Business context and reporting period
HSBC Holdings plc’s Form 20-F, filed February 20, 2018, reports the year ended December 31, 2017. It is an international banking and financial-services group, reporting in US dollars under IFRS. The filing does not provide standalone fourth-quarter results; comparisons below are full-year versus full-year.
Financial performance and position
| Metric | 2017 | 2016 | Change or context |
|---|---|---|---|
| Reported revenue | $51.4bn | $48.0bn | Up 7%; includes significant-item and currency effects. |
| Adjusted revenue | $51.5bn | $49.3bn | Up 5% on management’s adjusted basis. |
| Reported profit before tax | $17.2bn | $7.1bn | Up 141%; benefited substantially from the non-recurrence of significant 2016 items. |
| Adjusted profit before tax | $21.0bn | $18.9bn | Up 11%. |
| Profit for the year | $11.9bn | $3.4bn | Ordinary shareholders’ profit was $9.7bn versus $1.3bn; basic EPS was $0.48 versus $0.07. |
| Net interest income / margin | $28.2bn / 1.63% | $29.8bn / 1.73% | Income fell 5%; margin declined 10 basis points. |
| Loan impairment charges and other credit provisions | $1.8bn | $3.4bn | Down 48% reported; adjusted charges fell 32%, mainly reflecting lower oil-and-gas-related charges. |
| Operating expenses | $34.9bn reported; $31.1bn adjusted | $39.8bn reported; $30.1bn adjusted | Reported costs fell 12%, largely due to lower significant items; adjusted costs rose 4%. Adjusted jaws were positive 1%. |
| Return on equity | 5.9% | 0.8% | Management’s medium-term target is above 10%. |
| Assets and customer lending | $2.52tn assets; $963bn net customer loans | $2.37tn assets; $862bn net customer loans | Assets rose 6% reported; customer lending rose 12% reported, with growth concentrated in Asia. |
| Customer accounts | $1.36tn | $1.27tn | Up 7% reported. Loans-to-customer-accounts ratio increased to 70.6% from 67.7%. |
| Capital | CET1 14.5%; leverage ratio 5.6% | CET1 13.6%; leverage ratio 5.4% | Risk-weighted assets were $871bn, up $14bn reported. |
| Liquidity | $600bn unencumbered liquid assets; LCR 142% | $560bn; LCR 136% | Management described liquidity as strong. |
| Cash flow | Operating $(10.5)bn; investing $65.6bn; financing $(10.5)bn | Operating $69.0bn; investing $(15.1)bn; financing $(8.9)bn | Cash and cash equivalents increased $44.6bn to $337.4bn. The operating outflow reflected substantial balance-sheet movements, including loan growth. |
| Dividends | $0.51 per ordinary share for 2017 | $0.51 | Fourth interim dividend of $0.21 was declared after year-end and payable in April 2018. |
Total liabilities were $2.32tn at year-end. Balance-sheet debt measures include $64.5bn of debt securities in issue and $19.8bn of subordinated liabilities; these are not a complete measure of the Group’s funding obligations. The reported effective tax rate was 30.8%, including a $1.3bn charge from remeasurement of US deferred tax balances after the US federal tax-rate reduction.
Material changes versus 2016
- The sharp increase in reported profit primarily reflected the absence of major 2016 charges and valuation movements, including the $3.2bn European Global Private Banking goodwill impairment, the Brazil disposal loss, and adverse own-credit-spread movements. Adjusted profit provides a less distorted comparison.
- Adjusted revenue grew in Retail Banking and Wealth Management (+9%), Commercial Banking (+5%) and Global Banking and Markets (+3%); Global Private Banking revenue fell 3%. Asia generated over 75% of Group reported and adjusted profit.
- Lower impairment charges were an important earnings driver, particularly as 2016 included oil-and-gas and mining exposures. Adjusted operating costs increased with business-growth investment and performance-related pay, despite savings initiatives.
- HSBC completed $3bn of share buy-backs and reported a 14.5% CET1 ratio, up from 13.6%. Total assets, lending and customer deposits all increased.
- IFRS 9 own-credit presentation was adopted early for 2017: changes in own credit risk on designated liabilities moved to other comprehensive income. Comparatives were not restated, affecting year-on-year presentation.
Outlook, commentary, risks and unusual items
- Management expected reasonable growth in major economies in 2018 and expressed particular optimism about Asia, while warning that geopolitical tensions, protectionism and uneven growth could disrupt activity. The Board said it intended to sustain the annual dividend at its current level for the foreseeable future; future growth depends on profitability, capital release and regulatory requirements.
- The 2015 strategic programme concluded with eight of ten actions completed. HSBC reported $6.1bn of annualised run-rate savings and a $338bn reduction in RWAs since the programme began. It missed its US profit target and its renminbi internationalisation revenue target; 2017 RMB-related revenue was $1.2bn versus a $2.0bn–$2.5bn target.
- UK ring-fencing was in progress ahead of the January 1, 2019 deadline. Brexit arrangements, changing capital and liquidity rules, and the cost of regulatory programmes remain material uncertainties.
- Financial-crime compliance remains a significant risk. The five-year US AML deferred prosecution agreement expired in December 2017, but the Monitor reported remaining deficiencies and areas requiring further work. Separately, a three-year US FX deferred prosecution agreement was entered into in January 2018, requiring continued cooperation and control enhancements, with a financial penalty and restitution.
- Other principal risks include credit deterioration (particularly in China, emerging markets and oil and gas), cyber threats, operational resilience, litigation and regulatory actions, model and data risks, and market, funding and pension exposures. HSBC reported $4.0bn of provisions at year-end, including $1.5bn for legal proceedings and regulatory matters and $1.5bn for customer remediation.
- IFRS 9 adoption from January 1, 2018 was expected to reduce Group net assets by about $1.0bn; management did not expect a significant impact on regulatory capital. Estimates remain subject to finalisation.
Important facts for investors to verify
- Reconcile reported and adjusted performance, especially the effects of significant items, currency translation and the IFRS 9 own-credit presentation change.
- Review the sustainability of earnings improvement after lower credit charges and the outlook for net interest margin, adjusted costs and return on equity.
- Assess capital and liquidity under applicable regulatory definitions, including the effects of IFRS 9 transition, future rule changes and ring-fencing.
- Track the status, potential financial exposure and compliance requirements of the FX DPA, remaining AML-related oversight, customer remediation and other legal proceedings.
- Monitor loan growth and asset quality by region and sector, including China, Hong Kong, Mexico, commercial real estate and exposures to oil and gas.
- Confirm dividend capacity against distributable reserves, capital needs and the Board’s stated intention to maintain the annual dividend.