Country business highlights
In the UK, CMB lending decreased compared with the first half of 2013. However, new lending and re‑financing before attrition and amortisation increased by 23%. This was offset by higher levels of repayments in the existing loan book. We approved over 80% of small business loan applications. In addition, Business Banking UK launched a campaign to offer further support and lending to SME customers that trade either domestically or internationally. As part of this, £5.8bn (US$9.9bn) of lending was made available, along with a programme of activities such as 'Fast Lane to Growth' events for larger SMEs and workshops for micro-businesses.
We also grew our Payments and Cash Management business through a targeted deposit acquisition strategy.
In RBWM, we continued to support the housing market in the first half of 2014, approving £6.5bn (US$11.1bn) of new mortgage lending to over 56,000 customers, including £1.8bn (US$3.0bn) to over 13,000 first time buyers. Our mortgage balances remained broadly unchanged. The loan-to-value ('LTV') ratio on new lending remained robust at 59.7% compared with an average of 46.3% for the total mortgage portfolio. In addition, the UK mobile banking app has had nearly one million log-ons each week since its launch last year, offering a range of new functions such as a Cash ISA application and 'Paym'.
In GB&M, our Capital Financing business was successful with a number of transactions. Through collaboration with CMB, GB&M acted as joint bookrunner on a rights issue for a UK client, our largest ever bookrunning mandate for a UK CMB customer, demonstrating our ability to utilise connections between global businesses.
We strengthened our support of the renminbi ('RMB') internationalisation and in January became the first custodian bank servicing London-based RMB qualified foreign institutional investors following regulatory approval to the opening of mainland China's securities market to overseas investors.
In France, CMB signed innovative partnership agreements with Bpifrance and UBIFRANCE, designed to make it easier for clients who aspire to trade internationally to expand. Following the success of the SME Fund last year, CMB allocated another €1.5bn (US$2.0bn) to support customers seeking international growth, approving €0.9bn (US$1.2bn) of lending in the first half of 2014. In RBWM, we continued to focus on growing the home loans proposition by generating high quality new business and long-term relationships with affluent clients, increasing average balances by US$3.3bn.
We continued our growth initiative in Germany with the aim of positioning the corporate banking business as the 'Leading International Bank' by extending our product offerings to internationally operating middle market enterprises (Mittelstand) and international corporations.
In Turkey, RBWM launched a new transactional offering campaign 'Big Step', attracting over 59,000 customers in the first half of the year. CMB set up a strategic partnership with the Exporters' Association for customers seeking to trade internationally and embarked upon a programme of structural optimisation of the branch network to drive efficiencies. In addition across CMB Europe, our Trade business embarked on a series of initiatives to enable customers to fulfil their international trade ambitions, which included the roll out of trade academies and the launch of 'Trade Radar' communications in local languages. In Switzerland, we continued to reposition the GPB business and focused on growth through the high net worth client segment.
Review of performance
The following commentary is on a constant currency basis and comparisons are with the first half of 2013, unless stated otherwise.
Net interest income decreased by US$0.3bn, primarily due to a provision in the UK arising from a review of compliance with the Consumer Credit Act. Excluding this, net interest income was broadly unchanged as an increase in the UK was offset by a decrease in Turkey.
In the UK, excluding the provision noted above, net interest income increased in GB&M, CMB and RBWM. In GB&M, there was an increase in Capital Financing from growth in volumes, notwithstanding continuing spread compression, and in Balance Sheet Management from rising average balances in liquid asset portfolios. In CMB, net interest income rose due to higher spreads in term lending and deposit volume growth in Payments and Cash Management, although term lending volumes fell, while in RBWM the increase was from growth in deposit volumes and widening deposit spreads, despite narrower lending spreads.
These factors were broadly offset by a decrease in net interest income in Turkey due to interest rate caps on cards and overdrafts imposed by the local regulator.
Net fee income increased marginally, as increases in the UK and Turkey were partly offset by decreases in Switzerland.
In the UK, net fee income in GB&M increased, primarily due to a reduction in fees paid to other regions due to lower activity in Markets. In Capital Financing, the effects of market share and volume gains were broadly offset by fee compression. We also recorded a rise in fees in CMB due to increased volumes of new business lending in the large corporate and mid-market segments. By contrast, there was a decrease in RBWM as a result of higher fees payable under partnership agreements, along with lower investment and overdraft fees.
In Turkey, net fee income rose from growth in card fees. However, in Switzerland in GPB, net fee income decreased, reflecting a reduction in client assets as we continued to reposition the business.
Net trading income decreased by US$3.6bn to US$1.0bn. This included the effects of a number of significant items including:
· adverse movements on non-qualifying hedges of US$144m compared with favourable movements of US$98m in the first half of 2013;
· adverse movements on a DVA of US$77m, compared with favourable movements of US$306m; and
· a foreign exchange gain on sterling debt issued by HSBC Holdings of US$442m in the first half of 2013, which did not recur.
Excluding these items, trading income decreased, primarily in the UK, driven by adverse foreign exchange movements on assets held as economic hedges of foreign currency debt designated at fair value compared with favourable movements in the first half of 2013, with the offset reported in 'Net income from financial instruments designated at fair value'.
In addition, net trading income in Markets declined, primarily in Foreign Exchange and, to a lesser extent, in Rates, reflecting lower market volatility and reduced client flows. These were partially offset by an increase in Equities, notwithstanding revaluation gains reported in the first half of 2013, as we successfully positioned the business to capture increased client activity.
Net income from financial instruments designated at fair value was US$1.0bn compared with net expense of US$1.0bn. In the UK, in the first half of 2014 we reported adverse movements on the fair value of our own debt, compared with minimal movements in the first half of 2013.
Excluding this, net income rose, driven by favourable foreign exchange movements on foreign currency debt compared with adverse movements last year.
In addition, there were favourable fair value movements from interest and exchange rate ineffectiveness in the hedging of long-term debt issued principally by HSBC Holdings in 2014, compared with adverse movements in 2013.
Other operating incomeincreased by US$584m, primarily driven by a number of significant items in the first half of 2013:
· a loss following the write-off of allocated goodwill relating to our Monaco business; and
· a loss on the disposal of an HFC Bank secured loan portfolio in the UK.
Excluding these items, other operating income rose as we reported gains from legacy credit in the UK in GB&M reflecting price appreciation across certain asset classes in the ABS market.
LICs decreased by 70% to US$0.3bn, as decreases in the UK and Spain were partially offset by increases in Turkey and France. In the UK,individually and collectively assessed loan impairment charges in CMB fell, reflecting the enhanced quality of the portfolio and improved economic environment. GB&M recordedhigher net releases of creditrisk provisions on available-for-sale ABSs, mainly reflecting price appreciation on
the legacy portfolio. Loan impairment charges in RBWM also decreased as a result of the improved economic environment and customer behaviour. In Spain, loan impairment charges decreased, as economic conditions improved.
These factors were partially offset by increases in Turkey in RBWM, driven by the growth in the portfolio and the increase in card delinquency rates, and in France in GB&M, from an increase in individually assessed provisions relating to a small number of customers.
Operating expenses were broadly unchanged and included several significant items recorded in the first half of 2013 including:
· Madoff-related litigation charges in GB&M in Ireland (US$298m); and
· a provisionin respect of regulatory investigations in GPB in Switzerland (US$119m); partly offset by
· the non-recurrence of the benefit of an accounting gain relating to changes in delivering ill-health benefits to certain employees in the UK (US$430m).
In addition, operating expenses in the first half of 2014 included:
· a reduction of US$178m in charges in the UK relating to customer redress programmes (see page 243 for further details);
· lower restructuring costs of US$50m; and
· adjustments relating to the prior year UK bank levy charges (2014: US$45m credit; 2013 US$9m charge).
Excluding these items, operating expenses increased as a result of the timing of the recognition of the FSCS levy and increased Risk and Compliance expenses in line with the implementation of Global Standards, despite sustainable costs savings of over US$260m.
