RNS Number : 3189O
HSBC Holdings PLC
17 August 2017
Connecting customers to opportunities
HSBC aims to be where the growth is, enabling businesses to thrive and economies to prosper, and ultimately helping people to fulfil their hopes and realise their ambitions.
As a reminder
Reporting currency
We use US dollars.
Adjusted measures
We supplement our IFRS figures with adjusted measures used by management internally. These measures are highlighted with the following symbol: ^
In this document we use the following abbreviations to refer to reporting periods.
1H17 First half of 2017
2H16 Second half of 2016
1H16 First half of 2016
For a full list of abbreviations see page 114.
Unless stated otherwise, risk-weighted assets and capital are calculated and presented on a transitional CRD IV basis as implemented by the Prudential Regulation Authority.
Overview
02 Highlights
04 Group Chairman's Statement
07 Group Chief Executive's Review
10 Strategic actions
12 Financial overview
16 Global businesses
20 Risk overview
Interim Management Report
22 Financial summary
36 Global businesses
46 Geographical regions
54 Risk
73 Capital
Financial Statements
76 Financial Statements
82 Notes on the Financial Statements
104 Directors' Responsibility Statement
105 Independent Review Report by PricewaterhouseCoopers LLP to HSBC Holdings plc
Additional Information
106 Shareholder information
113 Cautionary statement regarding forward-looking statements
114 Abbreviations
Our photo competition winners
In 2016, we ran a Group-wide photo competition which attracted over 6,200 submissions from 1,100 employees. The joint overall winning photos are featured in this report. The image on the inside front cover shows a rice farmer at harvest time in north-east Vietnam, and the photo on the inside back cover was taken at sunrise at Situ (Lake) Patenggang, West Java, Indonesia.
Cover image:
The Hong Kong-Zhuhai-Macau Bridge is one of the most ambitious infrastructure projects in the Pearl River Delta. It will link three key cities, cutting transport costs and travelling times, and boosting economic development. HSBC has extended a HK$700m receivables finance facility to one of the companies building the bridge. Receivables finance is an area where HSBC has particular expertise, and this facility is the largest it has provided for infrastructure in the region.
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Highlights
Our international network, universal banking model and capital strength deliver long-term value for customers and shareholders
Group
- Our operating model consists of four global businesses and a Corporate Centre, supported by 11 global functions.
Performance highlights for 1H17
Strategy execution
- Delivered growth from our international network with a 7% increase in revenue from transaction banking products; 17% rise in revenue synergies.
- Achieved annualised run-rate savings of $4.7bn since our 2015 Investor Update. Incremental savings in 1H17 were $1.0bn.
- Targeted initiatives removed a further $29bn of RWAs in 1H17. RWA reduction programmes have extracted $296bn of RWAs since the start of 2015.
- Maintained momentum in Asian Insurance and Asset Management, with annualised new business premiums and assets under management up 14% and 17% respectively.
- Successfully achieved a non-objection to our US capital plan, as part of the Comprehensive Capital Analysis and Review ('CCAR').
Financial performance
- Reported profit before tax of $10.2bn was $0.5bn higher than in 1H16. This included significant items of $1.7bn, which adversely impacted reported performance, compared with $1.5bn in 1H16.
- Reported revenue of $26.2bn was $3.3bn lower than in 1H16, primarily reflecting the effects of significant items. However, reported loan impairment charges and other credit risk provisions ('LICs') decreased by $1.7bn, and reported operating expenses decreased by $2.2bn.
- Adjusted profit before tax of $12.0bn was $1.3bn higher, reflecting increased adjusted revenue and lower adjusted LICs, partly offset by higher adjusted operating expenses. In 1H17, we achieved positive adjusted jaws of 0.5%.
- Adjusted revenue increased by $0.8bn or 3%, reflecting improved performance in RBWM, GB&M and CMB. This was partly offset by lower adjusted revenue in Corporate Centre and GPB.
- Adjusted LICs decreased by $0.9bn, notably reflecting lower individually assessed LICs in CMB and GB&M.
- Adjusted operating expenses increased by $0.4bn or 3%, reflecting a UK bank levy credit of $0.1bn in 1H16, together with investments in business growth, primarily in RBWM where investments were partly funded by one-off disposal proceeds.
Capital
- Our capital position further strengthened, with a common equity tier 1 ('CET1') ratio at 30 June 2017 of 14.7%, up from 13.6% at 31 December 2016, primarily due to capital generation through profits net of dividends and scrip, and favourable foreign currency translation differences.
For the half-year to 30 June 2017
(1H16: $9.7bn)
$10.2bn
(1H16: $10.7bn)
$12.0bn
(1H16: $29.5bn)
$26.2bn
At 30 June 2017
(31 Dec 2016: $857.2bn)
$876.1bn
(31 Dec 2016: 13.6%)
14.7%
(31 Dec 2016: $2,375bn)
$2,492bn
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Our global businesses
Retail Banking and Wealth Management ('RBWM') |
Commercial Banking ('CMB') |
Global Banking and Markets ('GB&M') |
Global Private Banking ('GPB') |
We help millions of people across the world to manage their finances, buy their homes, and save and invest for the future. Our Insurance and Asset Management businesses support all our global businesses in meeting their customers' needs. |
We support approximately 1.7 million business customers in 54 countries and territories with banking products and services to help them operate and grow. Our customers range from small enterprises focused primarily on their domestic markets, through to large companies operating globally. |
We provide financial services and products to companies, governments and institutions. Our comprehensive range of products and solutions, across capital financing, advisory and transaction banking services, can be combined and customised to meet clients' specific objectives. |
We help high net worth individuals and their families to grow, manage and preserve their wealth. |
Adjusted profit before tax^ |
|
|
(1H16: $2.5bn) $3.4bn |
(1H16: $2.9bn) $3.4bn |
(1H16: $2.6bn) $3.4bn |
(1H16: $0.2bn) $0.1bn |
Risk-weighted assets |
|
|
|
(31 Dec 2016: $115.1bn) $116.6bn |
(31 Dec 2016: $275.9bn) $289.2bn |
(31 Dec 2016: $300.4bn) $306.1bn |
(31 Dec 2016: $15.3bn) $16.4bn |
^Our global businesses are presented on an adjusted basis, which is consistent with the way in which we assess the performance of our global businesses.
.
Delivery against Group financial targets
Return on equity 8.8% |
Adjusted jaws^ +0.5% |
Dividends per ordinary share in respect of 1H17 $0.20 |
For further details, see page 15.
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Group Chairman's Statement
The Group delivered strong results across its major businesses, providing further evidence of a successful repositioning. Its diversified business model, international network and capital strength provide a solid foundation for further growth.
As the Group approaches a periodic transition in leadership, it is extremely pleasing to report that, in the first half of 2017, it delivered a strong set of results across its major businesses. As well as being financially robust, these results added further evidence of the successful repositioning of the Group since 2011. This has created a solid foundation, with attractive optionality, for the future.
'One of the most significant opportunities for HSBC going forward is participation in China's domestic capital markets as these open up'
The benefits of diversification, combined with the Group's capital and funding strength, once again were apparent. Notwithstanding uncertainties arising from increasing geopolitical tensions and ambiguous predictions around the shape of transition to, and final form of, the UK's future relationship with its major trading partners in the EU, customer activity across all business segments was resilient. Markets-based revenues benefited from market share advances, commercial banking customer activity was robust, wealth management and insurance revenues were notably stronger in Hong Kong, and credit experience globally remained remarkably sound. As central bank interest rates edged higher, led by the US, we began to benefit from improved margins on our core deposit bases, providing a welcome enhancement to the Group's revenue mix, given the likely trajectory of interest rates over the medium term.
These factors drove reported profit before tax for the Group in the first six months of 2017 to $10.2bn, 5% higher than what was achieved in the first half of 2016. Earnings per share amounted to $0.35 (1H16: $0.32).
On the adjusted basis used to assess management performance, pre-tax profits were $12.0bn, 12% higher than in the comparable period. It was particularly pleasing to note improvements within both revenue and cost performance that derive from management actions taken in recent years to reshape the Group around its core strengths. Stuart Gulliver will address these in more detail in his review.
The Group's capital position remains strong, with the common equity tier 1 ratio standing at 14.7% at 30 June (31 December: 13.6%). During the period we completed the further share buy-back of $1bn that the Board approved in February and, also as previously announced, we maintained the first two dividends in respect of the year at $0.20 in aggregate, in line with the prior year. In light of the strong capital position, the Board approved a further buy-back of up to $2.0bn of ordinary shares, planned to commence shortly after publication of these interim results.
HSBC is now better positioned for the future
Management continued to make good progress against the strategic targets laid out in June 2015. The first half of the year included a number of important events that will contribute to the strengthening of HSBC's position in our two home markets and in core product areas.
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One of the most significant opportunities for HSBC going forward is participation in China's domestic capital markets as these open up. Meaningful progress in this regard was made in the first half of this year, which saw the granting of further access to undertake domestic corporate bond underwriting and the establishment of Bond Connect, which enables offshore investors to trade onshore Chinese interbank bonds through Hong Kong. In equity markets, Chinese stocks traded higher in part on MSCI's decision in June to include them in its global benchmark equity index for the first time.
Given these developments, we were delighted to receive approvals at the end of June enabling The Hongkong and Shanghai Banking Corporation to establish the first joint venture securities company majority-owned by a foreign bank. This will enable HSBC to offer a broad spectrum of securities and investment banking services nationally, and is an important step in building out our global banking and markets capabilities to serve the Chinese capital markets.
The second area to highlight is the value of our network and how we are investing to enhance that value. HSBC's position as the leading bank in trade finance reflects its unique global network and heritage. Technology is offering important opportunities to automate and digitise paper-heavy supply chain processes, and organise supply chain financing on a single platform. For example, HSBC, working with its strategic business commerce partner, Tradeshift, is now offering an integrated solution to enable our clients to manage their global supply chains and working capital requirements from a simple online platform. This will improve transparency and reduce costs.
In terms of structural change, the creation of the UK ring-fenced bank to meet the central recommendation of the Independent Commission on Banking in 2011 has been one of the largest projects ever undertaken by the Group. At its peak, the project team numbered more than 2,000 and costs to date amount to approximately half a billion dollars. In early July, the Prudential Regulation Authority approved a restricted licence for the new bank, representing an important milestone in meeting our legal obligations. We are targeting 1 July 2018 as the deadline to operationalise the UK ring-fenced bank, ahead of the statutory implementation date of 1 January 2019. Transition towards this deadline will be a key execution priority.
Finally, the Board was delighted that the successful transformation of the Group over the last six and a half years was recognised through HSBC being awarded the accolade of the 'World's Best Bank' earlier this month by Euromoney magazine. This award reflects the extraordinary efforts of the management team and all of our colleagues in reshaping the Group to meet the expectations of all our stakeholders. As ever, we owe them our sincere gratitude.
As I head towards retirement from HSBC later this year, I have taken the opportunity to set out the three public policy issues that are top of mind in terms of allowing the financial system to serve the global economy better.
Regulatory fragmentation must be avoided
The new administration in the US is leading the rest of the world in applying a retrospective lens to the aggregate of regulatory changes implemented and proposed in the aftermath of the global financial crisis. This fresh look, focusing on simplification and supporting economic growth, is to be welcomed. Earlier concerns that it could lead to fragmentation of the international regulatory concordat have substantially dissipated following supportive comments from senior US officials regarding continuing active participation in the international regulatory bodies.
However, there remain concerns, particularly in Europe, that outstanding work streams may be addressed over different time frames globally. This, too, would lead to a fragmented framework with the risk of skewing financial market activity to where the capital support required is lightest. Such an outcome has to be avoided to prevent capital misallocation, and is particularly pertinent for traded markets activity. The best outcome remains early finalisation of what has already been agreed globally in principle, and a further agreement that remaining regulatory changes will be implemented in lockstep across the major jurisdictions.
Europe must not allow its financial capacity and capabilities to be diminished
Negotiations concerning the future shape of financial service provision as the UK prepares to leave the EU will undoubtedly be complex and time-consuming. The essential questions that have to be addressed are whether, at the conclusion of the negotiations, the economies of Europe will continue to have access to at least the same amount of financing capacity and related risk management services, and as readily available and similarly priced, as they have enjoyed with the UK as part of the EU.
On a highly positive note, we are encouraged that there has been no suggestion of weakening regulatory or supervisory standards anywhere in Europe in order to improve competitive positioning; this is equally essential to preserve the credibility and capacity of European financial markets.
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Increased cooperation on tackling financial crime is essential
Tackling financial crime remains both a priority and a key challenge. We have made significant progress in detecting and preventing bad actors accessing the financial system but recognise this is a never-ending effort. Additionally, as digitalisation of commercial activity increases, the risks of confidence-threatening disruption and economic loss, not least from cyber attacks, are amplified. Technology, and in particular data analytics and machine learning applied to big data, will soon provide much greater capabilities to help us meet our objectives. What is also clear is that greater cooperation between the public and private sectors, together with a refresh of bank secrecy laws and regulation designed for a different age, would significantly increase the effectiveness of our joint efforts.
The good news is that there is increasing evidence of such discussions taking place. We should aspire to a unique digital identity for all participants in the financial system; a mandatory register of beneficial ownership of corporate and other non-personal structures in every country; and finally, enabling law and regulation to allow sanctioned sharing of customer information within institutions cross-border, between peer institutions, and between the industry and law enforcement services in pursuance of tackling financial crime. With enhanced public/private cooperation to combat financial crime, we could deploy the industry's considerable investment in this area much more effectively to the benefit of the societies we serve.
Outlook
In spite of geopolitical tensions and uncertainties, the major economic regions seem more synchronised in their growth trajectories than ever. Business investment is rising in the US and could expand further if promised tax reform can be delivered. Confidence is notably improving within the eurozone, with the prospect of structural reform in France, following the recent election outcomes, seen positively for future growth prospects. China's economic data also is evidencing resilience after a slower period, and against this backdrop China's financial regulators have taken the opportunity to tackle risks evident in both the traditional and so-called shadow banking systems. With careful coordination and calibration, these moves are positive for the economy. The UK is, however, showing some signs of slower growth as the inflationary impacts of a weaker currency, Bank of England caution over consumer indebtedness and uncertainties over the EU exit negotiations constrain consumer and business confidence and spending.
'We enter this period with confidence, given our geographical and business line diversification, and strong balance sheet'
The risks to economic growth remain concentrated around geopolitical events and political mis-steps. Additionally, the formidable challenge within Europe of negotiating both the terms of the UK's exit from the EU and the basis of the future relationship will dominate political agendas for some time, crowding out time for other policy considerations.
We enter this period with confidence, given our geographical and business line diversification, and strong balance sheet. On top of this, HSBC is served by an exceptional management team and 233,000 dedicated and talented colleagues.
For the past six and a half years, it has been my great privilege to lead HSBC's employees as Group Chairman. As I prepare to pass on the baton, I could not be more proud of what we have achieved together and I thank them on behalf of the Board, for the last time, for all their support.
Douglas Flint
Group Chairman
31 July 2017
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Group Chief Executive's Review
We have a diversified, universal banking business model and an integrated global network that work for our clients and deliver industry-leading returns for our investors.
We have made an excellent start to 2017, reflecting the changes we have made since our Investor Update in 2015 and the strength of our competitive position. Our three main global businesses performed well, generating significant increases in both reported and adjusted profit before tax, and gaining market share in many of the products that are central to our strategy. Revenue grew faster than costs on an adjusted basis compared with last year's first half, and we passed a number of major milestones on the way to completing our strategic actions.
'Our international network continues to distinguish us from our peers and we strengthened it further in the first half of the year'
Our international network continues to distinguish us from our peers and we strengthened it further in the first half of the year. We received regulatory approval in June to establish HSBC Qianhai Securities Limited, which will be the first joint-venture securities company in mainland China to be majority-owned by a foreign bank. This is a landmark achievement that will increase access to China's markets for our domestic and international clients. The new business is expected to launch in December 2017, pending the granting of the necessary securities licences.
HSBC was named 'World's Best Bank' at the Euromoney Awards for Excellence 2017 in July. This is a fantastic endorsement of all that we have achieved in transforming HSBC since 2011, and recognises the effectiveness of our business model, the value of our network and the superior ability that these things give us to help clients achieve their international ambitions. I am grateful to all 233,000 colleagues around the world for their considerable efforts in making this possible.
Business performance
Global Banking and Markets had a strong first half with large adjusted revenue increases in the majority of businesses compared with the same period last year. Our Equities and Fixed Income businesses performed well, growing revenue and capturing market share in spite of difficult conditions at the start of the second quarter. Debt Capital Markets also gained market share in Asia, MENA and Latin America.
Retail Banking and Wealth Management adjusted revenue grew significantly, with increases across multiple business lines. In Retail Banking, our robust balance sheet and trademark capital strength continued to attract deposits, particularly in Hong Kong, with associated revenue growth supported by interest rate rises. We also increased lending in our target markets, especially Hong Kong, the UK and Mexico. Wealth management benefited from improving customer investment appetite, strong product sales across all categories, and the impact of market movements on our life insurance manufacturing businesses.
Commercial Banking adjusted revenue increased on the back of strong growth in Global Liquidity and Cash Management. This more than compensated for marginal falls in revenue in Credit and Lending, and Global Trade and Receivables Finance. While Global Trade and Receivables Finance revenue
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was down compared with last year's first half, it remained stable from the end of 2016 as we grew the balance sheet in Asia. We continued to capture trade finance market share in key hubs, including Hong Kong and Singapore.
Adjusted operating expenses rose slightly compared with the same period last year, as we invested more in business growth. Performance-related compensation also rose in line with increases in profit before tax. We remain on track to hit our revised cost-saving target by the end of 2017.
Adjusted loan impairment charges were lower than in the first half of 2016, mainly due to improved credit conditions in the oil and gas industry in North America.
Delivering value for our shareholders
Our common equity tier 1 ratio was 14.7% at 30 June, up from 12.1% at the same point in 2016. In the past 12 months we have paid more in dividends than any other European or American bank and returned $3.5bn to shareholders through share buy-backs. We have done this while strengthening one of the most resilient capital ratios in the industry.
Where we have excess capital, we are open to returning it to shareholders. To that end, and having received the appropriate regulatory clearances, we will execute a further share buy-back of up to $2bn in the second half of 2017. This will bring the total value of shares repurchased since August 2016 to $5.5bn.
'Our Global Standards programme has transformed our ability to manage financial crime risk, making the Group and its customers safer and helping us to protect the integrity of the financial system'
Strategic actions
The strategic actions that we announced at our Investor Day in June 2015 have been instrumental in making HSBC a better and more profitable bank. They continue to improve our ability to increase returns and gain maximum value from our international network, and we remain on track to complete the majority of actions by the end of the year.
Targeted initiatives removed a further $29bn of RWAs from the business in the first half of 2017. Our RWA reduction programmes have extracted a total of $296bn of RWAs from the business since the start of 2015, comfortably exceeding our target. We will continue to identify and remove low-return RWAs to the end of 2017 and beyond.
We remain on track to achieve around $6bn of annualised cost savings by the end of the year, in line with the revised expectations that we set at our annual results. We removed a further $0.9bn of costs in the first six months, taking the total achieved since 2015 to $4.7bn.
HSBC Mexico maintained its momentum from 2016. Higher lending balances, strong deposit growth and improved collaboration between businesses helped to generate significantly higher profits than in last year's first half. It also continued to capture market share in targeted areas, particularly consumer lending.
Our US business remains a valuable source of business for other parts of our global network, and is therefore integral to HSBC. It is off track, but continues to make important progress. The run-off of our legacy US consumer and mortgage lending portfolio has been faster than we originally projected, and is almost complete. The US business received a non-objection to its capital plan from the US Federal Reserve Board as part of the Comprehensive Capital Analysis and Review in June.
We have been granted a restricted banking licence from the Financial Conduct Authority and the Prudential Regulation Authority for our UK ring-fenced bank. This is a significant achievement and an important milestone in the creation of HSBC UK. We have made good progress in establishing the IT infrastructure for HSBC UK, and have moved around 170,000 customer sterling accounts to new HSBC UK sort codes. We expect to move all
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remaining sterling accounts that require new HSBC UK sort codes by the end of September 2017. We are very well advanced in filling the roles that will move from London to Birmingham, and remain on track to have a fully functioning team in place for the opening of our new UK headquarters in the first quarter of 2018.
Our international network continues to drive revenue growth for the business. Revenue from transaction banking products, which rely on the strength of the network, grew relative to last year's first half, particularly in Global Liquidity and Cash Management, and Foreign Exchange. 49% of Group adjusted client revenue is now linked to our international network, up from 45% at the same point in 2016.
We continue to shift the Group's business mix towards Asia, building on our improved financial performance and strong customer acquisition in the region since June 2015. We won new mandates related to the China-led Belt and Road initiative in the first half of the year and helped connect more Chinese companies to international opportunities. We also continued to expand our product range in the Pearl River Delta, offering personal loans to existing customers and launching retail business banking in the region. We now have around a quarter of a million credit cards in circulation in mainland China following the launch of our exclusively HSBC-branded credit card in December 2016. HSBC was named 'Asia's Best Bank' at the Euromoney Awards for Excellence 2017.
We remain the world's leading international bank for renminbi business, and achieved a number one ranking among foreign banks for onshore bonds in the first half of the year. HSBC was appointed one of the first market makers for the new Bond Connect in mainland China's Interbank Bond Market, and we underwrote the first new bond issue under the scheme in July. We ranked number one for the sixth consecutive year in the Asiamoney Offshore RMB Poll 2017.
Over the past five years, our Global Standards programme has transformed our ability to manage financial crime risk, making the Group and its customers safer and helping us to protect the integrity of the financial system. We have more work to do this year to complete the programme before integrating it fully into 'business as usual' risk management practices. Combating financial crime will continue to be a high priority, and we will always look for ways to strengthen our capabilities.
Douglas Flint
Douglas Flint steps down as Group Chairman in October and retires from HSBC after 22 years' distinguished service. I am grateful to Douglas for his support since the end of 2010 as we have implemented our long-term strategy for HSBC. During that time, he has not only helped HSBC to negotiate an ever-evolving regulatory environment, but also played a leading role in helping the banking industry recast the regulatory framework in response to the global financial crisis. Douglas has a fantastic reputation around the world for his knowledge, experience and technical expertise. I am sure that he will continue to contribute all of those things for the benefit of business and wider society. He leaves with the best wishes of everyone at HSBC.
Looking forward
Our business is in good shape. We have a diversified, universal banking business model and an integrated global network that work for our clients and deliver industry-leading returns for our investors. It is run efficiently, with strict risk-weighted asset and cost discipline, and responsibly, with a robust balance sheet and a formidable capital base. We remain focused on growing the business, improving our competitive position and rewarding our shareholders.
Stuart Gulliver
Group Chief Executive
31 July 2017
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Strategic actions
We are well on our way towards achieving the
actions outlined in our June 2015 Investor Update.
Capturing value from our international network
In our June 2015 Investor Update, we outlined a series of strategic actions to make the most of our competitive advantages and respond to a changing environment. These actions are focused on improving efficiency in how we use our resources, and on investing for growth in line with our strategy. Each action has targets defined to the end of 2017. The table opposite summarises our progress in 2017 with additional details provided on this page.
Resizing and simplifying our business
We have exceeded our target to reduce RWAs, with a gross reduction of $28.6bn achieved in 1H17 through management actions. We completed asset sales totalling approximately $5.5bn from our US consumer and mortgage lending ('CML') run-off portfolio. We continue to manage RWAs in a disciplined way and aim for further RWA reductions from management actions through to the end of 2017.
We continue to develop our businesses across the North American Free Trade Agreement ('NAFTA') region. In Mexico, we grew adjusted revenue by 14% compared with 1H16, driven mainly by increased RBWM loan balances on improved product propositions. We grew adjusted profit before tax in the US and Canada, as well as cross-border revenue within the NAFTA region by 7%. Revenue from international subsidiaries of our US clients based outside the NAFTA region increased by 14% compared with 1H16.
We remain on course to complete the set-up of our UK ring-fenced bank ('RFB') ahead of the 1 January 2019 statutory deadline. In 1H17, we passed several significant milestones including the reconfiguration of several key IT systems required to operate the RFB and also the successful migration of approximately 170,000 customer sterling accounts to new HSBC UK sort codes. In addition, we received a restricted bank licence for the RFB and are now working through an agreed mobilisation plan with the PRA and FCA to receive an unrestricted licence in 2018.
Our programme to deliver total cost savings of around $6bn is on track. Costs to achieve in 1H17 were $1.7bn and we expect around $1bn of investment in the second half of 2017. Our cost savings allow us to fund new digital and innovation initiatives, and meet other costs related to regulatory programmes and compliance. For example, we introduced a new customised payments screen for CMB and GB&M customers, which is now live in 21 markets and has resulted in a near 20% reduction in customer queries. We are also one of the largest financial services users of biometrics globally, and continue to introduce voice recognition and fingerprint technology across our network.
Redeploying capital to grow our business
We continue to leverage our international network to support our clients. International client revenue continues to represent approximately one half of our total revenue. In 1H17, transaction banking revenue rose by 7%, with strong growth in our Global Liquidity and Cash Management ('GLCM') and foreign exchange businesses. Revenue synergies across our businesses grew by 17% compared with 1H16.
Our pivot towards Asia continues. In 1H17, we grew our loan portfolio in the region by approximately $31bn to $401bn. Our asset management and insurance businesses in Asia realised significant revenue growth, driven by strong net flows, and market movements supported by strong sales momentum, respectively. Since our launch of credit cards in China at the end of last year, we have reached nearly 250,000 cards in circulation.
We continue to be recognised as the leading bank for international renminbi ('RMB') products and services, ranking first for the sixth year in a row in the Asiamoney Offshore RMB Poll 2017. In 1H17, we were appointed as one of the first market makers for the launch of Bond Connect, a bond trading link between mainland China and Hong Kong. This allows, for the first time, foreign fund managers to trade in China's bond markets without using an onshore account. HSBC acted as joint lead underwriter for the first Belt and Road initiative RMB-denominated bond issued in mainland China by a non-Chinese issuer ('Panda bond') under Bond Connect.
Selected awards and recognition in 1H2017
Euromoney Awards for Excellence 2017
World's Best Bank
World's Best Investment Bank in the Emerging Markets
Asia's Best Bank
Asiamoney Banking Awards 2017
Best International Bank in China
Asiamoney Offshore RMB Poll 2017
Best overall offshore RMB products / services
Extel Survey 2017
#1 SRI & Sustainability
#1 Integrated Climate Change
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Progress against strategic actions
Actions to resize and simplify the Group |
|
|
Strategic actions |
Targeted outcome by the end of 2017 |
Progress |
Key performance indicators |
Status |
Reduce Group risk-weighted assets ('RWAs') by circa $290bn |
Group RWA reduction $290bn Return GB&M to Group target profitability; <1/3 of Group RWAs |
Further reduction of $28.6bn from management actions in 1H17, including $11bn in GB&M GB&M RWAs of $306.1bn, 35% of the Group total |
RWA reduction from management actions: circa $296bn (>100% of the 2015-17 target on a constant currency basis) |
a |
Optimise global network |
Reduced footprint |
Progressing previously announced transactions Completed sale of Lebanon business Turkey legal entity transfer completed in June 2017; Turkey 1H17 costs down 27% and adjusted PBT up >400% on 1H16 |
Present in 67 countries and territories at end of 1H17 (down from 73 at end of 2014) |
a |
Rebuild NAFTA region profitability |
US profit before tax circa $2bn Mexico profit before tax circa $0.6bn |
Completed asset sales totalling $5.5bn from US consumer and mortgage lending ('CML') run-off portfolio; remaining CML portfolio reduced to $1.6bn Mexico adjusted revenues up 14% driven primarily by growth in RBWM |
US (excluding CML run-off portfolio) adjusted profit before tax: $501m (up 122% on 1H16) Mexico adjusted profit before tax: $203m (up 61% on 1H16) |
- a1 |
Set up UK ring-fenced bank |
Completed in 2018 |
Received a restricted banking licence from regulators for UK ring-fenced bank On track to have a fully functioning team in place for the opening of our new UK headquarters in the first quarter of 2018 |
Implementation in progress |
a |
Deliver $4.5‑5.0bn of cost savings |
2017 exit rate to equal 2014 operating expenses |
$0.9bn of cost savings realised in 1H17 Positive adjusted jaws continued in 1H17 at 0.5% FTE reduction of approximately 2,200 in 1H17 |
Annual run-rate savings of $4.7bn achieved since start of cost-saving programme Adjusted costs up 3% on 1H16 |
a |
Actions to redeploy capital and invest |
|
|
Deliver growth above GDP from international network |
Revenue growth of international network above GDP |
Strong revenue growth in GLCM (up 11%) and Foreign Exchange (up 5%) Awarded 'North America's Best Bank for Transaction Services' by Euromoney |
Transaction banking revenue: $7.5bn (up 7% on 1H16) Revenue synergies: $5.9bn (up 17% on 1H16) |
a |
Investments in Asia - prioritise and accelerate |
Market share gains Circa 10% growth per annum in assets under management in Asia |
Received approval from the China Securities Regulatory Commission to set up majority-owned joint venture securities firm Ranked #1 among foreign banks in 1H17 in Panda bond underwriting league table $290m Innovation Growth Fund to support leading names in the Pearl River Delta high-tech sector |
Guangdong loans: $5.5bn (up 21% on 1H16) ASEAN adjusted revenue: $1.5bn (down 4% on 1H16) Asset Management assets under management distributed in Asia: $161bn (up 17% on 1H16) Insurance manufacturing annualised new business premiums in Asia: $1.3bn (up 14% on 1H16) |
a |
Grow business from renminbi ('RMB') internationalisation |
$2.0-2.5bn revenue |
Appointed as one of first market makers for Bond Connect, a bond trading link between China and Hong Kong Ranked first in offshore RMB bond underwriting league table in 1H17 with 28.5% market share according to Bloomberg |
RMB internationalisation revenue from offshore business partly or wholly denominated in RMB as well as selected products in mainland China: $0.6bn (down 10% on 1H16) |
- |
Global Standards - safeguarding against financial crime3 |
Implementation completed |
We remain on track to complete the introduction of the major compliance IT systems, to have our anti-money laundering ('AML') and sanctions policy framework in place, and to complete all actions committed to as part of the Global Standards programme in 2013 by the end of 2017 |
End of 2017: Introduction of major compliance IT systems; AML and sanctions policy framework in place; assessment against the capabilities of our financial crime risk framework to enable the capabilities to be fully integrated in our day-to-day operations Post 2017: Policy framework and associated operational processes fully integrated into day-to-day financial crime risk management practices in an effective and sustainable way. Target end state agreed with the UK Financial Conduct Authority to be achieved. Major compliance IT systems continue to be fine-tuned, and recommendations from the Monitor continue to be implemented |
a2 |
1 On track to achieve equivalent profit before tax target on a local currency basis; US dollar target set using the 2014 average exchange rate.
2 As set out under 'Key performance indicators'.
3 Further detail on the Monitor and the US deferred prosecution agreement and related agreements and consent orders can be found in our Annual Report and Accounts 2016 on pages 82 and 66, respectively.
HSBC Holdings plc Interim Report |
11 |
Financial overview
Reported results
This table shows our reported results for the last three half-years, ended 30 June 2017 ('1H17'), 31 December 2016 ('2H16') and 30 June 2016 ('1H16').
All commentary in this Financial overview compares the 1H17 results with 1H16, unless otherwise stated.
Reported profit before tax
Reported profit before tax of $10.2bn was $0.5bn or 5% higher than in 1H16, despite net adverse movements of significant items and unfavourable effects of foreign currency translation, which are described in more detail on page 22. Excluding significant items and currency translation, profit before tax increased by $1.3bn or 12%.
Reported revenue
Reported revenue of $26.2bn was $3.3bn or 11% lower, largely reflecting a net unfavourable movement in significant items of $3.1bn, which included:
- in 1H16, favourable fair value movements on our own debt designated at fair value reflecting changes in our own credit spread of $1.2bn, which are now reported in other comprehensive income, following our partial early adoption of IFRS 9 'Financial Instruments' on 1 January 2017;
- revenue of $1.5bn in 1H16 relating to the operations in Brazil that we sold in July 2016; and
- in 1H16, a $0.6bn gain on the disposal of our membership interest in Visa Europe. This compared with a $0.3bn gain on the disposal of our shares in Visa Inc. in 1H17.
Excluding significant items, and adverse effects of foreign currency translation of $1.0bn, revenue increased by $0.8bn or 3%.
Reported LICs
Reported LICs of $0.7bn were $1.7bn or 72% lower, notably from reductions in CMB and GB&M, as well as the effect of our sale of operations in Brazil ($0.7bn). We also recorded lower LICs in our US run-off portfolio in Corporate Centre, and favourable effects of foreign currency translation of $0.1bn.
Reported operating expenses
Reported operating expenses of $16.4bn were $2.2bn or 12% lower. This reflected a reduction in significant items of $2.0bn, which included:
- in 1H16, a $0.8bn write-off of goodwill in our GPB business in Europe;
- a net release of $0.3bn in 1H17 related to settlements and provisions in connection with legal matters compared with charges of $0.7bn in 1H16; and
- operating expenses of $1.1bn in 1H16 incurred in the operations in Brazil that we sold.
These were partly offset by:
- costs to achieve of $1.7bn, compared with $1.0bn in 1H16.
Excluding significant items and the favourable effects of foreign currency translation of $0.6bn, operating expenses increased by $0.4bn, partly due to a $0.1bn credit in 1H16 related to the 2015 UK bank levy. The remaining increase reflected investment in growth programmes, primarily in RBWM where investments were in part funded by the proceeds from our sale of Visa shares.
Reported income from associates
Reported income from associates and joint ventures of $1.2bn decreased by $55m, primarily reflecting the adverse impact of foreign currency translation.
|
Half-year to |
Reported results |
30 Jun 2017 $m |
30 Jun 2016 $m |
31 Dec 2016 $m |
Net interest income |
13,777 |
|
15,760 |
|
14,053 |
|
Net fee income |
6,491 |
|
6,586 |
|
6,191 |
|
Net trading income |
3,928 |
|
5,324 |
|
4,128 |
|
Other income |
1,970 |
|
1,800 |
|
(5,876 |
) |
Net operating income before loan impairment charges and other credit risk provisions ('revenue') |
26,166 |
|
29,470 |
|
18,496 |
|
Loan impairment charges and other credit risk provisions ('LICs') |
(663 |
) |
(2,366 |
) |
(1,034 |
) |
Net operating income |
25,503 |
|
27,104 |
|
17,462 |
|
Total operating expenses |
(16,443 |
) |
(18,628 |
) |
(21,180 |
) |
Operating profit |
9,060 |
|
8,476 |
|
(3,718 |
) |
Share of profit in associates and joint ventures |
1,183 |
|
1,238 |
|
1,116 |
|
Profit before tax |
10,243 |
|
9,714 |
|
(2,602 |
) |
HSBC Holdings plc Interim Report |
12 |
Adjusted performance
Our reported results are prepared in accordance with IFRSs as detailed in the Financial Statements on page 76. We also present adjusted performance measures to align internal and external reporting, identify and quantify items management believes to be significant, and provide insight into how management assesses period-on-period performance. Adjusted performance measures are highlighted with the following symbol: ^
To derive adjusted performance, we adjust for:
- the period-on-period effects of foreign currency translation; and
- the effect of significant items that distort period-on-period comparisons, which are excluded in order to understand better the underlying trends in the business.
For reconciliations of our reported results to an adjusted basis, including lists of significant items, see page 38.
Adjusted results^
This table shows our adjusted results for 1H17 and 1H16. These are discussed in more detail on the following pages.
|
Half-year to |
|
Movements compared with 1H16 |
Adjusted results^ |
30 Jun 2017 $m |
30 Jun 2016 $m |
|
Adverse |
Favourable |
(%) |
Net operating income before loan impairment charges and other credit risk provisions ('revenue') |
26,053 |
|
25,235 |
|
|
|
818 |
|
3 |
|
Loan impairment charges and other credit risk provisions ('LICs') |
(663 |
) |
(1,556 |
) |
|
|
893 |
|
57 |
|
Total operating expenses |
(14,606 |
) |
(14,222 |
) |
|
(384 |
) |
|
(3 |
) |
Operating profit |
10,784 |
|
9,457 |
|
|
|
1,327 |
|
14 |
|
Share of profit in associates and joint ventures |
1,183 |
|
1,194 |
|
|
(11 |
) |
|
(1 |
) |
Profit before tax |
11,967 |
|
10,651 |
|
|
|
1,316 |
|
12 |
|
Adjusted profit before tax^
On an adjusted basis, profit before tax of $12.0bn was $1.3bn or 12% higher than in 1H16. This reflected higher revenue (up $0.8bn) and lower LICs (down $0.9bn), partly offset by an increase in operating expenses (up $0.4bn).
Adjusted revenue^
Adjusted revenue of $26.1bn was $0.8bn or 3% higher. The increase reflected the following:
- In RBWM, revenue increased by $1.1bn or 12%, primarily in Wealth Management, driven by insurance manufacturing (up $554m), as favourable market impacts compared with adverse impacts in 1H16, notably in Asia and France. Investment distribution income also grew, notably in Asia, reflecting improved investor confidence. In Retail Banking, revenue grew in current accounts, savings and deposits, reflecting wider spreads and increased balances in Hong Kong. This was partly offset by lower personal lending revenue as a result of narrower spreads in Hong Kong and the UK.
- In GB&M, revenue increased by $0.6bn or 8%. Revenue rose in Fixed Income, Currencies and Commodities ('FICC') (up $176m), primarily in Rates and Credit, as we captured higher client flows and increased our market share, notably in Europe, and in Equities (up $167m) as we grew market share in Prime Financing. In Global Banking, revenue increased (up $168m), with continued momentum in investment banking products and growth in lending
HSBC Holdings plc Interim Report |
13 |
balances, which more than offset spread compression; the increase also reflected recoveries on restructured facilities in 1H17 compared with write-downs in 1H16. Revenue also increased by $129m in Global Liquidity and Cash Management ('GLCM'), reflecting balance growth from increased client mandates, and wider spreads, notably in Asia. These increases were partly offset by net adverse movements on credit and funding valuation adjustments of $147m.
- In CMB, revenue increased by $0.1bn or 1%, notably in GLCM from balance growth and wider spreads in Hong Kong. In the UK, we grew balances, though this was more than offset by narrower spreads. Revenue decreased in Credit and Lending from narrower spreads, notably in Hong Kong, although we increased average lending balances in both the UK (up 14%) and Hong Kong (up 13%). Revenue also decreased in Global Trade and Receivables Finance ('GTRF'), notably reflecting managed customer exits in the Middle East and North Africa ('MENA').
These increases were partly offset:
- In Corporate Centre, revenue decreased by $0.9bn or 50%, mainly in Central Treasury ($0.6bn). This reflected lower favourable fair value movements ($0.1bn in 1H17 compared with $0.4bn in 1H16) relating to the economic hedging of our long-term debt, as well as higher interest expense on our debt ($0.3bn). Revenue also fell in the US run-off portfolio ($0.3bn) from continuing disposals. These reductions were partly offset by a rise in Legacy Credit as a result of net favourable movements on credit and funding valuation adjustments.
- In GPB, revenue decreased by $48m or 5%, reflecting the continued impact of our repositioning actions. These actions are now largely completed. Revenue increased in markets targeted for growth, notably in Hong Kong reflecting an increase in client activity and wider deposit spreads.
|
Half-year to |
|
Adjusted revenue^ |
30 Jun 2017 $m |
30 Jun 2016 $m |
Variance $m |
% |
RBWM |
10,043 |
|
8,955 |
|
1,088 |
|
12 |
|
CMB |
6,407 |
|
6,315 |
|
92 |
|
1 |
|
GB&M |
7,823 |
|
7,213 |
|
610 |
|
8 |
|
GPB |
846 |
|
894 |
|
(48 |
) |
(5 |
) |
Corporate Centre |
934 |
|
1,858 |
|
(924 |
) |
(50 |
) |
Total |
26,053 |
|
25,235 |
|
818 |
|
3 |
|
Adjusted LICs^
Adjusted LICs of $0.7bn were $0.9bn or 57% lower, reflecting reductions in:
- CMB ($0.4bn lower), notably in North America and the UK, reflecting lower individually assessed LICs, primarily against exposures in the oil and gas sector. In addition, there was a net release in 1H17 in the UK relating to the construction sector. This was partly offset by higher LICs in Hong Kong relating to a small number of customers;
- GB&M ($0.4bn lower), as individually assessed LICs reduced, notably because 1H16 included charges against exposures in the oil and gas, and mining sectors in the US; and
- Corporate Centre ($0.1bn lower), primarily from lower collective LICs in the US run-off portfolio in 1H17.
Adjusted operating expenses^
Adjusted operating expenses of $14.6bn were $0.4bn or 3% higher. This was partly due to a credit of $0.1bn in 1H16 relating to the 2015 UK bank levy.
Excluding the impact of the UK bank levy, adjusted operating expenses were higher reflecting investments in business growth, primarily in RBWM where investments were in part funded by the proceeds from our sale of Visa shares. The impact of our cost-saving initiatives broadly offset inflation and continued investment in our regulatory programmes and compliance.
Our total investment in regulatory and compliance programmes in 1H17 was $1.6bn, up $168m or 12%. This reflected the continued implementation of our Global Standards programme to enhance financial crime risk controls and capabilities, and investment in stress testing and other regulatory programmes. These costs included spend incurred to deliver the programmes, as well as recurring costs to maintain the activities.
The number of employees expressed in full-time equivalent staff ('FTEs') at 30 June 2017 was 232,957, a decrease of 2,218 from 31 December 2016. This reflected reductions resulting from our transformation programmes, partly offset by investment in our Global Standards programme of 5,585 FTEs.
Adjusted income from associates^
Adjusted income from associates and joint ventures of $1.2bn fell by $11m compared with 1H16.
HSBC Holdings plc Interim Report |
14 |
Balance sheet and capital
Balance sheet strength
Total reported assets were $2.5tn, 5% higher than at 31 December 2016 on a reported basis, and 2% higher on a constant currency basis. We have increased the size of our balance sheet, reflecting targeted asset growth, supported by growth in customer accounts.
Distributable reserves
The distributable reserves of HSBC Holdings at 30 June 2017 were $41bn, compared with $42bn at 31 December 2016. The decrease was primarily driven by distributions to shareholders of $4.0bn, which were higher than profits generated of $3.7bn, as well as fair value losses due to movements in our own credit spread of $486m.
Capital strength
We manage our capital aiming to ensure we exceed current regulatory requirements and are well placed to meet those expected in the future. We monitor our position using capital ratios. These measure capital relative to a regulatory assessment of risks taken. We quantify how these risks relate to our business using RWAs.
Our CET1 ratio at 30 June 2017 was 14.7%, up from 13.6% at 31 December 2016.
Delivery against Group financial targets
Return on equity
Our medium-term target is to achieve a return on equity ('RoE') of more than 10%. In 1H17, we achieved an RoE of 8.8% compared with 7.4% in 1H16.
Adjusted jaws^
Jaws measures the difference between the rates of change in revenue and costs. Positive jaws occurs when the figure for the percentage change in revenue is higher than, or less negative than, the corresponding rate for costs.
We calculate adjusted jaws using adjusted revenue and costs. Our target is to maintain positive adjusted jaws.
In 1H17, adjusted revenue increased by 3.2%, whereas our adjusted operating expenses increased by 2.7%. Adjusted jaws was therefore positive 0.5%.
Dividends
In the current uncertain environment, we plan to sustain the annual dividend in respect of the year at its current level for the foreseeable future. Growing our dividend in the future will depend on the overall profitability of the Group, delivering further release of less efficiently deployed capital and meeting regulatory capital requirements in a timely manner. Actions to address these points were core elements of the strategic actions set out in our Investor Update in June 2015.
HSBC Holdings plc Interim Report |
15 |
Global businesses
We manage our products and services globally through our global businesses.
The 'Management view of adjusted revenue' tables provide a breakdown of revenue by major products, and reflect the basis on which revenue performance of each business is assessed and managed.
The comparative periods have been restated to reflect changes to reportable segments, as described on page 36.
Commentary is on an adjusted basis, which is consistent with how we assess the performance of our global businesses.^
Retail Banking and Wealth Management
RBWM serves close to 36 million customers worldwide through four main businesses: Retail Banking, Wealth Management, Asset Management and Insurance. Our HSBC Premier and Advance propositions are aimed at mass affluent and emerging affluent customers who value international connectivity and benefit from our global reach and scale. For customers with simpler banking needs, RBWM offers a full range of products and services reflecting local requirements.
Key events
- Continued to attract customer deposits (up 3% from December 2016), providing potential benefits from future rate rises.
- Gains on our sale of Visa shares are being used to finance strategic investments in Insurance and Retail Business Banking business growth.
Financial performance
Adjusted profit before tax of $3.4bn was $0.8bn or 32% higher than for 1H16, reflecting strong revenue growth, partly offset by higher costs and LICs, with positive adjusted jaws of 8.3%.
Adjusted revenue of $10.0bn was $1.1bn or 12% higher, as revenue grew in both Wealth Management and Retail Banking.
The revenue increase in Wealth Management resulted from:
- growth in insurance manufacturing revenue from favourable market impacts of $217m due to interest rates and equity markets, notably in Asia and France, compared with adverse market impacts in 1H16 of $319m, and higher insurance sales in Asia; and
- higher investment distribution revenue, primarily driven by higher sales of mutual funds in Hong Kong, reflecting increased investor confidence.
The revenue increase in Retail Banking resulted from:
- current accounts, savings and deposits due to wider spreads and balances in Hong Kong and Mexico.
This was partly offset by:
- lower personal lending revenue reflecting narrower spreads in mortgages, notably in Hong Kong and the UK, as well as lower revenue in the UK from current accounts, savings and deposits as spreads narrowed, though balances grew.
Adjusted LICs of $556m were $25m or 5% higher, reflecting our strategy to shift our portfolio to unsecured lending. This included an increase of $43m in Mexico, reflecting targeted growth in unsecured lending and associated higher delinquency rates. In addition, LICs in the UK increased by $47m, primarily against our mortgages and cards exposures. LICs in the UK remain at low levels, representing 16bps of the overall portfolio. The increases in LICs were partly offset by lower LICs in Turkey and the US.
Adjusted operating expenses of $6.1bn were $0.2bn or 4% higher, as transformational and other cost savings were more than offset by investments, increased technology costs resulting partly from higher transaction volumes, performance-related pay and inflation.
Management view of adjusted revenue^ |
Half-year to |
|
1H17 vs 1H16 |
30 Jun 2017
$m |
30 Jun 2016
$m |
31 Dec 2016
$m |
|
$m |
% |
Net operating income 1 |
|
|
|
|
|
Retail Banking |
6,549 |
|
6,275 |
|
6,310 |
|
|
274 |
|
4 |
|
Current accounts, savings and deposits |
3,011 |
|
2,574 |
|
2,619 |
|
|
437 |
|
17 |
|
Personal lending |
3,538 |
|
3,701 |
|
3,691 |
|
|
(163 |
) |
(4 |
) |
- mortgages |
1,150 |
|
1,274 |
|
1,249 |
|
|
(124 |
) |
(10 |
) |
- credit cards |
1,479 |
|
1,521 |
|
1,504 |
|
|
(42 |
) |
(3 |
) |
- other personal lending 2 |
909 |
|
906 |
|
938 |
|
|
3 |
|
- |
|
Wealth Management |
3,221 |
|
2,443 |
|
2,821 |
|
|
778 |
|
32 |
|
- investment distribution 3 |
1,598 |
|
1,414 |
|
1,477 |
|
|
184 |
|
13 |
|
- life insurance manufacturing |
1,113 |
|
559 |
|
837 |
|
|
554 |
|
99 |
|
- asset management |
510 |
|
470 |
|
507 |
|
|
40 |
|
9 |
|
Other 4 |
273 |
|
237 |
|
266 |
|
|
36 |
|
15 |
|
Total |
10,043 |
|
8,955 |
|
9,397 |
|
|
1,088 |
|
12 |
|
RoRWA (%) 5 |
5.9 |
|
4.5 |
|
4.7 |
|
|
|
|
For footnotes, see page 53.
Change in adjusted
profit before tax
+32%
HSBC Holdings plc Interim Report |
16 |
Commercial Banking
CMB serves approximately 1.7 million customers in 54 countries and territories. Our customers range from small enterprises focused primarily on their domestic markets through to corporates operating globally. We support customers with tailored financial products and services to allow them to operate efficiently and grow.
Services provided include working capital, term loans, payment services and international trade facilitation, as well as expertise in mergers and acquisitions, and access to financial markets.
Key events
- Launched Move Money, a single payments screen customised for specific clients, in 21 markets.
- Launched LinkScreen in the UK, making us the world's first bank to provide small and medium-sized clients with key elements of a traditional face-to-face meeting via an online platform.
Financial performance
Adjusted profit before tax of $3.4bn was $0.5bn or 17% higher, reflecting lower LICs and higher revenue. We achieved positive adjusted jaws of 1.5%.
Adjusted revenue rose by $0.1bn or 1%, as higher revenue in GLCM was partly offset in Credit and Lending, and GTRF.
- In GLCM, revenue increased by $192m or 9%, reflecting wider spreads in Hong Kong and mainland China. In the UK, growth in average deposit balances of 14% was more than offset by narrower spreads, following the UK base rate reduction in August 2016.
- In Credit and Lending, revenue decreased by $31m or 1%. This reduction was mainly in Asia reflecting narrower spreads, notably in Hong Kong and mainland China as a result of competitive environments, partly offset by growth in average balances in Hong Kong (13%). In the UK, revenue increased from growth in average balances (14%) which more than offset the effects of spread compression following the base rate reduction in August 2016.
- In GTRF, revenue decreased by $27m or 3%, primarily in MENA, reflecting managed customer exits in the UAE. GTRF revenue has stabilised since the end of 2016, supported by lending growth in Asia. Despite challenges in global trade, we continued to increase our share of key markets compared with 1H16, including trade finance in Hong Kong and Singapore, and receivables finance in the UK.
Adjusted LICs reduced by $0.4bn, notably in North America and the UK, reflecting lower individually assessed LICs, primarily against exposures in the oil and gas sector. 1H17 also included net releases in the UK relating to the construction sector. These reductions were partly offset by higher individually assessed LICs in Hong Kong relating to a small number of customers. Collectively assessed LICs were higher in Hong Kong and MENA, in part offset in the UK where the reduction reflected reduced exposures and lower loss rates in the oil and gas sector.
Adjusted operating expenses were unchanged as wage inflation and investment in digital initiatives and Global Standards were offset by cost-saving initiatives.
As a result of management initiatives, RWAs were reduced by $7bn, resulting in a cumulative decrease of $53bn since our Investor Update in June 2015, exceeding our target of $29bn.
Management view of adjusted revenue^ |
Half-year to |
|
1H17 vs 1H16 |
30 Jun 2017
$m |
30 Jun 2016
$m |
31 Dec 2016
$m |
|
$m |
% |
Net operating income 1 |
|
|
|
|
|
Global Trade and Receivables Finance |
900 |
|
927 |
|
897 |
|
|
(27 |
) |
(3 |
) |
Credit and Lending |
2,441 |
|
2,472 |
|
2,467 |
|
|
(31 |
) |
(1 |
) |
Global Liquidity and Cash Management |
2,269 |
|
2,077 |
|
2,121 |
|
|
192 |
|
9 |
|
Markets products, Insurance and Investments and Other 6 |
797 |
|
839 |
|
670 |
|
|
(42 |
) |
(5 |
) |
Total |
6,407 |
|
6,315 |
|
6,155 |
|
|
92 |
|
1 |
|
RoRWA (%) 5 |
2.5 |
|
2.2 |
|
2.1 |
|
|
|
|
For footnotes, see page 53.
Change in adjusted
profit before tax
+17%
HSBC Holdings plc Interim Report |
17 |
Global Banking and Markets
GB&M serves approximately 4,100 clients in more than 50 countries and territories. It supports major government, corporate and institutional clients worldwide. Our product specialists continue to deliver a comprehensive range of transaction banking, financing, advisory, capital markets and risk management services.
Key events
- The first foreign bank with a majority-owned securities joint venture in China, which will allow us to provide GB&M and CMB clients with a broad spectrum of investment banking and markets services in China.
- Growth of 4% in average balances in GLCM from December 2016 positioning us to benefit from potential interest rate rises.
Financial performance
Adjusted profit before tax of $3.4bn was $0.8bn or 33% higher, reflecting a strong revenue performance in 1H17, as well as a reduction in LICs of $0.4bn, partly offset by higher operating expenses of $0.2bn. We achieved positive adjusted jaws of 4.9%. Adjusted revenue increased by $0.6bn or 8% including a net adverse movement of $147m on credit and funding valuation adjustments. Excluding these movements, profit before tax rose by $1.0bn or 40%, and revenue increased by $0.8bn or 11%, with increases in all of our businesses. The rise in adjusted revenue was driven by:
- FICC (up $176m to $3.1bn), primarily in Rates and Credit, as we captured higher client flows and grew our market share in Europe, despite challenging industry-wide conditions at the start of 2Q17.
- Equities (up $167m), as we continued to capture market share in Prime Financing products. By contrast, performance in 1H16 was affected by market volatility which led to reduced client activity.
- A strong performance in Global Banking (up $168m), with continued momentum in Investment Banking products and growth in lending balances, which more than offset the effects of tightening spreads on lending in Asia. The increase in revenue also included recoveries on restructured facilities in 1H17 compared with write-downs in 1H16.
- An increase from all our transaction banking products, notably GLCM (up $129m) and Securities Services ('HSS') (up $92m). In GLCM, balances grew as we won client mandates and spreads widened, notably in Asia and the US, although UK balance growth was offset by narrower spreads.
Adjusted LICs of $41m in 1H17 decreased by $387m. This largely reflected a reduction in individually assessed charges, particularly as the prior year included LICs on exposures in the oil and gas, and mining sectors in the US.
Adjusted operating expenses increased by $152m or 4%, which reflected higher performance and severance costs, including pension costs. In addition, we made strategic investments in GLCM, HSS and Foreign Exchange. Our continued cost management, efficiency improvements and FTE reductions were broadly offset by the effects of inflation.
We have now exceeded the RWA reduction target set in our Investor Update in June 2015, with the cumulative reduction in RWAs from management initiatives reaching $107bn. This includes a further RWA reduction of $11bn in 1H17. Our adjusted RoRWA improved to 2.3% from 1.6% in 1H16.
Management view of adjusted revenue^ |
Half-year to |
|
1H17 vs 1H16 |
30 Jun 2017
$m |
30 Jun 2016
$m |
31 Dec 2016
$m |
|
$m |
% |
Net operating income1 |
|
|
|
|
|
|
Global Markets |
3,722 |
|
3,379 |
|
3,196 |
|
|
343 |
|
10 |
|
- Equities |
659 |
|
492 |
|
482 |
|
|
167 |
|
34 |
|
- FICC |
3,063 |
|
2,887 |
|
2,714 |
|
|
176 |
|
6 |
|
Foreign Exchange |
1,351 |
|
1,354 |
|
1,381 |
|
|
(3 |
) |
- |
|
Rates |
1,147 |
|
1,053 |
|
1,039 |
|
|
94 |
|
9 |
|
Credit |
565 |
|
480 |
|
294 |
|
|
85 |
|
18 |
|
Global Banking |
1,950 |
|
1,782 |
|
1,954 |
|
|
168 |
|
9 |
|
Global Liquidity and Cash Management |
1,042 |
|
913 |
|
953 |
|
|
129 |
|
14 |
|
Securities Services |
839 |
|
747 |
|
793 |
|
|
92 |
|
12 |
|
Global Trade and Receivables Finance |
358 |
|
340 |
|
341 |
|
|
18 |
|
5 |
|
Principal Investments |
77 |
|
(1 |
) |
223 |
|
|
78 |
|
> 100 |
Credit and funding
valuation adjustments7 |
(95 |
) |
52 |
|
(104 |
) |
|
(147 |
) |
> (100) |
Other8 |
(70 |
) |
1 |
|
(34 |
) |
|
(71 |
) |
> (100) |
Total |
7,823 |
|
7,213 |
|
7,322 |
|
|
610 |
|
8 |
|
RoRWA (%) 5 |
2.3 |
|
1.6 |
|
1.9 |
|
|
|
|
For footnotes, see page 53.
Change in adjusted profit before tax
+33%
HSBC Holdings plc Interim Report |
18 |
Global Private Banking
GPB serves high net worth individuals and families, including those with international banking needs, through 12 booking centres covering our priority markets.
We provide a full range of private banking services, including Investment Management, which includes advisory and brokerage services, and Private Wealth Solutions, which comprises trusts and estate planning, to protect and preserve wealth for future generations.
Key events
- Net new money of $1bn was driven by positive inflows of $8bn in key markets targeted for growth, mainly in Hong Kong. This was partly offset by outflows resulting from the repositioning of the business. These repositioning actions are largely complete.
- Positive momentum with strong growth in client inflows.
Financial performance
Adjusted profit before tax of $143m was $39m or 21% lower as revenue decreased, partly offset by a reduction in costs.
Adjusted revenue of $846m was $48m or 5% lower, reflecting the continued impact of client repositioning. Revenue from markets targeted for growth increased by 9%, mainly in Hong Kong reflecting higher investment revenue and wider deposit spreads.
Adjusted operating expenses of $702m were $20m or 3% lower, mainly as a result of the managed reduction in FTEs and the impact of our cost-saving initiatives.
Management view of adjusted revenue^ |
Half-year to |
|
1H17 vs 1H16 |
30 Jun 2017
$m |
30 Jun 2016
$m |
31 Dec 2016
$m |
|
$m |
% |
Net operating income1 |
|
|
|
|
|
|
Investment Revenue |
354 |
|
381 |
|
349 |
|
|
(27 |
) |
(7 |
) |
Lending |
186 |
|
211 |
|
198 |
|
|
(25 |
) |
(12 |
) |
Deposit |
191 |
|
176 |
|
164 |
|
|
15 |
|
9 |
|
Other |
115 |
|
126 |
|
127 |
|
|
(11 |
) |
(9 |
) |
Total |
846 |
|
894 |
|
838 |
|
|
(48 |
) |
(5 |
) |
RoRWA (%) 5 |
1.8 |
|
2.1 |
|
1.2 |
|
|
|
|
For footnotes, see page 53.
Change in adjusted
profit before tax
-21%
Corporate Centre
Corporate Centre comprises Central Treasury, including Balance Sheet Management (´BSM`), our legacy businesses, interests in our associates and joint ventures, central stewardship costs that support our businesses, and the UK bank levy.
Financial performance
Adjusted profit before tax of $1.6bn was $0.8bn or 33% lower, as revenue decreased, partly offset by a reduction in LICs.
Adjusted revenue fell by $0.9bn or 50%, reflecting a decrease in Central Treasury ($0.6bn) and continuing disposals in the US run-off portfolio ($0.3bn). In Central Treasury, revenue decreased as a result of:
- lower favourable fair value movements ($0.1bn in 1H17 compared with $0.4bn in 1H16) relating to the economic hedging of interest-rate and exchange-rate risk on our long-term debt with long-term derivatives; and
- higher interest expense on our debt ($0.3bn), mainly reflecting the higher cost of debt issued to meet regulatory requirements.
These reductions were partly offset by an increase in legacy credit ($0.2bn), primarily resulting from net favourable movements in credit and funding valuation adjustments.
Adjusted LICs were $136m lower, primarily in the US run-off portfolio.
Adjusted operating expenses were $29m or 5% higher, due to a credit booked in 1H16 relating to the UK bank levy in 2015 ($0.1bn), compared with minimal charges in 1H17. Excluding this, operating expenses fell by $116m, due to lower costs in the US run-off portfolio.
Adjusted income from associates rose by $13m or 1%.
Management view of adjusted revenue^ |
Half-year to |
|
1H17 vs 1H16 |
30 Jun 2017
$m |
30 Jun 2016
$m |
31 Dec 2016
$m |
|
$m |
% |
Net operating income1 |
|
|
|
|
|
|
Central Treasury9 |
765 |
|
1,354 |
|
83 |
|
|
(589 |
) |
(44 |
) |
Legacy portfolios |
134 |
|
328 |
|
392 |
|
|
(194 |
) |
(59 |
) |
- US run-off portfolio |
75 |
|
420 |
|
272 |
|
|
(345 |
) |
(82 |
) |
- Legacy credit |
59 |
|
(92 |
) |
120 |
|
|
151 |
|
> 100 |
Other10 |
35 |
|
176 |
|
(725 |
) |
|
(141 |
) |
(80 |
) |
Total |
934 |
|
1,858 |
|
(250 |
) |
|
(924 |
) |
(50 |
) |
For footnotes, see page 53.
HSBC Holdings plc Interim Report |
19 |
Risk overview
We actively manage risk to protect
and enable the business.
Managing risk
HSBC has maintained a conservative and consistent approach to risk throughout its history, helping to ensure we protect customers' funds, lend responsibly and support economies. By carefully aligning our risk appetite to our strategy, we aim to deliver long-term shareholder returns.
All employees are responsible for the management of risk, with ultimate accountability residing with the Board. We have a strong risk culture, which is embedded through clear and consistent communication and appropriate training for all employees. A comprehensive risk management framework is applied throughout the Group, with effective governance and corresponding risk management tools. This framework is underpinned by our risk culture and reinforced by the HSBC Values and our Global Standards programme.
Our Global Risk function oversees the framework and is led by the Group Chief Risk Officer, an executive Director. It is independent from the global businesses, including their sales and trading functions, to provide challenge, appropriate oversight, and balance in risk/reward decisions.
HSBC's risk appetite defines its desired forward-looking risk profile, and informs the strategic and financial planning process. It is articulated in a risk appetite statement, which is approved by the Board. Key elements include:
- risks that we accept as part of doing business, such as credit risk and market risk;
- risks that we incur as part of doing business, such as operational risk, which are actively managed to remain below an acceptable tolerance; and
- risks for which we have zero tolerance, such as knowingly engaging in activities where foreseeable reputational risk has not been considered.
Our risk management framework and risks associated with our banking and insurance manufacturing operations are described on pages 68 to 73 of the Annual Reports and Accounts 2016.
Top and emerging risks
Our top and emerging risks framework helps enable us to identify forward-looking risks so that we may take action to either prevent them materialising or limit their effect.
Top risks are those that may have a material impact on the financial results, reputation or business model of the Group in the year ahead. Emerging risks are those that have large unknown components and may form beyond a one-year horizon. If any of these risks were to occur, they could have a material effect on HSBC.
During 1H17, we made two changes to our top and emerging risks to reflect our assessment of their potential effects on the Group. The thematic issue 'Regulatory focus on conduct of business and financial crime' was removed and 'Financial crime risk environment' was added to further emphasise the heightened focus on, and robust oversight, monitoring and active risk management of, financial crime risks.
In addition, one thematic issue was renamed to better reflect the challenges facing the Group. We use the new name in the table opposite, which summarises our top and emerging risks.
Our top and emerging risks are also summarised and discussed in more detail on pages 27 and 64 of the Annual Report and Accounts 2016.
Our approach to identifying and monitoring top and emerging risks is described on page 70 of the Annual Reports and Accounts 2016.
HSBC Holdings plc Interim Report |
20 |
|
Risk |
Trend |
Mitigants |
|
Externally driven |
|
|
|
Geopolitical risk |
é |
We continually assess the impact of geopolitical events on our business including examining a range of potential impacts arising from the UK's exit from the European Union ('EU'). Where required, we take steps to mitigate these risks to help ensure we remain within our risk appetite. We have also strengthened physical security at our premises where the risk of terrorism is heightened. |
|
Economic outlook and capital flows |
é |
We actively monitor our wholesale credit and trading portfolios, and undertake stress tests and other analysis, to identify sectors and clients that may come under stress due to economic conditions in the eurozone, mainland China and the UK as its negotiations to exit from the EU commence. |
|
Turning of the credit cycle |
è |
We have conducted detailed reviews of our oil and gas, and commercial real estate portfolios. We are actively assessing sectors likely to come under stress due to macroeconomic or geopolitical events, and reducing limits where appropriate. |
|
Cyber threat and unauthorised access to systems |
é |
We continue to enhance our cybersecurity capabilities, strengthening the threat detection capability within our security operations centres, delivering enhanced anti-malware capability across our infrastructure, and improving our access control. |
* |
Regulatory, technological and sustainability developments with adverse impact on business model and profitability |
è |
We proactively engage with regulators and policy makers to help ensure new regulatory requirements are effectively implemented. We continue to engage with non-governmental organisations to ensure we address environmental concerns adopting changes in policy as required. |
|
Financial crime risk environment |
è |
We remain on track to complete the introduction of major compliance IT systems by the end of 2017 to support our global anti-money laundering ('AML') and sanctions policy framework. We are conducting an assessment against the core capabilities of our financial crime risk framework to enable the capabilities to be fully integrated in our day-to-day operations. |
|
US deferred prosecution agreement and related agreements and consent orders |
è |
We are taking concerted action to remediate AML and sanctions compliance deficiencies and to implement our Global Standards. |
|
Internally driven |
|
|
IT systems infrastructure and resilience |
è |
We continue to monitor and improve service resilience across our technology infrastructure, enhancing our problem diagnosis/resolution and change execution capabilities. This has significantly reduced service disruption to our customers since 1H16. |
|
Impact of organisational change and regulatory demands on employees |
è |
We continue to focus on resourcing and employee development to meet regulatory changes, including the UK ring-fenced bank, and to maintain and enhance our leadership strength. |
|
Execution risk |
è |
The Group Change Committee continues to oversee the progress of the highest priority programmes across the Group, underpinning the implementation of our strategic actions by managing interdependencies, providing direction and taking action to help ensure successful delivery. |
|
Third-party risk management |
è |
We are implementing our enhanced Group policy and framework to strengthen how we identify, assess, mitigate and manage risks across the range of third parties with which we do business. |
|
Enhanced model risk management expectations |
è |
We have established a model risk management sub-function in the second line of defence to further strengthen governance of this risk type. We continue to enhance our model risk management framework in order to address evolving requirements, both internal and external. |
|
Data management |
è |
We continue to enhance our data governance, quality and architecture to help enable consistent data aggregation, reporting and management. |
[é] Risk heightened during 2017
[è] Risk remained at the same level as 2016
* Thematic risk renamed during 1H17
HSBC Holdings plc Interim Report |
21 |
This information is provided by RNS
The company news service from the London Stock Exchange
END
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