Annual Financial Report 10 of 54

RNS Number : 0678I

HSBC Holdings PLC

20 March 2015

 



Global business
Summary	63
Retail Banking and Wealth Management	64
Commercial Banking	67
Global Banking and Markets	70
Global Private Banking	72
Other	75
Analysis by global business	76

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 78). Performance is discussed in this order because certain strategic themes, business initiatives and trends affect more than one geographical region. All commentaries are on an
adjusted basis (page 40) unless stated otherwise, while tables are on a reported basis 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 some subjectivity.

Where relevant, income and expense amounts presented include the results of inter-segment funding along with 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 presentation by global business, the cost of the levy is included in 'Other'.

Profit/(loss) before tax

		2014				2013				2012
		US$m		%		US$m		%		US$m		%
Retail Banking and Wealth Management		5,651		30.3		6,649		29.5		9,575		46.4
Commercial Banking		8,744		46.8		8,441		37.4		8,535		41.3
Global Banking and Markets		5,889		31.5		9,441		41.8		8,520		41.3
Global Private Banking		626		3.4		193		0.9		1,009		4.9
Other39		(2,230)		(12.0)		(2,159)		(9.6)		(6,990)		(33.9)
Year ended 31 December		18,680		100.0		22,565		100.0		20,649		100.0

Total assets⁴⁰

		2014				2013
		US$m		%		US$m		%
Retail Banking and Wealth Management		499,083		18.9		517,085		19.4
Commercial Banking		372,739		14.2		360,623		13.5
Global Banking and Markets		1,839,644		69.8		1,975,509		74.0
Global Private Banking		88,342		3.4		97,655		3.7
Other		164,537		6.2		171,812		6.4
Intra-HSBC items		(330,206)		(12.5)		(451,366)		(17.0)
At 31 December		2,634,139		100.0		2,671,318		100.0

For footnotes, see page 109.

Risk-weighted assets

		2014				2013
		US$bn		%		US$bn		%
Retail Banking and Wealth Management		205.1		16.8		233.5		21.4
Commercial Banking		432.4		35.4		391.7		35.8
Global Banking and Markets		516.1		42.3		422.3		38.6
Global Private Banking		20.8		1.8		21.7		2.0
Other		45.4		3.7		23.5		2.2
At 31 December		1,219.8		100.0		1,092.7		100.0

 

Principal Retail Banking and Wealth Management business

RBWM comprises the Principal RBWM business, the US run-off portfolio and the disposed-of US CRS business. We believe that looking at the Principal RBWM business allows management to more clearly discuss the cause of material changes from year-to-year in the ongoing business and to assess the factors and trends in the business which are expected to have a material effect in future years. The reconciliation of RBWM to Principal RBWM is on page 64. Tables which reconcile reported to adjusted financial measures are available on www.hsbc.com.

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.

						US
		Total		US		run-off		Principal
		RBWM		CRS		portfolio		RBWM
		US$m		US$m		US$m		US$m
2014
Net interest income		16,782		-		1,390		15,392
Net fee income		6,668		-		(4)		6,672
Other income/ (expense)42		1,144		-		(49)		1,193
Net operating income4		24,594		-		1,337		23,257
LICs43		(1,819)		-		(30)		(1,789)
Net operating income		22,775				1,307		21,468
Total operating expenses		(17,522)		-		(738)		(16,784)
Operating profit		5,253		-		569		4,684
Income from associates44		398		-		-		398
Profit before tax		5,651		-		569		5,082
						US
RoRWA36		2.6%		-		0.8%		3.3%
2013
Net interest income		18,339		-		2,061		16,278
Net fee income		7,021		-		11		7,010
Other income/ (expense)42		1,380		-		(400)		1,780
Net operating income4		26,740		-		1,672		25,068
LICs43		(3,227)		-		(705)		(2,522)
Net operating income		23,513		-		967		22,546
Total operating expenses		(17,248)		-		(1,166)		(16,082)
Operating profit/(loss)		6,265		-		(199)		6,464
Income/(expense) from associates44		384		-		(1)		385
Profit/(loss) before tax		6,649		-		(200)		6,849
RoRWA36		2.6%		-		(0.2%)		4.4%
2012
Net interest income		20,298		1,267		2,563		16,468
Net fee income		7,205		395		33		6,777
Other income/ (expense)42		6,358		3,155		(200)		3,403
Net operating income4		33,861		4,817		2,396		26,648
LICs43		(5,515)		(322)		(2,569)		(2,624)
Net operating income/ (expense)		28,346		4,495		(173)		24,024
Total operating expenses		(19,769)		(729)		(1,103)		(17,937)
Operating profit/(loss)		8,577		3,766		(1,276)		6,087
Income from associates44		998		-		2		996
Profit/(loss) before tax		9,575		3,766		(1,274)		7,083
RoRWA36		3.1%		14.7%		(1.1%)		4.2%

For footnotes, see page 109.

Principal RBWM RoRWA 3.3%

Global mobile application downloads surpass 6 million

Best Mobile Banking Application 2014 ( Global Finance Magazine)

Strategic direction RBWM provides retail banking and wealth management services for personal customers in markets where we have, or can build, the scale in our target customer segments to do so cost effectively. 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; ·   using our 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 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.

Review of reported performance

·   On a reported basis, RBWM profit before tax reduced by US$1.0bn to US$5.7bn, while Principal RBWM profit before tax fell by US$1.8bn to US$5.1bn. The reduction in RBWM partly reflected the effects of significant items (see page 42) including provisions of US$568m arising from the ongoing review of compliance with the CCA in the UK, adverse movements in non-qualifying hedges of US$493m in 2014 compared with favourable movements of US$262m in 2013, UK customer redress provisions of US$992m compared with US$953m in 2013, and disposals.

·   In the US run-off portfolio, a profit before tax was recorded compared with a loss in 2013. A reduction in revenue was more than offset by lower LICs reflecting decreased lending balances, reduced new impaired loans and lower delinquency levels. Operating expenses also fell, mainly from the non-recurrence of a customer remediation provision relating to our former CRS business and lower divestiture costs.

Review of adjusted performance⁴⁵

The commentary that follows reflects performance in our Principal RBWM⁴⁶ business (see page 63).

Profit before tax (US$m)

·   Profit before tax fell by US$0.7bn to US$6.9bn. Revenue was broadly unchanged, while lower LICs were more than offset by higher operating expenses.

Revenue (US$m)

·   Revenue was broadly unchanged despite the effect of de-risking initiatives and against a backdrop of continued low interest rates and muted growth in certain key markets. Higher income from current accounts, savings and deposits was broadly offset by lower revenues from personal lending and wealth management products.

Principal RBWM: management view of adjusted revenue

		2014		2013
		US$m		US$m
Current accounts, savings and deposits		5,839		5,606
Wealth management products		6,201		6,263
- investment distribution47		3,456		3,568
- life insurance manufacturing		1,603		1,602
- asset management		1,142		1,093
Personal lending		11,300		11,455
- mortgages		3,169		3,182
- credit cards		4,339		4,310
- other personal lending48		3,792		3,963
Other49		645		873
Net operating income4		23,985		24,197

For footnotes, see page 109.

·  
Revenue from current accounts, savings and deposits increased by 4%. This reflected an increase in customer account balances, of 4% compared with 2013, mainly in Hong Kong and the UK. In addition, higher revenue reflected increased spreads on savings products in the UK and, to a lesser extent, on deposits in mainland China where market interest rates increased.

·   Revenue from wealth management products reduced by 1%. Investment distribution income declined, mainly as a result of lower fees in the UK, in part reflecting the Retail Distribution Review undertaken in 2013, and in Brazil reflecting a change in product mix. Life insurance manufacturing income was broadly unchanged. This reflected higher new business sales and investment income in Hong Kong, and a net favourable movement in the PVIF asset in Brazil, offset by a reduction in the PVIF asset in France where a fall in long-term yields increased the cost of guarantees on savings business.

·   Personal lending revenue was down by 1%. While mortgage and credit card revenues were broadly unchanged, other personal lending income declined by 4%, notably in the UK due to the cessation of certain overdraft fees.

·   LICs decreased by 22% with reductions across all regions, mainly in Brazil due to impairment model changes and assumption revisions for restructured loans in 2013 which were not repeated in 2014. LICs also reduced in the US and the UK, partly reflecting lower delinquency levels and reduced outstanding credit card and UK loan balances.

Operating expenses (US$m)

·   Operating expenses increased by 7%, reflecting inflationary pressures, particularly in Latin America, in addition to higher costs associated with Regulatory Programmes and Compliance. The increase also reflected the timing of the recognition of the Financial Services Compensation Scheme levy in the UK and higher marketing costs across the regions. These factors were partly offset by sustainable cost savings of over US$200m.

Growth priorities

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

·   In 2014, we continued to focus on improving the quality of our revenue through the ongoing implementation of de-risking initiatives, although these have weighed on income. They included the introduction of a new discretionary incentive framework for our Retail Banking customer-facing staff similar to the one launched for Wealth Management relationship managers ('RM's) in 2013, removing the formulaic link between product sales and variable pay for front line staff. We also continued to simplify our product range, improve our risk governance and align our practices following regulatory changes.

·   We aim to deepen relationships with our existing customers and use personal lending to generate new business, targeting different segments and offerings in each market. To achieve this we continued to use improved analytics to support product decisions. Based on pricing and customer response measures, we enhanced revenue and grew balances in certain targeted segments, including the re-launch of the Advance segment in 17 markets in 2014. Lending and deposit balances and revenue per customer for Advance increased compared with 2013.

·   We maintained discipline around growing lending within our risk appetite in our home and priority growth markets. Home loan average balances increased by 3% in 2014, reflecting growth in our priority markets, notably with double-digit growth in approximately half of these countries as we re-balanced the product mix towards secured loans, although this mix change translated into lower spreads. In our home markets, we continued to target growth in unsecured lending, with average balances marginally higher including an increase in average card balances in Hong Kong, partly offset by a reduction in the UK. Despite overall balance growth, LICs remained lower than in 2013.

·   Customer recommendation levels improved in several markets during 2014, with the total volume of complaints related to products and services decreasing by more than 20% in the second half of the year, compared with the equivalent period in 2013. Further work is required and is ongoing to better meet our customer needs as they continue to evolve.

Continue to develop wealth management with a focus on growing customer balances

·   We remain committed to capturing opportunities from wealth creation, primarily through our Premier offering with its customers generating nearly four times the average revenue of non-Premier clients.

·   Although revenue from wealth management products remained lower than expected we continued to grow wealth balances, which comprise investment and insurance balances. These balances increased compared with 2013 across insurance, mutual funds and equities trading.

·   In 2014, Global Asset Management continued its strategy of strengthening collaboration across the global businesses to serve their customers. This helped to attract US$29bn of net new money principally in fixed income and liquidity products, in particular with GB&M clients. The investment performance in over 74% of Global Asset Management's eligible funds by value were above the market median.

·   In 2014, we improved our RMs' productivity through new training programmes and tools. Client contact and coverage rates increased from 2013 with higher numbers of client appointments, financial reviews and needs fulfilled per RM.

Develop digital capabilities to support customers and reduce cost

·   We continue to develop our digital channels and streamline processes to improve the customer experience and to deliver cost savings through our distribution network.

·   In 2014, downloads of our global mobile application, now with enriched functionality, were over 3m with the total number of downloads surpassing 6m. Global Finance magazine presented HSBC with the award for Best Mobile Banking App at its 2014 World's Best Internet Bank event based on the application's global reach and functionality.

·   In addition, we launched our first straight-through on‑line mortgage application service in the UK and, by the end of 2014, 14% of our annual approvals were produced online. We also deployed new Premier platforms, digital capabilities and tablet-based tools to enhance the end-to-end delivery process and customer experience. Across our priority growth markets, the revenue derived from digital channels increased by 18% compared with 2013.

Commercial Banking

CMB offers a full range of commercial financial services and tailored solutions to more than 2.5 million customers ranging from small and medium-sized enterprises to publicly quoted companies in almost 60 countries.
		2014		2013		2012
		US$m		US$m		US$m
Net interest income		10,506		10,200		10,361
Net fee income		4,738		4,717		4,470
Other income42		1,059		1,448		1,720
Net operating income4		16,303		16,365		16,551
LICs43		(1,675)		(2,384)		(2,099)
Net operating income		14,628		13,981		14,452
Total operating expenses		(7,489)		(7,049)		(7,598)
Operating profit		7,139		6,932		6,854
Income from associates44		1,605		1,509		1,681
Profit before tax		8,744		8,441		8,535
RoRWA36		2.1%		2.2%		2.2%
Record reported profit before tax of US$8.7bn
10% Growth in customer lending balances (excluding the effect of currency translation)
Best Global Cash Management Bank for Corporates and Financial Institutions for the third consecutive year (Euromoney 2014)
Strategic direction CMB aims to be the banking partner of choice for our customers 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 in Payments and Cash Management; and ·   enhancing collaboration with other global businesses. Implementing Global Standards, enhancing risk management controls and simplifying processes also remain top priorities for CMB.
For footnotes, see page 109.

Review of reported performance

·   In 2014, CMB reported a record profit before tax of US$8.7bn, 4% higher than in 2013. Reported profit before tax included the effect of a number of significant items (see page 42), notably the gain on sale of our operations in Panama of US$479m in 2013. The increase in reported profit before tax was also driven by a reduction in LICs, although this was partly offset by higher operating expenses.

Review of adjusted performance⁴⁵ 

Profit before tax (US$m)

·   Profit before tax grew by 13% to US$8.9bn. This was driven by increased revenue and a reduction in LICs, partly offset by a rise in operating expenses.

Revenue (US$m)

·   Revenue grew by 5%, driven by Credit and Lending and Payments and Cash Management, notably in our home markets of Hong Kong and the UK. This was due to higher net interest income from growth in average lending and deposit balances in Hong Kong and rising average deposit balances and wider lending spreads in the UK. Higher net fee income was driven by an increase in term lending fees in the UK.

·   Despite lending spread compression compared with 2013, spreads in 2014 stabilised and showed signs of recovery in certain markets. In addition, we saw notable growth in our UK lending balances in the second half of 2014.

Management view of adjusted revenue

		2014		2013
		US$m		US$m
Global Trade and Receivables Finance		2,680		2,625
Credit and Lending		6,316		5,938
Payments and Cash Management, current accounts and savings deposits		5,018		4,709
Markets products, Insurance and Investments and Other51		2,298		2,207
Net operating income4		16,312		15,479

For footnotes, see page 109.

The table above has been restated to reclassify Foreign Exchange revenue. In 2014, 'Markets products, Insurance and Investments and Other' included Foreign Exchange revenue of US$207m previously included within 'Global Trade and Receivables Finance' (2013: US$213m) and US$516m previously included within 'Payments and Cash Management' (2013: US$462m).

·   Global Trade and Receivables Finance revenue increased by 2% compared with 2013. Average balances rose, with growth in Asia, Europe and Latin America. The effect was partly offset by spread compression in Latin America, reflecting a change in portfolio mix in Brazil. In 2014, spread compression stabilised and showed signs of recovery in certain markets.

·   Credit and Lending revenue increased by 6% compared with 2013, reflecting higher average balances in Hong Kong and the US and, to a lesser extent, in Brazil. Revenue also increased in the UK due to wider lending spreads and increased fee income from term lending due to higher new business volumes. These factors were partly offset by spread compression in Latin America, primarily in Brazil as discussed above and in Mexico due to the repositioning of the business, and in mainland China.

·   Payments and Cash Management revenue increased by 7% compared with 2013. This reflected strong deposit growth, notably in the UK and Hong Kong, along with an increase in high value payment transaction volumes. This was partly offset by spread compression, notably in Europe.

·   Markets products, Insurance and Investments and Other revenue was 4% higher, primarily in North America. In Canada, this reflected the non-recurrence of a write-down of an investment property held for sale in 2013 and a gain on sale of an investment portfolio in 2014. In the US, higher revenue was driven by a gain on sale of a real estate portfolio.

·   LICs decreased by US$663m, mainly in Europe and Latin America. Lower LICs in Europe reflected a reduction in individually assessed loan impairment charges in the UK. The reduction in Latin America was driven by lower individually assessed charges in Mexico, in particular relating to homebuilders, and lower collectively assessed impairments in Brazil due to impairment model changes and assumption revisions for restructured loans in the Business Banking portfolios in 2013 not repeated in 2014. These factors were partly offset by higher individually assessed charges in Asia, notably in mainland China and Hong Kong.

Operating expenses (US$m)

·   Operating expenses increased by 8%, principally in Europe, Latin America and Asia. In Europe and Asia, higher costs reflected increased investment in staff to support business growth and inflationary pressures, while in Latin America costs rose due to inflation which was largely attributable to union-agreed salary increases in Brazil and Argentina. In addition, operating expenses increased due to higher Regulatory Programmes and Compliance costs.

·   Income from associates increased by 4% due to the improved performance of BoCom and The Saudi British Bank.

Growth priorities

Providing consistency through a globally led business model

·   Our business strategy is built on the foundation of global scale and consistency, focusing on customer segments and customer behaviour to ensure we provide tailored products to suit their needs. We continue to invest in providing global product coverage for our business segments. This enables us to manage risk more efficiently.

·   The creation of new senior management positions and a more defined global strategy within our customer segments enabled us to improve client coverage. In 2014, we appointed a new Global Head of International Subsidiary Banking to drive investment in supporting our international customers across our network. We also established dedicated RM teams for international subsidiary banking in key markets to focus on meeting the needs of these subsidiaries and growing the associated revenue streams.

·   We appointed a new Global Head of Lending and Transaction Management with a remit to support all segments. This globally-aligned product group is designed to optimise capital allocation and improve revenue mix within our risk appetite.

·   In 2014, we redefined our Large Corporate segment to focus on a smaller number of higher-value clients. The Large Corporate segment experienced strong growth in most markets fuelled by multi-country flow mandates and increased event-driven capital markets activity. The increased focus on 'global wallet' and connectivity led to increased awareness amongst our customers of our franchise and capabilities, resulting in stronger global strategic partnerships.

·   In addition, we increased our market presence in six of our key MME markets (Hong Kong, the UK, Canada, the US, Mexico and Brazil). We made further progress by appointing regional and country heads of MME and by enhancing our client management system.

·   In Business Banking, we invested in additional RMs in key markets, increased training worldwide and continued to deploy a globally consistent customer management system within our relationship-managed portfolios. Six major campaigns were launched in 2014 to help SME customers achieve their growth ambitions and expand overseas, including offering funds in the UK, France, the US, Canada, Australia and Turkey totalling US$18bn.

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

·   HSBC's network across the major global trade corridors continued to assist us to provide value-added solutions for our clients. For example, we helped one of the largest retailers in the US to improve its supply chain management by providing holistic financing and liquidity solutions including working capital, trade and supply chain finance.

·   In Payments and Cash Management, CMB remained well positioned to benefit from global trends such as the increase in cross-border payment flows as we are strategically located where more than 85% of the world's payment activity originates. For example, new customer mandates increased by 23% on 2013. In addition, we improved our digital offering, migrating
over 80,000 customers to date from legacy platforms to core electronic banking channels, and continued to develop innovative products. These included the enhancement of our Global Liquidity Solutions, which enables customers in mainland China to connect their operating cash with their liquidity structures globally.

Delivering excellence in our core products

·   HSBC is one of the largest trade finance banks in the world with access to more than 85% of the world's trade and capital flows. We continued to enhance our open account financing capabilities through investment in Receivables Finance and Supply Chain, specifically the launch of a new Supply Chain Solutions platform and the consolidation of the existing Receivables platform into regional hubs. This offers customers broader access to expertise and liquidity and gives us the ability to deploy our capabilities rapidly in new markets, providing better risk management and lower operating costs.

·   Against the backdrop of declining commodity prices, we achieved double-digit asset balance growth in Commodity and Structured Trade Finance compared with 2013.

Enhancing collaboration with other global businesses

·   We maintained our focus on strengthening CMB's collaboration with GB&M and GPB by increasing product coverage across the Group to our customers. In 2014, CMB customers generated over 80% of HSBC's total collaboration revenues. Revenue from collaboration remained broadly unchanged compared with 2013. This was driven by lower sales of Markets products to CMB customers, notably in the Foreign Exchange business, offset by growth in the sale of Capital Financing products with regard to mergers and acquisitions and debt capital markets.

Global Banking and Markets

GB&M provides tailored financial solutions to major government, corporate and institutional clients worldwide.

		2014		2013		2012
		US$m		US$m		US$m
Net interest income		7,022		6,766		6,960
Net fee income		3,560		3,482		3,329
Net trading income50		5,861		6,780		5,690
Other income42		1,335		2,148		2,294
Net operating income4		17,778		19,176		18,273
LICs43		(365)		(207)		(670)
Net operating income		17,413		18,969		17,603
Total operating expenses		(12,028)		(9,960)		(9,907)
Operating profit		5,385		9,009		7,696
Income from associates44		504		432		824
Profit before tax		5,889		9,441		8,520
RoRWA36		1.2%		2.3%		2.1%

Client flows up in Equities, although subdued in Foreign Exchange

Sustained growth in revenues in Payments and Cash Management

Bond and Derivatives House of the year (International Finance Review 2014)

Strategic direction GB&M's business model and strategy is well established with the objective of being a 'top 5' bank to our priority clients and in our chosen products and geographies. We focus on the following growth priorities: ·   connecting clients to international growth opportunities; ·   continuing to be well positioned in products that will benefit from global trends; and ·   leveraging our distinctive international expertise and geographical network which connects developed and faster‑growing regions. Enhancing risk management controls, implementing Global Standards and collaborating with other global businesses also remain top priorities for GB&M.

For footnotes, see page 109.

Review of reported performance

·   GB&M's reported profit before tax of US$5.9bn was down by US$3.6bn, primarily in Europe and North America, from higher operating expenses and lower revenue. The increase in operating expenses and decrease in revenue reflected a number of significant items (see page 42). Operating expenses included settlements and provisions of US$1.2bn in connection with foreign exchange investigations, of which US$809m was recorded in the fourth quarter of 2014, and a charge of US$533m in the US relating to a settlement agreement with the Federal Housing Finance Agency, which are included in significant items.

Review of adjusted performance⁴⁵

Profit before tax (US$m)

·   Profit before tax of US$8.1bn was US$1.1bn lower than in 2013, driven by higher operating expenses and a fall in revenue, which included the introduction of the FFVA on certain derivative contracts that resulted in a charge of US$263m.

Revenue (US$m)

·   Revenue was lower principally due to the effect of the FFVA and a reduction in our Foreign Exchange business which was partly offset by an increase in Capital Financing.

·     

Management view of adjusted revenue

		2014 US$m		2013 US$m
Markets52		6,262		6,933
- Credit		567		801
- Rates		1,563		1,678
- Foreign Exchange		2,916		3,140
- Equities		1,216		1,314
Capital Financing		4,066		3,981
Payments and Cash Management		1,794		1,743
Securities Services		1,698		1,653
Global Trade and Receivables Finance		767		723
Balance Sheet Management		3,020		3,046
Principal Investments		531		450
Other53		(32)		3
Total operating income4		18,106		18,532

For footnotes, see page 109.

·   The table below outlines the effect on businesses and total adjusted operating income of the FFVA:

Effect of FFVA on total operating income

		2014 US$m		2013 US$m
Total operating income		18,106		18,532
- FFVA in Rates		(164)		-
- FFVA in Credit		(97)		-
- FFVA in other businesses		(2)		-
Total operating income excluding FFVA		18,369		18,532
- of which Rates excluding FFVA		1,727		1,678
- of which Credit excluding FFVA		664		801

·   Excluding the above, revenue in the majority of our Markets businesses was lower. This was predominantly driven by a decline in our Foreign Exchange business, which was affected by lower volatility, notably in the first half of 2014, and reduced client flows. Credit revenue also decreased due to adverse movements in credit spreads and a reduction in Legacy Credit. Equities revenue fell too, as 2013 benefited from higher revaluation gains which more than offset a rise in revenue from increased client flows and higher derivatives income in 2014. By contrast, Rates revenue rose due to favourable market movements, notably in Asia, along with minimal fair value movements on our own credit spread on structured liabilities compared with adverse movements in 2013. These factors were partly offset by a fall in Rates revenue in Europe.

·   In Capital Financing, revenue grew by US$85m, as the effects of increased volumes and market share gains across our advisory, equity capital markets and lending products were partly offset by spread and fee compression.

·   Payments and Cash Management revenue was marginally higher, due to both increased deposit balances, notably in Asia, and a rise in high value transaction volumes, partly offset by spread compression. We also experienced growth in Securities Services revenue, in part from new business in Europe, and Global Trade and Receivables Finance from growth in lending balances.

·  
LICs were higher due to a revision to certain estimates used in our corporate collective loan impairment calculation and increased individually assessed provisions, including a provision against a guarantee in Brazil recorded as a credit risk provision. These were partially offset by higher net releases on available-for-sale ABSs in our legacy portfolio than in 2013.

Operating expenses (US$m)

·   Operating expenses increased by 6%, primarily due to higher Regulatory Programmes and Compliance related costs and from increased staff costs. These factors were partially offset by sustainable savings of over US$80m.

Growth priorities

Connecting clients to international growth opportunities

·   Following the re-shaping of GB&M in 2013, as part of which we brought together all our financing businesses into Capital Financing, including lending, debt capital markets and equity capital markets, we continued to focus on better aligning our resources with clients' needs. We segmented our client base and created a Client Strategy Group to ensure that GB&M's product, sector and coverage expertise supports clients in the growth of their business activities. Strong collaboration between these teams was recently demonstrated by our appointment as the joint global coordinator and joint book runner on the largest European corporate equity rights issue since 2011. This was our fifth transaction with this client in the last 12 months.

·   We are utilising our global network to provide solutions for our clients in both established markets and faster-growing regions. Our ability to connect clients to opportunities was highlighted by the first Sukuk bond issued outside the Islamic world on which we acted as sole structuring advisor, joint lead manager and joint book runner.

·   We continued to strengthen our Foreign Exchange franchise by enhancing our risk management capabilities and further developing our distribution platforms and electronic pricing capabilities. This will improve our systems and governance whilst enabling us to better serve clients with a robust and efficient offering.

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

·   Capturing new opportunities arising from the internationalisation of the renminbi continues to be one of our key growth priorities. Recently, we acted as joint lead manager, book runner and financial advisor on a pioneering Formosa bond issue, which simultaneously listed on three exchanges worldwide. We were also voted 'Best Overall for Products and Services' by Asiamoney Offshore RMB Services Survey 2014 for the third consecutive year, demonstrating our continued leading position in the overseas renminbi market.

·   In November 2014 we launched the Stock Connect programme, a mechanism linking trading and clearing between the Shanghai and Hong Kong securities markets. This will give our clients direct access to the Chinese A-share market and the ability to fund equity purchases in renminbi.

·   Geographical expansion of large corporates and rising world trade are expected to increase the demand for cross-border payments and related services. Our strength in Payments and Cash Management was recognised by Euromoney, who named HSBC the 'Best Global Cash Manager for Non-financial Institutions' and 'Best Global Cash Manager for Corporate and Financial Institutions', for the second and third consecutive years, respectively. We were also able to win a mandate for renminbi cash management and additional foreign exchange and deposit business from a global automotive group which is seeking to expand into mainland China.

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

·   Our distinctive geographical network and global expertise allows us to provide a truly international service to our clients. We recently demonstrated the value of our global capital markets capabilities and leading position in faster-growing markets to a European automotive group. We advised and acted as joint sub-underwriter on a domestic securitisation in mainland China which was structured to attract both international and domestic investors. We were the first foreign bank to advise on the structuring of an internationally rated ABS transaction in mainland China.

·   GB&M continues to focus on collaborating with other global businesses and supporting clients in accessing a range of products across our Markets and Capital Financing businesses. In 2014, collaboration revenue between GB&M and CMB was broadly unchanged, driven by a reduction in Foreign Exchange which was offset by growth in Capital Financing, notably in advisory.

Global Private Banking

GPB serves high net worth individuals and families with complex and international needs within the Group's priority markets.

		2014		2013		2012
		US$m		US$m		US$m
Net interest income		994		1,146		1,294
Net fee income		1,056		1,150		1,232
Other income42		327		143		646
Net operating income4		2,377		2,439		3,172
LICs43		8		(31)		(27)
Net operating income		2,385		2,408		3,145
Total operating expenses		(1,778)		(2,229)		(2,143)
Operating profit		607		179		1,002
Income from associates44		19		14		7
Profit before tax		626		193		1,009
RoRWA36		2.9%		0.9%		4.6%
Positive net new money of US$14bn in areas targeted for growth since December 2013
Performance continued to be affected by actions taken to reposition the customer base
Best Family Office Offering (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 by: ·   capturing growth opportunities in home and priority growth markets, particularly from intra-Group collaboration by accessing owners and principals of CMB and GB&M clients; and ·   repositioning the business to concentrate on onshore markets and a smaller number of target offshore markets, aligned with Group priorities. Implementing Global Standards, enhancing risk management controls, tax transparency and simplifying processes also remain top priorities for GPB.
For footnotes, see page 109.

Review of reported performance

·   Reported profit before tax of US$626m was US$433m higher than in 2013. This was due to a small number of significant items (see page 42), most notably in 2013 from the loss on write-off of allocated goodwill relating to our Monaco business of US$279m and regulatory provisions of US$352m.

·   We expect our GPB results in 2015 to be affected by the reduction in our client assets as we continue to reposition our business model, including reducing the number of clients in non-priority markets.

Review of adjusted performance⁴⁵

Profit before tax (US$m)

·   Profit before tax fell by US$162m to US$738m, mainly due to reduced revenue as we continued to reposition the business, partly offset by lower operating expenses and LICs.

Revenue (US$m)

·   Revenue decreased by 11% compared with 2013, due to lower trading income and net fee income reflecting a managed reduction in client assets and lower market volatility. Net interest income also declined, mainly in Europe and Asia, driven by a reduction in deposit balances and lower treasury income, respectively, both reflecting actions to reposition the business. In addition, lending spreads narrowed compared with 2013.

·   Net loan impairment releases in 2014 compared with charges of US$33m in 2013, largely due to releases of collective impairment allowances in the UK and in the US.

Operating expenses (US$m)

·   Operating expenses decreased by 5%, primarily due to the release of a UK customer redress provision recognised in 2012, the non-recurrence of the UK provision relating to a bilateral Rubik tax agreement between the UK and Swiss governments, and the managed reduction in staff numbers.

Reported client assets⁵⁴

		2014		2013
		US$bn		US$bn
At 1 January		382		398
Net new money		(3)		(26)
Of which: areas targeted for growth		14		(7)
Value change		8		12
Disposals		(11)		(3)
Exchange and other		(11)		1
At 31 December		365		382

Reported client assets by geography

		2014		2013
		US$bn		US$bn
Europe		179		197
Asia		112		108
North America		63		65
Latin America		11		12
At 31 December		365		382

For footnote, see page 109.

·   On a reported basis, client assets, which include funds under management and cash deposits, decreased, mainly in Europe, due to the effect of the sale of a portfolio of clients in Switzerland, the disposal of our HSBC Trinkaus & Burkhardt AG business in Luxembourg and negative net new money. In addition there were unfavourable foreign exchange movements, mainly in Europe. This was partly offset by favourable market movements. Negative net new money of US$3bn was mainly driven by the continued repositioning of our business, though we attracted positive net new money of US$14bn in areas that we have targeted for growth, including our home and priority growth markets and the high net worth client segment.

·  

·   On a reported basis, our return on assets, defined as the percentage of revenue to average client assets, was 63bps in 2014, broadly unchanged compared with 2013. On an adjusted basis, our return on assets was 6bps lower in 2014, reflecting the effect of the repositioning and reduced market volatility. Our client return on assets, which excludes treasury and capital revenue, also decreased by 4bps.

·   In January 2015, the Swiss National Bank removed its currency cap with the euro which resulted in the appreciation of the Swiss franc. We monitor the impact of foreign exchange rate fluctuations on a continuing basis and do not expect any significant effect on the reported results of our GPB business.

Strategic direction

Capture growth in our home and priority growth markets and focus on collaboration revenues

·   In 2014, new referrals from other global businesses generated net new money of over US$10bn, which was US$5.5bn higher than in 2013. In total, 74% of our net new money from areas targeted for growth in 2014 came from Group-referred clients, helped by adopting a more coordinated and systematic approach to identifying client needs in conjunction with the other global businesses.

·   We integrated our collaboration efforts with GB&M and CMB into one team, the Corporate Client Group ('CCG'). This was established to improve client introductions to and from GPB by standardising best practices and developing tailored offerings to meet client needs more effectively. The CCG is also responsible for enhancing coverage of existing personal and corporate relationships through a coordinated approach. In addition, the Global Solutions Group was established to deliver bespoke solutions to ultra-high net worth and global priority clients. This involves working closely with GB&M and CMB to enhance the service we offer to these sophisticated clients.

·   We also established the Wealth Client Group with responsibility for ensuring greater alignment and increased collaboration with RBWM, including utilising RBWM's transactional banking capabilities.

·   To support client growth, we expanded our product offering with investment opportunities in three new Alternatives products, comprising one private equity fund and two real estate funds. We strengthened our investment group by ensuring that the majority of
clients with assets greater than US$5m now have access to a dedicated investment counsellor. We partnered with the GB&M Global Research team to improve the advisory services for our clients supported by easy client access to a wider range of investment research reports. We plan to deploy this globally by the end of 2015. We also worked closely with HSBC Securities Services to provide our ultra-high net worth and family office clients with access to our institutional global custody platform in Europe and the Middle East and North Africa, providing clients with access to trade capture, clearing and settlement, safekeeping and investment administration services.

Repositioning the business

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

·   We remain focused on clients with wider Group connectivity within our home and priority growth markets. Following the announcement of the sale of a portfolio of clients in Switzerland to LGT Bank (Switzerland) Ltd earlier this year, we completed the migration of US$8bn of client assets in the second half of 2014. We also continued to reduce the number of clients in non-priority markets.

·   In 2014, we continued to streamline and rationalise the business, closing a number of non-strategic representative offices, and we announced the consolidation of our trust business in Europe into a regional hub in Jersey. We also commenced development of a new global IT banking platform. This is expected to deliver improved efficiency, enhanced services and a consistent client offering by consolidating GPB's multiple systems onto a single banking platform. We remain on track to deliver the first phase of the implementation in 2015.

·   We enhanced our digital capabilities with the deployment of a new mobile application in Switzerland, Monaco, Luxembourg and Guernsey, enabling clients to view their investment holdings and transactions while on the move. We introduced a secure tablet application for front office staff in Switzerland delivering digital document browsing during client visits, and also deployed video meeting capabilities in the US. Wider deployment of these and other applications is scheduled for 2015.

Other³⁹

'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.

		2014		2013		2012
		US$m		US$m		US$m
Net interest expense		(501)		(737)		(730)
Net fee income/ (expense)		(65)		64		194
Net trading income/ (expense)50		(92)		6		(537)
Changes in fair value of long-term debt issued and related derivatives		508		(1,228)		(4,327)
Changes in other financial instruments designated at fair value		(9)		(576)		(1,136)
Net income/(expense) from financial instruments designated at fair value		499		(1,804)		(5,463)
Other income		6,524		8,122		8,868
Net operating income4		6,365		5,651		2,332
LICs43		−		−		-
Net operating income		6,365		5,651		2,332
Total operating expenses		(8,601)		(7,796)		(9,369)
Operating loss		(2,236)		(2,145)		(7,037)
Income/(expense) from associates44		6		(14)		47
Loss before tax		(2,230)		(2,159)		(6,990)
For footnotes, see page 109.

Review of reported performance

Reported loss before tax of US$2.2bn was 3% higher than in 2013. This was driven by increased operating costs partly offset by higher revenue.

The increase in loss before tax of US$71m included favourable movements in the fair value of own debt of US$417m in 2014 compared with adverse movements of US$1.2bn in 2013. These results also included the following items in 2013:

·   gain on derecognition of Industrial Bank as an associate (US$1.1bn);

·   net gain on disposal of Ping An Insurance (Group) Company of China, Ltd ('Ping An') (US$553m); and

·   foreign exchange gains relating to sterling debt issued by HSBC Holdings (US$442m);

and the following items in 2014:

·   gain on sale of our shareholding in Bank of Shanghai in 2014 (US$428m); and

·   an impairment on our investment in Industrial Bank (US$271m).

For further details of all significant items, see page 42.

Review of adjusted performance⁴⁵

Loss before tax (US$m)

·   The loss before tax decreased, reflecting increased revenue partly offset by higher operating costs.

Revenue (US$m)

·   Revenuerose by US$1.3bn, primarily due to favourable movements in 2014 of US$96m on 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, compared with adverse movements of US$551m in 2013. In addition, recoveries of certain expenses from global businesses increased, reflecting higher operating expenses, and we recorded a gain arising from the external hedging of an intra-Group financing transaction in Europe. There was also a release of accrued interest on uncertain tax reserves in the US. These factors were partly offset by the expiry of the TSAs relating to the sale of the CRS business in the US and lower income from investment properties in Asia.

Operating expenses (US$m)

 

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