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HSBC Holdings PLC (HSBA)

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Wednesday 26 August, 2020

HSBC Holdings PLC

Half-year Report 1 of 2

RNS Number : 1460X
HSBC Holdings PLC
26 August 2020
 

 

HSBC Holdings plc

Interim Report 2020

 

Contents

 

Overview

1  At a glance

2  Highlights

4  Group Chief Executive's review

8  How we do business

10  Financial overview

14   Global businesses

21  Risk overview

 

Interim management report

25  Financial summary

32  Global businesses

40  Geographical regions

50  Risk

50   - Key developments in the first half of 2020

50  - Areas of special interest

54  - Credit risk

77  - Capital and liquidity risk

84  - Market risk

87  - Insurance manufacturing operations risk

 

Interim condensed financial statements

90  Directors' responsibility statement

91  Report of the independent auditors

92  Interim condensed financial statements

98  Notes on the interim condensed financial statements

 

Additional information

121  Shareholder information

126  Forward-looking statements

127  Certain defined terms

128  Abbreviations

 

A reminder

The currency we report in is US dollars.

 

Adjusted measures

We supplement our IFRS figures with alternative performance measures used by management internally. These measures are highlighted with the following symbol:

 
Further explanation may be found on page 12.

 

In this document we use the following abbreviations to refer to reporting periods:

1H20  First half of 2020   2Q20  Second quarter of 2020

2H19  Second half of 2019   1Q20  First quarter of 2020

1H19  First half of 2019   2Q19  Second quarter of 2019

  1Q19  First quarter of 2019

 

For a full list of abbreviations see page 128.

 

Cover image: Connecting our customers through blockchain

For centuries, international trade has been reliant on paper documents - from letters of credit to bills of lading. Today, HSBC is leading the way towards paperless trade finance. We are working with our clients, financial institutions and fintech partners to pioneer digitisation of trade, which has made doing business simpler and faster, improving the working capital efficiency for our customers. Paperless trade is becoming a reality. We have used a blockchain-based letter of credit platform, built on R3 Corda blockchain technology, to complete digital trade transactions for shipments of iron ore from Australia to mainland China, and soybeans from Argentina to Malaysia. By investing in digital solutions such as blockchain technology, we can help to increase the velocity of trade globally.

 

Our global businesses

We serve customers through three global businesses. On pages 14 to 20 we provide an overview of our performance in the first half of 2020 for each of the global businesses, as well as our Corporate Centre.

In the second quarter, we simplified our organisational structure by combining Global Private Banking and Retail Banking and Wealth Management to form Wealth and Personal Banking. This followed realignments within our internal reporting and includes the reallocation of Balance Sheet Management, hyperinflation accounting in Argentina and HSBC Holdings net interest expense from Corporate Centre to the global businesses.

 

Wealth and Personal Banking ('WPB')

We help millions of our customers look after their day-to-day finances and manage, protect and grow their wealth.

 

Commercial Banking ('CMB')

Our global reach and expertise help domestic and international businesses around the world unlock their potential.

 

Global Banking and Markets ('GBM')

We provide a comprehensive range of financial services and products to corporates, governments and institutions.

 

At a glance

 

Covid-19: The nature, scale and pervasiveness of the coronavirus pandemic dramatically impacted the global macroeconomic environment. The economic disruption caused by Covid-19, together with the worsened economic outlook, resulted in a material increase in expected credit losses and other credit impairment charges ('ECL'), as well as a reduction in revenue due to lower transaction volumes and reduced client activity.

Read more on page 22.

 

Geopolitical risk:   Levels of geopolitical risk increased in particular markets and are expected to have economic impacts for the Group. US-China relations continue to be under pressure, heightened by the passing of the Hong Kong national security law and the US Hong Kong Autonomy Act. The future relationship between the UK and the EU remains uncertain, while there are also emerging challenges in UK-China relations.

Read more on pages 22 and 23.

 

 

Market factors: Interest rates fell in the majority of our key markets and are expected to remain at lower levels for the foreseeable future, which will adversely impact our net interest income. In addition, heightened levels of uncertainty have led to a significant increase in market volatility globally. While this benefited some Global Markets businesses, it also led to large adverse mark-to-market movements in the first quarter of 2020, which reversed to some extent in the second quarter, notably in life insurance manufacturing.

Read more on pages 84 to 89.

 

 

 

 

Financial performance in 1H20:

Reported profit after tax

$3.1bn

(1H19: $9.9bn)

 

Return on average tangible equity (annualised)

3.8%

(1H19: 11.2%)

 

Basic earnings per share

$0.10

(1H19: $0.42)

Read more on page 10.

 

Supporting customers: We have remained operationally resilient throughout the Covid-19 outbreak and continued to keep our customers at the forefront of our operations. During 1H20, we introduced several measures and initiatives to support our customers and are also working with governments supporting national schemes, granting more than $27bn in payment holidays on loans, credit cards and mortgages for our personal lending customers around the world. For our wholesale lending customers, we have provided more than $52bn in lending to more than 172,000 customers.

 

Read more on page 9.

 

Business highlights: We helped our clients raise over $1.15tn in capital markets financing in 1H20, and we remained number one globally in sustainable finance bonds, according to Dealogic's 1H20 rankings. In Hong Kong, we launched a fully remote, digital account opening solution for business customers, while in the UK, we launched HSBC Kinetic, our new app-only digital banking offering for small and medium-sized business customers. In WPB, we launched Pinnacle in mainland China, our new digital platform for wealth planning and insurance services.

Read more on pages 14 to 20.

 

Business update: We have restarted most areas of the transformation programme we announced in February 2020, having temporarily paused elements, and we have already made progress in other areas. In the US, we completed the consolidation of our branch network, impacting 80 branches, and we closed a further 31 branches in other locations as we seek to optimise our global footprint. In GBM, we have formed a risk-weighted assets ('RWAs') optimisation unit and delivered a gross reduction in RWAs of $21bn in 1H20.

Read more on page 4.

Highlights

 

Performance in the first half of 2020 was heavily impacted by the Covid-19 outbreak, geopolitical risk and market factors. The outlook is highly uncertain and dependent on the path and speed of economic recovery.

 

Financial performance (vs 1H19)

•   Reported profit after tax down 69% to $3.1bn and reported profit before tax down 65% to $4.3bn from higher ECL and lower revenue. Reported profit in 1H20 also included a $1.2bn impairment of software intangibles, mainly in Europe.

•   In Asia, we reported profit before tax of $7.4bn in 1H20, despite higher ECL, demonstrating the strength and continued resilience of our operations in the region and underlining the importance of Asia to the Group. Higher ECL charges materially impacted profitability in our markets across the rest of the world, notably in our operations throughout Europe.

•   Reported revenue down 9% to $26.7bn, reflecting the impact of interest rate reductions, as well as adverse market impacts in life insurance manufacturing and adverse valuation adjustments in GBM, notably in 1Q20. These factors more than offset higher revenue in Global Markets.

•   Net interest margin ('NIM') of 1.43% in 1H20, down 18 basis points ('bps') from 1H19. NIM in 2Q20 was 1.33%, down 21bps from 1Q20, primarily reflecting the initial impact of the reduction in interest rates due to the Covid-19 outbreak.

•   Reported ECL increased by $5.7bn to $6.9bn due to the impact of the Covid-19 outbreak and the forward economic outlook, and due to an increase in charges related to specific wholesale customers. ECL (annualised) as a percentage of average gross loans and advances to customers was 1.33% in 1H20, while allowance for ECL against loans and advances to customers increased from $8.7bn at 31 December 2019 to $13.2bn at 30 June 2020.

•   Reported operating expenses down 4%, despite a $1.2bn impairment of software intangibles. Adjusted operating expenses fell 5%, despite continued investment, due to lower performance-related pay and reduced discretionary costs.

•   In 1H20, lending decreased by $18bn on a reported basis. On a constant currency basis, lending increased by $12bn, reflecting corporate customers drawing on existing and new credit lines and re-depositing these to increase cash balances in 1Q20, which was partly offset by paydowns in 2Q20. Deposits grew by $93bn on a reported basis and $133bn on a constant currency basis, with growth in all global businesses, including through the depositing of loans from government-backed schemes.

•   Common equity tier 1 capital ('CET1') ratio of 15.0%, up 30bps from 4Q19, as higher CET1 capital, which included an increase from the cancellation of the 4Q19 dividend and the current suspension of dividends on ordinary shares, more than offset the impact of RWA growth.

Financial performance (vs 2Q19)

•   Reported profit after tax down 88% to $0.6bn and reported profit before tax down 82% to $1.1bn due to higher ECL and lower revenue, which included the non-recurrence of a 2Q19 dilution gain of $0.8bn. This was partly offset by a reduction in operating expenses, despite a $1.2bn impairment of software intangibles.

Financial performance (vs 1Q20)

•   Reported profit after tax down 75% to $0.6bn and reported profit before tax down 66% to $1.1bn, reflecting higher ECL, primarily in CMB, which reported a loss before tax in 2Q20. Lower revenue reflected the impact of interest rate reductions, with net interest margin falling by 21bps to 1.33%. This was partly offset by the partial reversal of the adverse market impacts in life insurance manufacturing and valuation adjustments in GBM recorded in 1Q20. Results in 2Q20 were also adversely impacted by a $1.2bn impairment of software intangibles.

 

 

Outlook for 2020

•   We continue to face a wide range of potential economic outcomes for the second half of 2020 and into 2021 , partly dependent on the extent of any potential impacts from new waves of Covid-19, the path to the development of a possible vaccine and market and consumer confidence levels. Heightened geopolitical risk could also impact a number of our markets, including Hong Kong and the UK.

•   Applying a range of weightings to our ECL sensitivity analysis, as disclosed on pages 56 to 62, could result in an ECL charge in the range of $8bn to $13bn for 2020. This range, which continues to be subject to a high degree of uncertainty due to Covid-19 and geopolitical tensions, is higher than at 1Q20 given the deterioration in consensus economic forecasts and actual loss experience during 2Q20.

•   Lower global interest rates and reduced customer activity have put increasing pressure on revenue, and are expected to continue to do so.

•   We intend to accelerate our transformation programme and execute additional cost actions to help mitigate pressures on revenue and create capacity for further investments in technology.

•   We expect mid-to-high single-digit percentage growth in RWAs in 2020, primarily from credit rating migration movements, which is expected to have an adverse impact on our CET1 ratio. We will continue to aim to reduce RWAs in low-returning areas, and improve efficiency to allow resources to be further and faster allocated to areas of competitive advantage, higher returns and growth.

•   Given the current high degree of uncertainty, we are continuing to monitor closely the implications on our business plan and medium-term financial targets, while also undertaking a review of our future dividend policy. We intend to provide an update on our medium-term financial targets and dividend policy at our year-end results for 2020.

 

 

 

 

Key financial metrics

 

Half-year to

Reported results

30 Jun 2020

30 Jun 2019

31 Dec 2019

Reported revenue ($m)

26,745

 

29,372

 

26,726

 

Reported profit before tax ($m)

4,318

 

12,407

 

940

 

Reported profit after tax ($m)

3,125

 

9,937

 

(1,229

)

Profit attributable to the ordinary shareholders of the parent company ($m)

1,977

 

8,507

 

(2,538

)

Cost efficiency ratio (%)

61.8

 

58.4

 

94.3

 

Basic earnings per share ($)

0.10

 

0.42

 

(0.13

)

Diluted earnings per share ($)

0.10

 

0.42

 

(0.13

)

Return on average ordinary shareholders' equity (annualised) (%)

2.4

 

10.4

 

(3.0

)

Net interest margin (%)1

1.43

 

1.61

 

1.58

 

 

 

 

 

Alternative performance measures

 

 

 

Adjusted revenue ($m)

26,477

 

27,815

 

26,632

 

Adjusted profit before tax ($m)

5,635

 

12,273

 

9,660

 

Adjusted cost efficiency ratio (%)

56.4

 

56.6

 

61.8

 

Annualised expected credit losses and other credit impairment charges ('ECL') as a % of average gross loans and advances to customers (%)

1.33

 

0.22

 

0.30

 

Return on average tangible equity (annualised) (%)1,2

3.8

 

11.2

 

8.4

 

 

 

 

 

 

 

At

 

Balance sheet

30 Jun 2020

30 Jun 2019

31 Dec 2019

Total assets ($m)

2,922,798

 

2,751,273

 

2,715,152

 

Net loans and advances to customers ($m)

1,018,681

 

1,021,632

 

1,036,743

 

Customer accounts ($m)

1,532,380

 

1,380,124

 

1,439,115

 

Average interest-earning assets ($m)1

2,034,939

 

1,912,708

 

1,922,822

 

Loans and advances to customers as % of customer accounts (%)

66.5

 

74.0

 

72.0

 

Total shareholders' equity ($m)

187,036

 

192,676

 

183,955

 

Tangible ordinary shareholders' equity ($m)

147,879

 

145,441

 

144,144

 

Net asset value per ordinary share at period end ($)3,4

8.17

 

8.35

 

8.00

 

Tangible net asset value per ordinary share at period end ($)4

7.34

 

7.19

 

7.13

 

 

 

 

 

Capital, leverage and liquidity

 

 

 

Common equity tier 1 capital ratio (%)5

15.0

 

14.3

 

14.7

 

Risk-weighted assets ($m)5

854,552

 

885,971

 

843,395

 

Total capital ratio (%)5

20.7

 

20.1

 

20.4

 

Leverage ratio (%)5

5.3

 

5.4

 

5.3

 

High-quality liquid assets (liquidity value) ($bn)

654

 

533

 

601

 

Liquidity coverage ratio (%)

148

 

136

 

150

 

 

 

 

 

Share count

 

 

 

Period end basic number of $0.50 ordinary shares outstanding (millions)

20,162

 

20,221

 

20,206

 

Period end basic number of $0.50 ordinary shares outstanding and dilutive potential ordinary shares (millions)

20,198

 

20,286

 

20,280

 

Average basic number of $0.50 ordinary shares outstanding (millions)

20,162

 

20,124

 

20,191

 

Dividend per ordinary share (in respect of the period) ($)1

-

 

0.20

 

0.30

 

 

1  For these metrics, half-year to 31 December 2019 is calculated on a full-year basis and not a 2H19 basis.

2  Annualised profit attributable to ordinary shareholders, excluding impairment of goodwill and other intangible assets and changes in present value of in-force insurance contracts ('PVIF') (net of tax), divided by average ordinary shareholders' equity excluding goodwill, PVIF and other intangible assets (net of deferred tax).

3  The definition of net asset value per ordinary share is total shareholders' equity less non-cumulative preference shares and capital securities, divided by the number of ordinary shares in issue excluding shares the company has purchased and are held in treasury. 

4  Excludes impact of $0.10 per share dividend in 1Q19, following a June 2019 change in accounting practice on the recognition of interim dividends, from the date of declaration to the date of payment.

5  Unless otherwise stated, regulatory capital ratios and requirements are calculated in accordance with the transitional arrangements of the Capital Requirements Regulation in force in the EU at the time, including the regulatory transitional arrangements for IFRS 9 'Financial Instruments' in article 473a. The capital ratios and requirements at 31 December 2019 and 30 June 2020 are reported in accordance with the revised Capital Requirements Regulation and Directive ('CRR II'), as implemented, whereas the Capital Requirements Regulation and Directive ('CRD IV') applied at 30 June 2019. Leverage ratios are calculated using the end point definition of capital.

 

Group Chief Executive's review

 

 

We are helping our customers navigate their own path through uncertainty and acting with pace and decisiveness to adapt HSBC to an environment in which no business can afford to stand still.

 

The first six months of 2020 have been some of the most challenging in living memory. Due to the Covid-19 pandemic, much of the global economy slowed significantly and some sectors drew to a near total halt.

This meant two things for HSBC. First, that the financial performance of the bank inevitably suffered in line with the rest of the global economy. But second, that the real measure of our performance became our success in supporting our customers, colleagues and communities during the pandemic, and in laying the groundwork for the recovery to come.

Covid-19

In difficult times, HSBC's job has always been to support our communities, provide stability and help build economic growth. I have been immensely proud of the way our people have delivered this purpose as the Covid-19 outbreak has unfolded.

Our approach has hinged on three themes - securing a continuous service for all who rely on us; providing a financial bridge for our personal and business customers beyond the crisis; and ensuring that HSBC retains the strength to help our customers thrive once restrictions begin to ease.

We maintained a high level of business continuity with 85% of colleagues equipped to work from home, all of our customer contact centres fully operational, and between 70% and 90% of our branches open for business in the first half. We enhanced our digital capabilities to serve more customers remotely, with faster access and improved security. We also engaged with our regulators to better enable customers to access a broad range of banking products and services from their homes, including through remote consultations and sales.

This underpinned our ability to get our customers the support they need. For our personal lending customers, we granted more than 700,000 payment holidays on loans, credit cards and mortgages, providing more than $27bn in customer relief in the first half of the year. For our wholesale lending customers, we provided more than $52bn of facilities to more than 172,000 customers globally over the same period, both through government schemes and our own relief initiatives.

As a global bank, HSBC played a vital role in keeping capital flowing for our clients, arranging more than $1.1tn of loan, debt and equity financing for our wholesale customers in the first six months of 2020. Global Banking and Markets made a direct contribution to the Covid-19 relief effort, helping to arrange more than $48bn of financing for our clients through social and Covid-19 relief bonds.

We also took an early decision not to apply for government support packages for employees across the countries in which we operate.

Throughout all of this, the well-being of our people has been our paramount concern. We have taken steps to enable our front-line colleagues to do their jobs safely and effectively. For all our colleagues, we have maintained a regular flow of communication and listened closely to their needs, providing the support and flexibility to help them manage their lives during the pandemic.

"The real measure of our performance became our success in supporting our customers, colleagues and communities."

 

This has been one of the most demanding periods that I can remember for all of our people across HSBC. Many have had to juggle personal and professional priorities, while adapting to new and unfamiliar ways of working. I have been humbled by the dedication and commitment that they have shown in incredibly tough circumstances, and thank them deeply for all they have done - and are doing - for our customers, communities and each other.

 

 

 

Transformation

On 18 February, we announced a substantial transformation programme to ensure that HSBC is fit for the future. We published plans to reshape underperforming businesses, simplify our complex organisation and reduce our costs.

We are moving forward with these plans wherever we can. We have already begun combining our wholesale back office operations, and brought our retail, wealth and private banking businesses together into a single global business - Wealth and Personal Banking. Our US business has reduced its branch footprint, and Global Banking and Markets has made good early progress in reducing its risk-weighted assets. The lessons of the past six months are also being applied more broadly, particularly from parts of the business that have responded to a fast-moving situation with exceptional pace and agility.

The operational risks posed by the Covid-19 outbreak meant that we had to move more slowly in some areas than others. In March, I paused the redundancy programme intended to deliver the reduction in headcount we promised in February. It would have been wrong to proceed with job losses at a time of significant stress for our people and communities, and at a point when we needed to protect our capacity to serve our customers. Now, many countries have slowed the spread of the virus and are emerging from lockdown, and we have adapted to new ways of working. I therefore decided in June to lift the pause on redundancies, proceeding thoughtfully but purposefully, while taking local considerations into account.

Now that many governments have become better accustomed to managing the ebb and flow of the pandemic, we intend to accelerate implementation of the plans we announced in February. At the same time, our operating environment has changed significantly since the start of the year. We will also therefore look at what additional actions we need to take in light of the new economic environment to make HSBC a stronger and more sustainable business.

Financial performance

A good start to the year in January and February was overshadowed from March onwards by the Covid-19 outbreak and the impact of falling interest rates.

The sharp increase in expected credit losses that followed impacted all markets, but particularly those outside Asia. ECL grew further from the first to the second quarter as the economic outlook deteriorated, with increases in both stage 1 and 2 allowances. Stage 3 ECL were up overall but broadly stable during the first half, although the first quarter included a charge in Singapore unrelated to the Covid-19 crisis.

First half reported revenue was 9% lower than last year's first half, due mainly to the effects of interest rate cuts made at the start of the year across our deposit franchises. By contrast, our Asia businesses showed good resilience and Global Markets grew revenue on the back of higher client activity.

 

Response to Covid-19

Operational response

Our operations have stayed highly resilient:

 

Approximately

90%

of our branch network remained open for business globally, as at 30 June 2020.

 

Approximately

85%

of our employees are now equipped to work from home.

"We have taken steps to enable our front-line colleagues to do their jobs safely and effectively."

 

We took further action on costs in response to the weaker revenue environment, reducing both performance-related pay and discretionary spending. Together with our ongoing cost-saving initiatives, this helped reduce reported operating expenses by 4%.

While these cost measures mitigated some of the adverse effects of the radically changed economic environment, reported first half profit before tax was 65% lower than the same period last year, and adjusted profit before tax fell by 54%.

Lending decreased by $18bn in the first half. Customers initially drew on new and existing credit lines in the first quarter in response to the Covid-19 outbreak, but began to pay these down in the second quarter as circumstances changed. Deposits rose by $93bn in the first half, as customers increased their cash reserves and reduced their spending during lockdown.

We continued to invest in the future of the business while managing costs down, spending $2.8bn on technology in the first six months of the year.

Our balance sheet remains robust with a CET1 ratio of 15.0% and strong liquidity and funding.

 

Facing the future

Our performance in the second half of the year will continue to be influenced by the path and economic impact of the Covid-19 outbreak. Geopolitical uncertainty could also weigh heavily on our clients, particularly those impacted by heightened US-China and UK-China tensions, and the future of UK-EU trade relations.

Amid the current uncertainty, we remain focused on the things we can control - helping our customers navigate their own path to a complex future, and acting with pace and decisiveness to adapt HSBC to an environment in which no business can afford to stand still.

HSBC has always helped our clients manage complexity. There have been many times in the last 155 years when geopolitics has altered the nature of trade, or disruptive forces have changed entire industries. On each occasion, HSBC has adapted and innovated to help our customers when they need us most, and we will do so again.

We start from a strong position. As the world's leading trade bank1, we have the knowledge and network to help customers reorder their supply chains securely and sustainably. As the world's number one bank for green, social and sustainable bonds2, we have the experience and expertise to help customers finance their transition to a cleaner, more resilient future. These are important strengths, but we have to keep investing to maintain them and to provide the agile, responsive and entrepreneurial service that our clients require.

Like our clients, HSBC has to operate in a difficult geopolitical environment. Current tensions between China and the US inevitably create challenging situations for an organisation with HSBC's footprint. However, the need for a bank capable of bridging the economies of east and west is acute, and we are well placed to fulfil this role. We will face any political challenges that arise with a focus on the long-term needs of our customers and the best interests of our investors.

 

Response to Covid-19

Customer response

We are participating in several Covid-19 relief programmes to deploy a range of support measures for our customers at pace.

 

We arranged more than

$48bn

of financing through social and Covid-19 relief bonds in 1H20.

 

We granted more than

700,000

payment holidays for personal lending customers in 1H20.

 

We provided more than

$52bn

of lending facilities for our wholesale customers in 1H20.

"HSBC has always helped our clients manage complexity."

As we seek to accelerate our transformation in the second half of the year, I am mindful of the impact it will have for some of our people, particularly those leaving us. As necessary as these changes are, the human impact is a matter of deep personal regret to me. We will make sure that all those leaving HSBC as part of our transformation will be treated with fairness and consideration, and will receive support in finding new employment.

Finally, HSBC is a global bank serving customers from many different backgrounds. We therefore need to resemble the communities we serve. In May, we launched a new global ethnicity inclusion programme to better enable careers and career progression for colleagues from ethnic minorities, and in July, we made a series of commitments to address feedback from Black colleagues in particular. However, I want us to be judged by our actions, not our words. We will therefore provide more information about the ethnicity of our workforce in our annual reporting in February, so that our stakeholders can hold us accountable.

 

Noel Quinn

Group Chief Executive

3 August 2020

 

1 Euromoney, Trade Finance Survey, January 2020

2 Dealogic, Sustainable Finance Bond league table, 1H20

 

How we do business

We conduct our business intent on supporting the sustained success of our customers, people and other stakeholders.

Our approach

Our purpose is to connect customers to opportunities. To achieve our purpose, we need to build strong relationships with all of our stakeholders, including customers, employees and the communities in which we operate. This will help us deliver our strategy and operate our business in a way that is sustainable.

 

Our Covid-19 actions

Our ability to help our stakeholders is more important than ever during these challenging and unprecedented times. In the first half of 2020, we continued to promote and encourage good conduct through our people's behaviour and decision making to deliver fair outcomes for customers and preserve market integrity. This included our continuing focus on the needs of vulnerable customers in our product and process design.

We developed a number of digital enhancements to support the ongoing delivery of fair outcomes for our customers in different markets. This included the development of video conferencing guidance to ensure we continue to provide services and products to our customers securely when there is limited access to branches.

We have also played a lead role in issuing social and Covid-19 relief bonds to help raise funds for communities affected by Covid-19, and provided innovative supply chain solutions to help our business customers, as set out in the examples on this page.

On the following page, we have set out further ways that we have supported our stakeholders, including our communities, customers, employees, investors, regulators and governments, and suppliers.

 

Our approach to diversity

Our actions are focused on ensuring our people are valued, respected and supported to fulfil their potential and thrive. Our global ethnicity inclusion programme, which launched in May, is designed to improve the data and reporting of our people's ethnic backgrounds. It will help us take specific actions to enable the careers and career progression of all our colleagues in a supportive and inclusive way.

We are listening to what our colleagues are telling us in response to the Black Lives Matter movement. We are implementing further plans to develop senior Black talent and help diversify the ethnicity profile of HSBC's senior leadership through targeted development interventions. We aim to build a pipeline of future Black talent by strengthening our recruitment processes and partnering with a specialist search firm.

Further details on our plans and progress will be included in our Annual Report and Accounts 2020.

 

Social bonds fund Covid-19 response

We played a lead role in the issuance of the Bank of China Macau branch's HK$4bn social bond, with proceeds earmarked to help small firms hit by the Covid-19 crisis. The funds will be used to provide loans to micro, small and medium-sized enterprises in Macau to help generate employment in industries that have struggled due to the sharp drop in tourism.

We helped to arrange $66bn-worth of social and Covid-19 relief bonds in the first half of 2020, with proceeds supporting responses to the pandemic and projects that aim to deliver a positive societal impact.

 

Easing supply chain strains with trade finance solutions

We are working closely with our customers and governments to help ensure that the flow of critical goods and documents continues during Covid-19 lockdown restrictions. We are helping governments secure personal protective equipment and other critical medical goods, for example, by using our automated utility for sanctions and anti-money laundering controls to navigate risk. We are also supporting clients to deliver critical medical items through fast-track credit approvals. We provided more than 50,000 repayment extensions to our trade finance customers in the first half of 2020, and are helping them to manage liquidity in their end-to-end supply chains.

 

Supporting our stakeholders through Covid-19

The Covid-19 outbreak has created a great deal of uncertainty and disruption for the people, businesses and communities we serve around the world. It is affecting everyone in different ways, with markets at different stages of the crisis. We are tailoring our response to the different circumstances and situations in which our stakeholders find themselves.

 

Our stakeholders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

How we have engaged

 

 

 

Customers

 

The Covid-19 outbreak has posed significant challenges for our customers worldwide. Our immediate priority is to do what we can to provide them with support and flexibility. This has included offering payment holidays and restructuring mortgage payments, as well as extending relief loans or temporary credit limit increases for borrowers.
 
We are working across many markets to offer relief through market-wide and HSBC-led schemes. In the UK, we granted relief to our personal lending customers on 65,000 mortgage accounts and 153,000 personal loan and credit card accounts during the first half of the year. In Hong Kong, we initiated a simple digital and branch registration process to help customers gain access to government funds, following the launch of a government cash payout scheme. On the first day of the scheme, we received one million registrations. For our wholesale lending customers, we provided approximately $33bn of facilities through market-wide schemes and $19bn via HSBC-led schemes in the first half of the year, and helped them to navigate the current environment. For further details on our customer relief programmes, see page 66.
 
We have taken steps to keep many of our branches open while protecting customers and employees. However, with customers doing more of their banking online, we have also deployed new technology to help enable them to engage with us in new ways, including video calls with personal and business relationship managers, and, in some markets, online capabilities for payment relief programmes.
 

 

 
 

Employees

We moved quickly to protect our people. More than 230,000, or 85%, of our total workforce are now enabled to work from their homes if needed.

We provided new and enhanced well-being support to employees during this challenging time. Our dedicated Covid-19 resources are accessible to everyone and include expert medical guidance, education on mental health awareness, training on how to lead remote teams, and advice on managing stress and working remotely. Our employee assistance programmes, which provide confidential counselling to employees, continue to provide clinical support.

We have encouraged a culture of looking out for each other, and our employee networks have held regular support calls for those experiencing mental health challenges, and for those with caring responsibilities.

Listening to employees is vital to ensure we provide the right support. More than 118,000 employees responded to our employee survey, helping us understand how Covid-19 is impacting them and their thoughts about the future. Overall, 89% of people said they were getting the information they needed and 86% reported they were getting the support they needed from their line manager. We continue to use this data and insight to shape our work.

 

 

 
 

Communities

In the first half of the year, we committed more than $20m of donations for programmes and partners that support the medical response, relieve food insecurity and provide access to help for vulnerable people.

 

 

 
 

Regulators and governments

We have engaged proactively with regulators and governments globally regarding the policy changes issued in response to Covid-19 to help our customers, to contribute to normalisation and recovery, and to manage the operational capacity at both banks and regulators.

 

 

 

 
 

Suppliers

We made early payments to thousands of our suppliers during the first half of the year to support them through the pandemic.

 

 

 
 

Investors

At this year's Annual General Meeting ('AGM'), it was unfortunately not possible for shareholders to attend due to the introduction of social distancing measures. Shareholders were instead encouraged to vote by proxy and submit questions in advance. After the AGM, responses to the most frequent questions across key themes were published on our website.

 

HSBC, in line with all other large UK-based banks and at the direct request of the Group's lead regulator (the UK Prudential Regulation Authority), cancelled the fourth interim dividend of 2019. We have also suspended dividend payments until the end of 2020. We profoundly regret the impact this will have on shareholders, their families and their businesses. The Board will review the position at the 2020 year-end results.

 

 

 

 

 

 

 
 

Financial overview

 

In assessing the Group's financial performance, management uses a range of financial measures that focus on the delivery of sustainable returns for our shareholders and maintaining our financial strength.

 

Executive summary

Performance in the first half of 2020 was heavily impacted by the Covid-19 outbreak, geopolitical risk and market factors. Reported profit before tax of $4.3bn fell by 65% compared with 1H19, while adjusted profit before tax of $5.6bn decreased by 54%, mainly from higher ECL and lower revenue. The annualised return on average tangible equity ('RoTE') for 1H20 was 3.8%, compared with 11.2% in 1H19.

Revenue declined compared with 1H19, reflecting the impact of interest rate reductions, as well as adverse market impacts in life insurance manufacturing in WPB and adverse valuation adjustments in GBM, notably in 1Q20. Notwithstanding these factors, certain parts of the Group have remained resilient, notably our Asian franchises including Hong Kong, while our Global Markets business delivered growth compared with 1H19. The increase in ECL and lower revenue were in part mitigated by lower operating expenses due to reductions in the performance-related pay accrual and lower discretionary expenditure. The 1H20 period also included a $1.2bn impairment of capitalised software related principally to businesses within HSBC Bank plc, our non-ring-fenced bank in Europe. This reflected underperformance and a deterioration in the future forecasts of these businesses, substantially relating to prior periods.

The outlook remains highly uncertain. We will continue to monitor closely the implications on our business plan, while also undertaking a review of our future dividend policy. We intend to provide an update on our medium-term financial targets and dividend policy at our year-end results for 2020.

 

Reported results

 

 

Half-year to

Quarter ended

Reported results

30 Jun 2020

$m

30 Jun 2019

 $m

31 Dec 2019

$m

30 Jun 2020

$m

30 Jun 2019

 $m

31 Mar 2020

 $m

Net operating income before change in expected credit losses and other credit impairment charges ('revenue')

26,745

 

29,372

 

26,726

 

13,059

 

14,944

 

13,686

 

ECL

(6,858

)

(1,140

)

(1,616

)

(3,832

)

(555

)

(3,026

)

Net operating income

19,887

 

28,232

 

25,110

 

9,227

 

14,389

 

10,660

 

Total operating expenses

(16,527

)

(17,149

)

(25,200

)

(8,675

)

(8,927

)

(7,852

)

Operating profit/(loss)

3,360

 

11,083

 

(90

)

552

 

5,462

 

2,808

 

Share of profit in associates and joint ventures

958

 

1,324

 

1,030

 

537

 

732

 

421

 

Profit before tax

4,318

 

12,407

 

940

 

1,089

 

6,194

 

3,229

 

Tax expense

(1,193

)

(2,470

)

(2,169

)

(472

)

(1,167

)

(721

)

Profit/(loss) after tax

3,125

 

9,937

 

(1,229

)

617

 

5,027

 

2,508

 

 

Reported performance 1H20 vs 1H19

Reported profit

Reported profit after tax of $3.1bn in 1H20 was $6.8bn or 69% lower than in 1H19.

Reported profit before tax of $4.3bn was $8.1bn or 65% lower than in 1H19, primarily due to a rise in reported ECL, reflecting the impact of the Covid-19 outbreak on the economic outlook. The reduction also reflected lower reported revenue, reflecting the impact of interest rate reductions, as well as adverse market impacts in life insurance manufacturing in WPB and adverse valuation adjustments in GBM, notably in 1Q20. Lower revenue also reflected the non-recurrence of an $828m dilution gain in 1H19 recognised on the completion of the merger of our associate The Saudi British Bank ('SABB') with Alawwal bank in Saudi Arabia. These reductions were in part mitigated by lower reported operating expenses as we reduced the performance-related pay accrual and lowered discretionary expenditure. The 1H20 period also included a $1.2bn impairment of capitalised software related principally to businesses within HSBC Bank plc. This reflected underperformance and a deterioration in the future forecasts of these businesses, substantially relating to prior periods. This impairment has been recognised as a significant item, with $1.0bn included within 'impairment of goodwill and other intangibles' and $0.2bn included within 'restructuring and other related costs'.

Results in 1H20 included certain volatile items, which impacted revenue. These included adverse market impacts in life insurance manufacturing in WPB of $334m (1H19: $152m favourable), while GBM included an adverse movement in credit and funding valuation adjustments of $355m (1H19: $14m favourable) and losses in Principal Investments of $12m (1H19: $122m favourable). Results also included favourable movements on our long-term debt and associated swaps in Corporate Centre of $195m (1H19: $143m favourable). In 1H19, results included disposal gains in WPB and CMB of $157m.

 

Our operations across Asia delivered resilient performances during 1H20, despite interest rate headwinds, adverse market impacts in life insurance manufacturing and a rise in ECL. In 1H20, reported profit before tax in Asia represented more than 170% of Group profits, underlining the importance of the region to the Group. Outside of Asia, the increase in ECL and interest rate reductions adversely affected the profitability of our operations, most notably across Europe, including HSBC UK plc, our ring-fenced bank in Europe, while HSBC Bank plc was also impacted by an impairment of software intangibles.

Reported revenue

Reported revenue of $26.7bn was $2.6bn or 9% lower than in 1H19, reflecting the impact of interest rate reductions across our global businesses, most notably in Retail Banking and Global Liquidity and Cash Management ('GLCM'). In addition, the reduction reflected adverse market impacts in life insurance manufacturing in WPB and adverse valuation adjustments in GBM, both notably in the first quarter. These factors more than offset higher revenue in Global Markets as increased volatility resulted in higher client activity.

The reduction in reported revenue included net adverse movements in significant items of $0.6bn, primarily from the non-recurrence of a $0.8bn dilution gain in 1H19, as mentioned above.

 

Reported ECL

Reported ECL of $6.9bn were $5.7bn higher than in 1H19, with increases across all global businesses, mainly from charges relating to the global impact of the Covid-19 outbreak on the forward economic outlook. The increase also reflected higher charges related to specific wholesale exposures, including a significant charge related to a corporate exposure in Singapore in CMB.

The estimated impact of the Covid-19 outbreak was incorporated in the ECL through additional scenario analysis, which considered differing severity and duration assumptions relating to the global pandemic. These included probability-weighted shocks to annual GDP and consequential impacts on unemployment and other economic variables, with differing economic recovery assumptions.Given the severity of the macroeconomic projections, and the complexities of the government measures, which have never been modelled, additional judgemental adjustments have been made to our provisions.

For further details on the calculation of ECL, including the measurement uncertainties and significant judgements applied to such calculations, the impact of alternative/additional scenarios and post model-adjustments, see pages 56 to 62.

Reported operating expenses

Reported operating expenses of $16.5bn were $0.6bn or 4% lower than in 1H19 and included favourable foreign currency translation differences of $0.5bn and net adverse movements in significant items of $0.6bn, which included:

•   a $1.0bn impairment of capitalised software related principally to businesses within HSBC Bank plc. This reflected underperformance and a deterioration in the future forecasts of these businesses, substantially relating to prior periods (for more information, see Note 11 on the interim condensed financial statements); and

•   higher restructuring and other related costs of $0.5bn, of which $116m related to severance and $0.2bn related to an impairment of software intangibles, compared with $0.3bn in 1H19.

This was partly offset by:

•   customer redress programme costs in respect of payment protection insurance ('PPI') of $0.1bn in 1H20, compared with $0.6bn in 1H19.

The remaining reduction reflected lower performance-related pay and discretionary expenditure, while we continued to invest in technology.

Reported share of profit in associates and joint ventures

Reported share of profit in associates of $1.0bn fell $366m or 28%, primarily reflecting the impact of the Covid-19 outbreak and the lower interest rate environment on the share of profit we recognise from our associates.

Tax expense

The effective tax rate for 1H20 of 27.6% was higher than the 19.9% for 1H19, primarily reflecting the non-recognition of deferred tax on losses in the UK in 1H20. The effective tax rate for 1H19 was reduced by the non-taxable dilution gain arising on the merger of SABB with Alawwal bank in Saudi Arabia.

 

Reported 1H20 profit after tax ($bn)

$3.1bn

 

 

 

Basic earnings per share for 1H20 ($)

$0.10

 

 

 

Reported performance 2Q20 vs 2Q19

Reported profit

Reported profit after tax of $0.6bn in 2Q20 was $4.4bn or 88% lower than in 2Q19.

Reported profit before tax of $1.1bn was $5.1bn or 82% lower. This decrease reflected a significant rise in reported ECL and lower reported revenue, primarily in our CMB business, which reported a loss before tax in 2Q20, as well as in WPB. These factors were partly offset by reported revenue growth in GBM, as well as a reduction in reported operating expenses.

The reduction in profit before tax included the impact of the non-recurrence of a 2Q19 dilution gain of $0.8bn in Saudi Arabia, and a $1.2bn impairment of software intangibles in Europe. However, results were favourably affected by lower charges in respect of PPI.

Reported revenue of $13.1bn was $1.9bn or 13% lower, which included the non-recurrence of the dilution gain mentioned above. The impact of interest rate reductions adversely affected deposit revenue in Retail Banking and GLCM, which resulted in lower revenue in both WPB and CMB. Wealth management revenue in WPB was broadly unchanged. This reflected the partial reversal in 2Q20 of the significant adverse movement in market impacts in life insurance manufacturing recorded in 1Q20, offset by the lower demand for investment products due to market uncertainty. The reductions in WPB and CMB were partly offset by higher revenue in our Global Markets business in GBM as increased market volatility resulted in higher client activity.

ECL increased by $3.3bn to $3.8bn, largely from charges relating to the ongoing global impact of the Covid-19 outbreak and the forward economic outlook, and from charges relating to a small number of wholesale exposures in 2Q20.

Reported operating expenses of $8.7bn were $0.3bn or 3% lower, reflecting a reduction in discretionary expenditure and lower performance-related pay, partly offset by the impact of a $1.2bn impairment of software intangibles.

Reported share of profit in associates and joint ventures fell by $0.2bn, primarily reflecting the impact of the Covid-19 outbreak and the lower interest rate environment on the share of profit we recognise from our associates.

 

Reported 2Q20 profit after tax ($bn)

$0.6bn

(2Q19: $5.0bn)

 

 

Adjusted results

 

Our reported results are prepared in accordance with International Financial Reporting Standards ('IFRSs') as detailed in the financial statements on page 240 of the Annual Report and Accounts 2019.

We also present alternative performance measures. Adjusted performance is an alternative performance measure used to align internal and external reporting, identify and quantify items management believes to be significant, and provide insight into how management assesses period-on-period performance. Alternative performance measures are highlighted with the following symbol: <>

To derive adjusted performance, we adjust for:

- the period-on-period effects of foreign currency translation differences; and

- the effect of significant items that distort period-on-period comparisons, which are excluded in order to improve understanding of the underlying trends in the business.

The results of our global businesses are presented on an adjusted basis, which is consistent with how we manage and assess global business performance.
For reconciliations of our reported results to an adjusted basis, including lists of significant items, see page 33.

 

Adjusted results

Half-year to

 

1H20 vs 1H19

30 Jun 2020
$m

30 Jun 2019
 $m

31 Dec 2019
 $m

 

$m

%

Revenue

26,477

 

27,815

 

26,632

 

 

(1,338

)

(5

)

ECL

(6,858

)

(1,088

)

(1,554

)

 

(5,770

)

>(100)

Total operating expenses

(14,942

)

(15,739

)

(16,448

)

 

797

 

5

 

Operating profit

4,677

 

10,988

 

8,630

 

 

(6,311

)

(57

)

Share of profit in associates and joint ventures

958

 

1,285

 

1,030

 

 

(327

)

(25

)

Profit before tax

5,635

 

12,273

 

9,660

 

 

(6,638

)

(54

)

 

Adjusted performance - 1H20 vs 1H19

Adjusted profit before tax

Adjusted profit before tax of $5.6bn was $6.6bn or 54% lower than in 1H19, primarily from higher adjusted ECL and lower adjusted revenue. Adjusted ECL increased by $5.8bn, mainly from charges relating to the global impact of the Covid-19 outbreak on the forward economic outlook. Adjusted revenue decreased by $1.3bn, primarily from interest rate reductions across our deposit franchises, as well as the effects of a sharp fall in equity markets and widening of credit spreads towards the end of the first quarter of 2020, although there was a partial recovery in equity markets and a tightening of credit spreads during the second quarter. This was partly offset by higher revenue from Global Markets. Adjusted operating expenses decreased by $0.8bn as we lowered the performance-related pay accrual and reduced discretionary expenditure while continuing to invest in our businesses.

 

Reconciliation of reported to adjusted profit before tax

 

 

Half-year to

30 Jun 2020
$m

30 Jun 2019
$m

31 Dec 2019

$m

Reported profit before tax

4,318

 

12,407

 

940

 

Currency translation

 

(215

)

9

 

Significant items:

1,317

 

81

 

8,711

 

-  costs of structural reform

-

 

91

 

67

 

-  customer redress programmes

24

 

610

 

834

 

-  disposals, acquisitions and investment in new businesses

8

 

(827

)

59

 

-  fair value movements on financial instruments

(299

)

(50

)

(34

)

-  impairment of goodwill and other intangibles

1,025

 

-

 

7,349

 

-  restructuring and other related costs

554

 

287

 

540

 

-  settlements and provisions in connection with legal and regulatory matters

5

 

(2

)

(59

)

-  currency translation on significant items

-

 

(28

)

(45

)

Adjusted profit before tax

5,635

 

12,273

 

9,660

 

 

Adjusted revenue

Adjusted revenue of $26.5bn was $1.3bn or 5% lower than in 1H19, reflecting falls in WPB (down $1.6bn) and CMB (down $0.6bn), partly offset by higher revenue in GBM (up $0.6bn) and Corporate Centre (up $0.3bn).

The reduction in adjusted revenue reflected lower interest rates in many of the key markets in which we operate. This had an adverse impact on revenue from Retail Banking within WPB, and from GLCM within CMB and GBM, although we continued to grow average balances across these businesses. In addition, lower revenue included adverse movements in market impacts of $482m in life insurance manufacturing within WPB, following a weakening of global equity prices and lower interest rates. It also included an adverse movement in credit and funding valuation adjustments (down $0.4bn) and losses in Principal Investments of $12m, compared with gains in 1H19 of $120m in GBM. In 1H19, adjusted revenue included disposal gains in WPB and CMB of $157m.

These reductions were partly offset by higher revenue in Global Markets as increased market volatility resulted in higher client activity. Revenue also rose in Corporate Centre, which included favourable fair value movements of $0.1bn relating to the economic hedging of interest rate and exchange rate risk on our long-term debt with associated swaps, notably in 1Q20.

Revenue relating to Balance Sheet Management ('BSM'), Holdings net interest expense and Argentina hyperinflation was $0.4bn higher, primarily due to disposal gains in BSM. This revenue is allocated to our global businesses.

 

Adjusted ECL

Adjusted ECL, which removes the period-on-period effects of foreign currency translation differences, were $6.9bn, an increase of $5.8bn from 1H19. This increase occurred in WPB (up $1.7bn), CMB (up $3.0bn) and GBM (up $1.0bn) and mainly reflected charges related to the global impact of the Covid-19 outbreak and the forward economic outlook in all of our global businesses. In addition to these charges, ECL in 1H20 included a significant charge related to a corporate exposure in Singapore in CMB, and charges against a small number of corporate exposures in GBM.

Adjusted ECL (annualised) as a percentage of average gross loans and advances to customers was 1.33%, compared with 0.22% in 1H19.

Adjusted operating expenses

Adjusted operating expenses of $14.9bn were $0.8bn or 5% lower than in 1H19, as we continue to review and reprioritise costs and investments to help mitigate revenue headwinds. The decrease primarily reflected a $0.6bn reduction in the performance-related pay accrual and lower discretionary expenditure, including marketing (down $0.2bn) and travel costs (down $0.1bn). In addition, our cost-saving initiatives resulted in a reduction of $0.3bn. These decreases were partly offset by an increase of $0.2bn on investments in technology to enhance our digital capabilities and increase automation to improve how we serve our customers.

The number of employees expressed in full-time equivalent staff ('FTE') at 30 June 2020 was 232,764, a decrease of 2,587 compared with 31 December 2019. The number of contractors at 30 June 2020 was 6,221, a decrease of 1,190 from 31 December 2019.

Adjusted share of profit in associates and joint ventures<>

Adjusted share of profit from associates of $1.0bn was $0.3bn or 25% lower than in 1H19, primarily reflecting the impact of the Covid-19 outbreak and the lower interest rate environment on the share of profit we recognise from our associates.

 

Balance sheet and capital

 

$2,923bn

 

15.0%

 

Balance sheet strength

Total assets of $2.9tn were $208bn or 8% higher than at 31 December 2019 on a reported basis, and 11% higher on a constant currency basis. The increase in total assets included growth in cash balances and in financial investments, as well as from an increase in derivative assets, mainly reflecting gains on interest rate derivatives. The increase in derivative assets was consistent with the increase in derivative liabilities as the underlying risk is broadly matched. On a constant currency basis, loans and advances to customers grew by $12bn during 1H20.

Customer accounts of $1.5tn increased by $93bn, or $133bn on a constant currency basis, as corporate and personal customers consolidated their funds and redeployed them into cash, with growth in all global businesses. The growth reflected customers spending less during lockdown restrictions and the depositing of loans from government-backed schemes.

 

Distributable reserves

The distributable reserves of HSBC Holdings at 30 June 2020 were $33.1bn, compared with $31.7bn at 31 December 2019. The increase was primarily driven by profits generated during the year.

 

Capital position

We actively manage the Group's capital position to support our business strategy and meet our regulatory requirements at all times, including under stress, while optimising our capital efficiency. To do this, we monitor our capital position using a number of measures. These include: our capital ratios, the impact on our capital ratios as a result of stress, and the degree of double leverage being run by HSBC Holdings. Double leverage is a constraint on managing our capital position, given the complexity of the Group's subsidiary structure and the multiple regulatory regimes under which we operate. For further details, see page 77.

Our CET1 ratio at 30 June 2020 was 15.0%, up from 14.7% at 31 December 2019. This increase included the impact of the cancellation of the 4Q19 dividend and the current suspension of dividends on ordinary shares. These increases were partly offset by an increase in RWAs.

 

Liquidity position

We actively manage the Group's liquidity and funding to support our business strategy and meet regulatory requirements at all times, including under stress. To do this, we monitor our position using a number of risk appetite measures, including the liquidity coverage ratio and the net stable funding ratio. At 30 June 2020, we held high-quality liquid assets of $654bn.

 

Wealth and Personal Banking

 

Contribution to Group 1H20 adjusted profit before tax<>

 

% contribution to Group

30

%

 

WPB was formed in the second quarter by combining our Retail Banking and Wealth Management and Global Private Banking businesses. We supported our customers during the Covid-19 crisis through payment holidays, short-term credit facilities and access to cash. We continue to invest in digital capabilities to make it easier for customers to bank with us. Performance in 1H20 reflected a rise in adjusted ECL charges and a decline in adjusted revenue from the fall in global equity prices and lower interest rates.

We provide a full range of retail banking and wealth services to more than 39 million customers from personal banking to ultra high net worth individuals and their families.

We offer locally-tailored products and services across multiple channels for our customers' everyday banking needs, as well as insurance, investment management and Private Wealth Solutions for those with more sophisticated requirements. Our global presence provides for customers with international needs.

Adjusted results

Half-year to

 

1H20 vs 1H19

30 Jun 2020
$m

30 Jun
2019
$m

31 Dec
2019
$m

 

$m

%

Net operating income

11,251

 

12,861

 

12,492

 

 

(1,610

)

(13

)

ECL

(2,202

)

(527

)

(829

)

 

(1,675

)

>(100)

Operating expenses

(7,346

)

(7,551

)

(7,685

)

 

205

 

3

 

Share of profit in associates and JVs

(8

)

41

 

11

 

 

(49

)

>(100)

Profit before tax

1,695

 

4,824

 

3,989

 

 

(3,129

)

(65

)

RoTE excluding significant items and UK bank levy (annualised, YTD) (%)

6.0

 

22.1

 

19.7

 

 

 

 

 

Management view of adjusted revenue

Half-year to

 

1H20 vs 1H19

30 Jun 2020
$m

30 Jun
2019
$m

31 Dec
2019
$m

 

$m

%

Retail Banking

6,896

 

7,649

 

7,879

 

 

(753

)

(10

)

- net interest income

6,301

 

6,810

 

7,067

 

 

(509

)

(7

)

- non-interest income

595

 

839

 

812

 

 

(244

)

(29

)

Wealth Management

3,606

 

4,506

 

4,056

 

 

(900

)

(20

)

- investment distribution

1,602

 

1,696

 

1,554

 

 

(94

)

(6

)

- life insurance manufacturing

587

 

1,371

 

1,078

 

 

(784

)

(57

)

- Global Private Banking

921

 

925

 

927

 

 

(4

)

-

 

net interest income

372

 

441

 

439

 

 

(69

)

(16

)

non-interest income

549

 

484

 

488

 

 

65

 

13

 

- asset management

496

 

514

 

497

 

 

(18

)

(4

)

Other1

262

 

404

 

366

 

 

(142

)

(35

)

Balance Sheet Management, Holdings interest expense and Argentina hyperinflation

487

 

302

 

191

 

 

185

 

61

 

Net operating income2

11,251

 

12,861

 

12,492

 

 

(1,610

)

(13

)

1 'Other' mainly includes interest on capital and the distribution and manufacturing (where applicable) of non-wealth insurance products.

2 'Net operating income' means net operating income before change in expected credit losses and other credit impairment charges (also referred to as 'Revenue').

 

Financial performance

Adjusted profit before tax of $1.7bn in 1H20 was $3.1bn or 65% lower than in 1H19. This reflected an increase in adjusted ECL, as well as lower adjusted revenue. Lower revenue was driven by a reduction in life insurance manufacturing revenue largely from negative market impacts following a fall in equity markets in 1Q20, although these losses were partially reversed in 2Q20 as equity markets recovered. Retail Banking revenue was also lower from the reduction in interest rates.

Adjusted revenue of $11.3bn was $1.6bn or 13% lower, and included the non-recurrence of 1H19 disposal gains in Argentina and Mexico of $133m.

In Retail Banking, revenue of $6.9bn was down $0.8bn or 10%.

•   Net interest income was $0.5bn lower due to narrower margins, notably in the second quarter, as global interest rates fell as a result of the Covid-19 outbreak. This reduction was partly offset by deposit balance growth of $57bn or 9%, particularly in Hong Kong and the UK, and lending balance growth of $14bn or 4% compared with 1H19.

•   Non-interest income declined by $0.2bn from lower fee income earned on unsecured lending products.

In Wealth Management, revenue of $3.6bn was down $0.9bn or 20%.

•   Life insurance manufacturing revenue reduced by $0.8bn or 57%, primarily from an adverse movement in market impacts of $482m (an adverse movement of $334m in 1H20, compared with a favourable movement of $148m in 1H19). The value of new business written fell by $0.3bn or 37% as the reduction in volumes resulting from the Covid-19 outbreak was in part mitigated by actions to support remote engagement with customers, including digital enhancements to sales processes.

•   Investment distribution revenue was $0.1bn or 6% lower reflecting adverse market conditions in Hong Kong, which resulted in lower mutual fund sales, partly offset by higher brokerage fees from increased transaction volumes.

•   Global Private Banking revenue was stable, as higher investment revenue from increased market volatility and a rise in fees from advisory and discretionary mandates was broadly offset by the impact of lower interest rates on deposit revenue.

Adjusted ECL of $2.2bn were $1.7bn higher than in 1H19, reflecting the global impact of the Covid-19 outbreak on the forward economic outlook of $1.2bn and from higher charges, notably in the UK, Asia and the US against unsecured lending driven by moderate credit deterioration.

Adjusted operating expenses of $7.3bn were $0.2bn or 3% lower, as a lower performance-related pay accrual and reduced discretionary expenditure more than offset the impact of inflation and our continued investment in digital and wealth initiatives.

 

Divisional highlights

$1.4tn

WPB wealth balances at 30 June 2020. This was a 3% year-on-year increase, and broadly unchanged from 31 December 2019.

$17bn

Growth in mortgage book in the UK (up 6%) and Hong Kong (up 5%) since 30 June 2019.

 

Adjusted profit before tax

($bn)

$1.7bn

 

Adjusted net operating income

($bn)

$11.3bn

 

 

Commercial Banking

 

Contribution to Group 1H20 adjusted profit before tax

 

% contribution to Group

3

%

 

CMB continued to support our customers' liquidity and working capital needs, growing lending and deposit balances, while our ongoing investment in technology has enabled us to support customers under exceptionally challenging conditions. Performance in 1H20 was adversely impacted by an increase in adjusted ECL charges and the fall in interest rates globally.

We support approximately 1.3 million business customers in 53 countries and territories, ranging from small enterprises focused primarily on their domestic markets to large companies operating globally.

We help entrepreneurial businesses grow by supporting their financial needs, facilitating cross-border trade and payment services, and providing access to products and services offered by other global businesses.

Adjusted results

Half-year to

 

1H20 vs 1H19

30 Jun 2020
$m

30 Jun
2019
$m

31 Dec
2019
$m

 

$m

%

Net operating income

7,000

 

7,647

 

7,379

 

 

(647

)

(8

)

ECL

(3,526

)

(478

)

(684

)

 

(3,048

)

>(100)

Operating expenses

(3,290

)

(3,258

)

(3,498

)

 

(32

)

(1

)

Share of profit in associates and JVs

-

 

-

 

-

 

 

-

 

-

 

Profit before tax

184

 

3,911

 

3,197

 

 

(3,727

)

(95

)

RoTE excluding significant items and UK bank levy (annualised, YTD) (%)

(1.6

)

15.3

 

13.0

 

 

 

 

 

Management view of adjusted revenue

Half-year to

 

1H20 vs 1H19

30 Jun 2020
$m

30 Jun
2019
$m

31 Dec
2019
$m

 

$m

%

Global Trade and

Receivables Finance

892

 

920

 

890

 

 

(28

)

(3

)

Credit and Lending

2,741

 

2,685

 

2,674

 

 

56

 

2

 

Global Liquidity and Cash Management

2,347

 

2,986

 

2,909

 

 

(639

)

(21

)

Markets products, Insurance and Investments, and Other1

890

 

1,058

 

940

 

 

(168

)

(16

)

Balance Sheet Management, Holdings interest expense and Argentina hyperinflation

130

 

(2

)

(34

)

 

132

 

>100

Net operating income2
 

7,000

 

7,647

 

7,379

 

 

(647

)

(8

)

1 'Markets products, Insurance and Investments and Other' includes revenue from Foreign Exchange, insurance manufacturing and distribution, interest rate management and global banking products.

2 'Net operating income' means net operating income before change in expected credit losses and other credit impairment charges (also referred to as 'Revenue').

Financial performance

Adjusted profit before tax of $0.2bn was $3.7bn or 95% lower than in 1H19. The reduction reflected higher adjusted ECL and lower adjusted revenue, primarily due to lower interest rates. The impact of these factors on financial performance increased in the second quarter, resulting in a loss before tax of $0.5bn for 2Q20.

Adjusted revenue of $7.0bn was $0.6bn or 8% lower.

•   In GLCM, revenue decreased by $0.6bn or 21% due to the impact of the lower interest rate environment, mainly in Hong Kong and the UK. This was partly offset by an 11% increase in average deposit balances, which was across all regions, but mainly concentrated in the UK and the US.

•   In Global Trade and Receivables Finance, revenue decreased by $28m or 3% from lower fees and balances, notably in Hong Kong and the UK, reflecting a reduction in global trade volumes as a result of the Covid-19 crisis. This was partly offset by wider margins in Latin America and Asia.

•   In 'Other' products, revenue was $168m lower, reflecting a reduction in Insurance and Investments (down $29m), lower revaluation gains on shares (down $27m) and lower revenue from Global Markets products (down $19m). In addition, 1H19 included a disposal gain of $24m in Latin America.

This was partly offset by:

•   In Credit and Lending, revenue increased by $56m or 2%, reflecting balance growth in all regions from increased customer drawdowns and government-backed lending schemes, partly offset by lower margins.

Adjusted ECL of $3.5bn were $3.0bn higher than in 1H19. The increase reflected the global impact of the Covid-19 outbreak on the forward economic outlook, mainly in the UK and Asia. There were also higher charges against specific customers in 1H20 across all regions, particularly in the oil and gas and wholesale trade sectors, including a significant charge related to a corporate exposure in Singapore.

Adjusted operating expenses of $3.3bn were marginally higher, reflecting investment in digital capabilities to improve the client experience, partly offset by a lower performance-related pay accrual and a reduction in other discretionary expenditure.

 

Divisional highlights

$41bn

Growth in customer accounts in 1H20.

 

12%

Increase in international account openings, compared with 1H19.

 

Adjusted profit before tax

($bn)

$0.2bn

 

Adjusted net operating income

($bn)

$7.0bn

 

Global Banking and Markets

 

Contribution to Group 1H20 adjusted profit before tax

 

% contribution to Group

45

%

 

GBM increased adjusted revenue as a strong Global Markets performance more than offset the impact of falling interest rates and adverse movements in credit and funding valuation adjustments. In 1H20, management actions delivered gross RWA reductions of $21bn globally, while over 50% of our revenue was generated in Asia.

 

We continue to invest in digital capabilities to provide value to our clients and support them in the current environment. This was recognised in a client survey by Greenwich Associates where we were voted the leading FX dealer in supporting corporate clients during the Covid-19 outbreak.

 

We support major government, corporate and institutional clients worldwide. Our product specialists deliver a comprehensive range of transaction banking, financing, advisory, capital markets and risk management services.

Adjusted results

Half-year to

 

1H20 vs 1H19

30 Jun 2020
$m

30 Jun
2019
$m

31 Dec
2019
$m

 

$m

%

Net operating income

8,178

 

7,590

 

7,113

 

 

588

 

8

 

ECL

(1,118

)

(97

)

(61

)

 

(1,021

)

>(100)

Operating expenses

(4,512

)

(4,758

)

(4,656

)

 

246

 

5

 

Share of profit in associates and JVs

-

 

-

 

-

 

 

-

 

-

 

Profit before tax

2,548

 

2,735

 

2,396

 

 

(187

)

(7

)

RoTE excluding significant items and UK bank levy (annualised, YTD) (%)

7.7

 

10.2

 

9.8

 

 

 

 

 

Management view of adjusted revenue

Half-year to

 

1H20 vs 1H19

30 Jun 2020
$m

30 Jun
2019
$m

31 Dec
2019
$m

 

$m

%

Global Markets

4,272

 

3,096

 

2,584

 

 

1,176

 

38

 

- FICC

3,913

 

2,493

 

2,204

 

 

1,420

 

57

 

  Foreign Exchange

1,917

 

1,275

 

1,370

 

 

642

 

50

 

  Rates

1,351

 

865

 

575

 

 

486

 

56

 

  Credit

645

 

353

 

259

 

 

292

 

83

 

- Equities

359

 

603

 

380

 

 

(244

)

(40

)

Securities Services1

944

 

985

 

1,020

 

 

(41

)

(4

)

Global Banking1

1,944

 

1,887

 

1,953

 

 

57

 

3

 

Global Liquidity and Cash Management

1,094

 

1,357

 

1,349

 

 

(263

)

(19

)

Global Trade and Receivables Finance

393

 

398

 

394

 

 

(5

)

(1

)

Principal Investments

(12

)

120

 

138

 

 

(132

)

>(100)

Credit and funding valuation adjustments

(355

)

14

 

18

 

 

(369

)

>(100)

Other2

(300

)

(328

)

(333

)

 

28

 

9

 

Balance Sheet Management, Holdings interest expense and Argentina hyperinflation

198

 

61

 

(10

)

 

137

 

>100%

Net operating income3

8,178

 

7,590

 

7,113

 

 

588

 

8

 

1 From 1 June 2020, revenue from Issuer Services, previously reported in Securities Services, was reported within Global Banking. This resulted in $14m additional revenue being recorded in Global Banking. Comparatives have not been re-presented.

2 Includes allocated funding costs. Additionally, within the management view of total operating income, notional tax credits are allocated to the businesses to reflect the economic benefit generated by certain activities not reflected within operating income, such as notional credits on income earned from tax-exempt investments where the economic benefit of the activity is reflected in tax expense. The offset to these tax credits is included within 'Other'.

3 'Net operating income' means net operating income before change in expected credit losses and other credit impairment charges (also referred to as 'Revenue').

 

Financial performance

Adjusted profit before tax of $2.5bn was $0.2bn lower than in 1H19, mainly due to higher adjusted ECL, which reflected the global impact of Covid-19 and included charges relating to specific exposures. The rise in adjusted ECL was partly offset by higher adjusted revenue and from lower adjusted operating expenses, driven by a reduced performance-related pay accrual.

Adjusted revenue of $8.2bn increased by $0.6bn compared with 1H19, which included adverse movements in credit and funding valuation adjustments of $0.4bn.

•   In Global Markets, revenue increased by $1.2bn or 38%, as client activity increased due to higher volatility levels supporting an improved FICC performance across Foreign Exchange, Rates and Credit. By contrast, lower Equities revenue reflected a weaker performance in prime financing, which included the effect of dividend cancellation and reduced client activity, as well as the release of a historical provision in 1H19.

•   Global Banking revenue increased by $57m or 3% from higher capital markets revenue, increased corporate lending balances and the impact of widening credit spreads on portfolio hedges, partly offset by losses on legacy corporate restructuring positions.

This was partly offset by:

•   In GLCM, revenue decreased $0.3bn or 19% due to the lower interest rate environment across most regions, although we grew average balances, notably in the UK and the US.

•   In Principal Investments, revenue fell by $132m, reflecting revaluation losses incurred in 1Q20 as a result of the Covid-19 outbreak, mainly in Europe, which were substantially reversed during 2Q20.

Adjusted ECL were $1.1bn, up $1.0bn compared with 1H19 from charges relating to the global impact of Covid-19 on the forward economic outlook, and as charges against a small number of clients in 1H20 were higher than those recorded in 1H19.

Adjusted operating expenses of $4.5bn were $0.2bn or 5% lower, primarily from a lower performance-related pay accrual, which more than offset investment in regulatory programmes, and higher amortisation relating to technology investments.

 

Divisional highlights

50%

Percentage of adjusted revenue generated in Asia in 1H20.

38%

Growth in Global Markets revenue, compared with 1H19.

 

Adjusted profit before tax

($bn)

$2.5bn

 

Adjusted net operating income

($bn)

$8.2bn

 

 Corporate Centre

Contribution to Group 1H20 adjusted profit before tax

 

% contribution to Group

21

%

 

During the period, we began allocating the revenue and expenses relating to Balance Sheet Management ('BSM'), the funding costs of HSBC Holdings debt and the impacts of hyperinflation in Argentina, to the global businesses to improve how we reflect revenue and expense related to the global businesses generating or utilising these activities. All comparatives have been restated accordingly.

The results of Corporate Centre now primarily comprise the share of profit from our interests in our associates and joint ventures, Central Treasury, stewardship costs and consolidation adjustments.

Adjusted results

Half-year to

 

1H20 vs 1H19

30 Jun 2020
$m

30 Jun
2019
$m

31 Dec
2019
$m

 

$m

%

Net operating income

48

 

(283

)

(352

)

 

331

 

>100

ECL

(12

)

14

 

20

 

 

(26

)

>(100)

Operating expenses

206

 

(172

)

(609

)

 

378

 

>100

Share of profit in associates and JVs

966

 

1,244

 

1,019

 

 

(278

)

(22

)

Profit before tax

1,208

 

803

 

78

 

 

405

 

50

 

RoTE excluding significant items and UK bank levy (annualised, YTD) (%)

4.7

 

0.6

 

0.8

 

 

 

 

 

Financial performance

Adjusted profit before tax of $1.2bn primarily comprised our share of profit in associates and joint ventures of $1.0bn, which decreased by $0.3bn or 22%, primarily reflecting the impact of the Covid-19 outbreak and the lower interest rate environment. Adjusted profit before tax was $0.4bn higher than in 1H19, mainly due to favourable movements in operating expenses and revenue.

Adjusted revenue of $48m compared with net negative adjusted revenue of $0.3bn in 1H19. This included Central Treasury revenue of $0.2bn, an increase of $0.1bn compared with 1H19 due to favourable fair value movements relating to the economic hedging of interest rate and exchange rate risk on our long-term debt with associated swaps. In addition, 'Other' income increased by $0.2bn, which included an adjustment related to holdings of our own shares.

Adjusted operating expenses, which are stated after recovery of costs from our global businesses, were a net credit of $0.2bn. This compared with a net charge of $0.2bn in 1H19.

 

Management view of adjusted revenue

Half-year to

 

1H20 vs 1H19

30 Jun 2020
$m

30 Jun
2019
$m

31 Dec
2019
$m

 

$m

%

Central Treasury1, 2

201

 

138

 

41

 

 

63

 

46

 

Legacy portfolios

(48

)

(83

)

(28

)

 

35

 

42

 

Other

(105

)

(338

)

(365

)

 

233

 

69

 

Net operating income3

48

 

(283

)

(352

)

 

331

 

>100

1 Central Treasury includes favourable valuation differences on issued long-term debt and associated swaps of $195m (1H19: gains of $143m; 2H19: gains of $3m).

2 During the period we began allocating the revenue from BSM, Holdings net interest expense and Argentina hyperinflation out to the global businesses, to align them better with their revenue and expense. The total BSM revenue component of this allocation for 1H20 was $1,535m (1H19: $1,109m, 2H19: $920m).

3 'Net operating income' means net operating income before change in expected credit losses and other credit impairment charges (also referred to as 'Revenue').

 

Risk overview

Active risk management helps us to achieve our strategy, serve our customers and communities and grow our business safely.

 

Managing risk

The first half of 2020 has been marked by unprecedented global economic events, leading to banks playing an expanded role to support society and customers. The Covid-19 outbreak and its impact on the global economy have impacted many of our customers' business models and income, requiring significant levels of support from both governments and banks. In response, we have enhanced our approach to the management of risk in this rapidly changing environment.

Throughout the Covid-19 outbreak, we have supported our customers and adapted our operational processes. Our people, processes and systems have responded to the changes needed and increased the workload in serving our customers through this time. Operational resilience has been particularly evident in Hong Kong, where we have maintained high levels of service throughout the Covid-19 outbreak and the continuing domestic social unrest.

The performance of our operations has varied in different geographies, but overall the balance sheet and liquidity of the Group remain strong. This has helped enable us to respond to the economic recovery as government lockdowns ease.

Key geopolitical risks also heightened during the first half of 2020. These included rising tensions between the US and China, strains in relations between the UK and China following the passing of the new national security law in Hong Kong and the UK's imposition of restrictions on telecommunications, and the uncertain relationship between the UK and the EU following the UK's departure from the EU.

To meet the additional challenges, we supplemented our existing approach to risk management with additional tools and practices. We increased our focus on the quality and timeliness of the data used to inform management decisions, through measures such as early warning indicators, prudent active risk management of our risk appetite, and ensuring regular communication with our Board and other key stakeholders.

Our risk appetite

Our risk appetite defines our desired forward-looking risk profile, and informs the strategic and financial planning process. It provides an objective baseline to guide strategic decision making, helping to ensure that planned business activities provide an appropriate balance of return for the risk assumed, while remaining within acceptable risk levels.

Our risk appetite also provides an anchor between our global businesses and the Global Risk and Global Finance functions, helping to enable our senior management to allocate capital, funding and liquidity optimally to finance growth, while monitoring exposure and the cost impacts of managing non-financial risks. It also helps to develop aligned people and system capabilities.

Our risk appetite is articulated in our risk appetite statement, which is approved by the Board. Key elements include:

•   risks that we accept as part of doing business, such as credit risk, market risk, and capital and liquidity risk, which are controlled through both active risk management and our risk appetite;

•   risks that we incur as part of doing business, such as non-financial risks, which are actively managed to remain within an acceptable appetite; and

•   risks for which we have zero tolerance, such as knowingly engaging in activities where foreseeable reputational risk has not been appropriately considered.

In the first half of 2020, we continued to evolve our risk appetite by reallocating both financial and non-financial resources and adapting aspects of our risk appetite statement to ensure we remained able to support our customers and strategic goals against the backdrop of the Covid-19 outbreak. A specific emphasis was placed on capital risk to ensure the Group could withstand extreme but plausible stress, and had adequate capacity to provide increasing levels of financial support to customers. Associated non-financial risks were reviewed and, where applicable, processes and controls were enhanced to accommodate material increases in lending volumes and help our people manage the lending process from a home environment. Additional reporting is under development to provide a more holistic view of the Group's resilience capabilities. Significant work is also underway to align to the revised business segmentation and to further develop our risk appetite framework, with forward-looking statements informed by stress testing. The financial impact of Covid-19 is becoming apparent in our risk appetite where RoTE and ECL charges are outside of appetite. These are subject to close monitoring and management actions.

 

Key risk appetite metrics

Component

Measure

Risk appetite

1H20

Returns

Return on average tangible equity ('RoTE')

6.5%

3.8

%

Capital

CET1 ratio - end point basis

13.10%

15.0

%

Change in expected credit losses and other credit impairment charges

Change in expected credit losses and other credit impairment charges

 as a % of advances: retail

0.50%

1.08%

Change in expected credit losses and other credit impairment charges

 as a % of advances: wholesale

0.45%

0.79%

Stress tests

We regularly conduct stress tests to assess the resilience of our balance sheet and our capital adequacy, as well as to provide actionable insights into how key elements of our portfolios may behave during crises. Stress tests are used to calibrate our risk appetite and to review the robustness of our strategic and financial plans, helping to improve the quality of management's decision making. Stress testing analysis assists management in understanding the nature and extent of vulnerabilities to which the Group is exposed. The results from the stress tests also drive recovery and resolution planning to enhance the Group's financial stability under various macroeconomic scenarios.

Risk assessment through internal stress tests is used to assess the impacts of macroeconomic, geopolitical and other HSBC-specific risks. The selection of stress scenarios is based upon the identification and assessment of our top and emerging risks identified and our risk appetite.

In 2020, the Bank of England ('BoE') and European Banking Authority ('EBA') cancelled the requirement for all participating banks to conduct their respective 2020 stress test exercises in light of the emerging impacts of the Covid-19 outbreak.

 

Notwithstanding this, we conducted a range of internal stress tests during the first half of 2020. These included stress tests to assess the potential future impacts of the Covid-19 crisis and assess the resilience of key balance sheet metrics including our capital adequacy. To date, we have conducted stress tests covering several potential Covid-19-related outcomes, incorporating assessments from credit experts. We are regularly reviewing the economic impacts for key economies and markets to understand potential vulnerabilities in our balance sheet and to identify appropriate mitigating actions. We continue to monitor emerging geopolitical, economic and environmental risks impacting the Group's capital adequacy and liquidity. Our balance sheet and capital adequacy remain resilient based on regulatory and internal stress test outcomes.

 

Our operations

We remain committed to investing in the reliability and resilience of our IT systems and critical services that support all parts of our business. We do so to protect our customers, affiliates and counterparties, and to help ensure that we minimise any disruption to services that could result in reputational and regulatory consequences. We continue to operate in a challenging environment in which cyber threats are prevalent. We continue to invest in business and technical controls to defend against these threats.

We paused elements of the transformation programme announced in February to help ensure our safe operation during a period of significant change in the external environment due to the Covid-19 outbreak, and to support our people and communities during a difficult period. With many countries and territories beginning to relax lockdown rules, we are now starting to move forward with the implementation of our business transformation plans. We are ensuring that we are able to manage safely the risks of the restructuring, which include execution, operational, governance, reputational, conduct and financial risks. We are also putting support in place to help our people, particularly when we are unable to find alternative roles for them.

   
For further details on our risk management framework and risks associated with our banking and insurance manufacturing operations, see pages 74 and 83 of the Annual Report and Accounts 2019, respectively.

Geopolitical and macroeconomic risks

The Covid-19 outbreak has dominated the political and economic landscape for the first six months of 2020.

The passage of the Hong Kong national security law and the US Hong Kong Autonomy Act has heightened existing US-China tensions. There are also rising tensions in the context of UK-China and EU-China relations.

In addition, the UK and EU continue to negotiate on the shape of their future relationship following the UK's departure from the EU, although the outcome remains uncertain. Failure to reach a negotiated agreement by the end of the transition period would result in the application of World Trade Organization ('WTO') rules and the absence of formal arrangements could set back further the expected gradual recovery of the UK and EU economies.

For further details on our approach to geopolitical and macroeconomic risks, see 'Areas of special interest' on page 50.

 

Risks related to Covid-19

We have needed to build up our operational capacity rapidly as governments and central banks globally introduced measures to combat the impacts of the Covid-19 outbreak, and as we have dealt with complex conduct considerations and heightened risk of fraud. At a time when most of our people have been working remotely, we have remained operationally resilient and have continued to keep our customers at the forefront of our operations. We have maintained close to normal levels of operations across our branches.

Levels of Covid-19 infections have declined significantly in many regions from their respective peaks. However, there are other locations where infection rates are still increasing. Governments in some countries and territories that have recorded declines have begun to lift certain restrictions that they had placed on the movements of their respective populations. Nevertheless, social distancing and tight border restrictions remain commonplace, which is limiting the extent and pace of economic recovery. The situation remains uncertain as Covid-19 has proved to be highly contagious and there is some recent evidence of further waves of infection emerging. Where further waves of Covid-19 are evident, governments may choose to extend or reinstate lockdowns, leading to a more prolonged recovery.

In many of our markets we have initiated region-specific measures to support our personal and business customers through these challenging times. These measures include mortgage assistance, payment holidays, the waiving of certain fees and charges, and liquidity relief for businesses facing difficulties such as supply chain disruption. We endeavour to remain responsive to our customers' changing needs and are working closely with governments and supporting national schemes that focus on the parts of the economy most impacted by Covid-19.

The Covid-19 outbreak has led to a significant weakening in GDP in many of our markets with impacts varying by sectors and regions. The longer-term effects of the outbreak on businesses are uncertain and may lead to significant ECL charges in the worst affected sectors. However, our financial position remains strong, allowing us to continue to support our customers. At 30 June 2020, our CET1 ratio was 15.0%, compared with 14.7% at 31 December 2019, and our liquidity coverage ratio was 148%. The management of capital and liquidity was a key focus in the first half of the year to ensure the Group responded to unprecedented customer and market activity. Continual monitoring of capital and liquidity was in place at both Group and entity levels. This included some redeployment of funding within the Group to ensure customers and the economy could be supported across geographies and sectors. Additionally, the risk appetite for the Group CET1 ratio was revised to reflect the reduction in the UK countercyclical buffer in response to the Covid-19 outbreak.

The nature and scale of the Covid-19 crisis have necessitated very strong responses from governments, central banks and regulators, and has resulted in changes in the behaviours of our retail and wholesale customers. These factors have impacted the performance of our financial models, requiring more monitoring of model outputs and use of model adjustments. Compensating controls have been implemented as needed.

 

For further details on our approach to the risks related to Covid-19, see 'Areas of special interest' on page 51.

Risks to our operations and portfolios in Asia-Pacific

In the first half of 2020, US-China tensions continued to escalate including in relation to Hong Kong. In June 2020, the National People's Congress of China enacted the Hong Kong national security law. In response, the US took steps to terminate the preferential treatment afforded Hong Kong under the 1992 Hong Kong Policy Act. Additionally, the US President signed into law the Hong Kong Autonomy Act, and issued an Executive Order, providing authority to impose primary sanctions against entities and individuals determined to have undermined Hong Kong's autonomy. The Hong Kong Autonomy Act also provides authority to impose secondary sanctions against non-US financial institutions determined to have conducted a significant transaction for any individual or entity subject to primary sanctions under the Act. There are other steps that have been taken by the US as tensions with China rise.

 

Domestic social unrest in Hong Kong remains a risk, with investor and business sentiment in some sectors remaining dampened. There are concerns that ongoing tensions could result in an increasingly fragmented trade and regulatory environment, with the retail and leisure sectors being particularly affected by the lack of tourists. However, the financial services sector in Hong Kong has remained strong and has benefited from stable liquidity conditions.

The plans to roll out 5G telecommunications technology in several countries and its importance to future standard setting and economic growth are likely to lead to heightened corporate and national competition over ownership of the relevant technologies.

The financial impact to the Group of geopolitical risks in Asia is heightened due to the importance and profitability of the region, and Hong Kong in particular. We continue to manage carefully our exposures and conduct regular stress tests to assess the resilience of our balance sheet and our capital adequacy. These are used to consider our risk appetite and provide insights into our financial stability.

Our operational resilience has been strongly tested during the Covid-19 outbreak and we have continued to maintain a high level of service to clients during this period in markets that remain at different levels of recovery. Our Hong Kong operations in particular have shown resilience in continuing to operate in times of domestic social unrest, the Covid-19 outbreak and heightened geopolitical risks, although this will continue to be closely monitored.

We continue to believe in the core elements of our strategy, such as targeting growth on China's Greater Bay Area and the ASEAN region, and that we are well placed to be able to support opportunities as the economy recovers from the Covid-19 outbreak.

For further details on our approach to the risks to our operations and portfolios in Asia-Pacific, see 'Areas of special interest' on page 52.

UK withdrawal from the European Union

The UK left the EU on 31 January 2020 and entered a transition period until 31 December 2020. During the transition period, the UK continues to be bound by EU laws and regulations. Beyond that date, there is no certainty on what the future relationship between the UK and the EU will be. The prospect of exiting the transition period without a trade agreement is likely to drive increasing market volatility and economic risk, particularly in the UK. Our global presence and diversified customer base is expected to help mitigate the direct impacts on our financial position in a scenario where the transition period ends without a UK-EU trade agreement being in place. Our existing footprint in the EU, and in particular our subsidiary in France, provides a strong foundation for us to build upon. As part of our stress testing programme, a number of internal macroeconomic and event-driven scenarios were assessed to support our planning for, and evaluation of, the impact of the UK's withdrawal from the EU without a trade agreement. The results confirmed that we are well positioned to withstand potential shocks.

For further details on our approach to the UK's withdrawal from the EU, see 'Areas of special interest' on page 52.

 

Interest rate environment

Central banks have reduced interest rates in most financial markets due to the adverse impact on the timelines and the path for economic recovery from the Covid-19 outbreak, which in turn increased the likelihood of negative interest rates. This raises a number of risks and concerns, such as the readiness of our systems and processes to accommodate zero or negative rates, the resulting impacts on customers, regulatory constraints and the financial implications given the significant impact that prolonged low interest rates are likely to have on our net interest income.

For some products, we have floored deposit rates at zero or made decisions to not charge negative rates. This, alongside loans repriced at lower rates, results in our commercial margins being compressed, which is expected to be reflected in our profitability. The pricing of this risk will need to be carefully considered. If there is a rebalancing of portfolios towards fee-generating business and trading activities to offset reduced profits, we may become exposed once rates start rising again. These factors may challenge the long-term profitability of the banking sector, including HSBC, and will be considered as part of the Group's transformation programme.

For further details on interest rate sensitivity, see page 86.

 

Top and emerging risks

Our top and emerging risks report identifies forward-looking risks so that they can be considered in determining whether any incremental action is needed to either prevent them from materialising or to limit their effect.

Top risks are those that may have a material impact on the financial results, reputation or business model of the Group in the year ahead. Emerging risks are those that have large unknown components and may form beyond a one-year horizon. If any of these risks were to occur, they could have a material effect on HSBC.

Our suite of top and emerging risks are subject to regular review by senior governance forums. In January 2020, our top and emerging risk themes were streamlined to interconnect appropriate thematic risk issues that impact our portfolios and business. The themes 'geopolitical risk', 'the credit cycle' and 'economic outlook and capital flows' were merged into a single theme under 'geopolitical and macroeconomic risks'. We continue to monitor closely the identified risks and ensure robust management actions are in place, as required.

Update on Ibor transition

As a result of the likely cessation of the London interbank offered rate ('Libor') and the Euro Overnight Index Average ('Eonia') in 2021, we established an interbank offered rate ('Ibor') transition programme in early 2019 with the objective of facilitating an orderly transition from Libor and Eonia to new alternative benchmark rates (near risk free rates or 'RFRs') for our businesses and our customers.

In addition to conduct and execution risks, the process of adopting RFRs may expose the Group to an increased level of operational and financial risks, driven by large volumes of product, system and associated process changes and potential earnings volatility resulting from contract modifications. Furthermore, the transition to RFRs could adversely impact our businesses through legal proceedings or other actions relating to the interpretation and/or enforceability of provisions in existing Ibor-based contracts. The overall level of risks - including operational, conduct and legal risk - has potentially increased as a result of delays in our customers' transition plans and in our interim milestones relating to client outreach resulting from the Covid-19 outbreak.

 

For further details on our approach to Ibor transition, see 'Areas of special interest' on page 53.

Our current top and emerging risks are summarised on the next page and discussed in more detail on page 76 of the Annual Report and Accounts 2019.

Risk

Trend

Mitigants

Externally driven

 

 

Geopolitical and macroeconomic risks

 

 

^

 

We monitor developments in geopolitical risk and assess what impacts these may have on our portfolios. The Covid-19 outbreak has resulted in an unprecedented global economic slowdown, with a significant increase in credit stress in the portfolio. Across the Group, we increased the frequency and depth of the monitoring activities on the portfolios. We performed stress tests and other sectoral reviews to identify portfolios or customers who were experiencing, or were likely to experience, financial difficulty as a result of the Covid-19 outbreak. We are increasing resources to help address the increased level of credit defaults in the current environment and are monitoring the impact of prolonged low interest rates.

 

 

 

 

Cyber threat and unauthorised access to systems

 

We endeavour to protect HSBC and our customers by strengthening our cyber defences, helping us to execute our business priorities safely and keep our customers' information secure. Our data-driven approach, grounded in strong controls that mitigate advanced cyber threats, enhances our capability in threat detection, access controls and resiliency.

Regulatory developments including conduct, with adverse impact on business model and profitability

^

We monitor closely for regulatory developments and engage with regulators, as appropriate, to help ensure that new regulatory requirements, such as those in response to the Covid-19 outbreak, are implemented effectively and in a timely way.

Financial crime risk environment

 

During the first half of 2020, we continued to improve the effectiveness of our financial crime controls in accordance with our specific regulatory obligations. The application of both advanced analytics and artificial intelligence remain key elements of our next generation of tools to fight financial crime, and our investment in these areas is ongoing. As fraudulent activity is often more prevalent in times of crisis, we have put in place additional measures to help minimise and detect fraud.

Ibor transition

^

We are focused on developing RFRs alongside the supporting processes and systems to make them available to our customers. Our programme is concurrently developing the capability to transition, through repapering, outstanding Libor and Eonia contracts. We continue to engage with industry participants and the official sector to support an orderly transition.

Climate-related risks

 

^

 

We continue to improve how we identify, oversee and manage climate-related risk, both physical and transition. Our Board-approved risk appetite statement contains a qualitative statement, which will be further enhanced in 2020. Our risk management priorities are focusing on: assessing the physical and transition risk in our wholesale credit portfolio; reviewing retail mortgage exposures in respect of natural hazard risk; and developing scenarios internally for risk management, planning and stress testing. We continue to engage with our stakeholders, in particular with regard to how we compile related data and disclosures.

 

 

Internally driven

 

IT systems infrastructure and resilience

 

We actively monitor and improve service resilience across our technology infrastructure. We are enhancing our service management disciplines and change execution capabilities to minimise service disruption to our customers. Our IT systems have been resilient and we have further improved them to support both our customers and our people in new ways of operating during the Covid-19 outbreak.

Risks associated with workforce capability, capacity and environmental factors with potential impact on growth

^

 

We continue to monitor workforce capacity and capability requirements in line with our published growth strategy and any emerging issues in the markets in which we operate. We have also put in place measures to ensure that our people are properly supported and able to work safely during the Covid-19 outbreak. We are monitoring people risks that may arise due to business transformation to help ensure that we sensitively manage any redundancies and support impacted employees.

Risks arising from the receipt of services from third parties

 

We have set up a third-party risk management programme so we can better identify, understand, mitigate and manage the risks that arise from the outsourcing of services. The programme, due to conclude in the second half of 2020, aims to ensure adherence to our internal third-party risk policy and framework. We have worked closely with our third-party providers, which have faced constraints and enhanced oversight on their operations during the Covid-19 outbreak. There has been no major impact to our services during the period.

Enhanced model risk management expectations

^

 

 

 

We continue to strengthen our oversight of models and the second line of defence Model Risk Management function. We are embedding a new model risk policy across the Group, which includes updated controls around the monitoring and use of models. The impact of Covid-19 on model performance has highlighted the importance of the new policy, with several credit and risk models potentially requiring revisions to reflect the current extreme economic shocks and the various government support measures that are now in place.

Data management

We continue to enhance and advance our insights, data aggregation, reporting and decisions through ongoing improvement and investments in data governance, data quality, data privacy, data architecture, machine learning and artificial intelligence capabilities. We are continuing to work to modernise our data infrastructure, leveraging cloud technologies to increase flexibility and scalability and improve our fit-for-purpose data.

^  Risk heightened during first half 2020

>  Risk remained at the same level as 2019

 

Financial summary

 

Page

Use of non-GAAP financial measures

25

Adjusted performance

25

Significant items

25

Foreign currency translation differences

25

Summary consolidated income statement

26

Income statement commentary

 

26

Net interest income

27

Summary consolidated balance sheet

30

Balance sheet commentary compared with 31 December 2019

 

31

 

Use of non-GAAP financial measures

Our reported results are prepared in accordance with IFRSs as detailed in the interim condensed financial statements starting on page 92.

To measure our performance we also use non-GAAP financial measures, including those derived from our reported results that eliminate factors that distort period-on-period comparisons. The 'adjusted performance' measure used throughout this report is described below, and where others are used they are described. All non-GAAP financial measures are reconciled to the closest reported financial measure.

A change in reportable segments was made in 2Q20 by combining Global Private Banking and Retail Banking and Wealth Management to form Wealth and Personal Banking. Comparative data have been re-presented accordingly. The global business segmental results are presented on an adjusted basis in accordance with IFRS 8 'Operating Segments' with the change in reportable segments explained in more detail in Note 5: 'Segmental analysis' on page 100.

Adjusted performance

Adjusted performance is computed by adjusting reported results for the effects of foreign currency translation differences and significant items, which both distort period-on-period comparisons.

We consider adjusted performance provides useful information for investors by aligning internal and external reporting, identifying and quantifying items management believes to be significant, and providing insight into how management assesses period-on-period performance.

Significant items

'Significant items' refers collectively to the items that management and investors would ordinarily identify and consider separately to improve the understanding of the underlying trends in the business.

The tables on pages 33 to 35 and pages 42 to 49 detail the effects of significant items on each of our global business segments, geographical regions and selected countries/territories in 1H20, 1H19 and 2H19.

Foreign currency translation differences

Foreign currency translation differences reflect the movements of the US dollar against most major currencies during 2020.

We exclude them to derive constant currency data, allowing us to assess balance sheet and income statement performance on a like-for-like basis and to better understand the underlying trends in the business.

Foreign currency translation differences

Foreign currency translation differences for the half-year to 30 June 2020 are computed by retranslating into US dollars for non-US dollar branches, subsidiaries, joint ventures and associates:

•   the income statements for the half-years to 30 June 2019 and 31 December 2019 at the average rates of exchange for the half-year to 30 June 2020; and

•   the balance sheets at 30 June 2019 and 31 December 2019 at the prevailing rates of exchange on 30 June 2020.

No adjustment has been made to the exchange rates used to translate foreign currency-denominated assets and liabilities into the functional currencies of any HSBC branches, subsidiaries, joint ventures or associates. The constant currency data of HSBC's Argentina subsidiaries have not been adjusted further for the impacts of hyperinflation. When reference is made to foreign currency translation differences in tables or commentaries, comparative data reported in the functional currencies of HSBC's operations have been translated at the appropriate exchange rates applied in the current period on the basis described above.

 

Summary consolidated income statement

 

 

 

Half-year to

 

 

30 Jun

30 Jun

31 Dec

 

 

2020

2019

2019

 

Footnotes

$m

$m

$m

Net interest income

 

14,509

 

15,240

 

15,222

 

Net fee income

 

5,926

 

6,124

 

5,899

 

Net income from financial instruments held for trading or managed on a fair value basis

 

5,768

 

5,331

 

4,900

 

Net income/(expense) from assets and liabilities of insurance businesses, including related derivatives, measured at fair value through profit or loss

 

(1,290

)

2,196

 

1,282

 

Change in fair value of designated debt and related derivatives
 

 

1

197

 

88

 

2

 

Changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss

 

80

 

457

 

355

 

Gains less losses from financial investments
 

 

466

 

201

 

134

 

Net insurance premium income

 

5,020

 

6,323

 

4,313

 

Other operating income

 

471

 

2,072

 

885

 

Total operating income

 

31,147

 

38,032

 

32,992

 

Net insurance claims and benefits paid and movement in liabilities to policyholders

 

(4,402

)

(8,660

)

(6,266

)

Net operating income before change in expected credit losses and other credit impairment charges

2

26,745

 

29,372

 

26,726

 

Change in expected credit losses and other credit impairment charges

 

(6,858

)

(1,140

)

(1,616

)

Net operating income

 

19,887

 

28,232

 

25,110

 

Total operating expenses excluding impairment of goodwill and other intangible assets

 

(15,239

)

(17,125

)

(17,830

)

Impairment of goodwill and other intangible assets

 

(1,288

)

(24

)

(7,370

)

Operating profit/(loss)

 

3,360

 

11,083

 

(90

)

Share of profit in associates and joint ventures

 

958

 

1,324

 

1,030

 

Profit before tax

 

4,318

 

12,407

 

940

 

Tax expense

 

(1,193

)

(2,470

)

(2,169

)

Profit/(loss) for the period

 

3,125

 

9,937

 

(1,229

)

Attributable to:

 

 

 

 

-  ordinary shareholders of the parent company

 

1,977

 

8,507

 

(2,538

)

-  preference shareholders of the parent company

 

45

 

45

 

45

 

-  other equity holders

 

617

 

664

 

660

 

-  non-controlling interests

 

486

 

721

 

604

 

Profit/(loss) for the period

 

3,125

 

9,937

 

(1,229

)

 

 

$

$

$

Basic earnings per share

 

0.10

 

0.42

 

(0.13

)

Diluted earnings per share

 

0.10

 

0.42

 

(0.13

)

Dividend per ordinary share

3

-

 

0.31

 

0.20

 

 

 

%

%

%

Post-tax return on average total assets (annualised)

 

0.2

 

0.7

 

(0.1

)

Return on average ordinary shareholders' equity (annualised)

 

2.4

 

10.4

 

(3.0

)

Return on average tangible equity (annualised)

4

3.8

 

11.2

 

8.4

 

1  The debt instruments, issued for funding purposes, are designated under the fair value option to reduce an accounting mismatch.

2  Net operating income before change in expected credit losses and other credit impairment charges, also referred to as revenue.

3  Dividends recorded in the financial statements are dividends per ordinary share declared in a year and are not dividends in respect of, or for, that year.

4  Half-year to 31 December 2019 is calculated on a full-year basis and not a 2H19 basis.

Income statement commentary

For further financial performance data of our global business segments, see pages 33 to 39. For further financial performance data by geographical regions and selected countries/territories, see pages 40 to 49.

Net interest income

 

 

Half-year to

Quarter to

 

 

30 Jun

30 Jun

30 Jun

31 March

30 Jun

 

 

2020

2019

2020

2020

2019

 

Footnotes

$m

$m

$m

$m

$m

Interest income

 

23,000

 

27,750

 

10,372

 

12,628

 

14,207

 

Interest expense

 

(8,491

)

(12,510

)

(3,475

)

(5,016

)

(6,435

)

Net interest income

 

14,509

 

15,240

 

6,897

 

7,612

 

7,772

 

Average interest-earning assets

 

2,034,939

 

1,912,708

 

2,078,178.362

 

1,991,702

 

1,922,392

 

 

 

%

%

%

%

%

Gross interest yield

1

2.27

 

2.93

 

2.01

 

2.55

 

2.96

 

Less: cost of funds

1

(1.00

)

(1.55

)

(0.81

)

(1.19

)

(1.57

)

Net interest spread

2

1.27

 

1.38

 

1.20

 

1.36

 

1.39

 

Net interest margin

3

1.43

 

1.61

 

1.33

 

1.54

 

1.62

 

1  Gross interest yield is the average annualised interest rate earned on average interest-earning assets ('AIEA'). Cost of funds is the average annualised interest cost as a percentage on average interest-bearing liabilities.

2  Net interest spread is the difference between the average annualised interest rate earned on AIEA, net of amortised premiums and loan fees, and the average annualised interest rate payable on average interest-bearing funds.

3  Net interest margin is net interest income expressed as an annualised percentage of AIEA.

 

Summary of interest income by type of asset

 

Half-year to

Full-year to

 

30 Jun 2020

30 Jun 2019

31 Dec 2019

 

Average
balance

Interest
income

Yield

Average
balance

Interest
income

Yield

Average
balance

Interest
income

Yield

 

$m

$m

%

$m

$m

%

$m

$m

%

Short-term funds and loans and advances to banks

255,559

 

760

 

0.60

 

217,474

 

1,285

 

1.19

 

212,920

 

2,411

 

1.13

 

Loans and advances to customers

1,041,931

 

15,978

 

3.08

 

1,011,928

 

17,833

 

3.55

 

1,021,554

 

35,578

 

3.48

 

Reverse repurchase agreements - non-trading

222,151

 

1,292

 

1.17

 

231,308

 

2,635

 

2.30

 

224,942

 

4,690

 

2.08

 

Financial investments

451,344

 

4,451

 

1.98

 

408,673

 

5,380

 

2.65

 

417,939

 

10,705

 

2.56

 

Other interest-earning assets

63,954

 

519

 

1.63

 

43,325

 

617

 

2.87

 

45,467

 

1,311

 

2.88

 

Total interest-earning assets

2,034,939

 

23,000

 

2.27

 

1,912,708

 

27,750

 

2.93

 

1,922,822

 

54,695

 

2.84

 

 

Summary of interest expense by type of liability

 

 

Half-year to

Full-year to

 

 

30 Jun 2020

30 Jun 2019

31 Dec 2019

 

 

Average
balance

Interest
expense

Cost

Average
balance

Interest
expense

Cost

Average
balance

Interest
expense

Cost

 

Footnotes
 

$m

$m

%

$m

$m

%

$m

$m

%

Deposits by banks

1

61,765

 

226

 

0.74

 

51,199

 

370

 

1.46

 

52,515

 

702

 

1.34

 

Customer accounts

2

1,203,640

 

4,069

 

0.68

 

1,138,196

 

5,637

 

1.00

 

1,149,483

 

11,238

 

0.98

 

Repurchase agreements - non-trading

 

139,498

 

754

 

1.09

 

170,342

 

2,320

 

2.75

 

160,850

 

4,023

 

2.50

 

Debt securities in issue - non-trading
 

 

223,255

 

2,720

 

2.45

 

205,192

 

3,361

 

3.30

 

211,229

 

6,522

 

3.09

 

Other interest-bearing liabilities

 

77,256

 

722

 

1.88

 

59,266

 

822

 

2.80

 

59,980

 

1,748

 

2.91

 

Total interest-bearing liabilities

 

1,705,414

 

8,491

 

1.00

 

1,624,195

 

12,510

 

1.55

 

1,634,057

 

24,233

 

1.48

 

1  Including interest-bearing bank deposits only.

2  Including interest-bearing customer accounts only.

 

Net interest income ('NII') for 1H20 was $14.5bn, a decrease of $0.7bn or 5% compared with 1H19. This reflected the lower average interest rates compared with 1H19, partly offset by interest income associated with the increase in average interest-earning assets ('AIEA') of $122bn or 6%.

Excluding the effects of foreign currency translation differences, NII decreased by $0.4bn or 3%.

NII for 2Q20 was $6.9bn, down 11% compared with the previous year, and 9% compared with the previous quarter. This was driven by the impact of lower rates, partly offset by higher NII from growth in liquid assets and term lending balances.

Net interest margin ('NIM') of 1.43% was 18 basis points ('bps') lower compared with 1H19 as the reduction in the yield on AIEA of 66bps was partly offset by the fall in funding cost of average interest-bearing liabilities of 55bps. The decrease in NIM in 1H20 included the adverse effects of foreign currency translation differences. Excluding this, NIM fell by 16bps.

NIM for 2Q20 was 1.33%, down 29bps compared with the previous year, and down 21bps from the previous quarter, predominantly driven by the impact of lower rates.

Interest income of $23bn in 1H20 decreased by $4.8bn or 17%, primarily due to the lower average interest rates compared with 1H19 as the yield on AIEA fell 66bps. This was partly offset by increased income from growth in loans and advances to customers of $30bn, as well as a rise in income from short-term funds and loans and advances to banks and financial investments of $81bn. The decrease in interest income included $0.8bn in relation to the adverse effects of foreign currency translation. Excluding this, interest income decreased by $4.0bn.

Interest income of $10.4bn in 2Q20 was down $3.8bn compared with the previous year, and down $2.3bn from the previous quarter. This was predominantly driven by the impact of lower rates, although partly offset by growth in short-term funds and loans and advances to banks, financial investments and term lending.

Interest expense of $8.5bn in 1H20 decreased by $4.0bn or 32% compared with 1H19. This mainly reflected the decrease in funding cost of 55bps, offset by higher interest expense from growth in interest-bearing customer accounts of $65bn.

The decrease in interest expense included the favourable effects of foreign currency translation differences of $0.4bn. Excluding this, interest expense was $3.6bn lower.

Interest expense of $3.5bn in 2Q20 was down $2.9bn compared with the previous year, and down $1.5bn from the previous quarter. This was predominantly driven by the impact of lower rates, partly offset by growth in customer accounts.

Net fee income of $5.9bn was $0.2bn lower than in 1H19, and included adverse foreign currency translation differences of $0.1bn. The remaining reduction primarily reflected lower net fee income in WPB and CMB, partly offset by an increase in GBM.

In WPB, lower fee income reflected a reduction in income from credit cards, as customer spending activity fell across most markets, mainly in Hong Kong, Europe and MENA. Fee income from account services fell by $0.1bn due to lower customer activity and the change from fee-based to interest-based overdraft charges. These reductions were partly offset by higher fees from broking (up $0.1bn), primarily in Hong Kong as volatility resulted in increased customer activity, and by lower fee expenses as a result of reduced customer activity levels.

In CMB, trade-related fee income fell, reflecting the reduction in global trade activity, notably in Hong Kong and the UK. Income also fell in remittances, clearing fees and cards due to lower client activity.

In GBM, net fee income was higher, mainly from growth in underwriting fees in the US and the UK, as we helped clients raise finance during the Covid-19 outbreak. Global custody and broking fees also rose as client activity increased due to market volatility. These increases were partly offset by a reduction in fee income from credit facilities.

Net income from financial instruments held for trading or managed on a fair value basis of $5.8bn was $0.4bn higher and included a favourable fair value movement on non-qualifying hedges of $0.1bn.

The increase was in the US, mainly in our Rates business. Income also rose in Asia, notably in Hong Kong, reflecting increased market volatility and higher client activity in our Fixed Income and Foreign Exchange businesses.

Net income/(expense) from assets and liabilities of insurance businesses, including related derivatives, measured at fair value through profit or loss was a net expense of $1.3bn, compared with a net income of $2.2bn in 1H19. This decrease primarily reflected adverse equity market performance in Hong Kong and France due to the impact of the Covid-19 outbreak, resulting in revaluation losses on the equity and unit trust assets supporting insurance and investment contracts.

This adverse movement resulted in a corresponding movement in liabilities to policyholders and the present value of in-force long-term insurance business ('PVIF') (see 'Other operating income' below). This reflected the extent to which the policyholders and shareholders respectively participate in the investment performance of the associated assets.

Change in fair value of designated debt and related derivatives of $0.2bn was $0.1bn favourable compared with 1H19. The movements were driven by the fall in interest rates between the periods, notably in US dollars and pounds sterling.

The majority of our financial liabilities designated at fair value are fixed-rate, long-term debt issuances and are managed in conjunction with interest rate swaps as part of our interest rate management strategy. These liabilities are discussed further on page 31.

Changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss of $0.1bn was $0.4bn lower compared with 1H19. This primarily reflected adverse movements in equity markets due to the impact of the Covid-19 outbreak.

Gains less losses from financial investments of $0.5bn increased by $0.3bn, reflecting higher gains from the disposal of debt securities in Balance Sheet Management.

Net insurance premium income of $5.0bn was $1.3bn lower than in 1H19. The decrease reflected lower new business volumes, particularly in Hong Kong and France.

Other operating income of $0.5bn decreased by $1.6bn compared with 1H19, primarily reflecting the non-recurrence of an $0.8bn dilution gain in 1H19 following the merger of The Saudi British Bank ('SABB') with Alawwal bank in Saudi Arabia.

The change in PVIF was $0.5bn lower due to a decrease of $0.3bn in the value of new business written, primarily in Hong Kong in line with the adverse operating conditions. Assumption changes and experience variances decreased by $0.1bn, primarily in France.

The reduction also reflected the non-recurrence of 1H19 gains recognised in both Argentina, following the sale of a stake in the payment processing company Prisma Medios de Pago S.A., and in Mexico, associated with the launch of a merchant acquiring services joint venture with Global Payments Inc. In addition, we recognised revaluation losses on investment properties in Hong Kong in 1H20, compared with gains in 1H19.

Net insurance claims and benefits paid and movement in liabilities to policyholders was $4.3bn lower, primarily due to lower returns on financial assets supporting contracts where the policyholder is subject to part or all of the investment risk. New business volumes were also lower, particularly in Hong Kong and France, leading to lower amounts of policyholder liabilities being established at the point of sale.

Change in expected credit losses and other credit impairment charges ('ECL') of $6.9bn was $5.7bn higher compared with 1H19. ECL increased in all global businesses, mainly from charges relating to the global impact of the Covid-19 outbreak on the forward economic outlook.

The increase in ECL also reflected higher charges related to specific wholesale exposures, including a significant charge related to a corporate exposure in Singapore in CMB.

The estimated impact of the Covid-19 outbreak was incorporated in the ECL through additional scenario analysis, which considered differing severity and duration assumptions relating to the global pandemic. These included probability-weighted shocks to annual GDP and consequential impacts on unemployment and other economic variables, with differing economic recovery assumptions. Given the severity of the macroeconomic projections, and the complexities of the government measures, which have never been modelled, additional judgemental adjustments have been made to our provisions.

Applying a range of weightings to our ECL sensitivity analysis, as disclosed on pages 56 to 62, could result in an ECL charge in the range of $8bn to $13bn for 2020. This range is higher than at 1Q20, given the deterioration in consensus economic forecasts and actual loss experience during 2Q20, and reflects the current run-rate of stage 3 losses and our economic forecasts remaining broadly within the bounds of our Central and Downside consensus scenarios.

For further details on the calculation of ECL, including the measurement uncertainties and significant judgements applied to such calculations, the impact of alternative/additional scenarios and post model-adjustments, see pages 56 to 62.

There remains significant uncertainty over the ECL charge for the year given the ongoing impact of the Covid-19 outbreak, including further waves, the unwinding of government support schemes, geopolitical risks across a number of our markets including Hong Kong and the UK, and other factors discussed in 'Areas of special interest' on pages 50 to 54. As disclosed on page 62, under our alternative Downside scenario, the ECL charge would be higher than the stated range for the year.

Significant items and currency translation

 

 

Half-year to

 

 

30 Jun

30 Jun

31 Dec

 

 

2020

2019

2019

 

Footnotes

$m

$m

$m

Significant items

 

1,585

 

957

 

8,524

 

-  costs of structural reform

 

-

 

91

 

67

 

-  customer redress programmes

 

50

 

610

 

671

 

-  impairment of goodwill and other intangibles

 

1,025

 

-

 

7,349

 

-  restructuring and other related costs

1

505

 

287

 

540

 

-  settlements and provisions in connection with legal and regulatory matters

 

5

 

(2

)

(59

)

-    currency translation on significant items

 

 

(29

)

(44

)

Currency translation

 

 

453

 

228

 

Total

 

1,585

 

1,410

 

8,752

 

1  Includes impairment of software intangible assets of $173m.

Staff numbers (full-time equivalents)

 

At

 

30 Jun

30 Jun1

31 Dec1

 

2020

2019

2019

Global businesses

 

 

 

Wealth and Personal Banking

140,040

 

142,951

 

141,341

 

Commercial Banking

44,506

 

45,203

 

44,706

 

Global Banking and Markets

47,811

 

49,052

 

48,859

 

Corporate Centre

407

 

479

 

445

 

Total staff numbers

232,764

 

237,685

 

235,351

 

1  A change in reportable segments was made in 2Q20. Comparative data have been re-presented accordingly. For further guidance, refer to Note 5 on page 100.

Operating expenses

Reported operating expenses of $16.5bn were $0.6bn or 4% lower than in 1H19. These included favourable foreign currency translation differences of $0.5bn and a net adverse movement in significant items of $0.6bn, which included:

•   a $1.0bn impairment of capitalised software related principally to businesses within HSBC Bank plc, our non-ring-fenced bank in Europe. This reflected underperformance and a deterioration in the future forecasts of these businesses, substantially relating to prior periods (for more information see Note 11 on the interim condensed financial statements); and

•   restructuring and other related costs of $0.5bn compared with $0.3bn in 1H19. In 1H20, $116m related to severance, while $0.2bn related to an impairment of software intangibles.

These were partly offset by:

•   customer redress programme costs in respect of payment protection insurance ('PPI') of $0.1bn in 1H20, compared with $0.6bn in 1H19.

The remaining reduction in operating expenses reflected a lower performance-related pay accrual (down $0.6bn), as well as a reduction in discretionary expenditure, including marketing (down $0.2bn) and travel costs (down $0.1bn). In addition, our cost-saving initiatives resulted in a reduction of $0.3bn.

These decreases were partly offset by an increase of $0.2bn in technology investments to enhance our digital capabilities and automate how we serve our customers.

The number of employees expressed in full-time equivalent staff ('FTEs') at 30 June 2020 was 232,764, a decrease of 2,587 from 
31 December 2019. Additionally, the number of contractors at 30 June 2020 was 6,221, a decrease of 1,190 from 
31 December 2019.

Share of profit in associates and joint ventures

Share of profit in associates and joint ventures of $1.0bn was $0.4bn or 28% lower, primarily reflecting the impact of the Covid-19 outbreak and the lower interest rate environment on the share of profit we recognise from our associates.

At 30 June 2020, we performed impairment reviews of our investments in Bank of Communications Co., Limited ('BoCom') and SABB and concluded that they were not impaired, based on our value-in-use ('VIU') calculations. For more information on the key assumptions in our VIU calculations, including the sensitivity of the VIU to each key assumption, see Note 10 on the interim condensed financial statements.

Tax expense

The effective tax rate for 1H20 of 27.6% was higher than the 19.9% for 1H19, primarily reflecting the non-recognition of deferred tax on losses in the UK in 1H20. The effective tax rate for 1H19 was reduced by the non-taxable dilution gain arising on the merger of SABB with Alawwal Bank.

 

Summary consolidated balance sheet

 

 

At

 

 

30 Jun

31 Dec

 

 

2020

2019

 

Footnotes

$m

$m

Assets

 

 

 

Cash and balances at central banks

 

249,673

 

154,099

 

Trading assets

 

208,964

 

254,271

 

Financial assets designated and otherwise mandatorily measured at fair value through profit or loss

 

41,785

 

43,627

 

Derivatives

 

313,781

 

242,995

 

Loans and advances to banks

 

77,015

 

69,203

 

Loans and advances to customers

1

1,018,681

 

1,036,743

 

Reverse repurchase agreements - non-trading

 

226,345

 

240,862

 

Financial investments

 

494,109

 

443,312

 

Other assets

 

292,445

 

230,040

 

Total assets

 

2,922,798

 

2,715,152

 

Liabilities and equity

 

 

 

Liabilities

 

 

 

Deposits by banks

 

82,715

 

59,022

 

Customer accounts

 

1,532,380

 

1,439,115

 

Repurchase agreements - non-trading

 

112,799

 

140,344

 

Trading liabilities

 

79,612

 

83,170

 

Financial liabilities designated at fair value

 

156,608

 

164,466

 

Derivatives

 

303,059

 

239,497

 

Debt securities in issue

 

110,114

 

104,555

 

Liabilities under insurance contracts

 

98,832

 

97,439

 

Other liabilities

 

251,458

 

194,876

 

Total liabilities

 

2,727,577

 

2,522,484

 

Equity

 

 

 

Total shareholders' equity

 

187,036

 

183,955

 

Non-controlling interests

 

8,185

 

8,713

 

Total equity

 

195,221

 

192,668

 

Total liabilities and equity

 

2,922,798

 

2,715,152

 

1  Net of impairment allowances.

Selected financial information

 

 

At

 

 

30 Jun

31 Dec

 

 

2020

2019

 

Footnotes

$m

$m

Called up share capital

 

10,346

10,319

Capital resources

1

177,242

172,150

Undated subordinated loan capital

 

1,968

1,968

Preferred securities and dated subordinated loan capital

2

31,706

33,063

Risk-weighted assets

 

854,552

843,395

Total shareholders' equity

 

187,036

183,955

Less: preference shares and other equity instruments

 

(22,319)

(22,276)

Total ordinary shareholders' equity

 

164,717

161,679

Less: goodwill and intangible assets (net of tax)

 

(16,838)

(17,535)

Tangible ordinary shareholders' equity

 

147,879

144,144

Financial statistics

 

 

 

Loans and advances to customers as a percentage of customer accounts

 

66.5%

72.0%

Average total shareholders' equity to average total assets

 

6.51%

6.97%

Net asset value per ordinary share at period end ($)

3

8.17

8.00

Tangible net asset value per ordinary share at period end ($)

 

7.34

7.13

Tangible net asset value per fully diluted ordinary share at period end ($)

 

7.32

7.11

Number of $0.50 ordinary shares in issue (millions)

 

20,691

20,639

 

Basic number of $0.50 ordinary shares outstanding (millions)

 

20,162

20,206

Basic number of $0.50 ordinary shares outstanding and dilutive potential ordinary shares (millions)

 

20,198

20,280

Closing foreign exchange translation rates to $:

 

 

 

$1: £

 

0.811

0.756

$1: €

 

0.891

0.890

1  Capital resources are regulatory capital, the calculation of which is set out on page 78.

2  Including perpetual preferred securities.

3  The definition of net asset value per ordinary share is total shareholders' equity, less non-cumulative preference shares and capital securities, divided by the number of ordinary shares in issue, excluding own shares held by the company, including those purchased and held in treasury.

A more detailed consolidated balance sheet is contained in the interim condensed financial statements on page 94.

Balance sheet commentary compared with 31 December 2019

At 30 June 2020, our total assets were $2.9tn, an increase of $208bn or 8% on a reported basis, and $284bn or 11% on a constant currency basis.

The increase in total assets included growth in cash balances, financial investments and derivative assets, as well as higher settlement accounts and cash collateral due to the seasonal reduction at 31 December 2019 as clients settled trades prior to the year-end.

Our ratio of customer advances to customer accounts was 66%, down from 72% at 31 December 2019.

Assets

Cash and balances at central banks increased by $96bn or 62%, mainly in the UK, France and the US as a result of deposit inflows and as we redeployed our commercial surplus to cash to increase liquidity for our clients during the Covid-19 outbreak.

Trading assets decreased by $45bn or 18%, notably from a reduction in equity securities held, mainly in the UK and Hong Kong, and adverse mark-to-market movements as a result of unfavourable market conditions.

Derivative assets increased by $71bn or 29%, primarily in the UK, France and Hong Kong, reflecting favourable revaluation movements on interest rate contracts as interest rates fell in most major markets. Foreign exchange contracts also increased, amid a rise in currency volatility. The growth in derivative assets was consistent with the increase in derivative liabilities, as the underlying risk is broadly matched.

Loans and advances to customers decreased by $18bn on a reported basis compared with 31 December 2019. This included adverse foreign currency translation differences of $30bn. Excluding the effects of foreign currency translation differences, loans and advances to customers increased by $12bn or 1%.

The commentary below is on a constant currency basis.

In CMB, customer lending was $8bn higher, primarily in Europe (up $5bn) and North America (up $3bn). In GBM, lending was $3bn higher, mainly in Europe, North America and MENA, partly offset by Asia. The growth in both of these businesses occurred in the first quarter of 2020 and included the effect of clients drawing down on credit facilities and partially redeploying these funds into their customer accounts to increase cash balances during the initial stages of the Covid-19 outbreak. These balances subsequently reduced in the second quarter as a portion of these facilities were repaid.

In WPB, lending was broadly stable (up $1bn). Mortgages grew, notably in the UK (up $3bn) and Hong Kong (up $2bn), but this was mostly offset by a reduction in credit card balances, overdrafts and other personal lending as customer activity fell as a result of government measures to restrict the movement of populations following the outbreak of Covid-19.

Financial investments increased by $51bn or 11%, mainly as we increased our holdings of debt securities, mortgage-backed securities and treasury bills, as well as from valuation gains resulting from interest rate reductions in the UK, France and the US. Financial investments rose in Hong Kong as we increased our holdings of government-issued bonds and bills.

Other assets grew by $62bn or 27%, primarily due to an increase in settlement accounts and cash collateral in the US, the UK and Hong Kong from higher trading activity and derivative balances, compared with the seasonal reduction in December 2019.

Liabilities

Customer accounts increased by $93bn on a reported basis, and included adverse foreign currency translation differences of $39bn. Excluding this, customer accounts increased by $133bn or 9%.

The commentary below is on a constant currency basis.

Customer accounts increased in all our global businesses and regions, as corporate and personal customers consolidated their funds and redeployed them into cash. In WPB, customer account balances increased by $41bn with notable growth in the UK, Hong Kong and the US.

In GBM, customer accounts increased by $52bn, and in CMB, balances grew by $41bn. These increases included the impact of corporate clients drawing down on credit facilities, primarily in the first quarter, then partially redeploying the funds into their customer accounts to maintain liquidity, notably in the UK and US. In CMB, the increase was partly offset by a reduction in Hong Kong of $2.5bn due to a managed reduction in short-term time deposits in the first quarter, although balances increased in the second quarter.

Repurchase agreements - non-trading decreased by $28bn or 20%, primarily in Europe and the US due to higher balances eligible for netting, resulting in an overall balance reduction.

Derivative liabilities increased by $64bn or 27%, which is consistent with the increase in derivative assets, since the underlying risk is broadly matched.

Other liabilities increased by $57bn or 29%, mainly from an increase in settlement accounts and cash collateral in the US, the UK and Hong Kong due to higher seasonal trading activity compared with December 2019.

Equity

Total shareholders' equity increased by $3.1bn or 2% compared with 31 December 2019, reflecting the effects of profits generated of $3.1bn combined with other comprehensive income ('OCI') of $1.0bn. OCI included fair value gains on liabilities related to changes in own credit risk of $2.4bn, fair value gains of debt instruments of $1.7bn and favourable remeasurement of defined benefit pension obligations of $1.2bn. These were partly offset by adverse foreign exchange differences of $4.6bn. In addition, coupon distributions on securities classified as equity and dividends paid by non-controlling interests were $1.2bn.

 

Customer accounts by country/territory

 

At

 

30 Jun

31 Dec

 

2020

2019

 

$m

$m

Europe

562,505

 

528,718

 

-  UK

437,735

 

419,642

 

-  France

57,229

 

47,699

 

-  Germany

23,757

 

19,361

 

-  Switzerland

9,146

 

6,558

 

-  other

34,638

 

35,458

 

Asia

723,072

 

697,358

 

-  Hong Kong

514,381

 

499,955

 

-  Singapore

53,417

 

48,569

 

-  mainland China

47,557

 

48,323

 

-  Australia

25,448

 

23,191

 

-  India

18,047

 

14,935

 

-  Malaysia

14,688

 

14,624

 

-  Taiwan

14,720

 

14,668

 

-  Indonesia

4,467

 

4,732

 

-  other

30,347

 

28,361

 

Middle East and North Africa (excluding Saudi Arabia)

41,197

 

38,126

 

-  United Arab Emirates

20,906

 

17,949

 

-  Egypt

5,465

 

5,186

 

-  Turkey

3,787

 

3,870

 

-  other

11,039

 

11,121

 

North America

180,489

 

146,676

 

-  US

120,236

 

90,834

 

-  Canada

52,458

 

48,425

 

-  other

7,795

 

7,417

 

Latin America

25,117

 

28,237

 

-  Mexico

19,759

 

23,051

 

-  other

5,358

 

5,186

 

At end of period

1,532,380

 

1,439,115

 

Risk-weighted assets

Risk-weighted assets ('RWAs') rose by $11.2bn during the first half of the year, including a reduction of $22.0bn due to foreign currency translation differences. The increase of $33.2bn in RWAs (excluding foreign currency translation differences) included the following movements:

•   a $23.3bn asset size increase, of which $15.2bn arose from changes in credit and counterparty credit risk. This reflected a rise of $31.2bn in 1Q20, largely due to lending growth in GBM, CMB and WPB. During 2Q20, RWAs fell by $16.0bn as a result of repayments, maturities and management initiatives. The remaining $8.1bn increase stemmed from rises in market risk RWAs, mainly as a result of increased market volatility;

•   a $16.8bn increase in RWAs due to changes in asset quality, mainly in CMB and GBM. This included the impact of credit migration of $18.3bn, mostly in North America, Europe and Asia. The impact of credit migration was more pronounced during 2Q20, rising from $4.7bn in 1Q20 to $13.6bn; and

•   a $6.4bn fall in RWAs due to changes in methodology and policy. This included $11.1bn related to refined calculations by GBM and CMB, partly offset by RWA increases mainly as a result of changes in approach for our wholesale credit risk exposures.

From a global business perspective, GBM increases from lending growth, credit migration and market risk volatility were broadly mitigated by reductions of $21.2bn as a result of management actions during 1H20. Increases in CMB were mainly from lending growth and credit migration, partly offset by management actions.  The WPB increase primarily reflected lending growth.

In response to the Covid-19 outbreak, governments and regulators around the world have introduced a number of support measures. We are participating in market-wide schemes with $33.5bn of financing raised for wholesale clients in our major markets. We had $12.0bn of exposure (including undrawn commitments) through government-guaranteed loan schemes attracting $2.7bn RWAs at 30 June 2020.

Global businesses

 

Page

Summary

32

Basis of preparation

32

Reconciliation of reported and adjusted items - global businesses

33

Reconciliation of reported and adjusted items - risk-weighted assets

36

Supplementary tables for WPB and Global Private Banking

36

Summary

The Group Chief Executive, supported by the rest of the Group Executive Committee ('GEC') (previously the Group Management Board), reviews operating activity on a number of bases, including by global business and geographical region. Global businesses are our reportable segments under IFRS 8 'Operating Segments'.

Basis of preparation

The Group Chief Executive, supported by the rest of the GEC, is considered the Chief Operating Decision Maker ('CODM') for the purposes of identifying the Group's reportable segments. Global business results are assessed by the CODM on the basis of adjusted performance, which removes the effects of significant items and currency translation from reported results. Therefore, we present these results on an adjusted basis. Adjusted performance information for 1H19 and 2H19 is presented on a constant basis as described on page 25.

As required by IFRS 8, reconciliations of the total adjusted global business results to the Group's reported results are presented on page 101. Effective from 2Q20, we made the following realignments within our internal reporting to the GEC and CODM:

•   We simplified our matrix organisational structure by combining Global Private Banking and Retail Banking and Wealth Management to form Wealth and Personal Banking ('WPB').

•   We reallocated our reporting of Balance Sheet Management, hyperinflation accounting in Argentina and Holdings net interest expense from Corporate Centre to the global businesses.

Comparative data have been re-presented accordingly. Supplementary reconciliations from reported to adjusted results by global business are presented on pages 33 to 35 for information purposes.

Global business performance is also assessed using return on tangible equity ('RoTE'), excluding significant items and the UK bank levy. A reconciliation of global business RoTE, excluding significant items and the UK bank levy, to the Group's RoTE is provided in the Reconciliations of Non-GAAP Financial Measures 30 June 2020.

Our operations are closely integrated and, accordingly, the presentation of 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 they can be meaningfully attributed to global businesses and geographical regions. While such allocations have been made on a systematic and consistent basis, they necessarily involve a degree of subjectivity. Costs that are not allocated to global businesses are included in Corporate Centre.

Where relevant, income and expense amounts presented include the results of inter-segment funding along with inter-company and inter-business line transactions. All such transactions are undertaken on arm's length terms. The intra-Group elimination items for the global businesses are presented in Corporate Centre.

The expense of the 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 presentation by global business, the cost of the levy is included in Corporate Centre.

The results of geographical regions are presented on a reported basis.

Geographical information is classified by the location of the principal operations of the subsidiary or, for The Hongkong and Shanghai Banking Corporation Limited, HSBC Bank plc, HSBC UK Bank plc, HSBC Bank Middle East Limited and HSBC Bank USA, by the location of the branch responsible for reporting the results or providing funding.

A description of the global businesses is provided in the Overview section, pages 14 to 20.

 

 

Reconciliation of reported and adjusted items - global businesses

Supplementary analysis of significant items by global business is presented below.

 

 

Half-year to 30 Jun 2020

 

 

Wealth and Personal Banking

Commercial Banking

Global Banking and Markets

Corporate Centre

Total

 

Footnotes

$m

$m

$m

$m

$m

Revenue

1

 

 

 

 

 

Reported

 

11,270

 

7,000

 

8,185

 

290

 

26,745

 

Significant items

 

(19

)

-

 

(7

)

(242

)

(268

)

-  customer redress programmes

 

(26

)

-

 

-

 

-

 

(26

)

-  disposals, acquisitions and investment in new businesses

 

7

 

-

 

-

 

1

 

8

 

-  fair value movements on financial instruments

2

-

 

-

 

(65

)

(234

)

(299

)

-  restructuring and other related costs

 

-

 

-

 

58

 

(9

)

49

 

Adjusted

 

11,251

 

7,000

 

8,178

 

48

 

26,477

 

ECL

 

 

 

 

 

 

Reported

 

(2,202

)

(3,526

)

(1,118

)

(12

)

(6,858

)

Adjusted

 

(2,202

)

(3,526

)

(1,118

)

(12

)

(6,858

)

Operating expenses

 

 

 

 

 

 

Reported

 

(7,569

)

(3,397

)

(5,153

)

(408

)

(16,527

)

Significant items

 

223

 

107

 

641

 

614

 

1,585

 

-  customer redress programmes

 

49

 

1

 

-

 

-

 

50

 

-  impairment of goodwill and other intangibles

 

85

 

41

 

567

 

332

 

1,025

 

-  restructuring and other related costs

3

89

 

65

 

72

 

279

 

505

 

-  settlements and provisions in connection with legal and regulatory matters

 

-

 

-

 

2

 

3

 

5

 

Adjusted

 

(7,346

)

(3,290

)

(4,512

)

206

 

(14,942

)

Share of profit in associates and joint ventures

 

 

 

 

 

 

Reported

 

(8

)

-

 

-

 

966

 

958

 

Adjusted

 

(8

)

-

 

-

 

966

 

958

 

Profit before tax

 

 

 

 

 

 

Reported

 

1,491

 

77

 

1,914

 

836

 

4,318

 

Significant items

 

204

 

107

 

634

 

372

 

1,317

 

-  revenue

 

(19

)

-

 

(7

)

(242

)

(268

)

-  operating expenses

 

223

 

107

 

641

 

614

 

1,585

 

Adjusted

 

1,695

 

184

 

2,548

 

1,208

 

5,635

 

Loans and advances to customers (net)

 

 

 

 

 

 

Reported

 

429,487

 

344,567

 

243,355

 

1,272

 

1,018,681

 

Adjusted

 

429,487

 

344,567

 

243,355

 

1,272

 

1,018,681

 

Customer accounts

 

 

 

 

 

 

Reported

 

775,870

 

418,263

 

337,573

 

674

 

1,532,380

 

Adjusted

 

775,870

 

418,263

 

337,573

 

674

 

1,532,380

 

1  Net operating income before change in expected credit losses and other credit impairment charges, also referred to as revenue.

2  Includes fair value movements on non-qualifying hedges and debt valuation adjustments on derivatives.

3  Includes impairment of software intangible assets of $173m.

 

Reconciliation of reported results to adjusted results - global businesses (continued)

 

 

Half-year to 30 Jun 20194

 

 

Wealth and Personal Banking

Commercial Banking

Global
Banking and Markets

Corporate Centre

Total

 

Footnotes

$m

$m

$m

$m

$m

Revenue

1

 

 

 

 

 

Reported

 

13,154

 

7,812

 

7,696

 

710

 

29,372

 

Currency translation

 

(301

)

(169

)

(181

)

(30

)

(681

)

Significant items

 

8

 

4

 

75

 

(963

)

(876

)

-  disposals, acquisitions and investment in new businesses

 

-

 

-

 

-

 

(827

)

(827

)

-  fair value movements on financial instruments

2

7

 

4

 

77

 

(138

)

(50

)

-  currency translation on significant items

 

1

 

-

 

(2

)

2

 

1

 

Adjusted

 

12,861

 

7,647

 

7,590

 

(283

)

27,815

 

ECL

 

 

 

 

 

 

Reported

 

(561

)

(496

)

(98

)

15

 

(1,140

)

Currency translation

 

34

 

18

 

1

 

(1

)

52

 

Adjusted

 

(527

)

(478

)

(97

)

14

 

(1,088

)

Operating expenses

 

 

 

 

 

 

Reported

 

(8,428

)

(3,368

)

(4,988

)

(365

)

(17,149

)

Currency translation

 

228

 

84

 

112

 

29

 

453

 

Significant items

 

649

 

26

 

118

 

164

 

957

 

-    costs of structural reform

3

-

 

3

 

29

 

59

 

91

 

-  customer redress programmes

 

615

 

(1

)

(4

)

-

 

610

 

-  restructuring and other related costs

 

57

 

24

 

96

 

110

 

287

 

-  settlements and provisions in connection with legal and regulatory matters

 

(1

)

-

 

-

 

(1

)

(2

)

-    currency translation on significant items

 

(22

)

-

 

(3

)

(4

)

(29

)

Adjusted

 

(7,551

)

(3,258

)

(4,758

)

(172

)

(15,739

)

Share of profit in associates and joint ventures

 

 

 

 

 

 

Reported

 

43

 

-

 

-

 

1,281

 

1,324

 

Currency translation

 

(2

)

-

 

-

 

(37

)

(39

)

Adjusted

 

41

 

-

 

-

 

1,244

 

1,285

 

Profit before tax

 

 

 

 

 

 

Reported

 

4,208

 

3,948

 

2,610

 

1,641

 

12,407

 

Currency translation

 

(41

)

(67

)

(68

)

(39

)

(215

)

Significant items

 

657

 

30

 

193

 

(799

)

81

 

-  revenue

 

8

 

4

 

75

 

(963

)

(876

)

-  operating expenses

 

649

 

26

 

118

 

164

 

957

 

Adjusted

 

4,824

 

3,911

 

2,735

 

803

 

12,273

 

Loans and advances to customers (net)

 

 

 

 

 

 

Reported

 

421,987

 

347,437

 

250,999

 

1,209

 

1,021,632

 

Currency translation

 

(7,376

)

(6,461

)

(4,790

)

(25

)

(18,652

)

Adjusted

 

414,611

 

340,976

 

246,209

 

1,184

 

1,002,980

 

Customer accounts

 

 

 

 

 

 

Reported

 

724,955

 

361,286

 

293,367

 

516

 

1,380,124

 

Currency translation

 

(9,986

)

(6,480

)

(6,500

)

(11

)

(22,977

)

Adjusted

 

714,969

 

354,806

 

286,867

 

505

 

1,357,147

 

1  Net operating income before change in expected credit losses and other credit impairment charges, also referred to as revenue.

2  Includes fair value movements on non-qualifying hedges and debt valuation adjustments on derivatives.

3  Comprises costs associated with preparations for the UK's exit from the European Union.

4  A change in reportable segments was made in 2Q20. Comparative data have been re-presented accordingly. For further guidance, refer to Note 5 on page 100.

 

Reconciliation of reported results to adjusted results - global businesses (continued)

 

 

Half-year to 31 Dec 20194

 

 

Wealth and Personal Banking

Commercial Banking

Global
Banking and Markets

Corporate Centre

Total

 

Footnotes

$m

$m

$m

$m

$m

Revenue

1

 

 

 

 

 

Reported

 

12,398

 

7,444

 

7,198

 

(314

)

26,726

 

Currency translation

 

(116

)

(72

)

(90

)

(3

)

(281

)

Significant items

 

210

 

7

 

5

 

(35

)

187

 

-  customer redress programmes

 

155

 

7

 

-

 

1

 

163

 

-  disposals, acquisitions and investment in new businesses

 

52

 

-

 

-

 

7

 

59

 

-  fair value movements on financial instruments

2

-

 

-

 

7

 

(41

)

(34

)

-  currency translation on significant items

 

3

 

-

 

(2

)

(2

)

(1

)

Adjusted

 

12,492

 

7,379

 

7,113

 

(352

)

26,632

 

ECL

 

 

 

 

 

 

Reported

 

(876

)

(696

)

(64

)

20

 

(1,616

)

Currency translation

 

47

 

12

 

3

 

-

 

62

 

Adjusted

 

(829

)

(684

)

(61

)

20

 

(1,554

)

Operating expenses

 

 

 

 

 

 

Reported

 

(8,923

)

(6,537

)

(8,802

)

(938

)

(25,200

)

Currency translation

 

127

 

55

 

45

 

1

 

228

 

Significant items

 

1,111

 

2,984

 

4,101

 

328

 

8,524

 

-  costs of structural reform

3

-

 

1

 

13

 

53

 

67

 

-  customer redress programmes

 

649

 

18

 

4

 

-

 

671

 

-  impairment of goodwill and other intangibles

 

431

 

2,956

 

3,962

 

-

 

7,349

 

-  restructuring and other related costs

 

123

 

27

 

121

 

269

 

540

 

-  settlements and provisions in connection with legal and regulatory matters

 

(68

)

-

 

2

 

7

 

(59

)

-  currency translation on significant items

 

(24

)

(18

)

(1

)

(1

)

(44

)

Adjusted

 

(7,685

)

(3,498

)

(4,656

)

(609

)

(16,448

)

Share of profit in associates and joint ventures

 

 

 

 

 

 

Reported

 

12

 

-

 

-

 

1,018

 

1,030

 

Currency translation

 

(1

)

-

 

-

 

1

 

-

 

Adjusted

 

11

 

-

 

-

 

1,019

 

1,030

 

Profit/(loss) before tax

 

 

 

 

 

 

Reported

 

2,611

 

211

 

(1,668

)

(214

)

940

 

Currency translation

 

57

 

(5

)

(42

)

(1

)

9

 

Significant items

 

1,321

 

2,991

 

4,106

 

293

 

8,711

 

-  revenue

 

210

 

7

 

5

 

(35

)

187

 

-  operating expenses

 

1,111

 

2,984

 

4,101

 

328

 

8,524

 

Adjusted

 

3,989

 

3,197

 

2,396

 

78

 

9,660

 

Loans and advances to customers (net)

 

 

 

 

 

 

Reported

 

443,025

 

346,105

 

246,492

 

1,121

 

1,036,743

 

Currency translation

 

(14,191

)

(9,760

)

(6,081

)

(50

)

(30,082

)

Adjusted

 

428,834

 

336,345

 

240,411

 

1,071

 

1,006,661

 

Customer accounts

 

 

 

 

 

 

Reported

 

753,769

 

388,723

 

295,880

 

743

 

1,439,115

 

Currency translation

 

(18,468

)

(11,032

)

(9,926

)

(33

)

(39,459

)

Adjusted

 

735,301

 

377,691

 

285,954

 

710

 

1,399,656

 

1  Net operating income before change in expected credit losses and other credit impairment charges, also referred to as revenue.

2  Includes fair value movements on non-qualifying hedges and debt valuation adjustments on derivatives.

3  Comprises costs associated with preparations for the UK's exit from the European Union.

4  A change in reportable segments was made in 2Q20. Comparative data have been presented accordingly. For further guidance, refer to Note 5 on page 100.

 

 

Reconciliation of reported and adjusted risk-weighted assets

 

 

At 30 Jun 2020

 

Wealth and Personal Banking

Commercial
Banking

Global
Banking and
Markets

Corporate Centre

Total

 

$bn

$bn

$bn

$bn

$bn

Risk-weighted assets

 

 

 

 

 

Reported

161.8

 

330.9

 

277.6

 

84.3

 

854.6

 

Adjusted

161.8

 

330.9

 

277.6

 

84.3

 

854.6

 

 

 

 

 

 

 

 

At 30 Jun 2019

Risk-weighted assets

 

 

 

 

 

Reported

164.2

 

339.2

 

304.0

 

78.6

 

886.0

 

Currency translation

(3.2

)

(7.3

)

(5.2

)

(0.5

)