Annual Financial Report - 8 of 44

RNS Number : 1082A

HSBC Holdings PLC

27 March 2012

 



Geographical regions

Summary ..............................................................	59
Europe .................................................................	60
Hong Kong ..........................................................	66
Rest of Asia-Pacific .............................................	71
Middle East and North Africa ...............................	77
North America .....................................................	82
Latin America ......................................................	89

Summary

Additional information on results in 2011 may be found in the 'Financial Summary' on pages 16 to 42.

In the analysis of profit by geographical regions that follows, operating income and operating expenses include intra‑HSBC items of US$3,421m (2010: US$3,125m; 2009: US$2,756m).

Profit/(loss) before tax

	2011				2010				2009
	US$m		%		US$m		%		US$m		%
Europe ............................................................	4,671		21.3		4,302		22.6		4,009		56.7
Hong Kong .....................................................	5,823		26.6		5,692		29.9		5,029		71.0
Rest of Asia-Pacific ........................................	7,471		34.2		5,902		31.0		4,200		59.3
Middle East and North Africa ..........................	1,492		6.8		892		4.7		455		6.4
North America ................................................	100		0.5		454		2.4		(7,738)		(109.3)
Latin America .................................................	2,315		10.6		1,795		9.4		1,124		15.9
	21,872		100.0		19,037		100.0		7,079		100.0

Total assets⁴⁹

	At 31 December
	2011				2010
	US$m		%		US$m		%
Europe ......................................................................................................	1,281,945		50.3		1,249,527		50.9
Hong Kong ...............................................................................................	473,024		18.5		429,565		17.5
Rest of Asia-Pacific ..................................................................................	317,816		12.4		278,062		11.3
Middle East and North Africa ...................................................................	57,464		2.2		52,757		2.1
North America .........................................................................................	504,302		19.7		492,487		20.1
Latin America ..........................................................................................	144,889		5.7		139,938		5.7
Intra-HSBC items .....................................................................................	(223,861)		(8.8)		(187,647)		(7.6)
	2,555,579		100.0		2,454,689		100.0

Risk-weighted assets⁶⁷

	At 31 December
	2011				2010
	US$bn		%		US$bn		%
Total ........................................................................................................	1,209.5				1,103.1
Europe ......................................................................................................	340.2		27.8		301.6		27.2
Hong Kong ...............................................................................................	105.7		8.6		106.9		9.7
Rest of Asia-Pacific ..................................................................................	279.3		22.8		217.5		19.6
Middle East and North Africa ...................................................................	58.9		4.8		54.1		4.9
North America .........................................................................................	337.3		27.6		330.7		29.9
Latin America ..........................................................................................	102.3		8.4		95.9		8.7

For footnotes, see page 95.

Europe

Our principal banking subsidiaries in Europe are HSBC Bank plc in the UK, HSBC France S.A., HSBC Bank A.S. in Turkey, HSBC Bank Malta p.l.c., HSBC Private Bank (Suisse) S.A. and HSBC Trinkaus & Burkhardt AG. Through these subsidiaries we provide a wide range of banking, treasury and financial services to personal, commercial and corporate customers across Europe.
	2011		2010		2009
	US$m		US$m		US$m
Net interest income .....	11,001		11,250		12,268
Net fee income ............	6,236		6,371		6,267
Net trading income ......	2,161		2,863		5,459
Other income/(expense)	4,848		2,266		(450)
Net operating income52 ..................................	24,246		22,750		23,544
Impairment charges53 ..	(2,512)		(3,020)		(5,568)
Net operating income	21,734		19,730		17,976
Total operating expenses ..................................	(17,069)		(15,445)		(13,988)
Operating profit .......	4,665		4,285		3,988
Income from associates54	6		17		21
Profit before tax .......	4,671		4,302		4,009
Cost efficiency ratio ....	70.4%		67.9%		59.4%
RoRWA55 ....................	1.5%		1.3%		1.2%
Year-end staff numbers	74,892		75,698		76,703
Credit and Rates revenues within GB&M adversely affected by eurozone uncertainty
Best Debt House in Western Europe (Euromoney Awards for Excellence 2011)
53% reduction in RBWM loan impairment charges
For footnotes, see page 95. The commentary on Europe is on an underlying basis unless stated otherwise.

Economic background 

After growing by 2.1% in 2010, UK gross domestic product ('GDP') growth eased to 0.9% in 2011. The unemployment rate rose to 8.4% in December 2011. Despite the weakness in the domestic economy, an increase in the rate of value added tax and rising oil prices early in the year pushed the annual rate of consumer price index ('CPI') inflation to 5.2% in September 2011 before moderating to 3.6% in December 2011. The Bank of England maintained the Bank Rate at 0.5% throughout the year and expanded the size of its Asset Purchase Programme by £75bn (US$120bn) to £275bn (US$440bn) in October 2011.

The eurozone economy grew by 1.5% in 2011, on the back of a recovery in global trade in the first half of 2011 and domestic fixed investment growth. Within the region, Germany saw the strongest recovery with GDP growing by 3%. The German unemployment rate, as measured by the International Labour Organisation, fell during the year, touching 5.5% in December but, for the eurozone as a whole, unemployment rose further to 10.4% in December. Concerns about sovereign debt sustainability persisted in 2011, leading to banking sector strains. The European Central Bank cut interest rates to 1% and introduced several new measures to ease strains in the banking sector including long-term refinancing operations of 36 months maturity and easing of commercial banks' collateral requirements for use in these liquidity operations.

Review of performance

Our European operations reported a pre-tax profit of US$4.7bn, 9% higher than in 2010. These results included favourable fair value movements of US$2.9bn in 2011 due to the change in credit spreads on the Group's own debt held at fair value, compared with adverse fair value movements of US$198m in 2010. In addition, 2010 included gains of US$107m and US$255m on the disposal of HSBC Insurance Brokers Limited and Eversholt Rail Group, respectively.

Underlying profit before tax, excluding these items, decreased by 61% as turmoil in eurozone sovereign debt markets dominated European market sentiment, resulting in markedly lower revenues in GB&M.

During the year, we began to reshape our business portfolio and announced the closure of our retail banking businesses in Poland and Russia, the exit of operations from Georgia and the disposal of our UK motor insurance business. In order to

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

	Retail      Banking and Wealth Management17          US$m		Commercial       Banking           US$m		Global      Banking               and      Markets17           US$m		Global         Private       Banking           US$m		Other           US$m		Total           US$m
2011
UK ................................................	1,330		1,227		(265)		192		1,037		3,521
France44 ........................................	69		192		(194)		16		18		101
Germany .......................................	36		69		203		28		16		352
Malta ............................................	31		72		21		-		-		124
Switzerland ....................................	-		(8)		-		225		-		217
Turkey ..........................................	7		62		87		2		-		158
Other ............................................	(151)		73		225		94		(43)		198
	1,322		1,687		77		557		1,028		4,671
2010
UK ................................................	1,181		827		1,772		223		(1,605)		2,398
France44 ........................................	138		135		376		18		26		693
Germany .......................................	36		32		231		30		4		333
Malta ............................................	37		56		17		-		-		110
Switzerland ....................................	-		(5)		-		265		-		260
Turkey ..........................................	64		80		105		1		-		250
Other ............................................	(144)		80		202		103		17		258
	1,312		1,205		2,703		640		(1,558)		4,302
2009
UK ................................................	331		1,026		3,078		252		(2,561)		2,126
France44 ........................................	67		102		881		3		(429)		624
Germany .......................................	34		21		221		32		(18)		290
Malta ............................................	33		58		9		-		-		100
Switzerland ....................................	-		-		5		448		(3)		450
Turkey ..........................................	43		97		119		2		-		261
Other ............................................	(183)		(12)		219		117		17		158
	325		1,292		4,532		854		(2,994)		4,009

For footnotes, see page 95.

improve cost efficiency and organisational effectiveness, we took measures to streamline our processes with the aim of lowering the future cost base of our operations while maintaining high standards of service. As a result of these initiatives, total restructuring costs of US$404m were incurred across the region in 2011.

In RBWM, further progress was made in implementing our strategy of building long-term sustainable relationships with Premier customers. The Wealth Management business continued to develop with HSBC World Selection assets under management increasing by 21% during 2011 to £2.5bn (US$3.8bn) as a result of a strategic focus and continued marketing. The Global Investment Centre service was successfully launched in October 2011, enabling investors to hold and trade a wide range of third party and HSBC funds on-line.

We continued to support the UK housing market during 2011, achieving strong growth in mortgage balances driven by successful marketing campaigns. Our share of new lending increased to 10% in 2011, while maintaining a conservative loan to value ratio of 53% on new lending. To support our customers through the prevailing economic conditions, we committed to make available £350m (US$542m) to UK mortgage borrowers with deposits of 15% or less. In addition, an increase in the customer base of 5% contributed to a growth in our UK deposit balances of 4%.

In CMB, we made further progress on our strategy of becoming the leading international trade and business bank with a significant increase in the number of international customers, resulting in strong income growth from our trade-related business. We continue to strengthen our partnership with GB&M with a focus on driving product income growth, particularly in strategic financing and treasury risk management products. We also achieved strong growth in UK lending, reflecting our continued support to UK businesses during the difficult economic conditions. We exceeded our 2011 lending intentions under the Project Merlin agreement with the UK Government, both in terms of total and SME facilities.

In Continental Europe, we experienced strong demand in term lending and significant growth in our deposit base in both RBWM and CMB, reflecting marketing and pricing initiatives. Our Trade and Supply Chain business performed strongly across the region, following the launch of our export initiative during 2011. In Europe we now have 18 countries with full renminbi functionality with the ability to settle trade transactions via either Shanghai or Hong Kong.

We won several awards in GB&M including 'Best Debt House' in Western Europe and the UK from Euromoney Awards for Excellence in 2011. We continued to invest in technology platforms including Equities and Prime Services and are therefore well positioned to capture medium-term opportunities in the region. We also continued to focus on cross-border initiatives to position ourselves to take advantage of trade flows. In Payments & Cash Management, enhanced network capabilities together with innovative liquidity, channel and payables solutions allowed us to win substantial business across the corporate and financial institution business segments.

In GPB, revenue growth was driven by increased client activity as we leveraged our global businesses' strengths and connectivity. GPB continues to build on its expertise in alternative investments, emerging markets and foreign exchange.

The pace of regulatory reform is expected to gain momentum. This will include forthcoming legislation arising from the UK Independent Commission on Banking which is likely to require us to make significant changes to our corporate structure and business activities conducted through our UK banking subsidiary, HSBC Bank (see page 101).

Net interest income decreased by 6%, reflecting the decline in Balance Sheet Management revenues as higher-yielding positions matured and opportunities for reinvestment at similar yields were limited by the prevailing low interest rate environment. This was coupled with a fall in Credit and Lending net interest income as a result of lower balances, coupled with a decrease in effective yields and lower asset holdings in our legacy credit portfolio as a result of maturities and disposals aimed at reducing capital consumption. The above factors were partly offset by higher net interest income in CMB, driven by an increase in term lending balances in the UK and Continental Europe as a result of targeted campaigns during 2010 and 2011. Net interest income also benefited from strong mortgage balance growth in the UK along with strong deposit growth across the region, mainly driven by marketing campaigns, although offset in part by strong competition for deposits resulting in lower deposit spreads, notably in RBWM in the UK.

Net fee income declined by 4% as management services income generated from the securities investment conduits within our legacy credit portfolio was lower, along with higher intercompany fees payable on intra-group referrals. In addition, overdraft fees declined due to reduced customer appetite for debt in the current market conditions. This was partly offset by higher levels of client activity in GPB due to an increase in transaction volumes related to higher market volatility.

Net trading income decreased by 33%, due to significantly lower trading revenues in Credit and Rates as turmoil in eurozone sovereign debt markets escalated in the second half of 2011. Increased risk aversion and limited client activity led to a significant widening of spreads on certain eurozone sovereign and corporate bonds, resulting in losses in our Credit and Rates businesses. In addition, legacy credit revenues fell due to the non-recurrence of the price appreciation on legacy assets in 2010. Lower favourable foreign exchange movements were also reported on trading assets held as economic hedges of foreign currency debt designated at fair value. These offset lower adverse foreign exchange movements on the foreign currency debt which are reported in 'Net expense from financial instruments designated at fair value'.

Trading income included a favourable fair value movement of US$391m from structured liabilities, mainly in Rates, as credit spreads widened compared with adverse fair value movements of US$29m in 2010. In our Equities business, revenues rose as investment in platforms improved our competitive positioning and helped capture increased client flows. This was coupled with lower losses on portfolio hedges in Global Banking compared with the previous year.

Net expense from financial instruments designated at fair value was US$479m, reflecting net investment losses during 2011 on assets held by our insurance business to meet liabilities under insurance and investment contracts as equity markets fell, notably in the second half of 2011, compared with gains reported in 2010. To the extent that these losses were attributable to policyholders holding unit-linked insurance policies and insurance or investment contracts with DPF, there was a corresponding decrease in 'Net insurance claims incurred and movement in liabilities to policyholders'. These losses were partly offset by

lower adverse foreign exchange movements on foreign currency debt designated at fair value, issued as part of our overall funding strategy, with an offset reported in 'Net trading income'.

Gains less losses from financial investments were broadly in line with 2010. Net gains from the disposal of available-for-sale debt securities increased as part of normal portfolio management activities. These were offset by lower gains from the disposal of available-for-sale equity securities as a deterioration in market confidence resulted in fewer disposal opportunities and lower gains from the disposal of private equity investments. In addition, there were write-downs of our equity investments in real estate companies.

Net earned insurance premiums decreased by 3%, resulting from the non-renewal and transfer to third parties of certain contracts in our Irish business and the continued run-off and subsequent disposal of our motor insurance business in the UK. This was partly offset by an increase in premiums as we launched targeted sales campaigns, notably for investment contracts with DPF in France, and expanded distribution channels for unit-linked products in the UK.

Other operating income decreased by 15%, driven by the non-recurrence of a gain on the sale and leaseback of our Paris headquarters in 2010. In addition, there was a reduction in the PVIF asset from net experience and assumption updates and a higher unwind of cash flows related to the growing in-force book, compared with 2010. This reduction was partly offset by a rise in the PVIF asset as a result of higher life insurance sales and a positive impact from a refinement to the PVIF calculation during 2011.

Net insurance claims incurred and movement in liabilities to policyholders decreased by 28% as a result of investment losses experienced in 2011 on unit-linked insurance policies and insurance and investment contracts with DPF as equity markets declined, which contrasted with investment gains in 2010. Also, the non-renewal and transfer to third parties of certain contracts in the Irish business and the continued run-off and subsequent disposal of our legacy motor business in the UK resulted in a decrease in net insurance claims incurred and movement in liabilities to policyholders. Partly offsetting these declines were increases in liabilities to policyholders established for new business written.

Loan impairment charges and other credit risk provisionsdecreased by 20% to US$2.5bn. This mainly reflected a range of successful initiatives taken to mitigate credit risk within RBWM including a focus on monitoring and identifying customers facing financial hardship. This resulted in lower delinquency rates across both the secured and unsecured lending portfolios. In CMB, loan impairment charges declined as the non-recurrence of specific provisions in the UK was partly offset by higher specific provisions related to a small number of customers in Greece. In GB&M, we recorded a charge of US$145m to write down to market value available-for-sale Greek sovereign debt now judged to be impaired. In addition, impairments of US$46m were included in our GPB and insurance businesses in relation to Greek available-for-sale debt securities. These were partly offset by lower credit risk provisions on ABSs as the losses arising in the underlying collateral pools generated lower charges on ABSs.

Operating expenses increased by 9%. This included provisions of US$898m relating to UK customer redress programmes, including a charge in respect of possible mis-selling of PPI in previous years, a cost of US$570m in respect of the UK bank levy and restructuring provisions of US$404m. These were partly offset by a credit of US$587m resulting from a change in the inflation measure used to calculate the defined benefit obligation for deferred pensions in the UK. Costs in 2010 included one-off payroll and bonus taxes of US$354m (US$324m as reported) in the UK and France. Excluding these items, operating expenses rose as we incurred higher regulatory and compliance costs, along with an increase in expenses as a result of the strengthening of the Swiss franc, which accounts for a significant proportion of the GPB cost base. In GB&M, performance-related awards were substantially lower than in 2010, reflecting the decline in revenues, although this was mostly offset by higher amortisation charges for previous years' performance shares and an acceleration in the expense recognition of current-year deferred bonus awards. Notwithstanding these factors, we have achieved about US$300m of sustainable savings during 2011. This has enabled the funding of investment in strategic initiatives, including the development of Prime Services and equity market capabilities and the expansion of the Rates and Foreign Exchange e-commerce platforms.

 

END

 

 

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