6-K 1 hsba201502236k.htm 2014 RESULTS HIGHLIGHTS hsba201502236k.htm
FORM 6-K
 
SECURITIES AND EXCHANGE COMMISSION
 
Washington, D.C. 20549
 
 
 
Report of Foreign Private Issuer
 
Pursuant to Rule 13a - 16 or 15d - 16 of
 
the Securities Exchange Act of 1934
 
 
 
For the month of February
HSBC Holdings plc
 
42nd Floor, 8 Canada Square, London E14 5HQ, England
 
 
 
(Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F).
 
Form 20-F   X              Form 40-F ......
 
(Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934).
 
Yes.......          No    X
 
(If "Yes" is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82- ..............).
 
 
 





HSBC HOLDINGS PLC
 
2014 RESULTS HIGHLIGHTS
 
·   Reported profit before tax ('PBT') down 17% in 2014 at US$18,680m, compared with US$22,565m in 2013. This primarily reflected lower business disposal and reclassification gains and the negative effect, on both revenue and
     costs, of significant items including fines, settlements, UK customer redress and associated provisions
 
·   Adjusted PBT was broadly unchanged in 2014 at US$22,829m and excludes the year-on-year effects of foreign currency translation and significant items, compared with US$22,981m in 2013.
 
·   Earnings per share and dividends per share in respect of the year were US$0.69 and US$0.50 respectively, compared with US$0.84 and US$0.49 for 2013.
 
·   Return on equity lower at 7.3%, compared with 9.2% in 2013.
 
·   Stable revenue - 2014 adjusted revenue of US$62,002m compared with US$61,854m in 2013, underpinned by growth in Commercial Banking, notably in our home markets of Hong Kong and the UK. 
 
·   Loan impairment charges were lower reflecting the current economic environment and the changes we have made to our portfolio since 2011.
 
·   Higher 2014 operating expenses - adjusted operating expenses in 2014 were US$37,854m, up 6.1% from US$35,682m in 2013, due to increased regulatory and compliance costs, inflationary pressures and investment in strategic
     initiatives to support growth.
 
·   Capital - the common equity tier 1 capital ratio (CRD IV transitional basis) was 10.9% at 31 December 2014, up from 10.8% at 31 December 2013.
 

 
Stuart Gulliver, Group Chief Executive said:
 
"2014 was a challenging year in which we continued to work hard to improve business performance while managing the impact of a higher operating cost base. Profits disappointed, although a tough fourth quarter masked some of the progress made over the preceding three quarters. Many of the challenging aspects of the fourth quarter results were common to the industry as a whole. In spite of this, there were a number of encouraging signs, particularly in Commercial Banking, Payments & Cash Management and renminbi products and services. We were also able to continue to grow the dividend."
 
   
Twelve months ended 31 December
   
2014
 
2013
 
Change
 
   
US$m
 
US$m
 
%
 
Income statement and performance measures1
             
Reported profit before tax
 
18,680
 
22,565
 
(17)
 
Adjusted profit before tax
 
22,829
 
22,981
 
(1)
 
Profit attributable to ordinary shareholders of the parent company
 
13,115
 
15,631
 
(16)
 
Cost efficiency ratio
 
67.3%
 
59.6%
     
Pre-tax return on average risk-weighted assets
 
1.5%
 
2.0%
     
               
   
At 31 December
   
2014
 
2013
 
Change
 
   
%
 
%
     
               
Capital and balance sheet3
             
CRD IV transitional
             
Common equity tier 1 ratio
 
10.9
 
10.8
     
Tier 1 ratio
 
12.5
 
12.0
     
Total capital ratio
 
15.6
 
14.9
     
CRD IV end point
             
Common equity tier 1 ratio
 
11.1
 
10.9
     
Basel 2.5
             
Core tier 1 ratio
 
n/a
 
13.6
     
Tier 1 ratio
 
n/a
 
14.5
     
Total capital ratio
 
n/a
 
17.8
     
               
   
US$m
 
US$m
 
US$m
 
               
Loans and advances to customers2
 
974,660
 
992,089
 
(17,429)
 
Customer accounts2
 
1,350,642
 
1,361,297
 
(10,655)
 
Risk-weighted assets3
 
1,219,765
 
1,092,653
     
 
For footnotes, see page 2.
 
 
   
Twelve months ended 31 December
   
2014
 
2013
 
   
US$m
 
US$m
 
Reported
         
Revenue4
 
61,248
 
64,645
 
Loan impairment charges and other credit risk provisions
 
(3,851)
 
(5,849)
 
Operating expenses
 
(41,249)
 
(38,556)
 
Profit before tax
 
18,680
 
22,565
 
           
Adjusted
         
Revenue4
 
62,002
 
61,854
 
Loan impairment charges and other credit risk provisions
 
(3,851)
 
(5,614)
 
Operating expenses
 
(37,854)
 
(35,682)
 
Profit before tax
 
22,829
 
22,981
 
 
Other significant items affecting adjusted performance - Losses/(gains)
         
Revenue
         
Debit valuation adjustment on derivative contracts
 
332
 
(106)
 
Fair value movements on non-qualifying hedges
 
541
 
(511)
 
(Gain)/loss on sale of several tranches of real estate secured accounts in the US
 
(168)
 
123
 
Gain on sale of shareholding in Bank of Shanghai
 
(428)
 
 
Impairment of our investment in Industrial Bank
 
271
 
 
Provisions arising from the ongoing review of compliance with the Consumer Credit Act in the UK
 
632
 
 
Net gain on completion of Ping An disposal5
 
 
(553)
 
FX gains relating to sterling debt issued by HSBC Holdings
 
 
(442)
 
Write-off of allocated goodwill relating to the GPB Monaco business
 
 
279
 
Loss on sale of non-real estate secured accounts in the US
 
 
271
 
Loss on early termination of cash flow hedges in the US run-off portfolio
 
 
199
 
Loss on sale of an HFC Bank UK secured loan portfolio
 
 
146
 
           
Operating expenses
         
Charge in relation to the settlement agreement with Federal Housing Finance Authority
 
550
 
 
Settlements and provisions in connection with foreign exchange investigations
 
1,187
 
 
Restructuring and other related costs
 
278
 
483
 
Regulatory provisions in GPB
 
65
 
352
 
UK customer redress programmes
 
1,275
 
1,235
 
Madoff-related litigation costs
 
 
298
 
US customer remediation provisions relating to CRS
 
 
100
 
Accounting gain arising from change in basis of delivering ill-health benefits in the UK
 
 
(430)
 
 
1   Adjusted performance is computed by adjusting reported results for the year-on-year effects of foreign currency translation differences and significant items which distort year-on-year comparisons.
2   From 1 January 2014, non-trading reverse repos and repos are presented as separate lines in the balance sheet. Previously, non-trading reverse repos were included within 'Loans and advances to banks' and 'Loans and
     advances to customers' and non-trading repos were included within 'Deposits by banks' and 'Customer accounts'. Comparative data have been re-presented accordingly. Non-trading reverse repos and repos have been
     presented as separate lines in the balance sheet to align disclosure with market practice and provide more meaningful information in relation to loans and advances. The extent to which reverse repos and repos represent
     loans to/from customers and banks is set out in Note 17 of the
Annual Report and Accounts 2014.
3   On 1 January 2014, CRD IV came into force and the calculation of capital resources and risk-weighted assets at 31 December 2014 are calculated and presented on this basis. 2013 comparatives are on a Basel 2.5 basis.
4   Net operating income before loan impairment charges and other credit risk provisions, also referred to as revenue.
5   The gain of US$553m represents the net impact of the disposal of available-for-sale investments in Ping An offset by adverse changes in fair value of the contingent forward sale contract to the point of delivery of the shares.
 
 
 
 
 
Statement by Douglas Flint, Group Chairman
 
HSBC's performance in 2014 reflected another year of consolidation in the reshaping and strengthening of the Group against a backdrop of geopolitical and economic headwinds, many of which could not have been foreseen at the outset of the year.
 
As economic activity in much of the world failed to reach the levels required to rebuild sustainable consumer confidence and prompt renewed investment expenditure, governments most impacted expanded their stimulus measures and the major central banks maintained interest rates at their unprecedented low levels. Concerns over deflationary trends, particularly in the eurozone, grew. Although China delivered growth which comfortably surpassed all other major economies, expectations of slower growth in the future weighed heavily on market sentiment and contributed to significant commodity price falls and further curtailment of global investment spending.
 
Unsurprisingly in this environment, revenue growth opportunities were strongest in our Asian businesses, with expansion in lending and debt capital financing. Cost progression continued globally in large part to implement regulatory change and enhance risk controls, notably around financial system integrity and conduct. Streamlining initiatives could only partly offset this cost expansion. Further customer redress costs and regulatory penalties around past failings reinforced the Board's continuing commitment to prioritise whatever further investment in systems and controls is necessary to mitigate future repetition.
 
It is clear now that societal, regulatory and public policy expectations of our industry are changing its long-term cost structure. Technological advancements around data analytics, including 'big data', are providing much more sophisticated tools to enhance our capabilities to protect the financial system from bad actors. Also, as more and more customers choose to transact online and through mobile devices, we are making the necessary investment to protect ourselves and our customers from cyber threats. Building the required analytical capabilities entails considerable investment in systems and in maintaining customer data which is accurate and up to date. Reconfiguring customer and transactional data to the digital age is no small endeavour given legacy systems and a multiplicity of historical data standards globally. The benefits, however, of enhanced customer due diligence capabilities and greater systems security essentially go to the core of our systemic role and allow us to be more proactive in fulfilling that role as a key gatekeeper to the financial system.
 
As our industry reshapes in response to public policy and regulatory directives, we now need to demonstrate, through clarity of our business model, the value to society of our scale and diversification. We must never forget that investors have choices where to invest and individuals have choices where to make their careers. Thus it is essential that we can demonstrate a positive contribution to the societies we serve in order to bolster the business friendly environment that all agree is essential for economic growth and prosperity.
 
For 150 years HSBC has been following trade and investment flows to serve customers as they fulfil their financial ambitions. In a world which has moved from being interconnected to being interdependent, our business model is increasingly relevant to companies of all sizes and to individuals whose financial future is linked to economic activity in multiple countries.
 
This can be seen most markedly in our Commercial Banking business, which delivered a record year buoyed by the expansion of supply chain management solutions and increasing cross-border payment flows. Our network coverage of the countries which originate more than 85% of the world's payment activity drives this key element of our business model. On the investment side, throughout our network we saw corporate flows continuing to target the higher growth emerging markets. At the same time, growth in outward investment from mainland China accelerated as its major companies sought diversification and access to both skill bases and markets. These trends played to HSBC's scale and presence in the key financial centres, allowing us to support customers with debt and equity financing solutions, offering tailored liquidity and transactional banking support and providing risk management solutions primarily against our clients' interest rate and foreign exchange exposures. Success was evidenced by growing recognition in industry awards, the most important of which are referred to in the Group Chief Executive's Review. Finally, our Retail Banking and Wealth Management business continued its journey to build a sustainable customer focused business model, completing the removal of formulaic links between product sales and performance-related pay of our staff, and expanding our digital and mobile offerings.
 
Performance in 2014
 
Profit before tax of US$18.7bn on a reported basis was US$3.9bn or 17% lower than that achieved in 2013. This primarily reflected lower business disposal and reclassification gains and the negative effect, on both revenue and costs, of significant items including fines, settlements, UK customer redress and associated provisions. On the adjusted basis that is one of the key metrics used to assess current year management and business performance, profit before tax was US$22.8bn, broadly in line with 2013 on a comparable basis.
 
Earnings per share were US$0.69, against US$0.84 in 2013. The Group's capital position remained strong with the transitional common equity tier 1 ratio standing at 10.9% at the end of the year, compared with 10.8% 12 months earlier, and our end point ratio at 11.1% compared with 10.9%. Based on this capital strength and the Group's capital generating capabilities, the Board approved a fourth interim dividend in respect of 2014 of US$0.20 per share, taking the total dividends in respect of the year to US$0.50 per share (US$9.6bn, US$0.4bn higher than in respect of 2013).
 
Taking into account this financial performance, together with the further progress made in reshaping the Group, responding to regulatory change and implementing Global Standards, the Board considered executive management to have made good progress during 2014 towards strengthening HSBC's long-term competitive position.
 
 

 
The Group Chief Executive's Review analyses in detail the important benchmarks and highlights of 2014.
 
Regulatory landscape becomes clearer but still much to do
 
A great deal of progress was made during 2014 to finalise the framework under which globally systemic banks like HSBC will be required to operate when it is fully implemented. This clarity is essential if we are to be able to position our global businesses to meet the return expectations of those who invest in us within an acceptable risk appetite.
 
In particular, major progress was made in addressing the challenge of 'too big to fail', largely through finalising proposals to augment existing loss absorbing capacity with 'bail-inable' debt and through greater definition of how resolution frameworks would operate in practice. In both cases, this involved the critical issue of how to address cross-border implications and home and host country regulatory responsibilities.
 
There is, however, still much to complete. The regulatory reform agenda for 2015 is very full with pending public policy decisions, regulatory consultations and impact studies in areas of far reaching influence to the structure of our industry. These include the conclusion of structural separation deliberations in Europe, further work on so called 'shadow banking' including identifying non-bank systemically important institutions, addressing the resolution framework for central counterparties, finalising the calibration of the leverage ratio, calibrating the quantum of total loss absorbing capacity to be raised and settling the disposition of that capacity within global groups.
 
In addition, further work will be undertaken on utilising standardised risk weights to overcome regulatory loss of confidence in internally modelled capital measures and a 'fundamental review of the trading book' is also underway within the regulatory community to look again at capital support for this activity. These measures, which in aggregate are designed to make the industry structurally more stable, will take the next five or so years to implement, an indication of the scale of the transformation to be completed.
 
During 2014, the UK government also confirmed the permanence of the UK bank levy. This was introduced in 2010, in part to address the burden borne by taxpayers from failures during the global financial crisis; in 2014, the cost to HSBC of the levy was US$1.1bn, an increase of US$0.2bn over 2013. 58% of the levy we pay does not relate to our UK banking activity.
 
Rebuilding trust
 
Restoration of trust in our industry remains a significant challenge as further misdeeds are uncovered but it is a challenge we must meet successfully. We owe this not just to society but to our staff to ensure they can be rightly proud of the organisation to which they have committed their careers. When commentators extrapolate instances of control failure or individual misconduct to question the culture of the firm it strikes painfully at the heart of our identity.
 
Swiss Private Bank
 
The recent disclosures around unacceptable historical practices and behaviour within the Swiss private bank remind us of how much there still is to do and how far society's expectations have changed in terms of banks' responsibilities. They are also a reminder of the need for constant vigilance over the effectiveness of our controls and the imperative to embed a robust and ethical compliance culture.
 
We deeply regret and apologise for the conduct and compliance failures highlighted which were in contravention of our own policies as well as expectations of us.
 
In response to, and in parallel with, the tax investigations prompted by the data theft more than eight years ago, we have been completely overhauling our private banking business, putting the entire customer base through enhanced due diligence and tax transparency filters. Our Swiss Private Bank customer base and the countries we serve are now both about one-third of the size they were in 2007. In addition, HSBC is already working to implement the OECD's Common Reporting Standard and other measures to foster greater transparency. We cannot change the past. But, looking to the future, we can and must reinforce controls and provide demonstrable evidence of their effectiveness. This forms part of our commitment to Global Standards, to ensure that we will never knowingly do business with counterparties seeking to evade taxes or use the financial system to commit financial crime.
 
Banking standards
 
More broadly, following the publication in 2013 of the Parliamentary Commission on Banking Standards, considerable progress has been made in giving effect to its recommendations. The Financial Services (Banking Reform) Act of 2013 provided greater clarity on the accountabilities and responsibilities of management and the Board. We welcome the appointment of Dame Colette Bowe to lead the Banking Standards Review Council and have committed to support her fully in its work. The current Fair and Effective Markets Review being conducted by the Bank of England, Her Majesty's Treasury and the Financial Conduct Authority is an extremely timely and important exercise to re-establish the integrity of wholesale financial markets.
 
In terms of our own governance of these areas, the Conduct & Values Committee of the Board that we created at the beginning of 2014 to focus on behavioural issues has established itself firmly as the central support to the Board in these important areas.
 
 

 
 
Board changes
 
Since we reported at the interim stage we have taken further steps to augment the skills and experience within the Board and to address succession to key roles.
 
On 1 January 2015, Phillip Ameen joined the Board and the Group Audit Committee as an independent non-executive Director. Phil was formerly Vice President, Comptroller and Principal Accounting Officer of General Electric Corp. He brings with him extensive financial and accounting experience gained in one of the world's leading international companies as well as a depth of technical knowledge from his long service in the accounting standard setting world. As a serving Director on HSBC's US businesses he also brings further detailed insight to Group Board discussions and enhances the strong links that already exist between the Group Board and its major subsidiaries.
 
Sir Simon Robertson had previously indicated his intention to retire from the Board at the upcoming AGM. I am delighted to report that Simon has agreed to stay on for at least a further year as Deputy Chairman. He has been a considerable support to me and to Stuart Gulliver, in addition to his role leading the non-executives, and we are all delighted that we shall continue to benefit from his wisdom and experience.
 
150th anniversary
 
2015 marks the 150th anniversary of our founding back in Hong Kong and Shanghai as a small regional bank focused on trade and investment. All of us within HSBC owe a huge debt of gratitude and respect to our forebears who charted the course that has taken HSBC to one of the most important institutions serving the financial needs of this inter-dependent world.
 
Outlook
 
It is impossible not to reflect on the very broad range of uncertainties and challenges to be addressed in 2015 and beyond, most of which are outside our control, particularly against a backdrop of patchy economic recovery and limited policy ammunition. Unexpected outcomes arising from current geopolitical tensions, eurozone membership uncertainties, political changes, currency and commodity price realignments, interest rate moves and the effectiveness of central banks' unconventional policies, to name but a few, all could materially affect economic conditions and confidence around investment and consumption decisions. One economic uncertainty stands out for a major financial institution headquartered in the UK, that of continuing UK membership of the EU. Today, we publish a major research study which concludes that working to complete the Single Market in services and reforming the EU to make it more competitive are far less risky than going it alone, given the importance of EU markets to British trade.
 
There are also many underlying positive trends that shape our thinking about the coming year. We are very encouraged by the trends in outward investment from China, the potential for further liberalisation and internationalisation of the renminbi and the reshaping of the Chinese economy from export dependence to domestic consumption. We are positive on the opportunities that will arise from Capital Markets Union within Europe and the declared focus of the incoming Commission on growth and jobs. The strength of the US economy and the benefits of lower oil prices should be positive drivers of growth. There is much to be gained from successful negotiation of the Transatlantic Trade and Investment Partnership and the Trans-Pacific Partnership. Current attention on funding infrastructure investment globally is potentially of huge significance.
 
Finally, on behalf of the Board, I want again to express our thanks and gratitude to our 266,000 colleagues around the world who worked determinedly in 2014 to build an HSBC fit for the next 150 years.
 
 

 
Review by Stuart Gulliver, Group Chief Executive
 
2014 was a challenging year in which we continued to work hard to improve business performance while managing the impact of a higher operating cost environment.
 
Profits disappointed, although a tough fourth quarter masked some of the progress made over the preceding three quarters. Many of the challenging aspects of the fourth quarter results were common to the industry as a whole. In spite of this, there were a number of encouraging signs, particularly in Commercial Banking, Payments & Cash Management and renminbi products and services. We were also able to continue to grow the dividend.
 
Reported profit before tax in 2014 was US$18.7bn, US$3.9bn lower than in the previous year. This reflected lower gains from disposals and reclassifications, and the negative effect of other significant items, including fines, settlements, UK customer redress and associated provisions, totalling US$3.7bn.
 
Adjusted profit before tax, which excludes the year-on-year effects of currency translation differences and significant items, was US$22.8bn, broadly unchanged on 2013.
 
Asia continued to provide a strong contribution to Group profits. Middle East and North Africa reported a record profit before tax in 2014. Together, Asia and MENA generated more than 70% of adjusted Group profit before tax.
 
Commercial Banking also delivered a record reported profit, which is evidence of the successful execution of our strategy. Revenue in CMB continued to grow, notably in our two home markets of Hong Kong and the UK.
 
Global Banking and Markets performed relatively well for the first three quarters of the year, but, like much of the rest of the industry, suffered a poor fourth quarter. Revenue was lower in 2014, particularly in our Markets businesses, but all other client-facing businesses delivered year-on-year growth.
 
Revenue was also lower in Retail Banking and Wealth Management, due primarily to the continuing repositioning of the business. However, in our Global Asset Management business we continued our strategy of strengthening collaboration across our global businesses, which helped to attract net new money of US$29bn.
 
Global Private Banking continues to undergo a comprehensive overhaul which was accelerated from 2011. As part of this overhaul, we are implementing tough financial crime, regulatory compliance and tax transparency measures. In order to achieve our desired business model and informed by our six filters process, we have also sold a number of businesses and customer portfolios, including assets in Japan, Panama and Luxembourg. The number of customer accounts in our Swiss Private Bank is now nearly 70% lower than at its peak. We continued to remodel the Private Bank in 2014, which included the sale of a customer portfolio in Switzerland to LGT Bank. One consequence of this remodelling was a reduction in revenue. We have also grown the parts of the business that fit our new model, attracting US$14bn of net new money in 2014, mostly through clients of Global Banking & Markets and Commercial Banking.
 
Loan impairment charges were lower, reflecting the current economic environment and the changes we have made to our portfolio since 2011.
 
Operating expenses were higher due to increased regulatory and compliance costs, inflationary pressures and investment in strategic initiatives to support growth, primarily in Commercial Banking in Asia and Europe. Significant items, which include restructuring costs, were also higher than last year.
 
We agreed settlements in respect of inquiries by the UK Financial Conduct Authority and the US Commodity Futures Trading Commission into the foreign exchange market in 2014. HSBC was badly let down by a few individuals whose actions do not reflect the vast majority of employees who uphold the values and standards expected of the bank. This matter is now rightly in the hands of the Serious Fraud Office.
 
Our balance sheet remained strong, with a ratio of customer advances to customer accounts of 72%. Excluding the effects of currency translation, customer loans and advances grew by US$28bn during 2014.
 
The common equity tier 1 ratio on a transitional basis was 10.9% and on a CRD IV end point basis was 11.1% at 31 December 2014.
 
Connecting customers to opportunities
 
2015 is HSBC's 150th anniversary. Founded in Hong Kong in 1865 to finance local and international trade, the bank expanded rapidly to capture the increasing flow of commerce between Asia, Europe and North America. Our ability to connect customers across the world remains central to the bank's strategy today and in 2014 we continued to develop and grow the product areas that rely on international connectivity.
 
Our market-leading Global Trade and Receivables Finance business remains strong and we were voted best global trade finance bank and best trade finance bank in MENA in the Global Trade Review 'Leaders In Trade' Awards.
 
In Payments and Cash Management, we increased customer mandates and improved client coverage. We were recognised as the best global cash management bank for the third successive year in the 2014 Euromoney Cash Management Survey.
 
Our share of the capital financing market continued to improve and we were ranked number one for debt capital markets in our home markets of the UK and Hong Kong, and number one for Equity Capital Markets in Hong Kong by Dealogic. HSBC was also named global bond house of the year, global derivatives house of the year and Asian bond house of the year in the International Financing Review Awards 2014.
 
 

 
We consolidated our leadership of the rapidly growing renminbi market in 2014. According to SWIFT, the renminbi is now the fifth most widely used payment currency in the world, up from 13th just two years ago. We increased revenue from renminbi products and retained our ranking as number one issuer of offshore renminbi bonds worldwide over the last twelve months. HSBC was also recognised as the best overall provider for products and services in Asiamoney's Offshore Renminbi Services Survey in 2014, and renminbi house of the year in the 2014 Asia Risk Awards.
 
Operating a global business
 
It is already clear that the regulatory costs of operating a global business model have increased since we announced our strategy for HSBC in 2011.
 
As the Group Chairman's Statement explains, the regulatory environment continues to evolve.
 
Our commitment to be the world's leading international bank means that improving our regulatory and compliance abilities and implementing Global Standards must remain priorities for HSBC. Our Compliance staff headcount has more than doubled since 2011 and there is more work still to do to strengthen the Group's compliance capability.
 
At the same time, the level of capital that we hold has increased by over 60% since before the financial crisis. Specifically, we have further strengthened our capital levels in response to increasing capital requirements from the UK Prudential Regulation Authority.
 
Whilst we expected an increase in the amount of capital we were required to hold when setting targets for the Group in 2011, we could not have foreseen the full extent of the additional costs and capital commitment that would subsequently be asked of us. The pace of change has been exceptional. As a consequence, some of the targets that we set for the Group in 2011 are no longer realistic.
 
In recognition of that fact, we have set new medium-term targets that better reflect the ongoing operating environment.
 
We are setting a revised return on equity target of more than 10%. This target is modelled using a common equity tier 1 capital ratio on a CRD IV end point basis in the range of 12% to 13%.
 
Our cost target will be to grow our revenue faster than costs ('positive jaws') on an adjusted basis.
 
We are also restating our commitment to grow the dividend. To be clear, the progression of dividends should be consistent with the growth of the overall profitability of the Group and is predicated on our ability to meet regulatory capital requirements in a timely manner.
 
These targets offer a realistic reflection of the capabilities of HSBC in the prevailing operating environment.
 
Our employees
 
I am grateful for the hard work, dedication and professionalism of all of our employees in 2014.
 
Extensive work was required to prepare HSBC for stress tests in a number of jurisdictions throughout the year, the results of which confirmed the capital strength of the Group. HSBC will face additional stress testing in 2015.
 
We all have to work continuously to make sure that the Group remains compliant with anti-money laundering and sanctions legislation and this effort continued in 2014.
 
Management and staff across the Group continued to work very closely with the Monitor to deliver our commitments under the terms of our December 2012 settlement agreements with the US authorities and the UK Financial Conduct Authority. We have now received the second annual report from the Monitor. Whilst it confirmed that we continue to comply with the obligations we undertook in the Deferred Prosecution Agreement with the US Department of Justice, as we expected we still have substantial work to do.
 
Summary and outlook
 
The business remains in a good position structurally to capitalise on broader market trends and the macroeconomic backdrop remains favourable, notwithstanding the continuing low interest rate environment. There are still a number of historical issues left to resolve and we will make further progress on these in 2015. We will also continue the work we started in 2011 to simplify the Group to make it easier to manage and control.
 
Our 2014 results show a business powered by our continued strength in Hong Kong, with significant additional contributions from the rest of Asia and the Middle East and North Africa. The continuing success of Commercial Banking and the resilience of our differentiated Global Banking & Markets business illustrate the effectiveness of our strategy to bridge global trade and capital flows. Retail Banking & Wealth Management remains a work in progress, but we took considerable further steps to de-risk the business in 2014. Global Private Banking continues to attract net new money from clients in our other global businesses. We maintain a sharp focus on generating net savings to offset increased costs arising from inflation, and the cost of implementing global standards.
 
Our early 2015 performance has been satisfactory.
 
We continue to focus on the execution of our strategy and on delivering value to shareholders.
 
 

 
   
Year ended 31 December
 
   
2014
2013
 
   
US$m
US$m
 
For the year
       
Profit before tax
 
18,680
22,565
 
Profit attributable to shareholders of the parent company
 
13,688
16,204
 
Dividends declared on ordinary shares
 
9,320
8,937
 
       
 
At the year-end
     
Total shareholders' equity
 
190,447
181,871
 
Capital resources
 
190,730
194,009
 
Customer accounts
 
1,350,642
1,361,297
 
Total assets
 
2,634,139
2,671,318
 
Risk-weighted assets (CRD IV transitional)
 
1,219,765
n/a
 
Risk-weighted assets (Basel 2.5)
 
n/a
1,092,653
 
       
   
 
US$
 
US$
Per ordinary share
       
Basic earnings
 
0.69
0.84
 
Dividends1
 
0.49
0.48
 
Net asset value
 
9.28
9.27
 
       
 
Share information
     
US$0.50 ordinary shares in issue
 
19,218m
18,830m
 
Market capitalisation
 
US$182bn
US$207bn
 
Closing market price per share
 
£6.09
£6.62
 
 
 
   
Over
1 year
Over
3 years
Over
5 years
         
Total shareholder return to 31 December 2014
 
97
144
109
MSCI Banks
 
100
160
132
 
1   Dividends per ordinary share declared in the year.
 

 
Geographical distribution of results
 
Profit/(loss) before tax
 
   
Year ended 31 December
   
2014
 
2013
   
US$m
 
%
 
US$m
 
%
                 
Europe
 
596
 
3.2
 
1,825
 
8.1
Asia
 
14,625
 
78.3
 
15,853
 
70.3
Middle East and North Africa
 
1,826
 
9.8
 
1,694
 
7.5
North America
 
1,417
 
7.6
 
1,221
 
5.4
Latin America
 
216
 
1.1
 
1,972
 
8.7
                 
Profit before tax
 
18,680
 
100.0
 
22,565
 
100.0
                 
Tax expense
 
(3,975)
     
(4,765)
   
                 
Profit for the year
 
14,705
     
17,800
   
                 
Profit attributable to shareholders of the parent company
 
13,688
     
16,204
   
Profit attributable to non-controlling interests
 
1,017
     
1,596
   
 
Distribution of results by global business
 
   
Year ended 31 December
   
2014
 
2013
   
US$m
 
%
 
US$m
 
%
                 
Retail Banking and Wealth Management
 
5,651
 
30.3
 
6,649
 
29.5
Commercial Banking
 
8,744
 
46.8
 
8,441
 
37.4
Global Banking and Markets
 
5,889
 
31.5
 
9,441
 
41.8
Global Private Banking
 
626
 
3.4
 
193
 
0.9
Other
 
(2,230)
 
 (12.0)
 
(2,159)
 
(9.6)
                 
Profit before tax
 
18,680
 
100.0
 
22,565
 
100.0
 
 
 
 
 

 
Consolidated Income Statement for the year ended 31 December 2014
 
   
2014
 
2013
   
US$m
 
US$m
         
Interest income
 
50,955
 
51,192
Interest expense
 
(16,250)
 
(15,653)
         
Net interest income
 
34,705
 
35,539
         
Fee income
 
19,545
 
19,973
Fee expense
 
(3,588)
 
(3,539)
         
Net fee income
 
15,957
 
16,434
         
Trading income excluding net interest income
 
4,853
 
6,643
Net interest income on trading activities
 
1,907
 
2,047
         
Net trading income
 
6,760
 
8,690
         
Changes in fair value of long-term debt issued and related derivatives
 
508
 
(1,228)
Net income from other financial instruments designated at fair value
 
1,965
 
1,996
         
Net income from financial instruments designated at fair value
 
2,473
 
768
         
Gains less losses from financial investments
 
1,335
 
2,012
Dividend income
 
311
 
322
Net insurance premium income
 
11,921
 
11,940
Other operating income
 
1,131
 
2,632
         
Total operating income
 
74,593
 
78,337
         
Net insurance claims and benefits paid and movement in liabilities to policyholders
 
(13,345)
 
(13,692)
         
Net operating income before loan impairment charges and other credit risk provisions
 
61,248
 
64,645
         
Loan impairment charges and other credit risk provisions
 
(3,851)
 
(5,849)
         
Net operating income
 
57,397
 
58,796
         
Employee compensation and benefits
 
(20,366)
 
(19,196)
General and administrative expenses
 
(18,565)
 
(17,065)
Depreciation and impairment of property, plant and equipment
 
(1,382)
 
(1,364)
Amortisation and impairment of intangible assets
 
(936)
 
(931)
         
Total operating expenses
 
(41,249)
 
(38,556)
         
Operating profit
 
16,148
 
20,240
         
Share of profit in associates and joint ventures
 
2,532
 
2,325
         
Profit before tax
 
18,680
 
22,565
         
Tax expense
 
(3,975)
 
(4,765)
         
Profit for the year
 
14,705
 
17,800
         
Profit attributable to shareholders of the parent company
 
13,688
 
16,204
Profit attributable to non-controlling interests
 
1,017
 
1,596
   
US$
 
US$
Basic earnings per ordinary share
 
0.69
 
0.84
Diluted earnings per ordinary share
 
0.69
 
0.84
 

 
Consolidated Statement of Comprehensive Income for the year ended 31 December 2014
 
   
2014
 
2013
   
US$m
 
US$m
         
Profit for the year
 
14,705
 
17,800
         
Other comprehensive income/(expense)
       
Items that will be reclassified subsequently to profit or loss when specific conditions are met:
       
Available-for-sale investments
 
2,972
 
(1,718)
- fair value gains/(losses)
 
4,794
 
(1,787)
- fair value gains reclassified to the income statement
 
(1,672)
 
(1,277)
- amounts reclassified to the income statement in respect of impairment losses
 
374
 
286
- income taxes
 
(524)
 
1,060
         
Cash flow hedges
 
188
 
(128)
- fair value gains
 
1,512
 
776
- fair value gains reclassified to the income statement
 
(1,244)
 
(894)
- income taxes
 
(80)
 
(10)
         
Share of other comprehensive income/(expense) of associates and joint ventures
 
80
 
(71)
- share for the year
 
78
 
(35)
- reclassified to income statement on disposal
 
2
 
(36)
         
Exchange differences
 
(8,903)
 
(1,372)
- foreign exchange gains reclassified to income statement on disposal of a foreign operation
 
(21)
 
(290)
- other exchange differences
 
(8,917)
 
(1,154)
- income tax attributable to exchange differences
 
35
 
72
         
Items that will not be reclassified subsequently to profit or loss:
       
Remeasurement of defined benefit asset/liability
 
1,985
 
(458)
- before income taxes
 
2,419
 
(601)
- income taxes
 
(434)
 
143
         
Other comprehensive income for the year, net of tax
 
(3,678)
 
(3,747)
         
Total comprehensive income for the year
 
11,027
 
14,053
         
Attributable to:
       
- shareholders of the parent company
 
9,245
 
12,644
- non-controlling interests
 
1,782
 
1,409
         
Total comprehensive income for the year
 
11,027
 
14,053
 
 
 

 
Consolidated Balance Sheet at 31 December 2014
 
   
2014
 
2013
   
US$m
 
US$m
Assets
       
         
Cash and balances at central banks
 
129,957
 
166,599
Items in the course of collection from other banks
 
4,927
 
6,021
Hong Kong Government certificates of indebtedness
 
27,674
 
25,220
Trading assets
 
304,193
 
303,192
Financial assets designated at fair value
 
29,037
 
38,430
Derivatives
 
345,008
 
282,265
Loans and advances to banks
 
112,149
 
120,046
Loans and advances to customers
 
974,660
 
992,089
Reverse repurchase agreements - non-trading
 
161,713
 
179,690
Financial investments
 
415,467
 
425,925
Prepayments, accrued income and other assets
 
75,176
 
76,842
Current tax assets
 
1,309
 
985
Interests in associates and joint ventures
 
18,181
 
16,640
Goodwill and intangible assets
 
27,577
 
29,918
Deferred tax assets
 
7,111
 
7,456
         
Total assets at 31 December
 
2,634,139
 
2,671,318
         
 
Liabilities and equity
       
         
Liabilities
       
Hong Kong currency notes in circulation
 
27,674
 
25,220
Deposits by banks
 
77,426
 
86,507
Customer accounts
 
1,350,642
 
1,361,297
Repurchase agreements - non-trading
 
107,432
 
164,220
Items in the course of transmission to other banks
 
5,990
 
6,910
Trading liabilities
 
190,572
 
207,025
Financial liabilities designated at fair value
 
76,153
 
89,084
Derivatives
 
340,669
 
274,284
Debt securities in issue
 
95,947
 
104,080
Accruals, deferred income and other liabilities
 
53,396
 
52,341
Current tax liabilities
 
1,213
 
607
Liabilities under insurance contracts
 
73,861
 
74,181
Provisions
 
4,998
 
5,217
Deferred tax liabilities
 
1,524
 
910
Subordinated liabilities
 
26,664
 
28,976
         
Total liabilities at 31 December
 
2,434,161
 
2,480,859
         
Equity
       
Called up share capital
 
9,609
 
9,415
Share premium account
 
11,918
 
11,135
Other equity instruments
 
11,532
 
5,851
Other reserves
 
20,244
 
26,742
Retained earnings
 
137,144
 
128,728
         
Total shareholders' equity
 
190,447
 
181,871
Non-controlling interests
 
9,531
 
8,588
         
Total equity at 31 December
 
199,978
 
190,459
         
Total liabilities and equity at 31 December
 
2,634,139
 
2,671,318
 

 
Consolidated Statement of Cash Flows for the year ended 31 December 2014
 
   
2014
 
2013
   
US$m
 
US$m
Cash flows from operating activities
       
Profit before tax
 
18,680
 
22,565
Adjustments for:
       
-  net gain from investing activities
 
(1,928)
 
(1,458)
-  share of profits in associates and joint ventures
 
(2,532)
 
(2,325)
-  (gain)/loss on disposal of associates, joint ventures, subsidiaries and businesses
 
9
 
(1,173)
-  other non-cash items included in profit before tax
 
11,262
 
11,995
-  change in operating assets
 
25,877
 
(148,899)
-  change in operating liabilities
 
(93,814)
 
164,757
-  elimination of exchange differences
 
24,571
 
4,479
-  dividends received from associates
 
757
 
694
-  contributions paid to defined benefit plans
 
(681)
 
(962)
-  tax paid
 
(3,573)
 
(4,696)
         
Net cash generated from/(used in) operating activities
 
(21,372)
 
44,977
 
Cash flows from investing activities
       
Purchase of financial investments
 
(384,199)
 
(363,979)
Proceeds from the sale and maturity of financial investments
 
382,837
 
342,539
Purchase of property, plant and equipment
 
(1,477)
 
(1,952)
Proceeds from the sale of property, plant and equipment
 
88
 
441
Net cash inflow/(outflow) from disposal of customer and loan portfolios
 
(1,035)
 
6,518
Net purchase of intangible assets
 
(903)
 
(834)
Proceeds from disposal of Ping An
 
-
 
7,413
Net cash inflow/(outflow) from disposal of other subsidiaries, businesses, associates and joint ventures
 
(242)
 
3,295
Net cash outflow from acquisition of or increase in stake of associates
 
(30)
 
(26)
         
Net cash used in investing activities
 
(4,961)
 
(6,585)
         
 
Cash flows from financing activities
       
Issue of ordinary share capital
 
267
 
297
Net purchases of own shares for market-making and investment purposes
 
(96)
 
(32)
Issue of other equity instruments
 
5,681
 
-
Redemption of preference shares
 
(234)
 
-
Subordinated loan capital issued
 
3,500
 
1,989
Subordinated loan capital repaid
 
(3,163)
 
(1,662)
Dividends paid to shareholders of the parent company
 
(6,611)
 
(6,414)
Dividends paid to non-controlling interests
 
(639)
 
(586)
Dividends paid to holders of other equity instruments
 
(573)
 
(573)
         
Net cash used in financing activities
 
(1,868)
 
(6,981)
         
 
Net increase/(decrease) in cash and cash equivalents
 
(28,201)
 
31,411
         
Cash and cash equivalents at 1 January
 
346,281
 
315,308
Exchange differences in respect of cash and cash equivalents
 
(16,779)
 
(438)
         
Cash and cash equivalents at 31 December
 
301,301
 
346,281
 
 
 

Consolidated statement of changes in equity for the year ended 31 December 2014
 
   
2014
                   
Other reserves
           
   
      Called up share capital
 
            Share      Premium
 
            Other            equity            instru-           ments
 
      Retained       earnings
 
    Available- for-sale      fair value 
reserve
 
Cash
flow
hedging
reserve
 
        Foreign 
exchange 
reserve
 
      Merger 
reserve
 
              Total 
share-holders 
equity
                Non-     controlling
 interests
 
              Total 
equity
   
US$m
 
US$m
 
US$m
 
US$m
 
US$m
 
US$m
 
US$m
 
US$m
 
US$m
 
US$m
 
US$m
                                             
At 1 January 2014
 
9,415
 
11,135
 
5,851
 
128,728
 
97
 
(121)
 
(542)
 
27,308
 
181,871
 
8,588
 
190,459
                                             
Profit for the year
 
 
 
 
13,688
 
 
 
 
 
13,688
 
1,017
 
14,705
Other comprehensive income (net of tax)
 
 
 
 
2,066  
 
2,025
 
189
 
(8,723)
 
 
(4,443)
 
765
 
(3,678)
available-for-sale investments
 
 
 
 
 
2,025
     
 
 
2,025
 
947
 
2,972
cash flow hedges
 
 
 
 
 
 
189
 
 
 
189
 
(1)
 
188
remeasurement of defined benefit asset/liability
 
 
 
 
1,986
 
 
 
 
 
1,986
 
(1)
 
1,985
share of other comprehensive income of associates and
     joint ventures
 
 
 
 
80
 
 
 
 
 
80
 
 
80
exchange differences
 
 
 
 
 
 
 
(8,723)
 
 
(8,723)
 
(180)
 
(8,903)
                                             
                                             
Total comprehensive income for the year
 
 
 
 
15,754
 
2,025
 
189
 
(8,723)
 
 
9,245
 
1,782
 
11,027
                                             
Shares issued under employee remuneration and share plans
 
60
 
917
 
 
(710)
 
 
 
 
 
267
 
 
267
Shares issued in lieu of dividends and amounts arising thereon
 
134
 
(134)
 
 
2,709
 
 
 
 
 
2,709
 
 
2,709
Capital securities issued
 
 
 
5,681
 
 
 
 
 
 
5,681
 
 
5,681
Dividends to shareholders
 
 
 
 
(9,893)
 
 
 
 
 
(9,893)
 
(712)
 
(10,605)
Cost of share-based payment arrangements
 
 
 
 
732
 
 
 
 
 
732
 
 
732
Other movements
 
 
 
 
(176)
 
21
 
(10)
 
 
 
(165)
 
(127)
 
(292)
                                             
At 31 December 2014
 
9,609
 
11,918
 
11,532
 
137,144
 
2,143
 
58
 
(9,265)
 
27,308
 
190,447
 
9,531
 
199,978
                                             
At 1 January 2013
 
9,238
 
10,084
 
5,851
 
120,347
 
1,649
 
13
 
752
 
27,308
 
175,242
 
7,887
 
183,129
                                             
Profit for the year
 
 
 
 
16,204
 
 
 
 
 
16,204
 
1,596
 
17,800
Other comprehensive income (net of tax)
 
 
 
 
(561)
 
(1,577)
 
(128)
 
(1,294)
 
 
(3,560)
 
(187)
 
(3,747)
available-for-sale investments
 
 
 
 
 
(1,577)
 
 
 
 
(1,577)
 
(141)
 
(1,718)
cash flow hedges
 
 
 
 
 
 
(128)
 
 
 
(128)
 
 
(128)
remeasurement of defined benefit asset/liability
 
 
 
 
(490)
 
 
 
 
 
(490)
 
32
 
(458)
share of other comprehensive income of associates and
                                           
      joint ventures
 
 
 
 
(71)
 
 
 
 
 
(71)
 
 
(71)
exchange differences
 
 
 
 
 
 
 
(1,294)
 
 
(1,294)
 
(78)
 
(1,372)
                                             
                                             
Total comprehensive income for the year
 
 
 
 
15,643
 
(1,577)
 
(128)
 
(1,294)
 
 
12,644
 
1,409
 
14,053
                                             
Shares issued under employee remuneration and share plans
 
60
 
1,168
 
 
(931)
 
 
 
 
 
297
 
 
297
Shares issued in lieu of dividends and amounts arising thereon
 
117
 
(117)
 
 
2,523
 
 
 
 
 
2,523
 
 
2,523
Dividends to shareholders
 
 
 
 
(9,510)
 
 
 
 
 
(9,510)
 
(718)
 
(10,228)
Cost of share-based payment arrangements
 
 
 
 
630
 
 
 
 
 
630
 
 
630
Other movements
 
 
 
 
26
 
25
 
(6)
 
 
 
45
 
10
 
55
                                             
At 31 December 2013
 
9,415
 
11,135
 
5,851
 
128,728
 
97
 
(121)
 
(542)
 
27,308
 
181,871
 
8,588
 
190,459
 
 
Additional Information
 
1. Basis of preparation and accounting policies
 
The basis of preparation and summary of significant accounting policies applicable to the consolidated financial statements of HSBC and the separate financial statements of HSBC Holdings can be found in Note 1, or the relevant Note, on the Financial Statements in the Annual Report and Accounts 2014.
 
Compliance with International Financial Reporting Standards
 
International Financial Reporting Standards ('IFRSs') comprise accounting standards issued or adopted by the International Accounting Standards Board ('IASB') and interpretations issued or adopted by the IFRS Interpretations Committee ('IFRS IC').
 
The consolidated financial statements of HSBC and the separate financial statements of HSBC Holdings have been prepared in accordance with IFRSs as issued by the IASB and as endorsed by the EU. EU-endorsed IFRSs could differ from IFRSs as issued by the IASB if, at any point in time, new or amended IFRSs were not to be endorsed by the EU.
 
At 31 December 2014, there were no unendorsed standards effective for the year ended 31 December 2014 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 2014 are prepared in accordance with IFRSs as issued by the IASB.
 
Standards adopted during the year ended 31 December 2014
 
There were no new standards applied during the year ended 31 December 2014.
 
On 1 January 2014, HSBC applied 'Offsetting Financial Assets and Financial Liabilities (Amendments to IAS 32)', which clarified the requirements for offsetting financial instruments and addressed inconsistencies in current practice when applying the offsetting criteria in IAS 32 'Financial Instruments: Presentation'. The amendments were applied retrospectively and did not have a material effect on HSBC's financial statements.
 
During 2014, HSBC adopted a number of interpretations and amendments to standards which had an insignificant effect on the consolidated financial statements of HSBC and the separate financial statements of HSBC Holdings.
 
Differences between IFRSs and Hong Kong Financial Reporting Standards
 
There are no significant differences between IFRSs and Hong Kong Financial Reporting Standards in terms of their application to HSBC and consequently there would be no significant differences had the financial statements been prepared in accordance with Hong Kong Financial Reporting Standards. The Notes on the Financial Statements, taken together with the Report of the Directors, include the aggregate of all disclosures necessary to satisfy IFRSs and Hong Kong reporting requirements.
 
2. Dividends
 
Dividends to shareholders of the parent company
 
   
2014
 
2013
   
Per
share US$
 
Total
US$m
 
Settled
in scrip
US$m
 
Per
share US$
 
Total
US$m
 
Settled
in scrip
US$m
Dividends declared on ordinary shares
                       
In respect of previous year:
                       
- fourth interim dividend
 
0.19
 
3,582
 
1,827
 
      0.18
 
3,339
 
540
In respect of current year:
                       
- first interim dividend
 
0.10
 
1,906
 
284
 
      0.10
 
1,861
 
167
- second interim dividend
 
0.10
 
1,914
 
372
 
      0.10
 
1,864
 
952
- third interim dividend
 
0.10
 
1,918
 
226
 
      0.10
 
1,873
 
864
                         
Total
 
0.49
 
9,320
 
2,709
 
      0.48
 
8,937
 
2,523
Total dividends on preference shares classified as equity
(paid quarterly)
 
62.00
 
90
     
62.00
 
90
   
 
Total coupons on capital securities classified as equity
 
     
2014
 
2013
   
First
Per security
 
Total
 
Per security
 
Total
   
call date
US$
 
US$m
 
US$
 
US$m
Perpetual subordinated capital securities1
                 
- US$2,200m
 
Apr 2013
      2.032
 
179
 
2.032
 
179
- US$3,800m
 
Dec 2015
2.000
 
304
 
2.000
 
304
                   
Total
   
     
 
483
     
483
 
1  Coupons are paid quarterly on the perpetual subordinated capital securities.
 
The Directors declared after the end of the year a fourth interim dividend in respect of the financial year ended 31 December 2014 of US$0.20 per ordinary share, a distribution of approximately US$3,844m. The fourth interim dividend will be payable on 30 April 2015 to holders of record on 6 March 2015 on the Principal Register in the UK, the Hong Kong or the Bermuda Overseas Branch registers. No liability is recorded in the financial statements in respect of the fourth interim dividend for 2014.
 
 
The dividend will be payable in cash, in US dollars, sterling or Hong Kong dollars, or a combination of these currencies, at the forward exchange rates quoted by HSBC Bank plc in London at or about 11am on 20 April 2015, and with a scrip dividend alternative. Particulars of these arrangements will be sent to shareholders on or about 20 March 2015 and elections must be received by 16 April 2015. As this dividend was declared after the balance sheet date, no liability has been recorded on the Financial Statements at 31 December 2014.
 
The dividend will be payable on ordinary shares held through Euroclear France, the settlement and central depository system for Euronext Paris, on 30 April 2015. The dividend will be paid by Euroclear France to the holders of record as at 6 March 2015. The dividend will be payable by Euroclear France in cash, in euros at the forward exchange rate quoted by HSBC France on 20 April 2015, or as a scrip dividend. Particulars of these arrangements will be announced through Euronext Paris on 24 February 2015 and 12 March 2015.
 
On 15 January 2015, HSBC paid a coupon on the perpetual subordinated capital securities of US$0.508 per security, a distribution of US$45m. No liability was recorded in the balance sheet at 31 December 2014 in respect of this coupon payment.
 
In September 2014, HSBC issued three contingent convertible securities as set out on page 438 of the Annual Report and Accounts 2014 which are classified as equity under IFRSs. Coupons are paid semi-annually on the contingent convertible securities and none fell due in 2014. On 20 January 2015, HSBC paid a coupon on one of the contingent convertible securities of US$28.125 per security, a distribution of US$28m. No liability was recorded in the balance sheet at 31 December 2014 in respect of this coupon payment.
 
The reserves available for distribution at 31 December 2014 were US$48,883m.
 
3. Earnings per share
 
'Basic earnings per ordinary share' is calculated by dividing the profit attributable to ordinary shareholders of the parent company by the weighted average number of ordinary shares outstanding, excluding own shares held. 'Diluted earnings per ordinary share' is calculated by dividing the basic earnings, which require no adjustment for the effects of dilutive potential ordinary shares, by the weighted average number of ordinary shares outstanding, excluding own shares held, plus the weighted average number of ordinary shares that would be issued on conversion of dilutive potential ordinary shares.
 
 
Profit attributable to the ordinary shareholders of the parent company
 
   
2014
 
2013
   
US$m
 
US$m
         
Profit attributable to shareholders of the parent company
 
13,688
 
16,204
Dividend payable on preference shares classified as equity
 
(90)
 
(90)
Coupon payable on capital securities classified as equity
 
(483)
 
(483)
         
Year ended 31 December
 
13,115
 
15,631
 
Basic and diluted earnings per share
 
   
2014
 
2013
   
Profit
US$m
 
Number
of shares (millions)
 
Per
share
US$
 
Profit
US$m
 
Number
of shares (millions)
 
Per share
US$
                         
Basic1
 
13,115
 
18,960
 
0.69
 
15,631
 
18,530
 
0.84
Effect of dilutive potential ordinary shares
 
-
 
96
 
-
 
-
 
124
 
-
                         
                         
Diluted1
 
13,115
 
19,056
 
0.69
 
15,631
 
18,654
 
0.84
 
Weighted average number of ordinary shares outstanding (basic) or assuming dilution (diluted).
 
The weighted average number of dilutive potential ordinary shares excluded 6m employee share options that were anti-dilutive (2013: 60m).
 
 
4. Tax expense
 
   
2014
 
2013
   
US$m
 
US$m
Current tax
       
UK corporation tax
 
69
 
(8)
- for this year
 
54
 
103
- adjustments in respect of prior years
 
15
 
(111)
         
Overseas tax1
 
3,881
 
3,949
- for this year
 
4,423
 
3,947
- adjustments in respect of prior years
 
(542)
 
2
         
         
   
3,950
 
3,941
         
Deferred tax
 
25
 
824
- origination and reversal of temporary differences
 
(477)
 
739
- effect of changes in tax rates
 
83
 
93
- adjustments in respect of prior years
 
419
 
(8)
         
         
Year ended 31 December
 
3,975
 
4,765
 
Overseas tax included Hong Kong profits tax of US$1,135m (2013: US$1,133m; 2012: US$1,049m). The Hong Kong tax rate applying to the profits of subsidiaries assessable in Hong Kong was 16.5% (2013: 16.5%; 2012: 16.5%). Other overseas subsidiaries and overseas branches provided for taxation at the appropriate rates in the countries in which they operate.
 
Tax reconciliation
 
The tax charged to the income statement differs from the tax charge that would apply if all profits had been taxed at the UK corporation tax rate as follows:
 
   
2014
 
2013
   
US$m
 
%
 
US$m
 
%
                 
Profit before tax
 
18,680
     
22,565
   
                 
Tax expense
               
Tax at 21.5% (2013: 23.25%; 2012: 24.5%)
 
4,016
 
21.5
 
5,246
 
23.25
Effect of differently taxed overseas profits
 
33
 
0.2
 
(177)
 
(0.8)
Adjustments in respect of prior period liabilities
 
(108)
 
(0.6)
 
(117)
 
(0.5)
Deferred tax temporary differences not recognised/
(previously not recognised)
 
(154)
 
(0.8)
 
332
 
1.5
Effect of profits in associates and joint ventures
 
(547)
 
(2.9)
 
(543)
 
(2.4)
Tax effect of disposal of Ping An
 
-
 
-
 
(111)
 
(0.5)
Tax effect of reclassification of Industrial Bank
 
-
 
-
 
(317)
 
(1.4)
Non-taxable income and gains
 
(668)
 
(3.5)
 
(871)
 
(3.9)
Permanent disallowables
 
969
 
5.1
 
647
 
2.9
Change in tax rates
 
22
 
0.1
 
93
 
0.4
Local taxes and overseas withholding taxes
 
434
 
2.3
 
551
 
2.4
Other items
 
(22)
 
(0.1)
 
32
 
0.1
                 
Year ended 31 December
 
3,975
 
21.3
 
4,765
 
21.1
                     
 
The effective tax rate for the year was 21.3% compared with 21.1% for 2013. The effective tax rate for the year reflected the recurring benefits from tax exempt income from government bonds and equities held by a number of Group entities and recognition of the Group's share of post-tax profits of associates and joint ventures within our pre-tax income, together with a current tax credit for prior periods offset in part by non-tax-deductible settlements and provision in connection with foreign exchange investigations. The effective tax rate in 2013 was lower because of a write-down of deferred tax assets.
 
The main rate of corporation tax in the UK reduced from 23% to 21% on 1 April 2014 and will be further reduced to 20% on 1 April 2015. The reduction in the corporate tax rate to 20% was enacted through the 2013 Finance Act on 17 July 2013. It is not expected that the future rate reduction will have a significant effect on the Group.
 
The Group's legal entities are subject to routine review and audit by tax authorities in the territories in which the Group operates. Where the ultimate tax treatment is uncertain, the Group provides for potential tax liabilities that may arise on the basis of the amounts expected to be paid to the tax authorities. The amounts ultimately paid may differ materially from the amounts provided depending on the ultimate resolution of such matters.
 
 
5. Net fee income
 
   
2014
US$m
 
2013
US$m
         
Account services
 
3,407
 
3,581
Funds under management
 
2,658
 
2,673
Cards
 
2,460
 
2,455
Credit facilities
 
1,890
 
1,907
Broking income
 
1,371
 
1,388
Imports/exports
 
1,115
 
1,157
Unit trusts
 
1,005
 
891
Underwriting
 
872
 
866
Remittances
 
833
 
849
Global custody
 
726
 
698
Insurance
 
516
 
551
Other
 
2,692
 
2,957
         
Fee income
 
19,545
 
19,973
         
Less: fee expense
 
(3,588)
 
(3,539)
         
Year ended 31 December
 
15,957
 
16,434
 
6. Loan impairment charges and other credit risk provisions
 
   
2014
US$m
 
2013
US$m
Loan impairment charges
       
-  new allowances net of allowance releases
 
5,010
 
7,344
-  recoveries of amounts previously written off
 
(955)
 
(1,296)
         
   
4,055
 
6,048
         
Individually assessed allowances
 
1,780
 
2,320
Collectively assessed allowances
 
2,275
 
3,728
         
Impairment/(releases of impairment) available-for-sale
       
debt securities
 
(319)
 
(211)
Other credit risk provisions
 
115
 
12
         
Year ended 31 December
 
3,851
 
5,849
Impairment charges on loans and advances to customers as a percentage of
average gross loans and advances to customers
 
0.4%
 
0.7%
 
7. Segmental analysis
 
Products and services
 
HSBC provides a comprehensive range of banking and related financial services to its customers in its five geographical regions. The products and services offered to customers are organised by global business.
 
·   Retail Banking and Wealth Management ('RBWM') offers a broad range of products and services to meet the personal banking and wealth management needs of individual customers. Typically, customer offerings include
     personal banking products (current and savings accounts, mortgages and personal loans, credit cards, debit cards and local and international payment services) and wealth management services (insurance and investment
     products, global asset management services and financial planning services).
 
·   Commercial Banking ('CMB') offers a broad range of products and services to serve the needs of our commercial customers, including small and medium-sized enterprises, mid-market enterprises and corporates. These include
     credit and lending, international trade and receivables finance, treasury management and liquidity solutions (payments and cash management and commercial cards), commercial insurance and investments. CMB also offers its
     customers access to products and services offered by other global businesses, for example Global Banking & Markets ('GB&M'), which include foreign exchange products, raising capital on debt and equity markets and advisory
      services.
 
·   GB&M provides tailored financial solutions to major government, corporate and institutional clients and private investors worldwide. The client-focused business lines deliver a full range of banking capabilities including
     financing, advisory and transaction services, a markets business that provides services in credit, rates, foreign exchange, equities, money markets and securities services, and principal investment activities.
 
·   Global Private Banking ('GPB') provides a range of services to high net worth individuals and families with complex and international needs within the Group's priority markets.
 

 
Change in operating segments
 
HSBC's operating segments are Europe, Asia, Middle East and North Africa ('MENA'), North America and Latin America. Previously, HSBC's operating segments were reported as Europe, Hong Kong, Rest of Asia-Pacific, Middle East and North Africa, North America and Latin America. Hong Kong and Rest of Asia-Pacific are no longer regarded as separate reportable operating segments, having considered the geographical financial information presented to the chief operating decision maker. From 1 January 2014, they have been replaced by a new operating segment, 'Asia', which better aligns with internal management information used for evaluation when making business decisions and resource allocations. The chief operating decision-maker continues to be the GMB and the basis for measuring segmental results has not changed. Comparative financial information has been re-presented accordingly.
 
There has been no change in the underlying business operations comprising the Asia segment. Reported net operating income in Asia for the year to 31 December 2014 was US$23,677m (31 December 2013: US$24,432m). This was US$713m lower (31 December 2013: US$749m lower) than would be calculated by adding net operating income reported for Hong Kong and Rest of Asia-Pacific on an individual basis. The reduction in net operating income is offset by an equal decrease in operating expenses. The difference relates to shared service recharges and business activity undertaken between the two regions which form revenue or expense on an individual basis, but are eliminated as 'intra-segment' activity when reported as Asia. There is no difference between profit before tax reported for Asia and that which would be calculated by adding the profit before tax of Hong Kong and Rest of Asia-Pacific on an individual basis.
 
Profit/(loss) for the year
 
   
Europe
 
Asia
 
MENA
 
North
America
 
Latin
America
 
Intra-
HSBC
items
 
Total
   
US$m
 
US$m
 
US$m
 
US$m
 
US$m
 
US$m
 
US$m
2014
                           
Net interest income
 
10,611
 
12,273
 
1,519
 
5,015
 
5,310
 
(23)
 
34,705
Net fee income
 
6,042
 
5,910
 
650
 
1,940
 
1,415
 
 
15,957
Net trading income
 
2,534
 
2,622
 
314
 
411
 
856
 
23
 
6,760
Other income
 
2,384
 
2,872
 
65
 
786
 
691
 
(2,972)
 
3,826
                             
Net operating income1
 
21,571
 
23,677
 
2,548
 
8,152
 
8,272
 
(2,972)
 
61,248
Loan impairment (charges)/recoveries and other
credit risk provisions
 
(764)
 
(647)
 
6
 
(322)
 
(2,124)
 
 
(3,851)
                             
Net operating income
 
20,807
 
23,030
 
2,554
 
7,830
 
6,148
 
(2,972)
 
57,397
                             
Employee compensation and benefits
 
(8,191)
 
(5,862)
 
(676)
 
(3,072)
 
(2,565)
 
 
(20,366)
General and administrative expenses
 
(11,076)
 
(3,959)
 
(500)
 
(3,108)
 
(2,894)
 
2,972
 
(18,565)
Depreciation and impairment of property,
plant and equipment
 
(543)
 
(389)
 
(28)
 
(180)
 
(242)
 
 
(1,382)
Amortisation and impairment of intangible assets
 
(407)
 
(217)
 
(12)
 
(69)
 
(231)
 
 
(936)
                             
Total operating expenses
 
(20,217)
 
(10,427)
 
(1,216)
 
(6,429)
 
(5,932)
 
2,972
 
(41,249)
                             
Operating profit
 
590
 
12,603
 
1,338
 
1,401
 
216
 
 
16,148
Share of profit in associates and joint ventures
 
6
 
2,022
 
488
 
16
 
 
 
2,532
                             
Profit before tax
 
596
 
14,625
 
1,826
 
1,417
 
216
 
 
18,680
Tax expense
 
(853)
 
(2,542)
 
(339)
 
(195)
 
(46)
 
 
(3,975)
                             
Profit/(loss) for the year
 
(257)
 
12,083
 
1,487
 
1,222
 
170
 
 
14,705
                             
2013
                           
Net interest income
 
10,693
 
11,432
 
1,486
 
5,742
 
6,186
 
 
35,539
Net fee income
 
6,032
 
5,936
 
622
 
2,143
 
1,701
 
 
16,434
Net trading income/(expense)
 
4,423
 
2,026
 
357
 
948
 
936
 
 
8,690
Other income
 
(181)
 
5,038
 
38
 
(30)
 
1,745
 
(2,628)
 
3,982
                             
Net operating income1
 
20,967
 
24,432
 
2,503
 
8,803
 
10,568
 
(2,628)
 
64,645
Loan impairment (charges)/recoveries and other
                           
credit risk provisions
 
(1,530)
 
(498)
 
42
 
(1,197)
 
(2,666)
 
 
(5,849)
                             
Net operating income
 
19,437
 
23,934
 
2,545
 
7,606
 
7,902
 
(2,628)
 
58,796
                             
Employee compensation and benefits
 
(7,175)
 
(5,666)
 
(634)
 
(3,098)
 
(2,623)
 
 
(19,196)
General and administrative expenses
 
(9,479)
 
(3,660)
 
(607)
 
(3,051)
 
(2,896)
 
2,628
 
(17,065)
Depreciation and impairment of property,
                           
plant and equipment
 
(559)
 
(392)
 
(35)
 
(176)
 
(202)
 
 
(1,364)
Amortisation and impairment of intangible assets
 
(400)
 
(218)
 
(13)
 
(91)
 
(209)
 
 
(931)
                             
Total operating expenses
 
(17,613)
 
(9,936)
 
(1,289)
 
(6,416)
 
(5,930)
 
2,628
 
(38,556)
                             
Operating profit
 
1,824
 
13,998
 
1,256
 
1,190
 
1,972
 
 
20,240
Share of profit in associates and joint
                           
ventures
 
1
 
1,855
 
438
 
31
 
 
 
2,325
                             
Profit before tax
 
1,825
 
15,853
 
1,694
 
1,221
 
1,972
 
 
22,565
Tax expense
 
(1,279)
 
(2,170)
 
(328)
 
(313)
 
(675)
 
 
(4,765)
                             
Profit for the year
 
546
 
13,683
 
1,366
 
908
 
1,297
 
 
17,800
 
1   Net operating income before loan impairment charges and other credit risk provisions, also referred to as revenue.
 
 

 
Other information about the profit/(loss) for the year
 
   
Europe
 
Asia
 
MENA
 
North
America
 
Latin
America
 
Intra-
HSBC items
 
Total
   
US$m
 
US$m
 
US$m
 
US$m
 
US$m
 
US$m
 
US$m
2014
                           
Net operating income1
 
21,571
 
23,677
 
2,548
 
8,152
 
8,272
 
(2,972)
 
61,248
external
 
20,450
 
22,071
 
2,524
 
7,937
 
8,266
 
-
 
61,248
inter-segment
 
1,121
 
1,606
 
24
 
215
 
6
 
(2,972)
 
-
                             
Profit for the year includes the following
                           
significant non-cash items:
                           
Depreciation, amortisation
                           
and impairment
 
950
 
606
 
40
 
182
 
473
 
-
 
2,251
Loan impairment losses gross of recoveries
                           
and other credit risk provisions
 
1,066
 
800
 
37
 
437
 
2,466
 
-
 
4,806
Impairment of financial
                           
investments
 
(256)
 
286
 
-
 
14
 
10
 
-
 
54
Changes in fair value of long-term debt
                           
and related derivatives