The HK & Shanghai Bking Corp FY2012 results

Comment by Stuart Gulliver, Chairman

Asian economies entered 2012 with encouraging levels of growth, boosted in part by the positive effects of monetary easing by eurozone authorities. Economic activity was, however, soon impacted as economies in Europe and the US faltered and concerns rose over mainland China's ability to sustain its expansion. The final months of the year saw an improvement in growth and sentiment, with Asian economies picking up and worries over the eurozone moderating. Mainland China avoided a hard landing and there were some improvements in US housing and employment data. Nevertheless, the pace of growth in the West remains slow and there continue to be appreciable risks to the sustainability of economic recovery in the US and Europe. Despite these risks, the picture for Asia in 2013 is brighter than last year, with China's GDP growth forecast to climb back to 8.6%, driving an uplift in regional demand for consumer goods and raw materials. Economic stimulus by Japan is also likely to result in increased investment in economies around the region. Such conditions raise concerns, however, over asset bubbles and inflation and policy makers will face challenges during the year in keeping economies and markets on a steady course.

In the demanding operating environment of 2012 The Hongkong and Shanghai Banking Corporation Limited performed strongly, through sustained adherence to our strategy of focusing on serving our customers, developing our priority growth markets, controlling risk and simplifying the business. Profit before tax was HK$108,729m, 19% higher than in the previous year. This included gains of HK$7,687m from the sale of subscale activities and non-core investments in Hong Kong, Japan, Thailand, India and the Philippines. On 5 December 2012, we announced the sale of our shares in Ping An Insurance (Group) Company of China, Ltd., a transaction that completed in February 2013. These disposals represent further progress in our strategy of simplifying the group and focusing our capital and resources on our core businesses.

Profits in Hong Kong grew by 31%, driven by improved deposit spreads, growth in loans and deposit balances, and higher trading revenues, together with a reduction in loan impairment charges. Profits in the Rest of Asia-Pacific were ahead by 8%, including gains on the sale of businesses, increased lending and higher profits from our associates in mainland China. Overall, customer loans grew by 10% during the period, while deposits grew by 9% and, at the year end, the loans to deposits ratio stood at 60.6%. We maintained our focus on improving efficiency and, with income growth of 10% exceeding growth in costs of 1%, the cost income ratio improved to 42.4% from 46.1%. In competitive markets for both loans and deposits, spreads remained broadly stable. Asset quality continued to be strong and loan impairment charges remained at low levels.

We continued to invest in our priority growth markets of Hong Kong, mainland China, India, Singapore, Malaysia, Indonesia, Australia, Taiwan and Vietnam. This included investment in the network, notably in mainland China, where our branch network now numbers 207 outlets, and in Malaysia, where we also have the largest branch network among foreign banks, opening 11 new Islamic branches during the year. We invested a further HK$13.3bn in Bank of Communications in order to maintain our shareholding of 19.03% in this strategically important associate, and reinforce our position as the leading foreign bank in mainland China.

During 2012 the internationalisation of the renminbi gathered pace and we strengthened our position as the leading international bank for renminbi business worldwide, with HSBC having the largest global network, offering renminbi services in over 50 markets. We maintained our dominant market share of offshore renminbi bonds during the period and led the issue in London of the first renminbi bond outside Chinese sovereign territory. In June we were joint coordinator and the sole foreign bank appointed to manage the issue in Hong Kong of renminbi sovereign bonds by China's Ministry of Finance. We were pleased to receive first place in all seven categories in the Asiamoney Offshore Renminbi Services Survey, including 'Best for overall products and services'.

In Retail Banking and Wealth Management ('RBWM'), profits grew by 24%, with a notably strong performance in Hong Kong, where we maintained our leading market positions in deposits, mortgages, credit cards, life insurance and mandatory provident funds. Lending balances grew, principally residential mortgages, in our priority markets including Hong Kong, Singapore, mainland China, Malaysia and Australia, and we also maintained good deposit growth. Continued investment in our wealth management platform and the productivity of our front line staff resulted in higher wealth revenues, and we successfully launched a number of new funds. During the year we were awarded the Best Wealth Management Award by The Asian Banker. Our continued focus on increasing efficiency resulted in an improvement in the cost efficiency ratio.

Profits in Commercial Banking ('CMB') were 22% higher than in 2011, driven by growth in lending to customers around the region and by increased revenues in trade finance and Payments and Cash Management. We were also successful in growing deposits during the year, particularly in mainland China. Costs continued to be well controlled, growing by less than revenues, which benefited from further successful progress in income from collaboration with Global Banking and Markets ('GB&M'), which increased by 14%. Foreign exchange products remained the largest contributor to revenues from collaboration with GB&M and we also generated good growth in sales of debt capital markets products including high yield bonds. Asset quality remained good, although the loan impairment charge rose as a result of impairments on a small number of specific exposures. We won several major industry awards during the year, including FinanceAsia's Best Commercial Bank and both Best Trade Finance Bank and Best Bank for Cash Management in Asia from Global Finance.  

GB&M profits growth of 9% resulted from higher net interest income, continued growth in lending, and good growth in fees and commissions and trading income in Hong Kong, where we reinforced our leading market position in debt capital markets. Fee income increased, driven by Payments and Cash Management and debt capital markets transactions across the region. Trading income benefited from increased Credit and Rates activity, most notably in Hong Kong. We have continued to invest in broadening our range of products and services and our market presence was recognised during the year with a number of significant industry awards, including six Euromoney Best House awards for Excellence in Asia, five FinanceAsia Best Hong Kong Bank awards, and Asiamoney's Hong Kong awards for No.1 Best Local Brokerage, Best Execution, Best in Sales Trading and Best in Overall Sales services.

While the outlook for Asia's economies is for improved growth and activity this year, structural risks remain. The regulatory outlook continues to be uncertain and we face strong competition in many of our businesses. The group is in good shape for the challenges and growth opportunities of 2013, with strong capital and liquidity, sound asset quality and a simplified and more efficient business that is increasingly focused on our core markets and customers. With this focus, we will continue to connect customers to opportunities and ultimately help them to grow their businesses and realise their ambitions.