HSBC 2009 Annual Report Download - page 43

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Gains arising from dilution of interests in
associates
In 2007, HSBC’s associates, Industrial Bank,
Ping An Insurance and Bank of Communications
in mainland China, Financiera Independencia in
Mexico and Techcombank in Vietnam issued new
shares for which HSBC did not subscribe. As a
consequence of the new monies raised by the
associates, HSBC’s share of their underlying assets
increased by US$1.1 billion, notwithstanding the
reduction in the Group’s interests. These gains were
presented in the income statement as ‘Gains arising
from dilution of interests in associates’, and should
be regarded as exceptional.
Economic profit
HSBC’s internal performance measures include
economic profit, a calculation which compares the
return on financial capital invested in HSBC by its
shareholders with the cost of that capital. HSBC
prices its cost of capital internally and the difference
between that cost and the post-tax profit attributable
to ordinary shareholders represents the amount
of economic profit generated. Economic profit
generated is used by management as one input in
deciding where to allocate capital and other
resources.
In seeking to drive long-term sustainable
risk-based performance, HSBC emphasises the trend
in economic profit ahead of absolute amounts within
business units. The Group’s long-term cost of equity
is reviewed annually and for 2009 remained at 10 per
cent. The following commentary on economic profit
is on a reported basis.
The economic loss decreased by US$0.2 billion.
Profit attributable to shareholders reflected a
significant negative fair value movement in own debt
of US$6.5 billion as credit spreads tightened,
compared with an equivalent gain of US$6.6 billion
in 2008, and the non-recurrence of a goodwill
impairment charge of US$10.6 billion in 2008.
Average invested capital decreased by 1 per cent.
The additional equity raised through the rights issue
was offset by the effect of the goodwill impairment
charge at the end of 2008 and losses on structural
foreign exchange exposures, the result of a stronger
US dollar.
Economic spread increased by 0.1 percentage
points, the result of an increase in return on invested
capital of 2 per cent and a decrease in the cost of
capital in dollar terms of 1 per cent compared with
2008.
2009 2008
US$m %28 US$m %28
Average total shareholders’ equity ..................................................................... 115,431 122,292
Adjusted by:
Goodwill previously amortised or written off ............................................... 8,123 8,152
Property revaluation reserves ......................................................................... (799) (828)
Reserves representing unrealised losses on effective cash flow hedges ....... 385 997
Reserves representing unrealised losses on available-for-sale securities ...... 16,189 9,163
Preference shares and other equity instruments ............................................. (3,538) (2,685)
Average invested capital29 .................................................................................. 135,791 137,091
Return on invested capital30 ................................................................................ 5,565 4.1 5,497 4.0
Benchmark cost of capital .................................................................................. (13,579) (10.0) (13,709) (10.0)
Economic loss and spread .................................................................................. (8,014) (5.9) (8,212) (6.0)
For footnotes, see page 149.