Annual Financial Report - 8 of 48 | RNS | Ticker

Annual Financial Report - 8 of 48

RNS Announcement

RNS Number : 3527B

HSBC Holdings PLC

03 April 2013

Economic loss

Our internal performance measures include economic profit/(loss), a calculation which compares the return on financial capital invested in HSBC by our shareholders with the cost of that capital. We price our cost of capital internally and the difference between that cost and the post-tax profit attributable to ordinary shareholders represents the amount of economic profit/(loss) generated.

Our long-term cost of capital is reviewed annually and is 11% for 2012; this remains unchanged from 2011. However, it has been revised to 10% for 2013, primarily due to a reduction in the risk-free rate, reflecting the continued intervention of central banks, quantitative easing and the flight to quality, and greater banking sector stability through higher levels of capital and liquidity.

The following commentary is on a reported basis.

The return on invested capital fell by 2.2 percentage points to 8.0%, which was 3.0 percentage points lower than our benchmark cost of capital. Our economic loss was US$5.1bn, a deterioration of US$3.7bn compared with the loss in 2011. This reflected higher average invested capital and a decrease in profits attributable to ordinary shareholders, primarily due to adverse fair value movements on own debt attributable to credit spreads of US$5.2bn, compared with favourable movements of US$3.9bn in 2011, an increase in notable cost items and a higher tax charge in 2012.

	2012		2011
	US$m	%⁶³	US$m	%⁶³

Average total shareholders' equity ............................................................	166,820		156,129
Adjusted by:
Goodwill previously amortised or written off .........................................	8,399		8,123
Property revaluation reserves ...............................................................	(896)		(914)
Reserves representing unrealised losses on effective cash flow hedges ....	55		287
Reserves representing unrealised losses on available-for-sale securities ...	1,185		3,379
Preference shares and other equity instruments .....................................	(7,256)		(7,256)

Average invested capital⁶⁴ .........................................................................	168,307		159,748

Return on invested capital⁶⁵ ......................................................................	13,454	8.0	16,224	10.2

Benchmark cost of capital ........................................................................	(18,514)	(11.0)	(17,572)	(11.0)

Economic loss and spread .........................................................................	(5,060)	(3.0)	(1,348)	(0.8)

For footnotes, see page 120.

Reconciliation of RoRWA measures

Performance Management

We target a return on average ordinary shareholders' equity of 12%-15%. For internal management purposes we monitor global businesses and geographical regions by pre-tax return on RWAs, a metric which combines return on equity and regulatory capital efficiency objectives.

In addition to measuring return on average risk-weighted assets ('RoRWA') we measure our performance internally using the non-GAAP measure of underlying RoRWA, which is underlying profit before tax as a percentage of average risk-weighted assets adjusted for the effects of foreign currency translation differences and business disposals. Underlying RoRWA adjusts performance for certain items which distort year-on-year performance as explained on page 26.

We also present the non-GAAP measure of underlying RoRWA adjusted for the effect of operations which are not regarded as contributing to the longer-term performance of the Group. These include the run-off portfolios and the Card and Retail Services business which was sold in 2012.

The Card and Retail Services average RWAs in the table below represent the average of the associated operational risk RWAs that were not immediately released on disposal and have not already been adjusted as part of the underlying RoRWA calculation. The pre-tax loss for Card and Retail Services in the table below primarily relates to litigation expenses incurred after the sale of the business that have not been adjusted as part of the underlying RoRWA calculation.

Reconciliation of underlying RoRWA (excluding run-off portfolios and Card and Retail Services)

	2012			2011
	Pre-tax return	Average RWAs⁶⁶	RoRWA ^66,67	Pre-tax return	Average RWAs⁶⁶	RoRWA ^66,67
	US$m	US$bn	%	US$m	US$bn	%

Reported ...................................................	20,649	1,172	1.8	21,872	1,154	1.9

Underlying⁶⁷ .............................................	16,385	1,129	1.5	13,861	1,077	1.3
Run-off portfolios ....................................	(1,630)	167	(1.0)	(4,901)	169	(2.9)
Legacy credit in GB&M ........................	(280)	45	(0.6)	(429)	33	(1.3)
US CML and other⁶⁸ .............................	(1,350)	122	(1.1)	(4,472)	136	(3.3)

Card and Retail Services ............................	(150)	5	(3.0)	-	-	-

Underlying (excluding run-off portfolios and Card and Retail Services) .................	18,165	957	1.9	18,762	908	2.1

For footnotes, see page 120.

Reconciliation of reported and underlying average risk-weighted assets

	Year ended 31 December
	2012	2011	Change
	US$bn	US$bn	%

Average reported RWAs⁶⁶ ............................................................................	1,172	1,154	2
Currency translation adjustment²⁴ ................................................................	-	(7)
Acquisitions, disposals and dilutions ..............................................................	(43)	(70)

Average underlying RWAs⁶⁶ .........................................................................	1,129	1,077	5

Disposals, held for sale and run-off portfolios

In implementing our strategy, we have sold or agreed to sell a number of businesses and investments across the Group. The sale of these businesses and investments will have a significant effect on both our revenue and profitability in the future. In addition, we have substantial portfolios which are being run down. We expect the losses on these portfolios to continue to affect the Group in the future.

The table below presents the contribution of these businesses and investments to the historical results of the Group. We do not expect the historical results to be indicative of future results because of disposals or run-offs. Fixed allocated costs, included in total operating costs, will not necessarily be removed upon disposal and have been separately identified.

Summary income statements for disposals, held for sale and run-off portfolios^69,70

	2012
				Held	Run-off portfolios
	Card and Retail Services US$m	Ping An US$m	Other disposals US$m	for sale excluding US CML US$m	US CML and other⁷¹ US$m	Legacy credit in GB&M US$m

Net interest income/(expense) ....................	1,267	-	352	303	2,561	(28)
Net fee income/(expense) ...........................	395	-	13	(35)	33	(17)
Net trading income/(expense) .....................	-	-	67	22	(226)	99
Net income/(expense) from financial instruments designated at fair value .........	-	-	3	5	(785)	10
Gains less losses from financial investments	-	-	8	27	-	(72)
Dividend income .........................................	-	-	-	-	3	-
Net earned insurance premiums ...................	-	-	430	315	-	-
Other operating income/(expense) ..............	7	-	10	5	37	(3)

Total operating income/(expense) .........	1,669	-	883	642	1,623	(11)

Net insurance claims incurred and movement in liabilities to policyholders ...................	-	-	(218)	(225)	-	-

Net operating income/(expense)²¹..........	1,669	-	665	417	1,623	(11)

Loan impairment charges and other credit risk provisions ..............................	(322)	-	(16)	(77)	(2,569)	(168)

Net operating income/(expense) ............	1,347	-	649	340	(946)	(179)

Total operating expenses ............................	(729)	-	(467)	(344)	(1,106)	(101)

Operating profit/(loss) ............................	618	-	182	(4)	(2,052)	(280)

Share of profit in associates and joint ventures ..................................................	-	763	12	9	2	-

Profit/(loss) before tax ............................	618	763	194	5	(2,050)	(280)

By global business
Retail Banking and Wealth Management .....	618	622	99	(29)	(1,274)	-
Commercial Banking ...................................	-	82	40	24	9	-
Global Banking and Markets ........................	-	59	65	28	-	(280)
Global Private Banking ...............................	-	-	(9)	-	-	-
Other ..........................................................	-	-	(1)	(18)	(785)	-

Profit/(loss) before tax ................................	618	763	194	5	(2,050)	(280)

By geographical region
Europe ........................................................	-	-	(1)	-	-	(281)
Hong Kong .................................................	-	-	45	-	-	1
Rest of Asia-Pacific ....................................	-	763	(31)	22	-	(2)
Middle East and North Africa ......................	-	-	46	-	-	-
North America ............................................	618	-	25	(25)	(2,050)	2
Latin America .............................................	-	-	110	8	-	-

Profit/(loss) before tax ................................	618	763	194	5	(2,050)	(280)

Other information

Gain on sale ................................................	3,148	3,012	1,579
Fixed allocated costs included in total operating expenses ..................................	188	-	77	52	230	-

	US$bn	US$bn	US$bn	US$bn	US$bn	US$bn

Reduction in RWAs on disposal⁷² ................	39.3	24.9	7.5	8.8
RWAs⁷² ......................................................				9.3	107.1	38.6

	%	%	%	%	%	%

Share of HSBC's profit before tax ...............	3.0	3.7	0.9	-	(10.0)	(1.4)
Cost efficiency ratio ...................................	43.7	-	70.2	82.5	68.1	-

For footnotes, see page 120.

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RNS metadata

Title: Annual Financial Report - 8 of 48
Time: 17:22:02
Date: 3 Apr 2013
Category: Results
ID: 3527B