HSBC Holdings Regulatory News (HSBA)

Consolidated income statement

Summary consolidated income statement

Reported performance

Reported profit before tax of $13.6bn in the first half of 2015 ('1H15') was $1.3bn or 10% higher than in the first half of 2014 ('1H14'). This was primarily driven by a net favourable movement in significant items partly offset by the adverse effects of currency translation between the periods.

Reported net operating income before loan impairment charges and other credit risk provisions ('revenue') of $32.9bn was $1.8bn or 6% higher than in 1H14. Revenue was affected by significant items including, in 1H15, a $1.4bn gain on the partial sale of our shareholding in Industrial Bank Co. Ltd ('Industrial Bank') and positive favourable fair value movements on our own debt designated at fair value of $0.7bn compared with adverse movements of $0.2bn and a gain of $0.4bn recorded on the sale of our shareholding in Bank of Shanghai in 1H14. The overall favourable movement in significant items was largely offset by the adverse effects of currency translation between the periods. Excluding these items, the increase in revenue was primarily driven by growth in client-facing GB&M (see footnote 5 on page 56), Principal RBWM (see page 34) and CMB.

Reported loan impairment charges and other credit risk provisions ('LICs') of $1.4bn were $0.4bn or 22% lower than in 1H14, notably in North America and Latin America, partly offset in Middle East and North Africa.

Reported operating expenses of $19.2bn were $0.9bn or 5% higher than in 1H14, with 1H15 significant items, which included $1.1bn relating to settlements and provisions in connection with legal matters, more than offset by the positive effects of currency translation between the periods of $1.5bn.

Income from associates of $1.3bn increased marginally compared with 1H14.

On 3 August 2015, the Board announced the second interim dividend for 2015 of $0.10 per ordinary share.

Adjusted performance

For further information on non-GAAP financial measures, see page 15.

On an adjusted basis, profit before tax of $13.0bn in 1H15 rose by $0.3bn compared with 1H14. Higher revenue, notably in client-facing GB&M, Principal RBWM and CMB, and lower LICs were partly offset by higher operating expenses.

The following commentary is on an adjusted basis.

Revenue was 4% higher with growth in client-facing GB&M, Principal RBWM and CMB

Revenue rose by $1.3bn to $30.8bn reflecting global business performance as follows:

· In GB&M, total revenue was $0.9bn or 10% higher. This was driven by an increase of $0.8bn or 10% in client-facing GB&M, mainly in Europe, and an increase of $0.2bn in Balance Sheet Management ('BSM'), in part driven by increased gains on disposal of available-for-sale debt securities. The rise in client-facing GB&M was notably in Markets, where revenue rose in Equities by $0.5bn and in Foreign Exchange by $0.3bn following increased volatility in the period. Equities also benefited from higher client flows and favourable movements on own credit spreads compared with minimal movements in 1H14. By contrast, revenue fell in Principal Investments reflecting lower gains on disposal than in 1H14. Legacy credit also fell from reduced revaluation gains.

· In RBWM, revenue was $0.2bn or 2% higher driven by Principal RBWM (up $0.5bn) partly offset by the run-off of our US Consumer and Mortgage Lending ('CML') portfolio ($0.2bn lower). In our Principal RBWM business, revenue increased by 4%, mainly driven by higher income across all Wealth Management products, notably in Hong Kong from equities and mutual funds products in Investment Distribution as a result of higher stock market turnover. The increase also reflected a net favourable valuation movement in our life insurance manufacturing business following increasing interest rates in the eurozone compared with falling rates in 1H14, and improved equity market performance in Asia. Current accounts, savings and deposit revenues were up by 2%, mainly due to customer account balances increasing by 4%, principally in the UK and Hong Kong. By contrast, personal lending revenues decreased by 2% despite higher balances, driven lower in the UK by a reduction in overdraft fees reflecting re-pricing and the introduction in November 2014 of a text message alert service for customers, and reduced spreads on mortgages.

· In CMB, revenue rose by $0.3bn or 4%, primarily due to higher net interest income in Credit and Lending and Payments and Cash Management, mainly in Hong Kong and the UK. In Hong Kong, this reflected average balance sheet growth and wider lending spreads, while in the UK it reflected continued balance sheet growth, notably from lending in our Large Corporate and Middle-Market Enterprises ('MME') segments. In addition, revenue increased in the US, primarily from lending growth to Large Corporate customers, and in Argentina, in part reflecting wider deposit spreads.

· In GPB, revenue was broadly unchanged as a decrease arising from the managed reduction in client assets from the ongoing repositioning of our business, notably inEurope, was offset by an increase in revenue in Hong Kong which reflected a rise in client transaction volumes and higher market volatility, coupled with the effect of positive net new money in 2014. We continued to grow the parts of the business that fit our target model, attracting net new money of $7bn in 1H15, mainly in Hong Kong, the US and the UK, over 45% of which was driven by referrals from our three other global businesses.

LICs fell by 8%, primarily in North America and Latin America, partly offset in Middle East and North Africa, Europe and Asia

LICs reduced by $0.1bn.

· In North America, LICs continued to fall in the US CML portfolio in RBWM, driven by reduced levels of delinquency and new impaired loans in addition to lower lending balances from the continued run-off and loan sales. The reduction also reflected the non-recurrence of impairment charges recorded in CMB and GB&M in 1H14 following a revision to certain estimates used in our corporate loan impairment calculation. These factors were partly offset by lower favourable market value adjustments of underlying properties in the CML portfolio as improvements in housing market conditions were less pronounced in 1H15 than in 1H14.

· In Latin America, LICs decreased, mainly due to lower collectively assessed impairment charges in RBWM in Brazil, in part due to the non-recurrence of charges from refinements made in 1H14 to the impairment model for non-restructured loan portfolios, and in Mexico reflecting lower delinquency rates on personal lending, payroll and card portfolios.

However, LICs increased:

· in Middle East and North Africa, where the adverse movement reflected individually assessed impairment charges in 1H15 compared with a net release in 1H14, primarily on UAE-related exposures in CMB and GB&M;

· in Europe, primarily in GB&M reflecting lower releases of available-for-sale asset-backed securities ('ABS's) and higher impairment charges relating to Greek exposures, partly offset by lower individually assessed impairment charges notably in GB&M in the UK; and

· in Asia, mainly reflecting a specific CMB impairment charge in Indonesia in 1H15.

Operating expenses were 7% higher in 1H15

On an adjusted basis, operating expenses increased by $1.2bn or 7% reflecting increases in both 'run-the-bank' and 'change-the-bank' costs. For further information on the categorisation of operating expenses as run-the-bank and change-the-bank costs, see page 26.

The rise in run-the-bank costs of $0.8bn was primarily driven by staff costs, reflecting wage inflation, principally in Latin America and Hong Kong, and a targeted increase in the number of staff to support growth initiatives in the global businesses. The increase in staff numbers included:

· in GB&M, investment in our Payments and Cash Management business in North America, Asia and Europe;

· in CMB, investment in Payments and Cash Management in North America and organic growth initiatives in Asia and Europe; and

· in RBWM, additional FTEs in Asia to support revenue growth.

This investment was in line with our strategic objectives to prioritise growth in Asia and achieve revenue growth above GDP from our international network. Run-the-bank costs also increased due to higher Regulatory Programmes and Compliance costs as a result of our ongoing focus on Global Standards, particularly in the area of financial crime and compliance.

The increase in change-the-bank costs of $0.4bn was also driven by inflation and higher regulatory and compliance costs. This was a result of the continued focus on Global Standards, including the Group-wide roll out of the new AML and sanctions policy procedures and the ongoing parallel deployment of enhanced customer due diligence and financial crime compliance infrastructure. These actions are in line with our strategic target to complete the implementation of Global Standards by the end of 2017.

The number of employees, expressed in full-time equivalent numbers ('FTE's), increased by 2,186 during 1H15 to 259,788. The average number of FTEs adjusted for business disposals increased by 2% compared with 1H14 due to additional FTE requirements for regulatory programmes and compliance and business growth in GB&M.

Income from associates

Income from associates of $1.3bn increased marginally compared with 1H14.

Effective tax rate

The effective tax rate was 21.3% compared with 16.4% in 1H14.

The effective tax rate for 1H14 was significantly lower principally due to prior year adjustments.

Brazil and Turkey

We intend to dispose of our operations in Brazil and Turkey as part of the plans to re-size and simplify the business announced in our Investor Update. A presence in Brazil will be maintained to serve large corporate clients with respect to their international needs. We expect that the sales will have a significant effect on the future trading results of the Group, in particular the disposal of Brazil (see page 47 for further details).

The assets and liabilities relating to Brazil have been classified as 'held for sale' on the Group balance sheet in accordance with IFRS 5 'Non-current Assets Held for Sale and Discontinued Operations'.

There is no separate presentation in the income statement.

Group performance by income and expense item

For further financial performance data for each geographical region and global business, see pages 33 to 41 and 42 to 49, respectively.

Net interest income

For footnotes, see page 56.

Reported net interest income of $16.4bn decreased by $1.0bn or 6% compared with 1H14. This was driven by the currency translation and significant items summarised in the table below. On an adjusted basis, net interest income was broadly unchanged compared with 1H14.

Significant items and currency translation

On a reported basis, net interest spread and margin were marginally lower in 1H15 due to reduced yields on customer lending in Europe, Latin America and North America. In addition, there were lower yields on short-term funds and financial investments.

Interest income

Reported interest income decreased by $1.4bn compared with 1H14 due to lower interest income on loans and advances to customers. The decrease was driven by currency translation, notably in Latin America and Europe, although this was partly offset in Europe as 1H14 included the effect of UK Consumer Credit Act ('CCA') provisions. Excluding these factors, interest income on loans and advances to customers was broadly unchanged as higher interest income in Asia and Latin America was broadly offset in Europe and North America.

In Asia, the rise in interest income was driven by growth in average term lending balances, the effect of which was partly offset by compressed yields on customer lending in mainland China due to central bank rate reductions. In Latin America, the increase was primarily in Brazil and Argentina driven by average balance sheet growth and, additionally, in Brazil, by the effect of successive increases in central bank interest rates since late 2014.

By contrast, in Europe, the reduction in interest income was driven by lower average balances and yields on mortgages in the UK in line with competitive pricing, and the effect of downward movements in market interest rates in the eurozone. Interest income also decreased in North America as new lending to customers in RBWM and CMB was at reduced yields in the current low interest rate environment, and the CML portfolio continued to decrease from run-off and sales.

Interest income on short-term funds and financial investments in BSM decreased, due to currency translation in Latin America, notably in Brazil, and in Europe. Excluding this, interest income rose, primarily in Latin America due to an increase in average balances and the effect of central bank rate rises in Brazil. These rate rises also drove increased interest income on reverse repurchase agreements. The rise in Latin America was partly offset by falls in Europe due to a managed reduction in average balances and, to a lesser extent, in Asia reflecting movement in central bank interest rates in mainland China and changes in the currency mix of the overall portfolio.

Interest expense

Reported interest expense decreased by $0.5bn compared with 1H14, primarily on customer accounts, reflecting currency translation, primarily in Latin America and Europe. Excluding this, interest expense on customer accounts rose in Latin America notably in Brazil, driven by increases in the central bank interest rate and growth in average balances.

In North America, other interest expense increased as 1H14 benefited from the release of accrued interest associated with uncertain tax positions.

Interest expense on debt issued also increased, excluding the effects of currency translation. This was largely in Latin America, notably Brazil, in line with central bank interest rate rises, coupled with an increase in average balances. These factors were partly offset in Europe, as new debt was issued at lower prevailing rates and average outstanding balances fell as a result of net redemptions.

Net fee income

Reported net fee income fell by $452m compared with 1H14, primarily reflecting the adverse effects of currency translation of $598m between the periods, notably in Europe and Latin America.

On an adjusted basis, net fee income increased by $156m or 2%. This reflected higher net fee income in Asia and North America, mainly in RBWM, partly offset by a reduction in Europe, primarily within GB&M and RBWM.

Fee income from both broking and unit trusts grew strongly, mainly in Hong Kong, driven by higher sales of equities and mutual funds in RBWM. This reflected higher stock market turnover, in part facilitated by the Shanghai-Hong Kong Stock Connect platform following a relaxation of certain restrictions in 1H15 by the regulator in mainland China, and higher investor appetite following improvements in Asian equity markets notwithstanding the weakness experienced in the latter part of June 2015.

Fee income from funds under management also increased in Asia, Europe and North America. In our Global Asset Management business, management fees increased in Hong Kong, France and the US driven by volume growth, in part due to higher net inflows of fixed income products, and stronger equity market performance, notably in Europe and Asia. Fee income from funds under management also increased in Germany reflecting business growth in GB&M.

In addition, fee income from credit facilities increased, mainly in North America, reflecting continued lending growth in CMB through our focus on internationally connected cities.

By contrast, account services fee income decreased, primarily in the UK in RBWM where lower overdraft fees reflected re-pricing and fewer overdrawn balances following the introduction in November 2014 of a text-alert service for customers. Account services fees also reduced in Switzerland due to the continued repositioning of our GPB business.

In addition, underwriting fee income decreased, mainly in Hong Kong in GB&M reflecting reduced activity in equity capital markets, although this was partly offset by higher volumes of debt issuances in the US.

Fee expenses were marginally lower by $15m or 1%, compared with 1H14, primarily in the US reflecting favourable adjustments to mortgage servicing rights valuations following mortgage interest rate increases in 1H15 compared with decreases in 1H14.

Net trading income

Reported net trading income of $4.6bn was $1.3bn higher compared with 1H14, predominantly in Asia and Europe. The movement in net trading income in part reflected the following significant items and currency translation summarised in the table below.

Significant items and currency translation

On an adjusted basis, excluding the significant items and currency translation tabulated above, net trading income from trading activities increased by $943m compared with 1H14, notably in client-facing GB&M driven by our Equities and Foreign Exchange businesses, primarily in the UK, following a rise in volatility in 1H15. Equities also benefited from increased client activity and favourable movements on own credit spreads compared with minimal movements in 1H14.

Net interest income from trading activities grew, mainly in Asia from increased average balances of trading assets, and in North America from a change in portfolio mix towards higher-yielding debt securities.

Net income from financial instruments designated at fair value

Assets and liabilities from which net income from financial instruments designated at fair value arose

The majority of the financial liabilities designated at fair value are fixed-rate long-term debt issues and are managed in conjunction with interest rate swaps as part of our interest rate management strategy. These liabilities are discussed further on page 50 of the Annual Report and Accounts 2014.

Reported net income from financial instruments designated at fair value was $2.7bn in 1H15, compared with $1.7bn in 1H14. The former included favourable movements in the fair value of our own long-term debt of $650m due to changes in credit spread, compared with adverse movements of $215m in the latter period.

On an adjusted basis, which excludes changes in own credit spread and the net adverse effect of currency translation of $226m, net income from financial instruments designated at fair value increased by $367m.

Net income arising from financial assets held to meet liabilities under insurance and investment contracts of $1.6bn was $387m higher than in 1H14. This primarilyreflected stronger equity market performance, notably in Hong Kong, mainland China and France.

Investment gains or losses arising from equity markets result in a corresponding movement in liabilities to customers, reflecting the extent to which unit-linked policyholders, in particular, participate in the investment performance of the associated asset portfolio. Where these relate to assets held to back investment contracts, the corresponding movement in liabilities to customers is also recorded under 'Net income/(expense) from financial instruments designated at fair value'. This is in contrast to gains or losses related to assets held to back insurance contracts or investment contracts with discretionary participation features ('DPF'), where the corresponding movement in liabilities to customers is recorded under 'Net insurance claims and benefits paid and movement in liabilities to policyholders'.

Net income from 'Other changes in fair value' increased mainly reflecting a net favourable movement of $73m due to interest and exchange rate hedging ineffectiveness.

Gains less losses from financial investments

In 1H15, gains less losses from financial investments increased by $928m on a reported basis compared with 1H14, driven by the significant items and currency translation tabulated below, notably the gain on the partial sale of our shareholding in Industrial Bank ($1.4bn).

On an adjusted basis, excluding all significant items and currency translation tabulated below, gains less losses from financial investments increased by $46m, driven by an increase from the disposal of available-for-sale debt securities in Europe, Asia and North America. This was partly offset by lower gains on disposal in Principal Investments in the UK.

Significant items and currency translation

Net insurance premium income

Reported net insurance premium income decreased by $530m compared with 1H14, mainly reflecting the adverse effect of currency translation of $448m. On an adjusted basis, net insurance premium income fell marginally by $82m or 1%, driven by a reduction in Asia partly offset by higher premium income in Europe and Latin America.

In Asia, premium income fell, primarily in Hong Kong from lower unit-linked contract premiums and lower sales of endowment products.

In Europe, premium income increased, driven by France, where there were higher sales of investment contracts with DPF reflecting customer demand, partly offset in the UK by lower pension premiums following a decision to exit the commercial pensions market in 2014.

Net insurance premium income also increased in Latin America, primarily in Brazil due to higher volumes of new business reflecting sales campaigns.

Other operating income

Change in present value of in-force long-term insurance business

Reported other operating income of $836m increased by $298m compared with 1H14. This was in part due to thesignificant items and currency translation summarised in the table below.

Significant items and currency translation

On an adjusted basis, excluding the significant items and currency translation tabulated above, other operating income increased by $207m compared with 1H14. This was primarily due to higher favourable movements in the present value of in force long-term insurance business ('PVIF') in RBWM, partly offset by lower disposal and revaluation gains on investment properties in 1H15.

The higher favourable movement in the PVIF balance was driven by positive investment assumption changes in France due to rising interest rates in 1H15, compared with falling rates in 1H14. In addition, positive experience variances were reported in Hong Kong, though they were offset by an increase in liabilities to policyholders following a change in the regulatory discount rate. The overall increases were partially offset by a reduction in the value of new business driven mainly by a change in business mix in Hong Kong.

Net insurance claims and benefits paid and movement in liabilities to policyholders

Reported net insurance claims and benefits paid and movement in liabilities to policyholders were $209m lower than in 1H14, mainly reflecting the effect of currency translation of $562m. On an adjusted basis, net insurance claims and benefits paid and movement in liabilities to policyholders were $353m higher.

The increase was mainly driven by higher investment returns on the assets held to support liabilities under contracts where the policyholder bears investment risk. Notably, this included stronger equity market performance in France. The gains or losses recognised on the financial assets designated at fair value held to support theseinsurance and investment contract liabilities are reported in 'Net income from financial instruments designated at fair value'.

In addition, there was a one-off increase in liabilities to policyholders in Hong Kong following a change in the regulatory discount rate applied to the liabilities which is offset by the corresponding PVIF experience variance noted above.

These increases were partially offset by lower net insurance premium income as described above.

Loan impairment charges and other credit risk provisions

Reported loan impairment charges and other credit risk provisions ('LICs') of $1.4bn were $402m lower than in 1H14, in part reflecting the favourable effect of currency translation of $267m, notably in Latin America and Europe.

On an adjusted basis, LICs decreased by $133m or 8%, primarily within North America and Latin America, partly offset in Middle East and North Africa, Europe and Asia. The percentage of impairment charges to average gross loans and advances to customers fell to 30bps in 1H15 from 33bps in 1H14.

Collectively assessed impairment charges fell by $303m, mainly in North America and Latin America, partly offset in Europe.

· In North America, impairment charges continued to fall in the US CML portfolio in RBWM, reflecting reduced levels of delinquency and new impaired loans in addition to lower lending balances from the continued run-off and loan sales. The reduction also reflected the non-recurrence of impairment charges recorded in CMB and GB&M in 1H14 following a revision to certain estimates used in our corporate loan impairment calculation. These factors were partly offset by lower favourable market value adjustments of underlying properties in the CML portfolio as improvements in housing market conditions were less pronounced in 1H15 than in 1H14; and

· in Latin America, the decrease primarily reflected lower impairment charges in RBWM in Brazil, in part due to the non-recurrence of charges from refinements made in 1H14 to the impairment model for non-restructured loan portfolios, and in Mexico reflecting lower delinquency rates on personal lending, payroll and card portfolios.

These were partly offset:

· in Europe, where the increase primarily reflected higher impairment charges relating to Greek exposures in GB&M, RBWM and CMB (see page 74 for further details).

Individually assessed impairment charges were broadly unchanged, as increases in Middle East and North Africa, Latin America and Asia were largely offset by a reduction in Europe.

· In Middle East and North Africa, the increase reflected impairment charges in 1H15 compared with a net release in 1H14, primarily on UAE-related exposures in CMB and GB&M;

· in Latin America, impairment charges rose, notably in CMB in Brazil; and

· in Asia, the increase reflected a specific CMB impairment charge in Indonesia in 1H15.

These factors were broadly offset:

· in Europe, where the reduction primarily reflected lower impairment charges notably in GB&M in the UK.

Net releases of credit risk provisions decreased by $161m, mainly in the UK driven by lower releases of available-for-sale ABSs in the GB&M legacy portfolio.

Operating expenses

Staff numbers (full-time equivalent)

Reported operating expenses of $19.2bn were $0.9bn or 5% higher than in 1H14, with the increase in significant items in 1H15 more than offset by the positive effects of currency translation.

Significant items and currency translation

On an adjusted basis, excluding the significant items and currency translation tabulated above, operating expenses in 1H15 were $1.2bn or 7% higher than in 1H14 reflecting increases in both run-the-bank and change-the-bank costs.

Front office run-the-bank costs totalled $8.0bn in 1H15, an increase of $0.6bn (8%) on 1H14. This was primarily driven by higher staff costs reflecting wage inflation, principally in Argentina, Brazil and Hong Kong, and a targeted increase in the number of staff to support growth as follows:

· in line with our strategic target to achieve revenue growth above GDP from our international network, in CMB and GB&M we invested in Payments and Cash Management in North America, Asia and Europe; and

· in RBWM we invested in additional FTEs, mainly in Asia to support revenue growth.

Back office run-the-bank costs totalled $7.9bn in 1H15, an increase of $0.2bn (3%) on 1H14 in part driven by both wage inflation and non-wage inflation such as rental costs in Asia.

Regulatory Programmes and Compliance costs increased as a result of our ongoing focus on Global Standards, as part of which we continue to improve our compliance capabilities, particularly in the area of financial crime compliance. Additionally, we are delivering infrastructure changes and systems enhancements that support the effective and efficient operation of our financial crime controls. This supports ongoing delivery of HSBC's external commitments and enhances the quality of customer data and the operation of our financial crime control environment. We also continued our investment to strengthen the identification, analysis and mitigation of risk.

Change-the-bank costs totalled $1.7bn in 1H15, an increase of $0.4bn (28%) on 1H14. The increase was primarily driven by higher regulatory and compliance costs which included the bank-wide roll out of the new AML and sanctions policy procedures and the ongoing parallel deployment of enhanced customer due diligence and financial crime compliance infrastructure. These actions were in line with our strategic target to complete the implementation of Global Standards by the end of 2017.

The number of employees, expressed in FTEs, increased by 2,185 during 1H15 to 259,788. The average number of FTEs adjusted for business disposals increased by 2% compared with 1H14, primarily due to additional FTE requirements for regulatory programmes and compliance.

Reported cost efficiency ratios

For footnote, see page 56.

Share of profit in associates and joint ventures

HSBC's share of profit in associates and joint ventures of $1.3bn increased marginally compared with 1H14 driven by a higher contribution from Bank of Communications Co., Limited ('BoCom').

Our share of profit from BoCom rose as a result of balance sheet growth, increased fee income and a reduction in loan impairment charges, partly offset by higher operating expenses.

At 30 June 2015, we performed an impairment review of our investment in BoCom and concluded that it was not impaired based on our value in use calculation (see Note 14 in the Financial Statements for further details). The continued uncertainty regarding future movements in the value in use and the expectations around increases in the carrying amount are discussed further on page 55 of the Annual Report and Accounts 2014.

Tax expense

The effective tax rate for the first half of the year of 21.3% was slightly higher than the UK corporation tax rate of 20.25% principally due to non-deductible regulatory settlements and provisions.The effective tax rate for 1H14 was significantly lower, principally due to prior year adjustments.

Consolidated balance sheet

Summary consolidated balance sheet