Q3 2012 Interim Management Statement

HSBC Holdings plc ('HSBC') 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 GMT, and details of how to participate in the call and the live audio webcast can be found below and at Investor Relations on www.hsbc.com.

Conference call details

Date: Monday, 5 November 2012

Time: 6.00am EST

11.00am GMT

7.00pm HKT

Audio webcast: Please follow this link for the webcast: http://www.hsbc.com/1/2/investor-relations/financial-info

Speakers: Stuart Gulliver, Group Chief Executive

Iain Mackay, Group Finance Director

Conference details for investors and analysts: Passcode: HSBC

Replay conference call details (available until 5 December 2012): Passcode: 45344522#

Table of contents

Note to editors

HSBC Holdings plc

HSBC Holdings plc, the parent company of the HSBC Group, is headquartered in London. The Group serves customers worldwide from around 6,900 offices in over 80 countries and territories in Europe, the Asia-Pacific region, North and Latin America, and the Middle East and North Africa. With assets of US$2,721bn at 30 September 2012, HSBC is one of the world's largest banking and financial services organisations.

·; 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 PBT* 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 revenues** 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. (More detail is provided on page 9). 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. 

* The difference between reported and underlying results is explained and reconciled on page 5.

** Revenue is defined as net operating income before loan impairment charges and other credit risk provisions.

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." 

Underlying performance

Internally we measure our performance on a like-for-like basis by eliminating the effects of foreign currency translation and 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). We also eliminate the effects of acquisitions, disposals and changes of ownership levels of subsidiaries, associates and businesses. All of these distort period-on-period comparisons. For disposed businesses, we achieve this by eliminating the gain or loss on disposal in the period incurred and by adjusting the results of operations, where significant. Previously, this adjustment for the results of operations was effected by removing the time-equivalent component of operating profit or loss from the comparative period. From 3Q12 onwards, we will remove the operating profit or loss of the disposed business from all periods presented. This approach better reflects the results of the ongoing business. Had we maintained our previous approach, underlying profit before tax would have been US$802m higher for the nine months ended 30 September 2012. This was mainly due to the elimination of the entire results of the US credit card business.

Reconciliation of reported and underlying revenue

Reconciliation of reported and underlying loan impairment charges and other credit risk provisions ('LIC's)

Reconciliation of reported and underlying operating expenses

Reconciliation of reported and underlying profit before tax

Notable revenue items

Notable cost items

Financial performance commentary

·; Reported profit before tax of US$3.5bn in the third quarter ('3Q12') was down US$3.7bn on 3Q11 and in the nine months PBT of US$16.2bn was down US$2.4bn on the same period in 2011. This reflected adverse credit spread movements on the fair value of our own debt of US$1.7bn in 3Q12 and US$3.9bn in the nine months compared with favourable movements of US$4.1bn and US$4.0bn in the respective periods in 2011. In addition, pre-tax profit for both periods was affected by the absence of operational profits from our business disposals, most notably the sale of our Cards and Retail Services business ('CRS') in May 2012, and higher notable cost items of US$936m in 3Q12 and US$2.9bn in the nine months. The profit before tax for the nine months also included US$4.5bn of gains from the business disposals compared with US$83m in 2011.

·; Underlying revenue was US$2.7bn higher in the quarter and US$4.2bn higher in the nine months compared with the same periods in 2011. Favourable movements on non-qualifying hedges accounted for US$1.4bn and US$1.2bn of the quarterly and year-to-date increases in revenue respectively. Revenue growth in both periods was led by GB&M, mainly from Rates and Credit, as credit spreads on both government and corporate bond portfolios tightened, liquidity increased, and investor sentiment improved. This compared with a particularly difficult trading environment in 2011, notably in the third quarter, as a result of heightened uncertainty in the eurozone. CMB revenue also increased, driven by net interest income which reflected lending growth as well as higher deposit spreads and balances. In Retail Banking and Wealth Management ('RBWM'), revenues grew due to increased net interest income in Latin America and Hong Kong 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 significantly lower in 3Q12 and the first nine months than in the same periods in 2011. The decrease in both periods primarily arose in North America due to the continued decline in lending balances in our consumer finance portfolio and improved delinquency rates, as well as the sale of the CRS business in May 2012. 3Q11 loan impairment charges also reflected higher costs to obtain and realise collateral as a result of the delays in foreclosure activity. Loan impairment charges and other credit risk provisions were lower in Europe, reflecting lower credit risk provisions on available-for-sale asset-backed securities ('ABS's) in both periods. There were also lower loan impairment charges in RBWM in the UK, where delinquency rates improved in the nine months. These factors were partly offset by higher loan impairment charges in Latin America, notably in Brazil.

·; Loan impairment charges and other credit risk provisions also fell compared with 2Q12, mainly due to the lower lending balances in our consumer finance portfolio in North America. In addition, in Europe there were lower available-for-sale ABS credit risk provisions and significant individually assessed impairments were not repeated. In Latin America, in 3Q12 a marginal improvement in loan impairment charges was recorded as measures to improve credit quality began to take effect.

·; Reported operating expenses for 3Q12 were 4% higher than in 3Q11; for the nine months, they were also up 4% on the same period in 2011.

·; On an underlying basis, operating expenses in both 3Q12 and in the nine months were higher than in their respective comparable periods, primarily reflecting the impact of notable items. In 3Q12, this included a provision of US$800m in respect of US anti-money laundering ('AML'), Bank Secrecy Act ('BSA') and Office of Foreign Asset Control ('OFAC') investigations and provisions for UK customer redress programmes of US$353m, which took the balance sheet provision for UK customer redress programmes at 30 September to US$1.8bn. The effect of notable items in the nine months was increased due to higher customer redress provisions in the UK of US$1.1bn, US AML, BSA and OFAC investigation provisions of US$1.5bn and the non-recurrence of the 2011 UK pension credit. Also, we increased investment in regulatory and compliance infrastructure in the US and incurred certain additional litigation costs in North America and Rest of Asia-Pacific.

·; Excluding the factors noted above, 3Q12 costs were marginally higher than in 3Q11, reflecting additional expenses associated with the execution of the strategy (including transitional service agreement costs) which are offset in revenue, and costs associated with CRS divestiture. For the nine months, operating expenses were broadly in line with 2011, remaining in the range of US$8.6bn to US$9.2bn per quarter during the last 18 months. This reflected strict cost control and the realisation of sustainable cost savings through the implementation of our organisational effectiveness programme. These cost savings substantially offset inflationary pressures in certain of our Latin American and Asian markets, and investment in strategically growing the business and enhancing processes and technology capabilities. We continue to drive our organisational effectiveness programme and expect to exceed the top end of our sustainable cost savings target by the end of 2013.

·; Our underlying cost efficiency ratio improved from 65.8% in 3Q11 to 63.7% in 3Q12 as a result of our revenue growth and strict cost control within our operations. The ratios were affected by US$256m and US$1.2bn of notable cost items and by US$1.3bn adverse and US$118m favourable notable revenue items in 3Q11 and 3Q12, respectively.

·; On an underlying basis, our cost efficiency ratio for the nine months of 62.6% was higher than the 60.9% in 2011, as the effect of increased revenue was more than offset by higher notable cost items in 2012 (US$3.8bn in 2012 compared with US$0.9bn in 2011).

·; The number of FTE employees at the end of the quarter was 267,000, almost 22,000 lower than at 31 December 2011. This reflected the planned net reduction of staff numbers across the Group from organisational effectiveness initiatives and business disposals. We achieved a further US$0.5bn of sustainable savings in 3Q12 through our organisational effectiveness programmes. This took our total annualised savings achieved to US$3.1bn.

·; The tax charge of US$658m in the third quarter equated to an effective tax rate of 18.9%. This reflected the effect of the Group's geographic mix in the period, combining the tax benefit on losses in the US with the tax charge on profits in lower tax rate jurisdictions, notably Hong Kong.

·; Although reported PBT was lower in 2012, the tax charge for the nine months was US$941m higher than in the comparable period in 2011. The tax charge in 2012 included the effect of higher taxed profits arising on the disposal of the CRS business and the US branches, as well as the non-deductible provision in respect of US AML, BSA and OFAC investigations. The tax charge in 2011 included the benefit of deferred tax eligible to be recognised in respect of foreign tax credits. As a result of these factors, the effective tax rate for the nine months in 2012 was 26.4% compared with 18% for the same period in 2011.

·; Reported loans and advances to customers increased by US$26.1bn in the quarter. This included favourable foreign exchange movements of US$16.0bn, partly offset by a US$2.7bn reduction in reverse repo balances. Residential mortgage balances continued to grow strongly in the UK, Hong Kong and Rest of Asia-Pacific reflecting in part the success of our marketing campaigns and competitive pricing. Demand for credit and targeted lending activity focused on capturing international trade and capital flows led to a rise in customer advances in CMB in Hong Kong and Rest of Asia-Pacific. Lending to CMB and GB&M customers in North America also increased, reflecting our strategic investment in target segments. In addition, overdraft balances in the UK rose. This was partly offset by a decline in residential mortgage balances in North America due to repayments and write-offs on the run-off portfolio. In addition, we reclassified to 'Assets held for sale' net loans and advances to customers totalling US$3.7bn relating to the planned disposal of an unsecured personal lending portfolio in North America.

·; Customer account balances increased by US$33.6bn, including favourable foreign exchange differences of US$18.8bn. Customer account growth was largely driven by more conservative behaviour by customers in RBWM in Hong Kong, together with a rise in institutional deposits in Rest of Asia-Pacific and higher current accounts in the UK. These movements were offset in part by a decrease in Latin America due to a managed reduction in term deposits in Brazil and a decline in Mexico as customers in RBWM placed their cash in investment funds.

·; Other significant balance sheet movements in the quarter include a rise in trading assets and liabilities, notably in Europe, as inventories of debt and equity securities rose to meet higher client demand. This was partly offset by a decline in cash and balances at central banks and loans and advances to banks as liquidity was redeployed into highly rated debt securities, to repay debt in issue and to support customer lending growth.

·; Net interest margin fell by 20bps in the nine months. This was driven by a reduction in gross yield, which reflected the change in composition of the lending book following the disposal of the high-yielding US cards business in addition to growth in lower-yielding mortgage and term lending balances. Balance Sheet Management was also adversely affected, notably in Europe, as yield curves continued to flatten and interest rates remained low. These factors were partially offset by a lower cost of funds which was driven by a combination of lower interest rates in Latin America, maturity and repayment of older debt at higher coupons in the US and lower interbank and repo funding rates in Europe.

·; The core tier 1 capital ratio strengthened to 11.7%, from 11.3% at 30 June 2012. Internal capital generation of US$2.8bn and favourable foreign exchange movements of US$1.7bn contributed to a total increase of US$4.8bn in core tier 1 capital.

·; RWAs fell by US$4.8bn in the quarter, primarily due to a US$10.0bn reduction in market risk, mainly in GB&M, partially offset by a US$5.5bn increase in credit risk. The decrease in market risk reflected lower VaR and stressed VaR charges due to a reduction in risk levels.

·; Foreign currency translation differences increased credit risk RWAs by US$7.9bn while on a constant currency basis they fell by US$2.4bn. In Rest of Asia-Pacific, credit risk RWAs increased by US$10.4bn, mainly as a result of loan growth in our mainland Chinese associates, primarily in CMB. In Europe, credit risk RWAs fell by US$7.9bn, mainly in GB&M. This included a reduction of US$4.3bn in RWAs due to a decline in borrowing by large corporates and a reduction of US$2.6bn in securitisation RWAs. In North America, the continuing run-down of retail portfolios resulted in a decrease of US$4.2bn in credit risk RWAs in RBWM.

·; On 9 October 2012, the Board announced a third interim dividend for 2012 of US$0.09 per ordinary share.

Anti-money laundering, Bank Secrecy Act and Office of Foreign Assets Control investigations

These results include an additional provision of US$800m in relation to US anti-money laundering, Bank Secrecy Act and Office of Foreign Asset Control investigations, the background and risk factors relating to which are set out in Note 25 on the Financial Statements and in the 'Top and emerging risks' section starting on page 104 of the Interim Report 2012. We are actively engaged in ongoing discussions with the relevant authorities regarding steps to achieve a resolution, including potential fines, penalties and forfeitures, although no agreement has yet been reached. The resolution of at least some of these matters is likely to involve the filing of corporate criminal as well as civil charges and the imposition of significant fines, penalties and/or monetary forfeitures. While the prosecution of corporate criminal charges in these types of cases has most often been deferred through an agreement with the relevant authorities, the US authorities have substantial discretion, and prior settlements can provide no assurance as to how the US authorities will proceed in these matters. It should be noted that any amounts payable are assessed separately by each agency investigating these matters, and the amounts paid to one agency may or may not be offset against or otherwise taken into account in determining amounts payable to other agencies. There is a high degree of uncertainty in making any estimate of the ultimate cost; it is possible that the amounts when finally determined could be higher, possibly significantly higher, than the amount accrued.

Trading conditions since 30 September 2012 and outlook

Despite a drag on global growth caused by the lack of a sustained recovery in the West, we forecast that emerging markets will grow by close to 5% in 2012 and over 5% in 2013.

We believe that mainland China remains on course for a soft landing. The mainland Chinese economy has seen lower than expected growth in 3Q12, but we believe the problems to be cyclical rather than structural. We forecast that growth will recover in 2013 as the impact of accelerated infrastructure approvals and ambitious regional investment plans filter through. We also expect to see economic recovery in Latin America heading into 2013, helped by policy stimulus measures across the region.

In Europe, the recent European Central Bank actions have contributed to greater market confidence that steps will be taken to preserve the integrity of the single market and the euro within it. As structural and fiscal reform measures are implemented, however, the eurozone economy is at risk of contracting both this year and next. The prospects for growth in the UK remain subdued as they are in part influenced by the situation in the eurozone and weak consumer confidence, although the labour market has proved to be resilient.

In the US, the latest round of quantitative easing is likely to boost demand in the short term, although structural problems persist. There are encouraging signs that house prices are no longer falling and that higher prices can be supported without any direct government subsidy. A housing market recovery will have a positive impact on household finances and help to boost consumer confidence. There remain, however, a number of uncertainties over the remainder of this year and 2013, in particular, resolution of the 'fiscal cliff' of tax rises and spending cuts due to take effect early next year. Although recent data has offered encouragement, the pace of US economic growth remains weak compared with previous recoveries.

HSBC's trading performance in October was satisfactory.

Notes

·; Income statement comparisons, unless stated otherwise, are between the quarter ended 30 September 2012 and the quarter ended 30 September 2011, or between the nine months ended 30 September 2012 and the corresponding nine months in 2011. Balance sheet comparisons, unless otherwise stated, are between balances at 30 September 2012 and the corresponding balances at 30 June 2012.

·; The financial information on which this Interim Management Statement is based, and the data set out in the appendix to this statement, are unaudited and have been prepared in accordance with HSBC's accounting policies as described in the Annual Report and Accounts 2011. A glossary of terms is also provided in the Annual Report and Accounts 2011.

·; The Board has adopted a policy of paying quarterly interim dividends on the 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.

Cautionary statement regarding forward-looking statements

The Interim Management Statement contains certain forward-looking statements with respect to HSBC's financial condition, results of operations and business.

Statements that are not historical facts, including statements about HSBC's beliefs and expectations, are forward-looking statements. Words such as 'expects', 'anticipates', 'intends', 'plans', 'believes', 'seeks', 'estimates', 'potential' and 'reasonably possible', variations of these words and similar expressions are intended to identify forward-looking statements. These statements are based on current plans, estimates and projections, and therefore undue reliance should not be placed on them. Forward-looking statements speak only as of the date they are made, and it should not be assumed that they have been revised or updated in the light of new information or future events.

Written and/or oral forward-looking statements may also be made in the periodic reports to the US Securities and Exchange Commission, summary financial statements to shareholders, proxy statements, offering circulars and prospectuses, press releases and other written materials, and in oral statements made by HSBC's Directors, officers or employees to third parties, including financial analysts.

Forward-looking statements involve inherent risks and uncertainties. Readers are cautioned that a number of factors could cause actual results to differ, in some instances materially, from those anticipated or implied in any forward-looking statement. These include, but are not limited to:

·; 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 continuing availability of credit and price competition in the market segments we serve;

·; 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 practices, pricing or responsibilities of financial institutions serving their consumer markets; 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 recent 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; the costs, effects and outcomes of product regulatory reviews, actions or litigation, including any additional compliance requirements; 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; and our success in addressing operational, legal and regulatory, and litigation challenges, notably the ultimate resolution of the AML, BSA and OFAC investigations.

Summary consolidated income statement

Summary consolidated balance sheet

Capital

Capital structure

Risk-weighted assets

RWAs by risk type

RWAs by global businesses

RWAs by geographical regions1

1 RWAs are non-additive across geographical regions due to market risk diversification effects within the Group.

Profit before tax by global business and geographical region

Summary information - global businesses

Retail Banking and Wealth Management