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05 Nov 2012

HSBC Holdings plc Interim Management Statement for 3Q 2012

  • Reported profit before tax (‘PBT’) of US$3.5bn in the third quarter (‘3Q12’) was down US$3.7bn on 3Q11, with US$5.8bn relating to adverse movements on the fair value of our own debt; underlying PBT1 was US$5.0bn for 3Q12, up 125% on 3Q11.
  • Reported PBT in the nine months ended 30 September 2012 (‘the nine months’) of US$16.2bn was down US$2.4bn on the same period in 2011, of which US$7.9bn related to adverse movements on the fair value of our own debt. This was partially offset by higher gains on business disposals of US$4.4bn. Underlying PBT for the nine months was US$14.9bn, up 21% on 2011.
  • The main factors driving the improvement in underlying PBT for 3Q12 and the nine months were increased revenues2 in Global Banking and Markets (‘GB&M’) and Commercial Banking (‘CMB’), and lower loan impairment charges, notably in North America.
  • Reported operating expenses for 3Q12 were 4% higher than in 3Q11. Underlying operating expenses for 3Q12 were 16% higher than in 3Q11, primarily reflecting the impact of notable items, increased investment in regulatory and compliance infrastructure in the US and higher litigation costs. Excluding these factors, operating costs were marginally higher than in 3Q11, reflecting additional expenses primarily associated with the execution of our strategy.
  • The reported cost efficiency ratio for 3Q12 deteriorated to 70.6% from 49.5% in 3Q11, but improved from 65.8% to 63.7% on an underlying basis as a result of the underlying revenue growth. The ratios were affected by US$0.3bn and US$1.2bn of notable cost items and by US$1.3bn adverse and US$0.1bn favourable notable revenue items in 3Q11 and 3Q12, respectively.
  • We continued to make good progress in all areas of strategy, including generating sustainable cost savings of US$0.5bn in the quarter, which took our total annualised savings to US$3.1bn, and we now expect to exceed our target range of US$2.5bn to US$3.5bn by the end of 2013. We have increased investment in our target markets and in enhancing our processes and technology capabilities. We announced eight transactions to dispose of or close businesses since 30 June 2012, making a total of 41 since the start of 2011.
  • The third quarter results include an additional provision of US$800m in relation to the ongoing US anti-money laundering, Bank Secrecy Act and Office of Foreign Assets Control investigations. We are actively engaged in discussions with US authorities to try to reach a resolution, but there is not yet an agreement. The US authorities have substantial discretion in deciding exactly how to resolve this matter. Indeed, the final amount of the financial penalties could be higher, possibly significantly higher, than the amount accrued. We have also made UK customer redress provisions of US$353m, mainly in respect of Payment Protection Insurance.
  • The core tier 1 capital ratio was 11.7% at 30 September 2012.

HSBC Group Chief Executive Stuart Gulliver, commented:

"Our strategy and business model have enabled us to have a strong quarter. Although reported PBT for 3Q12 was down US$3.7bn compared with 3Q11, underlying profit was up US$2.8bn to US$5.0bn compared with 3Q11 and it is on this basis that we measure our performance. The increase in underlying profit was driven by revenue growth in Global Banking and Markets, mainly in Rates and Credit as conditions in the eurozone stabilised relative to 3Q11, and in Commercial Banking, where net interest income rose, reflecting higher average lending and deposit balances. We continued to grow in a majority of our priority markets. In addition, loan impairment charges reduced significantly compared with 3Q11, mainly in North America.

"The third quarter results include an additional provision of US$800m in relation to the ongoing US anti-money laundering, Bank Secrecy Act and Office of Foreign Assets Control investigations. We are actively engaged in discussions with US authorities to try to reach a resolution, but there is not yet an agreement. The US authorities have substantial discretion in deciding exactly how to resolve this matter. Indeed, the final amount of the financial penalties could be higher, possibly significantly higher, than the amount accrued. We have also made UK customer redress provisions of US$353m, mainly in respect of Payment Protection Insurance.

"We continue to execute our strategy to ensure that we are aligned with the key global trends of growth in international trade and capital flows and wealth creation, particularly in faster-growing markets. We have made significant progress in delivering our strategic priorities to simplify, restructure and grow HSBC. We have announced 24 disposals and closures this year, including eight since 30 June 2012, making a total of 41 since the beginning of 2011, exiting non-strategic markets and selling businesses and non-core investments. We recorded a further US$0.5bn of sustainable cost savings in 3Q12, which takes the total annualised savings to US$3.1bn. Compared with 3Q11, underlying revenues rose in a majority of our priority growth markets and we maintained our focus on the closer integration of our Global Businesses. This was illustrated by the 8% increase in revenues associated with the collaboration between Global Banking and Markets and Commercial Banking for the nine months. By delivering this strategy we are ensuring that we maintain our distinctive market position.

"While subdued economic conditions persist in Europe and other Western economies, we remain confident in our outlook for growth in the emerging world and, particularly, in mainland China, where we continue to expect a soft landing."

1 The difference between reported and underlying results is explained and reconciled on page 5 of the Interim Management Statement 3Q 2012.
2 Revenue is defined as net operating income before loan impairment charges and other credit risk provisions.

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