HSBC 2008 Annual Report Download - page 18

HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
Challenges and uncertainties / KPIs
16
transactions with counterparties in financial services,
including brokers and dealers, commercial banks,
investment banks, mutual and hedge funds, and other
institutional clients. Many of these transactions
expose HSBC to credit risk in the event of default by
its counterparty or client. Where counterparty risk
has been mitigated by taking collateral, HSBC’s
credit risk may be exacerbated if the collateral it
holds cannot be realised or has to be liquidated at
prices which are insufficient to recover the full
amount of its loan or derivative exposure. The
failure of one of HSBC’s counterparties could have
an adverse effect on its results.
HSBC operates in a highly competitive
environment, and competition could
intensify as a result of current global market
conditions
Consolidation in the financial services industry is
increasingly concentrating activity in companies that
are capable of offering a wide array of financial
products at competitive prices, with globalisation
exposing HSBC to competition in capital markets
and financial services at global and local levels alike.
In addition, technological advances, the growth of
e-commerce, regulatory developments and public
sector participation or guarantees have made it
possible for non-depository institutions to offer
products and services that traditionally were the
preserve of banks. The prominence in recent years
of sovereign wealth funds, private equity and hedge
funds as alternative sources of funding – which has
increased competition for traditional financial
institutions – may ease as investors seek safer, more
traditional alternatives. Competition may further
intensify or the competitive landscape may change
as the consolidation of financial services companies
continues and others are brought into part or full
public ownership in response to the current market
conditions. HSBC’s ability to grow its businesses,
and therefore its earnings, is affected by these
competitive pressures and is dependent on HSBC’s
ability to attract and retain talented and dedicated
employees.
HSBC is subject to political and economic
risks in the countries in which it operates
HSBC operates through an international network
of subsidiaries and affiliates in 86 countries and
territories around the world. Its results are therefore
subject to the risk of loss from unfavourable political
developments, currency fluctuations, social
instability and change in government policies on
such matters as expropriation, authorisations,
international ownership, interest-rate caps, limits
on dividend flows and tax in the jurisdictions in
which it operates. These factors may also negatively
affect revenues from the trading of securities and
investment in securities, the effect being accentuated
through certain international trading markets,
particularly those in emerging market countries,
being typically smaller, less liquid and more volatile
than developed trading markets. HSBC’s
subsidiaries’ and affiliates’ ability to pay dividends
could be restricted by changes to official banking
measures, exchange controls and other requirements.
Because HSBC prepares its accounts in US dollars,
while a substantial part of its assets, liabilities, assets
under management, revenues and expenses are
denominated in other currencies, changes in foreign
exchange rates have an effect on its reported income
and shareholders’ equity. For a detailed discussion of
global and regional factors that impact the results of
HSBC’s operations, see page 12.
Operational risks are inherent in HSBC’s
business
HSBC is exposed to many types of operational risk,
including fraudulent and other criminal activities
(both internal and external), breakdowns in
processes or procedures and systems failure or non-
availability. HSBC is also subject to the risk of
disruption of its business arising from events that are
wholly or partially beyond its control (for example
natural disasters, acts of terrorism, epidemics and
transport or utility failures) which may give rise to
losses in service to customers and/or economic loss
to HSBC. All of these risks are also applicable where
HSBC relies on outside suppliers or vendors to
provide services to it and its customers.
HSBC is subject to legal risks, which have an
adverse effect on the Group’s reputation
The risks to HSBC’s reputation arise from a variety
of sources with the potential to cause harm to the
Group and its ability to operate. These issues require
the Group to deal appropriately with potential
conflicts of interest; legal and regulatory
requirements; ethical issues; anti-money laundering
laws or regulations; privacy laws; information
security policies; sales and trading practices; and the
conduct of companies with which it is associated.
Failure to address these issues appropriately may
give rise to additional legal and compliance risk to
HSBC, with an increase in the number of litigation
claims and the amount of damages asserted against
HSBC, or subject HSBC to regulatory enforcement
actions, fines or penalties.