Last checked at 20 Mar 2015 17:00
2 Net income/(expense) from financial instruments designated at fair value
Accounting policy
Net income/(expense) from financial instruments designated at fair value includes: · all gains and losses from changes in the fair value of financial assets and liabilities designated at fair value through profit or loss, including liabilities under investment contracts; · all gains and losses from changes in the fair value of derivatives that are managed in conjunction with financial assets and liabilities designated at fair value through profit or loss; and · interest income, interest expense and dividend income in respect of financial assets and liabilities designated at fair value through profit or loss; and derivatives managed in conjunction with the above, except for interest arising from debt securities issued by HSBC and derivatives managed in conjunction with those debt securities, which is recognised in 'Interest expense'. |
Net income/(expense) from financial instruments designated at fair value
2014 | 2013 |
| 2012 | |||
US$m | US$m |
| US$m | |||
Net income/(expense) arising on: |
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|
| |||
- financial assets held to meet liabilities under insurance and investment contracts | 2,300 | 3,170 |
| 2,980 | ||
- other financial assets designated at fair value | 131 | 118 |
| 83 | ||
- derivatives managed in conjunction with other financial assets designated at fair value | (19) | (26) |
| 35 | ||
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| ||||
2,412 | 3,262 |
| 3,098 | |||
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| ||||
- liabilities to customers under investment contracts | (435) | (1,237) | (996) | |||
- HSBC's long-term debt issued and related derivatives | 508 | (1,228) |
| (4,327) | ||
- changes in own credit spread on long-term debt | 417 | (1,246) |
| (5,215) | ||
- derivatives managed in conjunction with HSBC's issued debt securities | 333 | (3,743) | 431 | |||
- other changes in fair value | (242) | 3,761 |
| 457 | ||
- other financial liabilities designated at fair value | (23) | (39) | (23) | |||
- derivatives managed in conjunction with other financial liabilities designated at fair value | 11 | 10 |
| 22 | ||
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| ||||
61 | (2,494) | (5,324) | ||||
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Year ended 31 December | 2,473 | 768 |
| (2,226) |
Net income/(expense) arising on HSBC Holdings long-term debt issued and related derivatives
2014 | 2013 |
| 2012 | |||
US$m | US$m |
| US$m | |||
Net income/(expense) arising on: |
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|
| |||
- changes in own credit spread on long-term debt | 339 | (695) |
| (2,260) | ||
- derivatives managed in conjunction with HSBC Holdings issued debt securities | 126 | (1,558) | 456 | |||
- other changes in fair value | (27) | 1,213 |
| (474) | ||
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| ||||
Year ended 31 December | 438 | (1,040) |
| (2,278) |
3 Net insurance premium income
Premiums for life insurance contracts are accounted for when receivable, except in unit-linked insurance contracts where premiums are accounted for when liabilities are established. Reinsurance premiums are accounted for in the same accounting period as the premiums for the direct insurance contracts to which they relate. |
Net insurance premium income
Non-linked insurance1 |
| Linked life insurance |
| Investment contracts with DPF2 |
| Total | ||
US$m |
| US$m |
| US$m |
| US$m | ||
Gross insurance premium income | 7,705 | 2,195 | 2,470 | 12,370 | ||||
Reinsurers' share of gross insurance premium income | (441) | (8) | − | (449) | ||||
Year ended 31 December 2014 | 7,264 | 2,187 | 2,470 | 11,921 |
Non-linked insurance1 | Linked life insurance | Investment contracts with DPF2 | Total | |||||
US$m | US$m | US$m | US$m | |||||
Gross insurance premium income | 7,002 |
| 3,012 |
| 2,384 |
| 12,398 | |
Reinsurers' share of gross insurance premium income | (450) |
| (8) |
| - |
| (458) | |
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Year ended 31 December 2013 | 6,552 |
| 3,004 |
| 2,384 |
| 11,940 | |
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| |
Gross insurance premium income | 7,578 |
| 3,325 |
| 2,699 |
| 13,602 | |
Reinsurers' share of gross insurance premium income | (550) |
| (8) |
| - |
| (558) | |
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Year ended 31 December 2012 | 7,028 |
| 3,317 |
| 2,699 |
| 13,044 |
1 Includes non-life insurance.
2 Discretionary participation features.
4 Net insurance claims and benefits paid and movement in liabilities to policyholders
Gross insurance claims for life insurance contracts reflect the total cost of claims arising during the year, including claim handling costs and any policyholder bonuses allocated in anticipation of a bonus declaration. Maturity claims are recognised when due for payment. Surrenders are recognised when paid or at an earlier date on which, following notification, the policy ceases to be included within the calculation of the related insurance liabilities. Death claims are recognised when notified. Reinsurance recoveries are accounted for in the same period as the related claim. |
Net insurance claims and benefits paid and movement in liabilities to policyholders
Non-linked insurance1 |
| Linked life insurance |
| Investment contracts with DPF2 |
| Total | ||
US$m |
| US$m |
| US$m |
| US$m | ||
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|
| ||
Gross claims and benefits paid and movement in liabilities | 7,770 |
| 2,765 |
| 3,188 |
| 13,723 | |
- claims, benefits and surrenders paid | 3,575 |
| 1,499 |
| 2,215 |
| 7,289 | |
- movement in liabilities | 4,195 |
| 1,266 |
| 973 |
| 6,434 | |
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Reinsurers' share of claims and benefits paid and movement in liabilities | (411) |
| 33 |
| - |
| (378) | |
- claims, benefits and surrenders paid | (176) |
| (88) |
| - |
| (264) | |
- movement in liabilities | (235) |
| 121 |
| - |
| (114) | |
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Year ended 31 December 2014 | 7,359 |
| 2,798 |
| 3,188 |
| 13,345 | |
Gross claims and benefits paid and movement in liabilities | 6,892 |
| 3,379 |
| 3,677 |
| 13,948 | |
- claims, benefits and surrenders paid | 3,014 |
| 1,976 |
| 2,308 |
| 7,298 | |
- movement in liabilities | 3,878 |
| 1,403 |
| 1,369 |
| 6,650 | |
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Reinsurers' share of claims and benefits paid and movement in liabilities | (367) |
| 111 |
| - |
| (256) | |
- claims, benefits and surrenders paid | (164) |
| (426) |
| - |
| (590) | |
- movement in liabilities | (203) |
| 537 |
| - |
| 334 | |
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Year ended 31 December 2013 | 6,525 |
| 3,490 |
| 3,677 |
| 13,692 | |
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Gross claims and benefits paid and movement in liabilities | 6,900 |
| 3,984 |
| 3,645 |
| 14,529 | |
- claims, benefits and surrenders paid | 1,905 |
| 1,810 |
| 2,525 |
| 6,240 | |
- movement in liabilities | 4,995 |
| 2,174 |
| 1,120 |
| 8,289 | |
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Reinsurers' share of claims and benefits paid and movement in liabilities | (537) |
| 223 |
| - |
| (314) | |
- claims, benefits and surrenders paid | (217) |
| (681) |
| - |
| (898) | |
- movement in liabilities | (320) |
| 904 |
| - |
| 584 | |
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Year ended 31 December 2012 | 6,363 |
| 4,207 |
| 3,645 |
| 14,215 |
1 Includes non-life insurance.
2 Discretionary participation features.
5 Operating profit
Operating profit is stated after the following items of income, expense, gains and losses, and loan impairment charges and other credit risk provisions:
2014 | 2013 | 2012 | ||||
US$m | US$m | US$m | ||||
Income | ||||||
Interest recognised on impaired financial assets | 1,137 | 1,261 | 1,261 | |||
Fees earned on financial assets or liabilities not held for trading nor designated atfair value, other than fees included in effective interest rate calculations on thesetypes of assets and liabilities | 9,438 | 9,799 | 10,042 | |||
Fees earned on trust and other fiduciary activities where HSBC holds or invests assetson behalf of its customers | 3,253 | 3,176 | 2,897 | |||
Income from listed investments | 6,726 | 5,432 | 5,850 | |||
Income from unlisted investments | 5,874 | 6,860 | 7,677 | |||
Expense | ||||||
Interest on financial instruments, excluding interest on financial liabilitiesheld for trading or designated at fair value | (15,322) | (14,610) | (17,625) | |||
Fees payable on financial assets or liabilities not held for trading nor designated atfair value, other than fees included in effective interest rate calculations on thesetypes of assets and liabilities | (1,427) | (1,396) | (1,501) | |||
Fees payable relating to trust and other fiduciary activities where HSBC holds orinvests assets on behalf of its customers | (185) | (171) | (170) | |||
Payments under lease and sublease agreements | (1,548) | (1,425) | (1,166) | |||
- minimum lease payments | (1,199) | (1,098) | (1,149) | |||
- contingent rents and sublease payments | (349) | (327) | (17) | |||
UK bank levy | (1,066) | (916) | (472) | |||
Gains/(losses) | ||||||
Impairment of available-for-sale equity securities | (373) | (175) | (420) | |||
Gains/(losses) recognised on assets held for sale | 220 | (729) | 485 | |||
Gains on disposal of HSBC Bank (Panama) S.A. | - | 1,107 | - | |||
(Losses)/gains arising from dilution of interest in Industrial Bank and other associates and joint ventures | (32) | 1,051 | - | |||
Loan impairment charges and other credit risk provisions | (3,851) | (5,849) | (8,311) | |||
- net impairment charge on loans and advances | (4,055) | (6,048) | (8,160) | |||
- release/(impairment) of available-for-sale debt securities | 319 | 211 | (99) | |||
- impairment in respect of other credit risk provisions | (115) | (12) | (52) |
6 Employee compensation and benefits
2014 | 2013 | 2012 | ||||
US$m | US$m | US$m | ||||
Wages and salaries | 17,477 | 16,879 | 17,780 | |||
Social security costs | 1,666 | 1,594 | 1,633 | |||
Post-employment benefits | 1,223 | 723 | 1,078 | |||
Year ended 31 December | 20,366 | 19,196 | 20,491 |
Average number of persons employed by HSBC during the year
2014 | 2013 |
| 2012 | |||
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Europe | 74,024 | 75,334 |
| 77,204 | ||
Asia | 116,492 | 114,216 |
| 116,779 | ||
Middle East and North Africa | 8,616 | 9,181 |
| 8,645 | ||
North America | 21,983 | 22,568 |
| 27,396 | ||
Latin America | 43,652 | 47,496 |
| 54,162 | ||
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Year ended 31 December | 264,767 | 268,795 |
| 284,186 |
Reconciliation of total incentive awards granted to incentive awards in employee compensation and benefits
2014 | 2013 |
| 2012 | |||
US$m | US$m |
| US$m | |||
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Total incentive awards approved and granted for the current year1 | 3,660 | 3,920 |
| 3,689 | ||
Less: deferred bonuses awarded for the current year, expected to be recognisedin future periods | (359) | (436) |
| (355) | ||
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Total incentives awarded and recognised in the current year | 3,301 | 3,484 |
| 3,334 | ||
Current year charges for deferred bonuses from previous years | 425 | 427 |
| 671 | ||
Other | (114) | (164) |
| (28) | ||
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Total incentive awards for the current year included in employee compensationand benefits | 3,612 | 3,747 |
| 3,977 |
1 This represents the amount of the Group variable pay pool that has been approved and granted. The total amount of Group variable pay pool approved by the Group Remuneration Committee is disclosed in the Directors' Remuneration Report on page 310.
Income statement charge: deferred bonuses
Current year bonus pool |
| Prior year bonus pools |
| Total | ||
US$m |
| US$m |
| US$m | ||
2014 |
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Charge recognised in 2014 | 245 |
| 425 |
| 670 | |
- deferred share awards | 147 |
| 373 |
| 520 | |
- deferred cash awards | 98 |
| 52 |
| 150 | |
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Charge expected to be recognised in 2015 or later | 359 |
| 381 |
| 740 | |
- deferred share awards | 250 | 334 | 584 | |||
- deferred cash awards | 109 | 47 | 156 | |||
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2013 |
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Charge recognised in 2013 | 269 |
| 427 |
| 696 | |
- deferred share awards | 188 |
| 354 |
| 542 | |
- deferred cash awards | 81 |
| 73 |
| 154 | |
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Charge expected to be recognised in 2014 or later | 436 |
| 306 |
| 742 | |
- deferred share awards | 356 |
| 259 |
| 615 | |
- deferred cash awards | 80 |
| 47 |
| 127 | |
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2012 |
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Charge recognised in 2012 | 277 |
| 671 |
| 948 | |
- deferred share awards | 224 |
| 613 |
| 837 | |
- deferred cash awards | 53 |
| 58 |
| 111 | |
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Charge expected to be recognised in 2013 or later | 355 |
| 376 |
| 731 | |
- deferred share awards | 315 |
| 335 |
| 650 | |
- deferred cash awards | 40 |
| 41 |
| 81 |
Share-based payments
Accounting policyHSBC enters into both equity-settled and cash-settled share-based payment arrangements with its employees as compensation for services provided by employees. The cost of equity-settled share-based payment arrangements with employees is measured by reference to the fair value of equity instruments on the date they are granted and recognised as an expense on a straight-line basis over the vesting period, with a corresponding credit to 'Retained earnings'. For cash-settled share-based payment arrangements, the services acquired and liability incurred are measured at the fair value of the liability and recognised as the employees render service. Until settlement, the fair value of the liability is re-measured, with changes in fair value recognised in the income statement. Fair value is determined by using appropriate valuation models. Vesting conditions include service conditions and performance conditions; any other features of the arrangement are non-vesting conditions. Market performance conditions and non-vesting conditions are taken into account when estimating the fair value of the award at the date of grant. Vesting conditions, other than market performance conditions, are not taken into account in the initial estimate of the fair value at the grant date. They are taken into account by adjusting the number of equity instruments included in the measurement of the transaction. A cancellation that occurs during the vesting period is treated as an acceleration of vesting, and recognised immediately for the amount that would otherwise have been recognised for services over the vesting period. Where HSBC Holdings enters into share-based payment arrangements involving employees of subsidiaries for which the subsidiaries are re-charged, the difference between the cost of the share-based payment arrangement and the fair value of the equity instruments expected to be issued to satisfy those arrangements is recognised as an adjustment to 'Investment in subsidiaries' over the vesting period. |
'Wages and salaries' include the effect of share-based payments arrangements, of which US$732m are equity settled (2013: US$630m; 2012: US$988m), as follows:
2014 | 2013 |
| 2012 | |||
US$m | US$m |
| US$m | |||
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Restricted share awards | 738 | 599 |
| 912 | ||
Savings-related and other share award option plans | 36 | 63 |
| 96 | ||
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Year ended 31 December | 774 | 662 |
| 1,008 |
HSBC share awards
Award | Policy | Purpose | ||
Restricted share awards (including Annual incentive awards delivered in shares) and GPSP | · An assessment of performance over the relevant period ending on 31 December is used to determine the amount of the award to be granted. · Deferred awards generally require employees to remain in employment over the vesting period and are not subject to performance conditions after the grant date. · Deferred Annual incentive awards generally vest over a period of three years and GPSP awards vest after five years. · Vested shares may be subject to a retention requirement (restriction) post-vesting. GPSP awards are retained until cessation of employment. · Awards granted from 2010 onwards are subject to malus provision prior to vesting. | · To drive and reward performance consistent with strategy and align to shareholder interests. · Deferral provides an incentive for a longer-term commitment and the ability to apply malus. |
Movement on HSBC share awards
2014 | 2013 | |||
Number (000s) | Number(000s) | |||
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Restricted share awards outstanding at 1 January | 116,932 | 165,589 | ||
Additions during the year | 82,871 | 59,261 | ||
Released in the year | (78,224) | (99,820) | ||
Forfeited in the year | (5,096) | (8,098) | ||
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Restricted share awards outstanding at 31 December | 116,483 | 116,932 | ||
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Weighted average fair value of awards granted (US$) | 10.18 | 10.95 |
HSBC share option plans
Main plans | Policy | Purpose | ||
Savings-related share option plans | · Two plans: the UK plan and the International Plan. The last grant of options under the International Plan was in 2012. · From 2014, eligible employees save up to £500 per month (or for International options granted prior to 2013, the equivalent of £250 in US dollars, Hong Kong dollars or Euros), with the option to use the savings to acquire shares. · Exercisable within six months following either the third or fifth anniversaries of the commencement of a three-year or five-year contract, respectively, (or for International options granted prior to 2013, three months following the first anniversary of the commencement of a one-year savings contract). · The exercise price is set at a 20% (2013: 20%) discount to the market value immediately preceding the date of invitation (except for the one-year options granted under the US sub-plan prior to 2013 where a 15% discount was applied). | · To align the interests of all employees with the creation of shareholder value. | ||
HSBC Holdings Group share option plan | · Plan ceased in May 2005. · Exercisable between third and tenth anniversaries of the date of grant. | · Long-term incentive plan between 2000 and 2005 during which certain HSBC employees were awarded share options. |
Calculation of fair values
The fair values of share options are calculated using a Black-Scholes model. The fair value of a share award is based on the share price at the date of the grant.
Movement on HSBC share option plans
Savings-related share option plans | HSBC Holdings Group share option plan | |||||||
Number (000s) | WAEP1 £ | Number (000s) | WAEP1 £ | |||||
Outstanding at 1 January 2014 | 93,760 | 4.04 | 55,026 | 7.23 | ||||
Granted during the year2 | 28,689 | 5.19 | - | - | ||||
Exercised during the year3 | (50,393) | 3.48 | (1) | 7.22 | ||||
Expired during the year | (5,690) | 4.81 | (48,651) | 7.22 | ||||
Outstanding at 31 December 2014 | 66,366 | 4.89 | 6,374 | 7.29 | ||||
Weighted average remaining contractual life (years) | 2.66 | 0.30 | ||||||
Outstanding at 1 January 2013 | 112,752 | 4.04 | 87,173 | 6.94 | ||||
Granted during the year2 | 8,679 | 5.47 | - | - | ||||
Exercised during the year3 | (17,968) | 4.56 | (17,595) | 6.21 | ||||
Expired during the year | (9,703) | 4.47 | (14,552) | 4.21 | ||||
Outstanding at 31 December 2013 | 93,760 | 4.04 | 55,026 | 7.23 | ||||
Weighted average remaining contractual life (years) | 1.80 | 0.45 | ||||||
1 Weighted average exercise price.
2 The weighted average fair value of options granted during the year was US$1.90 (2013: US$2.98).
3 The weighted average share price at the date the options were exercised was US$9.91 (2013: US$10.86) and US$9.49 (2013: US$10.93) for the savings-related share option plans and HSBC Holdings Group share option plan, respectively.
Post-employment benefit plans
Accounting policyHSBC operates a number of pension and other post-employment benefit plans throughout the world. These plans include both defined benefit and defined contribution plans and various other post-employment benefits such as post-employment healthcare. Payments to defined contribution plans and state-managed retirement benefit plans, where HSBC's obligations under the plans are equivalent to a defined contribution plan, are charged as an expense as the employees render service. The defined benefit pension costs and the present value of defined benefit obligations are calculated at the reporting date by the schemes' actuaries using the Projected Unit Credit Method. The net charge to the income statement mainly comprises the service cost and the net interest on the net defined benefit asset or liability and is presented in operating expenses. The past service cost, which is charged immediately to the income statement, is the change in the present value of the defined benefit obligation for employee service in prior periods resulting from a plan amendment (the introduction or withdrawal of, or changes to, a defined benefit plan) or curtailment (a significant reduction by the entity in the number of employees covered by a plan). A settlement is a transaction that eliminates all further legal and constructive obligations for part or all of the benefits provided under a defined benefit plan, other than a payment of benefits to, or on behalf of, employees that is set out in the terms of the plan and included in the actuarial assumptions. Re-measurements of the net defined benefit asset or liability, which comprise actuarial gains and losses, return on plan assets (excluding interest) and the effect of the asset ceiling (if any, excluding interest), are recognised immediately in other comprehensive income. Actuarial gains and losses comprise experience adjustments (the effects of differences between the previous actuarial assumptions and what has actually occurred), as well as the effects of changes in actuarial assumptions. The net defined benefit asset or liability represents the present value of defined benefit obligations reduced by the fair value of plan assets. Any net defined benefit surplus is limited to the present value of available refunds and reductions in future contributions to the plan. The cost of obligations arising from other post-employment defined benefit plans, such as defined benefit health-care plans, are accounted for on the same basis as defined benefit pension plans. |
Income statement charge
2014 | 2013 | 2012 | ||||
US$m | US$m | US$m | ||||
Defined benefit pension plans | 469 | 54 | 427 | |||
Defined contribution pension plans | 687 | 597 | 599 | |||
Pension plans | 1,156 | 651 | 1,026 | |||
Defined benefit and contribution healthcare plans | 67 | 72 | 52 | |||
Year ended 31 December | 1,223 | 723 | 1,078 |
Net assets/(liabilities) recognised on the balance sheet in respect of defined benefit plans
Fair value of plan assets | Present value of defined benefit obligations | Effect of limit on plan surpluses | Total | |||||
US$m | US$m | US$m | US$m | |||||
Defined benefit pension plans | 44,824 | (42,062) | (17) | 2,745 | ||||
Defined benefit healthcare plans | 179 | (1,104) | - | (925) | ||||
At 31 December 2014 | 45,003 | (43,166) | (17) | 1,820 | ||||
Total employee benefit liabilities (within 'Accruals, deferred incomeand other liabilities') | (3,208) | |||||||
Total employee benefit assets (within 'Prepayments, accrued income and other assets') | 5,028 | |||||||
Defined benefit pension plans | 40,622 | (40,467) | (30) | 125 | ||||
Defined benefit healthcare plans | 190 | (1,106) | - | (916) | ||||
At 31 December 2013 | 40,812 | 41,573 | (30) | (791) | ||||
Total employee benefit liabilities (within 'Accruals, deferred incomeand other liabilities') | (2,931) | |||||||
Total employee benefit assets (within 'Prepayments, accrued income and other assets') | 2,140 |
Cumulative actuarial gains/(losses) recognised in other comprehensive income
2014 | 2013 | 2012 | ||||
US$m | US$m | US$m | ||||
At 1 January | (4,445) | (3,844) | (3,453) | |||
HSBC Bank (UK) Pension Scheme | 2,764 | (1,524) | 208 | |||
Other plans | (274) | 796 | (440) | |||
Healthcare plans | (88) | 143 | (154) | |||
Change in the effect of limit on plan surpluses | 17 | (16) | (5) | |||
Total actuarial gains/(losses) recognised in other comprehensive income | 2,419 | (601) | (391) | |||
At 31 December | (2,026) | (4,445) | (3,844) |
HSBC pension plans
2014 | 2013 | 2012 | ||||
% | % | % | ||||
Percentage of HSBC employees: | ||||||
- enrolled in defined contribution plans | 66 | 64 | 62 | |||
- enrolled in defined benefit plans | 22 | 23 | 23 | |||
- covered by HSBC pension plans | 88 | 87 | 85 |
The Group operates a number of pension plans throughout the world. Some are defined benefit plans, of which the largest is the HSBC Bank (UK) Pension Scheme ('the principal plan'). The Pension Risk section on page 200 and the Appendix to Risk on page 236 contain details about the characteristics and risks and amount, timing and uncertainty of future cash flows and policies and practices associated with the principal plan.
Defined benefit pension plans
Net asset/(liability) under defined benefit pension plans
Fair value of plan assets | Present value of defined benefit obligations | Effect of the asset ceiling | Net defined benefit asset/(liability) | |||||||||||||
HSBC Bank (UK) Pension Scheme | Other plans | HSBC Bank (UK) Pension Scheme | Other plans | HSBC Bank (UK) Pension Scheme | Other plans | HSBC Bank (UK) Pension Scheme | Other plans | |||||||||
US$m | US$m | US$m | US$m | US$m | US$m | US$m | US$m | |||||||||
At 1 January 2014 | 31,665 | 8,957 | (29,629) | (10,838) | - | (30) | 2,036 | (1,911) | ||||||||
Current service cost | - | - | (228) | (257) | - | - | (228) | (257) | ||||||||
Past service cost and gains/(losses) from settlements | - | (5) | (26) | 11 | - | - | (26) | 6 | ||||||||
Service cost | - | (5) | (254) | (246) | - | - | (254) | (251) | ||||||||
Net interest income/(cost) on the net defined benefit asset/(liability) | 1,386 | 370 | (1,291) | (425) | - | (4) | 95 | (59) | ||||||||
Re-measurement effects recognised in other comprehensive income | 4,864 | 845 | (2,100) | (1,034) | - | 17 | 2,764 | (172) | ||||||||
- . return on plan assets (excluding interest income) | 4,864 | 845 | - | - | - | - | 4,864 | 845 | ||||||||
- . actuarial losses | - | - | (2,317) | (987) | - | - | (2,317) | (987) | ||||||||
- . other changes | - | - | 217 | (47) | - | 17 | 217 | (30) | ||||||||
Exchange differences | (2,112) | (316) | 1,838 | 357 | - | - | (274) | 41 | ||||||||
Contributions by HSBC | 397 | 278 | - | - | - | - | 397 | 278 | ||||||||
- . normal | 265 | 239 | - | - | - | - | 265 | 239 | ||||||||
- . special | 132 | 39 | - | - | - | - | 132 | 39 | ||||||||
Contributions by employees | 38 | 17 | (38) | (17) | - | - | - | - | ||||||||
Benefits paid | (954) | (543) | 954 | 598 | - | - | - | 55 | ||||||||
Administrative costs and taxespaid by plan | (40) | (23) | 40 | 23 | - | - | - | - | ||||||||
At 31 December 2014 | 35,244 | 9,580 | (30,480) | (11,582) | - | (17) | 4,764 | (2,019) | ||||||||
Present value of defined benefit obligation relating to: | ||||||||||||||||
- actives | (9,782) | (5,605) | ||||||||||||||
- deferreds | (8,799) | (2,498) | ||||||||||||||
- pensioners | (11,899) | (3,479) | ||||||||||||||
Net asset/(liability) under defined benefit pension plans (continued)
Fair value of plan assets | Present value of defined benefit obligations | Effect of the asset ceiling | Net defined benefit asset/(liability) | |||||||||||||
HSBC Bank (UK) Pension Scheme | Other plans | HSBC Bank (UK) Pension Scheme | Other plans | HSBC Bank (UK) Pension Scheme | Other plans | HSBC Bank (UK) Pension Scheme | Other plans | |||||||||
US$m | US$m | US$m | US$m | US$m | US$m | US$m | US$m | |||||||||
At 1 January 2013 | 29,092 | 9,015 | (26,475) | (11,581) | - | (19) | 2,617 | (2,585) | ||||||||
Current service cost | - | - | (259) | (249) | - | - | (259) | (249) | ||||||||
Past service cost and gains/(losses) from settlements1 | - | (3) | 438 | (41) | - | - | 438 | (44) | ||||||||
Service cost | - | (3) | 179 | (290) | - | - | 179 | (293) | ||||||||
Net interest income/(cost) on the net defined benefit asset/(liability) | 1,260 | 156 | (1,127) | (229) | - | - | 133 | (73) | ||||||||
Re-measurement effects recognised in other comprehensive income | 817 | 21 | (2,341) | 775 | - | (16) | (1,524) | 780 | ||||||||
- . return on plan assets(excluding interest income) | 817 | 21 | - | - | - | - | 817 | 21 | ||||||||
- . actuarial gains/(losses) | - | - | (2,453) | 829 | - | - | (2,453) | 829 | ||||||||
- . other changes | - | - | 112 | (54) | - | (16) | 112 | (70) | ||||||||
Exchange differences | 766 | (59) | (740) | 23 | - | 5 | 26 | (31) | ||||||||
Contributions by HSBC | 605 | 336 | - | - | - | - | 605 | 336 | ||||||||
- . normal | 399 | 274 | - | - | - | - | 399 | 274 | ||||||||
- . special | 206 | 62 | - | - | - | - | 206 | 62 | ||||||||
Contributions by employees | 38 | 17 | (38) | (17) | - | - | - | - | ||||||||
Benefits paid | (876) | (513) | 876 | 452 | - | - | - | (61) | ||||||||
Administrative costs and taxespaid by plan | (37) | (13) | 37 | 13 | - | - | - | - | ||||||||
Disposals | - | - | - | 16 | - | - | - | 16 | ||||||||
At 31 December 2013 | 31,665 | 8,957 | (29,629) | (10,838) | - | (30) | 2,036 | (1,911) | ||||||||
Present value of defined benefit obligation relating to: | ||||||||||||||||
- actives | (8,896) | (5,465) | ||||||||||||||
- deferreds | (8,358) | (2,144) | ||||||||||||||
- pensioners | (12,375) | (3,229) | ||||||||||||||
1 HSBC announced to employees in the UK that the future service accrual for active members of the Defined Benefit Section ('DBS') of the principal plan would cease with effect from 30 June 2015 and that all active members of the DBS will become member of the Defined Contribution Section from 1 July 2015. This resulted in a reduction in the defined benefit obligation of the Scheme and a corresponding gain of US$430m in 2013, recorded in 'Past service cost and (gains)/losses on settlements' in the table above.
HSBC expects to make US$530m of contributions to defined benefit pension plans during 2015. Benefits expected to be paid from the plans to retirees over each of the next five years, and in aggregate for the five years thereafter, are as follows:
Benefits expected to be paid from plans
2015 | 2016 | 2017 | 2018 | 2019 | 2020-2024 | ||||||
US$m | US$m | US$m | US$m | US$m | US$m | ||||||
HSBC Bank (UK) Pension Scheme1 | 970 | 999 | 1,029 | 1,060 | 1,091 | 5,968 | |||||
Other plans1 | 566 | 576 | 595 | 605 | 643 | 3,366 |
1 The duration of the defined benefit obligation is 19.8 years for the HSBC Bank (UK) Pension Scheme under the disclosure assumptions adopted (2013: 19.5 years) and 14.2 years for all other plans combined (2013: 13.7 years).
Fair value of plan assets by asset classes
31 December 2014 | 31 December 2013 | |||||||||||||||
Value | Quoted market price in active market | No quoted market price in active market | Thereof HSBC1 | Value | Quoted market price in active market | No quoted market price in active market | Thereof HSBC1 | |||||||||
US$m | US$m | US$m | US$m | US$m | US$m | US$m | US$m | |||||||||
HSBC Bank (UK) Pension Scheme | ||||||||||||||||
Fair value of plan assets | 35,244 | 31,355 | 3,889 | 930 | 31,665 | 26,520 | 5,145 | 2,827 | ||||||||
- equities | 5,502 | 4,557 | 945 | - | 4,655 | 3,667 | 988 | - | ||||||||
- bonds | 22,965 | 22,965 | - | - | 17,708 | 17,708 | - | - | ||||||||
- derivatives | 1,369 | 52 | 1,317 | 930 | 2,827 | - | 2,827 | 2,827 | ||||||||
- other | 5,408 | 3,781 | 1,627 | - | 6,475 | 5,145 | 1,330 | - | ||||||||
Other plans | ||||||||||||||||
Fair value of plan assets | 9,580 | 6,390 | 3,190 | (13) | 8,957 | 7,731 | 1,226 | 574 | ||||||||
- equities | 2,534 | 1,778 | 756 | 11 | 2,854 | 2,789 | 65 | 14 | ||||||||
- bonds | 6,376 | 4,109 | 2,267 | 7 | 4,892 | 4,409 | 483 | 9 | ||||||||
- derivatives | (100) | (8) | (92) | (107) | 399 | - | 399 | 399 | ||||||||
- other | 770 | 511 | 259 | 76 | 812 | 533 | 279 | 152 | ||||||||
1 The fair value of plan assets includes derivatives entered into with HSBC Bank plc as detailed in Note 41.
Post-employment defined benefit plans' principal actuarial financial assumptions
HSBC determines the discount rates to be applied to its obligations in consultation with the plans' local actuaries, on the basis of current average yields of high quality (AA-rated or equivalent) debt instruments, with maturities consistent with those of the defined benefit obligations.
Key actuarial assumptions for the principal plan
Discount rate | Inflation rate | Rate of increase for pensions | Rate of pay increase | Interest credit rate | ||||||
% | % | % | % | % | ||||||
UK | ||||||||||
At 31 December 2014 | 3.70 | 3.20 | 3.00 | 3.70 | n/a | |||||
At 31 December 2013 | 4.45 | 3.60 | 3.30 | 4.10 | n/a | |||||
At 31 December 2012 | 4.50 | 3.10 | 2.90 | 3.60 | n/a |
Mortality tables and average life expectancy at age 65 for the principal plan
Mortality table | Life expectancy at age 65 for a male member currently: | Life expectancy at age 65 for a female member currently: | |||||||
Aged 65 | Aged 45 | Aged 65 | Aged 45 | ||||||
UK | |||||||||
At 31 December 2014 | SAPS S11 | 23.6 | 25.2 | 25.0 | 26.9 | ||||
At 31 December 2013 | SAPS S11 | 23.6 | 25.2 | 24.9 | 26.8 | ||||
1 Self-administered Pension Scheme ('SAPS') with Continuous Mortality Investigation 2014 improvements (2013: 2013 improvements) and a 1.25% long-term allowance improvement. Light table with 1.01 rating for male pensioners and 1.02 rating for female pensioners.
Actuarial assumption sensitivities
The effect of changes in key assumptions on the principal plan
HSBC Bank (UK) Pension Scheme | ||||
2014 | 2013 | |||
US$m | US$m | |||
Discount rate | ||||
Change in pension obligation at year-end from a 25bps increase | (1,420) | (1,352) | ||
Change in pension obligation at year-end from a 25bps decrease | 1,523 | 1,450 | ||
Change in 2015 pension cost from a 25bps increase | (75) | (83) | ||
Change in 2015 pension cost from a 25bps decrease | 73 | 79 | ||
Rate of inflation | ||||
Change in pension obligation at year-end from a 25bps increase | 1,026 | 994 | ||
Change in pension obligation at year-end from a 25bps decrease | (1,184) | (1,137) | ||
Change in 2015 pension cost from a 25bps increase | 44 | 53 | ||
Change in 2015 pension cost from a 25bps decrease | (48) | (68) | ||
Rate of increase for pensions in payment and deferred pensions | ||||
Change in pension obligation at year-end from a 25bps increase | 1,188 | 1,301 | ||
Change in pension obligation at year-end from a 25bps decrease | (1,127) | (1,225) | ||
Change in 2015 pension cost from a 25bps increase | 50 | 66 | ||
Change in 2015 pension cost from a 25bps decrease | (45) | (64) | ||
HSBC Bank (UK) Pension Scheme | ||||
2014 | 2013 | |||
US$m | US$m | |||
Rate of pay increase | ||||
Change in pension obligation at year-end from a 25bps increase | 237 | 212 | ||
Change in pension obligation at year-end from a 25bps decrease | (232) | (205) | ||
Change in 2015 pension cost from a 25bps increase | 12 | 15 | ||
Change in 2015 pension cost from a 25bps decrease | (11) | (15) | ||
Mortality | ||||
Change in pension obligation from each additional year of longevity assumed | 768 | 712 | ||
HSBC Holdings
Employee compensation and benefit expense in respect of HSBC Holdings' employees in 2014 amounted to US$681m (2013: US$542m). The average number of persons employed by HSBC Holdings during 2014 was 2,070 (2013: 1,525).
Employees of HSBC Holdings who are members of defined benefit pension plans are principally members of either the HSBC Bank (UK) Pension Scheme or the HSBC International Staff Retirement Benefits Scheme. HSBC Holdings pays contributions to such plans for its own employees in accordance with the schedules of contributions determined by the Trustees of the plan and recognises these contributions as an expense as they fall due.
Directors' emoluments
The aggregate emoluments of the Directors of HSBC Holdings, computed in accordance with the Companies Act 2006 and the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 were:
2014 | 2013 | 2012 | ||||
US$000 | US$000 | US$000 | ||||
Fees | 4,567 | 4,027 | 5,435 | |||
Salaries and other emoluments | 17,812 | 9,488 | 10,316 | |||
Annual incentives | 4,426 | 7,357 | 13,983 | |||
Year ended 31 December | 26,805 | 20,872 | 29,734 | |||
Vesting of long-term incentive awards | - | - | 5,733 |
In addition, there were payments under retirement benefit agreements with former Directors of US$1,269,160 (2013: US$1,198,744). The provision at 31 December 2014 in respect of unfunded pension obligations to former Directors amounted to US$19,419,524 (2013: US$19,729,103).
During the year, aggregate contributions to pension schemes in respect of Directors were nil (2013: nil).
The salary and other emoluments figure includes fixed pay allowances. Discretionary annual incentives for Directors are based on a combination of individual and corporate performance and are determined by the Group Remuneration Committee. Details of Directors' remuneration, share options and awards under the HSBC Share Plan and HSBC Share Plan 2011 are included in the 'Directors' Remuneration Report' on page 300 to 327.
7 Auditors' remuneration
2014 | 2013 | 2012 | ||||
US$m | US$m | US$m | ||||
Audit fees payable to KPMG1 | 40.6 | 43.4 | 47.2 | |||
Audit fees payable to non-KPMG entities | 1.2 | 1.1 | 1.4 | |||
Year ended 31 December | 41.8 | 44.5 | 48.6 |
1 Fees payable to KPMG for HSBC Holdings' statutory audit and audit of HSBC's subsidiaries, pursuant to legislation and includes fees payable for the current year. Excluded from the 2014 audit fees payable to KPMG is a net release of accruals of US$2.5 million relating to prior years and fees related to the transition of the audit to PwC of US$1.3 million.
The following fees were payable by HSBC to the Group's principal auditor, KPMG Audit Plc and its associates (together 'KPMG'):
Fees payable by HSBC to KPMG
2014 | 2013 | 2012 | ||||
US$m | US$m | US$m | ||||
Fees for HSBC Holdings' statutory audit1 | 13.4 | 12.9 | 13.2 | |||
-.. relating to current year | 13.4 | 12.6 | 12.8 | |||
-.. relating to prior year | - | 0.3 | 0.4 | |||
Fees for other services provided to HSBC | 62.5 | 67.5 | 67.3 | |||
Audit of HSBC's subsidiaries2 | 27.2 | 30.5 | 34.0 | |||
Audit-related assurance services3 | 22.6 | 27.4 | 23.6 | |||
Taxation-related services: | ||||||
- . taxation compliance services | 1.5 | 1.3 | 2.1 | |||
- . taxation advisory services | 0.8 | 1.3 | 1.3 | |||
Other assurance services | 0.7 | 0.5 | 1.1 | |||
Other non-audit services4 | 9.7 | 6.5 | 5.2 | |||
Year ended 31 December | 75.9 | 80.4 | 80.5 |
1 Fees payable to KPMG for the statutory audit of the consolidated financial statements of HSBC and the separate financial statements of HSBC Holdings. They include amounts payable for services relating to the consolidation returns of HSBC Holdings' subsidiaries which are clearly identifiable as being in support of the Group audit opinion. Excluded from the 2014 fees is US$0.3m related to prior year and fees related to the transition of the audit to PwC of US$1.3m.
2 Fees payable for the statutory audit of the financial statements of HSBC's subsidiaries. Excluded from the 2014 fees is a net release of accruals of US$2.8m relating to prior years.
3 Including services for assurance and other services that relate to statutory and regulatory filings, including comfort letters and interim reviews.
4 Including valuation and actuarial services, translation services, ad-hoc accounting advice, review of financial models, advice on IT security and business continuity, corporate finance transactions and performing agreed-upon IT testing procedures.
No fees were payable by HSBC to KPMG for the following types of services: internal audit services, services related to litigation, recruitment and remuneration.
Fees payable by HSBC's associated pension schemes to KPMG
2014 | 2013 | 2012 | ||||
US$000 | US$000 | US$000 | ||||
Audit of HSBC's associated pension schemes | 322 | 379 | 256 | |||
Audit related assurance services | 5 | 5 | - | |||
Year ended 31 December | 327 | 384 | 256 |
No fees were payable by HSBC's associated pension schemes to KPMG for the following types of services: audit related assurance services, internal audit services, other assurance services, services related to corporate finance transactions, valuation and actuarial services, litigation, recruitment and remuneration, and information technology.
In addition to the above, KPMG estimate they have been paid fees of US$3.6m (2013: US$5.3m; 2012: US$3.3m)by parties other than HSBC but where HSBC is connected with the contracting party and may therefore be involved in appointing KPMG. These fees arise from services such as auditing mutual funds managed by HSBC and reviewing the financial position of corporate concerns which borrow from HSBC.
Fees payable to KPMG for non-audit services for HSBC Holdings are not disclosed separately because such fees are disclosed on a consolidated basis for the HSBC Group.
8 Tax
Accounting policy
Income tax comprises current tax and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised in other comprehensive income or directly in equity, in which case it is recognised in the same statement in which the related item appears. Current tax is the tax expected to be payable on the taxable profit for the year, calculated using tax rates enacted or substantively enacted by the balance sheet date, and any adjustment to tax payable in respect of previous years. HSBC provides for potential current tax liabilities that may arise on the basis of the amounts expected to be paid to the tax authorities. Current tax assets and liabilities are offset when HSBC intends to settle on a net basis and the legal right to offset exists. Deferred tax is recognised on temporary differences between the carrying amounts of assets and liabilities in the balance sheet and the amounts attributed to such assets and liabilities for tax purposes. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that future taxable profits will be available against which deductible temporary differences can be utilised. Deferred tax is calculated using the tax rates expected to apply in the periods in which the assets will be realised or the liabilities settled, based on tax rates and laws enacted, or substantively enacted, by the balance sheet date. Deferred tax assets and liabilities are offset when they arise in the same tax reporting group and relate to income taxes levied by the same taxation authority, and when HSBC has a legal right to offset. |
Deferred tax relating to actuarial gains and losses on post-employment benefits is recognised in other comprehensive income. Deferred tax relating to share-based payment transactions is recognised directly in equity to the extent that the amount of the estimated future tax deduction exceeds the amount of the related cumulative remuneration expense. Deferred tax relating to fair value re-measurements of available-for-sale investments and cash flow hedging instruments is charged or credited directly to other comprehensive income and is subsequently recognised in the income statement when the deferred fair value gain or loss is recognised in the income statement. |
Critical accounting estimates and judgements
Deferred tax assets The recognition of a deferred tax asset relies on an assessment of the probability and sufficiency of future taxable profits, future reversals of existing taxable temporary differences and ongoing tax planning strategies. In absence of a history of taxable profits, the most significant judgements relate to expected future profitability and to the applicability of tax planning strategies, including corporate reorganisations. Our US operations have a history of tax losses, but profitability is expected to improve. Tax planning strategies support the recognition of deferred tax assets in the US, with retention of capital in the US operations being a significant factor in recognising the deferred tax assets. Given the recent occurrence of tax losses, the recognition of deferred tax assets in Brazil takes into consideration both the reliance placed on management's projection of income and on the use of strategies, such as corporate reorganisations and other initiatives, to improve the profitability of our Brazilian banking operations from a tax perspective. |
2014 | 2013 | 2012 | ||||
| US$m | US$m | US$m | |||
Current tax | ||||||
UK corporation tax | 69 | (8) | 250 | |||
- for this year | 54 | 103 | 60 | |||
- adjustments in respect of prior years | 15 | (111) | 190 | |||
Overseas tax1 | 3,881 | 3,949 | 5,560 | |||
- for this year | 4,423 | 3,947 | 5,421 | |||
- adjustments in respect of prior years | (542) | 2 | 139 | |||
3,950 | 3,941 | 5,810 | ||||
Deferred tax | 25 | 824 | (495) | |||
- origination and reversal of temporary differences | (477) | 739 | (269) | |||
- effect of changes in tax rates | 83 | 93 | 66 | |||
- adjustments in respect of prior years | 419 | (8) | (292) | |||
Year ended 31 December | 3,975 | 4,765 | 5,315 |
1 Overseas tax included Hong Kong profits tax of US$1,135m (2013: US$1,133m; 2012: US$1,049m). The Hong Kong tax rate applying to the profits of subsidiaries assessable in Hong Kong was 16.5% (2013: 16.5%; 2012: 16.5%). Other overseas subsidiaries and overseas branches provided for taxation at the appropriate rates in the countries in which they operate.
Tax reconciliation
The tax charged to the income statement differs from the tax charge that would apply if all profits had been taxed at the UK corporation tax rate as follows:
| 2014 |
| 2013 | 2012 | |||||||||||
| US$m |
| % |
| US$m | % | US$m | % |
| ||||||
| |||||||||||||||
Profit before tax | 18,680 | 22,565 | 20,649 |
| |||||||||||
| |||||||||||||||
Tax expense |
| ||||||||||||||
Tax at 21.5% (2013: 23.25%; 2012: 24.5%) | 4,016 | 21.5 | 5,246 | 23.25 | 5,057 | 24.5 |
| ||||||||
Effect of differently taxed overseas profits | 33 | 0.2 | (177) | (0.8) | (57) | (0.3) |
| ||||||||
Adjustments in respect of prior period liabilities | (108) | (0.6) | (117) | (0.5) | 37 | 0.2 |
| ||||||||
Deferred tax temporary differences not recognised/ (previously not recognised) | (154) | (0.8) | 332 | 1.5 | 374 | 1.8 |
| ||||||||
Effect of profits in associates and joint ventures | (547) | (2.9) | (543) | (2.4) | (872) | (4.3) |
| ||||||||
Tax effect of disposal of Ping An | - | - | (111) | (0.5) | (204) | (1.0) |
| ||||||||
Tax effect of reclassification of Industrial Bank | - | - | (317) | (1.4) | - | - |
| ||||||||
Non-taxable income and gains | (668) | (3.5) | (871) | (3.9) | (542) | (2.6) |
| ||||||||
Permanent disallowables | 969 | 5.1 | 647 | 2.9 | 1,092 | 5.3 |
| ||||||||
Change in tax rates | 22 | 0.1 | 93 | 0.4 | 78 | 0.4 |
| ||||||||
Local taxes and overseas withholding taxes | 434 | 2.3 | 551 | 2.4 | 581 | 2.8 |
| ||||||||
Other items | (22) | (0.1) | 32 | 0.1 | (229) | (1.1) |
| ||||||||
| |||||||||||||||
Year ended 31 December | 3,975 | 21.3 | 4,765 | 21.1 | 5,315 | 25.7 |
| ||||||||
The effective tax rate for the year was 21.3% compared with 21.1% for 2013. The effective tax rate for the year reflected the recurring benefits from tax exempt income from government bonds and equities held by a number of Group entities and recognition of the Group's share of post-tax profits of associates and joint ventures within our pre-tax income, together with a current tax credit for prior periods offset in part by non-tax-deductible settlements and provision in connection with foreign exchange investigations. The effective tax rate in 2013 was lower because of benefits from non-taxable gains offset in part by a write-down of deferred tax assets.
The main rate of corporation tax in the UK reduced from 23% to 21% on 1 April 2014 and will be further reduced to 20% on 1 April 2015. The reduction in the corporate tax rate to 20% was enacted through the 2013 Finance Act on 17 July 2013. It is not expected that the future rate reduction will have a significant effect on the Group.
The Group's legal entities are subject to routine review and audit by tax authorities in the territories in which the Group operates. Where the ultimate tax treatment is uncertain, the Group provides for potential tax liabilities that may arise on the basis of the amounts expected to be paid to the tax authorities. The amounts ultimately paid may differ materially from the amounts provided depending on the ultimate resolution of such matters.
Deferred taxation
The table overleaf shows the gross deferred tax assets and liabilities recognised in the balance sheet and the related amounts recognised in the income statement, other comprehensive income and directly in equity.
The amounts presented in the balance sheet are different from the amounts disclosed in the table overleaf as they are presented after offsetting asset and liability balances where HSBC has the legal right to set-off and intends to settle on a net basis. The net deferred tax assets totalled US$5.6bn at 31 December 2014 (2013: US$6.5bn). The main items to note are:
US
The net deferred tax asset relating to HSBC's operations in the US was US$4.1bn (2013: US$4.4bn). The deferred tax assets included in this total reflected the carry forward of tax losses and tax credits of US$0.9bn (2013: US$0.7bn), deductible temporary differences in respect of loan impairment allowances of US$0.8bn (2013: US$1.2bn) and other temporary differences of US$2.4bn (2013: US$2.5bn).
Deductions for loan impairments for US tax purposes generally occur when the impaired loan is charged off, or if earlier, when the impaired loan is sold. The tax deduction is often in the period subsequent to that in which the impairment is recognised for accounting purposes. As a result, the amount of the associated deferred tax asset should generally move in line with the impairment allowance balance.
On the evidence available, including historical levels of profitability, management projections of future income and HSBC Holdings' commitment to continue to retain sufficient capital in North America to recover the deferred tax asset, it is expected that there will be sufficient taxable income generated by the business to realise these assets.
Management projections of profits from the US operations currently indicate that tax losses and tax credits will be fully recovered by 2017. The current level of the deferred tax asset in respect of loan impairment allowances and other deductible temporary differences is projected to reduce over the next four years.
As there has been a recent history of losses in HSBC's US operations, management's analysis of the recognition of these deferred tax assets significantly discounts any future expected profits from the US operations and relies on capital support from HSBC Holdings, including tax planning strategies in relation to such support. The principal strategy involves generating future taxable profits through the retention of capital in the US in excess of normal regulatory requirements in order to reduce deductible funding expenses or otherwise deploy such capital to increase levels of taxable income. As financial performance in our US operations improves it is expected that projected future profits from US operations will be relied on in the evaluation of the recognition of the deferred tax asset in future periods as the sustainability of the improving financial performance is demonstrated.
Brazil
The net deferred tax asset relating to HSBC's operations in Brazil was US$1.3bn (2013: US$1.0bn). The deferred tax assets included in this total reflected the carry forward of tax losses of US$0.3bn (2013: US$0.1bn), deductible temporary differences in respect of loan impairment allowances of US$0.7bn (2013: US$0.7bn) and other temporary differences of US$0.3bn (2013: US$0.2bn).
Deductions for loan impairments for Brazilian tax purposes generally occur when the impaired loan is charged off, often in the period subsequent to that in which the impairment is recognised for accounting purposes. As a result, the amount of the associated deferred tax asset should generally move in line with the impairment allowance balance.
Management projections of profits from the Brazilian banking operations currently indicate that the tax losses and other temporary differences will be substantially recovered within the next five to eight years. Loan impairment deductions are recognised for tax purposes typically within two to three years of the accounting recognition.
Mexico
The net deferred tax asset relating to HSBC's operations in Mexico was US$0.5bn (2013: US$0.5bn). The deferred tax assets included in this total related primarily to deductible temporary differences in respect of accounting provisions for impaired loans.
Management's analysis of the recognition of these deferred tax assets relies on the primary strategy of selling certain loan portfolios, the losses on which are deductible for tax in Mexico when sold. Any such deductions for tax would lead to the reversal of the carried forward loan impairment provision recognised for deferred tax purposes. The deferred tax balances are carried forward to future years without expiry.
In September 2013, the Mexican Government proposed a number of tax reforms that were approved by the Chamber of Senate in October 2013 and published in the Official Gazette in December 2013. The tax reforms included a new basis of tax deduction for loan impairment charges that will allow banks to recognise tax deductions as and when loans are written off the balance sheet. The reforms also brought in transitional rules to allow banks to continue to claim any unclaimed deductions as at 31 December 2013. On 4 July 2014, the Mexican Government issued rule I.3.22.5 of the Miscellaneous Tax Resolution that clarified the treatment of the transitional rules, but had no impact on the deferred tax assets held in our operations in Mexico.
On the evidence available, including historical and projected levels of loan portfolio growth, loan impairment rates and profitability, it is expected that the business will realise these assets over the next five years.
There were no material carried forward tax losses or tax credits recognised within the Group's deferred tax assets in Mexico.
UK
The net deferred tax liability relating to HSBC's operations in the UK was US$0.4bn (2013: asset of US$0.4bn). The deferred tax liabilities included in this total related primarily to retirement benefits.
There were no material carried forward tax losses or tax credits recognised within the Group's deferred tax assets in the UK.
Unrecognised deferred tax
The amount of temporary differences, unused tax losses and tax credits for which no deferred tax asset is recognised in the balance sheet was US$22.6bn (2013: US$22.0bn). These amounts included unused state losses arising in our US operations of US$14.1bn (2013: US$17.3bn).
Of the total amounts unrecognised, US$4.2bn (2013: US$5.0bn) had no expiry date, US$0.9bn (2013: US$1.0bn) was scheduled to expire within 10 years and the remaining will expire after 10 years.
Deferred tax is not recognised in respect of the Group's investments in subsidiaries and branches where remittance or other realisation is not probable, and for those associates and interests in joint ventures where it has been determined that no additional tax will arise. No amount is disclosed for the unrecognised deferred tax or the 2014 and 2013 temporary differences associated with such investments as it is impracticable to determine the amount of income taxes that would be payable when any temporary differences reverse. Deferred tax of US$132m (2013: US$20m) has, however, been provided in respect of distributable reserves of associates that, on distribution, would attract withholding tax.
Movement of deferred tax assets and liabilities
Retirement benefits | Loan impairment provisions | Unused tax losses and tax credits | Accelerated capital allowances and assets leased to customers | Available- for-sale investments | Cash flow hedges | Share- based payments | Fee income | Derivatives, FVOD1 and other investments | Insurance technical provisions | Expense provisions | Other | Total | ||||||||||||||
US$m | US$m | US$m | US$m | US$m | US$m | US$m | US$m | US$m | US$m | US$m | US$m | US$m | ||||||||||||||
Assets | 274 | 2,837 | 978 | 549 | - | 211 | 253 | - | 1,383 | - | 1,398 | 461 | 8,344 | |||||||||||||
Liabilities | - | - | - | (144) | (298) | (24) | - | (59) | (213) | (840) | - | (220) | (1,798) | |||||||||||||
At 1 January 2014 | 274 | 2,837 | 978 | 405 | (298) | 187 | 253 | (59) | 1,170 | (840) | 1,398 | 241 | 6,546 | |||||||||||||
Acquisitions and disposals | - | - | - | - | - | - | - | - | - | - | - | - | - | |||||||||||||
Income statement | (57) | (408) | 396 | (17) | (2) | (3) | (3) | 2 | 361 | (76) | (86) | (132) | (25) | |||||||||||||
Other comprehensive income | (438) | - | - | - | (203) | (87) | - | - | (12) | - | - | 48 | (692) | |||||||||||||
Equity | - | - | - | - | - | - | (20) | - | - | - | - | - | (20) | |||||||||||||
Foreign exchange and other adjustments | 10 | (165) | (42) | (26) | 11 | 1 | (21) | 1 | 12 | 55 | (68) | 10 | (222) | |||||||||||||
At 31 December 2014 | (211) | 2,264 | 1,332 | 362 | (492) | 98 | 209 | (56) | 1,531 | (861) | 1,244 | 167 | 5,587 | |||||||||||||
Assets | - | 2,264 | 1,332 | 362 | - | 98 | 209 | - | 1,764 | - | 1,244 | 167 | 7,440 | |||||||||||||
Liabilities | (211) | - | - | - | (492) | - | - | (56) | (233) | (861) | - | - | (1,853) | |||||||||||||
Assets | 469 | 3,912 | 617 | 473 | - | 285 | 305 | - | 1,530 | - | 1,457 | (22) | 9,026 | |||||||||||||
Liabilities | - | - | - | (226) | (1,203) | (44) | - | (105) | (162) | (815) | - | (10) | (2,565) | |||||||||||||
At 1 January 2013 | 469 | 3,912 | 617 | 247 | (1,203) | 241 | 305 | (105) | 1,368 | (815) | 1,457 | (32) | 6,461 | |||||||||||||
Acquisitions and disposals | - | - | (9) | - | (3) | 1 | - | - | - | - | - | (26) | (37) | |||||||||||||
Income statement | (419) | (985) | 399 | 123 | (53) | (91) | (49) | 42 | (165) | (72) | 47 | 399 | (824) | |||||||||||||
Other comprehensive income | 169 | - | - | - | 1,026 | 38 | - | - | (12) | - | - | - | 1,221 | |||||||||||||
Equity | - | - | - | - | - | - | (2) | - | - | - | - | - | (2) | |||||||||||||
Foreign exchange and other adjustments | 55 | (90) |
(29) | 35 | (65) | (2) | (1) | 4 | (21) | 47 |
(106) | (100) | (273) | |||||||||||||
At 31 December 2013 | 274 | 2,837 | 978 | 405 | (298) | 187 | 253 | (59) | 1,170 | (840) | 1,398 | 241 | 6,546 | |||||||||||||
Assets | 274 | 2,837 | 978 | 549 | - | 211 | 253 | - | 1,383 | - | 1,398 | 461 | 8,344 | |||||||||||||
Liabilities | - | - | - | (144) | (298) | (24) | - | (59) | (213) | (840) | - | (220) | (1,798) | |||||||||||||
1 Fair value of own debt.
HSBC Holdings
Movement of deferred tax assets
Accelerated capital allowances | Available- for-sale investments | Other Investments | Share- based payments | Other short- term timing differences | Total | |||||||
US$m | US$m | US$m | US$m | US$m | US$m | |||||||
At 1 January 2014 | 2 | (23) | 19 | 11 | 4 | 13 | ||||||
Income statement | - | - | 3 | 2 | 1 | 6 | ||||||
Other comprehensive income | - | (36) | - | - | - | (36) | ||||||
At 31 December 2014 | 2 | (59) | 22 | 13 | 5 | (17) | ||||||
At 1 January 2013 | 2 | (31) | 31 | 12 | - | 14 | ||||||
Income statement | - | - | (12) | (1) | 4 | (9) | ||||||
Other comprehensive income | - | 8 | - | - | - | 8 | ||||||
At 31 December 2013 | 2 | (23) | 19 | 11 | 4 | 13 |
The amount of unused tax losses for which no deferred tax asset is recognised in the balance sheet was US$3,760m (2013: US$3,405m) of which US$10m (2013: US$9m) relate to capital losses. On the evidence available, including historical levels of profitability and management projections of future income, it is expected that there will be not sufficient taxable income generated by the business to recover the tax losses carried forward by HSBC Holdings. The losses have no expiry date.
9 Dividends
Dividends to shareholders of the parent company
2014 | 2013 | 2012 | ||||||||||||||||
Per share US$ | Total US$m | Settled in scrip US$m | Per share US$ | Total US$m | Settled in scrip US$m | Per share US$ | Total US$m | Settled in scrip US$m | ||||||||||
Dividends paid on ordinary shares | ||||||||||||||||||
In respect of previous year: | ||||||||||||||||||
- fourth interim dividend | 0.19 | 3,582 | 1,827 | 0.18 | 3,339 | 540 | 0.14 | 2,535 | 259 | |||||||||
In respect of current year: | ||||||||||||||||||
- first interim dividend | 0.10 | 1,906 | 284 | 0.10 | 1,861 | 167 | 0.09 | 1,633 | 748 | |||||||||
- second interim dividend | 0.10 | 1,914 | 372 | 0.10 | 1,864 | 952 | 0.09 | 1,646 | 783 | |||||||||
- third interim dividend | 0.10 | 1,918 | 226 | 0.10 | 1,873 | 864 | 0.09 | 1,655 | 639 | |||||||||
Total | 0.49 | 9,320 | 2,709 | 0.48 | 8,937 | 2,523 | 0.41 | 7,469 | 2,429 | |||||||||
Total dividends on preference shares classified as equity (paid quarterly) | 62.00 | 90 | 62.00 | 90 | 62.00 | 90 | ||||||||||||
Total coupons on capital securities classified as equity
2014 | 2013 | 2012 | ||||||||||||
First | Per security | Total | Per security | Total | Per security | Total | ||||||||
call date | US$ | US$m | US$ | US$m | US$ | US$m | ||||||||
Perpetual subordinated capital securities1 | ||||||||||||||
- US$2,200m | Apr 2013 | 2.032 | 179 | 2.032 | 179 | 2.032 | 179 | |||||||
- US$3,800m | Dec 2015 | 2.000 | 304 | 2.000 | 304 | 2.000 | 304 | |||||||
Total |
| 483 | 483 | 483 | ||||||||||
1 Coupons are paid quarterly on the perpetual subordinated capital securities.
The Directors declared after the end of the year a fourth interim dividend in respect of the financial year ended 31 December 2014 of US$0.20 per ordinary share, a distribution of approximately US$3,844m. The fourth interim dividend will be payable on 30 April 2015 to holders of record on 6 March 2015 on the Principal Register in the UK, the Hong Kong or the Bermuda Overseas Branch registers. No liability is recorded in the financial statements in respect of the fourth interim dividend for 2014.
On 15 January 2015, HSBC paid a coupon on the perpetual subordinated capital securities of US$0.508 per security, a distribution of US$45m. No liability was recorded in the balance sheet at 31 December 2014 in respect of this coupon payment.
In September 2014, HSBC issued three contingent convertible securities as set out on page 438 which are classified as equity under IFRSs. Coupons are paid semi-annually on the contingent convertible securities and none fell due in 2014. On 20 January 2015, HSBC paid a coupon on one of the contingent convertible securities of US$28.125 per security, a distribution of US$28m. No liability was recorded in the balance sheet at 31 December 2014 in respect of this coupon payment.
The reserves available for distribution at 31 December 2014 were US$48,883m.
10 Earnings per share
'Basic earnings per ordinary share' is calculated by dividing the profit attributable to ordinary shareholders of the parent company by the weighted average number of ordinary shares outstanding, excluding own shares held. 'Diluted earnings per ordinary share' is calculated by dividing the basic earnings, which require no adjustment for the effects of dilutive potential ordinary shares, by the weighted average number of ordinary shares outstanding, excluding own shares held, plus the weighted average number of ordinary shares that would be issued on conversion of dilutive potential ordinary shares.
Profit attributable to the ordinary shareholders of the parent company
2014 | 2013 | 2012 | ||||
US$m | US$m | US$m | ||||
Profit attributable to shareholders of the parent company | 13,688 | 16,204 | 14,027 | |||
Dividend payable on preference shares classified as equity | (90) | (90) | (90) | |||
Coupon payable on capital securities classified as equity | (483) | (483) | (483) | |||
Year ended 31 December | 13,115 | 15,631 | 13,454 |
Basic and diluted earnings per share
2014 | 2013 | 2012 | ||||||||||||||||
Profit US$m | Number of shares (millions) | Per share US$ | Profit US$m | Number of shares (millions) | Per share US$ | Profit US$m | Number of shares (millions) | Per share US$ | ||||||||||
Basic1 | 13,115 | 18,960 | 0.69 | 15,631 | 18,530 | 0.84 | 13,454 | 18,125 | 0.74 | |||||||||
Effect of dilutive potential ordinary shares | - | 96 | - | - | 124 | - | - | 146 | - | |||||||||
Diluted1 | 13,115 | 19,056 | 0.69 | 15,631 | 18,654 | 0.84 | 13,454 | 18,271 | 0.74 | |||||||||
1 Weighted average number of ordinary shares outstanding (basic) or assuming dilution (diluted).
The weighted average number of dilutive potential ordinary shares excluded 6m employee share options that were anti-dilutive (2013: 60m; 2012: 103m).
11 Segmental analysis
HSBC has a matrix management structure. HSBC's chief operating decision-maker is the Group Management Board ('GMB') which operates as a general management committee under the direct authority of the Board. The GMB regularly reviews operating activity on a number of bases, including by geographical region and by global business. HSBC considers that geographical operating segments represent the most appropriate information for the users of the financial statements to best evaluate the nature and financial effects of the business activities in which HSBC engages, and the economic environments in which it operates. This reflects the importance of geographical factors on business strategy and performance, the allocation of capital resources, and the role of geographical regional management in executing strategy. As a result, HSBC's operating segments are considered to be geographical regions. Geographical information is classified by the location of the principal operations of the subsidiary or, for The Hongkong and Shanghai Banking Corporation, HSBC Bank, HSBC Bank Middle East and HSBC Bank USA, by the location of the branch responsible for reporting the results or providing funding. Measurement of segmental assets, liabilities, income and expenses is in accordance with the Group's accounting policies. Segmental income and expenses include transfers between segments and these transfers are conducted at arm's length. Shared costs are included in segments on the basis of the actual recharges made. The expense of the UK bank levy is included in the Europe geographical region as HSBC regards the levy as a cost of carrying on business and being headquartered in the UK. |
Products and services
HSBC provides a comprehensive range of banking and related financial services to its customers in its five geographical regions. The products and services offered to customers are organised by global business.
· Retail Banking and Wealth Management ('RBWM') offers a broad range of products and services to meet the personal banking and wealth management needs of individual customers. Typically, customer offerings include personal banking products (current and savings accounts, mortgages and personal loans, credit cards, debit cards and local and international payment services) and wealth management services (insurance and investment products, global asset management services and financial planning services).
· Commercial Banking ('CMB') offers a broad range of products and services to serve the needs of our commercial customers, including small and medium-sized enterprises, mid-market enterprises and corporates. These include credit and lending, international trade and receivables finance, treasury management and liquidity solutions (payments and cash management and commercial cards), commercial insurance and investments. CMB also offers its customers
access to products and services offered by other global businesses, for example Global Banking & Markets ('GB&M'), which include foreign exchange products, raising capital on debt and equity markets and advisory services.
· GB&M provides tailored financial solutions to major government, corporate and institutional clients and private investors worldwide. The client-focused business lines deliver a full range of banking capabilities including financing, advisory and transaction services, a markets business that provides services in credit, rates, foreign exchange, equities, money markets and securities services, and principal investment activities.
· Global Private Banking ('GPB') provides a range of services to high net worth individuals and families with complex and international needs within the Group's priority markets.
Change in operating segments
HSBC's operating segments are Europe, Asia, Middle East and North Africa ('MENA'), North America and Latin America. Previously, HSBC's operating segments were reported as Europe, Hong Kong, Rest of Asia-Pacific, Middle East and North Africa, North America and Latin America. Hong Kong and Rest of Asia-Pacific are no longer regarded as separate reportable operating segments, having considered the geographical financial information presented to the chief operating decision maker. From 1 January 2014, they have been replaced by a new operating segment, 'Asia', which better aligns with internal management information used for evaluation when making business decisions and resource allocations. The chief operating decision-maker continues to be the GMB and the basis for measuring segmental results has not changed. Comparative financial information has been re-presented accordingly.
There has been no change in the underlying business operations comprising the Asia segment. Reported net operating income in Asia for the year to 31 December 2014 was US$23,677m (31 December 2013: US$24,432m; 31 December 2012: US$25,332m). This was US$713m lower (31 December 2013: US$749m lower; 31 December 2012: US$674m lower) than would be calculated by adding net operating income reported for Hong Kong and Rest of Asia-Pacific on an individual basis. The reduction in net operating income is offset by an equal decrease in operating expenses. The difference relates to shared service recharges and business activity undertaken between the two regions which form revenue or expense on an individual basis, but are eliminated as 'intra-segment' activity when reported as Asia. There is no difference between profit before tax reported for Asia and that which would be calculated by adding the profit before tax of Hong Kong and Rest of Asia-Pacific on an individual basis.
Profit/(loss) for the year
Europe | Asia | MENA | North America | Latin America |
| Intra- HSBC items | Total | |||||||
US$m | US$m | US$m | US$m | US$m | US$m | US$m | ||||||||
2014 | ||||||||||||||
Net interest income | 10,611 | 12,273 | 1,519 | 5,015 | 5,310 | (23) | 34,705 | |||||||
Net fee income | 6,042 | 5,910 | 650 | 1,940 | 1,415 | − | 15,957 | |||||||
Net trading income | 2,534 | 2,622 | 314 | 411 | 856 | 23 | 6,760 | |||||||
Other income | 2,384 | 2,872 | 65 | 786 | 691 | (2,972) | 3,826 | |||||||
Net operating income1 | 21,571 | 23,677 | 2,548 | 8,152 | 8,272 | (2,972) | 61,248 | |||||||
Loan impairment (charges)/recoveries and other credit risk provisions | (764) | (647) | 6 | (322) | (2,124) | − | (3,851) | |||||||
Net operating income | 20,807 | 23,030 | 2,554 | 7,830 | 6,148 | (2,972) | 57,397 | |||||||
Employee compensation and benefits | (8,191) | (5,862) | (676) | (3,072) | (2,565) | − | (20,366) | |||||||
General and administrative expenses | (11,076) | (3,959) | (500) | (3,108) | (2,894) | 2,972 | (18,565) | |||||||
Depreciation and impairment ofproperty, plant and equipment | (543) | (389) | (28) | (180) | (242) | − | (1,382) | |||||||
Amortisation and impairment ofintangible assets | (407) | (217) | (12) | (69) | (231) | − | (936) | |||||||
Total operating expenses | (20,217) | (10,427) | (1,216) | (6,429) | (5,932) | 2,972 | (41,249) | |||||||
Operating profit | 590 | 12,603 | 1,338 | 1,401 | 216 | − | 16,148 | |||||||
Share of profit in associates and joint ventures | 6 | 2,022 | 488 | 16 | − | − | 2,532 | |||||||
Profit before tax | 596 | 14,625 | 1,826 | 1,417 | 216 | − | 18,680 | |||||||
Tax expense | (853) | (2,542) | (339) | (195) | (46) | − | (3,975) | |||||||
Profit/(loss) for the year | (257) | 12,083 | 1,487 | 1,222 | 170 | − | 14,705 |