Annual Financial Report - 2x of 44

RNS Number : 1044A

HSBC Holdings PLC

27 March 2012

 



Top and emerging risks

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

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

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

·     macro-economic and geopolitical risk;

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

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

During 2011 our senior management paid particular attention to a number of top and emerging risks which are summarised below:

Macro-economic and geopolitical risk

·  Eurozone - risk of sovereign defaults

·  Eurozone member departing from the currency union

·  Increased geopolitical risk in certain regions

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

·  Regulatory developments affecting our business model and Group profitability

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

·  Dispute risk

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

·  Challenges to achieving our strategy in a downturn

·  Internet crime and fraud

·  Social media risk

·  Level of change creating operational complexity and heightened operational risk

·  Information security risk

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

A detailed account of these risks is provided on page 99. Further comments on expected risks and uncertainties are made throughout the Annual Report and Accounts 2011, particularly in the section on Risk, pages 98 to 210.

Risk appetite

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

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

HSBC Values

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

·     dependable and doing the right thing;

·     open to different ideas and cultures; and

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

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

Key performance indicators

The Board of Directors and the GMB monitor HSBC's progress against its strategic objectives. Progress is assessed by comparison with our strategy, our operating plan and our historical performance using both financial and non-financial measures.

Following a review of our high-level key performance indicators ('KPI's) and reflecting the increased focus on the quality of the capital base, the GMB decided to adopt a core tier 1 capital ratio instead of a tier 1 capital ratio as the primary indicator of the strength of our capital base and its ability to support the growth of the business and meet regulatory requirements.

The GMB remains focused on improving our capital deployment to support the achievement of our medium term target for return on equity of between 12% and 15%, utilising the five filter analysis across the portfolio of businesses. We will continue to evaluate our businesses in 2012 using this methodology.

Strategy		Capital deployment - improving the way we deploy capital
		Return on average ordinary shareholders' equity3		Core tier 1 capital8				Advances to core funding ratio9
Key Performance Indicators
		Measure: (percentage) profit attributable to shareholders divided by average ordinary shareholders' equity.		Measure: (percentage) core tier 1 capital comprising shareholders' equity and related non-controlling interests less regulatory deductions and adjustments.				Measure: loans and advances to customers as a percentage of the total of core customer deposits and term funding with a remaining term to maturity in excess of one year.
		Target: to maintain a return in the medium term of between 12% and 15%.		Target: to maintain a strong capital base to support the development of the business and meet regulatory capital requirements at all times.				Target: to maintain an advances to core funding ratio below limits set for each entity.
		Outcome: return on average ordinary shareholders' equity was below the target range, but 1.4 percentage points higher than 2010.		Outcome: the decrease in core tier 1 capital to 10.1% reflected an increase in RWAs due to a growth in lending balances, including those held for sale and an increase in the RWAs of our mainland China associates, as well as the introduction of Basel 2.5.				Outcome: the strong funding position of HBAP has allowed us to take advantage of loan growth opportunities during the year, while reduced lending in the US resulted in further strengthening of our funding position.
Strategy		Cost efficiency - a lean and values-driven organisation
Key Performance Indicators		Cost efficiency (2011: underlying cost efficiency 61%)				Employee engagement
		Measure: (percentage) total operating expenses divided by net operating income before loan impairment and other credit risk provisions.				Measure: (percentage) measure of employee's emotional and rational attachment to HSBC, a combination of advocacy, satisfaction, commitment and pride.
		Target: to be between 48% and 52%, a range within which business is expected to remain to accommodate both returns to shareholders and the need for continued investment in support of future business growth.				Target: to achieve a 72% global rating in 2011, with progressive improvement to best in class.
		Outcome: on a reported and underlying basis the ratio was outside the target range, in part due to notable items including restructuring costs, customer redress programmes and a bank levy introduced by the UK government, but also due to an increase in staff costs reflecting wage inflation in key markets and higher average staff numbers.				Outcome: employee engagement behind global best in class. Improvement in 2011 despite a challenging environment.

Growth - continue to position ourselves for growth									Strategy
Risk-adjusted revenue growth (2011: underlying growth 2%)		Basic earnings per ordinary share					Dividends per ordinary share growth
									Key Performance Indicators
Measure: (percentage) increase in reported net operating income after loan impairment and other credit risk charges since last year.		Measure: (US$) level of basic earnings generated per ordinary share.					Measure: (percentage) increase in dividends per share since last year, based on dividends paid in respect of the year to which the dividend relates.
Target: to deliver consistent growth in risk adjusted revenues.		Target: to deliver consistent growth in basic earnings per share.					Target: to deliver sustained dividend per share growth.
Outcome: reported risk-adjusted revenue increased primarily due to favourable movements on the fair value of own debt due to credit spreads and on an underlying basis due to lower loan impairment charges.		Outcome: Earnings per share ('EPS') increased in 2011 reflecting significant favourable movements on the fair value of own debt due to credit spreads which resulted in an increase in reported profits.					Outcome: dividends per share increased by 14%.
Customer recommendation					Brand value
									Key Performance Indicators
Measure: we measure our customer satisfaction through an independent market research survey of retail banking and business banking customers in selected countries, using a specific metric of customer recommendation (the 'CRI') to score performance. We benchmark our performance against key competitors in each market and set targets for performance based on our peer group of banks.					Measure: in 2011, we moved our brand measure to the Brand Finance valuation method as reported in The Banker magazine. Our previous measure only gave us a score derived from a survey of our personal and small business customers. The Brand Finance methodology gives us a more complete measure of the strength of the brand and its impact across all business lines and customer groups. It is a wholly independent measure and is publicly reported.
Target: the Group target is for 75% of all the selected markets (based on their weighted revenue) to meet their CRI targets.					Target: a top 3 position in the banking peer group.
Outcome: CMB Business Banking exceeded its target. RBWM experienced a challenging environment in many of its large retail markets, with strong local competition and negative reaction to some strategic portfolio management activity, and only met its target in 35% of the markets by weighted revenue. It got to within 2 percentage points of its target in a further 44% of markets. See page 46 for further details. RBWM had a strong fourth quarter, with 77% of the markets meeting target and it finished the year ranked first in five of the six markets surveyed in Asia.					Outcome: HSBC's brand value in 2009 followed a sharp drop in industry brand values in 2008/9 which coincided with the financial crisis. The subsequent increase reflected a general rise in values, with HSBC's brand remaining one of the strongest in the sector.

For footnotes, see page 95.

 

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