Interim Report - 11 of 28

RNS Number : 9001L

HSBC Holdings PLC

16 August 2013

 



North America

Our North American businesses are located in the US, Canada and Bermuda. Operations in the US are primarily conducted through HSBC Bank USA, N.A. and HSBC Finance Corporation, a national consumer finance company. HSBC Markets (USA) Inc. is the intermediate holding company of, inter alia, HSBC Securities (USA) Inc. HSBC Bank Canada and HSBC Bank Bermuda operate in their respective countries.
	Half-year to
	30 Jun		30 Jun		31 Dec
	2013		2012		2012
	US$m		US$m		US$m
Net interest income .....	3,030		4,739		3,378
Net fee income ............	1,138		1,443		1,070
Net trading income ......	505		161		346
Gains on disposal of US branch network and cards business ............	-		3,809		203
Other expense .............	(41)		(174)		(282)
Net operating income22 ..................................	4,632		9,978		4,715
LICs55 ..........................	(696)		(2,161)		(1,296)
Net operating income	3,936		7,817		3,419
Total operating expenses ..................................	(3,276)		(4,462)		(4,478)
Operating profit/(loss) ..................................	660		3,355		(1,059)
Income/(expense) from associates56 ...............	6		(1)		4
Profit/(loss) before tax	666		3,354		(1,055)
Cost efficiency ratio ....	70.7%		44.7%		95.0%
RoRWA49 ....................	0.5%		2.1%		(0.8%)
Period-end staff numbers	21,454		23,341		22,443
Gross balances in the CML portfolio, including loans held for sale, down by US$6.6bn to US$36.1bn
Completed sales of our US$3.7bn non-real estate personal loan portfolio, and our US$1.6bn US Insurance business
Best Risk Adviser in North America (Euromoney Awards for Excellence 2013)
For footnotes, see page 100.

Economic background 

Annualised US real GDP growth averaged 1.4% in the first half of 2013. On the same basis, personal consumption rose by 2.0%, lifted by increased spending on durable goods. Government consumption and gross investment declined by 2.3%, reflecting budgetary cutbacks at the federal, state and local levels of government. Payroll employment growth was positive in the first half of 2013, with an average increase of 198,000 per month. The unemployment rate was 7.6% in June 2013, down from 7.8% in December 2012. Inflation decelerated in the first half of 2013. As measured by the core price index for personal consumption, core inflation slowed to 1.2% year-on-year through June, down from 1.4% in December 2012. In the first half of 2013, the Federal Open Market Committee maintained the federal funds rate in a range of zero to 0.25%. In addition, the Federal Reserve purchased agency mortgage-backed securities at a rate of US$40bn per month and longer-term Treasury securities at US$45bn per month in the period.

The Canadian economy struggled. Despite an export-led expansion in GDP of 2.5% in the first quarter of 2013, economic indicators for the second quarter suggested that the economy slowed markedly and net exports fell sharply. For example, the expansion in hours worked fell from 1.8% in the first quarter to just 0.1% in the second. In addition, private sector job creation stalled. Annualised inflation was less than 1%, below the Bank of Canada's 1% to 3% inflation target range.

Review of performance

In the first half of 2013, our operations in North America reported a profit before tax of US$666m, compared with US$3.4bn in the first half of 2012. On a constant currency basis, profit before tax declined by US$2.7bn.

Reported profits in both periods included gains and losses on disposal of businesses not aligned to our long‑term strategy, notably gains in the US of US$3.1bn and US$661m following the sales of the CRS business and 138 non-strategic retail branches, respectively, in the first half of 2012.

On an underlying basis, the pre-tax profit of US$808m in the first half of 2013 compared with a pre-tax loss of US$772m in the first half of 2012. This was mainly due to lower loan impairment charges in the US, primarily in the CML portfolio, driven by significant favourable adjustments to the market value of the underlying properties reflecting

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

	Retail       Banking and Wealth Management           US$m		Commercial      Banking          US$m	Global       Banking               and       Markets           US$m			Global        Private      Banking          US$m		Other          US$m		Total          US$m
Half-year to 30 June 2013
US ......................................................	(267)		144		500		31		(217)		191
Canada ...............................................	90		194		169		−		(4)		449
Bermuda .............................................	7		(21)		26		1		14		27
Other .................................................	−		−		(1)		−		−		(1)
	(170)		317		694		32		(207)		666
Half-year to 30 June 2012
US ......................................................	3,326		374		384		38		(1,388)		2,734
Canada ...............................................	129		307		174		−		(8)		602
Bermuda .............................................	18		1		(9)		3		4		17
Other .................................................	1		−		−		−		−		1
	3,474		682		549		41		(1,392)		3,354
Half-year to 31 December 2012
US ......................................................	(580)		263		277		34		(1,513)		(1,519)
Canada ...............................................	78		270		140		(1)		(8)		479
Bermuda .............................................	24		(16)		(9)		(2)		(11)		(14)
Other .................................................	(1)		-		-		-		-		(1)
	(479)		517		408		31		(1,532)		(1,055)

improvements in housing market conditions together with a decline in operating expenses, as the first half of 2012 included a US$700m provision for US anti-money laundering, BSA and OFAC investigations. These positive effects were partly offset by losses on the sale of certain loan portfolios in the first half of 2013 as described further below.

Underlying profit before tax in Canada declined due to lower revenues as a result of the closure to new business in 2012 of the Canadian consumer finance company, spread compression in a low rate and competitive market and the write-down of an investment property held for sale, partly offset by lower costs as a result of cost control and sustainable savings from organisational effectiveness initiatives. Our operations in Bermuda reported a higher profit before tax, primarily due to lower loan impairment charges and operating expenses.

In line with our objective to accelerate the run-off of our CML portfolio and simplify operations, we completed the sale of the CML non-real estate personal loan portfolio with a carrying amount of US$3.7bn on 1 April 2013 and recognised a loss on sale of US$271m. CML lending balances, including loans held for sale, at 30 June 2013 were US$36.1bn, a decline of US$6.6bn from 31 December 2012. At 30 June 2013, we had real estate secured accounts of US$5.8bn before impairment allowances, which we plan to actively market for sale in multiple transactions during the next 18 months. At 30 June 2013, the carrying value of these assets was US$56m greater than their estimated fair value. We expect to recognise a loss on sale of these loans although the amount will depend on market conditions at the date of sale. Their disposal is expected to be capital accretive, reduce funding requirements and alleviate operational burdens, given that the loans are intensive to service and subject to foreclosure delays. We completed the sale of a pool of similar real estate secured loans in June 2013 and recorded a loss on sale of US$1m.

In RBWM, as part of the simplification of our US operations, PHH Mortgage began to service HSBC Bank USA N.A. ('HSBC Bank USA') mortgage accounts, providing mortgage origination processing services and sub‑servicing of our portfolio. The outsourcing will enable RBWM to focus on strategic wealth products and service initiatives. RBWM has also made significant progress in transforming its RM model to one which is more client focused and needs‑based. This change includes realigning RM portfolios to match the needs and affluence of clients with the skills of the sales force, and a shift away from an incentive-based compensation scheme to drive appropriate behaviour in the sales process.

In CMB, the strategy to strengthen our position as the leading international trade and business bank made good progress. We hired over 170 RMs, product specialists and support personnel to drive the US growth strategy. New lending facilities of US$3.8bn were approved in the first half of 2013 representing a 9% increase in overall credit facilities to CMB customers since December 2012.

In GB&M, we continue to connect clients to global growth, with New York acting as a hub for the Americas. We have a strong domestic franchise servicing US based clients and are focused on growing inbound business from mainland China, driving business with mainland Chinese multinationals in the US and delivering RMB products to US clients with the support of our China desk in New York. In addition, we remain dedicated to enhancing collaboration with other global businesses to appropriately service the needs of our client base.

The following commentary is on a constant currency basis.

Net interest income decreased by 36% as a consequence of selling the CRS business and retail branches, lower average lending balances from the continued run-off of the CML portfolio and portfolio disposals during the first half of 2013, lower reinvestment rates in BSM, closing the Canada consumer finance company to new business in 2012 and reduced spreads on commercial loans in Canada. Partly offsetting the decrease were higher average lending balances in CMB from the continued expansion of our business in the US.

Net fee income decreased by 21%, primarily due to the sale of the CRS business and the retail branches in 2012. This was partly offset by fees from the transition service agreement with the purchaser of the CRS business.

Net trading income was US$347m higher in the first half of 2013, primarily due to favourable fair value movements on non-qualifying hedges in HSBC Finance of US$263m in 2013 due to a rise in interest rates, compared with adverse movements of US$217m in the first half of 2012. This was partly offset by a loss of US$199m relating to the early termination of qualifying accounting hedges in the first half of 2013 as a result of anticipated changes in funding.

Net trading income increased in GB&M as a result of higher Credit trading revenue driven by revaluation gains on securities, and monoline releases in the legacy portfolio. Net trading revenue also benefited from the performance of economic hedges used to manage interest rate risk which benefited from favourable interest rate movements. Rates trading revenue was broadly in line with the first half of 2012, as lower income from a decline in trading activities and the widening of credit spreads was offset by favourable fair value movements on structured liabilities due to a widening of our own credit spreads.

Net expense from financial instruments designated at fair value was US$72m in the first half of 2013 compared with US$639m in the comparable period in 2012. This was due to lower adverse fair value movements on our own debt designated at fair value in 2013 than in the first half of 2012 as credit spreads tightened to a lesser extent.

Gains less losses from financial investments increased by 27% during the first half of 2013 as Balance Sheet Management reported higher gains on sales of available-for-sale debt securities as a result of ongoing portfolio repositioning for risk management purposes.

Net premium income decreased by US$75m due to the sale of our US Insurance business in the first half of 2013.

Gains on disposal of US branch network and cards business reported in the first half of 2012 included a gain of US$3.1bn from the sale of the CRS business and US$661m from the sale of 138 non-strategic branches in upstate New York. We recognised gains of US$449m and US$212m in RBWM and CMB, respectively, as a result of the branch sales.

Other operating income decreased by US$455m to an expense of US$228m, due to the loss on sale of the CML non-real estate personal loan portfolio, a loss on sale of our US insurance business, and a write-down of an investment property held for sale.

LICs decreased by US$1.5bn to US$696m, mainly in the US, driven by significant favourable adjustments to the market value of the underlying properties of US$603m reflecting improvements in housing market conditions, a reduction in lending balances from the continued run-off of the CML portfolio and loan sales, and lower delinquency levels. In addition, loan impairment charges declined by US$323m due to the sale of the CRS business in the first half of 2012. Partially offsetting these declines was an increase of US$130m relating to a rise in the estimated average period of time from a loss event occurring to write‑off for real estate loans to twelve months (previously a period of ten months was used). In CMB, loan impairment charges increased by US$105m due to individually assessed impairments on a small number of exposures in Canada and, in the US, due to higher provisions as a result of increased loans in key growth markets and a lower level of recoveries compared with the same period in 2012.

Operating expenses were 26% lower than in the first half of 2012, primarily due to the non-recurrence of a US$700m provision for US anti-money laundering, BSA and OFAC investigations, lower average staff numbers and costs following the business disposals in the US and Canada, and a reduction in litigation provisions in relation to US
mortgage foreclosure servicing costs. We also achieved over US$140m of sustainable cost savings in the first half of 2013, primarily from organisational effectiveness. Partly offsetting the above was an increase of US$100m in the customer remediation provisions in the first half of 2013 related to enhancement services products sold by our former CRS business.

Profit/(loss) before tax and balance sheet data - North America

	Half-year to 30 June 2013
	Retail       Banking and Wealth Management           US$m		Commercial       Banking          US$m		Global       Banking and        Markets          US$m		Global Private       Banking          US$m		Other           US$m		Inter-       segment elimination62          US$m		Total          US$m
Profit/(loss) before tax
Net interest income ...............	1,888		706		321		97		49		(31)		3,030
Net fee income ......................	335		288		384		63		68		−		1,138
Trading income excluding net interest income ...................	(18)		23		375		11		(6)		−		385
Net interest income/(expense) on trading activities .............	8		−		81		−		−		31		120
Net trading income/ (expense)57 ..........................	(10)		23		456		11		(6)		31		505
Changes in fair value of long- term debt issued and related derivatives ...........................	−		-		-		-		(72)		-		(72)
Net expense from other financial instruments designated at fair value ........	−		−		−		−		−		−		−
Net expense from financial instruments designated at fair value .............................	−		−		−		−		(72)		−		(72)
Gains less losses from financial investments ..........	4		−		212		−		7		−		223
Dividend income ....................	7		5		25		2		2		−		41
Net earned insurance premiums	34		−		−		−		−		−		34
Other operating income/(expense) ................	(352)		(16)		122		2		847		(831)		(228)
Total operating income ......	1,906		1,006		1,520		175		895		(831)		4,671
Net insurance claims63 ............	(39)		−		−		−		−		−		(39)
Net operating income22 ......	1,867		1,006		1,520		175		895		(831)		4,632
Loan impairment charges and other credit risk provisions ..	(532)		(155)		(8)		(1)		−		−		(696)
Net operating income .........	1,335		851		1,512		174		895		(831)		3,936
Operating expenses ................	(1,504)		(540)		(818)		(143)		(1,102)		831		(3,276)
Operating profit/(loss) .......	(169)		311		694		31		(207)		−		660
Share of profit/(loss) in associates and joint ventures	(1)		6		−		1		−		−		6
Profit/(loss) before tax .......	(170)		317		694		32		(207)		−		666
	%		%		%		%		%				%
Share of HSBC's profit before tax ............................	(1.2)		2.3		4.9		0.2		(1.5)				4.7
Cost efficiency ratio ..............	80.6		53.7		53.8		81.7		123.1				70.7
Balance sheet data53
	US$m		US$m		US$m		US$m		US$m				US$m
Loans and advances to customers (net) reported in:
- loans and advances to customers (net) .............	71,547		35,367		21,956		5,624		−				134,494
- assets held for sale ...........	849		-		-		-		-				849
Total assets ............................	88,313		42,820		350,497		7,715		15,269		(31,396)		473,218
Customer accounts reported in:
- customer accounts ...............	54,159		46,455		34,942		13,432		65				149,053

	Half-year to 30 June 2012
	Retail        Banking    and Wealth Management           US$m		Commercial        Banking           US$m		Global        Banking and         Markets           US$m		Global Private        Banking           US$m		Other           US$m		Inter-        segment   elimination62          US$m		Total           US$m
Profit/(loss) before tax
Net interest income ...............	3,418		715		491		97		50		(32)		4,739
Net fee income ......................	681		272		375		64		51		−		1,443
Trading income/(expense) excluding net interest income	(206)		20		245		11		8		−		78
Net interest income on trading activities .............................	9		1		41		−		−		32		83
Net trading income/ (expense)57 ..........................	(197)		21		286		11		8		32		161
Changes in fair value of long-term debt issued and related derivatives ...............	-		-		-		-		(638)		-		(638)
Net expense from other financial instruments designated at fair value ........	-		-		(1)		-		-		-		(1)
Net expense from financial instruments designated at fair value .............................	−		−		(1)		−		(638)		−		(639)
Gains less losses from financial investments ..........	12		−		158		−		6		−		176
Dividend income ....................	8		5		11		1		1		−		26
Net earned insurance premiums	109		−		−		−		−		−		109
Gains on disposal of US branch network and cards business ...	3,597		212		−		−		−		−		3,809
Other operating income .........	109		93		87		5		1,011		(1,079)		226
Total operating income .........	7,737		1,318		1,407		178		489		(1,079)		10,050
Net insurance claims63 ............	(72)		−		−		−		−		−		(72)
Net operating income22 ..........	7,665		1,318		1,407		178		489		(1,079)		9,978
Loan impairment (charges)/ recoveries and other credit risk provisions .....................	(2,084)		(51)		(30)		4		−		−		(2,161)
Net operating income ............	5,581		1,267		1,377		182		489		(1,079)		7,817
Operating expenses ................	(2,108)		(583)		(828)		(141)		(1,881)		1,079		(4,462)
Operating profit/(loss) ...........	3,473		684		549		41		(1,392)		−		3,355
Share of profit/(loss) in associates and joint ventures	1		(2)		−		−		−		−		(1)
Profit/(loss) before tax ...........	3,474		682		549		41		(1,392)		−		3,354
	%		%		%		%		%				%
Share of HSBC's profit before tax ............................	27.3		5.4		4.3		0.3		(11.0)				26.3
Cost efficiency ratio ..............	27.5		44.2		58.8		79.2		384.7				44.7
Balance sheet data53
	US$m		US$m		US$m		US$m		US$m				US$m
Loans and advances to customers (net) reported in:
- loans and advances to customers (net) .............	83,060		33,754		32,068		5,109		-				153,991
- assets held for sale (disposal groups) ............	413		115		-		-		-				528
Total assets ............................	110,038		46,321		347,728		7,444		12,054		(22,995)		500,590
Customer accounts reported in:
- customer accounts ...............	58,962		45,783		29,465		14,061		89				148,360
- liabilities of disposal groups held for sale ......................	2,843		790		-		-		-				3,633

Profit/(loss) before tax and balance sheet data - North America (continued)

	Half-year to 31 December 2012
	Retail        Banking    and Wealth Management           US$m		Commercial        Banking           US$m		Global        Banking and         Markets           US$m		Global Private        Banking           US$m		Other           US$m		Inter-       segment   elimination62         US$m		Total           US$m
Profit/(loss) before tax
Net interest income ...............	2,063		728		457		95		68		(33)		3,378
Net fee income ......................	242		290		341		60		137		-		1,070
Trading income/(expense) excluding net interest income ...........................................	(10)		27		221		9		8		-		255
Net interest income on trading activities .................	8		-		50		-		-		33		91
Net trading income/ (expense)57 .........................	(2)		27		271		9		8		33		346
Changes in fair value of long-term debt issued and related derivatives ........	-		-		-		-		(581)		-		(581)
Net income from other financial instruments designated at fair value ..................................	-		-		1		-		-		-		1
Net income/(expense) from financial instruments designated at fair value .......	-		-		1		-		(581)		-		(580)
Gains less losses from financial investments .........	15		-		65		(7)		2		-		75
Dividend income ....................	7		6		21		2		(1)		-		35
Net earned insurance premiums	84		-		-		-		-		-		84
Gains on disposal of US branch network and cards business ..	138		65		-		-		-		-		203
Other operating income/ (expense) ...........................	64		56		104		-		776		(820)		180
Total operating income .........	2,611		1,172		1,260		159		409		(820)		4,791
Net insurance claims63 ............	(76)		-		-		-		-		-		(76)
Net operating income22 ..........	2,535		1,172		1,260		159		409		(820)		4,715
Loan impairment charges and other credit risk provisions .	(1,157)		(97)		(41)		(1)		-		-		(1,296)
Net operating income ............	1,378		1,075		1,219		158		409		(820)		3,419
Operating expenses ................	(1,858)		(561)		(811)		(127)		(1,941)		820		(4,478)
Operating profit/(loss) ...........	(480)		514		408		31		(1,532)		-		(1,059)
Share of profit in associates and joint ventures ...............	1		3		-		-		-		-		4
Profit/(loss) before tax ...........	(479)		517		408		31		(1,532)		-		(1,055)
	%		%		%		%		%				%
Share of HSBC's profit before tax ...........................	(6.1)		6.5		5.2		0.4		(19.3)				(13.3)
Cost efficiency ratio ..............	73.3		47.9		64.4		79.9		474.6				95.0
Balance sheet data53
	US$m		US$m		US$m		US$m		US$m				US$m
Loans and advances to customers (net) reported in:
- loans and advances to customers (net) ..............	76,414		36,387		22,498		5,457		-				140,756
- assets held for sale (disposal groups) .............	3,899		-		-		-		-				3,899
Total assets ............................	101,103		48,604		345,040		8,828		12,659		(25,987)		490,247
Customer accounts reported in:
- customer accounts ...............	57,758		48,080		29,595		13,553		51				149,037

For footnotes, see page 100.

 

END

 

 

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