Annual Financial Report - 6 of 44

RNS Number : 1077A

HSBC Holdings PLC

27 March 2012

 



Global businesses

Summary ................................................................	43
Products and services ..............................................	44
Retail Banking and Wealth Management .................	46
Commercial Banking ..............................................	48
Global Banking and Markets ...................................	51
Global Private Banking ...........................................	54
Other ......................................................................	55
Analysis by global business ......................................	57

Summary

HSBC's senior management reviews operating activity on a number of bases, including by geographical region and by global business, as presented on page 59.

RBWM was previously known as Personal Financial Services ('PFS'). With effect from 1 March 2011, our Global Asset Management business was moved from GB&M to RBWM. This resulted in reallocations between the two of US$321m and US$219m in profit before tax in 2010 and 2009, respectively, and in total assets of US$3.3bn and US$2.8bn at the end of 2010 and 2009, respectively. The presentation of both years has been adjusted accordingly.

The commentaries below present global businesses followed by geographical regions. 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 underlying basis (see page 16) unless stated otherwise.

Profit/(loss) before tax

	2011				2010				2009
	US$m		%		US$m		%		US$m		%
Retail Banking and Wealth Management17 ......	4,270		19.6		3,839		20.2		(1,846)		(26.1)
Commercial Banking .......................................	7,947		36.3		6,090		32.0		4,275		60.4
Global Banking and Markets17 .........................	7,049		32.2		9,215		48.4		10,262		145
Global Private Banking ...................................	944		4.3		1,054		5.5		1,108		15.6
Other48 ...........................................................	1,662		7.6		(1,161)		(6.1)		(6,720)		(94.9)
	21,872		100.0		19,037		100.0		7,079		100.0

Total assets⁴⁹

	At 31 December
	2011				2010
	US$m		%		US$m		%
Retail Banking and Wealth Management17 ................................................	540,548		21.2		530,970		21.6
Commercial Banking ................................................................................	334,966		13.1		296,797		12.1
Global Banking and Markets17 ...................................................................	1,877,627		73.5		1,755,043		71.5
Global Private Banking .............................................................................	119,839		4.7		116,846		4.8
Other ........................................................................................................	180,126		7.0		161,458		6.6
Intra-HSBC items .....................................................................................	(497,527)		(19.5)		(406,425)		(16.6)
	2,555,579		100.0		2,454,689		100.0

Risk-weighted assets⁵⁰

	At 31 December
	2011				2010
	US$bn		%		US$bn		%
Total .......................................................................................................	1,209.5				1,103.1
Retail Banking and Wealth Management17 ..............................................	351.2		29.0		357.0		32.4
Commercial Banking ...............................................................................	382.9		31.7		334.4		30.3
Global Banking and Markets17,51 ..............................................................	423.0		35.0		353.2		32.0
Global Private Banking ...........................................................................	22.5		1.9		24.9		2.3
Other ......................................................................................................	29.9		2.4		33.6		3.0

For footnotes, see page 95.

Products and services

Retail Banking and Wealth Management RBWM offers its products and services to customers based on their individual needs. Premier and Advance services are targeted at mass affluent and emerging affluent customers who value international connectivity and benefit from our global reach and scale. For customers who have simpler everyday banking needs, we offer a full range of banking products and services reflecting local requirements. In addition, we are one of the largest card issuers in the world, offering HSBC branded cards, co-branded cards with selected partners and private label (store) cards. Typically, customer offerings include personal banking products (current and savings accounts, mortgages and personal loans, credit cards, debit cards and local and international payment services) and wealth management services (insurance and investment products and financial planning services).

·  HSBC Premier provides preferential banking services and global recognition to our mass affluent customers and their immediate families with a dedicated relationship manager, specialist wealth advice and tailored solutions. Customers can access emergency travel assistance, priority telephone banking and an online 'global view' of their Premier accounts around the world. ·  HSBC Advance provides a range of preferential products and services customised to meet local needs. With a dedicated telephone service, access to wealth advice and online tools to support financial planning, it gives customers an online 'global view' of their Advance accounts. ·  Wealth Solutions & Financial Planning: a financial planning process designed around individual customer needs to help our clients to protect, grow and manage their wealth through investment and wealth insurance products manufactured by Global Asset Management, Global Markets and HSBC Insurance and by selected third-party providers. ·  Global Asset Management offers investment solutions to individual investors, financial intermediaries and institutions globally. Customers can transact with the bank via a range of channels such as internet banking and self-service terminals in addition to traditional and automated branches and telephone service centres.

Commercial Banking We segment our CMB business into Corporate, to serve both corporate and mid-market companies with more sophisticated financial needs, and Business Banking, to serve small and medium-sized enterprises ('SME's). This enables the development of tailored customer propositions while adopting a broader view of the entire commercial banking sector, from sole traders to large corporations. This allows us to provide continuous support to companies as they grow both domestically and internationally, and ensures a clear focus on internationally aspirant customers, who are typically key to innovation and growth in market economies. We place particular emphasis on international connectivity to meet the needs of our business customers. We aim to be recognised as the 'Leading international trade and business bank' by focusing on faster-growing markets, enhancing collaboration with GB&M, capturing growth in international SMEs and driving efficiency gains through adopting a global operating model.

·  Lending: we offer a broad range of domestic and cross-border financing, including overdrafts, term loans and syndicated, leveraged, acquisition and project finance. Asset finance is also offered in selected countries. ·  International trade and receivables finance: we provide buyers and suppliers with products and services such as documentary credits and collections, import and export finance, guarantees and forfaiting to facilitate trade payments, finance the trade cycle and help mitigate risk throughout the supply chain. Our Receivables Finance proposition for domestic and international customers is offered through an extensive network. ·  Payments and cash management: we are a leading provider of domestic and cross-border payments, collections, liquidity management and account services offering local, regional and global solutions delivered via e-enabled platforms designed to address the current and future needs of our clients. ·  GB&M: our CMB franchise represents a key client base for GB&M products and services, including foreign exchange and interest rate products, together with capital raising on debt and equity markets and advisory services. ·  Commercial cards: card issuing helps customers enhance cash management, credit control and purchasing. Card acquiring services enable merchants to accept credit and debit card payments in person or remotely. ·  Insurance: we offer business and financial protection, trade insurance, employee benefits, corporate wealth management and a variety of other commercial risk insurance products.

Global Banking and Markets GB&M provides tailored financial solutions to major government, corporate and institutional clients and private investors worldwide. Managed as a global business, GB&M operates a long-term relationship management approach to build a full understanding of clients' financial requirements. Sector-focused client service teams comprising relationship managers and product specialists develop financial solutions to meet individual client needs. With a presence in over 60 countries/territories and access to HSBC's worldwide presence and capabilities, this business serves subsidiaries and offices of our clients on a global basis. GB&M is managed as two principal business lines: Global Markets and Global Banking. This structure allows us to focus on relationships and sectors that best fit the Group's footprint and facilitate seamless delivery of our products and services to clients.

·  Global Markets operations consist of treasury and capital markets services. Products include foreign exchange; currency, interest rate, bond, credit, equity and other derivatives; government and non-government fixed income and money market instruments; precious metals and exchange-traded futures; equity services; distribution of capital markets instruments; and securities services, including custody and clearing services and funds administration to both domestic and cross-border investors. ·  Global Banking offers financing, advisory and transaction services. Products include: - capital raising, advisory services, bilateral and syndicated lending, leveraged and acquisition finance, structured and project finance, lease finance and non-retail deposit taking; - international, regional and domestic payments and cash management services; and trade services for large corporate clients.

Global Private Banking HSBC Private Bank is the principal marketing name of our private banking business, GPB. Utilising the most suitable products from the marketplace, GPB works with high net worth clients to offer both traditional and innovative ways to manage and preserve wealth while optimising returns. GPB has a global presence with major centres in Hong Kong, Singapore, London, Switzerland, Monaco,  New York and Miami to identify opportunities which meet clients' needs and investment strategies.

·  Private Banking services comprise multi-currency deposit accounts and fiduciary deposits, credit and specialist lending, treasury trading services, cash management, securities custody and clearing. GPB works to ensure that its clients have full access to other products and services available in HSBC such as credit cards, internet banking, corporate banking and investment banking. ·  Investment Management comprises both advisory and discretionary investment services. A wide range of investment vehicles is covered, including bonds, equities, derivatives, options, futures, structured products, mutual funds and alternatives (hedge funds, private equity and real estate). ·  Trust Solutions comprises inheritance planning, trustee and other fiduciary services designed to protect wealth and preserve it for future generations through structures tailored to meet the individual needs of each family. Areas of expertise include trusts, foundation and company administration, charitable trusts and foundations, insurance, family office advisory and philanthropy. ·  Corporate Finance Solutions helps provide clients with cross-border solutions for their companies, working in conjunction with GB&M.

Retail Banking and Wealth Management

RBWM provides banking and wealth management services to individual customers across our principal geographic markets.
	2011		2010		2009
	US$m		US$m		US$m
Net interest income .....	24,101		24,166		25,099
Net fee income ............	8,226		8,397		9,138
Other income ..............	1,206		1,048		2,060
Net operating income52..................................	33,533		33,611		36,297
Impairment charges53 ..	(9,319)		(11,259)		(19,902)
Net operating income ..................................	24,214		22,352		16,395
Total operating expenses..................................	(21,202)		(19,539)		(18,976)
Operating profit/(loss) ..................................	3,012		2,813		(2,581)
Income from associates54..................................	1,258		1,026		735
Profit/(loss) before tax ..................................	4,270		3,839		(1,846)
RoRWA55 ....................	1.2%		1.1%		(0.5%)
Strong revenue growth in faster-growing regions
Run-off portfolio balances reduced by US$8.9bn
Best Wealth Management House, Hong Kong (The Asset Triple A Investment Awards 2011)
Strategic direction RBWM's aim is to provide consistent and high quality retail banking and wealth management services to our customers. We will provide retail banking services in markets where we already have scale or where scale can be built over time and we will implement standardised distribution and service models to ensure we can deliver them more efficiently. As wealth creation continues to grow in both developed and faster-growing markets, we will leverage our global propositions such as Premier and our bancassurance and asset management capabilities to deepen our existing customer relationships and the penetration of our wealth management services. We focus on three strategic imperatives: ·  developing world class wealth management for retail customers; ·  leveraging global expertise in retail banking; and ·  portfolio management to drive superior returns.
For footnotes, see page 95.

Review of performance

·     RBWM reported a profit before tax of US$4.3bn, 11% higher than 2010 and 6% higher on an underlying basis, most notably in Rest of Asia-Pacific and Latin America, where the increased profitability reflected strong business and revenue growth.

·     The pre-tax profit of RBWM was significantly affected by the US Card and Retail Services business, of which we announced the pending sale, and the US run-off portfolios.

RBWM - profit/(loss) before tax

	2011		2010		2009
	US$m		US$m		US$m
US Card and Retail Services .......................	2,061		1,979		498
US run-off portfolios ......	(4,472)		(4,076)		(5,065)
Rest of RBWM ...............	6,681		5,936		2,721
	4,270		3,839		(1,846)

·     Revenue was marginally lower than 2010, with strong growth in Latin America (9%) and Rest of Asia-Pacific (8%) and modest growth in Hong Kong (3%) more than offset by lower revenues in North America from the continued run-off in the CML portfolios, lower balances in US Card and Retail Services and an increase in adverse fair value movements on non-qualifying hedges.

·     In Latin America, revenue growth reflected increased average lending and higher sales of unit-linked pensions and credit protection products in Brazil, together with business growth in Argentina on the back of favourable economic conditions. Gains on the sale and leaseback of branches in Mexico contributed US$36m to revenue growth.

·     Revenue in Rest of Asia-Pacific increased, primarily as a result of significant lending growth in mortgages, notably in Australia and Singapore due to competitive product offerings and strong property markets, and increased deposit spreads in a number of countries such as mainland China and India. This was partly offset by narrower asset spreads reflecting competitive pressures.

·     In Hong Kong, revenues increased from sales of wealth management products, notably from insurance, reflecting successful sales activity and higher demand. This was partly offset by narrower asset spreads, reflecting a shift in the product mix to lower yielding, HIBOR-linked mortgages and competitive pressures.

·    

·     Loan impairment charges and other credit risk provisions fell by 18% to US$9.3bn with a significant decline in North America as we continued to run off the CML portfolios, and as balances fell and delinquency rates improved in the Card and Retail Services business. Excluding our US Card and Retail Services and US run-off portfolios, loan impairment charges decreased by US$650m reflecting lower delinquency rates in the UK due to improved collections, and the managing down of unsecured lending portfolios in Rest of Asia-Pacific and the Middle East, which more than offset increases in Latin America resulting from lending growth.

·     Operating expenses increased by 6% to US$21.2bn. Increased costs included US$875m of provisions relating to UK customer redress programmes, including a charge in respect of the possible mis-selling of PPI in the UK in previous years. This was partly offset by a US$264m credit resulting from a change in the inflation measure used to calculate the defined benefit obligation for deferred pensions, also in the UK. Restructuring costs were incurred during 2011 as we drove organisational change to reduce the cost base and exited certain markets or non-strategic lines of business. In North America, costs increased reflecting US mortgage foreclosure and servicing costs (US$257m) and increased litigation costs.

·     Costs were higher in Latin America, Rest of Asia-Pacific and Hong Kong as a result of wage inflation and higher average headcount to support business growth.

·     Share of profit from associates and joint ventures rose by 17%, reflecting higher profits from Ping An as a result of strong growth in sales in its insurance business and a rise in income from its banking business following the acquisition of Shenzhen Development Bank in July 2011.

Strategic imperatives

Developing world class wealth management for retail customers

·     We aim to increase Wealth Management revenues by US$4bn in the medium term, against which target we made modest progress in 2011 with revenue growth of some US$300m. Notably, we had strong sales of insurance products in Hong Kong, Latin America and Rest of Asia-Pacific, while revenue from distribution of investment products to our clients and Global Asset Management was broadly unchanged, reflecting difficult market conditions, particularly in the second half of the year.

·     Growth in our insurance operations was largely driven by strong sales of unit-linked and deferred annuity products in Hong Kong and sales of unit-linked products in Brazil. We also benefited from a refinement to the calculation of the PVIF asset. Favourable trends during the first half of the year were partly offset by weaker investment returns in the second half of 2011.

·     During the year, 62% of the qualifying population of HSBC Global Asset Management Funds ranked in the top half based on past performance against their peer and sector groups over a 3 year period, up from 47% in 2010. Global Asset Management also successfully launched an Asian High Yield Bond Fund raising US$1.2bn in 2011.

·     Our World Selection global investment offering continued to attract new assets as a core wealth solution for customers, resulting in total FuM of US$8.6bn at 31 December 2011 compared with US$7.2bn at 31 December 2010. During 2011 we launched the Global Investment Centre in the UK, which will complement our existing services and deliver significant efficiencies to the way we are able to serve our Wealth Management customers.

·     Good progress was made in developing our Wealth Management infrastructure. In 2011 we implemented multi-channel financial simulators in the UK, a funds platform in Taiwan and the UK, and bond trading in mainland China and further deployed our foreign currency web-enabled 'Get Rate' programme. These deployments are all part of the strategic focus to provide expanded Wealth Management services utilising common technology.

Leveraging global expertise in retail banking

·     During 2011, we extended our mobile banking offering to 11 new markets. We launched our global cards platform in five new markets in Asia, with deployment in Brazil and Mexico due to be completed during 2012. We also introduced renminbi-denominated deposits in nine new markets.

·    

·     In Hong Kong, we retained our position of having the largest market share in residential mortgages in 2011. We were also market leaders in life insurance.

·     For 2011 we set an aggressive goal to achieve our target customer recommendation of 75% by revenue weighting of the 16 markets surveyed, against which we met the target in five markets, or 35% by revenue weighting. The shortfall resulted mainly from a challenging environment in many of our large markets, with strong local competitors improving their service performance, and a negative reaction to some portfolio management activity, particularly in the US and Canada. We had a very strong fourth quarter, with 77% of the markets by revenue weighting meeting target, driven in part by traction from service quality programmes implemented in Mexico, the UK and the UAE, and we finished the year ranked first in five of the six markets surveyed in Asia.

Portfolio management to drive superior returns

·     During 2011, we embarked on a process to improve our return on capital using the five filters analysis to determine portfolio rationalisation initiatives. As a result, we completed the sale of our Mexican pension administration business (HSBC Afore), our UK motor insurance business and our Canadian brokerage business. We announced the closure of our retail banking businesses in Poland, Russia, Georgia, and Kuwait, the sale of our operations in Chile, Central America (Costa Rica, El Salvador and Honduras) and, most recently, the disposal of our retail operations in Thailand. We also announced the cessation of life insurance manufacturing in the US, the sale of the Card and Retail Services business and upstate New York branches in the US.

·     The North American business has continued to focus on managing down the residual balances in our US run-off portfolios.

Commercial Banking

CMB offers a full range of commercial financial services and tailored propositions to over 3.6m customers ranging from sole proprietors to publicly quoted companies in 65 countries.
	2011		2010		2009
	US$m		US$m		US$m
Net interest income .....	9,931		8,487		7,883
Net fee income ............	4,291		3,964		3,702
Other income ..............	1,389		1,383		1,268
Net operating income52..................................	15,611		13,834		12,853
Impairment charges53...	(1,738)		(1,805)		(3,282)
Net operating income ..................................	13,873		12,029		9,571
Total operating expenses..................................	(7,221)		(6,831)		(5,963)
Operating profit .......	6,652		5,198		3,608
Income from associates54..................................	1,295		892		667
Profit before tax .......	7,947		6,090		4,275
RoRWA55 ....................	2.2%		2.0%		1.4%
Record annual profit before tax US$7.9bn
Revenue growth of 12% ahead of cost growth of 4% on an underlying basis
Number one trade finance bank in the world (Oliver Wyman Global Transaction Banking Survey 2011)
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 connectivity and support trade and capital flows around the world, thereby strengthening our leading position in international business and trade. We focus on four strategic imperatives: ·  focus on faster-growing markets while connecting revenue and investment flows with developed markets; ·  enhance collaboration with GB&M, providing capital market access and a wider range of sophisticated risk management and liquidity products to the growing mid-market corporates; ·  capture growth in international small and medium-sized enterprises; and ·  drive efficiency gains through adopting a global operating model.
For footnotes, see page 95.

Review of performance

·     CMB reported a record profit before tax of US$7.9bn in 2011, 31% higher than in 2010. On an underlying basis, profit before tax increased by 30%, driven by increased net interest income, a higher share of profits from associates in mainland China and lower loan impairment charges. Our 20 priority markets generated more than 90% of our profit before tax, benefiting from our strong international network and long-term approach to customer relationships.

·     Revenue grew by 12%, despite increasing economic, political and regulatory headwinds. This was largely driven by higher net interest income from lending activities and from growth in customer account balances. Net interest income from lending benefited from the strong customer loan growth achieved in 2010 which continued into 2011, albeit at a slower pace during the latter part of the year. Loans and advances to customers rose by 12% to US$262bn as a result of increased demand for credit in Hong Kong, Rest of Asia-Pacific, Latin America and Europe. Average customer account balances also rose, reflecting successful marketing campaigns, notably in Hong Kong and Rest of Asia-Pacific as part of a targeted strategy to support growth in customer lending. Customer account balances grew by 9% to US$306bn during 2011.

·     Net fee income and net trading income benefited from the strong collaboration with GB&M, particularly in foreign exchange and interest rate management products. Net fee income also rose, reflecting strong volumes and market share in our trade and payments businesses in Hong Kong, Rest of Asia-Pacific and Latin America.

·     Loan impairment charges and other credit risk provisions declined by 6% as credit quality remained strong despite the economic challenges. Specific impairments decreased, notably in North America, reflecting improved credit quality and in Business Banking lower delinquency levels, partly offset by a specific provision relating to a single commercial customer in Latin America. Collective impairment charges rose reflecting strong lending growth, notably in Latin America.

·     Operating expenses increased by 4%. This was driven by a rise in costs to support business growth, along with restructuring costs, partly offset by a credit of US$212m resulting from a change in the inflation measure used to calculate the defined benefit obligation for deferred pensions in the UK. Our cost efficiency ratio improved, reflecting our ability to manage our cost base and rising inflationary pressures while continuing to invest in key markets for ongoing expansion.

·     Income from associates increased by 41%. The contribution from BoCom was driven by strong lending growth, wider deposit spreads following interest rate rises in mainland China and higher fee income, including revenue earned from investment banking, settlements and cards. Income from Industrial Bank also increased as a result of strong growth in customer lending and a rise in fee-based revenue.

Strategic imperatives

Focus on faster-growing markets while connecting with developed markets

·     In line with our strategy to focus and invest in faster-growing markets, our operations in Rest of Asia-Pacific, Latin America, Hong Kong and the Middle East and North Africa expanded more quickly than in developed markets. Revenue from faster growing regions grew by 20% to US$8.5bn, representing 54% of the CMB total, driven by Brazil, Hong Kong, mainland China, Mexico, Argentina and Singapore. Customer lending growth was almost twice that of Europe and North America, and accounted for 50% of CMB's total lending.

·     Total trade and receivables finance revenues increased by 22% to US$2.6bn, of which 75% was generated from the faster-growing regions. Our businesses in these markets expanded more quickly than in developed regions as we leveraged our international capabilities to support our customers. 

·     Making it easy for customers to do business with HSBC is at the heart of our approach. During 2011, we merged our Trade and Supply Chain and Receivables Finance businesses to enable us to streamline our product proposition. It will also help us to expand our Receivables Finance offering beyond its current locations and achieve our goal of doubling trade revenue over the medium term. We also rolled out our Commodity and Structured Trade Finance service, strengthening our sales teams in Europe and Asia and enhancing our infrastructure.

·     Revenue from our Payments and Cash Management products rose by 15%, as they facilitated increased levels of cross-border transactions. We continued to roll out the award winning ClientSphere platform in the regions to help simplify our customers' cash management.

·     Successful cross-border referrals within CMB increased by 12% compared with 2010, with a total transaction value in 2011 of more than US$20bn. A significant proportion of this increase came from mainland China as Chinese companies looked to expand internationally.

·     We maintained our position as a leading international bank for renminbi products with services offered in over 50 countries. Our geographical coverage of renminbi cross-border trade services is the widest of all foreign banks in mainland China. We continue to develop new products in the currency, including renminbi structured deposits, renminbi cashier orders and the renminbi business card in Hong Kong.

Strong partnership with GB&M

·     Our customers benefit significantly from our partnership with GB&M. By working with our colleagues in the GB&M product teams we are able to provide customers with financing solutions, including access to capital markets and risk management products, as they expand internationally. Revenues from sales of GB&M products to CMB customers, which are shared between the two global businesses, grew strongly in all regions, increasing by more than US$500m compared with 2010. This was primarily from foreign exchange activity but also interest rate management products, leveraged and acquisition finance and debt capital markets.

·     In collaboration with GB&M, we have successfully completed our first global US dollar/renminbi cross-currency swap. We are also able to benefit from our market leading status in offshore renminbi bonds.

·     We continued to work closely with the other global businesses. CMB referred 43% of the total net new money generated from internal referrals to GPB in 2011, and successful internal premier account referrals from CMB to RBWM increased by 27%.

Capture growth in international SMEs

·     At the end of 2011, we had over 3.4m customers worldwide in Business Banking, which represented 54% of CMB's total deposits.

·     To optimise our Business Banking portfolio performance, we are reshaping our business portfolio based on the five filters and accelerating investment to enhance our international connectivity, notably in those markets such as Brazil, Mexico, mainland China, the US, Malaysia, Indonesia, Singapore and Turkey which we see as core to providing opportunities for growth.

·     We are repositioning Business Banking to focus on attracting and better serving the growing number of internationally aspirant SMEs. In the UK we invested in International Commercial Managers ('ICM's) who focus exclusively on international customers and we will continue to invest in ICMs in other markets in 2012.

·     Partnerships with leading international businesses are helping to position HSBC as the bank of choice for international SMEs. In the US, we signed a partnership agreement with the Export-Import Bank in the US and in the UAE we entered into partnerships with a number of Free Trade Zones to provide improved access to banking services for internationally-oriented SMEs. 

·     We exceeded our 2011 lending intentions under Project Merlin in the UK, both in terms of total and SME facilities.

Drive efficiency gains through adopting a global operating model

·     During the second half of 2011 and continuing in 2012, we are rolling out a globally consistent business model across all CMB countries to realise cost efficiencies through greater standardisation of key processes and practices. This includes the deployment of streamlined cross-border account opening, trade processing and credit approval processes which will reduce the time it takes to bring new customers on board. We are also undertaking an organisational effectiveness review to align and standardise our business structures across countries, which will result in a reduction in staff numbers and will allow us to redeploy resources towards our key growth markets.

·     We continued to develop our direct banking solutions to enhance accessibility and service for our customers. HSBCnet, our internet banking platform, now has over 400,000 users with access from more than 200 countries worldwide. Following a successful pilot in the first half of 2011, HSBCnet Mobile was launched in more than 60 countries. In addition, over 200,000 customers have downloaded our iApp, which is now live in five countries.

Global Banking and Markets

GB&M is a global business which provides tailored financial solutions to major government, corporate and institutional clients worldwide.
	2011		2010		2009
	US$m		US$m		US$m
Net interest income .....	7,263		7,343		8,618
Net fee income ............	3,227		3,664		3,463
Net trading income56 ...	5,204		5,830		6,867
Other income ...............	1,363		2,075		1,990
Net operating income52 ..................................	17,057		18,912		20,938
Impairment charges53 ..	(984)		(990)		(3,168)
Net operating income ..................................	16,073		17,922		17,770
Total operating expenses..................................	(9,722)		(9,228)		(7,853)
Operating profit .......	6,351		8,694		9,917
Income from associates54..................................	698		521		345
Profit before tax .......	7,049		9,215		10,262
RoRWA55 ....................	1.8%		2.5%		2.6%
Resilient financial performance despite eurozone uncertainty
Strong growth in Latin America and Rest of Asia-Pacific
Bookrunner in six of the 10 largest IPOs in Hong Kong in 2011
Strategic direction GB&M continues to pursue its well established 'emerging markets-led and financing-focused' strategy, with the objective of being a leading global wholesale bank. This strategy has evolved to include a greater emphasis on connectivity, leveraging the Group's extensive distribution network. We focus on four strategic imperatives: ·  reinforce client coverage and client-led solutions for major government, corporate and institutional clients; ·  continue to selectively invest in the business to support the delivery of an integrated suite of products and services; ·  enhance collaboration with other global businesses, particularly CMB, to deliver incremental revenues; and ·  focus on business re-engineering to optimise operational efficiency and reduce costs.
For footnotes, see page 95.

Review of performance

·     GB&M reported profit before tax of US$7.0bn, 24% lower than in 2010 as eurozone debt concerns continued to dominate European market sentiment. On an underlying basis, profit before tax declined by 23% as a result of lower revenues in Credit, Rates and Balance Sheet Management. Notwithstanding the difficult trading conditions, revenue grew strongly in over half of our lines of business, including Global Banking, Foreign Exchange and Equities, and particularly in the faster-growing regions of Rest of Asia-Pacific and Latin America.

·     Overall, revenue fell by 10%. This was primarily due to significantly lower trading revenues in Credit and Rates, notably in Europe, despite higher gains on structured liabilities from widening credit spreads, as turmoil in eurozone sovereign debt markets escalated, particularly in the second half of 2011, resulting in trading losses as increased risk aversion and limited client activity led to a significant widening of spreads on certain eurozone sovereign and corporate bonds. Balance Sheet Management reported lower revenues and revenues from our legacy credit portfolio also declined (see page 23).

·     Loan impairment charges and other credit risk provisions of US$984m in 2011 were broadly in line with 2010. Loan impairment charges declined by US$62m as specific impairments taken in 2010 following the restructuring of exposures of a small number of large clients in the Middle East and North Africa did not recur. Credit risk provisions on the available-for-sale portfolio were slightly higher than in 2010. A US$145m charge in respect of available-for-sale Greek sovereign debt was offset in part by a reduction in credit risk provisions on ABSs within our legacy credit portfolio from US$444m reported in 2010 to US$409m, as losses arising in underlying collateral pools generated lower impairment charges on ABSs.

·     Operating expenses increased by 4%, reflecting a rise in costs incurred in strengthening our compliance resources, predominantly in the US; targeted investment, including selective recruitment of senior hires and development of our trading and sales platforms; and restructuring in the form of various organisational efficiency initiatives. Performance-related awards were substantially lower than in 2010, reflecting the decline in net

Management view of total operating income

	2011 US$m		2010 US$m		2009 US$m
Global Markets57 ..........	8,098		9,173		10,364
Credit .......................	335		1,649		2,330
Rates ........................	1,341		2,052		2,648
Foreign Exchange ....	3,272		2,752		2,979
Equities ....................	961		755		641
Securities Services ....	1,673		1,511		1,420
Asset and Structured Finance .................	516		454		346
Global Banking ............	5,401		4,621		4,630
Financing and Equity Capital Markets .....	3,233		2,852		3,070
Payments and Cash Management58 .......	1,534		1,133		1,053
Other transaction services59 ...............	634		636		507
Balance Sheet Management60 .........	3,488		4,102		5,390
Principal Investments ..	209		319		42
Other61 ........................	(139)		697		512
Total operating income ..................................	17,057		18,912		20,938

Comparative information has been adjusted to reflect the current management view.

For footnotes, see page 95.

operating income, although this was mostly offset by higher amortisation charges for previous years' performance shares and accelerated expense recognition of current year deferred bonus awards. Cost growth was partly offset by a credit of US$111m in 2011 arising from a change in the inflation measure used to calculate the defined benefit obligation for deferred pensions in the UK, together with the non-recurrence of payroll and bonus taxes in the UK and France in 2010. 

·     Global Markets delivered full year revenues of US$8.1bn in a very challenging trading environment. As noted above, the decline was driven by significantly lower Credit and Rates trading revenues in Europe. A sharp reduction in revenues from our legacy credit portfolio, which decreased from US$848m reported in 2010 to US$165m in 2011, also contributed to the decline in Credit. This reflected a non-recurrence of the price appreciation in 2010 and lower holdings as a result of maturities and disposals aimed at reducing capital consumption, together with a reduction in effective yields and lower income from management services generated from the securities investment conduits. This was partly offset by resilient Rates trading revenues in Hong Kong, North America and Latin America as client flows increased, coupled with higher primary market revenues in the Rates business in most regions as we increased our market share of global bond issuances. Fair value gains on structured liabilities also increased, mainly in Rates, as credit spreads widened more significantly than in 2010, resulting in a gain of US$458m compared with a reported gain of US$23m in 2010. 

·     Other parts of Global Markets performed strongly. In our Equities business, revenues rose as investment in platforms improved our competitive positioning and helped capture increased client flows, notably in the first half of the year in Europe and Hong Kong. Foreign Exchange also delivered a strong performance in the year, driven by increased client activity in Hong Kong, Rest of Asia-Pacific, North America and Latin America. Market volatility during 2011, caused by geopolitical tensions, ongoing eurozone concerns and interventions by central banks, resulted in an improved trading environment for Foreign Exchange compared with 2010. In addition, increased client demand and a rally in precious metal prices led to significant revenue growth in our metals business, also reported within Foreign Exchange. Securities Services revenues increased as interest income benefited from higher spreads in Rest of Asia-Pacific and Latin America. Fee income also rose, reflecting higher transaction volumes along with a rise in average assets under custody and administration.

·     Global Banking delivered a strong performance as we continued to focus on key client relationships. Higher revenues in Financing and Equity Capital Markets reflected a rise in average corporate lending balances, continued new business origination in project and export finance and lower losses on portfolio hedges compared with 2010. Revenues in the advisory business within Financing and Equity Capital Markets also increased, notably in Europe, driven by success in cross-border transactions. Payments and Cash Management revenue rose by 32%, despite the prolonged low interest rate environment in many developed markets, as robust growth in liability balances led to higher net interest income. The Rest of Asia-Pacific region performed particularly strongly, reflecting a combination of strong sales activity and interest rate rises in some Asian markets, notably in mainland China.

·     Revenues in Balance Sheet Management declined, driven by the maturity of higher yielding positions, limited opportunities for reinvestment in the prevailing low interest rate environment, and flattening yield curves.

·      On a reported basis, the decline in Other reflected the non-recurrence of gains resulting from the sale of Eversholt Rail Group and HSBC Private Equity (Asia) Ltd in 2010. On an underlying basis, the reduction was driven by higher allocated funding costs, mainly in Europe, reflecting debt issuances during the year.

·      Principal Investments reported lower revenues as the deterioration in market confidence resulted in fewer disposal opportunities and lower gains on sale.

Strategic imperatives

Reinforce client coverage and client-led solutions

·      Investment in selective recruitment across our client coverage groups is key to delivering our strategy. Since June 2011, we have announced a number of key appointments to lead our global coverage teams and relocated a Co-Head of Global Banking to Asia to maintain our focus on growth markets.

·      We also established the Corporate Treasury Solutions Group, which brought together our fixed income, currency, commodities, debt financing and risk management capabilities in Europe, Middle East and North Africa. This enabled our client-facing teams to provide integrated, cross-product solutions to our corporate clients.

·      We continued to leverage our unique geographical franchise and global connectivity through our multinational proposition. Cross-border desks established in 2010 in Rest of Asia-Pacific, Latin America and the Middle East and North Africa to capitalise on growing international trade flows in 'South-South' trade corridors generated strong growth in revenues from these markets in 2011.

Enhance core product strengths and selectively develop new capabilities

·      We continued to invest in e-commerce platforms to enhance our product offerings in foreign exchange. The first phase of our new e-FX platform is complete and it is live internally in Hong Kong, Dubai, London, Toronto and New York. Get Rate, which provides customers with live dealable exchange rates, is now available in 11 countries through various channels. These developments have contributed to a 43% increase in electronic volumes and a 16% rise in foreign exchange revenues in 2011.

·      Prime Services, which offers a fully integrated set of services including custody, financing solutions and reporting to alternative fund managers, is now live in Europe and Asia and a significant number of hedge fund managers are in the process of on-boarding.

·      We also upgraded our equity execution and research platforms in 2011 in response to client demand, focusing on selected European countries and faster growing markets where we have a natural advantage. Our Equity Capital Markets team achieved top 10 league table positions in six out of nine target countries, as well as significant market share improvement in Asia and other key locations. We also strengthened our Equity Research team which, together with targeted client interaction, enabled us to move into the top 10 of equity research houses for the first time.

Collaborate with other global businesses to deliver incremental revenues

·      In order to further enhance our collaboration with CMB, we appointed heads of Coverage and Distribution to coordinate the specialist CMB sales teams and dedicated execution desks within GB&M. Revenues from the sale of GB&M products to CMB customers, which are shared between the two global businesses, grew by more than US$500m, primarily from foreign exchange and interest rate management products. In addition, we secured lead roles in a number of event deals with CMB clients in 2011, utilising our expertise in equity and debt capital markets, leveraged and acquisition finance and advisory.

·      We extended the Wealth Solutions Group model from Europe, Middle East and North Africa into Asia and the US to increase the sales of GB&M's wealth-related products, including foreign exchange, structured products and securities execution, through RBWM channels. We also developed new products aligned to customer needs, including Protected World Selection funds and mortgage protection products in the UK, which have led to growth in revenues from our RBWM distribution network.

Strategic re-engineering to deliver sustainable cost savings

·      We continued to reshape our business with the aim of lowering the future cost base of our operations. We undertook an organisational effectiveness review, which resulted in a reduction in staff numbers as we aligned our client coverage model and implemented productivity measures.

·      We focused on generating efficiency gains from the better use of technology and continued to rationalise and standardise our operational and trading platforms across asset classes and markets. This will enable ongoing investment in people and infrastructure to support our strategic priorities while minimising cost growth.

Global Private Banking

GPB serves high net worth individuals and families with complex and international needs.
	2011		2010		2009
	US$m		US$m		US$m
Net interest income .....	1,439		1,345		1,474
Net fee income ............	1,382		1,299		1,236
Other income ..............	471		449		402
Net operating income52 ..................................	3,292		3,093		3,112
Impairment (charges)/ recoveries53 ...............	(86)		12		(128)
Net operating income ..................................	3,206		3,105		2,984
Total operating expenses..................................	(2,266)		(2,035)		(1,884)
Operating profit .......	940		1,070		1,100
Income from associates54..................................	4		(16)		8
Profit before tax .......	944		1,054		1,108
RoRWA55 ....................	3.9%		4.1%		4.0%
Net new money inflows of US$13bn 2010: US$13bn; 2009: US$(7)bn
Continued investment in front-line capabilities in line with strategy
Best Private Banking in Asia (Euromoney 2011 Private Banking Survey)
Strategic direction GPB works with high net worth clients to manage and preserve their wealth while connecting them to global opportunities. We focus on four strategic imperatives: ·  further expand our business in domestic and faster-growing markets and deliver emerging markets products to clients in developed markets; ·  continue to leverage our intra-Group connectivity with CMB, GB&M and RBWM to deliver the full suite of HSBC products and services to clients; ·  increase our managed assets, and build on our expertise in alternative investments, foreign exchange and trust and estate planning; and ·  continue to invest in front-office client systems with strong data security, while maintaining a focus on risk management and cost control.
For footnotes, see page 95.

Review of performance

·     Reported profit before tax of US$944m was 10% lower than in 2010 and 11% lower on an underlying basis, as revenue growth was offset by higher operating expenses and increased loan impairment charges.

·     Revenue increased by 5%, primarily driven by growth in Europe and, to a lesser extent, in Rest of Asia-Pacific. Net interest income increased due to higher average lending resulting from continued client demand and, particularly in the UK, improved asset spreads. Net fee income benefited from a significant increase in transaction volumes related to higher market volatility and net new money inflows of US$13bn in part driven by the recruitment of additional front line staff particularly in faster‑growing markets.

·     Loan impairment charges and other credit risk provisions increased as a result of an impairment recorded in respect of available-for-sale Greek sovereign debt securities. Loan impairment charges also increased in Europe against a small number of individual customers.

·     The increase in operating expenses was mainly driven by the appreciation of the Swiss franc, which accounts for a significant proportion of our cost base, (see footnote 62). In addition we incurred higher regulatory compliance costs. We also recruited front office staff to cover faster‑growing markets which resulted in higher staff costs, coupled with restructuring costs to drive operational efficiencies.

Client assets
	2011		2010
	US$bn		US$bn
At 1 January ...............................	390		367
Net new money ...........................	13		13
Value change ...............................	(20)		13
Exchange and other ....................	(6)		(3)
At 31 December ..........................	377		390

·     Client assets (see footnote 63), which include funds under management and cash deposits, declined as net new money inflows were offset by adverse movements in financial markets and negative movements in foreign exchange, primarily in the second half of the year.

·     'Total client assets', the equivalent to many industry definitions of assets under management which include some non-financial assets held in client trusts, decreased marginally to US$496bn at 31 December 2011.

Strategic imperatives

Expand in faster-growing markets

·     Progress was made in implementing key strategic initiatives, including developing the faster-growing markets business through investment in front line staff and systems. The majority of net new money in 2011 has originated from faster-growing markets.

Grow annuity revenue

·     Product capabilities were enhanced with the launch of renminbi-based products and further development of our alternative investment offerings and trust and estate planning products.

Leverage intra-Group strengths

·     Intra-Group referrals contributed net new money of US$6.3bn or 49% of total net new money.

·     Referrals from GB&M for institutional private clients grew significantly, and benefited from the continued success of the Family Office advisory scheme.

Invest in platform while controlling costs

·     The global roll-out of the front-office systems programme continued in order to improve operational efficiency and client service, and information security standards were enhanced. Progress was made in rationalising the business, through the use of the five filters analysis, with the closure of operations in Russia and sale of our operations in Japan. A restructuring exercise is also underway in line with our targets to improve operational effectiveness, reflected in a 4% reduction in staff numbers in the second half of 2011.

Other

'Other' contains the results of certain property transactions, unallocated investment activities, centrally held investment companies, movements in fair value of own debt, central support and functional costs with associated recoveries, HSBC's holding company and financing operations.
	2011		2010		2009
	US$m		US$m		US$m
Net interest expense ....	(911)		(998)		(1,035)
Net trading income/ (expense) ..................	(355)		(311)		279
Change in credit spread on long-term debt .....	4,161		(258)		(6,247)
Other changes in fair value .........................	78		42		(196)
Net income/(expense) from financial instruments designated at fair value ...............	4,239		(216)		(6,443)
Other income ..............	6,172		6,185		5,176
Net operating income/ (expense)52...............	9,145		4,660		(2,023)
Impairment (charges)/ recoveries53 ...............	-		3		(8)
Net operating income/ (expense) ................	9,145		4,663		(2,031)
Total operating expenses ..................................	(7,492)		(5,918)		(4,715)
Operating profit/(loss) ..................................	1,653		(1,255)		(6,746)
Income from associates54 ..................................	9		94		26
Profit/(loss) before tax ..................................	1,662		(1,161)		(6,720)
For footnotes, see page 95.

Notes

·     Reported profit before tax of US$1.7bn compared with a loss before tax of US$1.2bn in 2010. This included favourable movements of US$3.9bn on the fair value of HSBC's own debt attributable to a widening in credit spreads compared with adverse fair value movements of US$63m in 2010. In addition, reported profits included a gain of US$62m on the reclassification of Bao Viet as an associate in 2010 and accounting gains of US$188m and US$181m in 2010 and 2011, respectively, arising from the dilution of our shareholding in Ping An following its issue of share capital to third parties. We also reported a re-measurement loss of US$48m relating to Ping An's acquisition of its associate, Shenzhen Development Bank and a dilution gain of US$27m as a result of the reduction in our holding in HSBC Saudi Arabia Limited following its merger with SABB Securities Limited in 2011. On an underlying basis, the loss before tax increased by US$1.1bn to US$2.4bn. This was primarily driven by the UK bank levy, restructuring provisions and the non-recurrence of gains from the sale and leaseback of buildings in 2010. For a description of the main items reported under 'Other', see footnote 61.

·     Net trading expense rose, driven by adverse fair value movements on derivatives relating to certain provident funds in Hong Kong as long‑term investment returns fell. This was partly offset by lower adverse fair value movements on non-qualifying hedges of US$276m in 2011 compared with adverse fair value movements of US$304m in 2010. These mainly related to cross-currency swaps used to economically hedge fixed rate long-term debt issued by HSBC Holdings.

·    
Net income from financial instruments designated at fair value of US$304m in 2011 compared with net expense from financial instruments designated at fair value in 2010 as favourable fair value movements from interest and exchange rate ineffectiveness in the hedging of long-term debt designated at fair value issued by HSBC Holdings and our European and North American subsidiaries compared with adverse fair value movements in 2010.

·     Other operating income increased as a result of higher intra-group recharges in line with the increase in costs from centralised operational and migrated activities described below. This was partly offset by the non-recurrence of gains of US$250m recognised from the sale and leaseback of our Paris and New York headquarters in 2010.

·     Operating expenses increased by 26% to US$7.5bn. Costs in 2011 included a charge of US$570m in relation to the UK bank levy and a charge of US$217m, primarily relating to impairment of intangibles and staff related costs, to restructure our regional and country support functions in Latin America as measures were taken to streamline processes and lower the future cost base of our operations. A rise in centralised operational and migrated activities, in line with our Global Resourcing model, also contributed to higher costs in the period. These costs are recorded in 'Other' and charged to global businesses through a recharge mechanism with income reported as 'Other operating income'.

 

END

 

 

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