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HSBC Holdings plc
Annual Report and Accounts 2011
Connecting customers
to opportunities

Table of contents

  • Page 1
    Connecting customers to opportunities HSBC Holdings plc Annual Report and Accounts 2011

  • Page 2
    ...underlying profit before tax is presented on page 17. Contents Report of the Directors Overview Financial highlights ...Group Chairman's Statement ...Group Chief Executive's Business Review ...Principal activities ...Business and operating models ...Strategic direction ...Risk ...HSBC Values ...Key...

  • Page 3
    ... of Asia-Pacific, Middle East and North Africa, North America and Latin America. Our aim is to be acknowledged as the world's leading international bank. Listed on the London, Hong Kong, New York, Paris and Bermuda stock exchanges, shares in HSBC Holdings plc are held by over 220,000 shareholders in...

  • Page 4
    ...PLC Report of the Directors: Overview Financial highlights Financial highlights Earnings per share Dividends per ordinary share1 Net assets per share US$0.92 - up 26% 2010: US$0.73 2009: US$0.34 US$0.39 2010: US$0.34 2009: US$0.34 US$8.48 - up 7% 2010: US$7.94 2009: US$7.17 For the year Profit...

  • Page 5
    ... income Net trading income to total operating income 2010: 55.2% 2009: 52.0% 2010: 49.3% 2009: 51.8% 2010: 21.7% 2009: 22.5% 2010: 9.0% 2009: 12.5% Share information at the year-end Closing market price US$0.50 ordinary shares in issue Market capitalisation London Hong Kong American Depositary...

  • Page 6
    .... The cover of this year' s Annual Report and Accounts illustrates a core element of HSBC' s strategic direction - that is connecting markets by providing the financing and risk management products that facilitate trade and investment flows. In so doing, we help our customers to achieve their growth...

  • Page 7
    ... to the Board from a distinguished career in financial services, most notably in the areas of money and bond markets, clearing, exchanges and electronic trading platforms where he was a pioneer in establishing The London International Financial Futures and Options Exchange. Financial Statements We...

  • Page 8
    ... brand in the world in the recent Brand Finance® Banking 500 2012 report. This is the fourth time HSBC has headed the list in the last five years. This recognition is a testament to the work of all my colleagues in building value for customers that translates to shareholder value. At the same...

  • Page 9
    ... strong sales of insurance products in Hong Kong, Latin America and Rest of AsiaPacific, while revenue from distribution of investment products to our clients and Global Asset Management was broadly unchanged, reflecting difficult market conditions, particularly in the second half of the year...

  • Page 10
    HSBC HOLDINGS PLC Report of the Directors: Overview (continued) Group Chief Executive's Business Review • Costs rose by 10%, reflecting wage inflation in key markets and higher average full-time equivalent employee numbers for the year (although numbers have fallen since the first quarter), as ...

  • Page 11
    ...2012 and will provide a further update at our forthcoming Investor Strategy Day. Our purpose and values HSBC is one of the world's largest banking and financial services organisations. We serve around 89 million customers and our network covers 85 countries and territories. With around 7,200 offices...

  • Page 12
    ..., trade finance, credit cards, sales of insurance and investment products and funds under management. These banking and financial services are provided to a wide range of clients including governments, large and mid-market corporates, small and medium-sized enterprises ('SMEs'), high net worth...

  • Page 13
    ... regions share responsibility for executing the strategies set by the global businesses. They represent the Group to clients, regulators, employee groups and other stakeholders, allocate capital, manage risk appetite, liquidity and funding by legal entity and are accountable for profit and...

  • Page 14
    ... our liquidity position and interest margins. • Risks concerning borrower credit quality are inherent in our businesses. • Our insurance businesses are subject to risks relating to insurance claim rates and changes in insurance customer behaviour. • HSBC Holdings is a holding company and, as...

  • Page 15
    ... to our business model Key performance indicators Corporate Governance Operating & Financial Review Overview A detailed account of these risks is provided on page 99. Further comments on expected risks and uncertainties are made throughout the Annual Report and Accounts 2011, particularly in...

  • Page 16
    ...' equity was below the target range, but 1.4 percentage points higher than 2010. Strategy Cost efficiency - a lean and values-driven organisation Cost efficiency (2011: underlying cost efficiency 61%) 60.1 57.5 55.2 75 Employee engagement HSBC - Actual Financial Services Average Global Best...

  • Page 17
    ... net operating income after loan impairment and other credit risk charges since last year. Target: to deliver consistent growth in risk adjusted revenues. Outcome: reported risk-adjusted revenue increased primarily due to favourable movements on the fair value of own debt due to credit spreads...

  • Page 18
    ...issue of share capital to third parties in May 2010 and June 2011 of US$188m and US$181m, respectively; the loss of US$42m on the sale of our investment in British Arab Commercial Bank plc in October 2010; the gain of US$74m on the deconsolidation of private equity funds following the management buy...

  • Page 19
    ... Europe ...Hong Kong ...Rest of Asia-Pacific ...Middle East and North Africa ...North America ...Latin America ...Profit before tax ...By global business Retail Banking and Wealth Management17 Commercial Banking ...Global Banking and Markets17 ...Global Private Banking . Other ...Profit before tax...

  • Page 20
    ... Consolidated income statement Five-year summary consolidated income statement 2011 US$m Net interest income ...Net fee income ...Net trading income ...Net income/(expense) from financial instruments designated at fair value ...Gains less losses from financial investments ...Dividend income ...Net...

  • Page 21
    ...of the HSBC Bank plc ('HSBC Bank') UK defined benefit plan for deferred pensions. Income from associates increased, mainly driven by strong results in our mainland China associates. The contribution from Bank of Communications Co., Limited ('BoCom') rose due to loan growth, wider deposit spreads and...

  • Page 22
    ... of asset 2011 Average Interest balance income US$m US$m Short-term funds and loans and advances to banks ...Loans and advances to customers ...Financial investments ...Other interest-earning assets26 ...Total interest-earning assets ...Trading assets and financial assets designated at fair value 27...

  • Page 23
    ... of debt securities in issue declined due to maturities not being replaced in North America and Europe, the related interest expense increased as a result of a general widening of credit spreads in the financial sector. 'Net interest income' includes the expense of internally funding trading assets...

  • Page 24
    ...PLC Report of the Directors: Operating and Financial Review (continued) Financial summary > Group performance Net fee income 2011 US$m Cards ...Account services ...Funds under management ...Credit facilities ...Broking income ...Imports/exports ...Insurance ...Remittances ...Global custody ...Unit...

  • Page 25
    ... by 23 Shareholder Information Financial Statements Corporate Governance Our Foreign Exchange business benefited from increased activity from both Global Banking and CMB customers, particularly in Hong Kong, Rest of Asia-Pacific, North America and Latin America, coupled with an improved trading...

  • Page 26
    ...designated at fair value 2011 US$m Net income/(expense) arising from: - financial assets held to meet liabilities under insurance and investment contracts ...- liabilities to customers under investment contracts ...- HSBC's long-term debt issued and related derivatives ...Change in own credit spread...

  • Page 27
    ... debt designated at fair value issued as part of our overall funding strategy, with an offset from trading assets held as economic hedges reported in 'Net trading income'. Net gains/(losses) from disposal of: - debt securities ...- equity securities ...- other financial investments ...Impairment...

  • Page 28
    ...with SABB Securities Limited. Income in 2010 included a gain of US$188m following the dilution of our holding in Ping An along with gains from the sale of HSBC Insurance Brokers (US$107m), the Wells Fargo HSBC Trade Bank (US$66m), Eversholt Rail Group (US$255m) and HSBC Private Equity (Asia) Ltd (US...

  • Page 29
    ...support policyholder funds, particularly in relation to unit-linked insurance contracts and investment and insurance contracts with DPF, as a result of equity market falls. The gains or losses experienced on the financial assets designated at fair value held to support insurance contract liabilities...

  • Page 30
    ... credit risk provisions in our GB&M business. This reflected the non-recurrence of individually assessed loan impairment charges recorded in the first half of 2010 related to restructuring activity for a small number of large corporate customers in the United Arab Emirates ('UAE'). In RBWM, loan...

  • Page 31
    ... 9,293 31,860 1,725 810 34,395 Staff numbers (full-time equivalents) 2011 Europe ...Hong Kong ...Rest of Asia-Pacific ...Middle East and North Africa ...North America ...Latin America ...Staff numbers ...74,892 28,984 91,051 8,373 30,981 54,035 288,316 At 31 December 2010 75,698 29,171 91,607 8,676...

  • Page 32
    ... controlled. 2011 % HSBC ...Geographical regions Europe ...Hong Kong ...Rest of Asia-Pacific ...Middle East and North Africa ...North America ...Latin America ...Global businesses Retail Banking and Wealth Management17 ...Commercial Banking ...Global Banking and Markets17 ...Global Private Banking...

  • Page 33
    ... to a taxable gain from an internal reorganisation in our North American operations. The resulting reported effective tax rate for 2011 was 18% compared with 25.5% in 2010. 31 Shareholder Information Financial Statements 5.4% Corporate Governance Operating & Financial Review Overview

  • Page 34
    ...Loans and advances to customers37 ...Financial investments ...Assets held for sale ...Other assets ...Total assets ...LIABILITIES AND EQUITY Liabilities Deposits by banks ...Customer accounts ...Trading liabilities ...Financial liabilities designated at fair value ...Derivatives ...Debt securities...

  • Page 35
    ...and sales of financial investments and strong growth in deposits also contributed to the rise. Trading assets decreased by 13%. Economic uncertainty led to a decline in market activity. As a result, we reduced our holdings of government and highly-rated corporate debt securities and equity positions...

  • Page 36
    ... at fair value', with a corresponding decrease in 'Financial assets designated at fair value'. Derivative businesses are managed within market risk limits and, as a consequence, the increase in the value of Derivative liabilities broadly matched that of 'Derivative assets'. Debt securities in issue...

  • Page 37
    ... assets ...Loans and advances to banks .. Loans and advances to customers ...Financial investments ...Other assets ...Total assets ...Deposits by banks ...Customer accounts ...Trading liabilities ...Financial liabilities designated at fair value ...Derivative liabilities ...Debt securities in issue...

  • Page 38
    ... PLC Report of the Directors: Operating and Financial Review (continued) Financial summary > Customer accounts by country // Economic profit / RoRWA measures Customer accounts by country At 31 December 2011 US$m Europe ...UK ...France44 ...Germany ...Malta ...Switzerland ...Turkey ...Other ...Hong...

  • Page 39
    ...the trend in economic profit/(loss) ahead of absolute amounts. Our long-term cost of capital is reviewed annually and is 11% for 2011; this remains unchanged from 2010. The following commentary is on a reported basis. The return on invested capital increased by 1.5 percentage points to 10.2%, which...

  • Page 40
    .... Impairment of loans and advances Our accounting policy for losses arising from the impairment of customer loans and advances is described in Note 2g on the Financial Statements. Loan impairment allowances represent management's best estimate of losses incurred in the loan portfolios at the balance...

  • Page 41
    ... cost of capital percentage is generally derived from a Capital Asset Pricing Model, which incorporates inputs reflecting a number of financial and economic variables, including the risk-free interest rate in the country concerned and a premium for the inherent risk of the business being evaluated...

  • Page 42
    ...-sale financial assets is described in Note 2j on the Financial Statements. At 31 December 2011, our total available-forsale financial assets amounted to US$379bn (2010: US$381bn), of which US$372bn or 98% (2010: US$373bn; 98%) were debt securities. The available-for-sale fair value reserve relating...

  • Page 43
    ... based on business plans, future capital requirements and ongoing tax planning strategies. These projections include assumptions about future house prices, US economic conditions including unemployment levels and their impact on loan impairment charges, and capital support from HSBC Holdings. These...

  • Page 44
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Financial summary > Critical accounting policies // Global businesses > Summary These strategies remain unaffected by the proposed sale of the Group's US credit card and private label credit card business and 195...

  • Page 45
    .... HSBC's senior management reviews operating activity on a number of bases, including by geographical region and by global business, as presented on page 59. RBWM was previously known as Personal Financial Services ('PFS'). With effect from Profit/(loss) before tax 2011 US$m Retail Banking and...

  • Page 46
    ... (current and savings accounts, mortgages and personal loans, credit cards, debit cards and local and international payment services) and wealth management services (insurance and investment products and financial planning services). • HSBC Premier provides preferential banking services and global...

  • Page 47
    ... and domestic payments and cash management services; and trade services for large corporate clients. HSBC Private Bank is the principal marketing name of our private banking business, GPB. Utilising the most suitable products from the marketplace, GPB works with high net worth clients to offer both...

  • Page 48
    ...9bn • Best Wealth Management House, Hong Kong (The Asset Triple A Investment Awards 2011) Strategic direction RBWM's aim is to provide consistent and high quality retail banking and wealth management services to our customers. We will provide retail banking services in markets where we already...

  • Page 49
    ... sales of insurance products in Hong Kong, Latin America and Rest of Asia-Pacific, while revenue from distribution of investment products to our clients and Global 47 Shareholder Information Financial Statements Good progress was made in developing our Wealth Management infrastructure. In 2011...

  • Page 50
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Global businesses > RBWM / CMB • In Hong Kong, we retained our position of having the largest market share in residential mortgages in 2011. We were also market leaders in life insurance. For 2011 we set an ...

  • Page 51
    ... exchange and interest rate management products. Net fee income also rose, reflecting strong volumes and market share in our trade and payments businesses in Hong Kong, Rest of Asia-Pacific and Latin America. Loan impairment charges and other credit risk provisions declined by 6% as credit quality...

  • Page 52
    ... business structures across countries, which will result in a reduction in staff numbers and will allow us to redeploy resources towards our key growth markets. We continued to develop our direct banking solutions to enhance accessibility and service for our customers. HSBCnet, our internet banking...

  • Page 53
    ... half of 2011, resulting in trading losses as increased risk aversion and limited client activity led to a significant widening of spreads on certain eurozone sovereign and corporate bonds. Balance Sheet Management reported lower revenues and revenues from our legacy credit portfolio also declined...

  • Page 54
    ... Financial Review (continued) Global businesses > GB&M Management view of total operating income 2011 US$m Global Markets57 ...Credit ...Rates ...Foreign Exchange ...Equities ...Securities Services ...Asset and Structured Finance ...Global Banking ...Financing and Equity Capital Markets ...Payments...

  • Page 55
    ...interest rate management products. In addition, we secured lead roles in a number of event deals with CMB clients in 2011, utilising our expertise in equity and debt capital markets, leveraged and acquisition finance and advisory. We extended the Wealth Solutions Group model from Europe, Middle East...

  • Page 56
    ... • Net new money inflows of US$13bn 2010: US$13bn; 2009: US$(7)bn • Continued investment in front-line capabilities in line with strategy Best Private Banking in Asia (Euromoney 2011 Private Banking Survey) Client assets Strategic direction GPB works with high net worth clients to manage...

  • Page 57
    ... development of our alternative investment offerings and trust and estate planning products. 2011 US$m Net interest expense ...Net trading income/ (expense) ...Change in credit spread on long-term debt ...Other changes in fair value ...Net income/(expense) from financial instruments designated...

  • Page 58
    ... from the sale and leaseback of buildings in 2010. For a description of the main items reported under 'Other', see footnote 61. Net trading expense rose, driven by adverse fair value movements on derivatives relating to certain provident funds in Hong Kong as long-term investment returns fell. This...

  • Page 59
    ...in fair value of longterm debt issued and related derivatives ...Net income/(expense) from other financial instruments designated at fair value ...Net income/(expense) from financial instruments designated at fair value ...Gains less losses from financial investments ...Dividend income ...Net earned...

  • Page 60
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Global businesses > Analysis // Geographical regions > Summary Profit/(loss) before tax and balance sheet data (continued) 2010 Retail Banking and Wealth Manage- Commercial Banking ment17 US$m US$m Global Banking...

  • Page 61
    ... and operating expenses include intra-HSBC items of US$3,421m (2010: US$3,125m; 2009: US$2,756m). Overview Shareholder Information 59 Profit/(loss) before tax 2011 US$m Europe ...Hong Kong ...Rest of Asia-Pacific ...Middle East and North Africa ...North America ...Latin America ...4,671 5,823 7,471...

  • Page 62
    ... we provide a wide range of banking, treasury and financial services to personal, commercial and corporate customers across Europe. Economic background After growing by 2.1% in 2010, UK gross domestic product ('GDP') growth eased to 0.9% in 2011. The unemployment rate rose to 8.4% in December...

  • Page 63
    ...conservative loan to value ratio 61 Shareholder Information In RBWM, further progress was made in implementing our strategy of building long-term sustainable relationships with Premier customers. The Wealth Management business continued to develop with HSBC World Selection assets under management...

  • Page 64
    ... foreign exchange movements on the foreign currency debt which are reported in 'Net expense from financial instruments designated at fair value'. Trading income included a favourable fair value movement of US$391m from structured liabilities, mainly in Rates, as credit spreads widened compared...

  • Page 65
    ... of our equity investments in real estate companies. Overview lower adverse foreign exchange movements on foreign currency debt designated at fair value, issued as part of our overall funding strategy, with an offset reported in 'Net trading income'. Loan impairment charges and other credit risk...

  • Page 66
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Geographical regions > Europe Profit/(loss) before tax and balance sheet data - Europe 2011 Retail Banking and Wealth Commercial Management Banking US$m US$m Global Banking and Markets US$m Global Private Banking...

  • Page 67
    ...65 Shareholder Information Share of HSBC's profit before tax ...Cost efficiency ratio ... 6.9 69.1 22.6 67.9 Financial Statements (1,217) (997) (783) (26) 3 - (3,020) Corporate Governance Operating & Financial Review Overview Retail Banking and Wealth Manage- Commercial Banking ment17...

  • Page 68
    ... funds and launched a new product which offers our customers a wider choice and lower fees. We retained our number one position in cards reflecting the success of our various marketing campaigns and customer focus, and saw continued strong sales of wealth management products, though revenues...

  • Page 69
    ... 2011 we won several awards including Best Investment Bank and Best Equity House from FinanceAsia and Best Flow House and Best Debt Capital Markets House in Asia from Euromoney. Average customer deposit balances rose despite a highly competitive environment, supported by the opening of new business...

  • Page 70
    ... line with improved volumes in the business. Net expense from financial instruments designated at fair value was US$537m compared with gains in 2010 due to investment losses on assets held by the insurance business as a result of negative movements in the equity market during the second half of 2011...

  • Page 71
    ...in fair value of longterm debt issued and related derivatives ...Net income/(expense) from other financial instruments designated at fair value ...Net income/(expense) from financial instruments designated at fair value ...Gains less losses from financial investments ...Dividend income ...Net earned...

  • Page 72
    ...HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Geographical regions > Hong Kong / Rest of Asia-Pacific Profit/(loss) before tax and balance sheet data - Hong Kong (continued) 2010 Retail Banking and Wealth Manage- Commercial ment17 Banking US$m US$m Global Banking...

  • Page 73
    ... key markets in the region (Finance Asia Country Awards 2011) For footnotes, see page 95. The commentary on Rest of Asia-Pacific is on an underlying basis unless stated otherwise. 71 Shareholder Information Best Foreign Commercial Bank in China 2011 Financial Statements Corporate Governance...

  • Page 74
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Geographical regions > Rest of Asia-Pacific Profit/(loss) before tax by country within global businesses Retail Banking and Wealth Management17 US$m 2011 Australia ...India ...Indonesia ...Mainland China ......

  • Page 75
    ..., notably in Payments and Cash Management reflecting our investment in infrastructure as part of a targeted strategy to support growth in customer lending. Deposit spreads increased as interest rates rose in a number of countries, particularly in mainland China and India. Net interest income from...

  • Page 76
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Geographical regions > Rest of Asia-Pacific income of US$29m in 2010. This was due to investment losses on assets held by the insurance business, primarily in Singapore, as a result of negative equity market ...

  • Page 77
    ...in fair value of longterm debt issued and related derivatives ...Net income/(expense) from other financial instruments designated at fair value ...Net income/(expense) from financial instruments designated at fair value ...Gains less losses from financial investments ...Dividend income ...Net earned...

  • Page 78
    ... HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Geographical regions > Rest of Asia-Pacific / Middle East and North Africa Profit before tax and balance sheet data - Rest of Asia-Pacific (continued) 2010 Retail Banking and Wealth Manage- Commercial ment17 Banking...

  • Page 79
    ... account balances also added to the challenges for the post-revolution economies. Review of performance Our operations in the Middle East and North Africa reported a profit before tax of US$1.5bn, an increase of US$600m, or 67%. In 2010, we completed the sale of our investment in the British Arab...

  • Page 80
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Geographical regions > Middle East and North Africa Profit/(loss) before tax by country within global businesses Retail Banking and Wealth Management17 US$m 2011 Egypt ...Qatar ...United Arab Emirates ...Other ...

  • Page 81
    ...GB&M benefited both businesses with a significant increase in GB&M-related revenues from 2010. In GB&M, we continued to focus on our key clients and used our global expertise and reach both to complete a number of cross-border deals for regional clients and provide risk management solutions tailored...

  • Page 82
    ... HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Geographical regions > Middle East and North Africa Profit/(loss) before tax and balance sheet data - Middle East and North Africa 2011 Retail Banking and Wealth Commercial Management Banking US$m US$m Global Banking...

  • Page 83
    .../(loss) before tax ... 2,410 (627) 1,783 (1,078) 705 187 892 Share of HSBC's profit before tax ...Cost efficiency ratio ... 0.6 62.2 4.7 44.7 Balance sheet data49 US$m Loans and advances to customers (net) ...Total assets ...Customer accounts ...For footnotes, see page 95. 5,063 6,286 17,538 US...

  • Page 84
    ...average maturity of its securities portfolio by selling US$400bn of short-term Treasury securities and buying an equivalent amount of longer-term Treasury securities in their place. These moves helped stabilise financial asset prices in the final quarter of the year. The annual rate of GDP growth in...

  • Page 85
    ... in our strategy for our North American businesses. In the second half of 2011, we announced the sale of our Card and Retail Services business to Capital One Financial Group, which we expect to complete in the 83 Shareholder Information Financial Statements Corporate Governance Operating...

  • Page 86
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Geographical regions > North America first half of 2012. We also announced the sale of 195 non-strategic branches, principally in upstate New York, to First Niagara Bank, N.A. We expect this transaction to close ...

  • Page 87
    ... manage portfolio risk and duration. This was mainly due to lower lending balances and improved credit quality in Canada. In the US the decline was mainly in the commercial real estate and mid-market sectors, while loan impairment charges in Business Banking also declined reflecting improved credit...

  • Page 88
    ...PLC Report of the Directors: Operating and Financial Review (continued) Geographical regions > North America Profit/(loss) before tax and balance sheet data - North America 2011 Retail Banking and Wealth Commercial Management Banking US$m US$m Global Banking and Markets US$m Global Private Banking...

  • Page 89
    ...in fair value of longterm debt issued and related derivatives ...Net income/(expense) from other financial instruments designated at fair value ...Net income/(expense) from financial instruments designated at fair value ...Gains less losses from financial investments ...Dividend income ...Net earned...

  • Page 90
    ... Share of HSBC's profit before tax ...Cost efficiency ratio ... 9.4 33.0 Balance sheet data49 US$m Loans and advances to customers (net) reported in: - loans and advances to customers ...- assets held for sale (disposal groups) ...Total assets ...Customer accounts reported in: - customer accounts...

  • Page 91
    ... of 2011. Review of performance In Latin America, our operations reported a profit before tax of US$2.3bn in 2011, an increase of 29% compared with 2010. On an underlying basis, which excludes a gain of US$83m from the sale of HSBC Afore (the Mexican pension administration business), profit before...

  • Page 92
    ... of the HSBC network to serve the growing number of global corporate businesses in Latin America. During 2011, our GB&M sales force actively targeted our CMB customer base and achieved strong growth in revenue compared with 2010, most notably from the sale of GB&M foreign exchange products. To...

  • Page 93
    ... of higher revenue from sales of foreign exchange products reflecting market volatility, while in Mexico higher trading income was due to the completion of a small number of individually large derivative transactions in GB&M. Net income from financial instruments designated at fair value was 26...

  • Page 94
    ...PLC Report of the Directors: Operating and Financial Review (continued) Geographical regions > Latin America Profit/(loss) before tax and balance sheet data - Latin America 2011 Retail Banking and Wealth Commercial Management Banking US$m US$m Global Banking and Markets US$m Global Private Banking...

  • Page 95
    ... before tax ... 9,731 (1,544) 8,187 (6,394) 1,793 2 1,795 Share of HSBC's profit before tax ...Cost efficiency ratio ... 1.9 71.5 9.4 65.7 Balance sheet data49 US$m Loans and advances to customers (net) ...Total assets ...Customer accounts ...For footnotes, see page 95. 20,823 38,819 30,149 US...

  • Page 96
    ... funds mainly in Europe and North America and adverse global equity markets performance and foreign exchange movements, partly offset by inflows in long-term funds, particularly in Europe. GPB funds decreased by 7% compared with 31 December 2010 to US$259bn as net new money inflows which benefited...

  • Page 97
    ...year at the average rates of exchange applicable in the current year. 12 Excluding adjustments in 2010. 13 Positive numbers are favourable: negative numbers are unfavourable. 14 Changes in fair value due to movements in own credit spread on long-term debt issued. This does not include the fair value...

  • Page 98
    ... cash flow hedges and available-for-sale securities. 47 Return on invested capital is profit attributable to ordinary shareholders of the parent company, which can be found in Note 12 on the Financial Statements on page 335. Global businesses and geographical regions 48 The main items reported...

  • Page 99
    ... Asset and Liability Management Committee ('ALCO'). Balance Sheet Management also manages the structural interest rate position of the entity within a Global Markets limit structure. 61 'Other' in GB&M includes net interest earned on free capital held in the global business not assigned to products...

  • Page 100
    ... position throughout 2011. The ratio of customer advances to deposits remains below 90%. Strong governance • • • Robust risk governance and accountability is embedded across the Group. The Board, advised by the Group Risk Committee, approves our risk appetite. A new global operating model...

  • Page 101
    ... the global banking system. In seeking to manage and mitigate this risk, we have prepared and tested detailed operational contingency plans to deal with such a scenario. We are keeping these plans under close review as events develop. Corporate Governance Shareholder Information Financial Statements...

  • Page 102
    ... counterparties, the capital valuation adjustment, will be introduced. Liquidity and funding: a new minimum standard, the liquidity coverage ratio, designed to improve the short-term resilience of a bank's liquidity risk profile, will be introduced after an observation and review period in 2015. To...

  • Page 103
    ...lead to lower returns on equity and cause some business activities and products to be less profitable and, in some instances, to fail to cover their cost of equity. Corporate Governance The proposed leverage ratio could cause HSBC, as an institution with a relatively low-risk portfolio overall, to...

  • Page 104
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Risk > Top and emerging risks business we can carry out, with the risk of decreased profitability as a result. Due to the stage of development and implementation of these various regulations, it is not possible ...

  • Page 105
    ... to manage these risks proactively include a close dialogue with regulators and customers and the involvement of HR, legal, compliance and other functional experts. Overview Shareholder Information Financial Statements Corporate Governance Operating & Financial Review • Social media risk The...

  • Page 106
    ...our US Card and Retail Services business and 195 branches in upstate New York. For further detail on assets held for sale see page 105. During 2011, we reduced our exposure to sovereigns and banks in the peripheral European countries. We also reduced our exposure to risk from sovereign and financial...

  • Page 107
    ... US and Hong Kong. Our UK mortgage portfolio remained of high quality with an average loan to value ('LTV') ratio for new business of 53%, while in Hong Kong the average LTV ratio on new mortgage originations was 49%. The average LTV ratio of our mortgage books in the UK and Hong Kong remained low...

  • Page 108
    ... successfully grow our residential mortgage portfolios in many other markets, notably in Hong Kong and the UK where credit quality remained high and LTV ratios were low. Our exposure to loans and advances to banks decreased in 2011, mainly in Europe as funds from maturing term loans and reverse repo...

  • Page 109
    ... ...Financial investments ...Treasury and other similar bills ...Debt securities ...Assets held for sale2 ...- disposal groups ...- non-current assets held for sale ...Other assets ...Endorsements and acceptances ...Other ...Financial guarantees and similar contracts ...Loan and other credit-related...

  • Page 110
    ... financial institutions. A detailed analysis of financial investments is provided in Note 21 on the Financial Statements and an analysis by credit quality on page 127. At 31 December 2011, our insurance businesses held diversified portfolios of debt and equity securities designated at fair value...

  • Page 111
    ... trade and services6 ...Commercial real estate ...Other property-related ...Government ...Other commercial7 ...Financial ...Non-bank financial institutions ...Settlement accounts ...Asset-backed securities reclassified ...Total gross loans and advances to customers ('TGLAC') ...Gross loans...

  • Page 112
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Risk > Credit risk > Credit exposure Gross loans and advances to customers by industry sector and by geographical region (Audited) Hong Kong US$m 63,181 46,817 16,364 91,592 9,004 29,066 20,828 17,367 2,918 12,...

  • Page 113
    ... 9,335 8,435 7,476 7,488 Gross loans and advances to customers by country (Audited) Residential mortgages US$m At 31 December 2011 Europe ...UK ...France ...Germany ...Malta ...Switzerland ...Turkey ...Other ...Hong Kong ...Rest of Asia-Pacific ...Australia ...India ...Indonesia ...Mainland China...

  • Page 114
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Risk > Credit risk > Credit exposure / Areas of special interest > Wholesale lending Gross loans and advances to customers by country (continued) Residential mortgages US$m At 31 December 2010 Europe ...UK ......

  • Page 115
    ...management of direct exposures to the peripheral eurozone countries. The overall quality of the portfolio was strong with most in-country and cross-border limits extended to countries with high-grade internal credit risk ratings. We regularly update our assessment of higher risk countries and adjust...

  • Page 116
    ... of loans and advances to customers by significant countries is provided on page 111. The on-balance sheet exposures disclosed in the exposure tables below are presented based on the appropriate IFRSs classification. Trading assets are net of short positions as the fair value of the short positions...

  • Page 117
    ... 31 December 2011 Cash and balances at central banks ...Financial investments held to maturity ...- fair value ...Financial investments available for sale11 ...- cumulative impairment ...- amortised cost ...Net trading assets ...- gross trading assets ...- short positions ...Derivatives12 ...- gross...

  • Page 118
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Risk > Credit risk > Areas of special interest > Wholesale lending Summary balance sheet exposures to core eurozone countries - sovereigns and agencies (Audited) France US$bn At 31 December 2011 ...27 Germany US$...

  • Page 119
    ... eurozone countries - banks (Audited) Greece US$bn At 31 December 2011 Loans and advances ...Financial investments held to maturity ...- fair value ...Financial investments available for sale11 ...- amortised cost ...Net trading assets ...- gross trading assets ...- short positions ...Derivatives12...

  • Page 120
    ... and corporates (Audited) Greece US$bn At 31 December 2011 Loans and advances ...- gross ...- impairment allowances ...Financial investments available for sale11 ...- available-for-sale reserve ...- amortised cost ...Net trading assets ...- gross trading assets ...- short positions ...Derivatives12...

  • Page 121
    ..., across our portfolios, credit risk is mitigated by long-standing and conservative policies on asset origination which focus on relationships with long-term customers and limited initial leverage. Group Risk, in conjunction with major subsidiaries, designates real estate as a Controlled Sector and...

  • Page 122
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Risk > Credit risk > Areas of special interest > Personal lending loans; and debt consolidation loans which may be secured or unsecured. Group credit policy prescribes the range of acceptable residential property...

  • Page 123
    ... products designed to meet customer needs, including capital repayment, interest-only, affordability and offset 121 Shareholder Information 2.9% Financial Statements Corporate Governance (4,439) (168) (834) (792) (2,645) Operating & Financial Review Rest of Europe US$m Rest of North America...

  • Page 124
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Risk > Credit risk > Areas of special interest > Personal lending end of 2010. Our most significant concentrations of mortgage lending were in the UK, the US and Hong Kong. US mortgage lending US mortgage lending...

  • Page 125
    ... half of 2010 and June 2011 such as increasing deposit requirements, reducing the maximum LTV ratios for new loans and capping the maximum debt-to-income ratios. These resulted in a reduction in property prices in the second half of the year and lower sales volumes. The quality of our mortgage book...

  • Page 126
    ... or more delinquent balances increased in dollar terms from US$4.9bn at 31 December 2010 to US$5.1bn at 31 December 2011, while in our Mortgage Services portfolio they remained unchanged at US$2.8bn. At HSBC Bank USA, two months or more delinquency rates increased from 7.9% to 8.2% at 31 December...

  • Page 127
    ...assets held for sale. We will continue to offer all card products and services during transition. HSBC Bank USA continues to offer credit cards to branch-based customers and corporate cards to commercial and wholesale banking clients. Two months or more delinquency rates in our credit card portfolio...

  • Page 128
    ...was mainly in Europe and in North America as we deposited a larger portion of our excess liquidity with central banks in these regions. As the increases in placements are The five classifications describing the credit quality of our lending, debt securities portfolios and derivatives are defined in...

  • Page 129
    ... and advances to customers ...Financial assets designated at fair value20 ...- treasury and other eligible bills ...- debt securities ...- loans and advances to banks - loans and advances to customers ...Derivatives 20 20 in line with the end of 2010, at 54% and 22% respectively. Trading assets, on...

  • Page 130
    ...of collection from other banks.. Hong Kong Government certificates of indebtedness .. Trading assets20 ...- treasury and other eligible bills ...- debt securities ...- loans and advances to banks - loans and advances to customers ...Financial assets designated at fair value20 ...- treasury and other...

  • Page 131
    ... related to the current or potential credit deterioration In the Annual Report and Accounts 2011, the Group has separately presented all renegotiated loans by credit quality classification and has adopted a 129 Shareholder Information of a customer. When the contractual payment terms of a loan...

  • Page 132
    ...advances to customers by industry sector, geography and credit quality classification. Renegotiated loans and advances to customers (Audited) At 31 December 2011 Neither past due nor impaired US$m Retail ...Residential Mortgages...Other personal ...Commercial real estate ...Corporate and commercial...

  • Page 133
    ... Corporate Governance Operating & Financial Review Forbearance activity within the Middle East and Latin America (primarily in Mexico and Brazil) was predominately undertaken in the commercial real estate and corporate and commercial sectors. Forbearance activity within Hong Kong and Rest of Asia...

  • Page 134
    ...North America's total renegotiated loans, and US$16bn (2010: US$18.2bn) of renegotiated real estate secured loans in HSBC Finance were classified as impaired. Further details of HSBC Finance's real estate secured accounts and renegotiation programmes are provided below. Gross loan portfolio of HSBC...

  • Page 135
    ... funding commercial real estate lending. However, it introduces a more stringent approach to the assessment of whether renegotiated loans are presented as impaired. Management believes that this revised approach better reflects the nature of risks and inherent credit quality in our loan portfolio...

  • Page 136
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Risk > Credit risk > Impairment of loans and advances > Impairment allowances portfolio. The payment performance periods are monitored to ensure they remain appropriate to the levels of recidivism observed within...

  • Page 137
    ... of TGLAC ...For footnotes, see page 185. 37.9 0.5 1.3 135 Shareholder Information Financial Statements Corporate Governance Individually assessed allowances as a percentage of individually assessed loans and advances ...Collectively assessed allowances as a percentage of collectively assessed...

  • Page 138
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Risk > Credit risk > Impairment of loans and advances > Impairment allowances Movement in impairment allowances on loans and advances to customers and banks (Audited) Banks individually assessed US$m 2011 At 1 ...

  • Page 139
    ...statement30 ...Personal ...- residential mortgages ...- other personal ...Corporate and commercial ...- manufacturing and international trade and services5 ...- commercial real estate and other property-related ...- other commercial ...Financial29 ...Governments ...Exchange and other movements ...At...

  • Page 140
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Risk > Credit risk > Impairment of loans and advances > Impairment allowances Movement in impairment allowances by industry sector and by geographical region (Audited) 2011 Hong Kong US$m 629 (210) (116) - (116) ...

  • Page 141
    ... mortgages ...- other personal5 ...Corporate and commercial ...- manufacturing and international trade and services ...- commercial real estate and other propertyrelated ...- other commercial7 ...Financial29 ...Exchange and other movements ...At 31 December ...Impairment allowances against banks...

  • Page 142
    ... US$m US$m Banks ...Personal ...Residential mortgages ...Other personal5 ...Corporate and commercial ...Manufacturing and international trade and services ...Commercial real estate and other property-related ...Other commercial7 ...Financial ...Total charge to income statement ...For footnote...

  • Page 143
    Net loan impairment charge to the income statement by geographical region (Unaudited) Hong Kong US$m 18 79 (41) (20) 99 126 (27) 117 - 117 Rest of AsiaPacific US$m 67 207 (114) (26) 207 366 (159) 274 - 274 North America US$m 243 398 (111) (44) 6,807 6,894 (87) 7,050 (5) 7,055 Latin America US$m 126 ...

  • Page 144
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Risk > Credit risk > Impairment of loans and advances > Impairment charge Charge for impairment losses as a percentage of average gross loans and advances to customers by geographical region (Unaudited) Hong Kong...

  • Page 145
    ... our Card and Retail Services business, lower balances, as well as improved delinquency rates as overall credit quality improved. This was partly offset by additional new loan impairment allowances related to the effects of the delays in foreclosure activity. Releases and recoveries in North America...

  • Page 146
    ... be an important mitigant of credit risk, it is the Group's practice to lend on the basis of the customer's ability to meet their obligations out of their cash flow resources rather than rely on the value of security offered. Depending on the customer's standing and the type of product, facilities...

  • Page 147
    ...in North America where loss experience on defaulted second lien loans has typically approached 100%; consequently, we do not generally attach any significant financial value to this type of collateral. Credit cards and overdrafts are generally unsecured. Corporate, commercial and financial (non-bank...

  • Page 148
    ... companies in Hong Kong is, by market practice, typically secured by guarantees or is unsecured. In Europe, facilities of a working capital nature are generally not secured by a first fixed charge and are therefore disclosed as not collateralised. The value of commercial real estate collateral...

  • Page 149
    ...bank and other financial institution issued securities may benefit from additional credit enhancement, notably through government guarantees that reference these assets. Details of government guarantees are included in Notes 15, 19 and 21 on the Financial Statements. Corporate issued debt securities...

  • Page 150
    ... Global Risk function, which provides high-level centralised oversight and management of our credit risks worldwide. HSBC Holdings' maximum exposure to credit risk at 31 December 2011 is shown below. Its financial assets principally represent claims on Group subsidiaries in Europe and North America...

  • Page 151
    ... debt obligations ('CDO's); direct lending at fair value through profit or loss; monolines; credit derivative product companies; leveraged finance transactions; and representations and warranties related to mortgage sales and securitisation activities. Exposure in 2011 (Audited) Business model...

  • Page 152
    ... HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Risk > Credit risk > Securitisation exposures and other structured products Overall exposure of HSBC (Audited) At 31 December 2011 Including sub-prime Carrying amount33 and Alt-A US$bn US$bn Asset-backed securities...

  • Page 153
    ... 2011, 25% (US$0.9bn) of our sub-prime residential mortgage-related assets were rated AA or AAA (2010: 38% (US$1.7bn). Of the non-high grade assets held of US$2.7bn (2010: US$2.8bn), US$1.2bn (2010: US$1.5bn) related to US-originated assets. There was a reduction in market prices for subprime assets...

  • Page 154
    ... HSBC's consolidated holdings of ABSs, and direct lending held at fair value through profit or loss33 (Audited) HSBC HOLDINGS PLC Trading US$m Available for sale US$m Designated at fair value Held to through maturity profit or loss US$m US$m Loans and receivables US$m Gross principal37 US$m Net...

  • Page 155
    ...US$m Designated at fair value through profit or loss US$m Loans and receivables US$m Gross principal37 US$m Credit default swap protection38 US$m Net principal exposure39 US$m Of which held through consolidated SPEs US$m At 31 December 2010 Mortgage-related assets: Sub-prime residential ...Direct...

  • Page 156
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Risk > Credit risk > Securitisation exposures and other structured products impairment of US$42m on assets was recognised in 2011 (2010: US$48m) as losses were incurred under current accounting impairment rules. ...

  • Page 157
    ... our trading and investment activities is shown in the table on page 152. Corporate Governance Operating & Financial Review of the monoline is reflected in market prices and, therefore, in the carrying amount of these securities at 31 December 2011. For wrapped bonds held in our trading portfolio...

  • Page 158
    ... and inquiries which have been directed at groups within the US mortgage market such as servicers, originators, underwriters, trustees or sponsors of securitisations. Further information is provided in Note 44 on the Financial Statements. At 31 December 2011, a liability of US$237m was recognised...

  • Page 159
    ... access to wholesale markets. During 2011, customer accounts grew by 2% while customer advances fell by 2%, leading to a decrease in our advances-todeposits ratio to 75%. Despite a highly competitive environment in Asia, our customer accounts grew by 8% due to growth in deposits in Hong Kong dollars...

  • Page 160
    ...December 2010 Deposits by banks ...Customer accounts ...Trading liabilities ...Financial liabilities designated at fair value ...Derivatives ...Debt securities in issue ...Subordinated liabilities ...Other financial liabilities ...Loan and other credit-related commitments ...Financial guarantees and...

  • Page 161
    ... note was the strong funding position of The Hongkong and Shanghai Banking Corporation, as reflected in the advances to core funding ratio in the table below, which allowed us to take advantage of loan growth opportunities in Asia while still maintaining ratios well below the Group's average. HSBC...

  • Page 162
    ... a one month time horizon. Group sites are required to target a ratio of 100% or more. HSBC Finance As HSBC Finance is unable to accept standard retail customer deposits, it takes funding from the professional markets. At 31 December 2011, US$51bn (2010: US$65bn) of HSBC Finance's liabilities were...

  • Page 163
    ... is an illustration of the strength of our liquidity position. Funding sources At 31 December 2011 2010 US$bn US$bn Customer accounts ...Deposits by banks ...Debt securities ...Financial liabilities designated at fair value ...Equity ...1,253.9 112.8 131.0 85.7 166.1 1,749.5 1,227.7 110.6 145.4 88...

  • Page 164
    ... date they can be called. During 2011, HSBC Holdings continued to have full access to debt capital markets at market rates and issued US$5.3bn of senior debt (2010: nil). The eligibility requirements for non-equity instruments under Basel III rules have not been clearly defined in the UK, so HSBC...

  • Page 165
    ... Shareholder Information Financial Statements Risk type Foreign exchange and commodity ...Interest rate ...Equity ...Credit spread ... Corporate Governance In 2011, our European Credit and Rates business reported significantly lower trading revenue as turmoil in eurozone sovereign debt markets...

  • Page 166
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Risk > Market risk > Trading and non-trading portfolios Value at risk of the trading and non-trading portfolios Our Group VAR, both trading and non-trading, was as follows: Value at risk (Audited) 2011 US$m At 31...

  • Page 167
    ... statement. Gap risk During 2011 gap risk continued to be managed down. We did not incur any material gap loss in 2011. Non-trading portfolios (Audited) Fair value of equity securities (Audited) 2011 US$bn Private equity holdings63 ...Funds invested for short-term cash management ...Investment...

  • Page 168
    ... details of structural foreign exchange exposures see Note 36 on the Financial Statements. Sensitivity of net interest income (Unaudited) interest income of an incremental 25 basis points parallel rise or fall in all yield curves worldwide at the beginning of each quarter during the 12 months from...

  • Page 169
    ... schemes (Audited) 2011 US$bn Liabilities (present value) ...Assets: Equities ...Debt securities ...Other (including property) ...35.0 % 15 73 12 100 2010 US$bn 32.6 % 20 66 14 100 For details of our defined benefit schemes, see Note 7 on the Financial Statements, and for pension risk management...

  • Page 170
    ...-term perspective on interest rate risk management appropriate to a financial services holding company. The table below sets out the effect on HSBC Holdings' future net interest income over a 5-year time horizon of incremental 25 basis point parallel falls or rises in all yield curves worldwide...

  • Page 171
    ... with HSBC undertakings ...Derivatives ...Loans and advances to HSBC undertakings ...Financial investments ...Investments in subsidiaries ...Other assets ...Total assets ...Amounts owed to HSBC undertakings ...Financial liabilities designated at fair values ...Derivatives ...Debt securities in issue...

  • Page 172
    ... PLC Report of the Directors: Operating and Financial Review (continued) Risk > Operational risk > In 2011 // Insurance > HSBC's bancassurance model / In 2011 Operational risk (Unaudited) • Operational risk is relevant to every aspect of our business, and covers a wide spectrum of issues...

  • Page 173
    ... experience, lapse and surrender rates and, if the policy has a savings element, the performance of the assets held to support the liabilities. In respect of financial risks, subsidiaries manufacturing products with guarantees are usually exposed to falls in market interest rates and equity prices...

  • Page 174
    ... life insurance products are investment contracts with DPF issued in France, insurance contracts with DPF issued in Hong Kong and unit-linked contracts issued in Latin America, Hong Kong and the UK. Analysis of non-life insurance risk - net written insurance premiums66,69 (Audited) Hong Kong US...

  • Page 175
    ...December 2011 Financial assets ...- trading assets ...- financial assets designated at fair value . - derivatives ...- financial investments ...- other financial assets ...Reinsurance assets ...PVIF72 ...Other assets and investment properties ...Total assets ...Liabilities under investment contracts...

  • Page 176
    ... December 2010 Financial assets ...- trading assets ...- financial assets designated at fair value - derivatives ...- financial investments ...- other financial assets ...Reinsurance assets ...PVIF72 ...Other assets and investment properties ...Total assets ...Liabilities under investment contracts...

  • Page 177
    ... contract. At 31 December 2011 Trading assets Debt securities ...Equity securities ...Financial assets designated at fair value ...Treasury bills ...Debt securities ...Equity securities ...Financial investments Held-to-maturity: debt securities...Available-for-sale: ...- Treasury bills ...- other...

  • Page 178
    ... of 2011. Market risk (Audited) back them. For example, mismatches between asset and liability yields and maturities give rise to interest rate risk. Long-term insurance or investment products may incorporate benefits that are guaranteed. Where mismatches exist as a result of current yields falling...

  • Page 179
    ... bills and debt securities within our insurance business by measures of credit quality. The five credit quality classifications are defined in the Appendix to Risk on page 188. Only assets supporting liabilities under non-linked insurance and investment contracts and shareholders' funds are included...

  • Page 180
    ... US$m At 31 December 2011 Supporting liabilities under non-linked insurance and investment contracts Trading assets - debt securities ...Financial assets designated at fair value ...- treasury and other eligible bills ...- debt securities ...Financial investments ...- treasury and other similar...

  • Page 181
    ... US$m At 31 December 2010 Supporting liabilities under non-linked insurance and investment contracts Trading assets - debt securities ...Financial assets designated at fair value ...- treasury and other eligible bills ...- debt securities ...Financial investments ...- treasury and other similar...

  • Page 182
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Risk > Insurance risk > Financial risks / PVIF Reinsurers' share of liabilities under insurance contracts (continued) Neither past due nor impaired Strong US$m At 31 December 2010 Linked insurance contracts ......

  • Page 183
    ... risk and valuation framework. The PVIF asset at 31 December 2011 was US$4.1bn (2010: US$3.4bn), representing the present value of the shareholders' interest in the profits expected to emerge from the book of in-force policies at that date. to future investment returns ('Changes in investment...

  • Page 184
    ... 241 726 - - - (74) 4,092 Key assumptions used in the computation of PVIF for main life insurance operations 2011 UK Hong Kong % % Risk free rate ...Risk discount rate ...Expense inflation ...2.24 2.74 3.45 1.47 8.00 3.00 France % 2.77 5.95 2.00 UK % 3.46 7.00 3.76 2010 Hong Kong % 3.10 11.00 3.00...

  • Page 185
    ... funded by premiums received and income earned on the investment portfolio supporting the liabilities. For a portfolio of term assurance, an increase in lapse rates typically has a negative effect on profit due to the loss of future premium income on the lapsed policies. France, Hong Kong and the UK...

  • Page 186
    ... a number of pension plans throughout the world. Some are defined benefit plans, of which the largest is the HSBC Bank (UK) Pension Scheme ('the principal plan'). There were no material changes to our policies and procedures for the management of pension risk in 2011. During 2011, the net liability...

  • Page 187
    ... on loans and advances to banks in 2010 relate to geographical regions, Europe, Middle East and North Africa, and North America. 11 Our available-for-sale holdings in sovereign and agency debt of Italy and Spain include debt held to support insurance contracts which provide discretionary profit...

  • Page 188
    ... Bank USA in 2011 is primarily due to the transfer of the majority of the committed lines provided for Bryant Park LLC to HSBC Bank plc. 50 HSBC-managed asset exposures relate to consolidated securities investment conduits, primarily Solitaire and Mazarin (see page 403). These vehicles issue debt...

  • Page 189
    ... this impacts profits on future business. Pension risk 83 In 2010 and 2011, alternative assets included ABSs, MBSs and infrastructure assets. In 2006, alternative assets included loans and infrastructure assets. 187 Shareholder Information Financial Statements Corporate Governance Operating...

  • Page 190
    ...risk Appendix to Risk Risk policies and practices This appendix describes the significant policies and practices employed by HSBC in managing our credit risk, liquidity and funding, market risk, insurance risk, operational risk, reputational risk, pension risk and sustainability risk. Managing risk...

  • Page 191
    ... to specified market sectors, activities and banking products and controlling exposures to certain higher-risk sectors; • to undertake an independent review and objective assessment of risk. Global Risk assesses all commercial non-bank credit facilities and exposures over designated limits, prior...

  • Page 192
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Risk > Appendix - Risk policies and practices > Credit risk with a global perspective and on the design and effectiveness of primary and secondary controls, carrying out oversight audits via sampling of global/...

  • Page 193
    ... securities with short-term issue ratings are reported against the long-term rating of the issuer of those securities. If major rating agencies have different ratings for the same debt securities, a prudent rating selection is made in line with regulatory requirements. 191 Shareholder Information...

  • Page 194
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Risk > Appendix - Risk policies and practices > Credit risk Renegotiated loans and forbearance (Audited) A range of forbearance strategies are employed in order to improve the management of customer ...

  • Page 195
    ... solely from statistical or historical experience. For further details and examples of the risk factor adjustments see 'Critical accounting policies' on page 38. In the corporate and commercial sectors, renegotiated loans are typically assessed individually. Credit risk ratings are intrinsic to the...

  • Page 196
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Risk > Appendix - Risk policies and practices > Credit risk - - - extension of the maturity date or dates at a stated interest rate lower than the current market rate for new debt with similar risk; reduction (...

  • Page 197
    ... a security benefits from a contract provided by a monoline insurer that insures payments of principal and interest, the expected recovery on the contract is assessed in determining the total expected credit support available to the ABS. 195 Shareholder Information Financial Statements Corporate...

  • Page 198
    ...day and the intra-day collateral position is managed so that there is liquidity available to meet payments. Policies and procedures (Audited) It is our policy that each banking entity should manage its liquidity and funding risk on a standalone basis. Exceptions are permitted for certain short-term...

  • Page 199
    ... loans and advances to customers without corresponding growth in core customer deposits or long-term debt funding; this measure is referred to as the 'advances to core funding' ratio. Advances to core funding ratio limits are set by the Risk Management Meeting for the major Group banking entities...

  • Page 200
    ... of profits to fund its dividend payments to shareholders. Market risk Monitoring and limiting market risk exposures (Audited) The management of market risk is principally undertaken in Global Markets using risk limits approved by the GMB. Limits are set for portfolios, products and risk types...

  • Page 201
    ... Financial Review Sensitivity analysis (Unaudited) We use sensitivity measures to monitor the market risk positions within each risk type, for example, the present value of a basis point movement in interest rates for interest rate risk. Sensitivity limits are set for portfolios, products and risk...

  • Page 202
    ...non-trading portfolios is based on transferring the risks to the books managed by Global Markets or the local ALCO. The net exposure is typically managed through the use of interest rate swaps within agreed limits. The VAR for these portfolios is included within the Group VAR. Credit spread risk The...

  • Page 203
    ... interest rate risk to it to be managed within defined limits and with flexibility as to the instruments used. • 201 Shareholder Information Financial Statements Corporate Governance Operating & Financial Review Overview Structural foreign exchange exposures represent net investments in...

  • Page 204
    ...its investments in our businesses; providing dividend payments to HSBC Holdings' equity shareholders and interest payments to providers of debt capital; and maintaining a supply of short-term cash resources. It does not take proprietary trading positions. The main market risks to which HSBC Holdings...

  • Page 205
    ... overseen by Regional Compliance Officers located in Europe, North America, Latin America, the Middle East and North Africa and Asia-Pacific and each business line is supported by a Global Business Compliance Officer. Group Compliance policies and procedures require the prompt identification...

  • Page 206
    ... would be reported to the GMB via the Risk Management Meeting. In addition, local ALCOs and Risk Management Committees monitor certain risk exposures, mainly for life business where the duration and cash flow matching of insurance assets and liabilities are reviewed. All insurance products, whether...

  • Page 207
    ... surrender rates and, if the policy has a savings element, the performance of the assets held to support the liabilities. Life and non-life business insurance risks are controlled by high-level policies and procedures set centrally, taking into account where appropriate local market conditions and...

  • Page 208
    ... years. Our current portfolio of assets includes debt securities issued at a time when yields were higher than those observed in the current market. As a result, yields on extant holdings of debt securities exceed those which may be obtained on current issues. We reduced short-term bonus rates paid...

  • Page 209
    ... point parallel shift in the discount curves used to calculate the net present values; • for equity price risk, the total market value of equity holdings and the market value of equity holdings by region and country; and • for foreign exchange risk, the total net short foreign exchange position...

  • Page 210
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Risk > Appendix - Risk policies and practices > Insurance risk / Reputational risk / Pension risk flow model in which the discount rate is based on current interest rates, guarantee costs increase in a falling ...

  • Page 211
    ...scheme liabilities; and • scheme members living longer than expected (known as longevity risk). 209 Shareholder Information Financial Statements We operate a number of pension plans throughout the world, as described in Note 7 on the Financial Statements. Some of them are defined benefit plans...

  • Page 212
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Risk > Appendix - Risk policies and practices > Sustainability risk // Capital > Overview / Movement in RWAs in 2011 A plan's investment strategy is determined after taking into consideration the market risk ...

  • Page 213
    ...2011 ...212 Future developments ...212 Appendix to Capital ...215 clearly defined in the UK. We therefore chose not to issue any such capital securities during 2011. Overview Shareholder Information Financial Statements Corporate Governance Operating & Financial Review Risk-weighted assets by risk...

  • Page 214
    ... tier 1 capital (Audited) Opening core tier 1 capital ...Contribution to core tier 1 capital from profit for the year ...Consolidated profits attributable to shareholders of the parent company ...Removal of own credit spread net of tax ...Net dividends ...Dividends ...Add back: shares issued in lieu...

  • Page 215
    ... than the current core tier 1 ratio. Management actions, primarily the run-off of legacy positions including the US CML portfolio and the sale of the US Card and Retail Services portfolio, coupled with active management of the correlation trading portfolio, the market risk capital requirement and...

  • Page 216
    ...on debt securities net of tax must be excluded from capital resources. 4 Under FSA rules, any defined benefit asset is derecognised and a defined benefit liability may be substituted with the additional funding that will be paid into the relevant schemes over the following five-year period. 5 Mainly...

  • Page 217
    ...FSA for the consolidated Group and by our local regulators for individual Group companies. The following risks managed through the capital management framework have been identified as material: credit, market, operational, interest rate risk in the banking book, pension fund, insurance and residual...

  • Page 218
    ... approaches. Under our Basel II rollout plans, a number of our Group companies and portfolios are in transition to advanced IRB approaches. At end of 2011, portfolios in much of Europe, Hong Kong, Rest of Asia-Pacific and North America were on advanced IRB approaches. Others remain on the...

  • Page 219
    ...capital and risk management under the Basel II framework. Our Pillar 3 disclosures for the year ended 31 December 2011 are published as a separate document on the Group Investor Relations website. 217 Shareholder Information Financial Statements Corporate Governance Operating & Financial Review...

  • Page 220
    ... with over 30 years' international experience with HSBC; has held a number of key roles in the Group's operations worldwide, including in London, Hong Kong, Tokyo, Kuala Lumpur and the United Arab Emirates; played a leading role in developing and expanding Global Banking and Markets, the wholesale...

  • Page 221
    ... member of the Open University of Hong Kong. 219 Shareholder Information Financial Statements Corporate Governance Operating & Financial Review Former appointments include: Chairman, Europe, Middle East and Global Businesses; Chairman of HSBC Bank plc and of HSBC Bank Middle East Limited; Head...

  • Page 222
    ... York and London; former Chief Executive Officer of Allianz Global Investors AG and a member of the management board of Allianz SE until 31 December 2011; 14 years experience with Citigroup Inc. holding positions in Trading and Project Finance and as Head of Capital Markets for Europe, North America...

  • Page 223
    ... Vice-President, Commercial Banking, HSBC Bank USA, N.A.; Managing Director of The Saudi British Bank. J P Lipsky†, 65 Member of the Group Risk Committee from 1 March 2012. Skills and experience: international experience having worked in Chile, New York, Washington and London and interacted...

  • Page 224
    ... Accountants of Scotland. Joined HSBC in 2007. Appointed to the Board: 2010 Current appointments include: member of the Group Management Board. Former appointments include: director of Hang Seng Bank Limited; Chief Financial Officer, Asia Pacific; and Chief Financial Officer, HSBC North America...

  • Page 225
    ...of China Limited and Intel Corporation, Inc.; and President of the Goldman Sachs Group, Inc. Sir Brian Williamson†, CBE, 67 Member of the Nomination Committee. Skills and experience: extensive experience in money and bond markets, insurance, private equity, futures, options and commodities trading...

  • Page 226
    ... Executive, HSBC Bank plc Joined HSBC in 1975. A Group Managing Director since 2008. Chairman of HSBC Life (UK) Limited. Former HSBC appointments include: Group Chief Risk Officer; Group General Manager, Group Credit and Risk; and Head of Global Banking and Markets for North America. P A Thurston...

  • Page 227
    ... of HSBC's management structure, headed by the Board of Directors of HSBC Holdings (the 'Board') and led by the Group Chairman, is to deliver sustainable value to our shareholders. The Board sets the strategy and risk appetite for the Group and approves capital and operating plans presented by...

  • Page 228
    HSBC HOLDINGS PLC Report of the Directors: Corporate Governance (continued) Board of Directors > Directors Board meetings Seven Board meetings and a two-day strategy meeting were held in 2011. At least one Board meeting each year is held in a key strategic location outside the UK. During 2011, ...

  • Page 229
    ...strategy and developments in the global businesses and principal geographical areas. Regular reports are also provided to the Board and Board committees on the Group's risk appetite profile, top and emerging risks, risk management, credit exposures and the Group's loan portfolio, asset and liability...

  • Page 230
    ... Directors and senior members of management and a review of relevant documents. Factors assessed during Oliver Wyman's review included the Board's performance in key priority areas for investors including strategy, financial performance, risk, regulation, compensation, sustainability and corporate...

  • Page 231
    ... of The UK Corporate Governance Code issued by the Financial Reporting Council and the Code on Corporate Governance Practices in Appendix 14 to the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited, save that the Group Risk Committee (all the members of which...

  • Page 232
    ... of whom are Group Managing Directors. The GMB is a key element of our management reporting and control structure such that all of our line operations are accountable either to a member of the GMB or directly to the Group Chief Executive, who in turn reports to the Group Chairman. The Board has set...

  • Page 233
    ... and experience of staff in the finance function. Reports were submitted to the Committee on internal control matters in relation to the Sarbanes-Oxley Act. The Group Finance Director, the Group Chief Risk Officer, the Group Head of Internal Audit, the Group Chief Accounting Officer and...

  • Page 234
    ...the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited and the UK Corporate Governance Code. The Committee received reports on proposed changes to the Group's disclosures in the financial statements and the adequacy of procedures to identify transactions and matters...

  • Page 235
    ... services, audit-related services, tax services and other services. Group Risk Committee The GRC is responsible for advising the Board on high-level risk-related matters and risk governance and for non-executive oversight of risk management and internal controls (other than over financial reporting...

  • Page 236
    ... committee on risk-related matters and internal controls (other than over financial reporting) of relevant subsidiaries Global Risk Management Board Group Chief Risk Officer Chief Risk Officers of HSBC's global businesses and regions Heads of risk areas within the Global Risk Function Subsidiary...

  • Page 237
    ... sheet Strong brand Healthy capital position Conservative liquidity management Risk must be commensurate with sustainable returns Robust Group structure of separate legal entities The global businesses should produce sustainable long-term earnings growth • Risk diversification Strategic and...

  • Page 238
    ... to the residential mortgage business in Hong Kong, and the implementation of action plans to mitigate risks where appropriate. Internal Audit has conducted a review of stress testing within the Group including model development, validation and use, and the methodology, governance and management of...

  • Page 239
    ... with the Group Chief Risk Officer, the Group Head of Internal Audit, the Group Finance Director, other senior executives and the external auditor. 237 Shareholder Information Financial Statements Corporate Governance Operating & Financial Review presentations on the procedure for determining...

  • Page 240
    ... Board and the skills, knowledge and • 1 All members are independent non-executive Directors. 2 During the year two meetings were held at short notice. The Group Remuneration Committee is responsible for approving remuneration policy. As part of its role, it considers the terms of bonus plans...

  • Page 241
    ...and high-quality service and customer experience. We use the benefits of our scale, financial strength, geographical reach and strong brand value to achieve this. We aim to take advantage of the opportunities and manage the risks presented by emerging global trends by developing sustainable business...

  • Page 242
    ... our customers and, by extension, our long-term success, introducing new risks to business activity. At the end of 2011, we committed to a series of targets stretching through to 2020, which will further reduce HSBC's impact on the environment. Community investment We have a long-standing commitment...

  • Page 243
    ... in HSBC to identify, control and report on the major risks including credit, market, liquidity, capital, financial management, model, reputational, pension, strategic, sustainability and operational risk (including accounting, tax, legal, compliance, fiduciary, information security, security and...

  • Page 244
    ... PLC Report of the Directors: Corporate Governance (continued) Internal control / Going concern / Employees > Global People Survey - the top and emerging risk process prompted a number of reviews and special papers on key risks, which were presented to the Risk Management Meeting, GRC and Board...

  • Page 245
    ... conditions, including future projections of profitability, cash flows and capital resources. Further information relevant to the assessment is provided elsewhere in this Report. In particular, HSBC's principal activities, business and operating models, strategic direction and top and emerging risks...

  • Page 246
    ... employees across the organisation to ensure an appropriate supply of high calibre individuals with the skills and experience for current and future senior management positions. In 2011, we continued to build global consistency across our learning curricula and to improve the relevance and quality...

  • Page 247
    ... details on share-based payments, including discretionary awards of shares granted under HSBC's share plans. All-employee share option plans All employees employed within the Group on the first working day of the year may be granted options to acquire HSBC Holdings ordinary shares under shareholder...

  • Page 248
    HSBC HOLDINGS PLC Report of the Directors: Corporate Governance (continued) Employees > Employee share plans / Subsidiary company share plans HSBC Holdings All-employee Share Option Plans Dates of award from to Exercise price from to Exercisable from to 1 Aug 2010 31 Jan 2017 At 1 Jan 2011 HSBC ...

  • Page 249
    ... the same exchange ratio. Details of options to acquire shares in HSBC Holdings under the share plans of HSBC Bank Bermuda are set out in the following table. No further options will be granted under the share plans of HSBC Bank Bermuda. 247 Shareholder Information Financial Statements Corporate...

  • Page 250
    HSBC HOLDINGS PLC Report of the Directors: Corporate Governance (continued) Employees / Other required disclosures / Annual General Meeting // Appendix - Other required disclosures > Share capital HSBC Bank Bermuda Dates of award from to Share Option Plan 1997 11 Jan 2001 (US$) 12.44 - (US$) 15.99...

  • Page 251
    ... resolution passed by the shareholders and subject to such terms and conditions as the Board may determine, offer to any holders of ordinary shares the right to elect to receive ordinary shares of the same or a different currency, credited as fully paid, instead of cash in any currency in respect...

  • Page 252
    ... in issue at 27 February 2012. The dividend is paid at the rate of US$15.50 per quarter at the sole and absolute discretion of the Board. A dividend will not be declared or paid on the Dollar Preference Shares if payment of the dividend would cause HSBC Holdings not to meet the applicable capital...

  • Page 253
    ... over HSBC ordinary shares granted in response to 45,000 applications from HSBC employees in 70 countries and territories on 20 April 2011 ...Plan d'Epargne Entreprise HSBC ordinary shares issued for the benefit of non-UK resident employees of HSBC France and its subsidiaries ...Exercise price from...

  • Page 254
    HSBC HOLDINGS PLC Report of the Directors: Corporate Governance (continued) Appendix - Other required disclosures > Directors' interests / Supplier payment policy / Dividends and shareholders Authority to allot shares At the Annual General Meeting in 2011, shareholders renewed the general ...

  • Page 255
    ... the publication of the Notice of Annual General Meeting will be set out in the notes to that Notice. Operating & Financial Review - 4263 4,1711 - - - - - Overview No Directors held any short position as defined in the Securities and Futures Ordinance of Hong Kong in the shares and loan capital...

  • Page 256
    ...the Annual General Meeting or the informal meeting of shareholders held in Hong Kong to discuss our progress. Shareholders may send enquiries to the Board in writing to the Group Company Secretary, HSBC Holdings plc, 8 Canada Square, London E14 5HQ or by sending an email to shareholderquestions@hsbc...

  • Page 257
    ... the Listing of Securities on The Stock Exchange of Hong Kong Limited at least 25% of the total issued share capital has been held by the public at all times during 2011 and up to the date of this Report. Dealings in HSBC Holdings shares Except for dealings as intermediaries by HSBC Bank and The...

  • Page 258
    ... of which are performance related. These are fixed pay; the annual bonus; the Group Performance Share Plan (the new long-term incentive plan of the HSBC Share Plan 2011); and benefits. Group Remuneration Committee Within the authority delegated by the Board, the Group Remuneration Committee ('the...

  • Page 259
    ... in the HSBC Finance portfolio in North America; loan impairment charges and other credit risk provisions reduced significantly, notably in North America; credit conditions remained stable elsewhere; • • 257 Shareholder Information Financial Statements • reported profit before tax...

  • Page 260
    ... with a ratio of customer advances to customer accounts of 75%. On an underlying basis, we grew loans to customers and customer deposits across our target markets of Latin America, Hong Kong, Rest of Asia-Pacific and Middle East and North Africa; • we increased dividends in respect of 2011 to our...

  • Page 261
    ... of nine global financial services companies, namely Banco Santander, Bank of America, Barclays, BNP Paribas, 259 Shareholder Information This approach applies to all executive Directors with the exception of the Group Chairman, D J Flint, who, from 2011, is not eligible for annual bonus and is...

  • Page 262
    ... sale of the upstate New York branches of the US commercial bank and the US credit and storecard businesses. The Committee noted that the portion of the annual bonus attributable to these latter two divestments would be clawed back in the event the agreed sales do not complete. Elsewhere in relation...

  • Page 263
    ... performance against the financial measures of Profit before Tax, Cost Efficiency and Return on Risk-Weighted Assets had been met or exceeded in CMB, Latin America and the Middle East and North Africa. The performance in Europe against these targets was below plan. Capital Generation targets were...

  • Page 264
    ...a core tier 1 capital ratio of 10.5%. The dividend payout fell within the range and the ranges for the Return on Equity and Cost Efficiency Ratio financial measures were not met. Within the non-financial measures the Committee's considered view was that Strategy, 2010 long-term scorecard and initial...

  • Page 265
    ... efficiency programmes underway to deliver targeted cost savings, the focus in terms of capital deployment on sustainable opportunities within the larger economies in which the Group has meaningful positions and in the faster-growing markets which will drive incremental trade and investment...

  • Page 266
    ... performance outcomes and adherence to HSBC Values. Long-term target range Measure Return on equity ...Cost efficiency ratio ...Capital strength ...Progressive dividend payout within 40% - 60% range ...Strategy ...Brand equity ...Compliance and reputation ...People and values ...12% - 15% 48% - 52...

  • Page 267
    ...of a number of business trips to the UK at the request of the Group. This liability was covered by HSBC. 4 Where applicable, bonus comprises: (i) the estimated monetary value of 33% of the award of HSBC Holdings Restricted Shares that will vest on 15 March 2012 arising from the 2010 bonus awarded in...

  • Page 268
    ... and absolute performance over the long term. They take into account an external measure of value creation, a measure of the extent to which the return on capital invested in HSBC is in excess of a benchmark return and a direct measure of the profits generated for shareholders. Awards did not vest...

  • Page 269
    ... Board has agreed that new shares may be issued to satisfy the vesting of Restricted Shares awards and GPSP awards that cannot be satisfied from shares already held by employee benefit trusts. Total shareholder return Pursuant to the Large and Medium-sized Companies and Groups (Accounts and Reports...

  • Page 270
    ... three years, subject to their re-election by shareholders at Annual General Meetings. Non-executive directors have no service contract and are not eligible to participate in our share plans. Current non-executive Directors' terms of appointment will expire as follows: • • • in 2012...

  • Page 271
    ... Seng Bank Limited. 3 Includes fees as non-executive Chairman of HSBC North America Holdings Inc. 4 Total fees for 2010 include the fees of non-executive Directors who retired in that year. Employee compensation and benefits Set out below are details of remuneration paid to Senior Management (being...

  • Page 272
    ... (members of the GMB, but not Directors of HSBC Holdings plc) 1 £000 Fixed Cash based ...Total fixed ...Annual bonus Cash ...Non-deferred shares2 ...Deferred cash ...Deferred shares3 ...Total annual bonus ...Long-term incentive plan (GPSP) Deferred shares ...Total variable pay ...Total remuneration...

  • Page 273
    ...Transfer value (less personal contributions) at 31 December 2011 relating to increase in accrued pension during 2011, excluding any increase for inflation1 £000 Operating & Financial Review V H C Cheng retired on 27 May 2011 and until that date was a member of the Hong Kong Special Administrative...

  • Page 274
    ...31 Jan 2013 31 Jan 2015 31 Jan 2012 At 1 Jan 2011 2,650 4,529 1,531 At 31 Dec 2011 2,650 4,529 1,531 The HSBC Holdings savings-related share option plans are all-employee share plans under which eligible HSBC employees may be granted options to acquire HSBC Holdings ordinary shares. Employees may...

  • Page 275
    ... share was £6.41. The market value per share on the date of the award, 31 March 2008, was £8.30. An award of 546 shares representing the fourth interim dividend for 2010 vested on 5 May 2011 when the market value per share was £6.46. 273 Shareholder Information Financial Statements Corporate...

  • Page 276
    ... HSBC Share Plan 2011. Vesting of GPSP awards is normally subject to the Director remaining an employee on the vesting date. Any shares (net of tax) which the Director becomes entitled to on the vesting date are subject to a retention requirement until cessation of employment. Under the Securities...

  • Page 277
    ... with the applicable set of accounting standards and give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group and the undertakings included in the consolidation taken as a whole; and the management report represented by the Report of the Directors has...

  • Page 278
    ... to the Members of HSBC Holdings plc Report We have audited the Group and parent company financial statements of HSBC Holdings plc for the year ended 31 December 2011 set out on pages 279 to 413. The financial reporting framework that has been applied in their preparation is applicable law and...

  • Page 279
    ... of the report to shareholders by the Board on Directors' remuneration. Financial Statements Corporate Governance G Bainbridge, Senior Statutory Auditor For and on behalf of KPMG Audit Plc, Statutory Auditor Chartered Accountants London, England 27 February 2012 Operating & Financial Review we...

  • Page 280
    ... financial instruments designated at fair value ...Net earned insurance premiums ...Net insurance claims incurred and movement in liabilities to policyholders ...Operating profit ...Employee compensation and benefits ...Auditors' remuneration ...Share-based payments ...Tax ...Dividends ...Earnings...

  • Page 281
    ...Net trading income ...Changes in fair value of long-term debt issued and related derivatives ...Net income/(expense) from other financial instruments designated at fair value ...Net income/(expense) from financial instruments designated at fair value ...Gains less losses from financial investments...

  • Page 282
    ... PLC Financial Statements (continued) Consolidated statement of comprehensive income / Consolidated balance sheet Consolidated statement of comprehensive income for the year ended 31 December 2011 2011 US$m Profit for the year ...Other comprehensive income/(expense) Available-for-sale investments...

  • Page 283
    ... assets ... Liabilities and equity Liabilities Hong Kong currency notes in circulation ...Deposits by banks ...Customer accounts ...Items in the course of transmission to other banks ...Trading liabilities ...Financial liabilities designated at fair value ...Derivatives ...Debt securities in issue...

  • Page 284
    ... assets ...- change in operating liabilities ...- elimination of exchange differences1 ...- dividends received from associates ...- contributions paid to defined benefit plans ...- tax paid ...Net cash generated from operating activities ...Cash flows from investing activities Purchase of financial...

  • Page 285
    ... (net of tax) ...Available-for-sale investments ...Cash flow hedges ...Actuarial gains/(losses) on defined benefit plans ...Share of other comprehensive income of associates and joint ventures ...Exchange differences ... Total comprehensive income for the year ... 283 Shares issued under employee...

  • Page 286
    ...) 154,915 Financial Statements (continued) Consolidated statement of changes in equity At 1 January ... Profit for the year ...Other comprehensive income (net of tax) ...Available-for-sale investments ...Cash flow hedges ...Actuarial losses on defined benefit plans ...Share of other comprehensive...

  • Page 287
    ...Availablefor-sale fair value reserve US$m Total Nonshareholders' controlling equity interests US$m US$m At 1 January ... Profit for the year ...Other comprehensive income (net of tax) ...Available-for-sale investments ...Cash flow hedges ...Actuarial gains/(losses) on defined benefit plans ...Share...

  • Page 288
    ... Holdings balance sheet / HSBC Holdings statement of cash flows HSBC Holdings balance sheet at 31 December 2011 Notes 2011 US$m 2010 US$m Assets Cash at bank and in hand: - balances with HSBC undertakings ...Derivatives ...Loans and advances to HSBC undertakings ...Financial investments ...Current...

  • Page 289
    HSBC Holdings statement of cash flows for the year ended 31 December 2011 Notes Cash flows from operating activities Profit before tax ...Adjustments for: - non-cash items included in profit before tax ...- change in operating assets ...- change in operating liabilities ...- net loss from investing ...

  • Page 290
    ...(net of tax) ...Available-for-sale investments ...Income tax ...Total comprehensive income for the year ...Shares issued under employee share plans ...Shares issued in lieu of dividends and amounts arising thereon2 ...Dividends to shareholders8 ...Tax credit on distributions ...Own shares adjustment...

  • Page 291
    ...sale investments ...Income tax ...Total comprehensive income for the year ...Shares issued under employee share plans ...Shares issued in lieu of dividends and amounts arising thereon2 ...Capital securities issued9 ...Dividends to shareholders8 ...Tax credit on distributions ...Own shares adjustment...

  • Page 292
    ...own shares held within HSBC's insurance business, retirement funds for the benefit of policyholders or beneficiaries within employee trusts for the settlement of shares expected to be delivered under employee share schemes or bonus plans, and the market-making activities in Global Markets (2010: 123...

  • Page 293
    ...: Capital' on pages 211 to 217. Disclosures relating to HSBC's securitisation activities and structured products have been included in the audited section of 'Report of the Directors: Risk' on pages 98 to 210. In accordance with HSBC's policy to provide meaningful disclosures that help investors and...

  • Page 294
    ... information is prepared. Management believes that HSBC's critical accounting policies where judgement is necessarily applied are those which relate to impairment of loans and advances, goodwill impairment, the valuation of financial instruments, the impairment of available-for-sale financial assets...

  • Page 295
    ... return on plan assets by a finance cost component comprising the net interest on the net defined benefit liability or asset. This finance 293 Shareholder Information Financial Statements Corporate Governance Operating & Financial Review Overview The consolidated financial statements of HSBC...

  • Page 296
    HSBC HOLDINGS PLC Notes on the Financial Statements (continued) 1 - Basis of preparation / 2 - Summary of significant accounting policies cost component is determined by applying the same discount rate used to measure the defined benefit obligation to the net defined benefit liability or asset. ...

  • Page 297
    ... from debt securities issued by HSBC, and derivatives managed in conjunction with those debt securities, which is recognised in 'Interest expense' (Note 2a). Dividend income is recognised when the right to receive payment is established. This is the ex-dividend date for listed equity securities, and...

  • Page 298
    ... cost, as applicable. (f) Loans and advances to banks and customers Loans and advances to banks and customers include loans and advances originated by HSBC which are not classified either as held for trading or designated at fair value. Loans and advances are recognised when cash is advanced to...

  • Page 299
    ... impairment include: - - - the size of the loan; the number of loans in the portfolio; and the importance of the individual loan relationship, and how this is managed. Overview Shareholder Information Financial Statements Corporate Governance Operating & Financial Review Loans that meet the above...

  • Page 300
    ...of the debt. The realisable value of security is determined based on the current market value when the impairment assessment is performed. The value is not adjusted for expected future changes in market prices; however, adjustments are made to reflect local conditions, such as forced sale discounts...

  • Page 301
    ... highly developed markets, sophisticated models also take into account behavioural and account management trends as revealed in, for example, bankruptcy and rescheduling statistics. âˆ' When the portfolio size is small or when information is insufficient or not reliable enough to adopt a roll rate...

  • Page 302
    ... rate risk management strategy. An accounting mismatch would arise if the debt securities issued were accounted for at amortised cost, because the related derivatives are measured at fair value with changes in the fair value recognised in the income statement. By designating the long-term debt...

  • Page 303
    ... insurance contracts are the main class of financial instrument so designated. HSBC has documented risk management and investment strategies designed to manage such assets at fair value, taking into consideration the relationship of assets to liabilities in a way that mitigates market risks. Reports...

  • Page 304
    HSBC HOLDINGS PLC Notes on the Financial Statements (continued) 2 - Summary of significant accounting policies - Available-for-sale debt securities. When assessing available-for-sale debt securities for objective evidence of impairment at the reporting date, HSBC considers all available evidence,...

  • Page 305
    ... and qualify as fair value hedging instruments are recorded in the income statement, along with changes in the fair value of the hedged assets, liabilities or group thereof that are attributable to the hedged risk. 303 Shareholder Information Financial Statements Corporate Governance Operating...

  • Page 306
    ... managed in conjunction with debt securities issued by HSBC), in which case gains and losses are reported in 'Net income from financial instruments designated at fair value'. The interest on derivatives managed in conjunction with debt securities issued by HSBC which are designated at fair value...

  • Page 307
    ... rate strategies relate. Nonqualifying hedges therefore operate as economic hedges of the related assets and liabilities. (m) Derecognition of financial assets and liabilities Financial assets are derecognised when the contractual right to receive cash flows from the assets has expired; or when HSBC...

  • Page 308
    ...For the accounting policy governing the present value of in-force long-term insurance business (see Note 24). (iii) Intangible assets with finite useful lives are amortised, generally on a straight-line basis, over their useful lives as follows: Trade names ...Mortgage servicing rights ...Internally...

  • Page 309
    ... to share-based payment transactions is recognised directly in equity to the extent that the amount of the estimated future tax deduction exceeds the amount of the related cumulative remuneration expense. Deferred tax relating to fair value re-measurements of available-for-sale investments and cash...

  • Page 310
    ... benefit pension costs and the present value of defined benefit obligations are calculated at the reporting date by the schemes' actuaries using the Projected Unit Credit Method. The net charge to the income statement mainly comprises the current service cost, plus the unwinding of the discount rate...

  • Page 311
    ... the consolidated financial statements, the assets, including related goodwill where applicable, and liabilities of branches, subsidiaries, joint ventures and associates whose functional currency is not US dollars, are translated into the Group's presentation currency at the rate of exchange ruling...

  • Page 312
    ... accounting year relating to the period of risk after the balance sheet date) is calculated on a daily or monthly pro rata basis. Premiums for life insurance contracts are accounted for when receivable, except in unit-linked insurance contracts where premiums are accounted for when liabilities are...

  • Page 313
    ... sheet date. The present value of in-force long-term insurance business and long-term investment contracts with DPF, referred to as 'PVIF', is determined by discounting the equity holders' interest in future profits expected to emerge from business currently in force using appropriate assumptions...

  • Page 314
    ...of new shares, the cash proceeds of the rights issue are recognised in shareholders' equity. Incremental costs directly attributable to the rights issue are shown as a deduction from the proceeds, net of tax. (ad) Assets held for sale Non-current assets and disposal groups (including both the assets...

  • Page 315
    ... investment contracts ...- HSBC's long-term debt issued and related derivatives ...- changes in own credit spread on long-term debt ...- derivatives managed in conjunction with HSBC's issued debt securities ...- other changes in fair value ...- other financial liabilities designated at fair value...

  • Page 316
    HSBC HOLDINGS PLC Notes on the Financial Statements (continued) 4 - Net earned insurance premiums / 5 - Net insurance claims incurred / 6 - Operating profit 4 Net earned insurance premiums Non-life insurance US$m 2011 Gross earned premiums ...- gross written premiums ...- movement in unearned ...

  • Page 317
    ... payable relating to trust and other fiduciary activities where HSBC holds or invests assets on behalf of its customers ...UK bank levy ...Auditors' remuneration (see Note 8) ...Gains/(losses) Gain on disposal or settlement of loans and advances ...Impairment of available-for-sale equity securities...

  • Page 318
    ... US$159m in the future in respect of deferred cash awards for current and prior performance years. Average number of persons employed by HSBC during the year 2011 Europe ...Hong Kong ...Rest of Asia-Pacific ...Middle East and North Africa ...North America ...Latin America ...Total ...81,263 30...

  • Page 319
    Net assets/(liabilities) recognised on balance sheet in respect of defined benefit plans 2011 US$m Defined benefit pension plans ...HSBC Bank (UK) Pension Scheme ...- fair value of plan assets ...- present value of defined benefit obligations ...Other plans ...- fair value of plan assets ...- ...

  • Page 320
    ... and benefits Pension plans in the UK The largest plan exists in the UK, where the HSBC Bank (UK) Pension Scheme ('the Scheme') covers employees of HSBC Bank plc and certain other employees of HSBC. This comprises a funded defined benefit plan ('the principal plan'), which is closed to new entrants...

  • Page 321
    ... were also introduced. Pension plans in Hong Kong In Hong Kong, the HSBC Group Hong Kong Local Staff Retirement Benefit Scheme covers employees of The Hongkong and Shanghai Banking Corporation and certain other employees of HSBC. The scheme comprises a funded defined benefit scheme (which provides...

  • Page 322
    ... compared nor related to other determinations included in these financial statements. At 31 December 2011, the present values of the defined benefit obligations of The HSBC Bank (UK) Pension Scheme was US$24,367m (2010: US$22,858m), The HSBC Group Hong Kong Local Staff Retirement Benefit Scheme was...

  • Page 323
    ...plans Net asset/(liability) under defined benefit pension plans 2010 US$m 6,822 437 422 194 228 17 394 (440) (136) (7) (10) 60 7,559 Fair value of plan assets At 1 January ...Expected return on plan assets ...Contributions by HSBC ...- normal ...- special ...Contributions by employees ...Experience...

  • Page 324
    ...death in service and ill health early retirement benefits to certain UK employees. Summary 2011 US$m Present value of defined benefit obligation ...Fair value of plan assets ...Net surplus/(deficit) ...Experience losses on plan liabilities ...Experience gains/(losses) on plan assets ...Gains/(losses...

  • Page 325
    ... plans' local actuaries, on the basis of current average yields of high quality (AA rated or equivalent) debt instruments, with maturities consistent with those of the defined benefit obligations. In countries where there is not a deep market in corporate bonds, government bond yields have been used...

  • Page 326
    ... HOLDINGS PLC Notes on the Financial Statements (continued) 7 - Employee compensation and benefits / 8 - Auditors' remuneration Expected rates of return 2011 Expected rates of return1 % HSBC Bank (UK) Pension Scheme Fair value of plan assets ...Equities ...Bonds ...Property ...Other ...Other plans...

  • Page 327
    ... number of persons employed by HSBC Holdings during 2011 was 1,212 (2010: 1,015). Employees of HSBC Holdings who are members of defined benefit pension plans are principally members of either the HSBC Bank (UK) Pension Scheme or the HSBC International Staff Retirement Benefits Scheme. HSBC Holdings...

  • Page 328
    HSBC HOLDINGS PLC Notes on the Financial Statements (continued) 8 - Auditors' remuneration / 9 - Share-based payments Fees payable by HSBC to KPMG 2011 US$m Fees for HSBC Holdings' statutory audit1 ...- relating to current year ...- relating to prior year ...Fees for other services provided to ...

  • Page 329
    9 Share-based payments Income statement charge Overview Shareholder Information 327 2011 US$m Restricted and performance share awards1 ...Savings-related and other share option plans ...1,041 121 1,162 Equity-settled share-based payments ...Cash-settled share-based payments ...1,154 8 2010 US$m 685...

  • Page 330
    ... the date of grant • Long-term incentive plan between 2000 and 2005 during which certain HSBC employees were awarded share options Purpose • Eligible employees save up to £250 per month (or its equivalent in US dollars, Hong Kong dollars or euros), with the option to use the savings to acquire...

  • Page 331
    ... US dollar denominated dividend yield was determined to be 4.5% per annum in line with consensus analyst forecasts (2010: 4.5%; 2009: 4.5%). HSBC subsidiary company share option plans There are a number of employee share option plans relating to HSBC France, HSBC Finance and HSBC Bank Bermuda...

  • Page 332
    ...average share price at the date the options were exercised was US$8.65 (2010: US$10.08) and US$9.51 (2010: US$10.26) for the Savings-related share option plans and HSBC Holdings Group share option plan respectively. 10 Tax Tax charged to the income statement 2011 US$m Current tax UK corporation tax...

  • Page 333
    ... offsetting asset and liability balances where HSBC has the legal right to set-off and intends to settle on a net basis. 331 Shareholder Information Financial Statements Corporate Governance The effective tax rate for the year was 18.0% compared with 25.5% for 2010. Although the reported profit...

  • Page 334
    ... Availablelosses and capital for-sale tax credits allowances investments US$m US$m US$m Cash flow hedges US$m Fee income US$m Other US$m Sharebased payments US$m Assets leased to Revaluation customers of property US$m US$m HSBC HOLDINGS PLC Loan Retirement impairment benefits provisions US...

  • Page 335
    ... deferred tax asset should generally move in line with the impairment allowance balance. On the evidence available, including historical levels of profitability, management projections of future income and HSBC Holdings' commitment to continue to invest sufficient capital in North America to recover...

  • Page 336
    ..., would attract withholding tax. HSBC Holdings Deferred tax assets/(liabilities) 2011 2010 US$m US$m Temporary differences: - short-term timing differences ...- available-for-sale investments ...- fair valued assets and liabilities ...- share-based payments ...- unused tax losses ...- (4) 46...

  • Page 337
    ... 2011 US$m Profit attributable to shareholders of the parent company ...Dividend payable on preference shares classified as equity ...Coupon payable on capital securities classified as equity ...Profit attributable to the ordinary shareholders of the parent company ...16,797 (90) (483) 16,224 2010...

  • Page 338
    ... offerings include personal banking products (current and savings accounts, mortgages and personal loans, credit cards, debit cards and local and international payment services) and wealth management services (insurance and investment products, global asset management services and financial planning...

  • Page 339
    ...) ...Profit for the year ...2010 Net interest income ...Net fee income ...Net trading income ...Other income/(expense) ...Net operating income ...Loan impairment charges and other credit risk provisions ...Net operating income ...Employee compensation and benefits .. General and administrative...

  • Page 340
    ... risk provisions ...Net operating income ...Employee compensation and benefits .. General and administrative expenses ...Depreciation and impairment of property, plant and equipment ...Amortisation and impairment of intangible assets ...Total operating expenses ...Operating profit/(loss) ...Share...

  • Page 341
    ... of recoveries and other credit risk provisions ...Impairment of financial investments ...Changes in fair value of long-term debt and related derivatives ...Restructuring costs ...2010 Net operating income ...External ...Inter-segment ...Profit/(loss) for the year includes the following significant...

  • Page 342
    HSBC HOLDINGS PLC Notes on the Financial Statements (continued) 13 - Segmental analysis / 14 - Analysis of financial assets and liabilities Balance sheet information Hong Kong US$m Rest of AsiaPacific US$m North America US$m Latin America US$m IntraHSBC items US$m Europe US$m At 31 December 2011 ...

  • Page 343
    ... in fair value of own debt and HSBC's holding company and financing operations. The 'Other' category also includes gains and losses on the disposal of certain significant subsidiaries or business units. Information by country 2011 External net operating income1 US$m UK ...Hong Kong ...USA ...France...

  • Page 344
    ...Total financial assets ... Financial liabilities Hong Kong currency notes in circulation ...Deposits by banks ...Customer accounts ...Items in the course of transmission to other banks ...Trading liabilities ...Financial liabilities designated at fair value ...Derivatives ...Debt securities in issue...

  • Page 345
    ...Total financial assets ... Financial liabilities Hong Kong currency notes in circulation ...Deposits by banks ...Customer accounts ...Items in the course of transmission to other banks ...Trading liabilities ...Financial liabilities designated at fair value ...Derivatives ...Debt securities in issue...

  • Page 346
    ... assets Cash at bank and in hand ...Derivatives ...Loans and advances to HSBC undertakings ...Financial investments ...Other assets ...Total financial assets ...Financial liabilities Amounts owed to HSBC undertakings ...Financial liabilities designated at fair value ...Derivatives ...Debt securities...

  • Page 347
    ... 70,456 79,622 385,052 Trading securities valued at fair value1 Fair value 2011 US$m US Treasury and US Government agencies2 ...UK Government ...Hong Kong Government ...Other government ...Asset-backed securities3 ...Corporate debt and other securities ...Equity securities ...15,686 12,917 8,844 90...

  • Page 348
    ... market price Level 1 US$m At 31 December 2011 Assets Trading assets ...Financial assets designated at fair value ...Derivatives ...Financial investments: available for sale ...Liabilities Trading liabilities ...Financial liabilities designated at fair value ...Derivatives ...At 31 December 2010...

  • Page 349
    ...of Product Control, Global Markets Consists of heads of Global Banking and Markets, finance and risk functions Determination of fair value Fair values are determined according to the following hierarchy: Financial Statements Shareholder Information • • Level 1 - quoted market price: financial...

  • Page 350
    ... to HSBC's liabilities. The change in fair value of issued debt securities attributable to the Group's own credit spread is computed as follows: for each security at each reporting date, an externally verifiable price is obtained or a price is derived using credit spreads for similar securities for...

  • Page 351
    Global Banking and Markets fair value adjustments At 31 December 2011 2010 US$m US$m Type of adjustment Risk-related ...Bid-offer ...Uncertainty ...Credit valuation adjustment ...Other ...Model-related ...Model limitation ...Other ...Inception profit (Day 1 P&L reserves) (Note 20) ...1,899 695 154 ...

  • Page 352
    HSBC HOLDINGS PLC Notes on the Financial Statements (continued) 16 - Fair values of financial instruments carried at fair value Inception profit (Day 1 P&L reserves) Inception profit adjustments are adopted where the fair value estimated by a valuation model is based on one or more significant ...

  • Page 353
    ...US$m US$m Liabilities Designated at fair value Held for through trading profit or loss Derivatives US$m US$m US$m Available for sale US$m At 31 December 2011 Private equity including strategic investments ...Asset-backed securities ...Loans held for securitisation ...Structured notes ...Derivatives...

  • Page 354
    ... as long-dated equity volatilities and correlations between equity prices, between equity prices and interest rates and between interest rates and foreign exchange rates. Derivatives OTC (i.e. non-exchange traded) derivatives are valued using valuation models. Valuation models calculate the present...

  • Page 355
    ...profit or loss relating to assets and liabilities held on 31 December: - net interest income ...- trading income excluding net interest income ...- net interest income on trading activities ...- net income/expense from other financial instruments designated at fair value ...- dividend income ...2010...

  • Page 356
    ...profit or loss Favourable Unfavourable changes changes US$m US$m At 31 December 2011 Derivatives, trading assets and trading liabilities1 ...Financial assets and liabilities designated at fair value ...Financial investments: available for sale ...369 72 - 441 At 31 December 2010 Derivatives, trading...

  • Page 357
    At 31 December 2010 Private equity investments ...Asset-backed securities ...Loans held for securitisation ...Structured notes ...Derivatives with monolines ...Other derivatives ...Other portfolios ... 112 8 8 18 94 256 135 631 (71) (8) (8) (16) (8) (258) (150) (519) 383 179 - - - - 201 763 (383)...

  • Page 358
    ... fixed-rate preferred securities and senior notes purchased from HSBC undertakings. The unobservable elements of the valuation technique include the use of implied credit spreads and simplified bond pricing assumptions. Movement in Level 3 financial instruments available for sale 2011 US$m At...

  • Page 359
    ... to banks ...Loans and advances to customers ...Financial investments: debt securities ...Financial investments: treasury and other eligible bills ...Liabilities Deposits by banks ...Customer accounts ...Debt securities in issue ...Subordinated liabilities ...180,987 940,429 21,018 181 Fair value US...

  • Page 360
    ...carried at fair value / 18 - Reclassification of financial assets Analysis of loans and advances to customers by geographical segment At 31 December 2011 Carrying amount US$m Loans and advances to customers Europe ...Hong Kong ...Rest of Asia-Pacific ...Middle East and North Africa ...North America...

  • Page 361
    ... the prices and future earnings streams of equivalent quoted securities. Deposits by banks and customer accounts For the purpose of estimating fair value, deposits by banks and customer accounts are grouped by remaining contractual maturity. Fair values are estimated using discounted cash flows...

  • Page 362
    ... ...30,738 118 30,856 Treasury and other eligible bills ...Debt securities ...Equity securities ...Securities designated at fair value ...Loans and advances to banks ...Loans and advances to customers ...123 11,834 17,930 29,887 119 850 30,856 2010 US$m 36,990 21 37,011 159 18,248 17,418...

  • Page 363
    ...631m of investments listed in Hong Kong (2010: US$756m). 20 Derivatives Fair values of derivatives by product contract type held by HSBC Trading US$m At 31 December 2011 Foreign exchange ...Interest rate ...Equity ...Credit ...Commodity and other ...Gross total fair values ...Netting ...Total ...At...

  • Page 364
    ...067 At 31 December 2010 Trading Trading assets liabilities US$m US$m 1,407 920 2,327 827 - 827 Derivatives are financial instruments that derive their value from the price of underlying items such as equities, bonds, interest rates, foreign exchange, credit spreads, commodities and equity or other...

  • Page 365
    ... products. Risk is typically controlled through entering into offsetting credit derivative contracts with other counterparties. HSBC manages the credit risk arising on buying and selling credit derivative protection by including the related credit exposures within its overall credit limit structure...

  • Page 366
    ... Financial investments Hedging instruments HSBC uses derivatives (principally interest rate swaps) for hedging purposes in the management of its own asset and liability portfolios and structural positions. This enables HSBC to optimise the overall cost to the Group of accessing debt capital markets...

  • Page 367
    ... 365 Shareholder Information 2011 US$m 2010 US$m Financial Statements The Group applies hedge accounting in respect of certain consolidated net investments. Hedging is undertaken using forward foreign exchange contracts or by financing with currency borrowings. Corporate Governance Operating...

  • Page 368
    ... governments. The fair value of the debt securities issued by banks and other financial institutions was US$68,765m (2010: US$100,070m; 2009: US$133,461m). 3 Includes securities that are supported by an explicit guarantee issued by the US Government. 4 Excludes asset-backed securities included under...

  • Page 369
    ...average yields of investment debt securities at 31 December 2011 Within one year Amount Yield US$m % Available-for-sale US Treasury ...US Government agencies ...US Government-sponsored agencies ...UK Government ...Hong Kong Government ...Other governments ...Asset-backed securities ...Corporate debt...

  • Page 370
    ... financial assets that do not qualify for derecognition relate to loans, credit cards, debt securities and trade receivables that have been securitised under arrangements by which HSBC retains a continuing involvement in such transferred assets. Continuing involvement may entail retaining the rights...

  • Page 371
    ... 2010 Carrying Fair amount value US$m US$m 6,944 1,769 5,596 1,580 15,889 10,773 2,799 13,735 3,224 30,531 At 31 December 2011 HSBC's Country of interest in incorporation equity capital Listed Bank of Communications Co., Limited ...Industrial Bank Co., Limited ...Ping An Insurance (Group) Company...

  • Page 372
    ...Summarised aggregate financial information on associates 2011 US$m HSBC's share of: - assets ...- liabilities ...- revenues ...- profit after tax ...249,461 230,902 12,009 3,221 2010 US$m 191,286 175,812 9,274 2,479 HSBC's investment in Bank of Communications Co., Limited was equity accounted with...

  • Page 373
    ... assets 2011 US$m Goodwill ...Present value of in-force long-term insurance business ('PVIF')1 ...Other intangible assets ...21,338 4,092 3,604 29,034 1 Disclosures on PVIF are provided on page 181. 2010 US$m 22,406 3,440 4,076 29,922 371 Shareholder Information Financial Statements Corporate...

  • Page 374
    ...of the long-term perspective within the Group of the business units making up the CGUs. In 2011, for most CGUs, management's cash flow projections until the end of 2012 were used. However, due to the current economic conditions in Retail Banking and Wealth Management - Europe, and Global Banking and...

  • Page 375
    ... services sector including HSBC and a fall in the risk free rate. Management's judgement in estimating the cash flows of a CGU: the cash flow projections for each CGU are based on plans approved by the Group Management Board. The key assumptions in addition to the discount rate and nominal long-term...

  • Page 376
    ... HOLDINGS PLC Notes on the Financial Statements (continued) 24 - Goodwill and intangible assets Global Banking and Markets - Europe: the key assumption included in the cash flow projection for Global Banking and Markets - Europe is that European markets will stabilise and begin to recover in 2012...

  • Page 377
    ... to acquire intangible assets. 2 The amortisation charge for the year is recognised within the income statement under 'Amortisation and impairment of intangible assets', with the exception of the amortisation of mortgage servicing rights which is recognised in 'Net fee income'. Financial Statements...

  • Page 378
    ... assets with a net book value of US$33m (2010: US$31m) pledged as security for liabilities. At 31 December 2011, HSBC had US$517m (2010: US$593m) of contractual commitments to acquire property, plant and equipment. The disposals included under 'Equipment on operating leases' relate to the sale...

  • Page 379
    ... are members of the Hong Kong Institute of Surveyors. Properties in other countries, which represent 56% by value of HSBC's investment properties, were valued by different independent professionally qualified valuers. HSBC Holdings had no investment properties at 31 December 2011 or 2010. HSBC...

  • Page 380
    ...assets 26 Investments in subsidiaries Principal subsidiaries of HSBC Holdings Country of incorporation or registration Europe HSBC Asset Finance (UK) Limited ...HSBC Bank A.S...HSBC Bank Malta p.l.c...HSBC Bank plc ...England Turkey Malta England At 31 December 2011 HSBC's interest in Issued equity...

  • Page 381
    ... loans and advances. SPEs consolidated by HSBC where HSBC owns less than 50% of the voting rights Carrying value of total consolidated assets Nature of SPE 2011 2010 US$bn US$bn Barion Funding Limited ...Bryant Park Funding LLC ...HSBC Affinity Corporation I ...HSBC Funding Inc V ...HSBC Home Equity...

  • Page 382
    ... to customers ...Financial investments ...Prepayments and accrued income ...Goodwill and intangible assets ...Other assets of disposal groups ...Total assets ...Liabilities of disposal groups held for sale (Note 31) Deposits by banks ...Customer accounts ...Trading liabilities ...Debt securities in...

  • Page 383
    ... in fair value attributable to changes in HSBC credit risk was a gain of US$599m (2010: gain of US$142m). 29 Financial liabilities designated at fair value HSBC 2011 US$m Deposits by banks and customer accounts ...Liabilities to customers under investment contracts ...Debt securities in issue (Note...

  • Page 384
    ...162,948 Structured notes Interest rate linked ...Equity, equity index or credit-linked ... - 3,180 3,180 151,367 HSBC Holdings 2011 US$m Debt securities ...Of which debt securities in issue reported as: - financial liabilities designated at fair value (Note 29) ...Fixed rate senior debt, unsecured...

  • Page 385
    ... An analysis of liabilities of disposal groups held for sale is provided on page 380. 22,200 2010 US$m 86 Other liabilities HSBC 2011 US$m Amounts due to investors in funds consolidated by HSBC ...Obligations under finance leases (Note 42) ...Dividend declared and payable by HSBC Holdings (Note 11...

  • Page 386
    ... current year ...Claims incurred in respect of current year ...Claims incurred in respect of prior years ...Exchange differences and other movements ...At 31 December ...Notified claims ...Claims incurred but not reported ...Other ...Total non-life insurance liabilities ...Reinsurers' share US$m Net...

  • Page 387
    ... claims, surrenders, lapses, liabilities to policyholders created at the initial inception of the policies, the declaration of bonuses and other amounts attributable to policyholders. 385 Shareholder Information Financial Statements Corporate Governance Operating & Financial Review Overview

  • Page 388
    ... Note 44 for further details), and US$785m in relation to the review of sales of payment protection insurance ('PPI') in the UK. Payment Protection Insurance Following the High Court judgement on the Judicial Review application on 20 April 2011, HSBC has been working with the FSA and the Financial...

  • Page 389
    ... liabilities HSBC Overview Shareholder Information Financial Statements Corporate Governance Operating & Financial Review 2011 US$m Subordinated liabilities At amortised cost ...- subordinated liabilities ...- preferred securities ...Designated at fair value (Note 29) ...- subordinated liabilities...

  • Page 390
    ... is held by HSBC Holdings. 13 The distributions on the trust preferred securities 2035 change in November 2015 to three-month dollar LIBOR plus 1.926%. Footnotes 3 to 7, 9 and 13 relate to notes that are repayable at the option of the borrower on the date of the change of the interest rate, and at...

  • Page 391
    ... term, then the preferred securities will be substituted by preference shares of HSBC Bank having economic terms which are in all material respects equivalent to those of the preferred securities and the guarantee taken together. Overview Shareholder Information 389 Financial Statements Corporate...

  • Page 392
    HSBC HOLDINGS PLC Notes on the Financial Statements (continued) 34 - Subordinated liabilities / 35 - Maturity analysis of assets and liabilities HSBC Holdings 2011 US$m Subordinated liabilities: - at amortised cost ...- designated at fair value (Note 29) ...12,450 15,398 27,848 2010 US$m 13,313 16...

  • Page 393
    ... banks ...Loans and advances to customers ...Financial investments ...Assets held for sale ...Other financial assets ...2,581 171,132 409,935 152,095 20,936 22,878 779,557 Liabilities Deposits by banks ...Customer accounts ...Financial liabilities designated at fair value ...Debt securities in issue...

  • Page 394
    ... and collateral accepted as security for assets Financial assets pledged to secure liabilities Assets pledged at 31 December 2010 2011 US$m US$m Treasury bills and other eligible securities ...Loans and advances to banks ...Loans and advances to customers ...Debt securities ...Equity shares ...Other...

  • Page 395
    ... basis. For further details refer to 'Liquidity and funding risk' on page 160. Of the financial assets pledged to secure liabilities, the most significant amounts are located in the following geographical regions: Assets pledged at 31 December 2010 2011 US$m US$m North America ...Europe ...58,086...

  • Page 396
    ... other equity instruments Issued and fully paid 2011 US$m HSBC Holdings ordinary shares1 ...8,934 Number HSBC Holdings ordinary shares of US$0.50 each At 1 January 2011 ...Shares issued under HSBC employee share plans ...Shares issued in lieu of dividends ...At 31 December 2011 ...At 1 January 2010...

  • Page 397
    ... HSBC Private Bank France, operated employee share option plans under which options could be granted over their respective shares. 395 Shareholder Information 1 During 2009, the number and prices of unexercised share options were adjusted for the rights issue. Financial Statements Corporate...

  • Page 398
    ... price payable for each option was adjusted using the same exchange ratio. During 2011, no options (2010: 306,964) over HSBC Holdings ordinary shares were exercised and no (2010: 306,964) HSBC Holdings ordinary shares were delivered from The HSBC (Household) Employee Benefit Trust 2003. During 2011...

  • Page 399
    .... The exercise price payable for each option was adjusted using the same exchange ratio. During 2011, no (2010: 4,781) options over HSBC Holdings ordinary shares were exercised and no shares were delivered from the HSBC (Bank of Bermuda) Employee Benefit Trust 2004. During 2011, options over...

  • Page 400
    ... 2011 US$m Change in accruals and deferred income ...Change in deposits by banks ...Change in customer accounts ...Change in debt securities in issue ...Change in financial liabilities designated at fair value ...Change in other liabilities ...(800) 2,238 48,401 (14,388) 5,468 3,093 44,012 HSBC 2010...

  • Page 401
    ... HSBC's overall credit risk management policies and procedures. Approximately half of the above guarantees have a term of less than one year. Guarantees with terms of more than one year are subject to HSBC's annual credit review process. 399 Shareholder Information Financial Statements Corporate...

  • Page 402
    ... Services Compensation Scheme The Financial Services Compensation Scheme ('FSCS') has provided compensation to consumers following the collapse of a number of deposit takers. The compensation paid out to consumers is currently funded through loans from the Bank of England and HM Treasury. HSBC Bank...

  • Page 403
    ... the accounting policy set out in Note 1e. 401 Shareholder Information HSBC enters into certain transactions with customers in the ordinary course of business which involve the establishment of special purpose entities ('SPE's) to facilitate or secure customer transactions. HSBC structures that...

  • Page 404
    ... Money market funds US$bn - 0.2 0.2 Non-money market investment funds US$bn 0.3 0.4 6.5 - - - - - 7.2 Conduits US$bn At 31 December 2011 Cash ...Trading assets ...Financial assets designated at fair value ...Derivatives ...Loans and advances to banks ...Loans and advances to customers ...Financial...

  • Page 405
    ... notes issued by these vehicles, which are substantially all held by third parties. Financial Statements Corporate Governance Operating & Financial Review At 31 December 2010 Conduits ...Securities investment conduits Multi-seller conduits ...Securitisations ...Money market funds ...Constant net...

  • Page 406
    ...loans and advances are transferred by HSBC to the SPEs for cash, and the SPEs issue debt securities to investors to fund the cash purchases. HSBC's maximum exposure is the aggregate of any holdings of notes issued by these vehicles and the reserve account positions intended to provide credit support...

  • Page 407
    ... at 31 December 2011 (see Note 33). Securities litigation As a result of an August 2002 restatement of previously reported consolidated financial statements and other corporate events, including the 2002 settlement with 46 State Attorneys General relating to real estate lending practices, Household...

  • Page 408
    ...value of these funds was US$8.4bn, an amount that includes fictitious profits reported by Madoff. Based on information available to HSBC to date, we estimate that the funds' actual transfers to Madoff Securities minus their actual withdrawals from Madoff Securities during the time that HSBC serviced...

  • Page 409
    ...'), funds whose assets were directly or indirectly invested with Madoff Securities, commenced multiple suits in the British Virgin Islands ('BVI') and the US against numerous fund shareholders, including various HSBC companies that acted as nominees for clients of HSBC's private banking business and...

  • Page 410
    ... related to the sale of RMBS to public and private customers in the State of Massachusetts from January 2005 to the present. HSBC expects this level of focus will continue and, potentially, intensify, so long as the US real estate markets continue to be distressed. As a result, HSBC Group companies...

  • Page 411
    ... by the DoJ and the US Internal Revenue Service regarding whether certain Group companies acted appropriately in relation to certain customers who had US tax reporting requirements. In April 2011, HSBC Bank USA received a subpoena from the SEC directing HSBC Bank USA to produce records in the US...

  • Page 412
    ... PLC Notes on the Financial Statements (continued) 45 - Related party transactions 45 Related party transactions Related parties of the Group and HSBC Holdings include subsidiaries, associates, joint ventures, post-employment benefit plans for HSBC employees, Key Management Personnel, close...

  • Page 413
    ... Review Shareholder Information Financial Statements Corporate Governance Associates and joint ventures The Group provides certain banking and financial services to associates and joint ventures, including loans, overdrafts, interest and non-interest bearing deposits and current accounts. Details...

  • Page 414
    ... US$m Assets Cash at bank ...Derivatives ...Loans and advances ...Financial investments ...Investments in subsidiaries ...Total related party assets ...Liabilities Amounts owed to HSBC undertakings ...Derivatives ...Subordinated liabilities: - at amortised cost ...- designated at fair value ...Total...

  • Page 415
    ... share (a distribution of approximately US$2,515m) was declared by the Directors after 31 December 2011. These accounts were approved by the Board of Directors on 27 February 2012 and authorised for issue. Operating & Financial Review 413 Shareholder Information Financial Statements Corporate...

  • Page 416
    ... ...Shares quoted ex-dividend in London, Hong Kong, Paris and Bermuda ...ADSs quoted ex-dividend in New York ...Record date in Hong Kong ...Record date in London, New York, Paris and Bermuda1 ...Mailing of Annual Report and Accounts 2011 and/or Annual Review 2011, Notice of Annual General Meeting...

  • Page 417
    ... ...To authorise the Directors to allot shares ...To disapply pre-emption rights (Special Resolution) ...To approve the HSBC Share Plan 2011 ...To approve fees payable to non-executive Directors ...To approve general meetings (other than annual general meetings) being called on 14 clear days' notice...

  • Page 418
    ... East and Africa: Communications HSBC Holdings plc 8 Canada Square London E14 5HQ United Kingdom For those in Asia-Pacific: Communications (Asia) The Hongkong and Shanghai Banking Corporation Limited 1 Queen's Road Central Hong Kong For those in the Americas: Employee Communications HSBC - North...

  • Page 419
    [email protected] Head of Investor Relations, Asia-Pacific The Hongkong and Shanghai Banking Corporation Limited 1 Queen's Road Central Hong Kong 852 2822 4908 852 3418 4469 [email protected] Where more information about HSBC is available This Annual Report and Accounts 2011...

  • Page 420
    HSBC HOLDINGS PLC Shareholder Information (continued) Simplified structure chart of HSBC Holdings plc / Taxation of shares and dividends > UK residents 418

  • Page 421
    ... Banking Corporation Limited, or acquired subsequent to 1991 in exchange for shares in other companies. For capital gains tax purposes, the acquisition cost for ordinary shares is adjusted to take account of subsequent rights and capitalisation issues. Any capital gain arising on a disposal by a UK...

  • Page 422
    ...is withheld from dividends paid by HSBC Holdings. A US holder must include cash dividends paid on the shares or ADSs in ordinary income on the date that such holder or the ADS depositary receives them, translating dividends paid in UK pounds sterling into US dollars using the exchange rate in effect...

  • Page 423
    ... the application of such information reporting requirements or backup withholding tax to payments received within the US or through certain financial intermediaries. Operating & Financial Review paid, be subject to UK inheritance tax on the individual's death or on a lifetime transfer of shares or...

  • Page 424
    ... 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...

  • Page 425
    ... and capital markets services in Global Banking and Markets Group Management Board Global Private Banking Group Performance Share Plan (which is part of the HSBC Share Plan 2011) HSBC Holdings together with its subsidiary undertakings Global Systemically Important Bank ABS1 ADR ADS Advance ALCO...

  • Page 426
    ... US mortgage-backed security Middle East and North Africa Monoline insurance company Morgan Stanley Capital International index New York Stock Exchange Office of Foreign Asset Control Over-the-counter Probability of default Awards of HSBC Holdings ordinary shares under employee share plans that...

  • Page 427
    ...sell The Risk Management Meeting of the Group Management Board Retail price index (UK) Risk-weighted asset Standard and Poor's rating agency Securities and Exchange Commission (US) Securities investment conduit Structured investment vehicle Small and medium-sized enterprise Solitaire Funding Limited...

  • Page 428
    HSBC HOLDINGS PLC Shareholder Information (continued) Glossary Term Definition Mortgage loans in the US on which the interest rate is periodically changed based on a reference price. These are included within 'affordability mortgages'. Mortgage loans where the customer's monthly payments are set ...

  • Page 429
    ... the loan. The present value of expected future payments required to settle the obligations of a defined benefit plan resulting from employee service. See 'Arrears'. Debt securities Debt securities in issue Deed-in-lieu Defined benefit obligation Delinquency E Economic profit Equity risk Expected...

  • Page 430
    ...of each business in each country, in terms of connectivity and economic development, and the current returns, in terms of profitability, cost efficiency and liquidity. Strategies that are employed in order to improve the management of customer relationships, maximise collection opportunities and, if...

  • Page 431
    ... Medium term notes ('MTN's) Monoline insurers ('monolines') Mortgage-backed securities ('MBS's) The risk that movements in market risk factors, including foreign exchange rates and commodity prices, interest rates, credit spreads and equity prices will reduce income or portfolio values. Notes issued...

  • Page 432
    ... not exchange traded and that is valued using valuation models. Overnight Index Swap ('OIS') discounting Operational risk Over-the-counter ('OTC') P Performance Shares Prime Private equity investments Probability of default ('PD') Awards of HSBC Holdings ordinary shares under employee share plans...

  • Page 433
    ...-income ratios, high loan-to-value ratios (for real estate secured products) or have experienced credit problems caused by occasional delinquencies, prior charge-offs, bankruptcy or other credit-related problems. Operating & Financial Review In relation to credit risk management, a 'short sale' is...

  • Page 434
    ... 191 Credit risk 104 in 2011 104 insurance 177, 207 management thereof 189 Critical accounting policies 38 Cross-border exposures 190 Customer accounts (by country) 36 Customer recommendation 15 D Daily distribution of revenues 164 Dealings in HSBC Holdings plc shares 255 Debt securities in issue...

  • Page 435
    ...assets 59 underlying/reported profit 17 HSBC Holdings plc balance sheet 286, cash flow 287, credit risk 148, deferred tax 334, dividends 334, employee compensation 317, 325, financial assets and liabilities 344, financial instruments not at fair value 359, liquidity and funding 162, 198, market risk...

  • Page 436
    ...20 accounting policy 294 average balance sheet 20 sensitivity 166, 168, 201 Interim management statements 416 Interim results 416 Internal control 240 IFRS and Hong Kong Financial Reporting Standards comparison 291 Investment properties 377 Investor relations 417 to customers by industry sector and...

  • Page 437
    R Ratios advances to core funding 14, 159, capital 2, credit coverage 3, cost efficiency 3, 14, 30, 57, 64, 69, 75, 80, 86, 92, dividends per share 2, earnings per share 2, 279, financial 2, key performance indicators 14, performance 3, risk adjusted revenue growth 15, return on average ordinary ...

  • Page 438
    ... under the UK Companies Act Registered in England: number 617987 REGISTERED OFFICE AND GROUP HEAD OFFICE 8 Canada Square London E14 5HQ United Kingdom Telephone: 44 (0) 20 7991 8888 Facsimile: 44 (0) 20 7992 4880 Web: www.hsbc.com REGISTRARS Principal Register Computershare Investor Services PLC The...

  • Page 439
    ... permission of HSBC Holdings plc. Published by Group Finance, HSBC Holdings plc, London Cover designed by Black Sun Plc, London; text pages designed by Group Finance, HSBC Holdings plc, London, and by Communications (Asia), The Hongkong and Shanghai Banking Corporation Limited, Hong Kong Printed by...

  • Page 440
    HSBC Holdings plc 8 Canada Square London E14 5HQ United Kingdom Telephone: 44 020 7991 8888 www.hsbc.com