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 99.

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 52. 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 107.

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 35 to 37 and pages 44 to 49 detail the effects of significant items on each of our global business segments, geographical regions and selected countries/territories in 1H21, 1H20 and 2H20.

Foreign currency translation differences

Foreign currency translation differences reflect the movements of the US dollar against most major currencies during 2021.

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.

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 Interim dividend of $0.15 per ordinary share in respect of the financial year ending 31 December 2020, paid in April 2021.

4 Half-year to 31 December 2020 is calculated on a full-year basis and not a 2H20 basis.

For further financial performance data of our global business segments, see pages 35 to 41. For further financial performance data by geographical regions and selected countries/territories, see pages 42 to 51.

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 1H21 was $13.1bn, a decrease of $1.4bn or 9.7% compared with 1H20. This reflected lower average market interest rates across the major currencies and in particular in Asia compared with 1H20, partly offset by interest income associated with the increase in average interest-earning assets ('AIEA') of $154.1bn or 7.6%.

Excluding the effects of foreign currency translation differences, NII decreased by $2bn or 13.1%.

NII for the second quarter of 2021 was $6.6bn, down 4.5% compared with the previous year, and up 1.1% compared with the previous quarter. The year-on-year decrease was driven by the impact of lower market interest rates, which was partly offset by higher NII from growth in short-term funds and loans to banks as well as mortgages. The increase compared with the previous quarter was driven by the additional day in the second quarter. The NII adjusted for the day-count differences remained materially unchanged.

Net interest margin ('NIM') of 1.21% was 22 basis points ('bps') lower compared with 1H20, as the reduction in the yield on AIEA of 62bps was partly offset by the fall in the funding cost of average interest-bearing liabilities of 46bps. The decrease in NIM in 1H21 included the adverse effects of foreign currency translation differences on AIEA. Excluding this, NIM fell by 21bps.

NIM for the second quarter of 2021 was 1.20%, down 13bps year-on-year, and down 1bps compared with the previous quarter. The year-on-year decrease was predominantly driven by lower market interest rates. The decrease compared with the previous quarter was due to a change in asset mix towards lower yielding assets.

Interest income of $18bn decreased by $5bn or 22%, primarily due to the lower average interest rates compared with 1H20 as the yield on AIEA fell 62bps. This was partly offset by income from balance sheet growth, predominantly in Europe and Asia, and driven by higher balances in short-term funds and loans to banks and mortgages, which increased by $166bn and $42.7bn,

respectively. The decrease in interest income included $0.8bn from the favourable effects of foreign currency translation. Excluding these, interest income decreased by $5.8bn.

Interest income of $9bn in the second quarter of 2021 was down $1.4bn year-on-year and materially unchanged compared with the previous quarter. The year-on-year decrease was predominantly driven by the impact of lower market interest rates, although partly offset by growth in short-term funds and loans to banks and mortgages. 

Interest expense of $4.9bn decreased by $3.6bn or 43% compared with 1H20. This reflected the decrease in funding costs of 46bps, mainly arising from lower interest rates paid on interest-bearing liabilities. This was partly offset by higher interest expense due to a rise in balances in interest-bearing customer accounts, which increased by $151.5bn.

The decrease in interest expense included the adverse effects of foreign currency translation differences of $0.3bn. Excluding this, interest expense decreased by $3.9bn.

Interest expense of $2.4bn in the second quarter of 2021 was down $1.1bn compared with the previous year, and down $0.1bn compared with the previous quarter. The year-on-year decrease was predominantly driven by the impact of lower market interest rates, partly offset by growth in customer accounts. The decrease compared with the previous quarter was mainly driven by reduced volumes in issued debt.

Net fee income of $6.7bn was $0.7bn higher than in 1H20, and included favourable foreign currency translation differences of $0.2bn. The remaining increase primarily reflected higher net fee income in all of our global businesses.

In WPB, the growth in fee income was mainly in Wealth, as improved market sentiment resulted in increased customer demand, particularly in the first quarter of 2021. This increase included higher fee income from unit trusts in Asia, from funds under management in Hong Kong, the UK and France, and from broking in Hong Kong.

In GBM, higher fee income was from growth in account services, which included higher activity from transaction banking clients. Fee income also increased in credit facilities, broking income, global custody and corporate finance, reflecting a higher level of client activity compared with 1H20.

In CMB, fee income increased from remittances and credit facilities, as well as from trade products, as global trade volumes recovered during 2021.

Net income from financial instruments held for trading or managed on a fair value basis of $4.2bn was $1.6bn lower and included adverse fair value movements on non-qualifying hedges of $0.4bn and adverse debit value adjustments of $0.1bn.

The remaining reduction was in GBM, as 1H20 benefited from higher market volatility supporting a particularly strong performance within Global Foreign Exchange and Global Debt Markets.

Net income/(expense) from assets and liabilities of insurance businesses, including related derivatives, measured at fair value through profit or loss was a net income of $2.8bn, primarily due to favourable equity market performances in France and Hong Kong. This compared with a net loss of $1.3bn in 1H20, which reflected unfavourable market performances following the Covid-19 outbreak.

This favourable 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.

Change in fair value of designated debt and related derivatives of $0.1bn was $0.3bn adverse compared with 1H20. The movements were driven by the fall in interest rates between the periods, notably in US dollars and pounds sterling.

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

Changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss of $0.5bn were $0.5bn higher compared with 1H20. This primarily reflected the impact of adverse movements in equity markets in 1H20 following the Covid-19 outbreak. The 1H21 period benefited from favourable equity market movements.

Gains less losses from financial investments of $0.4bn were broadly unchanged from 1H20, as gains on the disposal of debt securities remained stable.

Net insurance premium income of $5.7bn was $0.6bn higher than in 1H20, reflecting higher sales volumes, particularly in France and Singapore.

Other operating income of $0.2bn decreased by $0.3bn compared with 1H20, primarily due to lower net favourable changes in PVIF compared with 1H20 (down $0.4bn).

The change in PVIF included a net reduction of $0.5bn from assumption changes and experience variances, primarily inHong Kong and Singapore, partly offset in France where improved economic conditions resulted in a positive impact on PVIF assumptions. The net reduction due to assumption changes was partly offset by a $0.1bn increase in the value of new business written, primarily in Hong Kong.

PVIF is presented in accordance with IFRS 4. As set out in our Annual Report and Accounts 2020, 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 net reduction in PVIF was partly offset by the non-recurrence of revaluation losses on investment properties in Hong Kong in 1H20.

Net insurance claims and benefits paid and movement in liabilities to policyholders of $7.9bn were $3.5bn higher, primarily due to higher returns on financial assets supporting contracts where the policyholder is subject to part or all of the investment risk in France and Hong Kong, and from higher sales volumes in France and Singapore.

Change in expected credit losses and other credit impairment charges ('ECL') were a net release of $0.7bn in 1H21, compared with a charge of $6.9bn in 1H20. The net release in 1H21 reflected an improvement in the economic outlook, notably in the UK. This compared with the significant build-up of stage 1 and stage 2 allowances in 1H20 due to the worsening economic outlook at the onset of the Covid-19 outbreak. The reduction in ECL also reflected low levels of stage 3 charges, as well as the non-recurrence of a significant charge in 1H20 related to a corporate exposure in Singapore.

Given current consensus economic and default experience, ECL charges for 2021 are expected to be materially lower than our medium-term range of 30bps to 40bps of average loans and possibly a net release for the year. Uncertainty remains as countries emerge from the pandemic at different speeds, government support measures unwind and new virus strains test the efficacy of vaccination programmes. We expect further net releases of ECL in the first half of 2022.

For further details on the calculation of ECL, including the measurement uncertainties and significant judgements applied to such calculations, the impact of alternative/additional scenarios and post model-adjustments, see pages 62 to 70.

1 Includes impairment of software intangible assets of $173m in the six months to 30 June 2020 and impairment of tangible assets of $197m in the six months to 31 December 2020.

Operating expenses of $17.1bn were $0.6bn or 3% higher than in 1H20. This primarily reflected higher performance-related pay of $0.9bn, which is accrued based on the profile of our expected profit performance. In addition, investment in technology, including investments in our digital capabilities, increased by $0.3bn. Our Asia wealth investment also rose by $0.1bn. These increases were partly offset by a $0.9bn impact of our cost-saving initiatives.

The increase in operating expenses also included adverse foreign currency translation differences of $0.9bn and an increase in restructuring and other related costs of $0.3bn, of which $0.1bn related to severance payments. However, these items were broadly offset by the non-recurrence of a $1.2bn impairment of intangible assets in Europe in 1H20, of which $0.2bn was within restructuring and other related costs.

The number of employees expressed in full-time equivalent staff ('FTEs') at 30 June 2021 was 222,550, a decrease of 3,509 from 31 December 2020. Additionally, the number of contractors at 30 June 2021 was 7,401, an increase of 1,709 from 31 December 2020, primarily reflecting increases associated with our growth and transformation initiatives.

Share of profit in associates and joint ventures of $1.7bn was $0.7bn or 73% higher, primarily reflecting an increased share of profit from Bank of Communications Co., Limited ('BoCom') and a recovery in asset valuations of a UK associate relative to 1H20. In addition, our share of profit from The Saudi British Bank ('SABB') increased.

In relation to BoCom, we continue to be subject to a risk of impairment in the carrying value of our investment. For further details of our impairment review process, see Note 10 on the interim condensed financial statements.

Tax expense

The effective tax rate for 1H21 of 22.3% was lower than the 27.6% for 1H20. The effective tax rate for 1H21 was increased by 1.7% due to the remeasurement of UK deferred tax balances following substantive enactment of legislation to increase the UK main rate of corporation tax from 19% to 25% with effect from 1 April 2023. The effective tax rate for 1H20 was high, mainly due to the non-recognition of deferred tax on losses in the UK.

1 Net of impairment allowances.

1 Capital resources are regulatory capital, the calculation of which is set out on page 87.

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.

A more detailed consolidated balance sheet is contained in the interim condensed financial statements on page 101.

Balance sheet commentary compared with 31 December 2020

At 30 June 2021, our total assets were $3.0tn, broadly in line with 31 December 2020.

Our asset base included offsetting movements, with lower derivative asset balances due to adverse revaluation movements on interest rate contracts. In addition, there were decreases in financial investments and reverse repurchase agreements as we redeployed our commercial surplus into cash and balances at central banks. Other assets also increased due to the seasonal reduction in settlement accounts at 31 December 2020, as clients settled trades prior to the year end.

Our ratio of loans and advances to customers to customer accounts of 63% was in line with 31 December 2020.

Assets

Cash and balances at central banks increased by $89bn or 29%, mainly in the UK, France and the US, as we redeployed our commercial surplus to cash to increase liquidity for our clients and as a result of deposit inflows.

Trading assets increased by $28bn or 12%, notably from an increase in equity securities held, particularly in the UK, Hong Kong and the US, largely driven by client demand.

Derivative assets decreased by $98bn or 32%, primarily in the UK and France, reflecting adverse revaluation movements on interest rate contracts due to higher long-term yield curve rates in most major markets. Foreign exchange contracts also decreased as a result of foreign exchange rate movements and lower client demand. The decrease in derivative assets was consistent with the decrease in derivative liabilities, as the underlying risk is broadly matched.

Loans and advances to customers of $1.1tn were $22bn higher, which included adverse foreign currency translation differences of $1bn. On a constant currency basis, customer lending balances were $23bn higher.

The commentary below is on a constant currency basis.

Customer lending increased in WPB by $22bn to $491bn, which included a $9bn increase in Hong Kong as customers borrowed to fund investments in initial public offerings. This was partly offset by $2.6bn of loans and advances to customers being reclassified to assets held for sale, which is reported in 'other assets', reflecting the strategic initiative to exit the mass market retail banking business in the US. The remaining increase reflected higher mortgage balances, notably in the UK (up $5bn), Hong Kong (up $3bn) and Canada (up $2bn) as activity in housing markets globally continued to increase. There was also an increase in secured lending in Hong Kong Private Banking (up $3bn).

In CMB, customer lending of $351bn was $8bn higher, reflecting a recovery in trade volumes in 2021 and from increased term lending in Asia, partly offset by a reduction in other term balances in the UK.

In GBM, customer lending of $216bn fell by $7bn, primarily as customers repaid credit facilities, primarily in the UK, Singapore and the US.

Reverse repurchase agreements - non-trading decreased by $29bn or 13%, primarily in the US, as we redeployed our commercial surplus to cash due to a favourable US Federal Funds Rate. Additionally, in Europe there was an increase in balances eligible for netting, resulting in an overall balance reduction. These decreases were partly offset by an increase in Asia due to client demand.

Financial investments decreased by $56bn or 11%, mainly as we decreased our holdings of debt securities and treasury bills through a combination of disposals and maturities. A notable portion of these funds was redeployed into cash as we managed our commercial surplus.

Other assets grew by $27bn or 11%, primarily due to an increase in settlement accounts in the US, the UK and Hong Kong from higher trading activity, compared with the seasonal reduction in December 2020. Additionally, $3bn of loans and advances to customers were reclassified to assets held for sale, reflecting our exit of mass market retail banking in the US. These increases were partly offset by lower cash collateral as derivative balances decreased.

Liabilities

Customer accounts of $1.7tn increased by $26bn on a reported basis, including adverse foreign currency translation differences of $1bn. On a constant currency basis, customer accounts were $27bn higher.

The commentary below is on a constant currency basis.

The increase in customer accounts was primarily in WPB (up $7bn), despite a reclassification of $9.9bn to liabilities of disposal groups held for sale, which is reported in 'other liabilities', reflecting our exit of mass market retail banking in the US. The remaining increase was driven by lower consumer spending, resulting in higher deposit and savings balances, due to ongoing Covid-19 restrictions. There was a continued movement of funds from term accounts to call accounts as customers showed a preference for liquidity while interest rates remained low.

Additionally, increases in CMB (up $15bn) and GBM (up $5bn) were observed as wholesale customers continued to consolidate funds across many of our markets.

Trading liabilities increased by $14bn or 19%, notably from an increase in debt security and equity short positions in Hong Kong, the UK and the US.

Derivative liabilities decreased by $103bn or 34%, which is consistent with the decrease in derivative assets, since the underlying risk is broadly matched.

Other liabilities increased by $47bn or 23%. During the period $10bn of customer accounts were reclassified to liabilities held for sale, reflecting our exit of mass market retail banking in the US. Additionally, there was an increase in settlement accounts in the US, France, Hong Kong and the UK from higher trading activity, compared with the seasonal reduction in December 2020. These increases were partly offset by lower cash collateral as derivative balances decreased.

Equity

Total shareholders' equity, including non-controlling interests, increased by $1.8bn or 1% compared with 31 December 2020, reflecting the effects of profits generated of $8.4bn. These were partly offset by coupon distributions on securities classified as equity and dividends paid of $4.1bn, as well as net losses through other comprehensive income ('OCI') of $2.7bn. The net losses in OCI included adverse fair value movements of debt instruments of $1.4bn, an adverse remeasurement of defined benefit pension obligations of $0.7bn and adverse foreign exchange differences of $0.4bn.

1 At 30 June 2021, customer accounts of $9.9bn related to the disposal of the US retail banking business met the criteria to be classified as held for sale and are reported within 'Accruals, deferred income and other liabilities' on the balance sheet. Refer to Note 15 on page 124 for further details.

Risk-weighted assets

Risk-weighted assets ('RWAs') rose by $4.8bn during the first half of the year, including a decrease of $2.7bn due to foreign currency translation differences. The increase of $7.5bn in RWAs (excluding foreign currency translation differences) included the following movements:

• a $12.9bn asset size increase, largely driven by WPB and CMB lending growth in Asia, partly offset by reductions in GBM and market risk RWAs, which included the effects of management initiatives; and

• a $5.2bn decrease in RWAs due to changes in methodology and policy. This was mostly due to risk parameter refinements in GBM and CMB.

The Group Chief Executive, supported by the rest of the Group Executive Committee ('GEC'), reviews operating activity on a number of bases, including by global business and geographical region. Global businesses are our reportable segments under IFRS 8 'Operating Segments', and are presented in Note 5: 'Segmental analysis' on page 107.

A description of the global businesses is provided in the Overview section, pages 16 to 22.

Supplementary unaudited analysis of significant items by global business is presented below.

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

2 Includes fair value movements on non-qualifying hedges and debt valuation adjustments on derivatives.

3 Comprises losses associated with the RWA reduction commitments and gains relating to the business update in February 2020.

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

2 Includes fair value movements on non-qualifying hedges and debt valuation adjustments on derivatives.

3 Comprises losses associated with the RWA reduction commitments we made at our business update in February 2020.

4 Includes impairment of software intangible assets of $173m (of the total software intangible asset impairment of $1,247m).