Interim Report - 3 of 28

RNS Number : 1850P

HSBC Holdings PLC

15 August 2014

 



Value creation and long-term sustainability

Through our principal activities - making payments, holding savings, providing finance and managing risks - we play a central role in society and in the economic system. Our target is to build and maintain a business which is sustainable in the long term.

How we create value

Banks play a crucial role in the economic and social system, creating value for many parties in different ways. We provide a facility for customers to securely and conveniently deposit their savings. We allow funds to flow from savers and investors to borrowers, either directly or through the capital markets. The borrowers then use these loans or other forms of credit to buy goods or invest in businesses. By these means, we help the economy to convert savings which may be individually short-term into financing which is, in aggregate, longer term. We bring together investors and people looking for investment funding and we develop new financial products. We also facilitate personal and commercial transactions by acting as payment agent both within countries and internationally. Through these activities, we take on risks which we then manage and reflect in our prices.

Our direct lending includes residential and commercial mortgages and overdrafts, and term loan facilities. We finance importers and exporters engaged in international trade and provide advances to companies secured on amounts owed to them by their customers.

We also offer additional financial products and services including broking, asset management, financial advisory services, life insurance, corporate finance, securities services and alternative investments. We make markets in financial assets so that investors have confidence in efficient pricing and the availability of buyers and sellers. We provide these products for clients ranging from governments to large and mid-market corporates, small and medium-sized enterprises, high net worth individuals and retail customers. We help customers raise financing from external investors in debt and equity capital markets. We create liquidity and price transparency in these securities allowing investors to buy and sell them on the secondary market. We exchange national currencies, helping international trade.

Value creation

Our main products and services are described in more detail on page 79 of the Annual Report and Accounts 2013.

Our operating income is primarily derived from:

·  net interest income - interest income we earn on customer loans and advances and on our surplus funds, less interest expense we pay on interest-bearing customer accounts and debt securities in issue;

·  net fee income- fee income we earn from the provision of financial services and products to customers less fees we pay; and

·  net trading income - income from client driven trading activities primarily conducted in Markets, including Foreign Exchange, Credit, Rates and Equities trading.

We offer products that help a wide range of customers to manage their risks and exposures through, for example, life insurance and pension products for retail customers and receivables finance or documentary trade instruments for companies. Corporate customers also ask us to help with managing the financial risks arising in their businesses by employing our expertise and market access.

An important way of managing risks arising from changes in asset and liability values and movements in rates is provided by derivative

products such as forwards, futures, swaps and options. In this connection, we are an active market-maker and derivative counterparty. Customers use derivatives to manage their risks, for example, by:

·     using forward foreign currency contracts to hedge their income from export sales or costs of imported materials;

·     using an inflation swap to hedge future inflation-linked liabilities, for example, for pension payments;

·     transforming variable payments of debt interest into fixed rate payments, or vice versa; or

·     providing investors with hedges against movements in markets or particular stocks.

We charge customers a margin, representing the difference between the price charged to the customer and the theoretical cost of executing an offsetting hedge in the market. We retain that margin, which represents a profit to the Group, at maturity of the transaction if the risk management of the position has been effective.

We then use derivatives along with other financial instruments to constrain the risks arising from customer business within risk limits. Normally, we will have customers both buying and selling relevant instruments so our focus is then on managing any residual risks through transactions with other dealers or professional counterparties. Where we do not fully hedge the residual risks we may gain or lose money as market movements affect the net value of the portfolio.

Stress tests and other risk management techniques are also used to ensure that potential losses remain within our risk appetite under a wide range of potential market scenarios.

In addition, we manage risks within HSBC, including those which arise from the business we do with customers.

Long-term sustainability

At HSBC, we understand that the success of our business is closely connected to the economic, environmental and social landscape in which we operate. For us, long-term corporate sustainability means achieving a sustainable return on equity and profit growth so that we can continue to reward shareholders and employees, build long-lasting relationships with customers and suppliers, pay taxes and duties in the countries in which we operate, and invest in communities for future growth. The way we do business is as important as what we do: our
responsibilities to our customers, employees and shareholders as well as to the countries and communities in which we operate go far beyond simply being profitable.

Continuing financial success depends, in part, on our ability to identify and address environmental, social and ethical developments which present risks or opportunities for the business. It also depends on the consistent implementation of the highest standards everywhere we operate to detect, deter and protect against financial crime. Our response to these factors shapes our reputation, drives employee engagement and affects the riskiness of the business, and can help reduce costs and secure new revenue streams.

Our international network and the long-established position of many of our businesses in HSBC's home and priority growth markets, when combined with our wide-ranging portfolio of products and services, differentiate HSBC from our competitors and give our business and operating models an inherent resilience. This has enabled the Group to remain profitable and grow through the most turbulent of times for our industry, and we are confident that the models will continue to stand us in good stead in the future and will underpin the achievement of our strategic priorities.

Our strategy

Our strategy is designed to ensure we have a sustainable business for the long term.

Long-term trends

Our strategy is aligned to two long-term trends.

·     The world economy is becoming ever more connected, with growth in world trade and cross-border capital flows continuing to outstrip growth in average gross domestic product. Over the next decade we expect 35 markets to generate 90% of world trade growth with a similar degree of concentration in cross-border capital flows.

·     Of the world's top 30 economies, we expect those of Asia, Latin America, the Middle East and Africa to have increased by around fourfold in size by 2050, benefiting from demographics and urbanisation. By this time they will be larger than those of Europe and North America combined. By 2050, we expect 18 of the 30 largest economies will be from Asia, Latin America or the Middle East and Africa.

Competitive advantages

What matters in this environment are:

·     having an international network and global product capabilities to capture international trade and movements in capital; and

·     being able to take advantage of organic investment opportunities in the most attractive growth markets and maintaining the capacity to invest.

HSBC's competitive advantages come from:

·     our meaningful presence in and long-term commitment to our key strategic markets;

·     our strong ability to add to our capital base while also providing competitive rewards to our staff and good returns to our shareholders;

·     our stable funding base, with about US$1.4 trillion of customer accounts of which 74% has been advanced to customers;

·     our business network, which covers over 90% of global trade and capital flows; and

·     our local balance sheet strength and trading capabilities in the most relevant financial hubs.

A two-part strategy

Based on these long-term trends and our competitive advantages, we have developed a two-part strategy:

·     A network of businesses connecting the world. HSBC's network spans the largest and fastest-growing international trade corridors, putting us in a strong position to capture international trade and capital flows. The range of services available through our Commercial Banking and Global Banking and Markets businesses can help clients grow from small enterprises into large multinationals.

·     Wealth management and retail with local scale. We will capture opportunities arising from social mobility and wealth creation in our priority growth markets through our Premier proposition and Global Private Banking business. We will invest in full-scale retail banking only in markets where we can achieve profitable scale, namely our home markets of the UK and Hong Kong.

Our strategic priorities

Our strategic priorities are designed to ensure we have a sustainable business for the long term.

Grow the business and dividends

Profit underpins long-term business sustainability and growing our profit is an integral part of our strategy. The conditions for creating value and generating profits are reflected in our business and operating models, which determine how our global businesses, geographical regions and functions interact. We continue to invest in products and geographies that help us capitalise on our position as a leading international bank. Delivering organic growth will support a progressive dividend.

Implement Global Standards

As a global bank we need Global Standards - consistent operating principles that are fundamental to the way we do business and which help us to detect, deter and protect against financial crime. Implementing Global Standards affects how we govern the Group, the nature of our core business and the performance, recognition and behaviours of all our people in managing high quality customer relationships. It starts with embedding our HSBC Values in everything we do. Over the long term, implementing Global Standards will create a competitive advantage and enhance the quality of our earnings.

Streamline processes and procedures

Society's expectations of the financial services industry are evolving and becoming more demanding. At the same time, digital technologies are making it easier for new entrants to join the industry and markets are becoming increasingly competitive. In this environment, it is essential that we focus relentlessly on improving efficiency, ensuring that all parts of the Group streamline their processes and procedures and, as a consequence, reduce their costs. At the same time we recognise and respect our wider obligations to the community, including human rights, and the environment. Streamlining processes and procedures will support our investment in growth and Global Standards.

Business and operating models

Our businesses are organised to serve a cohesive portfolio of markets, as tabulated below. Our comprehensive range of banking and related financial services is provided by operating subsidiaries and associates. Services are primarily delivered by domestic banks, typically with local deposit bases.

Business model

Our business model is based on an international network connecting faster-growing and developed markets.

The UK and Hong Kong are our home markets, and a further 19 countries form our priority growth markets (see table below). These 21 markets accounted for over 90% of our profit before tax in the first half of 2014, and are the primary focus of
capital deployment. Network markets are markets with strong international relevance which serve to complement our international spread, operating mainly through Commercial Banking and Global Banking and Markets. Our combination of home, priority growth and network markets covers around 85-90% of all international trade and financial flows.

The final category, small markets, includes those where our operations are of sufficient scale to operate profitably, or markets where we maintain representative offices.

Our legal entities are regulated by their local regulators and on a Group-wide basis we are regulated from the UK by the Prudential Regulation Authority ('PRA') for prudential matters (safety and soundness) and by the Financial Conduct Authority ('FCA') for conduct (consumer and market protection).

HSBC's market structure

Operating model

Our operating model is based on a matrix management structure comprising global businesses, geographical regions and global functions. The matrix is overlaid on a legal entity structure headed by HSBC Holdings plc.

Holding company

HSBC Holdings, the holding company of the Group, is the primary source of equity capital for its subsidiaries and provides non-equity capital to them when necessary.

Under authority delegated by the Board of HSBC Holdings, the Group Management Board ('GMB') is responsible for the management and day-
to-day running of the Group, within the risk appetite set by the Board. GMB works to ensure that there are sufficient cash resources to pay dividends to shareholders, interest to bondholders, expenses and taxes.

HSBC Holdings does not provide core funding to any banking subsidiary, nor is a lender of last resort, and does not carry out any banking business in its own right. Subsidiaries operate as separately capitalised entities implementing the Group strategy.

Matrix management structure

The following table lists our four global businesses, five geographical regions and 11 global functions, and summarises their responsibilities under HSBC's matrix structure.

Matrix management structure

For footnotes, see page 96.

Global businesses

Our four global businesses are Retail Banking and Wealth Management ('RBWM'), Commercial Banking ('CMB'), Global Banking and Markets ('GB&M') and Global Private Banking ('GPB'). They are responsible for developing, implementing and managing their business propositions consistently across the Group, focusing on profitability and efficiency. They set their strategies within the parameters of the Group strategy in liaison with the geographical regions, are responsible for issuing planning guidance regarding their businesses, are accountable for their profit and loss performance, and manage their headcount.

The main business activities of our global business are summarised below, and their products and services on page 79 of the Annual Report and Accounts 2013.

Main business activities by global business and reported revenue¹³

For footnotes, see page 96.

Investment criteria

Our investment criteria are governed by six filters. The first two filters - international connectivity and economic development - determine whether the business is strategically relevant. The next three filters - profitability, efficiency and liquidity - determine whether the financial position of the business is attractive. The sixth filter - the risk of financial crime - governs our activities in high risk jurisdictions, and is applied to protect us by restricting the scope of our business where appropriate.

Decisions over where to invest additional resources have three components:

·     Strategic - we will only invest in businesses aligned to our strategy, mostly in our 21 home and priority growth markets and in target businesses and clients;

·     Financial - the investment must be value accretive for the Group, and must meet minimum returns, revenue and cost hurdles; and

·     Risk - the investment must be consistent with our risk appetite.

Using the six filters in decision-making

Global Standards

We have developed Global Standards shaped by the highest or most effective standards of financial crime compliance available in any jurisdiction where HSBC operates and are now in the process of deploying these globally on a consistent basis.

By definition, the impact of Global Standards is organisation-wide, and the principal means by which we drive consistently high standards is through universal application of our HSBC Values, strong systems of governance and the behaviours, performance and recognition of all our people in managing high quality customer relationships.

In line with our ambition to be recognised as the world's leading international bank, we aspire to set the industry standard for knowing our customers and detecting, deterring and protecting against financial crime. As international markets become more interconnected and complex and as threats to the global financial system grow, we are strengthening further the policies and practices which govern how we do business and with whom.

We greatly value our reputation. Our success over the years is due in no small part to our reputation for trustworthiness and integrity. In areas where we have fallen short in recent years - in the application of our standards and in our ability to identify and so prevent misuse and abuse of the financial system through our networks - we have moved immediately to strengthen our governance processes and have committed to adopt and enforce the highest or most effective financial crime compliance standards across HSBC.

We continue to reinforce the status and significance of compliance and adherence to our Global Standards by building strong internal controls, developing world class capabilities through communication, training and assurance programmes to make sure employees understand and can meet their responsibilities, and redesigning core elements of how we assess and reward senior executives.

We see the implementation of Global Standards as a source of competitive advantage. Global Standards allow us to:

·     strengthen our response to the ongoing threat of financial crime;

·     make consistent - and therefore simplify - the ways by which we monitor and enforce high standards at HSBC;

·     strengthen policies and processes that govern how we do business and with whom; and

·     ensure that we consistently apply our HSBC Values.

We expect our Global Standards to underpin our business practices now and in the future. Initially, we are concentrating on transforming how we detect, deter and protect against financial crime. We are implementing a more consistent, comprehensive approach to assessing financial crime risk in order to help protect our customers, our employees and the financial system as a whole.

Governance framework

Following Board approval of HSBC's global anti-money laundering ('AML') and sanctions policies in January 2014, the programme to implement Global Standards is transitioning from the design phase into deployment.

The global businesses and Financial Crime Compliance organisation, supported by HSBC Technology and Services, are formally accountable for delivering business procedures, controls and the associated operating environment to implement our new policies within each global business and jurisdiction.

To ensure that programme governance reflects this shift in accountability, we have revised the composition of the Global Standards Execution Committee to include the Chief Executive Officers of each global business, under the chairmanship of the Group Chief Risk Officer.

Correspondingly, and to promote closer integration with business as usual, a report on the implementation of Global Standards has now become a standing item at the Group's Risk Management Meeting. This replaces the Global Standards Steering Meeting (formerly a meeting of the GMB). The Financial System Vulnerabilities Committee and the Board continue to receive regular reports on the Global Standards programme.

The process of embedding Global Standards and the supporting controls and capabilities that allow the business to identify and mitigate financial crime risk has begun. The implementation programme is focused on the following four areas, as described on page 24 of the Annual Report and Accounts 2013:

·     data readiness;

·     customer due diligence;

·     financial crime compliance; and

·     financial intelligence.

Risk appetite

Over the longer term, the sustainable operation of financial crime risk controls as part of our everyday business is governed according to our global Financial Crime Risk Appetite Statement. The overarching approach and appetite to financial crime risk is that we will not tolerate operating without the appropriate systems and controls in place to prevent and detect financial crime and will not conduct business with individuals or entities we believe are engaged in illicit behaviour.

Enterprise-wide risk assessment

We have established an annual process for conducting enterprise-wide assessments of our risks and controls related to sanctions and AML compliance. The outcome of these assessments forms the basis for risk management planning, prioritisation and resource allocation.

The Monitor

Under the agreements entered into with the US Department of Justice ('DoJ'), the FCA (formerly the FSA) and the US Federal Reserve Board ('FRB') in 2012, including the five-year Deferred Prosecution Agreement ('US DPA'), it was agreed that an independent compliance monitor ('the Monitor') would be appointed to evaluate our progress in fully implementing our obligations and produce regular assessments of the effectiveness of our Compliance function.

Michael Cherkasky began his work as the Monitor in July 2013, charged with evaluating and reporting upon the effectiveness of the Group's internal controls, policies and procedures as they relate to ongoing compliance with applicable AML, sanctions, terrorist financing and proliferation financing obligations, over a five-year period.

The Monitor's work is proceeding as expected, consistent with the timelines and requirements set forth in the relevant agreements. HSBC is taking concerted action to remediate AML and sanctions compliance deficiencies and to implement Global Standards. We recognise we are only at the start of a long journey, being just over a year into our US DPA. We look forward to maintaining a strong, collaborative relationship with the Monitor and his team.

HSBC Values

Embedding HSBC Values in every decision and every interaction with customers and with each other
is a top priority for the Group and is shaping the way we do business.

The role of HSBC values in daily operating practice is fundamental to our culture, and is particularly important in the light of developments in regulatory policy, investor confidence and society's expectations of banks.

We require high standards of behaviour from all our employees. HSBC's Values of being dependable, open and connected form part of the performance assessment of every employee, including our most senior managers.

HSBC Values

Be dependable and do the right thing

·  stand firm for what is right, deliver on commitments, be resilient and trustworthy; and

·  take personal accountability, be decisive, use judgement and common sense, empower others.

Be open to different ideas and cultures

·  communicate openly, honestly and transparently, value challenge, learn from mistakes; and

·  listen, treat people fairly, be inclusive, value different perspectives.

Be connected with our customers, communities, regulators and each other

·  build connections, be externally focused, collaborate across boundaries; and

·  care about individuals and their progress, show respect, be supportive and responsive.

We continued to educate employees at all levels about our values, through induction and other learning programmes covering Group strategy, leadership and professional skills. Also, a number of employees have left the Group for breaching our values.

To achieve a values-led high performance culture, our leaders are being coached to listen, be open to other people's views and engage in honest and meaningful conversations. In 2014, we expect participation in our Values-led High Performance Workshop to extend to 20,000 employees.

We have continued to strengthen the alignment of employee compensation to our values and expected behaviours through the development of a malus and clawback policy and enhanced communication to employees and guidance to line management outlining how behaviours will affect remuneration. We are also developing a framework to more consistently apply consequence management across the Group for behaviours and outcomes that are not aligned with our values, business principles and regulation.

Risk

As a provider of banking and financial services, risk is at the core of our day-to-day activities.

All 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.

Our risk culture is fundamental to the delivery of the Group's strategic priorities. It may be characterised as conservative, control-based and collegiate. It is reinforced by our HSBC Values and our Global Standards, and forms the basis on which our risk appetite is established. Our risk management framework is employed at all levels of the organisation, and is instrumental in aligning the behaviour of individuals with the Group's attitude to assuming and managing risk and ensuring that our risk profile is aligned to our risk appetite. The main elements that underpin our risk culture are described on page 39 of the Annual Report and Accounts 2013.

The chart below provides a high level guide to how HSBC's business activities are reflected in our risk measures and in our balance sheet. The third-party assets and liabilities shown therein indicate the contribution of each global business to the Group's balance sheet. The regulatory RWAs illustrate the relative size of the risks each of them incur.

Exposure to risks arising from the business activities of global businesses

For footnote, see page 96.

Risk factors

Our businesses are exposed to a broad range of risks that could potentially affect the results of our operations or financial condition. These risk
factors are summarised on page 135 of the Annual Report and Accounts 2013. They inform the ongoing assessment of our top and emerging risks, which may result in our risk appetite being revised.

Top and emerging risks

Identifying and monitoring top and emerging risks are integral to our approach to risk management. We define a 'top risk' as being a current, emerged risk which has arisen across any of our risk categories, global businesses or regions and has the potential to have a material impact on our financial results or our reputation and the sustainability of our long-term business model, and which may form and crystallise within a one-year horizon. We consider an 'emerging risk' to be one with potentially significant but uncertain outcomes which may form and crystallise beyond a one-year horizon, in the event of which it could have a material effect on our ability to achieve our long‑term strategy.

Our top and emerging risk framework enables us to identify and manage current and forward-looking risks to ensure our risk appetite remains appropriate.

Top and emerging risks fall under the following three categories:

·     macroeconomic and geopolitical risk;

·     macro-prudential, regulatory and legal risks to our business model; and

·     risks related to our business operations, governance and internal control systems.

During the first half of 2014, senior management paid particular attention to a range of top and emerging risks. Our current ones are summarised below.

Top and emerging risks - /     

Macroeconomic and geopolitical risk

E    Emerging markets slowdown

E    Increased geopolitical risk

Macro-prudential, regulatory and legal risks to our business model

T    Regulatory developments affecting our business model and Group profitability

T    Regulatory investigations, fines, sanctions, commitments and consent orders and requirements relating to conduct of business and financial crime negatively affecting our results and brand

T    Dispute risk

Risks related to our business operations, governance and internal control systems

T    Heightened execution risk

T    People risk

T    Stress test impact risk

T    Social media risk

T    Internet crime and fraud

T    Information security risk

T    Data management

T    Model risk

We made a number of changes to our top and emerging risks in the first half of 2014 to reflect our revised assessment of their effect on HSBC. Stress test impact risk was identified as a top risk because of the increase in volume and granularity of regulatory stress test exercises and because public disclosure of the results of the exercises could have unexpected consequences for business and our reputation. HSBC is subject to a number of major regulatory stress tests during 2014, as described on page 105. Social media risk was also assessed as a top risk due to the speed at which speculation about an institution or customer complaints, either specific to an institution or more generally in relation to a particular product, can spread through the use of social media channels. Whilst people risk is inherent within a number of the Top and Emerging Risks, it has now been disclosed as a standalone risk, as the risks in this area continue to heighten.

When the top and emerging risks were assessed as having the potential to result in our risk appetite being exceeded, we took steps to mitigate them, including reducing our exposure to areas of stress. Significant senior management attention was given to tracking and monitoring our compliance with the requirements of the US DPA and improving our policies, processes and controls to minimise the risk of a breach.

A detailed account of these risks is provided on page 100. Further comments on risks and uncertainties are made throughout the Annual Report and Accounts 2013, particularly in the section on Risk, pages 134 to 297.

Risk appetite

The Group's Risk Appetite Statement ('RAS') describes the types and quantum of risks that we are willing to accept in achieving our medium and long-term strategic objectives. It is approved by the Board on the advice of the Group Risk Committee.

The RAS is a key component of our risk management framework, guides the annual planning process by defining the desired forward-looking risk profile of the Group in achieving our strategic objectives, and plays an important role in our six filters process. Our risk appetite may be revised in response to our assessment of the top and emerging risks we have identified.

Global businesses and geographical regions are required to align their risk appetite statements to the Group's RAS.

Quantitative and qualitative metrics are measured and monitored in ten key categories: returns, capital, liquidity and funding, securitisations, cost of risk, intra-Group lending, strategic investments, risk categories like credit, market and operational risk, risk diversification and concentration, and financial crime compliance. Measurement against the metrics:

·     guides underlying business activity, ensuring it is aligned to risk appetite statements;

·     informs risk-adjusted remuneration;

·     enables the key underlying assumptions to be monitored and, where necessary, adjusted through subsequent business planning cycles; and

·     allows the business decisions needed to mitigate risk to be promptly identified.

Some of the core metrics that are measured, monitored and presented monthly to the Risk Management Meeting of the GMB are tabulated below:

Risk appetite metrics    

	2014 target21		At 30 June 2014
Common equity tier 1 ratio5 .......................	>10%		11.3%
Return on equity ..........	Trending upwards to 12% to 15% by 2016		10.7%
Return on RWAs5 ........	2.2% to 2.6%		2.1%
Cost efficiency ratio ....	Mid-50s		58.6%
Advances to customer accounts ratio3 .........	Below 90%		74.0%
Cost of risk (LICs) .......	Below 15% of operating income		5.3%

For footnotes, see page 96.

  With effect from 2014 our common equity tier 1 ratio target was changed from 9.5-10.5% to >10% and our return on RWA target from 2.1-2.7%, to 2.2-2.6%, both calculated on an estimated CRD IV end point basis. The changes were made to reflect our anticipated regulatory capital requirements under CRD IV (see page 185). Similarly, the timeframe around achieving our return on equity target was extended to the medium term while capital rules are finalised. Our cost efficiency ratio target was changed from 48-52% to the mid-50s as our focus moves from organisational efficiency to streamlining processes and procedures while investing for growth.

In addition to the revisions noted above, we strengthened the Group's RAS in 2014 by incorporating into it measures related to the core financial crime compliance principles on deterrence, detection and protection.

Financial summary

Use of non-GAAP financial measures ...........	19
Constant currency ................................................	19
Underlying performance ......................................	22
Consolidated income statement .....................	25
Group performance by income and expense item ....................................................................	28
Net interest income .............................................	28
Net fee income ....................................................	29
Net trading income ..............................................	30
Net income/(expense) from financial instruments designated at fair value .....................................	31
Gains less losses from financial investments .........	32
Net earned insurance premiums ............................	32
Other operating income .......................................	33
Net insurance claims incurred and movement in liabilities to policyholders .................................	34
Loan impairment charges and other credit risk provisions ........................................................	34
Operating expenses ..............................................	35
Share of profit in associates and joint ventures .....	36
Tax expense ........................................................	37
Consolidated balance sheet ............................	38
Movement from 31 December 2013 to 30 June 2014 ....................................................................	39
Reconciliation of RoRWA measures ..............	43

Use of non-GAAP financial measures

Our reported results are prepared in accordance with IFRSs as detailed in the Financial Statements starting on page 206. In measuring our performance, the financial measures that we use include those which have been derived from our reported results in order to eliminate factors which distort period-on‑period comparisons. These are considered non-GAAP financial measures. Non-GAAP financial measures that we use throughout our Financial Review are described below. Other non-GAAP financial measures are described and reconciled to the closest reported financial measure when used.

 
Constant currency

Constant currency adjusts the period-on-period effects of foreign currency translation differences on performance by comparing reported results for the half-year to 30 June 2014 with reported results for the half-years to 30 June 2013 and 31 December 2013 retranslated at average exchange rates for the half-year to 30 June 2014. Except where stated otherwise, commentaries are on a constant currency basis, as reconciled in the table overleaf.

The foreign currency translation differences reflect the period-on-period movements of the US dollar against most major currencies.

We exclude the translation differences because we consider the like-for-like basis of constant currency financial measures more appropriately reflects changes due to operating performance.

Constant currency

Constant currency comparatives for the half-years to 30 June 2013 and 31 December 2013 referred to in the commentaries below 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 2013 and 31 December 2013 at the average rates of exchange for the half-year to 30 June 2014; and

·  the balance sheets at 30 June 2013 and 31 December 2013 at the prevailing rates of exchange at 30 June 2014.

No adjustment has been made to the exchange rates used to translate assets and liabilities denominated in foreign currency 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.

Reconciliation of reported and constant currency profit before tax

	Half-year to 30 June 2014 ('1H14') compared with half-year to 30 June 2013 ('1H13')
	1H13 as       reported           US$m		Currency translation adjustment22          US$m		1H13        at 1H14     exchange             rates           US$m		1H14 as       reported           US$m		Reported        change23                 %		Constant     currency        change23                          %
HSBC
Net interest income ......................	17,819		(235)		17,584		17,405		(2)		(1)
Net fee income .............................	8,404		(44)		8,360		8,177		(3)		(2)
Net trading income .......................	6,362		142		6,504		3,275		(49)		(50)
Own credit spread24 ......................	(19)		4		(15)		(215)
Other income/(expense) from financial instruments designated at fair value ..............................	(1,178)		(78)		(1,256)		1,875
Net income/(expense) from financial instruments designated at fair value ..............................	(1,197)		(74)		(1,271)		1,660
Gains less losses from financial investments ..............................	1,856		16		1,872		946		(49)		(49)
Net earned insurance premiums ....	6,226		(17)		6,209		6,137		(1)		(1)
Other operating income (including dividend income) ......................	1,053		(30)		1,023		626		(41)		(39)
Total operating income ............	40,523		(242)		40,281		38,226		(6)		(5)
Net insurance claims incurred and movement in liabilities to policyholders ............................	(6,151)		(19)		(6,170)		(7,059)		(15)		(14)
Net operating income13 ............	34,372		(261)		34,111		31,167		(9)		(9)
Loan impairment charges and other credit risk provisions .......	(3,116)		106		(3,010)		(1,841)		41		39
Net operating income ...............	31,256		(155)		31,101		29,326		(6)		(6)
Operating expenses ......................	(18,399)		125		(18,274)		(18,266)		1		-
Operating profit ........................	12,857		(30)		12,827		11,060		(14)		(14)
Share of profit in associates and joint ventures .....................	1,214		22		1,236		1,280		5		4
Profit before tax ........................	14,071		(8)		14,063		12,340		(12)		(12)
By global business
Retail Banking and Wealth Management .............................	3,267		43		3,310		3,045		(7)		(8)
Commercial Banking ....................	4,133		16		4,149		4,771		15		15
Global Banking and Markets .........	5,723		(46)		5,677		5,033		(12)		(11)
Global Private Banking .................	108		11		119		364		237		206
Other ...........................................	840		(32)		808		(873)
Profit before tax ..........................	14,071		(8)		14,063		12,340		(12)		(12)
By geographical region
Europe .........................................	2,768		227		2,995		2,258		(18)		(25)
Asia11 ...........................................	9,262		(98)		9,164		7,894		(15)		(14)
Middle East and North Africa .......	909		(3)		906		989		9		9
North America .............................	666		(33)		633		825		24		30
Latin America ..............................	466		(101)		365		374		(20)		2
Profit before tax ..........................	14,071		(8)		14,063		12,340		(12)		(12)

	Half-year to 30 June 2014 ('1H14') compared with half-year to 31 December 2013 ('2H13')
	2H13 as         reported            US$m		Currency    translation     adjustment22           US$m		2H13         at 1H14       exchange              rates            US$m		1H14 as         reported            US$m		Reported          change23                  %		Constant       currency          change23                          %
HSBC
Net interest income ......................	17,720		66		17,786		17,405		(2)		(2)
Net fee income .............................	8,030		39		8,069		8,177		2		1
Net trading income .......................	2,328		(87)		2,241		3,275		41		46
Own credit spread24 ......................	(1,227)		(13)		(1,240)		(215)		82		83
Other expense from financial instruments designated at fair value ..............................	3,192		109		3,301		1,875		(41)		(43)
Net income from financial instruments designated at fair value ..................................	1,965		96		2,061		1,660		(16)		(19)
Gains less losses from financial investments ..............................	156		-		156		946
Net earned insurance premiums.....	5,714		12		5,726		6,137		7		7
Other operating income (including dividend income) ......................	1,901		6		1,907		626		(67)		(67)
Total operating income ................	37,814		132		37,946		38,226		1		1
Net insurance claims incurred and movement in liabilities to policyholders ............................	(7,541)		(23)		(7,564)		(7,059)		6		7
Net operating income13 ................	30,273		109		30,382		31,167		3		3
Loan impairment charges and other credit risk provisions .......	(2,733)		(3)		(2,736)		(1,841)		33		33
Net operating income ...................	27,540		106		27,646		29,326		6		6
Operating expenses ......................	(20,157)		(146)		(20,303)		(18,266)		9		10
Operating profit ...........................	7,383		(40)		7,343		11,060		50		51
Share of profit in associates and joint ventures .....................	1,111		-		1,111		1,280		15		15
Profit before tax ..........................	8,494		(40)		8,454		12,340		45		46
By global business
Retail Banking and Wealth Management .............................	3,382		20		3,402		3,045		(10)		(10)
Commercial Banking ....................	4,308		2		4,310		4,771		11		11
Global Banking and Markets .........	3,718		(45)		3,673		5,033		35		37
Global Private Banking .................	85		-		85		364
Other ...........................................	(2,999)		(17)		(3,016)		(873)		71		71
Profit before tax ..........................	8,494		(40)		8,454		12,340		45		46
By geographical region
Europe .........................................	(943)		61		(882)		2,258
Asia11 ...........................................	6,591		(10)		6,581		7,894		20		20
Middle East and North Africa .......	785		(3)		782		989		26		26
North America .............................	555		(24)		531		825		49		55
Latin America ..............................	1,506		(64)		1,442		374		(75)		(74)
Profit before tax ..........................	8,494		(40)		8,454		12,340		45		46

For footnotes, see page 96.

Additional information is available on the HSBC website www.hsbc.com under Investor Relations and may be found in the Form 6-K filed
with the Securities and Exchange Commission ('SEC') and available on www.sec.gov.

Underlying performance

Underlying performance:

·     adjusts for the period-on-period effects of foreign currency translation;

·     eliminates the fair value movements on our long-term debt attributable to credit spread ('own credit spread') where the net result of such movements will be zero upon maturity of the debt (see footnote 24 on page 96); and

·     adjusts for acquisitions, disposals and changes of ownership levels of subsidiaries, associates, joint ventures and businesses.

For acquisitions, disposals and changes of ownership levels of subsidiaries, associates, joint ventures and businesses, we eliminate the gain or loss on disposal or dilution and any associated gain or loss on reclassification or impairment recognised in the period incurred, and remove the operating profit or loss of the acquired, disposed of or diluted subsidiaries, associates, joint ventures and businesses from all the periods presented so we can view results on a like-for-like basis. Disposal of investments other than those included in the above definition do not lead to underlying adjustments.

We use underlying performance to explain period-on-period changes when the effect of fair value movements on own debt, acquisitions, disposals or dilution is significant because we consider that this basis more appropriately reflects operating performance.

The following disposals and changes to ownership levels affected the underlying performance:

Disposal gains/(losses) affecting underlying performance

	Date		Disposal         gain/(loss)
			US$m
Reclassification gain in respect of our holding in Industrial Bank Co., Limited following the issue of additional share capital to third parties25 ....................................................................................	Jan 2013		1,089
HSBC Insurance (Asia-Pacific) Holdings Limited's disposal of its shareholding in Bao Viet Holdings25 .....................................................................................................................................	Mar 2013		104
Household Insurance Group holding company's disposal of its insurance manufacturing business25 .	Mar 2013		(99)
HSBC Seguros, S.A. de C.V., Grupo Financiero HSBC's disposal of its property and Casualty Insurance business in Mexico25 ...................................................................................................	Apr 2013		20
HSBC Bank plc's disposal of its shareholding in HSBC (Hellas) Mutual Funds Management SA26 ...	Apr 2013		(7)
HSBC Insurance (Asia-Pacific) Holdings Limited disposal of its shareholding in Hana HSBC Life Insurance Company Limited25 ...................................................................................................	May 2013		28
HSBC Bank plc's disposal of HSBC Assurances IARD26 .................................................................	May 2013		(4)
The Hongkong and Shanghai Banking Corporation Limited's disposal of  HSBC Life (International) Limited's Taiwan branch operations26 .......................................................................................	June 2013		(36)
HSBC Markets (USA) Inc.'s disposal of its subsidiary, Rutland Plastic Technologies26 ...................	Aug 2013		17
HSBC Insurance (Singapore) Pte Ltd's disposal of its Employee Benefits Insurance business in Singapore26 ............................................................................................................................	Aug 2013		(8)
HSBC Investment Bank Holdings plc's disposal of its investment in associate FIP Colorado26 .......	Aug 2013		(5)
HSBC Investment Bank Holdings plc group's disposal of its investment in subsidiary, Viking Sea Tech25 .......................................................................................................................................	Aug 2013		54
HSBC Latin America Holdings UK Limited's disposal of HSBC Bank (Panama) S.A.26 ..................	Oct 2013		1,107
HSBC Latin America Holdings UK Limited's disposal of HSBC Bank (Peru) S.A.26 ........................	Nov 2013		(18)
HSBC Latin America Holdings UK Limited's disposal of HSBC Bank (Paraguay) S.A.26 .................	Nov 2013		(21)
Reclassification loss in respect of our holding in Yantai Bank Co., Limited following an increase in its registered share capital25 .......................................................................................................	Dec 2013		(38)
HSBC Latin America Holdings UK Limited's disposal of HSBC Bank (Colombia) S.A.25 ................	Feb 2014		18
Reclassification loss in respect of our holding in Vietnam Technological & Commercial Joint Stock Bank following the loss of significant influence25 .......................................................................	Jun 2014		(32)
HSBC Bank Middle East Limited's disposal of its banking business in Jordan25 ...............................	Jun 2014		-

For footnotes, see page 96.

The following table reconciles our reported revenue, loan impairment charges, operating expenses and profit before tax for the first half of 2014 and the two halves of 2013 to an underlying basis. Throughout this Interim Report, we reconcile other reported results to underlying results when doing so results in a more useful discussion of operating performance. Equivalent tables are provided for each of our global businesses and geographical segments in the Form 6-K filed with the SEC, which is available on www.hsbc.com.

Reconciliation of reported and underlying items

	Half-year to
	30 June              2014		30 June              2013		Change23		30 June              2014		31 December              2013		Change23
	US$m		US$m		%		US$m		US$m		%
Net interest income
Reported ...........................	17,405		17,819		(2)		17,405		17,720		(2)
Currency translation adjustment22 ...................			(235)						66
Acquisitions, disposals and dilutions .........................	(27)		(223)				(27)		(150)
Underlying ........................	17,378		17,361		-		17,378		17,636		(1)
Other operating income
Reported ...........................	538		946		(43)		538		1,686		(68)
Currency translation adjustment22 ...................			(28)						6
Acquisitions, disposals and dilutions .........................	14		(1,107)				14		(1,132)
Underlying ........................	552		(189)				552		560		(1)
Revenue13
Reported ...........................	31,167		34,372		(9)		31,167		30,273		3
Currency translation adjustment22 ...................			(265)						122
Own credit spread23 ...........	215		19				215		1,227
Acquisitions, disposals and dilutions .........................	(23)		(1,406)				(23)		(1,332)
Underlying ........................	31,359		32,720		(4)		31,359		30,290		4
Loan impairment charges and other credit risk provisions
Reported ...........................	(1,841)		(3,116)		41		(1,841)		(2,733)		33
Currency translation adjustment22 ...................			106						(3)
Acquisitions, disposals and dilutions .........................	2		44				2		17
Underlying ........................	(1,839)		(2,966)		38		(1,839)		(2,719)		32
Total operating expenses
Reported ...........................	(18,266)		(18,399)		1		(18,266)		(20,157)		9
Currency translation adjustment22 ...................			125						(146)
Acquisitions, disposals and dilutions .........................	26		315				26		146
Underlying ........................	(18,240)		(17,959)		(2)		(18,240)		(20,157)		10
Underlying cost efficiency ratio ...............................	58.2%		54.9%				58.2%		66.5%
Share of profit in associates and joint ventures
Reported ...........................	1,280		1,214		5		1,280		1,111		15
Currency translation adjustment22 ...................			22						-
Acquisitions, disposals and dilutions .........................	-		(14)				-		102
Underlying ........................	1,280		1,222		5		1,280		1,213		6
Profit before tax
Reported ...........................	12,340		14,071		(12)		12,340		8,494		45
Currency translation adjustment22 ...................			(12)						(27)
Own credit spread3 ............	215		19				215		1,227
Acquisitions, disposals and dilutions .........................	5		(1,061)				5		(1,067)
Underlying ........................	12,560		13,017		(4)		12,560		8,627		46

For footnotes, see page 96.

Underlying profit before tax

	Half-year to
	30 June              2014		30 June              2013		Change23		30 June              2014		31 December              2013		Change23
	US$m		US$m		%		US$m		US$m		%
By global business
Retail Banking and Wealth Management .............................	3,039		3,382		(10)		3,039		3,104		(2)
Commercial Banking ....................	4,758		4,098		16		4,758		3,831		24
Global Banking and Markets .........	5,024		5,662		(11)		5,024		3,307		52
Global Private Banking .................	364		119		206		364		84
Other ...........................................	(625)		(244)		(156)		(625)		(1,699)		63
Underlying profit before tax .........	12,560		13,017		(4)		12,560		8,627		46
By geographical region
Europe .........................................	2,417		3,011		(20)		2,417		109
Asia11 ...........................................	7,931		8,035		(1)		7,931		6,727		18
Middle East and North Africa .......	984		891		10		984		768		28
North America .............................	870		775		12		870		717		21
Latin America ..............................	358		305		17		358		306		17
Underlying profit before tax .........	12,560		13,017		(4)		12,560		8,627		46

For footnotes, see page 96.

 

END

 

 

IR USRSRSNAWAAR