6-K
Table of Contents

 

 

FORM 6-K

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Report of Foreign Private Issuer

Pursuant to Rule 13a - 16 or 15d - 16 of

the Securities Exchange Act of 1934

For the month of August 2015

Commission File Number: 001-14930

 

 

HSBC Holdings plc

 

 

42nd Floor, 8 Canada Square, London E14 5HQ, England

 

 

(Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F).

Form 20-F  x            Form 40-F  ¨

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):  ¨

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):  ¨

(Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934).

Yes  ¨             No  x

(If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82-            ).

This Report on Form 6-K with respect to our Interim Financial Statements and Notes thereon for the six-month period ended June 30, 2015, except for the “Group Chairman’s Statement,” the “Group Chief Executive’s Review,” the table on page 12 of this Report on Form 6-K (under “Strategy Update—Strategic Actions”) and “Strategy Update—Targets,” is hereby incorporated by reference in the following HSBC Holdings plc registration statements: file numbers 333-10474, 333-92024, 333-102027, 333-103887, 333-104203, 333-109288, 333-113427, 333-127327, 333-126531, 333-135007, 333-143639, 333-145859, 333-155338, 333-158054, 333-158065, 333-162565, 333-17025, 333-176732, 333-180288, 333-183806, 333-197839 and 333-202420.

The “Group Chairman’s Statement,” the “Group Chief Executive’s Review,” the table on page 12 of this Report on Form 6-K (under “Strategy Update—Strategic Actions”) and “Strategy Update—Targets” furnished herewith in this Report on Form 6-K shall not be deemed “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934, and are not incorporated by reference to this Report on Form 6-K nor any filing of the Registrant, whether made before or after the date hereof, regardless of any general incorporation language in such filing. In addition, this Report on Form 6-K contains references to the Registrant’s website. The Registrant is not incorporating by reference any information posted on such website.

 

 

 


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SIGNATURES

The registrant hereby certifies that it meets all of the requirements for filing on Form 6-K and that it has duly caused and authorized the undersigned to sign this interim report on its behalf.

 

HSBC Holdings plc
By:   /s/ Iain J Mackay
  Name: Iain J Mackay
  Title: Group Finance Director

Dated: 5 August 2015


Table of Contents

Overview

 

  Overview
      1    Who we are
      1    Our purpose
      2    Highlights
      4    Global business snapshot
      5    Regional snapshot
    5a    Cautionary statement regarding forward-looking statements
      6    Group Chairman’s Statement
      9    Group Chief Executive’s Review
    11   

Strategy update

 

    
  Interim Management Report
    15    Financial summary
    33    Global businesses
    42    Geographical regions
    50    Other information
    57    Risk
    87   

Capital

 

    
  Financial Statements
  101    Financial Statements
  107   

Notes on the Financial Statements

 

    
  Additional Information
  142    Shareholder information
  152    Abbreviations
  154   

Index

 

Certain defined terms

Unless the context requires otherwise, ‘HSBC Holdings’ means HSBC Holdings plc and ‘HSBC’, the ‘Group’, ‘we’, ‘us’ and ‘our’ refer to HSBC Holdings together with its subsidiaries. Within this document, the Hong Kong Special Administrative Region of the People’s Republic of China is referred to as ‘Hong Kong’. When used in the terms ‘shareholders’ equity’ and ‘total shareholders’ equity’, ‘shareholders’ means holders of HSBC Holdings ordinary shares and those preference shares and capital securities classified as equity. The abbreviations ‘$m’ and ‘$bn’ represent millions and billions (thousands of millions) of US dollars, respectively.

Interim financial statements and notes

HSBC’s interim consolidated Financial Statements and Notes thereon, as set out on pages 101 to 139, have been prepared in accordance with the Disclosure Rules and Transparency Rules of the Financial Conduct Authority and International Accounting Standard (‘IAS’) 34 ‘Interim Financial Reporting’ as issued by the International Accounting Standards Board (‘IASB’) and as endorsed by the European Union (‘EU’). EU-endorsed International Financial Reporting Standards (‘IFRSs’) may differ from IFRSs issued by the IASB if, at any point in time, new or amended IFRSs have not been endorsed by the EU.

At 31 December 2014 there was no difference between IFRSs endorsed by the EU and IFRSs issued by the IASB. The consolidated financial statements of HSBC at 31 December 2014 were therefore prepared in accordance with IFRSs as issued by the IASB and as endorsed by the EU. At 30 June 2015, there were no unendorsed standards effective for the period ended 30 June 2015 affecting these interim consolidated financial statements, and there was no difference between IFRSs endorsed by the EU and IFRSs issued by the IASB in terms of their application to HSBC.

HSBC uses the US dollar as its presentation currency because the US dollar and currencies linked to it form the major currency bloc in which HSBC transacts and funds its business. Unless otherwise stated, the information presented in this document has been measured in accordance with IFRSs.

Reference to ‘adjusted’ in tables and commentaries indicates that reported results have been adjusted for the period-on-period effects of foreign currency translation differences and significant items which distort period-on-period comparisons as described on page 16. The adjusted return on risk-weighted assets is defined and reconciled on page 31.

We have enhanced the document to concentrate on events and transactions that are significant to an understanding of the changes in our financial position and performance since the Annual Report and Accounts 2014 and to provide information we consider most relevant to decision-making by users of the document. As a result, our business performance commentary has been streamlined to remove duplication and selected Risk sections and Notes on the Financial Statements have been refined or removed to focus on information that is material in the context of interim reporting.

 


Table of Contents

 

Who we are

 

HSBC is one of the largest

banking and financial

services organisations

in the world.

 

Customers:

48m

 

 

Served by:

268,543

employees (259,788 FTE)

 

 

 

Through four global businesses:

– Retail Banking and Wealth Management

– Commercial Banking

– Global Banking and Markets

– Global Private Banking

 

 

Located in:

72

countries and territories

 

 

Across five geographical regions:

– Europe

– Asia

– Middle East and North Africa

– North America

– Latin America

 

 

Offices:

Around 6,100

 

 

Global headquarters:

– London

 

 

Market capitalisation:

$175bn

 

 

Listed on stock exchanges in:

– London

– Hong Kong

– New York

– Paris

– Bermuda

 

 

Shareholders:

213,000 in 131

countries and territories

 

Our purpose

 

Our purpose is to be where the growth is, connecting customers to opportunities, enabling businesses to thrive and economies to prosper, and ultimately helping people to fulfil their hopes and realise their ambitions.

 

 
 

 

Our strategy

 

We aim to be the world’s leading and most respected international bank. We will achieve this by focusing on the needs of our customers and the societies we serve, thereby delivering long-term sustainable value to all our stakeholders.

 

Our two-part strategy reflects our purpose and competitive advantages:

 

• A network of businesses connecting the world: HSBC is well positioned to capture the growing international trade and capital flows. Our global reach and range of services place us in a strong position to serve clients as they grow from small enterprises into large multinationals.

 

• Wealth management and retail with local scale: we aim to capture opportunities arising from social mobility and wealth creation in our priority growth markets, through our Premier proposition and Global Private Banking business. We will invest in full-scale retail businesses only in markets where we can achieve profitable scale.

 

 
 

 

How we measure performance

 

We track our progress in implementing our strategy with a range of financial and non-financial measures or key performance indicators. From 2015, we have revised our targets to better reflect the changing regulatory and operating environment.

 

Highlights of the first half of 2015 are shown on page 2.

For further information on our new targets see page 13.

 

 
 

 

Rewarding performance

 

The remuneration of all staff within the Group, including executive Directors, is based on the achievement of financial and non-financial objectives. These objectives, which are aligned with the Group’s strategy, are detailed in individuals’ annual scorecards. To be considered for a variable pay award, an individual must have fully complied with HSBC Values. Our Values are described on page 10 of the Annual Report and Accounts 2014.

 

 

 
 

 

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1


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Overview (continued)

 

Highlights

 

Financial

(in respect

of 1H15)

 

Profit before tax

 

•  Reported profit before tax of $13,628m, up $1,288m or 10% compared with 1H14

 

•  Increase in adjusted profit before tax of $280m or 2% on 1H14, driven by a strong performance in Asia

 

Revenue

 

•  Increase in adjusted revenue of $1,316m or 4% on 1H14

 

•  Growth in adjusted revenue driven by client-facing GB&M, Principal RBWM and CMB

 

Operating expenses

 

•  Adjusted operating expenses increased by $1,206m or 7% from higher staff costs

 

Capital

 

•  Strong capital base with a common equity tier 1 ratio of 11.6% and two interim dividends declared amounting to $0.20 per ordinary share in respect of the first half of 2015

 

 

Strategy execution  

Clearly defined actions to capture value from our global network in a changed world

 

•  Growth of 6% in global business revenue synergies, demonstrating the strength of our universal banking model

 

•  Revenue from transaction banking products grew 8% highlighting the value and potential of our international network

 

•  Progress on reducing Group RWAs with a $50bn reduction relating mainly to GB&M

 

•  Entered into an agreement to sell entire business in Brazil*

 

•  Commenced initiatives to reduce costs

 

*We plan to maintain a corporate presence in Brazil to serve our international clients

 

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For the half-year to 30 June 2015

 

Profit before taxation (reported basis)

($bn)

  

Adjusted profit (before taxation)

($bn)

  
LOGO    LOGO   
At 30 June 2015      

Total equity

($bn)

  

Annualised return on average

ordinary shareholders’ equity

(%)

   Total assets

($bn)

LOGO    LOGO    LOGO  

Common equity tier 1 ratio (end point)

(%)

  

Risk-weighted assets

($bn)

   Pre-tax return on average RWAs

(%)

LOGO    LOGO    LOGO  

Share information at 30 June 2015

 

         

Closing market price

$0.50 ordinary shares

in issue

  

Market

capitalisation

   London    Hong Kong   

American

Depositary Share

19,516m    $175bn    £5.70    HK$70.15    $44.81
30 Jun 2014: 19,071m    30 Jun 2014: $193bn    30 Jun 2014: £5.93    30 Jun 2014: HK$78.60    30 Jun 2014: $50.80
31 Dec 2014: 19,218m    31 Dec 2014: $182bn    31 Dec 2014: £6.09    31 Dec 2014: HK$74.00    31 Dec 2014: $47.23
         

Total shareholder return

      Over 1 year    Over 3 years    Over 5 years
To 30 June 2015    102    119    119
Benchmark:            
– Morgan Stanley Capital International Index Banks    99    152    159

 

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3


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Overview (continued)

 

Global Business Snapshot    (Comments on adjusted basis)

Retail Banking and Wealth Management (‘RBWM’)

 

Profit before taxation ($bn)

(Reported: Adjusted)

 

LOGO

 

  

PBT in Principal RBWM up 2%

 

•  Total RBWM PBT was broadly in line with 1H14 as PBT growth in Principal RBWM was largely offset by the continued reduction of the US run-off portfolio.

 

•  The PBT growth in Principal RBWM of $70m or 2% was driven by increased revenues ($472m) and lower LICs ($48m), partly offset by a rise in operating expenses ($445m), notably from higher staff costs.

 

•  Revenue growth was driven by increased Wealth Management income, notably in Asia.

Commercial Banking (‘CMB’)

 

Profit before taxation ($bn)

(Reported: Adjusted)

 

LOGO

 

  

Revenue synergies between CMB & GB&M up 9%

 

•  PBT was broadly in line with 1H14 as growth in revenues was broadly offset by a rise in LICs from a small number of specific impairments and higher operating expenses.

 

•  Revenue growth of $320m or 4% was driven by Credit and Lending and Payments and Cash Management balances, notably in Hong Kong and the UK.

 

•  Revenue synergies arising from the cross-selling to CMB customers of GB&M products was up 9%.

Global Banking and Markets (‘GB&M’)

 

Profit before taxation ($bn)

(Reported: Adjusted)

 

LOGO

 

  

Double digit revenue growth

 

•  PBT increased by $589m or 12% on 1H14 from revenue growth, partly offset by higher costs.

 

•  Revenue grew by $932m or 10%, driven by client-facing GB&M, notably Equities and Foreign Exchange, and by Balance Sheet Management.

 

•  RWAs reduced, in part from management actions, of which $14bn related to mitigation in respect of legacy credit.

Global Private Banking (‘GPB’)

 

Profit before taxation ($bn)

(Reported: Adjusted)

 

LOGO

 

  

Continued repositioning of the business

 

•  PBT of $321m was $12m or 4% lower than in 1H14, driven by higher operating expenses of $9m due to the non-recurrence of a provision release in 1H14.

 

•  Revenue was broadly unchanged as lower revenue from the ongoing repositioning of the business was offset by a rise in client volumes and increased market volatility in Hong Kong, along with the effect of net new money in 2014.

 

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Regional Snapshot    (Comments on adjusted basis)

Europe

 

Profit before taxation ($bn)

(Reported: Adjusted)

 

LOGO

 

  

Continued investment in regulatory programmes and compliance

 

• PBT was $182m or 6% lower than in 1H14 as revenue growth in GB&M was more than offset by increased operating expenses from regulatory programmes and compliance costs.

 

• Revenue increased by $463m or 4%, driven by client-facing businesses and Balance Sheet Management in GB&M.

Asia

 

Profit before taxation ($bn)

(Reported: Adjusted)

 

LOGO

 

  

Revenue growth across all global businesses

 

• PBT of $7,989m was $553m or 7% higher than in 1H14 as revenue growth across all the global businesses was partly offset by increased staff costs.

 

• Revenue increased by $1,127m or 10%, notably in Hong Kong from Wealth Management products in RBWM and client-facing GB&M.

Middle East and North Africa

 

Profit before taxation ($bn)

(Reported: Adjusted)

 

LOGO

 

  

Loan impairment charges compared with a net release in 1H14

 

• PBT of $899m was $74m or 8% lower than in 1H14. This was primarily due to an adverse movement in LICs of $82m, reflecting individually assessed impairment charges in 1H15 compared with a net release in 1H14, mainly on UAE-related exposures in CMB and GB&M.

North America

 

Profit before taxation ($bn)

(Reported: Adjusted)

 

LOGO

 

  

Continued run-off of the CML portfolio

 

• PBT of $931m was $106m or 10% lower than in 1H14, driven by lower revenue and higher costs reflecting investment in CMB and GB&M growth initiatives, partly offset by lower LICs.

 

• Revenue decreased by $239m or 6%, reflecting the continued run-off and loan sales of the Consumer and Mortgage Lending (‘CML’) portfolio.

 

• LICs decreased by $252m or 62%, primarily as a result of lower levels of delinquency and reduced lending balances in the CML portfolio.

Latin America

 

Profit before taxation ($bn)

(Reported: Adjusted)

 

LOGO

 

  

Revenue growth driven by CMB

 

• PBT was $89m or 26% higher than in 1H14 due to higher revenues and lower LICs, partly offset by higher costs from inflationary pressures.

 

• Revenue increased by $83m or 2%, primarily in CMB.

 

• LICs reduced by $73m or 9% mainly in RBWM, in Mexico due to lower delinquency rates, and in Brazil mainly due to the non-recurrence of charges related to model changes in 1H14.

 

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Overview (continued)

 

Cautionary statement regarding forward-looking statements

The Interim Report 2015 contains certain forward-looking statements with respect to HSBC’s financial condition, results of operations and business.

Statements that are not historical facts, including statements about HSBC’s beliefs and expectations, are forward-looking statements. Words such as ‘expects’, ‘targets’, ‘anticipates’, ‘intends’, ‘plans’, ‘believes’, ‘seeks’, ‘estimates’, ‘potential’ and ‘reasonably possible’, variations of these words and similar expressions are intended to identify forward-looking statements. These statements are based on current plans, estimates and projections, and therefore undue reliance should not be placed on them. Forward-looking statements speak only as of the date they are made. HSBC makes no commitment to revise or update any forward-looking statements to reflect events or circumstances occurring or existing after the date of any forward-looking statements.

Written and/or oral forward-looking statements may also be made in the periodic reports to the US Securities and Exchange Commission, summary financial statements to shareholders, proxy statements, offering circulars and prospectuses, press releases and other written materials, and in oral statements made by HSBC’s Directors, officers or employees to third parties, including financial analysts.

Forward-looking statements involve inherent risks and uncertainties. Readers are cautioned that a number of factors could cause actual results to differ, in some instances materially, from those anticipated or implied in any forward-looking statement. These include, but are not limited to:

 

    changes in general economic conditions in the markets in which we operate, such as continuing or deepening recessions and fluctuations in employment beyond those factored into consensus forecasts; changes in foreign exchange rates and interest rates; volatility in equity markets; lack of liquidity in wholesale funding markets; illiquidity and downward price pressure in national real estate markets; adverse changes in central banks’ policies with respect to the provision of liquidity support to financial markets; heightened market concerns over sovereign creditworthiness in over-indebted countries; adverse changes in the funding
 

status of public or private defined benefit pensions; and consumer perception as to the continuing availability of credit and price competition in the market segments we serve;

 

    changes in government policy and regulation, including the monetary, interest rate and other policies of central banks and other regulatory authorities; initiatives to change the size, scope of activities and interconnectedness of financial institutions in connection with the implementation of stricter regulation of financial institutions in key markets worldwide; revised capital and liquidity benchmarks which could serve to deleverage bank balance sheets and lower returns available from the current business model and portfolio mix; imposition of levies or taxes designed to change business mix and risk appetite; the practices, pricing or responsibilities of financial institutions serving their consumer markets; expropriation, nationalisation, confiscation of assets and changes in legislation relating to foreign ownership; changes in bankruptcy legislation in the principal markets in which we operate and the consequences thereof; general changes in government policy that may significantly influence investor decisions; extraordinary government actions as a result of current market turmoil; other unfavourable political or diplomatic developments producing social instability or legal uncertainty which in turn may affect demand for our products and services; the costs, effects and outcomes of product regulatory reviews, actions or litigation, including any additional compliance requirements; and the effects of competition in the markets where we operate including increased competition from non-bank financial services companies, including securities firms; and

 

    factors specific to HSBC, including our success in adequately identifying the risks we face, such as the incidence of loan losses or delinquency, and managing those risks (through account management, hedging and other techniques). Effective risk management depends on, among other things, our ability through stress testing and other techniques to prepare for events that cannot be captured by the statistical models it uses; and our success in addressing operational, legal and regulatory, and litigation challenges, notably compliance with the US DPA.
 

 

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5a


Table of Contents

Overview (continued)

 

Group Chairman’s Statement

 

LOGO

We have had an encouraging start to 2015 with the interim results once again demonstrating the resilience and balance inherent within HSBC’s geographically diversified universal banking model. Particularly encouraging was the revenue growth from areas we have been investing in to offset the understandable decline in revenues from our run-off portfolios and divestments.

 

We are continuing to invest to capture the opportunities which are arising from changing trade and investment flows and from the clear momentum in greater customer adoption of mobile and digital banking. In the continuing low interest rate environment, it is essential we build these incremental revenues and use technology and process improvement to generate further cost savings to offset the growing expenditure needed to embed regulatory changes and provide greater assurance over financial crime risks. These factors provided much of the context to our Investor Update in June, when Stuart Gulliver and his senior management team laid out very clearly the priorities and objectives being set to build sustainable value for you, our shareholders.

Pre-tax profits in the first six months of 2015 on a reported basis of $13.6bn were 10% higher than those delivered in the first half of 2014. On the adjusted basis, which is one of the key metrics used by the Board to assess current management performance, pre-tax profits were 2% better at $13.0bn, with the difference explained by the reconciliations on pages 50 to 55. Earnings per share were $0.48, providing more than twice cover for

the first two interim dividends per ordinary share in respect of 2015 amounting to $0.20 in aggregate (2014: $0.50 and $0.20, respectively).

The Group’s capital position remains strong, benefiting from a higher than normal scrip dividend take-up in the period and from actions taken to manage down risk-weighted assets. At 30 June 2015, our end point common equity tier 1 ratio stood at 11.6% compared with 11.1% at the beginning of the year and 11.3% a year ago.

In the following pages, Stuart Gulliver, in his ‘Group Chief Executive’s Review’ reflects on the key drivers of first half performance and summarises the actions presented in the Investor Update which underpin the Group’s target to deliver a return on equity in excess of 10% by the end of 2017.

Board oversight of management is now tightly focused on the delivery of the actions set out in this plan and management performance scorecards have been adjusted to reflect this. Initial progress is encouraging with the highlight clearly being the agreement reached for the sale of our Brazilian operations. I want to underscore three points which are crucial to achieving what is a challenging set of objectives.

 

An ever more connected world needs international banking and within this, a diversified universal banking model promotes revenue synergies and resilience.

What drives HSBC’s rating as one of the two most systemically important banks in the world is the extent to which we do business outside the country from which we are regulated on a consolidated basis; we see this as a strength in a globalised world. As many banks shrink to domestic or regional bases, our international network and product capabilities are demonstrating significant competitive advantages as we pick up cross-border business. This was the key message from our Investor Update and, as Stuart illustrates in his review, the depth and breadth of the network are creating value in terms of revenue growth. In the first half of this year, transaction banking, which captures trade and investment flows, grew revenues by 8%. Further collaboration between our global businesses drove revenue synergies by 6%.

Nothing illustrates the importance of trade corridors better than the focus of China on its ‘One Belt, One Road’ initiative. This, together with the creation of the Asian Infrastructure Investment Bank, led by China but now with 57 founding member states, is planned to create opportunities for infrastructure investment coupled with green technology on a massive global scale. HSBC’s presence along the trade corridor, as well as at both ends, places it in a strong position to partner with participating firms. As investment grows, this will also accelerate the use of the renminbi as a global currency, an area where HSBC is the leading international bank.

The current period also illustrates convincingly the benefits of our international universal banking model and the revenue synergies noted above. A few examples will illustrate the point.

While eurozone anxieties over Greece dampened trade flows and falls in commodity prices led to a lower value of commodity related trade finance, the resultant volatility in foreign exchange led to a greater volume of activity through our dealing rooms. Although

 

 

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equity flows into emerging markets retreated, equity volumes in Hong Kong and mainland China expanded markedly with the Shanghai-Hong Kong stock connect system surpassing all expectations in terms of flows in both directions. As a result, HSBC’s Wealth Management revenues in Hong Kong from equities, mutual funds and asset management increased significantly.

Finally and importantly, the significant progress made in resolution planning, both by international and national regulatory bodies and by firms themselves, means that the contingent risk to home country taxpayers from international business activities has markedly reduced. This should allow international firms like HSBC to grow faster than the economies that host them without undue concerns being raised.

Technology is changing the shape of banking at a rapid pace

There is no doubt that banking is in a period of fundamental change as a consequence of technological developments that, firstly, allow storage and analysis of an almost unlimited amount of data and, secondly, allow customers to directly access third party providers when transacting or investing.

The opportunities are exciting; the risks are not insignificant.

The benefits to customers and society are potentially substantial. Better use of data will allow more accurate knowledge about the customer to be built, leading to improved customer segmentation and therefore less risk of mis-selling in the future. The same data, together with transaction monitoring, will enhance our ability to identify bad actors within the system, so reducing financial crime. A lower cost of delivery will flow through to lower intermediation costs for customers and allow banking services to reach communities currently under-served.

The nature, scale and pace of change do, however, pose a number of public policy questions still under review as well as highlighting new risks to financial stability that need to be addressed. The sheer scale of data to be collected and stored demands clarity over responsibility for data

security and transparency over who has access to that data and for what purpose. Customers need to understand the value of their data so that they can assess the bargain that is being offered by non-traditional providers in return for their financial footprint. Customers also need to know in a disaggregated service model to whom they should complain if a transaction goes awry. Finally, ever larger digital databases of financial credentials and transaction data will need best-in-class protection from cyber crime. This will require even greater co-operation between the industry and public sector law enforcement and intelligence services than exists today.

Restoring trust is essential

One of the most encouraging observations in the first half of 2015 was the growing emphasis in public policy and regulatory consultations and proposals on looking forwards not back. Much of the focus was on setting clarity over the behaviours expected of individuals within our industry and of those charged with supervising or providing governance over their activities.

We welcomed the ‘Fair and Effective Markets Review’ conducted jointly by the Bank of England, HM Treasury and the Financial Conduct Authority to reinforce confidence in wholesale markets in light of the serious misconduct evidenced in recent years. The consequential creation of an FICC Markets Standards Board to sit alongside the Banking Standards Board which came into being in April is a further contribution to creating a framework capable of reassuring market participants of the integrity of financial markets.

The focus of both these bodies, together with the Senior Managers Regime which comes into force next year, is to stress personal accountability for conduct within markets and in relation to consumers of financial products. Recent instances of misconduct have highlighted the inadequacy of legal and regulatory frameworks to attach appropriate sanctions in a timely way to responsible individuals, leaving shareholders to bear the burden of penalties imposed on the employing institutions, in many

cases long after the events in question occurred and where the evidence is either insufficient or too dated to pursue the individuals concerned. This is not a sustainable or a desirable model.

We absolutely concur, therefore, with this emphasis on personal responsibility and accountability. It is essential that regulatory governance in this area is seen to be transparent, fair and proportionate. However, the potential benefits are significant and we believe that if the clarity intended from the greater focus being given through these initiatives to expected behaviours is achieved, then this, together with the discipline derived from the greater incidence of deferred remuneration, will greatly enhance the prospects for the restoration of trust.

That restoration of trust will of course only be earned over time by the actions of firms being increasingly recognised by market participants and consumers as appropriate to the circumstances, balancing the interests of the firm with those of the customer.

Again actions speak louder than words. By way of example, in the first half of 2015, measures taken to assist customers in the UK to manage their financial affairs better delivered improved outcomes for customers and reduced a source of recurring frustration. These actions formed part of a comprehensive review of value exchange within RBWM conducted over the past year. As a consequence overdraft fees in the UK fell by some $88m, reflecting lower pricing and fewer instances of unauthorised overdrawn accounts, which was prompted by a new policy of text messaging when customers approached their agreed limits.

Three other areas are worthy of comment.

Progress on Global Standards and regulatory change

We are now firmly in the second phase of the Global Standards initiative, moving from design to implementation and assurance. Virtually all of the recommendations in the Monitor’s initial report have now been actioned with those remaining not due until later this year. Further recommendations for improvement, as they arise from the

 

 

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Overview (continued)

 

Monitor’s update reviews, regular regulatory examinations and the work of our own internal audit function, will continue to be incorporated as they arise. Similarly, in the area of regulatory change the focus is now firmly on embedding the changes now finalised.

The global functions and our operations and technology teams continued to add resources to meet the demands of the Global Standards programme and of continuing regulatory change. In the first half of 2015, the Group’s headcount increased by some 2,200. Reflecting the prioritisation being given to the above programmes, more than this number were in fact recruited into Compliance, principally in Financial Crime Compliance and to address the regulatory change programmes. As systems are upgraded we should realise planned productivity improvements to release resources currently allocated to manual processes and parallel working.

The above comments illustrate how the cost dynamics of our business model are clearly changing, and we are challenging afresh the sustainability of some of our smaller operations in light of the cost burdens they are now facing. This analysis, as was highlighted in the Investor Update, will inform some further streamlining of our geographical footprint over the next few years.

UK ring-fencing

During the period, the business design of the ring-fenced bank was settled and Birmingham was chosen as its headquarters location. A new HQ building is being constructed which will be available in 2018. Both the ring-fenced bank and the remaining activities outside the ring fence will be served by a new service company which will host shared infrastructure and employees. 22,000 UK employees of our UK bank will migrate to this new employer by the end of this year.

Review of headquarters location

Following the announcement at the Annual General Meeting that we would embark upon a review of the optimal location for our global headquarters, detailed work has commenced in line with the criteria laid out in the June Investor Update. It remains the Board’s

intention to conclude the review by the end of this year.

Board changes

Since the AGM we have announced two new members of the Board.

Irene Lee brings to the Board considerable banking experience and knowledge of Asia and joined the Board on 1 July, having served as a non-executive Director of The Hongkong and Shanghai Banking Corporation Limited and of Hang Seng Bank Limited since 2013 and 2014, respectively.

Irene is currently Executive Chairman of Hysan Development Company Limited and a non-executive director of Cathay Pacific Airways Limited, China Light & Power Holdings Limited and Noble Group Limited. She has over 30 years of finance industry experience, having held senior positions in investment banking and fund management in the UK, USA and Australia with the Commonwealth Bank of Australia, SealCorp Holdings Limited and Citibank.

Pauline van der Meer Mohr brings to the Board considerable legal and human resources experience and will join the Board on 1 September. Pauline is currently president of the Executive Board of Erasmus University Rotterdam, a role which she has held since 2010. Pauline began her career in the legal profession and held several legal and management positions with the Royal Dutch Shell Group from 1989 to 2004, rising to become HR Director, Information Technology. In 2004, she was appointed group human resources director at TNT NV before moving to become senior executive vice president and head of group human resources at ABN AMRO Bank NV in 2006. Pauline also served as a member of the Dutch Banking Code Monitoring Commission, which was aimed at restoring trust in the Dutch banking sector.

Looking forward

The environment for banking remains challenging. As Stuart points out in his review, economic conditions remain uncertain in many parts of the world, in particular in the eurozone and in China. On top of this, geopolitical risks are heightened. Regulatory workloads have never been higher as we embed structural change, build systems to

respond to demands for greater transparency, and augment stress testing models and reinforce business continuity design as part of recovery and resolution planning. Technology is empowering disruptive business models and facilitating new entrants whilst also offering good opportunities to improve efficiency and build better customer propositions. Responsibilities to protect the financial system from bad actors and from cyber threats are expanding at the same time as concerns are raised over risks of consequential financial exclusion.

Yet there are also observable mega-trends supportive of financial system growth. Growing urbanisation across Asia, infrastructure development in both emerging and developed markets, investment in new technology to address environmental efficiency and the development of capital market solutions to add fresh financing capabilities and contribute to the financial needs of an ageing population all have positive implications for the role and profitability of the financial system. Additionally, central banks remain determined to maintain a policy environment that facilitates the resumption of sustainable economic growth.

As set out by Stuart in the June Investor Update, our positioning across the major trade and investment corridors of the world is a privileged position from which to plan our future. We have the financial strength and the right people at all levels of the firm to make the most of the opportunities open to us. We look forward to reporting on progress.

 

LOGO

D J Flint

Group Chairman

3 August 2015

 

 

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Group Chief Executive’s Review

 

LOGO

Our performance in the first half of 2015 demonstrated the underlying strength of our business. Our diversified, universal model enabled the Group to deliver increased profitability in spite of slow global growth. In particular, a strong revenue performance across our Asia businesses helped drive increased profits and Global Banking and Markets had a good six months.

 

In June we announced a series of strategic actions to capture the value of our international network in a much changed world. These actions are designed to maximise revenue, significantly reduce our operating expenses and meet our obligations regarding the structure of the Group.

We are executing these plans and have significant momentum moving into the second half of the year.

First half of 2015

Reported profit before tax was $13.6bn, 10% higher than for the equivalent period in 2014.

Adjusted pre-tax profit, which excludes the period-on-period effects of currency translation differences and significant items, was $13.0bn, 2% higher than in the first half of 2014. This reflected growth in revenue and lower loan impairment charges, partially offset by increased costs.

Global Banking and Markets maintained its good start to the year, especially in our client-facing Markets businesses. Equities and Foreign Exchange were the main drivers of revenue growth.

Commercial Banking revenue continued to grow, particularly in Hong Kong and the UK.

Principal Retail Banking & Wealth Management generated increased revenue following a strong performance in our Wealth Management business in Asia.

There was a 6% increase in revenue arising from cross-selling between our global businesses, demonstrating the strength of our universal banking model.

Loan impairment charges continued to fall, driven particularly by reductions in North America and Latin America.

Operating expenses increased, although they were broadly flat relative to the second half of 2014, excluding the effect of the UK bank levy.

The common equity tier 1 ratio on a CRD IV end point basis was 11.6%.

Annualised return on equity was 10.6%, exceeding our target of 10%.

Maximising value from our international network

We continue to invest in the strategic product areas that benefit most from our international network. The positive impact of this investment was again apparent in the first half of the year.

Foreign Exchange revenue grew by 21% compared with the first half of 2014

 

and Payments and Cash Management revenue increased by 4%.

Global Trade & Receivables Finance continued to grow, and HSBC was named ‘Best Trade Bank in the World’, ‘Best Trade Bank in Asia Pacific’ and ‘Best Trade Bank in the Middle East’ in the Trade and Forfaiting Review Excellence Awards 2015.

We maintained our leadership position in international renminbi services, growing revenue by 9% compared with the first half of 2014. HSBC also received the Asiamoney ‘Best Overall Offshore RMB Products and Services’ award for the fourth year in a row.

In FinanceAsia’s International Banking Awards 2015, HSBC was the winner of the ‘Best Foreign Bank’ awards for China, Indonesia, Malaysia, Vietnam, Korea, Sri Lanka and Bangladesh. HSBC was also named Best Bank in Hong Kong for the 12th consecutive year.

Investor Update

Our Annual Report and Accounts 2014 outlined some of the considerable changes to our operating environment that have occurred since 2011. In response to these changes the Board set a new Group target of a return on equity of more than 10% by the end of 2017.

At our Investor Update in June, we set out the actions that will enable us to meet this goal.

We intend to:

 

  reduce risk-weighted assets across the Group by at least 25%, re-deploy some of these risk-weighted assets towards higher performing businesses and return Global Banking and Markets to Group target profitability;

 

  sell underperforming operations in Turkey and Brazil, and keep our network under review using our six-filter process;

 

  exploit the strategic opportunity in the region covered by the North American Free Trade Agreement to rebuild profitability in Mexico and deliver satisfactory returns in the US;

 

  set up a UK ring-fenced bank by 2018;

 

  realise $4.5-5.0bn in cost savings and return operating expenses to 2014 levels by the end of 2017;
 

 

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Overview (continued)

 

  deliver revenue growth greater than GDP growth from our international network;

 

  capture growth opportunities in Asia, including in China’s Pearl River Delta and the Association of Southeast Asian Nations, and in our Asset Management and Insurance businesses;

 

  generate $2.0-2.5bn revenue from our global leadership position in business arising from the internationalisation of the Chinese currency, the renminbi; and

 

  complete the implementation of Global Standards, our globally consistent and rigorous financial crime controls.

Delivering these actions will create value for our customers and shareholders, and enable us to meet global standards while driving business success. It will also help us to continue to adapt to the structural changes that are asked of us by regulators and legislators.

Meeting our targets

We will update shareholders on progress in executing these actions every quarter, beginning with our third quarter results in November. Delivery is our number one priority.

Work is proceeding on all of our actions, in particular those aimed at reducing risk-weighted assets (‘RWAs’), cutting costs and turning around or disposing of underperforming parts of the business.

Reducing RWAs will be a gradual process, but we have made a good start in the first half of the year. We reduced RWAs by $50bn, largely through asset sales in the Global Banking and Markets legacy book, the sale of part of our shareholding in Industrial Bank, and more detailed mapping within RWA calculations and improved recognition of collateral. We have redeployed $30bn RWAs into higher returning areas. I am confident that we will continue to make significant progress on this in the remainder of 2015.

Over the next two years we will continue to build our capital base and redeploy some of the RWAs that we take out of the business in line with the priorities we outlined in June.

Although we are aiming to ‘pivot’ our business towards profitable growth opportunities in Asia, Asia is not the exclusive focus of reinvestment. In order to maintain broad-based growth and a diversified risk profile, we expect around half of incremental RWAs to be redeployed to Asia, with the rest spread across Europe, the Middle East and North Africa, North America and Mexico. If we cannot find strategic opportunities to deploy capital with a return on equity above 10% we will return the capital to shareholders, subject to regulatory approval.

We have commenced our work to reduce costs and expect to be able to demonstrate tangible progress in the coming quarters. Fulfilling these actions will also entail a number of one-off transformation costs, some of which will be incurred during the second half

of 2015. We expect the largest portion of these costs to fall in 2016.

On 31 July we agreed to sell our Brazil business to Banco Bradesco S.A. for $5.2bn. As we said at our Investor Update, we plan to maintain a modest corporate banking presence in Brazil to serve our international clients in the country. This transaction delivers excellent value for shareholders and represents significant delivery against the actions we outlined in June.

Summary and outlook

We are hopeful for a modest improvement in the world economy in the second half of the year. More accommodating monetary conditions should help the mainland Chinese economy to stabilise after first half challenges. US economic growth is also likely to accelerate. Thanks to lower oil prices, real incomes are rising across much of the eurozone and in the UK. Key uncertainties include the pace of recovery in capital spending, the timing of any US monetary tightening and ongoing challenges in the eurozone.

Our performance in July was satisfactory. Our focus is on making significant progress in executing our strategic actions during the remainder of the year.

 

LOGO

S T Gulliver

Group Chief Executive

3 August 2015

 

 

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Strategy update

 

Strategy update

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.

 

 

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Strategy update (continued)

 

 

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; <1/3 of Group RWAs

 

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.

 

 

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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.

 

 

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Strategy update (continued)

 

Exposure to risks arising from the business activities of global businesses

 

LOGO

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         <0.65%           0.53%   
     Wholesale loan impairment charges as % of advances        
<0.45%
  
        0.29%   

For footnote, see page 56.

 

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Financial summary

 

 

  Financial summary

 

 

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  

 

 

Ratio of earnings to combined fixed charges

   32a

 

    

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.

 

 

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Financial summary (continued)

 

 

Consolidated income statement

Summary consolidated income statement

 

     Half-year to
         

    30 June

2015

$m

         

    30 June

2014

$m

         

31 December

2014

$m

      

Net interest income

        16,444            17,405            17,300      

Net fee income

        7,725            8,177            7,780      

Net trading income

        4,573            3,275            3,485      

Net income from financial instruments designated at fair value

        2,666            1,660            813      

Gains less losses from financial investments

        1,874            946            389      

Dividend income

        68            88            223      

Net insurance premium income

        5,607            6,137            5,784      

Other operating income

        836            538            593      

Total operating income

            39,793                38,226                36,367      

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

        (6,850         (7,059         (6,286   

Net operating income before loan impairment charges and other credit risk provisions

        32,943            31,167            30,081      

Loan impairment charges and other credit risk provisions

        (1,439         (1,841         (2,010   

Net operating income

        31,504            29,326            28,071      

Total operating expenses

        (19,187         (18,266         (22,983   

Operating profit

        12,317            11,060            5,088      

Share of profit in associates and joint ventures

        1,311            1,280            1,252      

Profit before tax

        13,628            12,340            6,340      

Tax expense

        (2,907         (2,022         (1,953   

Profit for the period

        10,721            10,318            4,387      

Profit attributable to shareholders of the parent company

        9,618            9,746            3,942      

Profit attributable to non-controlling interests

        1,103            572            445      

Average foreign exchange translation rates to $:

                    

$1: £

        0.657            0.599            0.615      

$1:

        0.897            0.730            0.777      

 

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.

 

From reported results to adjusted performance

 

To arrive at adjusted performance, we adjust for:

 

•     the period-on-period effects of currency translation; and

 

•     the effect of significant items.

 

Reconciliations of our reported and adjusted results are provided on pages 50 to 55.

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.

 

 

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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 in

Europe, 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:

 

 

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Financial summary (continued)

 

 

  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.

 

 

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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

 

     Half-year to  
         

30 June

2015

$m

         

30 June

2014

$m

         

31 December

2014

$m

 

Interest income

        24,019            25,435            25,520   

Interest expense

        (7,575         (8,030         (8,220

Net interest income6

        16,444            17,405            17,300   

Average interest-earning assets

            1,730,663                1,801,862                1,771,460   

Gross interest yield7

        2.80%            2.85%            2.86%   

Cost of funds

        (1.03%         (1.03%         (1.07%

Net interest spread8

        1.77%            1.82%            1.79%   

Net interest margin8

        1.92%            1.95%            1.94%   

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

 

     Half-year to  
         

30 June
2015

$m

         

30 June
2014

$m

         

31 December

2014

$m

 

Significant items

                 

– releases/(provisions) arising from the ongoing review of compliance with the Consumer Credit Act in the UK

        12            (367         (265

– acquisitions, disposals and dilutions

                   34            4   
                        12            (333         (261

Currency translation

                                1,356                    1,069   

Total

        12            1,023            808   

 

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.

 

 

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Financial summary (continued)

 

 

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

 

     Half-year to  
         

    30 June

2015

$m

         

    30 June

2014

$m

         

31 December

2014

$m

 

Account services

        1,383            1,734            1,673   

Funds under management

        1,310            1,283            1,375   

Cards

        1,120            1,210            1,250   

Credit facilities

        989            963            927   

Broking income

        817            664            707   

Unit trusts

        595            518            487   

Imports/exports

        485            558            557   

Underwriting

        450            536            336   

Remittances

        387            411            422   

Global custody

        371            359            367   

Insurance agency commission

        284            302            214   

Other

            1,181                1,493                1,199   

Fee income

        9,372            10,031            9,514   

Less: fee expense

        (1,647         (1,854         (1,734

Net fee income

        7,725            8,177            7,780   

 

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.

 

 

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Net trading income

 

         Half-year to  
        

        30 June

2015

            $m

        

            30 June

2014

            $m

        

    31 December

2014

            $m

 

Trading activities

       3,553           2,666           2,753   

Net interest income on trading activities

       1,053           913           994   

Gain/(loss) on termination of hedges

       (8        (4        5   

Other trading income/(expense) – hedge ineffectiveness:

              

– on cash flow hedges

       4           15           19   

– on fair value hedges

       26           22           (3

Adverse fair value movement on non-qualifying hedges

       (55        (337        (283

Net trading income

       4,573           3,275           3,485   

 

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

 

         Half-year to  
        

        30 June

2015

      $m

        

            30 June
2014

      $m

        

    31 December
2014

      $m

 

Included within trading activities:

              

– favourable/(adverse) debit valuation adjustment on derivative contracts

       165           (155        (177

Other significant items:

              

– adverse fair value movements on non-qualifying hedges

       (45        (322        (219

– acquisitions, disposals and dilutions

                 2             
       120           (475        (396

Currency translation

                  240           207   

Total

       120           (235        (189

 

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

 

         Half-year to  
        

        30 June
2015

      $m

        

            30 June
2014

      $m

        

31 December
2014

      $m

 

Net income/(expense) arising from:

              

– financial assets held to meet liabilities under insurance and investment contracts

       1,615           1,396           904   

– liabilities to customers under investment contracts

       (301        (231        (204

– HSBC’s long-term debt issued and related derivatives

       1,324           438           70   

– change in own credit spread on long-term debt

       650           (215        632   

– other changes in fair value

       674           653           (562

– other instruments designated at fair value and related derivatives

       28           57           43   

Net income from financial instruments designated at fair value

       2,666           1,660           813   

 

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Financial summary (continued)

 

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

 

         At  
        

        30 June

2015

            $m

         

            30 June

2014

                $m

         

    31 December

2014

            $m

 

Financial assets designated at fair value

       25,168            31,823            29,037   

Financial liabilities designated at fair value

       69,485            82,968            76,153   

Including:

                

Financial assets held to meet liabilities under:

                

– insurance contracts and investment contracts with DPF

       11,341            11,906            10,650   

– unit-linked insurance and other insurance and investment contracts

       12,297            16,927            16,333   

Long-term debt issues designated at fair value

       62,962            75,740            69,681   

 

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 primarily

reflected 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

 

         Half-year to  
        

        30 June

2015

            $m

        

            30 June

2014

            $m

        

    31 December

2014

            $m

 

Net gains from disposal of:

              

– debt securities

       310           185           480   

– equity securities

       1,578           782           255   

– other financial investments

       4           2           4   
       1,892           969           739   

Impairment of available-for-sale equity securities

       (18        (23        (350

Gains less losses from financial investments

       1,874           946           389   

 

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.

 

 

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Significant items and currency translation

 

         Half-year to  
        

        30 June

2015

            $m

         

            30 June

2014

            $m

         

    31 December

2014

            $m

 

Significant items

                

– gain on the partial sale of shareholding in Industrial Bank

       1,372                         

– gain on sale of shareholding in Bank of Shanghai

                  428              

– impairment on our investment in Industrial Bank

                             (271
       1,372            428            (271

Currency translation

                   62            26   

Total

       1,372            490            (245

Net insurance premium income

 

         Half-year to  
        

        30 June

2015

            $m

        

            30 June

2014

            $m

        

    31 December

2014

            $m

 

Gross insurance premium income

       5,855           6,358           6,012   

Reinsurance premiums

       (248        (221        (228

Net insurance premium income

       5,607           6,137           5,784   

 

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

 

         Half-year to  
        

        30 June

2015

            $m

        

            30 June

2014

            $m

        

    31 December

2014

            $m

 

Rent received

       84           82           80   

Gains recognised on assets held for sale

       34           10           210   

Gains on investment properties

       33           71           49   

Gains on disposal of property, plant and equipment, intangible assets and non-financial investments

       26           3           29   

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

       438           200           61   

Other

       221           172           164   

Other operating income

       836           538           593   

 

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

 

              
         Half-year to  
        

        30 June

2015

            $m

        

        30 June

2014

            $m

        

    31 December

2014

            $m

 

Value of new business

       438           479           391   

Expected return

       (279        (286        (259

Assumption changes and experience variances

       241           (3        (113

Other adjustments

       38           10           42   

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

       438           200           61   

 

HSBC HOLDINGS PLC

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Financial summary (continued)

 

Reported other operating income of $836m increased by $298m compared with 1H14. This was in part due to the

significant items and currency translation summarised in the table below.

 

 

Significant items and currency translation

 

         Half year to  
        

        30 June
2015

$m

         

            30 June
2014

$m

        

    31 December

2014

$m

 

Significant items

               

Included within gains recognised on assets held for sale:

               

– gain/(loss) on sale of several tranches of real estate secured accounts in the US

       17            (15        183   

Included within the remaining line items:

               

– acquisitions, disposals and dilutions

                  (14        (27
       17            (29        156   

Currency translation

                   (45        (28

Total

       17            (74        128   

 

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

 

         Half-year to  
        

        30 June

2015

$m

        

            30 June

2014

$m

        

    31 December

2014

$m

 

Insurance claims and benefits paid and movement in liabilities to policyholders:

              

– gross

       7,099           7,212           6,511   

– reinsurers’ share

       (249        (153        (225

Net total

       6,850           7,059           6,286   

 

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 these

insurance 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.

 

 

HSBC HOLDINGS PLC

24


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Loan impairment charges and other credit risk provisions

 

         Half-year to  
        

        30 June

2015

            $m

        

            30 June

2014

            $m

        

    31 December

2014

            $m

 

Loan impairment charges

              

– new allowances net of allowance releases

       1,797           2,581           2,429   

– recoveries of amounts previously written off

       (350        (556        (399
       1,447           2,025           2,030   

– individually assessed allowances

       480           558           1,222   

– collectively assessed allowances

       967           1,467           808   

Releases of impairment allowances of available-for-sale debt securities

       (38        (214        (105

Other credit risk provisions

       30           30           85   

Loan impairment charges and other credit risk provisions

       1,439           1,841           2,010   
       %           %           %   

Impairment charges on loans and advances to customers as a percentage of average gross loans and advances to customers (annualised)

       0.31           0.44           0.43   

 

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.

 

 

HSBC HOLDINGS PLC

25


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Financial summary (continued)

 

Operating expenses

 

In addition to detailing operating expense items by category, as set out in the table below, we also categorise adjusted expenses as follows:

 

• run-the-bank costs comprise business as usual running costs that keep operations functioning at the required quality and standard year-on-year, maintain IT infrastructure and support revenue growth;

 

• change-the-bank costs comprise expenses relating to the implementation of mandatory regulatory changes and other investment costs incurred relating to projects to change

 

business as usual activity to enhance future operating capabilities.

 

Change-the-bank costs do not include one-off transformation costs incurred to deliver the cost reduction and productivity outcomes outlined in the Investor Update; and

 

• the UK bank levy is reported as a separate category.

 

Run-the-bank costs are split between front office and back office reflecting the way the Group is organised into four global businesses (‘front office’), supported by the global functions (‘back office’).

 

         Half-year to  
        

        30 June

2015

$m

         

            30 June
2014

$m

         

  31 December
2014

$m

 

By expense category

                

Employee compensation and benefits

       10,041            9,978            10,388   

Premises and equipment (excluding depreciation and impairment)

       1,939            2,092            2,112   

General and administrative expenses

       6,190            5,035            9,326   

Administrative expenses

       18,170            17,105            21,826   

Depreciation and impairment of property, plant and equipment

       604            712            670   

Amortisation and impairment of intangible assets

       413            449            487   

Operating expenses

       19,187            18,266            22,983   

 

Staff numbers (full-time equivalent)

 

                
         At  
                 30 June
2015
                  30 June
2014
              31 December
2014
 

Geographical regions

                

Europe

       69,867            69,642            69,363   

Asia

       120,588            115,111            118,322   

Middle East and North Africa

       8,208            8,530            8,305   

North America

       20,338            20,649            20,412   

Latin America

       40,787            42,157            41,201   

Staff numbers

               259,788                    256,089                    257,603   

 

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

 

         Half-year to  
                 30 June
2015
            $m
                  30 June
2014
            $m
         

    31 December
2014

            $m

 

Significant items

                

– charge in relation to the settlement agreement with Federal Housing Finance Authority

                             550   

– settlements and provisions in connection with legal matters

       1,144                       1,187   

– regulatory provisions in GPB

       147                       65   

– UK customer redress programmes

       137            234            1,041   

– restructuring and other related costs

       117            82            196   

– acquisitions, disposals and dilutions

                  35            5   
       1,545            351            3,044   

Currency translation

                   1,479            1,287   

Total

       1,545            1,830            4,331   

 

HSBC HOLDINGS PLC

26


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         Half-year to  
        

        30 June

2015

            $m

        

            30 June

2014

            $m

        

    31 December

2014

            $m

 

By expense group

              

Run-the-bank – front office

       8,027           7,448           7,746   

Run-the-bank – back office

       7,924           7,680           8,273   

Change-the-bank

       1,736           1,353           1,525   

Bank levy

       (45        (45        1,108   

Significant items

       1,545           351           3,044   

Currency translation

                 1,479           1,287   

Operating expenses

       19,187           18,266           22,983   

 

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

 

         Half-year to  
        

        30 June
2015

%

         

            30 June
2014

%

         

    31 December
2014

%

 

HSBC

       58.2            58.6            76.4   

Geographical regions

                

Europe

       78.3            76.8            110.9   

Asia

       38.8            41.4            46.8   

Middle East and North Africa

       48.4            47.4            48.0   

North America

       79.7            69.8            87.9   

Latin America

       67.6            67.8            75.8   

Global businesses

                

Retail Banking and Wealth Management9

       67.1            67.6            75.8   

Commercial Banking9

       44.1            42.5            46.1   

Global Banking and Markets

       56.4            50.6            88.5   

Global Private Banking

       85.0            70.6            79.3   

For footnote, see page 56.

 

HSBC HOLDINGS PLC

27


Table of Contents

 

Financial summary (continued)

 

Share of profit in associates and joint ventures

 

         Half-year to  
        

        30 June

2015

$m

         

            30 June

2014

$m

         

    31 December

2014

$m

 

Associates

                

Bank of Communications Co., Limited

       1,021            978            996   

The Saudi British Bank

       240            239            216   

Other

       25            37            27   

Share of profit in associates

       1,286            1,254            1,239   

Share of profit in joint ventures

       25            26            13   

Share of profit in associates and joint ventures

       1,311            1,280            1,252   

 

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

 

         Half-year to  
        

        30 June

2015

$m

        

            30 June

2014

$m

        

    31 December

2014

$m

 

Profit before tax

       13,628           12,340           6,340   

Tax expense

       (2,907        (2,022        (1,953

Profit after tax

       10,721           10,318           4,387   

Effective tax rate

       21.3%           16.4%           30.8%   

 

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.

 

 

 

HSBC HOLDINGS PLC

28


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Consolidated balance sheet

Summary consolidated balance sheet

 

        

At

            30 June
2015

$m

        

At

            30 June
2014

$m

        

At

    31 December

2014

$m

 

ASSETS

              

Cash and balances at central banks

       144,324           132,137           129,957   

Trading assets

       283,138           347,106           304,193   

Financial assets designated at fair value

       25,168           31,823           29,037   

Derivatives

       296,942           269,839           345,008   

Loans and advances to banks

       109,405           127,387           112,149   

Loans and advances to customers

       953,985           1,047,241           974,660   

Reverse repurchase agreements – non-trading

       149,384           198,301           161,713   

Financial investments

       404,682           423,710           415,467   

Assets held for sale

       60,929           10,248           7,647   

Other assets

       143,756           165,801           154,308   

Total assets

       2,571,713           2,753,593           2,634,139   

LIABILITIES AND EQUITY

              

Liabilities

              

Deposits by banks

       71,140           92,764           77,426   

Customer accounts

       1,335,800           1,415,705           1,350,642   

Repurchase agreements – non-trading

       81,506           165,506           107,432   

Trading liabilities

       181,435           228,135           190,572   

Financial liabilities designated at fair value

       69,485           82,968           76,153   

Derivatives

       289,984           263,494           340,669   

Debt securities in issue

       102,656           96,397           95,947   

Liabilities under insurance contracts

       69,494           75,223           73,861   

Liabilities of disposal groups held for sale

       53,226           12,361           6,934   

Other liabilities

       115,605           122,318           114,525   

Total liabilities

       2,370,331           2,554,871           2,434,161   

Equity

              

Total shareholders’ equity

       192,427           190,281           190,447   

Non-controlling interests

       8,955           8,441           9,531   

Total equity

       201,382           198,722           199,978   

Total liabilities and equity

       2,571,713           2,753,593           2,634,139   
Selected financial information               
        

At

30 June

2015

$m

        

At

30 June

2014

$m

        

At

31 December

2014

$m

 

Called up share capital

       9,758           9,535           9,609   

Total regulatory capital

       195,110           192,834           190,730   

Undated subordinated loan capital

       2,771           2,777           2,773   

Preferred securities and dated subordinated loan capital

       44,852           49,644           47,208   

Risk-weighted assets

       1,193,154           1,248,572           1,219,765   

Financial statistics

              

Loans and advances to customers as a percentage of customer accounts

       71.4           74.0           72.2   

Average total shareholders’ equity to average total assets

       7.1           6.9           7.0   

Net asset value per ordinary share at period-end ($)

       9.11           9.64           9.28   

Number of $0.50 ordinary shares in issue (millions)

       19,516           19,071           19,218   

Closing foreign exchange translation rates to $:

              

$1: £

       0.635           0.586           0.642   

$1:

       0.893           0.732           0.823   

A more detailed consolidated balance sheet is contained in the Financial Statements on page 101.

 

HSBC HOLDINGS PLC

29


Table of Contents

Financial summary (continued)

 

 

Combined view of customer lending and customer deposits

 

         At  
        

      30 Jun

2015

$m

        

      30 Jun

2014

$m

        

      31 Dec

2014

$m

 

Loans and advances to customers

       953,985           1,047,241           974,660   

Loans and advances to customers reported in ‘Assets held for sale’

       21,024           1,658           577   

– Brazil

       20,827                       

– other

       197           1,658           577   
                                

Combined customer lending

       975,009           1,048,899           975,237   

Customer accounts

       1,335,800           1,415,705           1,350,642   

Customer accounts reported in ‘Liabilities of disposal groups held for sale’

       19,432           4,880           145   

– Brazil

       19,432                       

– other

       —             4,880           145   
                                

Combined customer deposits

       1,355,232           1,420,585           1,350,787   

Movement from 31 December 2014 to 30 June 2015

Total reported assets of $2.6 trillion were 2% lower than at 31 December 2014. On a constant currency basis, total assets were broadly unchanged.

Our ratio of customer advances to customer accounts was 71%. Both customer loans and customer accounts were lower on a reported basis with these movements including:

 

  adverse currency translation movements of $12bn and $14bn, respectively;

 

  the transfer to ‘Assets held for sale’ and ‘Liabilities of disposal groups held for sale’ of balances relating to the planned disposal of our operations in Brazil of $21bn and $19bn, respectively; and

 

  a $10bn reduction in corporate overdraft and current account balances relating to a small number of clients in our Payments and Cash Management business in the UK who settled their overdraft and deposit balances on a net basis. During 2014 we made our approach to our Payments and Cash Management business more globally consistent, with customers increasing the frequency with which they settled their overdraft and deposit positions.

Excluding these movements, customer lending grew by $22bn and customer accounts grew by $29bn, notably in Asia in each case.

Assets

Cash and balances at central banks increased by $14bn, primarily in Asia, notably Hong Kong, and in Europe, partly offset by a fall in North America as we managed the balance of our liquid asset portfolios across our regions.

Trading assets decreased by $21bn despite a rise in settlement accounts of $12bn, driven by reduced holdings of debt securities across Europe, Asia and North America, as we looked to maximise the effectiveness of our asset deployment.

 

Derivative assets decreased by $48bn or 14%, notably in Europe relating to interest rate contracts reflecting movements in yield curves.

Loans and advances to customers decreased by $21bn driven by Latin America and Europe. This included the following items:

 

  adverse currency translation movements of $12bn;

 

  reclassification of $21bn to ‘Assets held for sale’ relating to Brazil; and

 

  a $10bn reduction in corporate overdraft balances in Europe, with a corresponding fall in corporate customer accounts.

Excluding these factors, customer lending balances grew by $22bn or 3%, largely from growth in Asia of $12bn, North America $5bn and Europe $3bn.

In Asia, term lending to GB&M and CMB customers grew, primarily in Hong Kong, which included growth in lending to the property sector. Residential mortgage balances also increased, mainly in Hong Kong and mainland China. In North America the growth in balances was driven by increased term lending to corporate and commercial customers in CMB and GB&M, and in Europe, the growth in CMB was mainly driven by an increase in term lending, notably in the UK and Germany.

Liabilities

Repurchase agreements decreased by $26bn or 24%, driven by falls in Europe, notably in the UK and France, and in North America. We continued to closely manage these balances, as we reassessed the overall returns on these activities in light of new regulatory requirements.

Customer accounts decreased by $15bn and included the following items:

 

  adverse currency translation movements of $14bn;

 

  reclassification of over $19bn to ‘Liabilities of disposal groups held for sale’ relating to Brazil; and

 

  a $10bn reduction in corporate current account balances, in line with the fall in corporate overdraft positions.

Excluding these factors, customer accounts grew by $29bn, notably in Asia in the second quarter, reflecting growth in our Payments and Cash Management and Securities Services businesses in CMB and GB&M, respectively, together with a rise in RBWM from increased savings balances by new and existing Premier customers.

Balances in Europe were broadly unchanged. Growth in our Payments and Cash Management business in CMB and a rise in RBWM balances reflecting customers’ continued preference for holding balances in current and savings accounts were broadly offset by a fall in GB&M relating to a small number of clients.

The decrease in derivative liabilities was in line with that of Derivative assets’ as the underlying risk is broadly matched.

 

 

HSBC HOLDINGS PLC

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Table of Contents

Equity

Total shareholders’ equity rose by $2bn driven by profits generated in the period which were partly offset by dividends paid. In addition, shareholders’ equity increased from the issue of new contingent convertible securities of $2.5bn. These movements were partly offset by a reduction of $3.2bn in our foreign exchange reserve reflecting the weakening of a number of global currencies, notably the euro, partly offset by the strengthening of sterling against the US dollar.

Customer accounts by country

 

    At  
        

30 Jun

2015

$m

        

30 Jun

2014

$m

        

31 Dec

2014

$m

 

Europe

       536,251           614,776           545,959   

– UK

       435,958           499,295           439,313   

– France

       35,713           47,347           40,750   

– Germany

       15,741           15,912           15,757   

– Switzerland

       10,887           11,073           11,058   

– other

       37,952           41,149           39,081   

Asia

       599,940           570,221           577,491   

– Hong Kong

       412,652           381,058           389,094   

– Australia

       18,214           20,803           19,312   

– India

       11,372           12,155           11,678   

– Indonesia

       6,087           5,979           5,788   

– Mainland China

       47,348           41,198           46,588   

– Malaysia

       15,942           17,570           16,292   

– Singapore

       43,889           45,885           43,731   

– Taiwan

       13,014           14,609           14,901   

– other

       31,422           30,964           30,107   

Middle East and North Africa (excluding Saudi Arabia)

       38,186           40,082           39,720   

– Egypt

       6,638           6,945           7,663   

– United Arab Emirates

       19,864           19,840           19,771   

– other

       11,684           13,297           12,286   

North America

       137,296           136,774           138,884   

– US

       85,360           79,536           84,894   

– Canada

       40,548           46,197           43,871   

– other

       11,388           11,041           10,119   

Latin America

       24,127           53,852           48,588   

– Mexico

       17,112           20,112           18,360   

– other

       7,015           33,740           30,228   

included in other: Brazil10

                 27,068           23,204   

At end of period

           1,335,800               1,415,705               1,350,642   

For footnote, see page 56.

Risk-weighted assets

Risk-weighted assets totalled $1,193bn at 30 June 2015, a decrease of $27bn or 2% from 31 December 2014, reflecting targeted RWA initiatives and the effects of currency translation, partly offset by business growth. In 1H15, RWA initiatives resulted in a reduction of $50bn and included asset sales in the GB&M legacy book, the sale of part of our shareholding in Industrial Bank, and recognition of collateral and more detailed mapping in RWA calculations. Excluding associates, we achieved business growth in RWAs of $22bn, primarily in corporate lending across CMB and GB&M across Asia, Europe and North America.

Reconciliation of RoRWA measures

 

Performance Management

 

We target a return on average ordinary shareholders’ equity of greater than 10% by the end of 2017. For internal management purposes we monitor global businesses and geographical regions by pre-tax return on average risk-weighted assets (‘RoRWA’), a metric which combines return on equity and regulatory capital efficiency objectives.

In addition to measuring RoRWA, we measure our performance internally using the non-GAAP measure of adjusted RoRWA, which is adjusted profit before tax as a percentage of average risk-weighted assets (‘RWA’s) which are adjusted for the effects of foreign currency translation differences and acquisitions and disposals. Excluded from adjusted RoRWA are certain items which distort period-on-period performance as explained on page 15.

We also present the non-GAAP measure of adjusted RoRWA excluding run-off portfolios, in which adjusted RoRWA is further amended to exclude the run-off portfolios and the Card and Retail Services (‘CRS’) business which was sold in May 2012.

The CRS average RWAs as at 30 June 2014 in the table below represent the average of the associated operational risk RWAs that were not immediately released on disposal and were not adjusted for as part of the adjusted RoRWA calculation. These RWAs are now fully amortised.

 

 

HSBC HOLDINGS PLC

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Table of Contents

Financial Summary (continued)

 

 

Reconciliation of adjusted RoRWA (excluding run-off portfolios and Card and Retail Services)

 

         Half-year to 30 June 2015  
        

Pre-tax

return

$m

        

Average

RWAs

$bn

        

RoRWA11

%

 

Reported

       13,628           1,208           2.3   

Adjusted11

         13,002             1,203             2.2   

Run-off portfolios

       275           91           0.6   

– legacy credit in GB&M

       71           38           0.4   

– US CML and other

       204           53           0.8   

Card and Retail Services

                             

Adjusted (excluding run-off portfolios and Card and Retail Services)

       12,727           1,112           2.3   

 

          Half-year to 30 June 2014          Half-year to 31 December 2014  
       
 
Pre-tax
return
  
  
      

 

Average

RWAs

  

  

       RoRWA11          
 
Pre-tax
return
  
  
      

 

Average

RWAs

  

  

       RoRWA11   
          $m          $bn          %          $m          $bn          %  

Reported

        12,340           1,200           2.1           6,340           1,232           1.0   

Adjusted11

                12,722                   1,146           2.2                   9,387                   1,190           1.6   

Run-off portfolios

        528           122           0.9           318           110           0.6   

    – legacy credit in GB&M

        286           48           1.2           (138        49           (0.6

    – US CML and other

        242           74           0.7           456           61           1.5   

Card and Retail Services

                  1                                           

Adjusted (excluding run-off portfolios and Card and Retail Services)

        12,194           1,023           2.4           9,069           1,080           1.7   

 

For footnote, see page 56.

 

Reconciliation of reported and adjusted average risk-weighted assets

 

  

  

          Half-year to  
         

30 Jun

2015

$bn

        

30 Jun

2014

$bn

        

Change

%

        

30 Jun

2015

$bn

        

31 Dec

2014

$bn

        

Change

%

 

Average reported RWAs

        1,208           1,200           1           1,208           1,232           (2

Currency translation adjustment12

                  (46        (100                  (32        (100

Acquisitions, disposals and dilutions

        (5        (8        (38        (5        (10        (50

Average adjusted RWAs

            1,203               1,146           5               1,203               1,190           1   

For footnote, see page 56.

 

HSBC HOLDINGS PLC

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Table of Contents

Interim Management Report (continued)

 

 

Ratios of earnings to combined fixed charges

(and preference share dividends)

 

        

Half-year

to 30 June

          Year ended 31 December  
         2015           2014      2013      2012      2011      2010  

Ratios of earnings to combined fixed charges:1

                      

– excluding interest on deposits

       4.99                3.39             3.84             3.03             2.82             2.71   

– including interest on deposits

       2.47            1.86         2.09         1.76         1.68         1.73   

Ratios of earnings to combined fixed charges and preference share dividends:1

                      

– excluding interest on deposits

       4.28            3.07         3.50         2.79         2.64         2.56   

– including interest on deposits

       2.33            1.79         2.01         1.71         1.64         1.69   

 

1 For the purpose of calculating the ratios, earnings consist of income from continuing operations before taxation and non-controlling interest plus fixed charges and after deduction of the unremitted pre-tax income of associated undertakings. Fixed charges consist of total interest expense, including or excluding interest on deposits, as appropriate, dividends on preference shares and other equity instruments, as applicable, and the proportion of rental expense deemed representative of the interest factor.

 

HSBC HOLDINGS PLC

32a


Table of Contents

Global businesses

 

 

  Global businesses

 

 

Summary

     33  
 

Retail Banking and Wealth Management

     34  
 

Commercial Banking

     35  
 

Global Banking and Markets

     36  
 

Global Private Banking

     37  
 

Other

     38  
              

Summary

HSBC reviews operating activity on a number of bases, including by geographical region and by global business.

We present global businesses followed by geographical regions because certain strategic themes, business initiatives and trends affect more than one geographical region.

Basis of preparation

 

The results of global businesses are presented in accordance with the accounting policies used in the preparation of HSBC’s consolidated financial statements. Our operations are closely integrated and, accordingly, the presentation of global business data includes internal allocations of certain items of income and expense. These allocations include the costs of some support services and global functions to the extent that they can be meaningfully attributed to operational business lines. While such allocations have been made on a systematic and consistent basis, they necessarily involve a degree of subjectivity. Those costs which are not allocated to global businesses are included in ‘Other’.

 

Where relevant, income and expense amounts presented include the results of inter-segment funding as well as inter-company and inter-business line transactions. All such transactions are undertaken on arm’s length terms.

 

The expense of the UK bank levy is included in the Europe geographical region as we regard the levy as a cost of being headquartered in the UK. For the purposes of the segmentation by global businesses, the cost of the levy is included in ‘Other’.

 

 

 

Profit/(loss) before tax

 

         Half-year to  
         30 June 2015          30 June 2014          31 December 2014  
         $m          %          $m          %          $m          %  

Retail Banking and Wealth Management9

       3,362           24.7           3,002           24.4           2,579           40.7   

Commercial Banking9

       4,523           33.2           4,814           39.0           4,000           63.1   

Global Banking and Markets

       4,754           34.9           5,033           40.8           856           13.5   

Global Private Banking

       180           1.3           364           2.9           262           4.1   

Other13

       809           5.9           (873        (7.1        (1,357        (21.4
               13,628           100.0                   12,340           100.0                     6,340           100.0   

 

Total assets14

 

                             
         At  
         30 June 2015          30 June 2014          31 December 2014  
         $m          %          $m          %          $m          %  

Retail Banking and Wealth Management9

       497,199           19.3           526,089           19.1           500,864           19.0   

Commercial Banking9

       378,641           14.7           375,014           13.6           370,958           14.1   

Global Banking and Markets

       1,790,461           69.6           2,043,767           74.2           1,839,644           69.8   

Global Private Banking

       85,740           3.3           99,379           3.6           88,342           3.4   

Other

       167,946           6.5           170,802           6.2           164,537           6.2   

Intra-HSBC items

       (348,274        (13.4        (461,458        (16.7        (330,206        (12.5
       2,571,713           100.0           2,753,593           100.0           2,634,139           100.0   

 

Risk-weighted assets

 

                             
         At  
         30 June 2015          30 June 2014          31 December 2014  
         $bn          %          $bn          %          $bn          %  

Retail Banking and Wealth Management9

       204.6           17.2           225.4           18.1           207.2           17.0   

Commercial Banking9

       439.6           36.8           422.5           33.8           430.3           35.3   

Global Banking and Markets

       491.0           41.1           537.3           43.0           516.1           42.3   

Global Private Banking

       21.1           1.8           22.1           1.8           20.8           1.7   

Other

       36.9           3.1           41.3           3.3           45.4           3.7   
       1,193.2           100.0           1,248.6           100.0           1,219.8           100.0   

For footnotes, see page 56.

 

Global Banking and Markets client-facing and BSM

The GB&M client-facing and BSM businesses measure (see page 36) excludes the effects of the legacy credit portfolio and income from associates. We believe that highlighting the

client-facing and BSM businesses allows GB&M management to more clearly discuss the cause of material changes from period-to-period in the ongoing businesses and to assess the factors and trends in the businesses which are expected to have a material effect in future years.

 

 

HSBC HOLDINGS PLC

33


Table of Contents

Global businesses (continued)

 

 

Retail Banking and Wealth Management

RBWM provides banking and wealth management services for our personal customers to help them secure their future prosperity and realise their ambitions.

 

        

Total

RBWM

        

US

run-off

portfolio

        

Principal

RBWM16

 
         $m          $m          $m  

Half-year to 30 June 2015

              

Net interest income

       8,054           536           7,518   

Net fee income/(expense)

       3,334           (2        3,336   

Other income

       1,054           46           1,008   

Net operating income15

           12,442           580           11,862   

LICs

       (934        (47        (887

Net operating income

       11,508           533           10,975   

Total operating expenses

       (8,354        (688        (7,666

Operating profit/(loss)

       3,154           (155        3,309   

Income from associates

       208                     208   

Profit/(loss) before tax

       3,362           (155        3,517   

RoRWA

       3.3%           (0.6)%           4.6%   

Half-year to 30 June 20149

              

Net interest income

       8,617           750           7,867   

Net fee income/(expense)

       3,377           (1        3,378   

Other income/(expense)

       622           (149        771   

Net operating income15

       12,616           600           12,016   

LICs

       (1,299        (180        (1,119

Net operating income

       11,317           420           10,897   

Total operating expenses

       (8,530        (361        (8,169

Operating profit

       2,787           59           2,728   

Income from associates

       215                     215   

Profit before tax

       3,002           59           2,943   

RoRWA

       2.6%           0.2%           3.8%   

Half-year to 31 December 20149

              

Net interest income

       8,513           640           7,873   

Net fee income/(expense)

       3,459           (3        3,462   

Other income

       561           100           461   

Net operating income15

       12,533           737           11,796   

LICs

       (637        150           (787

Net operating income

       11,896           887           11,009   

Total operating expenses

       (9,500        (377        (9,123

Operating profit

       2,396           510           1,886   

Income from associates

       183                     183   

Profit before tax

       2,579           510           2,069   

RoRWA

       2.4%           1.7%           2.7%   

For footnotes, see page 56.

For details of significant items, see page 53.

Principal RBWM16 performance

Management view of adjusted revenue15

 

         Half-year to  
         30 Jun          30 Jun          31 Dec  
         2015          2014          2014  
         $m          $m          $m  

Current accounts, savings and deposits

       2,815           2,766           2,845   

Wealth Management products

       3,605           3,008           2,879   

– investment distribution

       1,966           1,635           1,666   

– life insurance manufacturing

       1,080           866           681   

– asset management

       559           507           532   

Personal lending

       5,101           5,222           5,210   

– mortgages

       1,432           1,491           1,494   

– credit cards

       1,995           1,992           2,037   

– other personal lending

       1,674           1,739           1,679   

Other

       321           374           395   

Net operating income15

           11,842               11,370               11,329   

For footnotes, see page 56.

Profit before tax ($m)

 

LOGO

Revenue ($m)

 

LOGO

Operating expenses ($m)

 

LOGO

 

 

HSBC HOLDINGS PLC

 

34


Table of Contents

 

 

Commercial Banking

CMB offers a full range of financial services and tailored solutions to almost three million customers ranging from small and medium-sized enterprises to publicly quoted companies in around 55 countries.

 

         Half-year to  
         30 Jun          30 Jun          31 Dec  
         2015          20149          20149  
         $m          $m          $m  

Net interest income

       4,892           4,994           5,164   

Net fee income

       2,168           2,327           2,243   

Other income

       474           502           518   

Net operating income15

       7,534           7,823           7,925   

LICs

       (511        (488        (1,070

Net operating income

       7,023           7,335           6,855   

Total operating expenses

       (3,321        (3,327        (3,654

Operating profit

       3,702           4,008           3,201   

Income from associates

       821           806           799   

Profit before tax

       4,523           4,814           4,000   

RoRWA

       2.1%           2.4%          1.9%  

 

Management view of adjusted revenue15

 

  

         Half-year to  
         30 Jun          30 Jun          31 Dec  
         2015          20149          20149  
         $m          $m          $m  

Global Trade and Receivables Finance

       1,219           1,214           1,266   

Credit and Lending

       2,982           2,747           2,925   

Payments and Cash Management, current accounts and savings deposits

       2,262           2,184           2,287   

Markets products, Insurance and Investments and Other

       1,071           1,069           996   

Net operating income15

       7,534           7,214           7,474   

For footnotes, see page 56.

For details of significant items, see page 53.

Profit before tax ($m)

 

LOGO

Revenue ($m)

 

LOGO

Operating expenses ($m)

 

LOGO

 

 

HSBC HOLDINGS PLC

35


Table of Contents

Global businesses (continued)

 

 

Global Banking and Markets

GB&M provides tailored financial solutions to major government, corporate and institutional clients worldwide.

 

        

Total

GB&M

         Legacy         

GB&M

client

facing

and BSM

 
         $m          $m          $m  

Half-year to 30 June 2015

              

Net interest income

       3,629           114           3,515   

Net fee income/(expense)

       1,711           (6        1,717   

Net trading income/(expense)6

       3,743           (1        3,744   

Other income/(expense)

       1,178           (10        1,188   

Net operating income15

       10,261           97           10,164   

LICs

       11           15           (4

Net operating income

       10,272           112           10,160   

Total operating expenses

       (5,790        (41        (5,749

Operating profit

       4,482           71           4,411   

Income from associates

       272             

Profit before tax

       4,754             

RoRWA

       1.9%           0.4%           2.0%   

Half-year to 30 June 2014

              

Net interest income/(expense)

       3,602           (19        3,621   

Net fee income

       1,939           4           1,935   

Net trading income6

       2,790           51           2,739   

Other income

       1,460           140           1,320   

Net operating income15

       9,791           176           9,615   

LICs

       (49        217           (266

Net operating income

       9,742           393           9,349   

Total operating expenses

       (4,958        (86        (4,872

Operating profit

       4,784           307           4,477   

Income from associates

       249             

Profit before tax

       5,033             

RoRWA

       2.0%           1.3%           2.1%   

Half-year to 31 December 2014

              

Net interest income/(expense)

       3,420           (153        3,573   

Net fee income/(expense)

       1,621           (11        1,632   

Net trading income/(expense)6

       3,071           (106        3,177   

Other income/(expense)

       (125        92           (217

Net operating income/(expense)15

       7,987           (178        8,165   

LICs

       (316        132           (448

Net operating income/(expense)

       7,671           (46        7,717   

Total operating expenses

       (7,070        (622        (6,448

Operating profit/(loss)

       601           (668        1,269   

Income from associates

       255             

Profit/(loss) before tax

       856             

RoRWA

       0.3%           (2.7)%           0.6%   

For footnotes, see page 56.

For details of significant items, see page 53.

Total GB&M performance

Management view of adjusted revenue15

 

         Half-year to  
        

30 Jun

2015

        

30 Jun

2014

         31 Dec
2014
 
         $m          $m          $m  

Markets

       4,372           3,557           2,261   

– Legacy credit

       97           161           (177

– Credit

       492           395           138   

– Rates

       1,006           1,027           395   

– Foreign Exchange

       1,670           1,343           1,411   

– Equities

       1,107           631           494   

Capital Financing

       1,881           1,922           1,891   

Payments and Cash Management

       899           851           849   

Securities Services

       865           792           814   

Global Trade and Receivables Finance

       370           359           353   

Balance Sheet Management

       1,588           1,369           1,508   

Principal Investments

       128           318           182   

Other17

       15           18           (83

Net operating income15

           10,118                 9,186               7,775   

For footnotes, see page 56.

Profit before tax ($m)

 

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Revenue ($m)

 

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Operating expenses ($m)

 

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Global Private Banking

GPB serves high net worth individuals and families with complex and international financial needs within the Group’s priority markets.

 

         Half-year to  
         30 Jun          30 Jun          31 Dec  
         2015          2014          2014  
         $m          $m          $m  

Net interest income

       454           536           458   

Net fee income

       527           533           523   

Other income/(expense)

       196           161           166   

Net operating income15

       1,177           1,230           1,147   

LICs

       (5        (6        14   

Net operating income

       1,172           1,224           1,161   

Total operating expenses

       (1,001        (868        (910

Operating profit

       171           356           251   

Income from associates

       9           8           11   

Profit before tax

       180           364           262   

RoRWA

       1.8%           3.3%           2.4%   

 

Client assets18

 

  

         Half-year to  
         30 Jun
2015
         30 Jun
2014
         31 Dec
2014
 
         $bn          $bn          $bn  

At beginning of period

       365           382           384   

Net new money

       (1        (3          

– of which: areas targeted for growth

       7           5           9   

Value change

       9           6           2   

Exchange and other

       (3        (1        (21

At end of period

       370           384           365   

For footnotes, see page 56.

For details of significant items, see page 53.

Profit before tax ($m)

 

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Revenue ($m)

 

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Operating expenses ($m)

 

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HSBC HOLDINGS PLC

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Table of Contents

Global businesses (continued)

 

 

Other13

‘Other’ contains the results of HSBC’s holding company and financing operations, central support and functional costs with associated recoveries, unallocated investment activities, centrally held investment companies, certain property transactions and movements in fair value of own debt.

 

         Half-year to  
         30 Jun          30 Jun          31 Dec  
         2015          2014          2014  
         $m          $m          $m  

Net interest expense

       (397        (221        (280

Net fee income/(expense)

       (15        1           (66

Net trading income/(expense)

       (123        (120        28   

– changes in fair value of long-term debt issued and related derivatives

       1,324           438           70   

– changes in other financial instruments designated at fair value

       (661        (719        710   

Net income/(expense) from financial instruments designated at fair value

       663           (281        780   

Other income

       4,559           3,279           3,245   

Net operating income

       4,687           2,658           3,707   

Total operating expenses

       (3,879        (3,533        (5,068

Operating profit/(loss)

       808           (875        (1,361

Income from associates

       1           2           4   

Profit/(loss) before tax

       809           (873        (1,357

For footnotes, see page 56.

For details of significant items, see page 53.

Profit/(loss) before tax ($m)

 

LOGO

Revenue ($m)

 

LOGO

Operating expenses ($m)

 

LOGO

 

 

HSBC HOLDINGS PLC

38


Table of Contents

 

 

Analysis by global business

HSBC profit/(loss) before tax and balance sheet data

 

         Half-year to 30 June 2015  
      
 

 

 
 

Retail
Banking

and Wealth

Management
$m

  
  

  

  
  

      

 

 

Commercial

Banking

$m

  

  

  

      
 
 

 

Global
Banking and
Markets

$m

  
  
  

  

      
 
 
 
Global
Private
Banking
$m
  
  
  
  
      

 

Other

$m

13 

  

      
 

 

 

Inter-
segment

elimination

$m

  
  

19 

  

      

 

Total

$m

  

  

Profit before tax                                   

Net interest income/(expense)

       8,054           4,892           3,629           454           (397        (188        16,444   

Net fee income/(expense)

       3,334           2,168           1,711           527           (15                  7,725   
             

– trading income/(expense) excluding net interest income

       295           308           2,880           175           (138                  3,520   

– net interest income/(expense) on trading activities

       (5        (7        863           (1        15           188           1,053   

Net trading income/(expense)6

       290           301           3,743           174           (123        188           4,573   

Net income from financial instruments designated at fair value

       1,237           128           638                     663                     2,666   

Gains less losses from financial investments

       51           27           402           24           1,370                     1,874   

Dividend income

       11           10           17           4           26                     68   

Net insurance premium income

       4,950           624           3           30                               5,607   

Other operating income

       609           100           120           2           3,163           (3,158        836   

Total operating income

       18,536           8,250           10,263           1,215           4,687           (3,158        39,793   

Net insurance claims

       (6,094        (716        (2        (38                            (6,850

Net operating income15

       12,442           7,534           10,261           1,177           4,687           (3,158        32,943   

Loan impairment (charges)/recoveries and other credit risk provisions

       (934        (511        11           (5                            (1,439

Net operating income

       11,508           7,023           10,272           1,172           4,687           (3,158        31,504   
             

– employee expenses20

       (2,571        (1,171        (1,994        (350        (3,955                  (10,041

– other operating income/(expense)

       (5,783        (2,150        (3,796        (651        76           3,158           (9,146

Total operating expenses

       (8,354        (3,321        (5,790        (1,001        (3,879        3,158           (19,187

Operating profit

       3,154           3,702           4,482           171           808                     12,317   

Share of profit in associates and joint ventures

       208           821           272           9           1                     1,311   

Profit before tax

       3,362           4,523           4,754           180           809                     13,628   
       %           %           %           %           %                %   

Share of HSBC’s profit before tax

       24.7           33.2           34.9           1.3           5.9                100.0   

Cost efficiency ratio

       67.1           44.1           56.4           85.0           82.8                58.2   
Balance sheet data14                                   
         $m          $m          $m          $m          $m                     $m  

Loans and advances to customers (net)

       352,189           310,256           244,321           44,242           2,977                953,985   

Reported in held for sale

       6,640           10,325           4,016           43                          21,024   

Total assets

       497,199           378,641           1,790,461           85,740           167,946           (348,274        2,571,713   

Customer accounts

       589,715           362,069           299,181           82,878           1,957                1,335,800   

Reported in held for sale

       9,549           4,694           3,438           1,751                          19,432   

 

HSBC HOLDINGS PLC

39


Table of Contents

Global businesses (continued)

HSBC profit/(loss) before tax and balance sheet data (continued)

 

 

         Half-year to 30 June 2014  
      
 

 

 

 

Retail
Banking

and Wealth

Management

$m

  
  

  

9 

  

      

 

 

Commercial

Banking9

$m

  

  

  

      

 

 

 

Global

Banking and

Markets

$m

  

  

  

  

      
 
 
 
Global
Private
Banking
$m
  
  
  
  
      

 

Other

$m

13 

  

      

 

 

 

Inter-

segment

elimination

$m

  

  

19 

  

      

 

Total

$m

  

  

Profit/(loss) before tax                                   

Net interest income/(expense)

       8,617           4,994           3,602           536           (221        (123        17,405   

Net fee income

       3,377           2,327           1,939           533           1                     8,177   
             

– trading income/(expense) excluding net interest income

       (12        338           2,001           161           (126                  2,362   

– net interest income/(expense) on trading activities

       1           (4        789           (2        6           123           913   

Net trading income/(expense)6

       (11        334           2,790           159           (120        123           3,275   

Net income/(expense) from financial instruments designated at fair value

       1,078           119           743           1           (281                  1,660   

Gains less losses from financial investments

       7           25           462           12           440                     946   

Dividend income

       15           14           32           3           24                     88   

Net insurance premium income

       5,501           615           2           19                               6,137   

Other operating income/(expense)

       378           81           222           (7        2,814           (2,950        538   

Total operating income

       18,962           8,509           9,792           1,256           2,657           (2,950        38,226   

Net insurance claims

       (6,346        (686        (1        (26                            (7,059

Net operating income15

       12,616           7,823           9,791           1,230           2,657           (2,950        31,167   

Loan impairment (charges)/recoveries and other credit risk provisions

       (1,299        (488        (49        (6        1                     (1,841

Net operating income

       11,317           7,335           9,742           1,224           2,658           (2,950        29,326   
             

– employee expenses20

       (2,544        (1,147        (1,806        (363        (4,118                  (9,978

– other operating income/(expense)

       (5,986        (2,180        (3,152        (505        585           2,950           (8,288

Total operating expenses

       (8,530        (3,327        (4,958        (868        (3,533        2,950           (18,266

Operating profit/(loss)

       2,787           4,008           4,784           356           (875                  11,060   

Share of profit in associates and joint ventures

       215           806           249           8           2                     1,280   

Profit/(loss) before tax

       3,002           4,814           5,033           364           (873                  12,340   
       %           %           %           %           %                %   

Share of HSBC’s profit before tax

       24.4           39.0           40.8           2.9           (7.1             100.0   

Cost efficiency ratio

       67.6           42.5           50.6           70.6           133.0                58.6   
Balance sheet data14                                   
         $m          $m          $m          $m          $m                     $m  

Loans and advances to customers (net)

       381,353           315,001           303,133           45,131           2,623                1,047,241   

Reported in held for sale

       380           157           82           972                          1,591   

Total assets

       526,089           375,014           2,043,767           99,379           170,802           (461,458        2,753,593   

Customer accounts

       600,650           363,235           360,732           89,641           1,447                1,415,705   

Reported in held for sale

       181           485           373           3,841                          4,880   

 

HSBC HOLDINGS PLC

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Table of Contents

 

 

         Half-year to 31 December 2014  
      
 

 

 

 

Retail
Banking

and Wealth

Management

$m

  
  

  

9 

  

      

 

 

Commercial

Banking9

$m

  

  

  

      

 
 

 

Global

Banking and
Markets

$m

  

  
  

  

      
 
 
 
Global
Private
Banking
$m
  
  
  
  
      

 

Other13

$m

  

  

      
 

 

 

Inter-
segment

elimination

$m

  
  

19 

  

      

 

Total

$m

  

  

Profit/(loss) before tax                                   

Net interest income/(expense)

       8,513           5,164           3,420           458           (280        25           17,300   

Net fee income/(expense)

       3,459           2,243           1,621           523           (66                  7,780   
             

– trading income excluding net interest income

       (14        280           2,062           137           26                     2,491   

– net interest income/(expense) on trading activities

       8           2           1,009           (2        2           (25        994   

Net trading income/(expense)6

       (6        282           3,071           135           28           (25        3,485   

Net income/(expense) from financial instruments designated at fair value

       606           160           (731        (2        780                     813   

Gains less losses from financial investments

       7           6           655           (3        (276                  389   

Dividend income

       9           4           48           2           160                     223   

Net insurance premium income

       5,108           642           3           31                               5,784   

Other operating income/(expense)

       348           160           (98        40           3,362           (3,219        593   

Total operating income

       18,044           8,661           7,989           1,184           3,708           (3,219        36,367   

Net insurance claims

       (5,511        (736        (2        (37                            (6,286

Net operating income15

       12,533           7,925           7,987           1,147           3,708           (3,219        30,081   

Loan impairment (charges)/recoveries and other credit risk provisions

       (637        (1,070        (316        14           (1                  (2,010

Net operating income

       11,896           6,855           7,671           1,161           3,707           (3,219        28,071   
             

– employee expenses20

       (2,582        (1,204        (1,849        (369        (4,384                  (10,388

– other operating expenses

       (6,918        (2,450        (5,221        (541        (684        3,219           (12,595

Total operating expenses

       (9,500        (3,654        (7,070        (910        (5,068        3,219           (22,983

Operating profit/(loss)

       2,396           3,201           601           251           (1,361                  5,088   

Share of profit in associates and joint ventures

       183           799           255           11           4                     1,252   

Profit/(loss) before tax

       2,579           4,000           856           262           (1,357                  6,340   
         %           %           %           %           %                %   

Share of HSBC’s profit before tax

       40.7           63.1           13.5           4.1           (21.4             100.0   

Cost efficiency ratio

       75.8           46.1           88.5           79.3           136.7                76.4   
Balance sheet data14                                   
         $m          $m          $m          $m          $m                     $m  

Loans and advances to customers (net)

       360,704           313,039           254,463           44,102           2,352                974,660   

Reported in held for sale

       198                     288           91                          577   

Total assets

       500,864           370,958           1,839,644           88,342           164,537           (330,206        2,634,139   

Customer accounts

       583,757           361,318           319,121           85,465           981                1,350,642   

Reported in held for sale

                                     145                          145   

For footnotes, see page 56.

 

HSBC HOLDINGS PLC

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Table of Contents

Geographical regions

 

 

  Geographical regions

 

 

Summary

     42  
 

Europe

     43  
 

Asia

     44  
 

Middle East and North Africa

     45  
 

North America

     46  
 

Latin America

     47  
 

Analysis by country

     48  
 

Half-year to 30 June 2015

     49a  
              

Summary

HSBC reviews operating activity on a number of bases, including by geographical region and by global business.

In the analysis of profit and loss by geographical region that follows, operating income and operating expenses include intra-HSBC items of $1,564m (first half of 2014: $1,439m; second half of 2014: $1,533m).

 

 

Profit/(loss) before tax

 

         Half-year to  
         30 June 2015          30 June 2014          31 December 2014  
         $m          %          $m          %          $m          %  

Europe

       2,205           16.2           2,258           18.3           (1,662        (26.2

Asia

       9,400           69.0           7,894           64.0           6,731           106.2   

Middle East and North Africa

       901           6.6           989           8.0           837           13.2   

North America

       690           5.1           825           6.7           592           9.3   

Latin America

       432           3.1           374           3.0           (158        (2.5

Profit before tax

       13,628           100.0           12,340           100.0           6,340           100.0   

 

Total assets14

 

  

         At 30 June 2015          At 30 June 2014          At 31 December 2014  
         $m          %          $m          %          $m          %  

Europe

       1,236,270           48.1           1,430,863           52.0           1,290,926           49.0   

Asia

       917,489           35.7           874,334           31.8           878,723           33.4   

Middle East and North Africa

       61,625           2.4           61,289           2.2           62,417           2.4   

North America

       411,601           16.0           437,706           15.9           436,859           16.6   

Latin America

       104,203           4.1           125,630           4.6           115,354           4.4   

Intra-HSBC items

       (159,475        (6.3        (176,229        (6.5        (150,140        (5.8

Total assets

               2,571,713           100.0                   2,753,593           100.0                   2,634,139           100.0   

 

Risk-weighted assets21

 

                             
         At 30 June 2015          At 30 June 2014          At 31 December 2014  
         $bn          %          $bn          %          $bn          %  

Total RWAs

       1,193.2                1,248.6                1,219.8        

Europe

       369.5           30.3           393.6           31.0           375.4           30.1   

Asia

       487.4           40.0           481.1           37.9           499.8           40.0   

Middle East and North Africa

       63.1           5.2           62.7           4.9           63.0           5.0   

North America

       215.7           17.7           236.9           18.6           221.4           17.8   

Latin America

       82.3           6.8           96.8           7.6           88.8           7.1   

For footnotes, see page 56.

 

HSBC HOLDINGS PLC

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Europe

Our principal banking operations in Europe are HSBC Bank plc in the UK, HSBC France, HSBC Private Bank (Suisse) SA and HSBC Trinkaus & Burkhardt AG. Through these operations we provide a wide range of banking, treasury and financial services to personal, commercial and corporate customers across Europe.

 

         Half-year to  
         30 Jun          30 Jun          31 Dec  
         2015          2014          2014  
         $m          $m          $m  

Net interest income

       5,115           5,244           5,367   

Net fee income

       2,447           3,188           2,854   

Net trading income

       1,913           982           1,552   

Other income

       1,994           1,459           925   

Net operating income15

       11,469           10,873           10,698   

LICs

       (288        (266        (498

Net operating income

       11,181           10,607           10,200   

Total operating expenses

       (8,978        (8,352        (11,865

Operating profit/(loss)

       2,203           2,255           (1,665

Income from associates

       2           3           3   

Profit/(loss) before tax

       2,205           2,258           (1,662

Loans and advances to customers (net)

       400,452           479,670           409,733   

Customer accounts

       536,251           614,776           545,959   

RoRWA

       1.2%           1.2%           (0.9)%   

Cost efficiency ratio

       78.3%           76.8%           110.9%   

Period-end staff numbers

       69,867           69,642           69,363   

 

For footnote, see page 56.

 

Country view of adjusted revenue

 

  

  

         Half-year to  
         30 Jun          30 Jun          31 Dec  
         2015          2014          2014  
         $m          $m          $m  

UK

       7,707           7,655           7,363   

France

       1,619           1,289           1,198   

Germany

       417           405           384   

Switzerland

       360           341           379   

Other

       786           736           611   
       10,889           10,426           9,935   

Profit before tax ($m)

 

LOGO

Revenue ($m)

 

LOGO

Operating expenses ($m)

 

LOGO

For details of significant items, see page 50.

 

 

HSBC HOLDINGS PLC

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Table of Contents

Geographical regions (continued)

 

 

Asia

Our principal banking subsidiaries in Hong Kong are The Hongkong and Shanghai Banking Corporation Limited and Hang Seng Bank Limited. The former is the largest bank incorporated in Hong Kong and is our flagship bank in Asia.

We offer a wide range of banking and financial services in mainland China through our local subsidiaries, HSBC Bank (China) Company Limited and Hang Seng Bank (China) Limited. We also participate indirectly in mainland China through our associate, Bank of Communications.

Outside Hong Kong and mainland China in Asia, we conduct business in 18 countries and territories, with particularly strong coverage in Australia, India, Indonesia, Malaysia, Singapore and Taiwan.

 

         Half-year to  
         30 Jun          30 Jun          31 Dec  
         2015          2014          2014  
         $m          $m          $m  

Net interest income

       6,060           6,090           6,183   

Net fee income

       3,291           2,966           2,944   

Net trading income

       1,779           1,329           1,293   

Other income

       2,935           1,722           1,150   

Net operating income15

       14,065           12,107           11,570   

LICs

       (246        (216        (431

Net operating income

       13,819           11,891           11,139   

Total operating expenses

       (5,457        (5,009        (5,418

Operating profit

       8,362           6,882           5,721   

Income from associates

       1,038           1,012           1,010   

Profit before tax

       9,400           7,894           6,731   

Loans and advances to customers (net)

       371,639           362,387           362,955   

Customer accounts

       599,940           570,221           577,491   

RoRWA

       3.8%           3.4%           2.7%   

Cost efficiency ratio

       38.8%           41.4%           46.8%   

Period-end staff numbers

       120,588           115,111           118,322   

 

For footnote, see page 56.

 

Country view of adjusted revenue

 

  

  

         Half-year to  
         30 Jun          30 Jun          31 Dec  
         2015          2014          2014  
         $m          $m          $m  

Hong Kong

       7,750           6,820           6,908   

Australia

       421           420           424   

India

       929           870           896   

Indonesia

       267           252           258   

Mainland China

       1,331           1,214           1,234   

Malaysia

       519           473           484   

Singapore

       653           620           640   

Taiwan

       218           262           217   

Other

       558           588           566   
       12,646           11,519           11,627   

Profit before tax ($m)

 

LOGO

Revenue ($m)

 

LOGO

Operating expenses ($m)

 

LOGO

For details of significant items, see page 50.

 

 

HSBC HOLDINGS PLC

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Middle East and North Africa

The network of branches of HSBC Bank Middle East Limited, together with HSBC’s subsidiaries and associates, gives us wide coverage in the region. Our associate in Saudi Arabia, The Saudi British Bank (40% owned), is the Kingdom’s fifth largest bank by total assets.

 

         Half-year to  
         30 Jun          30 Jun          31 Dec  
         2015          2014          2014  
         $m          $m          $m  

Net interest income

       758           736           783   

Net fee income

       325           335           315   

Net trading income

       167           193           121   

Other income

       39           30           35   

Net operating income15

       1,289           1,294           1,254   

LICs

       (31        50           (44

Net operating income

       1,258           1,344           1,210   

Total operating expenses

       (624        (614        (602

Operating profit

       634           730           608   

Income from associates

       267           259           229   

Profit before tax

       901           989           837   

Loans and advances to customers (net)

       31,207           28,910           29,063   

Customer accounts

       38,186           40,082           39,720   

RoRWA

       2.9%           3.2%           2.7%   

Cost efficiency ratio

       48.4%           47.4%           48.0%   

Period-end staff numbers

       8,208           8,530           8,305   

 

For footnote, see page 56.

 

Country view of adjusted revenue

 

  

  

         Half-year to  
         30 Jun          30 Jun          31 Dec  
         2015          2014          2014  
         $m          $m          $m  

UAE

       716           732           660   

Egypt

       301           235           266   

Other

       269           277           334   
       1,286           1,244           1,260   

Profit before tax ($m)

 

LOGO

Revenue ($m)

 

LOGO

Operating expenses ($m)

 

LOGO

For details of significant items, see page 50.

 

 

HSBC HOLDINGS PLC

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Table of Contents

Geographical regions (continued)

 

 

North America

Our North American businesses are principally located in the US and Canada. Operations in the US are primarily conducted through HSBC Bank USA, N.A. and HSBC Finance Corporation, a national consumer finance company. HSBC Markets (USA) Inc. is the intermediate holding company of, inter alia, HSBC Securities (USA) Inc. Canadian operations are conducted through HSBC Bank Canada.

 

         Half-year to  
        

      30 Jun

2015

        

    30 Jun

2014

        

      31 Dec

2014

 
         $m          $m          $m  

Net interest income

       2,278           2,635           2,380   

Net fee income

       1,057           991           949   

Net trading income

       296           228           183   

Other income

       495           213           573   

Net operating income15

       4,126           4,067           4,085   

LICs

       (153        (411        89   

Net operating income

       3,973           3,656           4,174   

Total operating expenses

       (3,287        (2,837        (3,592

Operating profit

       686           819           582   

Income from associates

       4           6           10   

Profit before tax

       690           825           592   

Loans and advances to customers (net)

       132,340           129,620           129,787   

Customer accounts

       137,296           136,774           138,884   

RoRWA

       0.6%           0.7%           0.5%   

Cost efficiency ratio

       79.7%           69.8%           87.9%   

Period-end staff numbers

       20,338           20,649           20,412   

For footnote, see page 56.

Country view of adjusted revenue

 

         Half-year to  
               30 Jun              30 Jun                31 Dec  
         2015          2014          2014  
         $m          $m          $m  

 

US

    

 

 

 

3,011

 

  

       3,194           2,889   

Canada

       852           878           844   

Other

       106           136           132   
       3,969           4,208           3,865   

Profit before tax ($m)

 

LOGO

Revenue ($m)

 

LOGO

Operating expenses ($m)

 

LOGO

For details of significant items, see page 50.

 

 

HSBC HOLDINGS PLC

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Latin America

 

      

 

 

Total

Latin

America

  

  

  

       Brazil          

 

 

Other

Latin

America

  

  

  

         $m          $m          $m  

Half year to 30 June 2015

                

Net interest income

         2,249           1,214           1,035   

Net fee income

         605           307           298   

Net trading income

         402           242           160   

Other income

       302           279           23   

Net operating income15

       3,558           2,042           1,516   

LICs

       (721        (498        (223

Net operating income

       2,837           1,544           1,293   

Total operating expenses

       (2,405        (1,353        (1,052

Operating profit

       432           191           241   

Income from associates

                             

Profit before tax

       432           191           241   

Loans and advances to customers (net)

       18,347                     18,347   

– reported in held for sale

       20,827           20,827             

Customer accounts

       24,127                     24,127   

– reported in held for sale

       19,432           19,432             

RoRWA

       1.0%           0.8%           1.3%   

Cost efficiency ratio

       67.6%           66.3%           69.4%   

Period-end staff numbers

       40,787           19,641           21,146   

Half-year to 30 June 2014

              

Net interest income

       2,700           1,572           1,128   

Net fee income

       697           365           332   

Net trading income

       543           246           297   

Other income

       325           290           35   

Net operating income15

       4,265           2,473           1,792   

LICs

       (998        (684        (314

Net operating income

       3,267           1,789           1,478   

Total operating expenses

       (2,893        (1,734        (1,159

Operating profit

       374           55           319   

Income from associates

                             

Profit before tax

       374           55           319   

Loans and advances to customers (net)

       46,654           27,515           19,139   

Customer accounts

       53,852           27,068           26,784   

Cost efficiency ratio

       67.8%           70.1%           64.7%   

RoRWA

       0.8%           0.2%           1.6%   

Period-end staff numbers

       42,157           19,881           22,276   

Half-year to 31 December 2014

              

Net interest income

       2,610           1,468           1,142   

Net fee income

       718           376           342   

Net trading income

       313           206           107   

Other income

       366           296           70   

Net operating income15

       4,007           2,346           1,661   

LICs

       (1,126        (815        (311

Net operating income

       2,881           1,531           1,350   

Total operating expenses

       (3,039        (1,833        (1,206

Operating profit/(loss)

       (158        (302        144   

Income from associates

                             

Profit/(loss) before tax

       (158        (302        144   

Loans and advances to customers (net)

       43,122           23,749           19,373   

Customer accounts

       48,588           23,204           25,384   

RoRWA

       (0.3)%           (1.1)%           0.7%   

Cost efficiency ratio

       75.8%           78.1%           72.6%   

Period-end staff numbers

       41,201           19,564           21,637   

For footnote, see page 56.

Our operations in Latin America principally comprise HSBC Bank Brasil S.A.-Banco Múltiplo and HSBC México, S.A. In addition to banking services, we operate insurance businesses in Brazil, Mexico and Argentina. During the period our operations in Brazil were classified as held for sale.

Country view of adjusted revenue

 

         Half-year to       
             30 Jun               30 Jun                 31 Dec      
         2015          2014          2014       
         $m          $m          $m       

Mexico

         1,018           1,027           979      

Other

         2,528           2,436           2,353      

– included in Other: Brazil

         2,031           1,916           1,832      
                                   
       3,546           3,463           3,332      

Profit before tax ($m)

 

LOGO

Revenue ($m)

 

LOGO

Operating expenses ($m)

 

LOGO

For details of significant items, see page 50.

 

 

HSBC HOLDINGS PLC

47


Table of Contents

Geographical regions (continued)

 

 

Analysis by country

Profit/(loss) before tax by priority growth markets within global businesses

 

      

 

 

 

Retail Banking

and Wealth

Management

$m

  

  

  

  

      

 

 

    Commercial

Banking

$m

  

  

  

      
 
 

 

Global
Banking
    and Markets

$m

  
  
  

  

      
 
 
 
Global
Private
        Banking
$m
  
  
  
  
      
 
              Other
$m
  
  
      

 

            Total

$m

  

  

  

Europe

       863           1,287           905           (23        (827        2,205      

– UK

       633           1,115           398           100           (821        1,425      

– France

       284           83           241           10           5           623      

– Germany

       12           30           74           12           (14        114      

– Switzerland

                 3           1           (162                  (158   

– other

       (66        56           191           17           3           201      

Asia

       2,531           2,404           2,683           156           1,626           9,400      

– Hong Kong

       2,172           1,239           1,238           120           1,464           6,233      

– Australia

       24           61           128                     (7        206      

– India

       (3        46           195           7           90           335      

– Indonesia

                 (29        38                     17           26      

– Mainland China

       184           817           544           (1        38           1,582      

– Malaysia

       67           60           105                     8           240      

– Singapore

       45           63           139           31           (17        261      

– Taiwan

       11           12           66                     (5        84      

– other

       31           135           230           (1        38           433      

Middle East and North Africa

       172           273           470           8           (22        901      

– Egypt

       26           50           128                     (1        203      

– Saudi Arabia

       54           82           118           10                     264      

– UAE

       83           76           157           (1        (21        294      

– other

       9           65           67           (1                  140      

North America

       (172        423           356           37           46           690      

– Canada

       33           206           142                     (17        364      

– USA

       (219        204           190           37           70           282      

– other

       14           13           24                     (7        44      

Latin America

       (32        136           340           2           (14        432      

– Mexico

       33           28           56                     1           118      

– other

       (65        108           284           2           (15        314      

included in other: Brazil10

       (74        32           208           2           23           191      

Half-year to 30 June 2015

       3,362           4,523           4,754           180           809           13,628      

Europe

       480           1,551           1,425           176           (1,374        2,258      

– UK

       565           1,324           887           112           (1,192        1,696      

– France

       (39        123           237           (2        (115        204      

– Germany

       14           38           86           17           (7        148      

– Switzerland

                 2           1           14           (2        15      

– other

       (60        64           214           35           (58        195      
                                  

Asia

       2,339           2,372           2,415           133           635           7,894      

– Hong Kong

       1,928           1,125           977           99           419           4,548      

– Australia

       49           62           92                     (5        198      

– India

       6           59           243           5           67           380      

– Indonesia

       2           43           62                     6           113      

– Mainland China

       140           797           515           (2        94           1,544      

– Malaysia

       90           54           90                     12           246      

– Singapore

       71           75           127           30           (7        296      

– Taiwan

       18           19           101                     2           140      

– other

       35           138           208           1           47           429      

 

HSBC HOLDINGS PLC

48


Table of Contents

 

 

      

 

 

 

Retail Banking

and Wealth

Management

$m

  

  

9 

  

      

 

 

    Commercial

Banking

$m

  

9 

  

      
 
 

 

Global
Banking
    and Markets

$m

  
  
  

  

      
 
 
 
Global
Private
        Banking
$m
  
  
  
  
      
 
            Other
$m
  
  
      
 
            Total
$m
  
  
  

Middle East and North Africa

       182           356           477           9           (35        989      

– Egypt

       33           46           71                     (1        149      

– Saudi Arabia

       55           94           99           9           1           258      

– UAE

       82           133           203                     (35        383      

– other

       12           83           104                               199      

North America

       130           386           314           51           (56        825      

– Canada

       35           280           130                     (6        439      

– USA

       80           110           162           50           (50        352      

– other

       15           (4        22           1                     34      

Latin America

       (129        149           402           (5        (43        374      

– Mexico

       (18        12           73           (1        (7        59      

– other

       (111        137           329           (4        (36        315      

included in other: Brazil10

       (161        54           175           (6        (7        55      

Half-year to 30 June 2014

       3,002           4,814           5,033           364           (873        12,340      

Europe

       (166        997           (1,376        139           (1,256        (1,662   

– UK

       24           869           (1,688        79           (1,036        (1,752   

– France

       (142        117           117           2           (84        10      

– Germany

       14           33           76           10           (3        130      

– Switzerland

                 3           1           24           (1        27      

– other

       (62        (25        118           24           (132        (77   

Asia

       2,133           2,370           2,161           78           (11        6,731      

– Hong Kong

       1,799           1,139           830           47           (221        3,594      

– Australia

       29           64           140                     1           234      

– India

       (2        62           199           6           55           320      

– Indonesia

       8           10           48                     19           85      

– Mainland China

       152           736           439           (1        81           1,407      

– Malaysia

       66           68           100                     16           250      

– Singapore

       58           93           116           27           (1        293      

– Taiwan

       1           16           65                     (1        81      

– other

       22           182           224           (1        40           467      

Middle East and North Africa

       141           248           449           10           (11        837      

– Egypt

       31           48           106                     1           186      

– Saudi Arabia

       36           74           104           10           4           228      

– UAE

       72           57           161                     (11        279      

– other

       2           69           78                     (5        144      

North America

       502           527           (426        34           (45        592      

– Canada

       61           234           112                     (17        390      

– USA

       433           290           (565        32           (10        180      

– other

       8           3           27           2           (18        22      

Latin America

       (31        (142        48           1           (34        (158   

– Mexico

       25           (35        16           (1        (13        (8   

– other

       (56        (107        32           2           (21        (150   

included in other: Brazil10

       (69        (151        (60        4           (26        (302   

Half-year to 31 December 2014

       2,579           4,000           856           262           (1,357        6,340      

For footnotes, see page 56.

 

HSBC HOLDINGS PLC

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Table of Contents

Interim Management Report (continued)

 

 

Half-year to 30 June 2015

Europe

Reported profit before tax of $2.2bn was $53m (2.3%) lower than in 1H14. The effect of currency translation between the periods and the net movement in significant items had a favourable effect of $129m on the reported profit before tax. The movement in significant items included favourable fair value movements on our own debt designated at fair value of $512m compared with adverse movements of $159m in 1H14; a release of $12m from the ongoing review of compliance with the Consumer Credit Act in the UK compared with a $367m provision in 2014; UK customer redress costs of $137m compared with $234m in 1H14; and regulatory provisions in GPB of $147m in 1H15.

On an adjusted basis, profit before tax of $2.8bn in 1H15 was $182m (6.2%) lower than in 1H14.

Adjusted revenue was US$0.5bn higher, primarily in GB&M and notably in Markets in the UK where revenue rose in Equities and Foreign Exchange from growth in client flows and increased volatility, respectively. In addition, Balance Sheet Management revenue rose, in part driven by increased gains on disposal of available-for-sale debt securities. Revenue also increased in CMB, mainly in Credit and Lending and Payments and Cash Management, driven by continued balance sheet growth in the UK.

LICs were $72m higher, reflecting lower releases of available-for-sale asset-backed securities (‘ABS’s) and higher impairment charges relating to Greek exposures ($92m in 1H15), partly offset by lower individually assessed charges in 1H14 in the UK.

Adjusted operating expenses increased by $0.6bn primarily due to higher Regulatory Programmes and Compliance costs across GB&M, RBWM and CMB.

Asia

Reported profit before tax of $9.4bn was $1.5bn (19.1%) higher than in 1H14. The effect of currency translation between periods and the net movement in significant items together contributed $953m of the increase in reported profit before tax. The movement in significant items included a gain on partial sale of our shareholding in Industrial Bank of $1.4bn in 1H15; a gain on sale of our shareholding in Bank of Shanghai of $428m in 1H14, and favourable movements on the debit valuation adjustment on derivative contracts of $50m in 1H15 compared with adverse movements of $53m in 1H14.

On an adjusted basis, profit before tax of $8.0bn was $0.6bn higher than in 1H14.

Adjusted revenue was $1.1bn higher, primarily in RBWM and notably from the investment distribution of equities and mutual funds products as a result of higher stock market turnover. In addition, revenue growth in RBWM reflected increased current accounts, savings and deposit revenue from growth in customer account balances. In GB&M, revenue increased mainly in Markets from

favourable equity market conditions and increased Foreign Exchange and Rates income in Hong Kong, while in CMB revenue reflected increased interest income from growth in term lending and deposit balances coupled with improved lending spreads, notably in Hong Kong.

LICs increased by $38m reflecting a specific CMB impairment charge in Indonesia in 1H15.

Adjusted operating expenses increased by $571m, primarily due to higher staff costs from wage inflation and increased FTEs in the Risk and Compliance functions, and to support business growth.

Middle East and North Africa

Reported profit before tax of $901m was $88m lower than in 1H14. The effect of currency translation and the net movement in significant items contributed $14m to the decrease in profit before tax.

On an adjusted basis, profit before tax of $899m was $74m lower than in 1H14.

Adjusted revenue was US$42m higher, primarily in Egypt, in part due to increased investment in treasury bills in Balance Sheet Management and growth in customer advances in GB&M and RBWM.

LICs were $82m higher, mainly due to increased individually assessed impairment charges in 1H15 compared with a net release in 1H14, primarily on UAE-related exposures in CMB and GB&M.

Operating expenses increased by $42m primarily due to higher staff costs driven by an increase in FTE and wage inflation.

North America

Reported profit before tax of $690m in 1H15 was $135m (16.4%) lower than in 1H14. The effect of currency translation between the periods and the net movement in significant items together contributed $30m to the decrease in reported profit before tax. The movement in significant items included settlements and provisions in connection with legal matters of $364m in 1H15; favourable fair value movements on our own debt designated at fair value of $139m compared with adverse movements of $45m in 1H14; and a decrease in the adverse movements on the fair value of non-qualifying hedges of $21m compared with $174m in 1H14.

On an adjusted basis, profit before tax of $931m in 1H15 was $106m lower than in 1H14.

Adjusted revenue was $239m lower, reflecting reduced average lending balances due to the continued run-off of and sales in the CML portfolio in RBWM. In addition, 1H14 included a release of accrued interest relating to an uncertain tax position. This was partly offset by an increase in revenue in GB&M, in part reflecting higher gains on available-for-sale debt securities and improved net interest income due to larger investment portfolio and financial investments made in higher yielding assets in Balance Sheet Management in the US.

 

 

HSBC HOLDINGS PLC

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Table of Contents

Interim Management Report (continued)

 

 

LICs were $252m lower, mainly 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 as improvements in housing market conditions were less pronounced in 1H15 than in 1H14.

Adjusted operating expenses increased by $118m, primarily due to higher staff costs reflecting growth initiatives across GB&M and CMB. These factors were partly offset by lower average staff numbers and costs resulting from the run-off and loan portfolio sales in the CML portfolio.

 

Latin America

Reported profit before tax of $432m was $58m (15.5%) higher than in 1H14. The effect of currency translation between the periods and the net movement in significant items had an adverse effect of $31m on the reported profit before tax.

On an adjusted basis, profit before tax of $426m was $89m higher than in 1H14.

Adjusted revenue was US$83m higher, primarily in CMB and notably in Brazil and Argentina where higher interest income was driven by deposit growth. In addition, revenue increased in RBWM reflecting higher sales of credit cards and increased investment income in the insurance business. GB&M revenue was broadly unchanged.

LICs were $73m lower, 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.

Adjusted operating expenses increased by $67m primarily due to wage inflation, partly offset by cost efficiency programmes including a reduction in staff numbers.

 

 

HSBC HOLDINGS PLC

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Table of Contents

Other information

 

 

Other information

Funds under management

 

         Half-year to  
         30 Jun 2015          30 Jun 2014          31 Dec 2014  
         $bn          $bn          $bn  

Funds under management by business

              

Global Asset Management

       440           465           445   

Global Private Banking

       280           286           275   

Affiliates

       6           6           5   

Other

       237           207           229   
       963           964           954   

At beginning of period

       954           921           964   

Net new money

       3           18           20   

Value change

       32           21           19   

Exchange and other

       (26        4           (49

At end of period

       963           964           954   

Reconciliation of reported results to adjusted performance

Reconciliation of reported results to adjusted performance – geographical regions

 

         Half-year to 30 June 2015       
             Europe                Asia                MENA         

North

  America

        

Latin

  America

               Total                   UK         

        Hong

Kong

      
         $m          $m          $m          $m          $m          $m          $m          $m       

Revenue15

                                          

Reported

       11,469           14,065           1,289           4,126           3,558           32,943           8,246           9,130      

Significant items

       (580        (1,419        (3        (157        (12        (2,171        (539        (1,380   

– debit valuation adjustment (‘DVA’) on derivative contracts

       (79        (50        (1        (22        (13        (165        (67        (14   

– fair value movements on non-qualifying hedges22

       23                               21           1           45           44           5      

– releases arising from the ongoing review of compliance with the Consumer Credit Act in the UK

       (12                                                (12        (12             

– gain on the partial sale of shareholding in Industrial Bank

                     (1,372)                                         (1,372                  (1,372   

– gain on sale of several tranches of real estate secured accounts in the US

                                     (17                  (17                       

– own credit spread23

       (512        3           (2        (139                  (650        (504        1      
                                                                                          

Adjusted

       10,889           12,646           1,286           3,969           3,546           30,772           7,707           7,750      

Loan impairment charges and other credit risk provisions (‘LIC’s)

                                          

Reported

       (288        (246        (31        (153        (721        (1,439        (72        (58   

Adjusted

       (288        (246        (31        (153        (721        (1,439        (72        (58   

Operating expenses

                                          

Reported

       (8,978        (5,457        (624        (3,287        (2,405        (19,187        (6,753        (2,855   

Significant items

       1,132           8           1           398           6           1,545           967           6      

– restructuring and other related costs

       68           8           1           34           6           117           50           6      

– regulatory provisions in GPB

       147                                                   147                          

– settlements and provisions in connection with legal matters

       780                               364                     1,144           780                

– UK customer redress programmes

       137                                                   137           137                
                                                                                          

Adjusted

       (7,846        (5,449        (623        (2,889        (2,399        (17,642        (5,786        (2,849   

Share of profit in associates and joint ventures

                                          

Reported

       2           1,038           267           4                     1,311           4           16      

Adjusted

       2           1,038           267           4                     1,311           4           16      

Profit before tax

                                          

Reported

       2,205           9,400           901           690           432           13,628           1,425           6,233      

Significant items

       552           (1,411        (2        241           (6        (626        428           (1,374   

– revenue

       (580        (1,419        (3        (157        (12        (2,171        (539        (1,380   

– operating expenses

       1,132           8           1           398           6           1,545           967           6      
                                                                                          

Adjusted

       2,757           7,989           899           931           426           13,002           1,853           4,859      

 

HSBC HOLDINGS PLC

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Table of Contents

 

 

          Half-year to 30 June 2014
          Europe               Asia               MENA          

 

North

 America

  

  

      

 

Latin

 America

  

  

           Total                   UK          

 

  Hong

Kong

  

  

  
          $m          $m          $m          $m          $m          $m          $m          $m       

Revenue15

                                           

Reported

        10,873           12,107           1,294           4,067           4,265           31,167           7,658           7,220      

Currency translation24

        (1,196        (254        (23        (107        (781        (2,326        (646        4      

Significant items

        749           (334        (27        248           (21        615           643           (404   

– DVA on derivative contracts

          79           53           3           14           6           155           57           15      

– fair value movements on non-qualifying hedges22

          144           4                     174                     322           94           10      

– provisions arising from the ongoing review of compliance with the Consumer Credit Act in the UK

          367                                                   367           367                

– own credit spread23

          159           5           6           45                     215           125           (1   

– loss on sale of several tranches of real estate secured accounts in the US

                                        15                     15                          

– gain on sale of shareholding in Bank of Shanghai

                    (428                                      (428                  (428   

– gain on sale arising from HSBC Latin America Holdings UK Limited’s disposal of HSBC Bank (Colombia) S.A. (‘HSBC Colombia’)

                                                  (18        (18                       

– reclassification loss in respect of our holding in Vietnam Technological & Commercial Joint Stock Bank following the loss of significant influence

                    32                                         32                          

– trading results – HSBC Colombia

                                                  (9        (9                       

– trading results – HSBC Bank Middle East Limited’s Pakistan operations

                              (8                            (8                       

– trading results – HSBC Bank Middle East Limited’s banking business in Jordan

                              (28                            (28                       
                                                                                           

Adjusted

        10,426           11,519           1,244           4,208           3,463           29,456           7,655           6,820      

LICs

                                           

Reported

        (266        (216        50           (411        (998        (1,841        30           (100   

Currency translation

        50           8           1           6           202           267           (2             

Significant items

                                                2           2                          

– trading results – HSBC Colombia

                                                  2           2                          
                                                                                           

Adjusted

        (216        (208        51           (405        (794        (1,572        28           (100   

Operating expenses

                                           

Reported

        (8,352        (5,009        (614        (2,837        (2,893        (18,266        (5,995        (2,597   

Currency translation24

        787           129           7           53           538           1,479           415                

Significant items

        287           2           26           13           23           351           274           3      

– restructuring and other related costs

          53           2                     13           14           82           40           3      

– UK customer redress programmes

          234                                                   234           234                

– trading results – HSBC Colombia

                                                  9           9                          

– trading results – HSBC Bank Middle East Limited’s Pakistan operations

                              9                               9                          

– trading results – HSBC Bank Middle East Limited’s banking business in Jordan

                              17                               17                          
                                                                                           

Adjusted

        (7,278        (4,878        (581        (2,771        (2,332        (16,436        (5,306        (2,594   

Share of profit in associates and joint ventures

                                           

Reported

        3           1,012           259           6                     1,280           3           25      

Currency translation

        4           (9                  (1                  (6        2                

Adjusted

        7           1,003           259           5                     1,274           5           25      

Profit before tax

                                           

Reported

        2,258           7,894           989           825           374           12,340           1,696           4,548      

Currency translation

        (355        (126        (15        (49        (41        (586        (231        4      

Significant items

        1,036           (332        (1        261           4           968           917           (401   

– revenue

          749           (334        (27        248           (21        615           643           (404   

– LICs

                                                  2           2                          

– operating expenses

          287           2           26           13           23           351           274           3      
                                                                                           

Adjusted

        2,939           7,436           973           1,037           337           12,722           2,382           4,151      

 

HSBC HOLDINGS PLC

51


Table of Contents

Other information (continued)

 

 

Reconciliation of reported results to adjusted performance – geographical regions (continued)

 

          Half-year to 31 December 2014       
          Europe                Asia                MENA         

North

America

        

Latin

America

               Total                  UK         

  Hong

Kong

      
          $m          $m          $m          $m          $m          $m          $m          $m       

Revenue15

                                           

Reported

        10,698           11,570           1,254           4,085           4,007           30,081           8,069           6,624      

Currency translation24

        (722        (229        (18        (88        (677        (1,698        (416        (1   

Significant items

        (41        286           24           (132        2           139           (290        285      

– DVA on derivative contracts

          155           16           2           2           2           177           146           11      

– fair value movements on non-qualifying hedges22

          91                               128                     219           (102        1      

– provisions arising from the ongoing review of compliance with the Consumer Credit Act in the UK

          265                                                   265           265             

– impairment of our investment in Industrial Bank

                    271                                         271                     271      

– own credit spread23

          (552        (1                  (79                  (632        (599        2      

– gain on sale of several tranches of real estate secured accounts in the US

                                        (183                  (183                       

– loss on sale arising from HSBC Bank Middle East Limited’s disposal of its operations in Pakistan

                              27                               27                          

– trading results – HSBC Bank Middle East Limited’s Pakistan operations

                              (5                            (5                       
                                                                                           

Adjusted

        9,935           11,627           1,260           3,865           3,332           28,522           7,363           6,908      

LICs

                                           

Reported

        (498        (431        (44        89           (1,126        (2,010        (244        (220   

Currency translation

        69           10           (2        4           204           285           28                

Significant items

                            (2                            (2                       

– trading results – HSBC Bank Middle East Limited’s Pakistan operations

                              (2                            (2                       
                                                                                           

Adjusted

        (429        (421        (48        93           (922        (1,727        (216        (220   

Operating expenses

                                           

Reported

        (11,865        (5,418        (602        (3,592        (3,039        (22,983        (9,581        (2,827   

Currency translation24

        637           118           6           46           516           1,287           395                

Significant items

        2,314           56           7           565           102           3,044           2,279           53      

– restructuring and other related costs

          70           7           2           15           102           196           51           4      

– regulatory provisions in GPB

          16           49                                         65                     49      

– UK customer redress programmes

          1,041                                                   1,041           1,041                

– charge in relation to the settlement agreement with the Federal Housing Finance Authority

                                        550                     550                          

– settlements and provisions in connection with legal matters

          1,187                                                   1,187           1,187                

– trading results – HSBC Bank Middle East Limited’s Pakistan operations

                              5                               5                          
                                                                                           

Adjusted

        (8,914        (5,244        (589        (2,981        (2,421        (18,652        (6,907        (2,774   

Share of profit in associates and joint ventures

                                           

Reported

        3           1,010           229           10                     1,252           4           17      

Currency translation

        1           (8                  (1                  (8                  (1   

Adjusted

        4           1,002           229           9                     1,244           4           16      

Profit before tax

                                           

Reported

        (1,662        6,731           837           592           (158        6,340           (1,752        3,594      

Currency translation

        (15        (109        (14        (39        43           (134        7           (2   

Significant items

        2,273           342           29           433           104           3,181           1,989           338      

– revenue

          (41        286           24           (132        2           139           (290        285      

– LICs

                              (2                            (2                       

– operating expenses

          2,314           56           7           565           102           3,044           2,279           53      
                                                                                           

Adjusted

        596           6,964           852           986           (11        9,387           244           3,930      

For footnotes, see page 56.

 

HSBC HOLDINGS PLC

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Table of Contents

 

 

Reconciliation of reported results to adjusted performance – global businesses

 

          Half-year to 30 June 2015       
              RBWM                CMB              GB&M                GPB              Other              Total       
          $m          $m          $m          $m          $m          $m       

Revenue15

                                 

Reported

        12,442           7,534           10,261           1,177           4,687           32,943      

Significant items

        (23                  (143        (24        (1,981        (2,171   

– DVA on derivative contracts

                              (165                            (165   

– fair value movements on non-qualifying hedges22

          (18                  22                     41           45      

– provisions/(releases) arising from the ongoing review of compliance with the Consumer Credit Act in the UK

          12                               (24                  (12   

– gain on the partial sale of shareholding in Industrial Bank

                                                  (1,372        (1,372   

– gain on sale of several tranches of real estate secured accounts in the US

          (17                                                (17   

– own credit spread23

                                                  (650        (650   
                                                                     

Adjusted

        12,419           7,534           10,118           1,153           2,706           30,772      

LICs

                                 

Reported

        (934        (511        11           (5                  (1,439   

Adjusted

        (934        (511        11           (5                  (1,439   

Operating expenses

                                 

Reported

        (8,354        (3,321        (5,790        (1,001        (3,879        (19,187   

Significant items

        472           52           816           165           40           1,545      

– restructuring and other related costs

          32           5           22           18           40           117      

– regulatory provisions in GPB

                                        147                     147      

– settlements and provisions in connection with legal matters

          350                     794                               1,144      

– UK customer redress programmes

          90           47                                         137      
                                                                     

Adjusted

        (7,882        (3,269        (4,974        (836        (3,839        (17,642   

Share of profit in associates and joint ventures

                                 

Reported

        208           821           272           9           1           1,311      

Adjusted

        208           821           272           9           1           1,311      

Profit before tax

                                 

Reported

        3,362           4,523           4,754           180           809           13,628      

Significant items

        449           52           673           141           (1,941        (626   

– revenue

          (23                  (143        (24        (1,981        (2,171   

– operating expenses

          472           52           816           165           40           1,545      
                                                                     

Adjusted

        3,811           4,575           5,427           321           (1,132        13,002      

 

HSBC HOLDINGS PLC

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Table of Contents

Other information (continued)

 

 

Reconciliation of reported results to adjusted performance – global businesses (continued)

 

          Half-year to 30 June 2014       
              RBWM                CMB              GB&M                GPB            Other            Total       
        $m           $m           $m           $m           $m           $m      

Revenue15

                                 

Reported

        12,616           7,823           9,791           1,230           2,657           31,167      

Currency translation24

        (1,020        (599        (698        (75        (48        (2,326   

Significant items

        576           (10        93                     (44        615      

– DVA on derivative contracts

                              155                               155      

– fair value movements on non-qualifying hedges22

          234                     (50                  138           322      

– provisions arising from the ongoing review of compliance with the Consumer Credit Act in the UK

          353           14                                         367      

– own credit spread23

                              2                     213           215      

– loss on sale of several tranches of real estate secured accounts in the US

          15                                                   15      

– gain on sale of shareholding in Bank of Shanghai

                                                  (428        (428   

– (gain)/loss on sale arising from HSBC Latin America Holdings UK Limited’s disposal of HSBC Bank (Colombia) S.A. (‘HSBC Colombia’)

          (7        (7        (5                  1           (18   

– reclassification loss in respect of our holding in Vietnam Technological & Commercial Joint Stock Bank following the loss of significant influence

                                                  32           32      

– trading results – HSBC Colombia

          (6        (1        (2                            (9   

– trading results – HSBC Bank Middle East Limited’s Pakistan operations

          (2        (4        (2                            (8   

– trading results – HSBC Bank Middle East Limited’s banking business in Jordan

          (11        (12        (5                            (28   
                                                                     

Adjusted

        12,172           7,214           9,186           1,155           2,565           29,456      

LICs

                                 

Reported

        (1,299        (488        (49        (6        1           (1,841   

Currency translation

        181           66           18           2                     267      

Significant items

        3           (1                                      2      

– trading results – HSBC Colombia

          2                                                   2      

– trading results – HSBC Bank Middle East Limited’s banking business in Jordan

          1           (1                                           
                                                                     

Adjusted

        (1,115        (423        (31        (4        1           (1,572   

Operating expenses

                                 

Reported

        (8,530        (3,327        (4,958        (868        (3,533        (18,266   

Currency translation24

        812           291           360           39           91           1,479      

Significant items

        235           38           33           2           43           351      

– restructuring and other related costs

          22           6           9           2           43           82      

– UK customer redress programmes

          194           20           20                               234      

– trading results – HSBC Colombia

          6           1           2                               9      

– trading results – HSBC Bank Middle East Limited’s Pakistan operations

          4           4           1                               9      

– trading results – HSBC Bank Middle East Limited’s banking business in Jordan

          9           7           1                               17      
                                                                     

Adjusted

        (7,483        (2,998        (4,565        (827        (3,399        (16,436   

Share of profit in associates and joint ventures

                                 

Reported

        215           806           249           8           2           1,280      

Currency translation

        (1        (8        (1        1           3           (6   
                                                                     

Adjusted

        214           798           248           9           5           1,274      

Profit before tax

                                 

Reported

        3,002           4,814           5,033           364           (873        12,340      

Currency translation

        (28        (250        (321        (33        46           (586   

Significant items

        814           27           126           2           (1        968      

– revenue

          576           (10        93                     (44        615      

– LICs

          3           (1                                      2      

– operating expenses

          235           38           33           2           43           351      
                                                                     

Adjusted

        3,788           4,591           4,838           333           (828        12,722      

 

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Table of Contents
         Half-year to 31 December 2014       
             RBWM                  CMB              GB&M                  GPB              Other              Total       
         $m          $m          $m          $m          $m          $m       

Revenue15

                                

Reported

       12,533           7,925           7,987           1,147           3,708           30,081      

Currency translation24

       (821        (470        (449        9           (70        (1,698   

Significant items

       301           19           237           41           (459        139      

– DVA on derivative contracts

                           177                               177      

– fair value movements on non-qualifying hedges22

       259           (1        58           1           (98        219      

– provisions arising from the ongoing review of compliance with the Consumer Credit Act in the UK

       215           10                     40                     265      

– impairment of our investment in Industrial Bank

                                               271           271      

– own credit spread23

                                               (632        (632   

– gain on sale of several tranches of real estate secured accounts in the US

       (183                                                (183   

– loss on sale arising from HSBC Bank Middle East Limited’s disposal of its operations in Pakistan

       11           13           3                               27      

– trading results – HSBC Bank Middle East Limited’s Pakistan operations

       (1        (3        (1                            (5   

 

                                
                                                                      

Adjusted

       12,013           7,474           7,775           1,197           3,179           28,522      

LICs

                                

Reported

       (637        (1,070        (316        14           (1        (2,010   

Currency translation

       100           120           67           (2                  285      

Significant items

       (1        (1                                      (2   

– trading results – HSBC Bank Middle East Limited’s Pakistan operations

       (1        (1                                      (2   

 

                                
                                                                      

Adjusted

       (538        (951        (249        12           (1        (1,727   

Operating expenses

                                

Reported

       (9,500        (3,654        (7,070        (910        (5,068        (22,983   

Currency translation24

       739           243           352           11           45           1,287      

Significant items

       883           151           1,864           69           77           3,044      

– restructuring and other related costs

       66           31           18           4           77           196      

– regulatory provisions in GPB

                                     65                     65      

– UK customer redress programmes

       798           118           125                               1,041      

– charge in relation to the settlement agreement with the Federal Housing Finance Authority

       17                     533                               550      

– settlements and provisions in connection with legal matters

                           1,187                               1,187      

– trading results – HSBC Bank Middle East Limited’s Pakistan operations

       2           2           1                               5      

 

                                
                                                                      

Adjusted

       (7,878        (3,260        (4,854        (830        (4,946        (18,652   

Share of profit in associates and joint ventures

                                

Reported

       183           799           255           11           4           1,252      

Currency translation

       (1        (4        (3                            (8   

Adjusted

       182           795           252           11           4           1,244      

Profit before tax

                                

Reported

       2,579           4,000           856           262           (1,357        6,340      

Currency translation

       17           (111        (33        18           (25        (134   

Significant items

       1,183           169           2,101           110           (382        3,181      

– revenue

       301           19           237           41           (459        139      

– LICs

       (1        (1                                      (2   

– operating expenses

       883           151           1,864           69           77           3,044      

 

                                
                                                                      

Adjusted

       3,779           4,058           2,924           390           (1,764        9,387      

For footnotes, see page 56.

 

HSBC HOLDINGS PLC

55


Table of Contents

Other information (continued)

 

 

Footnotes to pages 2 to 55

 

  1 The risk profile measures HSBC against a peer group average from a sample set of five global banks and five regional banks measured by: (a) the ratio of gross loans and advances to customers versus deposits; (b) the ratio of LICs to loans and advances to customers; and (c) the leverage ratio.
  2 2014 pro forma basis ex associates; excluding business growth.
  3 The sum of balances presented does not agree to consolidated amounts because inter-company eliminations are not presented here.
  4 Adjusted jaws is the difference between the percentage rate of growth of revenue and the percentage rate of growth of operating expenses, both on an adjusted basis.
  5 Client-facing GB&M refers to GB&M excluding associates, legacy credit and Balance Sheet Management. The GB&M client-facing and BSM businesses measure excludes the effects of the legacy credit portfolio and income from associates. We believe that looking at the client-facing and BSM businesses allows GB&M management to more clearly discuss the cause of material changes from period-to-period in the ongoing businesses and to assess the factors and trends in the business which are expected to have a material effect in future years.
  6 Net interest income includes the cost of internally funding trading assets, while the related revenues are reported in net trading income. In our global business results, the total cost of funding trading assets is included within GB&M’s net trading income as an interest expense. In the statutory presentation, internal interest income and expense are eliminated.
  7 Gross interest yield is the average annualised interest rate earned on average interest-earning assets (‘AIEA’).
  8 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. Net interest margin is net interest income expressed as an annualised percentage of AIEA.
  9 In the first half of 2015, a portfolio of customers was transferred from CMB to RBWM in Latin America in order to better align the combined banking needs of the customers with our established global businesses. Comparative data have been re-presented accordingly.
10 During the first half of 2015 our operations in Brazil were classified as held for sale. As a result, balance sheet accounts have been classified to ‘assets held for sale’ and ‘liabilities of disposal groups held for sale’. There is no separate income statement classification.
11 Adjusted RoRWA is calculated using adjusted pre-tax return and reported average RWAs at constant currency and adjusted for the effects of business disposals. RoRWAs are calculated using annualised PBT and average RWAs on a CRD IV basis for all periods from 1 January 2014 and on a Basel 2.5 basis at 31 December 2013.
12 ‘Currency translation adjustment’ is the effect of translating the assets and liabilities of subsidiaries and associates for the previous period-end at the rates of exchange applicable at the current period-end.
13 The main items reported under ‘Other’ are the results of HSBC’s holding company and financing operations, which includes net interest earned on free capital held centrally, operating costs incurred by the head office operations in providing stewardship and central management services to HSBC, along with the costs incurred by the Group Service Centres and Shared Service Organisations and associated recoveries. The results also include fines and penalties as part of the settlement of investigations into past inadequate compliance with anti-money laundering and sanctions laws, the UK bank levy together with unallocated investment activities, centrally held investment companies, gains arising from the dilution of interests in associates and joint ventures and certain property transactions. In addition, ‘Other’ also includes part of the movement in the fair value of long-term debt designated at fair value (the remainder of the Group’s movement on own debt is included in GB&M).
14 Assets by geographical region and global businesses include intra-HSBC items. These items are eliminated, where appropriate, under the headings ‘Intra-HSBC items’ or ‘Inter-segment elimination’, as appropriate.
15 Net operating income before loan impairment charges and other credit risk provisions, also referred to as revenue.
16 The Principal RBWM business measure excludes the effects of the US run-off portfolio. We believe that looking at the Principal RBWM business allows management to more clearly discuss the cause of material changes from period-to-period in the ongoing business and to assess the factors and trends in the business which are expected to have a material effect in future years.
17 ‘Other’ in GB&M includes net interest earned on free capital held in the global business not assigned to products and gains resulting from business disposals. Within the management view of total operating income, notional tax credits are allocated to the businesses to reflect the economic benefit generated by certain activities which is not reflected within operating income, for example notional credits on income earned from tax-exempt investments where the economic benefit of the activity is reflected in tax expense. In order to reflect the total operating income on an IFRSs basis, the offset to these tax credits are included within ‘Other’.
18 ‘Client assets’ are translated at the rates of exchange applicable for their respective period-ends, with the effects of currency translation reported separately. The main components of client assets are funds under management, which are not reported on the Group’s balance sheet, and customer deposits, which are reported on the Group’s balance sheet.
19 Inter-segment elimination comprises (i) the costs of shared services and Group Service Centres included within ‘Other’ which are recovered from global businesses, and (ii) the intra-segment funding costs of trading activities undertaken within GB&M. The Balance Sheet Management business, reported within GB&M, provides funding to the trading businesses. To report GB&M’s net trading income on a fully funded basis, ‘Net interest income/(expense)’ and ‘Net interest income/(expense) on trading activities’ are grossed up to reflect internal funding transactions prior to their elimination in the inter-segment column.
20 ‘Employee expenses’ comprises costs directly incurred by each global business. The reallocation and recharging of employee and other expenses directly incurred in the ‘Other’ category is shown in ‘Other operating expenses’.
21 RWAs are non-additive across geographical regions due to market risk diversification effects within the Group.
22 Excludes items where there are substantial offsets in the income statement for the same period.
23 ‘Own credit spread’ includes the fair value movements on our long-term debt attributable to credit spread where the net result of such movements will be zero upon maturity of the debt. This does not include fair value changes due to own credit risk in respect of trading liabilities or derivative liabilities.
24 Currency translations are non-additive across geographical regions and global businesses due to inter-company transactions within the Group.

 

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Risk

 

 

    

Risk

 

      
  

Risk profile

 

    

 

57

 

  

 

  

Managing risk

 

    

 

57

 

  

 

  

Top and emerging risks

 

    

 

57

 

  

 

  

Areas of special interest

 

    

 

59

 

  

 

  

Credit risk

 

    

 

60

 

  

 

  

Liquidity and funding

 

    

 

76

 

  

 

  

Market risk

 

    

 

78

 

  

 

  

Operational risk

 

    

 

82

 

  

 

  

Reputational risk

 

    

 

83

 

  

 

  

Risk management of insurance operations

 

    

 

84

 

  

 

     

There have been no material changes to the policies and practices regarding risk management and governance described in the Annual Report and Accounts 2014 with the exception of the implementation of the new AML and sanctions policy procedures outlined on page 83.

A description of our principal risks and uncertainties for the remaining six months of 2015 is discussed in top and emerging risks below.

A summary of our current policies and practices regarding risk is provided in the Appendix to Risk on page 204 of the Annual Report and Accounts 2014.

Risk profile

Managing our risk profile

 

  A strong balance sheet remains core to our philosophy.

 

  Our portfolios continue to be aligned to our risk appetite and strategy.

 

  Our risk management framework is supported by strong forward-looking risk identification.

 

  We manage and reduce financial crime compliance risk with defined global standards programme.

Maintaining capital strength and a strong liquidity position

 

  Our common equity tier 1 capital ratio remained strong at 11.6%.

 

  We sustained our strong liquidity position throughout the first half of 2015.

 

  The ratio of customer advances to deposits remained significantly below 90%.

Strong governance

 

  Robust risk governance and accountability is embedded across the Group.

 

  The Board, advised by the Group Risk Committee, approves our risk appetite.

 

  Our global risk operating model supports adherence to globally consistent standards and risk management policies across the Group.

Managing risk

Our established framework ensures appropriate oversight of and accountability for the effective management of risk.

We employ a risk management framework at all levels of the organisation and across all risk types, fostering a continuous monitoring of the risk environment and an integrated evaluation of risks and their interactions. It is underpinned by a strong risk culture and reinforced by HSBC Values and our Global Standards and ensures that our risk profile remains conservative and aligned to our risk appetite. Our risk management framework is set out on page 24 of the Annual Report and Accounts 2014.

Risk factors

Our businesses are exposed to a broad range of risks that could potentially affect the results of our operations or financial condition. These risk factors are summarised on page 113 of the Annual Report and Accounts 2014. They inform the ongoing assessment of our top and emerging risks, which may result in our risk appetite being revised.

Top and emerging risks

Our top and emerging risk framework enables us to identify, continuously monitor and manage current and forward-looking risks to ensure our risk appetite remains appropriate.

The ongoing assessment of our top and emerging risks, which is informed by analysis of our risk factors and the results of our stress testing programme, may result in our risk appetite being revised. Our approach to identifying and monitoring top and emerging risks is described on page 22 of the Annual Report and Accounts 2014.

During 1H15, senior management paid particular attention to those risks which were identified as top or emerging, and made one change to them during the period to reflect our assessment of their effect on HSBC. ‘Internet crime and fraud’ was removed as a top risk as mitigating actions taken have reduced losses through digital channels. HSBC remains a target for cyber-attacks, which is noted as a top risk under ‘Information security risk’.

‘Economic outlook’ heightened in 1H15. Expectations of divergent monetary policies increased market volatility and resulted in changes in capital flows. The impact of the turmoil in Greece is discussed further on page 74.

Our current top and emerging risks are summarised overleaf.

 

 

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Risk (continued)

 

 

Top and emerging risks   LOGO  

/

  LOGO   

 

Risk     Description   Mitigants

 

Macroeconomic and geopolitical risk

 

 

LOGO  

  Economic outlook   Weak economic growth in both developed and emerging market countries could adversely affect global trade and capital flows and our profits from operations in those countries.  

We closely monitor economic developments in key markets and take appropriate action as circumstances evolve.

We use stress testing, both internal and regulatory programmes, to assess the effect of changes in economic conditions on our operations.

 

LOGO  

  Increased geopolitical risk   Our operations are exposed to risks arising from political instability and civil unrest in a number of countries. This may have a wider effect on regional stability and regional and global economies.   We continuously monitor the geopolitical and economic outlook, particularly in countries where we have material exposures and/or a physical presence.

 

Macro-prudential, regulatory and legal risks to our business model

 

 

LOGO  

  Regulatory developments affecting our business model and Group profitability   Governments and regulators continue to develop and implement policies which impose new or additional requirements, particularly in the areas of capital and liquidity management and our business, governance and corporate structure.   We actively assess and consider the impact of relevant developments and engage closely with governments and regulators in the countries in which we operate. We seek to ensure that requirements are considered properly and implemented in an effective manner.

 

LOGO  

  Regulatory and other investigations, fines, sanctions, commitments and other requirements relating to conduct of business and financial crime negatively affecting our results and brand   Financial service providers are at risk of regulatory and other sanctions or fines related to conduct of business and financial crime. These can take significant time both to crystallise and to resolve. Breach of the US DPA may allow the US authorities to prosecute HSBC with respect to matters covered thereunder.  

We actively seek to manage and defend HSBC’s interests in those investigations. Significant programmes to enhance the management of conduct and financial crime risks are progressing in all global businesses and functions and we have significantly enhanced our financial crime and regulatory compliance controls and resources.

We continue to take steps to address the requirements of the US DPA and other consent orders in consultation with the relevant regulatory agencies.

 

LOGO  

  Dispute risk   HSBC is party to legal proceedings arising out of its normal business operations which could give rise to potential financial loss and significant reputational damage.   We continue to focus on identifying emerging regulatory and judicial trends in order to limit exposure to litigation or regulatory enforcement action in the future.

 

Risks related to our business operations, governance and internal control systems

 

 

LOGO  

  Heightened execution risk   The execution of the Group’s strategy requires the management of complex projects that are resource demanding and time sensitive. The size and scope of actions to meet regulatory demands and risks from business and portfolio disposals may affect our ability to execute our strategy.   We have strengthened our prioritisation and governance processes for significant projects and have invested in our project implementation and IT capabilities.

 

LOGO  

  People risk   Regulatory reform and remediation are placing significant demands on the human capital of the Group.   We continuously review our remuneration policy to ensure we remain competitive and attract and retain key talent. We have increased the level of specialist resources in key areas. We are embedding a learning-based culture to improve employee capability, collaboration and engagement.

 

LOGO  

  Third-party risk management   Risks arising from the use of third-party service providers may be less transparent and more challenging to manage or influence.   We continue to strengthen our risk management processes and procedures in relation to the use and monitoring of third-party service providers.

 

LOGO  

  Information security risk   HSBC and other multinational organisations continue to be the targets of cyber-attacks.   We continue to improve our governance and controls framework to protect HSBC information and technical infrastructure against ever-increasing and sophisticated cyber-threats.

 

LOGO  

  Data management   Regulatory requirements necessitate more frequent and granular data submissions, which must be produced on a consistent, accurate and timely basis.   A number of key initiatives and projects are in progress to implement our data strategy to enable consistent data aggregation, reporting and management.

 

LOGO  

  Model risk   Adverse consequences could result from decisions based on incorrect model outputs or from models that are poorly developed, implemented or used. The regulatory environment and supervisory concerns over banks’ use of internal models to determine regulatory capital further contribute to model risk.   The development, usage and validation of models used for a range of purposes including regulatory and economic capital calculations, stress testing, granting credit and pricing are subject to increased governance and independent review.

 

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Areas of special interest

During 1H15, we considered a number of particular areas because of the effect they may have on the Group. While some of these areas may have already been identified in top and emerging risks, further details of the actions taken in 1H15 are provided below.

Financial crime compliance and regulatory compliance

We have experienced increasing levels of compliance risk in recent years as regulators and other agencies pursued investigations into historical activities, for example, investigations regarding inadequate compliance with AML and sanctions law (giving rise to the US DPA), mis-selling in the UK of payment protection insurance (‘PPI’) policies, investigations in connection with the setting of Libor and other benchmark interest rates, and activities related to foreign exchange, precious metals and credit default swaps. Details of these investigations and legal proceedings can be found in Note 19 on the Financial Statements and the work of the Monitor, who has been appointed to assess our progress against our various obligations in the US DPA is discussed on page 13.

The level of inherent compliance risk remained high in 1H15 as the industry continued to experience greater regulatory scrutiny and heightened levels of regulatory oversight and supervision. Further information about the Group’s compliance risk management may be found on page 83.

Swiss Private Bank

Various tax administration, regulatory and law enforcement authorities around the world are conducting investigations and reviews of HSBC Swiss Private Bank in connection with past practices at the bank and the financial affairs of some of its clients. Details of these investigations and reviews may be found in Note 19 on the Financial Statements. We are cooperating with the relevant authorities.

Regulatory stress tests

Stress testing is an important tool for regulators to assess the resilience of the banking sector and of individual banks to adverse economic or financial developments. The results inform the regulators’ view of the capital adequacy of individual institutions and could have a significant effect on capital requirements, risk and capital management practices and planned capital actions, including the payment of dividends, going forward.

The Group is participating in the 2015 PRA concurrent stress test programme, which involves all major UK banks. The scenarios for the 2015 stress test incorporate a synchronised global downturn affecting Asia, Brazil and the eurozone in particular, a reduction in global risk appetite and market liquidity, and a slowdown in the UK

driven by a downturn in its trading partners. The results will be published by the Bank of England alongside the Financial Stability Report in the fourth quarter of 2015.

HSBC North America Holdings Inc. (‘HNAH’) participated in the Comprehensive Capital Analysis and Review (‘CCAR’) and Dodd-Frank Act Stress Testing (‘DFAST’) 2015 programmes of the Federal Reserve Board (‘FRB’); HSBC Bank USA N.A. (‘HSBC Bank USA’) participated in the DFAST 2015 programme of the Office of the Comptroller of the Currency. Submissions were made on 5 January 2015 and summaries of the results of the stress test were disclosed on 5 March 2015. On 11 March 2015, HNAH received the FRB’s non-objection to its 2015 CCAR submission and its capital plan, and on 16 July 2015, it disclosed a summary of the results of its DFAST 2015 company-run mid-cycle stress test.

Other entities in the Group, including the Hongkong and Shanghai Banking Corporation Limited, continue to participate in regional regulatory stress tests activities.

A summary of our approach to stress testing and scenario analysis programme is provided on page 117 of the Annual Report and Accounts 2014.

Oil and gas prices

Oil and commodity prices declined significantly during 2014 as a result of increasing global supply and demand imbalances and changes in market sentiment. During 1H15 oil prices increased compared with 2014. At the prices prevailing during 1H15 the pressure on large integrated producers and Middle Eastern economies was somewhat reduced. Higher cost non-integrated producers remained relatively weaker while we expect that infrastructure and services providers will continue to come under pressure due to reduced capital expenditure across the industry.

Our diversified lending portfolio was resilient during 1H15; impairments as a result of the lower oil and gas prices were insignificant. The sector remains under enhanced monitoring with risk appetite and new lending carefully monitored.

Greece

In light of recent developments in Greece we invoked our long-established major incident crisis management procedures and continue to monitor the situation carefully.

The rest of the eurozone, including Italy, Ireland, Portugal and Spain, has remained resilient. Various indicators such as credit default swap prices and interest rate spreads suggest that the risk of contagion to other peripheral eurozone countries has been successfully contained.

As a result of the unfolding crisis we have raised additional loan impairment charges and other credit risk provisions amounting to $0.1bn. Exposures to Greece are described in further detail on page 74.

 

 

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Risk (continued)

 

 

Credit risk

Credit risk is the risk of financial loss if a customer or counterparty fails to meet an obligation under a contract. It arises principally from direct lending, trade finance and leasing business, but also from certain other products such as guarantees and credit derivatives and from holding assets in the form of debt securities.

There have been no material changes to the policies and practices for the management of credit risk summarised in the credit risk section on page 127 and the Appendix to Risk on page 206 of the Annual Report and Accounts 2014.

Credit risk in the first half of 2015

An update on the effect of oil and gas prices is provided in ‘Areas of special interest’ on page 59, and our exposures to Greece are set out on page 74.

Reported gross loans and advances declined by $26bn. During 1H15, the assets of our Brazilian operations were reclassified as ‘Assets held for sale’ (see Note 12 on the Financial Statements), which reduced reported gross loans and advances by $31bn as detailed on page 62. Foreign exchange differences reduced reported gross loans and advances by a further $11bn. Excluding these adjustments, lending grew in both wholesale and personal lending.

Loan impairment charges reduced by 25% compared with 1H14 with notable decreases in Latin America, North America and Europe.

Information on constant currency movements is provided on page 71. The commentary that follows is on a constant currency basis, while tables are presented on a reported basis.

Excluding the Brazilian reclassification, wholesale gross loans grew by $13bn. Balances in Asia grew by $12bn, mainly in other property and international trade and services, and in North America by $5.6bn, mainly in manufacturing and commercial real estate, though this growth was partly offset by a $4.0bn reduction in Europe.

Excluding the Brazilian reclassification and the ongoing run-off of the US CML portfolio, personal lending balances grew by $4.5bn in 1H15. This was mainly due to increased mortgage and other lending in Asia, other personal lending in Mexico and growth in the Premier mortgage portfolio in the US.

Summary of credit risk

 

       

    30 Jun
2015

$bn

       

    30 Jun
2014

$bn

       

    31 Dec

2014

$bn

     

At end of period

             

Maximum exposure to credit risk

             

– total assets subject to credit risk

      2,373          2,546          2,434     

– off-balance sheet commitments subject to credit risk1

      699          688          699     
      3,072          3,234          3,133     

Gross loans and advances

             

– personal lending

      385          416          393     

– wholesale lending

      688          773          706     
      1,073          1,189          1,099     

Impaired loans

             

– personal lending

      13          18          15     

– wholesale lending

      12          16          14     
      25          34          29     

Impaired loans as a % of gross loans and advances

             

– personal lending

      3.4%          4.2%          3.9%     

– wholesale lending

      1.7%          2.1%          2.0%     

– total

      2.3%          2.9%          2.7%     
      $bn          $bn          $bn     

Impairment allowances

             

– personal lending

      3.3          5.9          4.6     

– wholesale lending

      6.4          8.1          7.8     
      9.7          14.0          12.4     

Loans and advances net of impairment allowances

      1,063          1,175          1,087     

For the period ended

             

Loan impairment charges

             

– personal lending

      0.9          1.2          0.6     

– wholesale lending

      0.6          0.8          1.5     
      1.5          2.0          2.1     

For footnote, see page 86.

Loans and advances

The following table analyses loans and advances by industry sector and by the location of the principal operations of the lending subsidiary or, in the case of the operations of The Hongkong and Shanghai Banking Corporation, HSBC Bank plc, HSBC Bank Middle East and HSBC Bank USA, by the location of the lending branch. The distribution of loans across geographical regions and industries remained similar to last year.

 

 

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Risk (continued)

 

 

Gross loans and advances by industry sector and by geographical region

 

          Europe          Asia          MENA          North
America
         Latin
America
         Total         

As a %

    of total

gross

      
          $m          $m          $m          $m          $m          $m          loans       

At 30 June 2015

                                      

Personal

        177,311           132,375           6,648           62,990           5,976           385,300           35.9      

– first lien residential mortgages

          130,909           95,176           2,642           53,995           2,031           284,753           26.5      

– other personal

          46,402           37,199           4,006           8,995           3,945           100,547           9.4      

Wholesale

                                      

Corporate and commercial

        200,188           225,249           22,833           63,524           12,413           524,207           48.9      

– manufacturing

          43,465           35,599           2,570           17,392           3,072           102,098           9.5      

– international trade and services

          65,459           76,683           10,109           13,720           3,508           169,479           15.8      

– commercial real estate

          26,925           34,249           721           7,444           1,418           70,757           6.6      

– other property-related

          8,209           39,518           1,691           9,652           39           59,109           5.5      

– government

          2,260           1,117           1,552           164           947           6,040           0.6      

– other commercial2

          53,870           38,083           6,190           15,152           3,429           116,724           10.9      

Financial

        27,163           15,413           2,896           8,055           691           54,218           5.0      

Banks

        23,460           66,286           9,014           7,372           3,311           109,443           10.2      

Total gross loans and advances

            428,122               439,323               41,391               141,941               22,391             1,073,168               100.0      

Percentage of total

        39.9%           40.9%           3.9%           13.2%           2.1%           100.0%           

At 30 June 2014

                                      

Personal

        194,898           129,680           6,553           69,573           15,048           415,752           35.0      

– first lien residential mortgages

          144,225           95,489           2,543           58,677           4,501           305,435           25.7      

– other personal

          50,673           34,191           4,010           10,896           10,547           110,317           9.3      

Wholesale

                                      

Corporate and commercial

        260,097           221,852           20,983           56,054           32,965           591,951           49.8      

– manufacturing

          65,374           35,210           2,445           12,941           14,196           130,166           10.9      

– international trade and services

          79,981           80,574           10,072           13,087           8,534           192,248           16.2      

– commercial real estate

          30,935           34,727           434           6,677           2,492           75,265           6.3      

– other property-related

          7,444           32,730           1,593           8,644           348           50,759           4.3      

– government

          2,404           1,082           1,696           568           1,007           6,757           0.6      

– other commercial2

          73,959           37,529           4,743           14,137           6,388           136,756           11.5      

Financial

        29,603           12,091           2,838           7,579           1,397           53,508           4.5      

Banks

        27,763           72,222           8,644           6,252           12,569           127,450           10.7      

Total gross loans and advances

        512,361           435,845           39,018           139,458           61,979           1,188,661           100.0      

Percentage of total

        43.1%           36.7%           3.3%           11.7%           5.2%           100.0%           

At 31 December 2014

                                      

Personal

        178,531           129,515           6,571           65,400           13,537           393,554           35.8      

– first lien residential mortgages

          131,000           93,147           2,647           55,577           4,153           286,524           26.1      

– other personal

          47,531           36,368           3,924           9,823           9,384           107,030           9.7      

Wholesale

                                      

Corporate and commercial

        212,523           220,799           20,588           57,993           30,722           542,625           49.4      

– manufacturing

          39,456           37,767           2,413           15,299           12,051           106,986           9.7      

– international trade and services

          76,629           72,814           9,675           13,484           8,189           180,791           16.4      

– commercial real estate

          28,187           35,678           579           6,558           2,291           73,293           6.7      

– other property-related

          7,126           34,379           1,667           8,934           281           52,387           4.8      

– government

          2,264           1,195           1,552           164           968           6,143           0.6      

– other commercial2

          58,861           38,966           4,702           13,554           6,942           123,025           11.2      

Financial

        23,103           13,997           3,291           9,034           1,393           50,818           4.6      

Banks

        21,978           62,960           10,495           7,405           9,360           112,198           10.2      

Total gross loans and advances

        436,135           427,271           40,945           139,832           55,012           1,099,195           100.0      

Percentage of total

        39.7%           38.9%           3.7%           12.7%           5.0%           100.0%           

For footnote, see page 86.

 

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Assets held for sale

During 1H15, gross loans and advances and related impairment allowances arising in our Brazilian operations were reclassified from ‘Loans and advances to customers’ and ‘Loans and advances to banks’ to ‘Assets held for sale’ in the balance sheet. There was no separate income statement reclassification. As a result, charges for loan impairment losses shown in the credit risk disclosures include loan impairment charges relating to financial assets classified as ‘Assets held for sale’.

Loans and advances to banks and customers measured at amortised cost

 

        

Total gross
loans and
advances
$m

 

        

Impairment

allowances

on loans and

advances
$m

 

 

As reported

       1,073,168           (9,778

Reported in ‘Assets held for sale’

       26,883           (1,666

At 30 June 2015

       1,100,051           (11,444

At 31 December 2014, the gross loans and advances and related impairment allowances of our Brazilian operations were $31bn and $1.7bn, respectively. Gross loans and advances reduced by $4.3bn mainly as a result of foreign exchange movements.

Gross loans and impairment allowances on loans and advances to customers and banks reported in ‘Assets held for sale’

 

           Brazil            Other          Total      
         $m          $m          $m      

Gross loans

                

Loans and advances to customers

       22,460           230           22,690     

– personal

       6,749           182           6,931     

– corporate and commercial

       15,403           48           15,451     

– financial

       308                     308     

Loans and advances to banks

       4,193                     4,193     

At 30 June 2015

       26,653           230           26,883     

Impairment allowances

                

Loans and advances to customers

       (1,632        (34        (1,666  

– personal

       (713        (16        (729  

– corporate and commercial

       (918        (18        (936  

– financial

       (1                  (1  

Loans and advances to banks

                               

At 30 June 2015

       (1,632        (34        (1,666  

The table below analyses the amount of LICs arising from assets held for sale. They primarily relate to the Brazilian operations.

Loan impairment charges and other credit risk provisions

 

             Total  
         $m  

LICs arising from:

    

– assets held for sale

       478   

– assets not held for sale

       961   

Half-year to 30 June 2015

       1,439   

Credit quality of financial instruments

We assess credit quality on all financial instruments which bear credit risk. The distribution of financial instruments by credit quality is tabulated below.

 

Distribution of total financial instruments exposed to credit risk by credit quality

 

         Neither past due nor impaired                                                         
         Strong          Good          Satis-
factory
        

Sub-

standard

         Past due
but not
impaired
         Impaired         

Total

gross

amount

        

Impairment

allowances

         Total  
        

$m

 

        

$m

 

        

$m

 

        

$m

 

        

$m

 

        

$m

 

        

$m

 

        

$m

 

        

$m

 

 

At 30 June 2015

       1,599,418           410,280           303,630           28,141           13,282           29,569           2,384,320           (11,445        2,372,875   

At 30 June 2014

       1,677,301           456,507           335,139           40,041           14,163           37,112           2,560,263           (14,109        2,546,154   

At 31 December 2014

       1,631,391           421,563           315,958           31,530           13,568           32,492           2,446,502           (12,402        2,434,100   
                                            
       %           %           %           %           %           %           %             

At 30 June 2015

       67.1           17.2           12.7           1.2           0.6           1.2           100.0             

At 30 June 2014

       65.5           17.8           13.1           1.6           0.6           1.4           100.0             

At 31 December 2014

       66.7           17.2           12.9           1.3           0.6           1.3           100.0             

 

This table shows the credit quality distribution for all assets exposed to credit risk, including the balances relating to our Brazilian operations. Within past due but not impaired

 

amounts at 30 June 2015, 99% were less than 90 days past due in line with previous periods.

 

 

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Risk (continued)

 

 

Distribution of loans and advances held at amortised cost by credit quality

 

         Neither past due nor impaired                                                        
         Strong          Good          Satis-
factory
        

Sub-

standard

        

Past due

but not

impaired

         Impaired         

Total

gross

amount

        

Impairment

allowances

         Total       
         $m          $m          $m          $m          $m          $m          $m          $m          $m       

At 30 June 2015

                                               

Loans and advances to customers3

       478,003           234,178           196,723           17,463           12,248           25,110           963,725           (9,740        953,985      

– personal

       316,984           31,572           14,715           975           7,817           13,237           385,300           (3,339        381,961      

– corporate and commercial

       133,683           186,759           172,404           15,960           3,834           11,567           524,207           (6,127        518,080      

– financial

       27,336           15,847           9,604           528           597           306           54,218           (274        53,944      

Loans and advances to banks

       86,768           17,655           4,571           404           1           44           109,443           (38        109,405      

At 30 June 2014

                                               

Loans and advances to customers3

       501,162           274,776           212,714           24,712           13,967           33,880           1,061,211           (13,970        1,047,241      

– personal

       332,045           38,673           16,847           1,366           9,283           17,538           415,752           (5,906        409,846      

– corporate and commercial

       140,941           222,982           185,541           22,450           4,327           15,710           591,951           (7,686        584,265      

– financial

       28,176           13,121           10,326           896           357           632           53,508           (378        53,130      

Loans and advances to banks

       96,849           21,948           6,986           1,599           12           56           127,450           (63        127,387      

At 31 December 2014

                                               

Loans and advances to customers3

       487,734           239,136           196,685           20,802           13,357           29,283           986,997           (12,337        974,660      

– personal

       320,678           32,601           15,109           1,130           8,876           15,160           393,554           (4,600        388,954      

– corporate and commercial

       141,375           192,799           171,748           18,986           3,922           13,795           542,625           (7,441        535,184      

– financial

       25,681           13,736           9,828           686           559           328           50,818           (296        50,522      

Loans and advances to banks

       83,766           19,525           7,945           914           1           47           112,198           (49        112,149      

For footnote, see page 86.

 

This table shows loans and advances held at amortised cost by credit quality distribution. Assets of our Brazilian

operations are not included in the 30 June 2015 balances following their classification as ‘Assets held for sale’.

 

 

Impaired loans

Impaired gross loans and advances to customers and banks by industry sector

 

        

Impaired loans and advances

at 30 June 2015

        

Impaired loans and advances

at 30 June 2014

        

Impaired loans and advances

at 31 December 2014

      
         Individ-
ually
assessed
         Collect-
ively
assessed
         Total          Individ-
ually
assessed
         Collect-
ively
assessed
         Total          Individ-
ually
assessed
         Collect-
ively
assessed
         Total       
         $m          $m          $m          $m          $m          $m          $m          $m          $m       

Banks

       44                     44           56                     56           47                     47      

Customers

       14,122           10,988           25,110           18,076           15,804           33,880           15,879           13,404           29,283      

– personal

       2,334           10,903           13,237           2,171           15,367           17,538           2,096           13,064           15,160      

– corporate and commercial

       11,482           85           11,567           15,274           436           15,710           13,456           339           13,795      

– financial

       306                     306           631           1           632           327           1           328      
                                                                                                     
       14,166           10,988           25,154           18,132           15,804           33,936           15,926           13,404               29,330      

 

On a reported basis, during 1H15 impaired gross loans and advances declined by $4.2bn. The classification of the assets of our Brazilian operations as ‘Assets held for sale’ reduced personal collectively assessed impaired loan balances by $0.7bn. The continued run-off of the US CML portfolio reduced personal collectively assessed impaired loan balances by a further $0.9bn. Personal individually assessed impaired loans increased, largely due to enhancements to the identification of impaired UK residential mortgages and the calculation of allowances on individual loans rather than on a collective basis. Corporate and commercial impaired loans reduced by $2.2bn mainly due to the Brazilian reclassification. Corporate and commercial impaired loans also decreased as a result of write-offs in Europe and Middle East and North Africa.

Renegotiated loans and forbearance

The most significant portfolio of renegotiated loans remained in North America, substantially all of which were personal loans held by HSBC Finance Corporation (‘HSBC Finance’). On a reported basis, during 1H15, total renegotiated loans decreased by $1.9bn to $25.6bn. The Brazilian reclassification reduced reported renegotiated loans by $1.0bn. The ongoing run-off of the US CML portfolio reduced renegotiated loans by a further $0.9bn, and new renegotiated loans and delinquency in the US CML portfolio diminished as a result of improvements in the US housing market and economic conditions.

The following tables show the gross carrying amounts of the Group’s holdings of renegotiated loans and advances to customers by industry sector, geography and credit quality classification.

 

 

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Risk (continued)

 

 

Renegotiated loans and advances to customers by geographical region

 

          Europe                  Asia                MENA           
 
North
America
  
  
       
 
Latin
America
  
  
             Total      
          $m           $m           $m           $m           $m           $m       

First lien residential mortgages

        1,586            82            49            12,828            44            14,589      

– neither past due nor impaired

        568            55            26            3,680            28            4,357      

– past due but not impaired

        213            6            1            1,822            6            2,048      

– impaired

        805            21            22            7,326            10            8,184      

Other personal lending

        318            280            23            1,166            41            1,828      

– neither past due nor impaired

        183            160            14            446            13            816      

– past due but not impaired

        39            18            4            198            1            260      

– impaired

        96            102            5            522            27            752      

Corporate and commercial4

        5,468            471            1,394            430            648            8,411      

– neither past due nor impaired

        1,290            76            344            39            262            2,011      

– past due but not impaired

        42            1            24                       4            71      

– impaired

        4,136            394            1,026            391            382            6,329      

Financial5

        444            4            282                                  730      

– neither past due nor impaired

        222                       282                                  504      

– past due but not impaired

                                                                    

– impaired

        222            4                                             226      
                                                                          

Renegotiated loans at 30 June 2015

                    7,816                           837                        1,748                      14,424                        733                      25,558      

– neither past due nor impaired

        2,263            291            666            4,165            303            7,688      

– past due but not impaired

        294            25            29            2,020            11            2,379      

– impaired

        5,259            521            1,053            8,239            419            15,491      
                                                                          

Impairment allowances on renegotiated loans

        1,458            158            513            1,246            146            3,521      

– renegotiated loans as % of total gross loans

        1.9%            0.2%            5.4%            10.7%            3.8%            2.7%      

First lien residential mortgages

        1,743            107            69            15,034            74            17,027      

– neither past due nor impaired

        593            72            22            3,827            36            4,550      

– past due but not impaired

        296            13            10            2,032            5            2,356      

– impaired

        854            22            37            9,175            33            10,121      

Other personal lending

        423            311            54            1,376            457            2,621      

– neither past due nor impaired

        287            201            31            468            15            1,002      

– past due but not impaired

        28            24            17            234            2            305      

– impaired

        108            86            6            674            440            1,314      

Corporate and commercial4

        7,064            454            1,579            508            2,024            11,629      

– neither past due nor impaired

        1,559            124            689            41            436            2,849      

– past due but not impaired

        145            2            95            2            35            279      

– impaired

        5,360            328            795            465            1,553            8,501      

Financial5

        287            5            356            1            1            650      

– neither past due nor impaired

        93                       265                                  358      

– past due but not impaired

                                                                    

– impaired

        194            5            91            1            1            292      
                                                                          

Renegotiated loans at 30 June 2014

        9,517            877            2,058            16,919            2,556            31,927      

– neither past due nor impaired

        2,532            396            1,007            4,336            488            8,759      

– past due but not impaired

        470            39            121            2,268            42            2,940      

– impaired

        6,515            442            930            10,315            2,026            20,228      
                                                                          

Impairment allowances on renegotiated loans

        1,355            73            436            2,025            893            4,782      

– renegotiated loans as % of total gross loans

        2.0%            0.2%            6.8%            12.7%            5.2%            3.0%      

 

HSBC HOLDINGS PLC

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Risk (continued)

 

 

         Europe                 Asia               MENA          
 
North
America
  
  
      
 
Latin
America
  
  
            Total      
         $m          $m          $m          $m          $m          $m       

First lien residential mortgages

       1,605           94           58           13,540           60           15,357      

– neither past due nor impaired

       529           63           19           3,695           32           4,338      

– past due but not impaired

       221           8           1           1,894           5           2,129      

– impaired

       855           23           38           7,951           23           8,890      

Other personal lending

       324           292           27           1,267           326           2,236      

– neither past due nor impaired

       184           173           16           453           14           840      

– past due but not impaired

       40           22           5           214           1           282      

– impaired

       100           97           6           600           311           1,114      

Corporate and commercial4

       5,469           501           1,439           427           1,324           9,160      

– neither past due nor impaired

       1,383           102           483           36           303           2,307      

– past due but not impaired

       68                     31           1           1           101      

– impaired

       4,018           399           925           390           1,020           6,752      

Financial5

       413           4           323           1           1           742      

– neither past due nor impaired

       219                     305                               524      

– past due but not impaired

                                                              

– impaired

       194           4           18           1           1           218      
                                                                    

Renegotiated loans at 31 December 2014

                   7,811                          891                       1,847                     15,235                       1,711                     27,495      

– neither past due nor impaired

       2,315           338           823           4,184           349           8,009      

– past due but not impaired

       329           30           37           2,109           7           2,512      

– impaired

       5,167           523           987           8,942           1,355           16,974      
                                                                    

Impairment allowances on renegotiated loans

       1,458           170           458           1,499           704           4,289      

– renegotiated loans as % of total gross loans

       1.9%           0.2%           6.1%           11.5%           3.7%           2.8%      

For footnotes, see page 86.

 

Loan impairment in the first half of 2015

On a reported basis, loan impairment charges of $1.4bn were $578m lower than in 1H14, in part reflecting the favourable effect of foreign currency movements of $282m, mainly in Latin America and, to a lesser extent, in Europe.

The following commentary is on a constant currency basis. Loan impairment charges decreased by $296m or 17%, primarily in North America, Europe and Latin America partly offset in Middle East and North Africa.

In North America, loan impairment charges decreased for both personal and corporate and commercial lending. The decrease in corporate and commercial lending impairment charges mainly reflected charges recorded in 1H14 following a revision to certain estimates used in our corporate loan impairment calculation. Personal lending loan impairment charges fell mainly due to lower collectively assessed charges on first lien mortgages, primarily in the US CML portfolio. This decline reflected reduced levels of delinquency and lower new impaired loans in addition

to lower lending balances from the continued run-off and loan sales. These factors were partly offset by lower favourable market value adjustments of underlying properties as improvements in housing market conditions were less pronounced in 1H15 than in 1H14.

In Europe, the reduction was driven by lower impairment charges on corporate and commercial lending. This primarily reflected the lower individually assessed loan impairment charge in the UK in 1H14, partly offset by $92m of loan impairments charges relating to Greek exposures during 1H15. An additional $19m of other credit risk provisions were taken in relation to off-balance sheet exposures to Greece.

In Latin America, loan impairment charges decreased by $88m, primarily in personal lending in Brazil due to the non-recurrence of loan impairment 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 factors were partly offset in Middle East and North Africa, reflecting higher individually assessed loan impairment charges in 1H15 compared with a net release in 1H14, primarily on commercial exposures in the UAE.

 

 

HSBC HOLDINGS PLC

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Table of Contents

Risk (continued)

 

 

Loan impairment charge to the income statement by industry sector

 

           Europe                Asia              MENA          North
America
         Latin
America
              Total       
         $m          $m          $m          $m          $m          $m       

Personal

       113           145           24           101           488           871      

– first lien residential mortgages

       (32        2           (7        68           33           64      

– other personal

       145           143           31           33           455           807      

Corporate and commercial

       214           97           21           50           216           598      

– manufacturing and international trade and services

       103           109           (11        9           175           385      

– commercial real estate and other property-related

       (10        13           25           1           17           46      

– other commercial2

       121           (25        7           40           24           167      
Financial5        (6                  (12        (3        (1        (22   

Total loan impairment charge for the half-year to 30 June 2015

                  321                      242                          33                      148                      703                     1,447      

Personal

       122           155           15           225           701           1,218      

– first lien residential mortgages

       (37        (2        (5        168           12           136      

– other personal

       159           157           20           57           689           1,082      

Corporate and commercial

       329           63           (44        141           290           779      

– manufacturing and international trade and services

       291           61           (8        79           141           564      

– commercial real estate and other property-related

       (17        (9        (30        23           59           26      

– other commercial2

       55           11           (6        39           90           189      
Financial5        28           (2        (28        29           1           28      

Total loan impairment charge for the half-year to 30 June 2014

       479           216           (57        395           992           2,025      

Personal

       123           166           10           (108        394           585      

– first lien residential mortgages

       (38        8           (19        (142        3           (188   

– other personal

       161           158           29           34           391           773      

Corporate and commercial

       461           264           50           55           647           1,477      

– manufacturing and international trade and services

       229           136           44           37           241           687      

– commercial real estate and other property-related

       95           38           2           4           117           256      

– other commercial2

       137           90           4           14           289           534      
Financial5        16           (2        (4        (42                  (32   

Total loan impairment charge for the half-year to 31 December 2014

       600           428           56           (95        1,041           2,030      

For footnotes, see page 86.

Movement in impairment allowances on loans and advances to customers and banks

 

         Banks          Customers                  
        

    individually

assessed

             Individually
assessed
             Collectively
assessed
                     Total       
         $m          $m          $m          $m       

At 1 January 2015

       49           6,195           6,142           12,386      

Amounts written off

                 (727        (1,463        (2,190   

Recoveries of loans and advances previously written off

                 23           327           350      

Charge to income statement

       (8        488           967           1,447      

Reclassified to held for sale

                 (656        (1,047        (1,703   

Exchange and other movements

       (3        (124        (385        (512   

At 30 June 2015

       38           5,199           4,541           9,778      

Impairment allowances:

                      

on loans and advances to customers

            5,199           4,541           9,740      

– personal

            425           2,914           3,339      

– corporate and commercial

            4,587           1,540           6,127      

– financial

            187           87           274      

as a percentage of gross loans and advances

       0.04%           0.54%           0.47%           0.92%      

 

HSBC HOLDINGS PLC

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Risk (continued)

 

 

         Banks          Customers                  
        

    individually

assessed

             Individually
assessed
             Collectively
assessed
                     Total       
         $m          $m          $m          $m       

At 1 January 2014

       58           7,072           8,071           15,201      

Amounts written off

       (6        (1,276        (2,288        (3,570   

Recoveries of loans and advances previously written off

                 74           483           557      

Charge to income statement

       10           548           1,467           2,025      

Reclassified to held for sale

                           (160        (160   

Exchange and other movements

       1           73           (94        (20   

At 30 June 2014

       63           6,491           7,479           14,033      

Impairment allowances:

                      

on loans and advances to customers

            6,491           7,479           13,970      

– personal

            534           5,372           5,906      

– corporate and commercial

            5,708           1,978           7,686      

– financial

            249           129           378      

as a percentage of gross loans and advances

       0.05%           0.61%           0.71%           1.19%      

At 1 July 2014

       63           6,491           7,479           14,033      

Amounts written off

                 (1,037        (1,772        (2,809   

Recoveries of loans and advances previously written off

                 40           358           398      

Charge to income statement

       (6        1,228           808           2,030      

Reclassified to held for sale

                 (50        (144        (194   

Exchange and other movements

       (8        (477        (587        (1,072   

At 31 December 2014

       49           6,195           6,142           12,386      

Impairment allowances:

                      

on loans and advances to customers

            6,195           6,142           12,337      

– personal

            468           4,132           4,600      

– corporate and commercial

            5,532           1,909           7,441      

– financial

            195           101           296      

as a percentage of gross loans and advances

       0.04%           0.63%           0.62%           1.13%      

Charge for impairment losses as a percentage of average gross loans and advances to customers by geographical region

 

       Europe           Asia           MENA          
 
North
America
  
  
      
 
Latin
America
  
  
       Total   
         %          %          %          %          %          %  

Half-year to 30 June 2015

                             

New allowances net of allowance releases

       0.27           0.18           0.32           0.29           3.65           0.39   

Recoveries

       (0.09        (0.04        (0.11        (0.06        (0.30        (0.08

Total charge for impairment losses

       0.18           0.14           0.21           0.23           3.35           0.31   

Amount written off net of recoveries

       0.22           0.09           1.67           0.57           3.19           0.40   

Half-year to 30 June 2014

                             

New allowances net of allowance releases

       0.39           0.17           (0.23        0.71           4.72           0.55   

Recoveries

       (0.15        (0.04        (0.17        (0.10        (0.49        (0.12

Total charge for impairment losses

                  0.24                      0.13                     (0.40                   0.61                      4.23                      0.43   

Amount written off net of recoveries

       0.61           0.11           0.38           1.11           3.74           0.65   

Half-year to 31 December 2014

                             

New allowances net of allowance releases

       0.34           0.29           0.51           (0.07        5.38           0.52   

Recoveries

       (0.02        (0.04        (0.12        (0.07        (0.96        (0.09

Total charge for impairment losses

       0.32           0.25           0.39           (0.14        4.42           0.43   

Amount written off net of recoveries

       0.36           0.15           0.79           0.83           3.52           0.52   

 

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Table of Contents

Risk (continued)

 

 

Wholesale lending

Wholesale lending covers the range of credit facilities granted to sovereign borrowers, banks, non-bank financial institutions, corporate entities and commercial borrowers.

 

 

Total wholesale lending

      

 

Europe

$m

  

  

      

 

Asia

$m

  

  

      

 

MENA

$m

  

  

      
 
 
North
America
$m
  
  
  
      
 
 
Latin
America
$m
  
  
  
      

 

Total

$m

  

  

  

Corporate and commercial

       200,188           225,249           22,833           63,524           12,413           524,207      

– manufacturing

       43,465           35,599           2,570           17,392           3,072           102,098      

– international trade and services

       65,459           76,683           10,109           13,720           3,508           169,479      

– commercial real estate

       26,925           34,249           721           7,444           1,418           70,757      

– other property-related

       8,209           39,518           1,691           9,652           39           59,109      

– government

       2,260           1,117           1,552           164           947           6,040      

– other commercial2

       53,870           38,083           6,190           15,152           3,429           116,724      

Financial

       27,163           15,413           2,896           8,055           691           54,218      

Loans and advances to banks

       23,460           66,286           9,014           7,372           3,311           109,443      

Gross loans at 30 June 2015

               250,811                   306,948                   34,743                   78,951                   16,415                   687,868      

Impairment allowances on wholesale lending

                                

Corporate and commercial

       2,927           1,138           983           561           518           6,127      

– manufacturing

       563           266           134           134           50           1,147      

– international trade and services

       823           589           330           139           48           1,929      

– commercial real estate

       819           33           146           92           364           1,454      

– other property-related

       151           71           236           34           1           493      

– government

       7                               1                     8      

– other commercial

       564           179           137           161           55           1,096      

Financial

       216           13           10           35                     274      

Loans and advances to banks

       20                     18                               38      

Impairment allowances at 30 June 2015

       3,163           1,151           1,011           596           518           6,439      

Corporate and commercial

       260,097           221,852           20,983           56,054           32,965           591,951      

– manufacturing

       65,374           35,210           2,445           12,941           14,196           130,166      

– international trade and services

       79,981           80,574           10,072           13,087           8,534           192,248      

– commercial real estate

       30,935           34,727           434           6,677           2,492           75,265      

– other property-related

       7,444           32,730           1,593           8,644           348           50,759      

– government

       2,404           1,082           1,696           568           1,007           6,757      

– other commercial2

       73,959           37,529           4,743           14,137           6,388           136,756      

Financial

       29,603           12,091           2,838           7,579           1,397           53,508      

Loans and advances to banks

       27,763           72,222           8,644           6,252           12,569           127,450      

Gross loans at 30 June 2014

       317,463           306,165           32,465           69,885           46,931           772,909      

Impairment allowances on wholesale lending

                                

Corporate and commercial

       3,355           951           1,161           817           1,402           7,686      

– manufacturing

       526           252           162           148           372           1,460      

– international trade and services

       961           458           490           187           257           2,353      

– commercial real estate

       1,062           19           147           178           454           1,860      

– other property-related

       257           99           239           89           7           691      

– government

       3                     4           1                     8      

– other commercial

       546           123           119           214           312           1,314      

Financial

       250           15           30           81           2           378      

Loans and advances to banks

       45                     18                               63      

Impairment allowances at 30 June 2014

       3,650           966           1,209           898           1,404           8,127      

Corporate and commercial

       212,523           220,799           20,588           57,993           30,722           542,625      

– manufacturing

       39,456           37,767           2,413           15,299           12,051           106,986      

– international trade and services

       76,629           72,814           9,675           13,484           8,189           180,791      

– commercial real estate

       28,187           35,678           579           6,558           2,291           73,293      

– other property-related

       7,126           34,379           1,667           8,934           281           52,387      

– government

       2,264           1,195           1,552           164           968           6,143      

– other commercial2

       58,861           38,966           4,702           13,554           6,942           123,025      

Financial

       23,103           13,997           3,291           9,034           1,393           50,818      

Loans and advances to banks

       21,978           62,960           10,495           7,405           9,360           112,198      

Gross loans at 31 December 2014

       257,604           297,756           34,374           74,432           41,475           705,641      

 

HSBC HOLDINGS PLC

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Table of Contents

Risk (continued)

 

 

Total wholesale lending (continued)

 

      
 
    Europe
$m
  
  
      
 
        Asia
$m
  
  
      
 
      MENA
$m
  
  
      
 
 
North
  America
$m
  
  
  
      
 
 
Latin
  America
$m
  
  
  
      
 
        Total
$m
  
  
  

Impairment allowances on wholesale lending

Corporate and commercial

       3,112           1,089           1,171           608           1,461           7,441      

– manufacturing

       529           242           141           152           348           1,412      

– international trade and services

       877           533           536           157           237           2,340      

– commercial real estate

       909           44           147           101           476           1,677      

– other property-related

       203           55           219           57           12           546      

– government

       4                     1                               5      

– other commercial

       590           215           127           141           388           1,461      

Financial

       221           13           21           39           2           296      

Loans and advances to banks

       31                     18                               49      

Impairment allowances at 31 December 2014

       3,364           1,102           1,210           647           1,463           7,786      

For footnote, see page 86.

 

On a reported basis, gross loans decreased by $18bn, mainly due to the classification of the assets of our Brazilian operations as ‘Assets held for sale’ of $23bn and adverse foreign exchange movements of $7.9bn.

Loan impairment allowances reduced by $1.3bn, mainly due to the Brazilian reclassification.

The commentary that follows is on a constant currency basis.

Excluding the Brazilian reclassification, gross loans increased by $13bn.

In Asia, balances grew by $12bn, mainly in other property and international trade and services. In North America, we experienced growth of $5.6bn mainly in manufacturing and commercial real estate. In Europe, balances reduced by $4.0bn mainly due to corporate and commercial lending balances reducing by $10bn which was partly offset by increases in financial and banks. The corporate and commercial lending reduction was mainly in the UK,

in international trade and service and other commercial balances which was partially offset by increases in manufacturing balances. These movements are mainly related to corporate overdraft balances where a small number of clients benefit from the use of net interest arrangements across overdraft and deposits. As a result, while net risk exposures are generally stable, gross balances can be volatile. In Middle East and North Africa, balances increased by $0.8bn, mainly due to an increase in corporate and commercial lending of $2.5bn partially offset by decreases in loans and advances to banks of $1.2bn.

Personal lending

We provide a broad range of secured and unsecured personal lending products to meet customer needs. Personal lending includes loans secured on assets such as first liens on residential property, and unsecured lending products such as overdrafts, credit cards and payroll loans.

 

 

Total personal lending

           Europe                   Asia                 MENA          
 
North
  America
  
  
      
 
Latin
  America
  
  
             Total     
         $m          $m          $m          $m          $m          $m      

First lien residential mortgages

       130,909           95,176           2,642           53,995           2,031           284,753     
           

Of which:

                                           

– interest only (including offset)

       43,541           887                     227                     44,655     

– affordability (including ARMs)

       340           4,984                     16,899                     22,223     

Other personal lending

       46,402           37,199           4,006           8,995           3,945           100,547     

– motor vehicle finance

       5           264           377           16           408           1,070     

– credit cards

       12,559           9,760           859           999           1,934           26,111     

– second lien residential mortgages

                 43           2           4,089                     4,134     

– other

       33,838           27,132           2,768           3,891           1,603           69,232     
                                                                   

Total gross loans at 30 June 2015

       177,311           132,375           6,648           62,990           5,976           385,300     

Impairment allowances on personal lending

                               

First lien residential mortgages

       271           43           88           1,362           23           1,787     

Other personal lending

       792           205           87           276           192           1,552     

– motor vehicle finance

       1           1           5                     4           11     

– credit cards

       354           114           30           30           117           645     

– second lien residential mortgages

                                     210                     210     

– other

       437           90           52           36           71           686     
                                                                   

Total impairment allowances at 30 June 2015

       1,063           248           175           1,638           215           3,339     

 

HSBC HOLDINGS PLC

69


Table of Contents

Risk (continued)

 

 

Total personal lending (continued)

 

      

 

Europe

$m

  

  

      

 

Asia

$m

  

  

      

 

MENA

$m

  

  

      

 

 

North

America

$m

  

  

  

      

 

 

Latin

America

$m

  

  

  

      

 

Total

$m

  

  

  

First lien residential mortgages

       144,225           95,489           2,543           58,677           4,501           305,435      

Of which:

                                            

– interest only (including offset)

       50,339           1,138           18           332                     51,827      

– affordability (including ARMs)

       350           5,532                     15,950                     21,832      

Other personal lending

       50,673           34,191           4,010           10,896           10,547           110,317      

– motor vehicle finance

       9           407           379           28           1,568           2,391      

– credit cards

       14,019           9,681           905           1,084           3,515           29,204      

– second lien residential mortgages

                 80           3           4,879                     4,962      

– other

       36,645           24,023           2,723           4,905           5,464           73,760      
                                                                    

Total gross loans at 30 June 2014

               194,898                   129,680                   6,553                   69,573                   15,048                   415,752      

Impairment allowances on personal lending

                                

First lien residential mortgages

       398           52           110           2,254           39           2,853      

Other personal lending

       925           218           163           434           1,313           3,053      

– motor vehicle finance

       4           2           5                     106           117      

– credit cards

       417           125           61           37           298           938      

– second lien residential mortgages

                                     345                     345      

– other

       504           91           97           52           909           1,653      
                                                                    

Total impairment allowances at 30 June 2014

       1,323           270           273           2,688           1,352           5,906      

First lien residential mortgages

       131,000           93,147           2,647           55,577           4,153           286,524      

Of which:

                                            

– interest only (including offset)

       44,163           956                     276                     45,395      

– affordability (including ARMs)

       337           5,248                     16,452                     22,037      

Other personal lending

       47,531           36,368           3,924           9,823           9,384           107,030      

– motor vehicle finance

       5           328           392           12           1,216           1,953      

– credit cards

       12,959           10,289           897           1,050           3,322           28,517      

– second lien residential mortgages

                 56           2           4,433                     4,491      

– other

       34,567           25,695           2,633           4,328           4,846           72,069      
                                                                    

Total gross loans at 31 December 2014

       178,531           129,515           6,571           65,400           13,537           393,554      

Impairment allowances on personal lending

                                

First lien residential mortgages

       306           46           97           1,644           36           2,129      

Other personal lending

       786           208           97           350           1,030           2,471      

– motor vehicle finance

       1           2           5                     60           68      

– credit cards

       347           119           33           36           298           833      

– second lien residential mortgages

                                     271                     271      

– other

       438           87           59           43           672           1,299      
                                                                    

Total impairment allowances at 31 December 2014

       1,092           254           194           1,994           1,066           4,600      

 

 

On a reported basis, total personal lending reduced by $8.3bn, mainly due to the classification of $7.6bn of assets of our Brazilian operations as ‘Assets held for sale’ and adverse foreign exchange movements of $3.3bn.

Loan impairment allowances reduced by $1.3bn, mainly due to the Brazilian reclassification.

Loan impairment charges were $0.9bn, $0.3bn less than in 1H14 due to reduced levels of lending balances and lower new impaired loans and delinquency in the US CML portfolio, reflecting the continued portfolio run-off and loan sales.

Excluding the Brazilian reclassification, personal lending grew by $2.7bn on a constant currency basis.

Mortgage lending

The commentary that follows is on a constant currency basis:

Excluding the effect of the reclassification of the assets of our Brazilian operations as ‘Assets held for sale’ and the

US CML run-off portfolio, mortgage lending increased by $3.4bn during 1H15. Mortgage lending balances in Asia grew by $3.1bn, primarily attributable to continued growth in Hong Kong ($2.2bn) due to increased promotional campaigns and, to a lesser extent, in Australia and mainland China ($1.0bn) as a result of strong demand and our competitive customer offerings. The quality of our Asian mortgage book remained high with negligible defaults and impairment allowances. The average loan to value (‘LTV’) ratio on new mortgage lending in Hong Kong was 44% compared with an estimated 27% for the overall portfolio.

In North America, our Canadian mortgage balances increased by $0.5bn during 1H15 a result of a spring mortgage campaign.

The Premier mortgage portfolio in the US also increased by $0.6bn as we continued to focus on growth in our core portfolios of higher credit quality mortgages. Collectively assessed impairment allowances reduced in 1H15 due to continued improvement in the credit quality of the

 

 

HSBC HOLDINGS PLC

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Risk (continued)

 

 

mortgage portfolio. The US CML portfolio declined by $1.8bn, including second lien mortgages, in 1H15.

We classified mortgage lending balances of $1.9bn in Brazil as ‘Assets held for sale’.

In Europe, there was a decline of $0.8bn or 0.6% in the mortgage portfolio due to decreased new mortgage lending and the effect of repayments, mainly in the UK, and a fall in impairment allowances due to reductions in receivables and defaulted loans.

The LTV ratio on new lending in the UK was 55.9% compared with an average of 42.5% for the total mortgage portfolio. The credit quality of our UK mortgage portfolio remained high and both loan impairment charges and delinquency levels declined in 1H15.

Other personal lending

The commentary that follows is on a constant currency basis:

Excluding the effect of the Brazilian reclassification and the US CML run-off portfolio, other personal lending increased by $1.0bn during 1H15. This was driven by strong growth in personal loans in Hong Kong ($1.5bn) and an increase in other lending in France ($0.4bn).

These increases were partially offset by reductions in credit card lending of $0.2bn in the UK and $0.3bn in Hong Kong. Other personal lending in North America declined by $0.6bn, of which $0.3bn was a reduction in second lien mortgage balances during 1H15.

HSBC Finance

Lending in HSBC Finance for residential mortgages, including second lien mortgages, decreased by $1.8bn

to $21.8bn at 30 June 2015. Of the mortgage lending in HSBC Finance 90% consisted of first lien residential mortgages and 10% of second lien mortgages. In addition to the continued loan sales in the CML portfolio, we transferred a further $0.4bn to ‘Assets held for sale’ during 1H15, and these loans were mainly sold in May 2015. The average gain on sale of foreclosed properties that arose after we took title to the property was 1%.

The decrease in impairment allowances from $1.7bn at 31 December 2014 to $1.3bn at 30 June 2015 reflected reduced levels of delinquency and lower newly impaired loans and loan balances outstanding as a result of continued sale and liquidation of the portfolio.

Across the first and second lien residential mortgages in our CML portfolio, two months and over delinquent balances reduced by $0.5bn to $1.8bn during 1H15, reflecting the continued portfolio run-off and loan sales.

At 30 June 2015, renegotiated real estate secured accounts in HSBC Finance represented 92% (December 2014: 93%) of North America’s total renegotiated loans. $7bn of renegotiated real estate secured loans were classified as impaired (31 December 2014: $8bn). During 1H15, the aggregate number of renegotiated loans in HSBC Finance reduced due to portfolio run-off and further loan sales in the CML portfolio.

HSBC Bank USA

In HSBC Bank USA, mortgage balances grew by $0.6bn to $17.4bn during 1H15 as we continued to implement our strategy to grow the HSBC Premier and Advance customer base. We continued to sell all agency eligible new originations in the secondary market.

 

 

Supplementary information

Reconciliation of reported and constant currency changes impaired loans and allowances by geographical region

 

      

 

 

31 December

2014

as reported

  

  

  

      

 

 

Currency

translation

adjustment

  

  

6 

      

 

 

 

 

31 December

2014 at

30 June 2015

exchange

rates

  

  

  

  

  

      
 
 
 
 
Movement
on a
constant
currency
basis
  
  
  
  
  
      

 

 

30 June

2015

as reported

  

  

  

      

 

Reported

change

  

7 

      

 

 

Constant

currency

change

  

  

7 

         $m          $m          $m          $m          $m          %          %  

Impaired loans

                                  

Europe

       10,242           (231        10,011           (491        9,520           (7        (5

Asia

       2,048           (56        1,992           159           2,151           5           8   

Middle East and North Africa

       1,981           (13        1,968           (264        1,704           (14        (13

North America

       11,694           (30        11,664           (1,029        10,635           (9        (9

Latin America

       3,365           (383        2,982           (1,838        1,144           (66        (62
       29,330           (713        28,617           (3,463        25,154           (14        (12

Impairment allowances

                                  

Europe

       4,455           (133        4,322           (94        4,228           (5        (2

Asia

       1,356           (25        1,331           67           1,398           3           5   

Middle East and North Africa

       1,406           (7        1,399           (212        1,187           (16        (15

North America

       2,640           (21        2,619           (388        2,231           (15        (15

Latin America

       2,529           (293        2,236           (1,502        734           (71        (67
       12,386           (479        11,907           (2,129        9,778           (21        (18

For footnotes, see page 86.

 

HSBC HOLDINGS PLC

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Table of Contents

Risk (continued)

 

 

Gross loans and advances by industry sector

 

        

At

  31 December

2014

        

      Currency

effect

             Movement         

At

        30 June

2015

      
                 $m          $m          $m          $m       

Personal

       393,554           (3,933        (4,321        385,300      

– first lien residential mortgages

       286,524           (1,895        124           284,753      

– other personal

       107,030           (2,038        (4,445        100,547      

Corporate and commercial

       542,625           (8,345        (10,073        524,207      

– manufacturing

       106,986           (2,467        (2,421        102,098      

– international trade and services

       180,791           (2,651        (8,661        169,479      

– commercial real estate

       73,293           (993        (1,543        70,757      

– other property-related

       52,387           (326        7,048           59,109      

– government

       6,143           (128        25           6,040      

– other commercial2

       123,025           (1,780        (4,521        116,724      

Financial

       50,818           (357        3,757           54,218      

Total gross loans and advances to customers (A)

       986,997           (12,635        (10,637        963,725      

Gross loans and advances to banks

       112,198           (2,471        (284        109,443      

Total gross loans and advances

       1,099,195           (15,106        (10,921        1,073,168      

Impaired loans and advances to customers

       29,283           (713        (3,460        25,110      

– as a percentage of (A)

       3.0%                     2.6%      

Impairment allowances on loans and advances to customers

       12,337           (480        (2,117        9,740      

– as a percentage of (A)

       1.2%                     1.0%      

For footnote, see page 86.

 

The currency effect on personal lending gross loans and advances of $3.9bn was made up as follows: Asia $1.4bn, North America $1.4bn, Latin America $1.0bn and Europe $0.1bn. The currency effect on wholesale lending gross

loans and advances of $11.2bn was made up as follows: Latin America $4.4bn, Europe $2.8bn, Asia $2.4bn, North America $1.1bn and Middle East and North Africa $0.5bn.

 

 

Gross loans and advances to customers by country

      

 

 
 

First lien

residential

    mortgages
$m

  

  

  
  

      
 
 
Other
      personal
$m
  
  
  
      
 

 

      Property-
related

$m

  
  

  

      
 
 

 

Commercial,
international
trade and other

$m

  
  
  

  

      

 

            Total

$m

  

  

  

Europe

       130,909           46,402           35,134           192,217           404,662      

– UK

       124,001           21,221           26,303           148,414           319,939      

– France

       2,342           12,248           6,811           21,028           42,429      

– Germany

       5           216           364           7,933           8,518      

– Switzerland

       346           8,266           235           841           9,688      

– other

       4,215           4,451           1,421           14,001           24,088      

Asia

       95,176           37,199           73,767           166,895           373,037      

– Hong Kong

       58,884           24,380           55,627           84,411           223,302      

– Australia

       9,079           709           1,837           6,457           18,082      

– India

       1,357           287           630           6,189           8,463      

– Indonesia

       58           380           84           5,706           6,228      

– Mainland China

       4,823           1,908           6,992           25,224           38,947      

– Malaysia

       4,945           1,576           2,000           5,446           13,967      

– Singapore

       8,942           5,707           4,146           12,137           30,932      

– Taiwan

       4,099           689           119           5,903           10,810      

– other

       2,989           1,563           2,332           15,422           22,306      

Middle East and North Africa (excluding Saudi Arabia)

       2,642           4,006           2,412           23,317           32,377      

– Egypt

       1           515           124           2,414           3,054      

– UAE

       2,248           1,866           1,650           14,935           20,699      

– other

       393           1,625           638           5,968           8,624      

North America

       53,995           8,995           17,096           54,483           134,569      

– US

       36,952           5,088           12,964           41,812           96,816      

– Canada

       15,679           3,654           3,807           11,618           34,758      

– other

       1,364           253           325           1,053           2,995      

Latin America

       2,031           3,945           1,457           11,647           19,080      

– Mexico

       1,919           2,630           1,296           8,435           14,280      

– other

       112           1,315           161           3,212           4,800      
                                                         

At 30 June 2015

       284,753           100,547           129,866           448,559           963,725      

 

HSBC HOLDINGS PLC

72


Table of Contents

Risk (continued)

 

 

        

First lien

residential

    mortgages
$m

         Other
      personal
$m
        

      Property-
related

$m

         Commercial,
international
trade and other
$m
        

Total

                $m

      

Europe

       144,225           50,673           38,379           251,321           484,598      

– UK

       135,701           22,121           28,124           204,624           390,570      

– France

       3,131           14,177           8,322           23,292           48,922      

– Germany

       6           205           146           8,080           8,437      

– Switzerland

       352           8,189           248           461           9,250      

– other

       5,035           5,981           1,539           14,864           27,419      

Asia

       95,489           34,191           67,457           166,486           363,623      

– Hong Kong

       54,988           21,777           49,209           84,002           209,976      

– Australia

       10,214           915           2,805           7,135           21,069      

– India

       1,169           303           593           4,993           7,058      

– Indonesia

       70           469           75           5,632           6,246      

– Mainland China

       5,516           151           6,228           24,349           36,244      

– Malaysia

       5,463           1,892           1,988           5,181           14,524      

– Singapore

       10,330           6,118           4,351           12,803           33,602      

– Taiwan

       4,193           691           127           6,960           11,971      

– other

       3,546           1,875           2,081           15,431           22,933      

Middle East and North Africa (excluding Saudi Arabia)

       2,543           4,010           2,027           21,794           30,374      

– Egypt

       1           493           104           2,264           2,862      

– UAE

       2,168           1,815           1,314           13,379           18,676      

– other

       374           1,702           609           6,151           8,836      

North America

       58,677           10,896           15,321           48,312           133,206      

– US

       39,939           5,842           10,609           34,279           90,669      

– Canada

       17,174           4,769           4,210           13,064           39,217      

– other

       1,564           285           502           969           3,320      

Latin America

       4,501           10,547           2,840           31,522           49,410      

– Mexico

       2,155           2,987           1,428           9,128           15,698      

– other

       2,346           7,560           1,412           22,394           33,712      

Included in other: Brazil

       2,232           6,360           1,273           19,555           29,420      

At 30 June 2014

       305,435           110,317           126,024           519,435           1,061,211      

Europe

       131,000           47,531           35,313           200,313           414,157      

– UK

       123,239           21,023           25,927           156,577           326,766      

– France

       2,914           12,820           7,341           21,834           44,909      

– Germany

       6           212           304           7,275           7,797      

– Switzerland

       298           8,149           225           614           9,286      

– other

       4,543           5,327           1,516           14,013           25,399      

Asia

       93,147           36,368           70,057           164,739           364,311      

– Hong Kong

       56,656           22,891           52,208           82,362           214,117      

– Australia

       9,154           815           2,130           6,360           18,459      

– India

       1,235           285           613           5,099           7,232      

– Indonesia

       64           469           202           5,476           6,211      

– Mainland China

       4,238           1,981           6,606           24,875           37,700      

– Malaysia

       5,201           1,750           1,988           5,217           14,156      

– Singapore

       9,521           5,878           4,210           11,951           31,560      

– Taiwan

       3,920           626           118           7,057           11,721      

– other

       3,158           1,673           1,982           16,342           23,155      

Middle East and North Africa (excluding Saudi Arabia)

       2,647           3,924           2,246           21,633           30,450      

– Egypt

       1           510           98           2,272           2,881      

– UAE

       2,263           1,782           1,545           13,814           19,404      

– other

       383           1,632           603           5,547           8,165      

North America

       55,577           9,823           15,492           51,535           132,427      

– US

       37,937           5,482           11,461           38,632           93,512      

– Canada

       16,236           4,085           3,708           11,825           35,854      

– other

       1,404           256           323           1,078           3,061      

Latin America

       4,153           9,384           2,572           29,543           45,652      

– Mexico

       1,967           2,642           1,336           9,503           15,448      

– other

       2,186           6,742           1,236           20,040           30,204      

Included in other: Brazil

       2,067           5,531           1,077           16,814           25,489      

At 31 December 2014

       286,524           107,030           125,680           467,763           986,997      

 

HSBC HOLDINGS PLC

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Table of Contents

Risk (continued)

 

 

Greece

As a result of the unfolding crisis, we have raised additional loan impairment charges and other credit risk provisions amounting to $111m. The tables in this section summarise our Greek country exposures.

Exposures to banks, other financial corporations, non-financial corporations and households are based on the counterparty’s country of domicile. We separately identify exposures to the shipping industry. These are denominated in US dollars and booked in the UK. We believe the shipping industry is less sensitive to the Greek economy as it is mainly dependent on international trade. The average LTV weighted by the value of loans of our residential mortgages is 66%. We have had restricted lending appetite in Greece for a number of years.

Summary of exposures to Greece

         $bn      

On-balance sheet exposures

      

Loans and advances to customers

       3.0     

– other financial institutions and corporates

       0.7     

– shipping industry booked in UK

       1.7     

– personal – mortgages

       0.6     

Derivative assets

       0.4     

Gross balance sheet exposure before risk mitigation

       3.4     

Risk mitigation: collateral and derivative liabilities

       (0.4  

Net on-balance sheet exposure

       3.0     

Off-balance sheet exposures

      

Gross off-balance sheet exposure to banks before risk mitigation

       0.3     

Risk mitigation: collateral and guarantees held on off-balance sheet exposures to banks

       (0.1  

Net off-balance sheet exposures to banks

       0.2     

Gross off-balance sheet exposures to customers

       0.6     

Net off-balance sheet exposures

       0.8     

Total net exposures at 30 June 2015

                   3.8     

Basis of preparation

The gross exposure represents the on-balance sheet carrying amounts recorded in accordance with IFRSs and off-balance sheet exposures before risk mitigation.

The net exposure is stated after taking into account mitigating offsets that are incorporated into the risk management view of the exposure but do not meet accounting offset requirements. These risk mitigating offsets include:

 

  derivative liabilities for which a legally enforceable right of offset with derivative assets exists;

 

  collateral received on derivative assets; and

 

  cash collateral and guarantees received on off-balance sheet exposures.

Redenomination risk

There is the continuing possibility of Greece exiting the eurozone. There remains no established legal framework within the European treaties to facilitate such an event; consequently, it is not possible to accurately predict the course of events and legal consequences that would ensue.

Greece funding exposure

 

         Denominated in             
           Euros
$bn
        

US

  dollars
$bn

        

Other

currencies
$bn

           Total
$bn
 

At 30 June 2015

                   

In-country assets

       1.0           0.0                     1.0   

In-country liabilities

       (0.8        (0.3                  (1.1

Net in-country funding exposure

       0.2           (0.3                  (0.1

Off-balance sheet exposure

       0                               0   

Key risks associated with an exit by Greece include:

Foreign exchange losses: an exit would probably be accompanied by the passing of laws establishing a new local currency and providing for a redenomination of euro assets into the new local currency. The value of assets and liabilities in Greece would immediately fall assuming the value of the redenominated currency is less than the original euros when translated into the carrying amounts. It is not possible to predict what the total consequential loss might be as it is uncertain which assets and liabilities would be legally redenominated or the extent of the devaluation. These assets and liabilities predominantly comprise loans and deposits arising from our commercial banking operations in Greece, and the net assets represent our net funding exposure. The table above also identifies in-country off-balance sheet exposures as these are at risk of redenomination should they be called, giving rise to a balance sheet exposure.

External contracts redenomination risk: contracts entered into between HSBC businesses based outside Greece with in-country counterparties or those otherwise closely connected with Greece may be affected by redenomination. The effect remains subject to a high level of uncertainty. Factors such as the country law under which the contract is documented, the HSBC entity involved and the payment mechanism may all be relevant to this assessment, as will the precise exit scenario as the consequences for external contracts of a disorderly exit may differ from one sanctioned under EU law. In addition, capital controls could be introduced which may affect our ability to repatriate funds including currencies not affected by the redenomination event.

We continue to identify and monitor potential redenomination risks and, where possible, take steps to mitigate them and/or reduce our overall exposure to losses that might arise in the event of a redenomination. We recognise, however, that a euro exit could take different forms, depending on the scenario. These could have distinct legal consequences which could significantly alter the potential effectiveness of any mitigation initiatives, and it is accordingly not possible to predict how effective particular measures may be until they are tested against the precise circumstances of a redenomination event.

 

 

HSBC HOLDINGS PLC

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Risk (continued)

 

 

Risk elements in the loan portfolio

The disclosure of credit risk elements in this section reflects US accounting practice and classifications. The purpose of the disclosure is to present within the US disclosure framework those elements of the loan portfolios with a greater risk of loss. The three main classifications of credit risk elements presented are:

 

  impaired loans;

 

  unimpaired loans contractually past due 90 days or more as to interest or principal; and

 

  troubled debt restructurings not included in the above.

Impaired loans

In the following tables, we present information on our impaired loans and advances in accordance with the classification approach described on page 137 of the Annual Report and Accounts 2014.

A loan is impaired, and an impairment allowance is recognised, when there is objective evidence of a loss event that has an effect on the cash flows of the loan which can be reliably estimated. In accordance with IFRSs, we recognise interest income on assets after they have been written down as a result of an impairment loss.

The balance of impaired loans at 30 June 2015 was $4.2bn lower than at 31 December 2014. This reduction was largely due to the reclassification of the assets of our Brazilian operations as ‘Assets held for sale’, and a combination of the continued run-off of the CML portfolio, and reductions in corporate individually assessed impaired loans in Europe.

Unimpaired loans past due 90 days or more

Examples of unimpaired loans past due 90 days or more include individually assessed mortgages that are in arrears more than 90 days where there are no other indicators of impairment, but where the value of collateral is sufficient to repay both the principal debt and all potential interest for at least one year; and short-term trade facilities past due more than 90 days for technical reasons such as delays in documentation, but where there is no concern over the creditworthiness of the counterparty.

The amount of unimpaired loans past due 90 days or more at 30 June 2015 was $66m, $6m lower than at 31 December 2014. The slight decrease was primarily in the Middle East and North Africa.

Troubled debt restructurings

Under US GAAP, a troubled debt restructuring (‘TDR’) is a loan the terms of which have been modified for economic or legal reasons related to the borrower’s financial difficulties to grant a concession to the borrower that the lender would not otherwise consider. A modification which results in a delay in payment that is considered insignificant is not regarded as a concession for the purposes of this disclosure. The SEC requires separate disclosure of any loans which meet the definition of a TDR that are not included in the previous two loan categories. These are classified as TDR’s in the table on page 74b. Loans that have been identified as TDRs under the US guidance retain

this designation until they are repaid or are derecognised. This treatment differs from the Group’s impaired loans disclosure convention under IFRS under which a loan may return to unimpaired status after demonstrating a significant reduction in the risk of non-payment of future cash flows. As a result reported TDRs include those loans that have returned to unimpaired status under the Group’s disclosure convention for renegotiated loans.

The balance of TDRs not included as impaired loans at 30 June 2015 remained broadly stable.

Potential problem loans

Potential problem loans are loans where information on possible credit problems among borrowers causes management to seriously doubt their ability to comply with the loan repayment terms. The following concentrations of credit risk have a higher risk of containing potential problem loans.

‘Mortgage lending’ on page 70 includes disclosure about certain homogeneous groups of loans which are collectively assessed for impairment, which may represent exposures to potential problem loans, including interest-only mortgages and affordability mortgages, including ARMs. Collectively assessed loans and advances, although not classified as impaired until more than 90 days past due, are assessed collectively for losses that have been incurred but have not yet been individually identified. This policy is further described on page 212 of the Form 20-F for 2014 filed with the Securities and Exchange Commission and available on our website www.hsbc.com under Investor Relations.

‘Renegotiated loans and forbearance’ on page 63 includes disclosure about the credit quality of loans whose contractual payment terms have been changed at some point in the life of the loan because of significant concerns about the borrower’s ability to make contractual payments when due. Renegotiated loans are classified as impaired when:

 

  there has been a change in contractual cash flows as a result of a concession which the lender would otherwise not consider, and

 

  it is probable that without the concession, the borrower would be unable to meet contractual payment obligations in full.

This presentation applies unless the concession is insignificant and there are no other indicators of impairment. The renegotiated loan will continue to be disclosed as impaired until there is sufficient evidence to demonstrate a significant reduction in the risk of non-payment of future cash flows, and there are no other indicators of impairment.

Renegotiated loans that are not classified as impaired may have a higher risk of becoming delinquent in the future, and may therefore be potential problem loans. Further information regarding the credit quality classification of renegotiated loans can be found on page 207 of the Form 20-F for 2014 filed with the Securities and Exchange Commission and available on our website www.hsbc.com under Investor Relations.

 

 

HSBC HOLDINGS PLC

74a


Table of Contents

Risk (continued)

 

 

Analysis of risk elements in the loan portfolio by geographical region

The analysis below sets out the amount of risk elements in loan portfolios included within loans and advances to customers and banks in the consolidated balance sheet, trading loans classified as in default and assets obtained by taking possession of security. The table excludes the amount of risk elements in loan portfolios classified as assets held for sale in the consolidated balance sheet, which is set out in footnote 2.

 

        

At

30 June

2015

$m

        

At

30 June

2014

$m

        

At
31 December
2014

$m

      

Impaired loans

       25,153           33,936           29,330      

– Europe

       9,519           11,992           10,242      

– Asia

       2,151           1,781           2,048      

– Middle East and North Africa

       1,704           2,222           1,981      

– North America

       10,635           13,702           11,694      

– Latin America

       1,144           4,239           3,365      

Unimpaired loans contractually past due 90 days or more as to principal or interest

       66           162           72      

– Europe

       6           8           6      

– Asia

       4           10           1      

– Middle East and North Africa

       55           105           59      

– North America

                 39           3      

– Latin America

       1                     3      

Troubled debt restructurings (not included in the classifications above)

       6,914           6,626           6,982      

– Europe

       1,669           1,253           1,652      

– Asia

       242           302           267      

– Middle East and North Africa

       631           381           778      

– North America

       4,060           4,285           3,932      

– Latin America

       312           405           353      

Trading loans classified as in default

       143           17           4      

– Europe

       139                          

– North America

       4           17           4      

Risk elements on loans

                       32,276                           40,741           36,388      

– Europe

       11,333           13,253           11,900      

– Asia

       2,397           2,093           2,316      

– Middle East and North Africa

       2,390           2,708           2,818      

– North America

       14,699           18,043           15,633      

– Latin America

       1,457           4,644           3,721      

Assets held for resale1

       204           317           245      

– Europe

       26           43           29      

– Asia

       14           20           14      

– Middle East and North Africa

                                

– North America

       149           228           186      

– Latin America

       15           26           16      

Total risk elements2

       32,480           41,058           36,633      

– Europe

       11,359           13,296           11,929      

– Asia

       2,411           2,113           2,330      

– Middle East and North Africa

       2,390           2,708           2,818      

– North America

       14,848           18,271           15,819      

– Latin America

       1,472           4,670           3,737      
       %           %           %      

Loan impairment allowances as a percentage of risk elements on loans3

       30.4           34.5           34.0      

 

1 Assets held for resale represent assets obtained by taking possession of collateral held as security for financial assets.
2 Total risk elements in respect of assets classified as held for sale in the consolidated balance sheet and not presented above were $2,358m (30 June 2014: $549m; 31 December 2014: $466m) of which $2,346 were impaired (30 June 2014: $548m; 31 December 2014: $465m); $1m unimpaired loans contractually past due 90 days or more as to principal or interest (30 June 2014: $1m; 31 December 2014: $1m) and $11m troubled debt restructurings (not included in the classifications above) (30 June 2014: nil; 31 December 2014: nil).
3 Ratio excludes trading loans classified as in default.

 

HSBC HOLDINGS PLC

74b


Table of Contents

Securitisation exposures and other structured products

The following table summarises the carrying amount of our asset-backed securities (‘ABS’s) exposure by categories of collateral and includes assets held in the GB&M legacy credit portfolio with a carrying value of $19bn (30 June 2014: $27bn; 31 December 2014: $23bn).

At 30 June 2015, the available-for-sale reserve in respect of ABSs was a deficit of $818m (30 June 2014: $951m; 31 December 2014: $777m). For 2015, the impairment write-back in respect of ABSs was $90m (30 June 2014: $203m; 31 December 2014: $276m).

Representations and warranties related to mortgage sales and securitisation activities

We have been involved in various activities related to the sale and securitisation of residential mortgages that are not recognised on our balance sheet. These activities are set out on page 162 of the Annual Report and Accounts 2014.

There have been no significant changes in the liabilities recognised in respect of various representations and warranties regarding the origination and sale by HSBC Bank USA of mortgage loans, primarily to government sponsored entities, nor repurchase demands outstanding since 31 December 2014.

 

Carrying amount of HSBC’s consolidated holdings of ABSs

 

             Trading              Available
for sale
         Held to
      maturity
         Designated
at fair value
through
profit or loss
         Loans and
receivables
                     Total         

Of which
held through
consolidated

SEs

      
         $m          $m          $m          $m          $m          $m          $m       

Mortgage-related assets

       2,343           23,469           14,140                     742           40,694           7,047      

– sub-prime residential

       114           2,571                               164           2,849           1,884      

– US Alt-A residential

       88           2,353           9                     85           2,535           2,247      

– US Government agency and sponsored enterprises: MBSs

       158           14,611           14,131                               28,900                

– other residential

       1,279           1,181                               205           2,665           660      

– commercial property

       704           2,753                               288           3,745           2,256      

Leveraged finance-related assets

       263           3,001                               191           3,455           2,092      

Student loan-related assets

       250           3,271                               95           3,616           3,057      

Other assets

       1,602           973                     13           212           2,800           683      

At 30 June 2015

       4,458           30,714           14,140           13           1,240           50,565           12,879      

Mortgage-related assets

       1,117           29,863           1,022                     1,477           33,479           11,587      

– sub-prime residential

       150           3,231                               394           3,775           3,041      

– US Alt-A residential

       96           3,214           18                     128           3,456           2,738      

– US Government agency and sponsored enterprises: MBSs

       136           16,739           1,004                               17,879                

– other residential

       266           1,737                               362           2,365           1,336      

– commercial property

       469           4,942                               593           6,004           4,472      

Leveraged finance-related assets

       298           4,836                               242           5,376           4,209      

Student loan-related assets

       227           3,654                               123           4,004           3,546      

Other assets

       1,375           1,245                     22           1,051           3,693           995      

At 30 June 2014

       3,017           39,598           1,022           22           2,893           46,552           20,337      

Mortgage-related assets

       1,882           21,350           13,447                     1,264           37,944           7,992      

– sub-prime residential

       122           3,081                               308           3,511           2,075      

– US Alt-A residential

       96           3,022           11                     110           3,239           2,411      

– US Government agency and sponsored enterprises: MBSs

       82           10,401           13,436                               23,919                

– other residential

       928           1,220                               330           2,478           652      

– commercial property

       654           3,627                               516           4,797           2,854      

Leveraged finance-related assets

       172           3,660                               218           4,050           2,526      

Student loan-related assets

       242           3,545                               119           3,906           3,284      

Other assets

       1,264           1,114                     19           646           3,043           758      

At 31 December 2014

       3,560           29,670           13,447           19           2,247           48,943           14,560      

 

HSBC HOLDINGS PLC

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Table of Contents

Risk (continued)

 

 

Liquidity and funding

Liquidity risk is the risk that the Group does not have sufficient financial resources to meet its obligations as they fall due, or will have to do so at an excessive cost. The risk arises from mismatches in the timing of cash flows.

Funding risk is the risk that funding considered to be sustainable (and therefore used to fund assets) proves not to be sustainable over time.

There have been no material changes to the policies and practices for the management of liquidity and funding risks described in the Annual Report and Accounts 2014.

A summary of our current policies and practices regarding liquidity and funding is provided on page 215 of the Annual Report and Accounts 2014.

Our liquidity and funding risk management framework

The objective of our liquidity framework is to allow us to withstand very severe liquidity stresses. It is designed to be adaptable to changing business models, markets and regulations.

Our liquidity and funding risk management framework requires:

 

  liquidity to be managed by operating entities on a stand-alone basis  with no implicit reliance on the Group or central banks;

 

  all operating entities to comply with their limits for the advances to  core funding ratio; and

 

  all operating entities to maintain a positive stressed cash flow position out to three months under prescribed Group stress scenarios.

Liquidity and funding in the first half of 2015

The liquidity position of the Group remained strong in 1H15, as demonstrated by the key liquidity and funding metrics presented below. During the period, reported customer accounts decreased by 1% ($15bn) while reported loans and advances to customers decreased by 2% ($21bn), leading to a small reduction in our advances to deposits ratio to 71% (30 June 2014: 74%; 31 December 2014: 72%).

Wholesale senior funding markets

Conditions in wholesale debt markets deteriorated through the second quarter as the uncertainty around Greece affected market confidence. The path of interest rates and broader global economic uncertainty means further volatility can be expected; however global bank funding needs and regulatory proposals for increased loss absorbing capacity suggest continued volumes of primary market supply. We retained good access to debt capital markets with Group entities issuing $9.6bn of public transactions, of which $4.3bn was in the form of senior unsecured debt.

Liquidity regulation

The European adoption of the Basel Committee framework (legislative texts known as the Capital Requirements Regulation and Directive – CRR/CRD IV) was published in June 2013, requiring the reporting of the liquidity coverage ratio (‘LCR’) and the net stable funding ratio (‘NSFR’) to European regulators from 30 June 2014. A significant level of interpretation was involved in reporting and calculating the LCR as defined in the CRR text as certain areas were only addressed by the finalisation of the LCR regulation in January 2015. This will not become a regulatory standard until 1 October 2015. The European calibration of NSFR is pending following the Basel Committee’s final recommendation in October 2014. We monitor NSFR in line with the relevant text from the Basel Committee of Banking Supervision (BCBS295), pending its implementation in Europe. Both Group NSFR and Group LCR as reported were above 100%.

Management of liquidity and funding risk

Our liquidity and funding risk management framework (‘LFRF’) employs two key measures to define, monitor and control the liquidity and funding risk of each of our operating entities. The advances to core funding ratio is used to monitor our structural long-term funding position, and the stressed coverage ratio, incorporating Group-defined stress scenarios, is used to monitor our resilience to severe liquidity stresses.

The three principal entities listed in the tables below represented 64% (30 June 2014: 67%; 31 December 2014: 66%) of the Group’s customer accounts. Including the other principal entities, the figure was 93% (30 June 2014: 96%; 31 December 2014: 95%).

Advances to core funding ratio

The table below shows the extent to which loans and advances to customers in the listed principal banking entities were financed by reliable and stable sources of funding.

Advances to core funding ratios8

 

        Half-year to  
       

    30 Jun

2015

        

30 Jun

2014

   

    31 Dec

2014

 
        %          %     %  

HSBC UK

          

Period-end

      96           99        97   

Maximum

      98           102        100   

Minimum

      96           99        97   

Average

      97           101        99   

The Hongkong and Shanghai Banking Corporation

          

Period-end

      74           74        75   

Maximum

      75           75        75   

Minimum

      73           72        73   

Average

      74           74        74   

HSBC USA

          

Period-end

      95           97        100   

Maximum

      100           98        100   

Minimum

      95           85        95   

Average

      97           93        97   
 

 

HSBC HOLDINGS PLC

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Table of Contents

 

 

Advances to core funding ratios8 (continued)

 

        Half-year to  
       

    30 Jun

2015

        

30 Jun

2014

   

    31 Dec

2014

 
        %          %     %  

Total of HSBC’s other principal entities

          

Period-end

      93           93        92   

Maximum

      94           94        93   

Minimum

      92           93        92   

Average

      93           93        93   

For footnote, see page 86.

There were no material movements in 1H15 for any of the principal banking entities and all entities remained within their advances to core funding limits. The limits set for principal operating entities at 30 June 2015 ranged from 80% to 120%.

Stressed coverage ratios

The ratios tabulated below express stressed cash inflows as a percentage of stressed cash outflows over both one-month and three-month time horizons. Operating entities are required to maintain a ratio of 100% or more out to three months.

Inflows included in the numerator of the stressed coverage ratio are generated from liquid assets net of assumed haircuts, and cash inflows related to assets contractually maturing within the time period.

In general, customer advances are assumed to be renewed and as a result do not generate a cash inflow.

 

Stressed one-month and three-month coverage ratios8

        

Stressed one-month

coverage ratios for the half-year to

        

Stressed three-month

coverage ratios for the half-year to

 
             30 Jun              30 Jun              31 Dec              30 Jun              30 Jun              31 Dec  
         2015          2014          2014          2015          2014          2014  
         %          %          %          %          %          %  

HSBC UK

                             

Period-end

       127           103           117           114           103           109   

Maximum

       127           106           117           114           109           109   

Minimum

       112           102           103           105           103           103   

Average

       117           104           110           108           104           104   

The Hongkong and Shanghai Banking Corporation

                             

Period-end

       118           114           117           114           111           112   

Maximum

       118           119           118           114           114           114   

Minimum

       113           114           114           111           111           111   

Average

       116           115           116           112           112           113   

HSBC USA

                             

Period-end

       120           115           111           110           108           104   

Maximum

       120           115           122           110           110           111   

Minimum

       109           108           111           101           104           104   

Average

       113           112           118           104           107           108   

Total of HSBC’s other principal entities

                             

Period-end

       116           115           121           109           108           108   

Maximum

       121           121           121           109           115           109   

Minimum

       112           114           115           106           108           108   

Average

       115           117           116           107           111           108   

The coverage ratio for HSBC UK increased due to strong growth in deposits over the period.

Sources of funding

Our primary sources of funding are customer current accounts and customer savings deposits payable on demand or at short notice. We issue wholesale securities (secured and unsecured) to supplement our customer deposits and change the currency mix, maturity profile or location of our liabilities.

The level of customer accounts continued to exceed the level of loans and advances to customers. The positive funding gap was predominantly deployed into liquid assets, cash and balances with central banks and financial investments, as required by the LFRF.

Loans and other receivables due from banks continued to exceed deposits taken from banks. The Group remained a net unsecured lender to the banking sector.

 

 

 

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Risk (continued)

 

 

Consolidated funding sources and uses

 

         At      
         30 Jun          30 Jun          31 Dec      
         2015          2014          2014      
         $m          $m          $m      

Sources

                

Customer accounts

       1,335,800           1,415,705           1,350,642     

Deposits by banks

       71,140           92,764           77,426     

Repurchase agreements – non-trading

       81,506           165,506           107,432     

Debt securities in issue

       102,656           96,397           95,947     

Liabilities of disposal groups held for sale

       53,226           12,361           6,934     

Subordinated liabilities

       24,781           28,052           26,664     

Financial liabilities designated at fair value

       69,485           82,968           76,153     

Liabilities under insurance contracts

       69,494           75,223           73,861     

Trading liabilities

       181,435           228,135           190,572     

– repos

       2,081           5,189           3,798     

– stock lending

       13,655           15,252           12,032     

– settlement accounts

       29,398           41,240           17,454     

– other trading liabilities

       136,301           166,454           157,288     

Total equity

       201,382           198,722           199,978     
           2,190,905               2,395,833               2,205,609     

Market risk

Market risk is the risk that adverse movements in market factors, such as foreign exchange rates, interest rates, credit spreads, equity prices and commodity prices, will reduce our income or the value of our portfolios.

There were no material changes to the policies and practices for the management of market risk described in the Annual Report and Accounts 2014.

A summary of our market risk management framework including current policies is provided on page 221 of the Annual Report and Accounts 2014.

Market risk in the first half of 2015

Global markets were influenced by the Greek crisis and concerns about the slowdown in the mainland Chinese economy. Markets remained volatile given the uncertainties in the global economic outlook compounded by volatility in the oil and gas markets.

We maintained an overall defensive risk profile that resulted in a continued reduction in our trading value at risk (‘VaR’). Non-trading VaR increased slightly during the first half of the year, driven by the expectations of an increase in US rates.

 

 

         At      
         30 Jun          30 Jun          31 Dec      
         2015          2014          2014      
         $m          $m          $m      

Uses

                

Loans and advances to customers

       953,985           1,047,241           974,660     

Loans and advances to banks

       109,405           127,387           112,149     

Reverse repurchase agreements – non-trading

       149,384           198,301           161,713     

Assets held for sale

       60,929           10,248           7,647     

Trading assets

       283,138           347,106           304,193     

– reverse repos

       741           4,484           1,297     

– stock borrowing

       11,639           13,903           7,969     

– settlement accounts

       33,249           48,139           21,327     

– other trading assets

       237,509           280,580           273,600     

Financial investments

       404,682           423,710           415,467     

Cash and balances with central banks

       144,324           132,137           129,957     

Net deployment in other balance sheet assets and liabilities

       85,058           109,703           99,823     
           2,190,905               2,395,833               2,205,609     

As a consequence of the Greek crisis, the yields on lower rated European government bonds increased but remained well below previous crisis peaks.

Although the Chinese government intervened through policy adjustments, mainly around interest rates and reserve requirements, the mainland Chinese equity markets fell during the latter part of the period under review.

In addition, divergent monetary policies were seen in the US and Europe. The US Federal Reserve Board continued to discuss a move to normalise monetary policy with an expected interest rate rise in 2015. This contrasted with the eurozone implementing its asset purchase programme earlier in the year.

Capital flows to emerging markets remained weak and are likely to stay uncertain as they await the timing of a possible US interest rate increase later this year.

Trading portfolios

Value at risk of the trading portfolios

Trading VaR resides within Global Markets. The VaR for trading activity at 30 June 2015 was lower than at 31 December 2014 due primarily to declines in interest rate trading VaR.

The Group trading VaR for the half-year is shown in the table below.

 

 

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Trading VaR, 99% 1 day

 

        

Foreign

exchange and

commodity

                     Interest
rate
                       Equity         

Credit

             spread

        

Portfolio

diversification

including RNIV9

                     Total  
        

$m

 

        

$m

 

        

$m

 

        

$m

 

        

$m

 

        

$m

 

 

Half-year to 30 June 2015

       11.5           36.7           8.1           14.9           (14.1        57.1   

Average

       15.2           41.1           7.2           16.3           (16.9        62.9   

Maximum

       21.7           47.1           12.4           21.8                     77.9   

Minimum

       9.2           33.3           3.4           9.9                     51.3   

Half-year to 30 June 2014

       13.6           41.7           9.1           12.7           (27.9        49.2   

Average

       15.8           37.1           5.9           15.0           (22.5        51.3   

Maximum

       28.0           50.5           12.4           20.9                     63.4   

Minimum

       8.7           26.9           3.2           9.3                     38.5   

Half-year to 31 December 2014

       9.8           45.4           7.3           12.5           (14.3        60.7   

Average

       18.0           41.9           7.9           12.4           (13.4        66.8   

Maximum

       34.2           50.6           15.6           17.1                     77.8   

Minimum

       8.8           34.4           3.8           8.8                     49.9   

For footnote, see page 86.

 

Back-testing

There were no loss or profit exceptions for the Group in 1H15.

Non-trading portfolios

Value at risk of the non-trading portfolios

Non-trading VaR of the Group includes contributions from all global businesses. There is no commodity risk in the

non-trading portfolios. The VaR for non-trading activity at 30 June 2015 was slightly higher than at 31 December 2014 driven by an increase in non-trading interest rate VaR, partially offset by an increase in diversification benefit.

The Group non-trading VaR for the half-year is shown in the table below.

 

Non-trading VaR, 99% 1 day

        

            Interest

rate

        

Credit

            spread

        

Portfolio

diversification9

         Total  
         $m          $m          $m          $m  

Half-year to 30 June 2015

       106.4           66.7           (45.3        127.8   

Average

       86.6           61.7           (33.6        114.7   

Maximum

       112.6           71.9                     128.1   

Minimum

       70.5           54.3                     91.5   

Half-year to 30 June 2014

               103.6                   75.1           (27.7                          151.0   

Average

       116.1           79.3           (40.9        154.5   

Maximum

       147.7           91.9                     189.0   

Minimum

       99.1           69.0                     122.5   

Half-year to 31 December 2014

       88.2           62.5           (28.5        122.2   

Average

       90.9           67.5           (34.0        124.4   

Maximum

       105.1           82.8                     160.6   

Minimum

       83.3           49.6                     92.3   

For footnote, see page 86.

 

Non-trading VaR excludes equity risk on available-for-sale securities, structural foreign exchange risk and interest rate risk on fixed rate securities issued by HSBC Holdings. This section and the sections below describe the scope of HSBC’s management of market risks in non-trading books.

Non-trading interest rate risk

Our policies regarding the funds transfer priority process for managing non-trading interest rate risk and liquidity and funding risk are described on pages 226 and 219, respectively, of the Annual Report and Accounts 2014.

Third-party assets in Balance Sheet Management

Third-party assets in BSM in total did not change during 1H15, primarily as a result of the reclassification of $10bn of assets in Brazil to held for sale, offset by an increase of $6bn in financial investments due to increased deployment of commercial surplus funds into securities in Hong Kong. Notwithstanding the reclassification, BSM continues to manage Brazilian assets pending entity disposal.

 

 

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Risk (continued)

 

 

Third-party assets in Balance Sheet Management

 

         At  
        

30 Jun

2015

        

30 Jun

2014

        

31 Dec

2014

 
         $m          $m          $m  

Cash and balances at central banks

       107,513           107,698           103,008   

Trading assets

       2,104           5,673           4,610   

Financial assets designated at fair value

                 70             

Loans and advances

              

– to banks

       54,586           61,277           53,842   

– to customers

       2,723           1,871           1,931   

Reverse repurchase agreements

       48,922           69,844           59,172   

Financial investments

       312,975           311,333           306,763   

Other

       2,370           1,420           2,470   
           531,193             559,186             531,796   

Sensitivity of net interest income

The table below sets out the effect on our future net interest income (‘NII’) of an incremental 25 basis points parallel rise or fall in all yield curves worldwide at the beginning of each quarter during the 12 months from 1 July 2015.

The sensitivities shown represent the change in the base case projected NII that would be expected under the two rate scenarios assuming that all other non-interest rate risk variables remain constant, and there are no management actions. In deriving our base case net interest income projections, the repricing rate of assets and liabilities used is derived from current yield curves. The interest rate sensitivities are indicative and based on simplified scenarios.

Assuming no management response, a sequence of such rises (‘up-shock scenario’) would increase planned net interest income for the 12 months to 30 June 2016 by $1,027m (to 31 December 2015: $885m), while a sequence of such falls (‘down-shock scenario’) would decrease planned net interest income by $1,905m (to 31 December 2015: $2,089m).

The NII sensitivity of the Group can be split into three key components; the structural sensitivity arising from the four

global businesses excluding BSM and Global Markets, the sensitivity of the funding of the trading book (Global Markets) and the sensitivity of BSM.

The structural sensitivity is positive in a rising rate environment and negative in a falling rate environment. The sensitivity of the funding of the trading book is negative in a rising rate environment and positive in a falling rate environment. The sensitivity of BSM depends on its position. Typically, assuming no management response, the sensitivity of BSM is negative in a rising rate environment and positive in a falling rate environment.

The NII sensitivity figures below also incorporate the effect of any interest rate behaviouralisation applied and the effect of any assumed repricing across products under the specific interest rate scenario. They do not incorporate the effect of any management decision to change the composition of HSBC’s balance sheet.

The NII sensitivity in BSM arises from a combination of the techniques that BSM uses to mitigate the transferred interest rate risk and the methods it uses to optimise net revenues in line with its defined risk mandate. The figures in the table below do not incorporate the effect of any management decisions within BSM, but in reality it is likely that there would be some short-term adjustment in BSM positioning to offset the NII effects of the specific interest rate scenario where necessary.

The NII sensitivity arising from the funding of the trading book comprises the expense of funding trading assets, while the revenue from these trading assets is reported in net trading income. This leads to an asymmetry in the NII sensitivity figures which is cancelled out in our global business results, where we include both NII and net trading income. It is likely, therefore, that the overall effect on profit before tax of the funding of the trading book will be much less pronounced than is shown in the figures below.

The scenario sensitivities remained broadly unchanged in 1H15.

 

 

Sensitivity of projected net interest income

 

        

    US dollar

bloc

         Rest of
    Americas
bloc
        

  Hong Kong
dollar

bloc

        

        Rest of
Asia

bloc

        

    Sterling

bloc

        

            Euro

bloc

                     Total  
         $m          $m          $m          $m          $m          $m          $m  

Change in July 2015 to June 2016 projected net interest income arising from a shift in yield curves at the beginning of each quarter of:

                                  

+ 25 basis points

       347           5           307           297           174           (103        1,027   

– 25 basis points

       (470        (22        (580        (246        (565        (22        (1,905

Change in January 2015 to December 2015 projected net interest income arising from a shift in yield curves at the beginning of each quarter of:

                                  

+ 25 basis points

       209           (9        245           265           321           (146        885   

– 25 basis points

       (521        (1        (494        (259        (783        (31        (2,089

Change in July 2014 to June 2015 projected net interest income arising from a shift in yield curves at the beginning of each quarter of:

                                  

+ 25 basis points

       54           26           293           252           451           (97        979   

– 25 basis points

       (308        (37        (450        (235        (691        (25        (1,746

 

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We monitor the sensitivity of reported reserves to interest rate movements on a monthly basis by assessing the expected reduction in valuation of available-for-sale portfolios and cash flow hedges due to parallel movements of plus or minus 100bps in all yield curves. These particular exposures form only a part of our overall interest rate exposures. The accounting treatment of our remaining interest rate exposures, while economically largely

offsetting the exposures shown in the above table, does not require revaluation movements to go to reserves.

The table below describes the sensitivity of our reported reserves to the stipulated movements in yield curves and the maximum and minimum month-end figures during the period. The sensitivities are indicative and based on simplified scenarios.

 

 

 

Sensitivity of reported reserves to interest rate movements

 

                    Impact in the preceding 6 months  
         $m         

Maximum

$m

        

Minimum

$m

 

At 30 June 2015

              

+ 100 basis point parallel move in all yield curves

       (3,858        (3,858        (3,306

As a percentage of total shareholders’ equity

       (2.0%        (2.0%        (1.7%

– 100 basis point parallel move in all yield curves

                   3,786                       3,786                       3,251   

As a percentage of total shareholders’ equity

       2.0%           2.0%           1.7%   

At 30 June 2014

              

+ 100 basis point parallel move in all yield curves

       (5,157        (5,212        (5,066

As a percentage of total shareholders’ equity

       (2.7%        (2.7%        (2.7%

– 100 basis point parallel move in all yield curves

       4,730           4,915           4,730   

As a percentage of total shareholders’ equity

       (2.5%        (2.6%        (2.5%

At 31 December 2014

              

+ 100 basis point parallel move in all yield curves

       (3,696        (5,212        (3,696

As a percentage of total shareholders’ equity

       (1.9%        (2.7%        (1.9%

– 100 basis point parallel move in all yield curves

       3,250           4,915           3,250   

As a percentage of total shareholders’ equity

       1.7%           2.6%           1.7%   

 

Additional market risk measures applicable only to the parent company

The principal tools used in the management of market risk are VaR for foreign exchange rate risk and the projected sensitivity of HSBC Holdings’ NII to future changes in yield curves and interest rate gap repricing for interest rate risk.

Foreign exchange risk

Total foreign exchange VaR arising within HSBC Holdings in the first half of 2015 was as follows:

HSBC Holdings – foreign exchange VaR

 

         Half-year to  
                 30 Jun
2015
        

        30 Jun

2014

        

        31 Dec

2014

 
         $m          $m          $m  

At period-end

       47.1           51.3           29.3   

Average

       38.8           47.0           42.1   

Maximum

       47.1           51.5           50.0   

Minimum

       32.9           42.5           29.3   

 

The foreign exchange risk largely arises from loans to subsidiaries of a capital nature that are not denominated in the functional currency of either the provider or the recipient and which are accounted for as financial assets. Changes in the carrying amount of these loans due to foreign exchange rate differences are taken directly to HSBC Holdings’ income statement. These loans, and most of the associated foreign exchange exposures, are eliminated on consolidation.

Interest rate repricing gap table

The interest rate risk on the fixed-rate securities issued by HSBC Holdings is not included within the Group VaR but is managed on a repricing gap basis. The interest rate repricing gap table below analyses the full-term structure of interest rate mismatches within HSBC Holdings’ balance sheet.

 

 

 

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Risk (continued)

 

 

Repricing gap analysis of HSBC Holdings

 

                     Total         

Up to

        1 year

        

1 to

    5 years

        

5 to

    10 years

        

More than

10 years

        

Non-interest

bearing

 
         $m          $m          $m          $m          $m          $m  

Cumulative interest rate gap

                             

Total assets

       148,926           46,084           402           2,144                     100,296   

Total liabilities and equity

       (148,926        (2,345        (6,850        (10,104        (14,507        (115,120

Off-balance sheet items attracting interest rate sensitivity

                 (21,248        5,351           9,222           5,763           912   

Net interest rate risk gap at 30 June 2015

                 22,491           (1,097        1,262           (8,744        (13,912

Cumulative interest rate risk gap

                 22,491           21,394           22,656           13,912             

Total assets

       145,891           45,396           591           1,961           665           97,278   

Total liabilities and equity

       (145,891        (9,503        (10,348        (8,509        (14,891        (102,640

Off-balance sheet items attracting interest rate sensitivity

                 (20,597        7,137           7,400           6,042           18   

Net interest rate risk gap at 30 June 2014

                 15,296           (2,620        852           (8,184        (5,344

Cumulative interest rate risk gap

                 15,296           12,676           13,528           5,344             

Total assets

       147,864           44,613           290           1,824                     101,137   

Total liabilities and equity

       (147,864        (3,506        (9,238        (8,413        (14,458        (112,249

Off-balance sheet items attracting interest rate sensitivity

                 (21,525        7,295           7,400           5,763           1,067   

Net interest rate risk gap at 31 December 2014

                 19,582           (1,653        811           (8,695        (10,045

Cumulative interest rate risk gap

                 19,582           17,929           18,740           10,045             

 

Operational risk

Operational risk is relevant to every aspect of our business and covers a wide spectrum of issues, in particular legal, compliance, security and fraud. Losses and other adverse consequences arising from breaches of regulation and law, unauthorised activities, error, omission, fraud, systems failure or external events all fall within the definition of operational risk.

Activity to further enhance and embed our Operational Risk Management Framework (‘ORMF’) continued in the first half of 2015. Responsibility for minimising operational risk lies with HSBC’s management and staff.

All regional, global business, country, business unit and functional heads are required to manage the operational risks and internal controls of the business and operational activities for which they are responsible.

The diagrammatic representation of our ORMF is provided on page 187 of the Annual Report and Accounts 2014.

A summary of our current policies and practices regarding operational risk is provided on page 228 of the Annual Report and Accounts 2014.

Operational risk profile in the first half of 2015

During 1H15, our operational risk profile continued to be dominated by compliance risks and we continued to see losses that relate to events from prior years (significant events are outlined in Notes 17 and 19 on the Financial Statements). A number of mitigating actions are being undertaken to prevent future conduct-related incidents.

Operational risks include:

 

  compliance with regulatory agreements and orders: failure to implement our obligations under the US DPA could have a material adverse effect on our results and operations. The work of the Monitor is discussed on page 13, with compliance risk described below;

 

  level of change creating operational complexity: the Global Risk function is engaged with business management in business transformation initiatives to ensure robust internal controls are maintained as we execute our change agenda;

 

  fraud risks: while compared with the industry our loss performance remains strong in most markets, the introduction of new technologies and ways of banking mean that we continue to be subject to fraud attacks as new attack vectors are developed. We continue to increase monitoring and enhance detective controls to mitigate these risks in accordance with our risk appetite;

 

 

information security: the security of our information and technology infrastructure is crucial for maintaining our banking services and protecting our customers and the HSBC brand. We continue to be a target of increasingly sophisticated cyber-attacks such as ‘distributed denial of service’, in common with other banks and multinational organisations, which can affect the availability of customer-facing websites. Programmes of work are ongoing to strengthen internal security controls to prevent unauthorised access to our systems, including lessons learnt from attacks experienced within the industry and information sharing with other financial institutions, government agencies and external

 

 

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intelligence providers. Our UK operation is currently participating in an external penetration testing scheme called CBEST developed by the PRA that is aimed at assessing the ability of critical financial institutions to detect and defend against cyber-attacks;

 

  third-party risk management: we are strengthening our third-party risk management capability, particularly the management of vendor risks, including the implementation of the supplier performance management programme with our most important suppliers. Attention is also being paid to the screening of suppliers to enable us to identify if any of them are on a sanctions list and we should therefore exit such relationships. Vendor risk management is a core element of third-party risk management.

Other operational risks are also monitored and managed through the use of the ORMF and governing policies.

Compliance risk

Compliance risk is the risk that we fail to observe the letter and spirit of all relevant laws, codes, rules, regulations and standards of good market practice, and incur fines and penalties and suffer damage to our business as a consequence. Compliance risk falls within the definition of operational risk.

All Group companies and employees are required to observe the letter and spirit of all relevant laws, codes, rules, regulations and standards of good market practice. These include those relating to AML, counter-terrorist and proliferation financing, sanctions compliance, anti-bribery and corruption, conduct of business and market conduct. The compliance risk policies and practices are described on pages 189 and 229 of the Annual Report and Accounts 2014. There were no material changes to our policies and practices for the management of compliance risk in the first half of 2015 with the exception of the implementation of the new AML and sanctions policy procedures as outlined below.

Enhanced global AML and sanctions policies were approved in 2014. Global businesses and all in-scope countries had implemented new AML and sanctions policy procedures by the end of March 2015. The application of procedures required to embed them in our day to day business operations globally will remain a key focus during the rest of 2015. The overriding policy objective is for every employee to engage in only ‘the right kind of business, conducted in the right way’.

Programmes to enhance the Group’s standards of regulatory conduct ensuring the delivery of fair outcomes for customers and orderly and transparent operations in financial markets continued to progress in 1H15.

We have experienced increasing levels of compliance risk in recent years as regulators and other agencies pursued investigations into historical activities, and we have continued to work with them in relation to these matters. They are described in ‘Areas of special interest’ on page 59.

It is clear that the level of inherent compliance risk that we face will continue to remain high for the foreseeable future. However, we consider that good progress is being made and will continue to be made in ensuring that we are well placed to effectively manage those risks.

Whistleblowing

HSBC operates global disclosure lines (telephone and email) which are available to allow employees to raise concerns regarding potential wrongdoing when the normal channels for escalation are unavailable or inappropriate. Matters raised are independently investigated by appropriate subject matter teams. Outcomes including remedial action taken are reported to the Conduct & Values Committee, in respect of AML and sanctions matters to the Financial System Vulnerabilities Committee and in respect of audit and accounting matters to the Group Audit Committee.

Reputational risk

Reputational risk is the risk of failure to meet stakeholder expectations as a result of any event, behaviour, action or inaction, either by HSBC itself, our employees or those with whom we are associated, that might cause stakeholders to form a negative view of the Group. This may have financial or non-financial implications or have other consequences such as loss of confidence.

The reputational risk policies and practices are described on pages 199 and 235 of the Annual Report and Accounts 2014.

We have a zero tolerance for knowingly engaging in any business, activity or association where foreseeable reputational damage has not been considered and mitigated. There must be no barriers to open discussion and the escalation of issues that could affect the Group negatively. While there is a level of risk in every aspect of business activity, appropriate consideration of potential harm to HSBC’s good name must be a part of all business decisions.

We have restructured our Reputational Risk Function and created a Reputational Risk Management team. This team’s mandate is to provide bespoke advisory services to the business on reputational risks to the bank and to work with the Financial Crime and Regulatory Compliance teams to mitigate such risks where possible.

 

 

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Risk (continued)

 

 

Risk management of insurance operations

The majority of the risk in our insurance business derives from manufacturing activities and can be categorised as insurance risk and financial risk. Insurance risk is the risk, other than financial risk, of loss transferred from the holder of the insurance contract to the issuer (HSBC). Financial risks include market risk, credit risk and liquidity risk.

There have been no material changes to the policies and practices for the management of risks arising in our insurance operations described in the Annual Report and Accounts 2014.

A summary of our policies and practices regarding the risk management of insurance operations, our insurance model and the main contracts we manufacture are provided on page 231 of the Annual Report and Accounts 2014.

Risk management of insurance operations in the first half of 2015

We measure the risk profile of our insurance manufacturing businesses using an economic capital approach. Under this approach, assets and liabilities are measured on a market value basis and capital is held to ensure that there is less than a 1 in 200 chance of insolvency during the coming year given the risks that the businesses are exposed to. This approach is aligned to the measurement approach for market, credit and insurance risks in the economic

capital model in the European Solvency II insurance capital regulations applicable from 2016.

The risk profile of our life insurance manufacturing businesses did not change materially during 1H15 despite the decrease in liabilities under insurance contracts to $69bn (31 December 2014: $74bn).

This reduction arose from the transfer of $5bn of these liabilities to ‘Liabilities of disposal groups held for sale’ during the period when we announced the plan to sell our operations in Brazil (including the entire insurance business there).

Asset and liability matching

A principal tool used to manage exposures to both financial and insurance risk, in particular for life insurance contracts, is asset and liability matching. In many markets in which we operate it is neither possible nor appropriate to follow a perfect asset and liability matching strategy. For long-dated non-linked contracts, in particular, this results in a duration mismatch between assets and liabilities. We therefore structure portfolios that support liabilities under non-linked contracts with due consideration to the risk exposure to HSBC and the capital requirements.

The table below shows the composition of assets and liabilities by contract type and demonstrates that there were sufficient assets to cover the liabilities to policyholders, in each case at 30 June 2015.

 

 

Balance sheet of insurance manufacturing subsidiaries by type of contract

 

         Insurance contracts          Investment contracts    Other                  
        

With

DPF

        

Unit-

    linked

         Annuities          Other         

With

DPF

        

Unit-

     linked

               Other          assets and
liabilities
         Total       
         $m          $m          $m          $m          $m          $m          $m          $m          $m       

Financial assets

           30,199           7,351           1,272                6,359               22,570           2,587           4,027           5,862           80,227      

– trading assets

                           3                                                             3      

– financial assets designated at fair value

       4,563           7,157           343           699           6,778           2,174           1,924           1,136           24,774      

– derivatives

       42           1                     2           100                     11           63           219      

– financial investments

       22,784                     830           5,478           13,902                     1,425           4,663           49,082      

– other financial assets

       2,810           193           96           180           1,790           413           667                     6,149      

Reinsurance assets

       199           239                     754                                                   1,192      

PVIF

                                                                             5,363           5,363      

Other assets and investment properties

       828           11           24           109           739           12           26           12,887           14,636      

Total assets at 30 June 2015

       31,226           7,601           1,296           7,222           23,309           2,599           4,053           24,112           101,418      

Liabilities under investment contracts:

                                                         2,558           3,786                     6,344      

– designated at fair value

                                                         2,558           3,786                     6,344      

Liabilities under insurance contracts

       30,914           7,541           1,237           6,493           23,309                                         69,494      

Deferred tax

       12                     8           4                                    1,131           1,155      

Other liabilities

                                                                             13,837           13,837      

Total liabilities

       30,926           7,541           1,245           6,497           23,309           2,558           3,786           14,968           90,830      

Total equity

                                                                             10,588           10,588      

Total equity and liabilities at 30 June 2015

       30,926           7,541           1,245           6,497           23,309           2,558           3,786           25,556           101,418      

 

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Balance sheet of insurance manufacturing subsidiaries by type of contract (continued)

 

         Insurance contracts           Investment contracts    Other                   
        

With

DPF

$m

         

Unit-

linked

$m

         

Annuities

$m

         

Other

$m

         

With

DPF

$m

         

Unit-

linked

$m

         

Other

$m

         

assets and

liabilities

$m

         

Total

$m

      

Financial assets

         28,014            12,043            1,629            5,452            26,657            2,867            4,455            6,064            87,181      

– trading assets

                             4                                                                   4      

– financial assets designated at fair value

       4,383            11,760            564            651            7,523            2,411            1,541            2,219            31,052      

– derivatives

       7            1                       2            95                                  71            176      

– financial investments

       20,565                       960            4,421            17,049                       1,750            3,697            48,442      

– other financial assets

       3,059            282            101            378            1,990            456            1,164            77            7,507      

Reinsurance assets

         183            265                       723                                             2            1,173      

PVIF

                                                                                      5,438            5,438      

Other assets and investment properties

       794            330            19            101            728            11            27            7,813            9,823      

Total assets at 30 June 2014

       28,991            12,638            1,648            6,276            27,385            2,878            4,482            19,317            103,615      

Liabilities under investment contracts:

                                                                2,878            4,276                       7,154      

– designated at fair value

                                                              2,878            3,800                       6,678      

– carried at amortised cost

                                                                         476                       476      

Liabilities under insurance contracts

       28,217            12,518            1,591            5,512            27,385                                             75,223      

Deferred tax

       12                       11            10                                             1,223            1,256      

Other liabilities

                                                                                    9,451            9,451      

Total liabilities

       28,229            12,518            1,602            5,522            27,385            2,878            4,276            10,674            93,084      

Total equity

                                                                                    10,531            10,531      

Total equity and liabilities at 30 June 2014

       28,229            12,518            1,602            5,522            27,385            2,878            4,276            21,205            103,615      

Financial assets

       29,040            11,278            1,517            6,253            24,238            2,561            4,322            5,732            84,941      

– trading assets

                             3                                                                   3      

– financial assets designated at fair value

       4,304            11,111            533            782            6,346            2,223            1,684            1,713            28,696      

– derivatives

       12            1                       1            101            1            10            73            199      

– financial investments

       21,152                       886            5,167            15,677                       1,807            3,812            48,501      

– other financial assets

       3,572            166            95            303            2,114            337            821            134            7,542      

Reinsurance assets

       190            262                       617                                             2            1,071      

PVIF

                                                                                    5,307            5,307      

Other assets and investment properties

       698            328            23            107            831            7            26            7,383            9,403      

Total assets at 31 December 2014

       29,928            11,868            1,540            6,977            25,069            2,568            4,348            18,424            100,722      

Liabilities under investment contracts:

                                                              2,542            4,155                       6,697      

– designated at fair value

                                                              2,542            3,770                       6,312      

– carried at amortised cost

                                                                         385                       385      

Liabilities under insurance contracts

       29,479            11,820            1,473            6,021            25,068                                             73,861      

Deferred tax

       12                       11            18                                             1,180            1,221      

Other liabilities

                                                                                    8,577            8,577      

Total liabilities

       29,491            11,820            1,484            6,039            25,068            2,542            4,155            9,757            90,356      

Total equity

                                                                                    10,366            10,366      

Total equity and liabilities at 31 December 2014

       29,491            11,820            1,484            6,039            25,068            2,542            4,155            20,123            100,722      

 

The Brazilian insurance operations and the UK pensions business are reported as disposal groups held for sale at 30 June 2015. The assets and liabilities of these disposal groups are included in the ‘Other assets and liabilities’ column of the table above.

These disposal groups contained a total of $12bn of total liabilities (mainly liabilities under insurance and investment contracts) and $12bn of total assets (mainly financial and reinsurance assets backing these liabilities and the PVIF associated with the insurance contracts) at 30 June 2015. The disposal of the UK pensions business is expected to be completed in the second half of 2015.

Insurance risk

Insurance risk is principally measured in terms of liabilities under the contracts in force.

A principal risk we face is that, over time, the cost of acquiring and administering a contract, claims and benefits may exceed the aggregate amount of premiums received and investment income. The cost of claims and benefits can be influenced by many factors, including mortality and morbidity experience, lapse and surrender rates and, if the policy has a savings element, the performance of the assets held to support the liabilities.

 

 

 

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Risk (continued)

 

 

The insurance risk profile and related exposures remain

largely consistent with those observed at 31 December

2014.

Footnotes to Risk

Credit risk

 

1 The amount of loan commitments reflects, where relevant, the expected level of take-up of pre-approved loan offers made by mailshots to personal customers. In addition to those amounts, there is a further maximum possible exposure to credit risk of $70bn (30 June 2014: $60bn; 31 December 2014: $71bn), reflecting the full take-up of loan commitments. The take-up of such offers is generally at modest levels.
2 ‘Other commercial loans and advances’ includes advances in respect of agriculture, transport, energy utilities and ABSs reclassified to ‘Loans and advances’.
3 ‘Loans and advances to customers’ includes asset-backed securities that have been externally rated as strong (30 June 2015: $812m; 30 June 2014: $1.8bn; 31 December 2014: $1.2bn), good (30 June 2015: $100m; 30 June 2014: $88m; 31 December 2014: $256m), satisfactory (30 June 2015: $125m; 30 June 2014: $54m; 31 December 2014: $332m), sub-standard (30 June 2015: $102m; 30 June 2014: $220m; 31 December 2014: $94m) and impaired (30 June 2015: $101m; 30 June 2014: $321m; 31 December 2014: $128m).
4 Corporate and commercial includes commercial real estate renegotiated loans of $2,547m (30 June 2014: $3,527; 31 December 2014: $2,724m) of which $656m (30 June 2014: $475m; 31 December 2014: $608m) were neither past due nor impaired, $1m (30 June 2014: $97m; 31 December 2014: $1m) were past due but not impaired and $1,890m (30 June 2014: $2,955m; 31 December 2014: $2,115m) were impaired.
5 ‘Financial’ includes loans and advances to banks.
6 ‘Currency translation adjustment’ is the effect of translating the results of subsidiaries and associates for the previous period at the average rates of exchange applicable in the current period.
7 Negative numbers are favourable: positive numbers are unfavourable.

Liquidity and funding

 

8 The most favourable metrics are a smaller advances to core funding and a larger stressed one month coverage ratio.

Market risk

 

9 Portfolio diversification is the market risk dispersion effect of holding a portfolio containing different risk types. It represents the reduction in unsystematic market risk that occurs when combining a number of different risk types, for example, interest rate, equity and foreign exchange, together in one portfolio. It is measured as the difference between the sum of the VaR by individual risk type and the combined total VaR. A negative number represents the benefit of portfolio diversification. As the maximum and minimum occur on different days for different risk types, it is not meaningful to calculate a portfolio diversification benefit for these measures. For presentation purposes, portfolio diversification within the trading portfolio includes VaR-based RNIV.

 

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Capital

 

 

  Capital

 

 

 Capital overview

 

   87  

 

 

 Movements by major driver

 

   88  

 

 

 Risk-weighted assets

 

   88  

 

 

 Capital

 

   94  

 

 

 Leverage ratio

 

   97  

 

 

 Regulatory developments

 

   97  

 

          

Our objective in the management of Group capital is to maintain appropriate levels of capital to support our business strategy and meet our regulatory and stress testing related requirements.

 

 

Capital highlights

 

•  Our end point CET1 ratio of 11.6% was up from 11.1% at the end of 2014 as a result of continued capital generation and RWA initiatives offset by business growth and regulatory changes.

 

•  Our leverage ratio remained strong at 4.9%.

 

Capital overview

Capital ratios

 

         At  
        

30 Jun
2015

%

        

30 Jun
2014

%

        

31 Dec
2014

%

 

CRD IV end point

              

Common equity tier 1 ratio1

       11.6           11.3           11.1   

CRD IV transitional

              

Common equity tier 1 ratio1

       11.6           11.2           10.9   

Tier 1 ratio

       13.4           12.3           12.5   

Total capital ratio

       16.3           15.4           15.6   

 

Total regulatory capital and risk-weighted assets

 

  

         At  
        

30 Jun

2015

$m

        

30 Jun

2014

$m

        

31 Dec

2014

$m

 

CRD IV end point

              

Common equity tier 1 capital1

       138,080           141,557           135,953   

CRD IV transitional

              

Common equity tier 1 capital1

       138,080           140,070           133,200   

Additional tier 1 capital

       21,346           13,813           19,539   

Tier 2 capital

       35,684           38,951           37,991   

Total regulatory capital

       195,110           192,834           190,730   

Risk-weighted assets

       1,193,154           1,248,572           1,219,765   

For footnotes, see page 100.

Our approach to managing Group capital is designed to ensure that we exceed current regulatory requirements and that we respect the payment priority of our capital providers. Throughout the first half of 2015, we complied with the PRA’s regulatory capital adequacy requirements, including those relating to stress testing. We are also well placed to meet our expected future capital requirements.

We continue to manage Group capital to meet a medium-term target for return on equity of more than 10% by 2017. This is modelled on a CET1 ratio on an end point basis in the range of 12% to 13%, which takes into account known and quantifiable end point CET1 requirements including a regulatory and management buffer of 1.5-2.5%, based on our estimate of the additional CET1 we will need to hold to cover the new time-varying buffers and other factors. It will be kept under review as clarity in respect of future regulatory developments continues to improve.

Capital and RWAs are calculated and presented on the Group’s interpretation of final CRD IV legislation and the PRA’s final rules as set out in the PRA Rulebook.

We continue to exceed the PRA’s current requirements in relation to capital ratios for major UK banks and building societies.

Despite the rules published to date, there remains continued uncertainty around the amount of capital that UK banks will be required to hold. While there is emerging clarity around the interaction of the capital buffers and the PRA’s Pillar 2 framework, uncertainty remains around the broader capital framework, including Basel revisions to the RWA framework, capital floors, global systemically important bank (‘G-SIB’) developments and total loss absorbing capacity (‘TLAC’) requirements. Furthermore, there remain a number of draft and unpublished European Banking Authority (‘EBA’) regulatory and implementing technical standards due in 2015.

A summary of our policies and practices regarding capital management, measurement and allocation is provided on page 257 of the Annual Report and Accounts 2014.

 

 

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Capital (continued)

 

 

Movements by major driver

Capital and RWA movements by major driver – CRD IV end point basis

 

         

Common

equity
tier 1 capital
$bn

                    RWAs
$bn
 

CRD IV end point basis at 1 January 2015

        136.0            1,219.8   

Capital generation from profit

        5.6         

– consolidated profits attributable to shareholders of the parent company (including regulatory adjustments) Of which $1.4bn gain on the partial sale of our shareholding in Industrial Bank including fair value gains reclassified to the income statement

        8.2               

– dividends net of scrip2,3

        (0.7        

– second interim dividend2 net of planned scrip

        (1.9            

Further impact on partial sale of shareholding in Industrial Bank including fair value gains reclassified to the income statement and lower allowable non-controlling interests

        (3.6      

Regulatory changes

              5.8   

RWA initiatives

              (50.3

Business growth including associates

              30.0   

Foreign currency translation differences4

        (1.8         (14.2

Other movements

        1.9            2.1   

CRD IV end point basis at 30 June 2015

        138.1            1,193.2   

For footnotes, see page 100.

Capital generation from profits contributed $5.6bn to CET1 capital, being profits attributable to shareholders of the parent company after regulatory adjustment for own credit spread, debit valuation adjustment and deconsolidation of insurance entities and net of dividends including the foreseeable second interim dividend after planned scrip. This also included the benefit of a higher fourth interim dividend scrip take-up and fair value gains reclassified to the income statement from the partial sale of our shareholding in Industrial Bank.

At our Investor Update we announced that we plan to significantly reduce Group RWAs by the end of 2017 and redeploy them to support higher returning areas. A number of internal programmes have been established to drive and manage these plans. RWAs reduced in the period,

driven by RWA initiatives and foreign currency translation differences. The reduction was largely offset by business growth, principally in CMB and Global Banking across Asia, Europe and North America and business growth in our associate BoCom.

These initiatives included accelerated reduction of GB&M legacy assets of $14.1bn from both the disposal of securitisation positions and the unwinding of other securitisation transactions. In both GB&M and CMB, more detailed mapping within RWA calculations and improved recognition of collateral and netting, reduced RWAs by $12.6bn and $6.1bn, respectively. The partial sale of our shareholding in Industrial Bank reduced RWAs by $12.3bn. In addition, the continued reduction of RBWM’s US CML run-off portfolio reduced RWAs by $5.2bn.

 

 

Risk-weighted assets

RWAs by risk type

 

         At       
        

        30 Jun
2015

$bn

        

          30 Jun
2014

$bn

        

        31 Dec
2014

$bn

      

Credit risk

       935.1           966.0           955.3      

– standardised approach

       348.5           350.9           356.9      

– IRB foundation approach

       23.3           15.5           16.8      

– IRB advanced approach

       563.3           599.6           581.6      

Counterparty credit risk

       83.7           101.4           90.7      

– standardised approach

       24.3           30.6           25.2      

– advanced approach

       59.4           70.8           65.5      

Market risk

       56.6           63.1           56.0      

– internal model based

       46.5           49.5           44.6      

– standardised approach

       10.1           13.6           11.4      

Operational risk

       117.8           118.1           117.8      
         1,193.2           1,248.6           1,219.8      

Of which:
Run-off portfolios

       79.9           121.6           99.2      

– legacy credit in GB&M

       30.0           52.7           44.1      

– US CML and Other

       49.9           68.9           55.1      

 

HSBC HOLDINGS PLC

88


Table of Contents

Capital (continued)

 

 

RWAs by global businesses

 

         At  
        

30 Jun
2015

$bn

        

30 Jun
2014

$bn

        

31 Dec
2014

$bn

 

Retail Banking and Wealth Management5

       204.6           225.4           207.2   

Commercial Banking5

       439.6           422.5           430.3   

Global Banking and Markets

       491.0           537.3           516.1   

Global Private Banking

       21.1           22.1           20.8   

Other

       36.9           41.3           45.4   
       1,193.2           1,248.6           1,219.8   

RWAs by geographical regions6

 

         At  
        

30 Jun
2015

$bn

        

30 Jun
2014

$bn

        

31 Dec
2014

$bn

 

Europe

       369.5           393.6           375.4   

Asia

       487.4           481.1           499.8   

Middle East and North Africa

       63.1           62.7           63.0   

North America

       215.7           236.9           221.4   

Latin America

       82.3           96.8           88.8   
       1,193.2           1,248.6           1,219.8   

For footnotes, see page 100.

Credit risk RWAs

Credit risk exposure – RWAs by geographical region

 

                 Europe
$bn
                 Asia
$bn
                 MENA
$bn
        

North

    America

$bn

        

Latin

    America
$bn

                 Total
$bn
      

IRB approach

       204.0           216.2           15.5           139.4           11.5           586.6      

– IRB advanced approach

       186.0           216.2           10.2           139.4           11.5           563.3      

– IRB foundation approach

       18.0                     5.3                               23.3      

Standardised approach

       50.7           177.7           38.6           32.5           49.0           348.5      

RWAs at 30 June 2015

       254.7           393.9           54.1           171.9           60.5           935.1      

IRB approach

       222.6           209.9           15.3           155.3           12.0           615.1      

– IRB advanced approach

       211.2           209.9           11.2           155.3           12.0           599.6      

– IRB foundation approach

       11.4                     4.1                               15.5      

Standardised approach

       46.9           174.3           39.0           30.7           60.0           350.9      

RWAs at 30 June 2014

       269.5           384.2           54.3           186.0           72.0           966.0      

IRB approach

       216.1           213.1           15.6           142.0           11.6           598.4      

– IRB advanced approach

       203.3           213.1           11.6           142.0           11.6           581.6      

– IRB foundation approach

       12.8                     4.0                               16.8      

Standardised approach

       47.1           186.0           39.0           29.6           55.2           356.9      

RWAs at 31 December 2014

       263.2           399.1           54.6           171.6           66.8           955.3      

Credit risk exposure – RWAs by global businesses

 

        

Principal5

RBWM
$bn

        

US

run-off

portfolio
$bn

        

Total

RBWM
$bn

         CMB5
$bn
         GB&M
$bn
         GPB
$bn
         Other
$bn
         Total
$bn
      

IRB approach

       60.1           42.6           102.7           225.6           234.8           9.5           14.0           586.6      

– IRB advanced approach

       60.1           42.6           102.7           210.6           227.8           9.4           12.8           563.3      

– IRB foundation approach

                                     15.0           7.0           0.1           1.2           23.3      

Standardised approach

       59.8           4.3           64.1           181.9           72.0           7.7           22.8           348.5      

RWAs at 30 June 2015

       119.9           46.9           166.8           407.5           306.8           17.2           36.8           935.1      

IRB approach

       60.5           60.6           121.1           213.2           256.4           11.2           13.2           615.1      

– IRB advanced approach

       60.5           60.6           121.1           206.0           249.5           11.1           11.9           599.6      

– IRB foundation approach

                                     7.2           6.9           0.1           1.3           15.5      

Standardised approach

       60.0           5.5           65.5           177.5           73.6           6.5           27.8           350.9      

RWAs at 30 June 2014

       120.5           66.1           186.6           390.7           330.0           17.7           41.0           966.0      

 

HSBC HOLDINGS PLC

89


Table of Contents

Capital (continued)

 

 

        

Principal5

RBWM
$bn

        

US

run-off

portfolio
$bn

        

Total

RBWM
$bn

         CMB5
$bn
         GB&M
$bn
         GPB
$bn
         Other
$bn
         Total
$bn
      

IRB approach

       56.1           47.3           103.4           217.2           255.6           10.2           12.0           598.4      

– IRB advanced approach

       56.1           47.3           103.4           209.2           248.1           10.0           10.9           581.6      

– IRB foundation approach

                                     8.0           7.5           0.2           1.1           16.8      

Standardised approach

       61.2           4.8           66.0           181.0           70.1           6.6           33.2           356.9      

RWAs at 31 December 2014

       117.3           52.1           169.4           398.2           325.7           16.8           45.2           955.3      

 

Credit risk RWAs are calculated using three approaches as permitted by the PRA. For consolidated Group reporting we have adopted the advanced IRB approach for the

majority of our business, with a small proportion being on the foundation IRB approach and the remaining portfolios on the standardised approach.

 

 

RWA movement by geographical regions by key driver – credit risk – IRB only7

 

         Europe
$bn
         Asia
$bn
         MENA
$bn
        

North

America
$bn

        

Latin

America
$bn

         Total
$bn
      

RWAs at 1 January 2015

       216.1           213.1           15.6           142.0           11.6           598.4      

Foreign currency movement

       (0.8        (2.2        (0.4        (1.8        (1.0        (6.2   

Acquisitions and disposals

       (12.1                                                (12.1   

Book size

       3.6           8.8           (0.6        1.3           (0.8        12.3      

Book quality

       (5.0        (3.1        (0.2        (0.6        1.7           (7.2   

Model updates

       1.6           (1.7                                      (0.1   

Methodology and policy

       0.6           1.3           1.1           (1.5                  1.5      

– internal updates

       (2.0        (0.7        1.0           (1.5                  (3.2   

– external updates – regulatory

       2.6           2.0           0.1                               4.7      
                                                                    

Total RWA movement

       (12.1        3.1           (0.1        (2.6        (0.1        (11.8   

RWAs at 30 June 2015

       204.0           216.2           15.5           139.4           11.5           586.6      

RWAs at 1 January 2014

       166.9           182.9           15.0           161.5           8.5           534.8      

Foreign currency movement

       4.9           0.8           (0.2        (0.1        (0.4        5.0      

Acquisitions and disposals

       (2.3                  (0.5        (2.6        (0.1        (5.5   

Book size

       3.0           13.0           (0.2        (0.5        1.9           17.2      

Book quality

       (1.7        0.7           0.7           (2.3        0.4           (2.2   

Model updates

       14.9           0.3                     (5.1                  10.1      

Methodology and policy

       36.9           12.2           0.5           4.4           1.7           55.7      

– internal updates

       (9.8        (5.6        (0.2        (2.6        (0.1        (18.3   

– external updates – regulatory

       2.2           6.7           (0.2        0.7           0.1           9.5      

– CRD IV impact

       37.0           5.7           0.4           4.9           0.2           48.2      

– NCOA moving from STD to IRB

       7.5           5.4           0.5           1.4           1.5           16.3      
                                                                    

Total RWA movement

       55.7           27.0           0.3           (6.2        3.5           80.3      

RWAs at 30 June 2014

       222.6           209.9           15.3           155.3           12.0           615.1      

RWAs at 1 July 2014

       222.6           209.9           15.3           155.3           12.0           615.1      

Foreign currency movement

       (16.5        (4.8                  (2.3        (1.5        (25.1   

Acquisitions and disposals

       (1.2                  (0.2        (1.6                  (3.0   

Book size

       8.4           6.5           2.0           3.4           0.1           20.4      

Book quality

       0.2           (0.7        (1.5        (8.0        1.0           (9.0   

Model updates

       4.5                               (1.0                  3.5      

Methodology and policy

       (1.9        2.2                     (3.8                  (3.5   

– internal updates

       (1.9        0.4                     (3.8                  (5.3   

– external updates – regulatory

                 1.8                                         1.8      

– CRD IV impact

                                                              

– NCOA moving from STD to IRB

                                                              
                                                                    

Total RWA movement

       (6.5        3.2           0.3           (13.3        (0.4        (16.7   

RWAs at 31 December 2014

       216.1           213.1           15.6           142.0           11.6           598.4      

 

HSBC HOLDINGS PLC

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Table of Contents

Capital (continued)

 

 

RWA movement by global businesses by key driver – credit risk – IRB only7

 

      

 

Principal

RBWM

5 

  

      

 

 

US

run-off

portfolio

  

  

  

      

 

Total

RBWM

  

  

       CMB5           GB&M           GPB           Other           Total      
         $bn          $bn          $bn          $bn          $bn          $bn          $bn          $bn       

RWAs at 1 January 2015

       56.1           47.3           103.4           217.2           255.6           10.2           12.0           598.4      

Foreign currency movement

       (0.5                  (0.5        (2.7        (2.8                  (0.2        (6.2   

Acquisitions and disposals

                                               (12.1                            (12.1   

Book size

       1.6           (2.7        (1.1        9.0           2.6           (0.2        2.1           12.4      

Book quality

       (1.5        (2.3        (3.8        2.0           (5.6                  0.1           (7.3   

Model updates

                                     1.6           (1.7                            (0.1   

Methodology and policy

       4.4           0.3           4.7           (1.5        (1.2        (0.5                  1.5      

– internal updates

       2.4           0.3           2.7           (1.5        (3.9        (0.5                  (3.2   

– external updates – regulatory

       2.0                     2.0                     2.7                               4.7      
                                                                                          

Total RWA movement

       4.0           (4.7        (0.7        8.4           (20.8        (0.7        2.0           (11.8   

RWAs at 30 June 2015

       60.1           42.6           102.7           225.6           234.8           9.5           14.0           586.6      

RWAs at 1 January 2014

       58.5           72.6           131.1           189.4           198.5           10.6           5.2           534.8      

Foreign currency movement

       0.5                     0.5           2.2           2.1           0.2                     5.0      

Acquisitions and disposals

                                               (5.5                            (5.5   

Book size

       1.2           (3.4        (2.2        11.6           8.5           (0.4        (0.3        17.2      

Book quality

       (1.8        (4.0        (5.8        2.8           0.7           (0.3        0.4           (2.2   

Model updates

       0.1           (4.9        (4.8        9.3           5.3           0.3                     10.1      

Methodology and policy

       2.0           0.3           2.3           (2.1        46.8           0.8           7.9           55.7      

– internal updates

       (2.6                  (2.6        (5.5        (9.9        (0.3                  (18.3   

– external updates – regulatory

                                     2.5           6.3           0.5           0.2           9.5      

– CRD IV impact

                                     (0.7        48.6           0.2           0.1           48.2      

– NCOA moving from STD to IRB

       4.6           0.3           4.9           1.6           1.8           0.4           7.6           16.3      
                                                                                          

Total RWA movement

       2.0           (12.0        (10.0        23.8           57.9           0.6           8.0           80.3      

RWAs at 30 June 2014

       60.5           60.6           121.1           213.2           256.4           11.2           13.2           615.1      

RWAs at 1 July 2014

       60.5           60.6           121.1           213.2           256.4           11.2           13.2           615.1      

Foreign currency movement

       (3.1                  (3.1        (10.9        (10.2        (0.4        (0.5        (25.1   

Acquisitions and disposals

                                               (2.7                  (0.3        (3.0   

Book size

       0.7           (3.5        (2.8        11.5           12.6           (0.1        (0.8        20.4      

Book quality

       (3.9        (4.6        (8.5                  (0.9                  0.4           (9.0   

Model updates

       0.5           (1.3        (0.8        2.9           1.7           (0.3                  3.5      

Methodology and policy

       1.4           (3.9        (2.5        0.5           (1.3        (0.2                  (3.5   

– internal updates

       (0.4        (3.9        (4.3        0.5           (1.3        (0.2                  (5.3   

– external updates – regulatory

       1.8                     1.8                                                   1.8      

– CRD IV impact

                                                                                  

– NCOA moving from STD to IRB

                                                                                  
                                                                                          

Total RWA movement

       (4.4        (13.3        (17.7        4.0           (0.8        (1.0        (1.2        (16.7   

RWAs at 31 December 2014

       56.1           47.3           103.4           217.2           255.6           10.2           12.0           598.4      

 

Standardised approach

For portfolios treated under the standardised approach, credit risk RWAs decreased by $8.4bn of which $8.0bn was due to foreign currency movements. Credit risk RWAs decreased by $12.3bn due to the partial sale of our investment in Industrial Bank as recorded in ‘Other’.

Business growth in North America, Europe and Middle East and Asia increased RWAs by $11.0bn.

RWA initiatives in CMB and GB&M resulted in an overall decrease in RWAs of $2.2bn across Middle East and Latin America.

Additionally, internal updates in CMB and GB&M relating to the reclassification of corporate exposures from the IRB to the standardised approach resulted in an increase in RWAs of $3.0bn on the standardised approach and a decline in the IRB approach of $2.6bn.

RWA increased by $0.8bn due to deferred tax assets.

Internal ratings-based approach

For portfolios treated under the IRB approach, credit risk RWAs decreased by $11.8bn of which $6.2bn was due to foreign currency movements driven by the deterioration of a range of currencies including euro against US dollar.

 

 

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Acquisitions and disposals

The continued disposal of legacy securitisation positions and the unwinding of other securitisation transactions in GB&M resulted in a decrease in RWAs of $12.1bn in Europe.

Book size

Business growth from higher term lending to corporate customers and institutions in CMB and GB&M in Asia, North America and Europe increased RWAs by $16.6bn. This was partially offset by RWA initiatives in Europe including a reduction in net current account balances which decreased RWAs by $2.2bn, and the run-down of legacy securitisation positions lowering RWAs by $3.6bn.

In North America, in RBWM, continued run-off of the US CML retail mortgage portfolios resulted in an RWA reduction of $2.7bn in book size. This was partially offset by growth in retail lending in Asia and Europe of $1.6bn.

Book quality

In GB&M, there were favourable movements in average customer credit quality in the corporate portfolio in Asia and Europe which decreased RWAs by $5.7bn, offset by credit quality deterioration in North America which increased RWAs by $1.6bn. In addition, improving economic stability in Asia resulted in an upgrade to the internal credit risk rating of sovereigns which decreased RWAs by $0.6bn, offset by internal sovereign downgrades in Latin America which increased RWAs by $1.1bn. RWA initiatives relating to the execution of a netting agreement reduced RWAs by $1.3bn in Europe.

In CMB, change in the average credit quality of the portfolio and model recalibrations resulted in an RWA increase of $3.2bn across Europe, North America, Middle East and Latin America, offset by credit quality improvements in Asia which reduced RWAs by $1.1bn.

RWAs reduced by $2.3bn in the US run-off portfolio in book quality as a result of exposures moving to default combined with continued improvements in the credit quality of the residual performing book.

Credit quality improvements in Principal RBWM related primarily to favourable shifts in portfolio quality in mortgages and revolving credit which reduced RWAs in Europe by $1.5bn.

Model updates

In CMB, selected portfolios in Europe were migrated from the advanced IRB approach to the foundation IRB approach, as a result of a change in permission, increasing RWAs by $1.6bn.

In GB&M, the update of the Sovereign PD model decreased RWAs by $1.8bn in Asia.

Methodology and policy changes

RWA initiatives in GB&M and CMB, consisting of improvements in asset classification and recognition of guarantees, resulted in a decrease in RWAs by $3.1bn across Europe, Asia and North America.

Internal updates in CMB and GB&M relating to the reclassification of corporate exposures to the standardised methodology resulted in a decrease in IRB RWAs of $2.6bn and a net increase of $0.4bn in overall RWAs.

This was partially offset by the application of a scaling factor to the securitisation positions risk-weighted at 1,250%, increasing RWAs by $2.1bn.

In Principal RBWM, the further application of a regulator mandated risk-weight floor on residential mortgages in Hong Kong resulted in an increase in RWAs of $2.0bn. Additionally a change in the methodology in the calculation of defaulted mortgage exposures resulted in an increase in RWAs of $2.0bn in Europe which was offset by a reduction in the capital deduction for expected loss in the calculation of regulatory capital.

 

 

Counterparty credit risk and market risk RWAs

Counterparty credit risk RWAs

 

         At       
                 30 Jun                  30 Jun                31 Dec       
         2015          2014          2014       
         $bn          $bn          $bn       

Advanced approach

       59.4           70.8           65.5      

– CCR IRB approach

       55.9           65.2           62.0      

– credit valuation adjustment

       3.5           5.6           3.5      

Standardised approach

       24.3           30.6           25.2      

– CCR standardised approach

       5.2           3.9           4.4      

– credit valuation adjustment

       16.6           22.2           18.0      

– central counterparty

       2.5           4.5           2.8      
                                   
       83.7           101.4           90.7      

 

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RWA movement by key driver – counterparty credit risk – advanced approach

 

         Half-year to       
                 30 June                  30 June           31 December       
         2015          2014          2014       
         $bn          $bn          $bn       

RWAs at beginning of period

       65.5           42.2           70.8      

Book size

       (3.0        3.2           (1.6   

Book quality

       (0.6        (0.3        (0.3   

Model updates

                 2.2           (2.1   

Methodology and policy

       (2.5        23.5           (1.3   

– internal regulatory updates

       (2.5        (1.0        (2.8   

– external regulatory updates

                 7.5           1.5      

– CRD IV impact

                 17.0                
                                   

Total RWA movement

       (6.1        28.6           (5.3   

RWAs at end of period

       59.4           70.8           65.5      

 

Counterparty credit risk RWAs decreased by $7.0bn, of which $6.1bn related to the advanced approach.

Standardised approach

RWA under the standardised approach reduced by $0.9bn. The main driver was a RWA initiative consisting of increased level of detail in counterparty mappings leading to additional CVA exemptions.

Advanced approach

Book size

The decrease was driven mainly by a combination of reduced portfolio size following trade maturities, RWA

initiatives, mainly trade compressions, and reducing mark to markets of over-the-counter derivatives, most notably in Asian and North American portfolios.

Methodology and policy changes

The decrease in RWAs from internal methodology updates was mainly driven by RWA initiatives consisting of more efficient allocation of collateral, mostly in North America, and refinement of transaction and counterparty static data used to calculate exposures and risk weights in the derivative portfolios globally.

 

Market risk RWAs

 

        At       
              30 Jun                30 Jun          31 Dec       
        2015          2014          2014       
        $bn          $bn          $bn       

Internal model based

      46.5           49.5           44.6      

– VaR

      7.2           5.6           7.3      

– stressed VaR

      10.4           7.8           10.4      

– incremental risk charge

      21.0           24.9           20.1      

– comprehensive risk measure

                2.0                

– other VaR and stressed VaR

      7.9           9.2           6.8      

Standardised approach

      10.1           13.6           11.4      
      56.6           63.1           56.0      

 

RWA movement by key driver – market risk – internal model based

 

  

  
        Half-year to       
        30 June                30 June          31 December       
        2015          2014          2014       
        $bn          $bn          $bn       

RWAs at beginning of period

      44.6           52.2           49.5      

Acquisitions and disposals

                          (2.2   

Movement in risk levels

      2.7           0.9           (5.1   

Model updates

                               

Methodology and policy

      (0.8        (3.6        2.4      

– internal updates

      (0.8        0.5           (4.3   

– external updates – regulatory

                (4.1        6.7      
                                  

Total RWA movement

      1.9           (2.7        (4.9   

RWAs at end of period

      46.5           49.5           44.6      

 

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Total market risk RWAs remained relatively stable during the first half of the year, increasing marginally by $0.6bn.

Standardised approach

Market risk RWA movements in portfolios not within the scope of modelled approaches reflected a decrease of $1.3bn, mainly related to the reduction in securitisation positions held within the trading book.

Internal Model based

Movement in Risk Levels

Movements relating to changes in risk levels reflected an increase in capital requirements arising from internal models due to the net effect of position management and increased market volatility mainly in European markets.

Methodology and policy changes

The movements in ‘Methodology and policy’ relate to an internal scenario refinement within the risk not in VaR (‘RNIV’) equity correlation risk model.

 

 

Capital

Source and application of total regulatory capital

 

         Half-year to      
        

30 June

2015

$m

        

30 June

2014

$m

        

31 December

2014

$m

     

Movement in total regulatory capital

                

Opening common equity tier 1 capital on a transitional basis8

       133,200           131,233           140,070     

Transitional adjustments

       2,753               

– Unrealised gains arising from revaluation of property

       1,375               

– Unrealised gains in available-for-sale debt and equities

       1,378               

Opening common equity tier 1 capital on an end point basis1,8

       135,953               

Contribution to common equity tier 1 capital from profit for the period

       8,151           9,432           3,246     

– consolidated profits attributable to shareholders of the parent company

       9,618           9,746           3,942     

– removal of own credit spread net of tax

       (568        202           (530  

– debit valuation adjustment

       (121        97           157     

– deconsolidation of insurance entities and SPE entities

       (778        (613        (323  

Net dividends including foreseeable net dividends2

       (2,562        (2,329        (5,212  

– update for actual dividends and scrip take-up

       1,255           1,108           (15  

– first interim dividend net of scrip

       (1,875        (1,766         

– second foreseeable interim dividend net of planned scrip

       (1,942        (1,671         

– third interim dividend net of scrip

                     (1,835  

– fourth foreseeable interim dividend net of planned scrip

                             (3,362  

Decrease in goodwill and intangible assets deducted4

       (81        237           159     

Ordinary shares issued

       9           14           253     

Foreign currency translation differences4

       (1,838        444           (6,634  

Unrealised gains arising from revaluation of property

            (65        (29  

Unrealised gains in available-for-sale debt and equities

            (141        (1,237  

Other, including regulatory adjustments

       (1,552        1,245           2,584     

Closing common equity tier 1 capital

       138,080           140,070           133,200     

Opening additional tier 1 capital on a transitional basis8

       19,539           14,408           13,813     

Movement in additional tier 1 securities

       1,190           (500        5,461     

– new issuance

       2,459                     5,681     

– grandfathering adjustments

       (1,269        (500        (220  

Other, including regulatory adjustments

       617           (95        265     

Closing tier 1 capital on a transitional basis

       159,426           153,883           152,739     

Opening tier 2 capital on a transitional basis8

       37,991           35,538           38,951     

Movement in tier 2 securities

       (2,198        3,450           (1,036  

– new issuance

       1,680           3,500               

– grandfathering adjustments

       (2,997                      

– foreign currency translation differences

       (410        105           (1,171  

– other movements

       (471        (155        135     

Other, including regulatory adjustments

       (109        (37        76     

Closing total regulatory capital on a transitional basis

       195,110           192,834           190,730     

For footnotes, see page 100.

 

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Capital (continued)

 

 

Composition of regulatory capital

 

         At       
        

      30 June

2015

$m

        

      30 June

2014

$m

        

31 December

2014

$m

      

Common equity tier 1 capital

                 

Shareholders’ equity

       167,374           173,453           166,617      

– shareholders’ equity per balance sheet9

       192,427           190,281           190,447      

– foreseeable interim dividend2

       (1,942        (1,671        (3,362   

– preference share premium

       (1,405        (1,405        (1,405   

– other equity instruments

       (13,991        (5,851        (11,532   

– deconsolidation of special purpose entities10

       (243        (686        (323   

– deconsolidation of insurance entities

       (7,472        (7,215        (7,208   

Non-controlling interests

       3,579           3,792           4,640      

– non-controlling interests per balance sheet

       8,955           8,441           9,531      

– preference share non-controlling interests

       (2,106        (2,153        (2,127   

– non-controlling interests transferred to tier 2 capital

                 (487        (473   

– non-controlling interests in deconsolidated subsidiaries

       (911        (824        (851   

– surplus non-controlling interest disallowed in CET1

       (2,359        (1,185        (1,440   

Regulatory adjustments to the accounting basis

       (2,660        (1,072        (3,556   

– own credit spread11

       184           1,314           767      

– debit valuation adjustment

       (318        (354        (197   

– defined benefit pension fund adjustment

       (2,583        (2,301        (4,069   

– cash flow hedging reserve

       57           269           (57   

Deductions

       (30,213        (34,616        (31,748   

– goodwill and intangible assets

       (21,397        (24,752        (22,475   

– deferred tax assets that rely on future profitability (excludes those arising from temporary differences)

       (859        (945        (1,036   

– additional valuation adjustment (referred to as PVA)

       (1,177        (1,688        (1,341   

– investments in own shares through the holding of composite products of which HSBC is a component (exchange traded funds, derivatives and index stock)

       (990        (904        (1,083   

– negative amounts resulting from the calculation of expected loss amounts

       (5,790        (6,327        (5,813   
                                   

Common equity tier 1 capital on an end point basis

       138,080           141,557           135,953      

Tier 1 and tier 2 capital on a transitional basis

                 

Common equity tier 1 capital on an end point basis

       138,080           141,557           135,953      

Transitional adjustments

                 (1,487        (2,753   

– unrealised gains arising from revaluation of property

                 (1,346        (1,375   

– unrealised gains in available-for-sale debt and equities

                 (141        (1,378   
                                   

Common equity tier 1 capital on a transitional basis

       138,080           140,070           133,200      

Other tier 1 capital before deductions

       21,449           13,977           19,687      

– preference share premium

       1,015           1,160           1,160      

– preference share non-controlling interests

       1,711           1,955           1,955      

– allowable non-controlling interest in AT1

       1,456           635           884      

– hybrid capital securities

       17,267           10,227           15,688      

Deductions

       (103        (164        (148   

– unconsolidated investments12

       (103        (164        (148   
                                   

Tier 1 capital on a transitional basis

       159,426           153,883           152,739      

Tier 2 capital on a transitional basis

                 

Total qualifying tier 2 capital before deductions

       35,924           39,197           38,213      

– allowable non-controlling interest in tier 2

       8           47           99      

– perpetual subordinated debt

       1,941           2,218           2,218      

– term subordinated debt

       33,975           36,692           35,656      

– non-controlling interests in tier 2 capital

                 240           240      

Total deductions other than from tier 1 capital

       (240        (246        (222   

– unconsolidated investments12

       (240        (246        (222   
                                   

Total regulatory capital on a transitional basis

       195,110           192,834           190,730      

For footnotes, see page 100.

 

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Reconciliation of regulatory capital from transitional basis to an estimated CRD IV end point basis

 

         At  
               30 June                30 June          31 December  
         2015          2014          2014  
         $m          $m          $m  

Common equity tier 1 capital on a transitional basis

       138,080           140,070           133,200   

Unrealised gains arising from revaluation of property

                 1,346           1,375   

Unrealised gains in available-for-sale debt and equities

                 141           1,378   

Common equity tier 1 capital on an end point basis

       138,080           141,557           135,953   

Additional tier 1 capital on a transitional basis

       21,346           13,813           19,539   

Grandfathered instruments:

              

Preference share premium

       (1,015        (1,160        (1,160

Preference share non-controlling interests

       (1,711        (1,955        (1,955

Hybrid capital securities

       (9,127        (10,227        (10,007

Transitional provisions:

              

Allowable non-controlling interest in AT1

       (1,282        (231        (487

Unconsolidated investments

       103           164           148   

Additional tier 1 capital on an end point basis

       8,314           404           6,078   

Tier 1 capital on an end point basis

       146,394           141,961           142,031   

Tier 2 capital on a transitional basis

       35,684           38,951           37,991   

Grandfathered instruments:

              

Perpetual subordinated debt

       (1,941        (2,218        (2,218

Term subordinated debt

       (19,033        (21,513        (21,513

Transitional provisions:

              

Non-controlling interest in tier 2 capital

                 (240        (240

Allowable non-controlling interest in tier 2

       14           190           396   

Unconsolidated investments

       (103        (164        (148

Tier 2 capital on an end point basis

       14,621           15,006           14,268   

Total regulatory capital on an end point basis

       161,015           156,967           156,299   

 

The capital position presented on a CRD IV transitional basis follows the CRD IV legislation as implemented in the PRA Rulebook.

The effects of draft EBA technical standards are not generally captured in our numbers. These could have additional effects on our capital position and RWAs.

While CRD IV allows for the majority of regulatory adjustments and deductions from CET1 to be implemented on a gradual basis from 1 January 2014 to 1 January 2018, the PRA has largely decided not to make use of these transitional provisions. From 1 January 2015, unrealised gains on investment property and available-for-sale securities are to be recognised in CET1 capital. As a result, our end point and transitional CET1 capital and ratios are now aligned. Transitional provisions, however, continue to apply for additional tier 1 and tier 2 capital.

For additional tier 1 and tier 2 capital, the PRA followed the transitional provisions timing as set out in CRD IV to apply the necessary regulatory adjustments and deductions, the effect of which is being phased in at 20% per annum from 1 January 2014 to 1 January 2018.

Non-CRD IV compliant additional tier 1 and tier 2 instruments also benefit from a grandfathering period. This progressively reduces the eligible amount by 10% annually following an initial reduction of 20% on 1 January 2014 until they are fully phased out by 1 January 2022.

Under CRD IV, as implemented in the UK, banks are required to meet a minimum CET1 ratio of 4.5% of RWAs and a minimum tier 1 ratio of 6% of RWAs (from 1 January 2015), and a total capital ratio of 8% of RWAs. In addition to the Pillar 1 minimum ratios, the PRA sets Pillar 2A capital requirements which together are considered the minimum level of regulatory capital to be maintained at all times. Pillar 2A is to be met at least with 56% CET1 capital and the remaining with non-common equity capital.

Alongside CRD IV requirements, from 1 July 2014, the PRA expects major UK banks and building societies to meet a 7% CET1 ratio using the CRD IV end point definition. Going forward, as the grandfathering provisions fall away, we intend to meet these regulatory minima in an economically efficient manner by issuing non-common equity capital as necessary. At 30 June 2015, we had issued $23.1bn of CRD IV compliant non-common equity capital instruments, of which $1.7bn of tier 2 and $2.5bn of additional tier 1 were issued during the first half of 2015. At 30 June 2015, we also had $32.8bn of non-common equity capital instruments qualifying as eligible capital under CRD IV by virtue of the application of the grand-fathering provisions, after applying a 30% reduction as outlined above.

 

 

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Capital (continued)

 

 

Leverage ratio

Estimated leverage ratio

 

         EU Delegated Act
basis at
         Basel III 2014
basis at
      
        

    30 June

2015

        

31 December

2014

        

30 June

2014

      
         $bn          $bn          $bn       

Total assets per accounting balance sheet

       2,572           2,634           2,754      

Deconsolidation of insurance/other entities

       (103        (102        (107   

Consolidation of banking associates

       206           194           186      

Total assets per regulatory/accounting balance sheet

       2,675           2,726           2,833      

Adjustment to reverse netting of loans and deposits allowable under IFRS

       37           38           98      

Reversal of accounting values:

       (476        (525        (498   

– derivatives

       (298        (345        (270   

– repurchase agreement and securities finance

       (178        (180        (228   

Replaced with regulatory values:

                 

Derivatives:

       168           166           199      

– mark-to-market value

       70           81           60      

– deductions of receivables assets for cash variation margin

       (67        (82        (55   

– add-on amounts for potential future exposure

       143           148           166      

– exposure amount resulting from the additional treatment for written credit derivatives

       22           19           28      

Repurchase agreement and securities finance:

       187           188           237      

– gross securities financing transactions assets

       246           269           314      

– netted amounts of cash payables and cash receivables of gross securities financing transactions assets

       (68        (89        (86   

– measurement of counterparty risk

       9           8           9      

Addition of off balance sheet commitments and guarantees:

       399           396           445      

– guarantees and contingent liabilities

       68           67           80      

– commitments

       322           321           356      

– other

       9           8           9      

Exclusion of items already deducted from the capital measure

       (33        (36        (37   

Exposure measure after regulatory adjustments

       2,957           2,953           3,277      

Tier 1 capital under CRD IV (end point)

       146           142           142      

Estimated leverage ratio (end point)

       4.9%           4.8%           4.3%      

 

In January 2015, the PRA issued a letter setting out the approach to be taken for calculating the leverage ratio for 2014 year end disclosures. While the numerator continues to be calculated using the final CRD IV end point tier 1 capital definition, the exposure measure is calculated based on the EU delegated act (rather than the Basel 2014 definition disclosed in the Interim Report 2014).

The basis of preparation for the leverage ratio can be found on page 261 of the Annual Report and Accounts 2014. The basis of preparation for the June 2014 comparative can be found on page 198 in the Interim Report 2014.

Regulatory developments

Regulatory capital buffers

CRD IV establishes a number of capital buffers, to be met with CET1 capital, broadly aligned with the Basel III framework. CRD IV suggests that these will be phased in from 1 January 2016, subject to national discretion.

Automatic restrictions on capital distributions apply if a bank’s CET1 capital falls below the level of its CRD IV combined buffer. The CRD IV combined buffer is defined as the total of the capital conservation buffer (‘CCB’), the countercyclical capital buffer (‘CCyB’), the global systemically important institutions (‘G-SII’s) buffer and the systemic risk buffer (‘SRB’) as these become applicable.

Under the revised Pillar 2 framework, the PRA has introduced a PRA buffer, the use of which will not result in automatic restrictions on capital distributions. However, the PRA expects firms not to meet the CRD IV buffers with any CET1 capital maintained to meet its individual capital guidance (‘ICG’).

In June 2015, the Financial Policy Committee (‘FPC’) maintained a 0% CCyB rate for UK exposures and recognised the 1.5% CCyB rates introduced by Norway and Sweden, which are to become effective from June 2016. The FPC had also previously recognised the 1% CCyB rates introduced by both these countries to become effective from October 2015. In March 2015, the FPC further stated that the PRA would reciprocate the HKMA CCyB rate of 0.625% to be applied to Hong Kong exposures from January 2016. In accordance with UK legislation and the PRA’s supervisory statement PS 3/14, this rate will directly apply to the calculation of our institution-specific CCyB rate from 1 January 2016.

The institution-specific CCyB rate for the Group is based on the weighted average of the CCyB rates that apply in the jurisdictions where relevant credit exposures are located. Currently the Group’s institution-specific CCyB is zero.

Further details of the aforementioned CRD IV buffers are set out on page 252 of the Annual Report and Accounts 2014.

 

 

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Pillar 2 and the ‘PRA buffer’

Under the Pillar 2 framework, banks are already required to hold capital in respect of the internal capital adequacy assessment and supervisory review which leads to a final determination by the PRA of ICG under Pillar 2A and Pillar 2B. Pillar 2A was previously met by total capital but, since 1 January 2015, in accordance with the PRA supervisory statement SS5/13, is expected to be met with at least 56% CET1.

The Pillar 2A requirement is a point in time assessment of the amount of capital the PRA considers that a bank should hold to meet the overall financial adequacy rule. It is therefore subject to change pending annual assessment and the supervisory review process. During 2014, our Pillar 2A requirement amounted to 1.5% of RWAs. In February 2015, this was revised to 2.0% of RWAs, of which 1.1% is expected to be met by CET1 with immediate effect.

In July 2015, the PRA published a final policy statement PS17/15, setting out revisions to the Pillar 2 Framework. The revised framework is to become effective from 1 January 2016. The PRA statement of policy sets out the methodologies that the PRA will use to inform its setting of firms’ Pillar 2 capital requirements, including new approaches for determining Pillar 2 requirements for credit risk, operational risk, credit concentration risk and pension obligation risk.

As is set out in the revised PRA supervisory statement SS31/15, the PRA will also introduce a PRA buffer which is to replace the capital planning buffer (‘CPB’), under Pillar 2B. This is to be met in the form of CET1 capital. The PRA buffer will avoid duplication with CRD IV buffers and will be set for a particular firm depending on its vulnerability in a stress scenario. In order to address significant weaknesses in risk management and governance, a scalar may be applied to firms’ CET1 Pillar 1 and Pillar 2A capital requirements, and will also form part of the PRA Buffer. Where the PRA considers there is overlap between the CRD IV buffers and the PRA buffer assessment, the PRA buffer will be set as the excess capital required over and above the CCB and relevant systemic buffers. The PRA buffer will also be in addition to the CCyB and sectoral capital requirements.

Overall capital requirements

Elements of the capital requirements that are known or quantified to date are set out in the diagram below.

Capital requirements framework (end point)

 

LOGO

There remains residual uncertainty as to what HSBC’s precise end point CET1 capital requirement will be. Time-varying elements such as the macro-prudential tools, the Pillar 2A and 2B requirements and systemic buffers are subject to change. This uncertainty is reflected in the 1.5-2.5% regulatory and management buffer we have included in the 12-13% CET1 range that is used to model our medium-term target for return on equity, of more than 10%, by 2017.

In addition, we will need to consider the effect of the FSB proposals in relation to TLAC requirements, and the UK implementation of the EU minimum requirement for own funds and eligible liabilities (‘MREL’). For further details, see page 100.

Regulatory stress testing

The Group is subject to supervisory stress testing in many jurisdictions. These supervisory requirements are increasing in frequency and in the granularity with which results are required. As such, stress testing represents a key focus for the Group. The results of the 2014 UK stress testing exercise were published in December 2014.

In March 2015, the Bank of England published key elements of the 2015 stress test and accompanying guidance. Unlike the 2014 stress test, which was based on the 2014 EBA stress testing exercise, the 2015 UK exercise is wholly designed by the Bank of England. This aims to assess the resilience of the UK banking system to a deterioration in global economic conditions. The results of the 2015 UK stress test are expected to be published at the end of 2015.

 

 

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The EBA is not undertaking a stress testing exercise in 2015, and will instead carry out a transparency exercise towards the end of the year. This exercise will involve publishing detailed data on bank balance sheets, covering their composition of capital, leverage ratio and RWAs. In July 2015, the EBA published draft templates on the data to be disclosed and a tentative list of banks expected to be included in this exercise, which includes HSBC. The EBA also disclosed a timeline for the 2016 EU wide stress test exercise, which is expected to be aligned with banks’ annual supervisory review and evaluation process. The EBA expects to publish the 2016 stress test scenario and methodology in the first quarter of 2016, with results published in the third quarter of 2016.

In 2015, Group entities also participated in regional stress testing exercises. For further details on stress testing exercises, see page 59.

RWA developments

Throughout 2014 and in the first half of 2015, UK, EU and international regulators issued a series of consultations designed to revise the various components of the RWA regime and increase related reporting and disclosures. In particular, the Basel Committee published proposals across all Pillar 1 risk types to update standardised, non-modelled approaches for calculating capital requirements and to provide the basis for the application of a capital floor. There have also been various consultations on proposed modelled approaches for market risk requirements. Quantitative impact studies (‘QIS’) in relation to the Basel Committee proposals for the revised standardised approach to credit risk and capital floors were published in February 2015. The QIS results will inform final requirements which are expected by the end of 2015. These will need to be transposed into EU law before coming into effect.

Further details of Basel RWA developments during 2014 may be found on page 254 of the Annual Report and Accounts 2014.

In March 2015, the EBA published a discussion paper on the future of the IRB approach. This set out further work in three key areas: a review of the IRB regulatory framework; supervisory consistency, which will include annual benchmarking exercises; and increased transparency based on comparable templates. In particular, it proposed a phased EBA work-plan to deliver final amendments by the end of 2017 with implementation thereafter.

In May 2015, the EBA consulted on regulatory technical standards (‘RTS’) for specialised lending exposures. This aims to specify how certain factors (e.g. financial strength and the political and legal environment) should be taken into account when assigning risk weights to specialised lending exposures. This also proposes to include more consistency in categorisation and definitions for specialised lending.

In June 2015, the Basel Committee published a consultation paper on the treatment of interest rate risk in the banking book (‘IRRBB’). IRRBB is currently included in the scope of Pillar 2 requirements. The consultation proposes two possible alternatives, either to include IRRBB within Pillar 1 requirements, or introduce a strengthened approach to Pillar 2 which would also include additional disclosures under Pillar 3. The consultation closes in September 2015 and is expected to include a QIS to inform final requirements.

In July 2015, the Basel Committee published a consultation paper proposing amendments to the methodology for calculating CVA. This was in response to calls to review the existing methodology, including from the EU. The Basel consultation will close in October 2015, and a QIS will be completed by September 2015 to inform final requirements. As part of this, the EU will review the exemptions to the CVA charge currently applied to corporates, sovereigns and intragroup exposures. Once finalised, changes would need to be transposed into CRD IV before coming into effect. A further QIS for the proposed revisions to the market risk framework and CVA requirements was also published in July 2015.

UK leverage ratio framework

Following consultations by the FPC and HM Treasury in 2014, secondary legislation came into force in April 2015 to provide the FPC with direction powers in relation to the UK leverage ratio framework. In July 2015, the FPC published its final policy statement setting out its intention to use its new powers of direction. As a result, in July 2015, the PRA issued a consultation paper to introduce requirements for the UK leverage ratio framework. This introduces a minimum leverage ratio of 3%, an additional leverage ratio buffer (‘ALRB’) for G-SIIs and a countercyclical leverage ratio buffer (‘CCLB’). The ALRB and CCLB are to be set at 35% of the relevant buffers in the risk-weighted capital framework. The PRA also proposes to introduce new reporting and disclosure templates as part of this framework. The minimum leverage ratio requirement is aligned with existing PRA expectations (as set out in the PRA supervisory statement SS3/13), and the additional leverage ratio buffers, subject to finalisation, are to apply from 1 January 2016 in line with the corresponding risk-weighted capital buffers. Transitional arrangements are proposed for the new disclosure and reporting requirements.

Both the FPC and the PRA note that an internationally agreed minimum leverage ratio requirement will be applied from 2018 and, as a result, will consider the implications for the UK leverage ratio framework again in 2017.

 

 

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Capital (continued)

 

 

Banking structural reform and recovery and resolution planning

In the EU, the Bank Recovery and Resolution Directive (‘BRRD’) came into effect from 1 January 2015, with the option to delay implementation of bail-in provisions until 1 January 2016. Despite this, the UK introduced bail-in powers from 1 January 2015. The UK transposition of the BRRD builds on the resolution framework already in place in the UK. In January 2015, the PRA published a policy statement containing updated requirements for recovery and resolution planning which revises PRA rules that have been in force since 1 January 2014. In addition, the EBA has produced a number of RTS and guidelines, some of which are yet to be finalised, that will further inform the BRRD requirements.

In July 2015, the EBA published final draft RTS for MREL which seeks to provide additional clarity on the criteria that resolution authorities should take into account when setting a firm specific minimum requirement for eligible liabilities. The EBA notes that it aims to implement the MREL in a way which is consistent with the developing international standard on total loss absorbing capacity. The Bank of England is expected to publish a consultation paper later in 2015 on the transposition of MREL into UK requirements.

In respect of UK ring-fencing requirements, in May 2015 the PRA published a policy statement containing near final rules on legal structure, corporate governance, and continuity of services and facilities. The PRA intends to undertake a further consultation in 2015 and publish final versions of PRA rules and supervisory statements during the first half of 2016, with implementation by 1 January 2019.

In the EU, discussions on the Banking Structural Reform Regulation continue to progress. In January 2014, the European Commission published legislative proposals on ring-fencing trading activities from deposit taking and prohibiting proprietary trading in financial instruments and commodities. In June 2015, the European Council published its negotiating position on the regulation, which will need to be agreed with the European Parliament before being finalised.

For further details of the Group’s approach to structural reform, see page 12.

Total loss absorbing capacity proposals

In November 2014, as part of the ‘too big to fail’ agenda, the FSB published proposals on TLAC for G-SIBs. The FSB proposals include a minimum TLAC requirement in the range of 16-20% of RWAs and a TLAC leverage ratio of at least twice the Basel III tier 1 leverage ratio. The TLAC requirement is to be applied in accordance with individual resolution strategies, as determined by the G-SIB’s crisis management group. A QIS was undertaken earlier this year, the results of which will inform final proposals. The conformance period for the TLAC requirement will also be influenced by the QIS, but will not be before 1 January 2019. Once finalised, it is expected that any new TLAC standard should be met alongside the Basel III minimum capital requirements.

The draft proposals require G-SIBs to be subject to a minimum TLAC requirement with the precise details to be informed by the QIS. There are a number of details relating to the types of liabilities which can be used to meet the TLAC requirement, the composition of TLAC and the location of liabilities within a banking group, in accordance with its resolution strategy. The TLAC proposals are expected to be finalised later in 2015 and will need to be implemented into national legislation before coming into effect.

Other regulatory updates

In January 2015, the Basel Committee published final standards on ‘Revised Pillar 3 disclosure requirements’. They mandate extensive use of standardised templates to enhance comparability between banks’ disclosures and require a considerable volume of disclosures to be produced semi-annually, rather than annually as hitherto. The revised framework calls for implementation concurrently with financial reports, at the latest for 2016 year-end reports, but is yet to be transposed into EU requirements.

In March 2015, the EBA also consulted on guidelines proposing criteria to set limits on exposures to shadow banking entities. Once finalised, implementation by national competent authorities is currently expected by the end of 2015.

 

Footnotes to Capital

 

  1 From 1 January 2015 the CRD IV transitional CET1 and end point CET1 capital ratios became aligned for HSBC Holdings plc due to the recognition of unrealised gains on investment property and available-for-sale securities.
  2 This includes dividends on ordinary shares, quarterly dividends on preference shares and coupons on capital securities, classified as equity.
  3 Dividends net of scrip are in respect of the 2015 first interim dividend and an update for a higher 2014 fourth interim dividend scrip take-up in excess of plan.
  4 The basis of presentation for foreign currency translation differences has changed to reflect the total amount in CET1 capital. Previously this only included foreign currency translation differences recognised in other comprehensive income. The comparative periods have also been updated to reflect the change.
  5 In the first half of 2015, a portfolio of customers was transferred from CMB to RBWM in Latin America in order to better align the combined banking needs of the customers with our established global businesses. Comparative data have been re-presented accordingly.
  6 RWAs are non-additive across geographical regions due to market risk diversification effects within the Group.
  7 For the basis of preparation, see page 260 of the Annual Report and Accounts 2014.
  8 CRD IV opening balances as at December 2013 were estimated based on the Group’s interpretation of final CRD IV legislation and final rules issued by the PRA, details of which can be found in the basis of preparation on page 324 of the Annual Report and Accounts 2013.
  9 Includes externally verified profits for the half-year to 30 June 2015.
10 Mainly comprises unrealised gains/losses in available-for-sale debt securities related to SPEs.
11 Includes own credit spread on trading liabilities.
12 Mainly comprise investments in insurance entities.

 

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Financial Statements (unaudited) (continued)

 

 

Financial Statements

Consolidated income statement

for the half-year to 30 June 2015

 

                  Half-year to      
                 

        30 June

2015

        

        30 June

2014

        

31 December

2014

     
         Notes        $m          $m          $m      
                     
     

Interest income

            24,019           25,435           25,520     

Interest expense

            (7,575        (8,030        (8,220  

Net interest income

            16,444           17,405           17,300     
     

Fee income

            9,372           10,031           9,514     

Fee expense

            (1,647        (1,854        (1,734  

Net fee income

            7,725           8,177           7,780     
     

Trading income excluding net interest income

            3,520           2,362           2,491     

Net interest income on trading activities

            1,053           913           994     

Net trading income

            4,573           3,275           3,485     
     

Changes in fair value of long-term debt issued and related derivatives

            1,324           438           70     

Net income from other financial instruments designated at fair value

            1,342           1,222           743     

Net income from financial instruments designated at fair value

            2,666           1,660           813     

Gains less losses from financial investments

            1,874           946           389     

Dividend income

            68           88           223     

Net insurance premium income

            5,607           6,137           5,784     

Other operating income

            836           538           593     

Total operating income

            39,793           38,226           36,367     

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

            (6,850        (7,059        (6,286  

Net operating income before loan impairment charges and other credit risk provisions

            32,943           31,167           30,081     

Loan impairment charges and other credit risk provisions

            (1,439        (1,841        (2,010  

Net operating income

            31,504           29,326           28,071     

Employee compensation and benefits

            (10,041        (9,978        (10,388  

General and administrative expenses

            (8,129        (7,127        (11,438  

Depreciation and impairment of property, plant and equipment

            (604        (712        (670  

Amortisation and impairment of intangible assets

            (413        (449        (487  

Total operating expenses

            (19,187        (18,266        (22,983  

Operating profit

            12,317           11,060           5,088     

Share of profit in associates and joint ventures

            1,311           1,280           1,252     

Profit before tax

            13,628           12,340           6,340     

Tax expense

     2        (2,907        (2,022        (1,953  

Profit for the period

            10,721           10,318           4,387     

Profit attributable to shareholders of the parent company

            9,618           9,746           3,942     

Profit attributable to non-controlling interests

            1,103           572           445     
                  $          $          $      

Basic earnings per ordinary share

     4        0.48           0.50           0.19     

Diluted earnings per ordinary share

     4        0.48           0.50           0.19     

The accompanying notes on pages 107 to 139 form an integral part of these financial statements1.

For footnote, see page 106.

 

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Financial Statements (unaudited) (continued)

 

 

Consolidated statement of comprehensive income

for the half-year to 30 June 2015

 

         Half-year to      
        

          30 June

2015

        

          30 June

2014

        

    31 December

2014

     
         $m          $m          $m      

Profit for the period

       10,721           10,318           4,387     

Other comprehensive income/(expense)

                

Items that will be reclassified subsequently to profit or loss when specific conditions are met:

                

Available-for-sale investments

       (2,445        958           2,014     

– fair value gains/(losses)

       (355        2,183           2,611     

– fair value gains reclassified to the income statement

       (2,317        (643        (1,029  

– amounts reclassified to the income statement in respect of impairment losses

       2           15           359     

– income taxes

       225           (597        73     

Cash flow hedges

       (150        (17        205     

– fair value gains/(losses)

       341           (44        1,556     

– fair value (gains)/losses reclassified to the income statement

       (538        50           (1,294  

– income taxes

       47           (23        (57  

Share of other comprehensive income/(expense) of associates and joint ventures

       2           (16        96     

– share for the period

       2           (18        96     

– reclassified to income statement on disposal

                 2               

Exchange differences

       (3,267        670           (9,573  

– foreign exchange gains reclassified to the income statement on disposal of a foreign operation

                 (21            

– other exchange differences

       (3,395        691           (9,608  

– income tax attributable to exchange differences

       128                     35     

Items that will not be reclassified subsequently to profit or loss:

                

Remeasurement of defined benefit asset/liability

       (1,680        316           1,669     

– before income taxes

       (2,085        421           1,998     

– income taxes

       405           (105        (329  

Other comprehensive income/(expense) for the period, net of tax

       (7,540        1,911           (5,589  

Total comprehensive income/(expense) for the period

       3,181           12,229           (1,202  

Attributable to:

                

– shareholders of the parent company

       2,856           11,706           (2,461  

– non-controlling interests

       325           523           1,259     

Total comprehensive income/(expense) for the period

       3,181           12,229           (1,202  

The accompanying notes on pages 107 to 139 form an integral part of these financial statements1.

For footnote, see page 106.

 

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Consolidated balance sheet

at 30 June 2015

 

                 

At

      30 June

2015

        

At

      30 June

2014

        

At

  31 December

2014

 
         Notes        $m          $m          $m  

Assets

                   

Cash and balances at central banks

            144,324           132,137           129,957   

Items in the course of collection from other banks

            10,190           8,144           4,927   

Hong Kong Government certificates of indebtedness

            28,104           26,640           27,674   

Trading assets

     6        283,138           347,106           304,193   

Financial assets designated at fair value

     9        25,168           31,823           29,037   

Derivatives

     10        296,942           269,839           345,008   

Loans and advances to banks

            109,405           127,387           112,149   

Loans and advances to customers

            953,985           1,047,241           974,660   

Reverse repurchase agreements – non-trading

            149,384           198,301           161,713   

Financial investments

     11        404,682           423,710           415,467   

Assets held for sale

     12        60,929           10,248           7,647   

Prepayments, accrued income and other assets

            55,489           75,520           67,529   

Current tax assets

            566           1,068           1,309   

Interests in associates and joint ventures

     14        18,705           17,497           18,181   

Goodwill and intangible assets

            24,913           29,740           27,577   

Deferred tax assets

            5,789           7,192           7,111   

Total assets

            2,571,713           2,753,593           2,634,139   

Liabilities and equity

                   

Liabilities

                   

Hong Kong currency notes in circulation

            28,104           26,640           27,674   

Deposits by banks

            71,140           92,764           77,426   

Customer accounts

            1,335,800           1,415,705           1,350,642   

Repurchase agreements – non-trading

            81,506           165,506           107,432   

Items in the course of transmission to other banks

            12,711           9,936           5,990   

Trading liabilities

     15        181,435           228,135           190,572   

Financial liabilities designated at fair value

            69,485           82,968           76,153   

Derivatives

     10        289,984           263,494           340,669   

Debt securities in issue

            102,656           96,397           95,947   

Liabilities of disposal groups held for sale

     12        53,226           12,361           6,934   

Accruals, deferred income and other liabilities

            42,224           50,882           46,462   

Current tax liabilities

            1,322           1,434           1,213   

Liabilities under insurance contracts

            69,494           75,223           73,861   

Provisions

     17        5,125           4,283           4,998   

Deferred tax liabilities

            1,338           1,091           1,524   

Subordinated liabilities

            24,781           28,052           26,664   

Total liabilities

            2,370,331           2,554,871           2,434,161   

Equity

                   

Called up share capital

            9,758           9,535           9,609   

Share premium account

            12,290           11,582           11,918   

Other equity instruments

            13,991           5,851           11,532   

Other reserves

            15,180           28,355           20,244   

Retained earnings

            141,208           134,958           137,144   

Total shareholders’ equity

            192,427           190,281           190,447   

Non-controlling interests

            8,955           8,441           9,531   

Total equity

            201,382           198,722           199,978   

Total liabilities and equity

            2,571,713           2,753,593           2,634,139   

The accompanying notes on pages 107 to 139 form an integral part of these financial statements1.

For footnote, see page 107.

 

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Financial Statements (unaudited) (continued)

 

 

Consolidated statement of cash flows

for the half-year to 30 June 2015

 

         Half-year to  
                 30 June
2015
                 30 June
2014
             31 December
2014
 
         $m          $m          $m  

Cash flows from operating activities

              

Profit before tax

       13,628           12,340           6,340   

Adjustments for:

              

– net gain from investing activities

       (1,926        (979        (949

– share of profit in associates and joint ventures

       (1,311        (1,280        (1,252

– (gain)/loss on disposal of associates, joint ventures, subsidiaries and businesses

                 (18        27   

– other non-cash items included in profit before tax

       4,522           4,284           6,978   

– change in operating assets

       12,077           (86,266        112,143   

– change in operating liabilities

       (15,544        59,108           (152,922

– elimination of exchange differences

       3,951           (5,486        30,057   

– dividends received from associates

       770           127           630   

– contributions paid to defined benefit plans

       (226        (315        (366

– tax paid

       (1,351        (1,358        (2,215

Net cash generated from/(used in) operating activities

       14,590           (19,843        (1,529

Cash flows from investing activities

              

Purchase of financial investments

       (211,669        (187,934        (196,265

Proceeds from the sale and maturity of financial investments

       208,637           194,335           188,502   

Purchase of property, plant and equipment

       (620        (523        (954

Proceeds from the sale of property, plant and equipment

       56           55           33   

Net cash inflow/(outflow) from disposal of customer and loan portfolios

       321           950           (1,985

Net purchase of intangible assets

       (400        (385        (518

Net cash inflow/(outflow) from disposal of subsidiaries, businesses, associates and joint ventures

       7           (140        (102

Net cash outflow from acquisition of or increase in stake of associates

       (1        (30          

Net cash generated from/(used in) investing activities

       (3,669        6,328           (11,289

Cash flows from financing activities

              

Issue of ordinary share capital

       9           14           253   

Net sales/(purchases) of own shares for market-making and investment purposes

       139           (25        (71

Issue of other equity instruments

       2,459                     5,681   

Redemption of preference shares and other equity instruments

       (462        234           (468

Subordinated loan capital issued

       1,680           3,500             

Subordinated loan capital repaid

       (778        (3,042        (121

Dividends paid to ordinary shareholders of the parent company

       (1,834        (1,755        (4,856

Dividends paid to non-controlling interests

       (386        (350        (289

Dividends paid to holders of other equity instruments

       (428        (287        (286

Net cash generated from/(used in) financing activities

       399           (1,711        (157

Net increase/(decrease) in cash and cash equivalents

       11,320           (15,226        (12,975

Cash and cash equivalents at the beginning of the period

       301,301           346,281           334,498   

Exchange differences in respect of cash and cash equivalents

       (3,829        3,443           (20,222

Cash and cash equivalents at the end of the period

       308,792           334,498           301,301   

 

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Table of Contents

 

 

Consolidated statement of changes in equity

for the half-year to 30 June 2015

 

                                                     Other reserves                                     
      
 
 
Called up
share
capital
  
  
  
      

 

Share

premium

  

  

      
 
 

 

Other
equity
instru-

ments

  
  
  

2 

      

 

Retained

earnings

  

  

      

 

 

 

Available-

for-sale

fair value

reserve

  

  

  

3 

      

 

 

Cash flow

hedging

reserve

  

  

3 

      
 

 

Foreign
exchange

reserve

  
  

3 

      

 

Merger

reserve

  

  

      
 
 
 
Total
share-
holders’
equity
  
  
  
  
     

 

 

Non-

controlling

interests

  

  

  

     

 

Total

equity

  

  

 
         $m          $m          $m          $m          $m          $m          $m          $m          $m         $m         $m      

At 1 January 2015

       9,609           11,918           11,532           137,144           2,143           58           (9,265        27,308           190,447          9,531          199,978     

Profit for the period

                                     9,618                                                   9,618          1,103          10,721     

Other comprehensive income (net of tax)

                                     (1,693        (1,735        (151        (3,183                  (6,762       (778       (7,540  

– available-for-sale investments

                                               (1,735                                      (1,735       (710       (2,445  

– cash flow hedges

                                                         (151                            (151       1          (150  

– remeasurement of defined benefit asset/liability

                                     (1,695                                                (1,695       15          (1,680  

– share of other comprehensive income of associates and joint ventures

                                     2                                                   2                   2     

– exchange differences

                                                                   (3,183                  (3,183       (84       (3,267  
                                                                                                                        

Total comprehensive income for the period

                                     7,925           (1,735        (151        (3,183                  2,856          325          3,181     

Shares issued under employee remuneration and share plans

       31           490                     (512                                                9                   9     

Shares issued in lieu of dividends and amounts arising thereon

       118           (118                  2,242                                                   2,242                   2,242     

Dividends to shareholders

                                     (6,224                                                (6,224       (432       (6,656  

Capital securities issued

                           2,459                                                             2,459                   2,459     

Cost of share-based payment arrangements

                                     444                                                   444                   444     

Other movements

                                     189           5                                         194          (469       (275  

At 30 June 2015

       9,758           12,290           13,991           141,208           413           (93        (12,448        27,308           192,427          8,955          201,382     

At 1 January 2014

       9,415           11,135           5,851           128,728           97           (121        (542        27,308           181,871          8,588          190,459     

Profit for the period

                                     9,746                                                   9,746          572          10,318     

Other comprehensive income (net of tax)

                                     300           956           (16        720                     1,960          (49       1,911     

– available-for-sale investments

                                               956                                         956          2          958     

– cash flow hedges

                                                         (16                            (16       (1       (17  

– remeasurement of defined benefit asset/liability

                                     316                                                   316                   316     

– share of other comprehensive income of associates and joint ventures

                                     (16                                                (16                (16  

– exchange differences

                                                                   720                     720          (50       670     
                                                                                                                        

Total comprehensive income for the period

                                     10,046           956           (16        720                     11,706          523          12,229     

Shares issued under employee remuneration and share plans

       28           539                     (553                                                14                   14     

Shares issued in lieu of dividends and amounts arising thereon

       92           (92                  2,111                                                   2,111                   2,111     

Dividends to shareholders

                                     (5,774                                                (5,774       (432       (6,206  

Cost of share-based payment arrangements

                                     333                                                   333                   333     

Other movements

                                     67           (39        (8                            20          (238       (218  

At 30 June 2014

       9,535           11,582           5,851           134,958           1,014           (145        178           27,308           190,281          8,441          198,722     

 

 

HSBC HOLDINGS PLC

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Table of Contents

Financial Statements (unaudited) (continued)

 

 

Consolidated statement of changes in equity for the half-year to 30 June 2015 (continued)

 

                                                     Other reserves                                     
      
 
 
Called up
share
capital
  
  
  
      

 

Share

premium

  

  

      
 
 
 
Other
equity
instru-
ments
  
  
  
  
      

 

Retained

earnings

  

  

      
 
 
 
Available-
for-sale
fair value
reserve
  
  
  
  
      

 

 

Cash flow

hedging

reserve

  

  

  

      
 
 
Foreign
exchange
reserve
  
  
  
      

 

Merger

reserve

  

  

      
 
 
 
Total
share-
holders’
equity
  
  
  
  
     

 

 

Non-

controlling

interests

  

  

  

     
 
Total
equity
  
  
 
         $m          $m          $m          $m          $m          $m          $m          $m          $m         $m         $m      

At 1 July 2014

       9,535           11,582           5,851           134,958           1,014           (145        178           27,308           190,281          8,441          198,722     

Profit for the period

                                     3,942                                                   3,942          445          4,387     

Other comprehensive income (net of tax)

                                     1,766           1,069           205           (9,443                  (6,403       814          (5,589  

– available-for-sale investments

                                               1,069                                         1,069          945          2,014     

– cash flow hedges

                                                         205                               205                   205     

– remeasurement of defined benefit asset/liability

                                     1,670                                                   1,670          (1       1,669     

– share of other comprehensive income of associates and joint ventures

                                     96                                                   96                   96     

– exchange differences

                                                                   (9,443                  (9,443       (130       (9,573  
                                                                                                                        

Total comprehensive income for the period

                                     5,708           1,069           205           (9,443                  (2,461       1,259          (1,202  

Shares issued under employee remuneration and share plans

       32           378                     (157                                                253                   253     

Shares issued in lieu of dividends and amounts arising thereon

       42           (42                  598                                                   598                   598     

Dividends to shareholders

                                     (4,119                                                (4,119       (280       (4,399  

Capital securities issued

                           5,681                                                             5,681                   5,681     

Cost of share-based payment arrangements

                                     399                                                   399                   399     

Other movements

                                     (243        60           (2                            (185       111          (74  

At 31 December 2014

       9,609           11,918           11,532           137,144           2,143           58           (9,265        27,308           190,447          9,531          199,978     

The accompanying notes on pages 107 to 139 form an integral part of these financial statements1.

Footnotes to financial statements

1 The tables: ‘Gross loans and advances to customers by industry sector and by geographical region’ (see page 61), ‘Movement in impairment allowances on loans and advances to customers and banks’ (see page 66), and the Composition of regulatory capital within ‘Capital’ (see page 94) also form an integral part of these financial statements.
2 During March 2015, HSBC Holdings issued $2,450m of Perpetual Subordinated Contingent Convertible Capital Securities, after issuance costs of $8m and tax benefits of $17m, which are classified as equity under IFRSs.
3 At 30 June 2015, our operations in Brazil were classified as held for sale (see Note 12).The cumulative amount of other reserves attributable to these operations were as follows: available-for-sale fair value reserve debit of $65m, cash flow hedging reserve debit of $29m and foreign exchange reserve debit of $1,724m.

 

HSBC HOLDINGS PLC

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Table of Contents

Notes on the Financial Statements (unaudited)

 

 

 

  Notes on the Financial Statements

 

  

  

 

  1   Basis of preparation and significant accounting policies

 

    

 

107

 

  

 

       

13    Assets charged as security for liabilities and collateral accepted as security for assets

 

    

 

123

 

  

 

 

  2   Tax

 

    

 

108

 

  

 

       

14   Interests in associates and joint ventures

 

    

 

123

 

  

 

 

  3   Dividends

 

    

 

108

 

  

 

       

15   Trading liabilities

 

    

 

124

 

  

 

 

  4   Earnings per share

 

    

 

109

 

  

 

       

16   Maturity analysis of assets and liabilities

 

    

 

125

 

  

 

 

  5   Segmental analysis

 

    

 

109

 

  

 

       

17   Provisions

 

    

 

128

 

  

 

 

  6   Trading assets

 

    

 

110

 

  

 

       

18    Contingent liabilities, contractual commitments and guarantees

 

    

 

129

 

  

 

 

  7   Fair values of financial instruments carried at fair value

 

    

 

111

 

  

 

       

19   Legal proceedings and regulatory matters

 

    

 

130

 

  

 

 

  8   Fair values of financial instruments not carried  at fair value

 

    

 

117

 

  

 

       

20   Goodwill impairment

 

    

 

139

 

  

 

 

  9   Financial assets designated at fair value

 

    

 

117

 

  

 

       

21   Transactions with related parties

 

    

 

139

 

  

 

 

10   Derivatives

 

    

 

118

 

  

 

       

22   Events after the balance sheet date

 

    

 

139

 

  

 

 

11   Financial investments

 

    

 

120

 

  

 

       

23   Interim Report 2015 and statutory accounts

 

    

 

139

 

  

 

 

12    Assets held for sale and liabilities of disposal groups held for sale

 

    

 

122

 

  

 

          
               

 

1 Basis of preparation and significant accounting policies

 

 

(a) Compliance with International Financial Reporting Standards

The interim condensed consolidated financial statements of HSBC have been prepared in accordance with the Disclosure Rules and Transparency Rules of the Financial Conduct Authority and IAS 34 ‘Interim Financial Reporting’ as issued by the International Accounting Standards Board (‘IASB’) and as endorsed by the EU. These interim consolidated financial statements should be read in conjunction with the Annual Report and Accounts 2014.

At 30 June 2015, there were no unendorsed standards effective for the half-year to 30 June 2015 affecting these interim consolidated financial statements, and there was no difference between IFRSs endorsed by the EU and IFRSs issued by the IASB in terms of their application to HSBC.

Standards applied during the half-year to 30 June 2015

There were no new standards applied during the half-year to 30 June 2015. During the period, HSBC applied a number of interpretations and amendments to standards which had an insignificant effect on these interim consolidated financial statements.

 

(b) Use of estimates and judgements

Management believes that HSBC’s critical accounting estimates and judgements are those which relate to impairment of loans and advances, goodwill impairment, the valuation of financial instruments, deferred tax assets, provisions for liabilities and interests in associates. There was no change in the current period to the critical accounting estimates and judgements applied in 2014, which are stated on pages 62 and 348 of the Annual Report and Accounts 2014.

 

(c) Composition of Group

There were no material changes in the composition of the HSBC Group in the half-year to 30 June 2015.

 

(d) Future accounting developments

Information on future accounting developments and their potential effect on the financial statements of HSBC are provided on page 345 of the Annual Report and Accounts 2014.

 

(e) Going concern

The financial statements are prepared on a going concern basis, as the Directors are satisfied that the Group and parent company have the resources to continue in business for the foreseeable future. In making this assessment, the Directors have considered a wide range of information relating to present and future conditions, including future projections of profitability, cash flows and capital resources.

 

(f) Accounting policies

The accounting policies applied by HSBC for these interim consolidated financial statements are consistent with those described on pages 345 to 457 of the Annual Report and Accounts 2014, as are the methods of computation.

 

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Table of Contents

Notes on the Financial Statements (unaudited) (continued)

 

 

2 Tax

 

 

         Half-year to  
                 30 June                  30 June          31 December  
         2015          2014          2014  
         $m          $m          $m  

Current tax

              

UK corporation tax charge

       343           165           (96

Overseas tax1

       2,071           1,803           2,078   
       2,414           1,968           1,982   

Deferred tax

       493           54           (29

Tax expense

       2,907           2,022           1,953   

Effective tax rate

       21.3%           16.4%           30.8%   

 

1 Overseas tax included Hong Kong profits tax of $714m (first half of 2014: $589m; second half of 2014: $546m). Subsidiaries in Hong Kong provided for Hong Kong profits tax at the rate of 16.5% (2014: 16.5%) on the profits for the period assessable in Hong Kong. Other overseas subsidiaries and overseas branches provided for taxation at the appropriate rates in the countries in which they operated.

Deferred taxation

Net deferred tax assets amounted to $4.5bn at 30 June 2015 (30 June 2014: $6.1bn; 31 December 2014: $5.6bn), mainly relating to timing differences in the US. Net deferred tax assets have fallen since 31 December 2014 mainly because the net assets of Brazilian operations were transferred to ‘Held for Sale’ (see Note 12).

 

3 Dividends

 

On 3 August 2015, the Directors declared a second interim dividend in respect of the financial year ending 31 December 2015 of $0.10 per ordinary share, a distribution of approximately $1,954m which will be payable on 2 October 2015. No liability is recognised in the financial statements in respect of this dividend.

Dividends to shareholders of the parent company

 

         Half-year to  
         30 June 2015          30 June 2014          31 December 2014  
         Per
share
$
         Total
$m
         Settled
in scrip
$m
         Per
share
$
         Total
$m
         Settled
in scrip
$m
         Per
share
$
         Total
$m
         Settled
in scrip
$m
 

Dividends paid on ordinary shares

                                            

In respect of previous year:

                                            

– fourth interim dividend

       0.20           3,845           2,011           0.19           3,582           1,827                                 

In respect of current year:

                                            

– first interim dividend

       0.10           1,951           231           0.10           1,906           284                                 

– second interim dividend

                                                                   0.10           1,914           372   

– third interim dividend

                                                                   0.10           1,918           226   

Total

       0.30           5,796           2,242           0.29           5,488           2,111           0.20           3,832           598   

Total dividends on preference shares classified as equity (paid quarterly)

       31.00           45                31.00           45                31.00           45        

Total coupons on capital securities classified as equity

 

                    Half-year to  
                    30 June 2015          30 June 2014    31 December 2014  
         First          Per security          Total          Per security          Total          Per security          Total  
         call date          $          $m          $          $m          $          $m  

Perpetual subordinated capital securities1

                                  

– $2,200m issued at 8.125%

       Apr 2013           1.016           89           1.016           89           1.016           90   

– $3,800m issued at 8.000%

       Dec 2015           1.000           152           1.000           152           1.000           152   

Perpetual subordinated contingent convertible securities2

                                  

– $2,250m issued at 6.375%

       Sep 2024           31.875           72                                           

– $1,500m issued at 5.625%

       Jan 2020           28.125           28                                           

1,500m issued at 5.250%

       Sep 2022           29.396           42                                           

Total

                 383                241                242   

 

1 Discretionary coupons are paid quarterly on the perpetual subordinated capital securities.
2 Discretionary coupons are paid semi-annually on the perpetual subordinated contingent convertible securities.

On 15 July 2015, HSBC paid a further coupon on the $2,200m subordinated capital securities of $0.508 per security, representing a total distribution of $45m. On 17 July 2015, HSBC paid a further coupon on the $1,500m subordinated contingent convertible securities, representing a total distribution of $42m. No liability is recognised in the financial statements in respect of these coupon payments.

 

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In March 2015, HSBC issued $2,450m of contingent convertible securities issued at 6.375% which are classified as equity under IFRSs. Discretionary coupons are paid semi-annually on these contingent convertible securities and none were declared in the first half of 2015.

 

4 Earnings per share

 

Profit attributable to ordinary shareholders of the parent company

 

         Half-year to  
         30 June          30 June          31 December  
         2015          2014          2014  
         $m          $m          $m  

Profit attributable to shareholders of the parent company

       9,618           9,746           3,942   

Dividend payable on preference shares classified as equity

       (45        (45        (45

Coupon payable on capital securities classified as equity

       (383        (241        (242

Profit attributable to ordinary shareholders of the parent company

       9,190           9,460           3,655   

Basic and diluted earnings per share

 

         Half-year to 30 June 2015          Half-year to 30 June 2014          Half-year to 31 December 2014  
        

Profit

$m

         Number
of shares
(millions)
        

Amount
per share

$

        

Profit

$m

        

Number
of shares

(millions)

        

Amount
per share

$

        

Profit

$m

        

Number

of shares

(millions)

        

Amount
per share

$

 

Basic1

       9,190           19,249           0.48           9,460           18,847           0.50           3,655           18,960           0.19   

Effect of dilutive potential ordinary shares

                  68                           101                           96        

Diluted1

       9,190           19,317           0.48           9,460           18,948           0.50           3,655           19,056           0.19   

 

1 Weighted average number of ordinary shares outstanding (basic) or assuming dilution (diluted).

 

5 Segmental analysis

 

HSBC operates a matrix management structure which includes geographical regions and global businesses. HSBC considers that geographical operating segments represent the most appropriate information for users of the financial statements to best evaluate the nature and financial effects of HSBC’s business activities and the economic environment in which it operates. HSBC’s operating segments are Europe, Asia, Middle East and North Africa, North America and Latin America.

 

             Europe              Asia              MENA         

North

    America

        

Latin

    America

        

Intra-HSBC

items

                 Total      
         $m          $m          $m          $m          $m          $m              $m      
Net operating income1                                     

Half-year to 30 June 2015

                                    

Net operating income

       11,469           14,065           1,289           4,126           3,558           (1,564        32,943     

– external

       10,974           13,148           1,279           3,979             3,563                     32,943     

– inter-segment

       495           917           10           147             (5        (1,564            

Half-year to 30 June 2014

                                    

Net operating income

       10,873           12,107           1,294           4,067           4,265           (1,439        31,167     

– external

       10,335           11,343           1,271           3,948             4,270                     31,167     

– inter-segment

       538           764           23           119             (5        (1,439            

Half-year to 31 December 2014

                                    

Net operating income

       10,698           11,570           1,254           4,085           4,007           (1,533        30,081     

– external

       10,115           10,728           1,253           3,989             3,996                     30,081     

– inter-segment

       583           842           1           96             11           (1,533            

Profit/(loss) before tax

                                    

Half-year to:

                                    

30 June 2015

       2,205           9,400           901           690           432                     13,628     

30 June 2014

       2,258           7,894           989           825           374                     12,340     

31 December 2014

       (1,662        6,731           837           592           (158                  6,340     

 

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Notes on the Financial Statements (unaudited) (continued)

 

 

         Europe          Asia          MENA         

North

America

        

Latin

America

        

Intra-HSBC

items

         Total  
         $m          $m          $m          $m          $m          $m          $m  

Balance sheet information

                                  

At 30 June 2015

                                  

Total assets

       1,236,270           917,489           61,625           411,601           104,203           (159,475        2,571,713   

Total liabilities

       1,171,686           842,077           51,745           372,300           91,998           (159,475        2,370,331   

At 30 June 2014

                                  

Total assets

       1,430,863           874,334           61,289           437,706           125,630           (176,229        2,753,593   

Total liabilities

       1,362,091           807,906           51,619           398,776           110,708           (176,229        2,554,871   

At 31 December 2014

                                  

Total assets

       1,290,926           878,723           62,417           436,859           115,354           (150,140        2,634,139   

Total liabilities

       1,223,371           807,998           52,569           398,356           102,007           (150,140        2,434,161   

 

1 Net operating income before loan impairment charges and other credit risk provisions.

 

6 Trading assets

 

 

         At  
        

    30 June

2015

        

    30 June

2014

        

31 December

2014

 
         $m          $m          $m  

Trading assets:

              

– not subject to repledge or resale by counterparties

       246,704           248,929           247,586   

– which may be repledged or resold by counterparties

       36,434           98,177           56,607   
       283,138           347,106           304,193   

Treasury and other eligible bills

       10,444           17,678           16,170   

Debt securities

       111,241           155,522           141,532   

Equity securities

       77,142           73,855           75,249   

Trading securities valued at fair value

       198,827           247,055           232,951   

Loans and advances to banks1

       35,309           41,048           27,581   

Loans and advances to customers1

       49,002           59,003           43,661   
       283,138           347,106           304,193   

 

1 Loans and advances to banks and customers include settlement accounts, stock borrowing, reverse repos and other amounts.

Trading securities valued at fair value1

 

         At  
        

    30 June

2015

        

    30 June

2014

        

31 December

2014

 
         $m          $m          $m  

US Treasury and US Government agencies2

       16,301           27,019           25,880   

UK Government

       11,142           9,364           9,280   

Hong Kong Government

       6,677           5,189           6,946   

Other government

       54,986           90,261           78,774   

Asset-backed securities3

       4,306           2,903           3,494   

Corporate debt and other securities

       28,273           38,464           33,328   

Equity securities

       77,142           73,855           75,249   
       198,827           247,055           232,951   

 

1 Included within these figures are debt securities issued by banks and other financial institutions of $19,298m (30 June 2014: $26,390m; 31 December 2014: $22,399m), of which $1,384m (30 June 2014: $4,036m; 31 December 2014: $2,949m) are guaranteed by various governments.
2 ‘US Treasury and US Government agencies’ includes securities that are supported by an explicit guarantee issued by the US Government.
3 Excludes asset-backed securities included under US Treasury and US Government agencies.

Trading securities listed on a recognised exchange and unlisted

 

        

Treasury

and other

eligible bills

        

Debt

securities

        

Equity

securities

         Total  
         $m          $m          $m          $m  

Fair value

                   

Listed1

       480           75,031           76,751           152,262   

Unlisted2

       9,964           36,210           391           46,565   

At 30 June 2015

       10,444           111,241           77,142           198,827   

Listed1

       1,394           99,414           73,163           173,971   

Unlisted2

       16,284           56,108           692           73,084   

At 30 June 2014

       17,678           155,522           73,855           247,055   

 

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Treasury

and other

eligible bills

        

Debt

securities

        

Equity

securities

         Total  
         $m          $m          $m          $m  

Listed1

       1,311           98,028           74,542           173,881   

Unlisted2

       14,859           43,504           707           59,070   

At 31 December 2014

       16,170           141,532           75,249           232,951   

 

1 Included within listed investments are $7,394m (30 June 2014: $4,479m; 31 December 2014: $5,956m) of securities listed in Hong Kong.
2 Unlisted treasury and other eligible bills primarily comprise treasury bills not listed on an exchange but for which there is a liquid market.

 

7 Fair values of financial instruments carried at fair value

 

The accounting policies, control framework and the hierarchy used to determine fair values at 30 June 2015 are consistent with those applied for the Annual Report and Accounts 2014.

Financial instruments carried at fair value and bases of valuation

 

                    Valuation techniques             
        

Quoted

market

price

Level 1

        

Using

observable

inputs

Level 2

        

With

significant

unobservable

inputs

Level 3

         Total  
         $m          $m          $m          $m  

Recurring fair value measurements

                   

At 30 June 2015

                   

Assets

                   

Trading assets

       153,912           123,486           5,740           283,138   

Financial assets designated at fair value

       20,318           4,377           473           25,168   

Derivatives

       7,932           285,942           3,068           296,942   

Financial investments: available for sale

       234,117           124,381           4,007           362,505   

Liabilities

                   

Trading liabilities

       47,975           128,155           5,305           181,435   

Financial liabilities designated at fair value

       3,557           65,923           5           69,485   

Derivatives

       7,781           280,760           1,443           289,984   

At 30 June 2014

                   

Assets

                   

Trading assets

       220,194           121,083           5,829           347,106   

Financial assets designated at fair value

       26,359           4,752           712           31,823   

Derivatives

       2,484           264,877           2,478           269,839   

Financial investments: available for sale

       259,077           132,934           6,443           398,454   

Liabilities

                   

Trading liabilities

       102,025           118,430           7,680           228,135   

Financial liabilities designated at fair value

       4,115           78,853                     82,968   

Derivatives

       2,857           258,776           1,861           263,494   

At 31 December 2014

                   

Assets

                   

Trading assets

       180,446           117,279           6,468           304,193   

Financial assets designated at fair value

       23,697           4,614           726           29,037   

Derivatives

       4,366           337,718           2,924           345,008   

Financial investments: available for sale

       241,464           131,264           4,988           377,716   

Liabilities

                   

Trading liabilities

       62,385           122,048           6,139           190,572   

Financial liabilities designated at fair value

       3,792           72,361                     76,153   

Derivatives

       4,649           334,113           1,907           340,669   

The decrease in Level 1 trading assets and liabilities during the first half of 2015 reflects a decrease in debt securities, treasury bills and other government bills/bonds. The decrease in Level 2 derivative assets and liabilities is driven by participation in ‘portfolio compression’ exercises and market movement. There were no material transfers between Level 1 and Level 2 during the period.

Fair value adjustments

Fair value adjustments are adopted when HSBC considers that there are additional factors that would be considered by a market participant that are not incorporated within the valuation model. HSBC classifies fair value adjustments as either ‘risk-related’ or ‘model-related’. The majority of these adjustments relate to GB&M. Movements in the level of fair value adjustments do not necessarily result in the recognition of profits or losses within the income statement. For example, as models are enhanced, fair value adjustments may no longer be required. Similarly, fair value adjustments will decrease when the related positions are unwound, but this may not result in profit or loss.

 

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Notes on the Financial Statements (unaudited) (continued)

 

 

Global Banking and Markets fair value adjustments

 

         At      
        

        30 June

2015

        

        30 June

2014

        

  31 December

2014

     
         $m          $m          $m      

Type of adjustment

                

Risk-related

       1,447           1,419           1,958     

– bid-offer

       547           558           539     

– uncertainty

       68           363           357     

– credit valuation adjustment

       808           968           871     

– debit valuation adjustment

       (431        (474        (270  

– funding fair value adjustment

       453                     460     

– other

       2           4           1     

Model-related

       410           202           57     

– model limitation

       400           198           52     

– other

       10           4           5     

Inception profit (Day 1 P&L reserves) (Note 10)

       117           135           114     
       1,974           1,756           2,129     

Fair value adjustments declined by $155m during the period (first half of 2014: $178m decline; second half of 2014: $373m rise). The debit valuation adjustment movement was $161m as a result of the widening of HSBC’s credit spreads (first half of 2014: $142m decline, second half of 2014: $204m decline). Reduced derivative counterparty exposures and narrowing of counterparty credit default swap spreads contributed to a reduction in the credit valuation adjustment of $63m (first half of 2014: $306m decline; second half of 2014: $97m decline). The movement in uncertainty and model limitation categories was primarily driven by a reclassification of an adjustment relating to derivative discounting assumptions between the categories.

Funding fair value adjustment was adopted in the second half of 2014.

A description of HSBC’s risk-related and model-related adjustments is provided on pages 381 and 382 of the Annual Report and Accounts 2014.

Fair value valuation bases

Financial instruments measured at fair value using a valuation technique with significant unobservable inputs – Level 3

 

         Assets          Liabilities  
      

 

Available

for sale

  

  

      
 
Held for
trading
  
  
      

 

At fair

value

  

1 

      
 
Deriv-
atives
  
  
       Total          
 
Held for
trading
  
  
      

 

At fair

value

  

1 

      
 
Deriv-
atives
  
  
       Total   
         $m          $m          $m          $m          $m          $m          $m          $m          $m  

Private equity including strategic investments

         3,026           194           441                     3,661           33                               33   

Asset-backed securities

         736           577                               1,313                                           

Loans held for securitisation

                   35                               35                                           

Structured notes

                                                           5,272                               5,272   

Derivatives with monolines

                                       189           189                                           

Other derivatives

                   7                     2,879           2,886                               1,443           1,443   

Other portfolios

       245           4,927           32                     5,204                     5                     5   

At 30 June 2015

       4,007           5,740           473           3,068           13,288           5,305           5           1,443           6,753   

Private equity including strategic investments

         3,562           169           455                     4,186                                           

Asset-backed securities

         2,450           641                               3,091                                           

Loans held for securitisation

                   56                               56                                           

Structured notes

                   2                               2           7,680                               7,680   

Derivatives with monolines

                                       270           270                               2           2   

Other derivatives

                                       2,208           2,208                               1,858           1,858   

Other portfolios

       431           4,961           257                     5,649                               1           1   

At 30 June 2014

       6,443           5,829           712           2,478           15,462           7,680                     1,861           9,541   

Private equity including strategic investments

         3,120           164           432                     3,716           47                               47   

Asset-backed securities

         1,462           616                               2,078                                           

Loans held for securitisation

                   39                               39                                           

Structured notes

                   2                               2           6,092                               6,092   

Derivatives with monolines

                                       239           239                               1           1   

Other derivatives

                                       2,685           2,685                               1,906           1,906   

Other portfolios

       406           5,647           294                     6,347                                           

At 31 December 2014

       4,988           6,468           726           2,924           15,106           6,139                     1,907           8,046   

 

1 Designated at fair value through profit or loss.

 

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The basis for determining the fair value of the financial instruments in the table above is explained on page 383 of the Annual Report and Accounts 2014.

Movement in Level 3 financial instruments

 

         Assets          Liabilities
      
 
Available
for sale
  
  
      
 
Held for
trading
  
  
      

 

 

 

 

Designated

at fair value

through

profit

or loss

  

  

  

  

  

       Derivatives          
 
Held for
trading
  
  
      

 

 

 

 

Designated

at fair value

through

profit

or loss

  

  

  

  

  

       Derivatives     
         $m          $m          $m          $m          $m          $m          $m      

At 1 January 2015

       4,988           6,468           726           2,924           6,139                     1,907     

Total gains/(losses) recognised in profit or loss

       (17        (14        (19        344           (223        (1        (467  

– trading income/(expense) excluding net interest income

                 (14                  344           (223                  (467  

– net income/(expense) from other financial instruments designated at fair value

                           (19                            (1            

– gains less losses from financial investments

       (29                                                              

– loan impairment charges and other credit risk provisions

       12                                                                 

Total gains/(losses) recognised in other comprehensive income1

       72           (6        (9        5           (20        (1        1     

– available-for-sale investments: fair value gains

       70                                                                 

– exchange differences

       2           (6        (9        5           (20        (1        1     

Purchases

       342           435           165                               9               

New issuances

                                               863                         

Sales

       (420        (1,134        (46                  (10        (2            

Settlements

       (15        (90        (72        43           (681                  41     

Transfers out

       (1,257        (31        (272        (312        (889                  (52  

Transfers in

       314           112                     64           126                     13     

At 30 June 2015

       4,007           5,740           473           3,068           5,305           5           1,443     

Unrealised gains/(losses) recognised in profit or loss relating to assets and liabilities held at 30 June 2015

       13           (6        17           444           (24        (1        (459  

– trading income/(expense) excluding net interest income

                 (6                  444           (24                  (459  

– net income/(expense) from other financial instruments designated at fair value

                           17                               (1            

– loan impairment recoveries and other credit risk provisions

       13                                                                 

At 1 January 2014

       7,245           5,347           608           2,502           7,514                     2,335     

Total gains/(losses) recognised in profit or loss

       58           18           48           10           94                     (248  

– trading income/(expense) excluding net interest income

                 18                     10           94                     (248  

– net income/(expense) from other financial instruments designated at fair value

                           48                                             

– gains less losses from financial investments

       79                                                                 

– loan impairment charges and other credit risk provisions

       (21                                                              

Total gains/(losses) recognised in other comprehensive income1

       334           70           (1        61           113                     83     

– available-for-sale investments: fair value gains

       145                                                                 

– cash flow hedges: fair value gains

                                                                   34     

– exchange differences

       189           70           (1        61           113                     49     

Purchases

       1,228           613           123                     (31                      

New issuances

                                               1,416                         

Sales

       (741        (210        (40                                          

Settlements

       (722        (40        (29        5           (801                  (99  

Transfers out

       (1,654        (31                  (228        (720                  (321  

Transfers in

       695           62           3           128           95                     111     

At 30 June 2014

       6,443           5,829           712           2,478           7,680                     1,861     

 

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Notes on the Financial Statements (unaudited) (continued)

 

 

Movement in Level 3 financial instruments (continued)

 

         Assets          Liabilities      
         Available
for sale
         Held for
trading
        

Designated

at fair value

through

profit

or loss

         Derivatives          Held for
trading
        

Designated

at fair value

through

profit

or loss

         Derivatives      
         $m          $m          $m          $m          $m          $m          $m      

Unrealised gains/(losses) recognised in profit or loss relating to assets and liabilities held at 30 June 2014

       (21        8           23           128           175                     43     

– trading income excluding net interest income

                 8                     128           175                     43     

– net income from other financial instruments designated at fair value

                           23                                             

– loan impairment charges and other credit risk provisions

       (21                                                              

At 1 July 2014

       6,443           5,829           712           2,478           7,680                     1,861     

Total gains/(losses) recognised in profit or loss

       116           176           8           949           (119                  243     

– trading income/(expense) excluding net interest income

                 176                     949           (119                  243     

– net income/(expense) from other financial instruments designated at fair value

                           8                                             

– gains less losses from financial investments

       119                                                                 

– loan impairment charges and other credit risk provisions

       (3                                                              

Total gains recognised in other comprehensive income1

       (208        (248        (15        (187        (236                  (29  

– available-for-sale investments: fair value gains

       63                                                                 

– cash flow hedges: fair value losses

                                     (9                                

– exchange differences

       (271        (248        (15        (178        (236                  (29  

Purchases

       277           92           150                                             

New issuances

                                               651                         

Sales

       (496        (271        (109                                          

Settlements

       (533        (9        (49        22           (854                  30     

Transfers out

       (1,373        (81                  (316        (1,198                  (206  

Transfers in

       762           980           29           (22        215                     8     

At 31 December 2014

       4,988           6,468           726           2,924           6,139                     1,907     

Unrealised gains/(losses) recognised in profit or loss relating to assets and liabilities held at 31 December 2014

       (3        (7        23           818           (297                  91     

– trading income/(expense) excluding net interest income

                 (7                  818           (297                  91     

– net income from other financial instruments designated at fair value

                           23                                             

– loan impairment charges and other credit risk provisions

       (3                                                              

1 Included in ‘Available-for-sale investments: fair value gains/(losses)’ and ‘Exchange differences’ in the consolidated statement of comprehensive income.

Transfers between levels of the fair value hierarchy are deemed to occur at the end of the reporting period. Movements in available-for-sale assets are mainly driven by sales of private equity investments and the transfer out of Level 3 of legacy credit assets following greater price certainty. Purchases and sales in trading assets reflect origination and sell-down of syndicated loans.

Effect of changes in significant unobservable assumptions to reasonably possible alternatives

The following table shows the sensitivity of Level 3 fair values to reasonably possible alternative assumptions:

 

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Sensitivity of fair values to reasonably possible alternative assumptions

 

        

Reflected in

profit or loss

        

Reflected in other

comprehensive income

 
      

 

    Favourable

changes

  

  

      
 
Unfavourable
changes
  
  
      

 

    Favourable

changes

  

  

      

 

Unfavourable

changes

  

  

         $m          $m          $m          $m  

Derivatives, trading assets and trading liabilities1

       255           (274                    

Financial assets and liabilities designated at fair value

       41           (42                    

Financial investments: available for sale

       33           (30        222           (217

At 30 June 2015

       329           (346        222           (217

Derivatives, trading assets and trading liabilities1

       266           (251                    

Financial assets and liabilities designated at fair value

       35           (60                    

Financial investments: available for sale

                           369           (614

At 30 June 2014

       301           (311        369           (614

Derivatives, trading assets and trading liabilities1

       296           (276                    

Financial assets and liabilities designated at fair value

       37           (47                    

Financial investments: available for sale

       51           (67        270           (350

At 31 December 2014

       384           (390        270           (350

 

1 Derivatives, trading assets and trading liabilities’ are presented as one category to reflect the manner in which these financial instruments are risk-managed.

The reduction in the effect of both favourable and unfavourable changes during the period primarily reflects increased pricing certainty, in particular in private equity, and some reduction in Level 3 balances offset by decreased pricing certainty in derivative funding assumptions.

Sensitivity of fair values to reasonably possible alternative assumptions by Level 3 instrument type

 

        

Reflected in

profit or loss

        

Reflected in other

comprehensive income

 
        

    Favourable

changes

         Unfavourable
changes
        

    Favourable

changes

        

Unfavourable

changes

 
         $m          $m          $m          $m  

Private equity including strategic investments

       79           (79        171           (171

Asset-backed securities

       31           (9        29           (24

Loans held for securitisation

       1           (1                    

Structured notes

       19           (14                    

Derivatives with monolines

       9           (9                    

Other derivatives

       117           (198                    

Other portfolios

       73           (36        22           (22

At 30 June 2015

       329           (346        222           (217

Private equity including strategic investments

       41           (78        224           (481

Asset-backed securities

       47           (18        103           (90

Loans held for securitisation

       2           (2                    

Structured notes

       15           (9                    

Derivatives with monolines

       21           (10                    

Other derivatives

       141           (156                    

Other portfolios

       34           (38        42           (43

At 30 June 2014

       301           (311        369           (614

Private equity including strategic investments

       77           (110        172           (255

Asset-backed securities

       49           (22        60           (55

Loans held for securitisation

       1           (1                    

Structured notes

       14           (9                    

Derivatives with monolines

       11           (11                    

Other derivatives

       129           (155                    

Other portfolios

       103           (82        38           (40

At 31 December 2014

       384           (390        270           (350

Favourable and unfavourable changes are determined on the basis of sensitivity analysis. The sensitivity analysis aims to measure a range of fair values consistent with the application of a 95% confidence interval. Methodologies take account of the nature of the valuation technique employed, the availability and reliability of observable proxies and historical data. When the available data is not amenable to statistical analysis, the quantification of uncertainty is judgemental, but remains guided by the 95% confidence interval.

 

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Notes on the Financial Statements (unaudited) (continued)

 

 

When the fair value of a financial instrument is affected by more than one unobservable assumption, the above table reflects the most favourable or the most unfavourable change from varying the assumptions individually.

Key unobservable inputs to Level 3 financial instruments and inter-relationships

The table below lists key unobservable inputs to Level 3 financial instruments, and provides the range of those inputs as at 30 June 2015. The core range of inputs is the estimated range within which 90% of the inputs fall.

There has been no change to the key unobservable inputs to Level 3 financial instruments and inter-relationships therein which are detailed on page 388 of the Annual Report and Accounts 2014.

Quantitative information about significant unobservable inputs in Level 3 valuations

 

         Fair value                                                     
               Assets          Liabilities                   Key unobservable        Full range of inputs          Core range of inputs  
         $m          $m          Valuation technique        inputs        Lower          Higher          Lower          Higher  

Private equity including strategic investments

       3,661           33         See notes3      See notes3        n/a           n/a           n/a           n/a   

Asset-backed securities

       1,313                                           

– CLO/CDO1

       632                   Market proxy      Prepayment rate        1%           6%           1%           6%   
                     Market proxy      Bid quotes        0           100           32           95   

– other ABSs

       681                   Market proxy      Bid quotes        0           102           26           72   

Loans held for securitisation

       35                                           

Structured notes

                 5,272                                 

– equity-linked notes

                 4,283         Model – option model      Equity volatility        11%           78%           19%           40%   
                   Model – option model      Equity correlation        35%           91%           43%           79%   

– fund-linked notes

                 390         Model – option model      Fund volatility        6%           8%           6%           8%   

– FX-linked notes

                 282         Model – option model      FX volatility        1%           27%           6%           15%   

– other

                 317                                 

Derivatives with monolines

       189                  

Model – discounted cash flow

     Credit spread        4%           4%           4%           4%   

Other derivatives

       2,886           1,443                                 
                                       

Interest rate derivatives:

– securitisation swaps

       733           649        

Model – discounted cash flow

     Prepayment rate        0%           58%           5%           56%   

– long-dated swaptions

       1,404           160         Model – option model      IR volatility        4%           58%           18%           40%   

– other

       285           70                                 
                                       

FX derivatives:

                                                   

– FX options

       153           124         Model – option model      FX volatility        0%           27%           6%           12%   

– other

       16           4                                 
                                       

Equity derivatives:

                                                   

– long-dated single stock options

       170           227         Model – option model      Equity volatility        10%           70%           18%           45%   

– other

       35           146                                 
                                       

Credit derivatives:

                                                   

– other

       90           63                                 

Other portfolios

       5,204           5                                 

– structured certificates

       4,416                    

Model – discounted cash flow

     Credit volatility        2%           4%           2%           4%   

– EM corporate debt

       248                     Market proxy      Credit spread        4%           4%           4%           4%   
                       Market proxy      Bid quotes        76           136           104           133   

Other2

       540             5                                 
                                                   

At 30 June 2015

       13,288           6,753                                 

 

1 Collateralised loan obligation/collateralised debt obligation.
2 ’Other’ includes a range of smaller asset holdings.
3 See notes on page 388 of the Annual Report and Accounts 2014.

 

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8 Fair values of financial instruments not carried at fair value

 

The basis for measuring the fair values of loans and advances to banks and customers, financial investments, deposits by banks, customer accounts, debt securities in issue and subordinated liabilities is explained on page 391 of the Annual Report and Accounts 2014.

Fair values of financial instruments which are not carried at fair value on the balance sheet

 

        At 30 June 2015         At 30 June 2014         At 31 December 2014  
       

      Carrying

amount

    

Fair

        value

       

      Carrying

amount

    

Fair

value

       

      Carrying

Amount

    

Fair

          value

 
        $m      $m         $m      $m         $m      $m  

Assets

                    

Loans and advances to banks

      109,405         109,411          127,387         127,421          112,149         112,133   

Loans and advances to customers

      953,985         953,388          1,047,241         1,040,666          974,660         972,837   

Reverse repurchase agreements – non-trading

      149,384         149,406          198,301         198,287          161,713         161,723   

Financial investments:

                    

– debt securities

      42,177         43,367          25,256         26,196          37,751         39,163   

Liabilities

                    

Deposits by banks

      71,140         71,128          92,764         92,758          77,426         77,398   

Customer accounts

      1,335,800         1,336,068          1,415,705         1,415,732          1,350,642         1,350,595   

Repurchase agreements – non-trading

      81,506         81,506          165,506         165,506          107,432         107,432   

Debt securities in issue

      102,656         103,160          96,397         97,536          95,947         96,403   

Subordinated liabilities

      24,781         27,045          28,052         31,084          26,664         30,054   

Other financial instruments not carried at fair value are typically short-term in nature and reprice to current market rates frequently. Accordingly, their carrying amount is a reasonable approximation of fair value.

 

9 Financial assets designated at fair value

 

 

                      At              
       

          30 June

2015

         

        30 June

2014

       

31 December

2014

 
        $m           $m         $m  

Financial assets designated at fair value:

             

– not subject to repledge or resale by counterparties

      25,168            31,523          28,357   

– which may be repledged or resold by counterparties

                 300          680   
        25,168            31,823          29,037   

Treasury and other eligible bills

      63            27          56   

Debt securities

      4,485            9,870          8,891   

Equity securities

      20,465            21,886          20,006   

Securities designated at fair value

      25,013            31,783          28,953   

Loans and advances to banks and customers

      155            40          84   
        25,168            31,823          29,037   

 

Securities designated at fair value1

 

  

                      At              
       

30 June

2015

         

30 June

2014

       

31 December

2014

 
        $m           $m         $m  

US Treasury and US Government agencies2

      7            12          8   

UK Government

      127            153          140   

Hong Kong Government

      34            111          40   

Other government

      779            4,729          4,088   

Asset-backed securities3

      17            354          18   

Corporate debt and other securities

      3,584            4,538          4,653   

Equity securities

      20,465            21,886          20,006   
        25,013            31,783          28,953   

 

1 Included within these figures are debt securities issued by banks and other financial institutions of $1,545m (30 June 2014: $1,587m; 31 December 2014: $1,388m), of which $102m (30 June 2014: $31m; 31 December 2014: $24m) are guaranteed by various governments.
2 ‘US Treasury and US Government agencies’ includes securities that are supported by an explicit guarantee issued by the US Government.
3 Excludes asset-backed securities included under US Treasury and US Government agencies.

 

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Notes on the Financial Statements (unaudited) (continued)

 

 

Securities listed on a recognised exchange and unlisted

 

        

Treasury

and other

    eligible bills

        

Debt

      Securities

        

Equity

      securities

                     Total  
         $m          $m          $m          $m  

Fair value

                   

Listed1

                 2,473           13,071           15,544   

Unlisted

       63           2,012           7,394           9,469   

At 30 June 2015

       63           4,485           20,465           25,013   

Listed 1

                 2,706           15,902           18,608   

Unlisted

       27           7,164           5,984           13,175   

At 30 June 2014

       27           9,870           21,886           31,783   

Listed1

       5           2,731           13,837           16,573   

Unlisted

       51           6,160           6,169           12,380   

At 31 December 2014

       56           8,891           20,006           28,953   

 

1 Included within listed securities are $1,593m (30 June 2014: $1,337m; 31 December 2014: $1,361m) of investments listed on a recognised exchange in Hong Kong.

 

10 Derivatives

 

Fair values of derivatives by product contract type held by HSBC

 

         Assets          Liabilities  
                 Trading                  Hedging                      Total                  Trading                  Hedging                      Total  
         $m          $m          $m          $m          $m          $m  

Foreign exchange

       89,992           1,302           91,294           90,812           775           91,587   

Interest rate

       322,112           1,628           323,740           312,496           3,417           315,913   

Equities

       12,243                     12,243           12,985                     12,985   

Credit

       7,130                     7,130           7,327                     7,327   

Commodity and other

       2,702                     2,702           2,339                     2,339   

Gross total fair values

       434,179           2,930           437,109           425,959           4,192           430,151   

Offset

                 (140,167                  (140,167

At 30 June 2015

                 296,942                     289,984   

Foreign exchange

       56,756           1,993           58,749           54,999           500           55,499   

Interest rate

       426,714           2,097           428,811           417,705           4,715           422,420   

Equities

       10,993                     10,993           13,808                     13,808   

Credit

       7,944                     7,944           8,146                     8,146   

Commodity and other

       1,285                     1,285           1,564                     1,564   

Gross total fair values

       503,692           4,090           507,782           496,222           5,215           501,437   

Offset

                 (237,943                  (237,943

At 30 June 2014

                 269,839                     263,494   

Foreign exchange

       95,584           1,728           97,312           95,187           572           95,759   

Interest rate

       471,379           1,864           473,243           463,456           4,696           468,152   

Equities

       11,694                     11,694           13,654                     13,654   

Credit

       9,340                     9,340           10,061                     10,061   

Commodity and other

       3,884                     3,884           3,508                     3,508   

Gross total fair values

       591,881           3,592           595,473           585,866           5,268           591,134   

Offset

                 (250,465                  (250,465

At 31 December 2014

                 345,008                     340,669   

Derivative assets decreased during the first half of 2015, primarily driven by a decrease in the fair value of interest rate derivatives as yield curves in major currencies steepened, and from ‘portfolio compression’ exercises. This resulted in the decrease in gross fair values and a corresponding decrease in the offset amount.

 

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Trading derivatives

The notional contract amounts of derivatives held for trading purposes indicate the nominal value of transactions outstanding at the balance sheet date; they do not represent amounts at risk. The 20% decline in the notional amounts of HSBC’s derivative contracts during the first half of 2015 was primarily driven by interest rate derivatives, reflecting participation in industry-wide ‘portfolio compression’ exercises.

Notional contract amounts of derivatives held for trading purposes by product type

 

         At  
        

30 June

2015

$m

        

30 June

2014

$m

        

31 December

2014

$m

 

Foreign exchange

       5,982,764           5,560,351           5,548,075   

Interest rate

       15,991,209           27,069,408           22,047,278   

Equities

       592,453           593,532           568,932   

Credit

       485,268           615,765           550,197   

Commodity and other

       82,138           88,297           77,565   
             23,133,832                 33,927,353                 28,792,047   

Credit derivatives

The notional contract amount of credit derivatives of $485bn (30 June 2014: $616bn; 31 December 2014: $550bn) consisted of protection bought of $245bn (30 June 2014: $306bn; 31 December 2014: $272bn) and protection sold of $240bn (30 June 2014: $310bn; 31 December 2014: $278bn).

HSBC manages the credit risk arising on buying and selling credit derivative protection by including the related credit exposures within its overall credit limit structure for the relevant counterparty. The trading of credit derivatives is restricted to a small number of offices within the major centres which have the control infrastructure and market skills to manage effectively the credit risk inherent in the products.

Derivatives valued using models with unobservable inputs

The difference between the fair value at initial recognition (the transaction price) and the value that would have been derived had valuation techniques used for subsequent measurement been applied at initial recognition, less subsequent releases, is as follows:

Unamortised balance of derivatives valued using models with significant unobservable inputs

 

         Half-year to      
        

          30 June

2015

$m

        

          30 June

2014

$m

        

31 December

2014

$m

     

Unamortised balance at beginning of period

       114           167           135     

Deferral on new transactions

       118           74           103     

Recognised in the income statement during the period:

       (115        (112        (122  

– amortisation

       (69        (56        (58  

– subsequent to unobservable inputs becoming observable

       (1        (7        (6  

– maturity or termination, or offsetting derivative

       (45        (49        (58  

Exchange differences

                 6           (2  

Unamortised balance at end of period1

       117           135           114     

 

1 This amount is yet to be recognised in the consolidated income statement.

The fair value at initial recognition is the transaction price. The transaction price may be viewed as the combination of a model price and a margin. In subsequent periods, the model price reflects changes in market conditions. The unamortised balance reflects that component of the margin that has yet to be recognised in the income statement.

Hedge accounting derivatives

The notional contract amounts of derivatives held for hedge accounting purposes indicate the nominal value of transactions outstanding at the balance sheet date; they do not represent amounts at risk.

 

HSBC HOLDINGS PLC

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Notes on the Financial Statements (unaudited) (continued)

 

 

Notional contract amounts of derivatives held for hedging purposes by product type

 

         At 30 June 2015          At 30 June 2014          At 31 December 2014  
        

Cash flow

hedges
$m

        

Fair value

hedges
$m

        

Cash flow

hedges
$m

        

Fair value

hedges
$m

        

Cash flow

hedges
$m

        

Fair value

hedges
$m

 

Foreign exchange

       24,611           128           25,456           97           25,340             

Interest rate

       118,599           88,994           220,089           101,784           190,902           90,338   
       143,210           89,122           245,545           101,881           216,242           90,338   

 

11 Financial investments

 

 

         At  
        

        30 June

2015

$m

        

        30 June

2014

$m

        

31 December

2014

$m

 

Financial investments:

              

– not subject to repledge or resale by counterparties

       392,367           409,500           380,419   

– which may be repledged or resold by counterparties

       12,315           14,210           35,048   
       404,682           423,710           415,467   

Carrying amounts and fair values of financial investments

 

         At 30 June 2015          At 30 June 2014          At 31 December 2014      
         Carrying
amount
$m
        

Fair

value

$m

         Carrying
amount
$m
        

Fair

value

$m

         Carrying
amount
$m
        

Fair

value

$m

     

Treasury and other eligible bills

       92,390           92,390           78,177           78,177           81,517           81,517     

– available for sale

       92,390           92,390           78,177           78,177           81,517           81,517     

Debt securities

       306,508           307,699           336,807           337,747           323,256           324,668     

– available for sale

       264,331           264,332           311,551           311,551           285,505           285,505     

– held to maturity

       42,177           43,367           25,256           26,196           37,751           39,163     

Equity securities

       5,784           5,784           8,726           8,726           10,694           10,694     

– available for sale

       5,784           5,784           8,726           8,726           10,694           10,694     
                                                                   
           404,682               405,873               423,710               424,650               415,467               416,879     

Financial investments at amortised cost and fair value

 

      

 

 

Amortised

cost

$m

  

1 

  

      

 

 

Fair

value

$m

  

2 

  

US Treasury

       37,187           37,485   

US Government agencies3

       22,954           22,897   

US Government sponsored entities3

       9,909           10,232   

UK Government

       21,473           21,793   

Hong Kong Government

       50,804           50,813   

Other government

       146,758           149,117   

Asset-backed securities4

       16,642           15,972   

Corporate debt and other securities

       90,356           91,780   

Equities

       4,261           5,784   

At 30 June 2015

               400,344                   405,873   

US Treasury

       37,378           37,900   

US Government agencies3

       17,393           17,326   

US Government sponsored entities3

       5,087           5,407   

UK Government

       29,941           30,189   

Hong Kong Government

       50,187           50,191   

Other government

       160,023           163,796   

Asset-backed securities4

       24,574           22,665   

Corporate debt and other securities

       85,864           88,448   

Equities

       7,876           8,728   

At 30 June 2014

       418,323           424,650   

 

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Financial investments at amortised cost and fair value (continued)

 

      

 

 

Amortised

cost

$m

  

1 

  

      

 

 

Fair

value

$m

  

2 

  

US Treasury

       33,931           34,745   

US Government agencies3

       18,326           18,516   

US Government sponsored entities3

       9,339           9,761   

UK Government

       28,680           29,758   

Hong Kong Government

       43,573           43,574   

Other government

       159,846           163,402   

Asset-backed securities4

       20,911           19,177   

Corporate debt and other securities

       84,387           87,252   

Equities

       7,421           10,694   

At 31 December 2014

       406,414           416,879   

 

1 Represents the amortised cost or cost basis of the financial investment.
2 Included within these figures are debt securities issued by banks and other financial institutions of $67bn (30 June 2014: $56bn; 31 December 2014: $54bn), of which $18bn (30 June 2014: $11bn; 31 December 2014: $9bn) were guaranteed by various governments. The fair value of the debt securities issued by banks and other financial institutions at 30 June 2015 was $67bn (30 June 2014: $57bn; 31 December 2014: $54bn).
3 ‘US Government agencies’ and ‘sponsored entities’ include securities that are supported by an explicit guarantee issued by the US Government.
4 Excludes asset-backed securities included under US Government agencies and sponsored entities.

Financial investments listed and unlisted

 

        

Treasury

and other

eligible bills
available
for sale

$m

        

Debt

securities

available

for sale
$m

        

Debt

securities

held to

maturity
$m

        

Equity

securities

available

for sale
$m

        

Total

$m

 

Carrying amount

                        

Listed1

       5,609           159,707           8,117           898           174,331   

Unlisted2

       86,781           104,624           34,060           4,886           230,351   

At 30 June 2015

       92,390           264,331           42,177           5,784           404,682   

Listed1

       4,219           160,719           6,325           3,892           175,155   

Unlisted2

       73,958           150,832           18,931           4,834           248,555   

At 30 June 2014

       78,177           311,551           25,256           8,726           423,710   

Listed1

       4,101           168,879           6,037           5,928           184,945   

Unlisted2

       77,416           116,626           31,714           4,766           230,522   

At 31 December 2014

       81,517           285,505           37,751           10,694           415,467   

 

1 The fair value of listed held-to-maturity debt securities at 30 June 2015 was $8bn (30 June 2014: $7bn; 31 December 2014: $6bn). Included within listed investments were $5bn (30 June 2014: $4bn; 31 December 2014: $4bn) of investments listed on a recognised exchange in Hong Kong.
2 Unlisted treasury and other eligible bills available for sale primarily comprise treasury bills not listed on an exchange but for which there is a liquid market.

Maturities of investments in debt securities at their carrying amount

 

         1 year
        or less
$m
        

5 years or

less but over

1 year

$m

        

10 years or

less but over

5 years

$m

         Over
        10 years
$m
                   Total
$m
 

Available for sale

       61,158           127,281           35,291           40,601           264,331   

Held to maturity

       1,862           10,886           7,797           21,632           42,177   

At 30 June 2015

       63,020           138,167           43,088           62,233           306,508   

Available for sale

       69,692           144,859           52,676           44,324           311,551   

Held to maturity

       2,055           8,811           7,003           7,387           25,256   

At 30 June 2014

       71,747           153,670           59,679           51,711           336,807   

Available for sale

       68,344           134,815           44,938           37,408           285,505   

Held to maturity

       1,396           9,622           7,087           19,646           37,751   

At 31 December 2014

       69,740           144,437           52,025           57,054           323,256   

 

HSBC HOLDINGS PLC

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Notes on the Financial Statements (unaudited) (continued)

 

 

12 Assets held for sale and liabilities of disposal groups held for sale

 

 

         At  
        

        30 June

2015

$m

        

        30 June

2014

$m

        

31 December

2014

$m

 

Disposal groups

       60,513           9,620           6,883   

Non-current assets held for sale

       416           628           764   

Total assets held for sale

       60,929           10,248           7,647   

Liabilities of disposal groups held for sale

       53,226           12,361           6,934   

Disposal groups

Brazil

In the first half of 2015, we announced the plan to sell our operations in Brazil. At 30 June 2015, the sale was considered highly probable and therefore the assets and liabilities of the disposal group were classified as held for sale. The disposal group includes the assets and liabilities expected to be sold plus allocated goodwill as set out in the table below.

The disposal group is measured at its carrying amount at 30 June 2015 which is lower than its fair value less cost to sell. The carrying amount includes a $1.3bn deferred tax asset (see Note 2) and $1.3bn of allocated goodwill (see Note 20). The assets and liabilities of the disposal group have been reclassified from their individual lines in the consolidated balance sheet and are presented in separate ‘Held for sale’ lines at 30 June 2015. There is no change to the comparative balance sheet presentation and there is no separate presentation in the income statement.

The planned sale gives rise to a deferred tax liability of $0.2bn (recorded in deferred tax liabilities in the Group’s consolidated balance sheet). At 30 June 2015, there were no other significant accounting implications in respect of the planned sale although this may evolve as it progresses. The disposal group represents a foreign operation and when the disposal completes the cumulative amount of associated exchange differences previously recognised in other comprehensive income will be reclassified to the income statement. At 30 June 2015, there was a cumulative loss of $1.7bn in the Group’s foreign exchange reserve attributable to the Brazilian operations.

Other

During 2014, we entered into an agreement to sell our pensions business in the UK. This represents the Other disposal group in the table below.

In the first half of 2015, we also announced the plan to sell our operations in Turkey. At 30 June 2015, the planned sale was not considered highly probable and therefore the operations were not classified as held for sale.

The major classes of assets and associated liabilities of disposal groups held for sale are as follows:

 

         At 30 June 2015  
        

Brazil

$m

                     Other
$m
                     Total
$m
 

Assets of disposal groups held for sale

              

Trading assets

       1,887                     1,887   

Fair value of financial assets designated at fair value

       4,130           6,187           10,317   

Loans and advances to banks

       4,193                     4,193   

Loans and advances to customers

       20,827                     20,827   

Reverse repurchase agreements

       6,142                     6,142   

Financial investments

       8,073                     8,073   

Goodwill and intangible assets

       1,847           134           1,981   

Deferred tax asset

       1,273                     1,273   

Prepayments, accrued income and other assets

       5,167           653           5,820   

Total assets

       53,539           6,974           60,513   

Liabilities of disposal groups held for sale

              

Deposits by banks

       2,212                     2,212   

Customer accounts

       19,432                     19,432   

Debt securities in issue

       10,790                     10,790   

Liabilities under insurance contracts

       4,462           2,972           7,434   

Accruals, deferred income and other liabilities

       9,380           3,978           13,358   

Total liabilities

       46,276           6,950           53,226   

Expected date of completion

       2016           Q3 2015        

Operating segment

       Latin America           Europe        

Fair value of selected financial instruments which are not carried at fair value on the balance sheet

              

Loans and advances to banks and customers

       24,675                     24,675   

Customer accounts

       19,401                     19,401   

 

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13 Assets charged as security for liabilities and collateral accepted as security for assets

 

Information on financial assets pledged as security for liabilities and collateral accepted as security for assets is disclosed on pages 401 and 402 of the Annual Report and Accounts 2014. There was no material change in the amount of assets charged as security for liabilities and collateral accepted as security for assets at 30 June 2015.

 

14 Interests in associates and joint ventures

 

At 30 June 2015, the carrying amount of HSBC’s interests in associates and joint ventures was $18.7bn (30 June 2014: $17.5bn; 31 December 2014: $18.2bn).

Principal associates of HSBC

 

         At 30 June 2015          At 30 June 2014          At 31 December 2014  
      
 
 
    Carrying
amount
$m
  
  
  
      

 

 

Fair

        value

$m

  

1 

  

      
 
 
    Carrying
amount
$m
  
  
  
      

 

 

Fair

        value

$m

  

1 

  

      
 
 
    Carrying
amount
$m
  
  
  
      

 

 

Fair

        value

$m

  

1 

  

Listed

                             

Bank of Communications Co., Limited

       15,021           14,715           14,113           9,757           14,590           13,140   

The Saudi British Bank

       2,905           5,312           2,579           5,205           2,811           6,220   
       17,926           20,027           16,692           14,962           17,401           19,360   

 

1 Principal associates are listed on recognised stock exchanges. The fair values are based on the quoted market prices of the shares held (Level 1 in the fair value hierarchy).

Bank of Communications Co., Limited

Impairment testing

As at 30 June 2015, the fair value of HSBC’s investment in Bank of Communications Co., Limited (‘BoCom’) had been below the carrying amount for approximately 38 months, apart from a short period in 2013 and briefly during the first half of 2015. As a result, we performed an impairment test on the carrying amount of the investment in BoCom. The test confirmed that there was no impairment as at 30 June 2015.

 

         At 30 June 2015          At 30 June 2014          At 31 December 2014  
                     VIU
$bn
        

Carrying

value
$bn

        

Fair

        value
$bn

                     VIU
$bn
        

Carrying

value
$bn

        

Fair

        value
$bn

                     VIU
$bn
        

Carrying

value
$bn

        

Fair

        value
$bn

 

BoCom

       16.5           15.0           14.7           14.6           14.1           9.8           15.7           14.6           13.1   

Basis of recoverable amount

The impairment test was performed by comparing the recoverable amount of BoCom, determined by a value-in-use (‘VIU’) calculation, with its carrying amount. The VIU calculation uses discounted cash flow projections based on management’s estimates of earnings. Cash flows beyond the short to medium-term are then extrapolated in perpetuity using a long-term growth rate. An imputed capital maintenance charge (‘CMC’) is included to meet the expected regulatory capital requirements, and calculated as a deduction from forecast cash flows. The principal inputs to the CMC calculation include estimates of asset growth, the ratio of risk-weighted assets to total assets, and the expected regulatory capital requirements. Management judgement is required in estimating the future cash flows of BoCom.

Key assumptions in VIU calculation

Long-term growth rate: the growth rate used was 5% (30 June 2014: 5%; 31 December 2014: 5%) for periods after 2018 and does not exceed forecast GDP growth in mainland China.

Long-term asset growth rate: the growth rate used was 4% (30 June 2014: 4%; 31 December 2014: 4%) for periods after 2018 and this is the rate of growth required for an assumed 5% long-term growth rate in profit.

Discount rate: the discount rate of 13% (30 June 2014: 13%; 31 December 2014: 13%) is derived from a range of values obtained by applying a Capital Asset Pricing Model (‘CAPM’) calculation for BoCom, using market data. Management supplements this by comparing the rates derived from the CAPM with discount rates available from external sources, and HSBC’s discount rate for evaluating investments in mainland China. The discount rate used was within the range of 10.1% to 14.3% (30 June 2014: 11.2% to 15.3%; 31 December 2014: 11.4% to 14.2%) indicated by the CAPM and external sources.

Loan impairment charge as a percentage of customer advances: the ratio used ranges from 0.73% to 1% (30 June 2014: 0.63% to 1%; 31 December 2014: 0.73% to 1%) in the short-to medium-term. The long-term ratio was assumed to revert to a historical rate of 0.65% (30 June 2014: 0.65%; 31 December 2014: 0.65%). The rates were within the medium-term range forecasts of 0.54% to 1.02% (30 June 2014: 0.52% to 1.11%; 31 December 2014: 0.51% to 1.08%) disclosed by external analysts.

 

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Notes on the Financial Statements (unaudited) (continued)

 

 

Risk-weighted assets as a percentage of total assets: the ratio used ranges from 70% to 72% (30 June 2014: 70.2% throughout; 31 December 2014: 70% to 72%) in the short- to medium-term. The long-term ratio reverts to a rate of 70% (30 June 2014: 70.2%; 31 December 2014: 70%).

Cost-income ratio: the ratio used was 41% (30 June 2014: ranged from 40.8% to 43.0%; 31 December 2014: ranged from 40.0% to 42.4%) in the short- to medium-term. The ratios were within the short- to medium-term range forecasts of 37.5% to 43.5% (30 June 2014: 39.8% to 44.3%; 31 December 2014: 37.2% to 44.5%) disclosed by external analysts.

Sensitivity analyses were performed on each key assumption to ascertain the impact of reasonably possible changes in assumptions. The following changes to each key assumption on its own used in the VIU calculation would be necessary to reduce headroom to nil:

 

Key assumption    Changes to key assumption to reduce headroom to nil

• Long-term growth rate

 

• Long-term asset growth rate

 

• Discount rate

 

• Loan impairment charge as a percentage of customer advances

 

• Risk-weighted assets as a percentage of total assets

 

• Cost-income ratio

 

  

• Decrease by 56 basis points

 

• Increase by 56 basis points

 

• Increase by 72 basis points

 

• Increase by 12 basis points

 

• Increase by 4.4%

 

• Increase by 2.5%

 

 

15 Trading liabilities

 

 

         At  
        

        30 June

2015

$m

        

        30 June

2014

$m

        

31 December

2014

$m

 

Deposits by banks

       45,900           47,901           41,453   

Customer accounts1

       52,384           67,077           50,600   

Other debt securities in issue

       33,957           35,071           33,602   

Other liabilities – net short positions in securities

       49,194           78,086           64,917   
       181,435           228,135           190,572   

 

1 Structured deposits placed at HSBC Bank USA and HSBC Trust Company (Delaware) National Association are insured by the Federal Deposit Insurance Corporation (FDIC), a US government agency, up to $250,000 per depositor.

At 30 June 2015, the cumulative amount of change in fair value attributable to changes in credit risk was a gain of $16m (30 June 2014: loss of $123m; 31 December 2014: loss of $79m).

 

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Table of Contents
16 Maturity analysis of assets and liabilities

 

HSBC

Maturity analysis of assets and liabilities

 

        

Due

not more

than 1 month

        

Due

over 1 month
but not more
than 3 months

        

Due

over 3 months
but not more
than 6 months

        

Due

over 6 months
but not more
than 9 months

        

Due

over 9 months
but not more
than 1 year

        

Due

over 1 year

but not more
than 2 years

        

Due

over 2 years

but not more

than 5 years

        

Due

over 5 years

         Total  
         $m          $m          $m          $m          $m          $m          $m          $m          $m  

Financial assets

                                            

Cash and balances at central banks

       144,324                                                                                 144,324   

Items in the course of collection from other banks

       10,190                                                                                 10,190   

Hong Kong Government certificates of indebtedness

       28,104                                                                                 28,104   

Trading assets

       282,483                                                   147           508                     283,138   

Financial assets designated at fair value

       383           182           164           232           214           743           2,944           20,306           25,168   

Derivatives

       294,171           84           22           296           240           624           856           649           296,942   

Loans and advances to banks

       74,112           16,136           4,272           2,882           2,117           6,145           2,047           1,694           109,405   

Loans and advances to customers

       192,308           73,948           51,291           36,703           37,713           83,083           198,247           280,692           953,985   

Reverse repurchase agreements – non-trading

       102,041           24,539           10,795           6,659           1,599           2,521           1,230                     149,384   

Financial investments

       32,486           52,871           35,737           18,669           16,588           41,709           97,837           108,785           404,682   

Assets held for sale

       17,846           4,378           3,501           1,883           2,852           6,682           6,553           11,489           55,184   

Accrued income and other financial assets

       12,008           7,151           1,757           390           275           469           421           2,435           24,906   

Total financial assets

       1,190,456           179,289           107,539           67,714           61,598           142,123           310,643           426,050           2,485,412   

Non-financial assets

                                                                             86,301           86,301   

Total assets at 30 June 2015

       1,190,456           179,289           107,539           67,714           61,598           142,123           310,643           512,351           2,571,713   

Financial liabilities

                                            

Hong Kong currency notes in circulation

       28,104                                                                                 28,104   

Deposits by banks

       62,588           2,961           871           468           150           739           3,286           77           71,140   

Customer accounts

       1,217,805           57,511           25,235           11,448           10,972           7,933           4,565           331           1,335,800   

Repurchase agreements – non-trading

       64,910           11,795           2,861           601           339                     500           500           81,506   

Items in the course of transmission to other banks

       12,711                                                                                 12,711   

Trading liabilities

       146,612           1,523           2,597           2,572           1,505           6,051           10,098           10,477           181,435   

Financial liabilities designated at fair value

       101           899           1,309           3,864           3,082           5,590           12,937           41,703           69,485   

Derivatives

       286,128           81           33           27           420           574           1,143           1,578           289,984   

Debt securities in issue

       16,235           13,703           19,315           11,725           7,924           8,421           19,782           5,551           102,656   

Liabilities of disposal groups held for sale

       26,188           1,827           4,731           2,071           1,802           1,995           3,088           8,248           49,950   

Accruals and other financial liabilities

       20,451           6,467           2,343           1,424           1,115           816           1,229           888           34,733   

Subordinated liabilities

                 2           1,557           402                     69           3,194           19,557           24,781   

Total financial liabilities

       1,881,833           96,769           60,852           34,602           27,309           32,188           59,822           88,910           2,282,285   

Non-financial liabilities

                                                                             88,046           88,046   

Total liabilities at 30 June 2015

       1,881,833           96,769           60,852           34,602           27,309           32,188           59,822           176,956           2,370,331   

 

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Table of Contents

Notes on Financial Statements (unaudited) (continued)

 

 

        

Due

not more

than 1 month

        

Due

over 1 month
but not more
than 3 months

        

Due

over 3 months
but not more
than 6 months

        

Due

over 6 months
but not more
than 9 months

        

Due

over 9 months
but not more
than 1 year

        

Due

over 1 year
but not more

than 2 years

        

Due

over 2 years

but not more
than 5 years

        

Due

over 5 years

         Total  
         $m          $m          $m          $m          $m          $m          $m          $m          $m  

Financial assets

                                            

Cash and balances at central banks

       132,137                                                                                 132,137   

Items in the course of collection from other banks

       8,144                                                                                 8,144   

Hong Kong Government certificates of indebtedness

       26,640                                                                                 26,640   

Trading assets

       345,144           1,025           100                                         837                     347,106   

Financial assets designated at fair value

       863           346           469           646           289           1,361           3,740           24,109           31,823   

Derivatives

       265,816           345           551           82           309           669           1,120           947           269,839   

Loans and advances to banks

       86,341           20,506           3,958           1,908           2,517           6,734           3,390           2,033           127,387   

Loans and advances to customers

       252,285           81,682           54,901           30,874           35,921           96,919           189,032           305,627           1,047,241   

Reverse repurchase agreements – non-trading

       138,214           41,593           7,387           5,034           4,190           363           1,520                     198,301   

Financial investments

       30,651           43,087           33,722           20,295           21,715           43,448           111,847           118,945           423,710   

Assets held for sale

       1,600           199           72           106           47           115           210           6,598           8,947   

Accrued income and other financial assets

       18,184           7,671           2,549           1,305           299           702           853           3,652           35,215   

Total financial assets

       1,306,019           196,454           103,709           60,250           65,287           150,311           312,549           461,911           2,656,490   

Non-financial assets

                                                                             97,103           97,103   

Total assets at 30 June 2014

       1,306,019           196,454           103,709           60,250           65,287           150,311           312,549           559,014           2,753,593   

Financial liabilities

                                            

Hong Kong currency notes in circulation

       26,640                                                                                 26,640   

Deposits by banks1

       83,467           3,888           1,613           346           323           850           1,801           476           92,764   

Customer accounts1

       1,269,487           62,090           29,768           14,215           20,194           14,620           5,065           266           1,415,705   

Repurchase agreements – non-trading

       126,600           23,791           7,603           2,239           4,523                               750           165,506   

Items in the course of transmission to other banks

       9,936                                                                                 9,936   

Trading liabilities

       189,446           1,304           3,763           3,713           2,752           6,879           9,396           10,882           228,135   

Financial liabilities designated at fair value

       2,648           973           9           2,135           4,291           9,211           18,622           45,079           82,968   

Derivatives

       258,655           40           78           41           92           698           1,650           2,240           263,494   

Debt securities in issue

       16,560           9,767           10,576           9,592           6,417           18,854           19,081           5,550           96,397   

Liabilities of disposal groups held for sale

       7,894           227           49           66           116           225           585           3,158           12,320   

Accruals and other financial liabilities

       23,412           8,366           3,086           1,939           1,416           1,661           1,632           1,075           42,587   

Subordinated liabilities

       16           114           26           183                     308           4,006           23,399           28,052   

Total financial liabilities

       2,014,761           110,560           56,571           34,469           40,124           53,306           61,838           92,875           2,464,504   

Non-financial liabilities

                                                                             90,367           90,367   

Total liabilities at 30 June 2014

       2,014,761           110,560           56,571           34,469           40,124           53,306           61,838           183,242           2,554,871   

 

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Maturity analysis of assets and liabilities (continued)

 

        

Due

not more

than 1 month

        

Due

over 1 month
but not more
than 3 months

        

Due

over 3 months
but not more
than 6 months

        

Due

over 6 months
but not more
than 9 months

        

Due

over 9 months
but not more
than 1 year

        

Due

over 1 year

but not more
than 2 years

        

Due

over 2 years

but not more
than 5 years

        

Due

over 5 years

         Total  
         $m          $m          $m          $m          $m          $m          $m          $m          $m  

Financial assets

                                            

Cash and balances at central banks

       129,957                                                                                 129,957   

Items in the course of collection from other banks

       4,927                                                                                 4,927   

Hong Kong Government certificates of indebtedness

       27,674                                                                                 27,674   

Trading assets

       303,463                                                             730                     304,193   

Financial assets designated at fair value

       244           399           417           346           208           1,825           4,634           20,964           29,037   

Derivatives

       341,558           56           463           220           32           1,003           1,033           643           345,008   

Loans and advances to banks

       73,758           17,649           5,682           1,934           1,850           7,371           1,981           1,924           112,149   

Loans and advances to customers

       203,130           76,236           55,018           35,347           37,674           91,300           187,728           288,227           974,660   

Reverse repurchase agreements – non-trading

       116,002           30,490           9,076           2,230           582           868           2,465                     161,713   

Financial investments

       28,237           50,445           41,503           14,577           17,011           48,392           96,891           118,411           415,467   

Assets held for sale

       114           186           13           18           10           41           126           6,224           6,732   

Accrued income and other financial assets

       17,756           7,386           2,402           587           317           707           1,156           3,579           33,890   

Total financial assets

       1,246,820           182,847           114,574           55,259           57,684           151,507           296,744           439,972           2,545,407   

Non-financial assets

                                                                             88,732           88,732   

Total assets at 31 December 2014

       1,246,820           182,847           114,574           55,259           57,684           151,507           296,744           528,704           2,634,139   

Financial liabilities

                                            

Hong Kong currency notes in circulation

       27,674                                                                                 27,674   

Deposits by banks

       66,829           2,890           2,539           511           810           621           2,963           263           77,426   

Customer accounts

       1,216,574           57,127           32,925           15,023           13,586           9,278           5,819           310           1,350,642   

Repurchase agreements – non-trading

       95,243           5,029           4,054           1,392           714                               1,000           107,432   

Items in the course of transmission to other banks

       5,990                                                                                 5,990   

Trading liabilities

       155,604           2,041           2,636           1,439           2,918           5,744           9,603           10,587           190,572   

Financial liabilities designated at fair value

       981           912           4,264           972           1,557           8,500           15,037           43,930           76,153   

Derivatives

       335,802           23           86           223           54           621           1,121           2,739           340,669   

Debt securities in issue

       14,741           15,424           13,027           7,854           6,050           14,209           19,481           5,161           95,947   

Liabilities of disposal groups held for sale

       191           28           56           55           63           213           551           2,837           3,994   

Accruals and other financial liabilities

       20,893           9,170           3,013           1,166           1,757           1,355           1,674           818           39,846   

Subordinated liabilities

                 150                     3           167           113           3,607           22,624           26,664   

Total financial liabilities

       1,940,522           92,794           62,600           28,638           27,676           40,654           59,856           90,269           2,343,009   

Non-financial liabilities

                                                                             91,152           91,152   

Total liabilities at 31 December 2014

       1,940,522           92,794           62,600           28,638           27,676           40,654           59,856           181,421           2,434,161   

 

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Notes on the Financial Statements (unaudited) (continued)

 

 

17 Provisions

 

 

        

Restructuring

costs

         Contractual
commitments
        

Legal

proceedings

and regulatory

matters

        

Customer

remediation

        

Other

    provisions

                     Total  
         $m          $m          $m          $m          $m          $m  

At 1 January 2015

       197           234           2,184           1,831           552           4,998   

Additional provisions/increase in provisions

       92           35           1,432           155           45           1,759   

Provisions utilised

       (47        (1        (145        (450        (71        (714

Amounts reversed

       (13        (10        (86        (13        (50        (172

Unwinding of discounts

                           24           4                     28   

Exchange differences and other movements

       (34        (89        (441        (173        (37        (774

At 30 June 2015

       195           169           2,968           1,354           439           5,125   

At 1 January 2014

       271           177           1,832           2,382           555           5,217   

Additional provisions/increase in provisions

       51           38           188           299           67           643   

Provisions utilised

       (77        (1        (214        (1,085        (51        (1,428

Amounts reversed

       (20        (14        (157        (64        (46        (301

Unwinding of discounts

                           22           3           3           28   

Exchange differences and other movements

       1           (6        94           37           (2        124   

At 30 June 2014

       226           194           1,765           1,572           526           4,283   

At 1 July 2014

       226           194           1,765           1,572           526           4,283   

Additional provisions/increase in provisions

       96           98           1,564           1,141           87           2,986   

Provisions utilised

       (66        (1        (895        (684        (61        (1,707

Amounts reversed

       (23        (32        (124        (120        (20        (319

Unwinding of discounts

                 1           21           7           8           37   

Exchange differences and other movements

       (36        (26        (147        (85        12           (282

At 31 December 2014

       197           234           2,184           1,831           552           4,998   

Further details of ‘Legal proceedings and regulatory matters’ are set out in Note 19. Legal proceedings include civil court, arbitration or tribunal proceedings brought against HSBC companies (whether by way of claim or counterclaim) or civil disputes that may, if not settled, result in court, arbitration or tribunal proceedings. Regulatory matters refer to investigations, reviews and other actions carried out by, or in response to the actions of, regulators or law enforcement agencies in connection with alleged wrongdoing by HSBC.

‘Customer remediation’ refers to activities (root cause analysis, customer contact, case reviews, decision making and redress calculations) carried out by HSBC to compensate customers for losses or damages associated with a failure to comply with regulations or to treat customers fairly. Customer remediation is often initiated by HSBC in response to customer complaints and/or industry developments in sales practices, and is not necessarily initiated by regulatory action.

Payment Protection Insurance

At 30 June 2015, a provision of $903m (30 June 2014: $759m; 31 December 2014: $1,079m) was held relating to the estimated liability for redress in respect of the possible mis-selling of payment protection insurance (‘PPI’) policies in previous years. An increase in provisions of $91m was recognised during the half-year to 30 June 2015, primarily reflecting higher expected levels of inbound complaints by claims management companies compared with previous forecasts.

The estimated liability for redress is calculated on the basis of the total premiums paid by the customer plus simple interest of 8% per annum (or the rate inherent in the related loan product where higher). The basis for calculating the redress liability is the same for single premium and regular premium policies. Future estimated redress levels are based on historically observed redress per policy.

A total of 5.4m PPI policies have been sold by HSBC since 2000 which generated estimated gross written premiums of approximately $4.9bn and revenues of approximately $4.0bn at first half of 2015 average exchange rates. At 30 June 2015, the estimated total complaints expected to be received were 2.0m, representing 36% of total policies sold. It is estimated that contact will be made with regard to 2.3m policies, representing 43% of total policies sold. This estimate includes inbound complaints as well as HSBC’s proactive contact exercise on certain policies (‘outbound contact’).

The following table details the cumulative number of complaints received at 30 June 2015 and the number of claims expected in the future:

 

         Cumulative to
30 June 2015
         Future
    expected
 

Inbound complaints1 (000s of policies)

       1,293           300   

Outbound contact (000s of policies)

       571           167   

Response rate to outbound contact

       51%           51%   

Average uphold rate per claim2

       73%           73%   

Average redress per claim ($)

       2,595           2,604   

 

1 Excludes invalid claims where the complainant has not held a PPI policy.
2 Claims include inbound and responses to outbound contact.

 

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The main assumptions involved in calculating the redress liability are the volume of inbound complaints, the projected period of inbound complaints, the decay rate of complaint volumes, the population identified as systemically mis-sold and the number of policies per customer complaint. The main assumptions are likely to evolve over time as root cause analysis continues, more experience is available regarding customer initiated complaint volumes received, and we handle responses to our ongoing outbound contact.

A 100,000 increase/decrease in the total inbound complaints would increase/decrease the redress provision by approximately $194m. Each 1% increase/decrease in the response rate to our outbound contact exercise would increase/decrease the redress provision by approximately $13m.

A 2014 decision of the UK Supreme Court (Plevin) held that, judged on its own facts, non-disclosure of the amount of commissions payable in connection with the sale of PPI to a customer created an unfair relationship under the provisions of the UK Consumer Credit Act (‘CCA’). The FCA is considering whether additional rules and/or guidance are required to deal with the effect of the Plevin decision on complaints about PPI, and the Financial Ombudsman Service is reviewing the implications for complaints referred to it. HSBC is assessing any possible consequences of the case on its historical sales of PPI; at 30 June 2015 no adjustment to the PPI provision had been recorded in relation to the matter.

In addition to these factors and assumptions, the extent of the required redress will also depend on the facts and circumstances of each individual customer’s case. For these reasons, there is currently a high degree of uncertainty as to the eventual costs of redress.

Interest rate derivatives

At 30 June 2015, a provision of $210m (30 June 2014: $317m; 31 December 2014: $312m) was held relating to the estimated liability for redress in respect of the possible mis-selling of interest rate derivatives in the UK. The provision relates to the estimated redress payable to customers in respect of historical payments under derivative contracts, the expected write-off by the bank of open derivative contract balances and the estimated project costs. There was no increase to the provision recorded in the period (30 June 2014: $38m; 31 December 2014: $250m).

UK Consumer Credit Act

HSBC has undertaken a review of compliance with the fixed-sum unsecured loan agreement requirements of the CCA. $334m was recorded within ‘Accruals, deferred income and other liabilities’ for the repayment of interest to customers (30 June 2014: $367m; 31 December 2014: $379m), primarily where annual statements did not remind them of their right to partially prepay the loan, notwithstanding that the customer loan documentation did refer to this right. The cumulative liability to date was $588m (30 June 2014: $339m; 31 December 2014: $591m), of which payments of $245m (30 June 2014: nil; 31 December 2014: $212m) were made to customers. There is some uncertainty as to whether other technical requirements of the CCA have been met.

Brazilian labour, civil and fiscal claims

Brazilian labour, civil and fiscal litigation provisions were $451m (30 June 2014: $404m; 31 December 2014: $501m) as at 30 June 2015. Of these provisions, $207m (30 June 2014: $256m; 31 December 2014: $246m) was in respect of labour and overtime litigation claims brought by past employees against HSBC operations in Brazil following their departure from the bank. The main assumptions involved in estimating the liability are the expected number of departing employees, individual salary levels and the facts and circumstances of each individual case. These provisions form part of the Brazilian disposal group and were classified as ‘held for sale’ at 30 June 2015 (see Note 12).

 

18 Contingent liabilities, contractual commitments and guarantees

 

 

         At  
        

        30 June

2015

        

        30 June

2014

        

31 December

2014

 
         $m          $m          $m  

Guarantees and contingent liabilities

              

Guarantees

       88,103           87,800           86,385   

Other contingent liabilities

       297           394           346   
       88,400           88,194           86,731   

Commitments

              

Documentary credits and short-term trade-related transactions

       11,720           12,986           12,082   

Forward asset purchases and forward deposits placed

       1,174           2,353           823   

Undrawn formal standby facilities, credit lines and other commitments to lend

       637,558           626,729           638,475   
       650,452           642,068           651,380   

The above table discloses the nominal principal amounts of commitments, guarantees and other contingent liabilities. Contingent liabilities arising from legal proceedings, regulatory and other matters against the Group are disclosed in Note 19. Nominal principal amounts represent the amounts at risk should contracts be fully drawn upon and clients default. As a significant proportion of guarantees and commitments is expected to expire without being drawn upon, the total of the nominal principal amounts is not indicative of future liquidity requirements.

 

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Notes on the Financial Statements (unaudited) (continued)

 

 

Capital commitments

In addition to the commitments disclosed above, at 30 June 2015 HSBC had $468m (30 June 2014: $513m; 31 December 2014: $656m) of capital commitments contracted but not provided for and $174m (30 June 2014: $232m; 31 December 2014: $101m) of capital commitments authorised but not contracted for.

 

19 Legal proceedings and regulatory matters

 

HSBC is party to legal proceedings and regulatory matters in a number of jurisdictions arising out of its normal business operations. Apart from the matters described below, HSBC considers that none of these matters are material. The recognition of provisions is determined in accordance with the accounting policies set out in Note 29 of the Annual Report and Accounts 2014. While the outcome of legal proceedings and regulatory matters is inherently uncertain, management believes that, based on the information available to it, appropriate provisions have been made in respect of these matters as at 30 June 2015 (see Note 17). Where an individual provision is material, the fact that a provision has been made is stated and quantified, except to the extent doing so would be seriously prejudicial. Any provision recognised does not constitute an admission of wrongdoing or legal liability. It is not practicable to provide an aggregate estimate of potential liability for our legal proceedings and regulatory matters as a class of contingent liabilities.

Securities litigation

As a result of an August 2002 restatement of previously reported consolidated financial statements and other corporate events, including the 2002 settlement with 46 states and the District of Columbia relating to real estate lending practices, Household International, Inc. (‘Household International’) and certain former officers were named as defendants in a class action lawsuit, Jaffe v. Household International, Inc., et al., filed in August 2002 in the US District Court for the Northern District of Illinois (the ‘Illinois District Court’). The complaint asserted claims under the US Securities Exchange Act and alleged that the defendants knowingly or recklessly made false and misleading statements of material fact relating to Household International’s Consumer Lending operations, including collections, sales and lending practices, some of which ultimately led to the 2002 state settlement agreement, and facts relating to accounting practices evidenced by the restatement. Ultimately, a class was certified on behalf of all persons who acquired and disposed of Household International common stock between July 1999 and October 2002.

A jury trial concluded in April 2009, which was decided partly in favour of the plaintiffs. Various legal challenges to the verdict were raised in post-trial briefing.

In December 2011, following the submission of claim forms by class members, the court-appointed claims administrator to the Illinois District Court reported that the total number of claims that generated an allowed loss was 45,921, and that the aggregate amount of these claims was approximately $2.2bn. The defendants filed legal challenges regarding the presumption of reliance as to the class and compliance with the claim form requirements, which the Illinois District Court, in September 2012, rejected for the most part. The Illinois District Court directed further proceedings before a court-appointed Special Master to address certain claims submission issues.

In October 2013, the Illinois District Court denied the defendants’ additional post-trial motions for judgement as a matter of law or, in the alternative, for a new trial, and granted plaintiffs’ motions for a partial final judgement and awarded pre-judgement interest at the prime rate, compounded annually. Subsequently, in October 2013, the Illinois District Court entered a partial final judgement against the defendants in the amount of approximately $2.5bn (including pre-judgement interest).

In addition to the partial judgement that has been entered, there also remain approximately $625m in claims, prior to imposition of pre-judgement interest, that still are subject to objections that have not yet been ruled upon by the Illinois District Court.

The defendants filed a Notice of Appeal of the partial final judgement, and oral argument was heard by the US Court of Appeals for the Seventh Circuit (the ‘Court of Appeals’) in May 2014. In May 2015, the Court of Appeals issued a decision reversing the partial final judgement of the Illinois District Court and remanding the case for a new trial on loss causation, which ultimately will entail a reassessment of the quantum of damages. In July 2015, the Court of Appeals denied plaintiffs’ petition for a panel rehearing of the decision of the Court of Appeals.

The timing and ultimate resolution of this matter remains highly uncertain, and given the complexity and uncertainties associated with a new trial on loss causation and a reassessment of the quantification of damages, there continues to be a wide range of possible outcomes. Depending on whether and to what extent the plaintiffs are able to demonstrate loss causation, the amount of damages, based upon the claims included in the reversed partial final judgement, and other pending claims and the application of pre-judgement interest on all pending claims, may lie in a range from a relatively insignificant amount to an amount up to or exceeding $3.6bn. A provision has been recognised based on management’s best estimate of probable outflows, but the amount of such provision is not disclosed as it would prejudice seriously the position of HSBC in the resolution of this matter.

Bernard L. Madoff Investment Securities LLC

Bernard L. Madoff (‘Madoff’) was arrested in December 2008, and ultimately pleaded guilty to running a Ponzi scheme. He has acknowledged, in essence, that while purporting to invest his customers’ money in securities, he in fact never invested in

 

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securities and used other customers’ money to fulfil requests to return investments. His firm, Bernard L. Madoff Investment Securities LLC (‘Madoff Securities’), is being liquidated in the US by a trustee (the ‘Trustee’).

Various non-US HSBC companies provided custodial, administration and similar services to a number of funds incorporated outside the US whose assets were invested with Madoff Securities. Based on information provided by Madoff Securities, as at 30 November 2008, the purported aggregate value of these funds was $8.4bn, an amount that includes fictitious profits reported by Madoff. Based on information available to HSBC, we have estimated that the funds’ actual transfers to Madoff Securities minus their actual withdrawals from Madoff Securities during the time that HSBC serviced the funds totalled approximately $4bn. Various HSBC companies have been named as defendants in lawsuits arising out of Madoff Securities’ fraud.

US/UK litigation: The Trustee has brought suits against various HSBC companies in the US Bankruptcy Court and in the English High Court. The Trustee’s US actions included common law claims, alleging that HSBC aided and abetted Madoff’s fraud and breach of fiduciary duty. Those claims were dismissed on grounds of lack of standing. The Trustee’s remaining US claims seek recovery of prepetition transfers pursuant to US bankruptcy law. The amount of these remaining claims has not been pleaded or determined as against HSBC.

Alpha Prime Fund Ltd (‘Alpha Prime’) and Senator Fund SPC (‘Senator’), co-defendants in the Trustee’s US actions, have brought cross-claims against HSBC. These funds have also sued HSBC in Luxembourg (discussed below).

The Trustee’s English action seeks recovery of unspecified transfers from Madoff Securities to or through HSBC. HSBC has not yet been served with the Trustee’s English action. The Trustee’s deadline for serving the claim has been extended through the third quarter of 2015.

Fairfield Sentry Limited, Fairfield Sigma Limited and Fairfield Lambda Limited (collectively, ‘Fairfield’), funds whose assets were invested with Madoff Securities, commenced multiple suits in the US and the British Virgin Islands (the ‘BVI’) against fund shareholders, including various HSBC companies that acted as nominees for HSBC clients, seeking restitution of payments made in connection with share redemptions. The US actions brought by Fairfield are stayed pending the outcome of the Fairfield cases in the BVI (discussed below).

In September 2013, the US Court of Appeals for the Second Circuit (‘Court of Appeals’) affirmed the dismissal of purported class action claims against HSBC and others brought by investors in three Madoff-invested funds on grounds of forum non conveniens. The plaintiffs filed petitions for certiorari to the US Supreme Court which were denied in March 2015. In May 2015, plaintiffs filed a motion asking the Court of Appeals to restore their class action claims on the basis of an alleged change of law governing the claims. In June 2015, the Court of Appeals denied plaintiffs’ motion.

In December 2014, three new Madoff-related actions were filed in the US. The first is a purported class action brought in New York federal court by direct investors in Madoff Securities who were holding their investments as of December 2008, asserting various common law claims and seeking to recover damages lost to Madoff Securities’ fraud on account of HSBC’s purported knowledge and alleged furtherance of the fraud. This matter has been stayed pending the outcome of a similar case not involving HSBC. The other two actions were filed by SPV Optimal SUS Ltd (‘SPV OSUS’), the purported assignee of the Madoff Securities-invested company, Optimal Strategic US Equity Ltd. One of these actions was filed in New York state court and the other in New York federal court. In January 2015, SPV OSUS dismissed its federal lawsuit against HSBC. The state court action against HSBC remains pending.

In May 2015, a new action was filed in New York federal court by two investors in Hermes International Fund Limited (‘Hermes’) asserting various common law claims against HSBC and seeking to recover damages lost to Madoff Securities’ fraud. A preliminary conference is scheduled to take place in October 2015.

BVI litigation: Beginning in October 2009, the Fairfield funds, whose assets were directly or indirectly invested with Madoff Securities, commenced multiple suits in the BVI against numerous fund shareholders, including various HSBC companies that acted as nominees for clients of HSBC’s private banking business and other clients who invested in the Fairfield funds. The Fairfield funds are seeking restitution of redemption payments made by the funds to defendants on the grounds that they were mistakenly based on inflated net asset values. In April 2014, the UK Privy Council issued a ruling on two preliminary issues in favour of other defendants in the BVI actions, and issued its order in October 2014. A motion was brought by other defendants before the BVI court challenging the Fairfield liquidator’s authorisation to pursue its claims in the US. That motion was heard in March 2015 and judgement is pending.

Bermuda litigation: In January 2009, Kingate Global Fund Limited and Kingate Euro Fund Limited (collectively, ‘Kingate’), funds whose assets were directly or indirectly invested with Madoff Securities, commenced an action in Bermuda against HSBC Bank Bermuda Limited for recovery of funds held in Kingate’s accounts, fees and dividends. This action is currently pending, but is not expected to move forward until there is a resolution as to the Trustee’s separate US actions against Kingate and HSBC Bank Bermuda Limited.

Thema Fund Limited (‘Thema’) and Hermes, funds invested with Madoff Securities, each also brought three actions in Bermuda in 2009. The first set of actions were brought against HSBC Institutional Trust Services (Bermuda) Limited and seek recovery of funds in frozen accounts held at HSBC. The second set of actions asserts liability against HSBC Institutional Trust Services (Bermuda) Limited in relation to claims for mistake, recovery of fees and damages for breach of contract. The third set of actions seeks return of fees from HSBC Bank Bermuda Limited and HSBC Securities Services (Bermuda). There has been little

 

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Notes on the Financial Statements (unaudited) (continued)

 

 

progress in these actions for several years, although in January 2015, Thema and Hermes served notice of intent to proceed in respect of the second set of actions referred to above. A hearing has not yet been scheduled.

Cayman Islands litigation: In February 2013, Primeo Fund, a Cayman Islands-based fund invested in Madoff Securities, brought an action against the fund administrator, Bank of Bermuda (Cayman), and the fund custodian, HSBC Securities Services (Luxembourg) (‘HSSL’), alleging breaches of contract. Primeo Fund claims damages from defendants to compensate it for alleged losses, including loss of profit and any liability to the Trustee. Trial is scheduled to begin in November 2016.

Luxembourg litigation: In April 2009, Herald Fund SPC (‘Herald’) (in official liquidation since July 2013) commenced action against HSSL before the Luxembourg District Court seeking restitution of all cash and securities Herald purportedly lost because of Madoff Securities’ fraud, or in the alternative, money damages in the same amount. In March 2013, the Luxembourg District Court dismissed Herald’s restitution claim for the return of the securities. Herald’s restitution claim for return of the cash and claim for money damages were reserved. Herald appealed this judgement in May 2013. In May 2015, the Luxembourg Court of Appeal held that Herald must pay security for costs before its claim can be pursued on appeal. Herald filed a request for correction of material errors with respect to the amount of the security, to which HSSL has responded. The parties are awaiting a hearing on Herald’s request. Proceedings on the reserved restitution claim were suspended pending resolution of the appeal.

In October 2009, Alpha Prime commenced an action against HSSL before the Luxembourg District Court, alleging breach of contract and negligence in the appointment of Madoff Securities as a sub-custodian of Alpha Prime’s assets. Alpha Prime was ordered to provide a judicial bond. Alpha Prime requested a stay of these proceedings pending its negotiations with the Trustee in the US proceedings. The matter has been temporarily suspended at Alpha Prime’s request. The parties are awaiting the next hearing date.

In March 2010, Herald (Lux) SICAV (‘Herald (Lux)’) (in official liquidation since April 2009) commenced an action against HSSL before the Luxembourg District Court seeking restitution of securities, or the cash equivalent, or money damages in the alternative. Herald (Lux) has also requested the restitution of fees paid to HSSL as custodian and service agent of the fund. The next preliminary hearing is scheduled to take place in September 2015.

In December 2014, Senator commenced an action against HSSL before the Luxembourg District Court, seeking the restitution of securities held as of the latest net asset value statement from November 2008, or in the alternative, money damages. The matter has been temporarily suspended at Senator’s request. The parties are awaiting the next hearing date.

In April 2015, Senator commenced an action against the Luxembourg branch of HSBC Bank plc before the Luxembourg District Court asserting identical claims to those asserted in Senator’s action against HSSL. This action is at an early stage.

HSSL has been sued in various actions by shareholders in the Primeo Select Fund, Herald, Herald (Lux), and Hermes. These actions are in different stages, most of which have been dismissed, suspended or postponed.

Ireland litigation: In November 2013, Defender Limited, a fund invested with Madoff securities, commenced an action against HSBC Institutional Trust Services (Ireland) Limited (‘HTIE’), alleging breach of the custodian agreement and claiming damages and indemnification for claims against Defender Limited for fund losses. The action also includes four non-HSBC parties, who served as directors and investment managers to Defender Limited. This matter is ongoing.

In July 2013 and December 2013, settlements were reached in respect of claims filed against HTIE in the Irish High Court by Thema International Fund plc (‘Thema International’) and Alternative Advantage Plc (‘AA’), respectively. Two actions by individual Thema International shareholders against HTIE and Thema International remain active. A hearing on preliminary matters relating to the plaintiffs’ entitlement to bring the actions is scheduled to take place in December 2015.

In December 2014, a new proceeding against HTIE and HSBC Securities Services (Ireland) Limited was brought by SPV OSUS, alleging breach of the custodian agreement and claiming damages and indemnification for fund losses.

There are many factors that may affect the range of possible outcomes, and the resulting financial impact, of the various Madoff-related proceedings described above, including but not limited to the multiple jurisdictions in which the proceedings have been brought and the number of different plaintiffs and defendants in such proceedings. Based upon the information currently available, management’s estimate of possible aggregate damages that might arise as a result of all claims in the various Madoff-related proceedings is up to or exceeding $800m. Due to uncertainties and limitations of this estimate, the ultimate damages could differ significantly from this amount.

US mortgage-related investigations

In April 2011, following completion of a broad horizontal review of industry residential mortgage foreclosure practices, HSBC Bank USA N.A. (‘HSBC Bank USA’) entered into a consent cease-and-desist order with the Office of the Comptroller of the Currency (the ‘OCC’). HSBC Finance Corporation (‘HSBC Finance’) and HSBC North America Holdings Inc. (‘HNAH’) also entered into a similar consent order with the Federal Reserve Board (the ‘FRB’) (together with the OCC order, the ‘Servicing Consent Orders’). The Servicing Consent Orders require prescribed actions to address the deficiencies noted in the joint examination and described in the consent orders. HSBC Bank USA, HSBC Finance and HNAH continue to work with the OCC and the FRB to align their processes with the requirements of the consent orders and are implementing operational changes as required. In June 2015, HSBC Bank USA entered into an amendment to the OCC order (‘Amended OCC Order’) setting forth, inter alia, that HSBC Bank USA is not yet in compliance with all requirements of the OCC order and imposing business restrictions related to

 

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residential mortgage servicing. The business restrictions, which include a prohibition against the bulk acquisition of residential mortgage servicing or residential mortgage servicing rights and a requirement to seek OCC supervisory non-objection to outsource any residential mortgage servicing activities that are not already outsourced as of the date of the Amended OCC Order, will remain in place until the OCC order is terminated. A failure to satisfy all requirements of the OCC order may result in a variety of regulatory consequences for HSBC Bank USA, including the imposition of civil money penalties.

Pursuant to the Servicing Consent Orders, an independent consultant was retained to conduct an independent review of foreclosures pending or completed between January 2009 and December 2010 (the ‘Independent Foreclosure Review’) to determine if any borrower was financially injured as a result of an error in the foreclosure process. In February 2013, HSBC Bank USA entered into an agreement with the OCC, and HSBC Finance and HNAH entered into an agreement with the FRB (together, the ‘IFR Settlement Agreements’), pursuant to which the Independent Foreclosure Review was replaced by a broader framework under which HSBC and 12 other participating servicers agreed to provide, in the aggregate, over $9.3bn in cash payments and other assistance to help eligible borrowers. Pursuant to the IFR Settlement Agreements, HNAH made a cash payment of $96m into a fund used to make payments to borrowers that were in active foreclosure during 2009 and 2010, and in addition, is providing other assistance (e.g. loan modifications) to help eligible borrowers. Borrowers who receive compensation will not be required to execute a release or waiver of rights and will not be precluded from pursuing litigation concerning foreclosure or other mortgage servicing practices. For participating servicers, including HSBC Bank USA and HSBC Finance, fulfilment of the terms of the IFR Settlement Agreements will satisfy the Independent Foreclosure Review requirements of the Servicing Consent Orders, including the wind-down of the Independent Foreclosure Review.

The Servicing Consent Orders do not preclude additional enforcement actions against HSBC Bank USA, HSBC Finance or HNAH by bank regulatory, governmental or law enforcement agencies, such as the US Department of Justice (the ‘DoJ’) or state Attorneys General, which could include the imposition of civil money penalties and other sanctions relating to the activities that are the subject of the Servicing Consent Orders. Pursuant to the IFR Settlement Agreement with the OCC, however, the OCC has agreed that it will not assess civil money penalties or initiate any further enforcement action with respect to past mortgage servicing and foreclosure-related practices addressed in the Servicing Consent Orders, provided the terms of the IFR Settlement Agreements are fulfilled. The OCC’s agreement not to assess civil money penalties is further conditioned on HNAH making payments or providing borrower assistance pursuant to any agreement that may be entered into with the DoJ in connection with the servicing of residential mortgage loans. The FRB has agreed that any assessment of civil money penalties by the FRB will reflect a number of adjustments, including amounts expended in consumer relief and payments made pursuant to any agreement that may be entered into with the DoJ in connection with the servicing of residential mortgage loans. The IFR Settlement Agreements do not preclude private litigation concerning these practices.

Separate from the Servicing Consent Orders and the settlements related to the Independent Foreclosure Review discussed above, in February 2012, five of the largest US mortgage servicers (not including any HSBC companies) reached a settlement with the DoJ, the US Department of Housing and Urban Development and state Attorneys General of 49 states with respect to foreclosure and other mortgage servicing practices. Following the February 2012 settlement, these government agencies initiated discussions with other mortgage industry servicers, including HSBC, HSBC Bank USA, HSBC Finance and HNAH, and discussions have been held with US bank regulators and other governmental agencies regarding a potential resolution. Any such settlement, however, may not completely preclude other enforcement actions by state or federal agencies, bank regulators or law enforcement bodies related to foreclosure and other mortgage servicing practices including, but not limited to, matters relating to the securitisation of mortgages for investors. These practices have in the past resulted in private litigation, and such a settlement would not preclude further private litigation concerning these practices.

US mortgage securitisation activity and litigation

HSBC Bank USA has been involved as a sponsor/seller of loans used to facilitate whole loan securitisations underwritten by HSBC Securities (USA) Inc. (‘HSI’). From 2005 to 2007, HSBC Bank USA purchased and sold $24bn of such loans to HSI which were subsequently securitised and sold by HSI to third parties. The outstanding principal balance on these loans was approximately $5.5bn as at 30 June 2015.

Participants in the US mortgage securitisation market that purchased and repackaged whole loans have been the subject of lawsuits and governmental and regulatory investigations and inquiries, which have been directed at groups within the US mortgage market such as servicers, originators, underwriters, trustees or sponsors of securitisations, and at particular participants within these groups. As the industry’s residential mortgage foreclosure issues continue, HSBC Bank USA has taken title to an increasing number of foreclosed homes as trustee on behalf of various securitisation trusts. As nominal record owner of these properties, HSBC Bank USA has been sued by municipalities and tenants alleging various violations of law, including laws regarding property upkeep and tenants’ rights. While HSBC believes and continues to maintain that the obligations at issue and any related liabilities are properly those of the servicer of each trust, HSBC continues to receive significant adverse publicity in connection with these and similar matters, including foreclosures that are serviced by others in the name of ‘HSBC, as trustee’.

Between June and December 2014, a number of lawsuits were filed in state and federal court in New York against HSBC Bank USA as trustee of over 250 mortgage securitisation trusts. These lawsuits are brought derivatively on behalf of the trusts by a class of investors including, amongst others, BlackRock and PIMCO funds. Similar lawsuits were filed simultaneously against other non-HSBC financial institutions that served as mortgage securitisation pool trustees. The complaints against HSBC Bank

 

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Notes on the Financial Statements (unaudited) (continued)

 

 

USA allege that the trusts have sustained losses in collateral value of over $34bn. The lawsuits seek unspecified damages resulting from alleged breaches of the US Trust Indenture Act, breach of fiduciary duties, negligence, breach of contract and breach of the common law duty of trust. HSBC filed a motion to dismiss three of these lawsuits in January 2015, which was unsuccessful.

Various HSBC companies have also been named as defendants in a number of actions in connection with residential mortgage-backed securities (‘RMBS’) offerings, which generally allege that the offering documents for securities issued by securitisation trusts contained material misstatements and omissions, including statements regarding the underwriting standards governing the underlying mortgage loans. In June 2015, HSBC’s motion to dismiss in one of these actions was granted in its entirety.

HSBC Bank USA, HSBC Finance and Decision One Mortgage Company LLC (an indirect subsidiary of HSBC Finance) have been named as defendants in various mortgage loan repurchase actions brought by trustees of securitisation trusts. In the aggregate, these actions seek to have the HSBC defendants repurchase mortgage loans, or pay compensatory damages in lieu of repurchase totalling at least $1bn. Motions to dismiss have been filed in two of these actions. In respect of one of these actions, the motion to dismiss was denied and a trial is scheduled to take place in February 2016. The other motion to dismiss remains pending. In addition to actions brought by trustees of securitisation trusts, HSBC Bank USA and Decision One Mortgage Company LLC have been named as defendants in two separate actions filed by Residential Funding Company LLC (‘RFC’), a mortgage loan purchase counterparty. These actions seek unspecified damages in relation to alleged losses suffered by RFC as a result of approximately 25,000 mortgage loans purchased from HSBC between 1986-2007. These actions are at an early stage.

Since 2010, various HSBC entities have received subpoenas and requests for information from US authorities seeking the production of documents and information regarding HSBC’s involvement, and the involvement of its affiliates, in particular private-label RMBS transactions as an issuer, sponsor, underwriter, depositor, trustee, custodian or servicer. HSBC continues to cooperate with these US authorities. In November 2014, HNAH, on behalf of itself and various subsidiaries including, but not limited to, HSBC Bank USA, HASCO, HSI, HSI Asset Loan Obligation, HSBC Mortgage Corporation (USA), HSBC Finance and Decision One Mortgage Company LLC, received a subpoena from the US Attorney’s Office for the District of Colorado, pursuant to the Financial Industry Reform, Recovery and Enforcement Act, concerning the origination, financing, purchase, securitisation and servicing of subprime and non-subprime residential mortgages. This matter is at an early stage and HSBC is cooperating fully.

HSBC expects the focus on mortgage securitisations to continue. As a result, HSBC companies may be subject to additional claims, litigation and governmental or regulatory scrutiny relating to its participation in the US mortgage securitisation market, either as a member of a group or individually.

There are many factors that may affect the range of possible outcomes, and the resulting financial impact, of these private lawsuits. Any liabilities that might arise as a result of the claims in these actions could, however, be significant.

Anti-money laundering and sanctions-related matters

In October 2010, HSBC Bank USA entered into a consent cease-and-desist order with the OCC, and HNAH entered into a consent cease-and-desist order with the FRB (the ‘Orders’). These Orders required improvements to establish an effective compliance risk management programme across HSBC’s US businesses, including risk management related to US Bank Secrecy Act (the ‘BSA’) and anti-money laundering (‘AML’) compliance. Steps continue to be taken to address the requirements of the Orders.

In December 2012, HSBC Holdings, HNAH and HSBC Bank USA entered into agreements with US and UK government agencies regarding past inadequate compliance with the BSA, AML and sanctions laws. Among those agreements, HSBC Holdings and HSBC Bank USA entered into a five-year deferred prosecution agreement with the DoJ, the US Attorney’s Office for the Eastern District of New York, and the US Attorney’s Office for the Northern District of West Virginia (the ‘US DPA’); HSBC Holdings entered into a two-year deferred prosecution agreement with the New York County District Attorney (the ‘DANY DPA’); and HSBC Holdings consented to a cease-and-desist order and HSBC Holdings and HNAH consented to a civil money penalty order with the FRB. In addition, HSBC Bank USA entered into a civil money penalty order with a bureau of the US Treasury Department known as the Financial Crimes Enforcement Network (‘FinCEN’) and a separate civil money penalty order with the OCC. HSBC Holdings also entered into an agreement with the Office of Foreign Assets Control (‘OFAC’) regarding historical transactions involving parties subject to OFAC sanctions and an undertaking with the UK FCA to comply with certain forward-looking AML and sanctions-related obligations.

Under these agreements, HSBC Holdings and HSBC Bank USA made payments totalling $1.9bn to US authorities and are continuing to comply with ongoing obligations. In July 2013, the US District Court for the Eastern District of New York approved the US DPA and retained authority to oversee implementation of that agreement. Under the agreements with the DoJ, FCA, and FRB, an independent monitor (who is, for FCA purposes, a ‘skilled person’ under Section 166 of the Financial Services and Markets Act) is evaluating and regularly assessing the effectiveness of HSBC’s AML and sanctions compliance function and HSBC’s progress in implementing its remedial obligations under the agreements.

HSBC Holdings has fulfilled all of the requirements imposed by the DANY DPA, which expired by its terms at the end of the two-year period of that agreement in December 2014. If HSBC Holdings and HSBC Bank USA fulfil all of the requirements imposed by the US DPA, the DoJ charges against those entities will be dismissed at the end of the five-year period of that

 

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agreement. The DoJ may prosecute HSBC Holdings or HSBC Bank USA in relation to any matters that are the subject of the US DPA if HSBC Holdings or HSBC Bank USA breaches the terms of the US DPA.

HSBC Bank USA also entered into a separate consent order with the OCC, requiring it to correct the circumstances and conditions as noted in the OCC’s then most recent report of examination, and imposing certain restrictions on HSBC Bank USA directly or indirectly acquiring control of, or holding an interest in, any new financial subsidiary, or commencing a new activity in its existing financial subsidiary, unless it receives prior approval from the OCC. HSBC Bank USA also entered into a separate consent order with the OCC requiring it to adopt an enterprise-wide compliance programme.

These settlements with US and UK authorities have led to private litigation, and do not preclude further private litigation related to HSBC’s compliance with applicable BSA, AML and sanctions laws or other regulatory or law enforcement actions for BSA, AML, sanctions or other matters not covered by the various agreements.

In May 2014, a shareholder derivative action was filed by a shareholder of HSBC Holdings purportedly on behalf of HSBC Holdings, HSBC Bank USA, HNAH and HSBC USA Inc. (the ‘Nominal Corporate Defendants’) in New York State Supreme Court against certain current and former directors and officers of those HSBC companies (the ‘Individual Defendants’). The complaint alleges that the Individual Defendants breached their fiduciary duties to the Nominal Corporate Defendants and caused a waste of corporate assets by allegedly permitting and/or causing the conduct underlying the US DPA. Plaintiff filed an amended complaint in February 2015. In March 2015, the Nominal Corporate Defendants moved to dismiss the action, and the Individual Defendants who had been served also responded to the complaint. The motion was fully briefed in May 2015. Oral argument is scheduled to take place in August 2015.

In July 2014, a claim was filed in the Ontario Superior Court of Justice against HSBC Holdings and a former employee purportedly on behalf of a class of persons who purchased HSBC common shares and American Depositary Shares between July 2006 and July 2012. The complaint, which seeks monetary damages of up to CA$20bn, alleges that the defendants made statutory and common law misrepresentations in documents released by HSBC Holdings and its wholly owned subsidiary, HSBC Bank Canada, relating to HSBC’s compliance with BSA, AML, sanctions and other laws.

In November 2014, a complaint was filed in the US District Court for the Eastern District of New York on behalf of representatives of US persons killed or injured in Iraq between April 2004 and November 2011. The complaint was filed against HSBC Holdings, HSBC Bank plc, HSBC Bank USA and HSBC Bank Middle East, as well as other non-HSBC banks and the Islamic Republic of Iran (together, the ‘Defendants’). The plaintiffs allege that defendants conspired to violate the US Anti-Terrorism Act, by altering or falsifying payment messages involving Iran, Iranian parties and Iranian banks for transactions processed through the US. Plaintiffs filed an amended complaint in April 2015. Defendants filed a motion to dismiss in May 2015. The motion will be fully briefed in August 2015.

Based on the facts currently known, it is not practicable at this time for HSBC to predict the resolution of these private lawsuits, including the timing or any possible impact on HSBC, which could be significant.

Tax-related investigations

HSBC continues to cooperate in ongoing investigations by the DoJ and the US Internal Revenue Service regarding whether certain HSBC companies and employees acted appropriately in relation to certain customers who had US tax reporting obligations. In connection with these investigations, HSBC Private Bank (Suisse) SA (‘HSBC Swiss Private Bank’), with due regard for Swiss law, has produced records and other documents to the DoJ. In August 2013, the DoJ informed HSBC Swiss Private Bank that it was not eligible for the ‘Program for Non-Prosecution Agreements or Non-Target Letters for Swiss Banks’ since a formal investigation had previously been authorised. The DoJ has requested additional information from HSBC Swiss Private Bank and other Swiss banks regarding the transfer of assets to and from US person-related accounts and employees who serviced those accounts. HSBC Swiss Private Bank is preparing this data, in a manner consistent with Swiss law.

Other HSBC companies have received subpoenas and requests for information from US and other authorities, including with respect to US-based clients of an HSBC company in India.

In addition, various tax administration, regulatory and law enforcement authorities around the world, including in Belgium, France, Argentina and India, are conducting investigations and reviews of HSBC Swiss Private Bank in connection with allegations of tax evasion or tax fraud, money laundering and unlawful cross-border banking solicitation. HSBC Swiss Private Bank has been placed under formal criminal examination by magistrates in both Belgium and France. In February 2015, HSBC was informed that the French magistrates are of the view that they have completed their investigation with respect to HSBC Swiss Private Bank and have referred the matter to the public prosecutor for a recommendation on any potential charges to be brought, whilst reserving the right to continue investigating other conduct at HSBC. In April 2015, HSBC Holdings was informed that it has been placed under formal criminal investigation by the French magistrates in connection with the conduct of HSBC Swiss Private Bank in 2006 and 2007 for alleged tax offences, and a 1bn bail was imposed. HSBC Holdings appealed the magistrates’ decision and, in June 2015, bail was reduced to 100m. The ultimate financial impact could differ significantly from the bail amount of 100m. In Argentina, in November 2014, the Argentine tax authority filed a complaint alleging an unlawful association between HSBC Swiss Private Bank, HSBC Bank Argentina, HSBC Bank USA and certain current and former HSBC officers, which allegedly enabled HSBC customers to evade Argentine tax obligations. In February 2015, a public prosecutor in Switzerland commenced an investigation of HSBC Swiss Private Bank, and the Indian tax authority issued a

 

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Notes on the Financial Statements (unaudited) (continued)

 

 

summons and request for information to an HSBC company in India. In June 2015, the public prosecutor’s investigation in Switzerland was closed.

With respect to each of these ongoing matters, HSBC is cooperating with the relevant authorities. There are many factors that may affect the range of outcomes, and the resulting financial impact, of these investigations and reviews, which could be significant.

In light of the recent media attention regarding these matters, it is possible that other tax administration, regulatory or law enforcement authorities will also initiate or enlarge similar investigations or regulatory proceedings.

London interbank offered rates, European interbank offered rates and other benchmark interest rate investigations and litigation

Various regulators and competition and law enforcement authorities around the world, including in the UK, the US, the EU, Switzerland and elsewhere, are conducting investigations and reviews related to certain past submissions made by panel banks and the processes for making submissions in connection with the setting of London interbank offered rates (‘Libor’), European interbank offered rates (‘Euribor’) and other benchmark interest rates. As certain HSBC companies are members of such panels, HSBC has been the subject of regulatory demands for information and is cooperating with those investigations and reviews.

In December 2013, the European Commission (the ‘Commission’) announced that it had imposed fines on eight financial institutions under its cartel settlement procedure for their participation in illegal activity related to euro interest rate derivatives and/or yen interest rate derivatives. Although HSBC was not one of the financial institutions fined, the Commission announced that it had opened proceedings against HSBC in connection with its Euribor-related investigation of euro interest rate derivatives only. This investigation will continue under the standard Commission cartel procedure. In May 2014, HSBC received a Statement of Objections from the Commission, alleging anti-competitive practices in connection with the pricing of euro interest rate derivatives. The Statement of Objections sets out the Commission’s preliminary views and does not prejudge the final outcome of its investigation. HSBC responded to the Commission’s Statement of Objections in March 2015. The hearing before the Commission took place in June 2015.

In addition, HSBC and other US dollar Libor panel banks have been named as defendants in a number of private lawsuits filed in the US with respect to the setting of US dollar Libor. The complaints assert claims under various US laws, including US antitrust and racketeering laws, the US Commodity Exchange Act (‘CEA’), and state law. The lawsuits include individual and putative class actions, most of which have been transferred and/or consolidated for pre-trial purposes before the New York District Court.

In March 2013, the New York District Court overseeing the consolidated proceedings related to US dollar Libor issued a decision in the six oldest actions, dismissing the plaintiffs’ federal and state antitrust claims, racketeering claims, and unjust enrichment claims in their entirety, but allowing certain of their CEA claims that were not barred by the applicable statute of limitations to proceed. Some of those plaintiffs appealed the New York District Court’s decision to the US Court of Appeals for the Second Circuit, which later dismissed those appeals. In January 2015, the US Supreme Court reversed the Court of Appeals’ decision and remanded the case to the Court of Appeals for consideration of the merits of the plaintiffs’ appeal. Briefing is ongoing in the Court of Appeals.

Other plaintiffs sought to file amended complaints in the New York District Court to assert additional allegations. In June 2014, the New York District Court issued a decision that, amongst other things, denied the plaintiffs’ request for leave to amend their complaints to assert additional theories of Libor manipulation against HSBC and certain non-HSBC banks, but granted leave to assert such manipulation claims against two other banks; and granted defendants’ motion to dismiss certain additional claims under the CEA as barred by the applicable statute of limitations. Proceedings with respect to all other actions in the consolidated proceedings were stayed pending this decision. The stay was lifted in September 2014. Amended complaints were filed in previously stayed non-class actions in October 2014; and amended complaints were filed in several of the previously stayed class actions in November 2014. Motions to dismiss were filed in November 2014 and January 2015, respectively, and remain pending.

Separately, HSBC and other panel banks have also been named as defendants in a putative class action filed in the New York District Court on behalf of persons who transacted in euroyen futures and options contracts related to the euroyen Tokyo interbank offered rate (‘Tibor’). The complaint alleges, amongst other things, misconduct related to euroyen Tibor, although HSBC is not a member of the Japanese Bankers Association’s euroyen Tibor panel, as well as Japanese yen Libor, in violation of US antitrust laws, the CEA, and state law. In March 2014, the New York District Court issued an opinion dismissing the plaintiffs’ claims under US antitrust law and state law, but sustaining their claims under the CEA. In June 2014, the plaintiffs moved for leave to file a third amended complaint. That motion was denied in March 2015, except insofar as it granted leave to add certain defendants not affiliated with HSBC and reserving on the question of whether the California State Teachers Retirement System may be added as a plaintiff.

In November 2013, HSBC and other panel banks were also named as defendants in a putative class action filed in the New York District Court on behalf of persons who transacted in euro futures contracts and other financial instruments related to Euribor. The complaint alleges, amongst other things, misconduct related to Euribor in violation of US antitrust laws, the CEA and state law. The plaintiffs filed a second and later third amended complaint in May 2014 and October 2014. The court previously

 

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stayed proceedings until May 2015. The court has set a deadline for plaintiffs to file a fourth amended complaint in August 2015, and for defendants to respond in September 2015.

In September and October 2014, HSBC Bank plc and other panel banks were named as defendants in a number of putative class actions that were filed and consolidated in the New York District Court on behalf of persons who transacted in interest rate derivative transactions or purchased or sold financial instruments that were either tied to US dollar International Swaps and Derivatives Association fix (‘ISDAfix’) rates or were executed shortly before, during, or after the time of the daily ISDAfix setting window. The complaint alleges, amongst other things, misconduct related to these activities in violation of US antitrust laws, the CEA and state law. In October 2014, the plaintiffs filed a consolidated amended complaint, and in February 2015, plaintiffs filed a second consolidated amended complaint replacing HSBC Bank plc with HSBC Bank USA. A motion to dismiss that complaint was filed in April 2015 and remains pending.

There are many factors that may affect the range of possible outcomes, and the resulting financial impact, of these private lawsuits. Based upon the information currently available, it is possible that any liabilities that might arise as a result of the claims in these actions could be significant.

Foreign exchange rate investigations and litigation

Various regulators and competition and law enforcement authorities around the world, including in the US, the EU, Brazil, South Korea and elsewhere, are conducting investigations and reviews into a number of firms, including HSBC, related to trading on the foreign exchange markets. These include a criminal investigation in the US, as well as investigations by the civil competition authorities in the EU, Brazil and South Korea.

HSBC has been cooperating with these ongoing investigations. In May 2015, the DOJ resolved its ongoing investigations against five non-HSBC financial institutions, resulting in four pleading guilty to a criminal charge for collusive efforts to influence foreign exchange benchmark rates and agreeing to pay criminal fines of more than $2.5bn. Additional penalties were imposed by the Board of Governors of the FRB at the same time. HSBC was not a party to these resolutions, and investigations into HSBC by the DOJ, FRB and other authorities around the world continue.

In addition, in late 2013 and early 2014, HSBC Holdings, HSBC Bank plc, HNAH and HSBC Bank USA were named as defendants, amongst other banks, in various putative class actions filed in the New York District Court. In March 2014, the plaintiffs filed a consolidated amended complaint alleging, amongst other things, that defendants conspired to manipulate the WM/ Reuters foreign exchange benchmark rates by sharing customers’ confidential order flow information, thereby injuring plaintiffs and others by forcing them to pay artificial and non-competitive prices for products based on these foreign currency rates (‘the Consolidated Action’). Separate putative class actions were also brought on behalf of non-US plaintiffs (the ‘Foreign Actions’). Defendants moved to dismiss all actions. In January 2015, the court denied defendants’ motion to dismiss as to the Consolidated Action, but granted defendants’ motion to dismiss as to the Foreign Actions. Five additional putative class actions were subsequently filed in the New York District Court making similar allegations on behalf of persons who engaged in foreign exchange futures transactions on a US exchange. An additional putative class action was filed in the New York District Court making similar allegations on behalf of ERISA plan participants, and one was filed in California District Court that is similar to the Consolidated Action. HSBC has not yet responded to the new actions.

As at 30 June 2015, HSBC has recognised a provision in the amount of $1.3bn in respect of these ongoing investigations and other actions. There are many factors that may affect the range of outcomes, and the resulting financial impact, of these matters. Due to uncertainties and limitations of these estimates, the ultimate penalties could differ significantly from the amount provided.

Precious metals fix-related litigation and investigations

Since March 2014, numerous putative class actions have been filed in the US District Courts for the Southern District of New York, the District of New Jersey and the Northern District of California naming HSBC Bank USA, HSBC Bank plc, HSI and other members of The London Gold Market Fixing Limited as defendants. The complaints allege that, from January 2004 to the present, defendants conspired to manipulate the price of gold and gold derivatives during the afternoon London gold fix in order to reap profits on proprietary trades. These actions have been assigned to and consolidated in the New York District Court. An amended consolidated class action complaint was filed in December 2014, and defendants filed a consolidated response in February 2015. A second consolidated amended complaint was filed in March 2015. Defendants filed a consolidated response in April 2015.

Since July 2014, putative class actions were filed in the US District Court for the Southern District of New York and the Eastern District of New York naming HSBC Holdings, HNAH, HSBC Bank USA, HSBC USA Inc. and other members of The London Silver Market Fixing Ltd as defendants. The complaints allege that, from January 2007 to the present, defendants conspired to manipulate the price of physical silver and silver derivatives for their collective benefit in violation of US antitrust laws and the CEA. These actions have been assigned to and consolidated in the New York District Court. An amended consolidated class action complaint was filed in January 2015, and defendants filed a consolidated response in March 2015. Plaintiffs filed a second amended complaint in April 2015. Defendants’ consolidated response was filed in May 2015.

Between late 2014 and early 2015, numerous putative class actions were filed in the New York District Court naming HSBC Bank USA and other members of The London Platinum and Palladium Fixing Company Limited as defendants. The

 

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Notes on the Financial Statements (unaudited) (continued)

 

 

complaints allege that, from January 2007 to the present, defendants conspired to manipulate the price of physical Platinum Group Metals (‘PGM’) and PGM-based financial products for their collective benefit in violation of US antitrust laws and the CEA. An amended consolidated class action complaint was filed in April 2015. Defendants’ consolidated response was filed in June 2015.

Various regulators and competition and law enforcement authorities in the US and the EU are conducting investigations and reviews related to HSBC’s precious metals operations. In November 2014, the DoJ issued a document request to HSBC Holdings, seeking the voluntary production of certain documents relating to a criminal antitrust investigation that the DoJ is conducting in relation to precious metals. In January 2015, the CFTC issued a subpoena to HSBC Bank USA, seeking the production of certain documents related to HSBC Bank USA’s precious metals trading operations. In April 2015, the European Commission issued a request for information seeking certain information related to HSBC’s precious metals operations. HSBC is cooperating with the authorities.

Based on the facts currently known, it is not practicable at this time for HSBC to predict the resolution of these matters, including the timing or any possible impact on HSBC, which could be significant.

Credit default swap regulatory investigation and litigation

In July 2013, HSBC received a Statement of Objections from the Commission relating to its ongoing investigation of alleged anti-competitive activity by a number of market participants in the credit derivatives market between 2006 and 2009. The Statement of Objections sets out the Commission’s preliminary views and does not prejudge the final outcome of its investigation. HSBC has submitted a response and attended an oral hearing in May 2014. Following the oral hearing, the Commission decided to conduct a further investigation phase before deciding whether or how to proceed with the case. HSBC is cooperating with this further investigation. There are many factors that may affect the range of possible outcomes, and the resulting financial impact, of this matter. The amounts of any fines and/or penalties, however, could be significant.

In addition, HSBC Bank USA, HSBC Holdings and HSBC Bank plc have been named as defendants, amongst others, in numerous putative class actions filed in the New York District Court and the Illinois District Court. These class actions allege that the defendants, which include ISDA, Markit and several other financial institutions, conspired to restrain trade in violation of US antitrust laws by, amongst other things, restricting access to credit default swap pricing exchanges and blocking new entrants into the exchange market, with the purpose and effect of artificially inflating the bid/ask spread paid to buy and sell credit default swaps in the US. The plaintiffs in these suits purport to represent a class of all persons who purchased credit default swaps from or sold credit default swaps to defendants primarily in the US.

In October 2013, these cases were consolidated in the New York District Court. An amended consolidated complaint was filed in January 2014, naming HSBC Bank USA and HSBC Bank plc as defendants, amongst other non-HSBC defendants. Following the filing of defendants’ initial motions to dismiss in March 2014, plaintiffs filed a second amended consolidated complaint, which defendants also moved to dismiss. In September 2014, the court granted in part and denied in part the defendants’ motion to dismiss. Discovery is in process.

There are many factors that may affect the range of possible outcomes, and the resulting financial impact, of these private lawsuits. Any liabilities that might arise as a result of the claims in these actions could, however, be significant.

Economic plans: HSBC Bank Brasil S.A.

In the mid-1980s and early 1990s, certain economic plans were introduced by the government of Brazil to reduce escalating inflation. The implementation of these plans adversely impacted savings account holders, thousands of which consequently commenced legal proceedings against financial institutions in Brazil, including HSBC Bank Brasil S.A. (‘HSBC Brazil’), alleging, amongst other things, that savings account balances were adjusted by a different price index than that contractually agreed, which caused them a loss of income. Certain of these cases have reached the Brazilian Supreme Court (the ‘Supreme Court’). The Supreme Court has suspended all cases pending before lower courts until it delivers a final judgement on the constitutionality of the changes resulting from the economic plans. It is anticipated that the outcome of the Supreme Court’s final judgement will set a precedent for all cases pending before the lower courts. Separately, the Brazilian Superior Civil Court (the ‘Superior Civil Court’) is considering matters relating to, amongst other things, contractual and punitive interest rates to be applied to calculate any loss of income.

There is a high degree of uncertainty as to the terms on which the proceedings in the Supreme Court and Superior Civil Court will be resolved and the timing of such resolutions, including the amount of losses that HSBC Brazil may be liable to pay in the event of an unfavourable judgement. Such losses may lie in a range from a relatively insignificant amount to an amount up to $700m, although the upper end of this range is considered unlikely.

Regulatory review of consumer ‘enhancement services products’

HSBC Finance, through its legacy Cards and Retail Services business, offered or participated in the marketing, distribution, or servicing of products, such as identity theft protection and credit monitoring products, that were ancillary to the provision of credit to the consumer. HSBC Finance ceased offering these products by May 2012. The offering and administration of these and other enhancement services products, such as debt protection products, has been the subject of enforcement actions against other institutions by regulators, including the Consumer Financial Protection Bureau, the OCC, and the Federal Deposit

 

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Insurance Corporation. Such enforcement actions have resulted in orders to pay restitution to customers and the assessment of penalties in substantial amounts. We have made restitution to certain customers in connection with certain enhancement services products, and we continue to cooperate with our regulators in connection with their ongoing review. In light of the actions that regulators have taken in relation to other non-HSBC credit card issuers regarding their enhancement services products, one or more regulators may order us to pay additional restitution to customers and/or impose civil money penalties or other relief arising from the prior offering and administration of such enhancement services products by HSBC Finance. There is a high degree of uncertainty as to the terms on which this matter will be resolved and the timing of such resolution, including the amount of any additional remediation which may lie in a range from zero to an amount up to $500m.

 

20 Goodwill impairment

 

As described on page 407 of the Annual Report and Accounts 2014, we test goodwill for impairment as at 1 July each year and whenever there is an indication that goodwill may be impaired. At 30 June 2015, we reviewed the inputs used in our most recent impairment test in the light of current economic and market conditions and there was no indication of goodwill impairment.

At 30 June 2015, our operations in Brazil were classified as held for sale (see Note 12). The disposal group includes allocated goodwill of $1.3bn which is included in ‘Assets held for sale’ in the consolidated balance sheet. Goodwill was allocated to the disposal group based on the relative value of the operations in Brazil to the cash generating units in Latin America.

 

21 Transactions with related parties

 

There were no changes in the related party transactions described in the Annual Report and Accounts 2014 that have had a material effect on the financial position or performance of HSBC in the half-year to 30 June 2015. All related party transactions that took place in the half-year to 30 June 2015 were similar in nature to those disclosed in the Annual Report and Accounts 2014.

 

22 Events after the balance sheet date

 

On 31 July 2015 we entered into an agreement to sell our entire business in Brazil, comprising HSBC Bank Brasil S.A. – Banco Multiplo and HSBC Servicos e Participacoes Ltda (collectively ‘HSBC Brazil’), to Banco Bradesco S.A. for an all cash consideration of US$5.2bn. The purchase price is subject to adjustments to reflect the net asset value of the businesses at completion. The transaction is subject to regulatory approval and is expected to complete by Q2 2016.

A second interim dividend for the financial year ending 31 December 2015 was declared by the Directors on 3 August 2015, as described in Note 3.

 

23 Interim Report 2015 and statutory accounts

 

The information in this Interim Report 2015 is unaudited and does not constitute statutory accounts within the meaning of section 434 of the Companies Act 2006. The Interim Report 2015 was approved by the Board of Directors on 3 August 2015. The statutory accounts for the year ended 31 December 2014 have been delivered to the Registrar of Companies in England and Wales in accordance with section 447 of the Companies Act 2006. The Group’s previous auditor, KPMG Audit Plc has reported on those accounts. Its report was unqualified; did not include a reference to any matters to which KPMG Audit Plc drew attention by way of emphasis without qualifying their report; and did not contain a statement under section 498(2) or (3) of the Companies Act 2

 

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Shareholder information

 

 

   

 

Shareholder information

 
 

1   Directors’ interests

 

    

 

142

 

  

 

                       

  9   Final results

 

    

 

147

 

  

 

 

2   Employee share plans

 

    

 

145

 

  

 

      

10   Corporate governance

 

    

 

147

 

  

 

 

3    Notifiable interests in share capital

 

    

 

146

 

  

 

      

11    Changes in Directors’ details

 

    

 

148

 

  

 

 

4    Dealings in HSBC Holdings listed securities

 

    

 

146

 

  

 

      

12   Going concern basis

 

    

 

148

 

  

 

 

5   First interim dividend for 2015

 

    

 

146

 

  

 

      

13    Telephone and online share dealing service

 

    

 

148

 

  

 

 

6   Second interim dividend for 2015

 

    

 

146

 

  

 

      

14   Stock symbols

 

    

 

149

 

  

 

 

7    Proposed interim dividends for 2015

 

    

 

147

 

  

 

      

15   Copies of Interim Report 2015 and shareholder

  
 

 

8   Earnings Release

 

  

 

 

 

 

147

 

 

  

 

      

enquiries and communications

 

    

 

149

 

  

 

              

 

1 Directors’ interests

 

According to the register of Directors’ interests maintained by HSBC Holdings pursuant to section 352 of the Securities and Futures Ordinance of Hong Kong, at 30 June 2015 the Directors of HSBC Holdings had the following interests, all beneficial unless otherwise stated, in the shares and loan capital of HSBC and its associates:

Directors’ interests – shares and loan capital

 

                    At 30 June 2015  
        

At

    1 January

2015

        

    Beneficial

owner

        

Child

under 18

    or spouse

        

Jointly

with

    another

person

               Trustee         

Total

    interests1

 

HSBC Holdings ordinary shares

                             

Phillip Ameen3

                 5,000                                         5,000   

Kathleen Casey3

                 3,500                                         3,500   

Safra Catz3

       20,045           20,515                                         20,515   

Lord Evans of Weardale

       5,519           5,519                                         5,519   

Joachim Faber

       24,105           45,778                                         45,778   

Rona Fairhead

       76,524                               77,063                     77,063   

Douglas Flint

       400,748           401,121                                         401,121   

Stuart Gulliver

       2,611,188           2,558,148           176,885                               2,735,033   

Sam Laidlaw

       36,768           35,352                               1,416 2         36,768   

John Lipsky3

       15,820           15,820                                         15,820   

Rachel Lomax

       15,500           18,900                                         18,900   

Iain Mackay

       79,933           151,579                                         151,579   

Heidi Miller3

       3,575           3,575                                         3,575   

Marc Moses

       480,423           554,103                                         554,103   

Sir Simon Robertson

       22,981           23,522                                         23,522   

Jonathan Symonds

       20,553           16,314           4,721                               21,035   

HSBC USA Inc. $2.8575 Cumulative Preferred Shares, Series Z

                             

Phillip Ameen

       31                                                     
         RMBm          RMBm          RMBm          RMBm          RMBm          RMBm  

HSBC Bank plc 2.875% Notes 2015

                             

Joachim Faber4

       5.1                                                     

 

1 Details of executive Directors’ other interests in HSBC Holdings ordinary shares arising from the HSBC Holdings savings-related share option plans and the HSBC Share Plan 2011 are set out on the following pages. At 30 June 2015, the aggregate interests under the Securities and Futures Ordinance of Hong Kong in HSBC Holdings ordinary shares, including interests arising through employee share plans, were: Douglas Flint – 406,056; Stuart Gulliver – 5,679,222; Iain Mackay – 1,363,678; and Marc Moses – 2,048,335. Each Director’s total interests represent less than 0.04% of the shares in issue.
2 Non-beneficial.
3 Interests in American Depositary Shares (‘ADS’), which are categorised as equity derivatives under Part XV of the Securities and Futures Ordinance of Hong Kong. Each ADS represents five HSBC Holdings ordinary shares.
4 Non-beneficial interest in renminbi (‘RMB’)1.2m 2.875% Notes 2015.

 

HSBC HOLDINGS PLC

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Table of Contents

Shareholder information (continued)

 

 

Savings-related share option plans and the HSBC Share Plan 2011

HSBC Holdings savings-related share option plans

 

                                                       HSBC Holdings ordinary shares   
                                                     Held at          Held at  
         Date of                  Exercise          Exercisable          1 Jan          30 Jun  
         award          price (£)          from1          until          2015          2015  

Douglas Flint

           24 Apr 2012           4.4621               1 Aug 2015               1 Feb 2016           2,016           2,016   
           23 Sep 2014             5.1887             1 Nov 2019             1 May 2020           2,919           2,919   

Iain Mackay

         23 Sep 2014             5.1887             1 Nov 2017             1 May 2018           3,469           3,469   

There are no performance criteria conditional upon which the outstanding options are exercisable and there have been no variations to the terms and conditions since the awards were made. See page 145 for more details on the HSBC Holdings savings-related share option plans. The market value per ordinary share at 30 June 2015 was £5.70. The highest and lowest market values per ordinary share during the period were £6.49 and £5.60. Market value is the mid-market price derived from the London Stock Exchange Daily Official List on the relevant date. Under the Securities and Futures Ordinance of Hong Kong, the options are categorised as unlisted physically settled equity derivatives.

 

1 May vest at an earlier date in certain circumstances, e.g. retirement.

Awards of Restricted Shares

HSBC Share Plan 2011

 

                               HSBC Holdings ordinary shares  
                    Year in              Awards          Awards made during          Awards vested during              Awards  
                    which          held at          period          period          held at  
         Date of          awards          1 Jan                         Monetary                         Monetary          30 Jun  
       award           may vest           2015               Number           value               Number           value           2015 1 
                                                     £000                     £000             

Stuart Gulliver

       12 Mar 2012 2             2013-2015           89,302                               91,298           511             
       11 Mar 2013 3         2018           87,007                                                   89,051   
       10 Mar 2014 4         2015-2017           93,101                               31,411           176           63,772   
       2 Mar 2015 5         2015                     44,677           260           44,677           260             
           2 Mar 2015 6           2016-2018                     67,016           391                               68,590   

Iain Mackay

       12 Mar 2012 2         2013-2015           44,966                               45,972           257             
       11 Mar 2013 3         2018           60,150                                                   61,563   
       10 Mar 2014 4         2015-2017           54,536                               18,399           103           37,357   
       2 Mar 2015 5         2015                30,024           175           30,024           175             
           2 Mar 2015 6           2016-2018                45,037           263                               46,095   

Marc Moses

       12 Mar 2012 2         2013-2015           46,738                               47,784           268             
       11 Mar 2013 3         2018           58,439                                                   59,812   
       10 Mar 2014 4         2015-2017           54,531                               18,397           103           37,353   
       2 Mar 2015 5         2015                     35,798           209           35,798           209             
           2 Mar 2015 6           2016-2018                     53,698           313                               54,959   

Vesting of Restricted Share awards is normally subject to the Director remaining an employee on the vesting date. The awards may vest at an earlier date in certain circumstances. Under the Securities and Futures Ordinance of Hong Kong, interests in Restricted Share awards are categorised as the interests of a beneficial owner.

 

1 Includes additional shares arising from scrip dividends.
2 At the date of the award, 12 March 2012, the market value per share was £5.56. 50% of these deferred awards were subject to a six month retention period upon vesting. The balance of these awards vested on 12 March 2015, the third anniversary of the award, and on that date the market value per share was £5.60.
3 Vesting of these awards is subject to satisfactory completion of the Deferred Prosecution Agreement with the US Department of Justice.
4 At the date of the award, 10 March 2014, the market value per share was £6.16. These deferred awards are subject to a six month retention period upon vesting. 33% of the award vested on 10 March 2015, the first anniversary of the award and on that date the market value per share was £5.60. A further 33% of the award will vest on the second anniversary and the balance will vest on the third anniversary of the award.
5 The non-deferred award vested immediately on 2 March 2015. The shares (net of tax) are subject to a six month retention period. At the date of vesting, the market value per share was £5.83.
6 At the date of the award, 2 March 2015, the market value per share was £5.83. These deferred awards are subject to a six month retention period upon vesting. 33% of the award will vest on the first anniversary of the award, 33% of the award will vest on the second anniversary and the balance will vest on the third anniversary of the award.

 

HSBC HOLDINGS PLC

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Table of Contents

Shareholder information (continued)

 

 

Conditional awards under the Group Performance Share Plan (‘GPSP’)

HSBC Share Plan 2011

 

                               HSBC Holdings ordinary shares  
                    Year in              Awards          Awards made during              Awards  
                    which          held at          period1          held at  
         Date of          awards          1 Jan                         Monetary          30 Jun  
       award               may vest           2015               Number           value           2015 1 
                                                     £000             

Stuart Gulliver

       23 Jun 2011           2016           455,200                               465,896   
           12 Mar 2012           2017           772,331                               790,478   
       11 Mar 2013           2018           446,194                               456,678   
       10 Mar 2014           2019           620,680                               635,264   
           2 Mar 2015 2           2020                     365,864           2,133           374,460   

Iain Mackay

       23 Jun 2011           2016           127,262                               130,252   
       12 Mar 2012           2017           144,168                               147,555   
       11 Mar 2013           2018           208,224                               213,116   
       10 Mar 2014           2019           363,576                               372,119   
           2 Mar 2015 2           2020                     195,969           1,142           200,573   

Marc Moses

       23 Jun 2011           2016           118,158                               120,934   
       12 Mar 2012           2017           401,611                               411,047   
       11 Mar 2013           2018           232,020                               237,472   
       10 Mar 2014           2019           363,541                               372,082   
           2 Mar 2015 2           2020                     195,969           1,142           200,573   

The GPSP is a long-term incentive plan governed by the rules of the HSBC Share Plan 2011. Vesting of GPSP awards is normally subject to the Director remaining an employee on the vesting date. Any shares (net of tax) which the Director becomes entitled to on the vesting date are subject to a retention requirement until cessation of employment. Under the Securities and Futures Ordinance of Hong Kong, interests in awards are categorised as beneficial.

 

1 Includes additional shares arising from scrip dividends.
2 At the date of award, 2 March 2015, the market value per share was £5.83.

No Directors held any short position (as defined in the Securities and Futures Ordinance of Hong Kong) in the shares and loan capital of HSBC Holdings and its associated corporations. Save as stated above, none of the Directors had an interest in any shares or debentures of HSBC Holdings or any associates at the beginning or at the end of the period, and none of the Directors or members of their immediate families were awarded or exercised any right to subscribe for any shares or debentures in any HSBC corporation during the period. Since 30 June 2015, the interests of each of the following Directors have increased by the number of HSBC Holdings ordinary shares shown against their name:

Increase in Directors’ interests since 30 June 2015

 

       

HSBC Holdings

ordinary shares

 

Beneficial owner

   

Safra Catz

      220 1 

Rona Fairhead

      247 2 

Douglas Flint

      75 3 

Stuart Gulliver

      31,005 4 

Sam Laidlaw

      372 2 

Iain Mackay

      14,481 5 

Heidi Miller

      35 1 

Marc Moses

      15,738 4 

Sir Simon Robertson

      247 2 

Jonathan Symonds

      220 2 

 

1 Comprises interests in ADSs, which are categorised as equity derivatives under Part XV of the Securities and Futures Ordinance of Hong Kong. Each ADS represents five HSBC Holdings ordinary shares.
2 Scrip dividend.
3 Comprises the acquisition of shares in the HSBC Holdings UK Share Incentive Plan through regular monthly contributions (27 shares) and the automatic reinvestment of dividend income on shares held in the HSBC Holdings UK Share Incentive Plan (48 shares).
4 Comprises scrip dividend on Restricted Share awards and GPSP awards granted under the HSBC Share Plan 2011.
5 Comprises scrip dividend on Restricted Share awards and GPSP awards granted under the HSBC Share Plan 2011 and the automatic reinvestment of dividend income on shares held in a nominee account.

 

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Table of Contents

Shareholder information (continued)

 

 

2 Employee share plans

 

Share options and discretionary awards of shares are granted under HSBC share plans to help align the interests of employees with those of shareholders. The following are particulars of outstanding options, including those held by employees working under employment contracts that are regarded as ‘continuous contracts’ for the purposes of the Hong Kong Employment Ordinance. The options were granted for nil consideration. No options have been granted to substantial shareholders, suppliers of goods or services, or in excess of the individual limit for each share plan. No options were cancelled by HSBC during the period. No discretionary share options have been granted under the HSBC Share Plan 2011, which replaced the HSBC Share Plan on 27 May 2011.

A summary for each plan of the total number of options which were granted, exercised or lapsed during the period is shown in the following tables. Particulars of options held by Directors of HSBC Holdings are set out on page 144. Further details required to be disclosed pursuant to Chapter 17 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited are available on our website at www.hsbc.com by selecting ‘Investor Relations’, then ‘Governance’ then ‘Share Plans’, and on the website of The Stock Exchange of Hong Kong Limited at www.hkex.com.hk. Copies may be obtained upon request from the Group Company Secretary, 8 Canada Square, London E14 5HQ.

All-employee share plans

The HSBC Holdings Savings-Related Share Option Plan and the HSBC Holdings Savings-Related Share Option Plan: International are all-employee share plans under which eligible employees have been granted options to acquire HSBC Holdings ordinary shares. There will be no further grant of options under the HSBC Holdings Savings-Related Share Option Plan: International; the final grant was in 2012. A new international all-employee share purchase plan was launched in the third quarter of 2013.

For options granted under the HSBC Holdings Savings-Related Option Plan, employees make contributions of up to £500 (or equivalent) each month over a period of three or five years which may be used within six months following the third or fifth anniversary of the commencement of the relevant savings contract, at the employee’s election, to exercise the options. Alternatively, the employee may elect to have the savings, plus (where applicable) any interest or bonus, repaid in cash. In the case of redundancy, retirement including on grounds of injury or ill health, the transfer of the employing business to another party, or a change of control of the employing company, options may be exercised before completion of the relevant savings contract. In certain circumstances, the exercise period of options awarded under the all-employee share plans may be extended, for example, on the death of a participant, the executors may exercise the option up to six months beyond the normal exercise period.

Under the HSBC Holdings Savings-Related Share Option Plan and the HSBC Holdings Savings-Related Share Option Plan: International the option exercise price has been determined by reference to the average market value of the ordinary shares on the five business days immediately preceding the invitation date, then applying a discount of 20%. Where applicable, the US dollar, Hong Kong dollar and euro exercise prices were converted from the sterling exercise price at the applicable exchange rate on the working day preceding the relevant invitation date. The HSBC Holdings Savings-Related Share Option Plan will terminate on 23 May 2025 unless the Directors resolve to terminate the plans at an earlier date.

HSBC Holdings All-employee Share Option Plans

 

                                                            HSBC Holdings ordinary shares  
Dates of award         Exercise price         Exercisable         At         Awarded         Exercised         Lapsed         At  
from         to         from         to         from         to         1 Jan 2015         in period         in period         in period         30 Jun 2015  

 

Savings-Related Share Option Plan1

  

                   
 

 

29 Apr

2009

  

  

       
 
23 Sep
2014
  
  
       

 

(£)

3.3116

  

  

       

 

(£)

5.4738

  

  

       
 
1 Aug
2014
  
  
       
 
1 May
2020
  
  
      53,743,955          _          891,541          2,314,304          50,538,110   

 

Savings-Related Share Option Plan: International2

  

                   
 
 
29 Apr
2009
  
  
       
 
24 Apr
2012
  
  
       

 

(£)

3.3116

  

  

       

 

(£)

5.4573

  

  

       
 
1 Aug
2014
  
  
       
 
1 Feb
2018
  
  
      3,714,447                   332,465          220,456          3,161,526   
 
 
29 Apr
2009
  
  
       
 
24 Apr
2012
  
  
       

 

($)

4.8876

  

  

       

 

($)

8.2094

  

  

       
 
1 Aug
2014
  
  
       
 
1 Feb
2018
  
  
      1,867,328                   153,990          235,089          1,478,249   
 
 
29 Apr
2009
  
  
       
 
24 Apr
2012
  
  
       

 

()

3.6361

  

  

       

 

()

6.0657

  

  

       
 
1 Aug
2014
  
  
       
 
1 Feb
2018
  
  
      571,502                   40,543          36,071          494,888   
 
 
29 Apr
2009
  
  
       

 

24 Apr

2012

  

  

       

 

(HK$)

37.8797

  

  

       

 

(HK$)

63.9864

  

  

       
 
1 Aug
2014
  
  
       

 

1 Feb

2018

  

  

      6,468,782                   360,839          140,702          5,967,241   

 

1 The weighted average closing price of the shares immediately before the dates on which options were exercised was £6.07.
2 The weighted average closing price of the shares immediately before the dates on which options were exercised was £6.10.

 

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Shareholder information (continued)

 

 

Discretionary Share Option Plans

There have been no awards of discretionary share options under employee share plans since 30 September 2005.

 

                                        HSBC Holdings ordinary shares  
Date of award        Exercise price (£)        Exercisable          At                  Exercised          Lapsed          At  
                  from          to                  1 Jan 2015          in period                  in period                  30 Jun 2015  

HSBC Holdings Group Share Option Plan1

  

                   

20 Apr 2005

       7.2869          20 Apr 2008             20 Apr 2015           6,373,982                     6,373,982             

HSBC Share Plan

  

                   

30 Sep 2005

       7.9911          30 Sep 2008             30 Sep 2015           86,046                               86,046   

 

1 The HSBC Holdings Group Share Option Plan expired on 26 May 2005. No options have been granted under the Plan since that date.

 

3 Notifiable interests in share capital

 

At 30 June 2015, HSBC Holdings had received the following notification of major holdings of voting rights pursuant to the requirements of Rule 5 of the Disclosure Rules and Transparency Rules:

 

  BlackRock, Inc. gave notice on 9 December 2009 that on 7 December 2009 it had the following: an indirect interest in HSBC Holdings ordinary shares of 1,142,439,457; qualifying financial instruments with 705,100 voting rights that may be acquired if the instruments are exercised or converted; and financial instruments with similar economic effect to qualifying financial instruments which refer to 234,880 voting rights, each representing 6.56%, 0.0041% and 0.0013%, respectively, of the total voting rights at that date.

At 30 June 2015, according to the register maintained by HSBC Holdings pursuant to section 336 of the Securities and Futures Ordinance of Hong Kong:

 

  JPMorgan Chase & Co. gave notice on 3 June 2015 that on 29 May 2015 it had the following interests in HSBC Holdings ordinary shares: a long position of 987,976,822 shares; a short position of 132,712,484 shares; and a lending pool of 634,037,110 shares, each representing 5.06%, 0.68% and 3.24%, respectively, of the ordinary shares in issue at that date; and

 

  BlackRock, Inc. gave notice on 21 May 2015 that on 20 May 2015 it had the following interests in HSBC Holdings ordinary shares: a long position of 1,256,860,007 shares and a short position of 754,653 shares, each representing 6.44% and 0.00%, respectively, of the ordinary shares in issue at that date.

 

4 Dealings in HSBC Holdings listed securities

 

Except for dealings as intermediaries by HSBC Bank plc which is a member of a European Economic Area (‘EEA’) exchange and The Hongkong and Shanghai Banking Corporation Limited which has direct access to a EEA exchange, neither HSBC Holdings nor any of its subsidiaries purchased, sold or redeemed any of its securities listed on the Stock Exchange of Hong Kong Limited during the six months to 30 June 2015.

 

5 First interim dividend for 2015

 

The first interim dividend for 2015 of $0.10 per ordinary share was paid on 8 July 2015.

 

6 Second interim dividend for 2015

 

On 3 August 2015, the Directors declared a second interim dividend for 2015 of $0.10 per ordinary share. The second interim dividend will be payable on 2 October 2015 to holders of record on 14 August 2015 on the Principal Register in the United Kingdom, Hong Kong and Bermuda Overseas Branch registers. The dividend will be payable in cash, US dollars, sterling or Hong Kong dollars, or a combination of these currencies, at the forward exchange rates quoted by HSBC Bank plc in London at or about 11.00am on 21 September 2015. A scrip dividend will also be offered. Particulars of these arrangements will be sent to shareholders on or about 26 August 2015 and elections must be received by 17 September 2015.

The dividend will be payable on ordinary shares held through Euroclear France, the settlement and central depositary system for Euronext Paris, on 2 October 2015 to the holders of record on 14 August 2015. The dividend will be payable by Euroclear France in cash, in euros, at the forward exchange rate quoted by HSBC France on 21 September 2015, or as a scrip dividend. Particulars of these arrangements will be announced through Euronext Paris on 5 August 2015, 20 August 2015 and 21 September 2015.

The dividend will be payable on ADSs, each of which represents five ordinary shares, on 2 October 2015 to holders of record on 14 August 2015. The dividend of $0.50 per ADS will be payable by the depositary in cash, in US dollars or as a scrip dividend of new ADSs. Elections must be received by the depositary on or before 11 September 2015. Alternatively, the cash dividend may be invested in additional ADSs for participants in the dividend reinvestment plan operated by the depositary.

Ordinary shares will be quoted ex-dividend in London, Hong Kong, Paris and Bermuda on 13 August 2015. The ADSs will be quoted ex-dividend in New York on 12 August 2015.

 

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Shareholder information (continued)

 

 

Any person who has acquired ordinary shares registered on the Principal Register in the United Kingdom, the Hong Kong Overseas Branch register or the Bermuda Overseas Branch register but who has not lodged the share transfer with the Principal Registrar, the Hong Kong or Bermuda Branch Registrar should do so before 4.00pm local time on 14 August 2015 in order to receive the dividend.

Ordinary shares may not be removed to or from the Principal Register in the United Kingdom, the Hong Kong Overseas Branch register or the Bermuda Overseas Branch register on 14 August 2015. Any person wishing to remove ordinary shares to or from each register must do so before 4.00pm local time on 13 August 2015.

Transfers of ADSs must be lodged with the depositary by 12 noon on 14 August 2015 in order to receive the dividend.

 

7 Proposed interim dividends for 2015

 

The Board has adopted a policy of paying quarterly dividends on the ordinary shares, under which it is intended to have a pattern of three equal interim dividends with a variable fourth interim dividend. The timetables for dividends payable on the ordinary shares in respect of 2015 that have not yet been declared are proposed as follows:

 

        

Third interim

    dividend for 2015

        

Fourth interim

dividend for 2015

 

Announcement

       5 October 2015           22 February 2016   

ADSs quoted ex-dividend in New York

       21 October 2015           2 March 2016   

Shares quoted ex-dividend in London, Hong Kong, Paris and Bermuda

       22 October 2015           3 March 2016   

Record date in London, Hong Kong, New York, Paris and Bermuda1

       23 October 2015           4 March 2016   

Payment date

       3 December 2015           20 April 2016   

 

1 Removals to and from the Overseas Branch Register of shareholders in Hong Kong will not be permitted on these dates.

 

8 Earnings Release

 

An Earnings Release for the three-month period ending 30 September 2015 is expected to be issued on 2 November 2015.

 

9 Final results

 

The results for the year to 31 December 2015 are expected to be announced on 22 February 2016.

 

10 Corporate governance

 

HSBC is committed to high standards of corporate governance.

Throughout the six months to 30 June 2015, HSBC Holdings has complied with the applicable code provisions of: (i) The UK Corporate Governance Code issued by the Financial Reporting Council in September 2014 and (ii) the Hong Kong Corporate Governance Code set out in Appendix 14 to the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited, save that the Group Risk Committee is responsible for the oversight of internal control (other than internal controls over financial reporting) and risk management systems (Hong Kong Corporate Governance Code provision C.3.3 paragraphs (f), (g) and (h)). In the absence of the Group Risk Committee, these matters would be the responsibility of the Group Audit Committee. The UK Corporate Governance Code is available at www.frc.org.uk and the Hong Kong Corporate Governance Code is available at www.hkex.com.hk.

The Board of HSBC Holdings has adopted a code of conduct for transactions in HSBC Group securities by Directors. The code of conduct complies with The Model Code in the Listing Rules of the Financial Conduct Authority and with The Model Code for Securities Transactions by Directors of Listed Issuers (‘Hong Kong Model Code’) set out in the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited, save that The Stock Exchange of Hong Kong Limited has granted certain waivers from strict compliance with the Hong Kong Model Code. The waivers granted by The Stock Exchange of Hong Kong Limited primarily take into account accepted practices in the UK, particularly in respect of employee share plans. Following a specific enquiry, each Director has confirmed that he or she has complied with the code of conduct for transactions in HSBC Group securities throughout the period. All Directors are routinely reminded of their obligations under the code of conduct for transactions in HSBC Group securities.

There have been no material changes to the information disclosed in the Annual Report and Accounts 2014 in respect of the number and remuneration of employees, remuneration policies, bonus and share option plans and training schemes.

 

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11 Changes in Directors’ details

 

Changes in Directors’ details since the date of the Annual Report and Accounts 2014 which are required to be disclosed pursuant to Rule 13.51(2) and Rule 13.51B(1) of the Hong Kong Listing Rules, are set out below.

Kathleen Casey

Director of Penn State Milton S. Hershey Medical Center since 1 July 2015.

Chairman of Penn State Health since 1 March 2015.

Laura Cha

A member of the International Advisory Board of Sotheby’s since 15 April 2015.

Lord Evans of Weardale

Member of the Advisory Board of Fluid IT Ltd since 1 June 2015.

Non-executive director of Ark Data Centres Ltd since 1 July 2015.

Non-executive director of the UK National Crime Agency until 13 March 2015.

Senior Advisor at Accenture until 6 June 2015.

Douglas Flint

Member of the Financial Services Trade and Investment Board until 20 July 2015.

Sam Laidlaw

Chairman of the National Centre for Universities and Business since 26 March 2015.

Heidi Miller

Independent Director of SRS Acquiom since 15 June 2015.

Sir Simon Robertson

Member of the International Advisory Board of Brown Advisory Ltd since 7 May 2015.

Director of Immodulon Therapeutics Limited since 20 May 2015.

Trustee of the Eden Trust until 31 March 2015.

 

12 Going concern basis

 

As mentioned in Note 1 Basis of preparation on page 107, the financial statements are prepared on a going concern basis, as the Directors are satisfied that the Group and parent company have the resources to continue in business for the foreseeable future. In making this assessment, the Directors have considered a wide range of information relating to present and future conditions, including future projections of profitability, cash flows and capital resources. Further information relevant to the assessment is provided elsewhere in this Interim Report 2015.

In particular, HSBC’s principal activities, business and operating models, strategic direction and top and emerging risks are addressed in the ‘Overview’ section; a financial summary, including a review of the consolidated income statement and consolidated balance sheet, is provided in the ‘Interim Management Report’ section; HSBC’s objectives, policies and processes for managing credit, liquidity and market risk are described in the ‘Risk’ section of the Annual Report and Accounts 2014; and HSBC’s approach to capital management and allocation is described in the ‘Capital’ section of the Annual Report and Accounts 2014.

 

13 Telephone and online share dealing service

 

For shareholders on the Principal Register who are resident in the UK, with a UK postal address, and who hold an HSBC Bank plc personal current account, the HSBC InvestDirect share dealing service is available for buying and selling HSBC Holdings ordinary shares. Details are available from: HSBC InvestDirect, Forum 1, Parkway, Whiteley, PO15 7PA, UK telephone: 03456 080848, overseas telephone: +44 (0) 1226 261090, web: www.hsbc.co.uk/shares.

 

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14 Stock symbols

 

HSBC Holdings plc ordinary shares trade under the following stock symbols:

 

London Stock Exchange    HSBA
Hong Kong Stock Exchange    5
New York Stock Exchange (ADSs)    HSBC
Euronext Paris    HSB
Bermuda Stock Exchange    HSBC.BH

 

15 Copies of the Interim Report 2015 and shareholder enquiries and communications

 

Further copies of the Interim Report 2015 may be obtained from Global Communications, HSBC Holdings plc, 8 Canada Square, London E14 5HQ, United Kingdom; from Communications (Asia), The Hongkong and Shanghai Banking Corporation Limited, 1 Queen’s Road Central, Hong Kong; or from Global Publishing Services, HSBC – North America, SC1 Level, 452 Fifth Avenue, New York, NY 10018, USA. The Interim Report 2015 may also be downloaded from the HSBC website, www.hsbc.com.

Shareholders may at any time choose to receive corporate communications in printed form or to receive notifications of their availability on HSBC’s website. To receive future notifications of the availability of a corporate communication on HSBC’s website by email, or to revoke or amend an instruction to receive such notifications by email, go to www.hsbc.com/ecomms. If you provide an email address to receive electronic communications from HSBC, we will also send notifications of your dividend entitlements by email. If you received a notification of the availability of this document on HSBC’s website and would like to receive a printed copy of it or, if you would like to receive future corporate communications in printed form, please write or send an email (quoting your shareholder reference number) to the appropriate Registrar at the address given below. Printed copies will be provided without charge.

Any enquiries relating to your shareholdings on the share register, for example transfers of shares, change of name or address, lost share certificates or dividend cheques, should be sent to the Registrar at the address given below. The Registrar offers an online facility, Investor Centre, which enables shareholders to manage their shareholding electronically.

 

Principal Register   Hong Kong Overseas Branch Register   Bermuda Overseas Branch Register

Computershare Investor Services PLC

The Pavilions

Bridgwater Road

Bristol BS99 6ZZ

United Kingdom

 

Computershare Hong Kong Investor
Services Limited

Rooms 1712-1716, 17th Floor

Hopewell Centre

183 Queen’s Road East

Hong Kong

  Investor Relations Team

HSBC Bank Bermuda Limited

6 Front Street

Hamilton HM 11

Bermuda

Telephone: +44 (0) 370 702 0137

Email via website:

www.investorcentre.co.uk/contactus

Investor Centre:

www.investorcentre.co.uk

 

Telephone: +852 2862 8555

Email:

hsbc.ecom@computershare.com.hk

Investor Centre:

www.investorcentre.com/hk

  Telephone: +1 441 299 6737

Email:

hbbm.shareholder.services@hsbc.bm

Investor Centre:

www.investorcentre.co.uk/bm

Any enquiries relating to ADSs should be sent to the depositary at:

 

BNY Mellon Shareowner Services

PO Box 30170

College Station, TX 77842-3170

USA

  

Overnight correspondence should be sent to:

BNY Mellon Shareowner Services

211 Quality Circle, Suite 210

College Station, TX 77845

USA

Telephone (US): +1 877 283 5786

Telephone (international): +1 201 680 6825

Email: shrrelations@cpushareownerservices.com

Website: www.mybnymdr.com

  

Any enquiries relating to shares held through Euroclear France, the settlement and central depositary system for NYSE Euronext Paris, should be sent to the paying agent:

HSBC France

103, avenue des Champs Elysées

75419 Paris Cedex 08

France

Telephone: +33 1 40 70 22 56

Email: ost-agence-des-titres-hsbc-reims.hbfr-do@hsbc.fr

Website: www.hsbc.fr

 

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A Chinese translation of this and future documents may be obtained on request from the Registrar. Please also contact the Registrar if you have received a Chinese translation of this document and do not wish to receive such translations in future.

Persons whose shares are held on their behalf by another person may have been nominated to receive communications from HSBC pursuant to section 146 of the UK Companies Act 2006 (‘nominated person’). The main point of contact for a nominated person remains the registered shareholder (for example your stockbroker, investment manager, custodian or other person who manages the investment on your behalf). Any changes or queries relating to a nominated person’s personal details and holding (including any administration thereof) must continue to be directed to the registered shareholder and not HSBC’s Registrar. The only exception is where HSBC, in exercising one of its powers under the UK Companies Act 2006, writes to nominated persons directly for a response.

 

LOGO

 

LOGO

 

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Abbreviations

 

Abbreviation    Brief description
1H14    First half of 2014
1H15    First half of 2015
A   
ABS    Asset-backed security
ADS    American Depositary Share
AML    Anti-money laundering
ARM    Adjustable-rate mortgage
B   
Basel Committee    Basel Committee on Banking Supervision
Basel III    Basel Committee’s reforms to strengthen global capital and liquidity rules
BoCom    Bank of Communications Co., Limited, one of China’s largest banks
BRRD    Bank Recovery and Resolution Directive (EU)
BSA    Bank Secrecy Act (US)
BSM    Balance Sheet Management
BVI    British Virgin Islands
C   
CA$    Canadian dollars
CAPM    Capital asset pricing model
CCB    Capital conservation buffer
CCyB    Countercyclical capital buffer
CEA    Commodity Exchange Act (US)
CET1    Common equity tier 1 ratio
CMB    Commercial Banking, a global business
CML    Consumer and Mortgage Lending (US)
CRD    Capital Requirements Directive
CRS    Card and Retail Services
CVA    Credit valuation adjustment
D   
DANY DPA    Two-year deferred prosecution agreement with the New York County District Attorney (US)
DoJ    Department of Justice (US)
DPA    Deferred prosecution agreement (US)
DPF    Discretionary participation feature of insurance and investment contracts
E   
EBA    European Banking Authority
EU    European Union
Euribor    European Interbank Offered Rates
F   
FCA    Financial Conduct Authority (UK)
FPC    Financial Policy Committee (UK)
FRB    Federal Reserve Board (US)
G   
GB&M    Global Banking and Markets, a global business
GDP    Gross domestic product
GPB    Global Private Banking, a global business
Group    HSBC Holdings together with its subsidiary undertakings
G-SIB    Global systemically important bank
G-SII    Global systemically important institutions
H   
HNAH    HSBC North America Holdings Inc.
Hong Kong    Hong Kong Special Administrative Region of the People’s Republic of China
HSBC    HSBC Holdings together with its subsidiary undertakings
HSBC Bank USA    HSBC Bank USA, N.A., HSBC’s retail bank in the US
HSBC Colombia    HSBC Bank (Colombia) S.A.
HSBC Finance    HSBC Finance Corporation, the US consumer finance company (formerly Household International, Inc.)
HSBC France    HSBC’s French banking subsidiary, formerly CCF S.A.
HSBC Holdings    HSBC Holdings plc, the parent company of HSBC
HSBC USA    The sub-group, HSBC USA Inc and HSBC Bank USA, consolidated for liquidity purposes
HSI    HSBC Securities (USA) Inc.
HSSL    HSBC Securities Services (Luxembourg)
HTIE    HSBC Institutional Trust Services (Ireland) Limited

 

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Abbreviation    Brief description
I   
IAS    International Accounting Standards
IASB    International Accounting Standards Board
IFRSs    International Financial Reporting Standards
Industrial Bank    Industrial Bank Co. Limited, a national joint-stock bank in mainland China in which Hang Seng Bank Limited has a shareholding
Investor Update    The Investor Update in June 2015
IRB    Internal ratings-based
ISDA    International Swaps and Derivatives Association
L   
LCR    Liquidity coverage ratio
LFRF    Liquidity and funding risk management framework
LGD    Loss given default
Libor    London Interbank Offered Rate
LICs    Loan impairment charge and other credit risk provisions
LTV    Loan to value
M   
Madoff Securities    Bernard L Madoff Investment Securities LLC
Mainland China    People’s Republic of China excluding Hong Kong and Macau
MBS    US mortgage-backed security
MENA    Middle East and North Africa
MREL    EU minimum requirements for own funds and eligible liabilities
N   
NII    Net interest income
NSFR    Net stable funding ratio
O   
OCC    Office of the Comptroller of the Currency (US)
ORMF    Operational risk management framework
P   
PBT    Profit before tax
PPI    Payment protection insurance product
PRA    Prudential Regulation Authority (UK)
Premier    HSBC Premier, HSBC’s premium personal global banking service
PVIF    Present value of in-force long-term insurance business and long-term investment contracts with DPF
Q   
QIS    Quantitative impact study
R   
RBWM    Retail Banking and Wealth Management, a global business
Repo    Sale and repurchase transaction
Reverse repo    Security purchased under commitments to sell
RMB    Renminbi
RMBS    Residential mortgage-backed securities
RoRWA    Return on average risk-weighted assets
RTS    Regulatory technical standards
RWA    Risk-weighted assets
S   
ServCo group    Separately incorporated group of service companies planned in response to UK ring-fencing proposals
SRB    Systematic risk buffer
T   
TLAC    Total loss absorbing capacity
U   
UAE    United Arab Emirates
UK    United Kingdom
US    United States of America
US DPA    Five-year deferred prosecution agreement with the Department of Justice and others (US)
V   
VaR    Value at risk
VIU    Value in use

Glossary

Terminology used in this interim report is consistent with that used in our Annual Report and Accounts 2014, where a glossary of terms can be found.

 

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Index

 

A

Abbreviations 152

Accounting

future developments 107

policies 107

Adjusted performance 15

Anti-money laundering investigations 134

Areas of special interest 59

Asia

adjusted/reported reconciliation 50

assets 42

balance sheet data 110

by country 44, 48, 72

commentary 49a

cost efficiency ratios 44

customer accounts 44

impaired loans 71

impairment allowances/charges 66

loans and advances 44, 61, 68, 69

net operating income 109

profit before tax 44, 48, 109

renegotiated loans 64

risk-weighted assets 42

snapshot 5

staff numbers 44

Asset-backed securities 75

Assets

by geographical region 42

by global business 33, 39

charged as security 123

held for sale 39, 62, 122

maturity analysis 125

movement in 30

risk-weighted 3

total 3, 29, 103

trading 110

Associates and joint ventures (income from) 18, 28, 123

adjusted/reported reconciliation 50, 53

B

Backtesting 79

Balance sheet

consolidated 29, 103

data 39

insurance manufacturing subsidiaries 84

movement 30

Balance Sheet Management 79

Bank of Communications 123

Basis of preparation 33, 107

Brazil 18, 122

Brazilian labour and fiscal claims 129, 138

C

Capital

buffers 98

commitments 130

composition 95

management 87

overall requirements 98

overview 87

ratios 14, 87

regulatory 29, 87, 95

source and application of regulatory capital 94

subordinated loan 29

total regulatory 87

Cash flows

consolidated statement 104

Cautionary statement regarding forward-looking statements 151

Client assets 37

Collateral 123

Combined customer lending and deposits 30

Commercial Banking 35

adjusted/reported reconciliation 53

cost efficiency ratios 27

management view 35

snapshot 4

Commitments 130

Compliance risk 83

Compliance with IFRSs 107

Composition of Group (changes in) 107

Consumer Credit Act (UK) 129

Contents – inside front cover

Contingent liabilities, contractual commitments and guarantees 130

Copies of the Interim Report 149

Corporate governance 147

Counterparty risk 92

Credit default swap regulatory investigation and litigation 138

Credit quality 62

Credit risk 60

risk-weighted assets 89

Customer accounts

by country 31

by global business 39

Customer lending and deposits (combined) 30

D

Dealings in HSBC Holdings shares 146

Deferred tax 108

Defined terms – inside front cover

Derivatives 118

by product contract type 118

credit 119

hedging instruments 119

interest rate 129

trading 119

Directors

Board changes 8

changes in details 148

interests 142

Disposal groups 122

Dividends 108, 146, 147

E

Earnings per share 101, 149

Earnings release 147

Earnings to combined fixed charges ratio 32a

Equity 3, 29, 103

movement in 31

Estimates and judgements 107

Europe

adjusted/reported reconciliation 50

assets 42

balance sheet data 110

by country 43, 48, 72

commentary 49a

cost efficiency ratios 43

customer accounts 43

impaired loans 71

impairment allowances/charges 66

loans and advances 43, 61, 68, 69

net operating income 109

profit before tax 43, 48, 109

renegotiated loans 63

risk-weighted assets 42

snapshot 5

staff numbers 43

Events after the balance sheet date 139

F

Fair values

adjustments 111

 

 

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movements 113

of derivatives 118

of financial instruments at fair value 111

of financial instruments not at fair value 117

significant unobservable assumptions 114

valuation bases 112

Fee income (net) 20

Final results 147

Financial assets

designated at fair value 117

Financial crime compliance 59

Financial highlights 2

Financial instruments

at fair value 111

credit quality 62

net income from 22

not at fair value 117

Financial investments 120

Footnotes 56, 86, 106

Forbearance 63

Foreign currency translation differences 15

Foreign exchange rates 29

investigations and litigation 137

Funding sources 77

Funds under management 50

G

Gains less losses from financial investments 22

significant items and currency translation 23

Geographical regions 42

Global Banking and Markets 36

adjusted/reported reconciliation 53

client-facing 33

cost efficiency ratios 27

fair value adjustments 112

management view 36

snapshot 4

Global businesses 33

Global Private Banking 37

adjusted/reported reconciliation 53

cost efficiency ratios 27

snapshot 4

Global Standards 7, 12

Glossary 153

Going concern 107, 148

Goodwill impairment 139

Greece 74

Group Chairman’s Statement 6

Group Chief Executive’s Review 9

H

Headquarters 8

Held for sale 39, 62, 122

Highlights 2

HSBC Finance 71

HSBC Bank USA 71

HSBC Holdings 81

I

Impairment

allowances and charges 66, 68

by geographical region 66

charges and other credit risk provisions 25

constant currency/reported profit 71

impaired loans 63, 71, 74a

Income from financial instruments designated at fair value (net) 21

Income statement

consolidated 16, 101

Information security 82

Insurance

asset and liability matching 84

balance sheet by type of contract 84

claims and benefits paid and movement in liabilities to
policyholders (net) 24

net insurance premium income 23

risk 85

Interest-earning assets 19

Interest expense 20

Interest income (net) 19

sensitivity 80

significant items and currency translation 19

Interest rate derivatives 129

Interim Report 2015 139

Investor update 9

L

Latin America

adjusted/reported reconciliation 50

assets 42

balance sheet data 110

by country 47, 48, 72

commentary 49b

cost efficiency ratios 47

customer accounts 47

impaired loans 71

impairment allowances/charges 66

loans and advances 47, 61, 68, 69

net operating income 109

profit before tax 47, 48, 109

renegotiated loans 63

risk-weighted assets 42

snapshot 3

staff numbers 47

Legal proceedings 130

Leverage ratio 97

Liabilities

maturity analysis 125

movement in 30

total 29, 103

trading 124

Libor investigation 136

Liquidity and funding 76

management 76

regulation 76

Loans and advances

by country/region 61, 72

by credit quality 62

by global business 39

by industry sector 61, 72

exposure 61

held for sale 39

impaired 63, 71

mortgage lending 70

personal lending 69

potential problems 74a

renegotiated 63

unimpaired loans past due 90 days or more 74a

wholesale lending 68

Loan impairment charges and other credit risk provisions 17, 25, 66

adjusted/reported reconciliation 50, 53

on held for sale 62

Loss absorbing capacity 100

M

Madoff 131

Margin 19

Market capitalisation 3

Market risk 78

measures applicable to parent 81

Middle East and North Africa

adjusted/reported reconciliation 50

assets 42

balance sheet data 110

by country 45, 48, 72

commentary 49a

cost efficiency ratios 45

customer accounts 45

impaired loans 71

 

 

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impairment allowances/charges 66

loans and advances 45, 61, 68, 69

net operating income 109

profit before tax 45, 48, 109

renegotiated loans 63

risk-weighted assets 42

snapshot 5

staff numbers 45

Monitor 13

Mortgage lending 70

Mortgage-related investigations (US) 133

Mortgage securitisation activity (US) 134

N

Non-GAAP measures 15

Non-trading portfolios 79

North America

adjusted/reported reconciliation 50

assets 42

balance sheet data 110

by country 46, 48, 72

commentary 49a

cost efficiency ratios 46

customer accounts 46

impaired loans 71

impairment allowances/charges 66

loans and advances 46, 61, 68, 69

net operating income 109

profit before tax 46, 48, 109

renegotiated loans 63

risk-weighted assets 42

snapshot 5

staff numbers 46

Notifiable interests in share capital 146

O

Offices 1

Oil and gas 59

Operating expenses 26

adjusted/reported reconciliation 50, 53

by geographical region 43 to 47

by global business 34 to 38

change-the-bank 26

run-the-bank 26

significant items and currency translation 26

Operating income (other) 23

significant items and currency translation 24

Operational risk 82

‘Other’ segment 38

adjusted/reported reconciliation 53

Outlook 8, 10

P

Payment protection insurance 128

Performance

adjusted 16

measurement 1

reported 16

Personal lending 69

Pillar 2 and the PRA buffer 98

Precious metals litigation 138

Preferred securities 29

Profit before tax

adjusted 3, 9

adjusted/reported reconciliation 50, 53

attributable 16, 101

by country 48

by geographical region 42, 43 to 47

by global business 33 to 38, 39

consolidated 101

reported 3, 9

PRA buffer 98

Provisions 128

Purpose 1

PVIF 23

R

Ratios

advances to core funding 76

advances to deposits 14

capital (total) 14, 87

common equity tier 1 3, 87

core tier 1 ratio 87

cost efficiency 14, 28, 43 to 47

customer advances to customer accounts 29

earnings per share 101

earnings to combined fixed charges 32a

leverage 97

LICs to advances 14

return on average risk-weighted assets 3, 31

by geographical region 43 to 47

by global business 34 to 37

return on equity 3, 14

shareholders’ equity to total assets 29

stressed coverage 77

Recovery and resolution 100

Regulatory

capital 29, 87

capital buffers 97

developments 97

review of consumer enhancement services products 139

risks 58

source and application 94

stress testing 98

Related parties 139

Representations and warranties 75

Reputational risk 83

Retail Banking and Wealth Management 34

adjusted/reported reconciliation 53

cost efficiency ratios 27

management view 34

Principal RBWM 34

snapshot 4

Revenue 17

adjusted/reported reconciliation 50, 53

by geographical region 43 to 47

by global business 34 to 38

items (significant) 50 to 55

Review of performance 6, 9, 16

Ring-fencing 8

Risk elements in loan portfolio 74a

Risks

appetite 14

compliance 83

counterparty credit risk 92

credit 60, 89

data management 58

dispute 58

economic outlook 58

factors 57

foreign exchange 81

fraud 82

geopolitical 58

information security 58, 82

insurance operations 84

interest rate repricing gap 81

liquidity and funding 76

managing risk 13, 57

market 78

model 58

non-trading interest rate 79

operational 82

complexity 82

people 58

profile 57

regulatory 58

 

 

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reputational 83

third parties 58, 83

top and emerging 57

Risk-weighted assets 3, 29, 88

adjusted/reported reconciliation 32

by geographical region 42, 89

by global business 33, 88

developments 99

S

Securities litigation 130

Securitisation 75

Segmental analysis 109

Sensitivity of fair values 115

Sensitivity of net interest income 80

Share capital 29

Share capital – notifiable interests 146

Shareholder enquiries 149

Share information 3

Share option plans

Directors’ interests 143

discretionary 146

employee share plans 145

Significant items 15, 50

Six filters 12

Snapshot

Global business 4

Regional 5

Spread 19

Staff numbers 1, 26

Statement of changes in equity (consolidated) 105

Statement of comprehensive income (consolidated) 102

Stock symbols 149

Strategic actions 11

Strategy 1, 2, 11

Stress testing 59, 98

Structural banking reform 12, 100

Swiss Private Bank 59

T

Targets 10, 13

Tax 18, 28, 108

US tax-related investigations 135

Telephone and online share-dealing service 148

Total shareholder return 3

Trading

assets 110

derivatives 119

income (net) 21

significant items and currency translation 21

liabilities 124

portfolios 78

Troubled debt restructurings 74a

Turkey 18

U

UK leverage ratio framework 99

V

Value at risk 78

W

Whistleblowing 83

Wholesale funding 76

Wholesale lending 68

Y

Yield 19

 

 

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