3rd Quarter 2015 Results

Financial performance commentary

3Q15 compared with 3Q14

·   Reported PBT of $6.1bn for the third quarter of 2015 ('3Q15') was $1.5bn or 32% higher than in the same period in the prior year ('3Q14'). This was mainly due to a net favourable movement in significant items. This reflected lower fines, settlements and UK customer redress (together down by $1.4bn from 3Q14) and favourable movements on our own debt designated at fair value from changes in credit spreads of $1.1bn (favourable movements of $0.2bn in 3Q14).

·   On an adjusted basis, PBT of $5.5bn was $0.9bn or 14% lower than in 3Q14.

·   Reported revenue was $15.1bn in the quarter, $0.7bn or 4% lower than in 3Q14 as a net favourable movement in significant items was broadly offset by the adverse effects of currency translation between the periods.

·   On an adjusted basis, revenue of $14.0bn fell by $0.7bn or 4%, mainly due to lower revenue in RBWM ($0.4bn) and GB&M ($0.2bn). A $0.3bn reduction in revenue in our Principal RBWM business reflected lower Wealth Management income in Hong Kong. This was mainly in our life insurance manufacturing business due to adverse market updates as a result of stock market corrections in Asia in 3Q15. In addition, revenue from overdraft fees fell in the UK. In the US CML portfolio, also part of RBWM, the continued run-off of lending balances led to reduction in revenue of $0.1bn. In GB&M, revenue declined due to a reduction in Rates and Credit reflecting challenging market conditions in 3Q15. Revenue also fell in Foreign Exchange as 3Q14 benefited from higher client flows. By contrast, revenue rose across most other GB&M client-facing businesses. This included Equities partly reflecting strong client flows, and Capital Financing where we recorded gains from hedging activities that help us to manage credit risk across our portfolio.

·   Reported LICs of $0.6bn were $0.1bn or 16% lower than 3Q14 reflecting currency translation between the periods. On an adjusted basis, LICs increased by 15%, primarily in North America driven by lower releases in the US CML run-off portfolio, and in MENA notably in the UAE. These factors were partly offset by lower LICs in Latin America, Europe and Asia reflecting improvement in individually assessed charges notably in Brazil, the UK and mainland China respectively.

·   Reported operating expenses of $9.0bn were $2.1bn 19% lower than 3Q14. This largely reflected a net favourable movement in significant items compared with 3Q14, principally a reduction in fines, settlements and UK customer redress, as well as the favourable effects of currency translation between the periods.

·   On an adjusted basis, operating expenses were $0.2bn or 2% higher than 3Q14. This was driven by inflationary pressures in Latin America and Asia, and higher investment in regulatory programmes and compliance costs, partly offset by lower costs from the US CML run-off portfolio in RBWM and lower performance costs in GB&M.

·   However, compared with 2Q15, operating expenses declined by $0.4bn or 4% as 2Q15 included the Financial Services Compensation Scheme levy in the UK. In addition, performance costs were lower in GB&M and RBWM because of lower revenue in 3Q15. Excluding these items, 3Q15 operating expenses were $0.1bn lower than 2Q15, in part reflecting the initial impact of cost saving initiatives.

·   The effective tax rate was 10.4% in 3Q15 compared with 21.4% in 3Q14.

9M15 compared with 9M14

·   Reported PBT of $19.7bn for the first nine months of 2015 ('9M15') was $2.8bn or 16% higher than in the same period in 2014 ('9M14'). This was mainly due to a net favourable movement in significant items, partly offset by the adverse effects of currency translation between the periods.

·   On an adjusted basis, PBT fell by $0.6bn or 3%.

·   Reported revenue of $48.0bn in 9M15, was $1.1bn or 2% higher than in 9M14. Revenue was affected by significant items including, in 9M15, a $1.4bn gain on the partial sale of our shareholding in Industrial Bank and favourable movements on our own debt designated at fair value from changes in credit spreads of $1.8bn, compared with minimal movements in 9M14. The overall favourable movement in significant items was substantially offset by the adverse effect of currency translation between the periods.

·   On an adjusted basis, revenue of $44.8bn was $0.7bn or 2% higher. The main drivers of revenue movements in our global businesses were as follows:

−   in GB&M, revenue of $14.4bn was $0.7bn or 5% higher, reflecting growth of $0.6bn in client-facing GB&M, and an increase of $0.2bn in Balance Sheet Management, in part driven by increased gains on disposal of available-for-sale debt securities. In client-facing GB&M, revenue rose in Equities ($0.5bn) and Foreign Exchange ($0.2bn) reflecting increased volatility in the period. Equities also benefited from higher client flows and favourable movements on own credit spread compared with minimal movements in 9M14. Revenue rose in Securities Services, notably in China, driven by increased client assets and cash balances. By contrast, revenue fell by $0.3bn in Principal Investments reflecting lower gains on disposals than in 9M14 and by $0.1bn in Rates, as client demand was affected by the ECB's quantitative easing programme. Legacy Credit revenue also fell as we recorded revaluation gains in 9M14.

−   in CMB, revenue of $11.2bn was $0.3bn or 3% higher. This was due to higher revenue from both Credit and Lending and Payments and Cash Management, mainly in Hong Kong and the UK. This reflected balance sheet growth, although demand for credit in Hong Kong has slowed in 2015. In addition, revenue rose in the US reflecting strong lending growth in our Large Corporate segment.

These factors were partially offset:

−   in RBWM, where revenue of $18.1bn fell by $0.1bn due to lower average balances in the US run-off portfolio (where revenue was down by $0.3bn), which included the impact of portfolio sales. Revenue in Principal RBWM was $0.2bn higher although revenue growth fell from 4% in 1H15 to 1% in 9M15. In Wealth Management, revenue was higher due to growth in Investment Distribution in Asia, notably in 2Q15 following high levels of stock market turnover which more than offset weaker investor sentiment experienced in 3Q15. Life insurance manufacturing revenues were broadly flat as favourable market updates in Europe in 1H15 were mostly offset by adverse market updates in 3Q15 in Asia reflecting stock market corrections. Personal lending revenues were 2% lower than 9M14, with a notable decline in the UK from a reduction in overdraft fees following re-pricing and the introduction of a text message alert service for customers in November 2014. Also in personal lending in the UK, revenue fell due to mortgage spread compression and lower interest income from credit cards.

−   in GPB, where revenue of $1.7bn was $0.1bn or 4% lower, reflecting a managed reduction in client assets. This was partly offset by an increase in revenue in Hong Kong during the first 6 months of the year from a rise in client transaction volumes reflecting strong stock market performance. We continued to grow the parts of the business that fit our target model, attracting $12bn in net new money since the end of 2014, mainly in Hong Kong, the UK and the US.

·   Reported LICs of $2.1bn were $0.5bn or 20% lower mainly reflecting the favourable effects of foreign currency translation between the periods in Latin America. On an adjusted basis, LICs were $0.1bn or 3% lower as reductions in LICs in Latin America and North America were partly offset by an increase in the Middle East and North Africa.

LICs declined:

−   in Latin America, in both Mexico and Brazil. In Mexico, the reduction was in RBWM reflecting lower delinquency rates on personal lending, payroll and card portfolios, and in CMB due to lower individually assessed charges notably on homebuilders. In Brazil, LICs decreased mainly driven by the non-recurrence of an individually assessed impairment charge in GB&M in 3Q14, although this was partly offset by higher LICs in RBWM and CMB, in part reflecting the economic slowdown; and

−   in North America, which reflected continued US CML run-off and the non-recurrence of impairment charges recorded in CMB and GB&M in 9M14 following a revision to certain estimates used in our corporate loan impairment calculation.

·   These factors were partly offset by adverse movements in:

−   the Middle East and North Africa, mainly in the UAE in RBWM, which recorded higher charges, primarily on mortgages in part reflecting higher write offs and a review of the portfolio collateral, and in CMB reflecting individually assessed impairment charges in 9M15, on UAE-related exposures.

·   Reported operating expenses for 9M15 of $28.2bn were $1.1bn or 4% lower than in 9M14. This reduction in reported expenses was driven by the favourable effects of currency translation between the periods. Significant items, which were broadly unchanged included one-off transformation costs to deliver the cost reduction and productivity outcomes outlined in the Investor Update ('Costs to Achieve') of $0.2bn.

·   On an adjusted basis, operating expenses of $26.2bn were $1.4bn or 6% higher than in 2014 reflecting increases in both run-the-bank and change-the-bank costs.

·   Run-the-bank costs totalled $23.6bn for 9M15, an increase of $0.9bn or 4% on 9M14. This was primarily driven by higher staff costs, including salary inflation in Latin America and Asia. In addition, we recruited new staff to support growth in targeted areas as follows:

−   in GB&M we invested in Payments and Cash Management in Europe;

−   in CMB, we invested in additional revenue generating FTEs in North America and Asia; and

−   in RBWM, costs increased due to investment in additional FTEs, mainly in Asia in our branch network and contact centres to support revenue growth.

·   Run-the-bank costs associated with regulatory programmes and compliance also increased reflecting our ongoing focus on Global Standards, primarily through the investment in the bank's financial crime compliance capabilities.

·   Change-the-bank costs totalled $2.7bn in 9M15, an increase of $0.5bn or 23% on 9M14. The increase was primarily driven by higher regulatory and compliance costs which included investment in infrastructure changes and systems enhancements for our customer due diligence and sanctions screening. These actions are in line with our strategic target to complete the implementation of Global Standards by the end of 2017.

·   Our total spend on regulatory programmes and compliance in 9M15, including both run-the-bank and change-the-bank elements, was $2.2bn, up by $0.5bn or 33% from 9M14.

·   Adjusted jaws for 9M15 was negative 4.1% compared with negative 2.9% for 1H15. The movement in jaws primarily reflected the slowdown in revenue growth, down to 1.5% in 9M15 from 4.5% in 1H15. However, cost growth also slowed, down to 5.6% in 9M15 from 7.3% in 1H15.

·   The number of employees, expressed in FTEs, at 30 September 2015 was 259,834, an increase of 2,231 FTEs from 31 December 2014. The average number of FTEs adjusted for business disposals increased by 2% compared with 9M14 due to additional FTE requirements for regulatory programmes and compliance.

·   The effective tax rate for 9M15 of 18.0% was slightly lower than the UK corporation tax rate of 20.25%, principally due to non-taxable gains arising on the partial disposal of our shareholding in Industrial Bank.

·   On 5 October 2015, the Board announced a third interim dividend for 2015 of $0.10 per ordinary share.

Balance sheet commentary compared with 30 June 2015

Total assets reduced by $23.2bn driven by adverse currency translation movements of $66.3bn. Excluding these, total assets increased by $43.1bn.

We continued to see growth in lending to CMB customers in the UK and in customer accounts in both RBWM and our Payments and Cash Management business in CMB.

·   Reported loans and advances to customers decreased by $26.6bn during 3Q15 and included the following items:

−   adverse currency translation movements of $24.8bn; and

−   a $3.6bn decrease in corporate overdraft balances in Europe that did not meet the criteria for netting, with a corresponding rise in customer accounts.

Excluding these factors, customer lending was marginally higher by $1.8bn driven by higher balances in Europe of $8.8bn primarily reflecting increased term lending to CMB customers in Europe, notably in the UK. This was partly offset by a $4.2bn fall in Asia, where repayments relating to a small number of GB&M clients more than offset an increase in term lending to CMB customers and an increase in mortgage balances. In addition, balances fell in North America by $2.2bn driven by the reclassification of residential mortgage balances to 'Assets held for sale' in line with the our strategic focus in reducing our legacy portfolios.

·   Reported customer accounts decreased by $25.2bn during 3Q15 and included the following items:

−   adverse currency translation movements of $32.0bn; and

−   a $3.6bn decrease in corporate current account balances, in line with the increase in corporate overdrafts.

Excluding these factors, customer accounts grew by $10.4bn with increases in Asia and Europe. Balances in Asia were higher reflecting growth in our Payments and Cash Management business and in RBWM. In Europe, balances grew mainly in GB&M and in RBWM. In GB&M this partly reflected growth in Payments and Cash Management and Securities Services. Balances grew in RBWM reflecting customers' continued preference for holding balances in current and savings accounts.

·   Other significant balance sheet movements in the quarter included reductions in cash balances, with growth in reverse repurchase agreements and financial investments as we continued to effectively manage the deployment of our surplus liquidity. In addition, Assets and Liabilities held for sale fell driven by adverse currency translation movements mainly relating to our operations in Brazil and the disposal of the UK Pension business of HSBC Life (UK) Limited.

Net interest margin

·   Net interest margin has remained broadly stable since 2Q15, although it decreased in 9M15 compared with the same period in 2014. This was due to the adverse effects of currency translation and the release in the prior year of a tax accrual on uncertain tax positions although these factors were partly offset by the effect of provisions in the prior year arising from the ongoing review of compliance with the Consumer Credit Act in the UK.

·   Excluding these factors, net interest margin fell marginally compared with 9M14, primarily driven by North America due to lower gross yields and higher cost of funds. Gross yields on customer loans fell, primarily due to new lending in CMB and RBWM which was at reduced yields in the current low interest rate environment, and the continued run-off and sales of the CML portfolio. In addition, cost of funds rose due to higher costs on customer accounts, reflecting a change in portfolio mix towards higher-priced wholesale term deposits and higher rates paid on savings accounts due to promotional offers to our Premier customers in RBWM.

Capital and risk-weighted assets

Our CET1 capital ratio increased to 11.8% from 11.6% at 30 June 2015.

Capital generation, in the quarter, contributed $1.9bn to CET1 capital after regulatory adjustments and net of the dividend. Foreign currency translation differences reduced CET1 capital by $4.2bn and RWAs by $27.9bn, which overall had the effect of reducing the CET1 capital ratio by 0.1%.

Our plans to reduce Group RWAs by the end of 2017 continue to make significant progress. After foreign currency translation differences, RWAs reduced in the quarter by $21.8bn. This was primarily driven by RWA initiatives in GB&M and CMB, which saved $32.4bn of RWAs net of business growth of $9.6bn.

The following comments describe RWA movements, in the quarter, excluding foreign currency translation differences.

RWA Initiatives

The main drivers of these reductions are:

·   $10.8bn as a result of reduced exposures principally from a decrease in positions subject to the Incremental Risk Charge, client facility reductions and trade compressions; that was mainly in Traded Risk RWAs.

·   $8.4bn as a result of refined calculations including further application of the small and medium-sized enterprise ('SME') supporting factor, a more refined application of credit conversion factors and movement of certain exposures from residual to cash flow weighted maturity. In addition, some Project Finance and Business Banking portfolios moved from the standardised to an IRB approach.

·   $7.1bn from process improvements such as better linking of collateral and guarantees to facilities and the use of more granular data resulting in lower credit conversion factors for off balance sheet items.

·   $3.7bn through the continued reduction in GB&M Legacy Credit and US Run off portfolios.

Where these RWA initiatives relate to advanced approaches, the saves are included in the categories disclosed in the RWA movement tables by key drivers. These initiatives have resulted in RWAs saves of $11.1bn from the methodology and policy category and $6.3bn from the book size/risk levels category. In the model update category RWA initiatives have increased advanced approach RWAs by $3.6bn with a corresponding reduction of $4.2bn in the standardised approach.

Business Growth

Business growth increased RWAs by $9.6bn, principally from:

·   CMB from higher term lending to corporate customers, principally in Europe, $6.9bn.

·   Our associates Bank of Communications and Saudi British Bank $4.1bn.

·   Partially offset by reduced institutional exposures in Asia of $1.6bn.

Goodwill

As described on page 407 of the Annual Report and Accounts 2014, an annual impairment test of goodwill allocated to each cash generating unit ('CGU') is performed at 1 July each year.

In the annual impairment test undertaken at 1 July 2015 we identified that, as a result of local capital requirements, the recoverable amount (the present value of expected future cash flows) was above, but close to, the carrying value of GB&M - North America. Furthermore, the recoverable amount is sensitive to reasonably possible changes in key assumptions, including discount rate, long‑term growth rate and cash flow projections. If the recoverable amount is less than the carrying value of a CGU, an impairment loss is charged to the income statement. At 1 July 2015 GB&M - North America had goodwill of $0.9bn allocated to it.

Domicile

In April 2015, the HSBC Holdings plc Board of Directors asked management to commence a review to assess the best place for the HSBC Group's headquarters to be located to maximise long-term shareholder value and the Group's future strategic opportunities. Although management is undertaking the review on behalf the Board, it is the Board that will make the final decision regarding the location of the Group's headquarters. The review will focus on long term perspectives, as opposed to short-term factors.

Whilst there is a considerable amount of work still to do, a significant amount of work has been carried out, supported by a number of external advisers. In addition, as the review has progressed, further information has been requested by the Board.

Whilst the target for completion of the review was initially set as by the end of 2015, this is a self-imposed deadline that can be moved should the Board require further work to be performed. An announcement will be made when the Board makes its final decision and, if necessary, a further update will be provided at the time of the full year results announcement.