Interim Report - 9 of 28

RNS Number : 1963P

HSBC Holdings PLC

15 August 2014

 



Asia¹¹

HSBC's principal banking subsidiaries in Hong Kong are The Hongkong and Shanghai Banking Corporation Limited and Hang Seng Bank Limited. The former is the largest bank incorporated in Hong Kong and is our flagship bank in Asia. We offer a full range of banking and financial services in mainland China, mainly through our local subsidiary, HSBC Bank (China) Company Limited. We also participate indirectly in mainland China through our associate, Bank of Communications. Outside mainland China and Hong Kong, we conduct business in 18 countries and territories, with particularly strong coverage in Australia, India, Indonesia, Malaysia and Singapore.
	Half-year to
	30 Jun		30 Jun		31 Dec
	2014		2013		2013
	US$m		US$m		US$m
Net interest income ..	6,090		5,519		5,913
Net fee income .........	2,966		3,090		2,846
Net trading income ...	1,329		918		1,108
Other income ............	1,722		3,764		1,274
Net operating income13 ...............	12,107		13,291		11,141
LICs53 .......................	(216)		(198)		(300)
Net operating income ..................	11,891		13,093		10,841
Total operating expenses .................	(5,009)		(4,812)		(5,124)
Operating profit ....	6,882		8,281		5,717
Income from associates54 .............	1,012		981		874
Profit before tax .....	7,894		9,262		6,591
Cost efficiency ratio .	41.4%		36.2%		46.0%
RoRWA47 .................	3.4%		4.6%		3.1%
Period-end staff numbers ..................	115,111		113,631		113,701
64% increase in underlying profit before tax in our mainland China operations excluding associates
11% growth in customer lending on a constant currency basis
Best Bank in Asia (Euromoney Awards for Excellence 2014)
For footnotes, see page 96. The following commentary is on a constant currency basis and comparisons are with the first half of 2013, unless stated otherwise. Tables are on a reported basis.

Economic background

Hong Kong's annual rate of real GDP growth slowed to 2.5% in the first quarter of 2014 from 2.9% at the end of 2013. The slowdown was broadly based, although there was a particularly sharp fall in the exports of goods. Private consumption held up relatively better, benefiting from a strong labour market as the headline rate of unemployment fell to the lowest level seen since the 1990s. In mainland China, economic activity slowed at the start of 2014. Real GDP grew by 7.4% in the first quarter of 2014 compared with a year ago, down from 7.7% in the fourth quarter of 2013 and slightly lower than the government's official target of 7.5% for 2014 as a whole. In response, the government announced a number of stimulus measures in early 2014 and the annual rate of GDP growth rose to 7.5% in the second quarter. Inflationary pressures remained subdued, with CPI inflation falling from 2.9% at the end of 2013 to 2.3% in June 2014. Producer prices continued their fall of the past two years.

Economic growth in Japan picked up sharply in the first quarter, thanks to a rise in spending in the run up to the 1 April 2014 increase in consumption tax, with strong consumer spending and robust business investment. Excluding the volatile fresh foods component and VAT increase, CPI inflation was 1.4% in June, in line with the Bank of Japan's forecasts. The central bank continued its purchases of 6-8 trillion yen a month as part of its monetary easing programme.

The region saw considerable political change in the first half of 2014. In India, the BJP-led NDA opposition won a decisive victory in the national elections, leading to hopes that the strong mandate will revive growth through structural reforms. In Indonesia, growth slowed in the first quarter of 2014 as previous rate rises restrained economic activity. Elsewhere, growth remained robust and central banks were increasingly concerned about rising inflationary pressure, while the central banks in Malaysia and Singapore indicated they may need to tighten monetary policy further.

Financial overview

Our operations in Asia reported a pre-tax profit of US$7.9bn compared with US$9.3bn, a decrease of 15% or 14% on a constant currency basis. This was driven by the non-recurrence of the accounting gain of US$1.1bn on the reclassification of Industrial Bank and the gain on disposal of our investment in Bao Viet Holdings of US$104m.

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

	Retail       Banking and Wealth Management           US$m		Commercial      Banking          US$m	Global      Banking              and      Markets          US$m			Global        Private      Banking          US$m		Other          US$m		Total          US$m
Half-year to 30 June 2014
Hong Kong ..........................................	1,928		1,125		977		99		419		4,548
Australia ..............................................	49		62		92		-		(5)		198
India ....................................................	6		59		243		5		67		380
Indonesia .............................................	2		43		62		-		6		113
Mainland China ...................................	140		797		515		(2)		94		1,544
Malaysia ..............................................	90		54		90		-		12		246
Singapore .............................................	71		75		127		30		(7)		296
Taiwan ................................................	18		19		101		-		2		140
Other ...................................................	35		138		208		1		47		429
	2,339		2,372		2,415		133		635		7,894
Half-year to 30 June 2013
Hong Kong ..........................................	1,867		1,083		1,078		137		40		4,205
Australia ..............................................	51		45		108		−		29		233
India ....................................................	(1)		74		255		4		82		414
Indonesia .............................................	18		46		63		−		14		141
Mainland China ...................................	106		763		423		(2)		1,645		2,935
Malaysia ..............................................	78		60		149		−		(13)		274
Singapore .............................................	78		60		147		39		37		361
Taiwan ................................................	(5)		19		83		−		3		100
Other ...................................................	106		160		300		(1)		34		599
	2,298		2,310		2,606		177		1,871		9,262
Half-year to 31 December 2013
Hong Kong ..........................................	1,875		1,027		893		71		18		3,884
Australia ..............................................	49		86		81		−		(3)		213
India ....................................................	(20)		39		163		3		54		239
Indonesia .............................................	(6)		60		63		−		22		139
Mainland China ...................................	117		773		419		(2)		(1)		1,306
Malaysia ..............................................	70		45		87		−		38		240
Singapore .............................................	69		60		115		35		(15)		264
Taiwan ................................................	12		11		75		−		2		100
Other ...................................................	(45)		47		173		−		31		206
	2,121		2,148		2,069		107		146		6,591

On an underlying basis, which excludes the gains noted above, profit before tax in the first half of 2014 was marginally lower. It included a gain of US$428m in Hong Kong on the sale of our investment in Bank of Shanghai and an adverse DVA of US$53m, which compared with a net gain of US$553m on the completion of the sale of our investment in Ping An and a favourable DVA of US$112m in the first half of 2013. Excluding these items, profit before tax increased, as higher net interest income in Hong Kong and mainland China was partly offset by higher operating expenses.

Country business highlights

We continued to focus on our strategic priorities for Asia, using our international network to connect customers across borders. We progressed with the closure of non-core operations, completed the sale of our investment in Bank of Shanghai and implemented the Retail Banking Incentive Framework that removes the formulaic link between product sales and remuneration.

In Hong Kong, we grew our average mortgage balances in RBWM by 2%, though activity levels in the property market were subdued, with average LTV ratios of 47% on new mortgage drawdowns and an estimated 32% on the portfolio as a whole. We saw continued adoption of our mobile banking applications, extended the contact-less payments system to Android phones and were awarded 'International Retail Bank of the Year' by Asian Banking and Finance and 'Best Regional Retail Bank' by The Asian Banker.

The collaboration between CMB and GB&M continued to benefit our clients, raising significant finance in Asia from debt capital markets. Our ongoing collaboration efforts were a key factor in being named as the 'Best Bank in Asia' by The Euromoney Awards for Excellence 2014. In addition,

Analysis of mainland China

	Retail      Banking and Wealth Management          US$m		Commercial      Banking          US$m		Global      Banking              and      Markets          US$m		Global        Private      Banking          US$m		Other          US$m		Total          US$m
Half-year to 30 June 2014
Associates ........................................	127		704		147		-		-		978
Other mainland China ......................	13		93		368		(2)		94		566
	140		797		515		(2)		94		1,544
Half-year to 30 June 2013
Industrial Bank .................................	-		-		-		-		1,089		1,089
Ping An ...........................................	-		-		-		-		553		553
Other associates ...............................	124		681		142		-		-		947
Other mainland China ......................	(18)		82		281		(2)		3		346
	106		763		423		(2)		1,645		2,935
Half-year to 31 December 2013
Associates ........................................	123		679		142		-		(38)		906
Other mainland China ......................	(6)		94		277		(2)		37		400
	117		773		419		(2)		(1)		1,306

we were awarded 'Best Trade Finance Bank in Hong Kong' by both The Asian Banker and The Corporate Treasurer.

In GB&M, we maintained our market leadership in Hong Kong dollar bond issuance and also led the market in Asia ex-Japan G3 currency bonds and Asian local currency bonds, demonstrating the strength of our network and capabilities. We were involved in three of the five largest equity capital markets transactions in Hong Kong during the period.

We continued to lead the market in offshore renminbi ('RMB') bond issuance in Hong Kong and were one of the first foreign banks to announce RMB cross-border pooling capability in the Shanghai Free Trade Zone. We completed Japan's first RMB-denominated import transaction, were the first foreign custodian bank in mainland China to service a Singaporean renminbi qualified foreign institutional investor and won 'Best Overall Offshore RMB Products and Services' in the AsiaMoney Offshore RMB Poll 2014.

In mainland China, we continued to expand our branch network with 167 HSBC outlets, 24 HSBC rural bank outlets and 50 Hang Seng Bank outlets at the end of June. We streamlined the mortgage application process in mainland China and were awarded 'Best Foreign Retail Bank' by The Asian Banker for the sixth consecutive year. In Payments and Cash Management, we launched the Global Payments System which supports all cross-border payments in and out of mainland China in all currencies, including RMB. In M&A, we were adviser to a number of state owned enterprises on significant overseas investments and acquisitions.

In India, we were adviser on two of the largest mergers and acquisitions transactions in the first half of 2014, assisting UK corporations investing in India, and in Wealth Management we launched Managed Solutions, a multi-asset fund series.

In Australia, we were a mandated lead arranger for the largest mining project financing deal and we were awarded 'Best Project Finance House in Asia' by The Asset AAA Award 2013.

Review of performance

The following commentary is on a constant currency basis and comparisons are with the first half of 2013, unless stated otherwise.

Net interest income rose by US$675m, primarily in Hong Kong and mainland China from growth in Balance Sheet Management income, increased term lending and growth in customer deposits.

The rise in Balance Sheet Management income reflected portfolio growth and higher reinvestment rates. Average term lending balances increased in Asia, driven by strong loan growth to GB&M clients in Hong Kong and mainland China, and in CMB from property-related, commercial and industrial lending. The benefit of this growth was partly offset by lending spread compression compared with the first half of 2013, although spreads in CMB were broadly unchanged from the end of 2013. 

Deposit balances increased in Payments and Cash Management in GB&M and CMB, notably in Hong Kong, as well as in Taiwan, mainland China and Singapore. Deposit balances in RBWM also increased, mainly in Hong Kong, in part from new Premier customers, while net interest income growth in mainland China reflected a widening of deposit spreads as market interest rates rose in the first half of 2014.

Additionally, in RBWM, higher net interest income reflected growth in the debt securities portfolio of our insurance operation in Hong Kong, reflecting a rise in premium income, while increased mortgage lending across the region was offset by asset spread compression.

Net fee income decreased by US$74m, mainly in GB&M, due to a reduction in fees received from other regions reflecting lower activity in Markets. In addition, fees from debt under-writing and corporate finance activity decreased due to reduced issuance volumes and the non-recurrence of significant transaction fees in the first half of 2013. These factors were partly offset by higher equity underwriting fees in Hong Kong.

Net trading income was US$454m higher due to the non-recurrence of adverse fair value movements on the Ping An contingent forward sale contract of US$682m, partly offset by an adverse DVA compared with a favourable DVA in the first half of 2013. Excluding these items, net trading income fell, mainly on structured deposits in mainland China from both revaluation losses as yield curves fell and increased interest expense from volume growth where the related income is included in 'Net interest income'.

Net income from financial instruments designated at fair value was US$386m compared with a net loss of US$260m a year earlier, primarily due to higher investment returns on assets held by the insurance business in Hong Kong reflecting improved equity market performance. To the extent that these investment returns were attributed to policyholders holding unit-linked insurance policies and insurance contracts with DPF, there was a corresponding movement in Net insurance claims incurred and movement in liabilities to policyholders.

Gains less losses from financial investments were US$440m compared with US$1.2bn, primarily reflecting the gain on disposal of our investment in Bank of Shanghai of US$428m in the first half of 2014, and the gain on the sale of our investment in Ping An of US$1.2bn in the first half of 2013.

Net earned insurance premiums grew by 7%, mainly in Hong Kong, due to increased new business from deferred annuity, universal life and endowment
contracts, coupled with higher renewals. This was partly offset by lower new business from unit-linked contracts. The growth in premiums resulted in a corresponding increase in Net insurance claims incurred and movement in liabilities to policyholders.

Other operating income decreased by US$1.2bn, as the comparable period in 2013 included an accounting gain of US$1.1bn on the reclassification of Industrial Bank as a financial investment and a gain on the disposal of our investment in Bao Viet Holdings of US$104m. Excluding these items, other operating income was lower by US$47m, mainly reflecting lower revaluation and disposal gains on investment properties, and a loss on the reclassification of our banking associate in Vietnam of US$32m, partly offset by an increase in PVIF assets due to favourable market conditions and a rise in the value of new business.

LICs increased by US$30m, primarily in CMB in Hong Kong due to a rise in individually assessed impairment charges and the non-recurrence of collective impairment releases. This was partly offset by lower collective impairment charges in RBWM in Malaysia reflecting reduced delinquencies, and the non-recurrence of individually assessed impairments on a few corporate exposures in Australia.

Operating expenses rose by US$299m, reflecting investment in the region, notably in risk and compliance initiatives such as Global Standards. Staff costs rose from inflationary pressures and additional headcount, in Hong Kong to support business growth, and in mainland China and India from increased usage of our Global Service Centres. Higher costs also reflected a litigation provision release in the first half of 2013, higher property costs in Hong Kong from rent inflation and refurbishments, and ongoing branch expansion in mainland China. These factors were partly offset by the non-recurrence of a US$72m write down of Hana HSBC Life Insurance in the first half of 2013. In addition, we achieved over US$100m of sustainable cost savings in the period.

Share of profit from associates and joint ventures rose, primarily from BoCom, reflecting higher fees and trade revenues, along with increased net interest income from balance sheet growth, partly offset by higher operating expenses and increased LICs.

Profit before tax and balance sheet data - Asia

	Half-year to 30 June 2014
	Retail     Banking and Wealth Management         US$m		Commercial     Banking         US$m	Global      Banking               and       Markets           US$m			Global       Private     Banking         US$m		Other         US$m		Inter-   segment elimination65        US$m		Total         US$m
Profit before tax
Net interest income/(expense).....	2,466		1,639		1,844		86		(11)		66		6,090
Net fee income ............	1,368		785		679		129		5		-		2,966
Trading income excluding net interest income .	107		211		664		79		16		-		1,077
Net interest income/(expense) on trading activities .	(9)		(5)		327		-		5		(66)		252
Net trading income59 ...	98		206		991		79		21		(66)		1,329
Changes in fair value of long-term debt issued and related derivatives ...............	-		-		-		-		(4)		-		(4)
Net income/(expense) from other financial instruments designated at fair value .......................	402		(17)		3		-		2		-		390
Net income/(expense) from financial instruments designated at fair value ........................	402		(17)		3		-		(2)		-		386
Gains less losses from financial investments .................................	-		4		6		-		430		-		440
Dividend income .........	-		-		-		1		20		-		21
Net earned insurance premiums .................	3,474		361		-		-		-		-		3,835
Other operating income .................................	341		51		62		6		1,290		(562)		1,188
Total operating income ...................	8,149		3,029		3,585		301		1,753		(562)		16,255
Net insurance claims66 .	(3,796)		(352)		-		-		-		-		(4,148)
Net operating income13 ................	4,353		2,677		3,585		301		1,753		(562)		12,107
Loan impairment (charges)/ recoveries and other credit risk provisions .........	(153)		(67)		4		-		-		-		(216)
Net operating income .................................	4,200		2,610		3,589		301		1,753		(562)		11,891
Operating expenses .....	(2,018)		(942)		(1,323)		(168)		(1,120)		562		(5,009)
Operating profit .......	2,182		1,668		2,266		133		633		-		6,882
Share of profit in associates and joint ventures ....	157		704		149		-		2		-		1,012
Profit before tax .......	2,339		2,372		2,415		133		635		-		7,894
	%		%		%		%		%				%
Share of HSBC's profit before tax ................	19.0		19.2		19.6		1.1		5.1				64.0
Cost efficiency ratio ....	46.4		35.2		36.9		55.8		63.9				41.4
Balance sheet data51
	US$m		US$m		US$m		US$m		US$m				US$m
Loans and advances to customers (net)3 ......	115,541		131,920		100,942		12,417		1,567				362,387
Total assets .................	165,254		157,401		549,935		14,521		76,008		(88,785)		874,334
Customer accounts3 .....	283,734		149,148		106,935		30,139		265				570,221

	Half-year to 30 June 2013
	Retail       Banking and Wealth Management          US$m		Commercial       Banking          US$m	Global        Banking                and        Markets            US$m			Global        Private       Banking          US$m		Other          US$m		Inter-     segment elimination65         US$m		Total          US$m
Profit before tax
Net interest income/(expense) ...........	2,424		1,503		1,584		109		(111)		10		5,519
Net fee income ..................	1,417		780		767		124		2		−		3,090
Trading income/(expense) excluding net interest income ...........................	101		192		929		105		(720)		−		607
Net interest income/(expense) on trading activities ........	(11)		(4)		327		−		9		(10)		311
Net trading income/ (expense)59 .....................	90		188		1,256		105		(711)		(10)		918
Changes in fair value of long-term debt issued and related derivatives ....	−		−		−		−		1		−		1
Net income/(expense) from other financial instruments designated at fair value ........................	(245)		(12)		3		−		(7)		−		(261)
Net income/(expense) from financial instruments designated at fair value ...	(245)		(12)		3		−		(6)		−		(260)
Gains less losses from financial investments .....	1		−		21		1		1,204		−		1,227
Dividend income ................	−		−		3		−		14		−		17
Net earned insurance premiums .......................	3,235		347		−		−		1		−		3,583
Other operating income .....	391		27		75		5		2,543		(588)		2,453
Total operating income .....	7,313		2,833		3,709		344		2,936		(588)		16,547
Net insurance claims66 ........	(2,938)		(318)		−		−		−		−		(3,256)
Net operating income13 ......	4,375		2,515		3,709		344		2,936		(588)		13,291
Loan impairment (charges)/ recoveries and other credit risk provisions ................	(176)		(22)		1		(1)		−		−		(198)
Net operating income ........	4,199		2,493		3,710		343		2,936		(588)		13,093
Operating expenses ............	(2,055)		(865)		(1,249)		(166)		(1,065)		588		(4,812)
Operating profit .................	2,144		1,628		2,461		177		1,871		−		8,281
Share of profit in associates and joint ventures ...........	154		682		145		−		−		−		981
Profit before tax ................	2,298		2,310		2,606		177		1,871		−		9,262
	%		%		%		%		%				%
Share of HSBC's profit before tax .......................	16.3		16.4		18.5		1.3		13.3				65.8
Cost efficiency ratio ..........	47.0		34.4		33.7		48.3		36.3				36.2
Balance sheet data51
	US$m		US$m		US$m		US$m		US$m				US$m
Loans and advances to customers (net)3 .............	109,290		119,621		85,816		10,389		1,567				326,683
Total assets ........................	154,394		142,794		455,744		31,706		87,076		(71,872)		799,842
Customer accounts3 ............	262,368		129,728		93,978		30,222		320				516,616

Profit before tax and balance sheet data -Asia (continued)

	Half-year to 31 December 2013
	Retail       Banking and Wealth Management          US$m		Commercial       Banking          US$m		Global       Banking              and       Markets          US$m		Global        Private       Banking          US$m		Other          US$m		Inter-      segment elimination65         US$m		Total          US$m
Profit before tax
Net interest income/(expense) ............	2,471		1,600		1,661		96		(13)		98		5,913
Net fee income/(expense) ....	1,341		738		652		125		(10)		−		2,846
Trading income/(expense) excluding net interest income ............................	137		185		554		70		(19)		−		927
Net interest income/(expense) on trading activities .........	(5)		(2)		281		−		5		(98)		181
Net trading income/ (expense)59 ......................	132		183		835		70		(14)		(98)		1,108
Changes in fair value of long-term debt issued and related derivatives .....	−		−		−		−		(2)		−		(2)
Net income from other financial instruments designated at fair value .........................	560		12		4		−		−		−		576
Net income/(expense) from financial instruments designated at fair value .....	560		12		4		−		(2)		−		574
Gains less losses on financial investments .....................	(2)		−		37		13		−		−		48
Dividend income .................	−		1		3		−		131		−		135
Net earned insurance premiums .........................	3,028		307		1		-		(1)		-		3,335
Other operating income ......	373		70		88		7		1,328		(644)		1,222
Total operating income .......	7,903		2,911		3,281		311		1,419		(644)		15,181
Net insurance claims66 .........	(3,671)		(369)		−		−		−		−		(4,040)
Net operating income13 .......	4,232		2,542		3,281		311		1,419		(644)		11,141
Loan impairment charges and other credit risk provisions .........................................	(171)		(122)		(4)		(3)		−		−		(300)
Net operating income ..........	4,061		2,420		3,277		308		1,419		(644)		10,841
Operating expenses .............	(2,083)		(921)		(1,311)		(201)		(1,252)		644		(5,124)
Operating profit ..................	1,978		1,499		1,966		107		167		−		5,717
Share of profit/(loss) in associates and joint ventures ...........................	143		649		103		−		(21)		−		874
Profit before tax .................	2,121		2,148		2,069		107		146		−		6,591
	%		%		%		%		%				%
Share of HSBC's profit before tax ........................	25.0		25.3		24.3		1.3		1.7				77.6
Cost efficiency ratio ............	49.2		36.2		40.0		64.6		88.2				46.0
Balance sheet data51
	US$m		US$m		US$m		US$m		US$m				US$m
Loans and advances to customers (net)3 ..............	111,769		122,882		89,722		10,904		1,620				336,897
Total assets .........................	158,456		146,898		515,023		12,994		82,453		(84,033)		831,791
Customer accounts3 .............	278,392		141,958		96,546		31,250		337				548,483

For footnotes, see page 96.

 

END

 

 

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