20-F 1 filing20flivegroupq42017doc.htm 20-F 20F FILING GROUP Q4 2017 Combined Document


As filed with the Securities and Exchange Commission on February 20, 2018.
 
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, 2017
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)
Gavin A Francis
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
3.400% Senior Unsecured Notes due 2021
 
New York Stock Exchange
4.300% Senior Unsecured Notes due 2026
 
New York Stock Exchange
Floating Rate Senior Unsecured Notes due 2021
 
New York Stock Exchange
2.950% Senior Unsecured Notes due 2021
 
New York Stock Exchange
3.600% Senior Unsecured Notes due 2023
 
New York Stock Exchange
3.900% Senior Unsecured Notes due 2026
 
New York Stock Exchange
Floating Rate Senior Unsecured Notes due 2021
 
New York Stock Exchange
2.650% Senior Unsecured Notes due 2022
 
New York Stock Exchange
Floating Rate Senior Unsecured Notes due 2022
 
New York Stock Exchange
4.375% Subordinated Notes due 2026
 
New York Stock Exchange
3.262% Fixed Rate/Floating Rate Senior Unsecured Notes due 2023
 
New York Stock Exchange
3.033% Fixed Rate/Floating Rate Senior Unsecured Notes due 2023
 
New York Stock Exchange
4.041% Fixed Rate/Floating Rate Senior Unsecured Notes due 2028
 
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 20,321,372,907
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. þ Yes ¨ 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). þ 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.
 
 
 
 




Connecting customers to opportunities
HSBC aims to be where the growth is, enabling business to thrive and economies to prosper, and ultimately helping people to fulfil their hopes and realise their ambitions.
Our cover image
Guangzhou is one of China’s largest and most dynamic cities. It is the capital of Guangdong Province and lies at the heart of China’s Pearl River Delta (PRD), one of the country’s fastest growing economic regions. The PRD in recent years has transformed from being the exporting factory floor of the world into a global leader in digital commerce and innovation. HSBC has had a presence in China for more than 150 years. China is an important part of the Group’s strategy and we have branches across the PRD. In December 2017 HSBC Qianhai Securities Limited, the first joint venture securities company in mainland China to be majority-owned by a foreign bank, opened for business in the PRD.
Inside front cover image
Dubai financial district.
Our photo competition winners
This report showcases five images taken by our employees around the world. The images were selected from more than 2,100 submissions to a Group-wide photography competition. Launched in June 2017, HSBC NOW Photo is an ongoing project that encourages employees to capture and share the diverse world around them with a camera.
None of the websites referred to in this Annual Report on Form 20-F for the year ended December 31, 2017 (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.
Contents
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 the Group Chief Executive, and also explains the role of the Board.
This Strategic Report was approved by the Board on 20 February 2018.
Mark E Tucker
Group Chairman
2    Highlights
1a    Forward-looking statements and Certain defined terms
4    Group Chairman’s Statement
7    Group Chief Executive’s Review
10    Our strategy
12    Strategic actions
14    Financial overview
18    Global businesses
22    How we do business
28    Risk overview
30    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.
32    Financial summary
64    Global businesses and geographical regions
83     Other information
86    Regulation and supervision
93    Disclosures pursuant to section 13(r) of the Securities Exchange Act
95     Risk
162    Capital
Corporate Governance
Details of our Board of Directors and senior management, and our approach to corporate governance and remuneration.
166    Corporate Governance Report
167    Biographies of Directors and senior management
171    Board of Directors
172    Board committees
178    Internal control
179    Going concern
179    Share capital and other disclosures
183    Employees
186    Directors’ Remuneration Report
Financial Statements
Our financial statements and related notes and reports.
210    Report of the Independent Registered Public Accounting Firm to the Board of Directors and Shareholders of HSBC Holdings plc
211    Financial Statements
222    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. A glossary of key terms is available online at www.hsbc.com/investor-relations.




298    Shareholder information
306    Glossary of accounting terms and US equivalents
307    2016 HSBC 20F reconciliations table
309    Abbreviations

Our values
Our values define who we are as an organisation and make us distinctive.
Dependable
We are dependable, standing firm for what is right and delivering on commitments.
Open
We are open to different ideas and cultures, and value diverse perspectives.
Connected
We are connected to our customers, communities, regulators and each other, caring about individuals and their progress.
As a reminder
Reporting currency
We use US dollars.
Adjusted measures
We supplement our IFRS figures with adjusted measures used by management internally. These measures are highlighted with the following symbol:<>
ÑFurther explanation may be found on page 32.

HSBC Holdings plc
1


Cautionary statement regarding forward-looking statements
The Form 20-F contains certain forward-looking statements with respect to HSBC’s financial condition, results of operations and business.
Statements that are not historical facts, including statements about HSBC’s beliefs and expectations, are forward-looking statements. Words such as ‘expects’, ‘targets’, ‘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.




Factors specific to HSBC, including our success in adequately identifying the risks we face, such as the incidence of loan losses or delinquency, and managing those risks (through account management, hedging and other techniques). Effective risk management depends on, among other things, our ability through stress testing and other techniques to prepare for events that cannot be captured by the statistical models it uses; and our success in addressing operational, legal and regulatory, and litigation challenges; and other risks and uncertainties we identify in ‘top and emerging risks’ on pages 95 to 106.
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 ‘$m’, ‘$bn’ and ‘$tn’ represent millions, billions (thousands of millions) and trillions of US dollars, respectively.
HSBC Holdings plc
1a
Highlights
Our international network, universal banking model and capital strength deliver long-term value for customers and shareholders.
Group
For year ended 31 Dec 2017
chart-2d639ed10bd65bc6bca.jpg
(2016: $7.1bn)
$17.2bn
chart-621dbaef41a1e49997d.jpg
(2016: $18.9bn)
$21.0bn
chart-46560352f125d930532.jpg
(2016: $48.0bn)
$51.4bn




At 31 Dec 2017
a1arastrateg_chart-08872.jpg
(2016: $857bn)
$871bn
chart-19c190b4c169f21fca8.jpg
(2016: 13.6%)
14.5%
chart-26001e8288c57538736.jpg
(2016: $2,375bn)
$2,522bn
Strategy execution
Delivered growth from our international network with a 6% increase in transaction banking product revenue and a 13% rise in revenue synergies between global businesses compared with 2016.
Achieved annualised run-rate savings of $6.1bn since our Investor Update in 2015, while continuing to invest in growth, and regulatory programmes and compliance; 2017 exit run-rate in line with 2014 cost base.
Exceeded our risk-weighted assets (‘RWAs’) reduction target; extracting a total of $338bn of RWAs from the business since the start of 2015.
Pivot to Asia generating returns and driving over 75% of Group reported and adjusted profit in 2017.
Delivered a return on equity of 5.9% in 2017, up from 0.8% in 2016.  We will continue to invest for growth and manage our capital efficiently to achieve our medium-term ROE target of >10%.
About HSBC
Around
38 million
customers bank with us.
We employ
229,000




people around the world*.
We have
200,000
shareholders in 131 countries and territories.
Today, HSBC has around
3,900
offices in 67 countries and territories worldwide.
*Full-time equivalent staff
2
HSBC Holdings plc
Our global businesses
Our operating model consists of four global businesses and a Corporate Centre, supported by HSBC Operations Services and Technology, and 11 global functions, including: risk, finance, financial crime risk, legal, marketing and human resources.
Retail Banking and Wealth Management (‘RBWM’)
Commercial Banking (‘CMB’)
Global Banking and Markets (‘GB&M’)
Global Private Banking (‘GPB’)
We help millions of people across the world to manage their finances, buy their homes, and save and invest for the future. Our Insurance and Asset Management businesses support all our global businesses in meeting their customers’ needs.
We support approximately 1.7 million business customers in 53 countries and territories with banking products and services to help them operate and grow. Our customers range from small enterprises focused primarily on their domestic markets, through to large companies operating globally.

We provide financial services and products to companies, governments and institutions. Our comprehensive range of products and solutions, across capital financing, advisory and transaction banking services, can be combined and customised to meet clients’ specific objectives.
We help high net worth individuals and their families to grow, manage and preserve their wealth.

Adjusted profit before tax<>
(2016: $5.2bn)
(2016: $5.9bn)
(2016: $5.5bn)
(2016: $0.3bn)
$6.5bn
$6.8bn
$5.8bn
$0.3bn
Adjusted risk-weighted assets<>
(31 Dec 2016: $114.7bn)
(31 Dec 2016: $286.9bn)
(31 Dec 2016: $307.7bn)
(31 Dec 2016: $15.7bn)
$121.5bn
$301.0bn
$299.3bn
$16.0bn
<>Our global businesses are presented on an adjusted basis, which is consistent with the way in which we assess the performance of our global businesses. 

Delivery against Group financial targets
Return on equity
5.9%
Adjusted jaws<> 
+1%
Dividends per ordinary share in respect of 2017
$0.51
ÑFor further details, see page 17.

HSBC Holdings plc
3

Group Chairman’s Statement
With an international network covering 90% of global trade flows and a leading presence in the world’s fastest growing region, we are in a prime position to help our customers capitalise on broad-based global growth.
Our 2017 results demonstrate both the strength and the potential of the Group. A large increase in reported profit before tax reflected both a healthy business and the non-recurrence of significant items from 2016. All of our global businesses grew adjusted profits and our three main global businesses generated improved adjusted revenue.




Strong revenue growth more than covered the cost of business investment, and increased lending laid a foundation for future performance. Asia again contributed a substantial proportion of the Group’s profits, particularly in Commercial Banking and Retail Banking and Wealth Management. Together, this delivered an adjusted Group profit before tax of $21bn, up 11% on 2016.
This performance has enabled us to approve an unchanged fourth interim dividend of $0.21. This brings the total dividend for 2017 to $0.51, representing a total shareholder return of 24% for 2017.
Board changes
As I start my first full year as Group Chairman, I am very grateful to my predecessor, Douglas Flint, and to Stuart Gulliver for ensuring a smooth handover. They steered HSBC through challenging waters during and after the global financial crisis, and renewed HSBC’s reputation as one of the world’s strongest and safest international banks. They have passed on a strong legacy.
My first responsibility as Group Chairman was to appoint a successor to Stuart who would be capable of building on his achievements while further enhancing the qualities that make HSBC unique. With an exceptional record of managing a diverse range of international businesses and a deep understanding of HSBC’s heritage and culture, John Flint was clearly the outstanding candidate. The Board and I look forward to working closely with John and his management team.
2017 also saw other Board changes as we said goodbye to Rachel Lomax, Sam Laidlaw and Paul Walsh. All three provided valuable service and wise counsel to the Board and I thank them warmly for their advice and support. I am especially grateful to Rachel for her excellent work as the Senior Independent Director and to Sam for his thoughtful leadership of the Nomination Committee.
4
HSBC Holdings plc

The year ahead
The Board is focused on sustaining resilience by enhancing reputation and performance. We will further develop our strategy to deliver value to all of our stakeholders within a governance framework that provides stability, prudence and effective oversight.
We expect the world’s major economies to show reasonable growth in 2018, helped by relatively low unemployment, recovering consumer confidence and improving trade. Fears of a hard landing in China have receded, and markets across Asia look set for a strong year. The anticipated conclusion of large regional trade agreements in 2018, mostly involving Asian nations, also provides cause for optimism. With an international network covering 90% of global trade flows and a leading presence in the world’s fastest growing region, we are in a prime position to help our customers capitalise on this broad-based global growth.
While we are optimistic about the prospects for the global economy, rising international tensions, the threat of protectionism and a lack of inclusive growth all have the potential to disrupt economic activity. We continue to model and anticipate a wide range of scenarios as part of our day-to-day risk management, to cover unlikely but not impossible events. As a well-diversified business underpinned by historically stable revenue generation and significant capital strength, HSBC is well equipped to manage the risks and uncertainty inherent in today’s world.
HSBC Holdings plc
5


Transparency and disclosure
Last year, we published a range of environmental, social and governance (‘ESG’) metrics to enable investors and customers to assess our non-financial performance. The data we disclose will continue to evolve as we learn more about what our stakeholders find useful and improve our ability to collect the necessary information. We will publish our next ESG Update on our website in April 2018.
We are also making our first disclosure under the terms of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures. This can be found on page 27. As one of the world’s largest international banks, we take seriously our responsibility to help develop a voluntary, consistent and comparable system of climate-related financial disclosure. We intend to continue to expand and improve the quality and specificity of these disclosures, and to encourage all those who work with us to do the same.
Supporting our people
It is important not just to achieve good results, but to do so in a way that treats all of our stakeholders – employees, customers, regulators and shareholders – in a fair and transparent way. We are committed to holding ourselves to account in meeting that aim, and to being accountable to our stakeholders for our actions.
As part of this commitment, the Board and I are determined to ensure that HSBC remains a place where all our people have the opportunity to fulfil their potential in a nurturing environment that encourages the right behaviour. Our stakeholders expect honesty and integrity and we will continue to promote a culture in which people do the right thing.
My special thanks are due on behalf of the Board to each of the 229,000 people who work for HSBC around the world. In my short time as Group Chairman I have been enormously impressed by the effort, energies and ability of our people in each country I have visited. These results are a testament to their hard work and dedication.
Mark E Tucker
Group Chairman
20 February 2018

6
HSBC Holdings plc




Group Chief Executive’s Review
HSBC is simpler, stronger and more secure than it was in 2011, and better able to connect customers to opportunities in the world’s fastest growing regions.
2017 was an important year for HSBC. We completed the transformation programme that we started in 2015, maximising the benefits of our network and increasing our competitive advantages. By the end of the year we had exceeded our risk-weighted asset and cost-saving targets, rebuilt our Mexico business, delivered revenue growth from our international network in excess of global economic growth, and accelerated investment in our operations in Asia. We also opened new businesses and launched products that considerably strengthen the service that we offer our international clients.
These achievements, and the work that preceded them, were a critical factor in delivering a strong financial performance in 2017. The strength of our three main global businesses generated significant increases in both reported and adjusted Group profit before tax (‘PBT’), while reported PBT also benefited from the non-recurrence of a number of large significant items from 2016. Adjusted PBT and adjusted revenue were up in four out of five regions. We grew adjusted revenue faster than adjusted costs, and continued to increase our market share in strategic product areas.
Business performance
Retail Banking and Wealth Management had an excellent 2017, with strong adjusted revenue increases across a number of business lines. In Retail Banking, interest rate rises helped to grow revenue as our robust balance sheet and capital strength continued to attract deposits, particularly in Hong Kong. We continued to grow lending in our target markets, especially Hong Kong, the UK and Mexico. Wealth Management benefited from improving customer investment appetite, strong product sales across all categories and the impact of market movements on our life insurance manufacturing businesses.
Commercial Banking adjusted revenue grew well on the back of an outstanding performance in Global Liquidity and Cash Management. Higher lending volumes helped Credit and Lending overcome the impact of narrower spreads. Global Trade and Receivables Finance revenue stabilised after a difficult 2016 and we increased our share of major markets, including trade finance in Hong Kong and receivables finance in the UK. HSBC was voted market leader for trade finance in Euromoney’s annual trade finance survey in January 2018.
Global Banking and Markets grew adjusted revenue, driven particularly by strong growth in Global Liquidity and Cash Management, and Securities Services. Growth in the first three quarters of the year in Markets and Banking enabled both to withstand the effects of subdued market activity in the fourth quarter.
Global Private Banking adjusted revenue reflected the impact of historical repositioning, but was stable over the course of 2017. The business grew adjusted revenue by 10% in its target markets.
Our strong revenue generation meant that the Group achieved positive adjusted jaws in 2017. We accelerated investment to grow the business, particularly in Retail Banking and Wealth Management, which contributed to an increase in adjusted costs. Performance-related compensation also grew in line with profit before tax.
HSBC Holdings plc
7


Adjusted loan impairment charges were significantly lower than 2016, mainly due to improved conditions in the oil and gas industry in North America.
Our strong common equity tier one ratio of 14.5% included the effect of recent changes in US tax legislation, which reduced our capital position by 9 basis points. It also included the impact of our most recent $2bn share buy-back. In 2017, we returned a total of $3bn to shareholders through share buy-backs and paid more in dividends than any other European or American bank. We achieved this while maintaining one of the strongest capital ratios in the industry.
Strategic actions
The strength of our business is due in large part to the strategic actions that we first announced in June 2015. This programme concluded at the end of 2017 with eight out of ten actions completed on time and on target (see page 12).
HSBC is much more capital efficient and capable of producing stronger returns for investors as a consequence of these actions. Our cost-reduction programmes have enabled us to absorb the cost of growing the business and protecting HSBC from financial crime, while improving the efficiency and security of our processes.
Our previously underperforming Mexico business is increasingly profitable and well positioned for further growth. Whilst our US business remains a work in progress, it is a valuable source of business for other regions and continues to make important progress. We also completed the run-off of our legacy US consumer and mortgage lending portfolio, bringing an end to a difficult chapter in HSBC’s recent history.
Our international network is now much better able to connect customers to opportunities and delivering revenue growth above that of the global economy. 53% of client revenue now comes from international clients, up from 50% in 2015. Global Liquidity and Cash Management in particular is now a major component of the bank’s success, and Global Trade and Receivables Finance has extended its leadership of the global trade finance market.
The Group’s business mix is more oriented towards Asia, improving our ability to channel the economic and social changes taking place within the world’s fastest growing region. Asia contributes a larger proportion of the Group’s profits than in 2015, reflecting regional investment in growing our loan book, building our insurance and asset management businesses, and connecting customers to opportunities within the region.
We continued to expand our presence in mainland China with the launch of new retail banking products and increased lending in the Pearl River Delta. In December we launched HSBC Qianhai Securities, the first securities joint venture in mainland China to be




majority-owned by an international bank. This allows us to offer our clients increased access to China’s rapidly expanding capital markets and provides an unprecedented opportunity to establish and grow a securities business in mainland China with strong international standards. This underlines our status as the leading international bank in mainland China.
We won a number of significant new business mandates related to the China-led Belt and Road Initiative in 2017, and opened new China desks in Poland, Luxembourg, Thailand and Macau to capture further opportunities. We now have a total of 24 China desks aimed at supporting Chinese businesses with global outbound ambitions, 20 of which are along the ‘Belt and Road’ routes. In November we were named ‘Best Bank for Belt and Road’ at the FinanceAsia Achievement Awards 2017.
8
HSBC Holdings plc

Fighting financial crime
For the past five years, we have been weaving Global Standards into the fabric of HSBC. The investment that we have made in our financial crime risk management capabilities has considerably strengthened our ability to protect the integrity of the financial system. We have assembled a highly expert team which is helping to shape the debate about our industry’s role in the fight against financial crime. We have made great strides in building a compliance function fit for the many evolving challenges we face, and built partnerships to combat financial crime with regulatory and law enforcement authorities around the world. 
The expiration in December of the five-year deferred prosecution agreement that we entered into with the US Department of Justice in 2012 (‘AML DPA’) was an important milestone for HSBC. Nevertheless, exiting the AML DPA was a product rather than the focus of the essential work that we have done to transform our compliance capabilities and protect the financial system. This work will continue as we seek to ensure that the changes we have made are effective and sustainable. Combating financial crime is a never-ending exercise and will be a constant focus for the Group’s management.
Thank you
As I prepare to pass on the stewardship of HSBC to my successor, I am proud of our achievements of the last seven and a half years. After the most extensive transformation programme in HSBC’s 153 year history, HSBC is simpler, stronger and more secure than it was in 2011, and better able to connect customers to opportunities in the world’s fastest growing regions. We have also delivered excellent value to shareholders through a higher share price, $64.7bn in declared dividends and $5.5bn in share buy-backs, representing a total shareholder return of 70.3% from 2011 to the end of 2017.
I am pleased to be handing over to such a capable successor as John Flint, whose intimate knowledge of HSBC and its culture will be a considerable asset to the bank and its clients. I am grateful to my colleagues on the Group Management Board for their support since 2011, and to Douglas Flint and Mark Tucker for their backing.
Finally, my sincere thanks go to all of my HSBC colleagues around the world, past and present, whose hard work and commitment are the foundation of the bank’s success. It has been my privilege to work with them for the last 38 years.



Stuart Gulliver
Group Chief Executive
20 February 2018
HSBC Holdings plc
9


Our strategy
We have developed a long-term strategy that reflects our purpose and enables us to capture value from our international network.
Two-pronged long-term strategy
Develop our international network
To serve enterprises across geographies and facilitate international trade and capital flows, thereby helping our clients to grow their business.
Invest in wealth and retail businesses with local scale
To make the most of global social mobility, wealth creation and long-term demographic changes in our select retail banking and wealth management markets.
Value of the network and our strategy
Access to global growth opportunities
Our unparalleled network covers countries accounting for approximately 90% of global GDP, trade and capital flows. We have a leading presence in large and fast-growing economies.




Our network covers all of the world’s 30 largest trade corridors forecast for 2030. These top 30 corridors are expected to have a compound annual growth rate well in excess of GDP growth expectations from 2016 to 2030.
Lower risk profile and volatility from our geographically diversified universal banking model
We operate a balanced universal banking model across both wholesale and retail businesses and we are geographically diversified. This has resulted in a lower risk profile and lower earnings volatility compared to our global peers. Our business model has remained resilient through business cycles, and it helps ensure stable funding and liquidity.
Strong capital and funding base
CET1 ratio of 14.5% supported by increased shareholders’ equity to meet new regulatory requirements since the end of 2010.
Four interconnected, global businesses share balance sheets and liquidity in addition to strong commercial links.
Stable shareholder returns
Industry leading dividend – approximately $65bn declared from 2011 to 2017 – as well as circa $5.5bn of share repurchases.
10
HSBC Holdings plc

Long-term trends
Our strategy positions us to capitalise on several long-term trends.
Increasing connectivity and global flows of trade, finance and data are key drivers of GDP growth.
a1arastrateg_chart-29768.jpg
Source: Global Insight’s Comparative World Overview.
Emerging market economies are expected to be twice the size of developed economies by 2050.a1arastrateg_chart-31248.jpg a1arastrateg_chart-32498.jpg
Source: United Nations Conference on Trade and Development.

The middle class is expected to grow by over two billion people from 2017 to 2030, driven by growth in Asia’s middle class.
a1arastrateg_chart-33679.jpg
Source: Global Economy and Development at Brookings, The Unprecedented Expansion of the Middle Class (2017).

Climate change is accelerating and global temperatures are trending significantly higher. Investment in renewable energy capacity will be needed to limit the global temperature increase to 2°C.




chart-7b24dcca4c56b12fc1c.jpg
 
Required by 2050 as per IEA 66% 2°C scenario
 
 
 
Current (2016)

Source: OECD, Investing in Climate, Investing in Growth (2017).

*The scenario assumes a 66% probability of keeping the mean global surface temperature rise throughout the 21st century to below 2°C above pre-industrialised levels.

Client examples
Trina Solar (‘Trina’): China, renewable energy
Exporter of solar panels globally. Trina’s aim is to bring China’s green energy solutions to countries along the Belt and Road Initiative route, and has thus stepped up its overseas investment, particularly in the ASEAN region. HSBC created a digital platform for Trina that gave its headquarters a transparent view of its ASEAN-region subsidiaries’ cash positions and set up a cash pool in Singapore to seamlessly connect Trina’s HSBC accounts globally.
Reckitt Benckiser (‘RB’): UK, consumer goods
Global consumer health and hygiene company. HSBC acted as financial adviser and lead financier to Reckitt Benckiser on its $18bn acquisition of Mead Johnson Nutrition Company, a leader in infant and children’s nutrition. This acquisition marked one of the largest UK into US transactions and considerably strengthened RB’s presence in developing markets, particularly China.
Zhejiang Geely: China, automotive
Leading automobile manufacturer. HSBC served as sole financial adviser for Zhejiang Geely on two interlinked China outbound investments, one in Malaysian carmaker Proton Holdings and the second in Lotus Advance Technologies, a subsidiary of Proton based in the UK. These transactions were enabled by collaboration between HSBC teams in mainland China, Hong Kong, Singapore, Malaysia and London.
Morgan McKinley: Ireland, professional services
Global recruitment agency with operations in Ireland, UK, EMEA and APAC. In 2017, Morgan McKinley expanded HSBC’s global mandate to include cross-border Global Trade and Receivables Finance (‘GTRF’) facilities and Global Liquidity and Cash Management (‘GLCM’) services in Canada and Japan. HSBC’s ‘one-team’ approach, not separated by product, was cited by the client as being a key driver in the decision to switch to HSBC.
HSBC Holdings plc
11

Strategic actions
We met eight out of ten targets from the strategic actions outlined in our Investor Update in June 2015.
Capturing value from our international network
In June 2015, we outlined a series of strategic actions to make the most of our competitive advantages and respond to a changing environment.
These actions focused on using our resources more efficiently and on investing for growth. Each action had targets defined to the end of 2017. The table opposite contains a summary of our progress with additional details provided below.
Resizing and simplifying our business
We passed several significant milestones in resizing and simplifying our business in 2017. Our management actions delivered a gross reduction of risk-weighted assets (‘RWAs’) by $338bn, exceeding our RWA reduction target from management initiatives by $60bn on an FX-adjusted basis.
Among our NAFTA region Investor Update targets, we did not reach our US profit before tax (‘PBT’) target of $2bn. However, we have taken steps forward in, for example, our US Retail Banking and Wealth Management (‘RBWM’) business, where we increased PBT, revenues and deposits, and migrated over one million customers to our impending new core banking platform. We also completed the wind-down of our US consumer and mortgage lending (‘CML’) run-off portfolio. In Mexico, our adjusted PBT reached $440m, surpassing our Investor Update target on a local currency basis. We also grew adjusted revenue in Mexico by 11% compared with 2016, supported by increased loan balances from market share gains.




We remain on course to complete the set-up of our UK ring-fenced bank (‘RFB’) ahead of the 1 January 2019 statutory deadline. In 2017, we received a restricted bank licence for the RFB and are working through an agreed mobilisation plan with the Prudential Regulatory Authority and Financial Conduct Authority to receive an unrestricted licence in 2018.
We successfully concluded our cost-saving programme and realised $6.1bn of annual run-rate savings, over $1bn more than our Investor Update target. The programme enabled 2017 exit run-rate adjusted costs to be kept flat compared with the 2014 cost base. The savings offset increased costs from areas such as regulatory programmes and compliance, and investments to help facilitate further business growth. For example, in RBWM, we expanded the use of biometrics globally with over 1.5 million customers using voice recognition, and with fingerprint technology launched in nine of our markets. For our corporate customers, we improved our key digital channels with significant improvements to HSBCnet and HSBC Connect. Our costs-to-achieve transformation concluded with approximately $7bn spent since the start of the programme.
Redeploying capital to grow our business
Our international network remains core to our strategy, and we achieved our Investor Update target of revenue growth above GDP. In 2017, we grew our revenue from transaction banking products by 6%, including double-digit percentage growth in GLCM and HSBC Security Services (‘HSS’). We grew GTRF market share in key markets, in particular Hong Kong and receivables finance in the UK. Cross-border revenues from our priority corridors grew 10%, with double-digit percentage growth in four of our five largest priority corridors including our China-US corridor. We were named ‘Top Global Trade Finance Bank’ by our clients in the Euromoney Trade Finance Survey 2018.
We delivered on our 2015 Investor Update commitment to prioritise and accelerate investments in Asia. In 2017, we grew our loan portfolio in the region by $53bn to $426bn. Our asset management and insurance businesses in Asia realised 17% and 8% growth in AUM and annualised new business premiums, respectively. In mainland China, we reached over 400,000 cards in circulation since launching credit cards at the end of 2016, and we grew our customer loans in the Pearl River Delta region by 23%. We launched HSBC Qianhai Securities, the first securities joint venture in mainland China to be majority-owned by an international bank.
Revenue tied to renminbi (‘RMB’) internationalisation in 2017 of $1.2bn did not meet our Investor Update target of $2.0bn to $2.5bn. This was largely due to a decrease in overall market volumes. However, we continue to be recognised as the leading bank for international RMB products and services. We ranked first in Bloomberg’s offshore RMB bond underwriting league table in 2017 with 28% market share and first for the sixth year in a row in the Asiamoney Offshore RMB Poll 2017. We had the largest share, at 53%, of approved quota of RMB Qualified Foreign Institutional Investor (‘RQFII’) custodian business.
Selected awards and recognition
Euromoney Trade Finance Survey 2018
Top Global Trade Finance Bank
Euromoney Awards for Excellence 2017
World’s Best Bank
World’s Best Investment Bank in the Emerging Markets
Asia’s Best Bank
North America’s Best Bank for Transaction Services
Euromoney Cash Management Survey 2017
Best Global Cash Manager for Corporates
Best Global Cash Manager for Financial Institutions for all Transactions
Asiamoney New Silk Road Finance Awards 2017
Best Overall International Bank for Belt and Road Initiative
12
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HSBC Holdings plc
13





Financial overview
Reported results
Reported results
2017
$m

2016
$m

2015
$m

Net interest income
28,176

29,813

32,531

Net fee income
12,811

12,777

14,705

Net trading income
7,719

9,452

8,723

Other income
2,739

(4,076
)
3,841

Net operating income before loan impairment charges and other credit risk provisions (‘revenue’)
51,445

47,966

59,800

Loan impairment charges and other credit risk provisions
(1,769
)
(3,400
)
(3,721
)
Net operating income
49,676

44,566

56,079

Total operating expenses
(34,884
)
(39,808
)
(39,768
)
Operating profit
14,792

4,758

16,311

Share of profit in associates and joint ventures
2,375

2,354

2,556

Profit before tax
17,167

7,112

18,867

This table shows our reported results for the last three years, ended 31 December 2017, 2016 and 2015.
All commentary in this financial overview compares the 2017 results with 2016, unless otherwise stated.
Reported profit before tax
Reported profit before tax of $17.2bn was $10.1bn or 141% higher, mainly reflecting a net favourable movement of significant items of $8.5bn, which is described in more detail on page 32. Excluding significant items and an adverse effect of foreign currency translation of $0.5bn, profit before tax increased by $2.1bn or 11%.
Reported revenue
Reported revenue of $51.4bn was $3.5bn or 7% higher, partly reflecting a net favourable movement in significant items of $2.0bn, which included:
in 2016, unfavourable fair value movements on our own debt designated at fair value reflecting changes in our own credit spread of $1.8bn, which are now reported in other comprehensive income, following our partial early adoption of IFRS 9 ‘Financial Instruments’ on 1 January 2017; and
favourable fair value movements in 2017 of $0.1bn on non-qualifying hedges, compared with adverse movements of $0.7bn in 2016.
Net favourable movements were partly offset by:
in 2016, a $0.7bn gain on the disposal of our membership interests in Visa Europe and Visa Inc. This compared with a $0.3bn gain on the disposal of our shares in Visa Inc. during 2017;
adverse debit value adjustments on derivative contracts in 2017 of $0.4bn, compared with minimal movements in 2016; and
in 2017, a $0.1bn provision related to customer redress programmes in the UK, and a $0.1bn charge arising from the opportunity to increase our investment in new businesses.
Significant items also included a loss of $1.7bn recognised in 2016 on the sale of operations in Brazil to Banco Bradesco S.A., which was completed on 1 July 2016. This loss was substantially offset by the reported revenue earned by the Brazil business during 2016 of $1.5bn.
Excluding significant items, and an adverse effect of foreign currency translation of $0.7bn, revenue increased by $2.2bn or 5%, reflecting growth in Retail Banking and Wealth Management (‘RBWM’), Commercial Banking (‘CMB’) and Global Banking and Markets (‘GB&M’).
Reported LICs
Reported loan impairment charges and other credit risk provisions (‘LICs’) of $1.8bn were $1.6bn lower, in part reflecting the effect of significant items, which comprised the LICs incurred by our operations in Brazil in 2016 of $0.7bn.
Excluding significant items and the adverse effect of foreign currency translation of $0.1bn, LICs decreased by $0.8bn or 32%. The reduction in LICs was primarily in CMB, RBWM and Corporate Centre.
Reported operating expenses
Reported operating expenses of $34.9bn were $4.9bn or 12% lower. This included a net decrease in significant items of $5.6bn, including:
a $3.2bn write-off of goodwill in our GPB business in Europe in 2016;
a net release of $0.4bn in settlements and provisions in connection with legal matters, compared with charges in 2016 of $0.7bn;
operating expenses of $1.1bn in 1H16 incurred by the operations in Brazil that we sold; and
costs to achieve of $3.0bn, compared with $3.1bn in 2016.
Excluding significant items and a favourable effect of foreign currency translation of $0.3bn, operating expenses increased by $1.1bn. This increase mainly reflected increased investment in growth programmes, primarily in RBWM, where investments were partly funded by the proceeds from our disposal of Visa shares, and higher performance-related pay.
14
HSBC Holdings plc




Reported income from associates and joint ventures
Reported income from associates and joint ventures of $2.4bn increased by $21m.
Dividends
On 20 February 2018, the Board announced a fourth interim dividend of $0.21 per ordinary share.

Adjusted performance
Our reported results are prepared in accordance with IFRSs as detailed in the Financial Statements on page 222.
We present adjusted performance measures to align internal and external reporting, identify and quantify items management believes to be significant, and provide insight into how management assesses period-on-period performance. Adjusted performance measures are highlighted with the following symbol:<>
To derive adjusted performance, we adjust for:
the year-on-year effects of foreign currency translation differences; and
the effect of significant items that distort year-on-year comparisons and are excluded in order to improve understanding of the underlying trends in the business.
ÑFor reconciliations of our reported results to an adjusted basis, including lists of significant items, see page 66.

Adjusted results<>
This table shows our adjusted results for 2017 and 2016. These are discussed in more detail on the following pages.
Adjusted results<>
2017
$m

2016
$m

(%)

Net operating income before loan impairment charges and other credit risk provisions (adjusted revenue)
51,524

49,290

5
 %
Loan impairment charges and other credit risk provisions
(1,769
)
(2,594
)
32
 %
Total operating expenses
(31,140
)
(30,084
)
(4
)%
Operating profit
18,615

16,612

12
 %
Share of profit in associates and joint ventures
2,375

2,322

2
 %
Profit before tax
20,990

18,934

11
 %
a1arastrateg_chart-30196.jpg
Adjusted profit before tax<>
On an adjusted basis, profit before tax of $21.0bn was $2.1bn or 11% higher. This was driven by higher revenue (up $2.2bn), with growth in our three main global businesses, and a significant reduction in LICs (down $0.8bn), notably as 2016 included charges relating to exposures to the oil and gas, and mining sectors. These movements were partly offset by higher operating expenses (up $1.1bn), in part due to investment in growth initiatives. In 2017, we achieved positive adjusted jaws of 1.0%.
HSBC Holdings plc
15


Adjusted revenue<>
Adjusted revenue of $51.5bn was $2.2bn or 5% higher, as growth in our three main global businesses was partly offset by reductions in GPB and Corporate Centre.
In RBWM, revenue increased by $1.7bn or 9%, driven by growth in Retail Banking from current accounts, savings and deposits, reflecting balance growth and wider spreads primarily in Hong Kong, and also in the US and Mexico, partly offset by lower personal lending revenue. Revenue also increased in Wealth Management, mainly in insurance manufacturing driven by favourable market impacts compared with adverse market impacts in 2016, notably in Asia. In addition, investment distribution income increased, reflecting increased investor confidence in Hong Kong.
In CMB, revenue increased by $0.6bn or 5%, driven by growth in Global Liquidity and Cash Management (‘GLCM’), notably in Asia. This primarily reflected wider spreads and increased average deposit balances. Revenue in Credit and Lending (‘C&L’)




increased as we grew lending balances in key markets, while revenue in Global Trade and Receivables Finance (‘GTRF’) fell marginally, due to managed client exits in MENA despite balance sheet growth in Asia and the UK.
In GB&M, revenue increased by $0.4bn or 3%, mainly in GLCM and Securities Services. In Global Markets, revenue was marginally higher as growth in Equities, reflecting increased market share in Prime Financing, was partly offset by lower revenue in Fixed Income, Currencies and Commodities that reflected lower market volatility, as well as a net adverse movement on credit and funding valuations adjustments.
These increases were partly offset:
In GPB, revenue was $45m or 3% lower, reflecting the impact of our customer repositioning actions. This was partly offset by increased revenue in the markets that we have targeted for growth, notably Hong Kong, due to higher investment revenue reflecting increased client activity and growth in deposit revenue as we benefited from wider spreads.
In Corporate Centre, revenue decreased by $0.4bn, with reductions in the US run-off portfolio (down $0.7bn), following the disposal of the remaining portfolio during 2017, and in Central Treasury (down $0.1bn). These decreases were partly offset in other income (up $0.4bn), which included revaluation gains on investment properties.
Movement in adjusted revenue compared with 2016<>
 
2017
$m

2016
$m

Variance
$m

%

Retail Banking and Wealth Management
20,287

18,542

1,745

9
 %
Commercial Banking
13,223

12,619

604

5
 %
Global Banking and Markets
15,091

14,715

376

3
 %
Global Private Banking
1,703

1,748

(45
)
(3
)%
Corporate Centre
1,220

1,666

(446
)
(27
)%
Total
51,524

49,290

2,234

5
 %
Adjusted LICs<>
Adjusted LICs of $1.8bn were $0.8bn lower, reflecting reductions in:
CMB ($0.5bn lower), notably in the UK and North America, primarily as 2016 included charges against exposures in the oil and gas sector. In addition, there were reductions in France, Spain and Singapore as we incurred individually assessed LICs against a small number of corporate exposures in 2016.
RBWM ($0.2bn lower), primarily in Turkey and the US, reflecting improved credit quality, partly offset by increases in Mexico, notably from growth in unsecured lending which resulted in an associated increase in delinquency rates.
LICs in GB&M of $0.5bn were broadly unchanged from the prior year. LICs in the current year related to two large corporate exposures in Europe. This compared with a small number of individually assessed LICs, notably on exposures in the oil and gas, and mining sectors in the US in 2016.
Adjusted operating expenses<>
Adjusted operating expenses of $31.1bn were $1.1bn or 4% higher. This reflected investments in business growth programmes ($0.6bn), primarily in RBWM where investments were partly funded by the proceeds from the disposal of our shares in Visa, as well as an increase in performance-related pay (up $0.4bn). Compared with 2016, our UK bank levy charge was broadly unchanged, at $916m. The impact of our cost-saving initiatives broadly offset inflation and continued investment in our regulatory programmes and compliance.
Our total investment in regulatory programmes and compliance was $3.0bn, up $0.2bn or 7%. This notably reflected the continued implementation of our Global Standards programme to enhance financial crime risk controls and capabilities.
The number of employees expressed in full-time equivalent staff at 31 December 2017 was 228,687, a decrease of 6,488 from 31 December 2016. This reflected reductions resulting from our transformation programmes and the completion of these programmes, partly offset by increases from our investments in Global Standards and in our business growth programmes.
Adjusted income from associates and joint ventures<>
Adjusted income from associates and joint ventures of $2.4bn increased by $0.1bn.
 
UK bank levy
 
Adjusted operating expenses (excluding bank levy)
a1arastrateg_chart-31764.jpg chart-069b91c7706ce08406a.jpg
2016: $30.1bn     




2017: $31.1bn
16
HSBC Holdings plc

Balance sheet and capital
Balance sheet strength
Total reported assets were $2.5tn, 6% higher than at 31 December 2016 on a reported basis, and 1% higher on a constant currency basis. We have maintained the strength of our balance sheet, as we continued our targeted asset growth, notably in Asia.
Distributable reserves
The distributable reserves of HSBC Holdings at 31 December 2017 were $38bn, compared with $42bn at 31 December 2016. The decrease was driven by distributions to shareholders of $8.3bn, which were higher than profits generated of $5.5bn, as well as fair value losses net of tax due to movements in our own credit risk of $0.8bn.
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 using capital ratios. These measure capital relative to a regulatory assessment of risks taken. We quantify how these risks relate to our businesses using RWAs.
ÑDetails of these risks are included on page 162.
Our CET1 ratio at 31 December 2017 was 14.5%, up from 13.6% at 31 December 2016.
Implementation of IFRS 9
IFRS 9 ‘Financial Instruments’ was adopted on 1 January 2018. The adoption of IFRS 9 will reduce the Group’s net assets at 1 January 2018 by $1.0bn. We do not expect this to have a significant impact on our regulatory capital position.
ÑFurther explanation of the expected impact of the implementation of IFRS 9 is provided in Note 1 on the Financial Statements on page 222.
Delivery against Group financial targets
a1arastrateg_chart-35331.jpg
Return on equity
Our medium-term target is to achieve a return on equity (‘RoE’) of more than 10%. In 2017, we achieved an RoE of 5.9% compared with 0.8% in 2016. In 2016, significant items, which included a write-off of goodwill in GPB in Europe, costs to achieve and adverse fair value movements arising from changes in credit spread on our own debt designated at fair value, had a significant effect on our reported RoE.
Adjusted jaws<>
Adjusted revenue up

 
5
%
Adjusted jaws

 
1
%
Adjusted costs up

 
4
%
 
Jaws measures the difference between the rates of change for revenue and costs. Positive jaws occurs when the figure for the annual percentage change in revenue is higher than, or less negative than, the corresponding rate for costs.
We calculate adjusted jaws using adjusted revenue and costs. Our target is to maintain positive adjusted jaws.
In 2017, adjusted revenue increased by 5% and our adjusted operating expenses increased by 4%. Adjusted jaws was therefore positive 1%.
Dividends




a1arastrateg_chart-38122.jpg
In the current uncertain environment, we plan to sustain the annual dividend in respect of the year at its current level for the foreseeable future. Growing our dividend will depend on the overall profitability of the Group, delivering further release of less efficiently deployed capital and meeting regulatory capital requirements in a timely manner. Actions to address these points were core elements of our Investor Update in June 2015.
HSBC Holdings plc
17

Global businesses
We manage our products and services globally through our global businesses.
The ‘Management view of adjusted revenue’ tables provide a breakdown of revenue by major products, and reflect the basis on which each business is assessed and managed.
ÑThe comparative period has been restated to reflect changes to reportable segments, as described on page 64.
Commentary is on an adjusted basis, which is consistent with how we assess the performance of our global businesses.<>
Retail Banking and Wealth Management (‘RBWM’)
RBWM serves close to 37 million customers worldwide through four main businesses: Retail Banking, Wealth Management, Asset Management and Insurance. Our HSBC Premier and Advance propositions are aimed at mass affluent and emerging affluent customers who value international connectivity and benefit from our global reach and scale. For customers with simpler banking needs, RBWM offers a full range of products and services reflecting local requirements.
Key events
Significant investment in digital transformation across our six core markets, reshaping the branch network and sales force, and improving customer engagement, including the launch of a payment app in Hong Kong (PayMe) and voice biometrics in the UK.
Continued to attract customer deposits (up 5%), providing the potential to benefit from future interest rate rises; lending balances increased by 7%.
Strong growth in sales of investment products, notably equities (up 45%) and mutual funds (up 22%), and growth in insurance annualised new business premiums (up 7%), primarily in Asia.
Financial performance
Adjusted profit before tax of $6.5bn was $1.2bn or 24% higher, reflecting strong revenue growth from deposits and Wealth Management, as well as lower LICs, partly offset by higher operating expenses. We achieved positive adjusted jaws of 4.0%.
Adjusted revenue of $20.3bn was $1.7bn or 9% higher, reflecting:
Higher revenue in Retail Banking (up $0.8bn or 6%):
Growth in revenue from current accounts, savings and deposits (up $1.1bn) due to wider spreads and higher balances primarily in Hong Kong, and also in the US and Mexico.
This was partly offset by:
Lower personal lending revenue (down $0.3bn), reflecting mortgage spread compression, primarily in Hong Kong, mainland China and the US. This was partly offset by lending growth of $22.2bn, notably driven by mortgages in the UK and Hong Kong, where we grew our market share.
Higher revenue in Wealth Management (up $0.9bn or 18%):
Growth in life insurance manufacturing revenue (up $0.5bn) including favourable movements in market impacts of $0.3bn in 2017 compared with adverse movements of $0.4bn in 2016, due to interest rate and equity market movements, notably in Asia and France, and to a lesser extent higher insurance sales in Asia.
Higher investment distribution revenue (up $0.4bn), primarily from higher sales of mutual funds and retail securities in Hong Kong, reflecting increased investor confidence.
Adjusted LICs of $1.0bn were $0.2bn or 14% lower, reflecting reductions in Turkey of $85m and in the US of $44m, as credit quality improved. This was partly offset in Mexico where higher LICs ($24m) reflected targeted growth in unsecured lending and associated higher delinquency rates. In the UK LICs of $132m were marginally higher, but remained at very low levels (10bps of the portfolio) as higher LICs relating to mortgages and unsecured lending were partly offset by a release from the sale of a loan portfolio.
Adjusted operating expenses of $12.8bn were $0.7bn or 5% higher, mainly due to investment in growth initiatives, notably in retail business banking, in our international proposition as we introduced new products and services, and in mainland China. Transformational and other cost savings partly offset inflation and higher performance-related pay.




 
 
 
 
 
2017 vs 2016
Management view of adjusted revenue<>
Footnotes
2017
$m

2016
$m

2015
$m

$m

%

Net operating income
3
 
 
 
 
 
Retail Banking
 
13,495

12,695

12,508

800

6
 %
– current accounts, savings and deposits
 
6,344

5,213

4,814

1,131

22
 %
personal lending
 
7,151

7,482

7,694

(331
)
(4
)%
   mortgages
 
2,337

2,546

2,648

(209
)
(8
)%
   credit cards
 
2,899

3,034

3,218

(135
)
(4
)%
   other personal lending
4
1,915

1,902

1,828

13

1
 %
Wealth Management
 
6,224

5,292

5,748

932

18
 %
– investment distribution
5
3,276

2,904

3,230

372

13
 %
– life insurance manufacturing
 
1,893

1,401

1,544

492

35
 %
– asset management
 
1,055

987

974

68

7
 %
Other
6
568

555

582

13

2
 %
Year ended 31 Dec
 
20,287

18,542

18,838

1,745

9
 %
Adjusted RoRWA (%)
7
5.5

4.6

4.8

 
 
ÑFor footnotes, see page 85.
chart-1198f906b57c11b7d5da04.jpg
Change in adjusted profit before tax
+24%
18
HSBC Holdings plc

Commercial Banking (‘CMB’)
CMB serves approximately 1.7 million customers in 53 countries and territories. Our customers range from small enterprises focused primarily on their domestic markets to corporates operating globally. We support customers with tailored financial products and services to allow them to operate efficiently and grow.
Services provided include working capital, term loans, payment services and international trade facilitation, as well as expertise in mergers and acquisitions, and access to financial markets.
Key events
Corporate customer value from our international subsidiary banking proposition grew 19%* compared with 2016, continuing to demonstrate the value of our global network.
In GLCM we launched a number of mobile solutions, including the government sponsored Unified Payments Interface in India, and Omni-Channel mobile collections in China. We also rolled out Voice and Touch ID in 37 markets and launched the next generation of HSBCnet.
HSBC was named the world’s Best Trade Finance Bank and Most Innovative Bank by Global Trade Review magazine. We also announced a strategic partnership with Tradeshift, the world’s largest business commerce platform, which will enable companies of all sizes to manage their global supply chains and working capital requirements from one simple online platform, from any device.
Financial performance
Adjusted profit before tax of $6.8bn was $0.9bn or 15% higher, reflecting higher revenue and lower LICs. This was partly offset by an increase in operating expenses. We achieved positive adjusted jaws of 1.3%.
Adjusted revenue of $13.2bn was $0.6bn or 5% higher, as strong growth in GLCM and increased revenue in C&L were partly offset by a reduction in GTRF revenue.
In GLCM, revenue increased by $536m or 13%, notably in Hong Kong and mainland China, reflecting wider spreads. Average balances grew 5%, reflecting customer deposit retention and new customer acquisitions. In the UK, average balance sheet growth of 10% was more than offset by narrower spreads due to the impact of the base rate reduction in 2016.
In C&L, revenue increased by $52m or 1%. In the UK, revenue increased as lending growth more than offset narrower spreads. By contrast, revenue in Asia was lower, as balance growth in Hong Kong was more than offset by the effects of spread compression in Hong Kong and mainland China, in part reflecting competitive pressures. Revenue in the US was lower, as we reposition the portfolio towards higher returns.
In GTRF, revenue was $21m or 1% lower, representing a stabilisation in performance following a challenging 2016. Notably, revenue increased in both Asia and the UK, reflecting balance sheet growth. However, this was more than offset by a reduction in revenue in the Middle East and North Africa (‘MENA’), reflecting the effect of managed customer exits in the UAE.




Adjusted LICs of $0.5bn were $0.5bn or 49% lower, notably in North America and the UK, primarily related to exposures in the oil and gas sector, and were also lower in France and Spain. In Asia, lower LICs in Singapore and mainland China were largely offset by higher LICs in Hong Kong, across various sectors.
Adjusted operating expenses were $0.2bn or 3% higher. This reflected our continued investment in Global Standards and digital capabilities, as well as inflation. This was partly offset by a reduction from our cost-saving initiatives.
Adjusted RWAs increased by 5% to $301bn reflecting growth in lending, mainly in Asia and Europe, in part funded through management initiatives which reduced RWAs by $14bn.
 
 
 
 
 
2017 vs 2016
Management view of adjusted revenue<>
Footnotes
2017
$m

2016
$m

2015
$m

$m

%

Net operating income
3
 
 
 
 
 
Global Trade and Receivables Finance
 
1,817

1,838

2,039

(21
)
(1
)%
Credit and Lending
 
5,061

5,009

4,934

52

1
 %
Global Liquidity and Cash Management
 
4,783

4,247

4,077

536

13
 %
Markets products, Insurance and Investments and Other
8
1,562

1,525

1,457

37

2
 %
Year ended 31 Dec
 
13,223

12,619

12,507

604

5
 %
Adjusted RoRWA (%)
7
2.3

2.1

1.9

 
 
ÑFor footnotes, see page 85.
chart-40e8ad3dea2ade7637ea04.jpg
Change in adjusted profit before tax
+15%
*
Analysis relates to corporate client income which includes total income from GB&M synergy products, including Foreign Exchange and Debt Capital Markets. This measure differs from reported revenue in that it excludes Business Banking and Other and internal cost of funds.
HSBC Holdings plc
19


Global Banking and Markets (‘GB&M’)
GB&M serves approximately 4,100 clients in more than 50 countries and territories. It supports major government, corporate and institutional clients worldwide. Our product specialists continue to deliver a comprehensive range of transaction banking, financing, advisory, capital markets and risk management services.
Key events
The first foreign bank with a majority-owned securities joint venture in China, Qianhai Securities Limited, which will allow us to provide GB&M and CMB clients with a broad spectrum of investment banking and markets services in China.
Issued the world’s first corporate sustainable development bond.
Financial performance
Adjusted profit before tax of $5.8bn was $0.3bn or 5% higher, reflecting a strong revenue performance, partly offset by higher operating expenses, while achieving positive adjusted jaws of 1.3%.
Adjusted revenue of $15.1bn was $0.4bn or 3% higher, with growth in all of our businesses. The increase included a net adverse movement of $0.2bn on credit and funding valuation adjustments. Excluding these movements, adjusted revenue increased by $0.6bn or 4%. The increase in revenue primarily reflected the following:
Revenue growth in all of our transaction banking products, notably GLCM (up $0.3bn) and Securities Services (up $0.2bn). These increases reflected continued momentum as we won and retained client mandates, and benefited from higher interest rates, particularly in Asia and the US.
Global Markets revenue was resilient (up $33m), despite lower volatility in 2017, compared with more robust trading conditions in 2016. In Equities revenue increased by $0.3bn, as we continued to capture market share from Prime Financing products. This was largely offset by Fixed Income, Currencies and Commodities, where revenue decreased by $0.2bn, reflecting subdued trading conditions.
Global Banking revenue was marginally higher than 2016 (up $16m), reflecting growth in lending balances and continued momentum in investment banking products, which broadly offset the effects of tightening spreads on lending in Asia.
Adjusted LICs of $0.5bn were broadly unchanged from the prior year. LICs in 2017 related to two large corporate exposures in Europe, compared with 2016, which included a small number of individually assessed LICs, notably on exposures in the oil and gas, and mining sectors in the US.




Adjusted operating expenses increased by $0.1bn or 1%, reflecting higher performance-related pay, pension and severance costs. Our continued cost management and efficiency improvements, and saves from technology investments, broadly offset the effects of inflation.
We have exceeded the RWA reduction target set in our Investor Update in June 2015, with a cumulative reduction in RWAs from management initiatives of $128bn. This includes a further RWA reduction of $32bn in 2017. Our adjusted RoRWA improved to 1.9% from 1.7% in 2016.
 
 
 
 
 
2017 vs 2016
Management view of adjusted revenue<>
Footnotes
2017
$m

2016
$m

2015
$m

$m

%

Net operating income
3
 
 
 
 
 
Global Markets
 
6,689

6,656

6,010

33

 %
Foreign Exchange
 
2,568

2,764

2,658

(196
)
(7
)%
Rates
 
1,970

2,120

1,404

(150
)
(7
)%
Credit
 
900

781

606

119

15
 %
– FICC
 
5,438

5,665

4,668

(227
)
(4
)%
– Equities
 
1,251

991

1,342

260

26
 %
Global Banking
 
3,807

3,791

3,757

16

 %
Global Liquidity and Cash Management
 
2,197

1,885

1,744

312

17
 %
Securities Services
 
1,746

1,561

1,600

185

12
 %
Global Trade and Receivables Finance
 
700

689

682

11

2
 %
Principal Investments
 
318

226

226

92

41
 %
Credit and funding valuation adjustments
9
(262
)
(51
)
186

(211
)
(414
)%
Other
10
(104
)
(42
)
73

(62
)
(148
)%
Year ended 31 Dec
 
15,091

14,715

14,278

376

3
 %
Adjusted RoRWA (%)
7
1.9

1.7

1.5

 
 
ÑFor footnotes, see page 85.
chart-92a2faa86bbb031eafba04.jpg
Change in adjusted profit before tax
+5%
20
HSBC Holdings plc

Global Private Banking (‘GPB’)
GPB serves high net worth individuals and families, including those with international banking needs.
We provide a full range of private banking services, including Investment Management, which includes advisory and brokerage services, and Private Wealth Solutions, which comprises trusts and estate planning, to protect and preserve wealth for future generations.
Key events
Net new money inflows of $15bn in key markets targeted for growth, especially in Hong Kong.
Significant progress made with repositioning, with outflows of over $15bn in 2017.
Positive momentum with significant growth in discretionary and advisory mandates in 2017.
Financial performance
Adjusted profit before tax of $296m was $24m or 9% higher as a reduction in operating expenses was partly offset by lower revenue. We achieved positive adjusted jaws of 3.2%.
Adjusted revenue of $1.7bn was $45m or 3% lower, reflecting the continued impact of client repositioning. Revenue from the markets that we have targeted for growth increased by 10%. This was mainly in Hong Kong, due to growth in investment revenue reflecting increased client activity, and higher deposit income from wider spreads.
Adjusted LICs of $16m in 2017 primarily related to a single client in the UK.
Adjusted operating expenses of $1.4bn were $85m or 6% lower, mainly as a result of a managed reduction in FTEs and the impact of our cost-saving initiatives.




 
 
 
 
 
2017 vs 2016
Management view of adjusted revenue<>
Footnotes
2017
$m

2016
$m

2015
$m

$m

%

Net operating income
3
 
 
 
 
 
Investment revenue
 
693

733

902

(40
)
(5
)%
Lending
 
387

411

411

(24
)
(6
)%
Deposit
 
401

342

354

59

17
 %
Other
 
222

262

299

(40
)
(15
)%
Year ended 31 Dec
 
1,703

1,748

1,966

(45
)
(3
)%
Adjusted RoRWA (%)
7
1.8

1.6

2.1

 
 
ÑFor footnotes, see page 85.
chart-83c59cb9f9b37add93da04.jpg
Change in adjusted profit before tax
+9%
Corporate Centre
Corporate Centre comprises Central Treasury, including Balance Sheet Management (‘BSM’), our legacy businesses, interests in our associates and joint ventures, central stewardship costs and the UK bank levy.
Financial performance
Adjusted profit before tax of $1.7bn was $0.4bn or 17% lower, reflecting lower revenue and higher operating expenses, partly offset by a fall in LICs.
Adjusted revenue fell by $0.4bn or 27%, mainly due to a decrease of $0.7bn related to the US run-off portfolio with respect to the disposal of the remaining loan portfolio during 2017. In Central Treasury revenue also decreased (down $0.1bn), due to:
higher interest on our debt (up $0.3bn), mainly from higher costs of debt issued to meet regulatory requirements; and
a reduction in revenue in BSM (down $0.3bn) reflecting lower yield rates and increased utilisation of the Group’s surplus liquidity by the global businesses; partly offset by:
favourable fair value movements relating to the economic hedging of interest and exchange rate risk on our long-term debt with long-term derivatives of $0.1bn, compared with adverse movements of $0.3bn in 2016.
Other income increased by $0.4bn, which included revaluation gains on investment properties.
Net loan impairment releases of $182m compared with adjusted LICs of $22m in 2016. This reflected lower LICs in the US run-off portfolio, and higher net releases related to our legacy credit portfolio.
Adjusted operating expenses of $2.1bn were $0.2bn or 8% higher due to investment in regulatory programmes and compliance, partly offset by lower US run-off portfolio costs.
Adjusted income from associates rose by $55m or 2%.
 
 
 
 
 
2017 vs 2016
Management view of adjusted revenue<>
Footnotes
2017
$m

2016
$m

2015
$m

$m

%

Net operating income
3
 
 
 
 
 
Central Treasury
11
1,340

1,454

1,760

(114
)
(8
)%
Legacy portfolios
 
8

724

1,233

(716
)
(99
)%
– US run-off portfolio
 
40

692

1,165

(652
)
(94
)%
– Legacy credit
 
(32
)
32

68

(64
)
(200
)%
Other
12
(128
)
(512
)
(160
)
384

(75
)%
Year ended 31 Dec
 
1,220

1,666

2,833

(446
)
(27
)%
ÑFor footnotes, see page 85.
HSBC Holdings plc
21






How we do business
Supporting sustainable growth
We conduct our business intent on supporting the sustained success of our customers, people and communities.
Customers
We aim to be the world’s leading international bank and strive for excellence.
Our customers are at the heart of everything we do and we are working to make life simpler, faster and better for them.
Understanding our customers
In this section we focus on our global business with the largest amount of customers. We also measure and report on customer data for Retail Banking and Wealth Management (‘RBWM’) and Commercial Banking in another eight markets within our Environmental, Social and Governance (‘ESG’) Update.
Taking responsibility for the service we provide
Operating with high standards of conduct is central to our long-term success and ability to serve customers, and we have clear policies, frameworks and governance in place to support our delivery of that commitment. These cover the way we behave, design products and services, train and incentivise employees, and interact with customers and each other. Our Conduct Framework guides activities to strengthen our business and increases our understanding of how the decisions we make affect customers and other stakeholders. Details on our Conduct Framework are available at www.hsbc.com and for further information on conduct, see pages 84 and 117.
Senior leaders have ultimate responsibility for customer service standards and monitor these through key metrics aligned to performance objectives. These include:
How customers feel about recommending us; and
The speed and quality of complaint handling.
The targets for each of these metrics are carefully set and managed to instil the right behaviours among our employees.
ÑFor more information about what we have done, see our ESG reporting available on www.hsbc.com/our-approach/measuring-our-impact.
Our largest global business
RBWM
Supports approximately 37 million customers worldwide
Our largest markets
United Kingdom
More than $401bn in customer accounts
Hong Kong
More than $477bn in customer accounts

Customer recommendation*
RBWM
chart-dc2b06eb1e744b3680b.jpg chart-b16dcc48f50566a405e.jpg
*Percentage of customers providing an 8 or above score out of 10. In Hong Kong the survey methodology changed in 2017, with surveys migrated from telephone to online. This may affect the comparison with prior year figures.
Complaints resolution
Time taken to resolve complaints (excluding PPI complaints)
chart-36634bafe6ab776977d.jpgchart-2575011da454164111f.jpg
 
Same day or next working day
 
Between 2-5 days
 
Longer than 5 days
*2017 figures do not include First Direct UK complaint volumes, which were not available at time of publication. They are not expected to materially impact results.




22
HSBC Holdings plc

What customers are telling us
In 2017, our CMB and RBWM customers told us there were three main issues that we needed to focus on to improve their experience of our products and services:
What our customers are telling us
Our response
Accessibility
Customers in all of our channels have provided feedback on length of queues in branches, call waiting and handling time in our contact centres, the length of appointments with our relationship managers, and the complexity of logging on to our online and mobile banking.
Increased capacity in our contact centres.
Introduced new multi-channel appointment booking tools.
Added biometrics to make it easier for customers to authenticate themselves using their unique voice and digital fingerprint.
Complexity
Customers told us our processes and procedures are too complicated which affects the quality and length of time required to service our customers day-to-day.
Delivered training to 53,500 employees globally to use plain language in communicating with our customers.
For our commercial customers we have simplified options on their online platform, HSBCnet.
Fees and charges
Our industry can be complex, and our customers can find it difficult to understand when and why they will be charged for our services.
Introduced instantaneous text message notifications in Hong Kong to provide application status and account servicing updates. This has helped many customers to better manage their accounts and to avoid incurring charges.
A digital transformation
Our customers are becoming increasingly digitally oriented in their everyday lives. This means their expectations of us are changing.
Customers are now using branches less often. In the future, we will have fewer – but better – branches and our front-line employees will be using a greater range of technology to support all our customers’ needs.
HSBC Holdings plc
23

Our employees
Our employees are key to our success. We are focused on creating a diverse and inclusive environment where people can speak up, build their skills and develop their careers. We want our employees to feel that they can contribute to our purpose and fulfil their potential with our support.
Giving employees a voice
Since 2012, we have been hosting HSBC Exchange to give employees a voice. Exchanges are meetings with no agendas, where managers and leaders simply listen and employees do the talking. It’s an innovative approach that provides a forum for people to share their views on any issue and talk about what matters most to them.
Our monthly employee survey – Snapshot – tests the views of a representative sample of colleagues on topics such as our strategy, regulation, culture and customer experience. Results are presented to the Group Management Board and relevant executive committees of the global functions and businesses, regions and countries.
Whilst 77% of employees feel able to speak up when they see behaviour which they think is wrong and 72% believe that HSBC is genuine in its commitment to encourage colleagues to speak up, a smaller proportion of employees – 61% – say that where they work people can state their opinions without fear of negative consequence.
The insight from Snapshot surveys, Exchanges and other employee engagement initiatives, informs policy, process and strategy across the Group and helps leadership make decisions that take employees into account.
Creating a diverse and inclusive environment
We believe that a diverse and inclusive workforce is critical to running a sustainable and successful business. Our approach aims to increase and leverage diversity of thought to drive greater innovation, better manage risks, enhance collaboration and improve workforce agility.
Our commitment
We are committed to enabling a thriving environment where people are valued, respected and supported. We create business value by drawing on the richness of ideas, backgrounds, styles and perspectives of our employees.
Gender balance at senior leadership
We focus on improving gender balance in senior leadership across the Group. Our objective was for the female share of our senior leadership** to be more than 26.3% by the end of 2017, and we achieved 26.8%. This is a 1.4 percentage point increase on our 2016 year-end position and is an improvement to the trend year on year.
Employee networks
Our seven global employee networks play a key role in building community, highlighting opportunities and achieving our diversity and inclusion ambitions. The networks focus on gender, age, ethnicity, LGBT+, faith, working parents and carers, and ability. Additionally we have common interest groups sharing experiences and engaging with others both internally and externally.




chart-3542335a22cc7ef8dc3.jpg
Employee retention
85.7%
(2016: 81.7%)
chart-77a44dcc122aaeb9846.jpg
 
Male
 
Female
chart-9e26b043d6eadfa0fd1.jpg
*Combined Executive Committee and direct reports was reported as at 30 June 2017 to the UK’s Hampton Alexander Review and includes the Executive Directors, Group Managing Directors and their direct reports (excluding administrative staff).
**Senior leadership refers to employees performing roles classified as 0, 1, 2 or 3 in our Global Career Band Structure.
Whistleblowing
We work hard to create an environment in which people feel able to speak up, but understand that employees may not always feel comfortable raising concerns through their regular escalation channels. There will also be some circumstances which require more discretion. We operate a global whistleblowing standard, HSBC Confidential, which allows individuals to report matters of concern confidentially. We also maintain an external email address for concerns about accounting and internal financial controls or auditing matters (accountingdisclosures@hsbc.com). The Group has a strict policy prohibiting retaliation against those who raise concerns. All allegations of retaliation reported are escalated to senior management.
24
HSBC Holdings plc




HSBC Confidential is overseen by our Conduct & Values Committee and Group Audit Committee. Investigations are carried out thoroughly and independently, drawing on the expertise of a variety of teams, including Regulatory Compliance, Human Resources, Legal, Financial Crime Risk, Information Security and Internal Audit.
1,585
Cases were raised during 2017 (2016: 1,102 cases). All cases are subject to investigation. In 30% of the closed cases in 2017 (2016: 34%), allegations were substantiated in whole or in part and appropriate remedial action taken.
Common themes:
Allegations of internal fraud by staff.
Issues with staff behaviour and personal conduct.
Weaknesses in adherence to information security protocols.
Other
HSBC’s purpose is to connect people with opportunities. With this purpose comes the responsibility to protect our customers, our communities and the integrity of the financial system.
Non-financial risks
We use a range of tools to monitor and manage our non-financial risks including our risk appetite, risk map, top and emerging risks and stress testing processes. In 2017, HSBC completed a multi-year Operational Risk Transformation Programme, the purpose of which was to make it easier to manage operational risk consistently in HSBC. This included the implementation of a new operational risk management framework (‘ORMF’) and system of record. The new ORMF provides an end-to-end view of non-financial risks, enhancing focus on associated controls and the capital we hold. It provides a platform to drive forward-looking risk awareness and assist management focus. Further details may be found in the Risk section on page 95 and page 117.
Financial crime compliance
HSBC operates in many countries around the world. As part of financial crime risk management, we have built a strong financial crime compliance system with a global footprint, and have a dedicated Financial Crime Risk team. We have invested heavily in training and communication for all employees. Our risk appetite has been set formally. Further details may be found in the Risk section on page 95.
Anti-bribery and corruption
As part of financial crime risk management, we have a global anti-bribery and corruption policy. The policy gives practical effect to global initiatives such as the Organisation of Economic Co-operation and Development (‘OECD’) Convention on Combating Bribery of Foreign Public Officials in International Business Transactions and Principle 10 of the United Nations Global Compact. We continue to invest in technology and training; in 2017 98% of our workforce was trained via a mandatory e-learning course ‘My Financial Crime Risk Responsibilities’.
Tax
Total: $6.8bn
chart-66234184f030b519f50.jpg
We apply the letter and the spirit of the law in all territories where we operate. We have adopted the UK tax authority’s Code of Practice on Taxation for 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 facilitate tax evasion. HSBC continues to apply 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 BEPS or similar initiatives adopted by national governments to adversely impact HSBC’s results.
Human rights
Our statement on modern slavery can be found on www.hsbc.com/our-approach/measuring-our-impact. Our supplier code of




conduct takes into account legislation on modern slavery and human rights; over 4,000 of our largest suppliers have signed the code.
Supporting sustainable growth
In 2017 we launched our strategy to support sustainable growth, which focuses on three main areas: sustainable finance; sustainable networks and entrepreneurship; and future skills. Full details are available in our ESG Supplement released in November 2017. This year we contributed $136m to charitable programmes and our employees volunteered 272,000 hours to community activities during the working day. We continue our flagship environmental partnership, the HSBC Water Programme.

ÑFor more information about what we have done, see our ESG reporting available on www.hsbc.com/our-approach/measuring-our-impact.
HSBC Holdings plc
25


Sustainable finance
Each and every one of us has a stake in developing a sustainable economic system. It is the combined responsibility of all players in society to respond to climate change, rapid technological evolution and continuing globalisation to secure a prosperous future.
Since its foundation in 1865, HSBC has adapted to and helped serve the needs of a changing world. It has financed economic growth, fostered international trade and overcome events such as economic crises. We recognise that governments, corporations, the financial system and civil society are all stakeholders in mitigating the effects of climate change and meeting sustainability challenges.
Now more than ever, there is a need to develop the skills, business innovation and low-carbon solutions needed to secure long-term prosperity for all. For HSBC, these are the key elements of sustainable growth that HSBC can influence.
Our network covers many of the world’s largest and fastest growing trade corridors and economic zones. As such, we are uniquely positioned to provide the connections needed to foster sustainable growth across borders and geographies.
We have a proud record of supporting the communities and environments in which we operate and our global sustainability strategy builds on this legacy.
HSBC’s sustainable finance commitments
In our November Environmental, Social, Governance (‘ESG’) Update, we published our five sustainable finance commitments. In this section we summarise key aspects of each commitment we aim to fulfil.
ÑFor our full commitments see our ESG Supplement released in November 2017.
Provide $100bn of sustainable financing and investment by 2025
We provide $100bn of financing and investments, including facilitation, to develop clean energy, lower-carbon technologies, and projects that contribute to the delivery of the Paris Agreement and the UN Sustainable Development Goals.
$10.5bn
Volume of green, social, sustainability bonds facilitated by HSBC in 2017*
HSBC Asset Management launched three low-carbon funds in 2017.
*Source: Dealogic HSBC portion of notional value.
Source 100% of our electricity from renewable sources by 2030, with an interim target of 90% by 2025
We source 100% renewable electricity via direct investment or purchases via power purchase agreements that directly help the financing of new renewable electricity assets.
27%
of signed renewable power purchase agreements (2016: 23%).
Reduce our exposure to thermal coal and actively manage the transition path for other high-carbon sectors
To reduce our exposure, we expect to discontinue the financing of:
new thermal coal mines or new customers dependent on thermal coal mining; and
new coal-fired power plants in developed countries.
In addition we expect to:
routinely reinforce lending criteria in developing countries, taking into account the state of climate transition and access to alternative sources of energy in individual countries; and
actively engage with clients in high-carbon sectors to support and influence their transition strategies, review their approach to reduce greenhouse gas emissions and assess their exposure to potentially stranded assets.
Adopt the recommendations of the Task Force on Climate-related Financial Disclosures (‘TCFD’) to improve transparency
The Financial Stability Board (‘FSB’) established the Task Force on Climate-related Financial Disclosures in 2015 to develop recommendations for more effective and efficient climate-related disclosures. This year, HSBC is reporting qualitatively on the




governance, strategy and risk management components of the recommendations published in 2017. See our first TCFD disclosure on page 27.
Lead and shape the debate around sustainable finance and investment
We aim to do this in two ways:
Establish a Centre of Sustainable Finance to provide thought leadership about climate change and the role of the financial services sector.
Drive the sustainable finance agenda by promoting the development of sector activities (such as industry-wide definitions, standards, tools and metrics) to improve market analysis of sustainability issues and impacts.
20
Number of Sustainability-focused industry forums of which HSBC is a member.
ÑFor more information about what we have done, see our ESG reporting available on www.hsbc.com/our-approach/measuring-our-impact.
26
HSBC Holdings plc

Task Force on Climate-related Financial Disclosures (‘TCFD’)

Initial response to the Financial Stability Board
Reducing global carbon dioxide emissions is a critical challenge for everyone. We recognise its importance and seek to be a leader in managing climate change risk while developing opportunities with – and for – our customers. We welcome the new disclosure recommendations from the FSB taskforce, which assist the understanding of climate-related risks, and we were a signatory to the June 2017 TCFD report. This represents our first disclosure under the framework. We recognise this will evolve and expand over time.
Governance
Sustainability is a key concern of the HSBC Group Management Board, with five presentations taking place during 2017.
HSBC’s 2016 Statement on Climate Change may be found on our website at www.hsbc.com/our-approach/measuring-our-impact. The site gives information on our approach to low/high carbon transition, managing our direct impact and partnerships.
Our Climate Business Council (‘CBC’), established in 2010, is an internal strategic committee whose role is to coordinate across the bank, identifying and developing products and services to meet customers’ sustainable finance needs. There is also a group-wide ESG steering group, chaired by the Group Finance Director, leading our approach to ESG issues, including external disclosure and materiality considerations.
Strategy
HSBC’s strategy is to connect customers to opportunities across a diversified range of products and services. This, along with our geographical presence in developing markets, gives us a unique opportunity to engage with our customers and support their transition strategies. HSBC has committed to directing $100bn of financing and investment to the low-carbon economy by 2025.
In order to facilitate the transition to the low-carbon economy for us and our clients, during 2017 we created a ‘Global Head of Sustainable Finance’ and an ‘HSBC Centre of Sustainable Finance’. Additionally, via training, we have expanded our in-house sustainability expertise to approximately 1,300 employees across the Group. We are committed to strengthening our role as a thought leader in the financial services industry.
During 2017, HSBC’s Global Research Climate Change Centre was ranked number one by Extel and HSBC was the second-ranked bookrunner by Dealogic for green, social and sustainability bonds. We will work with our customers in all our businesses to develop sustainable products and support innovation.
Risk Management
Climate risk, both physical and transition, is an increasing risk. During 2017 the Executive Risk Management Committee approved a framework for measuring transition risks across our loan portfolio. We have identified the higher transition risk sectors as oil and gas, metals and mining, power and utilities, automobiles, building and construction, and chemicals. We actively engage with clients in these sectors to support their transition strategies. We monitor and report our exposure internally, and will do so externally in 2018. Over time we expect a reduction in the carbon intensity of our portfolio.
Our Sustainability risk policies cover all our lending to sensitive sectors and we apply the Equator Principles to project finance. Details are available at www.hsbc.com/our-approach/measuring-our-impact. We also manage the physical risks to our global network relating to climate change by undertaking regular operational stress testing and contingency planning.
Next steps
The HSBC Centre of Sustainable Finance, Risk Management and Finance will work with external experts to develop climate-related scenario analysis and related disclosures.
HSBC Holdings plc
27


Risk overview
We actively manage risk to protect and enable the business.
Managing risk
HSBC has maintained a conservative and consistent approach to risk throughout its history, helping to ensure we protect customers’ funds, lend responsibly and support economies. By carefully aligning our risk appetite to our strategy, we aim to deliver sustainable long-term shareholder returns.




All employees are responsible for the management of risk, with the ultimate accountability residing with the Board. We have a strong risk culture, which is embedded through clear and consistent communication and appropriate training for all employees. A comprehensive risk management framework is applied throughout the Group, with governance and corresponding risk management tools. This framework is underpinned by our risk culture and reinforced by the HSBC Values.
Our Global Risk function oversees the framework and is led by the Group Chief Risk Officer, an executive Director. It is independent from the global businesses, including our sales and trading functions, to provide challenge, appropriate oversight and balance in risk/reward decisions.
HSBC’s risk appetite defines our desired forward-looking risk profile, and informs the strategic and financial planning process.
It is articulated in our risk appetite statement, which is approved by the Board. Key elements include:
risks that we accept as part of doing business, such as credit risk and market risk;
risks that we incur as part of doing business, such as operational risk, which are actively managed to remain below an acceptable tolerance; and
risks for which we have zero tolerance, such as knowingly engaging in activities where foreseeable reputational risk has not been considered.
Internal stress tests are an important element in our risk management and capital management frameworks. They include potential adverse macroeconomic, geopolitical and operational risk events, and other potential events that are specific to HSBC. The selection of scenarios reflects our top and emerging risks identification process and our risk appetite. Stress testing analysis helps management understand the nature and extent of vulnerabilities to which the bank is exposed.
We operate a comprehensive stress testing programme to help ensure the strength and resilience of HSBC, taking part in regulators’ as well as our own stress tests. In 2017, the results for HSBC as published by the Bank of England (‘BoE’) showed that our capital ratios, after taking account of CRD IV restrictions and strategic management actions, exceeded the BoE’s requirements. This outcome reflected our strong capital position, conservative risk appetite and diversified geographical and business mix. It also reflected our ongoing strategic actions, including the sale of operations in Brazil, ongoing RWA reduction initiatives and continued sales from our US CML run-off portfolio.
Key risk appetite metrics
Component
Measure
Risk appetite
2017

Returns
Return on average ordinary shareholders’ equity
≥10.0%
5.9
%
Capital
Common equity tier 1 ratio – CRD IV end point basis
≥11.5%
14.5
%
Loan impairment charges
Loan impairment charges as % of advances: RBWM
≤0.50%
0.37
%
Loan impairment charges as % of advances: wholesale (CMB, GB&M and GPB)
≤0.45%
0.27
%
ÑOur risk management framework and risks associated with our banking and insurance manufacturing operations are described on pages 106 and 118, respectively.
Top and emerging risks
Our top and emerging risks framework helps enable us to identify current and forward-looking risks so that we may take action to either prevent them materialising or limit their effect.
Top risks are those that may have a material impact on the financial results, reputation or business model of the Group in the year ahead. Emerging risks are those that have large unknown components and may form beyond a one-year horizon. If these risks occurred, they could have a material effect on HSBC.
During 2017, we made three changes to our top and emerging risks to reflect our assessment of their potential effect on HSBC. The thematic issue ‘Regulatory focus on conduct of business and financial crime’ was removed and ‘Financial crime risk environment’ was added to further emphasise the heightened focus on, and robust oversight, monitoring and active risk management of, financial crime risks. In addition, we removed the thematic issue ‘US DPA and Related Agreements and Consent Orders’ following the expiration in December 2017 of the AML DPA relating to past anti-money laundering and sanctions deficiencies.
In addition, three thematic issues were renamed to better reflect the challenges facing the Group. We use the new name in the table opposite, which summarises our top and emerging risks.
ÑOur current top and emerging risks are summarised on the next page and discussed in more detail on page 95.
ÑOur approach to identifying and monitoring top and emerging risks is described on page 107.
28
HSBC Holdings plc





 
Risk
Trend
Mitigants
 
Externally driven
 
 
 
Economic outlook and capital flows


^


We actively monitor our wholesale credit and trading portfolios, including undertaking stress tests, to identify sectors and clients that may come under stress due to economic conditions in the eurozone, mainland China and in the UK as negotiations to exit from the EU continue.
 
Geopolitical risk
^
We continually assess the impact of geopolitical events on our businesses and exposures, and take steps to mitigate them, where required, to help ensure we remain within our risk appetite. We have also strengthened physical security at our premises where the risk of terrorism is heightened.

l
The credit cycle
>
We continue to undertake detailed reviews of our portfolios and are proactively assessing customers and sectors likely to come under stress as a result of geopolitical or macroeconomic events, reducing limits where appropriate.

 
Cyber threat and unauthorised access to systems
^
We continue to strengthen our cyber control framework and implement initiatives to improve our resilience and cybersecurity capabilities, including threat detection and analysis, access control, payment systems controls, data protection and backup and recovery.


l
Regulatory, technological and sustainability developments including conduct, with adverse impact on business model and profitability
>


We proactively engage with regulators wherever possible to help ensure new regulatory requirements are effectively implemented, and work with them in relation to their investigations into historical activities. We also engage with non-governmental organisations to help ensure our policies address environmental concerns.

 
Financial crime risk environment
>
We continue to develop and enhance the Financial Crime Risk function and augment our risk management capabilities to further improve our financial crime detection and compliance capabilities. We will continue to take steps to enhance our defences against financial crime across our operations globally to help ensure our Global Standards are sustainable over the long term.

 
Internally driven
 
 
IT systems infrastructure and resilience
>
We continue to monitor and improve service resilience across our technology infrastructure, enhancing our problem diagnosis/resolution and change execution capabilities, reducing service disruption to our customers.


 
Impact of organisational change and regulatory demands on employees
>
We continue to focus on resourcing and employee development to meet regulatory changes as well as to maintain and enhance our leadership succession strength.


 
Execution risk
>
The Group Change Committee oversees the progress of the highest priority programmes, underpinning the implementation of our strategic actions to help ensure that we achieve a consistent on time, on budget and on quality delivery across these critical initiatives.


l
Risks arising from the receipt of services from third parties
>
We have strengthened essential governance processes and relevant policies relating to how we identify, assess, mitigate and manage risks across the range of third parties with which we do business. This includes control monitoring and assurance throughout the third-party lifecycle.


 
Enhanced model risk management expectations
>

We have strengthened our model risk management framework by establishing an independent second line of defence Model Risk Management sub-function, and we continue to enhance our existing policy and standards in order to address evolving regulatory, external and internal requirements.


 
Data management
^

We continue to improve our insights, consistency of data aggregation, reporting and decisions through ongoing enhancement of our data governance, data quality and architecture framework.


^
Risk heightened during 2017
>
Risk remained at the same level as 2016
Thematic risk renamed during 2017
HSBC Holdings plc
29

Remuneration
Our remuneration policy supports the achievement of our strategic objectives by balancing reward for short- and long-term sustainable performance.
Remuneration principles
The remuneration strategy for our employees is based on a series of key principles.
What we do
Focus on total compensation with a strong link between pay and performance
Judge not only what is achieved, but also how it is achieved, in line with the 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 stakeholder interests
Apply consequence management to strengthen the alignment between risk and reward

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 the 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

Embedding our values in our remuneration framework
Instilling the right behaviours, and driving and encouraging actions that are aligned to organisational values and expectations, are essential. We therefore have a number of programmes to reinforce our values.
Pay
Outcomes
Positive adjustments
- Individuals who exhibit exceptional conduct and behaviours which go beyond the normal course of an employee’s responsibilities, and set an outstanding example of our Values-aligned behaviours and conduct expectations, are awarded positive variable pay adjustments during the year.
Global consequence management policy
- This provides a set of guidelines designed to align the handling of employee conduct breaches, and support line managers in delivering greater consistency of outcomes and messages.
- Ensures clear messaging to employees on the impact of any inappropriate conduct as part of reward communications.
Global recognition programme
- Introduced from July 2015 as the Group’s global peer-to-peer recognition programme, designed to incentivise compliance by allowing colleagues to recognise and reward positive behaviours.
- Includes communication of positive stories on our intranet (HSBC Now).

Performance management
- Employees set objectives, which connect business, team and individual goals, and are guided by expected behaviours aligned to our core values.
- All employees receive a behaviour rating based on their adherence to HSBC Values to ensure performance is judged not only on what is achieved, but also on how it is achieved.
- Employees and managers are encouraged to hold frequent conversations throughout the year, exploring alternative ways to stay connected outside the regular performance management cycle using a mix of informal and formal check-ins on a range of topics, including performance, development and well-being.

30
HSBC Holdings plc

How we set our variable pay pool
When deciding on the variable pay pool, the Remuneration Committee considers a number of factors, which are set out in the following table:
Performance and risk appetite statement
– Our variable pay pool takes into account our performance in the context of our risk appetite.

Countercyclical funding methodology
– To dampen effects of economic cycles, the variable pay pool’s size has a floor and a ceiling, and we also limit the payout ratio as performance increases to prevent the risk of inappropriate behaviour.

Distribution of profits
– Our funding methodology ensures that the distribution of post-tax profit between capital, shareholders and variable pay is appropriate, and that the majority of post-tax profit is allocated to capital and shareholders.


Commerciality and affordability
– We face challenges arising from being headquartered in the UK, which has more stringent reward practices. We take into account these challenges in determining the size of the variable pay pool to ensure we can continue to attract and retain talent in key markets.

Our variable pay pool is $3,303m, an increase of 8.8% compared with 2016.
chart-8c31c87bf95c5f40e79.jpg




Variable pay for our executive Directors
Variable pay for our executive Directors is driven by scorecard achievement. Targets in the scorecard are set according to our key performance indicators to ensure linkages between our strategy and remuneration policies and outcome.
ÑSee the Directors’ Remuneration Report on page 191 for further details.

Remuneration for our executive Directors
Our remuneration policy for executive Directors was approved in our 2016 Annual General Meeting (‘AGM’) and is intended to apply for three performance years until the AGM in 2019. Full details of our remuneration policy can be found online in our Directors’ Remuneration Policy Supplement 2017.
The table below shows the amount our executive Directors earned in 2017.
ÑFor details of Directors’ pay and performance for 2017, see the Directors’ Remuneration Report on page 186.
(Audited)
(in £000)
Base salary

Fixed pay allowance

Cash in lieu of pension

Annual incentive

LTI1

Sub-total

Taxable benefits

Non-taxable benefits

Notional returns

Total

Douglas Flint2
2017
1,125


338



1,463

83

64


1,610

2016
1,500


450



1,950

100

86


2,136

Stuart Gulliver3
2017
1,250

1,700

375

2,127


5,452

500

71

63

6,086

2016
1,250

1,700

375

1,695


5,020

557

71

27

5,675

Iain Mackay
2017
700

950

210

1,334


3,194

64

37

42

3,337

2016
700

950

210

987


2,847

52

37

17

2,953

Marc Moses
2017
700

950

210

1,358


3,218

16

38

42

3,314

2016
700

950

210

1,005


2,865

15

38

18

2,936

1.
The first LTI award was made in February 2017, with a performance period ending in 2019. Vesting of the first LTI award will be included in the single figure table for the financial year ending on 31 December 2019.
2.
Douglas Flint stepped down from the Board on 30 September 2017 and his remuneration reflects time served as an executive Director. Details on retirement arrangements are provided on page 196.
3.
To meet regulatory deferral requirements for 2017, 60% of the annual incentive award of Stuart Gulliver has been deferred in shares and will vest in five equal instalments between the third and seventh anniversary of the grant date.
HSBC Holdings plc
31



 

Report of the Directors | Financial summary

Financial summary
 
Page
Use of non-GAAP financial measures
Critical accounting estimates and judgements
Consolidated income statement
Group performance by income and expense item
Net interest income
Net fee income
Net trading income
Net income/(expense) from financial instruments designated at fair value
Gains less losses from financial investments
Net insurance premium income
Other operating income
Net insurance claims and benefits paid and movement
in liabilities to policyholders
Loan impairment charges and other credit risk provisions
Operating expenses
Share of profit in associates and joint ventures
Tax expense
2016 compared with 2015
Consolidated balance sheet
Movement in 2017
Average balance sheet
Average balance sheet and net interest income
Analysis of changes in net interest income and net interest expense
Short-term borrowings
Contractual obligations
60
Loan maturity and interest sensitivity analysis
60
Deposits
61
Certificates of deposit and other time deposits
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 211.
To measure our performance we also use non-GAAP financial measures, including those derived from our reported results that eliminate factors that distort year-on-year comparisons. The ‘adjusted performance’ measure used throughout this report is described below, and where others are used they are described. All non-GAAP financial measures are reconciled to the closest reported financial measure.
The global business segmental results on pages 64 to 82 are presented on an adjusted basis in accordance with IFRS 8 ‘Operating Segments’ as detailed in ‘Basis of preparation’ on page 64.
Adjusted performance
Adjusted performance is computed by adjusting reported results for the effects of foreign currency translation differences and significant items, which both distort year-on-year comparisons.
Foreign currency translation differences are described below. ‘Significant items’ refers collectively to the items that management and investors would ordinarily identify and consider separately to understand better the underlying trends in the business.
We consider adjusted performance provides useful information for investors by aligning internal and external reporting, identifying and quantifying items management believes 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 2017. We exclude them to derive constant currency data, allowing us to assess balance sheet and income statement performance on a like-for-like basis and better understand the underlying trends in the business.
Foreign currency translation differences
Foreign currency translation differences for 2017 are computed by retranslating into US dollars for non-US dollar branches, subsidiaries, joint ventures and associates:
the income statements for 2016 and 2015 at the average rates of exchange for 2017; and
the balance sheets at 31 December 2016 and 31 December 2015 at the prevailing rates of exchange on 31 December 2017.
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 period on the basis described above.
Changes to presentation from 1 January 2017
Own credit spread
‘Own credit spread’ includes the fair value movements on our long-term debt attributable to credit spread where the net result of such movements will be zero upon maturity of the debt. This does not include fair value changes due to own credit risk in respect of trading liabilities or derivative liabilities. On 1 January 2017, HSBC adopted the requirements of IFRS 9 ‘Financial Instruments’ relating to the presentation of gains and losses on financial liabilities designated at fair value. As a result, the effects of changes in those liabilities’ credit risk is presented in other comprehensive income. These requirements were adopted in the separate financial statements of HSBC Holdings plc on 1 January 2016. Refer to ‘Compliance with International Financial Reporting Standards’ on page 222 for further detail.
Adjusted performance – foreign currency translation of significant items
The foreign currency translation differences related to significant items are presented as a separate component of significant items. This is considered a more meaningful presentation as it allows better comparison of year-on-year movements in performance.
Significant items
The tables on pages 67 to 69 and pages 78 to 80 detail the effects of significant items on each of our global business segments and geographical regions in 2017, 2016 and 2015.
Critical accounting estimates and judgements
The results of HSBC reflect the choice of accounting policies, assumptions and estimates that underlie the preparation of HSBC’s consolidated financial statements. The significant accounting policies, including the policies which include critical accounting estimates and judgements, are described in Note 1.2 on the Financial Statements. The accounting policies listed below are highlighted as they involve a high degree of uncertainty and have a material impact on the financial statements:
Impairment of loans and advances: For collective impairment allowances, estimation methods include the use of historical information supplemented by significant management judgement about whether current economic and credit conditions are such that actual incurred losses are likely to be greater or less than experienced in the past. For individually assessed loans, judgements are made about the financial condition of individual borrowers, which can involve a wide range of factors relating to their business and the value of any

32
HSBC Holdings plc


security. The exercise of judgement requires the use of assumptions that are highly subjective and sensitive, in particular to changes in economic and credit conditions across a large number of geographical areas. See Note 1.2(d) on page 226.
Deferred tax assets: The most significant judgements relate to those made in respect of expected future profitability. See Note 1.2(h) on page 230.
Valuation of financial instruments: In determining the fair value of financial instruments a variety of valuation techniques are used, some of which feature significant unobservable inputs and are subject to substantial uncertainty. See Note 1.2(c) on page 225.
Impairment of interests in associates: Impairment testing involves significant judgement in determining the value in use, and in particular estimating the present values of cash flows expected to arise from continuing to hold the investment,
 
based on a number of management assumptions. See Note 1.2(a) on page 224.
Goodwill impairment: A high degree of uncertainty is involved in estimating the future cash flows of the cash generating units (‘CGUs’) and the rates used to discount these cash flows. See Note 1.2(a) on page 224.
Provisions: A high degree of judgement may be required due to the high degree of uncertainty associated with determining whether a present obligation exists, and estimating the probability and amount of any outflows that may arise. See Note 1.2(i) on page 230.
Given the inherent uncertainties and the high level of subjectivity involved in the recognition or measurement of the items above, it is possible that the outcomes in the next financial year could differ from the expectations on which management’s estimates are based, resulting in the recognition and measurement of materially different amounts from those estimated by management in these Financial Statements.
Consolidated income statement
Summary consolidated income statement
 
2017

2016

2015

2014

2013

 
$m

$m

$m

$m

$m

Net interest income
28,176

29,813

32,531

34,705

35,539

Net fee income
12,811

12,777

14,705

15,957

16,434

Net trading income
7,719

9,452

8,723

6,760

8,690

Net income/(expense) from financial instruments designated at fair value
3,698

(2,666
)
1,532

2,473

768

Gains less losses from financial investments
1,150

1,385

2,068

1,335

2,012

Dividend income
106

95

123

311

322

Net insurance premium income
9,779

9,951

10,355

11,921

11,940

Other operating income/(expense)
337

(971
)
1,055

1,131

2,632

Total operating income
63,776

59,836

71,092

74,593

78,337

Net insurance claims and benefits paid and movement in liabilities to policyholders
(12,331
)
(11,870
)
(11,292
)
(13,345
)
(13,692
)
Net operating income before loan impairment charges and other
credit risk provisions
51,445

47,966

59,800

61,248

64,645

Loan impairment charges and other credit risk provisions
(1,769
)
(3,400
)
(3,721
)
(3,851
)
(5,849
)
Net operating income
49,676

44,566

56,079

57,397

58,796

Total operating expenses
(34,884
)
(39,808
)
(39,768
)
(41,249
)
(38,556
)
Operating profit
14,792

4,758

16,311

16,148

20,240

Share of profit in associates and joint ventures
2,375

2,354

2,556

2,532

2,325

Profit before tax
17,167

7,112

18,867

18,680

22,565

Tax expense
(5,288
)
(3,666
)
(3,771
)
(3,975
)
(4,765
)
Profit for the year
11,879

3,446

15,096

14,705

17,800

Attributable to:
 
 
 
 
 
– ordinary shareholders of the parent company
9,683

1,299

12,572

13,115

15,631

– preference shareholders of the parent company
90

90

90

90

90

– other equity holders
1,025

1,090

860

483

483

– non-controlling interests
1,081

967

1,574

1,017

1,596

Profit for the year
11,879

3,446

15,096

14,705

17,800

Five-year financial information
 
 
2017

2016

2015

2014

2013

 
Footnotes
$

$

$

$

$

Basic earnings per share
 
0.48

0.07

0.65

0.69

0.84

Diluted earnings per share
 
0.48

0.07

0.64

0.69

0.84

Dividends per ordinary share
13
0.51

0.51

0.50

0.49

0.48


 
%

%

%

%

%

Dividend payout ratio
14
106.3

728.6

76.5

71.0

57.1

Post-tax return on average total assets
 
0.5

0.1

0.6

0.5

0.7

Return on average risk-weighted assets
15
2.0

0.7

1.6

1.5

2.0

Return on average ordinary shareholders’ equity
 
5.9

0.8

7.2

7.3

9.2

Average foreign exchange translation rates to $:
 





$1: £
 
0.777

0.741

0.654

0.607

0.639

$1: €
 
0.887

0.904

0.902

0.754

0.753

For footnotes, see page 85.
Unless stated otherwise, all tables in the Annual Report and Accounts 2017 are presented on a reported basis.
For a summary of our financial performance in 2017, see page 14.
For further financial performance data for each global business and geographical region, see pages 64 to 75 and 76 to 82, respectively.

HSBC Holdings plc
33


Report of the Directors | Financial summary

Group performance by income and expense item
Net interest income
 
 
2017

2016
2015
 
Footnotes
$m

$m

$m

Interest income
 
40,995

42,414

47,189

Interest expense
 
(12,819
)
(12,601
)
(14,658
)
Net interest income
 
28,176

29,813

32,531

Average interest-earning assets
 
1,726,120

1,723,702

1,726,949

 
 
%

%

%

Gross interest yield
16
2.37

2.46

2.73

Less: cost of funds
 
(0.88
)
(0.87
)
(1.00
)
Net interest spread
17
1.49

1.59

1.73

Net interest margin
18
1.63

1.73

1.88

For footnotes, see page 85.
In July 2016, we completed the sale of operations in Brazil. During 2016, we earned net interest income of $0.9bn in Brazil from
 
average interest earning assets of $25.8bn. In 2016, our net interest margin excluding Brazil was 1.70%.
Summary of interest income by type of asset
 
 
2017
2016
2015
 
 
Average
balance

Interest
income

Yield
Average
balance

Interest
income

Yield
Average
balance

Interest
income

Yield
 
Footnotes
$m

$m

%
$m

$m

%
$m

$m

%
Short-term funds and loans and advances to banks
 
236,126

2,030

0.86
203,799

1,510

0.74
221,924

2,277

1.03
Loans and advances to customers
 
902,214

28,751

3.19
865,356

29,272

3.38
909,707

33,104

3.64
Reverse repurchase agreements – non-trading
 
173,760

2,191

1.26
168,207

1,227

0.73
162,308

1,301

0.80
Financial investments
 
389,807

7,440

1.91
430,775

7,248

1.68
396,113

7,508

1.90
Other interest-earning assets
 
24,213

583

2.41
55,565

3,157

5.68
36,897

2,999

8.13
Total interest-earning assets
 
1,726,120

40,995

2.37
1,723,702

42,414

2.46
1,726,949

47,189

2.73
Trading assets and financial assets designated at fair value
19, 20
186,673

4,245

2.27
179,780

3,897

2.17
195,285

4,626

2.37
Impairment allowances
 
(7,841
)



(9,127
)



(10,606
)



Non-interest-earning assets
 
616,688




653,115




682,143




Year ended 31 Dec
 
2,521,640

45,240

1.79
2,547,470

46,311

1.82
2,593,771

51,815

2.00
For footnotes, see page 85.
Summary of interest expense by type of liability and equity
 
 
2017
2016
2015
 
 
Average
balance

Interest
expense

Cost
Average
balance

Interest
expense

Cost
Average
balance

Interest
expense

Cost
 
Footnotes
$m

$m

%
$m

$m

%
$m

$m

%
Deposits by banks
21
47,337

451

0.95
49,782

342

0.69
55,863

378

0.68
Financial liabilities designated at fair value – own debt issued
22
60,566

1,261

2.08
62,042

942

1.52
58,489

717

1.23
Customer accounts
23
1,094,920

5,405

0.49
1,074,661

5,492

0.51
1,075,901

7,401

0.69
Repurchase agreements – non-trading
 
136,561

1,665

1.22
118,789

626

0.53
117,947

355

0.30
Debt securities in issue
 
108,677

3,130

2.88
114,343

2,807

2.45
129,039

3,521

2.73
Other interest-bearing liabilities
 
7,009

907

12.94
22,387

2,392

10.68
28,396

2,286

8.05
Total interest-bearing liabilities
 
1,455,070

12,819

0.88
1,442,004

12,601

0.87
1,465,635

14,658

1.00
Trading liabilities and financial liabilities designated at fair value (excluding own debt issued)
 
153,776

2,325

1.51
138,486

1,986

1.43
151,294

2,071

1.37
Non-interest bearing current accounts
 
197,104



184,016



190,914



Total equity and other non-interest bearing liabilities
 
715,690



782,964



785,928



Year ended 31 Dec
 
2,521,640

15,144

0.60
2,547,470

14,587

0.57
2,593,771

16,729

0.64
For footnotes, see page 85.

34
HSBC Holdings plc


Significant items and currency translation
 
2017

2016

 
$m

$m

Significant items
(108
)
1,110

– customer redress programmes
(108
)
2

– trading results from disposed-of operations in Brazil

949