Annual Financial Report - 14 of 54 | RNS | Ticker

Annual Financial Report - 14 of 54

RNS Announcement

RNS Number : 0713I

HSBC Holdings PLC

20 March 2015

Asia⁸

HSBC's principal banking subsidiaries in Hong Kong are The Hongkong and Shanghai Banking Corporation Limited and Hang Seng Bank Limited. The former is the largest bank incorporated in Hong Kong and is our flagship bank in Asia. We offer a wide range of banking and financial services in mainland China, through our local subsidiaries HSBC Bank (China) Company Limited and Hang Seng Bank (China) Limited. We also participate indirectly in mainland China through our associate, Bank of Communications. Outside Hong Kong and mainland China, we conduct business in 18 countries and territories in Asia, with particularly strong coverage in Australia, India, Indonesia, Malaysia and Singapore.
	2014	2013	2012
	US$m	US$m	US$m

Net interest income	12,273	11,432	10,707
Net fee income	5,910	5,936	5,418
Net trading income	2,622	2,026	2,516
Other income	2,872	5,038	6,691

Net operating income⁴	23,677	24,432	25,332

LICs⁴³	(647)	(498)	(510)

Net operating income	23,030	23,934	24,822

Total operating expenses	(10,427)	(9,936)	(9,980)

Operating profit	12,603	13,998	14,842

Income from associates⁴⁴	2,022	1,855	3,188

Profit before tax	14,625	15,853	18,030

Cost efficiency ratio	44.0%	40.7%	39.4%
RoRWA³⁶	3.1%	3.8%	4.4%

Year-end staff numbers	118,322	113,701	112,766
10% Growth in customer lending balances excluding the effect of currency translation
Market leader for Asia ex-Japan Bonds (Bloomberg)
Best Bank in Asia (The Euromoney Awards of Excellence 2014)
For footnotes, see page 109.

Economic background

Hong Kong's real GDP growth slowed in 2014 relative to 2013 due to weaker domestic demand, partly attributable to the slowdown in the annual growth of retail sales. Labour market conditions softened with unemployment rising, albeit from historically low levels. Tourism arrivals to Hong Kong held up overall, up by 16% in the year compared with 2013, driven by the growth of visitors from mainland China. Headline CPI inflation averaged just over 4% for 2014, with a number of expiring government subsidies offsetting lower inflation in fuel and food prices.

In mainland China, real GDP growth slowed from 7.7% in 2013 to 7.4% in 2014, largely due to a slowdown in activity in construction and manufacturing investment which was only partially offset by resilient infrastructure investment. Headline annual CPI inflation fell steadily to 1.5% in December, significantly below the government's target of 3.5%. The People's Bank of China eased monetary policy in November by cutting policy interest rates for the first time since July 2012. The one-year deposit rate was lowered by 25bps to 2.75% and the one-year lending rate by 40bps to 5.6%. Further measures were announced in December to support bank lending and spur economic activity.

Japan experienced significant economic volatility during 2014 from the imposition of a 3 percentage point consumption tax increase, which took effect on 1 April. The economy recorded annualised GDP growth of 5.8% in the first quarter of 2014, but growth slowed sharply after the tax rise, as government stimuli and exports were unable to offset the decline in private consumption. GDP grew at an annualised rate of 2.2% in the fourth quarter after falls of 6.7% and 1.9% in the preceding quarters. The Bank of Japan announced another round of quantitative easing on 31 October 2014, prompting further depreciation of the yen.

In India, a new government with a strong mandate for reform boosted market sentiment regarding the long-term prospects for the country's economy. However, the recovery remained constrained in 2014 with many infrastructure projects delayed pending government clearance. The steep decline in international commodity prices during the second half of the year helped push down goods price inflation and reduce the current account deficit. Following an interest rate rise early in 2014, the central bank kept monetary policy stable throughout the year.

The downward trend in global commodity prices permitted Indonesia and Malaysia to cut costly fuel subsidies, which is expected to reduce external imbalances and improve their fiscal position. Domestic demand in these countries remained relatively robust throughout 2014, supporting economic growth. In Singapore, GDP growth slowed in 2014 from weaker export growth and domestic economic restructuring. The Monetary Authority maintained its policy of gradual currency appreciation.

Profit/(loss) before tax by country within global businesses

	Retail Banking and Wealth Management US$m	Commercial Banking US$m	Global Banking and Markets US$m	Global Private Banking US$m	Other US$m	Total US$m

Hong Kong	3,727	2,264	1,807	146	198	8,142
Australia	78	126	232	−	(4)	432
India	4	121	442	11	122	700
Indonesia	10	53	110	−	25	198
Mainland China	292	1,533	954	(3)	175	2,951
Malaysia	156	122	190	−	28	496
Singapore	129	168	243	57	(8)	589
Taiwan	19	35	166	−	1	221
Other	57	320	432	−	87	896

Year ended 31 December 2014	4,472	4,742	4,576	211	624	14,625

Hong Kong	3,742	2,110	1,971	208	58	8,089
Australia	100	131	189	−	26	446
India	(21)	113	418	7	136	653
Indonesia	12	106	126	−	36	280
Mainland China	223	1,536	842	(4)	1,644	4,241
Malaysia	148	105	236	−	25	514
Singapore	147	120	262	74	22	625
Taiwan	7	30	158	−	5	200
Other	61	207	473	(1)	65	805

Year ended 31 December 2013	4,419	4,458	4,675	284	2,017	15,853

Hong Kong	3,694	2,188	1,518	249	(67)	7,582
Australia	97	38	184	-	(44)	275
India	41	89	497	7	175	809
Indonesia	29	124	146	-	7	306
Mainland China	838	1,724	1,257	(4)	2,525	6,340
Malaysia	183	131	242	-	8	564
Singapore	201	139	296	97	(65)	668
Taiwan	62	36	136	-	-	234
Other	66	321	567	59	239	1,252

Year ended 31 December 2012	5,211	4,790	4,843	408	2,778	18,030

In Australia, real GDP growth rose to an annual rate of around 2.8% in 2014 and unemployment remained roughly unchanged at 6.1%. Mining investment fell sharply and was only partly offset by an improvement in other sectors of the economy. Low interest rates continued to drive an increase in housing market activity and credit growth picked up modestly. The Australian dollar weakened during the year but remained well above its long-run average level.

In Taiwan, economic activity accelerated with the level of GDP in 2014 rising 3.5% in the year as a whole. This was the strongest annual rate of growth since 2011 and an improvement on the 2.1% growth seen in 2013. Growth was driven by a combination of strong exports and domestic consumption thanks to low unemployment and rising wage growth. The central bank in Taiwan kept its key policy rate unchanged throughout 2014 at 1.875%, which is the level it has been since 2011.

Financial overview

Profit before tax (US$m)

Our operations in Asia reported a profit before tax of US$14.6bn in 2014 compared with US$15.9bn in 2013, a decrease of 8%. The reduction reflected a decrease in revenue and an increase in costs and LICs, partly offset by a higher share of profits from associates. Revenue included the effect of a number of significant items, notably in 2013, an accounting gain arising from the reclassification of Industrial Bank as a financial investment (US$1.1bn) and the net gain on completion of the Ping An disposal (US$553m).

Analysis of mainland China profit/(loss) before tax

	Retail Banking and Wealth Management US$m	Commercial Banking US$m	Global Banking and Markets US$m	Global Private Banking US$m	Other US$m	Total US$m

BoCom and other associates	255	1,421	296	-	1	1,973
Mainland China operations	37	112	658	(3)	174	978
Industrial Bank	-	-	-	-	-	-
Ping An	-	-	-	-	-	-

Year ended 31 December 2014	292	1,533	954	(3)	175	2,951

BoCom and other associates	247	1,360	284	-	(38)	1,853
Mainland China operations	(24)	176	558	(4)	40	746
Industrial Bank	-	-	-	-	1,089	1,089
Ping An	-	-	-	-	553	553

Year ended 31 December 2013	223	1,536	842	(4)	1,644	4,241

BoCom and other associates	214	1,193	248	-	-	1,655
Mainland China operations	(52)	176	606	(4)	66	792
Industrial Bank	54	273	343	-	-	670
Ping An	622	82	60	-	2,459	3,223

Year ended 31 December 2012	838	1,724	1,257	(4)	2,525	6,340

In 2014, significant items included the gain on sale of our investment in Bank of Shanghai (US$428m) and an impairment of our investment in Industrial Bank (US$271m). See page 42 for further details of significant items.

On an adjusted basis, profit before tax rose by US$326m or 2%, driven by higher revenue partly offset by increased operating expenses and LICs.

Country business highlights

We continued to focus on our strategic priorities for Asia, using our international network to drive organic growth and connect customers across borders. We completed the sale of our investment in Bank of Shanghai and implemented a discretionary incentive framework that removes the formulaic link between product sales and remuneration. We also saw continued adoption of our mobile banking applications, extended the contact-less payment systems to Android phones and enhanced our digital banking capabilities.

In Hong Kong, average mortgage balances in RBWM increased by 7%, with average LTV ratios of 47% on new mortgage drawdowns and an estimated 29% on the portfolio as a whole. In November 2014, to coincide with the launch of the Hong Kong-Shanghai Stock Connect platform, we rolled out new services allowing retail customers to trade and invest in eligible shares that are listed on the Shanghai Stock Exchange. We strengthened our cards offering with the launch of the 'Visa Signature' card product in Hong Kong and continued building new merchant partnerships across the region. We also re-launched our Advance offering to emerging affluent customers in Hong Kong and nine other regional markets. We were awarded 'International Retail Bank of the Year' by Asian Banking and Finance.

In CMB, we were one of the first foreign banks to announce renminbi cross-border pooling capability in the Shanghai Free Trade Zone. The collaboration between CMB and GB&M continued throughout the year, as a consequence of which 157 primary markets transactions were completed in 2014, up from 122 in 2013, primarily for debt capital market issuances and leveraged asset finance mandates. In addition, we were named 'Best Commercial Bank' by FinanceAsia Achievement Awards 2014.

In GB&M, we maintained our market leadership in Asia ex-Japan G3 currency and investment grade bonds, and led the market in Hong Kong dollar bond issuances. We were involved in three of the five largest equity capital market transactions during 2014, as well as the first Sukuk sovereign bond issuance in Hong Kong. Furthermore, we continued to lead the market in offshore renminbi bond issuance in Hong Kong, becoming one of the Hong Kong Monetary Authority's primary liquidity providers for offshore renminbi. We also acted as a joint book runner for an offshore preference share issuance for a mainland Chinese bank, the first mainland Chinese Basel III compliant additional tier-1 capital offering. We remain well-positioned to service our institutional investors using Stock Connect through our integrated Custody Plus platform.

In mainland China, we continued to develop our branch network, which comprised 173 HSBC outlets, 25 HSBC rural bank outlets and 50 Hang Seng Bank outlets at the end of the year. In RBWM, we were one of the first foreign banks to launch renminbi derivative products linked to the US dollar/renminbi rate and were awarded 'Best Foreign Retail Bank' by The Asian Banker for the sixth consecutive year. During 2014, we were the first foreign custodian bank to service renminbi qualified foreign institutional investors based in Singapore and South Korea. We also became a member of the Shanghai Gold Exchange's international board, a newly established trading platform connecting mainland China's gold market to global investors. In addition, we received regulatory approval to be one of the first market makers to directly trade renminbi, euro and Singaporean dollars in mainland China's interbank foreign exchange market.

In Payments and Cash Management, we launched the Global Payments System which supports all cross-border payments in and out of mainland China in all currencies, including renminbi. In Global Trade and Receivables Finance, we launched trade link initiatives to connect mainland China with the rest of Asia, Germany and the US, to enhance international connectivity and promote activity between key trade routes. In mergers and acquisitions ('M&A'), we were adviser to a number of state owned enterprises on significant overseas investments and acquisitions.

Elsewhere in Asia, in India, we continued to grow our balance sheet in CMB, including term lending and Payments and Cash Management deposits, particularly helping UK corporations to invest in India. In GB&M, we were adviser on two of the largest M&A transactions in 2014, and in Wealth Management we launched Managed Solutions, a multi-asset fund series. In Australia, we were a mandated lead arranger for the largest mining project financing deal and for the largest transport infrastructure project during 2014. In CMB, we also announced an A$250m (US$225m) International Growth Fund, providing credit facilities to local SMEs to explore business opportunities abroad.

Review of adjusted performance⁴⁵

Revenue (US$m)

Revenue was US$1.2bn or 5% higher, driven by Hong Kong and mainland China, mainly in CMB and RBWM from balance sheet growth, as well as in GB&M from portfolio growth in Balance Sheet Management and increased term lending. Revenue was also higher in India and Australia.

Country view of adjusted revenue

	2014	2013
	US$m	US$m

Hong Kong	13,725	13,211
Australia	975	898
India	1,826	1,666
Indonesia	561	559
Mainland China	2,463	1,948
Malaysia	1,066	1,063
Singapore	1,339	1,319
Taiwan	491	501
Other	1,183	1,289

Year ended 31 December	23,629	22,454

In Hong Kong, revenue increased by 4%, primarily in CMB and RBWM and, to a lesser extent, in GB&M. Higher revenue in CMB was due to increased net interest income from growth in term lending across a range of sectors, higher average Payments and Cash Management deposit balances and higher fees from remittance volumes, as well as improved lending spreads.

In RBWM, revenue growth was driven by higher net interest income from increased average lending balances, mainly credit cards and other personal lending, and from growth in average deposit balances, though the benefit of higher volumes was partly offset by spread compression. Net fee income also increased, principally from volume growth in unit trusts, credit card transactions and securities brokerage. In our insurance operations, revenue growth reflected higher premium income, which also contributed to growth in the debt securities portfolio, although this was partly offset by less favourable movements in the PVIF asset from annual actuarial assumption updates.

Revenue in GB&M also increased, mainly in Balance Sheet Management due to portfolio growth, and in Capital Financing from higher average term lending balances. This was partly offset by lower net fee income in Markets due to reduced client flows and in Capital Financing reflecting fee compression.

In mainland China, revenue increased by 26% compared with 2013. In GB&M, we reported greater net interest income from Balance Sheet Management due to portfolio growth and higher reinvestment rates, and a rise in average term lending balances. Additionally, trading income improved in Rates from higher interest income on debt securities and revaluation gains on trading bonds as yields fell, and in Foreign Exchange from increased client flows. Revenue in RBWM increased, mainly from wider deposit spreads as market interest rates rose in the first half of 2014, while in CMB revenue growth was driven by higher average deposit and lending balances.

Elsewhere in Asia, revenue in India rose by 10%, primarily in GB&M from higher Rates trading income due to favourable credit valuation adjustments ('CVA's) on derivatives, coupled with higher net interest income from portfolio growth in Balance Sheet Management. In Australia, we reported an increase in revenue of 9%, predominantly in GB&M from higher trading income in Rates and Foreign Exchange. This was partly offset by lower revenue in South Korea following the run-off of our RBWM operations in 2013.

LICs rose by US$167m or 35%, principally in GB&M and CMB from a rise in a small number of individually assessed impairment charges in Hong Kong and mainland China. This was partly offset by a reduction in individually assessed impairment charges in CMB in New Zealand, Malaysia and Vietnam.

Operating expenses (US$m)

Operating expenses rose by US$753m following investment in the region, notably in Regulatory Programmes and Compliance, and increased use of our Global Services Centres across the Group. Cost growth also reflected wage inflation and additional headcount, notably in Hong Kong and mainland China to support business growth, mainly in CMB, as well as increased marketing activity. These factors were partly offset by around US$270m of sustainable cost savings achieved in 2014.

Share of profit from associates and joint ventures rose by US$71m, mainly from BoCom, reflecting higher revenue from balance sheet growth and trading income, partly offset by increases in operating expenses and LICs.

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END

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RNS metadata

Title: Annual Financial Report - 14 of 54
Time: 16:28:02
Date: 20 Mar 2015
Category: Results
ID: 0713I

Economic background

Financial overview

Country business highlights

Review of adjusted performance45

Review of adjusted performance⁴⁵