Business context and reporting period
HSBC Holdings plc filed this Form 20-F on 20 February 2019 for the fiscal year ended 31 December 2018. It is an annual report, not a standalone fourth-quarter filing. HSBC is a global banking and financial services group reporting in US dollars, with four global businesses: Retail Banking and Wealth Management, Commercial Banking, Global Banking and Markets, and Global Private Banking.
Financial performance and position
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Revenue before ECL/credit impairment | $53.8bn reported; $53.9bn adjusted | $51.4bn reported; $51.7bn adjusted |
| Profit before tax | $19.9bn reported; $21.7bn adjusted | $17.2bn reported; $21.1bn adjusted |
| Profit for the year | $15.0bn | $11.9bn |
| Profit attributable to ordinary shareholders | $12.6bn | $9.7bn |
| Basic earnings per share | $0.63 | $0.48 |
| Net interest income / margin | $30.5bn / 1.66% | $28.2bn / 1.63% |
| ECL / loan impairment charges | $1.8bn | $1.8bn |
| Operating expenses | $34.7bn reported; $33.0bn adjusted | $34.9bn reported; $31.2bn adjusted |
| Return on tangible equity | 8.6% reported | 6.8% reported |
| Total assets | $2.56tn | $2.52tn |
| CET1 ratio | 14.0% | 14.5% |
Reported net cash from operating activities was $6.5bn, versus a $10.5bn outflow in 2017; investing activities used $16.3bn and financing activities used $16.8bn. Cash and cash equivalents ended the year at $301.1bn. The Group’s liquidity coverage ratio was 154%, with $567bn of high-quality liquid assets. Customer accounts were $1.36tn; balance-sheet debt securities in issue were $85.3bn and subordinated liabilities were $22.4bn. Total liabilities were $2.36tn.
The Board declared dividends of $0.51 per ordinary share in respect of 2018, including a fourth interim dividend of $0.21 announced after year-end. HSBC also completed $2bn of share buy-backs.
Changes versus the prior comparable period
Reported profit before tax rose 16%, while adjusted profit before tax rose 3%; reported revenue increased 5% and adjusted revenue 4%. Reported expenses declined 1%, but adjusted expenses increased 6%, reflecting business, technology, productivity, regulatory and compliance investment. Adjusted jaws was negative 1.2%: adjusted revenue grew 4.4% against adjusted expense growth of 5.6%. Net interest margin improved 3 basis points. Reported profit benefited from a $2.1bn favourable movement in significant items, especially the non-recurrence of 2017 costs to achieve; reported results therefore show stronger growth than adjusted results.
All four global businesses increased adjusted revenue and profit before tax. Asia remained the largest profit contributor, accounting for 89.5% of reported profit before tax by region. The reported European loss was $0.8bn, including substantial Holdings and central costs. HSBC adopted IFRS 9 on 1 January 2018, reducing opening net assets by $1.6bn; 2018 ECL and prior-year IAS 39 loan impairment charges are not directly comparable.
Outlook, commentary, risks and unusual items
Management remained committed to positive adjusted jaws in 2019, reported RoTE above 11% by 2020, a CET1 ratio above 14%, and a stable dividend. The stated plan also targets mid-single-digit revenue growth, low-to-mid-single-digit expense growth and annual RWA growth of approximately 1–2% through 2020. Management said January 2019 revenue was ahead of plan, while noting this was an early-period observation, not full-year guidance.
Key uncertainties include UK withdrawal from the EU, global trade tensions—particularly between the US and China—slower growth, changing interest rates, market volatility, credit deterioration, regulation, financial-crime compliance, litigation, cyber threats, operational resilience and the transition away from Ibor benchmarks. Management recognised a $410m additional UK ECL allowance relative to consensus-based forecasts for economic uncertainty. Argentina’s hyperinflation accounting reduced 2018 profit before tax by $160m. Legal and regulatory settlements and provisions included $816m in 2018; conduct-related provisions stood at $872m at year-end. The US FX deferred prosecution agreement requires continuing remediation and monitoring. The filing identifies significant estimation uncertainty in ECL, fair value, deferred tax, provisions, goodwill and the BoCom investment.
Management reported that internal control over financial reporting was effective, and the independent auditor gave unqualified opinions on the financial statements and internal controls.
Most important facts for investors to verify
- Whether revenue growth can outpace expense growth after 2018’s negative adjusted jaws and substantial ongoing investment.
- Progress toward the 2020 RoTE and CET1 targets, including the effect of lending growth, foreign exchange and capital distributions.
- Whether UK and trade-related economic risks produce additional ECL beyond the $410m UK uncertainty adjustment.
- The nature, range and potential cash impact of material legal, regulatory, customer-remediation and financial-crime matters; outcomes remain uncertain.
- Dividend sustainability and capital flexibility, including distributable reserves of $30.7bn, which declined from $38.0bn in 2017.
- The effect of IFRS 9, Argentina hyperinflation accounting, and fair-value movements when assessing underlying performance and comparability.