half of 2014, primarily by reviewing our portfolio and ensuring that all clients comply with Global Standards, including financial crime compliance and tax transparency standards.

·     We remain focused on clients with wider Group connectivity who meet our segmentation thresholds within our home and priority markets, while also reducing the number of clients in non-priority markets. In line with this strategy, we agreed to sell a portfolio of private banking assets of clients in non-priority markets booked in Switzerland to LGT Bank (Switzerland) Ltd. The portfolio had client assets of US$12.5bn at 31 December 2013, representing 15% of client assets in Switzerland, and we reclassified the associated balances to held for sale at 30 June 2014. This transaction is expected to complete in the second half of 2014.

·     The replacement of GPB's multiple IT platforms with a new single banking platform is under way. This will deliver improved efficiency, an enhanced proposition and a consistent client experience globally. The initial roll-out, including Switzerland, is expected in the second half of 2015.

Other⁵⁰

'Other' contains the results of HSBC's holding company and financing operations, central support and functional costs with associated recoveries, unallocated investment activities, centrally held investment companies, certain property transactions and movements in fair value of own debt.
	Half-year to
	30 Jun		30 Jun		31 Dec
	2014		2013		2013
	US$m		US$m		US$m
Net interest expense .........	(221)		(376)		(361)
Net fee income	1		61		3
Net trading income/ (expense)59 ...	(120)		(169)		175
Changes in fair value of long-term debt issued and related derivatives ....	438		(1,419)		191
Changes in other financial instruments designated at fair value ..	(719)		957		(1,533)
Net expense from financial instruments designated at fair value .......	(281)		(462)		(1,342)
Other income ..	3,279		5,096		3,026
Net operating income ........	2,658		4,150		1,501
Total operating expenses .......	(3,533)		(3,312)		(4,484)
Operating profit/(loss) .	(875)		838		(2,983)
Income from associates54 ...	2		2		(16)
Profit/(loss) before tax ....	(873)		840		(2,999)

For footnotes, see page 96.

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

Notes

·     Reported loss before tax of US$873m compared with a profit of US$840m (US$808m on a constant currency basis). 2013 included gains of US$1.1bn relating to Industrial Bank.

·     On an underlying basis, a pre-tax loss of US$625m compared with a loss of US$244m. The first half of 2013 included a net gain on completion of the disposal of our investment in Ping An of US$553m, and foreign exchange gains of US$442m relating to sterling debt issued by HSBC Holdings, while the first half of 2014 included a gain of US$428m from the sale of our investment in Bank of Shanghai. Excluding these items and fair value movements
on non-qualifying hedges, loss before tax improved from lower adverse fair value movements from ineffectiveness in the hedging of our own debt and a reduction in interest expense partly offset by higher costs.

·     Net trading expense decreased by US$56m, primarily due to the non-recurrence of adverse fair value movements of US$682m on the contingent forward sale contract relating to Ping An. This was mostly offset by the foreign exchange gains in HSBC Holdings in 2013 noted above. In addition, in the first half of 2014 there were adverse fair value movements on non-qualifying hedges, notably in Europe, compared with favourable movements in the first half of 2013.

·     Net expense from financial instruments designated at fair value reduced by US$186m. The reduction was primarily due to lower adverse movements from interest and exchange rate ineffectiveness in the hedging of long-term debt designated at fair value issued principally by HSBC Holdings and its European subsidiaries. This was partly offset by adverse movements in the fair value of our own debt compared with minimal movements in the same period in 2013.

·     Gains less losses from financial investments reduced by US$772m due to the non-recurrence of a gain of US$1.2bn on the disposal of our investment in Ping An in the first half of 2013, partly offset by a gain of US$428m on the disposal of our investment in Bank of Shanghai in the first half of 2014.

·     Other operating income decreased by US$1.0bn, driven by the non-recurrence of an accounting gain of US$1.1bn arising from the reclassification of Industrial Bank as a financial investment in the first half of 2013.

·     Operating expenses increased by US$248m, reflecting increased investment in Global Standards, Risk and Compliance. This was partly offset by a reduction in North America due to lower divestiture costs from the sale in 2012 of our CRS business and the expiration in the first half of 2014 of the related Transaction Services Agreements. In addition, the first half of 2014 included a favourable adjustment of US$45m relating to the previous year's bank levy charge, compared with an unfavourable adjustment of US$9m.

 

END

 

 

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