3rd Apr 2013 16:22
Economic loss
Our internal performance measures include economic profit/(loss), a calculation which compares the return on financial capital invested in HSBC by our shareholders with the cost of that capital. We price our cost of capital internally and the difference between that cost and the post-tax profit attributable to ordinary shareholders represents the amount of economic profit/(loss) generated.
Our long-term cost of capital is reviewed annually and is 11% for 2012; this remains unchanged from 2011. However, it has been revised to 10% for 2013, primarily due to a reduction in the risk-free rate, reflecting the continued intervention of central banks, quantitative easing and the flight to quality, and greater banking sector stability through higher levels of capital and liquidity.
The following commentary is on a reported basis.
The return on invested capital fell by 2.2 percentage points to 8.0%, which was 3.0 percentage points lower than our benchmark cost of capital. Our economic loss was US$5.1bn, a deterioration of US$3.7bn compared with the loss in 2011. This reflected higher average invested capital and a decrease in profits attributable to ordinary shareholders, primarily due to adverse fair value movements on own debt attributable to credit spreads of US$5.2bn, compared with favourable movements of US$3.9bn in 2011, an increase in notable cost items and a higher tax charge in 2012.
2012 | 2011 | ||||||
US$m | %63 |
| US$m | %63 | |||
Average total shareholders' equity ............................................................ | 166,820 | 156,129 | |||||
Adjusted by: | |||||||
Goodwill previously amortised or written off ......................................... | 8,399 | 8,123 | |||||
Property revaluation reserves ............................................................... | (896) | (914) | |||||
Reserves representing unrealised losses on effective cash flow hedges .... | 55 | 287 | |||||
Reserves representing unrealised losses on available-for-sale securities ... | 1,185 | 3,379 | |||||
Preference shares and other equity instruments ..................................... | (7,256) | (7,256) | |||||
Average invested capital64 ......................................................................... | 168,307 | 159,748 | |||||
Return on invested capital65 ...................................................................... | 13,454 | 8.0 | 16,224 | 10.2 | |||
Benchmark cost of capital ........................................................................ | (18,514) | (11.0) | (17,572) | (11.0) | |||
Economic loss and spread ......................................................................... | (5,060) | (3.0) | (1,348) | (0.8) | |||
For footnotes, see page 120.
Reconciliation of RoRWA measures
Performance Management
We target a return on average ordinary shareholders' equity of 12%-15%. For internal management purposes we monitor global businesses and geographical regions by pre-tax return on RWAs, a metric which combines return on equity and regulatory capital efficiency objectives.
In addition to measuring return on average risk-weighted assets ('RoRWA') we measure our performance internally using the non-GAAP measure of underlying RoRWA, which is underlying profit before tax as a percentage of average risk-weighted assets adjusted for the effects of foreign currency translation differences and business disposals. Underlying RoRWA adjusts performance for certain items which distort year-on-year performance as explained on page 26.
We also present the non-GAAP measure of underlying RoRWA adjusted for the effect of operations which are not regarded as contributing to the longer-term performance of the Group. These include the run-off portfolios and the Card and Retail Services business which was sold in 2012.
The Card and Retail Services average RWAs in the table below represent the average of the associated operational risk RWAs that were not immediately released on disposal and have not already been adjusted as part of the underlying RoRWA calculation. The pre-tax loss for Card and Retail Services in the table below primarily relates to litigation expenses incurred after the sale of the business that have not been adjusted as part of the underlying RoRWA calculation.
Reconciliation of underlying RoRWA (excluding run-off portfolios and Card and Retail Services)
2012 | 2011 | ||||||||||
Pre-tax return | Average RWAs66 | RoRWA 66,67 | Pre-tax return | Average RWAs66 | RoRWA 66,67 | ||||||
US$m | US$bn | % | US$m | US$bn | % | ||||||
Reported ................................................... | 20,649 | 1,172 | 1.8 | 21,872 | 1,154 | 1.9 | |||||
Underlying67 ............................................. | 16,385 | 1,129 | 1.5 | 13,861 | 1,077 | 1.3 | |||||
Run-off portfolios .................................... | (1,630) | 167 | (1.0) | (4,901) | 169 | (2.9) | |||||
Legacy credit in GB&M ........................ | (280) | 45 | (0.6) | (429) | 33 | (1.3) | |||||
US CML and other68 ............................. | (1,350) | 122 | (1.1) | (4,472) | 136 | (3.3) | |||||
Card and Retail Services ............................ | (150) | 5 | (3.0) | - | - | - | |||||
Underlying (excluding run-off portfoliosand Card and Retail Services) ................. | 18,165 | 957 | 1.9 | 18,762 | 908 | 2.1 | |||||
For footnotes, see page 120.
Reconciliation of reported and underlying average risk-weighted assets
Year ended 31 December | |||||
2012 | 2011 | Change | |||
US$bn | US$bn | % | |||
Average reported RWAs66 ............................................................................ | 1,172 | 1,154 | 2 | ||
Currency translation adjustment24 ................................................................ | - | (7) | |||
Acquisitions, disposals and dilutions .............................................................. | (43) | (70) | |||
Average underlying RWAs66 ......................................................................... | 1,129 | 1,077 | 5 | ||
Disposals, held for sale and run-off portfolios
In implementing our strategy, we have sold or agreed to sell a number of businesses and investments across the Group. The sale of these businesses and investments will have a significant effect on both our revenue and profitability in the future. In addition, we have substantial portfolios which are being run down. We expect the losses on these portfolios to continue to affect the Group in the future.
The table below presents the contribution of these businesses and investments to the historical results of the Group. We do not expect the historical results to be indicative of future results because of disposals or run-offs. Fixed allocated costs, included in total operating costs, will not necessarily be removed upon disposal and have been separately identified.
Summary income statements for disposals, held for sale and run-off portfolios69,70
2012 | |||||||||||
Held | Run-off portfolios | ||||||||||
Card and Retail Services US$m | Ping An US$m | Other disposals US$m | for sale excluding US CML US$m | US CML and other71 US$m | Legacy credit in GB&M US$m | ||||||
Net interest income/(expense) .................... | 1,267 | - | 352 | 303 | 2,561 | (28) | |||||
Net fee income/(expense) ........................... | 395 | - | 13 | (35) | 33 | (17) | |||||
Net trading income/(expense) ..................... | - | - | 67 | 22 | (226) | 99 | |||||
Net income/(expense) from financial instruments designated at fair value ......... | - | - | 3 | 5 | (785) | 10 | |||||
Gains less losses from financial investments | - | - | 8 | 27 | - | (72) | |||||
Dividend income ......................................... | - | - | - | - | 3 | - | |||||
Net earned insurance premiums ................... | - | - | 430 | 315 | - | - | |||||
Other operating income/(expense) .............. | 7 | - | 10 | 5 | 37 | (3) | |||||
Total operating income/(expense) ......... | 1,669 | - | 883 | 642 | 1,623 | (11) | |||||
Net insurance claims incurred and movement in liabilities to policyholders ................... | - | - | (218) | (225) | - | - | |||||
Net operating income/(expense)21.......... | 1,669 | - | 665 | 417 | 1,623 | (11) | |||||
Loan impairment charges and othercredit risk provisions .............................. | (322) | - | (16) | (77) | (2,569) | (168) | |||||
Net operating income/(expense) ............ | 1,347 | - | 649 | 340 | (946) | (179) | |||||
Total operating expenses ............................ | (729) | - | (467) | (344) | (1,106) | (101) | |||||
Operating profit/(loss) ............................ | 618 | - | 182 | (4) | (2,052) | (280) | |||||
Share of profit in associates and joint ventures .................................................. | - | 763 | 12 | 9 | 2 | - | |||||
Profit/(loss) before tax ............................ | 618 | 763 | 194 | 5 | (2,050) | (280) | |||||
By global business | |||||||||||
Retail Banking and Wealth Management ..... | 618 | 622 | 99 | (29) | (1,274) | - | |||||
Commercial Banking ................................... | - | 82 | 40 | 24 | 9 | - | |||||
Global Banking and Markets ........................ | - | 59 | 65 | 28 | - | (280) | |||||
Global Private Banking ............................... | - | - | (9) | - | - | - | |||||
Other .......................................................... | - | - | (1) | (18) | (785) | - | |||||
| |||||||||||
Profit/(loss) before tax ................................ | 618 | 763 | 194 | 5 | (2,050) | (280) | |||||
By geographical region | |||||||||||
Europe ........................................................ | - | - | (1) | - | - | (281) | |||||
Hong Kong ................................................. | - | - | 45 | - | - | 1 | |||||
Rest of Asia-Pacific .................................... | - | 763 | (31) | 22 | - | (2) | |||||
Middle East and North Africa ...................... | - | - | 46 | - | - | - | |||||
North America ............................................ | 618 | - | 25 | (25) | (2,050) | 2 | |||||
Latin America ............................................. | - | - | 110 | 8 | - | - | |||||
| |||||||||||
Profit/(loss) before tax ................................ | 618 | 763 | 194 | 5 | (2,050) | (280) | |||||
Other information | |||||||||||
Gain on sale ................................................ | 3,148 | 3,012 | 1,579 | ||||||||
Fixed allocated costs included in total operating expenses .................................. | 188 | - | 77 | 52 | 230 | - | |||||
US$bn | US$bn | US$bn | US$bn | US$bn | US$bn | ||||||
Reduction in RWAs on disposal72 ................ | 39.3 | 24.9 | 7.5 | 8.8 | |||||||
RWAs72 ...................................................... |
|
|
| 9.3 | 107.1 | 38.6 | |||||
% | % | % | % | % | % | ||||||
Share of HSBC's profit before tax ............... | 3.0 | 3.7 | 0.9 | - | (10.0) | (1.4) | |||||
Cost efficiency ratio ................................... | 43.7 | - | 70.2 | 82.5 | 68.1 | - | |||||
For footnotes, see page 120.
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HSBC Holdings