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01 Aug 2011

HSBC Holdings plc 2011 interim results

Financial highlights:

  • Reported pre-tax profit US$11.5bn: up 3% on 1H10, and 45% on 2H10*
  • Profit attributable to ordinary shareholders US$8.9bn: up 35% on 1H10, 46% on 2H10
  • Return on average ordinary shareholders' equity 12.3%: up from 10.4% in 1H10, 8.9% in 2H10
  • Earnings per share US$0.51: up 34% on 1H10, and 46% on 2H10
  • Net assets per share of US$8.59: up 17% on 1H10, and 8% on 2H10
  • Dividends declared in respect of 2011 totalling US$0.18 per ordinary share, up 12.5%
  • Loan impairment and other credit risk provisions US$5.3bn: down 30% on 1H10, 19% on 2H10
  • Advances-to-deposits ratio 78.7%: up from 77.9% in 1H10, and 78.1% in 2H10
  • Core tier 1 capital ratio increased to 10.8% from 10.5% during the period

Business highlights:

  • Commercial Banking profits up 31%: supported by revenues up 14% and customer lending up 12% compared to year end
  • Retail Banking and Wealth Management profits up 131% as loan impairment charges fell
  • Global Banking and Markets profits down 12%, but held up well against strong 1H10
  • Profitable in all regions: profits up in Asia, Latin America, the Middle East and North America
  • Revenues stable at US$35.7bn: double digit growth in Asia and Latin America
  • Customer lending up 8% on year end: led by demand in trade, emerging markets and Europe
  • In the US, made progress on strategic review of credit card business and announced disposal of 195 non-strategic branches, principally in upstate New York
  • Announced: closure of retail banking in Russia and Poland; disposal of three insurance businesses
  • Cost efficiency ratio of 57.5%: compared with 50.9% in 1H10, and 59.9% in 2H10

Stuart Gulliver, Group Chief Executive said:

"I am pleased with these results, which mark a first step in the right direction on what will be a long journey."

Key performance indicators*: 1H11 1H10 2H10 Target/ benchmark
Return on average ordinary shareholders' equity 12.3% 10.4% 8.9% 12-15%
Cost efficiency ratio 57.5% 50.9% 59.9% 48-52%
Earnings per share (US$) 0.51 0.38 0.35 -
Core tier 1 ratio 10.8% 9.9% 10.5% 9.5-10.5%**

*All figures are given on a reported basis, unless otherwise stated
**Assumed common equity tier 1 ratio under Basel III

HSBC HOLDINGS REPORTS PRE-TAX PROFIT OF US$11,474M

HSBC made a profit before tax of US$11,474m, an increase of US$370m, or 3.3%, compared with the first half of 2010.

Profit attributable to ordinary shareholders was US$8,929m, an increase of US$2,300m or 35% compared with the first half of 2010.

Net interest income of US$20,235m was US$478m, or 2.4%, higher than the first half of 2010.

Net operating income before loan impairment charges and other credit risk provisions of US$35,694m was US$143m, or 0.4%, higher than the first half of 2010.

Total operating expenses of US$20,510m increased by US$2,399m, or 13.2%, compared with the first half of 2010. On an underlying basis, and expressed in terms of constant currency, operating expenses increased by 10%.

HSBC's cost efficiency ratio was 57.5% compared with 50.9% in the first half of 2010.

Loan impairment charges and other credit risk provisions were US$5,266m in the first half of 2011, US$2,257m lower than the first half of 2010.

The Directors have declared a second interim dividend for 2011 of US$0.09 per ordinary share, a distribution of approximately US$1,604m.

The core tier 1 ratio and tier 1 ratio for the Group remained strong at 10.8% and 12.2%, respectively, at 30 June 2011.

The Group's total assets at 30 June 2011 were US$2,691bn, an increase of US$236bn, or 9.6%, since 31 December 2010.

Geographical distribution of results

Profit/(loss) before tax
Half-year to
30 June 2011 30 June 2010 31 December 2010
US$m % US$m % US$m %
Europe 2,147 18.7 3,521 31.7 781 9.8
Hong Kong 3,081 26.9 2,877 25.9 2,815 35.5
Rest of Asia-Pacific 3,742 32.6 2,985 26.9 2,917 36.8
Middle East and North Africa 747 6.5 346 3.1 546 6.9
North America 606 5.3 492 4.4 (38) (0.5)
Latin America 1,151 10.0 883 8.0 912 11.5
11,474 100.0 11,104 100.0 7,933 100.0
Tax expense (1,712) (3,856) (990)
Profit/(loss) for the period 9,762 7,248 6,943
Profit/(loss) attributable to shareholders of the parent company 9,215 6,763 6,396
Profit attributable to minority interests 547 485 547

Statement by Douglas Flint, Group Chairman

Good progress has been made during the first half of 2011 in setting the necessary course to build further sustainable value from HSBC's many advantaged positions in attractive markets and customer-facing businesses. The priorities, set out in the Strategy Day which Stuart Gulliver, Group Chief Executive, presented with his team in early May this year, are now being actioned, as Stuart sets out clearly in his review. Against the backdrop of the significant regulatory change which is under way, our clear focus is to concentrate HSBC's capital allocation and resources on the market segments which we are best able to serve competitively and efficiently.

Our ability to make progress on these strategic issues has been enhanced by a period of relative stability in operating performance as revenue strength in the faster growing economies continued to offset the constraining impact of the wind-down of our exit portfolios. With credit experience also continuing to improve, earnings per share for the first half of 2011 of US$0.51 were 34% higher than those delivered in the first half of last year. The Group Chief Executive's review describes in more detail the drivers of this encouraging performance.

As foreshadowed when we reported our 2010 results, the Board has declared two interim dividends of US$0.09 per ordinary share in respect of 2011, with the second interim dividend payable on 6 October 2011 to holders of record on 18 August 2011 on the Hong Kong Overseas Branch Register and 19 August 2011 on the Principal Register in the United Kingdom or on the Bermuda Overseas Branch Register. These dividends are 12.5% higher than those declared at the comparable stages last year.

Given the intense current focus amongst the regulatory and political communities on bank capital strength, it is very positive to note both that our capital position strengthened during the period and that we comfortably passed the European Banking Authority's industry wide stress test, the results of which were made public on 15 July 2011. The Group's core tier 1 ratio, which is the ratio most critically monitored by regulators, increased to 10.8% at 30 June 2011 from 10.5% at 31 December 2010 and 9.9% at 30 June 2010.

There has been significant further activity on the regulatory reform front in the period. The Independent Commission on Banking in the UK published its Interim Report on 11 April 2011 and we submitted our comments on its preliminary conclusions on 4 July 2011 in line with the timetable laid down. HSBC has been very actively involved in the debate around one of the principal reform ideas raised in this report, namely the concept of structurally 'ring fencing' certain of the core activities contained within UK-incorporated universal banks; in our case this would affect our UK subsidiary, HSBC Bank plc. The objective of 'ring fencing' certain activities from other activities is to facilitate the resolution and continuation of the core activities contained within the 'ring-fence', at little or no cost to the taxpayer in the event of a future crisis.

Much of the ongoing debate is around assessing the likely impact of various alternative 'ring fencing' definitions on credit supply to the real economy in the UK and on the competitiveness of UK-incorporated banks. We believe the critical judgements ultimately to be made must consider two principal factors. The first of these is how any restructuring will likely affect the quantum and cost of credit supply to the real economy. The second is whether the benefit of this incremental restructuring - on top of the aggregate of all the reform measures already in hand under Basel III and EU directives - outweighs the considerable cost and time commitment involved.

In another major new development, the Basel Committee and the Financial Stability Board have now issued consultation documents concerning additional capital requirements for banks identified as global systemically important financial institutions. Incremental common equity of between 1% and 2.5% of risk-weighted assets on top of Basel III requirements is being proposed. We expect HSBC will fall at the higher end of incremental capital requirements. This level of capital is consistent with the expectation of Basel III common equity tier 1 ratio levels of between 9.5% and 10.5% referred to in our Annual Report and Accounts 2010.

The pace and quantum of regulatory reform continues to increase at the same time as the global economy appears to be losing momentum in its recovery. We are concerned about the possible pro cyclical impacts of further deleveraging of the global economy arising from the regulatory reform agenda, at the same time as sovereign credit concerns and fiscal consolidation challenges become more critical.

Distribution of results by customer group and global business

Profit/(loss) before tax
Half-year to
30 June 2011 30 June 2010 31 December 2010
US$m % US$m % US$m %
Retail Banking and Wealth Management 3,126 27.3 1,352 12.1 2,487
31.4
Commercial Banking 4,189 36.5 3,204 28.9 2,886 36.4
Global Banking and Markets 4,811 41.9 5,452 49.1 3,763 47.4
Global Private Banking 552 4.8 556 5.0 498 6.3
Other (1,204) (10.5) 540 4.9 (1,701) (21.5)
11,474 100.0 11,104 100.0 7,933 100.0

Financial markets globally will likely be volatile over the rest of this year and into 2012 as participants assess and react to the possibility of political constraints preventing timely or optimal economic decisions. The global economy is currently facing many such situations, ranging from reaching a sustainable solution to eurozone sovereign indebtedness through dealing with the impact of inflationary pressures and commodity price increases on developing economies, supporting social reform and cohesion in the Middle East, balancing the growth imperative in the faster growing economies with the consequences of asset price bubbles and, most importantly, negotiating a long-term framework for budget discipline and related financing in the United States.

Finally, I am delighted to report how effectively the new management team under the leadership of Stuart Gulliver is working together and making progress, under the governance and supervision of the Board, in delivering the strategic agenda which has been agreed. There is much to do and, as noted above, the current economic backdrop contains many challenges. However, the mood in the organisation is upbeat and there is real commitment and enthusiasm to tackle the tasks ahead of us.

Review by Stuart Gulliver, Group Chief Executive

HSBC's financial performance improved.

  • Reported profit before tax was US$11.5bn, up 3% from 1H10 and 45% from 2H10.
  • Profit attributable to ordinary shareholders was US$8.9bn, up 35% from 1H10 and 46% from 2H10.
  • Return on average ordinary shareholders' equity was 12.3%, up from 10.4% in 1H10 and 8.9% in 2H10.
  • The cost efficiency ratio was 57.5%, up from 50.9% in 1H10 but down from 59.9% in 2H10.
  • The advances-to-deposits ratio was 78.7%, up from 77.9% in 1H10 and 78.1% in 2H10.
  • We declared two interim dividends in respect of 2011 totalling US$0.18 per ordinary share, up 12.5% year on year.
  • The core tier 1 capital ratio was 10.8% at 30 June 2011, compared with 10.5% at 31 December 2010.

Progress on strategy

HSBC's global network covers the majority of world trade and capital flows, and provides access to faster-growing economies as well as the mature economies where wealth is stored. In May, we articulated our strategy to become the world's leading international bank by building on this distinctive position to leverage global economic and demographic trends. We also outlined our plans to deploy capital more efficiently, to improve cost efficiency and to target growth in selected markets. We are making progress in all three areas:

  • First, as a result of our portfolio review and application of a five-filter framework, we announced a number of closures and disposals. These included the closure of our retail businesses in Russia and Poland and the disposal of three insurance businesses. More materially in the US, we have made progress on the strategic review of our credit card business and announced the disposal of 195 non-strategic branches, principally in upstate New York.
  • Second, we are targeting US$2.5-3.5bn of sustainable cost savings by 2013. Since the start of 2011, we have begun operational restructurings in Latin America, the US, the UK, France and the Middle East which will reduce headcount by around 5,000. We launched a programme to reduce the costs of our head office and global support functions. We also initiated more efficient business operating models for Commercial Banking and Retail Banking and Wealth Management.
  • Third, we continued to position the business for growth. We increased revenues in target markets and we made progress in wealth management, where we saw higher investment income, especially in Asia, and funds under management in Global Asset Management reached a record high at the end of the period.

Revenues

  • At US$35.7bn, total Group revenues were stable compared with 1H10 and up 9% compared with 2H10.
  • We recorded double-digit revenue growth in Hong Kong, Rest of Asia-Pacific and Latin America compared with 1H10.
  • As we had forecast, revenue declined in the US as we continued to manage down balances in the run-off portfolios, and in Balance Sheet Management as positions matured. Along with many peers, we saw weaker Credit and Rates revenues in Europe in Global Banking and Markets.

Loan impairment charges

  • Loan impairment charges were US$5.3bn compared with US$7.5bn in 1H10 and US$6.5bn in 2H10.
  • Most of the improvement was in the US. The Consumer Finance run-off and Cards portfolios recorded lower balances as well as improved delinquency rates, although we saw a slowing of delinquency trend improvements in the second quarter.
  • In Global Banking and Markets, loan impairment charges and other credit risk provisions were lower.

Cost efficiency

  • The cost efficiency ratio rose from 50.9% to 57.5% compared with 1H10. Reflecting strategic investment in the business, key drivers behind the increase were higher staff numbers, wage inflation, and other costs related to business growth. We also reported a number of notable cost items during the period.
  • The cost efficiency ratio fell compared with 59.9% in 2H10 as we controlled discretionary spend and took action to make sustainable savings.
  • Significantly, on a quarterly basis, the cost efficiency ratio was 54.4% in 2Q11, lower than in each of the previous three quarters.

Balance sheet

  • Compared with year-end 2010, customer account balances increased by 7% or US$91.3bn to US$1.3 trillion, with most of the increase in Europe and Asia.
  • Compared with year-end 2010, total customer loan balances increased by 8% or US$79.5bn to US$1.0 trillion, rising in all regions except North America, where we managed down balances in the Consumer Finance portfolios.
  • The core tier 1 ratio increased during the period from 10.5% at the end of 2010 to 10.8%, driven primarily by profit generation.

Economic outlook

We remain positive on the outlook for emerging markets. We expect a soft landing in China and we believe Hong Kong is well-equipped to mitigate overheating pressures. We expect continued growth in the rest of Asia-Pacific and Latin America and take comfort from the focus of the authorities on managing inflationary pressures. In the Middle East, the outlook for the Gulf Cooperation Council economies is also positive.

In the developed world, growth in the US and Europe is likely to remain sluggish as long as the impact of high debt levels and government budget cuts weigh on economic activity. In the UK, we remain concerned that regulatory actions being contemplated and the ongoing regulatory uncertainty will constrain the supply of credit to the real economy and contribute to sub-par economic growth.

In closing, I would add that I am pleased with these results, which mark a first step in the right direction on what will be a long journey.

Full media release of the HSBC Holdings plc 2011 Interim Results highlights

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