Interim Report - 5 of 26

RNS Number : 0981M

HSBC Holdings PLC

12 August 2011

 



Customer groups and global businesses

Summary ...................................................................	29
Retail Banking and Wealth Management ...................	30
Commercial Banking .................................................	32
Global Banking and Markets ......................................	34
Global Private Banking .............................................	36
Other ........................................................................	37
Analysis by customer group and global business .........	38

Summary

HSBC's senior management reviews operating activity on a number of bases, including by geographical region and by customer group and global business. Capital resources are allocated and performance is assessed primarily by geographical region, as presented on page 41.

In addition to utilising information by geographical region, management assesses

performance through two customer groups, Retail Banking and Wealth Management ('RBWM'), (formerly Personal Financial Services ('PFS')) and Commercial Banking ('CMB'), and two global businesses, Global Banking and Markets ('GB&M')

and Global Private Banking ('GPB'). RBWM incorporates the Group's consumer finance businesses.

With effect from 1 March 2011, our Global Asset Management business was moved from GB&M to RBWM. This resulted in a reallocation between the two of US$181m and US$140m in profit before tax in the first and second halves of 2010, respectively, and in total assets of US$3bn and US$3.3bn at 30 June 2010 and 31 December 2010, respectively. All periods presented have been adjusted accordingly.

The commentaries below present customer groups and 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 an underlying basis (see page 10) unless stated otherwise.

Profit/(loss) before tax

					Half-year to
	30 June 2011				30 June 2010				31 December 2010
	US$m		%		US$m		%		US$m		%
Retail Banking and Wealth Management16 .................	3,126		27.3		1,352		12.1		2,487		31.4
Commercial Banking ..................................................	4,189		36.5		3,204		28.9		2,886		36.4
Global Banking and Markets16 ....................................	4,811		41.9		5,452		49.1		3,763		47.4
Global Private Banking ...............................................	552		4.8		556		5.0		498		6.3
Other38 .. .....................................................................	(1,204)		(10.5)		540		4.9		(1,701)		(21.5)
	11,474		100.0		11,104		100.0		7,933		100.0

Total assets³⁹

	At 30 June 2011				At 30 June 2010				At 31 December 2010
	US$m		%		US$m		%		US$m		%
Retail Banking and Wealth Management16 .................	557,952		20.7		510,092		21.1		530,970		21.6
Commercial Banking ..................................................	336,094		12.5		264,077		10.9		296,797		12.1
Global Banking and Markets16 ....................................	1,942,835		72.2		1,774,639		73.4		1,755,043		71.5
Global Private Banking ..............................................	122,888		4.6		108,499		4.5		116,846		4.8
Other .........................................................................	189,912		7.0		189,153		7.8		161,458		6.6
Intra-HSBC items .......................................................	(458,694)		(17.0)		(428,006)		(17.7)		(406,425)		(16.6)
	2,690,987		100.0		2,418,454		100.0		2,454,689		100.0

Risk-weighted assets⁴⁰

	At 30 June 2011				At 31 December 2010
	US$bn		%		US$bn		%
Total ................................................................................................................	1,168.5		100.0		1,103.1		100.0
Retail Banking and Wealth Management ..........................................................	365.0		31.2		357.0		32.4
Commercial Banking ........................................................................................	363.3		31.1		334.4		30.3
Global Banking and Markets .............................................................................	385.4		33.0		353.2		32.0
Global Private Banking .....................................................................................	23.9		2.1		24.9		2.3
Other ...............................................................................................................	30.9		2.6		33.6		3.0

For footnotes, see page 81.

Retail Banking and Wealth Management

RBWM provides 85 million individual and self-employed customers with financial services in over 60 markets worldwide.
	Half-year to16
	30 Jun			30 Jun		31 Dec
	2011			2010		2010
	US$m			US$m		US$m
Net interest income ......	12,086		12,194		11,972
Net fee income .............	4,212		4,060		4,337
Other income ................	1,274		299		749
Net operating income41 ...................................	17,572		16,553		17,058
Impairment charges42 ....	(4,270)		(6,318)		(4,941)
Net operating income	13,302		10,235		12,117
Total operating expenses ...................................	(10,746)		(9,349)		(10,190)
Operating profit ........	2,556		886		1,927
Income from associates43	570		466		560
Profit before tax .........	3,126		1,352		2,487
RoRWA44 .....................	1.8%		0.8%		1.4%
Significant growth in insurance and investments
Run-off portfolio balances reduced by US$4.9bn
Best retail bank in Hong Kong (The Asian Banker)		Best foreign bank in China (The Asian Banker)
Strategic direction RBWM's aim is to provide consistent and high quality 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 more efficiently. 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 81.

Review of performance

·      As announced last year, RBWM was created with effect from 1 March 2011, bringing together the PFS, insurance and Global Asset Management businesses under a unified management structure. This will enable us to drive our strategy of streamlining our retail banking businesses and developing world class wealth management services for retail customers.

·      RBWM reported a profit before tax of US$3.1bn in the first half of 2011, more than double that in the first half of 2010. This was largely attributable to a decline in loan impairment charges, particularly in the US, where delinquency trends continued to improve following the managed reduction in the run-off portfolios.

·      We continued to rebalance revenue and profit contribution with growth in our priority markets, offsetting declines in run-off portfolios in the US.

·      Revenue increased by 3%, as income rose in Hong Kong and Rest of Asia-Pacific from an increase in the sales of wealth management products. In Europe, revenue rose as a result of increased lending, notably in mortgages, and net insurance income, driven by successful targeted sales campaigns, particularly in France. Net interest income increased in Rest of Asia-Pacific and Latin America from higher volumes. Deposit spreads increased in parts of Rest of Asia-Pacific due to increases in interest rates, particularly in mainland China, India and Malaysia. This was partly offset by reductions in North America due to lower lending balances in both the run-off portfolio and in the Card and Retail Services business. In a number of markets, particularly Mexico, India and the UAE, we continued to reposition our lending portfolio to lower risk, lower yielding assets. Europe, Hong Kong and Rest of Asia‑Pacific benefited from an increase in PVIF due to refinement to the calculation of the PVIF asset (see footnote 27).

·      Loan impairment charges fell by 34%, reflecting the managed decline of riskier portfolios, and enhanced collection processes and underwriting practices. The loan book continued to decline in the US, and some high risk portfolios in Latin America, Rest of Asia-Pacific and Middle East and North Africa were managed down.

·      Operating expenses increased by 10% to US$10.7bn. The rise in costs resulted mainly from increases in front office headcount in Hong Kong, Rest of Asia‑Pacific and Brazil as we

invested in these key growth markets, coupled with wage inflation in certain markets. Operating expenses included US$589m of provisions relating to customer redress programmes in the UK, including a provision in respect of the adverse judgement in the Judicial Review relating to sales of PPI. Litigation provisions increased in the US. Operating costs also rose as we wrote off certain previously capitalised software development expenses and incurred other restructuring costs as part of our new strategic priorities. This was partly offset by a credit of US$264m resulting from a change in the inflation measure used to calculate the defined benefit obligation in the UK for deferred pensions.

·     The share of profits from associates increased by 18%, mainly in Ping An due to an increase in profits driven by strong sales growth and the performance of its wealth management businesses and banking business.

Developing world class wealth management for retail customers

·     Our World Selection global investment offering continued to grow and total assets under management were US$9.0bn at 30 June 2011, compared with US$7.2bn at 31 December 2010.

·     Our insurance operations performed strongly in the first half of 2011, with increased net earned premiums compared with 2010. This was driven by a growing demand for life insurance products. The improved outlook for investment markets in 2011 generated increased demand for wealth products in Asia and a rise in new business sales in Hong Kong. In Latin America, increased premium income reflected an improving economic environment and investment in the sales network, notably in Brazil. The contribution from our investment in Ping An also increased, driven by growth in its life insurance business.

·     Global Asset Management increased management fees by 6% on the first half of 2010, most notably in Europe, Hong Kong and Latin America. Funds under management ('FuM') reached a record period-end high of US$449bn of which emerging markets FuM were US$135bn. This represented growth in
total FuM of 10% and emerging markets FuM of 14% compared with the first half of 2010. The increasing focus on our wealth management proposition generated US$4.4bn of net inflows in the first half of 2011 compared with US$1.3bn in 2010.

Leveraging global expertise in retail banking

·     We enhanced our services with a number of innovative developments, including the launch of renminbi-denominated deposits in an additional seven markets across Asia in the first half of 2011, and extended our mobile banking solution to Canada, Malaysia and Singapore.

·     We continued to grow mortgage lending in the UK and in Asia, particularly in Hong Kong where our volume growth in mortgages enabled us to maintain our market leadership. In Australia, Singapore and Malaysia we increased mortgage balances through targeted marketing campaigns. Customer account balances also grew in Rest of Asia-Pacific, reflecting an increase in customer numbers, and in Europe due to competitive pricing and acquisition campaigns.

Portfolio management to drive superior returns

·     During the first half of 2011, we continued to reposition our operations and optimise our businesses. In line with this, in April, we announced the sale of HSBC Afore, our pension administration business in Mexico, which is expected to be completed in the third quarter of 2011. Also in April, following a strategic review of our operations in Russia, we announced our withdrawal from the retail business, and have now agreed the sale of some elements of this business.

·     In May 2011, we sold our Insurance Captive Management business which provided third party property and third party insurance claim administration services. This is part of our strategy to focus our insurance business on connectivity to core banking customers and wealth management product offerings.

·     In July, we announced the sale of our UK motor insurance portfolio and the closure of retail banking operations in Poland.

·     

Commercial Banking

CMB offers a full range of commercial financial services to 3.6m customers ranging from sole proprietors to publicly quoted companies in 65 countries.
	Half-year to
	30 Jun		30 Jun		31 Dec
	2011		2010		2010
	US$m		US$m		US$m
Net interest income ......	4,814		4,024		4,463
Net fee income .............	2,131		1,935		2,029
Other income ................	735		781		602
Net operating income41 ..... ..............................	7,680		6,740		7,094
Impairment charges42 ... .	(642)		(705)		(1,100)
Net operating income	7,038		6,035		5,994
Total operating expenses ...................................	(3,465)		(3,266)		(3,565)
Operating profit ........	3,573		2,769		2,429
Income from associates43 ...... .............................	616		435		457
Profit before tax .........	4,189		3,204		2,886
RoRWA44 .....................	2.4%		2.2%		1.8%
Revenue growth of 12% ahead of cost growth of 3% on an underlying basis
Trade revenue grew 26% compared with world GDP growth of 3%
Strong revenue growth from the sale of GB&M products
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; ·  enhance collaboration with GB&M, providing capital market access and a wider range of sophisticated risk management and liquidity products to the growing mid-market corporates; ·  capture growth in international small and medium-sized enterprises; and ·  drive efficiency gains through adopting a global operating model.
For footnotes, see page 81.

Review of performance

·      In the first half of 2011, CMB reported a profit before tax of US$4.2bn, US$1.0bn or 31% higher than in the first half of 2010. On an underlying basis, profit before tax also increased by 31%, reflecting higher lending balances and an expansion in world trade, in particular in the faster‑growing markets. Income from our associate, Bank of Communications, also increased reflecting strong loan growth and wider spreads. Profit before tax grew in all regions except North America where we are investing in areas of strong international connectivity.

·      Customer lending balances rose from the end of 2010 by 9% to US$268bn, primarily in Asia, Europe and Latin America, driven by the expanding trade flows and increased business activity. Demand for credit remained strong in Hong Kong, Malaysia and Brazil. Lending balances also increased in the UK by 2% to US$69.9bn.

·      Credit quality improved as our exposure to higher risk portfolios was managed down and the economic environment generally improved. As a result, loan impairment charges and other credit risk provisions declined by 14%. In the first half of 2011, there was a marked decline in loan impairment charges against specific exposures in Europe while, in North America, there were notable falls in loan impairment charges.

·      In the first half of 2011, CMB grew customer account balances by 3% to US$301bn, with significant growth in Asia and Latin America driven partly by new customer acquisitions.

Shift towards faster-growing markets while connecting with developed markets

·      Revenue increased by 12%, primarily in Latin America (specifically Brazil, Mexico and Argentina), Hong Kong and the Rest of Asia-Pacific region (specifically mainland China, India and Singapore). This was driven by lending to meet higher credit demand as a result of improved trade and business volumes, and deposit balance growth. Net fee income also increased from rising sales of trade, payments and cash management, investment and Global Markets products.

·      In line with our aspiration to double our trade revenue over the medium term, we merged our Trade and Supply Chain and Receivables Finance businesses, allowing us to build on the scale of our trade business to expand our receivables

finance offerings from the existing base of 23 countries.

·      In the first half of 2011, our trade revenue was US$1bn, an increase of 26% compared with the first half of 2010. Significantly, growth in our trade revenue was more than eight times that of world GDP growth, reflecting our concentration in the faster growing markets.

·      Our geographic presence across both mature and faster-growing markets allowed us to capitalise on the rising levels of international trade and investment flows. We achieved a significant number of mandates to provide cross-border payments and cash management solutions for our corporate customers, reinforcing the importance of our geographic network to this customer segment.

·      In the first half of 2011, the number of successful cross-border referrals increased by 43% compared with the first half of 2010, with a transaction value of over US$12bn. Notably, 66% of this increase came from mainland China, demonstrating its significance to CMB.

·      We continued to strengthen our position as a leading international bank for renminbi product offerings through product innovation in over 50 locations on six continents. In the first half of 2011, we were the first international bank to provide commercial banking customers with a dedicated renminbi Business Card in Hong Kong, minimising their foreign exchange risk, and in Singapore we expanded our renminbi capabilities, including an e‑platform for payments in the currency.

Enhance collaboration with GB&M

·      Our customers benefit from the diversity of products and services available from a universal bank. This includes Global Markets products provided to CMB customers with more complex requirements, as well as GPB and Premier services for our business customers' personal wealth requirements.

·      CMB revenue generated from the sale of Global Markets products grew strongly compared with the first half of 2010, with strong momentum in Asia and Latin America.

Capture growth in international SMEs

·      We are focusing our Business Banking propositions on attracting the growing number of internationally aspirant small and medium-sized enterprises ('SME's). 82% of SMEs in Hong Kong rate us as the best bank for international business and in the UK we have over 130 International Commercial Managers to support the Business Banking segment. In the Middle East and North Africa, we pledged a second US$100m during the period to SME customers in the UAE engaged in cross-border business and the amount has been fully utilised.

·        In Mexico, we launched the HSBC Business Card to facilitate working capital requirements and more effectively service the needs of our SME client base. Despite muted demand, CMB increased gross new lending to UK SMEs by 20% as we continued to support this important sector and assist new business start-ups. We are in line with our targets as set out in the Merlin Agreement between the major UK banks and the UK government.

Drive efficiency gains through adopting a global operating model

·      We continue to enhance and tailor CMB's direct banking solutions to improve our customer experience. We recognise our customers are increasingly more technologically oriented and CMB will continue to invest in and expand the transactional functionality and information services we offer. For example, in the UK, we were one of the first international financial institutions to offer a dedicated Business Mobile Banking iApp, achieving almost 70,000 downloads in the first month. For our corporate segment customers, HSBCnet for Mobile was piloted in 40 countries in the first half of 2011, with a further 25 countries due to go live by the end of 2011, subject to regulatory approvals.

·      Operating expenses rose by 3% to US$3.5bn. Excluding a credit of US$212m resulting from a change in the inflation measure used to calculate the defined benefit obligation in the UK for deferred pensions, they increased by 9% to US$3.7bn. On the same basis, after adjusting for this credit, our cost efficiency ratio improved from 49.2% to 47.8%, reflecting a disciplined approach to managing the cost base. In the Rest of Asia-Pacific region, the cost efficiency ratio improved by 2 percentage points to 47.2% despite inflationary pressures and the addition of almost 200 new staff as we expanded our business in this strategically important market.

Global Banking and Markets

GB&M is a global business which provides tailored financial solutions to major government, corporate and institutional clients worldwide.
	Half-year to16
	30 Jun			30 Jun		31 Dec
	2011			2010		2010
	US$m			US$m		US$m
Net interest income ......	3,603			3,724		3,619
Net fee income .............	1,730			1,879		1,785
Net trading income45 .....	3,827			3,754		2,076
Other income ................	529			963		1,112
Net operating income41 . ..................................	9,689			10,320		8,592
Impairment charges42 ....	(334)			(499)		(491)
Net operating income	9,355			9,821		8,101
Total operating expenses ...................................	(4,860)			(4,607)		(4,621)
Operating profit ........	4,495			5,214		3,480
Income from associates43 ...................................	316			238		283
Profit before tax .........	4,811			5,452		3,763
RoRWA44 .....................	2.6%			2.9%		2.0%
Significant contribution from faster-growing markets with particularly strong performances in Latin America and Rest of Asia-Pacific
Best Global Risk Management House Best Debt House: - in Asia - in Middle East (Euromoney Awards for Excellence 2011)		Best Domestic Equity House Hong Kong (Asiamoney Best Bank 2011 Awards) Best Investment Bank in Hong Kong (FinanceAsia Country Awards)
Strategic direction GB&M continues to pursue its well established 'emerging markets-led and financing-focused' strategy, with the objective of being a leading global 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 defend core, enhance existing and build new capabilities in major hubs to support the delivery of an integrated suite of products and services; ·  enhance collaboration with other customer groups, particularly CMB, to deliver incremental revenues; and ·  focus on business re-engineering to ensure the efficiency of our platform.

For footnotes, see page 81.

Review of performance

·        GB&M reported profit before tax of US$4.8bn, 12% lower than in the first half of 2010 as a result of the challenging trading environment, which was dominated by uncertainty around eurozone sovereign debt. On an underlying basis, profit before tax declined by 16% as a result of lower revenues in legacy Credit, and in Balance Sheet Management, coupled with the cost of continued strategic investment. These factors were partly offset by higher revenues in Global Banking, Equities and Securities Services and a significant decrease in loan impairment charges.

·      We continued to leverage our unique geographical franchise and global connectivity, particularly focused on 'South-South' trade corridors, to capitalise on opportunities presented by growing international trade flows. We also focused on connecting with other areas of HSBC, notably CMB, where gross revenues from the cross-sale of GB&M products increased, and GPB through the Family Office partnership. Investment in people and infrastructure continued during the first half of 2011 to enhance our product offerings. These strategic initiatives include the development of Prime Services and equity market capabilities together with the expansion of the Rates and Foreign Exchange e‑commerce platforms which remain key to supporting our customer-focused strategy over the long term through enhanced competitive positioning.

·      Net operating income before loan impairment charges and other credit risk provisions decreased by 9%. This was primarily due to lower income in Balance Sheet Management, reflecting the continuing effect of prevailing low interest rates and flattening yield curves. Legacy Credit was affected by lower recoveries generated from the securities investment conduits, a reduction in effective yields and lower holdings of legacy assets. Revenues in Credit were also affected by the re‑emergence of uncertainty in the eurozone sovereign credit markets in the second quarter of 2011. Trading income from structured liabilities declined, mainly in Rates, due to lower favourable fair value movements as credit spreads widened to a lesser extent than a year ago; a gain of US$60m compared with a reported gain of US$255m in the first half of 2010.  

·      Loan impairment charges and other credit risk provisions were significantly lower than both halves of 2010. Loan impairment charges were US$70m compared with the US$233m in the

Management view of total operating income

	Half-year to16
	30 Jun         2011		30 Jun         2010		31 Dec         2010
	US$m		US$m		US$m
Global Markets46 ..........	5,146		5,542		3,631
Credit .......................	530		1,043		606
Rates ........................	1,355		1,529		523
Foreign Exchange ....	1,517		1,513		1,239
Equities ....................	612		479		276
Securities Services47 ..	854		718		793
Asset and Structured Finance ................	278		260		194
Global Banking ............	2,670		2,288		2,333
Financing and Equity Capital Markets ...	1,664		1,420		1,432
Payments and Cash Management48 .....	695		542		591
Other transaction services49 ..............	311		326		310
Balance Sheet Management ............	1,765		2,269		1,833
Principal Investments ..	175		126		193
Other50 ........................	(67)		95		602
Total operating income	9,689		10,320		8,592

For footnotes, see page 81.

first half of 2010, driven by a general improvement in the credit environment and the non-recurrence of significant impairment charges taken against a small number of clients in 2010. Credit risk provisions fell by US$29m to US$263m, despite a US$65m charge recorded in respect of Greek sovereign debt in the first half of 2011. Asset-backed securities accounted for US$238m of US$263m, compared with impairments of US$256m reported in the first half of 2010.

·     Operating expenses increased, reflecting continued investment in GB&M platforms to deliver revenue growth and improved process automation in light of increasing competition and changing regulatory demands. Performance costs rose due to increased amortisation charges for previous years' performance shares and accelerated expense recognition for future deferred bonus awards. Offsetting these factors was a credit of US$111m in the first half of 2011 arising from a change in the inflation measure used to calculate the defined benefit obligation in the UK for deferred pensions. In addition, the first half of 2010 included the cost of payroll and bonus taxes in the UK and France on certain bonuses paid in respect of 2009. The cost efficiency ratio, at 50.2%, was 6.2 percentage
points higher than in the first half of 2010 reflecting both our investment in the business and the effect of prevailing market conditions on income.

·     Global Markets delivered first half revenues in excess of US$5bn for the third consecutive year in a very uncertain trading environment. The decrease compared with the first half of 2010 was mainly due to a decline in legacy Credit, as noted above. Credit revenues were also affected by the re-emergence of eurozone sovereign debt concerns in the second quarter of 2011, resulting in a decline in client activity and a general widening of credit spreads. These were partly offset by improved performance in primary markets as HSBC increased its market share of global bond issuance volumes. Revenues in Rates declined due to lower favourable fair value movements on structured liabilities, partly offset by higher customer demand for structured products. Equities revenues rose as improved competitive positioning helped capture increasing client flows, particularly during the global rally in the first quarter of 2011. Securities Services revenues increased by 14%, benefiting from balance growth in Europe, higher spreads in Asia and Latin America and increased transaction volumes.

·     Global Banking revenues rose by 12% as it maintained its focus on deepening key client relationships. This growth was led by continued momentum in project and export finance. Lending revenues were broadly in line, as higher income fuelled by asset growth in Asia, was offset by narrower spreads and limited demand in Europe and North America as clients in developed markets focused on refinancing existing facilities. Payments and Cash Management revenue rose by 24%, driven by Asia, with higher net interest income reflecting strong growth in deposit balances and wider spreads following interest rate rises in certain markets; fee income also benefited from growth in transaction volumes.

·     Revenues in Balance Sheet Management continued to reduce as higher-yielding positions matured and the opportunity for maintaining yields on reinvestment was limited by the prevailing low interest rate environment. Gains on disposal of securities in the available-for-sale portfolio also fell from the high level of realised gains primarily in Hong Kong and Rest of Asia‑Pacific in the first half of 2010.

Global Private Banking

GPB works with high net worth clients to manage and preserve their wealth while connecting them to global opportunities.
	Half-year to
	30 Jun			30 Jun		31 Dec
	2011			2010		2010
	US$m			US$m		US$m
Net interest income ......	729			646		699
Net fee income .............	731			643		656
Other income ................	229			254		195
Net operating income41 . ..................................	1,689			1,543		1,550
Impairment (charges)/ recoveries42 ................	(22)			-		12
Net operating income	1,667			1,543		1,562
Total operating expenses ...................................	(1,117)			(967)		(1,068)
Operating profit ........	550			576		494
Income from associates43 ...................................	2			(20)		4
Profit before tax .........	552			556		498
RoRWA44 .....................	4.5%			4.3%		3.9%
Client assets 7% up at US$416bn US$13bn net new money
Best Private Bank in Asia (Euromoney 2011 Private Banking Survey)
Best Private Bank in Hong Kong (FinanceAsia Country Awards 2010)		Outstanding Private Bank - Middle East (Private Banker International Awards 2010)
Strategic direction GPB serves high-net worth customers with complex and international needs. We focus on four strategic imperatives: ·  further expand our business in the domestic and faster-growing markets through the recruitment of front office staff and the delivery of faster-growing market products to clients in developed markets; ·  continue to leverage our intra-Group strengths, including referrals with CMB and RBWM and our Family Office Partnership with GB&M; ·  increase our managed assets, through building on our expertise in alternative investments, faster-growing markets and foreign exchange; and ·  continue to invest in front-office systems with strong data security, while maintaining a focus on risk management and cost control.

For footnotes, see page 81.

Review of performance

·      Reported profit before tax was US$552m, marginally lower than in the first half of 2010 on both a reported and an underlying basis, as strong revenue growth, driven by increases in client assets under management and activity levels, was offset by a rise in costs and impairment charges.

·      Although clients remained cautious in the prevailing market environment, risk appetite showed signs of improvement. Net fee income rose as a result of higher transaction volumes and growth in average client assets under management, driven by net new money inflows and our focus on faster growing markets. Demand for lending continued to recover which, together with improved spreads, led to higher net interest income.

·      The increase in operating expenses was primarily driven by the strengthening of the Swiss franc (see footnote 51), which accounts for a significant proportion of our cost base, together with higher costs incurred as a result of the developing regulatory environment, the hiring of front office staff to cover faster growing markets and an acceleration in the expense recognition for deferred bonus awards. A restructuring programme started in the first half of 2011, the benefits of which are expected in future reporting periods.

·      Loan impairment charges and other credit risk provisions increased, due to the impairment of available-for-sale debt securities.

Client assets

	Half-year to
	30 Jun          2011		30 Jun          2010	31 Dec           2010
	US$bn		US$bn		US$bn
At beginning of period ............	390		367		354
Net new money	13		7		6
Value change ....	1		(4)		17
Exchange/other	12		(16)		13
At end of period	416		354		390

·      Reported client assets, which include funds under management and cash deposits, increased due to US$13bn of net new money inflows, together with favourable foreign exchange and market movements. Net new money continued to benefit from intra-Group referrals and strong inflows from Asia and Latin America. As a result, reported 'Total client assets', the equivalent to many industry definitions of assets under management which includes some non-financial assets held in client trusts, increased by 11% since 31 December 2010 to US$556bn.

Other

'Other' contains the results of certain property transactions, unallocated investment activities, centrally held investment companies, movements in fair value of own debt, HSBC's holding company and financing operations.
	Half-year to
	30 Jun		30 Jun		31 Dec
	2011		2010		2010
	US$m		US$m		US$m
Net interest expense .....	(481)		(537)		(461)
Net trading income/ (expense) ...................	(222)		(572)		261
Net income/(expense) from financial instruments designated at fair value ................	(286)		1,178		(1,394)
Other income ................	3,017		3,163		3,022
Net operating income41  ...................................	2,028		3,232		1,428
Impairment (charges)/ recoveries42 ................	2		(1)		4
Net operating income	2,030		3,231		1,432
Total operating expenses ...................................	(3,286)		(2,759)		(3,159)
Operating profit/(loss) ...................................	(1,256)		472		(1,727)
Income from associates43 ...................................	52		68		26
Profit/(loss) before tax	(1,204)		540		(1,701)
US$1.2bn reduction in profit before tax due to fair value movements on own debt
Increase in operating expenses due to restructuring costs in Latin America and centralisation of processes

For footnotes, see page 81.

Notes

·      Reported loss before tax of US$1.2bn compared with a profit before tax of US$540m in the first half of 2010. This included losses of US$143m on the fair value of HSBC's own debt attributable to a narrowing in credit spreads compared with gains of US$1.1bn in the first half of 2010. In addition, reported profits included a gain of US$62m on the reclassification of Bao Viet as an associate in the first half of 2010 and accounting gains of US$188m and US$181m in the first halves of 2010 and 2011, respectively, arising from the dilution of our shareholding in Ping An following its issue of share capital to third parties. On an underlying basis, the loss before tax increased by 57% to US$1.2bn. For a description of the main items reported under 'Other', see footnote 38.

·      Net interest expense substantially comprised interest expense on long-term debt issued by HSBC Holdings.

·      Net trading expense fell by US$350m, primarily driven by lower adverse fair value movements on non-qualifying hedges, mainly cross-currency swaps used to economically hedge fixed rate long-term debt issued by HSBC Holdings. This was the result of a less pronounced decrease in long-term US interest rates relative to sterling and euro interest rates than in the first half of 2010.

·      Net expense from financial instruments designated at fair value of US$143m compared with income of US$112m in the first half of 2010 due to 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.

·      Other operating income reduced as gains of US$250m recognised from the sale and leaseback of our Paris and New York headquarters did not recur.

·    Operating expenses increased by 18% to US$3.3bn driven by restructuring costs in Latin America of US$149m as we took measures to improve efficiencies and processes in order to reduce the future cost base of our operations. The increasing number of centralised operational and migrated activities also contributed to higher costs in the period. These costs were previously incurred directly by customer groups, but are now recorded in 'Other' and charged to customer groups through a recharge mechanism with income reported as 'Other operating income'.

 

END

 

 

IR URORRASAWAAR