Last checked at 26 Aug 2015 16:17
Distinctive advantages
Throughout our 150-year history, HSBC has been where the growth is, connecting customers to opportunities.
Our strategy is to maintain an international network to connect faster-growing and developed markets. We seek to develop our Wealth business and invest in Retail Banking only in markets where we can achieve profitable scale.
HSBC has three distinctive advantages that bring value to our customers, shareholders and other stakeholders:
· an unrivalled global presence;
· a diversified universal banking model; and
· strong capital generation.
Unrivalled global presence
Our network covers more than 85% of global trade and capital flows, and we provide clients and investors with access to the most attractive global growth opportunities.
We expect global trade to continue to grow faster than global gross domestic product ('GDP'). We are a leading provider of transaction banking products which support global economic flows, including Payments and Cash Management, Global Trade and Receivables Finance, Foreign Exchange and Securities Services. We estimate that approximately 40% of our client revenues are linked to our international network.
Our strong presence in key trade corridors includes the largest and fastest-growing. Trade between mainland China and the US, for example, is expected to grow at an average of about 10% a year to 2020.
We have banking operations in the fastest-growing locations, particularly in Asia. In the first half of 2015 ('1H15') revenues from Asia and the Middle East and North Africa contributed about 45% of adjusted Group revenues. The breadth and scale of our coverage permits deeper client relationships and generates higher revenue per client served across multiple geographical regions.
Diversified universal banking model
We generate revenues through four global businesses - Retail Banking and Wealth Management ('RBWM'); Commercial Banking ('CMB'); Global Banking and Markets ('GB&M') and Global Private Banking ('GPB') - with the first three each contributing 25% to 40% of total revenues.
Diversification keeps the Group's earnings volatility at low levels and, through diverse business activities, we maintain a lower risk profile than our global and regional competitors (see footnote 1 on page 56). For example, the percentage of loan impairment charges to loans and advances to customers on an adjusted basis fell to 30bps in 1H15, down from 33bps in the first half of 2014 ('1H14'). Our large deposit base provides stable and inexpensive funding for our lending activities.
Our universal banking model provides benefits from shared resources and product capabilities. Synergies across global businesses generated $6.1bn of revenue for the Group (18% of the total) in 1H15. We realised particular growth in revenues from GB&M products provided to CMB clients, which increased by 9% compared with 1H14.
Strong capital generation
From 2011 to 2014, HSBC generated an average of $9.1bn of capital each year. Strong capital generation enables us to meet increasing regulatory requirements while continuing a long-term trend of progressive dividend payments to shareholders. We are among the top five dividend payers of major stock exchanges worldwide.
Our common equity tier 1 ('CET1') ratio (end point) at 30 June 2015 was 11.6% compared with 11.3% at 30 June 2014. We declared first and second interim dividends totalling $3.9bn in 1H15, compared with $3.8bn in 1H14.
Strategic actions
The environment in which HSBC operates is dynamic, with macroeconomic, technology and regulatory changes reshaping the competitive landscape.
At our Investor Update in June 2015 ('Investor Update'), we announced a series of strategic actions to capture the value of our global network and adapt to structural changes in the operating environment. We also announced a review of the Group headquarters location to be completed by the end of 2015. These strategic actions are shown in the table below. For further information and full Investor Update materials see www.hsbc.com/investor-relations.
Strategic actions to be completed by 2017 unless otherwise stated
Targeted outcomes | |
1. Reduce RWAs across the Group by 25% or more2 and reinvest the capital in higher-performing businesses. Reducing RWAs will help GB&M reach profitability targets | · $290bn reduction in Group RWAs · GB&M return to Group target profitability; |
2. Continue to optimise our global network and reduce complexity through the ongoing application of the six-filter process that guides our decisions on where we do business | · Reduced footprint |
3. Leverage our international network and strategic opportunity in the area covered by the North American Free Trade Agreement to rebuild profitability in Mexico and deliver satisfactory returns in the US | · Profit before tax: - US: about $2bn - Mexico: about $0.6bn |
4. Set up a UK ring-fenced bank | · Completion by 2018 |
5. Deliver $4.5-5.0bn in cost savings | · 2017 exit rate equal to 2014 operating expenses |
6. Deliver revenue growth above GDP growth from our international network | · Revenue growth of international network above GDP growth |
7. Capture growth opportunities in Asia including in China's Pearl River Delta, in the Association of Southeast Asian Nations, and in our Asset Management and Insurance businesses | · Market share gains · About 10% growth per annum in assets under management in Asia |
8. Grow business from our global leadership position in the internationalisation of the Chinese currency, the renminbi | · $2.0-2.5bn revenue |
9. Implement Global Standards, our globally consistent and rigorous financial crime controls | · Completion by end of 2017 |
10. Review the location of the Group's headquarters | · Completion by end of 2015 |
For footnote, see page 56.
Global footprint and six filters review
At 30 June 2015, we were present in 72 markets, of which 18 are priority markets.
Priority markets represent about 85% of Group revenues but cover only 55-60% of world GDP, trade and capital flows. Our other markets cover an additional 25-30% of global economic flows. Our presence in these network markets allows us to serve clients as a provider of global trade and payments services across a truly international network.
We conduct a periodic review of our markets using six filters to guide our decisions about when and where to invest. At the Investor Update, we announced our intention to sell our operations in Turkey and Brazil, though we plan to maintain a presence in Brazil to serve large corporate clients' international needs.
Structural reform and resolution planning
We continue to work with our primary regulators to develop and agree a resolution strategy for HSBC. It is our view that a strategy by which the Group breaks up at a subsidiary bank level at the point of resolution (referred to as a Multiple Point of Entry strategy) is the optimal approach as it is aligned to our existing legal and business structure. We are engaging with our regulators to address inter-dependencies between different subsidiary banking entities in order to enhance resolution.
In the first half of 2015, we continued to progress our plans to establish a separately incorporated group of service companies ('ServCo group') in order to remove operational dependencies where one subsidiary bank provides critical services to another. In the UK, we have commenced the transfer of critical services, including associated employees and assets, from each of HSBC Bank plc and HSBC Holdings to the ServCo group. Similar transfers are planned to begin in Hong Kong soon.
The Group presented an updated ring-fencing project plan to regulators in May 2015. The plan provides for the transfer into a separate subsidiary of the HSBC Group, the qualifying components of HSBC Bank plc's UK RBWM, CMB and GPB businesses. The plan remains subject to further planning and approvals internally and is ultimately subject to the approval of the Prudential Regulation Authority ('PRA'), the Financial Conduct Authority ('FCA') and other applicable regulators. The Group announced in March 2015 that the headquarters of the new UK ring-fenced bank will be located in Birmingham.
Global Standards implementation
We are at the midpoint of our five-year programme to implement the highest or most effective standards to combat financial crime and transform the way that we manage financial crime risk.
On 31 March 2015, we put in place enhanced procedures everywhere we do business to help us detect, deter and protect against financial crime. These procedures cover how we meet the requirements of our global anti-money laundering ('AML') and sanctions policies - our Global Standards.
Through the adoption of these Global Standards, we aim to deliver a consistent, comprehensive approach to managing financial crime risk in all our markets. In many instances, the policies extend beyond what we are required to do under local laws and regulations, reflecting the fact that HSBC has no appetite for business with illicit actors.
We continue to deliver infrastructure changes and systems enhancements that support the effective and sustainable operation of our financial crime controls.
In this respect, we have made significant progress since the beginning of 2015, including:
· deploying enhanced customer due diligence by GPB in their 18 markets;
· specific deployments of enhanced customer due diligence by other lines of business in the United Arab Emirates ('UAE'), the US, Lebanon, Hong Kong, Singapore, Russia and Germany;
· completing targeted training for those identified as being in the highest risk roles;
· moving Financial Intelligence Units from the Global Standards programme to business as usual management. This establishes a new strategic capability to identify and analyse significant financial crime cases, trends and strategic issues and share information across HSBC; and
· commencing the roll-out of strategic technology that supports our customer selection decisions, including how we exit business relationships that exceed our risk appetite.
The Monitor
An independent compliance monitor ('the Monitor') was appointed in 2012 under the agreements entered into with the US Department of Justice, the UK FCA and the US Federal Reserve Board to produce regular assessments of the effectiveness of our financial crime compliance procedures and controls. The work of the Monitor is described on page 27 of the Annual Report and Accounts 2014. We are working to implement the agreed recommendations flowing from the Monitor's 2013 and 2014 reviews. We recognise we are only half-way through our five-year Deferred Prosecution Agreement ('US DPA') and look forward to maintaining a strong, collaborative relationship with the Monitor and his team.
Targets
The strategic actions announced in our Investor Update will help the Group achieve the targets set out in the Annual Report and Accounts 2014.
We aim to achieve a return on equity of more than 10% by 2017, with momentum for higher returns in the future. We aim to grow business revenues faster than operating expenses on an adjusted basis. We are also committed to delivering a progressive dividend consistent with the growth of the overall profitability of the Group and predicated on our ability to meet regulatory capital requirements in a timely manner.
Delivering these actions will create value for our customers and shareholders and contribute to the long-term sustainability of HSBC. In the process, we shall maintain a robust, resilient and environmentally sustainable business in which our customers can have confidence, our employees can take pride, and our communities can trust.
Risk
All our activities involve, to varying degrees, the measurement, evaluation, acceptance and management of risk or combinations of risks.
As a provider of banking and financial services, we actively manage risk as a core part of our day-to-day activities. Our risk management framework seeks to ensure we have a robust and consistent approach to risk management at all levels of the organisation and across all risk types. This is described on page 24 of the Annual Report and Accounts 2014.
The principal risks associated with our banking and insurance manufacturing operations are listed on page 114 of the Annual Report and Accounts 2014.
Identifying and monitoring current and forward-looking risks is integral to our approach to risk management. During the first half of 2015, senior management paid particular attention to the top and emerging risks that are described on page 57.
The chart below provides a high level guide to how our business activities are reflected in our risk measures and in the Group's balance sheet at 30 June 2015. The assets and liabilities indicate the contribution each business makes to the balance sheet, while RWAs illustrate the relative size of the risks incurred for each business.
Exposure to risks arising from the business activities of global businesses
For footnote, see page 56.
Risk appetite
We define risk appetite as the type and quantum of risks that we are willing to accept in achieving our medium- and long-term strategic goals. It is a key component of our management of risk, is set on a time horizon consistent with the strategic planning period and is reviewed on an ongoing basis, with a formal review every six months. Our approach to risk appetite is described on page 25 of the Annual Report and Accounts 2014.
Changes to key metrics of the Group Risk Appetite Statement for 2015 include:
· the risk appetite threshold for returns has been updated to reflect the Group's revised financial targets as announced in the Annual Report and Accounts 2014 and re-affirmed at the Investor Update;
· positive adjusted jaws will be used as a single measure to assess cost efficiency; and
· cost of risk has been replaced with two new measures to monitor loan impairment charges as a percentage of gross retail and wholesale advances. This better aligns with existing risk management practices and reflects the increased focus on credit risk due to slowing global growth and the low interest rate environment.
Key metrics that were measured, monitored and presented monthly to the Risk Management Meeting of the Group Management Board during 1H15 are tabulated below:
Key risk appetite metrics
Component | Measure | Risk Appetite | 30 June 2015 | ||
Returns | Return on average ordinary shareholders' equity | ≥10% | 10.6% | ||
Cost efficiency | Adjusted jaws4 | Positive | (2.9)% | ||
Capital | Common equity tier 1 ratio - CRD IV basis | ≥10% | 11.6% | ||
Liquidity | HSBC consolidated balance sheet advances-to-deposits ratio | ≤90% | 71.4% | ||
Loan impairment charges | Retail (Principal RBWM - see page 34) loan impairment charges as % of advances |
| 0.53% | ||
Wholesale loan impairment charges as % of advances |
| 0.29% |
For footnote, see page 56.
Use of non-GAAP financial measures | 15 |
Adjusted performance | 15 |
Foreign currency translation differences | 15 |
Significant items | 15 |
Consolidated income statement | 16 |
Group performance by income and expense item | 19 |
Net interest income | 19 |
Net fee income | 20 |
Net trading income | 21 |
Net income from financial instruments designated at fair value | 21 |
Gains less losses from financial investments | 22 |
Net insurance premium income | 23 |
Other operating income | 23 |
Net insurance claims and benefits paid and movement in liabilities to policyholders | 24 |
Loan impairment charges and other credit risk provisions | 25 |
Operating expenses | 26 |
Share of profit in associates and joint ventures | 28 |
Tax expense | 28 |
Consolidated balance sheet | 29 |
Movement from 31 December 2014 to 30 June 2015 | 30 |
Reconciliation of RoRWA measures | 31 |
Use of non-GAAP financial measures
Our reported results are prepared in accordance with IFRSs as detailed in the Financial Statements starting on page 101. In measuring our performance, the financial measures that we use include those which have been derived from our reported results in order to eliminate factors which distort period-on-period comparisons. These are considered non-GAAP financial measures.
Non-GAAP financial measures that we use throughout the Interim Management Report are described below. Non-GAAP financial measures are described and reconciled to the closest reported financial measure when used.
Adjusted performance
Adjusted performance is computed by adjusting reported results for the period-on-period effects of foreign currency translation differences and significant items which distort period-on-period comparisons.
We use the term 'significant items' to collectively describe the group of individual adjustments which are excluded from reported results when arriving at adjusted performance. Significant items, which are detailed below, are those items which management and investors would ordinarily identify and consider separately when assessing performance in order to better understand the underlying trends in the business.
We consider adjusted performance provides useful information for investors by aligning internal and external reporting, identifying and quantifying items management believe to be significant and providing insight into how management assesses period-on-period performance.
Foreign currency translation differences
Foreign currency translation differences reflect the movements of the US dollar against most major currencies for the half-year to 30 June 2015. We exclude the translation differences when deriving constant currency data because using this data allows us to assess balance sheet and income statement performance on a like-for-like basis to better understand the underlying trends in the business.
Foreign currency translation differences Foreign currency translation differences for the half-years to 30 June 2014 and 31 December 2014 are computed by retranslating into US dollars for non-US dollar branches, subsidiaries, joint ventures and associates: • the income statements for the half-years to 30 June 2014 and 31 December 2014 at the average rates of exchange for the half-year to 30 June 2015; and • the balance sheets at 30 June 2014 and 31 December 2014 at the prevailing rates of exchange on 30 June 2015. No adjustment has been made to the exchange rates used to translate foreign currency denominated assets and liabilities into the functional currencies of any HSBC branches, subsidiaries, joint ventures or associates. When reference is made to foreign currency translation differences in tables or commentaries, comparative data reported in the functional currencies of HSBC's operations have been translated at the appropriate exchange rates applied in the current period on the basis described above. |
Significant items
The tables on pages 50 to 55 detail the effect of significant items on each of our geographical segments and global businesses during the first half of 2015 and the two halves of 2014.