Interim Report - 5 of 25

RNS Number : 4081J

HSBC Holdings PLC

10 August 2012

 



Global businesses

Summary ...............................................................	39
Basis of preparation ..............................................	39
Retail Banking and Wealth Management ...............	40
Commercial Banking .............................................	43
Global Banking and Markets ..................................	46
Global Private Banking ..........................................	49
Other ....................................................................	51
Analysis by global business .....................................	53
Disposals, held for sale and run-off portfolios ........	56

Summary

HSBC reviews operating activity on a number of bases, including by geographical region and by global business, as presented on page 57.

The commentaries below present global businesses followed by geographical regions. Performance is discussed in this order because certain strategic themes, business initiatives and trends affect more than one geographical region. All commentaries are on a constant currency basis (see page 13) unless stated otherwise.

Basis of preparation

The results of 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 global business data includes internal allocations of certain items of income and expense. These allocations include the costs of certain support services and global 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.

The expense of the 2011 UK bank levy is included in the Europe geographical region as HSBC regards the levy as a cost of being headquartered in the UK. For the purposes of the segmentation by global business, the cost of the levy is included in 'Other'.

The provision of US$700m relating to US anti-money laundering, BSA and OFAC investigations is included in the North America geographical region, and in 'Other' for the purposes of the segmentation by global business.

Profit/(loss) before tax

					Half-year to
	30 June 2012				30 June 2011				31 December 2011
	US$m		%		US$m		%		US$m		%
Retail Banking and Wealth Management .....................	6,410		50.3		3,126		27.3		1,144		11.0
Commercial Banking ...................................................	4,429		34.8		4,189		36.5		3,758		36.1
Global Banking and Markets ........................................	5,047		39.6		4,811		41.9		2,238		21.5
Global Private Banking ................................................	527		4.1		552		4.8		392		3.8
Other46 ........................................................................	(3,676)		(28.8)		(1,204)		(10.5)		2,866		27.6
	12,737		100.0		11,474		100.0		10,398		100.0

Total assets⁴⁷

	At 30 June 2012				At 30 June 2011				At 31 December 2011
	US$m		%		US$m		%		US$m		%
Retail Banking and Wealth Management .....................	526,069		19.8		557,952		20.7		540,548		21.2
Commercial Banking ...................................................	351,157		13.2		336,094		12.5		334,966		13.1
Global Banking and Markets ........................................	1,905,455		71.8		1,942,835		72.2		1,877,627		73.5
Global Private Banking ...............................................	119,271		4.5		122,888		4.6		119,839		4.7
Other ..........................................................................	179,703		6.8		189,912		7.0		180,126		7.0
Intra-HSBC items ........................................................	(429,321)		(16.1)		(458,694)		(17.0)		(497,527)		(19.5)
	2,652,334		100.0		2,690,987		100.0		2,555,579		100.0

Risk-weighted assets

	At 30 June 2012				At 30 June 2011				At 31 December 2011
	US$m		%		US$m		%		US$m		%
Total ...........................................................................	1,159.9				1,168.5				1,209.5
Retail Banking and Wealth Management .....................	298.7		25.7		365.0		31.2		351.2		29.0
Commercial Banking ...................................................	397.8		34.3		363.3		31.1		382.9		31.7
Global Banking and Markets ........................................	412.9		35.6		385.4		33.0		423.0		35.0
Global Private Banking ................................................	21.8		1.9		23.9		2.1		22.5		1.9
Other ...........................................................................	28.7		2.5		30.9		2.6		29.9		2.4

For footnotes, see page 100.

Retail Banking and Wealth Management

RBWM provides banking and wealth management services to individual customers across our principal geographical markets.
	Half-year to
	30 Jun		30 Jun		31 Dec
	2012		2011		2011
	US$m		US$m		US$m
Net interest income ......	10,774		12,086		12,015
Net fee income .............	3,760		4,212		4,014
Other income/(expense)	4,781		1,274		(68)
Net operating income48 ...................................	19,315		17,572		15,961
Impairment charges49 ....	(3,273)		(4,270)		(5,049)
Net operating income	16,042		13,302		10,912
Total operating expenses ...................................	(10,218)		(10,746)		(10,456)
Operating profit ........	5,824		2,556		456
Income from associates50 ...................................	586		570		688
Profit before tax .........	6,410		3,126		1,144
RoRWA40 .....................	3.9%		1.8%		0.6%
Revenue growth in faster-growing regions
Announced 14 disposals or closures and completed five as part of our strategy to deploy capital more effectively
Best Foreign Retail Bank in China (The Asian Banker)
Strategic direction RBWM's aim is to provide world class retail banking and wealth management services to our customers. We will provide retail banking services in markets where we already have scale or where scale can be built over time and we will implement standardised distribution and service models to ensure we can deliver them consistently and with a high level of quality. As wealth creation continues to grow in both developed and emerging markets, we will leverage our global propositions such as Premier and our bancassurance and asset management capabilities to deepen our existing customer relationships and the penetration of our wealth management services. We focus on three strategic imperatives: ·  developing world class wealth management for retail customers; ·  leveraging global expertise in retail banking; and ·  portfolio management to drive superior returns.
For footnotes, see page 100. The commentary is on a constant currency basis unless stated otherwise.

Review of performance

·     RBWM reported a profit before tax of US$6.4bn, compared with US$3.1bn in the first half of 2011 on both a reported and constant currency basis. This included gains resulting from a number of strategic transactions, including US$3.1bn following completion of the disposal of the US Card and Retail Services business and US$449m on completion of the sale of 138 of the 195 non-strategic branches we agreed to sell in the US, as well as gains from the disposal of our operations in Thailand (US$108m), the Private Client Services business in Canada (US$75m) and the general insurance business in Argentina (US$57m). These gains were partly offset by the loss of operating profits from the Card and Retail Services business after 1 May 2012.

·     On an underlying basis, profit before tax fell by US$313m, largely driven by additional charges related to the customer redress programmes in the UK (US$532m). Further, revenue in the first half of 2011 had benefited from a gain of US$177m (US$181m as reported) following the implementation of a refinement to the calculation of the PVIF asset. These were partly offset by improved profitability in the US run-off portfolios of US$412m, with lower loan impairment charges more than offsetting lower revenues.

RBWM - profit/(loss) before tax

	Half-year to
	30 Jun		30 Jun		31 Dec
	2012		2011		2011
	US$m		US$m		US$m
US Card and Retail Services .........................	768		982		1,079
US run-off portfolios .......	(961)		(1,363)		(3,109)
Gain on disposal of US branch network and cards business .........................	3,597		-		-
Rest of RBWM ................	3,006		3,507		3,174
	6,410		3,126		1,144

·     Excluding the results of the US Card and Retail Services, the US run-off portfolios and the gains on disposals in the US, the reported profit before tax for the Rest of RBWM declined by US$501m, with profit improvement in most countries being more than offset by a US$532m increase in customer redress charges in the UK, and the non-recurrence of PVIF gains and a pension credit.

·    

·     We continued to build revenues in faster-growing regions, with Hong Kong, Latin America, Rest of Asia-Pacific, Middle East and North Africa, all showing increases over the first half of 2011 on a constant currency basis.

·     Revenue increased by 7% in Latin America due to a change in the product mix of the lending book as we grew our balances of higher-yielding assets and managed down our exposure to non- strategic products, including vehicle finance and payroll loans in Brazil. Revenue also increased due to higher average lending balances in personal loans and credit cards in Argentina. In addition, insurance revenues grew due to strong sales of unit-linked pension products in Brazil and, in Argentina, from the gain on sale of the general insurance business. The revenue growth was partly offset by the loss on reclassification of certain businesses to held for sale and the non-recurrence of a gain on the sale and lease-back of branches in Mexico in the first half of 2011.

·     Revenue grew by 6% in Hong Kong reflecting wider deposit spreads, higher mortgage and personal lending balances, a nd higher insurance revenues due to strong sales and renewals of life insurance products. This was partly offset by narrower asset spreads in residential mortgages.

·     Revenue in Rest of Asia-Pacific increased by 8%, due to the gain on the sale of our operations in Thailand and higher net interest income, as a result of increased mortgage balances mainly in Singapore and Malaysia, driven by promotional campaigns, in addition to higher deposit volumes. This was partly offset by narrower lending spreads reflecting competitive pricing pressures in residential mortgage lending in a number of markets.

·     In Europe, revenue decreased by 7% despite strong deposit growth in the region and healthy mortgage lending growth in the UK, with wider lending spreads. Deposit spreads in the UK narrowed in the face of strong domestic competition.Insurance revenues also fell, mainly in France, reflecting an adverse movement in PVIF due to experience and assumption updates. In addition, life insurance sales also decreased resulting from increased competition from short-term bank products and the adverse economic environment. Our income from Insurance also declined as the gain of US$74m (US$78m as reported) following the implementation of a refinement to the calculation of the PVIF asset in the first half of 2011 did not recur.

·     Loan impairment charges and other credit risk provisions fell by 22% compared with the first half of 2011. This was mainly in North America, where average balances declined significantly as we continued to run-off the CML portfolio. We saw an improvement in two-months-and-over contractual delinquency on balances less than 180 days past due. Loan impairment charges were adversely affected by delays in expected cash flows from mortgage loans due, in part, to delays in foreclosure processing, though the effects were less pronounced than in the first half of 2011. Additionally, in the first half of 2012 we increased our loan impairment allowances having updated our assumptions regarding the timing of expected cash flows received from customers with loan modifications. Loan impairment charges also fell due to the sale of the Card and Retail Services portfolio.

·     In Europe, loan impairment charges improved as a result of lower delinquency rates in both the secured and unsecured lending portfolios, primarily in the UK.

·     These reductions were partly offset by worsening delinquency rates in Brazil, following strong balance sheet growth in previous periods which was driven by increased marketing and acquisitions, and strong consumer demand in buoyant economic conditions which subsequently weakened.

·     Operating expenses decreased by 1% to US$10.2bn, as we reduced headcount and costs through both our organisation effectiveness programmes and the transactions undertaken through our portfolio management activities.

·     We achieved sustainable cost savings of more than US$160m, primarily in Europe, Latin America and North America, through ongoing measures taken to improve our efficiency. The completion of disposals during the period also resulted in a lower operational cost base. In North America, litigation and marketing expenses also fell.

·     Lower costs were achieved despite the additional provisions of US$1.1bn which were raised in the first half of 2012 in respect of customer redress provisions in the UK, compared with a charge of US$576m (US$589m as reported) in the first half of 2011, as explained on page 28. Cost pressures also came from the non-recurrence of a credit of US$256m (US$264m as reported) in the first half of 2011 relating to defined benefit pension obligations

in the UK, and from wage inflation in faster-growing markets.

Strategic imperatives

Developing world class wealth management for retail customers

·     Wealth Management revenues fell by some US$0.1bn in the first half of 2012 compared with the same period in 2011, primarily due to a gain from the refinement to the calculation of the PVIF asset in the first half of 2011 which did not recur. We continued to grow our premium revenue from life insurance products, primarily in Hong Kong, Latin America and Rest of Asia-Pacific, and revenues from foreign exchange transactions also increased, supported by the successful deployment of our web-enabled foreign currency 'Get Rate' system across key markets in Europe and Asia towards the end of 2011. However, investment markets remained challenging, with muted demand for investment products, and we saw lower volumes of securities trading by customers.

·     We saw continued growth in our World Selection and Premier Investment Management services with net inflows amounting to around US$1.2bn in the first half of the year, resulting in FuM of US$16.8bn at 30 June 2012 across both of these portfolios.

·     Global Asset Management FuM increased by US$9bn compared with 31 December 2011. However, average FuM in the first half of 2012 decreased by US$12.3bn, compared with the first half of 2011, due to adverse movements in equity markets and muted investor sentiment, particularly in the latter part of 2011.

·     In Insurance, we entered into strategic partnerships in North America with Met Life and in the Middle East and North Africa with Zurich Life International, delivering an enhanced product offering for our customers and dedicated sales and marketing support for our relationship managers.

Leveraging global expertise in retail banking

·     In the UK, the mortgage business continued to grow. Our market share of new mortgage lending remained at 11%. We committed to lending at least £17bn (US$26bn) to UK mortgage customers in 2012, of which we had approved £10bn (US$15bn) by the end of June 2012. In Hong Kong, average mortgage balances increased, maintaining our position as market leaders.

·     We enhanced our digital banking capabilities and distributed these across our geographical regions. For example, in the UAE the HSBC website was launched in Arabic making us the first international bank with a bilingual digital presence in the Emirates. In Australia we launched an online share trading platform giving our customers mobile access at a competitive price.

·     Our business re-engineering programmes are enabling us to drive efficiency improvements and cost reductions across the business, and to improve and standardise business models, organisation structures and control frameworks.

Portfolio management to drive superior returns

·     During the first half of 2012 we made further progress towards our strategic priority of maximising returns from our portfolios, with 14 newly announced disposals or closures impacting 17 businesses, and five transactions closed. The sale of our retail operations in Thailand, our US Card and Retail Services business, the Private Client Services business in Canada and the general insurance business in Argentina were completed. The closure of a retail banking business in a non-priority market was completed in Europe, and sale transactions were announced in Latin America, as was the closure of the consumer finance business in Canada.

·     We are exiting the general insurance manufacturing business while focusing on life insurance manufacturing, where we have scale. We announced the sale of our general insurance businesses in Hong Kong, Singapore, Argentina and Mexico. The Argentina sale was completed in the first half of 2012 and the Asia and Mexico disposals are expected to be completed in the second half of the year.

·     In the US, we entered into a strategic relationship to outsource the management of our mortgage origination and servicing operations. The conversion of these operations is expected to be completed in the first quarter of 2013.

·     During the first half of 2012, we also announced a strategic acquisition in the UAE and completed the merger of our Omani operations, offering our new customers the benefit of a wider range of banking products and services.

·     We remained focused on managing the run-off of balances in our CML portfolio, with period-end lending balances declining by 8% from December 2011 to US$45.7bn with 44% attributable to the write-off of balances. We engaged an adviser to assist us in exploring options to accelerate the liquidation of this portfolio and identified certain loan pools that we intend to sell as market conditions permit.

Commercial Banking

CMB offers a full range of commercial financial services and tailored propositions to 3.6m customers ranging from sole proprietors to publicly quoted companies in more than 60 countries.
	Half-year to
	30 Jun		30 Jun		31 Dec
	2012		2011		2011
	US$m		US$m		US$m
Net interest income ......	5,144		4,814		5,117
Net fee income .............	2,224		2,131		2,160
Other income ................	885		735		654
Net operating income48 ...................................	8,253		7,680		7,931
Impairment charges49 ....	(924)		(642)		(1,096)
Net operating income	7,329		7,038		6,835
Total operating expenses ...................................	(3,736)		(3,465)		(3,756)
Operating profit ........	3,593		3,573		3,079
Income from associates50 ...................................	836		616		679
Profit before tax .........	4,429		4,189		3,758
RoRWA40 .....................	2.3%		2.4%		2.0%
Record half year profit before tax of US$4.4bn
14% growth in trade-related income
9% growth in customer accounts since June 2011, driven by Payments and Cash Management
Strategic direction CMB aims to be the banking partner of choice for international businesses by building on our rich heritage, international capabilities and relationships to enable connectivity and support trade and capital flows around the world thereby strengthening our leading position in international business and trade. We focus on four strategic imperatives: ·  focus on faster-growing markets while connecting revenue and investment flows with developed markets; ·  capture growth in international small and medium-sized enterprises; ·  enhance collaboration across all global businesses to provide our customers with access to the full range of the Group's services; and ·  drive efficiency gains through adopting a global operating model.
For footnotes, see page 100. The commentary is on a constant currency basis unless stated otherwise.

Review of performance

·     CMB reported a profit before tax of US$4.4bn, 6% higher than in the first half of 2011. On a constant currency basis, profit before tax increased by 8%.

·     On an underlying basis, excluding the gain of US$212m from the sale of non-strategic branches in the US and US$35m from the disposal of our general insurance business in Argentina, profit before tax rose by 3%. This reflected strong revenue growth across most products, particularly in faster-growing regions, and higher income from our associates in mainland China, partly offset by a rise in expenses reflecting the customer redress provisions in Europe, the non-recurrence of a credit relating to UK pension obligations in the first half of 2011 and a rise in loan impairment charges.

·     Revenue rose by 12%. Higher net interest income from lending activities reflected the strong demand for credit, particularly in 2011, in Hong Kong, Rest of Asia-Pacific, Latin America and Europe. Net interest income from deposits also rose as a result of higher spreads, coupled with growth in average customer account balances. This was partly attributable to our Payments & Cash Management business in Europe, North America and Rest of Asia-Pacific, which benefited from our focus on international customers and international connectivity.

·     We continued to benefit from strong revenue growth through our ongoing collaboration with GB&M, particularly from sales of GB&M financing and risk-management products to CMB customers, tailored as appropriate to meet their needs. Over half of this growth was generated from sales of foreign exchange products. Revenues from Global Trade and Receivables Finance also grew strongly, benefiting from export-led lending growth in Hong Kong and Rest of Asia-Pacific, as we continued to capitalise on our position as the world's leading trade finance bank (as reported in the Oliver Wyman Global Transaction Banking Survey 2011) supporting those businesses that trade internationally.

·     Loan impairment charges and other credit risk provisions increased by US$315m, driven by a rise in collective and individually assessed provisions in Latin America associated with the significant lending growth in Brazil in previous years, together with rising delinquency in business banking. Loan impairment charges also rose as a result of a small number of individually assessed provisions in Rest of Asia-Pacific and in Europe, across a range of sectors, reflecting the challenging economic conditions in the region.

·     Operating expenses increased by 13%, largely due to a credit of US$206m (US$212m as reported) in the first half of 2011 relating to defined benefit pension obligations in the UK, which did not recur, coupled with a customer redress provision relating to interest rate protection products in Europe (see page 28). Inflationary pressures in Rest of Asia-Pacific and Latin America, together with an increase in costs to support business expansion in key markets such as new branch openings in mainland China, also led to a rise in operating expenses.

·     Income from associates grew by 32% as our associates in mainland China benefited from a strong rise in lending, reflecting the continued economic growth and wider spreads following interest rate rises during 2011.

Strategic imperatives

Focus on faster-growing markets while connecting with developed markets

·     Our operations in the faster-growing regions of Hong Kong, Rest of Asia-Pacific, Latin America and Middle East and North Africa accounted for half of our lending balances and revenue and two-thirds of our profit before tax. However, while we are extending our strategic presence in faster-growing regions, we continue to invest in developed markets, leveraging our ability to connect revenue and investment flows between the two.We launched the first renminbi commercial savings account in Canada, enabling CMB clients to hold funds locally in the Chinese currency. In addition, as part of our 'China Out' strategy within Global Trade and Receivables Finance, we have established dedicated desks with Mandarin speakers in key trading markets outside mainland China, to facilitate Chinese businesses expanding overseas.

·     Global Trade and Receivables Finance revenues increased by 14% as we continued to capitalise on our position as the world's leading trade finance bank. Global Trade and Receivables revenue growth from our faster-growing regions was 5% higher than from our developed regions. Our total Global Trade and Receivables revenues grew by more than twice the rate of global trade growth. Our Commodity and Structured Trade Finance expansion is gathering momentum with more than 55 staff now working in six offices in Europe, Hong Kong, Rest of Asia-Pacific and Latin America. We will extend the offering to additional markets later this year and into 2013. Together with GB&M, we remain on target to deliver the Group's target of doubling trade revenues to US$5bn in the medium term.

·     Our Payments and Cash Management business is fundamental to our client relationships and, in the first half of 2012, grew more quickly than global payments volumes with revenue increasing by 19% on the first half of 2011. This was driven by strong growth in average liability balances, reflecting in part the implementation of our Global Liquidity Solutions platform, together with increased focus on cross-selling payments and cash management products to target customers.

Capture growth in international SMEs

·     Our international SME customer base generates significantly higher revenues than our domestic customers and accounted for more than a third of our Business Banking revenues in the first half of 2012. During the period, we continued to reposition Business Banking to focus on attracting the growing number of internationally aspirant SMEs and serving them better.

·     We have a strong Business Banking franchise with over 3.4 million customers worldwide and are therefore well positioned to support customers who begin to trade internationally. In the first half of 2012, we launched a £4bn (US$6bn) International SME fund in the UK and our third International Trade SME fund in the UAE of US$272m to support SMEs in these countries who trade, or aspire to trade, internationally. We had approved lending of more than £2.5bn (US$4bn) in the UK and US$68m in the UAE against these commitments at the end of June 2012. Our Business Banking customer base is also a significant source of funding, generating more than 50% of total CMB deposits.

·     To service this growing customer base, in 2011 we invested in International Commercial Managers in the UK who focus exclusively on supporting international SMEs. We deployed over 150 of these managers and, following the model's success, rolled it out to two other priority countries during the first half of 2012, with further countries to follow in the latter part of the year and into 2013.

Strong partnership with global businesses

·     In the first half of 2012, CMB identified additional revenue opportunities totalling US$1bn from stronger and more strategic collaboration with the other global businesses. This, together with the previously announced target of US$1bn takes the potential revenue upside from greater collaboration between CMB and the other global businesses to US$2bn in the short to medium term. To achieve this, we are focusing on increasing sales of insurance products to CMB customers, particularly trade credit and business protection insurance products. Our trade credit proposition will be rolled out to the UK in the third quarter of 2012, with Brazil and Hong Kong to follow later this year and further countries in 2013. We also launched the Global Priority Clients initiative with GPB to jointly service the Group's largest ultra-high net worth clients with corporate and personal needs. Each client will have a single dedicated point of contact accountable for overall client management activities across the Group.

·     Our customers also continued to benefit from our partnership with GB&M. We have now implemented consistent management structures at regional and country level as part of our enhanced collaboration initiative to ensure our clients have access to relevant GB&M products, where this helps to meet their financial needs. Dedicated resources in Global Banking have been allocated to support CMB clients in Hong Kong and Rest of Asia-Pacific. In addition, we have developed an e-FX proposition for CMB clients. Revenues from the sale of GB&M products to CMB customers, which are shared between the two global businesses, increased by 16% on the first half of 2011, driven by sales of foreign exchange products in faster-growing regions.

Drive efficiency gains through adopting a global operating model

·     Our reported cost efficiency ratio was in line with the first half of 2011 as we continued to focus on operational improvements, streamlining our processes and simplifying our operations to deliver sustainable savings.

·     To date, we have rolled out our globally consistent operating model in 20 markets, delivering a consistent management structure across countries and optimising sales capacity against global benchmarks. The implementation of our standard model to increase relationship manager capacity has yielded efficiency gains. In addition, we are now tracking customer experience consistently across our priority markets to ensure we are meeting the needs of our clients.

·     Process re-engineering, particularly in the credit function, is key to successful implementation of our global model to increase the capacity of our relationship managers. We have made significant progress in accelerating credit renewals for higher quality customers, freeing up relationship manager time to support our customers. Pilots are underway in three countries, with plans to implement these improvements in all priority markets by the end of the year.

·     We have also continued to deliver efficiencies by centralising support functions, leveraging scale and expertise in our global service centres, and we have made significant progress in migrating the processing of certain trade activities to these centres. We now have over 600 staff located within the Service Delivery function processing trade-related transactions and almost all of our markets have fully migrated to this model.

Global Banking and Markets

GB&M provides tailored financial solutions to major government, corporate and institutional clients worldwide.
	Half-year to
	30 Jun		30 Jun		31 Dec
	2012		2011		2011
	US$m		US$m		US$m
Net interest income ......	3,625		3,603		3,660
Net fee income .............	1,598		1,730		1,497
Net trading income51 .....	3,735		3,827		1,377
Other income ................	1,377		529		834
Net operating income48 ...................................	10,335		9,689		7,368
Impairment charges49 ....	(598)		(334)		(650)
Net operating income	9,737		9,355		6,718
Total operating expenses ...................................	(5,073)		(4,860)		(4,862)
Operating profit ........	4,664		4,495		1,856
Income from associates50 ...................................	383		316		382
Profit before tax .........	5,047		4,811		2,238
RoRWA40 .....................	2.4%		2.6%		1.1%
Record revenues in Hong Kong, Rest of Asia-Pacific and Latin America on a reported basis
First bank to issue offshore renminbi bond to European investors
Best for bond origination Best for overall products/services (Asiamoney Offshore RMB Services Survey 2012)
Strategic direction GB&M continues to pursue its 'emerging markets-led and financing-focused' strategy, with the objective of being a leading international wholesale bank. This strategy has evolved to include a greater emphasis on connectivity, leveraging the Group's extensive distribution network. We focus on four strategic imperatives: ·  reinforce client coverage and client-led solutions for major government, corporate and institutional clients; ·  continue to selectively invest in the business to support the delivery of an integrated suite of products and services; ·  enhance collaboration with other global businesses, particularly CMB, to deliver incremental revenues; and ·  focus on business re-engineering to optimise operational efficiency and reduce costs.

For footnotes, see page 100.

The commentary is on a constant currency basis unless stated otherwise.

Review of performance

·       In conditions dominated by uncertainty in the financial markets and the economic environment, GB&M reported profit before tax of US$5.0bn, 5% higher than in the first half of 2011. On a constant currency basis, profit before tax increased by 8% due to higher revenues in a number of businesses, offset in part by a rise in operating expenses and higher loan impairment charges. GB&M is well positioned for growth in faster-growing markets, with revenues rising by 15% in Hong Kong, 17% in Rest of Asia-Pacific and 17% in Latin America in the first half of 2012.

·     Revenues increased by 10%, driven by gains on the disposal of available-for-sale debt securities in Balance Sheet Management and higher Rates revenues following the ECB's announcement of the LTRO. Foreign Exchange also recorded strong revenues, driven by robust client flows and increased market volatility. Higher revenues in Payments and Cash Management ('PCM') benefited from an increase in average customer account balances compared with the first half of 2011. These results were partly offset by a decrease in Equities' revenues as market volumes declined.

·     Loan impairment charges and other credit risk provisions were US$598m, compared with US$320m in the first half of 2011. Loan impairment charges increased by US$290m due to a small number of individually assessed impairment charges in Europe and Middle East & North Africa together with a rise in loan impairment charges in our legacy credit business in Europe. By contrast, credit risk provisions decreased from US$255m to US$243m, reflecting lower charges on available-for-sale ABSs in legacy credit, where we reported a US$52m decline due to losses arising in underlying collateral pools generating lower impairment charges. In addition, charges on Greek sovereign debt reduced from US$65m in the first half of 2011 to US$5m in the first half of 2012. These movements were offset in part by an impairment charge on an available-for-sale debt security in Principal Investments.

·     Operating expenses increased by 7%. The rise in costs was mainly attributable to a credit of US$108m (US$111m as reported) in the first half of 2011 relating to defined benefit obligations in the UK which did not recur,

Management view of total operating income/(expense)

	Half-year to
	30 Jun       2012		30 Jun       2011		31 Dec       2011
	US$m		US$m		US$m
Global Markets52 ...........	5,334		5,146		2,952
Credit ........................	370		530		(195)
Rates .........................	1,805		1,355		(14)
Foreign Exchange ......	1,733		1,517		1,755
Equities .....................	396		612		349
Securities Services ......	818		854		819
Asset and Structured Finance .................	212		278		238
Global Banking ..............	2,785		2,670		2,731
Financing and Equity Capital Markets .....	1,526		1,664		1,569
Payments and Cash Management53 .......	874		695		839
Other transaction services54 ...............	385		311		323
Balance Sheet Management .............	2,206		1,765		1,723
Principal Investments ...	147		175		34
Other55 .........................	(137)		(67)		(72)
Total operating income	10,335		9,689		7,368

For footnotes, see page 100.

and a customer redress provision relating to interest rate protection products in Europe in the first half of 2012 (see page 28). Excluding these items, expenses rose as we continued to strengthen our compliance resources, principally in the US.

·      Global Markets delivered a strong performance, supported by robust customer flows and a stronger market sentiment, notably in the first quarter of 2012. Foreign Exchange reported strong revenue growth, particularly in Europe and Hong Kong, driven by a rise in customer activity in part due to collaboration with CMB, coupled with higher market volatility which led to an improved trading environment for foreign exchange compared with the first half of 2011, particularly in Europe. In Rates, trading revenues increased significantly compared with each half of 2011, notably in Europe, following the European Central Bank's announcement of the LTRO, which resulted in improved liquidity, tightening spreads and increased customer demand. Primary market revenues in the Rates business also increased, mainly in Hong Kong and Rest of Asia‑Pacific.

·      However, this was partly offset by adverse fair value movements on structured liabilities of US$330m as credit spreads tightened in the first half of 2012, compared with a US$60m reported favourable movement in the first half of 2011.

·      In Equities, a decline in revenues reflected lower market volumes and a less favourable trading environment. Lower revenues were also reported in Credit as revenues in our legacy credit portfolio (see page 284) declined by US$280m due to write-downs compared with releases in the first half of 2011, along with net   realised losses on the disposal of specific bond positions. In addition, effective yields declined as funding costs increased and the size of the portfolio was reduced. Excluding legacy credit, Credit revenues rose, driven by higher primary issuances in Europe, Hong Kong and North America.

·      Global Banking revenues increased by 7%, mainly in Payments and Cash Management, which benefited from higher average customer account balances in Europe and Rest of Asia-Pacific, reflecting new mandates, partly as a result of the implementation of our Global Liquidity Solutions platform. Revenues in Global Trade and Receivables Finance, reported within other transaction services, also increased, mainly in Hong Kong, Rest of Asia-Pacific and Latin America reflecting export-led lending growth. This was partly offset by lower revenues in Financing and Equity Capital Markets mainly in Credit and Lending, due to losses on disposal of certain high-yielding positions as we continued to manage risk in the portfolio. In addition, revenues in Equity Capital Markets declined as overall deal volumes were affected by the challenging economic environment.

·      Balance Sheet Management reported significantly higher gains on the disposal of available-for-sale debt securities, mainly in the UK, as part of structural interest rate risk management activities. Net interest income declined in Europe as yield curves continued to flatten and interest rates remained low, together with a reduction in available-for-sale debt securities as a result of disposals. This was partly offset by lower funding costs in Latin America coupled with higher spreads and portfolio growth in Rest of Asia-Pacific.

Strategic imperatives

Reinforce client coverage and client-led solutions

·     Global Banking's multinationals coverage proposition, which facilitates growth in cross-border business, contributed to revenues in faster-growing markets, in part due to more focused origination efforts.

·     To further enhance coverage efforts in Global Banking, we announced the formation of the Corporate Finance Group. The group will pro-actively engage with client coverage and solution teams to strengthen the financial advisory and financing event business by providing holistic advice to customers. We also created a Global Product Organisation structure in Payments and Cash Management to streamline product management and better service customer needs.

·     In Global Markets, we established the Institutional Client Group to complement the existing Corporate Treasury Solutions Group. This improved the positioning of our product offering, enabling us to provide tailored cross-product solutions to institutional clients in Europe in the changing financial and regulatory environment. In addition, cross-regional sales teams in Global Markets also executed a number of significant transactions, partnering with global product teams established in each region to strengthen expertise and coverage.

·     Our 'Client Engagement Programme', a global initiative that seeks to understand client relationships in a consistent way across regions, contributed to more focused dialogue with our key clients to better meet their banking needs.

Enhance core product strengths and selectively develop new capabilities

·     In April 2012, we issued the first international renminbi bond outside sovereign Chinese territory, mainly distributing to European investors. The success of this transaction reinforced HSBC's position as the leading global house for international renminbi issuance in this growing market.

·     The enhancement of product offerings on our e‑FX platforms contributed to our performance in the 2012 Euromoney FX survey. Our market share ranking has improved since 2010, reflecting our investment in recent years which has resulted in a significant increase in transaction volumes.

·    

·     Despite underlying market volumes being lower in the period, we remain focused on our Equities strategy targeting selected European countries and faster-growing markets. Following recent investment in our equity execution platform, our ranking in Europe in the 2012 Extel survey improved from tenth in 2011 to sixth in 2012.

·     Our Global Liquidity Solutions proposition within Payments and Cash Management, now live in 24 countries, provides advanced liquidity management functionality for our clients with improved visibility and control of their liquidity positions.

Collaborate with other global businesses to deliver incremental revenues

·     Collaboration with other global businesses remains key to delivering our strategy and we continued to work closely with CMB to provide their clients access to relevant GB&M products. This resulted in a rise in revenues, which are shared between the two global businesses, of 16% in the first half of 2012, primarily from sales of foreign exchange products in faster-growing markets.

·     We also announced a partnership between GB&M and GPB to formalise existing links between the Institutional Private Client Group in GB&M, previously known as the Family Office, and the Global Priority Client Group within GPB. The newly formed teams will work together to service jointly the diverse corporate and personal investment needs of the Group's largest ultra-high net worth clients.

·     Building on GB&M's expertise in foreign exchange trading and RBWM's extensive retail customer base, we jointly launched a real-time online foreign currency margin trading product in Hong Kong, providing retail customers with access to an integrated foreign exchange trading platform.

Delivering sustainable cost savings

·     We made progress in implementing the organisational design announced in 2011 and we continued to optimise our resources, with efficiency gains within our trading and operational platforms. A number of established projects are expected to deliver further sustainable cost savings and all discretionary spending continues to be tightly managed.

Global Private Banking

GPB serves high net worth individuals and families with complex and international financial needs.
	Half-year to
	30 Jun		30 Jun		31 Dec
	2012		2011		2011
	US$m		US$m		US$m
Net interest income ......	672		729		710
Net fee income .............	625		731		651
Other income ................	344		229		242
Net operating income48 ...................................	1,641		1,689		1,603
Impairment charges49 ....	(4)		(22)		(64)
Net operating income	1,637		1,667		1,539
Total operating expenses ...................................	(1,113)		(1,117)		(1,149)
Operating profit ........	524		550		390
Income from associates50 ...................................	3		2		2
Profit before tax .........	527		552		392
RoRWA40 .....................	4.7%		4.5%		3.4%
US$2.4bn of intra-group referrals primarily from CMB and RBWM Completed the sale of our operations in Japan resulting in a gain on sale of US$67m
Best Private Bank in Asia and the Middle East (Euromoney's 2011 Private Banking Survey)
Strategic direction GPB works with high net worth clients to manage and preserve their wealth while connecting them to global opportunities. We focus on three strategic imperatives: ·  implementing a new operating model to manage the business globally and better service client needs, with an enhanced systems platform and improved risk and compliance standards; ·  intensifying collaboration with Group, particularly CMB to access entrepreneur wealth creation; and ·  capturing growth by focusing investment on the most attractive developed and faster-growing wealth markets, where GPB can access the Group's client franchise and its strong local and international product capabilities.

For footnotes, see page 100.

The commentary is on a constant currency basis unless stated otherwise.

Review of performance

·     Reported profit before tax of US$527m was 5% lower than in the first half of 2011 on a reported basis and 4% lower on a constant currency basis.

·     On an underlying basis, which excludes the gain of US$67m on the sale of the GPB business in Japan, profit before tax fell by 16% due to lower revenues and increased operating expenses, partly offset by decreased loan impairment charges and other credit risk provisions.

·     Revenues declined by 2%, primarily in fee income. Brokerage fees fell in the first half of 2012, most notably in the second quarter, as the volume of client transactions decreased reflecting reduced client risk appetite. Annuity fees fell, reflecting lower average assets under management, notably in Europe, largely driven by adverse movements in financial markets in the second half of 2011. Average FuM were also affected by lower net new money inflows and a fall in client numbers, in part due to the ongoing strategic business review, as explained below. The lower revenues were partly offset by the gain on sale of the business in Japan.

·     Loan impairment charges and other credit risk provisions were lower than in the first half of 2011 as a result of an impairment booked in the previous year in relation to available-for-sale Greek sovereign debt securities, part of which was released in the first half of 2012.

·       Operating expenses increased marginally, primarily driven by higher customer redress provisions and restructuring costs incurred in the first half of 2012. This was partly offset by a decrease in performance-related pay due to the lower revenue generated as well as lower average staff numbers following a restructuring programme across the business to improve operational efficiencies.

Client assets⁵⁶

	Half-year to
	30 Jun         2012		30 Jun         2011		31 Dec         2011
	US$bn		US$bn		US$bn
At beginning of period .............	377		390		416
Net new money .	(2)		13		-
Value change ......	4		1		(21)
Exchange/other .	(4)		12		(18)
At end of period	375		416		377

For footnote, see page 100.

·    
GPB is undertaking a programme to change its target client base from smaller, traditional offshore private banking clients to ultra-high net worth international and domestic relationships. This programme, along with a review of certain client relationships with a view to reduce control risk, resulted in a loss of US$1.7bn of client assets in the first half of 2012.

·     Client assets (see footnote 56), which include FuM and cash deposits, decreased driven by the sale of our Japan business which resulted in a decline in client assets of US$3.1bn, coupled with net new money outflows, notably in Europe including a small number of large client withdrawals.

·     'Total client assets', which include some non-financial assets held in client trusts, remained broadly unchanged at US$497bn compared with 31 December 2011.

Strategic imperatives

Integrated operating model

·     We started implementing a new target operating model designed to enable us to manage the business globally, better service the needs of clients through our global product offering and improve risk and compliance standards.

·     During the first half of 2012, we continued to restructure our business and incurred US$37m of costs. The restructuring resulted in a reduction of more than 350 staff numbers in the first half of 2012 and generated sustainable cost savings for the business.

·     The roll-out of front office systems and enhanced information security standards continued with a number of releases in Hong Kong, Singapore, the UK and the US.

·     In June, we completed the sale of our business in Japan, recognising a gain on sale of US$67m.

Integration with the Group

·     Intra-Group referrals contributed net new money of US$2.4bn. We aim to leverage our existing relationships by intensifying our collaboration with CMB in order to access wealth creating entrepreneurs and a joint initiative was launched to further enhance referral flows between the two global businesses.

·    

·     A new segmentation model has been designed to define the client proposition more clearly and ensure a seamless Group wealth proposition alongside RBWM. Entry thresholds and segmentation levels have been agreed for each market where both GPB and RBWM operate, and a systematic process for review and referral of clients is being instituted to ensure they receive the most appropriate proposition.

·     The Global Priority Clients initiative was launched with CMB and GB&M to jointly service the Group's largest ultra-high net worth clients with corporate and personal needs. Each client will have a single dedicated point of contact accountable for overall client management activities across the Group.

·     GPB and Global Research announced an agreement to grant selected ultra-high net worth clients direct access to Global Research materials.

Capturing growth

·     We continued to develop our faster-growing markets business, with the majority of the new money inflow to FuM (US$1.9bn) originating from Hong Kong, Latin America and Rest of Asia-Pacific.

·     Our investments product range has been further developed with the launch of additional real estate and private equity offerings, and the Emerging Market and Developed Market Fixed Income.

Other

'Other' contains the results of certain property transactions, unallocated investment activities, centrally held investment companies, movements in fair value of own debt, central support and functional costs with associated recoveries, HSBC's holding company and financing operations.
	Half-year to
	30 Jun		30 Jun		31 Dec
	2012		2011		2011
	US$m		US$m		US$m
Net interest expense ..........	(464)		(481)		(430)
Net fee income ..	100		3		31
Net trading expense ..........	(205)		(222)		(133)
Change in credit spread on long-term debt ........	(1,810)		(494)		4,655
Other changes in fair value	(465)		208		(130)
Net income/(expense) from financial instruments designated at fair value ........	(2,275)		(286)		4,525
Other income ....	3,182		3,014		3,124
Net operating income48 .......	338		2,028		7,117
Impairment (charges)/ recoveries49 ....	−		2		(2)
Net operating income ..........	338		2,030		7,115
Total operating expenses .........	(4,049)		(3,286)		(4,206)
Operating profit/(loss) ...	(3,711)		(1,256)		2,909
Income/(expense) from associates50 .....	35		52		(43)
Profit/(loss) before tax .....	(3,676)		(1,204)		2,866

For footnotes, see page 100.

The commentary is on a constant currency basis unless stated otherwise.

Notes

·     The reported loss before tax of US$3.7bn compared with a loss of US$1.2bn in the first half of 2011. On a constant currency basis, pre‑tax loss increased by US$2.5bn.

·     Reported PBT in the first half of 2012 included adverse fair value movements of US$2.2bn on the fair value of our own debt attributable to a narrowing of credit spreads in the first half of 2012 compared with 2011 notably in Europe and North America, along with a gain on disposal of US$130m from the sale of our shareholding in a property company in the Philippines. In the first half of 2011, reported loss before tax included adverse fair value movements of US$143m on the fair value of our own debt and an accounting gain of US$181m arising from the dilution of our holding in Ping An following its issue of share capital to third parties. On an underlying basis, excluding the items noted above, the pre-tax loss increased by 34% driven by higher operating expenses, notably the provision for anti-money laundering, BSA and OFAC investigations in the US. For a description of the main items reported under 'Other', see footnote 46.

·     Net fee income increased by US$98m, due in part to fees received under the transition services agreement entered into following the sale of the Card and Retail Services business in North America.

·     Gains less losses from financial investmentsincluded gains of US$275m from the sale of our shares in two non-strategic investments in India, Axis Bank Limited and Yes Bank Limited.

·    
Other operating income decreased by US$66m as the gain arising from the dilution of our holding in Ping An in the first half of 2011 was only partly offset by the gain from the sale of our shareholding in a property company in the Philippines in the first half of 2012.

·      Excluding the adverse movements in the fair value of our own debt, Net expense from financial instruments designated at fair value decreased due to lower adverse fair value movements from interest and exchange rate ineffectiveness in the hedging of long-term debt designated at fair value issued by HSBC Holdings and our European and North American subsidiaries.

·     Operating expenses increased by 26% to US$4.0bn, driven by provisions for US anti‑money laundering, BSA and OFAC investigations of US$700m. In addition, there were higher restructuring costs in our global support functions, notably in North America, Europe and Rest of Asia-Pacific, as part of our organisational effectiveness programmes, along with inflationary pressures on wages across Rest of Asia-Pacific. This was partly offset by lower restructuring costs in Latin America as the equivalent period in 2011 included costs associated with the reorganisation of regional and country support functions.

 

END

 

 

IR UNUSRUOAWRAR