20-F 1 u10720e20vf.htm 20-F e20vf
Table of Contents

As filed with the Securities and Exchange Commission on March 8, 2011.
 
 
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
     
o   REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Or
 
þ   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2010
Or
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Or
     
o   SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
     
    Date of event requiring this shell company report ________
For the transition period from N/A to N/A
Commission file number: 1-14930
HSBC Holdings plc
(Exact name of Registrant as specified in its charter)
     
N/A   United Kingdom
(Translation of Registrant’s name into English)   (Jurisdiction of incorporation or organisation)
8 Canada Square
London E14 5HQ
United Kingdom
(Address of principal executive offices)
Russell C Picot
8 Canada Square
London E14 5HQ
United Kingdom
Tel +44 (0) 20 7991 8888
Fax +44 (0) 20 7992 4880
(Name, Telephone, Email and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
     
Title of each class   Name of each exchange on which registered
Ordinary Shares, nominal value US$0.50 each.   London Stock Exchange
    Hong Kong Stock Exchange
    Euronext Paris
    Bermuda Stock Exchange
    New York Stock Exchange*
American Depository Shares, each representing 5   New York Stock Exchange
Ordinary Shares of nominal value US$0.50 each.    
6.20% Non-Cumulative Dollar Preference Shares,   New York Stock Exchange*
Series A    
American Depositary Shares, each representing one-   New York Stock Exchange
fortieth of a Share of 6.20% Non-Cumulative Dollar    
Preference Shares, Series A    
5.25% Subordinated Notes 2012   New York Stock Exchange
6.5% Subordinated Notes 2036   New York Stock Exchange
6.5% Subordinated Notes 2037   New York Stock Exchange
6.8% Subordinated Notes Due 2038   New York Stock Exchange
8.125% Perpetual Subordinated Capital Securities   New York Stock Exchange
Exchangeable at the Issuer’s Option into Non-    
Cumulative Dollar Preference Shares    
Securities registered or to be registered pursuant to Section 12(g) of the Securities Exchange Act of 1934: None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Securities Exchange Act of 1934: None
     Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:
     Ordinary Shares, nominal value US$0.50 each                                         17,686,155,902
     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
þ Yes o No
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
o Yes þ No.
     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
þ Yes o No
     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
         
     Large accelerated filer þ   Accelerated filer o   Non-accelerated filer o
        (Do not check if a smaller reporting company)
     Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
         
U.S. GAAP o
  International Financial Reporting Standards as issued by the   Other o
 
  International Accounting Standards Board þ
     If “Other” has been checked in response to the previous question indicate by check mark which financial statement item the registrant has elected to follow.
o Item 17 o Item 18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes þ No
 
*   Not for trading, but only in connection with the registration of American Depositary Shares.
 
 


 

HSBC HOLDINGS PLC
Annual Report and Accounts 2010
     
 
 
 
 
 

Certain defined terms
Unless the context requires otherwise, ‘HSBC Holdings’ means HSBC Holdings plc and ‘HSBC’, the ‘Group’, ‘we’, ‘us’ and ‘our’ refers to HSBC Holdings together with its subsidiaries. Within this document the Hong Kong Special Administrative Region of the People’s Republic of China is referred to as ‘Hong Kong’. When used in the terms ‘shareholders’ equity’ and ‘total shareholders’ equity’, ‘shareholders’ means holders of HSBC Holdings ordinary shares and those preference shares classified as equity. The abbreviations ‘US$m’ and ‘US$bn’ represent millions and billions (thousands of millions) of US dollars, respectively.
Financial statements
The consolidated financial statements of HSBC and the separate financial statements of HSBC Holdings have been prepared in accordance with International Financial Reporting Standards (‘IFRSs’) as issued by the International Accounting Standards Board (‘IASB’) and as endorsed by the European Union (‘EU’). EU-endorsed IFRSs may differ from IFRSs as issued by the IASB if, at any point in time, new or amended IFRSs have not been endorsed by the EU. At 31 December 2010, there were no unendorsed standards effective for the year ended 31 December 2010 affecting these consolidated and separate financial statements, and there was no difference between IFRSs endorsed by the EU and IFRSs issued by the IASB in terms of their application to HSBC. Accordingly, HSBC’s financial statements for the year ended 31 December 2010 are prepared in accordance with IFRSs as issued by the IASB.
     We use the US dollar as our presentation currency because the US dollar and currencies linked to it form the major currency bloc in which we transact and fund our business. Unless otherwise stated, the information presented in this document has been prepared in accordance with IFRSs.
     When reference to ‘underlying’ or ‘underlying basis’ is made in tables or commentaries, comparative information has been expressed at constant currency (see page 14), eliminating the impact of fair value movements in respect of credit spread changes on HSBC’s own debt and adjusting for the effects of acquisitions and disposals. A reconciliation of reported and underlying profit before tax is presented on page 15.
Report of the Directors
The information set out in the Report of the Directors on pages 2 to 219 does not constitute the directors’ report included in the Company’s Annual Report and Accounts for the year ended 31 December 2010 under Section 415 of the Companies Act 2006 as it includes certain supplementary information and explanations.
Contents
 
     
   
   
  2
  3(a)
  4
  7
  10
  10
  10
  11
 
   
   
  14
  37
  38
  50
  81
  80(h)
  80(h)
  85(b)
  86
  177
 
   
   
  183
  183
  189
  194
  206
  212
  214
  217
 
   
  220
 
   
Financial Statements and Other Information
   
  235
 
   
   
  237
  250
 
   
   
  371
  379
  380
  389
 Exhibit 1.1
 Exhibit 4.1
 Exhibit 4.4
 Exhibit 4.6
 Exhibit 4.7
 Exhibit 7.1
 Exhibit 12.1
 Exhibit 12.2
 Exhibit 13.1
 Exhibit 14.1
 Exhibit 23.1
 Exhibit 23.2
 Exhibit 23.3
1   Detailed contents are provided on the referenced pages.


 


Table of Contents

HSBC HOLDINGS PLC
Report of the Directors: Overview
Overview
     
 
 
 
 
 
(HSBC LOGO)
Headquartered in London, HSBC is one of the world’s largest banking and financial services organisations and one of the industry’s most valuable brands. We provide a comprehensive range of financial services to around 95 million customers through two customer groups, Personal Financial Services (including consumer finance), and Commercial Banking, and two global businesses, Global Banking and Markets, and Global Private Banking.
     Our international network covers 87 countries and territories in six geographical regions; Europe, Hong Kong, Rest of Asia-Pacific, the Middle East, North America and Latin America.
     With listings on the London, Hong Kong, New York, Paris and Bermuda stock exchanges, shares in HSBC Holdings plc are held by over 221,000 shareholders in 127 countries and territories.
 
Highlights
 
  Pre-tax profit more than doubled to US$19bn on a reported basis.
 
  Underlying pre-tax profit up by almost US$5bn or 36% to US$18.4bn.
 
  Profitable in every customer group and region, including North America, for the first time since 2006.
 
  Dividends declared in respect of 2010 totalled US$6.3bn, or US$0.36 per ordinary share, with a fourth interim dividend for 2010 of US$0.12 per ordinary share.
 
  Continued capital generation – core tier 1 ratio increased to 10.5% from 9.4%.
 
  Customer lending up 8% to US$958bn; deposits up 7% to US$1.2 trillion on an underlying basis.
 
Cover theme
An evening view of the Central Elevated Walkway in Hong Kong’s business district. Used by tens of thousands of commuters every day, this walkway forms a vital artery through the heart of Asia’s pre-eminent financial centre, which hosts over 190 banks and deposit-taking companies from all over the world.

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Table of Contents

HSBC HOLDINGS PLC
Report of the Directors: Overview (continued)
     
 
 
 
 
 
Financial highlights
 
         
For the year
       
 
       
Profit before taxation
  Underlying profit before taxation   Total operating income
 
       
US$19,037m – up 169%
  US$18,366m – up 36%   US$80,014m – up 2%
 
       
2009: US$7,079m
  2009: US$13,482m   2009: US$78,631m
2008: US$9,307m
      2008: US$88,571m
 
       
Net operating income before loan
       
impairment charges and other credit
  Profit attributable to shareholders of    
risk provisions
  the parent company    
 
       
US$68,247m – up 3%
  US$13,159m – up 126%    
 
       
2009: US$66,181m
  2009: US$5,834m    
2008: US$81,682m
  2008: US$5,728m    
 
       
 
       
 
Earnings per share and dividends per share    
 
       
Earnings per share
  Dividends per share1    
 
       
US$0.73 – up 115%
  US$0.34    
 
       
2009: US$0.34
  2009: US$0.34    
2008: US$0.41
  2008: US$0.93    
 
       
 
       
 
At the year-end
       
 
       
Loans and advances to
      Ratio of customer advances to
customers
  Customer accounts   customer accounts
 
       
US$958bn – up 7%
  US$1,228bn – up 6%   78.1%
 
       
2009: US$896bn
  2009: US$1,159bn   2009: 77.3%
2008: US$933bn
  2008: US$1,115bn   2008: 83.6%
 
       
 
  Average total shareholders’ equity    
Total equity
  to average total assets   Risk-weighted assets
 
       
US$155bn – up 14%
  5.5%   US$1,103bn – down 3%
 
       
2009: US$136bn
  2009: 4.7%   2009: US$1,133bn
2008: US$100bn
  2008: 4.9%   2008: US$1,148bn
 
       
 
       
 
Capital ratios
       
 
       
Core tier 1 ratio
  Tier 1 ratio   Total capital ratio
 
       
10.5%
  12.1%   15.2%
 
       
2009: 9.4%
  2009: 10.8%   2009: 13.7%
2008: 7.0%
  2008: 8.3%   2008: 11.4%

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HSBC HOLDINGS PLC
Report of the Directors: Overview (continued)
     
 
 
 
 
 
         
Performance ratios
       
 
       
Credit coverage ratios
       
 
       
Loan impairment charges to
  Loan impairment charges to   Total impairment allowances to
total operating income
  average gross customer advances   impaired loans at year-end
 
       
16.9%
  1.5%   71.6%
 
       
2009: 31.7%
  2009: 2.8%   2009: 83.2%
2008: 27.2%
  2008: 2.5%   2008: 94.3%
             
Return ratios
           
 
           
Return on average
  Return on average   Post-tax return on   Post-tax return on average
invested capital2
  shareholders’ equity3,   average total assets   risk-weighted assets
 
           
8.7%
  9.5%   0.6%   1.3%
 
           
2009: 4.1%
  2009: 5.1%   2009: 0.3%   2009: 0.6%
2008: 4.0%
  2008: 4.7%   2008: 0.3%   2008: 0.6%
 
           
Efficiency and revenue mix ratios
           
 
           
 
  Net interest income to   Net fee income to   Net trading income to
Cost efficiency ratio4
  total operating income   total operating income   total operating income
 
           
55.2%
  49.3%   21.7%   9.0%
 
           
2009: 52.0%
  2009: 51.8%   2009: 22.5%   2009: 12.5%
2008: 60.1%
  2008: 48.1%   2008: 22.6%   2008: 7.4%
 
           
 
           
 
Share information at the year-end
                 
        Closing market price
 
               
US$0.50 ordinary
  Market           American
shares in issue
  capitalisation   London   Hong Kong   Depositary Share5
 
               
17,686m
  US$180bn   £6.51   HK$79.70   US$51.04
 
               
2009: 17,408m
  2009: US$199bn   2009: £7.09   2009: HK$89.40   2009: US$57.09
2008: 12,105m
  2008: US$114bn   2008: £5.77   2008: HK$67.81   2008: US$44.15
 
               
 
               
        Total shareholder return6
         
 
      Over 1 year   Over 3 years   Over 5 years
 
               
To 31 December 2010   95.3   103.4   103.4
Benchmarks:            
– FTSE 1007   112.6   102.8   126.3
– MSCI World7   115.9   111.0   127.0
– MSCI Banks7   103.7   81.9   79.0
For footnotes, see page 83.

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HSBC HOLDINGS PLC
Report of the Directors: Overview (continued)
     
 
 
 
 
 

Cautionary statement regarding
forward-looking statements
 
The Annual Report and Accounts 2010 contains certain forward-looking statements with respect to HSBC’s financial condition, results of operations and business.
     Statements that are not historical facts, including statements about HSBC’s beliefs and expectations, are forward-looking statements. Words such as ‘expects’, ‘anticipates’, ‘intends’, ‘plans’, ‘believes’, ‘seeks’, ‘estimates’, ‘potential’ and ‘reasonably possible’, variations of these words and similar expressions are intended to identify forward-looking statements. These statements are based on current plans, estimates and projections, and therefore undue reliance should not be placed on them. Forward-looking statements speak only as of the date they are made, and it should not be assumed that they have been revised or updated in the light of new information or future events.
     Written and/or oral forward-looking statements may also be made in the periodic reports to the US Securities and Exchange Commission, summary financial statements to shareholders, proxy statements, offering circulars and prospectuses, press releases and other written materials, and in oral statements made by HSBC’s Directors, officers or employees to third parties, including financial analysts.
     Forward-looking statements involve inherent risks and uncertainties. Readers are cautioned that a number of factors could cause actual results to differ, in some instances materially, from those anticipated or implied in any forward-looking statement. These include, but are not limited to:
  changes in general economic conditions in the markets in which we operate, such as continuing or deepening recessions and fluctuations in employment beyond those factored into consensus forecasts; changes in foreign exchange rates and interest rates; volatility in equity markets; lack of liquidity in wholesale funding markets; illiquidity and downward price pressure in national real estate markets; adverse changes in central banks’ policies with respect to the provision of liquidity support to financial markets; heightened market concerns over sovereign creditworthiness in over-indebted countries; adverse changes in the funding status
    of public or private defined benefit pensions; and consumer perception as to the continuing availability of credit and price competition in the market segments we serve;
  changes in government policy and regulation, including the monetary, interest rate and other policies of central banks and other regulatory authorities; initiatives to change the size, scope of activities and interconnectedness of financial institutions in connection with the implementation of stricter regulation of financial institutions in key markets worldwide; revised capital and liquidity benchmarks which could serve to deleverage bank balance sheets and lower returns available from the current business model and portfolio mix; imposition of levies or taxes designed to change business mix and risk appetite; the practices, pricing or responsibilities of financial institutions serving their consumer markets; expropriation, nationalisation, confiscation of assets and changes in legislation relating to foreign ownership; changes in bankruptcy legislation in the principal markets in which we operate and the consequences thereof; general changes in government policy that may significantly influence investor decisions; extraordinary government actions as a result of current market turmoil; other unfavourable political or diplomatic developments producing social instability or legal uncertainty which in turn may affect demand for our products and services; the costs, effects and outcomes of product regulatory reviews, actions or litigation, including any additional compliance requirements; and the effects of competition in the markets where we operate including increased competition from non-bank financial services companies, including securities firms; and
 
  factors specific to HSBC, including our success in adequately identifying the risks we face, such as the incidence of loan losses or delinquency, and managing those risks (through account management, hedging and other techniques). Effective risk management depends on, among other things, our ability through stress testing and other techniques to prepare for events that cannot be captured by the statistical models it uses; and our success in addressing operational, legal and regulatory, and litigation challenges.


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Table of Contents

HSBC HOLDINGS PLC
Report of the Directors: Overview (continued)
     
 
 
 
 
 

Group Chairman’s Statement
 
(PHOTO)
When I took on the role of Chairman less than 90 days ago, I was acutely aware of the challenges facing our industry. I was conscious too of the need to demonstrate to all of our stakeholders that HSBC understands the responsibilities that accompany the systemic significance which continued success has built for HSBC in many of the markets in which we operate, not least those in Asia, given their historical significance to the Group. 145 years after we were founded, Hong Kong and the rest of Asia remain at the heart of HSBC’s strength and identity and our commitment to the region is unwavering.
     I fully acknowledge that our scale, the trust that our depositors place in us and our relevance to our personal and corporate clients – for their financing, banking, investment and risk management needs – all depend upon our maintaining our reputation and our integrity.
     I also understand how important it is for you, our shareholders, that HSBC builds sustainable long-term value that is reflected through the share price and rebuilds, as quickly as competing regulatory demands allow, the dividend that was reduced during the financial crisis.
     I firmly believe that HSBC has the people, the financial strength and the organisational structure best able to deliver all of the above and it is a privilege to have the opportunity to serve as Group Chairman as we enter a fresh chapter in our history.
     Before I go any further, I want to pay tribute to both Stephen Green and Michael Geoghegan, who stepped down at the end of last year from their roles as Group Chairman and Group Chief Executive after, respectively, 28 and 37 years’ service to HSBC. It fell to them to be at the helm as HSBC
navigated its way through the worst financial crisis since the 1930s. Mike led from the front in addressing the problems in our consumer finance subsidiary in the United States and in reshaping HSBC’s organisational structure and operational practices in order to better and more efficiently serve an increasingly interconnected world. Stephen’s personal reputation for integrity and probity stood out and distinguished HSBC during a period of intense disaffection with the banking industry. For their contribution over many years we owe them a deep debt of gratitude and wish them both well.
Our performance in 2010
The Group Chief Executive’s Business Review sets out clearly how HSBC delivered a much improved balance of profits in 2010. It is reassuring to see our Personal Financial Services businesses returning to profitability in aggregate and Commercial Banking growing significantly, largely in emerging markets. These achievements augmented another year of strong performance in Global Banking and Markets.
     Earnings per share improved strongly, rising by 115% to reach US$0.73 per share.
     The Group’s capital position also strengthened with the core tier 1 ratio, the ratio most favoured by regulators as it comprises equity capital after regulatory adjustments and deductions, increasing from 9.4% to 10.5%, largely due to profit retention throughout the year.
     As a consequence of this strong capital generation, together with greater clarity on the direction of regulatory reform of capital requirements and an improving economic backdrop in the developed world – particularly in the United States – the Board has approved increases in both the final dividend payment in respect of 2010 and the planned quarterly dividends for 2011. The final dividend for 2010, payable on 5 May 2011 to shareholders on the register on 17 March 2011, will be 12 cents per ordinary share, up from 10 cents at the same point last year. For the remainder of 2011 we plan to pay quarterly dividends of nine cents for each of the first three quarters compared with eight cents in respect of the equivalent quarters of 2010.
A new leadership team
We enter 2011 with a new leadership team, but only in the sense of changed roles. Everyone has worked together over many years and there is immense experience to draw on both from within HSBC and from earlier careers at peer organisations. Stuart Gulliver is leading the management team as Group Chief Executive. His clear objective is to deliver


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HSBC HOLDINGS PLC
Report of the Directors: Overview (continued)
     
 
 
 
 
 

sustainable long-term value for shareholders consistently in a manner that maintains the confidence of all other key stakeholders in our businesses including depositors, counterparties, long-term creditors, customers, employees, regulators and governments. His review on pages 7 to 9 gives an insight into his immediate priorities.
     Everything we do is governed by the imperative of upholding HSBC’s corporate reputation and character at the highest level and adding further strength to our brand; we deeply regret that a number of weaknesses in regulatory compliance were highlighted in 2010 and we are resolved to remedy these and reinforce the high standards we demand of ourselves.
     For my part, I shall be focusing on engaging at the highest level in the regulatory reform debates that will, in large part, shape our future. I shall also lead the Board in the stewardship and review of performance of our financial and human resources.
     In the interest of full transparency, we have today published on our website the respective roles and responsibilities of the Group Chairman, the Deputy Chairman and Senior Independent Director and the Group Chief Executive.
Board changes
I have already paid tribute to the contributions of Stephen Green and Michael Geoghegan. Vincent Cheng has indicated that he will step down at the next AGM and on behalf of the Board I want to thank him for his immense contribution in many roles over 33 years. Vincent will retain an association with the Group by taking on an advisory role to the Group Chief Executive on regional matters. Laura Cha will join the Board on 1 March; Laura has been Deputy Chair of The Hongkong and Shanghai Banking Corporation Limited for four years and brings a wealth of experience of China; fuller details of her background and experience are set out in the Directors’ Report.
Regulatory update
There was much progress made during 2010 on the regulatory reform agenda. Although there is still a great deal to do, the shape of capital requirements was broadly clarified and an implementation timetable stretching out to 2019 was agreed to allow time for the industry to adjust progressively. A minimum common equity tier 1 ratio of 7%, including a capital conservation buffer, has been agreed. HSBC already meets this threshold requirement. The Group Chief Executive’s Business Review addresses how these revised requirements
will impact our targeted return on equity.
     During 2011, the debate will be dominated by consideration of the calibration of minimum liquidity standards. Although it is clear that liquidity and funding weaknesses were key elements contributing to the crisis, HSBC agrees with the industry consensus that the revised requirements in these areas are overly conservative and could lead to unnecessary deleveraging at a time of fragile economic recovery in much of the developed world. It will be a near impossibility for the industry to expand business lending at the same time as increasing the amount of deposits deployed in government bonds while, for many banks but not HSBC, reducing dependency on central bank liquidity support arrangements. It is to be hoped that the observation period, which starts this year and precedes the formal introduction of the new requirements, will inform a recalibration of these minimum liquidity standards.
     A second debate of importance to HSBC’s shareholders in 2011 will concern the designation of ‘Systemically Important Financial Institutions’ (‘SIFI’s). Consideration is being given in the regulatory community to mandating higher capital requirements, together with more intense supervision, for institutions classified as SIFIs. We agree with heightened supervision but it is not clear that the reduced shareholder returns that would follow the imposition of incremental capital would be compensated for by improved stability. Classification as a SIFI with a requirement to hold incremental capital would, however, probably lead others to favour SIFIs as counterparties, and may therefore have the unintended consequence of further concentrating the industry.
     HSBC’s position is that systemic importance should not be determined by size alone. It is clear, however, that, on almost any basis, HSBC would be classified as systemically important. For this reason we are engaging fully in the debate around the consequences of designation as a SIFI. In particular, we draw attention to the benefits of our corporate organisation through separate subsidiaries in mitigation against the imposition of incremental capital for SIFIs based on size alone.
     In October 2010, the UK government confirmed its intention to raise the sum of £2.5bn (US$3.9bn) through a levy on bank balance sheets, and recently announced it will accelerate the full impact of this levy to 2011. We take no issue with the right of the UK government to raise a levy on the banking industry, particularly when having had to risk taxpayers’ money to rescue a number of important UK institutions. However, as the proposed levy is to


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Table of Contents

HSBC HOLDINGS PLC
Report of the Directors: Overview (continued)
     
 
 
 
 
 

be applied to the consolidated balance sheet, it applies beyond the legal boundary of the domestic institution to include overseas operations conducted through separately capitalised subsidiaries. This therefore constitutes an additional cost of basing a growing multinational banking group in the UK.
     We intend to clarify in each set of results going forward the impact of the levy, split between UK and overseas operations, and Stuart Gulliver covers this in more detail in his review. We regard the levy, which is not tax deductible, as akin to a distribution of profits. For this reason, we intend to add to future shareholder dividends that would otherwise be paid, any amount saved in the event that the levy is restructured or relieved in due course.
The role of banks in society
The recent crisis has caused a proper introspection as to the role that banks play in society and at HSBC we welcome this. Banking is not simply about money. It is about helping individuals and organisations within society to meet personal and corporate objectives by facilitating access to financial capital and protecting value for those who make capital available. Payment mechanisms, the provision of long-term credit, trade finance, hedging and other risk management products, deposit, investment and retirement services are but a few of the activities through which banking groups contribute to today’s financial system. Society cannot function without an effective financial system that delivers value to those it serves at an intermediation cost that is proportionate to the value created. Somehow, many participants and not just banks, lost sight of this basic principle in the run-up to the recent financial crisis and the consequences for all have, inevitably, been far reaching. There is no doubt that the scale of regulatory reform will bring many challenges, but it will also open new opportunities.
     At HSBC, we shall not forget what happened to precipitate the scale of reform now underway. Although the financial turmoil arising from the events of 2007-2008 has largely moderated, in large part as a result of co-ordinated government action and support to the financial system, we enter 2011 with humility, ready to apply right across HSBC all of the lessons learned, notwithstanding that HSBC itself neither sought nor received support from any government.
     Society has a right to ask if banks ‘get it’. At HSBC, we do – and we are focused on embedding the necessary changes in our business model for long-term sustainable value creation. But we also do not forget that value creation depends upon HSBC recruiting, training and retaining the right talent in
order to manage the risks we accept through intermediating customer flows; design solutions to address complex financial problems; build enduring relationships with core customers; build confidence in the Group’s financial strength; and create the strategic options that offer the next generation fresh opportunities to continue building sustainable value.
     In this globalised world, there is intense competition for the best people and, given our long history within and connections into the faster-growing developing markets, our best people are highly marketable. It would be irresponsible to allow our comparative advantages to wither by ignoring the market forces that exist around compensation, even though we understand how sensitive this subject is. Reform in this area can only be achieved if there is concerted international agreement on limiting the quantum of pay as well as harmonising pay structures but there appears to be no appetite to take the initiative on this. Our duty to shareholders is to build sustainable value in the economic and competitive environment in which we operate and our principal resource for achieving this is human talent. Under the governance of the Board, we will continue to operate and apply remuneration policies and practices that take full recognition of best practice and are aligned with the long-term interests of shareholders.
HSBC’s people
Finally, I want to pay tribute to my 307,000 colleagues. So many of HSBC’s people have exemplified commitment and endeavour again in 2010, helping our customers and clients to meet their financial objectives while taking on the additional burden of preparing for regulatory change. This has been done against a backdrop of continuing broad-based fiscal support to many economies, with public opinion consistently and highly critical of our industry. As I look forward, it is the combination of the capabilities of HSBC’s people, their determination to do the right thing for our customers and their deep sense of responsibility to the communities they serve that makes me confident that HSBC will play a leading role in rebuilding the trust that our industry has lost and, by doing so, will build sustainable value for you, our shareholders.
(-s- D J Flint)
D J Flint, Group Chairman
28 February 2011


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HSBC HOLDINGS PLC
Report of the Directors: Overview (continued)
     
 
 
 
 
 

Group Chief Executive’s
Business Review
 
(PHOTO)
Underlying financial performance continued to improve in 2010 and shareholders continued to benefit from HSBC’s universal banking model. All regions and customer groups were profitable, as Personal Financial Services and North America returned to profit. Commercial Banking made an increased contribution to underlying earnings and Global Banking and Markets also remained strongly profitable, albeit behind 2009’s record performance, reflecting a well-balanced and diversified business.
     Credit experience continued to improve, as a result of a stronger global economy and our actions to reduce balance sheet risk. As a globally-connected bank with a growing presence across the world’s faster-growing regions, HSBC also benefited from higher trade volumes and strong momentum in emerging economies, especially in Asia. Asia contributed the largest proportion to underlying pre-tax profits, while the contributions made by Latin America and the Middle East also increased. Together with our conservative management of the balance sheet, this improved performance allowed us to concentrate on serving our customers and to further strengthen our capital position.
Group performance headlines1
  Profit before tax improved year on year. On a reported basis, profits increased by nearly US$12bn from US$7.1bn to US$19bn. On an underlying basis, profits increased by 36%, or almost US$5bn, from US$13.5bn to US$18.4bn.
1   All figures are discussed on a reported basis and all references to profits are profits before tax unless otherwise stated.
  In a period of sustained low interest rates, revenues remained constrained, reflecting four principal factors: reducing loan balances in our US business; lower trading income in Global Banking and Markets resulting from lower client activity; adverse fair value movements on non-qualifying hedges; and a reduced contribution from Balance Sheet Management in line with earlier guidance.
 
  Strong asset growth in Commercial Banking, particularly in Asia, higher trade-related revenues generally, and expansion of our wealth management business, again most notably in Asia, partially offset these revenue pressures.
 
  Loan impairment charges reduced by almost half to US$14.0bn. All regions and customer groups improved. The US experienced the greatest improvement, largely in the cards and consumer finance portfolios. Loan impairment charges also declined significantly in Latin America and the Middle East.
 
  In Global Banking and Markets, loan impairment charges fell significantly, notably in Europe as economic conditions improved. Credit risk provisions reduced by US$1bn to US$0.4bn in the available-for-sale asset-backed-securities portfolios due to a slowing in the rate of anticipated losses on underlying assets, in line with previous guidance. The associated available for sale reserve declined to US$6.4bn from US$12.2bn.
 
  The cost efficiency ratio rose to 55.2%, which is above our target range and unacceptable to me. The causes were constrained revenues and, in part, investment in strategic growth initiatives across the business together with higher staff costs. It additionally reflected one-off payroll taxes of US$0.3bn paid in 2010 in respect of the previous year and a pension accounting credit of US$0.5bn in 2009 and US$0.1bn in 2010. However, it is also clear that we need to re-engineer the business to remove inefficiencies.
 
  Return on average total shareholders’ equity rose from 5.1% to 9.5%, reflecting increased profit generation during the year.
 
  HSBC continued to grow its capital base and strengthen its capital ratios further. The core tier 1 ratio increased from 9.4% to 10.5%, as a result of capital generation and lower risk weighted assets.


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HSBC HOLDINGS PLC
Report of the Directors: Overview (continued)
     
 
 
 
 
 

  Total loans and advances to customers increased by 7% to US$958bn while deposits rose by 6% to US$1.2 trillion.
Impact of the evolving regulatory
environment on the business
Much of the detail around the potential impact of change for banks remains uncertain. However, analysis of what we know confirms that our ability to generate capital and manage our risk-weighted assets positions HSBC strongly – and competitively – within the industry as the pace of change intensifies.
     HSBC fully supports the rationale of the Basel III proposals which require banks to hold more capital. This is absolutely core to ensuring that governments and taxpayers are better protected in future than they have been in the past.
     Certain aspects of the Basel III rules remain uncertain as to interpretation and application by national regulators. Notably, this includes any capital requirements which may be imposed on the Group over the implementation period in respect of the countercyclical capital buffer and any additional regulatory requirements for SIFIs. However, we believe that ultimately the level for the common equity tier 1 ratio of the Group may lie in the range 9.5 to 10.5%. This exceeds the minimum requirement for common equity tier 1 capital plus the capital conservation buffer.
     We have estimated the pro forma common equity tier 1 ratio of the Group based on our interpretation of the new Basel III rules as they will apply from 1 January 2019, based on the position of the Group at year-end 2010. The rules will be phased in from 2013 with a gradual impact and we have estimated that their full application, on a proforma basis, would result in a common equity tier 1 ratio which is lower than the Basel II core tier 1 ratio by some 250–300 basis points. The changes relate to increased capital deductions, new regulatory adjustments and increases in risk-weighted assets. However, as the changes will progressively take effect over six years leading up to 2019 and as HSBC has a strong track record of capital generation and actively manages its risk-weighted assets, we are confident in our ability to mitigate the effect of the new rules before they come into force.
     Last year, HSBC committed to reviewing its target shareholder return on equity once the effects of new regulation became clearer. Now that we have better visibility on the impact of increased capital requirements, we believe that higher costs of the
evolving regulatory framework will, all other things being equal, depress returns for shareholders of banks. We will therefore target a return on average shareholders’ equity of 12-15% in the future.
     As Group Chief Executive, it is right that, in managing the business and developing Group strategy, my principal office should be in Hong Kong – a global financial hub of growing importance at the centre of HSBC’s strategically most important region. However, the company is headquartered in London and we hope to remain there. London’s pre-eminence as an international financial services centre is widely recognised and well-deserved and reflects successful government policy over decades to build that position. It is therefore important to us that the UK’s competitive position is protected and sustained. Appropriate supervision is an important part of the larger equation. Policymakers should continue to legislate and regulate, but they must not destroy London’s competitive position in the process.
     As the Group Chairman has outlined, new legislation is expected to be enacted in the UK, effective from the start of 2011, one curious consequence of which is an explicit incremental cost of being headquartered in the UK for any global bank. Had this been applied for 2010, this annual charge would have amounted to approximately US$0.6bn in HSBC’s case. Moreover, the overseas balance sheet would account for the majority of the annual charge, with the UK balance sheet accounting for approximately one third of the total.
Outlook
We have been closely watching events unfold in parts of the Middle East and North Africa. Our primary concern is for the security of our 12,000 staff across the region and we continue to work to ensure their safety. We have also activated robust continuity plans so that we can also stay open for business and support the needs of our customers. As a strongly capitalised global bank, HSBC’s financial performance has not been materially affected by events to date. HSBC has been present in the Middle East for more than 50 years and we remain absolutely committed to its future. We also believe that the region’s economies have a number of structural strengths which leave us positive on the longer-term outlook.
     In the short term, risks to global growth remain, not least from an elevated oil price. We therefore expect cyclical volatility to continue – including in emerging markets – and progress is unlikely to be linear. In the longer term, we believe that growth


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HSBC HOLDINGS PLC
Report of the Directors: Overview (continued)
     
 
 
 
 
 

rates in many Western markets will continue to significantly underperform those of the emerging world. Emerging markets are no longer simply leading the recovery from a Western crisis; the growth gap has become a sustained secular trend.
     The global economy’s structural position also requires fundamental readjustment. Many Western economies must still deal with a large overhang of household and government debt and weak growth and high unemployment will make this a slow and painful process. As faster-growing nations seek to limit the effect of Western monetary policy on their own economies, we cannot discount the risk of increased tension over exchange rate and trade issues.
     HSBC’s balance sheet remains strongly positioned to benefit from future interest rate rises. We are realistic that, in many developed countries at least, historically low rates may continue to constrain income growth in the near-term. Nevertheless, maintaining a conservative liquidity position is core to our proposition and to our funding strength. In our risk appetite statement approved by the Board we have set a maximum advances-to-deposits ratio for the Group of 90%. This underlines our continuing commitment to a high level of liquidity and reflects our philosophy that HSBC should not be reliant on wholesale markets for funding. Even with a ratio currently slightly below 80%, we have capacity for further lending growth.
     In the short-term, we expect the benefits of asset growth achieved in 2010 to continue to flow into revenues. In the medium-term, we will continue to target growth in the most strategically attractive markets for HSBC and build our capabilities in connectivity, one of our distinctive strengths as a globally-connected bank.
     At the same time, with demand in many developed markets constrained and interest spreads
remaining compressed, we fully recognise the importance of ever more robust cost management discipline and the need to continue re-engineering the business to improve efficiency.
     Furthermore, capital is becoming a scarcer resource and, as a new regulatory environment evolves, I am committed to making capital allocation a more disciplined and rigorous process at HSBC in order to drive the correct investment decisions for the future.
     We will talk more to investors about each of these initiatives later in the spring. However, as a result of this focus, we are committed to delivering a cost efficiency ratio and a return on average shareholders’ equity within our published target range.
     We also recognise the importance of reliable dividend income for our shareholders and I believe it should be possible to benchmark a payout ratio of between 40-60% of attributable profits under normal market conditions.
     In closing, I would like to acknowledge the huge contribution that my predecessor, Mike Geoghegan, made to HSBC in his five years as Group Chief Executive – not least during 2010 – and I wish him well for the future.
     Finally, I am pleased to report that we have had a good start to the year, with continued momentum in lending, mainly in emerging markets and in respect of global trade.
 
(-s- S T Gulliver)
S T Gulliver, Group Chief Executive
28 February 2011


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HSBC HOLDINGS PLC
Report of the Directors: Overview (continued)
     
 
 
 
 
 

Principal activities
 
HSBC is one of the largest banking and financial services organisations in the world, with a market capitalisation of US$180bn at 31 December 2010. We are headquartered in London.
     As ‘The world’s local bank’, we combine the largest global emerging markets banking business and a uniquely cosmopolitan customer base with an extensive international network and substantial financial strength.
     HSBC operates through long-established businesses and has an international network of some 7,500 offices in 87 countries and territories in six geographical regions; Europe, Hong Kong, Rest of Asia-Pacific, the Middle East, North America and Latin America.
     Our products and services are delivered through two customer groups, Personal Financial Services (‘PFS’) and Commercial Banking (‘CMB’), and two global businesses, Global Banking and Markets (‘GB&M’), and Global Private Banking (‘GPB’). PFS incorporates the Group’s consumer finance businesses, the largest of which is HSBC Finance Corporation (‘HSBC Finance’).
     Taken together, our five largest customers do not account for more than 1% of our income.
     We have contractual and other arrangements with numerous third parties in support of our business activities. None of the arrangements is individually considered to be essential to the business of the Group.
     There were no significant acquisitions during the year (for details of acquisitions see page 340).
Strategic direction
 
Our objective is to deliver sustainable long-term value to shareholders through consistent earnings and superior risk-adjusted returns.
     Our strategy is to be the world’s leading international bank, by:
   leveraging the HSBC brand and our network of businesses which covers the world’s most relevant geographies. This network provides access to the world’s fastest growing economies, for example Greater China. We serve companies as they grow and become more international and individuals as they become wealthier and require more sophisticated financial services, such as wealth management; and
 
  competing as a universal bank across the full financial services spectrum only where we have scale and can achieve appropriate returns. This implies building scale in attractive geographical regions and businesses where we can be competitive and reviewing businesses which do not meet our financial hurdles.
     The strategy reflects the key trends which are shaping the global economy. In particular, we recognise that over the long term, developing markets are growing faster than mature economies and connectivity continues to increase as world trade is expanding at a greater rate than gross domestic product, generating increased demand for financial services. We are, therefore, continuing to direct incremental investment primarily to the faster growing markets and client segments which have international connectivity. In order to deliver this strategy we pursue a series of initiatives, reflected in the Group’s key performance indicators:
   enhance efficiency by taking full advantage of local, regional and global economies of scale, in particular by adopting a common systems architecture wherever possible;
 
  maintain capital strength and a strong liquidity position. Capital and liquidity are critical for our strategy and are the foundation of decisions about the pace and direction of investment; and
 
  align objectives and incentives to motivate and reward staff for being fully engaged in delivering the strategy.


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HSBC HOLDINGS PLC
Report of the Directors: Overview (continued)
     
 
 
 
 
 

Top and emerging risks
 
All of our activities involve, to varying degrees, the measurement, evaluation, acceptance and management of risk or combinations of risks. We classify risks as ‘top’ and ‘emerging’. A ‘top risk’ is a current, visible risk with the potential to have a material effect on our financial results or our reputation. An ‘emerging risk’ is one which has large unknown components which could have a material impact on our long-term strategy. Top and emerging risks are viewed as falling under the following four broad categories:
   challenges to our business operations;
 
  challenges to our governance and internal control systems;
 
  macro-economic and geopolitical risk; and
 
  macro-prudential and regulatory risks to our business model.
     The top and emerging risks are summarised below:

 
Challenges to our business operations
  Challenges to our operating model in an economic downturn (in developed countries) and rapid growth (in emerging markets)
 
  Internet crime and fraud
Challenges to our governance and internal control systems
  Level of change creating operational complexity
 
  Information security risk
Macro-economic and geopolitical risk
  Potential emerging markets asset bubble
 
  Increased geopolitical risk in Asia-Pacific and Middle East regions
Macro-prudential and regulatory risks to our business model
  Regulatory change impacting our business model and Group profitability
 
  Regulatory requirements affecting conduct of business
 
Key performance indicators
 
The Board of Directors and the Group Management Board (‘GMB’) monitor HSBC’s progress against its strategic objectives. Progress is assessed by comparison with our strategy, our operating plan targets and our historical performance using both financial and non-financial measures.
     Following a review of our high-level key performance indicators (‘KPI’s), the GMB decided to make the following changes to the Group’s published indicators in order to restrict their number to those which most accurately reflect its management priorities. The Group now has seven financial and three non-financial KPIs.
   the ratio of advances to core funding has been added to highlight the relationship between loans and advances to customers and core customer deposits in our principal banking entities;
 
  tier 1 capital has been added as a primary indicator of the strength of our capital base, and its ability to support the growth of the business and meet regulatory capital requirements;
 
  revenue growth, revenue mix factors and credit performance as measured by risk-adjusted margin have been replaced with risk-adjusted revenue growth;
 
  the GMB will prioritise return on average total shareholders’ equity in place of return on average invested capital, which has therefore been excluded; and
 
  customer transactions processed and percentage of information technology (‘IT’) services meeting targets form part of management information within our IT function. However, the GMB decided that these measures, which we have previously disclosed, were not appropriate proxies for assessing efficiencies and progress with implementing standard systems architecture.


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HSBC HOLDINGS PLC
Report of the Directors: Overview (continued)
     
 
 
 
 
 
             
Strategic    
objectives   Deliver consistent earnings and superior risk-adjusted returns
    Risk-adjusted revenue growth   Basic earnings   Dividends per share
    (2010: underlying growth 15%)   per ordinary share   growth
Key Performance Indicators
           
  (BAR GRAPH)   (BAR GRAPH)   (BAR GRAPH)
           
  Measure: (percentage) increase in reported net operating income after loan impairment and other credit risk charges since last year.   Measure: (US$) level of basic earnings generated per ordinary share.   Measure: (percentage) increase in dividends per share since last year, based on dividends paid in respect of the year to which the dividend relates.
     
 
           
 
  Target: to deliver consistent growth in risk adjusted revenues.   Target: to deliver consistent growth in basic earnings per share.   Target: to deliver sustained dividend per share growth.
 
           
 
  Outcome: reported risk-adjusted revenue increased, primarily due to a reversal of adverse movements in previous years on the fair value of own debt designated at fair value and lower loan impairment charges. The latter also drove the increase in underlying risk-adjusted revenue.   Outcome: Earnings per share (‘EPS’) increased in 2010, reflecting significantly lower adverse movements on the fair value of own debt due to credit spreads and lower loan impairment charges, which resulted in an increase in reported profit.   Outcome: dividends per share increased by 5.9%.
 
         
Strategic   Enhance efficiency using   Motivate staff to
objectives   economies of scale   deliver strategy
    Cost efficiency   Employee engagement
Key Performance Indicators
       
  (BAR GRAPH)   (BAR GRAPH)
       
  Measure: (percentage) total operating expenses divided by net operating income before loan impairment and other credit risk provisions.   Measure: (percentage) measure of employee’s emotional and rational attachment to HSBC, a combination of advocacy, satisfaction, commitment and pride.
       
 
  Target: to be between 48% and 52%, a range within which business is expected to remain to accommodate both returns to shareholders and the need for continued investment in support of future business growth.   Target: to achieve a 72% global rating in 2010, with progressive improvement to best in class by 2011.
 
       
 
  Outcome: the ratio was outside the target range in part due to one-off costs, but also increased investment in operational infrastructure and strategic initiatives.   Outcome: 68%, mirroring the fall in global best in class but remaining well above the financial services average.

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HSBC HOLDINGS PLC
Report of the Directors: Overview (continued)
     
 
 
 
 
 
             
            Strategic
Maintain capital strength and strong liquidity   objectives
Return on average            
total shareholders’ equity   Tier 1 capital   Advances to core funding ratio    
 
         
Key Performance Indicators
(BAR GRAPH)
  (BAR GRAPH)   (BAR GRAPH)  
 
         
Measure: (percentage) profit attributable to ordinary shareholders divided by average total shareholders’ equity.
  Measure: component of regulatory capital comprising core tier 1 and other tier 1 capital.   Measure: current loans and advances to customers as a percentage of the total of core customer deposits and term funding with a remaining term to maturity in excess of one year.  
 
         
Target: to maintain a return in the medium term of between 15% and 19%. In 2011, we intend to replace the target with one in the 12% to 15% range over the normal cycle.
  Target: to maintain a strong capital base to support the development of the business and meet regulatory capital requirements at all times.   Target: to maintain an advances to core funding ratio below limits set for each entity.    
 
           
Outcome: return on equity was below the target range, but 4.4 percentage points higher than in 2009.
  Outcome: the increase in tier 1 capital to 12.1% reflected the contribution of profit to capital, the issue of hybrid capital securities during the year and careful management of RWAs.   Outcome: ratio within the limits set by the Risk Management Meeting for each site.    
 
                 
Reach new customers and expand services to existing customers   Strategic
using the HSBC brand and global network   objectives
 
Brand perception   Customer recommendation    
 
PFS   Business
Banking
  PFS   Business
Banking
 
Key Performance Indicators
 
           
(BAR GRAPH)   (BAR GRAPH)   (BAR GRAPH)   (BAR GRAPH)
Measure: an independent survey of brands around the world which judges their relative strength. The results are used to form a brand perception index, where the industry average is zero.   Measure: an independent survey of customers in up to 15 countries which judges how likely they are to recommend a particular brand. The results are used to create a customer recommendation index, where the industry average is zero.  
 
             
Target: to meet or exceed targets based on performance against key competitors and the industry average.   Target: to meet or exceed targets based on performance against key competitors and the industry average.  
 
               
Outcome: PFS and Business Banking customers judged HSBC’s brand to be six points stronger than the competitor average. Our ratings met or exceeded our targets in 2010.   Outcome: Business Banking exceeded its target. Personal Financial Services fell short of its challenging target, but remained well above the competitor average.    
For footnotes, see page 83.

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HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review
     
 
 
 
 
 

Financial summary
         
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The management commentary included in the Report of the Directors: ‘Overview’ and ‘Operating and Financial Review’, together with the ‘Employees’ and ‘Corporate sustainability’ sections of ‘Governance’ and the ‘Directors’ Remuneration Report’ is presented in compliance with the IFRS Practice Statement Management Commentary issued by the IASB.
Reconciliation of reported and
underlying profit before tax
 
We measure our performance internally on a like-for-like basis by eliminating the effects of foreign currency translation differences, acquisitions and disposals of subsidiaries and businesses, and fair value movements on own debt attributable to credit spread where the net result of such movements will be zero upon maturity of the debt; all of which distort year-on-year comparisons. We refer to this as our underlying performance.
     Reported results include the effects of the above items. They are excluded when monitoring progress against operating plans and past results because
management believes that the underlying basis more accurately reflects operating performance.
 
Constant currency
Constant currency comparatives for 2009 referred to in the commentaries are computed by retranslating into US dollars for non-US dollar branches, subsidiaries, joint ventures and associates:
  the income statements for 2009 at the average rates of exchange for 2010; and
 
  the balance sheet at 31 December 2009 at the prevailing rates of exchange on 31 December 2010.
     Constant currency comparatives for 2008 referred to in the 2009 commentaries are computed on the same basis, by applying average rates of exchange for 2009 to the 2008 income statement and rates of exchange on 31 December 2009 to the balance sheet at 31 December 2008.
     No adjustment has been made to the exchange rates used to translate foreign currency denominated assets and liabilities into the functional currencies of any HSBC branches, subsidiaries, joint ventures or associates. When reference is made to ‘constant currency’ in tables or commentaries, comparative data reported in the functional currencies of HSBC’s operations have been translated at the appropriate exchange rates applied in the current period on the basis described above.
Underlying performance
The tables below compare our underlying performance in 2010 and 2009 with reported profits in those years.
     The foreign currency translation differences reflect the relative strengthening of the US dollar against the euro and sterling, which offset its relative weakness against currencies in Asia, Mexico and Brazil during 2010.
     The following acquisitions and disposals affected both comparisons:
  the acquisition of PT Bank Ekonomi Raharja Tbk (‘Bank Ekonomi’) in May 2009;
 
  the gain on sale of our 49% interest in a joint venture for a UK merchant acquiring business in June 2009 of US$280m;
 
  the gain of US$62m on reclassification of Bao Viet Holdings (‘Bao Viet’) from an available-for-sale asset to an associate in January 2010;
 
  the gain on sale of our stake in Wells Fargo HSBC Trade Bank in March 2010 of US$66m;
 
  the gain on disposal of HSBC Insurance Brokers Limited of US$107m in April 2010;
 
  the dilution gain of US$188m which arose on our holding in Ping An Insurance (Group) Company of China, Limited (‘Ping An Insurance’) following the issue of shares by the company in May 2010;


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HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
     
 
 
 
 
 

  the loss of US$42m on the completion of the sale of our investment in British Arab Commercial Bank plc in October 2010;
 
  the gain on sale of Eversholt Rail Group of US$255m in December 2010; and
  the gain of US$74m on the deconsolidation of private equity funds following the management buy-out of Headland Capital Partners Ltd (formally known as HSBC Private Equity (Asia) Ltd) in November 2010.


Reconciliation of reported and underlying profit before tax
                                                                         
    2010 compared with 2009
                            2009                                  
    2009     2009             at 2010     2010     2010     2010     Re-     Under-  
    as     adjust-     Currency     exchange     as     adjust-     under-     ported     lying  
    reported     ments 10   translation 11   rates 12   reported     ments 10   lying     change 13   change 13
HSBC   US$m     US$m     US$m     US$m     US$m     US$m     US$m     %     %  
 
                                                                       
Net interest income
    40,730       (1 )     642       41,371       39,441       (31 )     39,410       (3 )     (5 )
Net fee income
    17,664       (210 )     182       17,636       17,355       (3 )     17,352       (2 )     (2 )
Changes in fair value14
    (6,533 )     6,533                   (63 )     63             99        
Other income
    14,320       (283 )     228       14,265       11,514       (719 )     10,795       (20 )     (24 )
 
                                           
 
                                                                       
Net operating income15
    66,181       6,039       1,052       73,272       68,247       (690 )     67,557       3       (8 )
 
                                                                       
Loan impairment charges and other credit risk provisions
    (26,488 )           (330 )     (26,818 )     (14,039 )           (14,039 )     47       48  
 
                                           
 
                                                                       
Net operating income
    39,693       6,039       722       46,454       54,208       (690 )     53,518       37       15  
 
                                                                       
Operating expenses
    (34,395 )     200       (568 )     (34,763 )     (37,688 )     19       (37,669 )     (10 )     (8 )
 
                                           
 
                                                                       
Operating profit
    5,298       6,239       154       11,691       16,520       (671 )     15,849       212       36  
 
                                                                       
Income from associates
    1,781       (1 )     11       1,791       2,517             2,517       41       41  
 
                                           
 
                                                                       
Profit before tax
    7,079       6,238       165       13,482       19,037       (671 )     18,366       169       36  
 
                                           
 
                                                                       
By geographical region
                                                                       
 
                                                                       
Europe
    4,009       2,546       (152 )     6,403       4,302       (164 )     4,138       7       (35 )
Hong Kong
    5,029       1       (10 )     5,020       5,692       (130 )     5,562       13       11  
Rest of Asia-Pacific
    4,200       3       205       4,408       5,902       (211 )     5,691       41       29  
Middle East
    455             (2 )     453       892       42       934       96       106  
North America
    (7,738 )     3,688       46       (4,004 )     454       (208 )     246                  
Latin America
    1,124             78       1,202       1,795             1,795       60       49  
 
                                           
 
                                                                       
Profit before tax
    7,079       6,238       165       13,482       19,037       (671 )     18,366       169       36  
 
                                           
 
                                                                       
By customer group and global business
                                                                       
 
                                                                       
Personal Financial Services
    (2,065 )     (2 )     (70 )     (2,137 )     3,518       (10 )     3,508                  
Commercial Banking
    4,275       (306 )     64       4,033       6,090       (133 )     5,957       42       48  
Global Banking and Markets
    10,481       13       173       10,667       9,536       (342 )     9,194       (9 )     (14 )
Global Private Banking
    1,108             1       1,109       1,054       1       1,055       (5 )     (5 )
Other
    (6,720 )     6,533       (3 )     (190 )     (1,161 )     (187 )     (1,348 )     83       (609 )
 
                                           
 
                                                                       
Profit before tax
    7,079       6,238       165       13,482       19,037       (671 )     18,366       169       36  
 
                                           
For footnotes, see page 83.
Additional information is available on pages 47(a) to 47(f) and 80(b) to 80(g).

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HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
     
 
 
 
 
 
Consolidated income statement
 
Five-year summary consolidated income statement
                                         
    2010     2009     2008     2007     2006  
    US$m     US$m     US$m     US$m     US$m  
 
                                       
Net interest income
    39,441       40,730       42,563       37,795       34,486  
Net fee income
    17,355       17,664       20,024       22,002       17,182  
Net trading income
    7,210       9,863       6,560       9,834       8,222  
Net income/(expense) from financial instruments
designated at fair value
    1,220       (3,531 )     3,852       4,083       657  
Gains less losses from financial investments
    968       520       197       1,956       969  
Gains arising from dilution of interests in associates
    188                   1,092        
Dividend income
    112       126       272       324       340  
Net earned insurance premiums
    11,146       10,471       10,850       9,076       5,668  
Gains on disposal of French regional banks
                2,445              
Other operating income
    2,374       2,788       1,808       1,439       2,546  
 
                   
 
                                       
Total operating income
    80,014       78,631       88,571       87,601       70,070  
 
                                       
Net insurance claims incurred and movement in liabilities to policyholders
    (11,767 )     (12,450 )     (6,889 )     (8,608 )     (4,704 )
 
                   
 
                                       
Net operating income before loan impairment charges
and other credit risk provisions
    68,247       66,181       81,682       78,993       65,366  
 
                                       
Loan impairment charges and other credit risk provisions
    (14,039 )     (26,488 )     (24,937 )     (17,242 )     (10,573 )
 
                   
 
                                       
Net operating income
    54,208       39,693       56,745       61,751       54,793  
 
                                       
Total operating expenses17
    (37,688 )     (34,395 )     (49,099 )     (39,042 )     (33,553 )
 
                   
 
                                       
Operating profit
    16,520       5,298       7,646       22,709       21,240  
 
                                       
Share of profit in associates and joint ventures
    2,517       1,781       1,661       1,503       846  
 
                   
 
                                       
Profit before tax
    19,037       7,079       9,307       24,212       22,086  
 
                                       
Tax expense
    (4,846 )     (385 )     (2,809 )     (3,757 )     (5,215 )
 
                   
 
                                       
Profit for the year
    14,191       6,694       6,498       20,455       16,871  
 
                   
 
                                       
Profit attributable to shareholders of the parent company
    13,159       5,834       5,728       19,133       15,789  
Profit attributable to non-controlling interests
    1,032       860       770       1,322       1,082  
 
                                       
Five-year financial information
                                       
 
                                       
 
  US$     US$     US$     US$     US$  
 
                                       
Basic earnings per share18
    0.73       0.34       0.41       1.44       1.22  
Diluted earnings per share18
    0.72       0.34       0.41       1.42       1.21  
Dividends per share1
    0.34       0.34       0.93       0.87       0.76  
 
                                       
 
    %       %       %       %       %  
 
                                       
Dividend payout ratio19
    46.6       100.0       226.8       60.4       62.3  
Post-tax return on average total assets
    0.57       0.27       0.26       0.97       1.00  
Return on average total shareholders’ equity
    9.5       5.1       4.7       15.9       15.7  
 
                                       
Average foreign exchange translation rates to US$:
                                       
US$1: £
    0.648       0.641       0.545       0.500       0.543  
US$1: €
    0.755       0.719       0.684       0.731       0.797  
For footnotes, see page 83.

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HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
     
 
 
 
 
 

Reported profit before tax of US$19.0bn in 2010 was 169% higher than in 2009, and 36% higher on an underlying basis. The difference between reported and underlying results is explained on page 14. Except where stated otherwise, the commentaries in the Financial Summary are on an underlying basis and references to HSBC Finance and HSBC Bank USA are on a management basis, rather than a legal entity basis (for details see page 37).
     Net operating income before loan impairment charges and other credit risk provisions (‘revenue’) was lower than in 2009, notably due to a decline in balances in North America, lower trading income from adverse movements on non-qualifying hedges and a fall in revenue from GB&M. In the former, we continued to reposition our core businesses and we remained focused on managing down our run-off portfolios. As a consequence, revenue fell, reflecting declining balances in the run-off portfolios and in the Card and Retail Services business, where revenue was also adversely affected by new regulations. In GB&M, lower revenue was generated in Balance Sheet Management as higher yielding positions matured and funds were invested in lower yielding assets. Trading income declined driven by increased competition and reduced margins across core products, and less favourable market conditions caused by the European sovereign debt crisis. These factors were partly offset by increased CMB revenue from balance sheet growth, particularly in Asia, and higher trade-related fees.
     Loan impairment charges were significantly lower than in 2009, with decreases across all regions and customer groups as economic conditions improved. The most significant decline in loan impairment charges was in North America, reflecting lower balances due to increased repayments, an improvement in delinquency rates in Card and Retail Services, and the continued run-off of balances in the Consumer Finance business. There were also marked declines in the Middle East and in
Latin America, primarily in Mexico and Brazil, reflecting a reduction in personal lending balances as selected portfolios were managed down, and an improvement in credit quality as origination criteria were tightened and collection practices improved. In GB&M, loan impairment charges were significantly lower, reflecting the improvement in the credit environment which resulted in fewer significant charges than those taken in 2009 in relation to a small number of clients, notably in Europe and other credit risk provisions fell in the available-for-sale asset-backed securities (‘ABS’) portfolio due to a slowing in the rate of anticipated losses in the underlying collateral pools.

Underlying profit before tax rose by 36% as a significant fall in impairment charges offset a decline in revenue.
     Operating expenses were higher than in 2009, in part due to specific one-off items such as a US$0.3bn charge for UK bank payroll tax in 2010 and the non-recurrence of a pension accounting gain of US$0.5bn in 2009 relating to the treatment of staff benefits. Excluding these items, operating expenses rose in support of strategic growth initiatives in our target markets to invest in operational infrastructure and the selective recruitment of customer-facing staff.
     Income from associates increased, driven by strong results in Asia which reflected robust economic growth in mainland China.
     In 2010, taxable profits were achieved in the US, principally as the result of a gain from an internal reorganisation that was not recognised for accounting purposes which increased the effective tax rate by 6.4 percentage points. If this were excluded, the effective tax rate would be 19.1% which is in line with our geographical range of business activities. Reported profit after tax was US$7.5bn higher than in 2009.


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HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
     
 
 
 
 
 
Group performance by income and expense item
 
Net interest income
                         
    2010     2009     2008  
    US$m     US$m     US$m  
 
                       
Interest income
    58,345       62,096       91,301  
Interest expense
    (18,904 )     (21,366 )     (48,738 )
 
           
 
                       
Net interest income20
    39,441       40,730       42,563  
 
           
 
                       
Average interest-earning assets
    1,472,294       1,384,705       1,466,622  
Gross interest yield21
    3.96%       4.48%       6.23%  
Net interest spread22
    2.55%       2.90%       2.87%  
Net interest margin23
    2.68%       2.94%       2.90%  
Summary of interest income by type of asset
                                                                         
    2010   2009   2008
    Average     Interest             Average     Interest             Average     Interest        
    balance     income     Yield     balance     income     Yield     balance     income     Yield  
    US$m     US$m     %     US$m     US$m     %     US$m     US$m     %  
 
                                                                       
Short-term funds and loans and advances to banks
    236,742       4,555       1.92       192,578       4,199       2.18       240,111       9,646       4.02  
Loans and advances to customers
    858,499       44,186       5.15       870,057       48,301       5.55       943,662       68,722       7.28  
Financial investments
    378,971       9,375       2.47       322,880       9,425       2.92       264,396       12,618       4.77  
Other interest-earning assets24
    (1,918 )     229       (11.94 )     (810 )     171       (21.11 )     18,453       315       1.71  
 
                                               
 
                                                                       
Total interest-earning assets
    1,472,294       58,345       3.96       1,384,705       62,096       4.48       1,466,622       91,301       6.23  
Trading assets25
    332,511       6,027       1.81       357,504       7,614       2.13       428,539       16,742       3.91  
Financial assets designated at fair value26
    52,692       1,033       1.96       62,143       1,032       1.66       37,303       1,108       2.97  
Impairment provisions
    (22,905 )                     (26,308 )                     (20,360 )                
Non-interest-earning assets
    664,308                       667,942                       596,885                  
 
                                               
 
                                                                       
Total assets and interest income
    2,498,900       65,405       2.62       2,445,986       70,742       2.89       2,508,989       109,151       4.35  
 
                                               
Summary of interest expense by type of liability and equity
                                                                         
    2010   2009   2008
    Average     Interest             Average     Interest             Average     Interest        
    balance     expense     Cost     balance     expense     Cost     balance     expense     Cost  
    US$m     US$m     %     US$m     US$m     %     US$m     US$m     %  
 
                                                                       
Deposits by banks27
    111,443       1,136       1.02       117,847       1,659       1.41       135,747       4,959       3.65  
Financial liabilities designated at fair
value – own debt issued28
    66,706       1,271       1.91       60,221       1,558       2.59       63,835       3,133       4.91  
Customer accounts29
    962,613       10,778       1.12       940,918       11,346       1.21       950,854       27,989       2.94  
Debt securities in issue
    189,898       4,931       2.60       225,657       5,901       2.62       286,827       11,982       4.18  
Other interest-bearing liabilities
    8,730       788       9.03       8,640       902       10.44       14,579       675       4.63  
 
                                               
 
                                                                       
Total interest-bearing liabilities
    1,339,390       18,904       1.41       1,353,283       21,366       1.58       1,451,842       48,738       3.36  
Trading liabilities
    258,348       3,497       1.35       205,670       3,987       1.94       277,940       11,029       3.97  
Financial liabilities designated at fair value (excluding own debt issued)
    17,456       283       1.62       15,688       293       1.87       21,266       345       1.62  
Non-interest bearing current accounts
    142,579                       123,271                       98,193                  
Total equity and other non-interest bearing liabilities
    741,127                       748,074                       659,747                  
 
                                               
 
                                                                       
Total equity and liabilities
    2,498,900       22,684       0.91       2,445,986       25,646       1.05       2,508,988       60,112       2.40  
 
                                               
For footnotes, see page 83.
Reported net interest income fell by 3% to US$39bn; the decline was 5% on an underlying basis. This was driven by the exceptionally low interest rate environment and by the effect of repositioning our customer assets towards secured lending as we reduced our higher risk and higher yielding portfolios.
     Revenues in Balance Sheet Management decreased, as expected, from the strong levels of 2009 as higher yielding positions taken in prior years matured and opportunities for reinvestment at equivalent yields were limited by the prevailing low interest rates and flatter yield curves.


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HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
     
 
 
 
 
 

     The fall in income from interest-earning assets was driven by declining yields on loans and advances to customers following the Group’s decision to reposition the lending portfolio towards higher quality assets. Higher yielding unsecured lending balances decreased, particularly in North America, where the run-off portfolios continued to diminish and credit card balances fell as the number of active accounts declined and repayments by customers increased. Certain higher risk portfolios were also managed down in Latin America, Asia and the Middle East. This reduction was partly offset by commercial lending growth in CMB and GB&M, and growth in secured lending in the UK in residential mortgages.
     The interest expense on debt issued by the Group fell, largely due to a decline in average balances in debt securities in issue as HSBC Finance’s funding requirements continued to decrease in line with the run-off of the residual balances in Mortgage Services and Consumer
Lending and the sale of the vehicle finance portfolios.
     Net interest income includes the expense of the internal funding of trading assets, while related revenue is reported in trading income. The cost of funding these assets declined as a result of the low interest rates. In reporting our customer group results, this cost is included within net trading income.
     Net interest spread decreased due to lower yields on loans and advances to customers, partly as a result of the greater focus on secured lending. In addition, returns on financial investments and deposit spreads remained constrained due to low interest rates. Our net interest margin fell by a lesser amount due to the benefit from an increase in net free funds as customers held more funds in liquid non-interest bearing current accounts in the current low interest rate environment.


Net fee income
                         
    2010     2009     2008  
    US$m     US$m     US$m  
 
                       
Cards
    3,801       4,625       5,844  
Account services
    3,632       3,592       4,353  
Funds under management
    2,511       2,172       2,757  
Broking income
    1,789       1,617       1,738  
Credit facilities
    1,635       1,479       1,313  
Insurance
    1,147       1,421       1,771  
Imports/exports
    991       897       1,014  
Global custody
    700       988       1,311  
Remittances
    680       613       610  
Underwriting
    623       746       325  
Unit trusts
    560       363       502  
Corporate finance
    440       396       381  
Trust income
    291       278       325  
Mortgage servicing
    118       124       120  
Maintenance income on operating leases
    99       111       130  
Taxpayer financial services
    73       87       168  
Other
    2,027       1,894       2,102  
 
           
 
                       
Fee income
    21,117       21,403       24,764  
 
                       
Less: fee expense
    (3,762 )     (3,739 )     (4,740 )
 
           
 
                       
Net fee income
    17,355       17,664       20,024  
 
           
Net fee income marginally decreased compared with 2009 on both a reported and an underlying basis. The significant decrease in fee income in North America, primarily in Card and Retail Services, was mostly offset by higher investment-related fees in Asia and Europe and an increase in trade-related fee income in Asia.
     The significant fall in fee income from cards occurred primarily in North America, driven by lower volumes, improved delinquency rates and the revision to charging practices following the implementation of the Credit Card Accountability, Responsibility and Disclosure Act (‘CARD Act’).
     Insurance fee income was markedly down. In the US, the decline resulted from lower sales of credit protection products associated with the cards business. In the UK, income was lower on a reported basis due to the sale of the insurance brokerage business in the first half of 2010.
     Overall, underwriting fee income declined, particularly in Europe as a result of reduced capital market activity in the uncertain economic environment, although in Asia underwriting fees increased following several notable transactions.


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HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
     
 
 
 
 
 

     Net fee income from sales of investment products in Asia and Europe increased, driven by a stronger investment performance in funds and improved customer sentiment which led to higher volumes.
     Credit facilities fees also rose, notably in Asia, as a result of an increase in loan syndication transactions completed during the year.
     Net fee income from trade finance also increased, particularly in Asia, reflecting a rise in trade activity.


Net trading income
                         
    2010     2009     2008  
    US$m     US$m     US$m  
 
                       
Trading activities
    5,708       5,312       2,988  
Net interest income on trading activities
    2,530       3,627       5,713  
Other trading income – hedge ineffectiveness:
                       
– on cash flow hedges
    (9 )     90       (40 )
– on fair value hedges
    38       (45 )     5  
Non-qualifying hedges
    (1,057 )     951       (1,122 )
Losses on Bernard L. Madoff Investment Securities LLC fraud
          (72 )     (984 )
 
           
 
                       
Net trading income30,31
    7,210       9,863       6,560  
 
           
For footnotes, see page 83.
Reported net trading income was US$7.2bn, 27% lower than in 2009. On an underlying basis, net trading income declined by 28% due to adverse movements on non-qualifying hedges and lower income from trading activities.
     A US$1.1bn adverse fair value movement was reported on non-qualifying hedges compared with a favourable fair value movement of US$954m in 2009. These instruments are derivatives entered into as part of a documented interest rate management strategy for which hedge accounting was not, or could not be, applied. They are principally cross-currency and interest rate swaps used to economically hedge fixed rate debt issued by HSBC Holdings, floating rate debt issued by HSBC Finance and certain operating leased assets. The loss recognised on non-qualifying hedges was a result of fair value losses on these instruments, driven by the decrease in long-term US interest rates relative to sterling and euro rates. In HSBC Finance, the volume of non-qualifying hedge positions also increased as the duration of the mortgage book lengthened and swaps were used to align more closely the duration of the funding liabilities. The size and direction of the changes in fair value of non-qualifying hedges which are recognised in the income statement can be volatile from year to year, but do not alter the cash flows expected as part of the documented interest rate management strategy for both the instruments and the underlying economically hedged assets and liabilities.
     The remaining decline in net trading income was driven by increased competition and reduced margins across core products. European sovereign debt concerns and increased economic uncertainty resulted in less favourable market conditions
compared with 2009.
     In the Credit business, corporate bond trading volumes remained robust following investment in electronic trading capabilities, though revenues were affected as margins declined and credit spread movements were more favourable in 2009. This was partly offset by gains on the legacy portfolio which included a net release of write-downs on legacy positions and monoline credit exposures of US$429m. This compared with a reported write-down of US$331m in 2009.
     Rates income decreased, reflecting reduced margins and increased risk aversion from customers due to economic uncertainty. Turmoil in the eurozone led to sovereign debt downgrades and falling asset prices in certain European countries, leading to lower revenues in the trading portfolio. These factors were partly offset by a small favourable fair value movement on structured liabilities, compared with an adverse movement in 2009.

Lower net trading income was driven by a US$2.0bn adverse movement on non-qualifying hedges from 2009.
     Performance in the Foreign Exchange business remained strong, although was affected by a competitive trading environment and tighter bid-offer spreads as competitors sought to rebuild their businesses. In addition, revenues fell as market volatility declined from the exceptional levels seen in early 2009.
     The Equities business continued to increase market share in its target markets, following


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Report of the Directors: Operating and Financial Review (continued)
     
 
 
 
 
 

investment in the equities platform. However, core revenues fell, as overall market volumes and margins declined.
     Trading income benefited from foreign exchange gains on trading assets held as economic hedges of foreign currency debt designated at fair value compared with losses on these instruments in 2009. These gains were largely offset by
corresponding losses reported in ‘Net income from financial instruments designated at fair value’.
     Net interest income earned on trading activities decreased by 30%, driven by reduced holdings of debt securities. The cost of internally funding these assets also declined, but this interest expense is reported under ‘Net interest income’ and excluded from net trading income.


Net income/(expense) from financial instruments designated at fair value
                         
    2010     2009     2008  
    US$m     US$m     US$m  
 
                       
Net income/(expense) arising from:
                       
– financial assets held to meet liabilities under insurance and
investment contracts
    2,349       3,793       (5,064 )
– liabilities to customers under investment contracts
    (946 )     (1,329 )     1,751  
 
                       
– HSBC’s long-term debt issued and related derivatives
    (258 )     (6,247 )     6,679  
 
           
Change in own credit spread on long-term debt
    (63)       (6,533 )     6,570  
Other changes in fair value32
    (195)       286       109  
 
           
 
                       
– other instruments designated at fair value and related derivatives
    75       252       486  
 
           
 
                       
Net income/(expense) from financial instruments designated at fair value
    1,220       (3,531 )     3,852  
 
           
Assets and liabilities from which net income/(expense) from financial instruments designated at fair value arose
                         
    2010     2009     2008  
    US$m     US$m     US$m  
 
                       
Financial assets designated at fair value at 31 December
    37,011       37,181       28,533  
Financial liabilities designated at fair value at 31 December
    88,133       80,092       74,587  
 
                       
Including:
                       
Financial assets held to meet liabilities under:
                       
– insurance contracts and investment contracts with DPF33
    7,167       6,097       5,556  
– unit-linked insurance and other insurance and investment contracts
    19,725       16,982       12,758  
Long-term debt issues designated at fair value
    69,906       62,641       58,686  
For footnotes, see page 83.
The accounting policies for the designation of financial instruments at fair value and the treatment of the associated income and expenses are described in Notes 2i and 2b on the Financial Statements, respectively.
     The majority of the financial liabilities designated at fair value relate to certain fixed-rate long-term debt issues whose rate profile has been changed to floating through interest rate swaps as part of a documented interest rate management strategy. The movement in fair value of these long-term debt issues includes the effect of our credit spread changes and any ineffectiveness in the economic relationship between the related swaps and own debt. As credit spreads widen or narrow, accounting profits or losses, respectively, are booked. The size and direction of the changes in the credit spread on our debt and ineffectiveness, which are recognised in the income statement, can be volatile from year to year, but do not alter the cash flows envisaged as part of the documented interest
rate management strategy. As a consequence, fair value movements arising from changes in our own credit spread on long-term debt and other fair value movements on the debt and related derivatives are not regarded internally as part of managed performance and are therefore not allocated to customer groups, but are reported in ‘Other’. Credit spread movements on own debt are excluded from underlying results, and related fair value movements are not included in the calculation of regulatory capital.
     We reported net income from financial instruments designated at fair value of US$1.2bn in 2010 compared with a net expense of US$3.5bn in 2009. On an underlying basis, the equivalent figures were income of US$1.3bn in 2010 and US$2.9bn in 2009. The difference between the reported and underlying results arises from the exclusion from the latter of the credit spread-related movements in the fair value of our own long-term debt, on which we reported adverse fair value movements of US$63m


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Report of the Directors: Operating and Financial Review (continued)
     
 
 
 
 
 

in 2010 and US$6.5bn in 2009. In North America, a small favourable fair value movement was reported in 2010 as credit spreads widened marginally, in contrast with a significant adverse fair value movement in 2009. In Europe, significantly lower adverse fair value movements were reported in 2010 as credit spreads tightened, but to a lesser extent than in the previous year.
     Income arising from financial assets held to meet liabilities under insurance and investment contracts reflected lower investment gains as the growth in equity markets was less than that of 2009. This predominantly affected the value of assets held to support unit-linked contracts in the UK, Hong Kong, Singapore and Brazil and participating contracts in France.
     For investment gains or losses related to assets held to back investment contracts, the corresponding movement in liabilities to customers is also recorded under ‘Net income from financial instruments designated at fair value’.
     Investment gains or losses related to assets held to back insurance contracts or investment contracts with discretionary participation features (‘DPF’) are offset by a corresponding change in ‘Net insurance claims incurred and movement in liabilities to policyholders’ to reflect the extent to which unit-linked policyholders, in particular, participate in the investment performance of the associated asset portfolios.


Gains less losses from financial investments
                         
    2010     2009     2008  
    US$m     US$m     US$m  
 
                       
Net gains/(losses) from disposal of:
                       
– debt securities
    564       463       19  
– equity securities
    516       407       1,216  
– other financial investments
    (7 )     8       4  
 
           
 
                       
 
    1,073       878       1,239  
Impairment of available-for-sale equity securities
    (105 )     (358 )     (1,042 )
 
           
 
                       
Gains less losses from financial investments
    968       520       197  
 
           
Reported gains less losses from financial investments increased by US$448m to US$968m. On an underlying basis, excluding an accounting gain arising from the reclassification of Bao Viet as an associate following our purchase of additional shares, they increased by 69%. This was driven by a decrease in the level of impairments on available-for-sale equity investments as market values improved, along with an increase in gains on the disposal of equity and debt securities.
     Impairments on equity investments declined markedly compared with 2009 as the improving economic situation resulted in a reduction in the level of write-downs required on private equity and other strategic equity investments.
     Higher net gains were reported in Balance Sheet Management on disposals of available-for-sale debt securities, mainly in Europe and Asia. These were partly offset by a decrease in North America, where net gains realised from the sale of mortgage-backed securities and other ABSs in 2009 did not recur.
     Net gains on the disposal of equity securities increased, primarily in our private equity portfolio in Europe, as the market offered greater opportunities for divestment. This was partly offset by the non-recurrence of the gain on disposal of our holdings of Visa Inc. shares in 2009.


Net earned insurance premiums
                         
    2010     2009     2008  
    US$m     US$m     US$m  
 
                       
Gross insurance premium income
    11,609       10,991       12,547  
Reinsurance premiums
    (463 )     (520 )     (1,697 )
 
           
 
                       
Net earned insurance premiums
    11,146       10,471       10,850  
 
           

Net earned insurance premiums increased by 6% to US$11.1bn on both a reported and an underlying basis.
     Growth was largely attributable to the continued strong performance of life insurance products in Asia. Successful sales campaigns and the


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Report of the Directors: Operating and Financial Review (continued)
     
 
 
 
 
 

recruitment of additional insurance sales managers increased net earned premiums in Hong Kong, particularly from deferred annuity and unit-linked products, and a life insurance product designed for high net worth individuals. Higher sales were also reported in Malaysia, Taiwan and mainland China, primarily from successful product launches and marketing campaigns.
     Net earned premiums in Latin America increased marginally in the improved economic conditions, driven by higher sales in Brazil, Argentina and Mexico and repricing initiatives in Argentina.
     In France, an increase in sales of investment
contracts with DPF drove higher net earned premiums. Strong sales activity also led to higher net earned premiums in our UK life insurance business.
     This growth was partly offset by a reduction in non-life insurance premiums, primarily due to the run-off of the legacy motor book in the UK, which was closed during the second half of 2009, and the decision taken during 2010 not to renew certain contracts in the Irish business.
     Net earned premiums in North America also decreased, reflecting a decline in sales of payment protection products following the discontinuation of mortgage originations in HSBC Finance.


Other operating income
                         
    2010     2009     2008  
    US$m     US$m     US$m  
 
                       
Rent received
    535       547       606  
Losses recognised on assets held for sale
    (263 )     (115 )     (130 )
Valuation gains/(losses) on investment properties
    93       (24 )     (92 )
Gain on disposal of property, plant and equipment, intangible assets and non-financial investments
    889       1,033       881  
Change in present value of in-force long-term insurance business
    705       605       286  
Other
    603       742       257  
 
           
 
                       
Other operating income
    2,562       2,788       1,808  
 
           
Reported other operating income of US$2.6bn was 8% lower than in 2009. Income in 2010 included gains of US$188m following the dilution of our holding in Ping An Insurance, US$107m from the sale of HSBC Insurance Brokers, US$66m from the disposal of our interest in the Wells Fargo HSBC Trade Bank and US$255m from the sale of Eversholt Rail Group. In addition, we reported a gain of US$74m resulting from the sale of HSBC Private Equity (Asia) Ltd, partly offset by a loss of US$42m on the disposal of our shareholding in British Arab Commercial Bank plc. Reported results in 2009 included a gain of US$280m from the sale of the remaining stake in the card merchant-acquiring business in the UK.
     On an underlying basis, excluding the items referred to above, other operating income decreased by 23%, primarily because gains on the sale of properties in London and Hong Kong in 2009 did not recur.
     Net losses recognised on assets held for sale increased, reflecting a US$207m loss on the sale of the US vehicle finance servicing operation and associated US$5.3bn loan portfolio.
     Net investment valuation gains on investment properties contrasted with losses in 2009. This reflected improvements in the property markets in Hong Kong and the UK which led to net valuation gains on investment properties, compared with net valuation losses in 2009.

A loss on sale of the US vehicle finance business contributed to a fall in Other operating income.
     We recognised gains of US$194m and US$56m in 2010 on the sale and leaseback of our Paris and New York headquarters buildings, respectively. These compared with more substantial underlying gains of US$667m (US$686m as reported) on the sale and leaseback of 8 Canada Square and the sale of a property in Hong Kong in 2009.
     Strong sales of life insurance products, notably in Hong Kong, resulted in favourable movements in the present value of in-force (‘PVIF’) long-term insurance business. These were offset in part by the non-recurrence of gains recognised in 2009 following the refinement of the income recognition methodology in HSBC Finance.


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Report of the Directors: Operating and Financial Review (continued)
     
 
 
 
 
 
Net insurance claims incurred and movement in liabilities to policyholders
                         
    2010     2009     2008  
    US$m     US$m     US$m  
 
                       
Insurance claims incurred and movement in liabilities to policyholders:
                       
– gross
    11,969       12,560       9,206  
– reinsurers’ share
    (202 )     (110 )     (2,317 )
 
           
 
                       
– net34
    11,767       12,450       6,889  
 
           
For footnote, see page 83.
Net insurance claims incurred and movement in liabilities to policyholders decreased by 5% and 4% on a reported and an underlying basis, respectively.
     Lower investment returns than in 2009, particularly in Asia, Europe and Brazil, led to a decrease in the movement in liabilities to policyholders on unit-linked insurance contracts and, to a certain extent, participating contracts, whose policyholders share in the investment performance of the assets supporting their policies. The gains or losses experienced on the financial assets designated at fair value held to support insurance contract liabilities and investment contracts with DPF are reported in ‘Net income from financial instruments designated at fair value’.
     In Asia, the effect of the lower investment returns was more than offset by additional reserves established for new business written, consistent with the increase in net insurance premiums earned, particularly in Hong Kong, as a result of successful sales campaigns and the recruitment of additional insurance sales managers.
     In addition, the increase in reserves in 2009 on the now closed UK motor insurance book, which reflected the rising incidence and severity of claims at that time, did not recur. The decision taken in 2010 not to renew certain contracts in our Irish business resulted in a further decrease in net insurance claims incurred and movement in liabilities to policyholders.


Loan impairment charges and other credit risk provisions
                         
    2010     2009     2008  
    US$m     US$m     US$m  
Loan impairment charges
                       
New allowances net of allowance releases
    14,568       25,832       24,965  
Recoveries of amounts previously written off
    (1,020 )     (890 )     (834 )
 
           
 
                       
 
    13,548       24,942       24,131  
 
                       
 
           
Individually assessed allowances
    2,625       4,458       2,064  
Collectively assessed allowances
    10,923       20,484       22,067  
 
           
 
                       
Impairment of available-for-sale debt securities
    472       1,474       737  
Other credit risk provisions
    19       72       69  
 
           
 
                       
Loan impairment charges and other credit risk provisions
    14,039       26,488       24,937  
 
           
 
                       
 
    %       %       %  
 
                       
–   as a percentage of net operating income excluding the effect of fair value movements in respect of credit spread on own debt and before loan impairment charges and other credit risk provisions
    20.6       36.4       33.2  
Impairment charges on loans and advances to customers as a percentage of gross average loans and advances to customers
    1.5       2.8       2.5  
 
                       
 
  US$m     US$m     US$m  
 
                       
Customer impaired loans
    28,091       30,606       25,352  
Customer loan impairment allowances
    20,083       25,542       23,909  
On a reported basis, loan impairment charges and other credit risk provisions were US$14bn, a decline of 47% compared with 2009 and 48% on an underlying basis. There was improvement across all regions and in all customer groups.
     At 31 December 2010, the aggregate balance of customer loan impairment allowances was US$20.1bn. This represented 2.2% of gross loans and advances to customers (net of reverse repos and settlement accounts) compared with 3.0% at 31 December 2009.


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Report of the Directors: Operating and Financial Review (continued)
     
 
 
 
 
 

     We actively managed down some of our higher risk portfolios in all regions and enhanced credit quality through tighter underwriting and increased focus on the sale of secured products to customers where we already held a banking relationship. Loan impairment charges in our CMB and GB&M businesses fell as economic conditions improved and we recognised fewer large loan impairment charges against specific clients than in 2009.
 
Loan impairment charges and other credit risk provisions of US$14bn were 48% or US$12.8bn lower than in 2009.
     Impairments on available-for-sale debt securities declined markedly to US$472m from the US$1.5bn reported in 2009, mainly reflecting a slowing in the rate of anticipated losses in the underlying collateral pools.
     The most significant decline in loan impairment charges was in our HSBC Finance portfolios in the US, where lending balances reduced and delinquency levels improved.
     Loan impairment charges and other credit risk provisions in the US declined by 48% to US$7.9bn, the lowest level since 2006, representing 57% of the Group’s total reduction compared with 2009. This mainly occurred in the US PFS business, where loan impairment charges declined by US$6.1bn to US$8.0bn, primarily in the Card and Retail Services business of HSBC Finance and, to a lesser extent, in the run-off consumer finance portfolios.
     In Cards and Retail Services, loan impairment charges declined by 57% to US$2.2bn. This improvement reflected the continuing effects of additional steps taken from the fourth quarter of 2007 to manage risk, including tightening underwriting criteria, lowering credit limits and reducing the number of active cards. An increased focus by our customers on reducing outstanding credit card debt helped improve delinquency levels.
     Loan impairment charges in our Consumer Lending and Mortgage Services businesses declined by 29% to US$5.7bn, due to the continued run-off of lending balances in these portfolios and lower delinquency balances. Total loss severities on foreclosed loans improved compared with 2009, reflecting an increase in the number of properties for which we accepted a deed in lieu of foreclosure or a short sale, both of which result in lower losses compared with loans which are subject to a formal foreclosure process.
     During 2010, state and federal prosecutors announced investigations into foreclosure practices
of certain mortgage service providers. As a result, we expect that the scrutiny of documents will increase, and in some states additional verification of information will be required. If these trends continue there may be delays in their processing. See page 83 for more information on the investigation into US foreclosure practices.
     In HSBC Bank USA, loan impairment charges in PFS fell by 92% to US$50m, reflecting lower lending balances and improved credit quality in the residential mortgage portfolio.
     In GB&M in the US, a net release of loan impairment charges and other credit risk provisions reflected the improved credit environment and a release of impairments of available-for-sale ABSs as mentioned previously. In CMB, loan impairment charges declined by US$194m as the improved economic conditions resulted in credit upgrades on certain accounts, and fewer downgrades across all business lines.
     In the UK, loan impairment charges in PFS and CMB declined as economic conditions improved and interest rates remained at low levels, resulting in an improvement in delinquency levels. In PFS, loan impairment charges fell by 35% to US$1.1bn as we actively reduced our exposure to unsecured lending, while collections increased mainly due to programmes implemented to improve performance. In the UK secured lending book, credit quality continued to be high and loan impairment charges remained at low levels. In CMB, loan impairment charges declined by US$159m due to strengthened credit risk management and improved collections, notably in the UK property, retail and service sectors.
     Loan impairment charges and other credit provisions fell markedly in GB&M reflecting the improved credit outlook, loan restructuring activity and the non-recurrence of significant charges against a small number of clients in the financial and property sectors. Credit risk provisions on certain available-for-sale ABSs also reduced.
     Loan impairment charges and other credit risk provisions in Latin America declined by 44% to US$1.5bn. In PFS, loan impairment charges of US$1.2bn were 45% lower, mainly in Mexico due to a reduction in balances and improved delinquency rates in our credit card portfolio. In Brazil, they also declined as we managed down the size of certain consumer finance portfolios and economic conditions improved. In 2010, initiatives taken in the region to improve the quality of the loan portfolios continued. These steps included the tightening of underwriting criteria, reducing and, in some


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Report of the Directors: Operating and Financial Review (continued)
     
 
 
 
 
 

instances, eliminating the use of higher risk, non-branch sales channels, and continued investment in our collections infrastructure. In our CMB portfolios, loan impairment charges and other credit risk provisions declined by 50% to US$293m, as improved economic conditions and credit quality resulted in lower specific impairment charges in all sectors.
     In the Middle East, loan impairment charges and other credit risk provisions fell by 53% to US$627m as lower loan impairment charges in both PFS and CMB were partly offset by an increase in GB&M following restructuring activities. In our PFS business, loan impairment charges declined by 61% to US$227m, reflecting a marked decline in delinquency levels and lower lending balances, particularly in our credit card and unsecured personal lending book, as a result of managing down higher risk portfolios. Credit limits were tightened and our customer acquisition strategy was revised in the region to concentrate on Premier and Advance customers. This resulted in an improvement in credit quality. In CMB, lower loan impairment charges
reflected a reduction in collective impairment charges and fewer specific loan impairment charges as economic conditions improved.
     In Rest of Asia-Pacific, loan impairment charges declined as the credit environment improved. In India, loan impairment charges fell by 83% to US$82m, mainly in PFS as certain unsecured lending portfolios and the higher risk elements of the credit card portfolio were managed down, and economic conditions improved. Impairment charges also declined in CMB, due to the non-recurrence of charges against specific technology-related exposures in 2009. Partly offsetting these increases were higher specific loan impairment charges in GB&M.
     In Hong Kong, loan impairment charges fell by 77% to US$114m, as economic conditions improved and fewer large specific loan impairment charges were reported against the CMB and GB&M portfolios. Loan impairment charges fell in PFS too, mainly on unsecured lending as unemployment and bankruptcy levels reduced.


Operating expenses
                         
    2010     2009     2008  
    US$m     US$m     US$m  
 
                       
By expense category
                       
Employee compensation and benefits
    19,836       18,468       20,792  
Premises and equipment (excluding depreciation and impairment)
    4,348       4,099       4,305  
General and administrative expenses
    10,808       9,293       10,955  
 
           
 
                       
Administrative expenses
    34,992       31,860       36,052  
Depreciation and impairment of property, plant and equipment
    1,713       1,725       1,750  
Amortisation and impairment of intangible assets
    983       810       733  
Goodwill impairment
                10,564  
 
           
 
                       
Operating expenses
    37,688       34,395       49,099  
 
           
Staff numbers (full time equivalents)
                         
    At 31 December
    2010     2009     2008  
 
                       
Europe
    75,698       76,703       82,093  
Hong Kong
    29,171       27,614       29,330  
Rest of Asia-Pacific
    91,607       87,141       89,706  
Middle East
    8,676       8,281       8,453  
North America
    33,865       35,458       44,725  
Latin America
    56,044       54,288       58,559  
 
           
 
                       
Staff numbers
    295,061       289,485       312,866  
 
           
Operating expenses increased by 10% to US$37.7bn on a reported basis and by 8% on an underlying basis. Significant one-off items included aggregate payroll taxes of US$324m levied on 2009 bonuses in the UK and France, and the curtailment of certain benefits delivered through pension schemes, which generated accounting credits of US$148m in the US and US$480m (US$499m as reported) in the UK in
2010 and 2009, respectively. Excluding these items, expenses grew by 6% as we continued to invest in our operational infrastructure, customer-facing and support staff, and GB&M’s capabilities and platforms.
     Employee compensation and benefits increased by 7%, partly due to the net effect of the curtailment gains and the payroll tax referred to above.


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Report of the Directors: Operating and Financial Review (continued)
     
 
 
 
 
 

Excluding these items, staff costs rose by 3%. Performance-related costs increased, primarily in Asia, reflecting improved business performance and increased staff numbers. While year-end staff numbers increased as the pace of recruitment accelerated in the second half of the year, average staff numbers remained below 2009 levels. The growth in staff numbers in Asia encompassed both customer-facing and back-office staff supporting business growth and increased operational capacity. In Latin America, staff costs grew following union-agreed salary increases and the recruitment of customer-facing and regional support staff, primarily in the latter part of the year. We also increased resources in our Global Service Centres as we continued to move processes there.
     Staff costs declined in the US due to the non-recurrence of restructuring costs associated with the closure of the Consumer Lending branch network in 2009. Also, headcount fell due to the sale of the vehicle finance portfolio and related servicing platform. Similarly, reported staff numbers fell in Europe due to the sale of the insurance broking business in the UK and business reorganisation in France, though this was partly offset by higher numbers of customer-facing staff in the UK and Turkey.
     Premises and equipment costs increased as rental costs in the UK, the US and France rose
following the sale and leaseback of 8 Canada Square, London and our headquarters buildings in the US and France, combined with business expansion in Asia and Europe and refurbishment costs in Europe and Latin America. This was partly offset by lower costs in the US following the closure of the Consumer Lending branch offices and the non-recurrence of the related restructuring costs.
     General and administrative expenses rose, reflecting in part higher marketing and advertising costs. These grew in North America in Card and Retail Services, partly from complying with the CARD Act. Marketing costs also rose in Asia and Latin America in support of the launch of Advance and sales campaigns for credit cards and investment products. Project costs increased from various initiatives to enhance operational capabilities, in connection with which consultancy and contractors’ fees rose, primarily in the UK as GB&M continued to invest in strategic initiatives to drive future revenue growth. These included the development of Prime Services and equity market capabilities, and the expansion of the Rates and foreign exchange e-commerce platforms.
     Travel costs increased as we increased our focus on international connectivity and business growth. Costs also increased due to litigation provisions in North America and Europe.


Cost efficiency ratios
                         
    2010     2009     2008  
    %     %     %  
 
                       
HSBC
    55.2       52.0       60.1  
 
                       
Personal Financial Services
    57.7       51.7       76.4  
 
           
Europe
    67.4       68.7       62.7  
Hong Kong
    35.3       34.9       32.2  
Rest of Asia-Pacific
    85.1       81.2       81.5  
Middle East
    62.2       53.5       53.2  
North America
    46.9       38.1       106.8  
Latin America
    72.1       66.7       59.7  
 
           
 
                       
Commercial Banking
    49.4       46.4       43.0  
 
                       
 
           
Europe
    51.9       47.4       44.2  
Hong Kong
    32.2       33.7       26.2  
Rest of Asia-Pacific
    49.2       47.0       45.9  
Middle East
    36.4       33.8       32.0  
North America
    46.6       47.7       46.1  
Latin America
    65.7       57.0       55.0  
 
           
 
                       
Global Banking and Markets
    49.9       39.1       67.3  
 
                       
Global Private Banking
    65.8       60.5       58.3  

     Our cost efficiency ratio worsened by 3.2 percentage points on a reported basis and by 8.4 percentage points to 55.8% on an underlying basis.
In PFS, there was a deterioration of 5.7 percentage points in the cost efficiency ratio. Operating expenses remained broadly unchanged as a rise in costs in


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HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
     
 
 
 
 
 

Asia in support of business expansion was broadly offset by strict cost control across the Group and lower costs in the US. Revenue fell, largely in the run-off portfolio and in Card and Retail Services in North America.
     In CMB, the cost efficiency ratio deteriorated by 2.9 percentage points as we continued to invest for future revenue growth in those markets that we see as central to international connectivity. Revenue grew in all regions, albeit at a slower pace, resulting in a deterioration in the cost efficiency ratio, with the exception of Hong Kong where strong revenue growth led to an improvement of 1.5 percentage points.
     In GB&M, the cost efficiency ratio deteriorated by 12.1 percentage points reflecting the one-off payroll and bonus taxes in the UK and France. Excluding them, the ratio deteriorated by 10.5 percentage points following a rise in costs related to higher support costs and continued investment in strategic initiatives being undertaken to drive future revenue growth. Revenue fell during 2010 mainly due to lower net interest income in Balance Sheet Management and lower trading income.
     In GPB, the cost efficiency ratio deteriorated by 5.3 percentage points as costs increased, reflecting the hiring of front-line staff, investment in systems and higher compliance costs coupled with lower revenue in the low interest rate environment.


Share of profit in associates and joint ventures
                         
    2010     2009     2008  
    US$m     US$m     US$m  
 
                       
Associates
                       
Bank of Communications Co., Limited
    987       754       741  
Ping An Insurance (Group) Company of China, Limited
    848       551       324  
Industrial Bank Co., Limited
    327       216       221  
The Saudi British Bank
    161       172       251  
Other
    156       42       63  
 
           
 
                       
Share of profit in associates
    2,479       1,735       1,600  
Share of profit in joint ventures
    38       46       61  
 
           
 
                       
Share of profit in associates and joint ventures
    2,517       1,781       1,661  
 
           

The share of profit from associates and joint ventures increased by 41% to US$2.5bn on both a reported and an underlying basis as our associates in mainland China capitalised on the improved economic conditions in region.
     Our share of profits in Ping An Insurance increased due to strong insurance sales performance, while fee income and lending growth resulted in
higher profits from the Bank of Communications Co., Limited (‘Bank of Communciations’) and from Industrial Bank Co., Limited (‘Industrial Bank’).
     These results were partly offset by a decrease in our share of profits from The Saudi British Bank as revenue declined amidst challenging economic conditions.


Tax expense
                         
    2010     2009     2008  
    US$m     US$m     US$m  
 
                       
Profit before tax
    19,037       7,079       9,307  
Tax expense
    (4,846 )     (385 )     (2,809 )
 
           
 
                       
Profit after tax
    14,191       6,694       6,498  
 
           
 
                       
Effective tax rate
    25.5 %     5.4 %     30.2 %

The most significant factor influencing the year on year changes to the effective tax rate is the changing geographical split of profits, including the relative proportion of tax on the share of profits in associates and joint ventures included within profit before tax. The impact of the tax on profit on associates and joint ventures included within pre-tax profits was a reduction in the effective tax rate of 3.7% in 2010 and 7.1% in 2009.
     In 2010 HSBC’s US operations achieved taxable profits, principally as a result of realising a taxable gain from an internal reorganisation which increased the effective tax rate by 6.4%. If this was excluded the effective tax rate would be 19.1% which is in line with the geographic profile of the Group.


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HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
     
 
 
 
 
 
2009 compared with 2008
Reconciliation of reported and underlying profit before tax
                                                                         
    2009 compared with 2008  
                            2008                                
    2008     2008             at 2009     2009     2009     2009     Re-     Under-  
    as     adjust-     Currency     exchange     as     adjust-     under-     ported     lying  
    reported     ments 10   translation 11   rates 16   reported     ments 10   lying     change 13   change 13
HSBC   US$m     US$m     US$m     US$m     US$m     US$m     US$m     %     %  
 
                                                                       
Net interest income
    42,563       (65 )     (2,062 )     40,436       40,730       (53 )     40,677       (4 )     1  
Net fee income
    20,024       (58 )     (1,315 )     18,651       17,664       (6 )     17,658       (12 )     (5 )
Changes in fair value14
    6,570       (6,570 )                 (6,533 )     6,533                        
Gains on disposal of French regional banks
    2,445       (2,445 )                                   (100 )        
Other income
    10,080       (680 )     (1,597 )     7,803       14,320       (298 )     14,022       42       80  
 
                                           
 
                                                                       
Net operating income15
    81,682       (9,818 )     (4,974 )     66,890       66,181       6,176       72,357       (19 )     8  
 
                                                                       
Loan impairment charges and other credit risk provisions
    (24,937 )     6       709       (24,222 )     (26,488 )           (26,488 )     (6 )     (9 )
 
                                           
 
                                                                       
Net operating income
    56,745       (9,812 )     (4,265 )     42,668       39,693       6,176       45,869       (30 )     8  
 
                                                                       
Operating expenses (excluding goodwill impairment)
    (38,535 )     68       2,655       (35,812 )     (34,395 )     31       (34,364 )     11       4  
 
                                                                       
Goodwill impairment
    (10,564 )                 (10,564 )                       100       100  
 
                                           
 
                                                                       
Operating profit
    7,646       (9,744 )     (1,610 )     (3,708 )     5,298       6,207       11,505       (31 )        
 
                                                                       
Income from associates
    1,661             25       1,686       1,781             1,781       7       6  
 
                                           
 
                                                                       
Profit before tax
    9,307       (9,744 )     (1,585 )     (2,022 )     7,079       6,207       13,286       (24 )        
 
                                           
 
                                                                       
By geographical region
                                                                       
 
                                                                       
Europe
    10,869       (6,221 )     (1,054 )     3,594       4,009       2,561       6,570       (63 )     83  
Hong Kong
    5,461       (5 )     20       5,476       5,029       1       5,030       (8 )     (8 )
Rest of Asia-Pacific
    4,722       (3 )     (184 )     4,535       4,200       (43 )     4,157       (11 )     (8 )
Middle East
    1,746             (7 )     1,739       455             455       (74 )     (74 )
North America
    (15,528 )     (3,444 )     (67 )     (19,039 )     (7,738 )     3,688       (4,050 )     50       79  
Latin America
    2,037       (71 )     (293 )     1,673       1,124             1,124       (45 )     (33 )
 
                                           
 
                                                                       
Profit before tax
    9,307       (9,744 )     (1,585 )     (2,022 )     7,079       6,207       13,286       (24 )        
 
                                           
 
                                                                       
By customer group and global business
                                                                       
 
                                                                       
Personal Financial Services
    (10,974 )     (148 )     (457 )     (11,579 )     (2,065 )     (3 )     (2,068 )     81       82  
Commercial Banking
    7,194       (486 )     (665 )     6,043       4,275       (318 )     3,957       (41 )     (35 )
Global Banking and Markets
    3,483             (479 )     3,004       10,481       (5 )     10,476       201       249  
Global Private Banking
    1,447             (48 )     1,399       1,108             1,108       (23 )     (21 )
Other
    8,157       (9,110 )     64       (889 )     (6,720 )     6,533       (187 )             79  
 
                                           
 
                                                                       
Profit before tax
    9,307       (9,744 )     (1,585 )     (2,022 )     7,079       6,207       13,286       (24 )        
 
                                           
 
Consolidated income statement
Our reported pre-tax profits in 2009 fell by 24% to US$7.1bn and earnings per share declined to US$0.34. Return on average shareholders’ equity remained broadly at 2008 levels at 5.1% (2008: 4.7%).
     On an underlying basis, our profit before tax increased by US$15.3bn compared with 2008. The difference between reported and underlying results is
explained on page 14. Except where otherwise stated, the commentaries in the Financial Summary are on an underlying basis.
 
Profit before tax on an underlying basis and excluding the goodwill impairment charge of US$10.6bn in 2008, was 56% or US$4.7bn higher.
 


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HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
     
 
 
 
 
 

     The increase in profit before tax was driven by strong growth in net operating income in GB&M, in part reflecting the absence of significant write-downs in securities and structured credit positions which had affected results in 2008. More significantly, the business benefited from market share gains in core activities and the effect of early positioning by Balance Sheet Management, in anticipation of the low interest rate environment. Results in 2009 also reflected lower loan impairment charges in North America, partly offset by an increase in loan impairment charges and other credit risk provisions elsewhere.
     Although our business in North America continued to record a loss, performance improved as write-downs in GB&M reduced and loan impairment charges in PFS decreased. This resulted from steps taken to curtail origination in 2007 and 2008, which culminated in the closure of the Consumer Lending branch network in the second quarter of 2009, and from our decision to place all consumer finance portfolios other than credit cards into run-off. The closure of the branch network fed through to lower operating expenses during the remainder of the year.
     In Hong Kong, economic performance remained robust despite continuing challenges, with our results underpinned by a market-leading share in deposits, residential mortgages, cards and insurance. Overall profitability declined, however, as revenue was driven lower by compressed deposit spreads in the low interest rate environment. Loan impairment charges improved on 2008, remaining low, and operating expenses reflected a disciplined approach to cost management.
     In the Rest of Asia-Pacific region, the economic challenges faced were similar to those in Hong Kong and their impact was reflected in lower income and higher loan impairment charges. Income from associates, primarily in mainland China, made a significant positive contribution to the region’s performance. We continued to expand our presence in Rest of Asia-Pacific through organic growth and strategic investment.
     Our Middle East operations suffered from a combination of factors: a severe contraction in the economy of Dubai, a fall in oil revenues for much of the year and investment losses incurred by many regional investors. This led to a decline in profit before tax of 74%, primarily due to a significant increase in loan impairment charges. The regional economic downturn and continuing uncertainty affected both retail and corporate customers, particularly in the United Arab Emirates (‘UAE’) where the downturn was most pronounced.
     In Europe, we reported an increase in profit before tax on an underlying basis, driven by GB&M in London and Paris. This resulted from a strong performance in Rates and Balance Sheet Management, coupled with the benefit of stabilisation of asset prices and general tightening of credit spreads and lower write-downs in the credit trading business. This was partly offset by a reduction in deposit spreads in PFS and CMB as interest rates fell, and an increase in loan impairment charges in Global Banking, reflecting a deterioration in the credit position of a small number of clients.
 
The increase in profit before tax was driven by strong growth in GB&M.
 
     In Latin America, the decline in pre-tax profits was driven by an increase in loan impairment charges in PFS and CMB and lower revenues in PFS, partly offset by a strong performance in trading and Balance Sheet Management in GB&M. The lower revenues in PFS were in part due to the continued curtailment of personal unsecured credit exposures, following our adverse experience in 2008, with net interest income also adversely affected by declining interest rates and narrowing spreads.
     With the exception of PFS, which continued to be heavily affected by the consumer finance losses in North America, all customer groups remained profitable.
     The following items are significant to a comparison of reported results with 2008:
  the non-recurrence of the US$10.6bn goodwill impairment charge in North America recorded in 2008;
 
  the non-recurrence of a US$2.4bn gain on the sale of French regional banks in 2008;
 
  fair value losses relating to own credit spreads of US$6.5bn in 2009 compared with gains of US$6.6bn in 2008;
 
  a US$72m fraud loss relating to Bernard L Madoff Investment Securities LLC (‘Madoff Securities’) in 2009, which was in addition to the US$984m charge reported in 2008;
 
  loss from write-downs in legacy securities and structured credit positions amounting to US$0.3bn in 2009 compared with US$5.4bn in 2008;
 
  the acquisition in 2008 of the subsidiary, Project Maple II B.V., which owned our headquarters at 8 Canada Square, London E14 5HQ and the subsequent sale of the company and leaseback of


28(b)


Table of Contents

HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
     
 
 
 
 
 

    the property in 2009, resulting in gains of US$0.6bn in 2009 and US$0.4bn in 2008;
 
  the sale of the card merchant-acquiring business in the UK, resulting in gains of US$0.3bn in 2009 and US$0.4bn in 2008;
 
  the change in the basis of delivering long-term employee benefits in the UK, which generated a one-off accounting gain of US$0.5bn in 2009; and
 
  the tax expense of US$0.3bn in 2009, which was lower than in previous years as a result of the geographic distribution of income. We generated profits in low tax rate jurisdictions, principally Asia, and incurred losses in high tax rate jurisdictions, principally the US, which when mixed produced a low overall rate.
Group performance by income and expense item
Net interest income
Our reported net interest income of US$40.7bn fell by 4% compared with 2008, but was marginally higher on an underlying basis.
     Reported net interest income includes the expense of the internal funding of trading assets, while related revenue is reported in trading income. The cost of internally funding these assets declined significantly as a result of the low interest rate environment. In our customer group reporting, this cost is included within trading income.
     Deposit spreads were squeezed by the exceptionally low interest rates, although this was partly offset by the reduced cost of funding trading activities. Strong revenues in Balance Sheet Management reflected positions taken in 2008 ahead of the reduction in major currency interest rates. As these positions began to mature, the revenue from Balance Sheet Management’s activities reduced but remained strong in the second half of 2009.
     Average interest-earning assets fell slightly due to a decline in term lending, mainly from the run-off portfolios in North America and the decline in consumer credit appetite globally.
     Average interest-bearing liabilities also decreased, due to a decline in debt securities in issue as funding requirements for HSBC Finance fell as certain portfolios were managed down. This was largely offset by a rise in current account balances, driven by growth in customer demand for more liquid assets. The very low interest rates led to clients holding an increasing proportion of funds in liquid current accounts rather than in savings and deposit
accounts as they positioned for rising interest rates or prospective investment opportunities.
 
Competition for deposits and exceptionally low interest rates squeezed deposit margins.
 
     The net interest spread rose slightly. As a result of continuing deposit inflows, we sourced an increasing proportion of our funding from customer accounts, and consequently reduced our reliance on relatively more expensive debt securities. The benefit of this was largely offset, however, by a decline in customer lending, particularly higher yielding personal lending, which reduced the average yield on assets.
Net fee income
Reported net fee income decreased by 12% to US$17.7bn, 5% lower on an underlying basis.
 
Lower credit card fees and weaker equity markets led to a decline in net fee income.
 
     Credit card fees fell significantly, mainly in North America, reflecting lower transaction volumes, a reduction in cards in issue and changes in customer behaviour which led to lower cash advance, interchange, late and overlimit fees. In the UK, the decrease primarily arose from the disposal of the card-acquiring business to a joint venture in June 2008.
     Weaker equity markets and subdued investor sentiment for higher risk products led to a reduction in both the volume and the value of equity-related products. This resulted in a decrease in fees generated from funds under management, global custody and unit trusts, though fees grew from equity capital markets products in GB&M. The impact was particularly marked in the first half of 2009, though market-related fees recovered somewhat in the second half of the year as market values rose and investor appetite for equity products increased.
     Account services fees fell, predominantly in North America as the result of a decline in credit card volumes and changes in customer behaviour, and in GPB due to a decrease in fiduciary deposit commissions as lower interest rates drove down balances.
     Insurance broking fees also fell, mainly due to lower origination volumes of credit-related products, principally in the US consumer finance business, and reduced payment protection business in the UK.
     Corporate credit facility and underwriting fees increased strongly on the back of higher debt originations in Europe and North America which


28(c)


Table of Contents

HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
     
 
 
 
 
 

accompanied the considerable reconstruction and refinancing of corporate balance sheets in 2009.
Net trading income
Reported net trading income increased by 50% to US$9.9bn, 83% higher on an underlying basis.
     Reported trading income excludes the interest expense of the internal funding of trading assets. As noted in ‘Net interest income’, the cost of internally funding these assets declined significantly as a result of the low interest rate environment.
     The Credit business benefited from a general tightening of credit spreads following a return of liquidity to much of the market, and the write-downs on legacy positions in Credit trading declined significantly following the stabilisation of asset prices.
 
Net trading income rose by 83% on an underlying basis.
 
     An increase in Rates revenues, particularly in the first half of the year, reflected increased market share and client trading volumes, wider bid-offer spreads and early positioning for interest rate movements. Partly offsetting these gains, fair value losses were recorded on our structured liabilities as a result of credit spreads tightening, compared with gains in this area in 2008.
     Equities benefited from the non-recurrence of the US$984m charge reported in 2008 in respect of Madoff Securities. The core Equities business also took advantage of a changed competitive landscape to capture a greater share of business in strategic markets from key institutional clients.
     Foreign exchange trading revenues were well ahead of 2007, but fell short of the record year in 2008. This reflected a combination of reduced customer volumes from lower trade flows and investment activity, and relatively lower market volatility.
     Tightening credit spreads led to losses of US$429m on credit default swap transactions in parts of the Global Banking portfolio. In 2008, gains of US$912m were reported on these credit default swaps as a result of widening credit spreads.
     A reduction in net interest income on trading activities reflected the sharp fall in interest rates at the end of 2008 but was partly compensated for by a reduction in the internal funding cost of trading activities, which is reported in ‘Net interest income’.
     Income from non-qualifying hedges related to mark-to-market gains on cross-currency swaps as the
US dollar depreciated against sterling, and on interest rate swaps as US dollar long and medium term interest rates increased over the year. In 2008, appreciation of the US dollar and a fall in interest rates led to mark-to-market losses on these instruments.
     During the second half of 2008, we reclassified US$17.9bn of assets from ‘held for trading’ to ‘loans and receivables’ and ‘available for sale’ following the IASB’s amendment to International Accounting Standard (‘IAS’) 39. Had these reclassifications not taken place and the assets had continued to be accounted for on a fair value basis, we would have recorded additional gains of US$1.5bn in 2009 (2008: losses of US$3.5bn).
Net income from financial instruments designated at fair value
We designate certain financial instruments at fair value to remove or reduce accounting mismatches in measurement or recognition, or where financial instruments are managed and their performance is evaluated together on a fair value basis. All income and expense from financial instruments designated at fair value are included in this line except for interest arising from our issued debt securities and related derivatives managed in conjunction with those debt securities, which is recognised in ‘Interest expense’.
     We principally use the fair value designation in the following instances (for which all numbers are ‘reported’):
  for certain fixed-rate long-term debt issues whose rate profile has been changed to floating through interest rate swaps as part of a documented interest rate management strategy. Approximately US$63bn (2008: US$59bn) of our debt issues have been accounted for using the fair value option.
 
    The movement in fair value of these debt issues includes the effect of own credit spread changes and any ineffectiveness in the economic relationship between the related swaps and own debt. As credit spreads widen or narrow, accounting profits or losses, respectively, are booked. The size and direction of the accounting consequences of changes in own credit spread and ineffectiveness can be volatile from year to year, but do not alter the cash flows envisaged as part of the documented interest rate management strategy. As a consequence, gains and losses arising from changes in own credit spread on long-term debt are not regarded internally as part of managed performance and are excluded from underlying results. Similarly, such gains and


28(d)


Table of Contents

HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
     
 
 
 
 
 

    losses are ignored in the calculation of regulatory capital;
 
  for US$15bn (2008: US$11bn) of financial assets held to meet liabilities under insurance contracts, and certain liabilities under investment contracts with discretionary participation features; and
 
  for US$8bn (2008: US$7bn) of financial assets held to meet liabilities under unit-linked and other investment contracts, as well as the associated liabilities.
     A net expense from financial instruments designated at fair value of US$3.5bn was reported compared with income of US$3.9bn in 2008.
 
A significant change in credit spread on our own debt in 2009 reversed the movement in 2008.
 
     On an underlying basis, we reported income of US$3.0bn in 2009 compared with an expense of US$2.6bn in 2008. The large difference between the reported and underlying results is due to the exclusion of the effect of credit spread-related movements in the fair value of our own long-term debt from underlying performance.
     Income of US$3.8bn was recorded due to a fair value movement on assets held to back insurance and investment contracts, compared with an expense of US$4.8bn in 2008. This reflected investment gains in the current year driven by improved market performance, predominantly affecting the value of assets held in unit-linked and participating funds in Hong Kong, the UK and France.
  To the extent that the investment gains related to assets held to back investment contracts, the expense associated with the corresponding increase in liabilities to customers was also recorded under net income from financial instruments designated at fair value. This expense amounted to US$1.3bn in 2009 compared with an income of US$1.5bn in 2008 when liabilities fell in line with declining asset markets.
 
  To the extent that the investment gains related to assets held to back insurance contracts, they were offset by a corresponding increase in ‘Net insurance claims and movement in liabilities to policyholders’ to reflect the extent to which unit-linked policyholders, in particular, participate in the investment performance experienced in the associated asset portfolios.
Gains less losses from financial investments
Reported gains less losses from financial investments increased by US$323m to US$520m. On an underlying basis, they increased by US$546m.
     Net gains on the disposal of debt securities increased significantly, due to gains recorded on the sale of mortgage-backed securities in North America. They were supplemented by smaller gains, principally on the disposal of available-for-sale bonds in Latin America and the UK.
     Sales of Visa shares contributed significant gains during 2008, with additional gains from further sales in 2009. Other gains recognised during 2008, including those recorded on the sale of MasterCard shares, were not repeated in 2009.
     A significantly lower level of impairments on equity investments was recognised in 2009 than in 2008 in Asia, Europe and North America, reflecting the improvement in the economic situation and equity markets. Of the investments on which material impairments were recognised in 2008, a significant amount reversed during 2009 due to share price appreciation, notably in India and, to a lesser extent, Vietnam; however, under IFRSs all subsequent increases in the fair value are treated as a revaluation and are recognised in other comprehensive income rather than the income statement.
Net earned insurance premiums
Reported net earned insurance premiums amounted to US$10.5bn, a decrease of 3% compared with 2008. On an underlying basis, net earned insurance premiums increased by 3%. Growth was recorded in Asia, Brazil and France, but this was largely offset by significant declines in the UK and the US.
     Net earned insurance premiums continued to grow in Asia, mainly from the launch of new products including a life insurance product designed for high net worth individuals and a guaranteed savings product. In Hong Kong, we retained our position as the leading bancassurer and increased net earned insurance premiums as a result of higher sales of unit-linked and whole life products.
 
Growth in insurance premiums in Asia, Brazil and France was largely offset by declines in the UK and US.
 
     In Latin America, premium growth was driven by higher sales of pension and life products in Brazil, partly due to a number of customers switching their personal pension annuities to us.


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Report of the Directors: Operating and Financial Review (continued)
     
 
 
 
 
 

     In France, growth was significantly influenced by a large one-off reinsurance transaction in June 2008, which passed insurance premiums to a third-party reinsurance provider. Adjusting for this, net earned insurance premiums were ahead of 2008 despite a significant reduction in the distribution network following the disposal of the French regional banks in July 2008.
     In the UK, demand for the Guaranteed Income Bond savings product declined as HSBC offered more favourable rates on an alternative deposit product. As the deposit product was a savings bond rather than an insurance contract, its income was recorded under net interest income, while the associated fall in sales of insurance products led to a US$1.1bn reduction in insurance premium income with an equivalent decrease in ‘Net insurance claims incurred and movement in liabilities to policyholders’, as described below.
     The reduction in origination volumes in the consumer finance business in North America also led to correspondingly lower sales of credit protection insurance as the consumer finance business was closed.
Other operating income
Reported other operating income of US$2.8bn was 54% higher than in 2008. This included a US$280m gain related to the sale of the remaining stake in the card merchant-acquiring business in the UK, compared with a US$425m gain in 2008 from the sale of the first tranche. In 2008, results also included gains of US$71m related to the sale of our stake in Financiera Independencia. On an underlying basis, other operating income rose by 163%, driven mainly by an increase in insurance-related income in Hong Kong, a rise in gains on property disposals and lower losses on foreclosed properties.
 
Increased insurance income in Hong Kong, higher gains on property disposals and lower losses on foreclosed properties in the US helped drive an underlying US$1.5bn rise in other operating income.
 
     Losses recognised on assets held for sale declined as losses on foreclosed properties in HSBC Finance decreased, partly due to lower inventory levels following delays in the foreclosure process and partly due to some stabilisation in real estate prices.
     Property gains of US$576m were recognised in respect of the sale and leaseback of 8 Canada Square, London which was effected through the disposal of our entire shareholding in Project Maple II B.V. (‘PMII’) to the National Pension Service of Korea.
In 2008, we reported a gain of US$416m in respect of the purchase of PMII.
     An increase in insurance sales to new customers in Hong Kong resulted in positive movements in the present value of in-force (‘PVIF’) long-term insurance business. Further positive movements arose from refining the income recognition methodology used in respect of long-term insurance contracts in HSBC Finance. In 2008, a similar refinement in Brazil and our introduction of enhanced benefits to existing pension products in the UK, resulted in favourable movements in PVIF.
     In Hong Kong, a gain of US$110m was recognised in respect of a property disposal, and in Argentina a gain was realised on the sale of the head office building.
     Other operating income includes higher gains on the sale of prime residential mortgage portfolios in the US, gains from the extinguishment of certain debt issued by our mortgage securitisation vehicles in the UK and lower costs associated with the provision of support to certain money market funds.
Net insurance claims incurred and movement in liabilities to policyholders
Reported net insurance claims incurred and movement in liabilities to policyholders increased by 81% to US$12.5bn. On an underlying basis, they increased by 94%.
     The increase in net insurance claims incurred and movement in liabilities to policyholders mainly reflected the improvement in investment market performance compared with 2008 described above under ‘Financial instruments designated at fair value’. Higher investment gains were broadly matched by movement in liabilities to policyholders on unit-linked and, to a certain extent, participating policies whose policyholders share in the investment performance of the supporting assets. The gains generated on the assets held to support insurance contract liabilities are reported in ‘Net income from financial instruments designated at fair value’.
     New business growth in a number of regions during 2009, particularly Hong Kong and Singapore, also contributed to an increase in the movement in liabilities to policyholders, as did the non-recurrence of a large one-off reinsurance transaction in France in 2008. The decline in sales of a Guaranteed Income Bond noted above had a corresponding effect on movement in liabilities to policyholders in the UK.
     As a consequence of a rising incidence and severity of claims, aggregate charges of US$310m were made to strengthen reserves in the UK motor


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HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
     
 
 
 
 
 

book and the Irish reinsurance business during 2009. The UK motor insurance business was placed into run-off in September 2009.
Loan impairment charges and other credit risk provisions
Reported loan impairment charges and other credit risk provisions were US$26.5bn in 2009, an increase of 6% over 2008, 9% on an underlying basis. Within this, collectively assessed impairment allowances declined while individually assessed impairment allowances continued to increase.
     Our aggregate outstanding customer loan impairment allowances at 31 December 2009 of US$25.5bn represented 3% of gross customer advances (net of reverse repos and settlement accounts) compared with 2.6% at the end of 2008.
     Loan impairment charges declined in certain businesses, notably PFS in North America and CMB in Hong Kong, but this was more than offset by increases elsewhere, primarily on individually significant loans within GB&M and more broadly on CMB exposures outside Hong Kong as the global economic downturn adversely affected the ability of many customers to service their loan commitments. As a consequence, loan impairment charges rose despite an underlying 9% decline in gross loans and advances to customers which was driven mainly by the run-off of the US consumer finance portfolios.
     In our US PFS business, loan impairment charges declined by 11% to US$14.2bn, as additional delinquencies due to the continued deterioration in the US economy were more than offset by the effect of lower balances in the run-off portfolios in HSBC Finance.
     In HSBC Finance, loan impairment charges decreased by 12%. The reduction arose in most portfolios, but mainly in Mortgage Services as the portfolio continued to run off. In Consumer Lending, loan impairment charges increased, particularly in the unsecured personal lending portfolio, due to a deterioration in the 2006 and 2007 vintages and, to a lesser extent, first lien real estate secured loans, which was partly offset by lower loan impairment charges in the real estate secured portfolio. Loan impairment charges in the Card and Retail Services portfolio decreased despite the state of the US economy and higher levels of unemployment and personal bankruptcy. The main reason was the decline in card balances following actions taken to manage risk beginning in the fourth quarter of 2007 and continuing through 2009, and stable credit conditions.
     In HSBC Bank USA, increased loan impairment charges in the personal lending portfolios were due to additional delinquencies which resulted in increased write-offs in the prime first lien mortgage loan portfolios as house prices continued to deteriorate in certain markets.
     Loan impairment charges and other credit risk provisions increased significantly in GB&M. Loan impairment charges increased, reflecting the impairment of a small number of exposures in the financial and property sectors in Europe and the Middle East. Further impairments were also recognised in respect of certain asset-backed securities held in the available-for-sale portfolio, reflecting mark-to-market losses which we judged to be significantly in excess of the likely ultimate cash losses.
 
Loan impairment charges declined in PFS in the US but rose in CMB outside Hong Kong and in GB&M.
 
     In the UK, loan impairment charges rose in both the CMB and PFS portfolios. However, despite the contraction in the economy, charges remained a low proportion of the portfolio. In CMB, loan impairment charges largely reflected economic weakness in a broad range of sectors.
     In UK PFS, loan impairment charges also increased as unemployment rose. This was seen primarily in the credit card and unsecured personal loan portfolios. In the residential mortgage portfolios, delinquency rates decreased as we continued to benefit from very limited exposure to buy-to-let and self-certified mortgages. Our mortgage exposure continued to be well secured, with an average loan-to-value ratio for new UK business in HSBC Bank’s mortgage portfolio, excluding First Direct, of under 55% in 2009, compared with 59% in 2008.
     In the Middle East, our loan impairment charges increased markedly from US$280m to US$1.3bn as the region experienced a significant economic contraction in activity, predominantly in real estate and construction, which particularly affected the UAE. CMB recorded a number of specific loan impairment charges and a significant increase in collective loan impairment charges. Lower employment in the region, largely driven by the decline in construction activity, led to a rise in loan impairment charges in PFS, particularly in the credit card and personal lending portfolios.
     In Latin America, our portfolios were affected by the weaker economic environment for much of the year. In PFS, loan impairment charges rose by 12% to US$2.0bn, with increased delinquencies in


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HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
     
 
 
 
 
 

credit cards, mortgages, vehicle finance and payroll loans due to higher unemployment. In the Brazilian CMB portfolios, higher delinquencies were experienced primarily in the business banking and mid-market segments. In Mexico, action taken in 2008 to curtail originations and increase collection resources held loan impairment charges broadly unchanged notwithstanding the deterioration in the economy and the impact of the H1N1 virus.
     In India, as in Mexico, curtailment of origination activity in unsecured personal lending slowed the increase in loan impairment charges in the unsecured credit card and personal lending portfolios in PFS. In CMB, a higher number of corporate failures including a number of fraud-related losses, led to increased loan impairment charges.
     Loan impairment charges and other credit risk provisions in Hong Kong decreased by 35% to US$500m as the economic environment improved in 2009, credit conditions recovered and international trade volumes improved.
     In GPB, loan impairment charges increased from a very low level, largely attributable to a specific charge relating to a single client relationship in the US.
Operating expenses
Reported operating expenses fell by US$14.7bn to US$34.4bn, with the most significant feature being the non-recurrence of the goodwill impairment charge of US$10.6bn in 2008 to fully write off goodwill in PFS in North America. Excluding this and on an underlying basis, operating expenses fell by 4%.
 
Underlying operating expenses excluding goodwill impairment fell by 4%.
 
     Employee compensation and benefits fell by 4% as costs in the US declined following the closure of the branch-based consumer finance business in the first quarter of 2009. Average headcount in most regions was lower and this was reflected in lower costs. In the UK, a change in the basis of delivering death-in-service, ill health and early retirement benefits for some UK employees generated a one-off accounting gain of US$499m which was partly offset by increased regular pension costs. There were higher performance-related costs in GB&M reflecting its results. The UK and French governments announced one-off taxes in late 2009 in respect of certain bonuses payable by banks and banking groups. In both countries there is uncertainty over the interpretation of the draft proposals, and detailed analysis of individual awards
in the context of the final legislation will be required to determine the precise effect of the taxes. The estimated tax payable under the proposals as currently drafted is US$355m in the UK and US$45m in France. The taxes will be payable and accounted for in 2010 once the legislation is enacted.
     Premises and equipment costs increased marginally with higher rental costs reflecting the sale and leaseback of a number of properties in 2008. One-off costs incurred due to the closure of the Consumer Lending branch network in the US were partly offset by savings resulting from the closure.
     General and administrative expenses fell as we focused on managing costs tightly and increasing efficiency. Marketing and advertising costs fell across the Group, most notably in Card and Retail Services in North America, and in the UK. Travel and entertainment costs, and expenditure related to services contracted to third parties, fell, primarily in Europe and North America. Better use of direct channels, increased automation of manual processes, enhanced utilisation of global service centres and elimination of redundant systems continued to be driven through our One HSBC programme. In North America, cost savings also resulted in the Consumer Lending Business from the discontinuation of loan originations and the closure of branches.
Share of profit in associates and joint ventures
The share of profit in associates and joint ventures was US$1.8bn, an increase of 7% on 2008, and 6% on an underlying basis.
     Our share of profits from Ping An Insurance increased by 62% as a result of the non-recurrence of its impairment of its investment in Fortis SA/NV and Fortis N.V. (‘Fortis’) in 2008 and an increase in new business sales and investment returns which were boosted by a recovery in equity markets during 2009. This was partly offset by the non-recurrence of favourable changes to investment assumptions in the first half of 2008.
 
6% underlying increase in share of profit in associates and joint ventures.
 
     Our share of profits from the Bank of Communications remained in line with 2008 as higher fee and trading income and a lower tax charge were broadly offset by a decline in net interest income and higher loan impairment charges.
     Profits from The Saudi British Bank were lower than in 2008 as an increase in loan impairment charges was only partly offset by increased operating income.


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HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
     
 
 
 
 
 

     The share of profits from joint ventures fell due to a decline in the profitability of HSBC Saudi Arabia Ltd as a result of a slowdown in initial public offerings (‘IPO’s) and a decline in assets under management. This was partly offset by an increase in profits from HSBC Merchant Services UK Ltd in the first half of 2009 compared with the second half of 2008. HSBC Merchant Services UK Ltd was created in June 2008 and sold in June 2009.
Tax expense
The most significant factor influencing the year on year changes to the effective tax rate is the changing geographical split of profits, including the relative proportion of tax on the share of profits in associates and joint ventures included within profit before tax. The impact of the tax on profit on associates and joint ventures included within pre-tax profits was a reduction in the effective tax rate of 7.1% in 2009 and 5.1% in 2008.
     In 2009 the losses in HSBC’s US operations were tax effected at the local tax rate of 35.4%, while the profits in the rest of the HSBC Group were taxed at their local rates which averaged 18.8%. The combination of these two rates produced an overall tax effect of 5.44%.
     The tax expense and effective tax rate also fell in 2009 due to the non-recurrence of the US$10.6bn goodwill impairment charge in North America which, for tax purposes, was non-deductible and hence increased the effective tax rate by some 16% in 2008.
      


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HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
     
 
 
 
 
 
Consolidated balance sheet
 
Five-year summary consolidated balance sheet and selected financial information
                                         
    At 31 December
    2010     2009     2008     2007     2006  
    US$m     US$m     US$m     US$m     US$m  
 
                                       
ASSETS
                                       
Cash and balances at central banks
    57,383       60,655       52,396       21,765       12,732  
Trading assets
    385,052       421,381       427,329       445,968       328,147  
Financial assets designated at fair value
    37,011       37,181       28,533       41,564       20,573  
Derivatives
    260,757       250,886       494,876       187,854       103,702  
Loans and advances to banks
    208,271       179,781       153,766       237,366       185,205  
Loans and advances to customers35
    958,366       896,231       932,868       981,548       868,133  
Financial investments
    400,755       369,158       300,235       283,000       204,806  
Other assets
    147,094       149,179       137,462       155,201       137,460  
 
                     
 
                                       
Total assets
    2,454,689       2,364,452       2,527,465       2,354,266       1,860,758  
 
                     
 
                                       
LIABILITIES AND EQUITY
                                       
Liabilities
                                       
Deposits by banks
    110,584       124,872       130,084       132,181       99,694  
Customer accounts
    1,227,725       1,159,034       1,115,327       1,096,140       896,834  
Trading liabilities
    300,703       268,130       247,652       314,580       226,608  
Financial liabilities designated at fair value
    88,133       80,092       74,587       89,939       70,211  
Derivatives
    258,665       247,646       487,060       183,393       101,478  
Debt securities in issue
    145,401       146,896       179,693       246,579       230,325  
Liabilities under insurance contracts
    58,609       53,707       43,683       42,606       17,670  
Other liabilities
    109,954       148,414       149,150       113,432       103,010  
 
                     
 
                                       
Total liabilities
    2,299,774       2,228,791       2,427,236       2,218,850       1,745,830  
 
                     
 
                                       
Equity
                                       
Total shareholders’ equity
    147,667       128,299       93,591       128,160       108,352  
Non-controlling interests
    7,248       7,362       6,638       7,256       6,576  
 
                     
 
                                       
Total equity
    154,915       135,661       100,229       135,416       114,928  
 
                     
 
                                       
Total equity and liabilities
    2,454,689       2,364,452       2,527,465       2,354,266       1,860,758  
 
                     
 
                                       
Five-year selected financial information
                                       
 
                                       
Called up share capital
    8,843       8,705       6,053       5,915       5,786  
Capital resources36,37
    167,555       155,729       131,460       152,640       127,074  
Undated subordinated loan capital
    2,781       2,785       2,843       2,922       3,219  
Preferred securities and dated subordinated loan capital38
    54,421       52,126       50,307       49,472       42,642  
 
                                       
Risk weighted assets and capital ratios36
                                       
Risk weighted assets
    1,103,113       1,133,168       1,147,974       1,123,782       938,678  
 
                                       
 
    %       %       %       %       %  
 
                                       
Tier 1 ratio
    12.1       10.8       8.3       9.3       9.4  
Total capital ratio
    15.2       13.7       11.4       13.6       13.5  
 
                                       
Financial statistics
                                       
Loans and advances to customers as a percentage of customer accounts
    78.1       77.3       83.6       89.5       96.8  
Average total shareholders’ equity to average total assets
    5.53       4.72       4.87       5.69       5.97  
 
                                       
Net asset value per ordinary share at year-end39 (US$)
    7.94       7.17       7.44       10.72       9.24  
Number of US$0.50 ordinary shares in issue (millions)
    17,686       17,408       12,105       11,829       11,572  
 
                                       
Closing foreign exchange translation rates to US$:
                                       
US$1: £
    0.644       0.616       0.686       0.498       0.509  
US$1: €
    0.748       0.694       0.717       0.679       0.759  
For footnotes, see page 83.
A more detailed consolidated balance sheet is contained in the Financial Statements on page 240.

29


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HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
     
 
 
 
 
 

Movement in 2010
Total assets amounted to US$2.5 trillion, 4% higher than at 31 December 2009. Excluding the effect of currency movements, underlying total assets increased by 5%. This reflected higher mortgage lending in Hong Kong and the UK, strong demand for commercial loans and a rise in trading assets in North America and Asia as a result of customer demand, supported by improved liquidity generated by higher deposits and our debt issuance programme.
     The Group’s reported tier 1 ratio increased from 10.8% to 12.1% due to the contribution from profits attributable to shareholders for the year net of dividends paid, the issue of hybrid capital securities net of redemptions, and a reduction in the reported level of risk-weighted assets (‘RWA’s). The latter was driven by a decline in some retail portfolio exposures in North America as a result of run-off, partly offset by the effect of lending growth in Asia. Market risk RWAs decreased as a result of reduced volatility and continuing exposure management. For more details of capital and RWAs, see page 177.
     The following commentary is on an underlying basis.
Assets
Cash and balances at central banks decreased by 4% as a result of lower year-end cash balances in North America as excess liquidity was redeployed into highly-rated government debt securities. This was partly offset by higher year-end cash balances in Europe.
     Trading assets fell by 6%, due to the deconsolidation of the Constant Net Asset Value (‘CNAV’) funds totalling US$44bn (see Note 43 on the Financial Statements). This was offset, in part, by higher issuance of and customer demand for government and government agency debt securities, particularly in North America and Asia, and an increase in holdings of equities to hedge derivative positions arising from a rise in client trading activity. Higher customer-driven trading volumes also resulted in an increase in reverse repo balances in North America; this was partly offset by a reduction in reverse repo balances in Europe due to market uncertainty.
 
Strong increase in loans and advances to customers and customer accounts, notably in Asia, drove balance sheet growth.
 
     Financial assets designated at fair value grew by 3% due to an increase in volumes in equity funds and a rise in the fair value of equity securities held
within the insurance business, particularly in Europe and Hong Kong, as market values recovered and client risk appetite returned. This was partly offset by the sale of European government debt securities by Balance Sheet Management.
     Derivative assets rose by 8%. This was driven by increases in the fair value of interest rate contracts as a result of downward shifts of major yield curves, offset by higher netting from increased trading with clearing houses. The notional value of outstanding contracts also rose, reflecting an increase in the number of open transactions compared with 2009.
     Loans and advances to banks increased by 16% due to higher placements with commercial and central banks in Europe and Latin America.
     Loans and advances to customers grew by 8% as we targeted commercial loans and, in the improved economic conditions, demand grew from customers, notably in Asia. The increase in demand for credit, along with competitive pricing, also drove continued growth in mortgage lending in Hong Kong and the UK, though mortgage balances declined in North America as the Consumer Lending and Mortgage Services portfolios continued to run off and credit card lending fell.
     Financial investments rose by 9%, mainly in North America and Europe, as Balance Sheet Management redeployed cash into available-for-sale treasury bills and government agency debt securities. This was partly offset by a decline in financial investments in Asia, as a result of disposals and debt securities that matured and were not replaced to support growth in commercial lending.
Liabilities
Deposits by banks decreased by 8%, reflecting a notable decline in central bank deposits in Europe which was partly offset by an increase in central bank deposits in Asia.
     Customer accounts were 7% higher, driven by an overall increase in savings and current accounts across most regions, particularly in Asia and Europe. Growth in Premier and online savings contributed to a significant increase in current account balances as customers responded well to targeted promotional campaigns.
     Trading liabilities increased by 16%. Higher repo balances in North America were reported as a result of increased trading volumes of treasury and corporate bonds driven by market volatility in the bond market. In Europe, short bond and equity


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HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
     
 
 
 
 
 

positions used to hedge derivative transactions increased, reflecting higher client demand.
     Financial liabilities designated at fair value rose by 12% due to debt issuances by HSBC entities in Europe during 2010.
     Derivative businesses are managed within market risk limits and, as a consequence, the increase in the value of derivative liabilities broadly matched that of derivative assets.
     Debt securities in issue were in line with 2009, as new issuances of medium-term notes by HSBC entities in Europe during 2010 were offset by lower funding requirements in North America as the consumer finance portfolios in run-off declined.
     Liabilities under insurance contracts grew by 12%. This was driven by strong life insurance sales
in Hong Kong following the launch of several new products, and gains on unit-linked products as investment market values improved.
     Other liabilities were 26% lower than at 31 December 2009 due to the deconsolidation of the CNAV funds (see ‘Trading assets’ above).
Equity
Total shareholders’ equity increased by 17%, driven by profits generated during the year and the issue of Perpetual Subordinated Capital Securities, a form of tier 1 hybrid capital securities, in June 2010. In addition, the negative balance on the available-for-sale reserve declined from US$10.0bn at 31 December 2009 to US$4.1bn at 31 December 2010, largely reflecting improvements in the market value of assets.


Reconciliation of reported and underlying assets and liabilities
                                                         
    31 December 2010 compared with 31 December 2009
                    31 Dec 09                            
    31 Dec 09             at 31 Dec 10     Under-     31 Dec 10             Under-  
    as     Currency     exchange     lying     as     Reported     lying  
    reported     Translation 40   rates     change     reported     change     change  
HSBC   US$m     US$m     US$m     US$m     US$m     %     %  
 
                                                       
Cash and balances at central banks
    60,655       (731 )     59,924       (2,541 )     57,383       (5 )     (4 )
Trading assets
    421,381       (12,483 )     408,898       (23,846 )     385,052       (9 )     (6 )
Financial assets designated at fair value
    37,181       (1,134 )     36,047       964       37,011             3  
Derivative assets
    250,886       (9,285 )     241,601       19,156       260,757       4       8  
Loans and advances to banks
    179,781       (5 )     179,776       28,495       208,271       16       16  
Loans and advances to customers
    896,231       (10,788 )     885,443       72,923       958,366       7       8  
Financial investments
    369,158       (268 )     368,890       31,865       400,755       9       9  
 
                                                       
Other assets
    149,179       (1,826 )     147,353       (259 )     147,094       (1 )      
 
                                   
 
                                                       
Total assets
    2,364,452       (36,520 )     2,327,932       126,757       2,454,689       4       5  
 
                                   
 
                                                       
Deposits by banks
    124,872       (4,182 )     120,690       (10,106 )     110,584       (11 )     (8 )
Customer accounts
    1,159,034       (8,064 )     1,150,970       76,755       1,227,725       6       7  
Trading liabilities
    268,130       (8,660 )     259,470       41,233       300,703       12       16  
Financial liabilities designated at fair value
    80,092       (1,570 )     78,522       9,611       88,133       10       12  
Derivative liabilities
    247,646       (9,262 )     238,384       20,281       258,665       4       9  
 
                                                       
Debt securities in issue
    146,896       (1,066 )     145,830       (429 )     145,401       (1 )      
Liabilities under insurance contracts
    53,707       (1,593 )     52,114       6,495       58,609       9       12  
Other liabilities
    148,414       (431 )     147,983       (38,029 )     109,954       (26 )     (26 )
 
                                   
 
                                                       
Total liabilities
    2,228,791       (34,828 )     2,193,963       105,811       2,299,774       3       5  
 
                                   
 
                                                       
Total shareholders’ equity
    128,299       (1,679 )     126,620       21,047       147,667       15       17  
Non-controlling interests
    7,362       (13 )     7,349       (101 )     7,248       (2 )     (1 )
 
                                   
 
                                                       
Total equity
    135,661       (1,692 )     133,969       20,946       154,915       14       16  
 
                                   
 
                                                       
Total equity and liabilities
    2,364,452       (36,520 )     2,327,932       126,757       2,454,689       4       5  
 
                                   
For footnote, see page 83.
     In 2010, the effect of acquisitions was not material.

31


Table of Contents

HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
     
 
 
 
 
 
Reconciliation of reported and underlying loans and advances to customers and customer accounts by geographical region
                                                         
    31 December 2010 compared with 31 December 2009
                    31 Dec 09                            
    31 Dec 09             at 31 Dec 10     Under-     31 Dec 10             Under-  
    as     Currency     exchange     lying     as     Reported     lying  
    reported     translation 11   rates     change     reported     change     change  
    US$m     US$m     US$m     US$m     US$m     %     %  
 
                                                       
Loans and advances to customers (net)
                                                       
Europe
    439,481       (20,778 )     418,703       17,096       435,799       (1 )     4  
Hong Kong
    99,381       (92 )     99,289       41,402       140,691       42       42  
Rest of Asia-Pacific
    80,043       5,802       85,845       22,886       108,731       36       27  
Middle East
    22,844       (139 )     22,705       1,921       24,626       8       8  
North America
    206,853       2,562       209,415       (18,883 )     190,532       (8 )     (9 )
Latin America
    47,629       1,857       49,486       8,501       57,987       22       17  
 
                                   
 
                                                       
 
    896,231       (10,788 )     885,443       72,923       958,366       7       8  
 
                                   
 
                                                       
Customer accounts
                                                       
Europe
    495,019       (21,560 )     473,459       18,104       491,563       (1 )     4  
Hong Kong
    275,441       (474 )     274,967       22,517       297,484       8       8  
Rest of Asia-Pacific
    133,999       8,938       142,937       15,218       158,155       18       11  
Middle East
    32,529       (320 )     32,209       1,302       33,511       3       4  
North America
    149,157       2,259       151,416       7,070       158,486       6       5  
Latin America
    72,889       3,093       75,982       12,544       88,526       21       17  
 
                                   
 
                                                       
 
    1,159,034       (8,064 )     1,150,970       76,755       1,227,725       6       7  
 
                                   
Reconciliation of reported and underlying loans and advances to customers and customer accounts by customer groups and global businesses
                                                         
    31 December 2010 compared with 31 December 2009
                    31 Dec 09                            
    31 Dec 09             at 31 Dec 10     Under-     31 Dec 10             Under-  
    as     Currency     exchange     lying     as     Reported     lying  
    reported     translation 11   rates     change     reported     change     change  
    US$m     US$m     US$m     US$m     US$m     %     %  
 
                                                       
Loans and advances to customers (net)
                                                       
Personal Financial Services
    399,460       (2,176 )     397,284       (6,327 )     390,957       (2 )     (2 )
Commercial Banking
    199,674       (1,493 )     198,181       41,105       239,286       20       21  
Global Banking and Markets
    256,956       (6,622 )     250,334       34,169       284,503       11       14  
Global Private Banking
    37,031       (431 )     36,600       4,065       40,665       10       11  
Other
    3,110       (66 )     3,044       (89 )     2,955       (5 )     (3 )
 
                                   
 
                                                       
 
    896,231       (10,788 )     885,443       72,923       958,366       7       8  
 
                                   
 
                                                       
Customer accounts
                                                       
Personal Financial Services
    499,109       (1,710 )     497,399       27,785       525,184       5       6  
Commercial Banking
    267,388       (1,537 )     265,851       20,156       286,007       7       8  
Global Banking and Markets
    284,727       (4,711 )     280,016       28,437       308,453       8       10  
Global Private Banking
    106,533       (108 )     106,425       705       107,130       1       1  
Other
    1,277       2       1,279       (328 )     951       (26 )     (26 )
 
                                   
 
                                                       
 
    1,159,034       (8,064 )     1,150,970       76,755       1,227,725       6       7  
 
                                   
For footnote, see page 83.
     In 2010, the effect of acquisitions was not material.

31(a)


Table of Contents

HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
     
 
 
 
 
 

Average balance sheet                                       
Average balance sheet and net interest income
Average balances and related interest are shown for the domestic operations of our principal commercial banks by geographical region. ‘Other operations’ comprise the operations of our principal commerical banking and consumer finance entities outside their domestic markets and all other banking operations, including investment banking balances and transactions.
     Average balances are based on daily averages for the principal areas of our banking activities with monthly or less frequent averages used elsewhere.
     Balances and transactions with fellow subsidiaries are reported gross in the principal commercial banking and consumer finance entities within ‘Other interest-earning assets’ and ‘Other interest-bearing liabilities’ as appropriate and the elimination entries are included within ‘Other operations’ in those two categories.
     Net interest margin numbers are calculated by dividing net interest income as reported in the income statement by the average interest-earning assets from which interest income is reported within the ‘Net interest income’ line of the income statement. Interest income and interest expense arising from trading assets and liabilities and the funding thereof is included within ‘Net trading income’ in the income statement.


Assets
                                                                             
        2010     2009     2008  
        Average     Interest             Average     Interest             Average     Interest        
        balance     income     Yield     balance     income     Yield     balance     income     Yield  
        US$m     US$m     %     US$m     US$m     %     US$m     US$m     %  
   
 
                                                                       
Summary                                                                        
   
 
                                                                       
Total interest-earning assets (itemised below)
    1,472,294       58,345       3.96       1,384,705       62,096       4.48       1,466,622       91,301       6.23  
Trading assets63     332,511       6,027       1.81       357,504       7,614       2.13       428,539       16,742       3.91  
Financial assets designated at fair value64     52,692       1,033       1.96       62,143       1,032       1.66       37,303       1,108       2.97  
Impairment provisions     (22,905 )                     (26,308 )                     (20,360 )                
Non-interest-earning assets     664,308                       667,942                       596,885                  
   
 
                                               
   
 
                                                                       
Total assets and interest income     2,498,900       65,405       2.62       2,445,986       70,742       2.89       2,508,989       109,151       4.35  
   
 
                                               
   
 
                                                                       
Short-term funds and loans and advances to banks
                                                                       
   
 
                                                                       
Europe  
HSBC Bank
    47,741       1,290       2.70       38,455       1,379       3.59       46,703       2,187       4.68  
   
HSBC Private Banking Holdings (Suisse)
    2,603       15       0.58       4,451       43       0.97       8,040       333       4.14  
   
HSBC France
    47,094       337       0.72       37,239       440       1.18       35,801       1,495       4.18  
   
 
                                                                       
Hong Kong  
Hang Seng Bank
    14,884       222       1.49       16,626       202       1.21       17,402       587       3.37  
   
The Hongkong and Shanghai Banking Corporation
    16,544       117       0.71       27,903       182       0.65       47,244       1,344       2.84  
   
 
                                                                       
Rest of Asia-Pacific
 
The Hongkong and Shanghai Banking Corporation
    30,288       464       1.53       23,107       326       1.41       27,907       881       3.16  
   
HSBC Bank Malaysia
    5,113       126       2.46       3,776       81       2.15       4,659       165       3.54  
   
 
                                                                       
Middle East  
HSBC Bank Middle East
    5,335       60       1.12       4,312       52       1.21       6,028       188       3.12  
   
 
                                                                       
North America  
HSBC Bank USA
    28,653       103       0.36       2,338       94       4.02       9,595       328       3.42  
   
HSBC Bank Canada
    3,823       16       0.42       2,934       10       0.34       3,354       107       3.19  
   
 
                                                                       
Latin America  
HSBC Mexico
    3,238       129       3.98       3,722       149       4.00       3,682       247       6.71  
   
Brazilian operations65
    16,102       1,525       9.47       10,490       1,003       9.56       7,959       951       11.95  
   
HSBC Bank Panama
    959       8       0.83       1,187       10       0.84       1,133       30       2.65  
   
HSBC Bank Argentina
    169       20       11.83       256       29       11.33       612       43       7.03  
   
 
                                                                       
Other operations     14,196       123       0.87       15,782       199       1.26       19,992       760       3.80  
   
 
                                               
   
 
                                                                       
   
 
    236,742       4,555       1.92       192,578       4,199       2.18       240,111       9,646       4.02  
   
 
                                               

31(b)


Table of Contents

HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
     
 
 
 
 
 
                                                                             
        2010     2009     2008  
        Average     Interest             Average     Interest             Average     Interest        
        balance     income     Yield     balance     income     Yield     balance     income     Yield  
        US$m     US$m     %     US$m     US$m     %     US$m     US$m     %  
   
 
                                                                       
Loans and advances to customers                                                                        
   
 
                                                                       
Europe  
HSBC Bank
    265,163       9,761       3.68       276,602       10,898       3.94       288,214       18,587       6.45  
   
HSBC Private Banking Holdings (Suisse)
    11,987       191       1.59       9,993       176       1.76       12,355       494       4.00  
   
HSBC France
    66,910       1,684       2.52       71,048       1,932       2.72       73,455       3,604       4.91  
   
HSBC Finance
    2,251       198       8.80       3,094       319       10.31       4,808       505       10.50  
   
 
                                                                       
Hong Kong  
Hang Seng Bank
    51,028       1,313       2.57       42,619       1,194       2.80       42,304       1,589       3.76  
   
The Hongkong and Shanghai Banking Corporation
    65,226       1,755       2.69       55,287       1,757       3.18       54,628       2,291       4.19  
   
 
                                                                       
Rest of Asia-Pacific  
The Hongkong and Shanghai Banking Corporation
    81,080       3,928       4.84       66,262       3,668       5.54       77,741       5,163       6.64  
   
HSBC Bank Malaysia
    9,614       531       5.52       8,113       455       5.61       8,407       553       6.58  
   
 
                                                                       
Middle East  
HSBC Bank Middle East
    21,193       1,303       6.15       22,612       1,593       7.04       23,697       1,549       6.54  
   
 
                                                                       
North America  
HSBC Bank USA
    78,556       4,582       5.83       98,422       5,541       5.63       93,088       5,758       6.19  
   
HSBC Finance
    78,105       7,741       9.91       101,132       9,941       9.83       140,957       15,835       11.23  
   
HSBC Bank Canada
    46,360       1,643       3.54       43,072       1,499       3.48       48,331       2,455       5.08  
   
 
                                                                       
Latin America  
HSBC Mexico
    12,309       1,571       12.76       12,185       1,708       14.02       17,252       2,565       14.87  
   
Brazilian operations65
    23,366       5,118       21.90       18,704       4,494       24.03       19,642       4,879       24.84  
   
HSBC Bank Panama
    9,348       815       8.72       9,302       864       9.29       8,620       810       9.40  
   
HSBC Bank Argentina
    2,460       367       14.92       1,940       357       18.40       2,136       378       17.70  
   
 
                                                                       
Other operations     33,543       1,685       5.02       29,670       1,905       6.42       28,027       1,707       6.09  
   
 
                                               
   
 
                                                                       
   
 
    858,499       44,186       5.15       870,057       48,301       5.55       943,662       68,722       7.28  
   
 
                                               
   
 
                                                                       
Financial investments                                                                        
   
 
                                                                       
Europe  
HSBC Bank
    85,206       1,725       2.02       79,763       2,321       2.91       83,725       3,840       4.59  
   
HSBC Private Banking Holdings (Suisse)
    17,013       287       1.69       15,602       363       2.33       12,018       553       4.60  
   
HSBC France
    4,017       102       2.54       5,327       141       2.65       14,862       795       5.35  
   
 
                                                                       
Hong Kong  
Hang Seng Bank
    30,334       541       1.78       24,594       630       2.56       24,031       1,063       4.42  
   
The Hongkong and Shanghai Banking Corporation
    65,256       477       0.73       52,965       644       1.22       15,361       563       3.67  
   
 
                                                                       
Rest of Asia-Pacific  
The Hongkong and Shanghai Banking Corporation
    37,833       1,161       3.07       34,056       1,039       3.05       31,992       1,507       4.71  
   
HSBC Bank Malaysia
    911       28       3.07       1,218       37       3.04       937       36       3.84  
   
 
                                                                       
Middle East  
HSBC Bank Middle East
    8,086       126       1.56       6,996       118       1.69       5,671       144       2.54  
   
 
                                                                       
North America  
HSBC Bank USA
    38,541       1,156       3.00       27,253       969       3.56       25,089       1,232       4.91  
   
HSBC Finance
    2,834       116       4.09       2,426       120       4.95       2,908       143       4.92  
   
HSBC Bank Canada
    14,310       257       1.80       10,282       205       1.99       7,037       197       2.80  
   
 
                                                                       
Latin America  
HSBC Mexico
    7,177       388       5.41       3,916       227       5.80       3,470       244       7.03  
   
Brazilian operations65
    9,564       1,089       11.39       6,930       820       11.83       6,758       853       12.62  
   
HSBC Bank Panama
    996       38       3.82       604       39       6.46       618       47       7.61  
   
HSBC Bank Argentina
    370       58       15.68       181       35       19.34       287       47       16.38  
   
 
                                                                       
Other operations     56,523       1,826       3.23       50,767       1,717       3.38       29,632       1,354       4.57  
   
 
                                               
   
 
                                                                       
   
 
    378,971       9,375       2.47       322,880       9,425       2.92       264,396       12,618       4.77  
   
 
                                               

31(c)


Table of Contents

HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
     
 
 
 
 
 
Assets (continued)
                                                                             
        2010     2009     2008  
        Average     Interest             Average     Interest             Average     Interest        
        balance     income     Yield     balance     income     Yield     balance     income     Yield  
        US$m     US$m     %     US$m     US$m     %     US$m     US$m     %  
   
 
                                                                       
Other interest-earning assets                                                                        
   
 
                                                                       
Europe  
HSBC Bank
    14,255       100       0.70       17,406       188       1.08       25,885       630       2.43  
   
HSBC Private Banking Holdings (Suisse)
    17,738       241       1.36       21,450       360       1.68       21,189       875       4.13  
   
HSBC France
    9,954       93       0.93       11,867       172       1.45       23,414       630       2.69  
   
 
                                                                       
Hong Kong  
Hang Seng Bank
    1,077       13       1.21       2,618       32       1.22       1,629       48       2.95  
   
The Hongkong and Shanghai Banking Corporation
    27,112       260       0.96       26,657       214       0.80       33,571       949       2.83  
   
 
                                                                       
Rest of Asia-Pacific  
The Hongkong and Shanghai Banking Corporation
    18,476       55       0.30       19,917       106       0.53       24,492       352       1.44  
   
HSBC Bank Malaysia
    745       14       1.88       407       6       1.47       212       7       3.30  
   
 
                                                                       
Middle East  
HSBC Bank Middle East
    1,272       46       3.62       541       46       8.50       843       63       7.47  
   
 
                                                                       
North America  
HSBC Bank USA
    3,467       58       1.67       3,327       71       2.13       3,091       188       6.08  
   
HSBC Finance
    2,895       7       0.24       2,995       6       0.20       2,638       63       2.39  
   
HSBC Bank Canada
    1,287       20       1.55       773       9       1.16       1,025       25       2.44  
   
 
                                                                       
Latin America  
HSBC Mexico
    158       9       5.70       138                   193       2       1.04  
   
Brazilian operations65
    1,170       80       6.84       1,074       46       4.28       1,438       147       10.22  
   
HSBC Bank Panama
    1,234       12       0.97       1,372       9       0.66       1,807       23       1.27  
   
HSBC Bank Argentina
    87                   51                   58       1       1.72  
   
 
                                                                       
Other operations     (102,845 )     (779 )             (111,403 )     (1,094 )             (123,032 )     (3,688 )        
   
 
                                               
   
 
                                                                       
   
 
    (1,918 )     229       (11.94 )     (810 )     171       (21.11 )     18,453       315       1.71  
   
 
                                               
   
 
                                                                       
Total interest-earning assets                                                                        
   
 
                                                                       
Europe  
HSBC Bank
    412,365       12,876       3.12       412,226       14,786       3.59       444,527       25,244       5.68  
   
HSBC Private Banking Holdings (Suisse)
    49,341       734       1.49       51,496       942       1.83       53,602       2,255       4.21  
   
HSBC France
    127,975       2,216       1.73       125,481       2,685       2.14       147,532       6,524       4.42  
   
HSBC Finance
    2,251       198       8.80       3,094       319       10.31       4,808       505       10.50  
   
 
                                                                       
Hong Kong  
Hang Seng Bank
    97,323       2,089       2.15       86,457       2,058       2.38       85,366       3,287       3.85  
   
The Hongkong and Shanghai Banking Corporation
    174,138       2,609       1.50       162,812       2,797       1.72       150,804       5,147       3.41  
   
 
                                                                       
Rest of Asia-Pacific  
The Hongkong and Shanghai Banking Corporation
    167,677       5,608       3.34       143,342       5,139       3.59       162,132       7,903       4.87  
   
HSBC Bank Malaysia
    16,383       699       4.27       13,514       579       4.28       14,215       761       5.35  
   
 
                                                                       
Middle East  
HSBC Bank Middle East
    35,886       1,535       4.28       34,461       1,809       5.25       36,239       1,944       5.36  
   
 
                                                                       
North America  
HSBC Bank USA
    149,217       5,899       3.95       131,340       6,675       5.08       130,863       7,506       5.74  
   
HSBC Finance
    83,834       7,864       9.38       106,553       10,067       9.45       146,503       16,041       10.95  
   
HSBC Bank Canada
    65,780       1,936       2.94       57,061       1,723       3.02       59,747       2,784       4.66  
   
 
                                                                       
Latin America  
HSBC Mexico
    22,882       2,097       9.16       19,961       2,084       10.44       24,597       3,058       12.43  
   
Brazilian operations65
    50,202       7,812       15.56       37,198       6,363       17.11       35,797       6,830       19.08  
   
HSBC Bank Panama
    12,537       873       6.96       12,465       922       7.40       12,178       910       7.47  
   
HSBC Bank Argentina
    3,086       445       14.42       2,428       421       17.34       3,093       469       15.16  
   
 
                                                                       
Other operations     1,417       2,855               (15,184 )     2,727               (45,381 )     133          
   
 
                                               
   
 
                                                                       
   
 
    1,472,294       58,345       3.96       1,384,705       62,096       4.48       1,466,622       91,301       6.23  
   
 
                                               
For footnotes, see page 83.

31(d)


Table of Contents

HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)