3Q17 Earnings Release

Review by Stuart Gulliver, Group Chief Executive

•

the non-recurrence of a $1.7bn loss recognised in 3Q16 on our sale of operations in Brazil to Banco Bradesco S.A., which we completed on 1 July 2016; and

•

in 3Q16, $1.4bn of adverse fair value movements on our own debt designated at fair value, reflecting changes in our own credit spread, which are now reported in the statement of other comprehensive income, following our partial early adoption of IFRS 9 'Financial Instruments' on 1 January 2017.

•

costs to achieve of $0.7bn, compared with $1.0bn in 3Q16; and

•

a provision of $0.5bn in 3Q16 relating to UK customer redress programmes, compared with $0.1bn in 3Q17.

•

In RBWM, revenue increased by $0.3bn. This was primarily in Retail Banking in current accounts, savings and deposits, particularly in Hong Kong, the US and Mexico, as we benefited from increased balances and wider spreads.

•

In CMB, revenue increased by $0.2bn, driven by Global Liquidity and Cash Management ('GLCM'), notably in Asia, as we benefited from wider deposit spreads and grew balances. In the UK, deposit balances grew, but this was more than offset by spread compression, following the base rate reduction in 2016. Revenue also increased to a lesser extent in Credit and Lending ('C&L'), as balance growth in the UK more than offset narrower spreads in Asia.

•

In GB&M, revenue increased by $0.1bn. There was continued momentum in revenue from transaction banking products, notably in GLCM, where we grew balances and benefited from wider spreads, particularly in Asia. In Global Markets, revenue increased in Equities, partly offset by lower revenue in Foreign Exchange and Credit, as a result of lower volatility and narrower spreads. In Global Banking, revenue fell primarily reflecting narrower spreads, notably in Asia.

•

In Corporate Centre, revenue decreased by $0.2bn, notably reflecting continuing disposals in the US run-off portfolio, reducing revenue by $0.2bn, and net unfavourable movements in credit and funding valuation adjustments in legacy credit (down $0.1bn).

•

in 9M16, a $0.8bn write-off of goodwill in our GPB business in Europe;

•

a net release of $0.4bn in 9M17 related to settlements and provisions in connection with legal matters compared with charges of $0.7bn in 9M16; and

•

operating expenses of $1.1bn incurred by our Brazil business prior to its sale.

•

costs to achieve of $2.3bn, compared with $2.0bn in 9M16.

•

In RBWM, revenue increased by $1.4bn or 10%, with growth in Wealth Management and Retail Banking. The increase in Wealth Management was mainly in insurance manufacturing (up $0.5bn) as favourable market impacts compared with adverse market impacts in 9M16, notably in Asia. In addition, investment distribution income increased. Retail Banking revenue also increased, notably from current accounts, savings and deposits, reflecting balance growth and wider spreads in Hong Kong, Mexico and the US. This was partly offset by lower personal lending revenue compared with 9M16.

•

In GB&M revenue increased by $0.7bn or 6%. In Global Markets revenue was higher, notably in Equities reflecting Prime Financing growing its market share. Revenue also increased in GLCM, Securities Services ('HSS') and Global Banking. These increases were partly offset by lower revenue in Foreign Exchange and a net adverse movement on credit and funding valuations adjustments ($136m).

•

In CMB, revenue increased by $0.3bn or 3%, driven by growth in GLCM. This reflected wider spreads and increased deposit balances in Asia. In the UK, narrower spreads more than offset balance growth.

•

In Corporate Centre, revenue decreased by $1.1bn, with reductions in the US run-off portfolio (down $0.5bn), as a result of continuing disposals, and Central Treasury (down $0.6bn). In Central Treasury, a fall in revenue reflected lower favourable fair value movements ($0.2bn in 9M17, compared with $0.5bn in 9M16) relating to the hedging of our long-term debt, higher interest expense on our debt and a fall in Balance Sheet Management ('BSM') revenue.

•

In GPB, revenue was $0.1bn or 4% lower, primarily due to the impact of client repositioning actions. However, in the markets that we have targeted for growth, revenue increased, notably in Hong Kong due to higher investment revenue reflecting increased client activity, and growth in deposit revenue as spreads widened.

•

CMB ($0.5bn lower), notably due to lower LICs in North America and the UK, primarily as 9M16 included charges against exposures in the oil and gas sector, and in Spain as 9M16 included charges related to an exposure in the construction sector. In addition, 9M17 included a release of allowances related to the construction sector in the UK. These reductions were partly offset by higher LICs in Hong Kong across various sectors.

•

GB&M ($0.4bn lower) due to a reduction in individually assessed charges, particularly as 9M16 included LICs on exposures in the oil and gas, and mining sectors in the US.

•

growth in current accounts, savings and deposits (up $0.8bn) due to wider spreads and higher balances in Hong Kong, Mexico and the US.

•

lower personal lending revenue (down $0.2bn) reflecting mortgage spread compression, notably in Hong Kong, the UK and mainland China, which was partly offset by balance growth.

•

growth in insurance manufacturing revenue (up $0.5bn) including favourable market impacts of $257m due to

•

higher investment distribution revenue (up $0.3bn), primarily driven by higher sales of mutual funds in Hong Kong, reflecting increased investor confidence.

•

In GLCM, revenue increased by $362m or 12%, notably in Asia, reflecting wider spreads and balance growth, partly achieved through customer deposit retention initiatives. In the UK, average balances increased by 14%, but this was more than offset by narrower spreads following the base rate reduction in 2016.

•

In GTRF, revenue was $22m or 2% lower. While revenue has stabilised in 2017 following a period of decline, mainly from lending growth in Asia and Europe, this was more than offset by a reduction in Middle East and North Africa ('MENA') reflecting the effect of managed customer exits in the UAE.

•

In C&L revenue was broadly unchanged. In Asia revenue was lower, as balance growth was more than offset by spread compression, although in the UK revenue increased as lending growth more than offset narrower spreads.

•

Revenue increased from our transaction banking products, notably GLCM (up $0.2bn) and HSS (up $0.1bn). In GLCM, balances grew as we won client mandates and deposit spreads widened, notably in Asia and the US.

•

Global Markets revenue increased by $0.3bn, notably in Equities (up $0.2bn), as we continued to capture market share with Prime Financing products. In Fixed Income, Currencies and Commodities ('FICC'), revenue increased by $0.1bn as we captured increased client flows and grew market share in Europe in Rates and Credit.

•

Global Banking revenue increased by $0.1bn or 4%, reflecting growth in lending balances and continued momentum in investment banking products, which offset the effects of tightening spreads on lending in Asia. The increase in revenue also included recoveries on restructured facilities in 9M17, compared with write-downs in 9M16.

•

lower favourable fair value movements relating to the economic hedging of interest and exchange rate risk on our long-term debt with long-term derivatives of $0.2bn compared with $0.5bn in 9M16;

•

higher interest on our debt (up $0.3bn), mainly reflecting the higher costs of debt issued to meet regulatory requirements; and

•

a reduction in revenue in BSM reflecting lower reinvestment yields.

•

favourable currency translation differences of $13.3bn; and

•

a $3.8bn increase in corporate overdraft balances in the UK relating to a small number of customers that settled their overdraft and deposit balances on a net basis.

•

a favourable currency translation effect of $16.4bn; and

•

a $3.8bn increase in corporate current account balances, in line with the increase in corporate overdrafts.

•

The continuing run-off of our higher-yielding US CML portfolio;

•

Pressure on asset yields, notably in Europe, reflecting negative interest rates in continental Europe, market competition and decreased yields on mortgages in the UK, due to a change in portfolio mix towards lower-yielding fixed-rate products, partly offset by the benefits of lending volume growth in Asia and central bank rate rises in Mexico; and

•

Higher Group debt costs, affected by the longer maturities and the structural subordination of our new issuance. The cost of debt was also affected by the US dollar rate rises.

•

The benefits of US dollar rate rises, notably from increased yields on our surplus liquidity; and

•

A lower cost of customer accounts in Europe, reflecting base rate reductions in the UK and negative interest rates in continental Europe, and in Asia reflecting a change in mix towards lower-cost accounts.

•

Income statement comparisons, unless stated otherwise, are between the quarter ended 30 September 2017 and the quarter ended 30 September 2016. Balance sheet comparisons, unless otherwise stated, are between balances at 30 September 2017 and the corresponding balances at 30 June 2017.

•

The financial information on which this Earnings Release is based, and the data set out in the appendix to this statement, are unaudited and have been prepared in accordance with HSBC's significant accounting policies as described on pages 194 to 203 of our Annual Report and Accounts 2016.

•

The Board has adopted a policy of paying quarterly interim dividends on ordinary shares. Under this policy, it is intended to have a pattern of three equal interim dividends with a variable fourth interim dividend. Dividends are declared in US dollars and, at the election of the shareholder, paid in cash in one of, or in a combination of, US dollars, sterling and Hong Kong dollars or, subject to the Board's determination that a scrip dividend is to be offered in respect of that dividend, may be satisfied in whole or in part by the issue of new shares in lieu of a cash dividend.

Footnotes to financial performance

commentary

1

Net operating income before loan impairment charges and other credit risk provisions, also referred to as revenue.

2

'Other personal lending' includes personal non-residential closed-end loans and personal overdrafts.

3

'Investment distribution' includes Investments, which comprises mutual funds (HSBC manufactured and third party), structured products and securities trading, and Wealth Insurance distribution, consisting of HSBC manufactured and third-party life, pension and investment insurance products.

4

'Other' mainly includes the distribution and manufacturing (where applicable) of retail and credit protection insurance.

5

Adjusted return on average risk-weighted assets ('RoRWA') is used to measure the performance of RBWM, CMB, GB&M and GPB. Adjusted RoRWA is calculated using annualised profit before tax and reported average risk-weighted assets at constant currency adjusted for the effects of significant items.

6

'Markets products, Insurance and Investments and Other' includes revenue from Foreign Exchange, insurance manufacturing and distribution, interest rate management and Global Banking products.

7

In 3Q17, credit and funding valuation adjustments included an adverse fair value movement of $126m on the widening of credit spreads on structured liabilities (3Q16: adverse fair value movement of $160m; 2Q17: adverse fair value movement of $216m).

8

'Other' in GB&M includes net interest earned on free capital held in the global business not assigned to products, allocated funding costs 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 that is not reflected within operating income, such as 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 IFRS basis, the offset to these tax credits is included within 'Other'.

9

Central Treasury includes revenue relating to BSM of $584m (2Q17: $643m; 3Q16: $744m), interest expense of $331m (2Q17: $296m; 3Q16: $293m) and favourable valuation differences on issued long-term debt and associated swaps of $80m (2Q17: favourable movements of $125m; 3Q16: favourable movements of $108m). Revenue relating to BSM includes other internal allocations, including notional tax credits to reflect the economic benefit generated by certain activities that 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 IFRS basis, the offset to these tax credits is included in other Central Treasury.

10

'Other' in Corporate Centre includes internal allocations relating to legacy credit.

•

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

•

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 conduct of business of financial institutions in serving their retail customers, corporate clients and counterparties; the standards of market conduct; the costs, effects and outcomes of product regulatory reviews, actions or litigation, including any additional compliance requirements; 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; 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 we use; our success in addressing operational, legal and regulatory, and litigation challenges, notably compliance with the Deferred Prosecution Agreement with US authorities; and other risks and uncertainties we identify in the 'top and emerging risks' on pages 64 to 67 of the Annual Report and Accounts 2016.

Investor Relations

Media Relations

UK - Richard O'Connor

UK - Heidi Ashley

Tel: +44 (0) 20 7991 6590

Tel: +44 (0) 20 7992 2045

 

 

Email: [email protected]

 

 

 

Hong Kong - Hugh Pye

Hong Kong - Gareth Hewett

Tel: +852 2822 4908

Tel: +852 2822 4929

 

 

 

US - Rob Sherman

 

Tel: +1 (1) 212 525 6901

 

 

Summary consolidated income statement

 

Nine months ended

Quarter ended

 

30 Sep

 

30 Sep

 

30 Sep

 

30 Jun

 

30 Sep

 

 

2017

 

2016

 

2017

 

2017

 

2016

 

 

$m

 

$m

 

$m

 

$m

 

$m

 

Net interest income

20,904

 

22,945

 

7,127

 

6,990

 

7,185

 

Net fee income

9,746

 

9,848

 

3,255

 

3,267

 

3,262

 

Net trading income

5,758

 

7,555

 

1,830

 

1,682

 

2,231

 

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

3,048

 

(252

)

1,041

 

1,078

 

(813

)

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

752

 

(1,402

)

272

 

540

 

(1,672

)

- net income from other financial instruments designated at fair value

2,296

 

1,150

 

769

 

538

 

859

 

Gains less losses from financial investments

1,079

 

1,271

 

388

 

353

 

306

 

Dividend income

89

 

78

 

40

 

36

 

14

 

Net insurance premium income

7,462

 

7,891

 

2,651

 

2,018

 

2,535

 

Other operating income/(expense)

416

 

(847

)

(110

)

324

 

(1,491

)

Total operating income

48,502

 

48,489

 

16,222

 

15,748

 

13,229

 

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

(9,358

)

(9,507

)

(3,244

)

(2,575

)

(3,717

)

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

39,144

 

38,982

 

12,978

 

13,173

 

9,512

 

Loan impairment charges and other credit risk provisions

(1,111

)

(2,932

)

(448

)

(427

)

(566

)

Net operating income

38,033

 

36,050

 

12,530

 

12,746

 

8,946

 

Total operating expenses

(24,989

)

(27,349

)

(8,546

)

(8,115

)

(8,721

)

Operating profit

13,044

 

8,701

 

3,984

 

4,631

 

225

 

Share of profit in associates and joint ventures

1,819

 

1,856

 

636

 

651

 

618

 

Profit before tax

14,863

 

10,557

 

4,620

 

5,282

 

843

 

Tax expense

(3,310

)

(3,094

)

(1,115

)

(994

)

(803

)

Profit after tax

11,553

 

7,463

 

3,505

 

4,288

 

40

 

Attributable to:

 

 

 

 

 

 

- ordinary shareholders of the parent company

9,957

 

5,739

 

2,958

 

3,869

 

(617

)

- preference shareholders of the parent company

67

 

67

 

22

 

23

 

22

 

- other equity holders

722

 

902

 

256

 

153

 

391

 

- non-controlling interests

807

 

755

 

269

 

243

 

244

 

Profit after tax

11,553

 

7,463

 

3,505

 

4,288

 

40

 

 

$

 

$

 

$

 

$

 

$

 

Basic earnings per share

0.50

 

0.29

 

0.15

 

0.19

 

(0.03

)

Diluted earnings per share

0.50

 

0.29

 

0.15

 

0.19

 

(0.03

)

Dividend per ordinary share (in respect of the period)

0.30

 

0.30

 

0.10

 

0.10

 

0.10

 

 

%

 

%

 

%

 

%

 

%

 

Return on average ordinary shareholders' equity (annualised)

8.2

 

4.4

 

7.1

 

9.5

 

(1.4

)

Return on average risk-weighted assets1

2.3

 

1.3

 

2.1

 

2.4

 

0.3

 

Cost efficiency ratio

63.8

 

70.2

 

65.8

 

61.6

 

91.7

 

Summary consolidated balance sheet

 

At

 

30 Sep

 

30 Jun

 

31 Dec

 

 

2017

 

2017

 

2016

 

 

$m

 

$m

 

$m

 

Assets

 

 

 

Cash and balances at central banks

162,555

 

163,353

 

128,009

 

Trading assets

334,283

 

320,037

 

235,125

 

Financial assets designated at fair value

28,952

 

27,937

 

24,756

 

Derivatives

221,936

 

229,719

 

290,872

 

Loans and advances to banks

89,710

 

86,633

 

88,126

 

Loans and advances to customers

945,168

 

919,838

 

861,504

 

Reverse repurchase agreements - non-trading

184,920

 

196,834

 

160,974

 

Financial investments

383,898

 

385,378

 

436,797

 

Assets held for sale

669

 

2,301

 

4,389

 

Other assets

174,123

 

160,413

 

144,434

 

Total assets

2,526,214

 

2,492,443

 

2,374,986

 

Liabilities and equity

 

 

 

Liabilities

 

 

 

Deposits by banks

69,653

 

64,230

 

59,939

 

Customer accounts

1,337,121

 

1,311,958

 

1,272,386

 

Repurchase agreements - non-trading

122,196

 

145,306

 

88,958

 

Trading liabilities

227,961

 

202,401

 

153,691

 

Financial liabilities designated at fair value

95,205

 

93,163

 

86,832

 

Derivatives

213,269

 

223,413

 

279,819

 

Debt securities in issue