Interim Report - 8 of 28

RNS Number : 1953P

HSBC Holdings PLC

14 August 2014

 



Europe

Our principal banking operations in Europe are HSBC Bank plc in the UK, HSBC France, HSBC Bank A.S. in Turkey, HSBC Bank Malta p.l.c., HSBC Private Bank (Suisse) SA and HSBC Trinkaus & Burkhardt AG. Through these operations we provide a wide range of banking, treasury and financial services to personal, commercial and corporate customers across Europe.
	Half-year to
	30 Jun		30 Jun		31 Dec
	2014		2013		2013
	US$m		US$m		US$m
Net interest income .....	5,244		5,250		5,443
Net fee income ............	3,188		2,969		3,063
Net trading income ......	982		4,339		84
Other income/(expense) ..................................	1,459		(1,084)		903
Net operating income13 ..................................	10,873		11,474		9,493
LICs53 ..........................	(266)		(846)		(684)
Net operating income ..................................	10,607		10,628		8,809
Total operating expenses ..................................	(8,352)		(7,862)		(9,751)
Operating profit/(loss) ..................................	2,255		2,766		(942)
Income/(expense) from associates54 ...............	3		2		(1)
Profit/(loss) before tax ..................................	2,258		2,768		(943)
Cost efficiency ratio ....	76.8%		68.5%		102.7%
RoRWA47 ....................	1.2%		1.8%		(0.6%)
Period-end staff numbers ..................................	69,642		69,599		68,334
Debt Capital Markets business continues to be rated in the top three in the UK (Dealogic 2014)
Best Bank Mortgage Provider Award in the UK (Moneyfacts Awards, 2014) Sixth consecutive year
70% decrease in loan impairment charges on a constant currency basis
For footnotes, see page 96. The following commentary is on a constant currency basis and comparisons are with the first half of 2013, unless stated otherwise. Tables are on a reported basis.

Economic background 

The UK recovery gained pace during the first half of 2014, with real Gross Domestic Product ('GDP') expanding by 0.8% in the period and unemployment falling to 6.5% in May. One measure of consumer confidence rose to a nine-year high in June, and house prices rose by 10.5% in the 12 months to May. Signs of overheating in the housing market prompted the Bank of England to announce in June a number of macro-prudential measures to prevent a build-up of debt in the household sector. Consumer spending was the main contributor to the improvement in activity. Annual consumer price index ('CPI') inflation fell below the central bank's target of 2% throughout the first half of 2014. The Bank of England kept Bank Rate and its Asset Purchase Programme steady at 0.5% and £375bn, respectively.

The recovery in the eurozone stalled in the first months of the year. Real GDP in the region as a whole grew by 0.2% in the first quarter relative to the final quarter of 2013, but the recovery was increasingly uneven. The German and Spanish economies expanded but many other countries in the region saw economic activity contract. Domestic weakness and the strength of the euro contributed to a decline in inflation, which fell to 0.5% in June. The likelihood that low growth and inflation could persist for an extended period prompted the European Central Bank ('ECB') to cut both the refinancing and deposit rates by 0.1% in June, taking the latter into negative territory.

Financial overview

Our European operations reported a profit before tax of US$2.3bn in the first half of 2014 compared with US$2.8bn (US$3.0bn on a constant currency basis). On an underlying basis profit before tax decreased by US$0.6bn, driven by a number of significant items, primarily affecting revenue. These included a US$367m provision in the UK arising from a review of compliance with the Consumer Credit Act and adverse DVA movements of US$77m compared with favourable movements of US$306m. In addition, the first half of 2013 included a US$442m foreign exchange gain on sterling debt issued by HSBC Holdings, partly offset by a loss of US$279m following the write-off of allocated goodwill relating to our Monaco business.

Excluding these items, underlying profit before tax rose, driven primarily by a reduction in LICs, notably in CMB in the UK, partly offset by an increase in operating expenses, whilst revenue was broadly unchanged.

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

	Retail     Banking and Wealth    Management          US$m		Commercial     Banking         US$m	Global   Banking            and    Markets        US$m			Global       Private     Banking         US$m		Other         US$m		Total         US$m
Half-year to 30 June 2014
UK .............................................................	565		1,324		887		112		(1,192)		1,696
France46 .....................................................	(39)		123		237		(2)		(115)		204
Germany ....................................................	14		38		86		17		(7)		148
Malta .........................................................	17		22		15		-		-		54
Switzerland .................................................	-		2		1		14		(2)		15
Turkey .......................................................	(83)		22		35		-		(2)		(28)
Other .........................................................	6		20		164		35		(56)		169
	480		1,551		1,425		176		(1,374)		2,258
Half-year to 30 June 2013
UK .............................................................	804		894		1,047		132		(657)		2,220
France46 ................... ..................................	130		135		302		−		(78)		489
Germany ....................................................	15		31		45		21		(6)		106
Malta .........................................................	22		29		19		−		−		70
Switzerland .................................................	−		1		1		(42)		−		(40)
Turkey .......................................................	(18)		31		72		−		(1)		84
Other .........................................................	3		(35)		82		(225)		14		(161)
	956		1,086		1,568		(114)		(728)		2,768
Half-year to 31 December 2013
UK .............................................................	667		790		199		120		(2,836)		(1,060)
France46 .......... ...........................................	155		120		49		21		(84)		261
Germany ....................................................	15		39		138		23		(19)		196
Malta .........................................................	12		22		16		−		−		50
Switzerland .................................................	−		1		1		(249)		−		(247)
Turkey .......................................................	(56)		5		36		(1)		2		(14)
Other .........................................................	4		25		(206)		35		13		(129)
	797		1,002		233		(51)		(2,924)		(943)

For footnote, see page 96.

Country business highlights

In the UK, CMB lending decreased compared with the first half of 2013. However, new lending and re‑financing before attrition and amortisation increased by 23%. This was offset by higher levels of repayments in the existing loan book. We approved over 80% of small business loan applications. In addition, Business Banking UK launched a campaign to offer further support and lending to SME customers that trade either domestically or internationally. As part of this, £5.8bn (US$9.9bn) of lending was made available, along with a programme of activities such as 'Fast Lane to Growth' events for larger SMEs and workshops for micro-businesses.

We also grew our Payments and Cash Management business through a targeted deposit acquisition strategy.

In RBWM, we continued to support the housing market in the first half of 2014, approving £6.5bn (US$11.1bn) of new mortgage lending to over 56,000 customers, including £1.8bn (US$3.0bn) to over 13,000 first time buyers. Our mortgage balances remained broadly unchanged. The loan-to-value ('LTV') ratio on new lending remained robust at 59.7% compared with an average of 46.3% for the total mortgage portfolio. In addition, the UK mobile banking app has had nearly one million log-ons each week since its launch last year, offering a range of new functions such as a Cash ISA application and 'Paym'.

In GB&M, our Capital Financing business was successful with a number of transactions. Through collaboration with CMB, GB&M acted as joint bookrunner on a rights issue for a UK client, our largest ever bookrunning mandate for a UK CMB customer, demonstrating our ability to utilise connections between global businesses.

We strengthened our support of the renminbi ('RMB') internationalisation and in January became the first custodian bank servicing London-based RMB qualified foreign institutional investors following regulatory approval to the opening of mainland China's securities market to overseas investors.

In France, CMB signed innovative partnership agreements with Bpifrance and UBIFRANCE, designed to make it easier for clients who aspire to trade internationally to expand. Following the success of the SME Fund last year, CMB allocated another €1.5bn (US$2.0bn) to support customers seeking international growth, approving €0.9bn (US$1.2bn) of lending in the first half of 2014. In RBWM, we continued to focus on growing the home loans proposition by generating high quality new business and long-term relationships with affluent clients, increasing average balances by US$3.3bn.

We continued our growth initiative in Germany with the aim of positioning the corporate banking business as the 'Leading International Bank' by extending our product offerings to internationally operating middle market enterprises (Mittelstand) and international corporations.

In Turkey, RBWM launched a new transactional offering campaign 'Big Step', attracting over 59,000 customers in the first half of the year. CMB set up a strategic partnership with the Exporters' Association for customers seeking to trade internationally and embarked upon a programme of structural optimisation of the branch network to drive efficiencies. In addition across CMB Europe, our Trade business embarked on a series of initiatives to enable customers to fulfil their international trade ambitions, which included the roll out of trade academies and the launch of 'Trade Radar' communications in local languages. In Switzerland, we continued to reposition the GPB business and focused on growth through the high net worth client segment.

Review of performance

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

Net interest income decreased by US$0.3bn, primarily due to a provision in the UK arising from a review of compliance with the Consumer Credit Act. Excluding this, net interest income was broadly unchanged as an increase in the UK was offset by a decrease in Turkey.

In the UK, excluding the provision noted above, net interest income increased in GB&M, CMB and RBWM. In GB&M, there was an increase in Capital Financing from growth in volumes, notwithstanding continuing spread compression, and in Balance Sheet Management from rising average balances in liquid asset portfolios. In CMB, net interest income rose due to higher spreads in term lending and deposit volume growth in Payments and Cash Management, although term lending volumes fell, while in RBWM the increase was from growth in deposit volumes and widening deposit spreads, despite narrower lending spreads.

These factors were broadly offset by a decrease in net interest income in Turkey due to interest rate caps on cards and overdrafts imposed by the local regulator.

Net fee income increased marginally, as increases in the UK and Turkey were partly offset by decreases in Switzerland.

In the UK, net fee income in GB&M increased, primarily due to a reduction in fees paid to other regions due to lower activity in Markets. In Capital Financing, the effects of market share and volume gains were broadly offset by fee compression. We also recorded a rise in fees in CMB due to increased volumes of new business lending in the large corporate and mid-market segments. By contrast, there was a decrease in RBWM as a result of higher fees payable under partnership agreements, along with lower investment and overdraft fees.

In Turkey, net fee income rose from growth in card fees. However, in Switzerland in GPB, net fee income decreased, reflecting a reduction in client assets as we continued to reposition the business.

Net trading income decreased by US$3.6bn to US$1.0bn. This included the effects of a number of significant items including:

·     adverse movements on non-qualifying hedges of US$144m compared with favourable movements of US$98m in the first half of 2013;

·     adverse movements on a DVA of US$77m, compared with favourable movements of US$306m; and

·     a foreign exchange gain on sterling debt issued by HSBC Holdings of US$442m in the first half of 2013, which did not recur.

Excluding these items, trading income decreased, primarily in the UK, driven by adverse foreign exchange movements on assets held as economic hedges of foreign currency debt designated at fair value compared with favourable movements in the first half of 2013, with the offset reported in 'Net income from financial instruments designated at fair value'.

In addition, net trading income in Markets declined, primarily in Foreign Exchange and, to a lesser extent, in Rates, reflecting lower market volatility and reduced client flows. These were partially offset by an increase in Equities, notwithstanding revaluation gains reported in the first half of 2013, as we successfully positioned the business to capture increased client activity.

Net income from financial instruments designated at fair value was US$1.0bn compared with net expense of US$1.0bn. In the UK, in the first half of 2014 we reported adverse movements on the fair value of our own debt, compared with minimal movements in the first half of 2013.

Excluding this, net income rose, driven by favourable foreign exchange movements on foreign currency debt compared with adverse movements last year.

In addition, there were favourable fair value movements from interest and exchange rate ineffectiveness in the hedging of long-term debt issued principally by HSBC Holdings in 2014, compared with adverse movements in 2013.

Other operating incomeincreased by US$584m, primarily driven by a number of significant items in the first half of 2013:

·     a loss following the write-off of allocated goodwill relating to our Monaco business; and

·     a loss on the disposal of an HFC Bank secured loan portfolio in the UK.

Excluding these items, other operating income rose as we reported gains from legacy credit in the UK in GB&M reflecting price appreciation across certain asset classes in the ABS market.

LICs decreased by 70% to US$0.3bn, as decreases in the UK and Spain were partially offset by increases in Turkey and France. In the UK,individually and collectively assessed loan impairment charges in CMB fell, reflecting the enhanced quality of the portfolio and improved economic environment. GB&M recordedhigher net releases of creditrisk provisions on available-for-sale ABSs, mainly reflecting price appreciation on
the legacy portfolio. Loan impairment charges in RBWM also decreased as a result of the improved economic environment and customer behaviour. In Spain, loan impairment charges decreased, as economic conditions improved.

These factors were partially offset by increases in Turkey in RBWM, driven by the growth in the portfolio and the increase in card delinquency rates, and in France in GB&M, from an increase in individually assessed provisions relating to a small number of customers.

Operating expenses were broadly unchanged and included several significant items recorded in the first half of 2013 including:

·      Madoff-related litigation charges in GB&M in Ireland (US$298m); and

·      a provisionin respect of regulatory investigations in GPB in Switzerland (US$119m); partly offset by

·      the non-recurrence of the benefit of an accounting gain relating to changes in delivering ill-health benefits to certain employees in the UK (US$430m).

In addition, operating expenses in the first half of 2014 included:

·      a reduction of US$178m in charges in the UK relating to customer redress programmes (see page 243 for further details);

·      lower restructuring costs of US$50m; and

·      adjustments relating to the prior year UK bank levy charges (2014: US$45m credit; 2013 US$9m charge).

Excluding these items, operating expenses increased as a result of the timing of the recognition of the FSCS levy and increased Risk and Compliance expenses in line with the implementation of Global Standards, despite sustainable costs savings of over US$260m.

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

	Half-year to 30 June 2014
	Retail      Banking and Wealth Management          US$m		Commercial      Banking          US$m		Global   Banking           and   Markets       US$m		Global     Private   Banking       US$m		Other        US$m		Inter-     segment elimination65         US$m		Total       US$m
Profit/(loss) before tax
Net interest income/(expense)	2,567		1,806		1,020		334		(352)		(131)		5,244
Net fee income .......	1,225		978		653		326		6		-		3,188
Trading income/(expense) excluding net interest income ...	(134)		20		683		72		(123)		-		518
Net interest income/(expense) on trading activities .............	7		1		328		(2)		-		130		464
Net trading income/(expense)59 ..........................	(127)		21		1,011		70		(123)		130		982
Changes in fair value of long-term debt issued and related derivatives ..........	-		-		-		-		545		-		545
Net income/(expense) from other financial instruments designated at fair value ...................	403		47		740		1		(720)		-		471
Net income/(expense) from financial instruments designated at fair value ...................	403		47		740		1		(175)		-		1,016
Gains less losses from financial investments ........	8		5		304		11		8		-		336
Dividend income .....	4		7		15		1		1		-		28
Net earned insurance premiums ............	1,429		125		-		19		1		-		1,574
Other operating income/ (expense) ............	(51)		(7)		165		(15)		500		(70)		522
Total operating income/ (expense)  .........	5,458		2,982		3,908		747		(134)		(71)		12,890
Net insurance claims66 ...............	(1,840)		(151)		-		(26)		-		-		(2,017)
Net operating income/ (expense)13 ........	3,618		2,831		3,908		721		(134)		(71)		10,873
Loan impairment (charges)/ recoveries and other credit risk provisions ....	(131)		(128)		(4)		(4)		1		-		(266)
Net operating income/ (expense) ..........	3,487		2,703		3,904		717		(133)		(71)		10,607
Operating expenses .	(3,010)		(1,153)		(2,479)		(541)		(1,240)		71		(8,352)
Operating profit/(loss) .......	477		1,550		1,425		176		(1,373)		-		2,255
Share of profit/(loss) in associates and joint ventures ......	3		1		-		-		(1)		-		3
Profit/(loss) before tax ......................	480		1,551		1,425		176		(1,374)		-		2,258
	%		%		%		%		%				%
Share of HSBC's profit before tax ...........	3.9		12.6		11.5		1.4		(11.1)				18.3
Cost efficiency ratio ............................	83.2		40.7		63.4		75.0		(925.4)				76.8
Balance sheet data51
	US$m		US$m		US$m		US$m		US$m				US$m
Loans and advances to customers (net)3 ..	180,967		108,218		162,661		26,768		1,056				479,670
Total assets ............	241,878		123,632		1,080,070		76,006		75,403		(166,126)		1,430,863
Customer accounts3	217,080		140,043		212,557		44,176		920				614,776

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

	Half-year to 30 June 2013
	Retail        Banking   and Wealth Management           US$m		Commercial        Banking           US$m		Global     Banking            and     Markets        US$m		Global       Private     Banking         US$m		Other         US$m		Inter-       segment elimination65          US$m		Total        US$m
Profit/(loss) before tax
Net interest income/(expense).	2,751		1,638		799		357		(310)		15		5,250
Net fee income/(expense).	1,246		844		489		397		(7)		-		2,969
Trading income excluding net interest income ...	102		26		2,958		108		538		-		3,732
Net interest income on trading activities .............	3		7		594		4		14		(15)		607
Net trading income59 ............................	105		33		3,552		112		552		(15)		4,339
Changes in fair value of long-term debt issued and related derivatives ..........	-		-		-		-		(1,347)		-		(1,347)
Net income/(expense) from other financial instruments designated at fair value ...................	296		103		(965)		-		964		-		398
Net income/(expense) from financial instruments designated at fair value ...................	296		103		(965)		-		(383)		-		(949)
Gains less losses from financial investments .........	43		(7)		332		3		2		-		373
Dividend income .....	2		1		32		4		1		-		40
Net earned insurance premiums ............	1,519		222		-		6		(1)		-		1,746
Other operating income/ (expense) ............	(149)		(21)		(11)		(274)		343		62		(50)
Total operating income ................	5,813		2,813		4,228		605		197		62		13,718
Net insurance claims66 ...............	(1,958)		(281)		-		(5)		-		-		(2,244)
Net operating income13 .............	3,855		2,532		4,228		600		197		62		11,474
Loan impairment charges and other credit risk provisions ...........	(169)		(498)		(166)		(13)		-		-		(846)
Net operating income ................	3,686		2,034		4,062		587		197		62		10,628
Operating expenses .	(2,731)		(950)		(2,493)		(700)		(926)		(62)		(7,862)
Operating profit/(loss) .........	955		1,084		1,569		(113)		(729)		-		2,766
Share of profit/(loss) in associates and joint ventures ......	1		2		(1)		(1)		1		-		2
Profit/(loss) before tax .......................	956		1,086		1,568		(114)		(728)		-		2,768
	%		%		%		%		%				%
Share of HSBC's profit before tax ............	6.8		7.7		11.1		(0.8)		(5.2)				19.7
Cost efficiency ratio ............................	70.8		37.5		59.0		116.7		470.1				68.5
Balance sheet data51
	US$m		US$m		US$m		US$m		US$m				US$m
Loans and advances to customers (net)3 ..	157,613		97,814		129,954		23,095		795				409,271
Total assets .............	220,259		115,819		1,091,624		74,917		70,010		(207,095)		1,365,534
Customer accounts3 .	187,725		121,334		165,147		45,888		890				520,984

	Half-year to 31 December 2013
	Retail       Banking and Wealth Management          US$m		Commercial        Banking           US$m		Global      Banking              and      Markets          US$m		Global Private        Banking           US$m		Other           US$m		Inter-       segment elimination65           US$m		Total           US$m
Profit/(loss) before tax
Net interest income/ (expense) ......	2,849		1,715		975		365		(384)		(77)		5,443
Net fee income .	1,299		945		468		347		4		-		3,063
Trading income/(expense) excluding net interest income ..........	104		4		(777)		84		160		-		(425)
Net interest income/ (expense) on trading activities .......	(1)		(2)		419		-		16		77		509
Net trading income/ (expense)59 ....	103		2		(358)		84		176		77		84
Changes in fair value of long-term debt issued and related derivatives .....	-		-		-		-		411		-		411
Net income/(expense) from other financial instruments designated at fair value ...	763		168		1,556		4		(1,534)		(1)		956
Net income/(expense) from financial instruments designated at fair value........	763		168		1,556		4		(1,123)		(1)		1,367
Gains less losses from financial investments ...	9		7		12		(20)		(2)		-		6
Dividend income ......................	2		1		33		-		(1)		-		35
Net earned insurance premiums ......	1,263		139		(1)		10		1		-		1,412
Other operating income ..........	46		30		121		21		423		(62)		579
Total operating income/ (expense) ......	6,334		3,007		2,806		811		(906)		(63)		11,989
Net insurance claims66 .........	(2,178)		(286)		-		(32)		-		-		(2,496)
Net operating income/ (expense)13 ....	4,156		2,721		2,806		779		(906)		(63)		9,493
Loan impairment charges and other credit risk provisions ......................	(160)		(437)		(76)		(11)		-		-		(684)
Net operating income/ (expense) ......	3,996		2,284		2,730		768		(906)		(63)		8,809
Operating expenses ........	(3,203)		(1,281)		(2,494)		(819)		(2,017)		63		(9,751)
Operating profit/(loss) ...	793		1,003		236		(51)		(2,923)		-		(942)
Share of profit/(loss) in associates and joint ventures	4		(1)		(3)		-		(1)		-		(1)
Profit/(loss) before tax ......	797		1,002		233		(51)		(2,924)		-		(943)
	%		%		%		%		%				%
Share of HSBC's profit before tax ......	9.4		11.8		2.7		(0.6)		(34.4)				(11.1)
Cost efficiency ratio...............	77.1		47.1		88.9		105.1		(222.6)				102.7
Balance sheet data51
	US$m		US$m		US$m		US$m		US$m				US$m
Loans and advances to customers (net)3 ............	177,357		105,498		145,136		27,289		830				456,110
Total assets .......	238,499		124,242		1,054,506		75,718		72,174		(172,180)		1,392,959
Customer accounts3 .......	205,288		134,120		191,715		49,789		1,021				581,933

For footnotes, see page 96.

 

END

 

 

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