Half Year Report - 2022 Interim Report - Part 1

Commercial Banking

Contribution to Group 1H22 adjusted profit before tax<>

We support businesses in 53 countries and territories, ranging from small enterprises to large companies operating globally.

We help businesses grow by supporting their financial needs, facilitating cross-border trade and payment services, and providing access to products and services. We help them access international markets, provide expert financial advice and offer a full suite of products and services from across the Group's other businesses.

In the first half of 2022, CMB increased lending and enabled our clients to participate in the recovery in global trade volumes, while navigating recent supply chain constraints. We continued our investment in technology, launching new platforms to support customers and make banking with us easier. There was strong revenue performance in all core CMB products, notably in GLCM, due to interest rate rises. This was partly offset by a more normalised ECL charge relative to the net releases in 1H21.

1 Includes CMB's share of revenue from the sale of Markets and Securities Services and Banking products to CMB customers. GBM's share of revenue from the sale of these products to CMB customers is included within the corresponding lines of the GBM management view of adjusted revenue. Also includes allocated revenue from Markets Treasury, HSBC Holdings interest expense and hyperinflation.

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 $3.6bn was $0.4bn or 11% higher than in 1H21. This was driven by an increase in adjusted revenue in all core CMB products, notably including a 51% increase in GLCM net interest income. This was partly offset by an adjusted net ECL charge in 1H22, compared with Covid-19-related releases in 1H21. Adjusted operating expenses were down 1%, as cost discipline more than offset continued investment spend.

Adjusted revenue of $7.2bn was $0.9bn or 14% higher.

•       In GLCM, revenue increased by $0.7bn or 42%, with double-digit growth across all regions, particularly in Europe and Asia. This was driven by higher margins, reflecting interest rate rises and pricing actions, as well as average balance growth of 8%. Period end balances were 6% higher compared with 30 June 2021. There was also an increase of 23% in fee income, with growth across all regions, as we delivered on our strategic fee initiatives.

•       In GTRF, revenue increased by $0.2bn or 20%, with double-digit percentage growth across all regions, notably in Asia and the UK. This was driven by a continued increase in average trade balances, which rose by 25% compared with 1H21. Trade period end balances at 30 June 2022 increased by 8% compared with 31 December 2021, and we benefited from improved margins. We grew fee income by 9%.

•       In Credit and Lending, revenue increased by $0.1bn or 5%, with growth across all regions, driven by wider margins and a 1% growth in average balances, compared with 1H21. Period end balances at 30 June 2022 were 4% higher compared with 31 December 2021, with growth in North America and Asia. In addition, fee income grew by 4%.

•       In Market products, Insurance and Investments, and Other, revenue decreased by $0.2bn or 16%, reflecting a lower allocation of Markets Treasury revenue of $0.1bn and the adverse effects of hyperinflation accounting of $0.1bn. This was partly offset by a $0.1bn or 21% increase in collaboration revenue from GBM products, notably Foreign Exchange.

Adjusted ECL were a net charge of $0.3bn, mainly related to stage 3 charges, notably against exposures in the commercial real estate sector in mainland China. Our stage 1 and stage 2 ECL charges were a net release in 1H22, as a release of Covid-19-related allowances, notably relating to the UK hotels sector, was partly offset by the effects of a deterioration in the forward economic outlook reflecting heightened levels of uncertainty and inflationary pressures. This compared with a net ECL release of $0.2bn in 1H21, reflecting the release of Covid-19-related allowances previously built up in 2020.

Adjusted operating expenses of $3.4bn were $20m or 1% lower, reflecting continued cost discipline on discretionary spend and hiring efficiencies, as well as the impact of our cost-saving initiatives and the Group-wide phasing of the performance-related pay accrual. These reductions more than offset continued investment in technology and the impact of higher inflation.

Divisional highlights

20%

Increase in adjusted net interest income, notably 51% in GLCM and 33% in GTRF.

12%

Increase in adjusted net fee income, with growth across all products.

Adjusted profit before tax <>

($bn)

$3.6bn

Adjusted net operating income <>

($bn)

$7.2bn

Global Banking and Markets

Contribution to Group 1H22 adjusted profit before tax<>

We support multinational corporates, financial institutions and institutional clients, as well as public sector and government bodies. We are leaders in facilitating global trade and payments, particularly into and within Asia and the Middle East, enabling our clients in the East and West to achieve their objectives by accessing our expertise and geographical reach. Our product specialists deliver a comprehensive range of transaction banking, financing, capital markets and advisory, and risk management services.

GBM continued to invest in technology in 1H22 to support our clients and to improve our operational resilience, while achieving on our cost-saving initiatives. We delivered a good revenue performance due to elevated levels of volatility in financial markets and rising interest rates. Adjusted profit before tax decreased due to ECL charges that reflected heightened levels of economic uncertainty, compared with ECL releases in 1H21.

1 Includes portfolio management, earnings on capital and other capital allocations on all Banking products.

2 Includes notional tax credits and Markets Treasury, HSBC Holdings interest expense and hyperinflation.

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 $2.9bn was $0.3bn or 10% lower than in 1H21. This was driven by an adjusted net ECL charge in 1H22 of $0.2bn, primarily due to provisions taken in the first quarter, compared with a net release of $0.4bn in 1H21. Adjusted revenue grew, while adjusted operating expenses were broadly stable.

Adjusted revenue of $7.8bn was $0.3bn or 4% higher.

In MSS, revenue increased by $0.4bn or 10%, driven by strong client activity and robust risk management, despite adverse movements in credit and funding valuation adjustments of $42m.

•       In Global Foreign Exchange, revenue growth of $0.6bn or 37% reflected increased client activity and risk management due to elevated market volatility and the macroeconomic impacts from rising inflation and increasing interest rates.

•       In Securities Services, revenue grew by $0.1bn or 10% from higher net interest income, as global interest rates rose, partly offset by lower fee income, as a fall in market indices adversely impacted asset valuations.

•       In Securities Financing, revenue increased by $47m or 11% from increased client activity in prime finance, partly offset by a more challenging macroeconomic environment for repurchase agreement products.

•       In Global Debt Markets, revenue fell by $0.2bn or 36%, reflecting lower primary issuances and reduced client activity due to uncertainty and challenging market conditions.

In Banking, revenue increased by $0.2bn or 7%.

•       In GLCM, revenue increased by $0.3bn or 36%, driven by a rise in net interest income due to higher global interest rates and an 8% growth in average balances. There was also a 16% increase in fee income, as we delivered on our strategic initiatives.

•       Capital Markets and Advisory revenue decreased by $0.1bn or 25%, within the context of a significant reduction in the global market fee pool, particularly in equity and debt capital markets.

In GBM Other, Principal Investments revenue fell by $0.2bn, as 1H22 included lower revaluation gains compared with 1H21. This also included a reduction in revenue allocated from Markets Treasury.

Adjusted ECL were a net charge of $0.2bn, compared with a release of $0.4bn in 1H21. The net charge in 1H22 reflected a deterioration in the forward economic outlook due to heightened levels of uncertainty and inflationary pressures. This compared with the net release in 1H21 of Covid-19-related allowances previously built up in 2020.

Adjusted operating expenses were broadly unchanged, as the impact of our cost-saving initiatives and the Group-wide phasing of the performance-related pay accrual helped fund strategic investments across key transformation initiatives, and mitigated the impact of higher inflation.

Divisional highlights

47%

Percentage of adjusted revenue generated in Asia in 1H22.

36%

Revenue increase in GLCM compared with 1H21.

Adjusted profit before tax <>

($bn)

$2.9bn

Adjusted net operating income <>

($bn)

$7.8bn

Corporate Centre

Contribution to Group 1H22 adjusted profit before tax<>

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

Corporate Centre performance in 1H22 reflected lower adjusted revenue and a decrease in the adjusted share of profit from associates and joint ventures, partly offset by a reduction in adjusted operating expenses.

Financial performance

Adjusted profit before tax of $1.3bn was $0.1bn or 8% lower.

Adjusted revenue decreased by $0.2bn, mainly due to transactional foreign currency-related valuation losses. The reduction also included the non-recurrence of 1H21 gains related to the revaluation of assets.

Adjusted operating expenses decreased by $0.3bn due to an increase in costs allocated to our global businesses.

Adjusted share of profit from associates and joint ventures of $1.4bn decreased by $0.2bn, primarily as 1H21 included a higher share of profit from BGF due to the recovery in asset valuations.

1 Central Treasury includes adverse valuation differences on issued long-term debt and associated swaps of $28m (1H21: losses of $54m; 2H21: losses of $45m).

2 Revenue from Markets Treasury, HSBC Holdings net interest expense and Argentina hyperinflation are allocated out to the global businesses, to align them better with their revenue and expense. The total Markets Treasury revenue component of this allocation for 1H22 was $877m (1H21: $1,269m; 2H21: $965m).

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

Political tensions, together with the risk of a global economic slowdown and high inflationary pressures, have resulted in an increasingly fragmented macroeconomic, trade and regulatory environment.

Global commodity markets have been significantly impacted by the Russia-Ukraine war, leading to supply chain disruptions and increased prices for both energy and raw materials. The continuation of - or any further escalation in - the Russia-Ukraine war could have additional economic, social and political consequences. These include further sanctions and trade restrictions, longer-term changes in the macroeconomic environment with the risk of higher and sustained inflation, and a continued increase in energy prices.

The macroeconomic, trade and regulatory environment has been further impacted with market concerns regarding potential impacts following instability in China's commercial real estate sector. Continued tensions between China and the US, the UK, the EU, India and other countries, and developments in Hong Kong and Taiwan, may affect the Group by creating regulatory, reputational and market risks. We continue to monitor the situation closely.

We continued to focus on improving the quality and timeliness of the data used to inform management decisions, through measures such as early warning indicators, prudent active management of our risk appetite, and ensuring regular communication with our Board and key stakeholders.

While the financial performance of our operations varied in different geographies, our balance sheet and liquidity remained strong.

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. Risk appetite supports senior management in allocating capital, funding and liquidity optimally to finance growth, while monitoring exposure to non-financial risks.

Capital and liquidity remain at the core of our risk appetite framework, with forward-looking statements informed by stress testing. We continue to develop our climate risk appetite as we engage with businesses on including climate risk in decision making and starting to embed climate risk appetite into business planning.

At 30 June 2022, our CET1 ratio and ECL charges were within their defined risk appetite thresholds. Monitoring of measures against our risk appetite remains a key focus. During the first half of 2022, we enhanced the monitoring and forecasting of our CET1 ratio through regular reviews in periods of high volatility.

Key risk appetite metrics

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. We use the outcomes 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. The results from the stress tests also drive recovery and resolution planning to help enhance the Group's financial stability under various macroeconomic scenarios. The selection of stress scenarios is based upon the identification and assessment of our top risks, emerging risks and our risk appetite. During the first half of 2022, assessments were made of the impact on the Group of the Russia-Ukraine war and the consequences from the deteriorating global economic outlook.

Our latest solvency stress testing results published by the Bank of England ('BoE') in December 2021 confirmed the Group was sufficiently capitalised.

The 2022 BoE annual cyclical scenario was originally due in June 2022, although this has been postponed in light of the uncertainty related to the Russia-Ukraine war. The exercise will now commence later in the third quarter of 2022.

We will also conduct our own internal stress test in the second half of 2022, which will explore the potential impacts of key vulnerabilities to which we are exposed, including geopolitical issues, related macroeconomic headwinds and the continued impact of the Covid-19 pandemic. The internal stress test will consider the impacts of various risk scenarios across all risk types and on capital resources.

To support the requirements for assessing the impacts of climate change, we have developed a set of capabilities to execute climate stress testing and scenario analysis. These are used to improve our understanding of our risk exposures for risk management and business decision making. In 2021, the Prudential Regulation Authority requested all major UK banks to run a climate-related stress test to explore the impacts of a set of scenarios: an early policy action, a late policy action and no additional policy action. This was followed in the first half of 2022 with a second round to explore our strategic responses to such scenarios.  We have also conducted climate change stress testing exercises for the European Central Bank and the Monetary Authority of Singapore. We continue to develop our climate change capabilities and methodologies, and we are planning to execute in the second half of 2022 an internal climate scenario analysis to identify challenges and opportunities to our net zero strategy, as well as to inform capital planning and risk appetite.  

Our operations

We remain committed to investing in the reliability and resilience of our IT systems and critical services, including those provided by third parties, that support all parts of our business. We do so to help 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. In our approach to defend against these threats, we invest in business and technical controls to help us detect, manage and recover from issues, including data loss, in a timely manner.

We have made progress on the implementation of our business transformation plans, and as we shift from transformation to growth-focused initiatives, we will continue to seek to manage the risks associated with any structural change, which include execution, operational, governance, reputational, conduct and financial risks.

 
For further details on our risk management framework and risks associated with our banking and insurance manufacturing operations, see pages 121 and 135 of the Annual Report and Accounts 2021, respectively.

Geopolitical and macroeconomic risks

Heightened geopolitical tensions, alongside other factors, have disrupted global supply chains and created potential ramifications for the Group. The Russia-Ukraine war has elevated geopolitical instability and resulted in the US, the UK and the EU, as well as other countries, imposing significant sanctions and trade restrictions against Russia, including against numerous Russian government officials and individuals with close ties to the Russian government, and a number of Russian financial institutions and companies. Russia has implemented certain countermeasures in response.

The Russia-Ukraine war, alongside the economic impacts that continue to result from the Covid-19 pandemic, has increased commodity prices, with the resulting sharp increase in inflation creating further challenges for monetary authorities and our customers. Central banks both in developed and emerging markets have stepped up the pace of monetary policy tightening in 2022 to help ease inflationary pressures. Price pressures may increase further in coming months as the effects of the war and supply chain disruptions intensify. This may lead central banks to increase tightening to a greater level than currently envisaged. There is an increasing risk that a combination of significant monetary policy tightening and worse-than-anticipated economic effects from the Russia-Ukraine war, including as a result of continued pressure exerted through extensive sanctions, trade restrictions and Russian countermeasures, could precipitate a recession in parts of the global economy. 

Higher inflationary concerns around the world and the resulting economic uncertainty are having an impact on ECL. We have continued to carry out enhanced monitoring of model outputs and use of model overlays, including management adjustments based on the expert judgement of senior credit risk managers. Inflation has been considered both directly in certain models, and assessed via adjustments where not directly considered. Government programmes implemented during the Covid-19 pandemic to support businesses and individuals also impacted the level of credit losses, which in turn may have impacted the longer-term reliability of loss and capital models. As a result, these models may require significant changes.

Political tensions between China and the US, extending to the UK, the EU, India and other countries, and political developments in Hong Kong and Taiwan, may affect the Group and its customers by creating regulatory, reputational and market risks. The US, the UK, the EU, Canada and other countries have imposed various sanctions and trade restrictions on Chinese persons and companies. In response to foreign sanctions and trade restrictions, China has imposed sanctions and trade restrictions and enacted laws that could impact the Group and its customers.

Market participants remain concerned about the repercussions for the Chinese domestic economy from instability in its commercial real estate sector, including deteriorating operating performance and challenging liquidity conditions, and more recently from China's government-imposed lockdown restrictions in major Chinese cities in response to elevated Covid-19 infections. Such repercussions may occur directly through financial exposures to the Chinese commercial real estate sector, or indirectly through the effect of a slowdown in economic activity in China and on global supply chains in various sectors. Despite a recent improvement in economic indicators as lockdown restrictions are lifted, we continue to monitor the situation closely, including potential indirect impacts, and seek to take mitigating actions as required.

Strains in the relationship between the UK and the EU, which to a certain extent have had less of a focus in light of the Russia-Ukraine war, have come back to the fore through a number of potential areas of tension, notably the Northern Ireland Protocol, with possible impacts for the operation of the EU-UK Trade and Cooperation Agreement ('TCA'). The ongoing leadership election to replace Boris Johnson as prime minister has added to that uncertainty.

In December 2021, the OECD published model rules that provided a template for countries to implement a new global minimum tax rate of 15%. In January 2022, the UK government opened a consultation on how the UK plans to implement the model rules, with guidance to accompany these rules published in March 2022. In July 2022, the UK government issued draft legislation to implement these rules and has confirmed that the final legislation will be effective for accounting periods beginning on or after 31 December 2023.

The impact on HSBC will depend on how the UK implements the model rules, as well as the profitability and local tax liabilities of HSBC's operations in each tax jurisdiction from 2024. Separately, potential changes to tax legislation and tax rates in the countries in which we operate could increase our effective tax rate in future as governments seek revenue to pay for Covid-19 support packages.

We continue to monitor, and seek to manage, the potential implications of all the above developments on our customers and our business.

For further details on our approach to geopolitical and macroeconomic risks, see 'Areas of special interest' on page 59.

Risks related to Covid-19

While the global vaccination roll-out has helped reduce the social and economic impact of the Covid-19 pandemic, new variants and sub-variants pose a continuing risk. Countries continue to differ in their approach to restrictions on activity and travel, and if these differences persist, this could prolong or worsen supply chain and international travel disruptions. Most notably, China's government-imposed lockdown restrictions in major Chinese cities, which were only eased recently, have impacted China's economy, Asia tourism and global supply chains adversely. A full return to pre-pandemic levels of social interaction across all our key markets remains unlikely in the short to medium term.

While our operations have been resilient throughout the pandemic, the operational support functions on which the Group relies are based in countries around the world, some of which have been particularly affected by Covid-19. As a result, business continuity responses have been implemented and most service level agreements have been maintained in places where the Group operates.

We continue to monitor the situation closely and, given the significant uncertainties related to the post-pandemic landscape, additional mitigating actions may be required.

For further details on our approach to the risks related to Covid-19, see 'Areas of special interest' on page 60.