20-F 1 d117963d20f.htm 20-F 20-F
Table of Contents

As filed with the Securities and Exchange Commission on February 25, 2016.

 

 

 

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 20-F

 

¨ 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, 2015

Or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Or

 

¨ 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: 001-14930

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

Ordinary Shares of nominal value US$0.50 each.

   New York Stock Exchange

6.20% Non-Cumulative Dollar Preference Shares,

Series A

   New York Stock Exchange*

American Depositary Shares evidenced by American

Depositary receipts, each representing one-

fortieth of a Share of 6.20% Non-Cumulative Dollar

Preference Shares, Series A

   New York Stock Exchange
5.10% Senior Unsecured Notes Due 2021    New York Stock Exchange
4.00% Senior Unsecured Notes Due 2022    New York Stock Exchange
4.875% Senior Unsecured Notes Due 2022    New York Stock Exchange
7.625% Subordinated Notes due 2032    New York Stock Exchange
7.35% Subordinated Notes due 2032    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
6.100% Senior Unsecured Notes due 2042    New York Stock Exchange

8.125% Perpetual Subordinated Capital Securities

Exchangeable at the Issuer’s Option into Non-

Cumulative Dollar Preference Shares

   New York Stock Exchange

8.00% Perpetual Subordinated Capital Securities

Exchangeable at the Issuer’s Option into Non-

Cumulative Dollar Preference Shares, Series 2

   New York Stock Exchange

4.250% Subordinated Notes due 2024

   New York Stock Exchange

5.250% Subordinated Notes due 2044

   New York Stock Exchange
4.250% Subordinated Notes due 2025    New York Stock Exchange

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                                              19,685,096,934

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

¨ Yes þ 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.

¨ 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 ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

¨ Yes ¨ 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 ¨   Non-accelerated filer ¨

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP ¨   International Financial Reporting Standards as issued by the
International Accounting Standards Board þ
  Other ¨

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.

¨ Item 17 ¨ 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).

¨ Yes þ No

 

* Not for trading, but only in connection with the registration of American Depositary Shares.

 

 

 


Table of Contents

LOGO


Table of Contents
    

 

None of the websites referred to in this Annual Report on Form 20-F for the year ended December 31, 2015 (the “Form 20-F”), including where a link is provided, nor any of the information contained on such websites is incorporated by reference in the Form 20-F.

 

 

 

 

 

 

 

As a reminder

 

Reporting currency

We use US dollars.

 

Adjusted measures

We supplement our IFRSs figures with adjusted measures used by management internally. These measures are highlighted with the following symbol:

 

LOGO

Further explanation may be found on

 

LOGO  page 48.

 

 

 

 

 

 

Cover image:

Tsing Ma Bridge carries road and rail traffic to Hong Kong International Airport and accommodates large container ships. At HSBC, we help customers across the world to trade and invest internationally.

          

 

Strategic Report

 

An overview of how we are structured, what we do and where, our strategic actions, the principal risks we face, and high-level performance information. The section is introduced by both the Group Chairman and Group Chief Executive, and also explains the role of the Board.

 

This Strategic Report was approved by the Board on 22 February 2016. Douglas Flint, Group Chairman

   01a    Cautionary statement regarding forward-looking statements
   01b    Certain defined terms
   02    HSBC at a glance
   04    Who we are
   06    Group Chairman’s Statement
   10    Group Chief Executive’s Review
   12    Our strategy
   14    Value of the network
   16    Delivering our network to customers
   20    Progress on selected strategic actions
   22    Financial overview
   28    Global businesses
   32    Regions
   34    How we do business
   39    Our approach to tax
   40    Our conduct
   42    Risk overview
   44

 

  

Remuneration

 

 

Financial Review

 

Detailed reporting of our financial performance, at Group level as well as within our matrix structure. It also includes our full risk report and reporting on how we manage capital.

   47    Detailed financial performance
      – 48  Financial summary
      – 65  Global businesses
     

– 76  Geographical regions

 

   100b    Regulation and supervision
  

100j

   Disclosures pursuant to Section 13(r) of the Securities Exchange Act
  

101

   Risk
  

227

  

Capital

 

 

     

 

Corporate Governance

 

Details of our Board of Directors and senior management, and our approach to corporate governance and remuneration.

   249    Corporate Governance Report
   249    Biographies of Directors and senior management
   256    Board of Directors
   262    Board committees
   275    Internal control
   278    Employees
   285   

Directors’ Remuneration Report

 

 

 

 

Financial Statements

 

Our financial statements and related notes and reports.

   323    Report of Independent Registered Public Accounting Firm to the Board of Directors and Shareholders of HSBC Holdings plc only
      – 323  31 December 2015
     

– 335  31 December 2014

 

   336
   Financial Statements
   347   

Notes on the Financial Statements

 

 

 

Other Information

 

Important information for our shareholders, including contact information. Like any industry and company, we have our set of abbreviations and terminology. Accordingly, we provide an explanation of the abbreviations used and a glossary of key terms.

 

   470    Shareholder information
   478g    Glossary of accounting terms and US equivalents
   479    Abbreviations
   483    Glossary
   491   

Index

 

 

 
 

 

    

HSBC HOLDINGS PLC        

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Table of Contents

Strategic Report

 

 

 

 

Cautionary statement regarding forward-looking statements

This Form 20-F contains certain forward-looking statements with respect to HSBC’s financial condition, results of operations, capital position 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. HSBC makes no commitment to revise or update any forward-looking statements to reflect events or circumstances occurring or existing after the date of any forward-looking statements.

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 discretionary RWA growth and 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, notably compliance with the DPA.
 

 

 

HSBC HOLDINGS PLC

1a


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Certain defined terms

 

 

 

Certain defined terms

Unless the context requires otherwise, ‘HSBC Holdings’ means HSBC Holdings plc and ‘HSBC’, the ‘Group’, ‘we’, ‘us’ and ‘our’ refer 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 and capital securities issued by HSBC Holdings classified as equity. The abbreviations ‘$m’ and ‘$bn’ represent millions and billions (thousands of millions) of US dollars, respectively.

 

 

 

HSBC HOLDINGS PLC

1b


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Strategic Report

HSBC at a glance

We are one of the most international banking

and financial services organisations in the world.

    

 

 

Group

Our operating model consists of four global businesses and five geographical regions supported by 11 global functions.

 

 

 

Reported profit before tax

(2014: $18.7bn)

$18.9bn

 

 

Reported revenue

(2014: $61.2bn)

$59.8bn

Key highlights

 

We grew adjusted revenue by 1%, primarily in client-facing GB&M, CMB and Principal RBWM.

 

Adjusted operating expenses increased by 5% from 2014. However, costs in the second half of the year were in line with the first half as our cost saving initiatives began to take effect.

 

Through management initiatives, we were able to reduce risk-weighted assets (‘RWAs’) by $124bn in 2015 and therefore also the amount of capital we are required to hold.

 

 

 

Adjusted profit before tax  LOGO

(2014: $22.0bn)

$20.4bn

 

 

Risk-weighted assets

(2014: $1,220bn)

$1,103bn

 

Global businesses

Our global businesses set globally consistent

business strategies and operating models.

They manage the products and business

propositions offered to our customers.

 

 

Retail Banking and Wealth Management (‘RBWM’)

 

 

 

Commercial Banking (‘CMB’)

 

 

 

Global Banking and Markets (‘GB&M’)

 

 

 

Global Private Banking (‘GPB’)

 

We help millions of people across the world to manage their finances, buy their homes, and save and invest for the future. Our Insurance and Asset Management businesses support all our global businesses in meeting their customers’ needs.

 

Further details on page 30

 

We support more than two million business customers in 55 countries with banking products and services to help them operate and grow. Our customers range from small enterprises focused primarily on their domestic markets, through to large companies operating globally.

 

Further details on page 28

 

We provide financial services and products to companies, governments and institutions. Our comprehensive range of products and solutions, across capital financing, advisory and transaction banking services, can be combined and customised to meet our clients’ specific objectives.

 

Further details on page 29

 

 

We help high net worth individuals and their families to grow, manage and preserve their wealth.

 

Further details on page 31

 

Reported profit before tax

 

 

 

 

 

 

$5.0bn   $8.0bn   $7.9bn   $0.3bn

 

LOGO

 

 

 

HSBC HOLDINGS PLC

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HSBC at a glance

Key metrics

 

LOGO

 

   

Geographical regions

 

We operate in 71 countries and territories

around the world. Our operating entities

represent HSBC to customers, regulators,

employees and other stakeholders.

   LOGO  For further
details on our
regions, see
page 32.

Market presence

 

LOGO

 

 

HSBC HOLDINGS PLC

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LOGO


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LOGO


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Strategic Report

Group Chairman’s

Statement

We enter 2016 with a clear strategy and with

a plan for its implementation already well

under way. Our diversified business model

and balance sheet strength form the foundation

for our future progress, and position HSBC

well to deal with today’s challenging economic

and financial conditions.

 

LOGO   

2015 was marked by some seismic shifts in global economic conditions, most notably the continuation of a sharp decline in commodity and oil prices, in part attributable to growing concerns over China’s slowing economic growth. As a consequence, monetary policy remained accommodative throughout the major developed economies and key currency interest rates remained at historically low levels. Fiscal priorities continued to focus on controlling spending, an emphasis replicated in the private sector as weak revenue growth persisted in many industries.

 

Against this backdrop, the Group’s financial performance in 2015 was broadly satisfactory, with reported profit before tax rising 1% to $18.9bn. On the adjusted basis used to measure management and business performance, profit before tax of $20.4bn was 7% lower than that achieved in 2014, driven by higher costs and credit charges.

 

Earnings per share of $0.65 compared with $0.69 in 2014. Sound management of capital, accelerated run-off of legacy books and shrinking the balance sheet in areas that can no longer support the expanded capital requirements now in force, contributed to the common equity tier 1 ratio increasing by 0.8 percentage points to 11.9%. This capital released from managing the asset base, together with that generated from operations, allowed the Board to approve a fourth interim dividend in respect of 2015 of $0.21 per ordinary share. This took dividends per ordinary share in respect of the year to $0.51, $0.01 higher than 2014. Total dividends in respect of 2015 amounted to $10.0bn, $0.4bn higher than in respect of 2014.

 

In approving the dividend increase, the Board noted that prospective dividend growth remained dependent upon the long-term overall profitability of the Group and delivering further release of less efficiently deployed capital. Actions to address these points are core elements of the Investor Update provided last June.

 

 

HSBC HOLDINGS PLC

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Group Chairman’s Statement

Sound progress on strategic initiatives

The Strategic Report highlights delivery to date against the strategic objectives laid out in last June’s Investor Update.

When assessing management performance during 2015, outside of the financial results, the Board took particular account of the following aspects.

The successful negotiation of a majority stake in a new nationally licensed securities joint-venture in mainland China is the culmination of more than a decade of seeking out an appropriate platform through which to participate in the country’s fast-developing securities markets. Once final approvals have been received, we believe this will establish a landmark opportunity for HSBC to contribute to the development of China’s capital markets.

 

 

‘Our three major businesses generated higher revenue, notwithstanding the uncertain economic environment and the considerable reshaping necessitated by regulatory changes’

 

 

During 2015, the Group maintained, reinforced and broadened its leadership position in all aspects of the internationalisation of the renminbi. This position has been built over the past five years to establish a highly competitive platform to service China’s international trade and investment flows as it pursues the financial liberalisation and outgoing investment priorities laid out in the recent 13th five-year plan. The recent highly successful State visit to the UK, following an equally successful Economic and Financial dialogue in China, served to illustrate the huge potential for mutually beneficial cooperation between the UK and China from which HSBC is uniquely positioned to benefit in the realm of financial services.

The disposal of our Brazilian operations, which is expected to complete shortly, was both timely and well executed. This divestment was a key element of the Board’s desire to simplify the Group and redeploy capital to geographic areas where we have greater competitive strength, most particularly in Asia.

Our three major businesses generated higher revenue, notwithstanding the uncertain economic

environment and the considerable reshaping necessitated by regulatory changes. Global Banking and Markets and Retail Banking and Wealth Management, in particular, have made significant changes to their business models and are now beginning to see the benefits. Commercial Banking continued to leverage the value of the Group’s international network and product capabilities. Global Private Banking, chastened by the exposure of historical failings in Switzerland, accelerated disposal of a number of customer portfolios as it refocused its business model on core customer segments within a fully transparent operating model.

Across all businesses, the Board recognised a heightened emphasis on customer focus, which permeated recruitment, training, product design and incentives. This is essential to the restoration of trust.

Finally, and underpinning the above, we made further progress embedding the standards now expected to protect customers and the financial system from bad actors and financial crime. We are, however, not yet where we need to be. There is still more investment to make with ever greater urgency as more and more activity takes place digitally through multiple channels and via increasingly sophisticated mobile devices. HSBC’s determination to address emerging risks and identify bad actors remains resolute. The Board has made it one of its top priorities to oversee and ensure management’s delivery of the necessary enhancements to customer and transaction screening systems.

The regulatory landscape has

become clearer

The second half of 2015 saw completion of some of the most important and complex initiatives undertaken to repair the fault lines that contributed to the global financial crisis. International agreement was reached on the amount of total loss-absorbing capacity that global systemically important banks, such as HSBC, need for orderly resolution, without risks to public funds. This allowed the Financial Stability Board to report to G20 leaders that they had finalised the tools needed to end ‘too big to fail’ in the banking sector. There is still much to do to build these tools into national legislative and regulatory frameworks; however, this international agreement is an important step forward towards finally settling the capital base against which we can assess our target returns.

 

 

 

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Strategic Report | Group Chairman’s Statement

 

There is now broad agreement that the implementation of the suite of regulatory reforms introduced post-crisis has made the financial system more resilient. Accordingly, public policy priorities are now focusing on harnessing this greater strength and resilience to support economic growth, which we welcome.

 

Concentration within the current regulatory agenda is increasingly on new and emerging risks and vulnerabilities. There is growing industry participation in dialogue around these emerging threats, most notably regarding cyber risk, the changing liquidity dynamics resulting from more market-based finance and financial exclusion stemming from excessive risk aversion.

 

Likewise, addressing the root causes of the misconduct issues that have bedevilled our industry in recent years has led to growing cooperation arising out of the multiplicity of joint working groups and enquiries that have examined the most serious failings. 2016 sees the introduction of the new Senior Managers’ Regime in the UK, which will reinforce individual responsibility and accountability, which we welcome.

 

Also in the UK, 2015 saw further clarity given to the operation of the ‘ring-fenced’ bank structure and a welcome announcement of a reduction in the scope and rate of the bank levy going forward.

 

It is too early to say whether this amounts to a new understanding between the industry and the public, but it is encouraging that the industry is once again gaining a voice at a time of great economic and geopolitical uncertainty. We can only fulfil our essential role if we have regained trust, a fact that is now fully understood.

 

Review of headquarters’ location

 

As we announced last week, the Board concluded its review of domicile alternatives and decided unanimously to remain headquartered in the UK. As we evaluated jurisdictions against the specified criteria, it became clear that the combination of our strategic focus on Asia and maintaining our hub in one of the world’s leading international financial centres, London, was not only compatible, but offered the best outcome for our customers and shareholders. This decision was taken after some 10 months of careful analysis and assessment of geopolitical, economic, regulatory and financial factors. Advice was taken from internationally respected experts and from leading financial advisers. After considering all the relevant factors, the Board concluded that having our headquarters in the UK and our significant business in Asia Pacific led from Hong Kong, delivers the best of both worlds to our stakeholders. The completion of this review closes out one of the 10 strategic actions set out at our Investor Update last June.

   

Board changes

 

Subsequent to the changes announced with our interim results, we have made further changes to the Board. Safra Catz stepped down from the Board at the end of 2015 and Sir Simon Robertson, our Deputy Chairman, and Rona Fairhead will retire at the forthcoming Annual General Meeting.

 

  
   

 

 

‘There is now broad agreement that the implementation of the suite of regulatory reforms introduced post-crisis has made the financial system more resilient’

 

   

 

Safra served on the Board for nearly eight years while Simon and Rona are HSBC’s longest serving non-executive Directors, having served for close to 10 and 12 years, respectively. Over their respective periods of service, they have made invaluable contributions to the Group, not least during the global financial crisis, for which the Board is extremely grateful. Their combined expertise and experience in matters of governance, audit and risk, remuneration, technology, and international business affairs has been invaluable to HSBC and they will, upon their retirement, be sorely missed. On behalf of shareholders and the Board, I want to take this further opportunity to recognise their immense contributions to HSBC.

 

The Board was delighted to announce the appointments of Paul Walsh and Henri de Castries as independent non-executive Directors. Paul joined the Board on 1 January 2016 and Henri’s appointment takes effect from 1 March 2016.

 

Paul Walsh was Group CEO of Diageo plc between 2000 and 2013. Under his leadership, Diageo was refocused from a diversified food, beverage and hotels conglomerate into one of the world’s leading global alcoholic beverage businesses. In building this position, Paul took Diageo from a largely European and US business into emerging markets and to global leadership through the acquisition of many of the world’s leading brands.

 

Henri de Castries has more than 25 years of international experience in the finance industry. Henri has been Chairman and Chief Executive Officer of AXA, one of the world’s leading global insurance and asset management companies since April 2010 after serving as Chairman of its Management Board from May 2000.

 

Their international experience and track record in leading the reshaping of growing businesses, including undertaking business portfolio realignments, will be of great value to the Board as we address the opportunities and challenges ahead.

  

 

 

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Group Chairman’s Statement

Looking back – our 150th anniversary

In 2015, HSBC marked its 150th anniversary by recognising its staff for their essential contributions through the ages, and its customers for their shared commitment and loyalty. As we enter the next period of our history, I want to reiterate these messages of gratitude and underline our recognition that such commitment and loyalty have to be earned.

HSBC has also always recognised its responsibilities to the communities it serves and so in this special year committed $150m of additional funding to community projects around the world over three years.

We also wanted to identify a distinctive cause with global significance to mark our special anniversary.

 

 

‘We enter 2016 with a clear strategy and with much of the Group’s required reshaping completed or under way’

 

 

We were delighted, therefore, to announce a partnership with Cancer Research UK to support the scientific leaders of tomorrow through a $25m contribution towards the development and construction of the Francis Crick Institute. This state-of-the-art biomedical research facility will open in the heart of London in 2016 and support more than 1,200 scientists, collaborating to tackle the diseases that pose the greatest threat to humanity – cancer, heart disease, lung disease and infectious diseases, including HIV and malaria.

To mark HSBC’s support, 150 PhD students, selected from across the world, will have the opportunity to conduct vital research at the new institute.

Looking ahead

Current market conditions are inevitably concentrating attention on the risks that exist within the global economy. It is, however, important also to recognise again the resilience that our diversified business model and balance sheet strength provide, as well as noting the many counterbalances that should help to underpin the global economy.

China’s slower economic growth will undoubtedly contribute to a bumpier financial environment, but it is still expected to be the largest contributor to global growth as its economy transitions to higher added value manufacturing and services and becomes more consumer driven. This transition is driving our focus on the Pearl River Delta as a priority growth opportunity given its concentration of high tech, research focused and digital businesses.

 

 

There is a real possibility of meaningful stimulus for the global economy to come from further trade liberalisation initiatives such as the Trans-Pacific Partnership agreement, which was signed earlier this month.

The global focus on infrastructure development, most notably the Belt and Road initiative in China and the Juncker plan in Europe will expand public/ private financing opportunities.

Similarly, the agreements reached on climate change at the recent COP21 conference in Paris will require further significant infrastructure renewal. They will also greatly expand the market for sustainable financing options such as green bonds where HSBC is a leading participant. Reinforcing this position, the Group recently committed $1bn to a green bond portfolio to fund projects in sectors such as renewable energy, energy efficiency, clean transportation and climate change adaption as well as SME financing in sectors such as public transport, education and healthcare.

Technology advancements in financial services are broadening access, improving customer service and lowering the costs of service delivery. At the same time, the amount of data held digitally is exploding, reinforcing the need to bolster cyber security. There is an urgent public policy need to clarify how responsibility is to be shared, given the growing number of routes through which customers can authorise movement of money from their accounts or the sharing of data within these accounts.

We enter 2016 with a clear strategy and with much of the Group’s required reshaping completed or under way. Our 264,000 staff, like their predecessors, went the extra mile consistently throughout 2015 to meet the demands placed on them by our customers, regulators and the public. I want to place on the record the Board’s appreciation of that commitment and our gratitude for what they have achieved to make HSBC fit for the next 150 years.

 

LOGO

Douglas Flint

Group Chairman

22 February 2016

 

 

 

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Strategic Report

Group Chief Executive’s Review

HSBC is better balanced, better connected and better placed to capitalise on higher return businesses than it was 12 months ago.

 

 

LOGO

 

 

 

Business performance

Our performance in 2015 again demonstrated the fundamental strength of our business. Targeted investment, prudent lending and our diversified, universal banking business model helped us achieve revenue growth in a difficult market environment whilst also reducing risk-weighted assets.

We also started to implement the actions that we announced at our Investor Update in June to adapt HSBC to new operating conditions. Completing these plans will refocus the business to achieve stronger, sustainable growth and we are acting on them quickly and efficiently.

On an adjusted basis, we grew revenue over the course of the year. Global Banking and Markets performed strongly and Commercial Banking grew steadily in spite of slower trade. Principal Retail Banking and Wealth Management also grew following a strong Wealth Management performance in the first half. Global Private Banking grew in Asia, but was down overall due to the impact of the continued repositioning of the business.

Our adjusted operating expenses increased as we continued to strengthen our compliance capability whilst also investing for growth. However, a combination of strict cost management and the cost reduction programmes that we started in the middle of the year helped us keep second half costs flat relative to the first half, excluding the bank levy.

Loan impairment charges remained generally low despite an increase in provisions towards the end of the year. This demonstrates again our prudent approach to lending and the benefit of our de-risking measures since 2011.

In total, we generated $11.3bn of capital in 2015, which enabled us to increase the dividend and strengthen the common equity tier 1 ratio.

 

 

 

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Group Chief Executive’s Review

Adapting HSBC

The plans that we announced at our Investor Update are designed to grow income, reduce costs and thereby increase our return on equity. There is a lot to do to achieve our targets but we have made a good start.

Reducing our risk-weighted assets (‘RWAs’) is vital to achieving a better return for shareholders. In 2015, management action reduced RWAs by $124bn, which takes us nearly half-way towards our target to be achieved by the end of 2017. Much of this reduction came from Global Banking and Markets, although a large proportion also came from Commercial Banking, accelerated asset sales in our US Consumer and Mortgage Lending portfolio and the sale of our investment in Industrial Bank. We expect to deliver further RWA reductions in 2016, in addition to a decrease of around $33bn from the sale of our business in Brazil.

 

 

‘The plans that we announced at our Investor Update are designed to grow income, reduce costs and increase our return on equity. There is a lot to do to achieve our targets but we have made a good start’

 

 

We have received a number of offers for our business in Turkey since June, none of which were deemed to be in the best interests of shareholders. We have therefore decided to retain and restructure our Turkish operations, maintaining our wholesale banking business and refocusing our retail banking network. This will provide better value for shareholders and continue to allow our clients to capitalise on HSBC’s international footprint.

Our cost-reduction measures are already having an impact on our cost base and HSBC is now a leaner business than at the half-year. All of our initiatives to reduce costs are under way and we expect further progress in 2016.

We continued to redevelop our businesses in the US and Mexico over the course of 2015. These are important businesses in the context of the wider Group and we are committed to turning them around. An increase in cross-border business across the NAFTA area and improved collaboration between global businesses helped to generate increased revenue. They remain works in progress.

 

 

We are investing in areas of the business that extract the greatest gain from our international network and market-leading strength in Asia.

Investment in flagship transaction banking products helped to increase our market share, particularly in Payments and Cash Management, Foreign Exchange and Securities Services.

The development of our Asia businesses is gaining momentum and we achieved growth in excess of GDP in seven out of eight of our priority Asia markets.

We continue to expand our business in the Pearl River Delta and reached a number of milestones in 2015, including the signing of an agreement to form the first majority foreign-owned securities company in mainland China. When approved, this will allow us to engage in the full spectrum of securities business in the country.

We remain the world’s number one bank for offshore renminbi services and increased revenue by 3% year-on-year in this vitally important growth market.

Summary and outlook

HSBC is better balanced, better connected and better placed to capitalise on higher return businesses than it was 12 months ago. Our universal banking model is generating higher income from collaboration between businesses and our operating expenses and capital ratio are trending in the right direction. Maintaining these trends while boosting revenue will be the principal challenge in the year ahead.

The current economic environment is uncertain, but our diversified banking model, low earnings volatility and strong capital generation give us strength and resilience that will stand us in good stead.

We remain focused on delivering our nine remaining strategic actions by the end of 2017.

 

LOGO

Stuart Gulliver

Group Chief Executive

22 February 2016

 

 

 

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Strategic Report

Financial overview

 

 

 

Reported results

 

This table shows our reported results for
the last three years. The results for 2015
are described below.

  Reported results    2015     2014     2013  
       $m     $m     $m  
  Net interest income      32,531        34,705        35,539   
  Net fee income      14,705        15,957        16,434   
  Net trading income      8,723        6,760        8,690   
  Other income      3,841        3,826        3,982   
  Net operating income before loan impairment charges and other credit risk provisions (revenue)      59,800        61,248        64,645   
 

 

Loan impairment charges and other credit risk provisions (‘LICs’)

     (3,721     (3,851     (5,849
  Net operating income      56,079        57,397        58,796   
 

 

Total operating expenses

     (39,768     (41,249     (38,556
  Operating profit      16,311        16,148        20,240   
 

 

Share of profit in associates and joint ventures

     2,556        2,532        2,325   
  Profit before tax      18,867        18,680        22,565   

 

 

Reported profit before tax

Reported profit before tax was $18.9bn, up by $0.2bn or 1% from 2014. This was driven by a favourable movement in significant items of $2.6bn partly offset by $0.9bn of adverse effects of foreign currency translation between the years. The favourable movement in significant items included lower fines, settlements, UK customer redress and associated provisions (down by $1.3bn in total) and a gain on the partial disposal of Industrial Bank ($1.4bn).

Excluding the effects of significant items and currency translation, profit before tax was down by 7% from 2014. We describe the drivers of our performance under ‘Adjusted performance’ on page 23.

Reported revenue

Revenue of $59.8bn was $1.4bn or 2% lower than in 2014. Revenue benefited from a favourable movement in significant items but this was more than offset by the adverse effect of currency translation of $4.8bn between the years.

Significant items affecting revenue in 2015 included:

 

a $1.4bn gain on the partial sale of our shareholding in Industrial Bank;

 

lower provisions and charges relating to the ongoing review of compliance with the Consumer Credit Act in the UK ($0.6bn lower than in 2014); and

 

an increase in favourable movements on our own debt designated at fair value from changes in credit spreads of $0.6bn.

Reported LICs

Loan impairment charges and other credit risk provisions (‘LICs’) of $3.7bn were $0.1bn or 3% lower than in 2014, reflecting the favourable impact of currency translation between the years.

Reported operating expenses

Operating expenses of $39.8bn were $1.5bn or 4% lower than in 2014. This reduction primarily reflected the favourable effect of currency translation of $3.3bn between the years.

The total of significant items was broadly in line with 2014, although there were notable movements as follows:

 

lower provisions and charges relating to UK customer redress ($0.7bn lower than in 2014); and

 

the non-recurrence of a charge of $0.6bn in 2014 relating to a settlement with the US Federal Housing Finance Agency; broadly offset by

 

settlements and provisions in connection with legal matters ($0.5bn higher than in 2014); and

 

costs-to-achieve relating to business transformation of $0.9bn in 2015 (for further details, see page 58).

Reported income from associates

Income from associates of $2.6bn was in line with 2014.

 

 

 

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Financial overview

 

 

 

Adjusted performance

Our reported results are prepared in accordance with IFRSs as detailed in the Financial Statements on page 347. We also present adjusted performance measures as we believe these help explain our performance and these are highlighted with the following symbol: LOGO

To arrive at adjusted performance, we adjust for:

 

the year-on-year effects of foreign currency translation; and

 

the effect of significant items that distort year-on-year comparisons and are excluded in order to understand better the underlying trends in the business.

LOGO For reconciliations of our reported results to an adjusted basis, including lists of significant items, see pages 66–67 and 77–78.

 

 

 

 

Adjusted results LOGO

 

This table shows our adjusted results for 2015.
These are discussed in more detail on the
following pages.

  Adjusted results    2015     2014  
       $m     $m  
  Net operating income before loan income charges and other credit risk provisions (revenue)      57,765        57,227   
  Loan impairment charges and other credit risk provisions (‘LICs’)      (3,721     (3,168
  Total operating expenses      (36,182     (34,576
  Operating profit      17,862        19,483   
  Share of profit in associates and joint ventures      2,556        2,493   
  Profit before tax      20,418        21,976   

 

 

Adjusted profit before tax LOGO

 

Our adjusted profit before tax fell by $1.6bn or 7%.

 

We grew adjusted revenue by $0.5bn or 1%, notably in GB&M (up by $1.2bn or 7%), CMB (up by $0.4bn or 3%) and Principal RBWM, which is our RBWM business excluding the US run-off
  portfolio (up by $0.4bn or 2%). These increases were partly offset in GPB (down by $0.1bn or 6%) and Other (down by $0.3bn).

 

Our LICs were $0.6bn or 17% higher than in 2014, primarily due to increases in CMB ($0.5bn) and RBWM ($0.3bn), partly offset by a reduction in GB&M ($0.3bn).
Our adjusted operating expenses increased by $1.6bn or 5%. Excluding the bank levy, operating expenses in the second half of 2015 were broadly in line with the first half of the year. This was despite investment and inflationary pressures, and partly reflects the initial effect of our cost saving initiatives as well as a strong focus on cost management.
 

 

LOGO      

 

 

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LOGO

 

 

Adjusted performance (continued)   

 

Adjusted revenue LOGO

 

Adjusted revenue rose by 1% in part due to growth in GB&M, CMB and Principal RBWM reflecting the following:

 

–  GB&M: Revenue of $18.0bn was $1.2bn or 7% higher than in 2014. This was driven by higher revenue in all client-facing businesses except Principal Investments. In Equities, revenue increased by $0.5bn, reflecting higher client flows and increased market volatility. Revenue from transaction banking products rose $0.4bn as volatility drove higher client flows in Foreign Exchange, as assets under custody in Asia rose in Securities Services, and as deposits rose in Payments and Cash Management (‘PCM’). Revenue was also higher in Balance Sheet Management (‘BSM’), rising $0.1bn.

   LOGO

–  CMB: We grew revenue by $0.4bn or 3%, in particular in Credit and Lending (up by $0.4bn) and PCM (up by $0.1bn). This growth was mainly in Hong Kong and the UK, reflecting average balance sheet growth. In Hong Kong, lending balance growth was primarily in 2014 and the first half of 2015. Balances were broadly unchanged for the remainder of 2015 reflecting subdued demand for credit. In Global Trade and Receivables Finance, performance was resilient (revenue down $44m or 2%) despite a significant decline in commodity prices (approximately 40%) and stagnant world trade.

 

–  RBWM: Our revenue was broadly unchanged from 2014. We continued to reduce the size of the balances in our US Consumer and Mortgage Lending (‘CML’) run-off portfolio, resulting in a fall in revenue of $0.3bn. However, in our Principal RBWM

   business, revenue was higher (up by $0.4bn or 2%). This was driven by increased Wealth Management revenue in Asia (up by $0.2bn) in the first half of 2015, from growth in investment distribution, which more than offset weaker investor sentiment in the second half of 2015. There was also growth in Europe (up by $0.3bn), notably from insurance manufacturing. We also increased our current account, savings and deposit revenue by $0.1bn, notably in Hong Kong and the UK, from an increase in customer deposit balances of $32bn. This was partly offset by a decrease in Personal Lending revenue of $0.3bn, primarily from lower overdraft fees in the UK after the introduction of a text message alert service in late 2014.   

–    GPB: Our revenue fell by $0.1bn or 6% reflecting lower brokerage and account services fee income from a managed reduction in client assets. However, revenue increased in Asia, notably in the first half of 2015, due to higher client activity as a result of stock market performance.

 

–    Other: Revenue was $0.3bn or 4% lower, reflecting adverse hedging ineffectiveness movements compared with favourable movements in 2014 (a net adverse movement of $0.2bn), together with the non-recurrence of a gain on the external hedging of an intra-Group financing transaction of $0.2bn. In addition, dividend income was $0.1bn lower following the partial sale of our shareholding in Industrial Bank.

 

 

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Financial overview

 

 

Adjusted performance (continued)   

Adjusted LICs LOGO

 

–  Our LICs were $0.6bn or 17% higher than in 2014, mainly in CMB ($0.5bn). This included a fourth quarter increase in specific LICs in a small number of countries, largely reflecting local factors, as well as LICs related to oil and gas.

 

–  LICs increased in RBWM by $0.3bn, mainly in Brazil as delinquency rates increased; while in the UAE, impairments on mortgages rose, following a review of the quality and value of collateral.

 

–  In GB&M, there was a reduction of $0.3bn in specific impairments as 2014 included a small number of significant charges, notably in Brazil and Hong Kong.

 

Adjusted operating expenses LOGO

 

–  Our adjusted operating expenses in 2015 were up $1.6bn or 5% on 2014.

 

–  Run-the-bank costs rose by $0.8bn or 2%. This was mainly due to wage inflation in Latin America and Asia. We also recruited additional staff across the Group to support business growth.

 

–  Change-the-bank costs rose by $0.5bn or 16% on 2014. This reflected investment in regulatory programmes and compliance, including infrastructure and systems.

 

–  The bank levy of $1.4bn was $0.4bn or 34% higher than in 2014. Excluding the bank levy, adjusted operating expenses in the second half of 2015 were broadly in line with the first half of the year. This was despite investment and inflation, and reflected the initial effect of our cost-saving initiatives and a strong focus on cost management. This included a reduction in full-time equivalent staff in the second half of the year of 4,585 and lower travel costs.

  

LOGO

 

LOGO

  

 

LOGO For further details on the categorisation of run-the-bank and change-the-bank costs, see page 58.

  

 

Adjusted income from associates

 

–  Our share of profit from associates and joint-ventures was broadly unchanged in 2015. The majority of this profit was from our investments in Bank of Communications Co. (‘BoCom’) and The Saudi British Bank.

 

 

 

 

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Balance sheet and capital strength

 

LOGO  

Balance sheet strength

 

Total reported assets were $2.4 trillion, 8.5% lower than at 31 December 2014. On a constant currency basis, total assets were $91bn or 4% lower. This reduction in part reflects the efficient use of our balance sheet to maximise shareholder returns.

 

We are focused on reducing our use of the balance sheet in areas that are capital intensive relative to returns. This provides capacity for growth in higher returning business areas and regions. For example, in GB&M, we have reduced trading assets by decreasing holdings of debt securities in our Rates business in Europe and North America.

 

Capital strength

 

We manage our capital in an effort to ensure we exceed current regulatory requirements and are well placed to meet those expected in the future.

 

We monitor our position by using capital ratios. These measure capital relative to a regulatory assessment of risks taken. We quantify how these risks relate to our businesses using risk-weighted assets. Details of these risks are included on page 227.

 

Our common equity tier 1 (‘CET1’) ratio at 31 December 2015 was 11.9%, up from 11.1% at 31 December 2014.

 

Distributable reserves

 

The distributable reserves of HSBC Holdings plc at 31 December 2015 were $47bn, and at 31 December 2014 were $49bn.

 

 

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Financial overview

 

  

LOGO For detailed information
on our financial performance,
see pages 50 to 60.

 

 

Delivering on our Group financial targets

 

 

LOGO

  

Return on equity

 

Our medium-term target is to achieve a return on equity (‘RoE’) of more than 10%. This target is modelled on a CET1 ratio in the range of 12% to 13%.

 

In 2015, we achieved an RoE of 7.2% compared with 7.3% in 2014. The bank levy and significant items, such as fines, penalties, customer redress and associated provisions, had a significant effect on our 2015 RoE, reducing the return achieved by 190 basis points.

 

Adjusted jaws LOGO

 

Our target is to grow revenue faster than operating expenses on an adjusted basis. This is referred to as positive jaws. In 2015, we grew adjusted revenue by 0.9% whilst our adjusted operating expenses rose by 4.6%.

 

Jaws was therefore negative 3.7%. Jaws for 2015 was affected by the revenue performance in the second half of the year. Adjusted revenue growth in the first half of 2015 was 4.5% but fell in the second half of 2015, reflecting the economic environment, including slowing GDP growth in China. This resulted in overall revenue growth of 0.9% for 2015.

 

The increase in adjusted operating expenses in 2015 included a $0.4bn rise in the bank levy (to $1.4bn). Excluding this increase, jaws in 2015 would have been negative 2.8%. During the second half of 2015, we made progress on our cost saving plans set out at our Investor Update. We reduced the growth rate in adjusted operating expenses, down from 7.3% in the first half of 2015 to 4.7% for the year.

 

Progressive dividend

 

In 2015, we increased the dividends per ordinary share in respect of the year to $0.51 from $0.50 in 2014.

 

 

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Global businesses

We manage our products and services
globally through four global businesses.

LOGO For further details on the financial performance
of our global businesses, see pages 68 to 73.

 

 

Commercial Banking (‘CMB’)

 

LOGO

 

Customers

 

CMB serves more than two million customers in 55 countries and territories. Our customers range from small enterprises focused primarily on their domestic markets through to corporates operating globally.

 

We have been simplifying our product range and services to meet clients’ needs better. Since 2013, we have reduced the number of products we offer around the world from 975 to fewer than 410. We have also completed role-specific conduct training for more than 20,000 employees to help ensure that products are sold appropriately.

 

Products and services

 

We support our customers with tailored financial products and services to allow them to operate efficiently and to grow. This includes providing them with working capital, term loans, payment services and international trade facilitation, among other services. We offer expertise in mergers and acquisitions, and provide access to financial markets.

  

In 2015, the quality of our service was recognised by several leading awards. For the fourth consecutive year, we were recognised as the Best Global Cash Manager (for Non-Financial Institutions) in the Euromoney Cash Management survey. We were also recognised as the Best Overall Global Trade Finance Bank, among other awards, in the Trade Finance Awards for Excellence.

 

Business synergies

 

CMB is at the centre of business synergies within the Group, enabling nearly $6bn of business synergy revenue in 2015. For example, it provides trade finance, working capital and liquidity management solutions to GB&M clients. It also provides Capital Finance expertise, and Insurance and Asset Management capabilities from across the Group to benefit customers.

 

Areas of focus

 

We are focused on creating value from our network, which covers 90% of global trade and capital flows. We are therefore investing in digital and technology aspects of our core Payments and Cash Management (‘PCM’), and Global Trade and Receivables Finance propositions, as well as in the Pearl River Delta, ASEAN and NAFTA growth areas.

 

We achieved significant risk-weighted asset efficiencies through management initiatives in 2015 and continue to ensure our capital is deployed effectively.

  

Continued revenue growth in Hong Kong and the UK LOGO

 

–    Adjusted profit before tax of $8.2bn was $0.4bn or 5% lower than in 2014, as revenue growth was more than offset by a rise in LICs and higher costs.

 

–    We grew revenue by $0.4bn or 3%, in particular in Credit and Lending, and PCM. This was mainly in Hong Kong and the UK, reflecting average balance sheet growth, although demand for credit in Hong Kong was subdued in the second half of 2015, with balances remaining broadly unchanged.

 

–    LICs were $0.5bn or 36% higher, reflecting enhanced credit risk in the oil and gas sector, notably in North America, Asia, and Middle East and North Africa. In addition, we raised LICs against a small number of specific clients in Indonesia, the UAE and the UK.

 

–    Costs increased by $0.4bn or 6%, notably in Asia and the US, due to wage inflation and investment in growth initiatives, regulatory programmes and compliance.

 

–    Management initiatives set out in our Investor Update in June 2015 contributed a reduction in risk-weighted assets (‘RWAs’) of $23.0bn or more than 75% of our 2015–2017 target.

 

LOGO

Adjusted profit before tax LOGO

-5%

     
     
     
     
     
     

 

 

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Global businesses

 

LOGO

 

 

Global Banking and Markets (‘GB&M’)

 

LOGO

 

Customers

 

GB&M supports major government, corporate and institutional clients worldwide in achieving their long-term strategic goals through tailored and innovative solutions. Our deep sector expertise extends across transaction banking, financing, advisory, capital markets and risk management. We serve nearly 4,000 clients in more than 50 countries and territories, helping them to realise opportunities in the markets that matter to them.

 

We continue to strengthen the services we provide and our relationships with clients. We regularly assess these relationships, using benchmarking and internal programmes. As a result, in 2015 we improved the on-boarding experience for clients and enabled relationship bankers to spend more time understanding clients’ needs. Customer feedback allows us to identify opportunities to further improve our business and the wider client experience.

 

Products and services

 

Our product specialists continue to deliver a comprehensive range of transaction banking, financing, advisory, capital markets and risk management services. In 2015, our product strengths were recognised by numerous

  

accolades, including Most Innovative Investment Bank and Best Bank for Securities Services in The Banker awards. We were ranked number one Bank for Corporates (Global Market Share) in the Euromoney FX Survey, and for the third consecutive year we were voted Best Bond House in Asia by FinanceAsia.

 

In addition, we provide award-winning research to investors with an emphasis on emerging markets.

 

Business synergies

 

In 2015, GB&M enabled business synergies of $8.4bn, supporting growth in a number of areas. For example, we provide Markets products to CMB and RBWM customers, Capital Financing products to CMB customers, and also use CMB and Asset Management products to serve GB&M clients.

 

Areas of focus

 

Deepening relationships with clients in both event and transaction banking products remains a priority. We will focus on regions where we see the greatest growth opportunities such as NAFTA, ASEAN and the Pearl River Delta. We also plan to grow our business from the internationalisation of China’s renminbi currency and by investing in digital capabilities.

 

We made significant progress towards reducing RWAs in 2015. This will remain a focus as we continue to exit legacy credit, manage our Markets and Capital Financing businesses and employ a disciplined approach to new client business.

 

Our continued focus on cost discipline will result in further simplification of the business from streamlining of our business lines, operations and technology.

  

Adjusted profit growth of 14% compared with 2014  LOGO

 

–    Adjusted profit before tax was higher by $1.1bn due to higher revenue and lower LICs, partly offset by increased costs.

 

–    Our revenue increased by $1.2bn or 7%, with higher revenue in all businesses except Principal Investments. In client-facing GB&M, revenue rose due to increased client flows and volatility in Equities (up by $0.5bn) and in transaction banking products (up by $0.4bn). Revenue was also higher in Balance Sheet Management (up $0.1bn).

 

–    LICs were $0.3bn lower. This reflected minimal impairments in 2015 compared with a net charge in 2014 in client-facing GB&M. However, in 2015 we had lower net releases of credit risk provisions, primarily on available-for-sale asset-backed securities in legacy credit.

 

–    Our operating expenses increased by $0.4bn or 5%, mainly from higher performance-related costs and higher staff costs reflecting wage inflation. In addition, we continued to invest in our PCM and Foreign Exchange businesses, as well as in regulatory programmes and compliance.

 

–    Management initiatives identified in our Investor Update in June 2015 contributed to an overall reduction in RWAs of $72bn this year. This is 54% of our target of $134bn (stated at December 2015 exchange rates).

 

–    The graph below shows reported and adjusted profit before tax. The difference between these figures primarily reflects fines, penalties and charges in relation to legal matters, which totalled $1.9bn and $0.9bn in 2014 and 2015, respectively. Significant items are detailed on page 66.

 

LOGO

Adjusted profit before tax LOGO

+14%

     

 

 

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LOGO

 

 

Retail Banking and Wealth Management (‘RBWM’)

 

LOGO

 

Customers

 

RBWM serves close to 45 million customers worldwide through four main business areas: Retail Banking, Wealth Management, Asset Management and Insurance.

 

Since 2012, we have taken numerous actions to improve the way we conduct our business. We have removed the formulaic link between product sales and remuneration, paying all staff on a discretionary basis, which includes assessment of their behaviour and the satisfaction of our customers. We have simplified our product range, reviewed the fairness of our product features and pricing, and enhanced the way we monitor the quality of our sales.

 

Products and services

 

RBWM provides services to individuals under the HSBC Premier and Advance propositions aimed at mass affluent and emerging affluent customers who value international connectivity and benefit from our global reach and scale. For customers who have simpler everyday banking needs, RBWM offers a full range of banking products and services reflecting local requirements.

  

Asset Management and Insurance

We operate our own Asset Management and Insurance businesses. By owning these businesses directly, we can tailor their products to the needs of customers and maintain end-to-end control over their quality. We are investing for growth in these businesses, leveraging our network and strong client relationships.

 

Business synergies

 

RBWM makes a significant contribution to the overall success of the Group. In 2015, Insurance Manufacturing (within Wealth Management) and Asset Management generated revenue of $1.7bn and $1.1bn, respectively, from the provision of services to clients across all of our global businesses. In addition, the foreign exchange and wealth management needs of our RBWM clients create opportunities for GB&M.

 

RBWM’s strong deposit franchise supports a stable and diversified core funding base for the Group, and the branch network supports the needs of other global business clients while enhancing the visibility of the HSBC brand.

 

Areas of focus

 

RBWM’s focus is on growing the business through relationship-led personal lending and wealth management, while transforming our customer experience and cost base through investment in digital infrastructure.

  

Despite a challenging second half of 2015, Wealth Management revenue grew by 8%  LOGO

 

Total RBWM – Total RBWM adjusted profit before tax fell by $0.7bn or 10%, with a decrease in profit before tax in both Principal RBWM and from the continued reduction in our US run-off portfolio.

 

The graph below shows reported and adjusted profit before tax. The difference between them primarily reflects fines, penalties and charges in relation to legal matters, which totalled $1.6bn and $1.3bn in 2014 and 2015, respectively. Significant items are detailed on page 66.

 

Principal RBWM – In our Principal RBWM business, profit before tax was down by $0.5bn or 7%, reflecting higher costs and LICs. Revenue grew.

 

–    Revenue rose $0.4bn in Wealth Management in Asia in the first half of the year from investment distribution, offsetting weaker investor sentiment in the second half of 2015. Wealth Management income in Europe also grew as insurance manufacturing increased. Deposit and savings income grew in Asia and the UK as deposits increased by $32bn. This was partly offset by lower overdraft fees in the UK.

 

–    LICs increased by $0.3bn or 20%, mainly in Brazil from increased impairment charges following the economic slowdown, and the UAE following a review of collateral in the mortgage book.

 

–    Costs rose by $0.5bn or 4%, driven by inflation in Asia and Latin America. Our marketing costs also increased as we relaunched our Global Advance account proposition with notable investment in the UK, and we continued to invest in regulatory programmes and compliance.

 

LOGO

Adjusted profit before tax – total RBWM LOGO

-10%

 

 

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Global businesses

 

LOGO

 

 

Global Private Banking (‘GPB’)

 

LOGO

 

Customers

 

GPB serves high net worth individuals and families, including those with international banking needs, through 18 booking centres covering our priority markets.

 

Since 2011, GPB has taken significant steps to simplify and improve the way it conducts its business. We have reduced the number of booking centres to refocus resources on a smaller number of locations where we have the scale to support our new client service model and enhanced sales quality standards.

 

We have also reduced the number of offshore markets we cover to ensure appropriate focus is given to key growth areas.

 

GPB remains committed to implementing the most effective global standards, including customer due diligence, a tax transparency framework and financial crime compliance measures.

  

Products and services

 

We work closely with our clients to provide solutions to grow, manage and preserve wealth. Our products and services include: Investment Management, incorporating advisory, discretionary and brokerage services; Private Wealth Solutions, comprising trusts and estate planning, designed to protect wealth and preserve it for future generations; and a full range of Private Banking services.

 

Business synergies

 

GPB aims to bring the best of the Group’s research, product and service capabilities to GPB clients.

 

To achieve this, we have three client service groups: the Corporate Client Group, enhancing connectivity with CMB and GB&M; the Wealth Client Group, delivering a seamless transition across the RBWM and GPB wealth franchises; and the Global Solutions Group, delivering non-traditional wealth management solutions.

 

Wherever possible, GPB uses product capabilities within GB&M, CMB and RBWM, including asset management, research, insurance, trade finance and capital financing, to offer a unique proposition to our clients.

 

Areas of focus

 

GPB aspires to build on HSBC’s commercial banking heritage and be the leading private bank for high net worth business owners and principals. We work closely and systematically with CMB and GB&M to deliver a coordinated private and corporate coverage model for our clients.

  

Continued repositioning of our GPB business LOGO

 

–    Adjusted profit before tax fell by 26% to $0.5bn, mainly because revenue fell by 6% as we continued to reposition the GPB business.

 

–    However, revenue increased in Asia, notably in the first half of 2015, due to higher client activity as a result of a strong stock market performance, which more than offset the weaker investor sentiment in the second half of the year.

 

–    We attracted positive net new money of $14bn in 2015 in the parts of the business that fit our target model, mainly in Hong Kong, the UK, Singapore and the US.

 

LOGO

Adjusted profit before tax LOGO

-26%

     
     
     
     

 

 

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Strategic Report | How we do business

 

 

 

 

Building lasting business relationships

Ensuring fair outcomes

We recognise that delivering fair outcomes for customers and upholding financial market integrity is critical to a sustainable business model.

We continue to enhance our product governance processes to further ensure products are designed to meet customers’ needs and are sold appropriately. In the UK, for example, we have started to alert customers by text message when they are about to go into overdraft. As a result, customer complaints in this area have declined by 67% and customers have saved more than $129.9m in fees.

For further details on the steps we have taken to strengthen conduct across the Group, see page 40. For further details on compliance risk and for further details on conduct-related costs included in significant items, see pages 178 and 97, respectively.

Increasing quality of service

We seek feedback from customers in order to assess how well we are doing and what we can do better. In 2015, we improved our processes for responding to customer complaints and tools for understanding their causes. For example, in India our analysis of customer complaints led us to improve customer communication regarding minimum balances and change our fee structure. Complaints in this area subsequently reduced by 62%.

Through our commercial banking research programmes, we have spoken to more than 50,000 businesses to gather feedback on our products and services from existing and potential customers. We use competitor benchmarking, brand tracking and customer surveys to evaluate our performance. In RBWM, we conducted more than 350,000 individual customer surveys.

Developing long-term opportunities

Technology and climate change are two areas that present both challenges and opportunities to us and our customers.

Investing in technology

We are investing in innovation and digital capabilities to serve customers better, and enhancing security around financial transactions and customer data.

In 2015, we enabled the Apple Pay mobile payment service for customers in the UK and the US, and launched live-chat online customer service in six markets including the UK, Hong Kong and France. We made digital secure keys available in the UK to simplify the customer login experience. In Argentina and the Philippines, we launched our new online banking platform, which will be deployed in additional countries in 2016.

Facilitating a low-carbon economy

Reducing global carbon dioxide emissions is a critical challenge for society. We see the potential for financial services to facilitate investment that can help the world transition to a low-carbon economy.

In 2015, our Global Research team was ranked number one for Integrated Climate Change for the second year running in the Extel Survey. Furthermore, our Asset Management business joined the Montreal Pledge to disclose the carbon intensity of its portfolio.

For more information about our climate business, see page 37.

 

LOGO

HSBC Global Research

1st

for integrated climate

change research, ranked

by Extel Survey 2015.

 

 

 

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Strategic Report | How we do business

 

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Empowering people

Valuing diversity

We are proud to provide an open, supportive and inclusive workplace where people can grow and achieve their potential. Our commitment to diversity and inclusion helps us attract, develop and retain employees. We are also committed to reflecting the communities we serve.

Our employees lead and organise seven global employee networks to promote diversity. They focus on gender, age, ethnicity, sexual orientation, religion, working parents and disability.

To help managers address bias in hiring, promotion and talent identification, we use education programmes and have expanded mentoring initiatives for under-represented groups.

In 2015, we won Diversity Team of the Year at the European Diversity Awards. We were also one of 10 companies recognised as a Top Global Employer in Stonewall’s Global Workplace Equality Index.

We continue to address gender representation, particularly at senior levels, with additional focus on promotions and hiring. We also continue to expand support and flexible working programmes for parents returning to work.

Our award-winning Balance employee network aims to address gender diversity across HSBC, encouraging dialogue and a better understanding of the challenges and opportunities in promoting a gender-balanced workforce throughout the Group. It is available to staff of all genders, and had active groups in more than 30 offices around the world in 2015.

Encouraging ownership

We promote individual ownership and responsibility, and have created forums to encourage dialogue. In 2015, we continued to facilitate agenda-free exchange meetings across the Group for employees to collaborate on ideas and initiatives to improve our work. We also held 14 webcasts with senior executives to promote understanding of our strategic actions and allow employees to ask questions.

Equipping employees

Our training programmes reinforce a culture grounded in our values. In 2015, we completed a three-year programme of values-led leadership training for all employees.

We are building employee training centres in Birmingham, Dubai and mainland China. These will operate alongside HSBC University, our online training service.

In 2015, we also launched HSBC Confidential, which brought together all our existing whistleblowing channels on to a global platform that allows employees to raise concerns confidentially without fear of personal repercussions. The global channel can be accessed by telephone, email, web or mail. For further details, see ‘Whistleblowing’ on page 179.

Rewarding positive behaviours

We have embedded behaviour ratings in our performance review processes, which are factored into variable pay considerations.

In 2015, we introduced an At Our Best online recognition tool for all employees. It allows them to recognise colleagues’ actions by awarding points that are redeemed for gifts and benefits.

LOGO

Exchange meeting participation

(% of employees that attended a 2015 meeting)

53%

 

 

Employee retention

84.1%

 

LOGO

 

 

 

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How we do business

 

LOGO

 

 

    

 

Ensuring sustainable outcomes         Tax

 

Managing environmental

and social impacts

We continue to reduce the environmental impact of our operations and have robust policies and processes to manage sustainability risks in our business activities.

We are reducing the amount of energy we consume, and increasing the proportion from renewable sources. We have signed agreements to increase the percentage of our electricity from new wind and solar sources to 9%, and have a target of 25% by 2020. We report on our carbon dioxide emissions for the year in the Report of the Directors on page 98.

Our sustainability risk policies cover a number of sensitive industries and themes. After we issued new standards in our forestry and agricultural commodities policies in 2014, we took the decision to stop banking more than 160 customers as soon as possible because they did not comply. In 2015, HSBC was recognised as a leader in the Forest 500 ranking of 150 investors’ policies on the sustainability of forest commodity supply chains.

We also support a transition to certified, sustainable palm oil. Our standards require our palm oil customers to have all their operations certified as sustainable by the end of 2018, and we continue to support them in meeting this goal.

In 2015, there were more than 2,300 attendances by relationship and risk managers of training on our sustainability risk policies to help ensure their implementation is robust.

LOGO Details on our sustainability risk framework and policies are available online at www.hsbc.com/citizenship/ sustainability/finance.

Respecting human rights

We apply human rights considerations directly as they affect our employees and indirectly through our suppliers and customers, and through our action to prevent bribery and corruption. For example, our code of conduct for suppliers includes elements related to human rights, as do our project finance lending and sustainability risk policies. Our Statement on Human Rights, issued in 2015, explains how we do this and is available on our website. We will integrate the provisions of the Modern Slavery Act 2015 into our business and supply chain, and will report in line with the guidelines published by the UK government.

We are guided by the International Bill of Human Rights, and support the UN Declaration of Human Rights and the principles concerning fundamental rights set out in the International Labour Organisation’s Declaration on Fundamental Principles and Rights at Work.

Investing in our communities

We believe that education and the environment are essential to resilient communities and thriving economies. For more than 10 years, we focused our community investment activities on these two areas. In 2015, following survey responses from employees, we decided to add medical charities to the causes we support.

In 2015, we contributed a total of $205m to charitable programmes and our employees volunteered 304,555 hours in community activities during the working day.

We marked our 150th year by setting up an additional fund of $150m to support causes selected by our employees. It will support 140 charities across the world over three years. We also made a one-off $62m donation to charities in Hong Kong from the sale of commemorative HK$150 bank notes.

 

LOGO

Our approach to tax

We apply the spirit as well as the letter of the law in all territories where we operate, and have adopted the UK Code of Practice for the Taxation of Banks. As a consequence, we pay our fair share of tax in the countries in which we operate. We continue to strengthen our processes to help ensure our banking services are not associated with any arrangements known or suspected to be designed to facilitate tax evasion.

HSBC continued to support global initiatives to improve tax transparency such as:

 

the US Foreign Account Tax Compliance Act (‘FATCA’);

 

the OECD Standard for Automatic Exchange of Financial Account Information (also known as the Common Reporting Standard);

 

the Capital Requirements Directive IV (‘CRD IV’) Country by Country Reporting; and

 

the OECD Base Erosion and Profit Shifting (‘BEPS’) initiative.

We do not expect the BEPS initiative or similar initiatives adopted by national governments to adversely impact HSBC’s results.

 

 

 

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Strategic Report

Risk overview

We actively manage risk to protect

and enable the business.

 

 

Managing risk

As a provider of banking and financial services, managing risk is part of our core day-to-day activities. Our success in doing so is due to our clear risk appetite, which is aligned to our strategy. We set out the aggregate level and types of risk that we are willing to accept in order to achieve our medium- and long-term strategic objectives in our risk appetite statement, which is approved by the Board, covering:

 

risks that we accept as part of doing business, such as credit risk and market risk;

 

risks that we incur to generate income, such as operational risk and capital and liquidity risk, which are managed to remain below an acceptable tolerance; and

 

risks that we have zero tolerance for, such as reputational risk.

LOGO Our risk management framework and its key components, and our exposure to risks arising from the business activities of the global businesses are shown on pages 101 and 109.

The strategic actions designed to increase our return on equity are described on page 18.

To ensure that risks are managed in a consistent way across the Group, we employ a risk management framework that is applicable to all levels of the organisation and across all risk types. It sets out governance and structures,

 

responsibilities and processes. Global Risk, led by the Group Chief Risk Officer, who is an executive Director, is responsible for enterprise-wide risk oversight and is independent from the sales and trading functions of the Group’s businesses. This independence ensures the necessary balance in risk/ return decisions.

 
  Key risk appetite metrics  
   
  Component    Measure    Risk appetite      2015  

 

  Returns

  

 

Return on average ordinary shareholders’ equity in excess of our estimated cost of equity of 9%

 

  

 

 

 

>10%

 

  

  

 

 

 

7.2%

 

  

 

 

 

  Capital

 

  

 

Common equity tier 1 ratio – CRD IV end point basis

 

  

 

 

 

>10%

 

  

  

 

 

 

11.9%

 

  

 

 

 

  Liquidity

  

 

HSBC consolidated balance sheet advances-to- deposits ratio

 

  

 

 

 

 

£90%

 

 

  

 

  

 

 

 

72%

 

  

 

 

 

  Loan

  impairment

  charges

  

RBWM loan impairment charges as % of advances1

 

  

 

 

 

<0.65%

 

  

  

 

 

 

0.58%

 

  

  

 

     
  

 

Wholesale loan impairment charges as % of advances

 

  

 

 

 

<0.45%

 

  

  

 

 

 

0.26%

 

  

 

1 Including the loans of the Brazilian operations held for sale.

  

 

 

Risk management and stress testing

Stress testing is an integral component of our risk management framework. It is an important tool for us to assess potential vulnerabilities in our businesses, business model or portfolios. It allows us to understand the sensitivities of the core assumptions in our strategic and capital plans, and improve decision-making through balancing risk and return.

Internal stress test scenarios are closely aligned to our assessment of top and emerging risks. The potential impact from these scenarios, were they to occur, may prompt pre-emptory management actions including a reduction in limits or direct exposures, or closer monitoring of exposures sensitive to stress.

LOGO Our approach to stress testing and the results of regulatory stress testing programmes are discussed on pages 103 and 116, respectively.

We also participate in regulatory stress test exercises in a number of jurisdictions. The primary Group-wide exercise is requested by the Bank of England. The 2015 scenario incorporated a synchronised global downturn affecting Asia, Brazil and the eurozone in particular, a reduction in global risk appetite and market liquidity, and a recession in the UK.

 

The results were published by the Bank of England on 1 December 2015 and are summarised below. Our CET1 ratio remained well above the regulatory minimum despite our significant presence in the countries and regions affected by the scenario, demonstrating our resilience to a severe stress situation in our core markets.

 
 

2015 Bank of England Stress Test Results

  
   

Group Common Equity Tier 1 Ratio

        
 

 

31 December 2014 actual (end point)

 

    

 

11.1%

 

  

 

 

 

 
 

 

Minimum stressed ratio before management actions

 

    

 

7.0%

 

  

 

 

 

 
 

 

Minimum stressed ratio after management actions

 

    

 

7.7%

 

  

 

 

 

 
 

 

Bank of England minimum ratio

 

    

 

4.5%

 

  

 

 

 

 
 

 

31 December 2015 actual (end point)

 

    

 

11.9%

 

  

 

 

 

 

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Risk overview

 

 

Top and emerging risks

 

We employ a top and emerging risks framework at all levels of the organisation to identify current and forward-looking risks so that we may take action that either prevents them materialising or limits their effect.

Top risks are those that may have a material impact on the financial results, reputation or business model of the Group in the year ahead. Emerging risks are those that have large unknown components and may form beyond a one-year horizon. If these risks were to occur, they could have a material effect on HSBC.

Our current top and emerging risks are summarised below.

During 2015, we made two changes to our top and emerging risks to reflect our assessment of their effect on the Group. ‘Turning of the credit cycle’ was added as a new risk, reflecting the risk of deterioration in the credit environment. ‘Internet crime and fraud’ was removed as mitigating actions taken have reduced credit and fraud losses through digital channels.

In addition, four risks were renamed to better reflect the issues facing HSBC. We use the new names below.

LOGO

LOGO  Our top and emerging risks

are discussed in more detail

on page 110.

 

 

 

 Risk

 

 

Trend        

 

 

Mitigants

 

 
  Externally driven      
     
 

Economic outlook

and capital flows

 

  LOGO  

We closely monitor economic developments in key markets, undertaking business or portfolio reviews or stress tests as required, and take appropriate action as circumstances evolve.

 

 
 

 

 
  Geopolitical risk   LOGO  

We continuously assess the impact of the geopolitical outlook on our country limits and exposures to ensure we remain within our risk appetite.

 

 
 

 

 
  Turning of the credit cycle           LOGO  

We undertook portfolio and limit reviews and conducted stress tests on the sectors and portfolios that are most sensitive to the credit cycle.

 

 
 

 

 
 

Regulatory developments

affecting our business

model and profitability

 

  LOGO  

We actively assess the effect of relevant developments and engage closely with governments and regulators, seeking to ensure that requirements are considered properly and implemented in an effective manner.

 

 
 

 

 
 

US DPA and related

agreements and

consent orders

 

  LOGO  

We are continuing to take concerted action to remedy anti-money laundering and sanctions compliance deficiencies and to implement Global Standards.

 

 
 

 

 
 

Regulatory focus on

conduct of business

and financial crime

 

  LOGO  

We are enhancing our financial crime and regulatory compliance controls and resources and are implementing significant programmes to enhance the management of conduct and financial crime risks.

 

 
 

 

 
  Dispute risk   LOGO  

We continue to focus on identifying emerging regulatory and judicial trends, and sharing lessons learned globally in an effort to avoid or limit future litigation exposure.

 

 
 

 

 
 

Cyber threat and

unauthorised access

to systems

 

  LOGO  

We continue to improve our governance and controls framework to protect HSBC’s information and technical infrastructure against ever-increasing and sophisticated cyber threats.

 

 
 

 

 
 

Internally driven

 

     
 

 

 
  People risk   LOGO  

We continue to focus on attracting and retaining key talent and are implementing a number of initiatives to improve employee capability, collaboration and engagement.

 

 
 

 

 
  Execution risk   LOGO  

We have strengthened our prioritisation and governance processes for significant strategic, regulatory and compliance projects. Risks related to the disposals of our operations in Brazil and Turkey were subject to close management oversight.

 

 
 

 

 
 

Third-party risk

management

 

  LOGO  

We are enhancing our third-party risk management governance, processes and procedures and have conducted enhanced risk assessments of our most critical third parties.

 

 
 

 

 
  Model risk   LOGO  

We have strengthened our governance framework, created centralised global analytical functions and recruited additional subject matter experts in our modelling and independent model review teams.

 

 
 

 

 
  Data management   LOGO  

A number of key initiatives and projects are in progress to implement our data strategy to enable consistent data aggregation, reporting and management.

 

 
 

 

 
 

LOGO Risk heightened during 2015

LOGO Risk remained at the same level as 2014

 

 

 

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Strategic Report

Remuneration

Our remuneration policy supports the
achievement of our strategic objectives
through balancing reward for both short-term
and long-term sustainable performance.

 

 

Remuneration principles

 

The remuneration strategy for our employees is based on a series of key principles.

 

LOGO

What we do

–    Focus on total compensation with a strong link between pay and performance

 

–    Judge not only what is achieved but how it is achieved in line with HSBC Values

 

–    Operate a thorough performance management and HSBC Values assessment process

 

–    Recognise and reward our employees for outstanding positive behaviour

 

–    Design our policy to align compensation with long-term shareholder interests

 

–    Apply consequence management to strengthen the alignment between risk and reward

  

LOGO For full details of our remuneration policy, see www.hsbc.com/~/media/ HSBC-com/InvestorRelationsAssets/ governance/151023-remuneration-policy.

 

LOGO

What we don’t do

–    Reward inappropriate or excessive risk taking or short-term performance at the expense of long-term company sustainability

 

–    Use only a formulaic approach to determine bonuses for our executives

 

–    Award discretionary bonuses to employees rated unacceptable against our HSBC Values and behaviours

 

–    Allow our employees to hedge against their unvested or retained awards

 

–    Offer employment contracts with a notice period of more than 12 months

 

–    Have pre-arranged individual severance agreements

   LOGO

 

 

Single figure of remuneration for our executive Directors

 

 

(£000)

 

LOGO

 

LOGO  For full details of our Directors’
pay and performance for 2015,
see the Directors’ Remuneration Report
on page 285.

                           
 

 

How much our executive Directors earned in 2015 (£000)

           Douglas Flint      Stuart Gulliver      Iain Mackay      Marc Moses
           Group Chairman      Group Chief      Group Finance      Group Chief
                         Executive      Director      Risk Officer
      

 

 

           2015      2014      2015      2014      2015      2014      2015      2014  
    Fixed pay                        
   

 

    Base salary      1,500         1,500         1,250         1,250         700         700         700       700  
   

 

    Fixed pay allowance                      1,700         1,700         950         950         950       950  
   

 

    Pension      750         750         625         625         350         350         350       350  
   

 

    Total fixed pay      2,250         2,250         3,575         3,575         2,000         2,000         2,000       2,000  
   

 

    Variable pay                        
   

 

    Annual incentive                      1,072         1,290         1,068         867         827       1,033  
   

 

    GPSP                      1,969         2,112         1,101         1,131         1,101       1,131  
   

 

    Total variable pay                      3,041         3,402         2,169         1,998         1,928       2,164  
   

 

    Total fixed and variable pay      2,250         2,250         6,616         6,977         4,169         3,998         3,928       4,164  
   

 

    Benefits      151         136         662         589         54         43         6       6  
   

 

    Non-taxable benefits      95         105         53         53         28         28         29       33  
   

 

    Notional return on deferred cash              41         9                 5         11         5       36  
   

 

    Total single figure of remuneration      2,496         2,532         7,340         7,619         4,256         4,080         3,968       4,239  
   

 

                           
                           
                           
                           
                           
                           
                           
                           
                           

 

 

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Remuneration

 

 

Policy for executive Directors

 

We are making changes to our Directors’ remuneration policy

Our current remuneration policy was approved by shareholders at the 2014 Annual General Meeting (‘AGM’) and was applied for 2015. Due to increased

regulatory requirements, we are putting forward a new remuneration policy for shareholder approval at the AGM this year. For further details, see page 288.

The table below summarises how each element of pay was implemented in 2015 and how it will change for 2016 if the new policy is approved.

LOGO For full details of the current Directors’ remuneration policy, see page 381 of the 2013 Directors’ Remuneration Report.

 

 

  Pay

 

  Element   Implementation in 2015    Proposed changes to policy for 2016
  Fixed   Base salary  

– Benchmarked on an annual basis

   No change to policy:
   

– Increases will not exceed more than 15% of base salary levels as at 2013 during the term of the policy

  

– Increase will not exceed more than 15% of base salary levels as at 2016 during the term of the policy

   

– Amounts have not changed since 2010

 

  
 

 

  Fixed pay allowance  

– Fixed pay allowances introduced in 2014 to ensure the total compensation package remains competitive as a consequence of new regulatory requirements in 2013

  

– Maximum fixed pay allowance for each executive Director is 150% of base salary

– Granted in immediately vested shares, subject to a retention period released pro-rata over a period of five years

   

– Granted in immediately vested shares, subject to a retention period with 20% released after one year and the remainder after five years

 

  
 

 

  Pension  

– Cash allowance in lieu of pension of up to 50% of base salary

 

   – Reduced to a maximum of 30% of base salary
 

 

  Benefits  

– Takes account of local market practice, including but not limited to medical and income protection insurance

  

– No change to current provided benefits

– Post-departure benefits introduced for up to seven years from date of departure

 

 

  Variable   Annual incentive  

– Maximum is 67% of fixed pay (equal to approximately 181% of base salary)

  

– Maximum is 215% of base salary

– 100% delivered in shares subject to a retention period, with the Remuneration Committee to have discretion to defer a portion of the awards or apply a longer retention period

   

– Measured against an annual scorecard

  
   

– A minimum of 60% will be deferred and vest over a three-year period

  
   

– Delivered in cash and shares, with a minimum of 50% delivered in shares

 

  
 

 

 

Long-term

incentive

 

– Group Performance Share Plan

  

– New long-term incentive plan

   

– Maximum of 133% of fixed pay (equal to approximately 381% of base salary)

  

– Maximum is 320% of base salary

– Performance targets set annually for each three-year forward-looking performance period

– Introduction of relative total shareholder return as a performance measure

   

– Measured against 2014 long-term scorecard

  
   

– Delivered in shares with a five-year vesting period

  
   

– Required to hold shares until retirement

  
      

– Delivered in shares, subject to the outcome of the performance conditions at the end of the three-year performance period, in equal instalments between the third and seventh anniversary of the grant date

      

– A retention period may be applied to ensure compliance with regulatory requirements

 

 

 

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Financial review

  
   All disclosures in the Financial Review section are unaudited unless otherwise stated.
   Disclosures marked as audited should be considered audited in the context of financial statements taken as a whole.

 

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Report of the Directors: Financial summary

Use of non-GAAP financial measures

 

    

 

Financial summary

  

Use of non-GAAP financial measures

   48

Reconciliation of 2015 and 2014 reported and adjusted items

   49

Reconciliation of 2014 and 2013 reported and adjusted items

   49a

Return on equity and return on tangible equity

   49b

Consolidated income statement

   50

Group performance by income and expense item

   51

Net interest income

   51

Net fee income

   53

Net trading income

   54

Net income from financial instruments designated at fair value

   54

Gains less losses from financial investments

   55

Net insurance premium income

   56

Other operating income

   56

Net insurance claims and benefits paid and movement in liabilities to policyholders

   57

Loan impairment charges and other credit risk provisions

   57

Operating expenses

   58

Share of profit in associates and joint ventures

   60

Tax expense

   60

2014 compared with 2013

   60a

Consolidated balance sheet

   61

Movement in 2015

   62

Average balance sheet

   63a

Average balance sheet and net interest income

   63a

Analysis of changes in net interest income and net interest expense

   63g

Short-term borrowings

   63j

Loan maturity and interest sensitivity analysis

   63k

Deposits

   63l

Ratio of earnings to fixed charges

   63o

Reconciliation of RoRWA measures

   64

Critical accounting estimates and judgements

   64

The management commentary included in the Strategic Report, the Report of the Directors: ‘Financial Review’, together with the ‘Employees’ and ‘Corporate sustainability’ sections of ‘Corporate Governance’ and the ‘Directors’ Remuneration Report’ is presented in compliance with the IFRSs Practice Statement ‘Management Commentary’ issued by the IASB.

Use of non-GAAP financial measures

Our reported results are prepared in accordance with IFRSs as detailed in the Financial Statements starting on page 336. In measuring our performance, the financial measures that we use include those which have been derived from our reported results in order to eliminate factors which distort year-on-year comparisons. These are considered non-GAAP financial measures.

The primary non-GAAP financial measure we use is ‘adjusted performance’. Other non-GAAP financial measures are described and reconciled to the most relevant reported financial measure when used.

Adjusted performance

Adjusted performance is computed by adjusting reported results for the year-on-year effects of foreign currency translation differences and significant items that distort year-on-year comparisons. ‘Significant items’ are excluded from adjusted performance because management and investors would ordinarily identify and consider them separately in order to better understand the underlying trends in a business.

These items, which are detailed in the tables starting on pages 66 and 77, include:

 

  gains or losses on the disposal or reclassification of subsidiaries, associates and joint ventures;

 

  fines, penalties, customer redress and associated provisions, together with settlements and provisions relating to legal matters when their size or historical nature mean they warrant separate consideration;

 

  costs incurred to achieve the productivity and cost reduction targets outlined in the Investor Update of June 2015; and

 

  credit spread movements on our long-term debt designated at fair value.

We consider adjusted performance provides useful information for investors by aligning internal and external reporting, identifying and quantifying items management believe to be significant and providing insight into how management assesses year-on-year performance.

Foreign currency translation differences

Foreign currency translation differences reflect the movements of the US dollar against most major currencies during 2015. We exclude the translation differences when deriving constant currency data because using this data allows us to assess balance sheet and income statement performance on a like-for-like basis to better understand the underlying trends in the business.

 

Foreign currency translation differences

 

Foreign currency translation differences for 2015 are computed by retranslating into US dollars for non-US dollar branches, subsidiaries, joint ventures and associates:

 

•  the income statements for 2014 at the average rates of exchange for 2015; and

 

•  the balance sheet at 31 December 2014 at the prevailing rates of exchange on 31 December 2015.

 

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 foreign currency translation differences 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 year on the basis described above.

 

 

 

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Significant items

The tables starting on pages 66 and 77, detail the effect of significant items on each of our geographical segments and global businesses in 2015 and 2014.

The following table reconciles selected reported items for 2015 and 2014 to adjusted items at a Group level.

 

 

Reconciliation of 2015 and 2014 reported and adjusted items

Reconciliation of reported and adjusted items

 

          2015           2014           Change  
          $m           $m           %  

Revenue1

                 

Reported

        59,800            61,248            (2

Currency translation

              (4,775      

Own credit spread2

        (1,002         (417      

Acquisitions, disposals and dilutions

                   (9      

Other significant items

        (1,033         1,180         

Adjusted

        57,765            57,227            1   

Loan impairment charges and other credit risk provisions

                 

Reported

        (3,721         (3,851         3   

Currency translation

              683         

Acquisitions, disposals and dilutions

                           

Other significant items

                           

Adjusted

        (3,721         (3,168         (17

Total operating expenses

                 

Reported

        (39,768         (41,249         4   

Currency translation

              3,278         

Acquisitions, disposals and dilutions

                   40         

Other significant items

        3,586            3,355         

Adjusted

        (36,182         (34,576         (5

Adjusted cost efficiency ratio

        62.6%            60.4%         

Share of profit in associates and joint ventures

                 

Reported

        2,556            2,532            1   

Currency translation

              (39      

Acquisitions, disposals and dilutions

                           

Other significant items

                           

Adjusted

        2,556            2,493            3   

Profit before tax

                 

Reported

        18,867            18,680            1   

Currency translation

              (853      

Own credit spread2

        (1,002         (417      

Acquisitions, disposals and dilutions

                   31         

Other significant items

        2,553            4,535         

Adjusted

        20,418            21,976            (7

For footnotes, see page 99.

 

HSBC HOLDINGS PLC

 

49


Table of Contents

    

    

    

    

    

 

Reconciliation of 2014 and 2013 reported and adjusted items

Reconciliation of reported and adjusted items

 

          2014           2013           Change  
          $m           $m           %  

Revenue1

                 

Reported

        61,248            64,645            (5

Currency translation

              (686      

Own credit spread2

        (417         1,246         

Acquisitions, disposals and dilutions

        (9         (2,757      

Other significant items

        1,180            (594      

Adjusted

        62,002            61,854              

Loan impairment charges and other credit risk provisions

                 

Reported

        (3,851         (5,849         34   

Currency translation

              168         

Acquisitions, disposals and dilutions

                   67         

Other significant items

                           

Adjusted

        (3,851         (5,614         31   

Total operating expenses

                 

Reported

        (41,249         (38,556         (7

Currency translation

              348         

Acquisitions, disposals and dilutions

        40            488         

Other significant items

        3,355            2,038         

Adjusted

        (37,854         (35,682         (6

Adjusted cost efficiency ratio

        61.1%            57.7%         

Share of profit in associates and joint ventures

                 

Reported

        2,532            2,325            9   

Currency translation

              11         

Acquisitions, disposals and dilutions

                   87         

Other significant items

                           

Adjusted

        2,532            2,423            4   

Profit before tax

                 

Reported

        18,680            22,565            (17

Currency translation

              (159      

Own credit spread2

        (417         1,246         

Acquisitions, disposals and dilutions

        31            (2,115      

Other significant items

        4,535            1,444         

Adjusted

        22,829            22,981            (1

For footnotes, see page 100a.

Negative percentage change numbers are favourable:

positive numbers are unfavourable.

 

HSBC HOLDINGS PLC

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Table of Contents

    

    

    

    

    

 

Return on equity and Return on tangible equity

Return on tangible equity (‘ROTE’) is computed by adjusting reported results for the movements in the present value of in-force long-term insurance business (‘PVIF’), impairments of goodwill, and adjusting the reported equity for goodwill, intangibles and PVIF. The

adjustment to reported results and reported equity excludes amounts attributable to non-controlling interests.

We provide ROTE as an additional measure to ROE to provide a way to look at our performance which is closely aligned to our capital position.

The following table details the adjustments made to the reported results and equity:

 

 

          2015           2014           2013  
          $m           $m           $m  

Profit

                 

Profit attributable to the ordinary shareholders of the parent company

        12,572            13,115            15,631   

Goodwill impairment (net of tax)

                              279   

Increase in PVIF (net of tax)

        (494         (213         (397

Profit attributable to the ordinary shareholders, excl. goodwill impairment and PVIF

        12,078            12,902            15,513   

Equity

                 

Average ordinary shareholders’ equity

        174,627            178,898            169,260   

Effect of Goodwill, PVIF and other intangibles (net of deferred tax)

        (25,012         (27,740         (28,024

Average tangible equity

        149,615            151,158            141,236   
          %           %           %  

Ratio

                 

Return on equity

        7.2            7.3            9.2   

Return on tangible equity

        8.1            8.5            11.0   

 

HSBC HOLDINGS PLC

49b


Table of Contents

Report of the Directors: Financial summary (continued)

Consolidated income statement / Group performance by income and expense item

    

    

    

 

Consolidated income statement

Five-year summary consolidated income statement

 

         

2015

$m

         

2014

$m

         

2013

$m

         

2012

$m

         

2011

$m

 

Net interest income

        32,531            34,705            35,539            37,672            40,662   

Net fee income

        14,705            15,957            16,434            16,430            17,160   

Net trading income

        8,723            6,760            8,690            7,091            6,506   

Net income/(expense) from financial instruments designated at fair value

        1,532            2,473            768            (2,226         3,439   

Gains less losses from financial investments

        2,068            1,335            2,012            1,189            907   

Dividend income

        123            311            322            221            149   

Net insurance premium income

        10,355            11,921            11,940            13,044            12,872   

Gains on disposal of US branch network, US cards business and Ping An Insurance (Group) Company of China, Ltd

                                         7,024              

Other operating income

        1,055            1,131            2,632            2,100            1,766   

Total operating income

        71,092            74,593            78,337            82,545            83,461   

Net insurance claims and benefits paid and movement in liabilities to policyholders

        (11,292         (13,345         (13,692         (14,215         (11,181

Net operating income before loan impairment charges and other credit risk provisions

        59,800            61,248            64,645            68,330            72,280   

Loan impairment charges and other credit risk provisions

        (3,721         (3,851         (5,849         (8,311         (12,127

Net operating income

        56,079            57,397            58,796            60,019            60,153   

Total operating expenses

        (39,768         (41,249         (38,556         (42,927         (41,545

Operating profit

        16,311            16,148            20,240            17,092            18,608   

Share of profit in associates and joint ventures

        2,556            2,532            2,325            3,557            3,264   

Profit before tax

        18,867            18,680            22,565            20,649            21,872   

Tax expense

        (3,771         (3,975         (4,765         (5,315         (3,928

Profit for the year

        15,096            14,705            17,800            15,334            17,944   

Profit attributable to shareholders of the parent company

        13,522            13,688            16,204            14,027            16,797   

Profit attributable to non-controlling interests

        1,574            1,017            1,596            1,307            1,147   

Five-year financial information

 

  

                 
         

2015

$

         

2014

$

         

2013

$

         

2012

$

         

2011

$

 

Basic earnings per share

        0.65            0.69            0.84            0.74            0.92   

Diluted earnings per share

        0.64            0.69            0.84            0.74            0.91   

Dividends per ordinary share3

        0.50            0.49            0.48            0.41            0.39   
          %           %           %           %           %  

Dividend payout ratio4

        76.5            71.0            57.1            55.4            42.4   

Post-tax return on average total assets

        0.6            0.5            0.7            0.6            0.6   

Return on average ordinary shareholders’ equity

        7.2            7.3            9.2            8.4            10.9   

Average foreign exchange translation rates to $:

                             

$1: £

        0.654            0.607            0.639            0.631            0.624   

$1:

        0.902            0.754            0.753            0.778            0.719   

For footnotes, see page 99.

Unless stated otherwise, all tables in the Annual Report and Accounts 2015 are presented on a reported basis.

For a summary of our financial performance in 2015, see page 22.

 

HSBC HOLDINGS PLC

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Table of Contents

    

    

    

    

    

 

Group performance by income and expense item

Net interest income

 

          2015           2014           2013  
          $m           $m           $m  

Interest income

        47,189            50,955            51,192   

Interest expense

        (14,658         (16,250         (15,653

Net interest income5

        32,531            34,705            35,539   

Average interest-earning assets

        1,726,949            1,786,536            1,669,368   

Gross interest yield6

        2.73%            2.85%            3.07%   

Less: cost of funds

        (1.00%         (1.05%         (1.10%

Net interest spread7

        1.73%            1.80%            1.97%   

Net interest margin8

        1.88%            1.94%            2.13%   

For footnotes, see page 99.

Summary of interest income by type of asset

 

          2015           2014           2013  
         

Average

balance

         

Interest

income

          Yield          

Average

balance

         

Interest

income

          Yield          

Average

balance

         

Interest

income

          Yield  
          $m           $m           %           $m           $m           %           $m           $m           %  

Short-term funds and loans and advances to banks

        221,924            2,277            1.03            237,148            3,068            1.29            236,377            2,851            1.21   

Loans and advances to customers

        909,707            33,104            3.64            931,311            37,429            4.02            897,322            38,529            4.29   

Reverse repurchase agreements – non-trading

        162,308            1,301            0.80            198,273            1,800            0.91            114,324            995            0.87   

Financial investments

        396,113            7,508            1.90            399,816            8,323            2.08            393,309            8,002            2.03   

Other interest-earning assets

        36,897            2,999            8.13            19,988            335            1.68            28,036            815            2.91   

Total interest-earning assets

        1,726,949            47,189            2.73            1,786,536            50,955            2.85            1,669,368            51,192            3.07   

Trading assets and financial assets designated at fair value9,10

        195,285            4,626            2.37            238,958            5,596            2.34            354,817            5,763            1.62   

Impairment allowances

        (10,606                     (14,015                     (15,954            

Non-interest-earning assets

        682,143                              668,564                              683,785                     

Year ended 31 December

        2,593,771            51,815            2.00            2,680,043            56,551            2.11            2,692,016            56,955            2.12   

For footnotes, see page 99.

 

Summary of interest expense by type of liability and equity

 

                          
          2015           2014           2013  
         

Average

balance

         

Interest

expense

          Cost          

Average

balance

         

Interest

expense

          Cost          

Average

balance

         

Interest

expense

          Cost  
          $m           $m           %           $m           $m           %           $m           $m           %  

Deposits by banks11

        55,863            378            0.68            61,217            481            0.79            61,616            555            0.90   

Financial liabilities designated at fair value – own debt issued12

        58,489            717            1.23            66,374            837            1.26            72,333            967            1.34   

Customer accounts13

        1,075,901            7,401            0.69            1,088,493            9,131            0.84            1,035,500            8,794            0.85   

Repurchase agreements – non-trading

        117,947            355            0.30            190,705            652            0.34            94,410            405            0.43   

Debt securities in issue

        129,039            3,521            2.73            129,724            4,554            3.51            150,976            4,182            2.77   

Other interest-bearing liabilities

        28,396            2,286            8.05            10,120            595            5.88            11,345            750            6.61   

Total interest-bearing liabilities

        1,465,635            14,658            1.00            1,546,633            16,250            1.05            1,426,180            15,653            1.10   

Trading liabilities and financial liabilities designated at fair value (excluding own debt issued)

        151,294            2,071            1.37            178,518            2,856            1.60            301,353            3,027            1.00   

Non-interest bearing current accounts

        190,914                        185,990                        184,370               

Total equity and other non-interest bearing liabilities

        785,928                              768,902                              780,113                     

Year ended 31 December

        2,593,771            16,729            0.64            2,680,043            19,106            0.71            2,692,016            18,680            0.69   

For footnotes, see page 99.

 

HSBC HOLDINGS PLC

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Table of Contents

Report of the Directors: Financial summary (continued)

Group performance by income and expense item

    

    

    

 

Reported net interest income of $32.5bn decreased by $2.2bn or 6% compared with 2014. This included the

significant items and currency translation summarised in the table below.

 

Significant items and currency translation

 

        

            2015

$m

        

            2014

$m

 

Significant items

         

Provisions arising from the ongoing review of compliance with the Consumer Credit Act in the UK

       (10        (632

Acquisitions, disposals and dilutions

                 38   
       (10        (594

Currency translation

                  2,890   

Year ended 31 December

       (10        2,296   

 

Excluding the significant items and currency translation tabulated above, net interest income was broadly unchanged compared with 2014, as increases in Asia and Latin America were offset by a reduction in North America.

On a reported basis, net interest spread and margin both fell, mainly due to adverse foreign exchange movements in Latin America and Europe, partly offset by a reduction in significant items, namely lower provisions arising from the ongoing review of compliance with the Consumer Credit Act (‘CCA’) in the UK. Excluding these factors, net interest spread and margin were marginally lower due to reduced yields on customer lending in Europe and North America. However, during the year, we changed the mix of our overall portfolio towards higher yielding customer lending balances. This was through a managed reduction in the average balances of lower yielding short-term funds, reverse repos and financial investments, notably in Europe, reflecting our continued focus on the efficient use of our balance sheet.

Interest income by type of asset and interest expense by type of liability, and the associated average balances as set out in the summary tables above, were affected by the reclassification in June 2015, of our operations in Brazil to ‘Assets held for sale’ in ‘Other interest-earning assets and liabilities of disposal groups held for sale in ‘Other interest-bearing liabilities, respectively.

Interest income

Reported interest income decreased by $3.8bn compared with 2014 driven by currency translation, notably in Latin America and Europe, although this was partly offset in Europe as 2014 included higher provisions arising from the on-going review of compliance with the CCA.

Excluding these factors, interest income was broadly unchanged compared with 2014.

Interest income on loans and advances to customers was broadly unchanged as lower interest income in Europe and North America was offset by increases in Asia and Latin America.

In Europe, the reduction in interest income was driven by lower yields on mortgages in the UK in line with competitive pricing, and the effect of downward movements in market interest rates in the eurozone. Interest income also fell in North America as the CML portfolio continued to decrease from run-off and sales. In addition, new lending to customers in RBWM and CMB was at reduced yields in the current low interest rate

environment, although the effect of this was partly offset by an increase in average term lending balances.

By contrast, in Asia, the rise in interest income was driven by growth in average term lending balances, primarily in Hong Kong and mainland China. This was partly offset by compressed yields on customer lending, notably in mainland China and Australia due to central bank rate reductions, although yields in Hong Kong marginally increased. In Latin America, the increase was primarily in Argentina, driven by growth in average balances.

Interest income on short-term funds and financial investments in Balance Sheet Management marginally decreased. This was driven by lower interest income in Europe, due to a managed reduction in average balances, and in Asia, reflecting movement in central bank interest rates in mainland China and India. These factors were partly offset in North America by a change in product mix towards higher yielding mortgage backed securities in order to maximise the effectiveness of the portfolio.

Interest income from other interest-earning assets rose due to the reclassification of our operations in Brazil to ‘Assets held for sale’ in June 2015. In Brazil, excluding the impact of currency translation, interest income rose due to growth in average term lending balances and financial investments, together with higher yields reflecting successive increases in central bank interest rates in 2014 and 2015.

Interest expense

Reported interest expense decreased by $1.6bn compared with 2014 driven by currency translation, primarily in Latin America and Europe.

Excluding this, interest expense fell driven by a lower cost of customer accounts, debt issued and repos.

Interest expense on customer accounts fell marginally despite growth in average balances. This reflected central bank rate reductions in a number of markets, notably Mexico, mainland China, Australia and India. Europe was affected by downward movements in market rates in the eurozone. This was partly offset by rising costs in North America, in line with promotional deposit offerings.

Interest expense on debt issued also fell, primarily in Europe as new debt was issued at lower prevailing rates and average outstanding balances fell as a result of net redemptions. Interest expense also fell on repos, notably in Europe, reflecting the managed reduction in average balances.

 

 

HSBC HOLDINGS PLC

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Interest expense on other interest-bearing liabilities increased due to the reclassification of our operations in Brazil. In Brazil, excluding currency translation, interest expense rose, primarily on debt securities in issue and also

on customer accounts driven by successive increases in central bank rates. Other interest expense also increased in North America, as 2014 benefited from the release of accrued interest associated with uncertain tax positions.

 

Net fee income

 

         2015
$m
         2014
$m
         2013
$m
 

Account services

       2,745           3,407           3,581   

Funds under management

       2,570           2,658           2,673   

Cards

       2,281           2,460           2,455   

Credit facilities

       1,919           1,890           1,907   

Broking income

       1,441           1,371           1,388   

Unit trusts

       1,007           1,005           891   

Imports/exports

       971           1,115           1,157   

Remittances

       772           833           849   

Underwriting

       762           872           866   

Global custody

       721           726           698   

Insurance agency commission

       519           516           551   

Other

       2,308           2,692           2,957   

Fee income

       18,016           19,545           19,973   

Less: fee expense

       (3,311        (3,588        (3,539

Year ended 31 December

                   14,705                       15,957                       16,434   

 

Reported net fee income fell by $1.3bn compared with 2014, primarily reflecting the adverse effects of currency translation

between the years of $1.2bn, notably in Europe and Latin America, as tabulated below.

 

Significant items and currency translation

 

        

            2015

$m

       

            2014

$m

 

Significant items

        

Acquisitions, disposals and dilutions

                10   

Currency translation

                 1,204   

Year ended 31 December

                1,214   

 

On an adjusted basis, net fee income decreased by $38m. This reflected a reduction in Europe, primarily within RBWM and GB&M, largely offset by increases in Asia in RBWM and North America in GB&M.

Account services fee income fell significantly by $348m, mainly in the UK in RBWM where lower overdraft fees reflected re-pricing and fewer overdrawn balances following the introduction in November 2014 of a text-alert service for customers. Account services fees also fell in Switzerland due to the continuing repositioning of our GPB business.

Import and export fees fell too (by $79m), mainly in Asia reflecting a reduction in trade activity. In addition, our underwriting fee income fell by $65m, mainly in Hong Kong in GB&M, where there was reduced activity in equity capital markets, although this was partly offset by higher debt issuances in the US.

By contrast, our credit facilities fee income grew strongly (by $190m) in North America and, to a lesser extent, in Asia, reflecting continued growth in average lending

balances, although balances were broadly unchanged in Asia in the second half of the year.

Our fee income from broking and unit trusts also grew (up by $182m), mainly in Hong Kong, driven by higher sales of equities and mutual funds in RBWM. This was from increased stock market turnover, in part facilitated by the Shanghai-Hong Kong Stock Connect platform and greater investor appetite following improvements in Asian equity markets in the first half of the year, however there was weaker investor sentiment in the second half of the year.

Fees from funds under management increased by $157m. In our Global Asset Management business, this was notably in France and the US due to volume growth from fixed income products. In addition, fee income from funds under management also increased in Germany from growth in Securities Services in GB&M, and in Hong Kong from increased funds under management in GPB.

Fee expenses were marginally higher by $101m due to a rise in brokerage fees, notably in Germany.

 

 

HSBC HOLDINGS PLC

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Table of Contents

Report of the Directors: Financial summary (continued)

Group performance by income and expense item

    

    

    

 

Net trading income

 

        

2015

$m

        

2014

$m

        

2013

$m

 

Trading activities

       7,285           5,419           6,921   

Ping An contingent forward sale contract

                           (682

Net interest income on trading activities

       1,775           1,907           2,047   

Gain/(loss) on termination of hedges

       (11        1           (194

Other trading income – hedge ineffectiveness:

              

– on cash flow hedges

       15           34           22   

– on fair value hedges

       (11        19           65   

Fair value movement on non-qualifying hedges14

       (330        (620        511   

Year ended 31 December

                   8,723                       6,760                       8,690   

For footnote, see page 99.

 

Reported net trading income of $8.7bn was $2.0bn higher than in 2014, predominantly in Europe. The movement in net trading income in part reflected the favourable

significant items and currency translation summarised in the table below.

 

Significant items and currency translation

 

        

            2015

$m

        

            2014

$m

 

Significant items

         

Included within trading activities:

       230           (332

– favourable/(adverse) debit valuation adjustment on derivative contracts

       230           (332

Included in other net trading income:

       (327        (539

– fair value movement on non-qualifying hedges

       (327        (541

– acquisitions, disposals and dilutions

                 2   
               
       (97        (871

Currency translation

                  520   

Year ended 31 December

       (97        (351

 

On an adjusted basis, net trading income from trading activities increased by $1.7bn compared with 2014, driven by our client-facing GB&M businesses, notably Equities, Foreign Exchange and Credit. This was primarily in the UK following an increase in volatility and client activity.

Net trading income from trading activities also rose due to a number of other valuation movements. In 2014, we revised our estimation methodology for valuing

uncollateralised derivative portfolios by introducing the funding fair value adjustment (‘FFVA’) which resulted in a charge of $263m. In addition, the Equities and Rates businesses benefited from favourable movements on own credit spreads compared with minimal movements in 2014.

These movements contributed to an increase in net trading income from trading activities in Rates, although client activity remained subdued.

 

Net income from financial instruments designated at fair value

 

        

            2015

$m

        

            2014

$m

        

            2013

$m

 

Net income/(expense) arising from:

              

– financial assets held to meet liabilities under insurance and investment contracts

       531           2,300           3,170   

– liabilities to customers under investment contracts

       34           (435        (1,237

– HSBC’s long-term debt issued and related derivatives

       863           508           (1,228

– change in own credit spread on long-term debt (significant item)

       1,002           417           (1,246

– other changes in fair value

       (139        91           18   

– other instruments designated at fair value and related derivatives

       104           100           63   

Year ended 31 December

       1,532           2,473           768   

Assets and liabilities from which net income from financial instruments designated at fair value arose

 

        

            2015

$m

        

            2014

$m

        

            2013

$m

 

Financial assets designated at fair value at 31 December

       23,852           29,037           38,430   

Financial liabilities designated at fair value at 31 December

       66,408           76,153           89,084   

Including:

              

Financial assets held to meet liabilities under:

              

– insurance and investment contracts with DPF

       11,119           10,650           10,717   

– unit-linked insurance and other insurance and investment contracts

       11,153           16,333           25,423   

Long-term debt issues designated at fair value

       60,188           69,681           75,278   

 

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The majority of the financial liabilities designated at fair value are fixed-rate long-term debt issuances and are managed in conjunction with interest rate swaps as part of our interest rate management strategy.

Reported net income from financial instruments designated at fair value was $1.5bn in 2015, compared with $2.5bn in 2014. The former included favourable movements in the fair value of our own long-term debt of $1.0bn due to changes in credit spread, compared with favourable movements of $417m in 2014.

 

Significant items and currency translation

 

        

2015

$m

        

2014

$m

 

Significant items

         

Own credit spread

       1,002           417   

Currency translation

                  303   

Year ended 31 December

                   1,002                       720   

 

On an adjusted basis, which excludes changes in our own credit spread and the net adverse effect of currency translation shown above, net income from financial instruments at fair value decreased by $1.2bn.

Net income from financial assets held to meet liabilities under insurance and investment contracts of $531m was $1.8bn lower than in 2014. This was primarily driven by weaker equity markets in Hong Kong and the UK, notably in the second half of the year. The fair value movement in

2015 included gains in Brazil and France, partly offset by losses in Hong Kong. These gains and losses are broadly offset by ‘Net insurance claims and benefits paid and movements in liabilities to policyholders’ and ‘Liabilities to customers under investment contracts’.

Other changes in fair value reflected a net adverse movement due to interest and exchange rate hedging ineffectiveness.

 

Gains less losses from financial investments

 

        

2015

$m

        

2014

$m

        

2013

$m

 

Net gains/(losses) from disposal of:

              

– debt securities

       345           665           491   

– equity securities

       1,829           1,037           1,697   

– other financial investments

       5           6           (1
                   2,179                       1,708                       2,187   

Impairment of available-for-sale equity securities

       (111        (373        (175

Year ended 31 December

       2,068           1,335           2,012   

 

In 2015, gains less losses from financial investments increased by $733m on a reported basis compared with 2014. This was driven by the significant items and currency

translation tabulated below, notably the gain on the partial sale of our shareholding in Industrial Bank Co. Ltd (‘Industrial Bank’) of $1.4bn.

 

Significant items and currency translation

 

        

2015

$m

        

2014

$m

 

Significant items

         

Gain on sale of shareholding in Bank of Shanghai

                 428   

Gain on the partial sale of shareholding in Industrial Bank

       1,372             

Impairment of our investment in Industrial Bank

                 (271
                   1,372                       157   

Currency translation

                  95   

Year ended 31 December

       1,372           252   

 

On an adjusted basis, excluding all significant items and currency translation tabulated above, gains less losses from financial investments decreased by $387m. This was primarily in our GB&M business, driven by lower gains on disposals of available-for-sale debt securities, notably in the UK and US and lower gains on equity securities in Principal Investments in the UK.

In addition, we recorded minor losses on disposals from our legacy credit portfolio compared with gains in 2014. The disposal of these assets reflects our continued efforts to manage down low-returning assets to maximise returns.

 

 

HSBC HOLDINGS PLC

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Report of the Directors: Financial summary (continued)

Group performance by income and expense item

    

    

    

 

Net insurance premium income

 

        

2015

$m

        

2014

$m

        

2013

$m

 

Gross insurance premium income

       11,012                       12,370                       12,398   

Reinsurance premiums

       (657        (449        (458

Year ended 31 December

                   10,355           11,921           11,940   

 

Reported net insurance premium income was $1.6bn lower, largely from the adverse effects of currency translation of $930m.

 

Significant items and currency translation

 

        

            2015

$m

        

            2014

$m

 

Significant items

                   

Currency translation

                  930   

Year ended 31 December

                 930   

 

On an adjusted basis, excluding the effect of currency translation, net insurance premium income fell by $636m or 6%, driven by Asia, primarily in Hong Kong where it declined because of lower unit-linked contract premiums and new reinsurance agreements.

 

In Europe, premium income fell mainly in the UK, reflecting a decision to exit the commercial pensions market in 2014.

 

Other operating income

 

        

2015

$m

        

2014

$m

        

2013

$m

 

Rent received

       171           162           155   

Gains/(losses) recognised on assets held for sale

       (244        220           (729

Gains on investment properties

       61           120           113   

Gain on disposal of property, plant and equipment, intangible assets and non-financial investments

       53           32           178   

Gains/(losses) arising from dilution of interest in Industrial Bank and other associates and joint ventures

                 (32        1,051   

Gain on disposal of HSBC Bank (Panama) S.A.

                           1,107   

Change in present value of in-force long-term insurance business

       799           261           525   

Other

       215           368           232   

Year ended 31 December

                   1,055                       1,131                       2,632   

Change in present value of in-force long-term insurance business

 

        

            2015

$m

        

            2014

$m

        

            2013

$m

 

Value of new business

       809           870           924   

Expected return

       (552        (545        (505

Assumption changes and experience variances

       504           (116        88   

Other adjustments

       38           52           18   

Year ended 31 December

                      799                          261                          525   

 

Reported other operating income decreased by $76m from 2014. This was partly due to the significant items recorded in the table below.

 

 

Significant items and currency translation

 

        

            2015

$m

        

            2014

$m

 

Significant items

         

Included within gains/(losses) recognised on assets held for sale:

       (232        168   

– disposal costs of our Brazilian operation

       (18          

– gain/(loss) on sale of several tranches of real estate secured accounts in the US

       (214        168   

Included within the remaining line items:

                 (41

– acquisitions, disposals and dilutions

                 (41

Currency translation

                  (64

Year ended 31 December

       (232        63   

 

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Excluding the significant items and currency translation tabulated above, other operating income increased by $219m compared with 2014. This was primarily from higher favourable movements in present value of in-force (‘PVIF’) long-term insurance business, partly offset by lower

disposal and revaluation gains on investment properties, mainly in Asia.

The higher favourable movement in the PVIF balance was driven by changes in interest rates and investment return assumptions, notably in France and Hong Kong.

 

 

Net insurance claims and benefits paid and movement in liabilities to policyholders

 

        

            2015

$m

        

            2014

$m

        

            2013

$m

 

Net insurance claims and benefits paid and movement in liabilities to policyholders:

              

– gross

       11,872           13,723           13,948   

– less reinsurers’ share

       (580        (378        (256

Year ended 31 December15

       11,292           13,345           13,692   

For footnote, see page 99.

 

Reported net insurance claims and benefits paid and movement in liabilities to policyholders were $2.1bn lower

than in 2014, in part reflecting the effect of currency translation of $1.1bn.

 

 

Significant items and currency translation

 

        

            2015

$m

        

            2014

$m

 

Significant items

                   

Currency translation

                  1,109   

Year ended 31 December

                 1,109   

 

Excluding the effects of currency translation, net insurance claims and benefits paid and movements in liabilities to policyholders were $0.9bn lower.

This was primarily driven by a decrease in returns on financial assets supporting liabilities to policyholders, where the policyholder shares in the investment risk. This decrease in returns reflected a weaker equity market performance in Hong Kong in the second half of the year.

 

The gains or losses recognised on the financial assets designated at fair value that are held to support these insurance contract liabilities are reported in ‘Net income from financial instruments designated at fair value’.

In addition, movements in liabilities to policyholders were lower due to a decrease in premiums written in Asia, as explained in ‘Net earned insurance premiums’.

 

Loan impairment charges and other credit risk provisions

 

        

            2015

$m

        

            2014

$m

        

            2013

$m

 

Loan impairment charges:

              

– new allowances net of allowance releases

       4,400           5,010           7,344   

– recoveries of amounts previously written off

       (808        (955        (1,296
       3,592           4,055           6,048   

Individually assessed allowances

       1,505           1,780           2,320   

Collectively assessed allowances

       2,087           2,275           3,728   

Releases of impairment on available-for-sale debt securities

       (17        (319        (211

Other credit risk provisions

       146           115           12   

Year ended 31 December

       3,721           3,851           5,849   

Impairment charges on loans and advances to customers as a percentage of average gross loans and advances to customers

       0.39%           0.43%           0.67%   

 

Reported loan impairment charges and other credit risk provisions (‘LICs’) of $3.7bn were $0.1bn lower than in 2014, primarily due to favourable currency translation of $683m.

 

Excluding the effects of currency translation, LICs were $0.6bn higher than in 2014.

 

Significant items and currency translation

 

        

            2015

$m

        

            2014

$m

 

Significant items

                   

Currency translation

                  683   

Year ended 31 December

                 683   

 

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Report of the Directors: Financial summary (continued)

Group performance by income and expense item

    

    

    

 

In the fourth quarter of 2015, our LICs increased compared with the third quarter following a rise in individually assessed LICs in a small number of countries. This was reflective of specific circumstances associated with those countries with no common underlying theme. In addition, we increased our collectively assessed LICs on exposures related to the oil and gas industry by $0.2bn, notably in North America, Middle East and North Africa, and Asia. For more information on our exposure to the oil and gas sector, see page 117.

The following paragraphs set out in more detail the factors that have contributed to movements in our collectively and individually assessed LICs compared with 2014.

On an adjusted basis, collectively assessed LICs rose by $221m, mainly in Middle East and North Africa, North America and Asia, partly offset in Europe. It arose from the following:

 

  in Middle East and North Africa (up by $167m), this was mainly in the UAE in RBWM, where we increased the impairment allowances on our mortgage book following a review of the quality and value of collateral. In addition, LICs grew in our CMB business, notably relating to the oil and foodstuffs industries;

 

  in North America (up by $132m) and Asia (up by $108m), this reflected an increase in allowances against our oil and gas exposures. In our US CML portfolio, LICs were higher than in 2014 reflecting lower favourable market value adjustments of underlying properties as improvements in the housing market conditions were less pronounced in 2015. This was partly offset by a fall in LICs from lower levels of newly impaired loans and
   

reduced lending balances from continued run-off and sales. Additionally, collectively assessed LICs rose in Indonesia following credit deterioration; and

 

  in Europe, collectively assessed LICs were $192m lower, most notably in our GB&M business in the UK, as 2014 included additional impairment charges from revisions to certain estimates used in our corporate collective loan impairment calculation.

Individually assessed LICs were broadly unchanged from 2014 on an adjusted basis. This reflected decreases in Latin America, Europe and Asia which were offset by increases in Middle East and North Africa and in North America. This included the following:

 

  in Latin America (down by $95m), Europe (down by $44m) and Asia (down by $44m), we saw reductions in individually assessed LICs in our GB&M business as 2014 included significant impairment charges related to corporate clients in our respective regions. In Asia, the reduction was partly offset by an increase in LICs against a small number of CMB customers in Indonesia; and

 

  in Middle East and North Africa (up by $134m) and North America (up by $47m), individually assessed LICs increased in our CMB business. In the former, this primarily related to higher LICs on food wholesalers, while in North America LICs rose in the oil and gas sector.

In 2015, there were lower net releases of credit risk provisions than in 2014, down by $0.3bn, mainly on available-for-sale asset-backed securities (‘ABS’s) in our UK GB&M business.

 

 

Operating expenses

 

In addition to detailing operating expense items by category, as set out in the table below, we also categorise adjusted expenses as follows:

 

• ‘run-the-bank’ costs comprise business-as-usual running costs that keep operations functioning at the required quality and standard year-on-year, maintain IT infrastructure and support revenue growth. Run-the-bank costs are split between front office and back office, reflecting the way the Group is organised into four global businesses (‘front office’) supported by global functions (‘back office’);

 

• ‘change-the-bank’ costs comprise expenses relating to the implementation of mandatory regulatory changes and other

  

investment costs incurred relating to projects to change business-as-usual activity to enhance future operating capabilities;

 

• ‘costs-to-achieve’ comprise those specific costs relating to the achievement of the strategic actions set out in the Investor Update in June 2015. They comprise costs incurred between 1 July 2015 and 31 December 2017 and do not include ongoing initiatives such as Global Standards. Any costs arising within this category have been incurred as part of a significant transformation programme. Costs-to-achieve are included within significant items and incorporate restructuring costs which were identified as a separate significant item prior to 1 July 2015; and

 

• the UK bank levy is reported as a separate category.

Operating expenses

 

          2015           2014           2013  
          $m           $m           $m  

By expense category

                 

Employee compensation and benefits

        19,900            20,366            19,196   

Premises and equipment (excluding depreciation and impairment)

        3,830            4,204            4,183   

General and administrative expenses

        13,832            14,361            12,882   

Administrative expenses

        37,562            38,931            36,261   

Depreciation and impairment of property, plant and equipment

        1,269            1,382            1,364   

Amortisation and impairment of intangible assets

        937            936            931   

Year ended 31 December

        39,768            41,249            38,556   

 

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         2015          2014  
         $m          $m  

By expense group

         

Run-the-bank – front office

       15,482           14,879   

Run-the-bank – back office

       15,784           15,631   

Change-the-bank

       3,494           3,002   

Bank levy

       1,421           1,063   

Significant items

       3,586           3,396   

Currency translation

                 3,278   

Year ended 31 December

                   39,768                       41,249   

 

Reported operating expenses for 2015 of $39.8bn were $1.5bn or 4% lower than in 2014. The reduction in reported expenses was driven by the favourable effects of currency translation between the years. Significant items increased by $0.2bn, with a reduction in fines, penalties, redress and associated provisions of $0.7bn, more than offset by transformation costs (costs-to-achieve) of $0.9bn.

Costs-to-achieve, which relate to specific programmes

aimed at achieving the cost reduction and productivity outcomes outlined in the Investor Update, comprise:

 

  severance costs of $0.4bn across a number of areas including CMB ($147m), RBWM ($49m), Risk ($44m) and GB&M ($45m);
  staff costs for the transformation programme in progress of $0.1bn in the second half of 2015; and
  other costs of $0.4bn, including software write-offs, US portfolio run-off costs and consultancy costs.
 

 

Significant items and currency translation

 

         2015          2014  
         $m          $m  

Significant items

         

Disposal costs of our Brazilian operations

       110             

Charge in relation to settlement agreement with Federal Housing Finance Authority

                 550   

Costs-to-achieve

       908             

Cost to establish UK ring-fenced bank

       89             

Regulatory provisions in GPB

       172           65   

Restructuring and other related costs

       117           278   

Settlements and provisions in connection with legal matters

       1,649           1,187   

UK customer redress programmes

       541           1,275   

Acquisitions, disposals and dilutions

                 40   
       3,586           3,395   

Currency translation

                  3,278   

Year ended 31 December

                     3,586                         6,673   

 

On an adjusted basis, operating expenses of $36.2bn were $1.6bn or 5% higher than in 2014, reflecting increases in both run-the-bank and change-the-bank costs.

Run-the-bank costs totalled $31.3bn for 2015, an increase of $0.8bn or 2% on 2014. This was primarily driven by targeted investment in Latin America, Asia and Europe. We recruited new staff to support growth in targeted areas as follows:

 

  in GB&M we invested in Payments and Cash Management (‘PCM’) mainly in Europe;
  in CMB, we invested in PCM revenue-generating full time equivalent staff (‘FTEs’) in North America and Asia; and
  in RBWM, we invested in additional FTEs in Asia in our branch network to support revenue growth.

Our total expenditure on regulatory programmes and compliance in 2015, including both run-the-bank and change-the-bank elements, was $2.9bn, up by $0.7bn or 33% from 2014.

Run-the-bank costs associated with regulatory programmes and compliance increased by $0.2bn reflecting the continued implementation of our Global Standards programme to enhance our financial crime risk controls and capabilities, and to meet our external commitments.

Change-the-bank costs totalled $3.5bn in 2015, an increase of $0.5bn or 16% on 2014, primarily driven by regulatory programmes and compliance costs. This reflected investment in strategic IT infrastructure including systems enhancements for customer due diligence, transaction monitoring and sanctions screening as part of the Global Standards programme. These actions were in line with our strategic target to complete the implementation of Global Standards in 2017. There was also further investment in stress testing and other programmes to meet legal and regulatory requirements.

The bank levy totalled $1.4bn, up by $0.4bn or 34% from 2014. Excluding the bank levy, operating expenses in the second half of 2015 were broadly in line with the first half of the year. Investment in regulatory programmes and compliance and inflationary pressures were offset by cost saving initiatives mainly driven by reduced staff costs. This reflected a reduction in FTEs of 4,585 from 30 June 2015 to 31 December 2015. In addition we reduced travel and entertainment costs through a strong focus on cost management.

Excluding investment in regulatory programmes and compliance, and the bank levy, adjusted operating expenses grew by 2% compared with 2014.

 

 

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Report of the Directors: Financial summary (continued)

Group performance by income and expense item / Consolidated balance sheet

    

    

    

 

Staff numbers (full-time equivalents)

 

                     2015                      2014                      2013  

Geographical regions

              

Europe

       67,509           69,363           68,334   

Asia

       120,144           118,322           113,701   

Middle East and North Africa

       8,066           8,305           8,618   

North America

       19,656           20,412           20,871   

Latin America

       39,828           41,201           42,542   

At 31 December

       255,203           257,603           254,066   

 

The number of employees, expressed in FTEs, at 31 December 2015 was 255,203, a decrease of 4,585 from 30 June 2015 reflecting the initial impact of cost saving initiatives. Compared with 31 December 2014, FTEs decreased by 2,400. This was driven by reductions in global businesses and global functions, offset by an increase in compliance of 2,419 FTEs.

The average number of FTEs adjusted for business disposals increased by 1.2% compared with 2014 due to additional FTE requirements for regulatory programmes and compliance, and investment in growth areas.

 

Reported cost efficiency ratios16

 

        

            2015

%

        

            2014

%

        

            2013

%

 

HSBC

       66.5           67.3           59.6   

Geographical regions

              

Europe

       93.7           93.7           84.0   

Asia

       43.0           44.0           40.7   

Middle East and North Africa

       48.1           47.7           51.5   

North America

       84.9           78.9           72.9   

Latin America

       72.6           71.7           56.1   

Global businesses

              

Retail Banking and Wealth Management

       72.4           71.7           64.7   

Commercial Banking

       45.4           44.3           41.7   

Global Banking and Markets

       59.4           67.7           51.9   

Global Private Banking

       84.3           74.8           91.4   

For footnote, see page 99.

Share of profit in associates and joint ventures

 

        

            2015

$m

        

            2014

$m

        

            2013

$m

 

Associates

              

Bank of Communications Co., Limited

       2,011           1,974           1,878   

The Saudi British Bank

       462           455           403   

Other

       45           64           5   

Share of profit in associates

       2,518           2,493           2,286   

Share of profit in joint ventures

       38           39           39   

Year ended 31 December

       2,556           2,532           2,325   

 

Our reported share of profit in associates and joint ventures was $2.6bn, an increase of $24m or 1%, driven by higher contributions from Bank of Communications Co., Limited (‘BoCom’) and The Saudi British Bank.

Our share of profit from BoCom rose as a result of balance sheet growth, partly offset by higher operating expenses.

Profits from The Saudi British Bank also rose, by $7m, reflecting strong balance sheet growth.

 

 

Tax expense

 

        

            2015

$m

        

            2014

$m

        

            2013

$m

 

Profit before tax

       18,867           18,680           22,565   

Tax expense

       (3,771        (3,975        (4,765

Profit after tax for the year ended 31 December

       15,096           14,705           17,800   

Effective tax rate

       20.0%           21.3%           21.1%   

 

The effective tax rate for the year was 20.0% (2014: 21.3%) and was in line with expectations.

We expect the effective rate of tax to increase due to the introduction of the 8% surcharge on UK banking profits in 2016.

 

 

HSBC HOLDINGS PLC

60


Table of Contents

Report of the Directors: Financial summary (continued)

    

    

    

    

 

2014 compared with 2013

Net interest income

 

Reported net interest income of $35bn decreased by $834m or 2% compared with 2013. This included the significant items and currency translation summarised in the table below.

 

Significant items and currency translation

 

        

            2014

$m

        

            2013

$m

 

Significant items

         

Provisions arising from the ongoing review of compliance with the Consumer Credit Act in the UK

       (632          

Acquisitions, disposals and dilutions

       38           386   
       (594        386   

Currency translation

                  518   

Year ended 31 December

       (594        904   

 

On a reported basis, net interest spread and margin both fell, reflecting lower yields on customer lending in North America and Europe. In North America, this was due to changes in the composition of the lending portfolios towards lower yielding secured assets and to the run-off of the CML portfolio. In Europe, it was principally due to a significant item, namely provisions arising from the ongoing review of compliance with the Consumer Credit Act (‘CCA’) in the UK. These factors were partially offset by a lower cost of funds.

Excluding the significant items and currency translation tabulated above, net interest income rose by $664m or 2% from 2013, driven by increases in Asia, partly reflecting growth in customer lending volumes.

Interest income

Reported interest income was broadly unchanged, as decreases in interest income from customer lending (which included the effect of the CCA provisions) were offset by increases in income from short-term funds, as well as a rise due to the change in the management of reverse repo transactions (see page 60b).

Interest income on loans and advances to customers decreased, principally in North America and Latin America, partially offset by increases in Asia. In North America, this was a consequence of the disposal of the higher yielding non-real estate loan portfolio and the reduction in the CML portfolio from run-off and sales. In addition, new lending to customers in RBWM and CMB was at lower yields, reflecting a shift in the portfolio towards higher levels of lower yielding first lien real estate secured loans. In Latin America, interest income on customer lending also decreased, reflecting a fall in yields in both Brazil and Mexico, despite the rise in average balances in term lending in both countries. In Brazil, the falling yield reflected the shift in product and client mix to more secured, relationship-led lending while, in Mexico, it was driven by reductions in Central Bank interest rates. The region was also affected by the disposal of non-strategic businesses.

By contrast, we recorded increased interest income on customer lending in Asia, driven by growth in term lending volumes and, to a lesser extent, residential

mortgages during the year. This increase in balances was partially offset by compressed yields. In Europe, excluding the effect of the CCA provisions noted above, interest income on customer lending rose due to increases in mortgage and term lending balances.

Interest income on short-term funds and financial investments increased both in Latin America and Asia, as interest rates rose in certain countries in these regions (notably in Brazil, Argentina and mainland China) and average balances grew. However, in Europe, interest income on short-term funds and financial investments fell as maturing positions were replaced by longer-term but lower-yielding bonds.

Interest expense

Reported interest expense increased in the year. We recorded increased interest expense on customer accounts in Asia and Latin America, partly offset by a reduction in North America. In Asia, the growth was principally from an increase in the average balances of customer accounts. In Latin America, interest expense on customer accounts rose as reductions in average balances were more than offset by the increase in the cost of funds due to interest rate rises, notably in Brazil. However, the effects of this were partly offset by a fall in the cost of funds in Mexico as Central Bank rates fell, and the disposal of non-strategic businesses. Conversely, in North America, interest expense on customer deposits declined as a result of a strategic decision to re-price deposits downwards. In addition, other interest expense decreased due to a release of accrued interest associated with an uncertain tax position.

Interest expense on debt issued rose. We recorded an increase in the cost of funds which was partly offset by decreased overall balances. Interest expense rose in Latin America, notably in Brazil, in line with interest rate rises and increased medium-term loan note balances. By contrast, in North America the business disposals led to a decline in our funding requirements. The cost of funds also fell as higher coupon debt matured and was repaid. In Europe, interest expense on debt also decreased, as average outstanding balances fell as a result of net redemptions and the cost of funds reduced.

 

 

HSBC HOLDINGS PLC

60a


Table of Contents

Report of the Directors: Financial Review (continued)

    

    

    

    

 

Repos and reverse repos

During the final quarter of 2013, GB&M changed the way it managed reverse repurchase (‘reverse repo’) and repurchase (‘repo’) activities. This had the effect of reducing the net interest margin as average interest earning assets and interest bearing liabilities increased significantly. These reverse repo and repo agreements have a lower gross yield and cost of funds, respectively, than the remainder of our portfolio.

‘Net interest income’ includes the expense of internally funded trading assets, while related revenue is reported in ‘Net trading income’. The internal cost of funding these assets decreased, as average trading asset balances fell to a greater extent than trading liabilities. In reporting our global business results, this cost is included within ‘Net trading income’.

Net fee income

Reported net fee income fell by $477m, primarily in Latin America and North America. In Latin America, the decrease included the effect of currency translation and the continued repositioning and disposal of businesses, notably the sale of our Panama operations in 2013. In North America, net fee income was lower following the expiry of the Transition Servicing Agreements we entered into with the buyer of the Card and Retail Services (‘CRS’) business, and adverse adjustments to mortgage servicing rights valuations.

Net trading income

Account services fee income decreased, notably in Latin America and Europe. In Latin America, the fall was due to a reduction in customer numbers in Mexico, as we continued to reposition the business, and in Brazil, due to strong market competition. In Europe, account services fees were lower, primarily in Switzerland due to the repositioning of our GPB business, and in the UK, in part reflecting the implementation of the Retail Distribution Review in 2013.

By contrast, unit trust fees rose, primarily in Asia, due to increased sales of equity funds in Hong Kong.

Other fee income declined in North America due to the expiry of the Transition Servicing Agreements and in Latin America following the sale of our operations in Panama in 2013 and the continued repositioning of the business in Mexico.

In addition, fee expenses were higher due to adverse adjustments to mortgage servicing rights valuations in North America, reflecting mortgage interest rate decreases in 2014 which compared with increases in 2013.

Reported net trading income of $6.8bn was $1.9bn lower, predominantly in Europe. The reduction in net trading income was partly driven by the significant items summarised in the table below.

 

 

Significant items and currency translation

 

        

            2014

$m

        

            2013

$m

 

Significant items

         

Included within trading activities:

       (332        548   

– Debit valuation adjustment on derivative contracts

       (332        106   

– FX gains relating to sterling debt issued by HSBC Holdings

                 442   

Included in other net trading income:

       (539        (346

– Ping An contingent forward sale contract51

                 (682

– Loss on early termination of cash flow hedges in the US run-off portfolio

                 (199

– Fair value movement on non-qualifying hedges

       (541        511   

– Acquisitions, disposals and dilutions

       2           24   
                     
       (871        202   

Currency translation

                  (11

Year ended 31 December

       (871        191   

For footnote, see page 100a.

 

Excluding the significant items and currency translation tabulated above, net trading income from trading activities decreased by $0.6bn, notably in Markets within GB&M. This was predominantly driven by our Foreign Exchange business, which was affected by lower volatility and reduced client flows. In Equities, revenue decreased, as 2013 benefited from higher revaluation gains which more than offset a rise in 2014 in revenue from increased client flows and higher derivatives income.

In 2014, we revised our estimation methodology for valuing uncollateralised derivative portfolios by introducing the funding fair value adjustment (‘FFVA’), resulting in a reduction in net trading income of $263m, primarily in Rates ($164m) and Credit ($97m). Excluding the FFVA, Credit was also affected by adverse movements

on credit spreads and a reduction in revenue in Legacy Credit. By contrast, Rates was affected by favourable market movements, notably in Asia, along with minimal fair value movements on our own credit spread on structured liabilities compared with adverse movements in 2013. These factors were partly offset by a fall in Rates in Europe.

Included within net trading income from trading activities, there were favourable foreign exchange movements on assets held as economic hedges of foreign currency debt designated at fair value, compared with adverse movements in 2013. These movements offset fair value movements on the foreign currency debt which are reported in ‘Net income/(expense) from financial instruments designated at fair value’.

 

 

HSBC HOLDINGS PLC

60b


Table of Contents

Report of the Directors: Financial Review (continued)

    

    

    

    

 

In addition, net interest income from trading activities fell due to lower average balances, notably relating to reverse repo and repo agreements, in line with the change in the way GB&M manages these agreements. The net interest income from these activities is now recorded in ‘Net interest income’.

Net income/(expense) from financial instruments designated at fair value

The accounting policies for the designation of financial instruments at fair value and the treatment of the associated income and expenses are described in Note 2 on the Financial Statements.

The majority of the financial liabilities designated at fair value are fixed-rate long-term debt issues, the interest rate profile of which has been changed to floating through swaps as part of a documented interest rate management strategy. The movement in fair value of these long-term debt issues and the related hedges includes the effect of our credit spread changes and any ineffectiveness in the economic relationship between the related swaps and own debt. 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 expected 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 global businesses, but are reported in ‘Other’. Credit spread movements on own debt designated at fair value are excluded from adjusted results, and related fair value movements are not included in the calculation of regulatory capital.

Reported net income from financial instruments designated at fair value was $2.5bn in 2014, compared with $768m in 2013. The former included favourable movements in the fair value of our own long-term debt of

$417m due to changes in credit spread, compared with adverse movements of $1.2bn in 2013. Excluding this significant item, net income from financial instruments designated at fair value increased by $42m.

Net income arising from financial assets held to meet liabilities under insurance and investment contracts of $2.3bn was $870m lower than in 2013. This was driven by weaker equity market performance in the UK and France, partly offset by improved equity market performance in Hong Kong and higher net income on the bonds portfolio in Brazil.

Investment gains or losses arising from equity markets result in a corresponding movement in liabilities to customers, reflecting the extent to which unit-linked policyholders, in particular, participate in the investment performance of the associated asset portfolio. Where these relate to assets held to back investment contracts, the corresponding movement in liabilities to customers is also recorded under ‘Net income/(expense) from financial instruments designated at fair value’. This is in contrast to gains or losses related to assets held to back insurance contracts or investment contracts with discretionary participation features (‘DPF’), where the corresponding movement in liabilities to customers is recorded under ‘Net insurance claims and benefits paid and movement in liabilities to policyholders’.

Other changes in fair value reflected a net favourable movement due to interest and exchange rate hedging ineffectiveness. This was partly offset by net adverse foreign exchange movements on foreign currency debt designated at fair value and issued as part of our overall funding strategy (offset from assets held as economic hedges in ‘Net trading income’).

Gains less losses from financial investments

Reported gains less losses from financial investments were $1.3bn, a decrease of $677m from 2013. The decrease primarily reflected the significant items summarised below.

 

Significant items and currency translation

 

        

            2014

$m

        

            2013

$m

 

Significant items

         

Gain on sale of shareholding in Bank of Shanghai

       428             

Impairment on our investment in Industrial Bank

       (271          

Net gain on completion of Ping An disposal51

                 1,235   

Acquisitions, disposals and dilutions

                 5   
       157           1,240   

Currency translation

                  (10

Year ended 31 December

       157           1,230   

For footnote, see page 100a.

 

Excluding the significant items and currency translation noted above, gains less losses from financial investments increased by $396m, primarily driven by higher net gains on the disposal of debt securities as we actively managed the Legacy Credit portfolio. In addition, we reported higher gains on sale of available-for-sale equity securities and lower impairments on available-for-sale equity securities

from improved market conditions and business performance of the underlying portfolio.

 

 

HSBC HOLDINGS PLC

60c


Table of Contents

Report of the Directors: Financial Review (continued)

    

    

    

    

 

Net insurance premium income

Reported net insurance premium income was broadly unchanged, with reductions in Europe and Latin America largely offset by higher premium income in Asia.

In Asia, premium income rose, primarily in Hong Kong, due to increased new business from deferred annuity, universal life and endowment contracts. This was partly offset by lower new business from unit-linked contracts.

In Europe, premium income decreased, mainly in the UK, reflecting lower sales following the withdrawal of external independent financial adviser distribution channels for

certain linked insurance contracts in the second half of 2013. This was partly offset by increases in France, mainly reflecting higher sales of investment contracts with DPF.

Net insurance premium income also fell in Latin America, primarily in Brazil, reflecting lower sales, in part due to changes in our distribution channel.

Other operating income

Reported other operating income of $1.1bn decreased by $1.5bn from 2013. This was largely due to the significant items summarised in the table below.

 

 

Significant items and currency translation

 

        

            2014

$m

        

            2013

$m

 

Significant items

         

Included within gains/(losses) recognised on assets held for sale:

       168           (772

– write-off of allocated goodwill relating to the GPB Monaco business

                 (279

– loss on sale of the non-real estate portfolio in the US

                 (271

– gain/(loss) on sale of several tranches of real estate secured accounts in the US

       168           (123

– Household Insurance Group Holding company’s disposal of its insurance manufacturing business52

                 (99

Included within the remaining line items:

       (41        2,193   

– reclassification gain in respect of our holding in Industrial Bank Co., Limited following the issue of additional share capital to third parties52

                 1,089   

– HSBC Latin America Holdings UK Limited’s disposal of HSBC Bank (Panama) S.A.53

                 1,107   

– HSBC Insurance (Asia-Pacific) Holdings Limited’s disposal of its shareholding in Bao Viet Holdings52

                 104   

– loss on sale of an HFC Bank UK secured loan portfolio

                 (146

– acquisitions, disposals and dilutions

       (41        39   

Currency translation

                  (18

Year ended 31 December

       127           1,403   

For footnotes, see page 100a.

 

Excluding the significant items and currency translation tabulated above, other operating income decreased by $0.2bn compared with 2013. This was primarily from lower favourable movements in 2014 in present value of in-force (‘PVIF’) long-term insurance business, and lower disposal and revaluation gains on investment properties, mainly in Hong Kong. The decrease was partly offset by gains reported in Legacy Credit in GB&M in the UK as we actively managed the portfolio.

Lower favourable movements in the PVIF long-term insurance business asset in 2014 were mainly due to the following factors:

 

  a reduction in the value of new business, mainly in Brazil, due to higher interest rates and lower volumes; and

 

  adverse assumption changes and experience variances in 2014 compared with favourable movements in 2013. This was mainly driven by falling interest rates in France and adverse actuarial assumption updates in Hong Kong, partly offset by the favourable effects of interest rate fluctuations, mainly in Asia and Brazil.

Net insurance claims and benefits paid and movement in liabilities to policyholders

Reported net insurance claims and benefits paid and movement in liabilities to policyholders were $347m lower than in 2013.

Movements in claims resulting from investment returns on the assets held to support policyholder contracts, where

the policyholder bears investment risk, decreased. This reflected weaker equity market performance in the UK and France, partly offset by improved equity market performance in Hong Kong and higher net income on the bonds portfolio in Brazil. The gains or losses recognised on the financial assets designated at fair value held to support these insurance and investment contract liabilities are reported in ‘Net income from financial instruments designated at fair value’.

Loan impairment charges and other credit risk provisions

Reductions in claims resulting from a decrease in new business written in Europe and Latin America were mostly offset by increases in Hong Kong as explained under ‘Net earned insurance premiums’.

Reported loan impairment charges and other credit risk provisions (‘LICs’) of $3.9bn were $2.0bn lower than in 2013, primarily in North America, Europe and Latin Amer