HSBC Holdings Regulatory News (HSBA)

Financial review

The financial review gives detailed reporting of our financial performance at Group level as well as across our different global businesses and geographical regions.

98 Financial summary

110 Global businesses and geographical regions

129 Reconciliation of alternative performance measures

Pioneering a sustainable supply chain finance programme

In June 2022, we worked closely with US-based fashion group PVH Corp. to launch the first sustainable supply chain finance programme tied to environmental and social objectives, and based on suppliers' sustainability ratings.

The programme provides the company's global suppliers with access to critical funding based on a set of science-based environmental targets, as well as a series of social elements, including a healthy and safe working environment, compensation and benefits, and employment issues, such as forced labour, child labour, and harassment and abuse.

Sustainable supply chain finance supports leading companies and key sectors like the apparel industry to help ensure progress is made towards their targets and commitments.

Contents

Use of alternative performance measures

Our reported results are prepared in accordance with IFRSs as detailed in the financial statements starting on page 324.

To measure our performance, we supplement our IFRSs figures with non-IFRSs measures, which constitute alternative performance measures under European Securities and Markets Authority guidance and non-GAAP financial measures defined in and presented in accordance with US Securities and Exchange Commission rules and regulations. These measures include 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. Definitions and calculations of other alternative performance measures are included in our 'Reconciliation of alternative performance measures' on page 128. All alternative performance measures are reconciled to the closest reported performance measure.

The global business segmental results are presented on an adjusted basis in accordance with IFRS 8 'Operating Segments' as detailed in Note 10 'Segmental analysis' on page 360.

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.

We consider that 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.

Management does not assess forward-looking reported operating expenses as a target of the business, and therefore a reconciliation of the adjusted operating expenses target to an equivalent IFRS measure is not available without unreasonable efforts.

Significant items

'Significant items' refers collectively to the items that management and investors would ordinarily identify and consider separately to improve the understanding of the underlying trends in the business.

The tables on pages 109 to 112 and pages 119 to 124 detail the effects of significant items on each of our global business segments, geographical regions and selected countries/territories in 2022, 2021 and 2020.

Foreign currency translation differences

Foreign currency translation differences reflect the movements of the US dollar against most major currencies during 2022.

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 to better understand the underlying trends in the business.

Changes to presentation from 1 January 2022

Application of IAS 29 'Financial Reporting in Hyperinflationary Economies'

Since 1 June 2022, Türkiye has been deemed a hyperinflationary economy for accounting purposes. The results of HSBC's operations with a functional currency of the Turkish lira have been prepared in accordance with IAS 29 'Financial Reporting in Hyperinflationary Economies' as if the economy had always been hyperinflationary. The results of those operations for the 12-month period ended 31 December 2022 are stated in terms of current purchasing power using the Türkiye Consumer Price Index ('CPI') at 31 December 2022 with the corresponding adjustment presented in the consolidated statement of comprehensive income. In accordance with IAS 21 'The Effects of Changes in Foreign Exchange Rates', the results have been translated and presented in US dollars at the prevailing rates of exchange on 31 December 2022. The Group's comparative information presented in US dollars with respect to the 12-month periods ended 31 December 2021 and 31 December 2020 has not been restated. Argentina remains a hyperinflationary economy for accounting purposes. The impact of applying IAS 29 and the hyperinflation provisions of IAS 21 in the current period for both Türkiye and Argentina was a decrease in the Group's profit before tax of $548m, comprising a decrease in revenue of $541m (including a loss of net monetary position of $543m) and an increase in ECL and operating expenses of $7m. The CPI at 31 December 2022 for Türkiye was 1,047 (movement 2022: 359.94) and for Argentina was 1,147 (movement 2022: 563.92, 2021: 197.47).

Changes to presentation from 1 January 2023

Foreign currency and notable items

From 1 January 2023, 'adjusted performance' will no longer exclude the impact of significant items. Rather it will be computed by adjusting reported results only for the effects of foreign currency translation differences between periods to enable users to understand the impact this has had on the Group's performance. We will separately disclose 'notable items', which are components of our income statement which management and investors would consider as outside the normal course of business and generally non-recurring in nature. We will recalibrate applicable targets and guidance to reflect the impact of these changes, as well as the impact on our targets following the implementation of IFRS 17 'Insurance Contracts', and intend to communicate these as part of our first quarter results in May 2023.

Reporting by legal entity

From 1 January 2023, the Group will no longer present results by geographical regions. We will instead report performance by our main legal entities to better reflect the Group's structure.

Future accounting developments

IFRS 17 'Insurance Contracts'

IFRS 17 'Insurance Contracts' was issued in May 2017, with amendments to the standard issued in June 2020 and December 2021. Following the amendments, IFRS 17 is effective for annual reporting periods beginning on or after 1 January 2023 and is applied retrospectively, with comparatives restated from 1 January 2022.

On the basis of the implementation work performed to date, our current assumption remains that the accounting changes will result in a reduction in the earnings of our insurance business by approximately two thirds on transition to IFRS 17, albeit within a range of expected outcomes and before the effect of market impacts in specific periods. Unlike current accounting where market impacts and changes in assumptions are reported immediately in profit or loss, under IFRS 17 these are primarily accumulated with the contractual service margin ('CSM') and recognised in profit or loss over the remaining life of the contracts. While IFRS 17 changes the timing of profit recognition, there is no impact to the underlying economics of the insurance business, including solvency, capital and cash generation.

Results of work performed to date on the half-year to 30 June 2022 IFRS17 comparatives indicate there would be a likely reduction to reported profit before tax for our insurance manufacturing operations from $0.6bn under IFRS 4, to approximately $0.3bn under IFRS 17. IFRS 4 based profit before tax included negative market impacts of $0.7bn and a $0.3bn specific pricing update for policyholder funds held on deposit with us in Hong Kong. The consolidated Group insurance accounting considers the effect of eliminating intra-group distribution fees between insurance manufacturing and non-insurance Group entities, and instead includes the costs of selling insurance contracts incurred by such entities within the Group CSM. These factors generate a further impact on the 30 June 2022 Group IFRS 17 profit before tax of negative $0.1bn, in addition to the impact on insurance manufacturing operations.

We also anticipate some impact on selected key Group metrics. We expect an estimated reduction of approximately $1.1bn to the first half of 2022 Group net interest income due to the reclassification of assets supporting policyholder liabilities from amortised cost to fair value through profit and loss classification, following which the associated interest income will be included within the 'net income/(expense) from assets and liabilities of insurance businesses, including related derivatives, measured at fair value through profit or loss' line item. Group operating expenses are expected to reduce by approximately $0.3bn as a result of the IFRS 17 requirement for directly attributable costs to be included in the CSM and recognised within the insurance service result line, within revenue.

These estimates are based on accounting policies, assumptions, judgements and estimation techniques that remain subject to change.

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 amortised cost financial assets and financial assets measured at fair value through other comprehensive income ('FVOCI'): The most significant judgements relate to defining what is considered to be a significant increase in credit risk, determining the lifetime and point of initial recognition of revolving facilities, selecting and calibrating the probability of default ('PD'), the loss given default ('LGD') and the exposure at default ('EAD') models, as well as selecting model inputs and economic forecasts, and making assumptions and estimates to incorporate relevant information about late-breaking and past events, current conditions and forecasts of economic conditions. A high degree of uncertainty is involved in making estimations using assumptions that are highly subjective and very sensitive to the risk factors. See Note 1.2(i) on page 341.

• Deferred tax assets: The most significant judgements relate to those made in respect of recoverability, which is based on expected future profitability. See Note 1.2(l) on page 346.

• 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 339.

• Impairment of investment in subsidiaries: 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. The most significant judgements relate to the impairment testing of HSBC Holdings' investment in HSBC North America Holdings Limited and HSBC Bank Bermuda Limited. See Note 1.2(a) on page 337.

• 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. The most significant judgements relate to the impairment testing of our investment in Bank of Communications Co., Limited ('BoCom'). See Note 1.2(a) on page 337.

• Impairment of goodwill and non-financial assets: 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 337.

• Provisions: Significant 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(m) on page 346.

• Post-employment benefit plans: The calculation of the defined benefit pension obligation involves the determination of key assumptions including discount rate, inflation rate, pension payments and deferred pensions, pay and mortality. See Note 1.2(k) on page 345.

• Non-current assets and disposal groups held for sale: Management judgement is required on determining the likelihood of the sale to occur, and the anticipated timing in assessing whether the held for sale criteria have been met. See Note 1.2(o) on page 347.

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

1 The debt instruments, issued for funding purposes, are designated under the fair value option to reduce an accounting mismatch.

2 Includes impairment of goodwill of $425m.

3 Net operating income before change in expected credit losses and other credit impairment charges also referred to as revenue.

4 Includes an interim dividend of $0.09 per ordinary share in respect of the financial year ending 31 December 2022, paid in September 2022, and an interim dividend of $0.18 per ordinary share in respect of the financial year ending 31 December 2021, paid in April 2022.

5 Dividend per share, in respect of the period, as a percentage of earnings per share adjusted for certain items (recognition of certain deferred tax assets: $0.11 reduction in EPS; planned sales of the retail banking operations in France and banking business in Canada: $0.09 increase in EPS). No items were adjusted in 2021, 2020, 2019 or 2018.

Unless stated otherwise, all tables in the Annual Report and Accounts 2022 are presented on a reported basis.

For a summary of our financial performance in 2022, see page 28.

For further financial performance data for each global business and geographical region, see pages 109 to 112 and 117 to 127 respectively. The global business segmental results are presented on an adjusted basis in accordance with IFRS 8 'Operating Segments', in Note 10: Segmental analysis on page 360.

Income statement commentary

The following commentary compares Group financial performance for the year ended 2022 with 2021.

Net interest income

1 Gross interest yield is the average annualised interest rate earned on average interest-earning assets ('AIEA'). Gross interest payable is the average annualised interest cost as a percentage on average interest-bearing liabilities.

2 Net interest spread is the difference between the average annualised interest rate earned on AIEA, net of amortised premiums and loan fees, and the average annualised interest rate payable on average interest-bearing funds.

3 Net interest margin is net interest income expressed as an annualised percentage of AIEA.

1 Including interest-bearing bank deposits only.

2 Including interest-bearing customer accounts only.

Net interest income ('NII') for 2022 was $32.6bn, an increase of $6.1bn or 23% compared with 2021. The increase reflected the benefit of rising global interest rates, while actively managing our pricing strategy and funding requirements, with growth in all regions, notably in Asia and the UK.

Excluding the unfavourable impact of foreign currency translation differences, net interest income increased by $7.7bn or 31%.

NII for the fourth quarter was $9.6bn, up 41% compared with the previous year, and 12% compared with the previous quarter. This was driven by higher interest rates and management of our funding costs, with growth in all regions, notably in Asia and the UK.

Net interest margin ('NIM') for 2022 of 1.48% was up 28 basis points ('bps') compared with 2021, as the gross yield on AIEA improved by 86bps in the high interest rate environment. This was partly offset by the rise in the funding cost of average interest-bearing liabilities of 71bps. Excluding the adverse impact of foreign currency translation differences, net interest income increased by 29bps.

NIM for the fourth quarter of 2022 was 1.74%, up 55bps year on year, and up 17bps compared with the previous quarter, predominantly driven by the impact of higher market interest rates.

Interest income for 2022 of $55.1bn increased by $18.9bn or 52%, primarily due to higher average interest rates compared with 2021, as the yield on AIEA rose by 86bps, mainly driven by loans and advances to customers, short-term funds, loans and advances to banks, and reverse repurchase agreements. However, mortgage yields rose more modestly due to competitive pressures and market factors in the UK and Hong Kong. The increase in interest income included adverse effects of foreign currency translation differences of $2.2bn. Excluding this, interest income increased by $21.1bn.

Interest income of $19.5bn in the fourth quarter was up $10.3bn year on year, and up $4.9bn from the previous quarter. The increase was driven by the impact of higher interest rates, resulting in improved yields on loans and advances to customers and reverse repurchase agreements.

Interest expense for 2022 of $22.4bn increased by $12.8bn or 131% compared with 2021. This reflected the increase in funding cost of 71bps, mainly arising from higher interest rates paid on interest-bearing customer accounts, repurchase agreements and debt securities in issue. The increase in interest expense included the favourable effects of foreign currency translation differences of $0.6bn. Excluding this, interest expense increased by $13.4bn.

Included within net interest income in 2022 is a $2.5bn interest expense representing a component of centrally allocated funding costs associated with generating 'net income from financial instruments held for trading or managed on a fair value basis'. This compared with an interest expense of $0.4bn in 2021.

Interest expense of $10.0bn in the fourth quarter of 2022 was up $7.5bn year on year, and up $3.9bn compared with the previous quarter. The steep rise in interest expense was mainly driven by higher funding cost on customer accounts as interest rates increased, particularly in Asia and Europe.

Net fee income of $11.5bn was $1.6bn lower than in 2021, and included an adverse impact from foreign currency translation differences of $0.6bn. Net fee income fell in WPB and GBM, although it increased in CMB.

In WPB, net fee income decreased by $0.9bn. The reduction was mainly in Wealth, as adverse market sentiment resulted in lower customer demand, mainly in Hong Kong. Fee income fell due to lower sales of unit trusts and from subdued customer demand in funds under management, as well as from lower broking income. Cards income grew as spending increased compared with 2021. This also resulted in higher fee expense.

In GBM, net fee income decreased by $0.8bn. This was driven by lower fee income from underwriting, in line with the reduction in the global fee pool. Fee income also decreased in credit facilities and in corporate finance, reflecting subdued client demand.

In CMB, net fee income increased by $0.1bn. Fee income grew in cards, as spending increased compared with 2021, and in account services, reflecting greater client activity in transaction banking, notably Global Payments Solutions ('GPS').

Net income from financial instruments held for trading or managed on a fair value basis of $10.5bn was $2.7bn higher compared with 2021. This primarily reflected a strong trading performance in Global Foreign Exchange due to increased client activity, driven by elevated levels of market volatility.

This was partly offset by adverse fair value movements on non-qualifying hedges of $0.5bn.

Net expense from assets and liabilities of insurance businesses, including related derivatives, measured at fair value through profit or loss of $3.4bn compared with a net income of $4.1bn in 2021. This reduction primarily reflected unfavourable equity market performances in Hong Kong and France. This compared with 2021, which benefited from favourable equity markets.

This adverse movement resulted in a corresponding movement in liabilities to policyholders and the present value of in-force long-term insurance business ('PVIF') (see 'Other operating income/expense'). This reflected the extent to which the policyholders and shareholders respectively participate in the investment performance of the associated assets.

Changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss of $0.2bn was $0.6bn lower compared with 2021. This primarily reflected lower revaluation gains in our Principal Investments business in GBM.

Gains less losses from financial investments of $3m were $0.6bn lower compared with 2021, reflecting lower gains on the disposal of debt securities.

Net insurance premium income of $12.8bn was $2.0bn higher than in 2021, primarily reflecting higher sales volumes, particularly in Hong Kong, which had a higher proportion of single premium products in its product mix, as well as in Singapore following our acquisition of AXA Insurance Pte Limited.

Impairment loss relating to the sale of the retail banking operations in France was $2.4bn. In accordance with IFRS 5 'Non-current Assets Held for Sale and Discontinued Operations', the disposal group was classified as held for sale on 30 September 2022, at which point the Group recognised the estimated impairment of $2.4bn, which included impairment of goodwill of $0.4bn and related transaction costs.

Other operating income/expense was an expense of $0.1bn compared with an income of $0.5bn in 2021, and included an adverse impact from foreign currency translation differences of $0.4 bn. The reduction also reflected losses of $0.4bn related to the planned sales of our branch operations in Greece and our business in Russia, as well as the non-recurrence of a prior year gain on the sale of a property in Germany. These reductions were partly offset by a gain of $0.1bn on the completion of our acquisition of AXA Singapore and a favourable change in PVIF of $0.2bn.

The favourable change in PVIF included a $0.2bn increase in the value of new business, notably in Hong Kong, a $0.5bn favourable impact from sharing lower investment returns with policyholders, and a $0.3bn gain following a pricing update for our policyholders' funds held on deposit with us in Hong Kong to reflect the cost to provide this service. These factors were partly offset by a $0.7bn reduction from assumption changes, primarily reflecting the impact of higher interest rates in Hong Kong.

PVIF is presented in accordance with IFRS 4 'Insurance Contracts'. As set out on page 335, IFRS 17 'Insurance Contracts' is effective from 1 January 2023. Under IFRS 17, there will be no PVIF asset recognised. Instead, the estimated future profit will be included in the measurement of the insurance contract liability as the contractual service margin and gradually recognised in revenue as services are provided over the duration of the insurance contract.

Net insurance claims and benefits paid and movement in liabilities to policyholders was $4.5bn lower, primarily in France and Hong Kong due to a reduction in returns on financial assets supporting contracts where the policyholder is subject to part or all of the investment risk. This was in part mitigated by higher sales volumes in Hong Kong.

Change in expected credit losses and other credit impairment charges ('ECL') were a charge of $3.6bn, compared with a net release of $0.9bn in 2021.

The charges in 2022 reflected stage 3 charges of $2.2bn, in part relating to exposures to the commercial real estate sector in mainland China. We also recognised stage 1 and stage 2 charges in all global businesses, reflecting a deterioration in the macroeconomic environment, with many markets experiencing increased interest rates, continued inflation, supply chain risks and heightened recessionary risks. These economic conditions also contributed to the increase in stage 3 charges, mainly in CMB and GBM. These increases were in part mitigated by the release of most of our remaining Covid-19-related allowances.

The charge in 2022 compared with a net release in 2021, primarily relating to Covid-19-related allowances previously built up in 2020.

For further details on the calculation of ECL, including the measurement uncertainties and significant judgements applied to such calculations, the impact of the economic scenarios and management judgemental adjustments, see pages 153 to 162.

1 The UK bank levy charge for the year ended 2022 includes adjustments made to prior period UK bank levy charges recognised in the current year.

2 Other operating expenses includes professional fees, contractor costs, transaction taxes, marketing and travel. The decrease was driven by favourable currency translation movements, partly offset by higher costs related to our cost reduction programme.

1 Represents the number of full-time equivalent people with contracts of service with the Group who are being paid at the reporting date.

Operating expenses of $33.3bn were $1.3bn or 4% lower than in 2021, primarily as foreign currency translation differences resulted in a favourable impact of $2.2bn, and due to the non-recurrence of a 2021 goodwill impairment of $0.6bn related to our WPB business in Latin America.

Reported operating expenses also reflected the impact of ongoing cost discipline across the Group. This helped mitigate growth from increased investment in technology of $0.5bn, which included investments in our digital capabilities, the impact of business volume growth, and inflation. Restructuring and other related costs increased by $1.0bn.

In 2022, cost to achieve spend, included within restructuring and other related costs, was $2.9bn. This three-year programme ended on 31 December 2022 with a total spend of $6.5bn and cumulative gross saves realised of $5.6bn. We expect additional gross cost savings of approximately $1bn to be delivered in 2023 due to actions taken in 2022.

The number of employees expressed in full-time equivalent staff ('FTE') at 31 December 2022 was 219,199, a decrease of 498 compared with 31 December 2021. The number of contractors at 31 December 2022 was 6,047, a decrease of 145.

Share of profit in associates and joint ventures of $2.7bn was $0.3bn lower, primarily as 2021 included a higher share of profit from Business Growth Fund in the UK due to the recovery in asset valuations. This was partly offset by an increase in the share of profit from The Saudi British Bank.

In relation to Bank of Communications Co., Limited ('BoCom'), we continue to be subject to a risk of impairment in the carrying value of our investment. We have performed an impairment test on the carrying amount of our investment and confirmed there was no impairment at 31 December 2022.

For more information, see Note 18: Interests in associates and joint ventures on page 379.

Tax expense

The effective tax rate for 2022 of 4.9% was lower than the 22.3% in 2021. Tax in 2022 included a $2.2bn credit arising from the recognition of a deferred tax asset from historical tax losses in HSBC Holdings, which was recognised as a significant item. This was a result of improved profit forecasts for the UK tax group, which accelerated the expected utilisation of these losses and reduced uncertainty regarding their recoverability. We also benefited from other deferred tax asset reassessments during 2022. Excluding these, the effective tax rate for 2022 was 19.2%, which was 3.1 percentage points lower than in 2021. The effective tax rate for 2022 was also decreased by the remeasurement of deferred tax balances following the substantive enactment in the first quarter of 2022 of legislation to reduce the rate of the UK banking surcharge from 8% to 3% from 1 April 2023.

Supplementary table for planned disposals

The income statements and selected balance sheet metrics for the year ended 31 December 2022 of our banking business in Canada and our retail banking operations in France are shown below.

The asset and liability balances relating to these planned disposals are reported on the Group balance sheet within 'Assets held for sale' and 'Liabilities of disposal groups held for sale', respectively, as at 31 December 2022.

1 Under the terms of the sale agreement, the pre-tax profit on the sale will be recognised through a combination of the consolidation of HSBC Canada's results into the Group's financial statements from 30 June 2022 until completion, and the remaining gain on sale recognised at completion.

2 France retail includes the transferring retail banking business, HSBC SFH and associated supporting services. For more information, see Note 23: Assets held for sale and liabilities of disposal groups held for sale on page 389.

3 Includes $0.3bn in Canada and $0.1bn in France retail in respect of Group recharges and other costs not transferring as part of the planned transactions.

4 Includes $3.0bn in Canada and $0.9bn in France retail in respect of operational risk RWAs.

Consolidated balance sheet

1 'Assets held for sale' in 2021, including $2.4bn of loans and advances to customers in relation to our exit of mass market retail banking business in the US, were reported within 'Other assets' in the Annual Report and Accounts 2021. Similarly, $8.8bn of customer accounts classified as 'Liabilities of disposal groups' were previously presented within 'Other liabilities'.

A more detailed consolidated balance sheet is contained in the financial statements on page 326.

1 Capital resources are regulatory total capital, the calculation of which is set out on page 205.

2 Including perpetual preferred securities, details of which can be found in Note 29: Subordinated liabilities on page 393.

3 The definition of net asset value per ordinary share is total shareholders' equity, less non-cumulative preference shares and capital securities, divided by the number of ordinary shares in issue, excluding own shares held by the company, including those purchased and held in treasury.

4 The definition of tangible net asset value per ordinary share is total ordinary shareholders' equity excluding goodwill, PVIF and other intangible assets (net of deferred tax), divided by the number of basic ordinary shares in issue, excluding own shares held by the company, including those purchased and held in treasury.