HSBC HOLDINGS PLC annual report, Q4 FY2022

Business context and reporting period

HSBC Holdings plc’s Form 20-F, filed 22 February 2023, reports the fiscal year ended 31 December 2022, not a standalone 2022 fourth quarter. Figures are in US dollars unless stated otherwise. The financial statements are prepared under IFRS and received an unqualified audit opinion. The filing text provides fourth-quarter net interest income and margin, but no clear value for standalone fourth-quarter consolidated profit.

Key financial metrics

Fourth-quarter net interest income was $9.6bn, up 41% year over year; the quarter’s net interest margin was 1.74%, versus 1.19% a year earlier.

Balance sheet, capital and liquidity

• Total assets were $3.0tn, broadly unchanged on a reported basis. Net loans and advances to customers were $924.9bn, down from $1.046tn; customer accounts were $1.570tn, down from $1.711tn. Planned disposals and foreign-exchange movements materially affected both comparisons.
• CET1 capital ratio was 14.2%, down from 15.8%; total capital ratio was 19.3%, versus 21.2%. Risk-weighted assets were $839.7bn.
• Average high-quality liquid assets were $647bn, versus $688bn. Average liquidity coverage ratio was 132%, versus 139%; net stable funding ratio was 136% (no prior-year comparative was provided).
• Debt securities in issue were $78.1bn and subordinated liabilities were $22.3bn on the consolidated balance sheet. The Group issued $25.4bn of public-market debt securities during 2022.
• Consolidated cash and cash equivalents ended the year at $521.7bn, down from $574.0bn. Net cash from operating activities was $26.4bn, compared with $104.3bn; investing activities used $34.5bn, compared with providing $27.5bn; financing activities used $6.3bn, compared with $10.8bn.

Business performance and material changes

• Adjusted profit before tax rose 17%, while reported profit before tax fell 7%. Higher interest income and lower reported expenses were outweighed in reported results by higher credit impairment charges and significant disposal-related items.
• Net interest income increased 23%, reflecting higher rates. Net fee income fell $1.6bn to $11.5bn, while trading income benefited from stronger foreign-exchange activity. Insurance fair-value income swung to a $3.4bn expense from $4.1bn income, mainly due to weaker equity markets.
• Adjusted profit before tax increased in each global business: Wealth and Personal Banking (WPB) $8.5bn, up 27%; Commercial Banking (CMB) $7.7bn, up 24%; and Global Banking and Markets (GBM) $5.4bn, up 8%. Corporate Centre profit before tax was $2.3bn, down 12%.
• Reported profit after tax included a $2.2bn deferred-tax credit related principally to historical UK tax losses. The effective tax rate was 4.9%; excluding deferred-tax and other tax reassessments, management reported an effective rate of 19.2%.
• Operating cash-flow comparisons were affected by substantial movements in banking assets and liabilities; investors should not read the cash-flow change in isolation from the balance sheet and liquidity disclosures.

Guidance, management commentary, risks and unusual items

• Management targeted RoTE of at least 12% from 2023 onwards. Based on then-current central-bank rate consensus, it expected 2023 net interest income of at least $36bn on an IFRS 4 basis, with guidance to be updated for IFRS 17. It expected 2023 ECL charges of around 40 basis points of average loans, and adjusted cost growth of approximately 3% on an IFRS 4 basis.
• The medium-term CET1 target range was 14%–14.5%. The Board set a 50% dividend payout ratio for 2023 and 2024, excluding material significant items, and intended to return to quarterly dividends. Buy-backs were to be considered at first-quarter 2023 results, subject to capital levels.
• Subject to completion of the planned Canada sale, the Board intended to consider a special dividend of $0.21 per share, with completion then expected in late 2023 and payment potentially in early 2024. This was not a declared dividend.
• Significant items included a $2.4bn impairment on the planned sale of French retail banking operations, $0.4bn of losses associated with planned exits in Greece and Russia, and $3.1bn of restructuring and related costs. Hyperinflation accounting in Türkiye and Argentina reduced 2022 profit before tax by $548m.
• The Canada banking business sale, announced in November 2022, remained subject to regulatory and governmental approvals. The French retail sale and exits from Greece and Russia were also pending approvals. The French disposal classification resulted in an impairment; the Canada sale was expected to generate an estimated $5.7bn pre-tax gain, subject to transaction completion and subsequent adjustments.
• IFRS 17 took effect on 1 January 2023. HSBC estimated that transition could reduce insurance-business earnings by approximately two-thirds, within a range of outcomes; management said the change affects profit-recognition timing, not underlying insurance economics, solvency, capital or cash generation.
• Key risks included inflation, recession and higher rates; the Russia-Ukraine war and sanctions; geopolitical tensions involving China and the US; China commercial real estate credit deterioration; cyber and operational resilience; regulatory and litigation matters; model and data limitations; and execution of strategic exits and transformation. The Group reported a $3.6bn ECL charge, including $2.2bn of stage 3 charges, partly related to mainland China commercial real estate.
• Climate-related targets and financed-emissions reporting carry data and methodology uncertainty. HSBC deferred some disclosures, including thermal coal exposures and facilitated emissions, pending additional verification, and did not fully quantify climate impacts on financial planning or disclose a transition plan in this filing.

Most important facts an investor should verify

1. Whether the Canada and France disposals complete on the expected terms and timing, and the final gain, capital impact and any special distribution.
2. Whether higher rates sustain net interest income and the 12%+ RoTE ambition, particularly as deposit costs, lending growth and market conditions change.
3. The trajectory of ECL, especially China commercial real estate exposures, and whether the 2023 charge approaches management’s roughly 40-basis-point expectation.
4. The CET1 ratio and liquidity metrics after disposals, regulatory changes, dividends and any buy-backs.
5. The actual IFRS 17 transition effect on insurance earnings and reported Group metrics, compared with management’s estimates.