Annual Financial Report -40 of 48

RNS Number : 3925B

HSBC Holdings PLC

03 April 2013

3 Net income/(expense) from financial instruments designated at fair value

Net income/(expense) from financial instruments designated at fair value includes:

· all gains and losses from changes in the fair value of financial assets and liabilities designated at fair value, including liabilities under investment contracts;

· all gains and losses from changes in the fair value of derivatives that are managed in conjunction with financial assets and liabilities designated at fair value; and

· interest income, interest expense and dividend income in respect of:

- financial assets and liabilities designated at fair value; and

- derivatives managed in conjunction with the above,

except for interest arising from HSBC's issued debt securities and derivatives managed in conjunction with those debt securities, which is recognised in 'Interest expense'.

Net income/(expense) from financial instruments designated at fair value

	2012	2011	2010
	US$m	US$m	US$m
Net income/(expense) arising on:
- financial assets held to meet liabilities under insurance and investment contracts ..............................................................................................	2,980	(933)	2,349
- other financial assets designated at fair value ............................................	83	1,050	230
- derivatives managed in conjunction with other financial assets designated at fair value ..........................................................................	35	(182)	(149)

	3,098	(65)	2,430

- liabilities to customers under investment contracts ...................................	(996)	231	(946)
- HSBC's long-term debt issued and related derivatives ................................	(4,327)	4,161	(258)
- changes in own credit spread on long-term debt ....................................	(5,215)	3,933	(63)
- derivatives managed in conjunction with HSBC's issued debt securities ..	431	3,165	(275)
- other changes in fair value ....................................................................	457	(2,937)	80
- other financial liabilities designated at fair value .......................................	(23)	(911)	(18)
- derivatives managed in conjunction with other financial liabilities designated at fair value ..........................................................................	22	23	12

	(5,324)	3,504	(1,210)

	(2,226)	3,439	1,220

HSBC Holdings

Net income/(expense) arising on HSBC Holdings long-term debt issued and related derivatives

	2012	2011	2010
	US$m	US$m	US$m
Net income/(expense) arising on:
- changes in own credit spread on long-term debt ........................................	(2,260)	1,657	248
- derivatives managed in conjunction with HSBC Holdings issued debt securities .......................................................................................	456	1,368	(482)
- other changes in fair value ........................................................................	(474)	(1,113)	373

	(2,278)	1,912	139

4 Net earned insurance premiums

	Non-life insurance	Life insurance (non-linked)	Life insurance (linked)	Investment contracts with DPF¹	Total
	US$m	US$m	US$m	US$m	US$m
2012
Gross earned premiums .................................	716	6,862	3,325	2,699	13,602
- gross written premiums ..........................	760	6,815	3,325	2,699	13,599
- movement in unearned premiums ..........	(44)	47	-	-	3

Reinsurers' share of gross earned premiums ..	(107)	(443)	(8)	-	(558)
- gross written premiums ceded to reinsurers ..............................................	(104)	(408)	(8)	-	(520)
- reinsurers' share of movement in unearned premiums ..............................................	(3)	(35)	-	-	(38)


	609	6,419	3,317	2,699	13,044

2011
Gross earned premiums .................................	1,144	6,238	2,801	3,155	13,338
- gross written premiums ..........................	1,175	6,207	2,804	3,155	13,341
- movement in unearned premiums ..........	(31)	31	(3)	-	(3)

Reinsurers' share of gross earned premiums ..	(180)	(278)	(8)	-	(466)
- gross written premiums ceded to reinsurers ..............................................	(182)	(255)	(8)	-	(445)
- reinsurers' share of movement in unearned premiums ..............................................	2	(23)	-	-	(21)


	964	5,960	2,793	3,155	12,872

2010
Gross earned premiums .................................	1,275	5,427	1,956	2,951	11,609
- gross written premiums ..........................	1,192	5,357	1,956	2,951	11,456
- movement in unearned premiums ..........	83	70	-	-	153

Reinsurers' share of gross earned premiums ..	(160)	(289)	(14)	-	(463)
- gross written premiums ceded to reinsurers ..............................................	(172)	(266)	(8)	-	(446)
- reinsurers' share of movement in unearned premiums ..............................................	12	(23)	(6)	-	(17)


	1,115	5,138	1,942	2,951	11,146

1 Discretionary participation features.

5 Net insurance claims incurred and movement in liabilities to policyholders

	Non-life insurance	Life insurance (non-linked)	Life insurance (linked)	Investment contracts with DPF¹	Total
	US$m	US$m	US$m	US$m	US$m
2012
Gross claims incurred and movement in liabilities .	342	6,558	3,984	3,645	14,529
- claims, benefits and surrenders paid ................	339	1,566	1,810	2,525	6,240
- movement in liabilities ..................................	3	4,992	2,174	1,120	8,289

Reinsurers' share of claims incurred and movement in liabilities ....................................	(58)	(479)	223	-	(314)
- claims, benefits and surrenders paid ................	(57)	(160)	(681)	-	(898)
- movement in liabilities ..................................	(1)	(319)	904	-	584


	284	6,079	4,207	3,645	14,215

Net insurance claims incurred and movement in liabilities to shareholders (continued)

	Non-life insurance	Life insurance (non-linked)	Life insurance (linked)	Investment contracts with DPF¹	Total
	US$m	US$m	US$m	US$m	US$m
2011
Gross claims incurred and movement in liabilities ......................................................................	435	5,729	2,462	3,005	11,631
- claims, benefits and surrenders paid .............	631	1,793	1,129	2,628	6,181
- movement in liabilities ...............................	(196)	3,936	1,333	377	5,450

Reinsurers' share of claims incurred and movement in liabilities .................................	(85)	(254)	(111)	-	(450)
- claims, benefits and surrenders paid .............	(81)	(164)	(56)	-	(301)
- movement in liabilities ...............................	(4)	(90)	(55)	-	(149)


	350	5,475	2,351	3,005	11,181
2010
Gross claims incurred and movement in liabilities ......................................................................	625	5,108	2,520	3,716	11,969
- claims, benefits and surrenders paid .............	815	1,355	507	2,023	4,700
- movement in liabilities ...............................	(190)	3,753	2,013	1,693	7,269

Reinsurers' share of claims incurred and movement in liabilities .................................	(100)	(201)	99	-	(202)
- claims, benefits and surrenders paid .............	(114)	(143)	(45)	-	(302)
- movement in liabilities ...............................	14	(58)	144	-	100


	525	4,907	2,619	3,716	11,767

1 Discretionary participation features.

6 Operating profit

Operating profit is stated after the following items of income, expense, gains and losses:

	2012	2011	2010
	US$m	US$m	US$m
Income
Interest recognised on impaired financial assets¹ ...........................................	1,261	1,604	516
Fees earned on financial assets or liabilities not held for trading nor designated at fair value, other than fees included in effective interest rate calculations on these types of assets and liabilities ............................................................	10,042	11,318	11,445
Fees earned on trust and other fiduciary activities where HSBC holds or invests assets on behalf of its customers ...............................................	2,897	3,072	3,074
Income from listed investments ...................................................................	5,850	8,283	7,418
Income from unlisted investments ................................................................	7,677	8,031	7,187
Gain arising from dilution of interests in associates and joint ventures ..........	-	208	188

Expense
Interest on financial instruments, excluding interest on financial liabilities held for trading or designated at fair value .................................................	(17,625)	(20,965)	(17,549)
Fees payable on financial assets or liabilities not held for trading nor designated at fair value, other than fees included in effective interest rate calculations on these types of assets and liabilities ............................................................	(1,501)	(1,697)	(1,529)
Fees payable relating to trust and other fiduciary activities where HSBC holds or invests assets on behalf of its customers ............................	(170)	(182)	(151)
UK bank levy ...............................................................................................	(472)	(570)	-
Auditors' remuneration (see Note 8) ............................................................	(49)	(51)	(51)

Gains/(losses)
Gain on disposal or settlement of loans and advances ...................................	24	116	121
Impairment of available-for-sale equity securities .........................................	(420)	(177)	(105)
Gains on disposal of property, plant and equipment, intangible assets and non-financial investments ........................................................................	187	57	701

Loan impairment charges and other credit risk provisions ................	(8,311)	(12,127)	(14,039)
Net impairment charge on loans and advances ..............................................	(8,160)	(11,505)	(13,548)
Impairment of available-for-sale debt securities ............................................	(99)	(631)	(472)
Release/(impairment) in respect of other credit risk provisions ....................	(52)	9	(19)

1 During 2011 the Group adopted a more stringent treatment for impaired loans for geographical regions with significant levels of forbearance. As a result loans and advances have been classified as impaired that under the previous disclosure convention would otherwise have been classified as neither past due nor impaired or past due but not impaired. The effect of this change on 2011 reported numbers was to increase interest earned on impaired loans from US$0.3bn to US$1.5bn. Restatement of comparative data prior to 31 December 2010 is impracticable (see page 162, 'Impaired loans disclosure', for further details).

7 Employee compensation and benefits

	2012	2011	2010
	US$m	US$m	US$m

Wages and salaries ........................................................................................	17,780	18,923	17,193
Social security costs ......................................................................................	1,633	1,754	1,567
Post-employment benefits ...........................................................................	1,078	489	1,076

	20,491	21,166	19,836

Average number of persons employed by HSBC during the year

	2012	2011	2010

Europe .........................................................................................................	77,204	81,263	79,902
Hong Kong ...................................................................................................	28,764	30,323	29,105
Rest of Asia-Pacific ......................................................................................	88,015	92,685	89,737
Middle East and North Africa .......................................................................	8,645	8,816	8,983
North America .............................................................................................	27,396	34,871	36,822
Latin America ..............................................................................................	54,162	58,026	57,778

Total ............................................................................................................	284,186	305,984	302,327

Included in 'Wages and salaries' above are share-based payment arrangements, as follows:

Share-based payments income statement charge

	2012	2011	2010
	US$m	US$m	US$m

Restricted and performance share awards¹ .....................................................	912	1,041	685
Savings-related and other share option plans ................................................	96	121	127

	1,008	1,162	812

Equity-settled share-based payments .............................................................	988	1,154	812
Cash-settled share-based payments ................................................................	20	8	-

1 Restricted share awards include awards granted under the Group Performance Share Plan ('GPSP').

The share-based payment income statement charge above includes US$837m (2011: US$974m; 2010: US$610m) relating to deferred share awards. These awards are generally granted to employees early in the year following the year to which the award relates. The charge for these awards is recognised from the start of the period to which the service relates to the end of the vesting period. The vesting period is the period over which the employee satisfies certain service conditions in order to become entitled to the award. Due to the staggered vesting profile of certain deferred share awards, the employee becomes entitled to a portion of the award at the end of each year during the vesting period. The income statement charge reflects this vesting profile.

In addition, wages and salaries also includes US$111m (2011: US$88m; 2010: US$15m) in respect of deferred cash awards for current and prior performance years. The reconciliation of total incentive awards (both deferred and non-deferred) to income statement charge is as follows:

Reconciliation of total incentive awards granted to incentive awards in employee compensation and benefits

	2012	2011	2010
	US$m	US$m	US$m

Total incentive awards approved and granted for the current year¹ ...............	3,689	3,966	4,297
Less: deferred bonuses awarded for the current year but not amortised ..........	(355)	(369)	(778)

Total incentives awarded and recognised in the current year .........................	3,334	3,597	3,519
Current year charges for deferred bonuses from previous years .....................	671	897	625
Other² ..........................................................................................................	(28)	(261)	(109)

Total incentive awards for the current year included in employee compensation and benefits ..............................................................................................	3,977	4,233	4,035

1 This represents the amount of the Group variable pay pool that has been approved and granted. The total amount of Group variable pay pool approved by the Group Remuneration Committee is disclosed in the Directors' Remuneration Report on page 347.

2 This mainly comprises incentive awards paid to employees acting as selling agents, which form an integral part of the effective interest of a financial instrument, recognised as an adjustment to the effective interest rate and recorded in 'Interest income'.

The following table identifies the charge recognised in the current year, or expected to be recognised in future years, in relation to deferred bonus awards from the current year and prior year bonus pools.

Income statement charge for current and prior year bonus pools

	Current year bonus pool¹	Prior year bonus pools	Total
	US$m	US$m	US$m

2012
Charge recognised in 2012 ............................................................................	277	671	948
Deferred share awards ................................................................................	224	613	837
Deferred cash awards .................................................................................	53	58	111

Charge expected to be recognised in 2013 or later ........................................	355	376	731
Deferred share awards ................................................................................	315	335	650
Deferred cash awards .................................................................................	40	41	81

2011
Charge recognised in 2011 ............................................................................	165	897	1,062
Deferred share awards ................................................................................	131	843	974
Deferred cash awards .................................................................................	34	54	88

Charge expected to be recognised in 2012 or later ........................................	369	731	1,100
Deferred share awards ................................................................................	289	652	941
Deferred cash awards .................................................................................	80	79	159

2010
Charge recognised in 2010 ............................................................................	-	625	625
Deferred share awards ................................................................................	-	610	610
Deferred cash awards .................................................................................	-	15	15

Charge expected to be recognised in 2011 or later ........................................	778	802	1,580
Deferred share awards ................................................................................	759	801	1,560
Deferred cash awards .................................................................................	19	1	20

1 Current year bonus pool relates to the bonus pool declared for the reporting period (2012 for the current year, 2011 for the 2011 comparatives and 2010 for the 2010 comparatives).

Share-based payments

HSBC share awards

Award

Policy

Purpose

Restricted share awards (including GPSP awards)

· Vesting of awards generally subject to continued employment with HSBC.

· Vesting is generally staggered over three years. GPSP awards vest after five years.

· Certain shares subject to a retention requirement post-vesting. In the case of GPSP awards retention applies until cessation of employment.

· Awards generally not subject to performance conditions.

· Awards granted from 2010 onwards are subject to clawback provision prior to vesting.

· Rewards employee performance and potential and supports retention of key employees.

· To defer variable pay.

Movement on HSBC share awards

	Restricted share awards¹		Performance share awards²
	2012	2011	2012	2011
	Number (000s)	Number (000s)	Number (000s)	Number (000s)

Outstanding at 1 January ....................................................	262,241	229,092	-	4,425
Additions during the year ...................................................	107,928	100,819	-	154
Released in the year ...........................................................	(193,692)	(56,301)	-	(883)
Forfeited in the year ..........................................................	(10,888)	(11,369)	-	(3,696)

Outstanding at 31 December ..............................................	165,589	262,241	-	-

Weighted average fair value of awards granted (US$) ..........	8.93	10.11	-	-

1 Restricted share awards include awards granted under the Group Performance Share Plan ('GPSP').

2 Additions during 2011 comprised reinvested dividend equivalents. The last award of performance shares was made in 2008, and shares under the plan were released in March 2011.

HSBC share option plans

Main plans

Policy

Purpose

Savings-related share option plans

· Exercisable within three months following the first anniversary of the commencement of a one-year savings contract or within six months following either the third or fifth anniversaries of the commencement of three-year or five-year contracts, respectively.

· The exercise price is set at a 20% (2011: 20%) discount to the market value immediately preceding the date of invitation (except for the one-year options granted under the US sub-plan where a 15% discount is applied).

· Eligible employees save up to £250 per month (or its equivalent in US dollars, Hong Kong dollars or euros), with the option to use the savings to acquire shares.

· To align the interests of all employees with the creation of shareholder value.

HSBC Holdings Group share option plan

· Plan ceased in May 2005.

· Exercisable between third and tenth anniversaries of the date of grant.

· Long-term incentive plan between 2000 and 2005 during which certain HSBC employees were awarded share options.

The table on page 412 shows the movement on HSBC share option plans during the year.

Calculation of fair values

The fair values of share options at the date of grant of the option are calculated using a Black-Scholes model.

The fair value of a share award is based on the share price at the date of the grant. The fair value of a share option is inherently subjective and uncertain due to the assumptions made and the limitations of the model used.

Significant weighted average assumptions used to estimate the fair value of options granted

	Savings-related share option plans
	1-year plan	3-year plans	5-year plans
2012
Risk-free interest rate¹ (%) ...........................................................................	0.4	0.6	1.2
Expected life (years) ....................................................................................	1	3	5
Expected volatility² (%) ...............................................................................	25	25	25
Share price at grant date (£) .........................................................................	5.46	5.46	5.46

2011
Risk-free interest rate¹ (%) ...........................................................................	0.8	1.7	2.5
Expected life (years) ....................................................................................	1	3	5
Expected volatility² (%) ...............................................................................	25	25	25
Share price at grant date (£) .........................................................................	6.37	6.37	6.37

2010
Risk-free interest rate¹ (%) ...........................................................................	0.7	1.9	2.9
Expected life (years) ....................................................................................	1	3	5
Expected volatility² (%) ...............................................................................	30	30	30
Share price at grant date (£) .........................................................................	6.82	6.82	6.82

1 The risk-free rate was determined from the UK gilts yield curve. A similar yield curve was used for the HSBC Holdings Savings-Related Share Option Plan: International.

2 Expected volatility is estimated by considering both historic average share price volatility and implied volatility derived from traded options over HSBC Holdings ordinary shares of similar maturity to those of the employee options.

The expected US dollar denominated dividend yield was determined to be 5.0% per annum in line with consensus analyst forecasts (2011: 4.5%; 2010: 4.5%).

HSBC subsidiary company share option plans

There are a number of employee share option plans relating to HSBC France, HSBC Finance and HSBC Bank Bermuda as a result of the acquisition of these entities.

Options granted prior to public announcement of the acquisitions vested on acquisition and are not included in the table below. HSBC France and HSBC Finance granted share options after announcement of the acquisition which vested in subsequent years. Of these, at 31 December 2012, none remained outstanding (2011: 2.4m). Full details of all options outstanding under these plans can be found in Note 38.

Movement on HSBC share option plans

	Savings-related share option plans		HSBC Holdings Group share option plan		HSBC Finance share option plan
	Number (000s)	WAEP¹ £	Number (000s)	WAEP¹ £	Number (000s)	WAEP¹ US$
2012
Outstanding at 1 January .............................	153,465	3.80	120,792	7.02	2,429	9.29
Granted during the year² ..............................	44,868	4.44	-	-	-	-
Exercised during the year³ ...........................	(63,954)	3.47	(1,606)	6.02	(2,054)	9.29
Expired during the year ...............................	(21,627)	4.82	(32,013)	7.29	(375)	9.29

Outstanding at 31 December .......................	112,752	4.04	87,173	6.94	-	-

At 31 December 2012
Exercise price range (£):
... 3.00 - 4.50 .............................................	95,333		-		-
... 4.51 - 6.00 .............................................	16,129		-		-
... 6.01 - 7.50 .............................................	1,290		82,278		-
... 7.51 - 7.96 .............................................	-		4,895		-
Of which exercisable ...................................	4,538		87,173		-
Weighted average remaining contractual life (years) .....................................................	2.26		1.11		-

2011
Outstanding at 1 January .............................	157,855	3.87	152,758	7.12	2,429	9.29
Granted during the year² ..............................	23,199	5.11	-	-	-	-
Exercised during the year³ ...........................	(7,439)	5.27	(646)	6.06	-	-
Expired during the year ...............................	(20,150)	4.71	(31,320)	7.56	-	-

Outstanding at 31 December .......................	153,465	3.80	120,792	7.02	2,429	9.29

	Savings-related share option plans		HSBC Holdings Group share option plan		HSBC Finance share option plan
	Number (000s)	WAEP¹ £	Number (000s)	WAEP¹ £	Number (000s)	WAEP¹ US$
At 31 December 2011
Exercise price range (£):
.. 3.00 - 4.50 ...............................................	117,387		-		-
.. 4.51 - 6.00 ...............................................	32,778		-		-
.. 6.01 - 7.50 ...............................................	2,341		115,901		-
.. 7.51 - 9.29 ...............................................	959		4,891		2,429
Of which exercisable ....................................	3,209		120,792		2,429
Weighted average remaining contractual life (years) ......................................................	2.04		1.66		0.89

1 Weighted average exercise price.

2 The weighted average fair value of options granted during the year was US$1.63 (2011: US$2.11).

3 The weighted average share price at the date the options were exercised was US$8.78 (2011: US$8.65) and US$9.00 (2011: US$9.51) for the savings-related share option plans and HSBC Holdings Group share option plan, respectively.

Post-employment benefit plans

Income statement charge

	2012	2011	2010
	US$m	US$m	US$m

Defined benefit pension plans .......................................................................	427	(172)	468
- HSBC Bank (UK) Pension Scheme .........................................................	169	(428)	308
- other plans ............................................................................................	258	256	160

Defined contribution pension plans ..............................................................	599	626	545

	1,026	454	1,013
Defined benefit healthcare plans ...................................................................	49	32	58
Defined contribution healthcare plans ..........................................................	3	3	5

	1,078	489	1,076

Net assets/(liabilities) recognised on balance sheet in respect of defined benefit plans

	2012	2011
	US$m	US$m
Defined benefit pension plans
HSBC Bank (UK) Pension Scheme ......................................................................................	2,617	2,237
- fair value of plan assets ...............................................................................................	29,092	26,604
- present value of defined benefit obligations .................................................................	(26,475)	(24,367)

Other plans .........................................................................................................................	(2,585)	(2,445)
- fair value of plan assets ...............................................................................................	9,015	8,232
- present value of defined benefit obligations .................................................................	(11,600)	(10,680)
- effect of limit on plan surpluses ...................................................................................	(19)	(18)
- unrecognised past service cost .....................................................................................	19	21


Total ...................................................................................................................................	32	(208)

Defined benefit healthcare plans
- fair value of plan assets ...................................................................................................	189	151
- present value of defined benefit obligations .....................................................................	(1,261)	(1,091)
- unrecognised past service cost .........................................................................................	(19)	(21)

Total ...................................................................................................................................	(1,091)	(961)

Fair value of plan assets ..........................................................................................................	38,296	34,987
Present value of defined benefit obligations .............................................................................	(39,336)	(36,138)
Effect of limit on plan surpluses ..............................................................................................	(19)	(18)

	(1,059)	(1,169)

Retirement benefit liabilities ...................................................................................................	(3,905)	(3,666)
Retirement benefit assets ........................................................................................................	2,846	2,497

Cumulative actuarial gains/(losses) recognised in other comprehensive income

	2012	2011	2010
	US$m	US$m	US$m

At 1 January ........................................................................................................	(3,453)	(4,720)	(4,660)

HSBC Bank (UK) Pension Scheme .......................................................................	208	1,945	321
Other plans ..........................................................................................................	(440)	(642)	(275)
Healthcare plans ..................................................................................................	(154)	(61)	(112)
Change in the effect of limit on plan surpluses¹ ....................................................	(5)	25	6

Total actuarial gains/(losses) recognised in other comprehensive income .............	(391)	1,267	(60)

At 31 December² .................................................................................................	(3,844)	(3,453)	(4,720)

1 Excludes exchange loss of US$4m (2011: US$4m loss; 2010: US$6m gain)

2 Includes cumulative movements related to the limit on plan surpluses. This limit was US$19m at 31 December 2012 (2011: US$18m; 2010: US$47m)

HSBC pension plans

	2012	2011	2010

Number of plans worldwide ...........................................................................	225	230	218

	%	%	%
Percentage of HSBC employees:
- enrolled in defined contribution plans .....................................................	62	64	63
- enrolled in defined benefit plans .............................................................	23	25	27

- covered by HSBC pension plans .............................................................	85	89	90

HSBC has been progressively offering all new employees membership of defined contribution plans.

The majority of the Group's defined benefit plans are funded plans. The assets of most of the larger plans are held in trusts or similar funds separate from HSBC. The plans are reviewed at least annually or in accordance with local practice and regulations by qualified actuaries. The actuarial assumptions used to calculate the defined benefit obligations and related current service costs vary according to the economic conditions of the countries in which the plans are situated.

At 31 December 2012, the present values of the defined benefit obligations of The HSBC Bank (UK) Pension Scheme was US$26,475m (2011: US$24,367m), The HSBC Group Hong Kong Local Staff Retirement Benefit Scheme was US$1,476m (2011:US$1,523m) and the HSBC North America (US) Retirement Income Plan was US$4,374m (2011: US$3,895m). These defined benefit pension plans covered 12% of HSBC's employees and represented 82% of the Group's present value of defined benefit obligations. The Pension Risk section on page 246 and the Appendix to Risk on page 252 contain details about the characteristics and risks and amount, timing and uncertainty of future cash flows and policies and practices associated with these three schemes.

The determinations described in the Pension Risk section on page 246 for actuarial funding valuation purposes are based on different methods and assumptions from those used for financial reporting purposes, and as a result should neither be compared nor related to other determinations included in these financial statements. There is no actuarial deficit in the Principal plan.

HSBC healthcare benefits plans

HSBC also provides post-employment healthcare benefits under plans in the UK, the US, Bermuda, Canada, Mexico and Brazil, the majority of which are unfunded. The majority of post-employment healthcare benefits plans are defined benefit plans and are accounted for in the same manner as defined benefit pension plans. The plans are reviewed at least annually or in accordance with local practice and regulations by qualified actuaries. The actuarial assumptions used to calculate the defined benefit obligation and related current service cost vary according to the economic conditions of the countries in which they are situated.

At 31 December 2012, the present value of the defined benefit obligation of HSBC's healthcare benefit plans was US$1,261m (2011: US$1,091m). In aggregate, healthcare benefit plans comprised 3% of HSBC's present value of defined benefit obligations.

Defined benefit pension plans

Net asset/(liability) under defined benefit pension plans

	HSBC Bank (UK) Pension Scheme		Other plans
	2012	2011	2012	2011
	US$m	US$m	US$m	US$m
Fair value of plan assets
At 1 January ......................................................................	26,604	22,236	8,232	7,559
Expected return on plan assets ...........................................	1,245	1,325	486	481
Contributions by HSBC ......................................................	238	600	475	565
- normal ........................................................................	238	314	191	176
- special .........................................................................	-	286	284	389

Contributions by employees ...............................................	37	34	20	22
Experience gains ................................................................	680	3,426	410	200
Benefits paid ......................................................................	(907)	(803)	(630)	(495)
Assets distributed on settlements ........................................	-	-	(16)	(25)
Exchange differences .........................................................	1,195	(214)	38	(75)

At 31 December .................................................................	29,092	26,604	9,015	8,232

Present value of defined benefit obligations
At 1 January ......................................................................	(24,367)	(22,858)	(10,680)	(9,785)
Current service cost ...........................................................	(236)	(251)	(310)	(299)
Interest cost .......................................................................	(1,178)	(1,233)	(404)	(456)
Contributions by employees ...............................................	(36)	(34)	(21)	(22)
Actuarial losses ..................................................................	(472)	(1,481)	(850)	(842)
Benefits paid ......................................................................	906	804	743	569
Past service cost - vested immediately ...............................	-	587	(47)	(40)
Past service cost - unvested benefits ..................................	-	-	2	2
Reduction in liabilities resulting from curtailments .............	-	-	11	59
Liabilities extinguished on settlements ...............................	-	-	26	29
Exchange differences .........................................................	(1,092)	99	(70)	105

At 31 December .................................................................	(26,475)	(24,367)	(11,600)	(10,680)
Funded ............................................................................	(26,475)	(24,367)	(10,956)	(10,074)
Unfunded ........................................................................	-	-	(644)	(606)

Effect of limit on plan surpluses .........................................	-	-	(19)	(18)
Unrecognised past service cost ...........................................	-	-	19	21

Net asset/(liability) .............................................................	2,617	2,237	(2,585)	(2,445)

Retirement benefit liabilities recognised in the balance sheet ...........................................................................................	-	-	(2,814)	(2,705)
Retirement benefit assets recognised in the balance sheet (within 'Other assets') ....................................................	2,617	2,237	229	260

Plan assets of the Group's pension schemes included US$20m (2011: US$45m) of equities and no bonds (2011: nil) issued by HSBC and US$292m (2011: US$1,228m) of other assets placed or transacted with HSBC. The fair value of plan assets included derivatives entered into with HSBC Bank plc by the HSBC Bank (UK) Pension Scheme with a positive fair value of US$5,226m at 31 December 2012 (2011: US$5,560m positive fair value) and US$328m positive fair value (2011: US$297m positive fair value) in respect of the HSBC International Staff Retirement Benefits Scheme. Further details of these swap arrangements are included in Note 44.

In December 2011, HSBC Bank plc made a £184m (US$286m) special contribution to the HSBC Bank (UK) Pension Scheme. Following the contribution the Scheme purchased asset-backed securities from HSBC at an arm's length value, determined by the Scheme's independent third-party advisers.

The special contributions of US$284m to other plans include an additional contribution of US$181m to the HSBC North America (US) Retirement Income Plan which was made to maintain a minimum funding level.

The actual return on plan assets for the year ended 31 December 2012 was a positive return of US$2,784m (2011: positive US$5,432m).

HSBC expects to make US$604m of contributions to defined benefit pension plans during 2013. Benefits expected to be paid from the plans to retirees over each of the next five years, and in aggregate for the five years thereafter, are as follows:

Benefits expected to be paid from plans

	2013	2014	2015	2016	2017	2018-2022
	US$m	US$m	US$m	US$m	US$m	US$m

HSBC Bank (UK) Pension Scheme ..................................................	745	776	810	849	899	5,411
Other plans ..................................	556	541	557	577	624	3,595

Total (income)/expense recognised in the income statement in 'Employee compensation and benefits'

	HSBC Bank (UK) Pension Scheme			Other plans
	2012	2011	2010	2012	2011	2010
	US$m	US$m	US$m	US$m	US$m	US$m

Current service cost ......................	236	251	252	310	299	300
Interest cost .................................	1,178	1,233	1,148	404	456	438
Expected return on plan assets .....	(1,245)	(1,325)	(1,092)	(486)	(481)	(437)
Past service cost ...........................	-	(587)	-	51	45	12
Gains on curtailments ...................	-	-	-	(11)	(59)	(151)
Gains on settlements ....................	-	-	-	(10)	(4)	(2)

Total (income)/expense ...............	169	(428)	308	258	256	160

Summary

	HSBC Bank (UK) Pension Scheme
	2012	2011	2010	2009	2008
	US$m	US$m	US$m	US$m	US$m

Present value of defined benefit obligation ...........	(26,475)	(24,367)	(22,858)	(21,523)	(15,257)
Fair value of plan assets .......................................	29,092	26,604	22,236	17,701	14,865

Net surplus/(deficit) ..............................................	2,617	2,237	(622)	(3,822)	(392)

Experience gains/(losses) on plan liabilities ..........	880	(383)	(327)	(234)	(49)
Experience gains/(losses) on plan assets ...............	680	3,426	1,772	871	(2,861)
Gains/(losses) from changes in actuarial assumptions ......................................................	(1,352)	(1,098)	(1,124)	(4,329)	3,081

Total net actuarial gains/(losses) ..........................	208	1,945	321	(3,692)	171

	Other plans
	2012	2011	2010	2009	2008
	US$m	US$m	US$m	US$m	US$m

Present value of defined benefit obligation ...........	(11,600)	(10,680)	(9,785)	(9,109)	(8,787)
Fair value of plan assets .......................................	9,015	8,232	7,559	6,822	6,024

Net deficit ............................................................	(2,585)	(2,448)	(2,226)	(2,287)	(2,763)

Experience gains/(losses) on plan liabilities ..........	56	(78)	(73)	20	(52)
Experience gains/(losses) on plan assets ...............	410	200	394	65	(1,452)
Gains/(losses) from changes in actuarial assumptions ......................................................	(906)	(764)	(596)	94	(306)

Total net actuarial gains/(losses) ..........................	(440)	(642)	(275)	179	(1,810)

Post-employment defined benefit plans' principal actuarial financial assumptions

The principal actuarial financial assumptions used to calculate the Group's obligations for the largest defined benefit pension plans at 31 December for each period, and used as the basis for measuring periodic costs under the plans in the following periods, were as follows:

Principal actuarial assumptions

	Discount rate	Inflation rate	Rate of increase for pensions	Rate of pay increase
	%	%	%	%
At 31 December 2012
UK¹ ...................................................................................	4.50	3.10	2.90	3.60
Hong Kong ........................................................................	0.60	n/a	n/a	4.00
US ......................................................................................	3.95	2.50	n/a	2.75

At 31 December 2011
UK¹ ...................................................................................	4.80	3.20	3.10	3.70
Hong Kong ........................................................................	1.47	n/a	n/a	5.00
US ......................................................................................	4.60	2.50	n/a	2.75

At 31 December 2010
UK¹ ...................................................................................	5.40	3.70	3.50	4.20
Hong Kong ........................................................................	2.85	n/a	n/a	5.00
US ......................................................................................	5.41	2.50	n/a	2.75

1 Rate of increase for pensions in the UK is for pensions in payment only, capped at 5%. Deferred pensions are projected to increase in line with the CPI, capped at 5%. For 2010, deferred pensions were projected to increase in line with the RPI, capped at 5%.

HSBC determines the discount rates to be applied to its obligations in consultation with the plans' local actuaries, on the basis of current average yields of high quality (AA rated or equivalent) debt instruments, with maturities consistent with those of the defined benefit obligations. In countries where there is not a deep market in corporate bonds, government bond yields have been used. The yield curve has been extrapolated where the term of the liabilities is longer than the duration of available bonds and the discount rate used then takes into account the term of the liabilities and the shape of the yield curve. When determining the discount rate with reference to a bond index, an appropriate index for the specific region has been used.

Mortality tables and average life expectancy at age 65

	Mortality table	Life expectancy at age 65 for a male member currently:		Life expectancy at age 65 for a female member currently:
		Aged 65	Aged 45	Aged 65	Aged 45
At 31 December 2012
UK .............................................................	SAPS S1¹	23.9	25.6	25.4	27.7
Hong Kong² ...............................................	n/a	n/a	n/a	n/a	n/a
US ..............................................................	RP 2000 fully generational³	21.1	23.1	23.2	25.0

At 31 December 2011
UK .............................................................	SAPS MC⁴	22.5	24.4	23.5	25.4
Hong Kong² ...............................................	n/a	n/a	n/a	n/a	n/a
US ..............................................................	RP 2000 fully generational³	19.4	20.9	21.3	22.2

1 SAPS S1 with Continuous Mortality Investigation 2011 improvements and a 1.25% long-term allowance improvement. Light table with 1.01 rating for male pensioners and 1.02 rating for female pensioners.

2 The significant plans in Hong Kong are lump sum plans which do not use a post-retirement mortality table.

3 The projections scale applied to the mortality rates has changed from AA at 31 December 2011 to BB at 31 December 2012, to better reflect observed mortality improvements.

4 SAPS MC projections with 1% minimum improvement beyond 2002. Light table with 1.08 rating for male pensioners and standard table with 1.06 rating for female pensioners.

Expected rates of return

	2012		2011
	Expected rates of return¹	Value	Expected rates of return¹	Value
	%	US$m	%	US$m
HSBC Bank (UK) Pension Scheme
Fair value of plan assets .....................................................		29,092		26,604
Equities ..........................................................................	7.1	3,899	7.2	3,190
Bonds .............................................................................	4.0	22,258	4.1	20,737
Property ........................................................................	6.7	1,583	6.7	1,524
Other .............................................................................	3.1	1,352	2.8	1,153

Other plans
Fair value of plan assets .....................................................		9,015		8,232
Equities ..........................................................................	7.9	2,688	7.7	2,184
Bonds .............................................................................	4.1	4,963	4.7	4,659
Property ........................................................................	5.0	107	4.6	106
Other .............................................................................	3.6	1,257	4.0	1,283

1 The expected rates of return are used to measure the net defined benefit pension costs in each subsequent year, and weighted on the basis of the fair value of the plan assets. In 2013 the basis will change as described on page 386.

The expected return on plan assets represents the best estimate of long-term future asset returns, which takes into account historical market returns plus additional factors such as the current rate of inflation and interest rates.

Actuarial assumption sensitivities

The discount rate is sensitive to changes in market conditions arising during the reporting period. The mortality rates used are sensitive to experience from the plan member profile. The following table shows the effect of changes in these and the other key assumptions on the principal defined benefit pension plan:

The effect of changes in key assumptions on the principal plan

	HSBC Bank (UK) Pension Scheme
	2012	2011
	US$m	US$m
Discount rate
Change in pension obligation at year end from a 25bps increase ..........................................	(1,191)	(980)
Change in pension obligation at year end from a 25bps decrease ..........................................	1,275	1,045
Change in 2013 pension cost from a 25bps increase¹ ...........................................................	(78)	2
Change in 2013 pension cost from a 25bps decrease¹ ..........................................................	76	(2)

Rate of inflation
Change in pension obligation at year end from a 25bps increase ..........................................	881	1,026
Change in pension obligation at year end from a 25bps decrease ..........................................	(842)	(978)
Change in 2013 pension cost from a 25bps increase¹ ...........................................................	48	57
Change in 2013 pension cost from a 25bps decrease¹ ..........................................................	(47)	(54)

Rate of increase for pensions in payment and deferred pensions
Change in pension obligation at year end from a 25bps increase ..........................................	719	876
Change in pension obligation at year end from a 25bps decrease ..........................................	(692)	(841)
Change in 2013 pension cost from a 25bps increase¹ ...........................................................	36	43
Change in 2013 pension cost from a 25bps decrease¹ ..........................................................	(34)	(42)

Rate of pay increase
Change in pension obligation at year end from a 25bps increase ..........................................	175	248
Change in pension obligation at year end from a 25bps decrease ..........................................	(173)	(240)
Change in 2013 pension cost from a 25bps increase¹ ...........................................................	15	19
Change in 2013 pension cost from a 25bps decrease¹ ..........................................................	(13)	(15)

Investment return
Change in 2013 pension cost from a 25bps increase¹ ...........................................................	-	(65)
Change in 2013 pension cost from a 25bps decrease¹ ..........................................................	-	67

Mortality
Change in pension obligation from each additional year of longevity assumed .....................	663	619

1 The change in 2013 pension cost from a 25bps increase/decrease was calculated based on the requirements of IAS 19 revised, which will be adopted from 1 January 2013. The comparative numbers, which show the change in 2012 pension cost from a 25bps increase/decrease, were calculated in accordance with the accounting policy set out in Note 2(t).

The effect of changes in the discount rate and in mortality rates on plans other than the principal plan

	Other plans
	2012	2011
	US$m	US$m

Change in defined benefit obligation at year end from a 25bps increase in discount rate ..........	(379)	(325)
Change in 2013 pension cost from a 25bps increase in discount rate¹ ......................................	(17)	-
Increase in defined benefit obligation from each additional year of longevity assumed .............	174	144

HSBC Holdings

Employee compensation and benefit expense in respect of HSBC Holdings' employees in 2012 amounted to US$439m (2011: US$413m). The average number of persons employed by HSBC Holdings during 2012 was 1,323 (2011: 1,212).

Employees of HSBC Holdings who are members of defined benefit pension plans are principally members of either the HSBC Bank (UK) Pension Scheme or the HSBC International Staff Retirement Benefits Scheme. HSBC Holdings pays contributions to such plans for its own employees in accordance with the schedules of contributions determined by the Trustees of the plan.

Directors' emoluments

The aggregate emoluments of the Directors of HSBC Holdings, computed in accordance with the Companies Act 2006 and the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 were:

	2012	2011	2010
	US$000	US$000	US$000

Fees ..............................................................................................................	5,435	5,108	3,597
Salaries and other emoluments ......................................................................	10,316	12,906	12,841
Annual incentives .........................................................................................	13,983	12,516	14,294
			-
Total.............................................................................................................	29,734	30,530	30,732
			-
Vesting of long-term incentive awards ..........................................................	5,733	2,596	8,523

In addition, there were payments under retirement benefit agreements with former Directors of US$1,171,796 (2011: US$1,166,580). The provision at 31 December 2012 in respect of unfunded pension obligations to former Directors amounted to US$19,285,971 (2011: US$18,006,894).

During the year, aggregate contributions to pension schemes in respect of Directors were US$29,078 (2011: US$373,310). Discretionary annual incentives for Directors are based on a combination of individual and corporate performance and are determined by the Group Remuneration Committee. Details of Directors' remuneration, share options and awards under the HSBC Share Plan and HSBC Share Plan 2011 are included in the 'Directors' Remuneration Report' on pages 347 to 367.

8 Auditors' remuneration

	2012	2011	2010
	US$m	US$m	US$m

Audit fees payable to KPMG¹ .......................................................................	47.2	48.8	49.1
Audit fees payable to non-KPMG entities .....................................................	1.4	1.9	2.3

Total auditors' remuneration ........................................................................	48.6	50.7	51.4

1 Fees payable to KPMG for HSBC Holdings' statutory audit and audit of HSBC's subsidiaries, pursuant to legislation.

The following fees were payable by HSBC to the Group's principal auditor, KPMG Audit Plc and its associates (together 'KPMG'):

Fees payable by HSBC to KPMG

	2012	2011	2010
	US$m	US$m	US$m

Fees for HSBC Holdings' statutory audit¹ ......................................................	13.2	12.7	11.8
-. relating to current year .........................................................................	12.8	12.4	11.8
-. relating to prior year ............................................................................	0.4	0.3	-

Fees for other services provided to HSBC .....................................................	67.3	74.4	66.5
Audit of HSBC's subsidiaries² ....................................................................	34.0	36.1	37.3
Audit-related assurance services³ ...............................................................	23.6	25.7	20.8
Taxation-related services:
-. taxation compliance services ............................................................	2.1	2.8	1.5
-. taxation advisory services .................................................................	1.3	1.5	0.9
Other assurance services ...........................................................................	1.1	1.3	1.4
Other non-audit services⁴ ..........................................................................	5.2	7.0	4.6


Total fees payable ........................................................................................	80.5	87.1	78.3

1 Fees payable to KPMG for the statutory audit of the consolidated financial statements of HSBC and the separate financial statements of HSBC Holdings. They include amounts payable for services relating to HSBC Holdings' subsidiaries consolidation returns which are clearly identifiable as being in support of the Group audit opinion, with effect from 1 January 2012. Previously these fees were included in 'Fees for other services provided to HSBC'. Comparative information has been updated accordingly. The adjustment reduced 'Fees for other services provided to HSBC' and increased 'Fees for HSBC Holdings' statutory audit' by US$11.0m in 2012 (2011: US$10.5m; 2010: US$9.4m). There was no effect on basic or diluted earnings per share following the change.

2 Fees payable for the statutory audit of HSBC's subsidiaries financial statements.

3 Including services for assurance and other services that relate to statutory and regulatory filings, including comfort letters and interim reviews.

4 Including valuation and actuarial services, translation services, ad-hoc accounting advice, review of financial models, advice on IT security and business continuity, corporate finance transactions and performing agreed-upon IT testing procedures.

No fees were payable by HSBC to KPMG for the following types of services: internal audit services, services related to litigation and recruitment and remuneration.

Fees payable by HSBC's associated pension schemes to KPMG

	2012	2011	2010
	US$000	US$000	US$000

Audit of HSBC's associated pension schemes ................................................	256	248	384
Taxation-related services .............................................................................	-	11	-
-. taxation compliance services ................................................................	-	-	-
-. taxation advisory services .....................................................................	-	11	-


Total fees payable ........................................................................................	256	259	384

No fees were payable by HSBC's associated pension schemes to KPMG for the following types of services: audit related assurance services, internal audit services, other assurance services, services related to corporate finance transactions, valuation and actuarial services, litigation, recruitment and remuneration, and information technology.

In addition to the above, KPMG estimate they have been paid fees of US$3.3m (2011: US$8.6m; 2010: US$14.9m) by parties other than HSBC but where HSBC is connected with the contracting party and therefore may be involved in appointing KPMG. These fees arise from services such as auditing mutual funds managed by HSBC and reviewing the financial position of corporate concerns which borrow from HSBC.

Fees payable to KPMG for non-audit services for HSBC Holdings are not disclosed separately because such fees are disclosed on a consolidated basis for HSBC Group.

9 Tax

Tax charged to the income statement

	2012	2011	2010
	US$m	US$m	US$m
Current tax
UK corporation tax ......................................................................................	250	820	383
- for this year ...........................................................................................	60	462	404
- adjustments in respect of prior years ......................................................	190	358	(21)

Overseas tax¹ ...............................................................................................	5,560	4,255	3,328
- for this year ...........................................................................................	5,421	4,155	3,235
- adjustments in respect of prior years ......................................................	139	100	93


	5,810	5,075	3,711

Deferred tax .................................................................................................	(495)	(1,147)	1,135
Origination and reversal of temporary differences .....................................	(269)	(1,178)	1,176
Effect of changes in tax rates ....................................................................	66	(3)	31
Adjustments in respect of prior years ........................................................	(292)	34	(72)


Total tax charged to the income statement...................................................	5,315	3,928	4,846

1 Overseas tax included Hong Kong profits tax of US$1,049m (2011: US$997m; 2010: US$962m). The Hong Kong tax rate applying to the profits of subsidiaries assessable in Hong Kong was 16.5% (2011: 16.5%; 2010: 16.5%). Other overseas subsidiaries and overseas branches provided for taxation at the appropriate rates in the countries in which they operate.

Tax reconciliation

The tax charged to the income statement differs to the tax charge that would apply if all profits had been taxed at the UK corporation tax rate as follows:

	2012		2011		2010
	US$m	%	US$m	%	US$m	%

Profit before tax......................................................	20,649		21,872		19,037

Tax at 24.5% (2011: 26.5%; 2010: 28.0%) ............	5,057	24.5	5,796	26.5	5,330	28.0
Impact of differently taxed overseas profits ...........	(57)	(0.3)	(492)	(2.2)	(744)	(3.9)
Adjustments in respect of prior period liabilities .....	37	0.2	495	2.3	-	-
Deferred tax temporary differences not recognised/ (previously not recognised) .................................	374	1.8	(923)	(4.2)	(6)	-
Effect of profits in associates and joint ventures .....	(872)	(4.3)	(865)	(4.0)	(758)	(4.0)
Tax impact of intra-group transfer of subsidiary .....	-	-	-	-	1,216	6.4
Tax impact of disposal of Ping An .........................	(204)	(1.0)	-	-	-	-
Non taxable income and gains .................................	(542)	(2.6)	(613)	(2.8)	(700)	(3.7)
Permanent disallowables .........................................	1,092	5.3	467	2.1	355	1.9
Change in tax rates .................................................	78	0.4	(3)	-	31	0.2
Local taxes and overseas withholding taxes .............	581	2.8	267	1.2	224	1.2
Other items.............................................................	(229)	(1.1)	(201)	(0.9)	(102)	(0.6)

Total tax charged to the income statement ............	5,315	25.7	3,928	18.0	4,846	25.5

The effective tax rate for the year was 25.7% compared with 18.0% for 2011. The higher effective tax rate in 2012 reflects the non tax deductible effect of fines and penalties as part of the settlement of investigations into past inadequate compliance with anti-money laundering and sanction laws, together with the non-recognition of the tax benefit in respect of the accounting charge associated with negative fair value movements on own debt. The lower effective tax rate in 2011 included the benefit of deferred tax of US$0.9bn in respect of foreign tax credits in the US.

The UK corporation tax rate applying to HSBC Holdings and its subsidiaries was 24.5% (2011: 26.5%; 2010: 28%).

The UK Government announced that the main rate of corporation tax for the year beginning 1 April 2012 will reduce from 26% to 24% to be followed by a 1% reduction to 23% for the year beginning 1 April 2013 and a further 2% reduction to 21% for the year beginning 1 April 2014. The reduction in the corporate tax rate to 24% was substantively enacted in the first half of 2012 and this results in a weighted average rate of 24.5% for 2012

(2011: 26.5%). The reduction to 23% was enacted through the 2012 Finance Act in July and the reduction to 21% announced in the 2012 Autumn Statement is expected to be enacted through the 2013 Finance Act. It is not expected that the proposed future rate reductions will have a significant effect on the Group.

The Group's legal entities are subject to routine review and audit by tax authorities in the territories in which the Group operates. The Group provides for potential tax liabilities that may arise on the basis of the amounts expected to be paid to the tax authorities. The amounts ultimately paid may differ materially from the amounts provided depending on the ultimate resolution of such matters. A substantial proportion of the material open issues related to the UK of which the principal matter concerned the application of the UK Controlled Foreign Company ('CFC') rules. Following further discussion with Her Majesty's Revenue and Customs, the CFC and certain other open UK issues have now been resolved.

Deferred taxation

The table overleaf shows the gross deferred tax assets and liabilities recognised in the balance sheet and the related amounts recognised in the income statement, other comprehensive income and directly in equity.

The amounts presented in the balance sheet are different from the amounts disclosed in the table overleaf as they are presented after offsetting asset and liability balances where HSBC has the legal right to set-off and intends to settle on a net basis.

Of the total net deferred tax assets of US$6.5bn at 31 December 2012 (2011: US$6.2bn), the net deferred tax asset relating to HSBC's operations in the US was US$4.6bn (2011: US$5.2bn). The deferred tax assets included in this total reflected the carry forward of no tax losses and tax credits (2011: US$1.2bn), deductible temporary differences in respect of loan impairment allowances of US$2.0bn (2011: US$2.7bn) and other temporary differences of US$2.6bn (2011: US$1.3bn).

Deductions for loan impairments for US tax purposes generally occur when the impaired loan is charged off, often in the period subsequent to that in which the impairment is recognised for accounting purposes. As a result, the amount of the associated deferred tax asset should generally move in line with the impairment allowance balance. The taxable gains on the disposal of the US branch network and Card and Retail Services business has resulted in a reduction in the amount of deferred tax assets related to carried forward tax losses and tax credits. This was offset in part by the reversal of deferred tax liabilities as a result of these disposals.

On the evidence available, including historical levels of profitability, management projections of future income and HSBC Holdings' commitment to continue to invest sufficient capital in North America to recover the deferred tax asset, it is expected that there will be sufficient taxable income generated by the business to realise these assets. Management projections of profits from the US operations are prepared for a 10-year period and include assumptions about future house prices and US economic conditions, including unemployment levels.

The current level of the deferred tax asset in respect of loan impairment allowances is projected to reduce over the 10‑year period in line with the reduction in the Consumer and Mortgage Lending portfolio.

As there has been a recent history of losses in HSBC's US operations, management's analysis of the recognition of these deferred tax assets significantly discounts any future expected profits from the US operations and relies to a greater extent on capital support from HSBC Holdings, including tax planning strategies in relation to such support. The principal strategy involves generating future taxable profits through the retention of capital in the US in excess of normal regulatory requirements in order to reduce deductible funding expenses or otherwise deploy such capital to increase levels of taxable income.

Movement of deferred tax assets and liabilities before offsetting balances within countries

	Retirement benefits	Loan impairment provisions	Unused tax losses and tax credits	Accelerated capital allowances	Available- for-sale investments	Cash flow hedges	Share- based payments	Assets leased to customers	Revaluation of property		Fee income	Other	Total
	US$m	US$m	US$m	US$m	US$m	US$m	US$m	US$m		US$m	US$m	US$m	US$m
2012

Assets ...............................................	742	4,448	1,328	117	-	487	286	14		-	-	1,709	9,131
Liabilities ..........................................	(107)	-	-	-	(557)	(137)	-	(595)		(227)	(737)	(563)	(2,923)

At 1 January .....................................	635	4,448	1,328	117	(557)	350	286	(581)		(227)	(737)	1,146	6,208
Acquisitions and disposals ..................	-	-	-	-	-	-	-	-		-	-	3	3
Income statement .............................	(313)	(590)	(692)	168	(270)	(9)	(52)	569		111	616	957	495
Other comprehensive income ...........	174	-	(33)	-	(395)	(90)	-	-		-	-	-	(344)
Equity ...............................................	-	-	-	-	-	-	45	-		-	-	-	45
Foreign exchange and other adjustments ...................................	(27)	54	14	(50)	19	(10)	26	24		19	16	(31)	54

At 31 December ..............................	469	3,912	617	235	(1,203)	241	305	12		(97)	(105)	2,075	6,461

Assets ...............................................	469	3,912	617	289	-	285	305	184		-	-	2,965	9,026
Liabilities ..........................................	-	-	-	(54)	(1,203)	(44)	-	(172)		(97)	(105)	(890)	(2,565)

2011

Assets ...............................................	1,538	4,799	351	109	11	352	241	-		-	-	957	8,358
Liabilities ..........................................	-	-	(3)	(126)	(135)	(88)	-	(707)		(225)	(756)	(400)	(2,440)

At 1 January .....................................	1,538	4,799	348	(17)	(124)	264	241	(707)		(225)	(756)	557	5,918
Acquisitions and disposals ..................	3	-	11	-	(3)	(5)	1	-		22	-	(6)	23
Income statement .............................	(437)	(224)	945	137	10	14	1	93		(36)	17	627	1,147
Other comprehensive income ...........	(322)	-	-	-	(533)	53	-	-		-	-	-	(802)
Equity ...............................................	-	-	-	-	-	-	27	-		-	-	-	27
Foreign exchange and other adjustments ...................................	(147)	(127)	24	(3)	93	24	16	33		12	2	(32)	(105)

At 31 December ................................	635	4,448	1,328	117	(557)	350	286	(581)		(227)	(737)	1,146	6,208

Assets ...............................................	742	4,448	1,328	117	-	487	286	14		-	-	1,709	9,131
Liabilities ..........................................	(107)	-	-	-	(557)	(137)	-	(595)		(227)	(737)	(563)	(2,923)

Brazil

The net deferred tax asset relating to HSBC's operations in Brazil was US$0.9bn (2011: US$0.7bn). The deferred tax assets included in this total arose primarily in relation to deductible temporary differences in respect of loan impairment allowances. Deductions for loan impairments for Brazilian tax purposes generally occur in periods subsequent to those in which they are recognised for accounting purposes and, as a result, the amount of the associated deferred tax assets move in line with the impairment allowance balance.

Loan impairment deductions are recognised for tax purposes typically within 24 months of accounting recognition. On the evidence available, including historic levels of profitability, management projections of income and the state of the Brazilian economy, it is anticipated that there will be sufficient taxable income generated by the business to realise these assets when deductible for tax purposes.

There were no material carried forward tax losses or tax credits recognised within the Group's deferred tax assets in Brazil.

Mexico

The net deferred tax asset relating to HSBC's operations in Mexico was US$0.6bn (2011: US$0.5bn). The deferred tax assets included in this total related primarily to deductible temporary differences in respect of accounting provisions for impaired loans, including losses realised on sales of impaired loans. The annual deduction for loan impairments is capped under Mexican legislation at 2.5% of the average qualifying loan portfolio. The balance is carried forward to future years without expiry but with the annual deduction subject to the 2.5% cap.

On the evidence available, including historic and projected levels of loan portfolio growth, loan impairment rates and profitability, it is anticipated that the business will realise these assets within the next 15 years. The projections assume that loan impairment rates will remain at levels consistently below the annual 2.5% cap over the medium term.

There were no material carried forward tax losses or tax credits recognised within the Group's deferred tax assets in Mexico.

The net deferred tax asset relating to HSBC's operations in the UK was US$0.3bn (2011: liability US$0.2bn). The deferred tax assets included in this total relate primarily to the carry forward of tax losses.

On the evidence available, including historical levels of profitability and management projections of future income it is anticipated that there will be sufficient taxable income generated by the business to recover the deferred tax asset over the next 12 months.

Unrecognised deferred tax

The amount of temporary differences, unused tax losses and tax credits for which no deferred tax asset is recognised in the balance sheet was US$16.6bn (2011: US$14.7bn). These amounts included unused state losses arising in our US operations of US$12.6bn (2011: US$12.5bn).

Of the total amounts unrecognised, US$3.9bn (2011: US$2.4bn) had no expiry date, US$0.3bn (2011: US$0.1bn) was scheduled to expire within 10 years (2011: 10 years) and the remaining will expire after 10 years.

Deferred tax is not recognised in respect of the Group's investments in subsidiaries and branches where remittance or other realisation is not probable, and for those associates and interests in joint ventures where it has been determined that no additional tax will arise. No amount is disclosed for the unrecognised deferred tax or the 2012 and 2011 temporary differences associated with such investments as it is impracticable to determine the amount of income taxes that would be payable when any temporary differences reverse. Deferred tax of US$0.3bn (2011: US$0.2bn) has, however, been provided in respect of distributable reserves of associates that, on distribution, would attract withholding tax.

HSBC Holdings

Movement of deferred tax assets

	Accelerated capital allowances	Short-term timing differences	Available- for-sale investments	Fair valued assets and liabilities	Share- based payments	Unused tax losses	Total
	US$m	US$m	US$m	US$m	US$m	US$m	US$m
2012
At 1 January ...............	-	-	(4)	46	9	40	91
Income statement .......	2	-	-	(15)	(7)	(40)	(60)
Other comprehensive income ....................	-	-	(27)	-	-	-	(27)
Equity .........................	-	-	-	-	10	-	10

At 31 December .......	2	-	(31)	31	12	-	14

2011
At 1 January ...............	-	1	(21)	61	16	-	57
Income statement .......	-	(1)	-	(15)	(7)	40	17
Other comprehensive income ....................	-	-	17	-	-	-	17

At 31 December .........	-	-	(4)	46	9	40	91

The amount of unused tax losses for which no deferred tax asset is recognised in the balance sheet was US$1,775m (2011: US$8m) of which US$9m (2011: US$8m) relate to capital losses. The losses have no expiry date.

10 Dividends

Dividends to shareholders of the parent company

	2012			2011			2010
	Per share US$	Total US$m	Settled in scrip US$m	Per share US$	Total US$m	Settled in scrip US$m	Per share US$	Total US$m	Settled in scrip US$m
Dividends declared on ordinary shares
In respect of previous year:
- fourth interim dividend .	0.14	2,535	259	0.12	2,119	1,130	0.10	1,733	838
In respect of current year:
- first interim dividend ....	0.09	1,633	748	0.09	1,601	204	0.08	1,394	746
- second interim dividend	0.09	1,646	783	0.09	1,603	178	0.08	1,402	735
- third interim dividend ...	0.09	1,655	639	0.09	1,605	720	0.08	1,408	205

	0.41	7,469	2,429	0.39	6,928	2,232	0.34	5,937	2,524
Quarterly dividends on preference shares classified as equity
March dividend ....................	15.50	22		15.50	22		15.50	22
June dividend .......................	15.50	23		15.50	23		15.50	23
September dividend ..............	15.50	22		15.50	22		15.50	22
December dividend ..............	15.50	23		15.50	23		15.50	23

	62.00	90		62.00	90		62.00	90

Quarterly coupons on capital securities classified as equity¹

	2012		2011		2010
	Per share	Total	Per share	Total	Per share	Total
	US$	US$m	US$	US$m	US$	US$m

January coupon ............................	0.508	44	0.508	44	0.508	44
March coupon ..............................	0.500	76	0.500	76	-	-
April coupon ................................	0.508	45	0.508	45	0.508	45
June coupon .................................	0.500	76	0.500	76	-	-
July coupon ..................................	0.508	45	0.508	45	0.508	45
September coupon ........................	0.500	76	0.500	76	0.450	68
October coupon ............................	0.508	45	0.508	45	0.508	45
December coupon .........................	0.500	76	0.500	76	0.500	76

	4.032	483	4.032	483	2.982	323

1 HSBC Holdings issued Perpetual Subordinated Capital Securities of US$3,800m in June 2010 and US$2,200m in April 2008, which are classified as equity under IFRSs.

The Directors declared after the end of the year a fourth interim dividend in respect of the financial year ended 31 December 2012 of US$0.18 per ordinary share, a distribution of approximately US$3,327m. The fourth interim dividend will be payable on 8 May 2013 to holders of record on 21 March 2013 on the Hong Kong Overseas Branch Register and 22 March 2013 on the Principal Register in the UK or the Bermuda Overseas Branch Register. No liability is recorded in the financial statements in respect of the fourth interim dividend for 2012.

On 15 January 2013, HSBC paid a further coupon on the capital securities of US$0.508 per security, a distribution of US$44m. No liability is recorded in the balance sheet at 31 December 2012 in respect of this coupon payment.

11 Earnings per share

Basic earnings per ordinary share was calculated by dividing the profit attributable to ordinary shareholders of the parent company by the weighted average number of ordinary shares outstanding, excluding own shares held. Diluted earnings per ordinary share was calculated by dividing the basic earnings, which require no adjustment for the effects of dilutive potential ordinary shares, by the weighted average number of ordinary shares outstanding, excluding own shares held, plus the weighted average number of ordinary shares that would be issued on conversion of dilutive potential ordinary shares.

Profit attributable to the ordinary shareholders of the parent company

	2012	2011	2010
	US$m	US$m	US$m

Profit attributable to shareholders of the parent company ............................	14,027	16,797	13,159
Dividend payable on preference shares classified as equity ............................	(90)	(90)	(90)
Coupon payable on capital securities classified as equity ...............................	(483)	(483)	(323)

Profit attributable to the ordinary shareholders of the parent company ........	13,454	16,224	12,746

Basic and diluted earnings per share

	2012				2011				2010
	Profit US$m	Number of shares (millions)		Per share US$	Profit US$m	Number of shares (millions)		Per share US$	Profit US$m	Number of shares (millions)		Per share US$

Basic¹ ........................................	13,454		18,125	0.74	16,224		17,700	0.92	12,746		17,404	0.73
Effect of dilutive potential ordinary shares ......................			146				222				229
- Savings-related Share Option Plan ......................			23				45				55
-. Other plans .......................			123				177				174


Diluted¹ .....................................	13,454		18,271	0.74	16,224		17,922	0.91	12,746		17,633	0.72

1 Weighted average number of ordinary shares outstanding (basic) or assuming dilution (diluted).

The weighted average number of dilutive potential ordinary shares excluded 103m employee share options that were anti-dilutive (2011: 151m; 2010: 150m).

12 Segmental analysis

HSBC's operating segments are organised into six geographical regions, Europe, Hong Kong, Rest of Asia-Pacific, Middle East and North Africa ('MENA'), North America and Latin America.

Geographical information is classified by the location of the principal operations of the subsidiary or, for The Hongkong and Shanghai Banking Corporation, HSBC Bank, HSBC Bank Middle East and HSBC Bank USA, by the location of the branch responsible for reporting the results or advancing the funds.

HSBC's chief operating decision-maker is the Group Management Board ('GMB') which operates as a general management committee under the direct authority of the Board. Information provided to GMB to make decisions about allocating resources to, and assessing the performance of, operating segments is measured in accordance with IFRSs. The financial information shown below includes the effects of intra-HSBC transactions between operating segments which are conducted on an arm's length basis and are eliminated in arriving at the total. Shared costs are included in operating segments on the basis of the actual recharges made.

Products and services

HSBC provides a comprehensive range of banking and related financial services to its customers in its six geographical regions. The products and services offered to customers are organised by global business.

· Retail Banking and Wealth Management ('RBWM') offers a broad range of products and services to meet the personal banking and wealth management needs of individual customers. 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, global asset management services and financial planning services).

· Commercial Banking ('CMB') offers a broad range of products and services to serve the needs of our commercial customers, including small and medium sized enterprises, mid-market enterprises and corporates. These include credit and lending, international trade and receivables finance, treasury management and liquidity solutions (payments and cash management and commercial cards), commercial insurance and investments. We also offer our customers access to products and services offered by other global businesses, for example Global Banking and Markets ('GB&M') which include foreign exchange products, raising capital on debt and equity markets and advisory services.

· GB&M provides tailored financial solutions to major government, corporate and institutional clients and private investors worldwide. The client-focused business lines deliver a full range of banking capabilities including financing, advisory and transaction services, a markets business that provides services in credit, rates, foreign exchange, money markets and securities services, and principal investment activities.

· Global Private Banking ('GPB') provides a range of services to high net worth individuals and families with complex and international needs.

Financial information

In the following segmental analysis, the benefit of shareholders' funds impacts the analysis only to the extent that these funds are actually allocated to businesses in the segment by way of intra-HSBC capital and funding structures.

This information is provided by RNS

The company news service from the London Stock Exchange

END

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