Interim Report - 3 of 26

RNS Number : 0970M

HSBC Holdings PLC

12 August 2011

 



Principal activities

HSBC is one of the largest banking and financial services organisations in the world, with a market capitalisation of US$177bn at 30 June 2011.

Through our subsidiaries and associates, we provide a comprehensive range of banking and related financial services. Headquartered in London, we operate through long-established businesses and have an international network of around 7,500 offices in 87 countries and territories in six geographical regions: Europe, Hong Kong, Rest of Asia-Pacific, Middle East and North Africa ('MENA'), North America and Latin America. Within these regions, a comprehensive range of financial services is offered to personal, commercial, corporate, institutional, investment and private banking clients. Services are delivered primarily by domestic banks, typically with large retail deposit bases.

HSBC's values

The role of HSBC's values in daily operating practice has taken on increased significance in the context of the global financial crisis, with changes to regulatory policy, investor confidence and society's view of the role of banks. We expect our executives and staff to act with courageous integrity in the execution of their duties.

HSBC's values are being:

·     dependable and doing the right thing;

·     open to different ideas and cultures; and

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

We have strengthened our values-led culture by embedding HSBC's values into our operating standards, training, development and employee induction, and through the personal sponsorship of senior executives. These initiatives will continue in 2011 and beyond.

Strategic direction

HSBC's objective is to deliver sustainable long-term value to shareholders through consistent earnings and superior risk‑adjusted returns. We have a clear strategy to become the leading international bank, based on two main elements which are aligned with the key trends shaping the global economy:

·      international connectivity - we are strengthening our presence in those markets and businesses that are most relevant to global trade and capital flows; and

·      economic development and wealth creation - we are investing to capture wealth creation in the selected markets and focusing on retail banking only in those markets where we can achieve profitable scale.

To deliver on our strategy, we are taking action in three areas: ·      Capital deployment - we are improving the way we deploy capital as part of our efforts to achieve our targeted return on equity of 12% to 15% over the business cycle. We have introduced a strategic framework assessing each of our businesses on a set of five strategic evaluation criteria, namely international connectivity, economic development, profitability, cost efficiency and liquidity. The results of this review determine whether we invest in, turn around, continue with or exit businesses; ·      Cost efficiency - we have launched a transformation programme to achieve sustainable cost savings of between US$2.5bn and US$3.5bn over the next three years. Sustainable cost savings are intended to facilitate self-funded growth in key markets and investment in new products, processes and technology, and provide a buffer against regulatory and inflationary headwinds; and ·      Growth - we continue to position ourselves for growth. We are increasing our relevance in fast-growing markets and in wealth management, and are improving the collaboration between our international network of businesses, particularly between Commercial Banking and Global Banking and Markets.

The objectives and incentives of management are aligned to delivering the strategy. Progress is measured through our quarterly financial performance and will be reviewed at the annual Strategy Investor Day.

Top and emerging risks

All of our activities involve, to varying degrees, the measurement, evaluation, acceptance and management of risk or combinations of risks which we assess on a Group-wide basis. We classify certain risks as 'top' or 'emerging'. A 'top risk' is a current, visible risk with the potential to have a material effect on our financial results or our reputation. An 'emerging risk' is one with large unknown components which could have a material impact on our long-term strategy. Top and emerging risks are viewed as falling under the following four broad categories:

·     challenges to our business operations;

·     challenges to our governance and internal control systems;

·     macro-economic and geopolitical risk; and

·     macro-prudential and regulatory risks to our business model.

The top and emerging risks are summarised below:

Challenges to our business operations

·  Challenges to our operating model in an economic downturn (in developed countries) and rapid growth (in emerging markets)

·  Internet crime and fraud

Challenges to our governance and internal control systems

·  Level of change creating operational complexity

·  Information security risk

Macro-economic and geopolitical risk

·  Eurozone crisis, US deficit and elevated risk from potentially overheating economies in emerging markets

·  Increased geopolitical risk in the Middle East and North Africa

Macro-prudential and regulatory risks to our business model

·  Regulatory change impacting our business model and Group profitability

·  Regulatory and legislative requirements affecting conduct of business

A detailed account of HSBC's challenges and uncertainties is provided on pages 84 to 88. Further comments on expected risks and uncertainties are made throughout the Interim Management Report, particularly in the section on Risk.

Basis of preparation

The results of customer groups and global businesses are presented in accordance with the accounting policies used in the preparation of HSBC's consolidated financial statements. Our operations are closely integrated and, accordingly, the presentation of customer group and global business data includes internal allocations of certain items of income and expense. These allocations include the costs of certain support services and Group Management Office ('GMO') functions, to the extent that these can be meaningfully attributed to operational business lines. While such allocations have been made on a systematic and consistent basis, they necessarily involve a degree of subjectivity.

Where relevant, income and expense amounts presented include the results of inter-segment funding as well as inter-company and inter-business line transactions. All such transactions are undertaken on arm's length terms.

Financial summary

Reconciliation of reported and underlying profit before tax .........................................................	10
Consolidated income statement ............................	13
Group performance by income and expense item .	15
Net interest income ...........................................	15
Net fee income ..................................................	16
Net trading income ...........................................	17
Net income from financial instruments designated at fair value ..................................................	18
Gains less losses from financial investments ......	19
Net earned insurance premiums .......................	19

Other operating income ...................................	20
Net insurance claims incurred and movement in liabilities to policyholders .............................	21
Loan impairment charges and other credit risk provisions .....................................................	21
Operating expenses ..........................................	23
Share of profit in associates and joint ventures .	24
Tax expense ......................................................	24
Consolidated balance sheet ...................................	25
Movement in the first half of 2011 ....................	26
Economic profit ..................................................	28

Reconciliation of reported and underlying profit before tax

In addition to results reported on an IFRSs basis, we measure our performance internally on a like-for-like basis by eliminating the effects of foreign currency translation differences, acquisitions and disposals of subsidiaries and businesses, and fair value movements on own debt attributable to credit spread where the net result of such movements will be zero upon maturity of the debt; all of which distort period-on-period comparisons. We refer to this as our underlying performance.

Reported results include the effects of the above items. They are excluded when monitoring progress against operating plans and past results because management believes that the underlying basis more accurately reflects operating performance.

Constant currency

Constant currency comparatives for the half-years to 30 June 2010 and 31 December 2010, used in the 2011 commentaries, are computed by retranslating into US dollars for non-US dollar branches, subsidiaries, joint ventures and associates:

·  the income statements for the half-years to 30 June 2010 and 31 December 2010 at the average rates of exchange for the half-year to 30 June 2011; and

·  the balance sheets at 30 June 2010 and 31 December 2010 at the rates of exchange ruling at 30 June 2011.

No adjustment has been made to the exchange rates used to translate foreign currency-denominated assets and liabilities into the functional currencies of any HSBC branches, subsidiaries, joint ventures or associates.

When reference is made to 'constant currency' in tables or commentaries, comparative data reported in the functional currencies of HSBC's operations have been translated at the appropriate exchange rates applied in the current period on the basis described above.

Underlying performance

The tables below compare our underlying performance for the half-year to 30 June 2011 with the half-years to 30 June 2010 and 31 December 2010. Equivalent tables are provided for each of HSBC's customer groups, global businesses and geographical segments on www.hsbc.com and in the Form 6-K filed with the SEC.

The foreign currency translation differences reflect the relative weakening of the US dollar against most major currencies.

The following acquisitions and disposals were adjusted for in arriving at the underlying comparison:

·     the gain of US$62m on reclassification of Bao Viet Holdings ('Bao Viet') from an available-for-sale asset to an associate in January 2010;

·     the gain of US$66m on sale of our stake in Wells Fargo HSBC Trade Bank in March 2010;

·     the gain of US$107m on disposal of HSBC Insurance Brokers Limited in April 2010;

·     the dilution gains which arose on our holding in Ping An Insurance (Group) Company of China, Limited ('Ping An') following the issue of share capital to third parties in both May 2010 and June 2011 of US$188m and US$181m, respectively;

·     the loss on the sale of our investment in British Arab Commercial Bank plc in 2010;

·     the gain of US$74m on the deconsolidation of private equity funds following the management buy-out of Headland Capital Partners Ltd (formerly known as HSBC Private Equity (Asia) Ltd) in November 2010;

·     the operating results of Eversholt Rail Group for the half year to 30 June 2010 and the gain on the sale of US$255m in December 2010.

Reconciliation of reported and underlying profit before tax

	Half-year to 30 June 2011 ('1H11') compared with half-year to 30 June 2010 ('1H10')
HSBC	1H10            as   reported       US$m	1H10         adjust-           ments9           US$m			Currency translation10        US$m		1H10    at 1H11 exchange         rates11       US$m	1H11                as       reported          US$m			1H11       adjust-        ments9        US$m		1H11      under-        lying       US$m		Re- ported change12        %		Under-   lying change12        %
Net interest income .........	19,757		17		698		20,472		20,235		-		20,235		2		(1)
Net fee income .	8,518		(50)		288		8,756		8,807		-		8,807		3		1
Changes in fair value13...........	1,074		(1,074)		-		-		(143)		143		-
Other income14	6,202		(404)		254		6,052		6,795		(180)		6,615		10		9
Net operating income15......	35,551		(1,511)		1,240		35,280		35,694		(37)		35,657		-		1
Loan impairment charges and other credit risk provisions ......................	(7,523)		-		(176)		(7,699)		(5,266)		-		(5,266)		30		32
Net operating income ........	28,028		(1,511)		1,064		27,581		30,428		(37)		30,391		9		10
Operating expenses .......	(18,111)		148		(737)		(18,700)		(20,510)		-		(20,510)		(13)		(10)
Operating profit ...........	9,917		(1,363)		327		8,881		9,918		(37)		9,881		-		11
Share of profit in associates and joint ventures	1,187		-		41		1,228		1,556		-		1,556		31		27
Profit before tax ...............	11,104		(1,363)		368		10,109		11,474		(37)		11,437		3		13
By geographical region
Europe .............	3,521		(594)		140		3,067		2,147		71		2,218		(39)		(28)
Hong Kong .......	2,877		(56)		(3)		2,818		3,081		-		3,081		7		9
Rest of Asia-Pacific ..........	2,985		(188)		151		2,948		3,742		(178)		3,564		25		21
Middle East and North Africa .	346		47		(5)		388		747		4		751		116		94
North America .	492		(572)		29		(51)		606		66		672		23
Latin America ..	883		-		56		939		1,151		-		1,151		30		23
Profit before tax ......................	11,104		(1,363)		368		10,109		11,474		(37)		11,437		3		13
By customer group and global business
Retail Banking and Wealth Management16......................	1,352		(3)		85		1,434		3,126		-		3,126		131		118
Commercial Banking ........	3,204		(116)		99		3,187		4,189		-		4,189		31		31
Global Banking and Markets16	5,452		80		183		5,715		4,811		-		4,811		(12)		(16)
Global Private Banking ........	556		-		5		561		552		-		552		(1)		(2)
Other ...............	540		(1,324)		(4)		(788)		(1,204)		(37)		(1,241)				(57)
Profit before tax ......................	11,104		(1,363)		368		10,109		11,474		(37)		11,437		3		13

Reconciliation of reported and underlying profit before tax (continued)

	Half-year to 30 June 2011 ('1H11') compared with half-year to 31 December 2010 ('2H10')
HSBC	2H10             as     reported       US$m	2H10          adjust-           ments9           US$m			Currency   translation10         US$m		2H10     at 1H11    exchange          rates17       US$m	1H11                as        reported          US$m			1H11        adjust-         ments9        US$m		1H11       under-        lying       US$m		Re-   ported change12         %		Under-     lying change12         %
Net interest income .........	19,684		1		424		20,109		20,235		-		20,235		3		1
Net fee income .	8,837		-		195		9,032		8,807		-		8,807		-		(2)
Changes in fair value13 ..........	(1,137)		1,137		-		-		(143)		143		-		87		-
Other income14	5,312		(334)		123		5,101		6,795		(180)		6,615		28		30
Net operating income15........	32,696		804		742		34,242		35,694		(37)		35,657		9		4
Loan impairment charges and other credit risk provisions ......................	(6,516)		-		(116)		(6,632)		(5,266)		-		(5,266)		19		21
Net operating income .........	26,180		804		626		27,610		30,428		(37)		30,391		16		10
Operating expenses .......	(19,577)		-		(471)		(20,048)		(20,510)		-		(20,510)		(5)		(2)
Operating profit ......................	6,603		804		155		7,562		9,918		(37)		9,881		50		31
Share of profit in associates and joint ventures	1,330		(1)		27		1,356		1,556		-		1,556		17		15
Profit before tax ......................	7,933		803		182		8,918		11,474		(37)		11,437		45		28
By geographical region
Europe .............	781		518		52		1,351		2,147		71		2,218		175		64
Hong Kong .......	2,815		(74)		(5)		2,736		3,081		-		3,081		9		13
Rest of Asia-Pacific ..........	2,917		1		83		3,001		3,742		(178)		3,564		28		19
Middle East and North Africa .	546		(5)		(4)		537		747		4		751		37		40
North America .	(38)		363		19		344		606		66		672				95
Latin America ..	912		-		37		949		1,151		-		1,151		26		21
Profit before tax ......................	7,933		803		182		8,918		11,474		(37)		11,437		45		28
By customer group and global business
Retail Banking and Wealth Management16......................	2,487		-		51		2,538		3,126		-		3,126		26		23
Commercial Banking ........	2,886		(3)		54		2,937		4,189		-		4,189		45		43
Global Banking and Markets16 ......................	3,763		(331)		65		3,497		4,811		-		4,811		28		38
Global Private Banking ........	498		-		3		501		552		-		552		11		10
Other ...............	(1,701)		1,137		9		(555)		(1,204)		(37)		(1,241)		29		(124)
Profit before tax ......................	7,933		803		182		8,918		11,474		(37)		11,437		45		28

For footnotes, see page 81.

 

END

 

 

IR URURRABAWAAR