HSBC Holdings Regulatory News (HSBA)

Our reported results are prepared in accordance with IFRSs as detailed in the interim condensed financial statements starting on page 104.

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 period-on-period 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 56. 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 5: 'Segmental analysis' on page 112.

Adjusted performance

Adjusted performance is computed by adjusting reported results for the effects of foreign currency translation differences and significant items, which distort period-on-period comparisons.

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

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 37 to 39 and pages 48 to 53 detail the effects of significant items on each of our global business segments, geographical regions and selected countries/territories in 1H22, 1H21 and 2H21.

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.

Application of IAS 29 'Financial Reporting in Hyperinflationary Economies'

Since 1 June 2022, Turkey 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 six-month period ended 30 June 2022 are stated in terms of current purchasing power using the Turkey consumer price index at 30 June 2022 with the corresponding adjustment presented in the consolidated statement of comprehensive income in 2Q22. 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 rate of exchange on 30 June 2022. The Group's comparative information presented in US dollars with respect to the six-month periods ended 30 June 2021 and 31 December 2021 has not been restated. The impact of applying IAS 29 and the hyperinflation provisions of IAS 21 in the current period was a decrease in the Group's profit before tax of $114m, comprising a decrease in revenue of $113m and an increase in ECL and operating expenses of $1m.

IFRS 17 'Insurance Contracts'

IFRS 17 will be effective from 1 January 2023, with comparatives restated from 1 January 2022. The standard sets out the requirements that an entity should apply in accounting for insurance contracts it issues and reinsurance contracts it holds, and applies retrospectively. The main changes arising from IFRS 17 are the removal of the present value of in-force long-term insurance business ('PVIF') asset in respect of unearned profits, the recognition of a contractual service margin ('CSM') liability, the measurement of insurance liabilities, and the redesignation of financial assets held to support insurance liabilities currently measured at amortised cost, to fair value under IFRS 9. All of these impacts will be subject to deferred tax.

The Group continues to make progress on the implementation of IFRS 17 with accounting policies, data and models in place, with focus now on finalising the opening balance sheet and rehearsing our operational readiness. However, industry practice and interpretation of aspects of the standard are still evolving, and there remains uncertainty around the likely financial impact of its implementation. As previously guided, our preliminary management estimate of the impact of applying IFRS 17, compared with our current accounting policies for insurance contracts, is an approximate two-third reduction in total equity of our insurance operations at 1 January 2022. Work is ongoing to estimate the impact on the 2022 income statement, which will form the basis for comparative period results following the adoption of the standard in 2023. This estimate is expected to be communicated through an update, to be provided towards the end of 2022, to our previously communicated planning assumption of a reduction in profitability of approximately two-thirds, albeit within a range of expected outcomes.

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

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

3 Second interim dividend of $0.18 per ordinary share in respect of the financial year ending 31 December 2021, paid in April 2022.

4 Half-year to 31 December 2021 is calculated on a full-year basis and not a 2H21 basis.

For further financial performance data of our global business segments, see pages 37 to 45. For further financial performance data by geographical regions and selected countries/territories, see pages 46 to 55.

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 of 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 1H22 was $14.5bn, an increase of $1.4bn or 10.3% compared with 1H21. This reflected higher average market interest rates across the major currencies compared with 1H21.

Excluding the unfavourable impacts of significant items and foreign currency translation differences, NII increased by $1.9bn or 15.3%.

NII for 2Q22 was $7.5bn, up 13.2% year-on-year, and 6.5% compared with the previous quarter. This was driven by the impact of higher market interest rates across major currencies, particularly in Europe and North America. The increase was driven by higher asset yields, particularly on customer term lending, short-term funds and loans and advances to banks, as well as on reverse repurchase agreements. This was partly offset by higher funding costs, in particular for customer deposits, debt securities and repurchase agreements.

Net interest margin ('NIM') of 1.30% was 9 basis points ('bps') higher compared with 1H21, as the rise in the yield on AIEA of 23bps was partly offset by the rise in the funding cost of average interest-bearing liabilities of 17bps. The increase in NIM in 1H22 included the unfavourable impacts of significant items and foreign currency translation differences. Excluding this, NIM increased by 11bps.

NIM for 2Q22 was 1.35%, up 15bps year-on-year, and up 9bps compared with the previous quarter, predominantly driven by the impact of higher market interest rates.

Interest income of $20.9bn increased by $2.9bn or 16%, primarily due to higher average interest rates compared with 1H21, as the yield on AIEA increased by 23bps. This was caused by the increase in market interest rates, partly offset by unfavourable changes in balance sheet mix, as balances of low-yielding assets, particularly short-term funds and loans and advances to banks, increased by $37bn and reverse repurchase agreements increased by $27bn, while the balances of high-yielding assets, particularly customer term lending in the loans and advances to customer category, declined by $24bn. The change in interest income included $32.1m in relation to the unfavourable impact of significant items and $743m from the adverse effects of foreign currency translation. Excluding these, interest income increased by $3.7bn.

Interest income of $11.2bn in 2Q22 was up $2.2bn year-on-year, and up $1.5bn from the previous quarter. This was predominantly driven by the impact of higher market interest rates, partly offset by an unfavourable change in the balance sheet mix as balances in low-yielding assets increased, while balances in high-yielding assets declined. Compared with the previous year, balances in low-yielding reverse repurchase agreements increased by $34bn, whereas higher-yielding customer term lending balances declined by $23bn.

Interest expense of $6.4bn increased by $1.5bn or 32% compared with 1H21. This reflected the increase in funding costs by 17bps, mainly arising from higher interest rates paid on interest-bearing customer accounts, repurchase agreements and debt securities in issue. This was partly offset by a reduction in interest expense attributable to reduced balances of high-costing subordinated debt, which declined by $12bn. The change in interest expense included the favourable effects of foreign currency translation differences of $0.2bn. Excluding this, interest expense increased by $1.7bn.

Interest expense of $3.7bn in 2Q22 was up $1.3bn year-on-year, and up $1.1bn compared with the previous quarter. This was predominantly driven by the impact of higher market interest rates.

Net fee income of $6.1bn was $0.6bn lower than in 1H21, and included a $0.2bn adverse impact from currency translation. The fall in net fee income was in WPB and GBM, although it rose in CMB.

In WPB, the reduction in fee income was mainly in Wealth, particularly in broking and unit trusts in Hong Kong, reflecting weaker equity markets due to muted customer sentiment. Covid-19-related restrictions in Hong Kong in 1Q22 also resulted in temporary branch network closures. These reductions were partly offset by higher cards income, notably in the UK, as customer spending increased. The growth in cards activity resulted in a rise in fee expense.

In GBM, a reduction in fee income was driven by lower underwriting fees, as market activity fell due to the effects of the Russia-Ukraine war and wider macroeconomic uncertainty. This compared with a strong 1H21 when corporates raised finance as initial Covid-19 restrictions were eased.

In CMB, fee income increased from account services and credit cards as customer activity increased, as well as from trade products, as global trade volumes recovered compared with 1H21.

Net income from financial instruments held for trading or managed on a fair value basis of $4.9bn was $0.7bn higher. The increase was driven by GBM, as higher market volatility supported a strong performance within Global Foreign Exchange.

This was partly offset by adverse fair value movements on non-qualifying hedges of $0.2bn.

Net expense from assets and liabilities of insurance businesses, including related derivatives, measured at fair value through profit or loss of $3.1bn compared with a net income of $2.8bn in 1H21. This decrease primarily reflected adverse equity market performances in Hong Kong and France.

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' below). This reflected the extent to which the policyholders and shareholders respectively participate in the investment performance of the associated asset portfolios.

Changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss of $0.1bn were $0.5bn lower compared with 1H21. This included lower revaluation gains in Principal Investments. It also included revaluation losses on other financial assets due to the increased macroeconomic uncertainty, in part due to the Russia-Ukraine war, as well as adverse movements on interest rate-linked instruments as yield curves steepened.

Gains less losses from financial investments of $21m were $0.4bn lower compared with 1H21, reflecting smaller gains on the disposal of debt securities.

Net insurance premium income of $7.6bn was $2.0bn higher than in 1H21, reflecting strong sales in Hong Kong.

Other operating income of $0.7bn increased by $0.6bn compared with 1H21, primarily due to $0.9bn higher net favourable changes in PVIF.

The changes in PVIF were mainly in Hong Kong and included a $0.2bn increase in the value of new business 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. There was also an increase of $0.3bn primarily reflecting the effect of sharing lower investment returns with policyholders.

PVIF is presented in accordance with IFRS 4 'Insurance Contracts'. As set out in 'Future accounting developments' on page 29, 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.

The increase in 'Other operating income' also included a $0.1bn provisional gain on completion of our acquisition of AXA Singapore in 1H22. The increases were partly offset by 1H22 losses associated with the planned sales of our branch operations in Greece and our operations in Russia.

Net insurance claims and benefits paid and movement in liabilities to policyholders of $5.4bn were $2.5bn lower, primarily due to lower returns on financial assets supporting contracts where the policyholder is subject to part or all of the investment risk, mainly in France and Hong Kong, together with the impact of higher sales volumes in Hong Kong.

Change in expected credit losses and other credit impairment charges ('ECL') were a charge of $1.1bn, compared with a net release of $0.7bn in 1H21.

The 1H22 charge primarily reflected stage 3 charges of $0.8bn, including charges related to the commercial real estate sector in mainland China, as well as against Russia exposures. We also recognised additional stage 1 and stage 2 allowances to reflect heightened levels of economic uncertainty and inflationary pressures, in part offset by the release of most of our remaining Covid-19-related allowances. This compared with a net release in 1H21 primarily relating to Covid-19-related allowances previously built up in 2020.

We continue to expect our ECL charges to normalise towards 30bps of average loans in 2022, recognising the possible risk of further deterioration in the consensus economic outlook. We also continue to monitor external developments in certain key vulnerable sectors, particularly offshore commercial financing of the real estate sector in mainland China.

For further details on the calculation of ECL, including the measurement uncertainties and significant judgements applied to such calculations, the impact of economic scenarios and management judgemental adjustments, see pages 67 to 75.

1 Other operating expenses includes professional fees, contractor costs, transaction taxes, marketing and travel. The decrease was driven by favourable currency translation, as well as higher capitalisation resulting from changes in the capitalisation offset to contractors, services contracted out and other administration expenses compared with the prior year. This was partly offset by higher professional fees resulting from investment in technology including cost to achieve spend.

Operating expenses of $16.4bn were $0.7bn or 4% lower than in 1H21. This included a favourable impact of $0.7bn from foreign currency translation differences, in part offset by an increase in restructuring and other related costs of $0.2bn.

The reduction also reflected the impact of our cost-saving initiatives of $1.1bn and a lower performance-related pay accrual of $0.4bn, for which the Group-wide phasing of the accrual is driven by the expected profile of full-year profits. Given profits in 1H21 benefited from significant ECL releases, we recognised a larger share of the accrual in the first half of the year relative to 1H22. These factors more than offset increases from our continued investments in technology of $0.4bn, which is gross of cost savings of $0.2bn, and in wealth in Asia of $0.2bn, as well as from other increases, including higher inflation, regulatory investments, growth in business volumes and marketing.

The number of employees expressed in full-time equivalent staff ('FTEs') at 30 June 2022 was 218,866, a decrease of 831 from 31 December 2021. Additionally, the number of contractors at 30 June 2022 was 6,642, an increase of 450 from 31 December 2021.

Share of profit in associates and joint ventures of $1.4bn was $0.2bn or 13% lower, primarily as 1H21 included a higher share of profit from BGF due to the recovery in asset valuations.

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 30 June 2022. For further details of our impairment review process, see Note 10 on the interim condensed financial statements.

Tax expense

Tax in 1H22 was a credit of $39m. This was mainly due to a $1.8bn credit arising from the recognition of a deferred tax asset on historical tax losses of HSBC Holdings as a result of improved profit forecasts for the UK tax group, which accelerated the expected utilisation of these losses and reduced the uncertainty regarding their recoverability. Excluding this, the effective tax rate for 1H22 was 19.4% and was reduced by the remeasurement of deferred tax balances following substantive enactment of legislation to reduce the rate of the UK banking surcharge from 8% to 3% with effect from 1 April 2023. The effective tax rate for 1H21 was 22.3%.

1 Net of impairment allowances.

1 Capital resources are regulatory capital, the calculation of which is set out on page 91.

2 Including perpetual preferred securities.

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 shareholder's 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.

A more detailed consolidated balance sheet is contained in the interim condensed financial statements on page 106.

Balance sheet commentary compared with 31 December 2021

At 30 June 2022, our total assets were $3.0tn, an increase of $27bn or 1% on a reported basis, and $173bn or 6% on a constant currency basis.

Our asset base included growth in derivative asset balances due to favourable revaluation movements on interest rate contracts, and higher other assets reflecting seasonal reductions in settlement accounts at 31 December 2021, as clients settled trades prior to the year end. These increases were partly offset by reductions in cash and balances at central banks and lower trading assets.

Our ratio of loans and advances to customers as a percentage of customer accounts of 62% was in line with 31 December 2021.

Assets

Cash and balances at central banks decreased by $39bn or 10%, which included a $32bn impact of foreign exchange movements since 31 December 2021.

Trading assets decreased by $31bn or 13%, notably from a reduction in equity securities held, particularly in the UK and Hong Kong, notably reflecting lower client demand.

Derivative assets increased by $66bn or 34%, mainly in Europe, reflecting favourable revaluation movements on interest rate contracts due to movements in long-term yield curve rates in most major markets. Foreign exchange contracts also increased as a result of foreign exchange rate movements, mainly in the UK, France and Hong Kong. The increase in derivative assets was consistent with the increase in derivative liabilities, as the underlying risk is broadly matched.

Loans and advances to customers of $1.0tn were $17bn lower, which included an adverse impact from foreign currency translation differences of $51bn. On a constant currency basis, customer lending balances were $34bn higher.

The commentary below is on a constant currency basis.

Customer lending increased in WPB by $13bn to $475bn, mainly from higher mortgage balances, notably in the UK (up $5bn), Australia (up $2bn) and Hong Kong (up $1bn). There was also an increase in term lending of $2bn, mainly in Hong Kong and the UK, although overdraft and credit card balances fell, mainly in Asia.

In CMB, customer lending of $348bn was $16bn higher with increases in all regions. Trade volumes remained robust, with growth in term lending of $9bn, reflecting a strong performance in North America and Asia. 

In GBM, customer lending of $204bn grew by $5bn, reflecting higher term lending of $5bn, mainly in the US, the UK and UAE due to increased customer drawdowns. There was also growth in overdraft balances of $3bn, mainly in the UK and Hong Kong.

Financial investments decreased by $15bn or 3%, mainly in Europe from the adverse impact of foreign currency translation differences since 31 December 2021. The reduction included adverse fair value movements recorded in 'other comprehensive income' in equity on debt securities, treasury and other eligible bills as a result of higher yield curves and wider macroeconomic pressures. It also included reductions due to disposals and maturity of these securities. The reductions were partly offset by increases in debt instruments measured at amortised cost, as we repositioned our portfolio to reduce capital volatility.

Other assets grew by $53bn or 22%, primarily due to an increase of $29bn in settlement accounts in the UK, the US and Hong Kong from higher trading activity, compared with the seasonal reduction in December 2021. Cash collateral grew by $14bn, reflecting the increase in fair value of derivative assets.

Liabilities

Customer accounts of $1.7tn decreased by $59bn on a reported basis, including the adverse impact of foreign currency translation differences of $83bn. On a constant currency basis, customer accounts were $24bn higher.

The commentary below is on a constant currency basis.

The increase in customer accounts was primarily in WPB (up $15bn), driven by higher interest-bearing and term deposit balances, as interest rates rose. There was a smaller corresponding reduction in non-interest-bearing current accounts.

Customer accounts also increased in GBM, mainly due to growth in interest-bearing and term deposit balances as customers demonstrated a preference for higher yielding accounts as interest rates rose, notably in Europe.

In CMB, customer accounts remained broadly stable, with reductions in North America, partly offset with growth in all other regions. In the UK, customer accounts grew as clients deployed their commercial surplus to interest-bearing accounts as interest rates rose.

Financial liabilities designated at fair value decreased by $19bn or 13%, notably from maturities, mark-to-market reductions and foreign exchange revaluations on non-US dollar instruments.

Derivative liabilities increased by $60bn or 32%, which is consistent with the increase in derivative assets, since the underlying risk is broadly matched.

Other liabilities increased by $43bn or 22%, notably from a rise of $31bn in settlement accounts in the UK, Hong Kong and the US from an increase in trading activity, compared with the seasonal reduction in December 2021. Cash collateral increased by $15bn, mainly due to the increase in fair value of derivative liabilities.

Equity

Total shareholders' equity, including non-controlling interests, decreased by $10bn or 5% compared with 31 December 2021.

Profits generated of $9bn were more than offset by coupon distributions on securities classified as equity and dividends paid of $4bn, as well as net losses through other comprehensive income ('OCI') of $13bn. The net losses in OCI included adverse movements of $5bn on financial instruments designated as hold-to-collect-and-sell, which are held as hedges to our exposure to interest rate movements, as a result of the increase in term market yield curves in 1H22. The net loss also included an adverse impact from foreign exchange differences of $9bn. These losses were partly offset by fair value gains on liabilities related to changes in own credit risk of $2bn.

Overall the Group is positively exposed to rising interest rates through net interest income, although there is an impact on our capital base due to the fair value of hold-to-collect-and-sell instruments. These instruments are reported within 'financial investments'. There is an initial negative effect materialising through reserves, after which the net interest income of the Group is expected to result in a net benefit over time, provided policy rates follow market implied rates.

Over time, these adverse movements will unwind as the instruments reach maturity, although not all will necessarily be held to maturity.

It is currently estimated that it will take around four quarters for the benefit to Group net interest income to offset the adverse impact of these revaluations, provided the composition of the portfolio were to remain static.