HSBC 2012 Annual Report Download - page 53

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Overview Operating & Financial Review Corporate Governance Financial Statements Shareholder Information
Economic loss
Our internal performance measures include
economic profit/(loss), a calculation which compares
the return on financial capital invested in HSBC by
our shareholders with the cost of that capital. We
price our 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/(loss) generated.
Our long-term cost of capital is reviewed
annually and is 11% for 2012; this remains
unchanged from 2011. However, it has been revised
to 10% for 2013, primarily due to a reduction in the
risk-free rate, reflecting the continued intervention of
central banks, quantitative easing and the flight to
quality, and greater banking sector stability through
higher levels of capital and liquidity.
The following commentary is on a reported
basis.
The return on invested capital fell by
2.2 percentage points to 8.0%, which was
3.0 percentage points lower than our benchmark cost
of capital. Our economic loss was US$5.1bn,
a deterioration of US$3.7bn compared with the
loss in 2011. This reflected higher average invested
capital and a decrease in profits attributable to
ordinary shareholders, primarily due to adverse fair
value movements on own debt attributable to credit
spreads of US$5.2bn, compared with favourable
movements of US$3.9bn in 2011, an increase in
notable cost items and a higher tax charge in 2012.
2012 2011
US$m %
63 US$m %63
Average total shareholders’ equity ......................................................................... 166,820 156,129
Adjusted by:
Goodwill previously amortised or written off ................................................... 8,399 8,123
Property revaluation reserves ............................................................................. (896) (914)
Reserves representing unrealised losses on effective cash flow hedges ........... 55 287
Reserves representing unrealised losses on available-for-sale securities .......... 1,185 3,379
Preference shares and other equity instruments ................................................. (7,256) (7,256)
Average invested capital64 ...................................................................................... 168,307 159,748
Return on invested capital65 .................................................................................... 13,454 8.0 16,224 10.2
Benchmark cost of capital ...................................................................................... (18,514) (11.0) (17,572) (11.0)
Economic loss and spread ...................................................................................... (5,060) (3.0) (1,348) (0.8)
For footnotes, see page 120.