HSBC 2010 Annual Report Download - page 10

HSBC HOLDINGS PLC
Report of the Directors: Overview (continued)
Group Chief Executive’s Business Review
8
• Total loans and advances to customers increased
by 7% to US$958bn while deposits rose by 6%
to US$1.2 trillion.
Impact of the evolving regulatory
environment on the business
Much of the detail around the potential impact
of change for banks remains uncertain. However,
analysis of what we know confirms that our ability
to generate capital and manage our risk-weighted
assets positions HSBC strongly – and competitively
– within the industry as the pace of change
intensifies.
HSBC fully supports the rationale of the
Basel III proposals which require banks to hold more
capital. This is absolutely core to ensuring that
governments and taxpayers are better protected in
future than they have been in the past.
Certain aspects of the Basel III rules remain
uncertain as to interpretation and application by
national regulators. Notably, this includes any capital
requirements which may be imposed on the Group
over the implementation period in respect of the
countercyclical capital buffer and any additional
regulatory requirements for SIFIs. However, we
believe that ultimately the level for the common
equity tier 1 ratio of the Group may lie in the range
9.5 to 10.5%. This exceeds the minimum
requirement for common equity tier 1 capital plus
the capital conservation buffer.
We have estimated the pro forma common
equity tier 1 ratio of the Group based on our
interpretation of the new Basel III rules as they will
apply from 1 January 2019, based on the position of
the Group at year-end 2010. The rules will be phased
in from 2013 with a gradual impact and we have
estimated that their full application, on a proforma
basis, would result in a common equity tier 1 ratio
which is lower than the Basel II core tier 1 ratio by
some 250–300 basis points. The changes relate
to increased capital deductions, new regulatory
adjustments and increases in risk-weighted assets.
However, as the changes will progressively take
effect over six years leading up to 2019 and as
HSBC has a strong track record of capital generation
and actively manages its risk-weighted assets, we
are confident in our ability to mitigate the effect of
the new rules before they come into force.
Last year, HSBC committed to reviewing its
target shareholder return on equity once the effects
of new regulation became clearer. Now that we have
better visibility on the impact of increased capital
requirements, we believe that higher costs of the
evolving regulatory framework will, all other things
being equal, depress returns for shareholders of
banks. We will therefore target a return on average
shareholders’ equity of 12-15% in the future.
As Group Chief Executive, it is right that, in
managing the business and developing Group
strategy, my principal office should be in Hong
Kong – a global financial hub of growing importance
at the centre of HSBC’s strategically most important
region. However, the company is headquartered in
London and we hope to remain there. London’s pre-
eminence as an international financial services centre
is widely recognised and well-deserved and reflects
successful government policy over decades to build
that position. It is therefore important to us that the
UK’s competitive position is protected and
sustained. Appropriate supervision is an important
part of the larger equation. Policymakers should
continue to legislate and regulate, but they must not
destroy London’s competitive position in the
process.
As the Group Chairman has outlined, new
legislation is expected to be enacted in the UK,
effective from the start of 2011, one curious
consequence of which is an explicit incremental cost
of being headquartered in the UK for any global
bank. Had this been applied for 2010, this annual
charge would have amounted to approximately
US$0.6bn in HSBC’s case. Moreover, the overseas
balance sheet would account for the majority of the
annual charge, with the UK balance sheet accounting
for approximately one third of the total.
Outlook
We have been closely watching events unfold in
parts of the Middle East and North Africa. Our
primary concern is for the security of our 12,000
staff across the region and we continue to work to
ensure their safety. We have also activated robust
continuity plans so that we can also stay open for
business and support the needs of our customers. As
a strongly capitalised global bank, HSBC’s financial
performance has not been materially affected by
events to date. HSBC has been present in the Middle
East for more than 50 years and we remain
absolutely committed to its future. We also believe
that the region’s economies have a number of
structural strengths which leave us positive on the
longer-term outlook.
In the short term, risks to global growth remain,
not least from an elevated oil price. We therefore
expect cyclical volatility to continue – including in
emerging markets – and progress is unlikely to be
linear. In the longer term, we believe that growth