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08 May 2012

HSBC Holdings plc - Interim Management Statement

HSBC Holdings plc will be conducting a trading update conference call with analysts and investors today to coincide with the release of its Interim Management Statement. The trading update call will take place at 11.00am BST.

Highlights

  • Reported profit before tax ('PBT'), which included adverse credit spread movements of US$2.6bn on the fair value of our own debt, was US$4.3bn. We continue to reap the benefit of investment in faster-growing markets, with PBT increasing by 21% in Hong Kong, 24% in Rest of Asia-Pacific and 11% in Latin America over 1Q11.
  • Underlying PBT for 1Q12 was up 25% compared with 1Q11 to US$6.8bn. The main factors driving this improvement were increased revenues in Global Banking and Markets, Commercial Banking and Retail Banking and Wealth Management, the latter from faster-growing regions.
  • Underlying cost efficiency improved from 58.7% to 55.5%, driven by increased revenues.
  • We have made good progress on all areas of strategy, including sustainable cost savings, and have announced 11 transactions to dispose of or close businesses since the start of 2012. FTEs have fallen by 14,000 since Q1 2011 and 3,500 since the end of last year.
  • Core tier 1 capital ratio was 10.4% at 31 March 2012.

Group Chief Executive, Stuart Gulliver, commented:

"We have had a good start to the year. Reported PBT for the quarter was US$0.6bn down compared with 1Q11 but underlying PBT increased by US$1.4bn, driven by increased revenues in Global Banking and Markets and Commercial Banking. We also increased Retail Banking and Wealth Management revenue in faster-growing regions. Our underlying cost efficiency ratio improved from 58.7% in 1Q11 to 55.5% in 1Q12.

Reconciliation of reported and underlying profit before tax

  Quarter ended    
  31 Mar 2012 31 Mar 2011 31 Dec 2011
  US$m US$m US$m
Profit before tax 4,322 4,906 3,243
Effect of changes in own credit spread on the fair value of long-term debt issued 2,644 589 38
Adjustments for foreign currency translation and acquisitions and disposals (191) (82) 72
Underlying profit before tax 6,775 5,413 3,353

1We measure our performance internally on a like-for-like basis by eliminating the effects of exchange differences, acquisitions and disposals of subsidiaries and businesses and the effect of changes in credit spread on the fair value of our long-term debt where the net result of such movements will be zero upon maturity of the debt, all of which distort year-on-year comparisons. We refer to this as our underlying performance.

"Underlying PBT was up by US$3.4bn on the preceding quarter, largely driven by a typically strong first quarter revenue performance by Global Banking and Markets which tends, like its industry peers, to perform well in the quarter. In addition, loan impairment charges reduced significantly compared with 4Q11, mainly in North America and Europe, and operating expenses fell following a reduction in the size and number of notable cost items. 

"We continued to make good progress in implementing our strategy, with 11 transactions to dispose of or close businesses announced since the start of 2012, and we continued to position the business for growth with increased revenues in Hong Kong, Latin America and Rest of Asia-Pacific against the previous quarter. We also continued to reduce costs, recording US$0.3bn of sustainable cost savings in 1Q12, which takes the total annualised savings achieved to US$2.0bn.

"Markets remain volatile with high levels of debt and regulatory and political uncertainty in developed economies, contrasting with an encouraging outlook in faster-growing markets. Our performance in April has been satisfactory, and we remain confident that we will deliver on executing our strategy."


Execution of strategy

It is a year since we set out our strategy of establishing ourselves as the world's leading international bank. We have made significant progress in executing this strategy since last May, including important developments during the first quarter of 2012:

  • We continued to reshape the Group and improve capital deployment, testing the business against our five filters framework, and since the start of 2012, we have announced 11 transactions to dispose of or close businesses. We also entered into an agreement to acquire the onshore retail and commercial banking business of Lloyds Banking Group in the United Arab Emirates ('UAE'), a strong strategic fit in a country where we already have a significant presence, and we reached a preliminary agreement to merge our operations in Oman with those of Oman International Bank ('OIB') where, on completion, we will own 51% of the merged entity. OIB complements our Retail Banking and Wealth Management ('RBWM') business. Combining our two firms provides scale and access to a strong retail funding base from which we can leverage opportunities across Commercial Banking ('CMB') and Global Banking and Markets ('GB&M').
  • We took further steps to improve our cost efficiency and continued our programmes to implement consistent business models and restructure global businesses and global functions. Full time equivalent ('FTE') staff numbers are 14,000 lower than 1Q11 and 3,500 lower than 4Q11. Since May 2011, we have achieved US$1.2bn of sustainable cost savings, including US$0.3bn in 1Q12. This takes our total annualised savings achieved to US$2.0bn.
  • We continued to position the business for growth. Compared with 1Q11, revenue rose strongly in our faster-growing regions, notably in Latin America, Hong Kong and Rest of Asia-Pacific, which were up by 7%, 16% and 18%, respectively. We also captured incremental revenues during the quarter as a result of improved collaboration between CMB and GB&M. Wealth Management revenues were also higher, driven by a strong performance in insurance reflecting favourable market conditions and higher sales volumes, primarily in Hong Kong.
  • We will provide an update on the implementation of our strategy at the Investor Day on 17 May.

Financial performance commentary

1Q12 compared with 1Q11

  • Net operating income before loan impairment charges and other credit provisions ('revenue') was US$16.2bn in 1Q12, US$0.8bn lower than in 1Q11, reflecting the effect of adverse credit spread movements on the fair value of our own debt of US$2.6bn compared with adverse movements of US$0.6bn in 1Q11.
  • Excluding the effect of credit spread movements on the fair value of our own debt, revenues increased by US$1.2bn compared with 1Q11, of which positive movements on non-qualifying hedges accounted for US$0.2bn and gains on the disposal of businesses a further US$0.2bn. Revenue growth was led by GB&M, which reported higher disposal gains on available-for-sale securities in Balance Sheet Management, continued growth in Foreign Exchange earnings and stronger Rates income as market sentiment improved. CMB revenue also increased, driven by net interest income mainly derived from strong balance sheet growth in Asia, Latin America and Europe during the first half of 2011. In RBWM, revenues grew due to increased net interest income in faster-growing regions and higher insurance revenues, mainly in Hong Kong. These factors were partially offset by the effect of the ongoing run-off of the US consumer finance portfolios.
  • Loan impairment charges and other credit risk provisions were broadly in line with 1Q11. In North America, loan impairment charges were US$0.5bn less than in 1Q11 due to a reduction in balances and improvements in delinquency on balances less than 180 days contractually delinquent in the run-off Consumer Mortgage and Lending ('CML') and Card and Retail Services portfolios. In addition, in 1Q11 we increased our loan impairment allowances to reflect changes in economic assumptions about the pace of recovery of US home prices and delays in the timing of expected cash flows, notably as a result of the industry-wide slowdown in foreclosure processing. These factors continued to affect performance in 1Q12, but did so to a lesser extent than in 1Q11. This improvement in North America was offset by higher loan impairment charges in Latin America, mainly in our RBWM and CMB businesses in Brazil which were affected by higher delinquency rates following the rapid rise in lending balances in previous periods. In GB&M, loan impairment charges rose due to higher individually assessed charges for UAE-related exposures.
  • Operating expenses in 1Q12 of US$10.4bn were broadly in line with 1Q11. However, on a constant currency basis, costs were US$0.2bn higher due to a rise in performance-related costs in GB&M reflecting the higher revenues noted above (although the ratio of total compensation to net operating income remained in line with the 2011 full year payout ratio) and wage inflation in faster-growing regions. Operating expenses in both periods included provisions relating to customer redress programmes made in respect of the potential mis-selling of Payment Protection Insurance ('PPI') (US$468m in 1Q12 compared with US$440m in 1Q11).
  • The reported cost efficiency ratio was 63.9% compared with 60.9% in 1Q11 and 67.1% in 4Q11 while, on an underlying basis, it was 55.5%.
  • The number of FTE employees at the end of the quarter was 285,000, 14,000 lower than the peak at 1Q11 and nearly 3,500 below December 2011. This reflected the planned net reduction of staff numbers across the Group. We continue to recruit in our target areas.
  • During 1Q12 we achieved a further US$0.3bn of sustainable savings through our organisational effectiveness programme started in 2011. This was in addition to the US$0.9bn recorded during 2011. This takes our total annualised savings achieved to US$2.0bn.
  • The effective tax rate for the year to date of 32.0% was higher than 1Q11 mainly due to a current tax charge in respect of previous periods. The lower tax charge in 1Q11 included the benefit of US deferred tax of US$0.9bn recognised in respect of foreign tax credits.
  • Profit attributable to ordinary shareholders for the first quarter was US$2.4bn, down by US$1.6bn on 1Q11. This reflected a decrease in reported PBT driven by the adverse credit spread movements on the fair value of our own debt and the higher tax charge noted above. As a result, the annualised return on average ordinary shareholders' equity was 6.4%.

1Q12 compared with 4Q11

  • Revenue of US$16.2bn in 1Q12 was US$0.4bn lower than in 4Q11. Excluding the effect of credit spread movements on the fair value of our own debt, revenue was US$2.2bn higher than in 4Q11. This was driven by an increase in Rates and Credit revenues in GB&M as 4Q11 revenue was significantly affected by the turmoil in the eurozone sovereign debt markets. GB&M revenue also benefited from higher Balance Sheet Management gains on disposals and foreign exchange earnings. CMB revenue increased compared with 4Q11, though the growth slowed as lending balances remained broadly unchanged.
  • Compared with 4Q11, loan impairment charges decreased significantly, mainly in North America due to lower balances in Card and Retail Services and run-off portfolios, higher repayments and improved collections as customers made use of their seasonal tax refunds. An improvement in Europe reflected lower levels of individually assessed impairments in CMB and Global Banking, credit risk impairments on available-for-sale asset-backed securities and provisions on Greek sovereign debt.
  • Operating expenses were US$0.8bn lower than in 4Q11, due to the reduced effect of items such as the UK Government's bank levy of US$570m in 4Q11, US mortgage foreclosure and servicing costs of US$257m in 4Q11 and restructuring costs (including the impairment of certain intangible assets) of US$260m in 1Q12 compared with US$449m in 4Q11. By contrast, customer redress provisions of US$468m in 1Q12 were higher than in 4Q11 (US$262m). Excluding these items, operating expenses were in line with the previous quarter.

Balance sheet commentary

  • Reported loans and advances to customers increased by US$20.9bn during 1Q12. Excluding foreign exchange differences of US$19.0bn and a reduction in reverse repo balances, loans and advances to customers rose by US$4.7bn. In RBWM, mortgage lending continued to grow strongly in the UK, reflecting targeted sales activity, and, to a lesser extent, in Hong Kong, where housing market activity was relatively subdued compared with previous periods. This increase was largely offset by a seasonal reduction in credit card balances, the managed decline in lending balances in the run-off portfolios in North America and the reclassification of loans and advances relating to disposals of non-strategic RBWM banking operations in Rest of Asia-Pacific to 'Assets held for sale'. Lending to CMB customers has increased significantly in the past two years, although the pace of growth slowed in the second half of 2011 due to a reduction in certain trade finance loans in Hong Kong, and remained broadly unchanged during 1Q12. Targeted term and trade-related lending activity led to a rise in customer advances in CMB in Europe, Rest of Asia-Pacific, North America and Middle East and North Africa, while trade-related lending in Hong Kong stabilised. This was offset in part by a decline in lending balances in Latin America, primarily Brazil, as economic activity slowed, competition increased and more conservative credit risk policies were implemented, partly as a result of the rise in impairments. GB&M benefited from higher overdrafts in Europe and trade-related lending, notably in Hong Kong and Rest of Asia-Pacific, although this was partly offset by a small number of significant customer repayments in Europe. Global Private Banking ('GPB') saw a rise in demand for credit from its customers, notably in Hong Kong and Europe.
  • Reported customer account balances rose by US$30.5bn compared with December 2011. Excluding foreign exchange movements of US$22.3bn and an increase in repo balances, customer deposits rose by US$3.5bn in 1Q12. This reflected successful deposit campaigns in Hong Kong in RBWM and in Europe in RBWM and CMB, while GB&M benefited from institutional placements. The rise was partly offset by declines in deposit balances in GPB, due to a small number of large withdrawals, and in North America, where short-term customer placements at the end of 2011 returned to more normal levels in a competitive market.
  • Other significant balance sheet movements in the quarter included an increase in trading assets and liabilities as market activity recovered from the subdued levels seen in 4Q11 during the turmoil in the eurozone. Cash and balances at central banks also increased as we continued to place excess liquidity in Europe with central banks. This was partly offset by a decline in the fair value of interest rate and, to a lesser extent, foreign exchange derivative contracts, primarily in Europe, driven by upward movements in the yield curves in major currencies.
  • In addition to our €5.2bn (US$6.7bn) participation in the first tranche of the European Central Bank's ('ECB') Long Term Refinancing Operation ('LTRO') in December 2011, mainly in France, we participated in a further €0.3bn (US$0.5bn) of funding, primarily in Spain under the second tranche of the LTRO in February.
  • The core tier one ratio strengthened to 10.4% from 10.1% at 31 December 2011 as we generated capital of US$1.8bn. RWAs remained broadly unchanged with a decrease of US$7.2bn in the quarter, excluding the effect of foreign exchange differences. Market risk RWAs decreased by US$14.4bn as we reduced the risk in our trading portfolio and benefited from reduced market volatility. This reduction was offset by an increase of US$7.2bn in RWAs from credit risk, reflecting loan growth, mainly in our mainland China associates.
  • On 30 April, the Board announced an interim dividend of US$0.09 per ordinary share.

Read the full Interim Management Statement announcement (35 page pdf 278k).

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