Interim Management Statement - 3Q 2013

·     The reported cost efficiency ratio improved from 61.2% for the first nine months of 2012 to 56.6% in 2013 while, on an underlying basis, it improved from 62.5% to 57.0%.

Full-time equivalent staff numbers ('FTE's) at the end of the quarter were 259,300, broadly unchanged compared with 30 June 2013.

·      The effective tax rate for the nine months of 20.3% was lower than the UK corporation tax rate of 23.25%. The lower tax rate was driven by the geographical distribution of the Group's profit and non-taxable gains from the reclassification of Industrial Bank as a financial investment and the disposal of our investment in Ping An. These factors were offset in part by a reduction in deferred tax assets recognised in Mexico following clarification of the tax law by the Mexican fiscal authority and a write-down of the UK deferred tax asset arising from the reduction in the future UK tax rate to 20% from 1 April 2015.

·     On 7 October 2013, the Board announced a third interim dividend for 2013 of US$0.10 per ordinary share.

3Q13 compared with 3Q12

·     Reported profit before tax of US$4.5bn for 3Q13 was US$1.0bn or 30% higher than in 3Q12, primarily due to higher revenue from lower adverse fair value movements of US$1.2bn on our own debt designated at fair value resulting from changes in credit spreads, and lower operating expenses.

·     Reported revenue was US$15.1bn in the quarter, 3.5% higher than in the same period in 2012. On an underlying basis, revenue was US$15.6bn in the quarter, broadly in line with 3Q12 notwithstanding an adverse DVA movement in GB&M of US$0.2bn. Excluding this, revenue in GB&M was marginally higher. It was also marginally higher in CMB, in line with trends seen throughout the first nine months of 2013. By contrast, revenue in RBWM decreased, primarily reflecting lower average balances in the CML portfolio and a fall in insurance revenues. These factors were partly offset by higher net interest income in Hong Kong, mainly due to improved mortgage spreads and higher average mortgage balances. In GPB, the trends driving performance in the first nine months of 2013 contributed to a fall in revenue in the quarter.

·     LICs of US$1.6bn were US$0.1bn lower than in 3Q12, on both a reported and underlying basis. The movement in underlying LICs was driven by a decrease in North America of US$0.4bn (to US$0.3bn) reflecting improvements in housing market conditions, lower lending balances, lower levels of new impaired loans and reduced delinquency levels in our CML portfolio. This was largely offset by higher LICs in Latin America of US$0.2bn (to US$0.6bn) and in Europe of US$0.1bn (to US$0.5bn). In Latin America, the higher LICs reflected an increase in specific impairments in CMB, notably in Mexico due to further deterioration of recoverability on exposures to homebuilders and in Brazil across a number of corporate exposures. In Europe, the rise in LICs reflected specific customer impairments in GB&M partially offset by provision releases.

·     Reported operating expenses of US$9.6bn were 7% lower than in the same period in 2012. On an underlying basis, operating expenses fell by US$0.4bn, primarily reflecting the non-recurrence of the provision of US$0.8bn booked in 3Q12 in respect of US anti-money laundering, BSA and OFAC investigations which was partially offset by higher UK customer redress charges of US$0.1bn and restructuring and related costs of US$0.1bn. Excluding these items, operating expenses rose by US$0.3bn, reflecting increased strategy and investment costs, wage inflation and litigation and regulatory-related costs including a provision in respect of regulatory investigations in GPB. These factors were partly offset by additional sustainable costs savings of US$0.4bn.

·      The reported cost efficiency ratio improved from 70.6% in 3Q12 to 63.6% in 3Q13 while, on an underlying basis, it improved from 63.5% to 61.4%.

·      The effective tax rate for the three months was 23.1%, similar to the UK corporation tax rate of 23.25%. The tax for the quarter included a write-down of the UK deferred tax asset arising from a reduction in the future UK tax rate to 20% from 1 April 2015.

Balance sheet commentary compared with 30 June 2013

·     Reported loans and advances to customers increased by US$47.8bn during 3Q13. This resulted from foreign exchange differences of US$23.5bn coupled with a rise of US$7.8bn in reverse repo balances and an increase in customer lending of US$16.5bn. The latter included the reclassification of assets previously included in 'Assets held for sale' following the strategic review of our Monaco business in GPB. Excluding this, loans and advances were marginally higher, driven by increases in Hong Kong from term lending to CMB and Global Banking customers, particularly commercial real estate related, together with an increase in corporate overdraft balances in the UK, notably in GB&M, which did not meet the netting criteria.

·     Reported customer accounts increased by US$66.6bn in the quarter, largely resulting from foreign exchange differences of US$28.9bn, an increase in repo balances of US$14.5bn and a rise in customer deposits of US$23.2bn. The latter included the reclassification of customer deposits previously included in 'Liabilities of disposal groups held for sale' arising from the strategic review noted above. Excluding these factors, customer deposits were marginally higher, driven by RBWM in Hong Kong, where customers adopted a more conservative approach to managing assets and, to a lesser extent, by CMB. In addition, there was an increase in the UK of customer deposit balances which did not meet the netting criteria.

·     Other significant balance sheet movements in the quarter included an increase in cash and balances at central banks, mainly in Europe and, to a lesser degree, in Hong Kong and Rest of Asia-Pacific as surplus liquidity was redeployed. In addition, there was a decline in derivative assets and liabilities, reflecting continued shifts in major yield curves.

Net interest margin

·     Net interest margin decreased in the nine months to 30 September 2013 compared with the same period in 2012 as a result of significantly lower gross yields on customer lending, including balances within 'Assets held for sale'. This was driven by the effect of disposals, notably of the higher-yielding CRS and non-real estate portfolios in the US, and downward trends in interest rates in a small number of countries, particularly Brazil. Yields on our own surplus liquidity also fell, notably in Latin America and Europe, as proceeds from maturing investments and disposals were reinvested at lower prevailing rates. These factors were partly offset by a reduction in the cost of funds on customer accounts in the majority of our regions, especially in Latin America, in line with the declining interest rate trends noted above. In addition, the cost of funds on debt issued by the Group decreased, as debt issued at higher coupons in the US matured and was repaid.

Capital and risk-weighted assets 

·      The core tier 1 capital ratio strengthened to 13.3% from 12.7% at 30 June 2013. Internal capital generation of US$2.6bn and favourable foreign exchange movements of US$2.4bn contributed to a total increase of US$4.8bn in core tier 1 capital.

·     Risk-weighted assets ('RWA's) decreased by US$5.9bn in the quarter, mainly due to a US$7.7bn reduction in market risk and reductions in other risk types, partially offset by the effect of foreign exchange movements. The lower market risk RWAs reflected a lesser incremental risk charge from falls in sovereign exposures.

·      The estimated CRD IV end point basis common equity tier 1 capital ratio increased to 10.6%, from 10.1% at 30 June 2013, reflecting internal capital generation, favourable foreign exchange movements and a reduction in RWAs.

Trading conditions since 30 September 2013 and outlook

Our results in October included an estimated gain of US$1.1bn on the disposal of our operations in Panama. Excluding this, our performance was in line with the trends we experienced during the first nine months of the year.

The Financial Conduct Authority is conducting investigations alongside several other agencies in various countries into a number of firms, including HSBC, relating to trading on the foreign exchange market. We are cooperating with the investigations which are at an early stage.