Business context and reporting period
HSBC Holdings plc filed this Form 20-F on February 24, 2021, reporting its fiscal year ended December 31, 2020. Although the request labels the period “2020 Q4,” the filing primarily reports full-year results; it provides selected fourth-quarter data, including quarterly net interest income and margin. Financial statements are prepared under IFRS as issued by the IASB and presented in US dollars. HSBC is a global banking and financial services group operating in 64 countries and territories, with three global businesses: Wealth and Personal Banking (WPB), Commercial Banking (CMB), and Global Banking and Markets (GBM).
Financial performance and position
| Metric | 2020 | 2019 |
|---|---|---|
| Reported revenue | $50.4bn | $56.1bn |
| Reported profit before tax | $8.8bn | $13.3bn |
| Reported profit after tax | $6.1bn | $8.7bn |
| Profit attributable to ordinary shareholders | $3.9bn | $6.0bn |
| Basic EPS | $0.19 | $0.30 |
| Adjusted profit before tax | $12.1bn | $22.1bn |
| Adjusted operating expenses | $31.5bn | $32.5bn |
| Net interest margin | 1.32% | 1.58% |
| Expected credit losses and other credit impairment charges | $8.8bn | $2.8bn |
| Return on average tangible equity | 3.1% | 8.4% |
Reported cost-efficiency ratio was 68.3% (75.5% in 2019); the adjusted ratio was 62.5% (59.2%). Adjusted measures are non-IFRS measures and exclude currency translation and significant items, so they should be read alongside reported results.
Lower interest rates and higher credit impairment charges were the main earnings pressures. Reported revenue fell 10%, primarily from lower net interest income; adjusted revenue fell 8%. Reported ECL increased by $6.1bn, reflecting the pandemic and forward economic outlook. The loan allowance rose to $14.5bn from $8.7bn. Adjusted expenses fell 3% as savings, reduced performance-related pay and lower discretionary spending more than offset investment, including $5.5bn of technology spend.
Full-year operating cash flow was $182.2bn, compared with $29.7bn in 2019; cash and cash equivalents ended the year at $468.3bn, up from $293.7bn. These figures were substantially affected by balance-sheet movements, notably customer deposits. Total assets were $2.984tn, up 10% reported (7% constant currency). Customer accounts increased $204bn reported, or $173bn constant currency, to $1.643tn. Net loans and advances to customers were $1.038tn, broadly flat reported but down $25bn constant currency.
Capital and liquidity remained strong: CET1 ratio was 15.9% (14.7% in 2019), total capital ratio 21.5% (20.4%), and leverage ratio 5.5% (5.3%). High-quality liquid assets were $678bn, up from $601bn; the liquidity coverage ratio was 139%, down from 150%. Total liabilities were $2.779tn. Balance-sheet debt securities in issue were $95.5bn and subordinated liabilities $22.0bn; contractual long-term debt obligations were reported at $229.5bn, a separate contractual-maturity measure.
Reported results included a $1.3bn impairment of software and other intangible assets, primarily related to the underperforming European non-ring-fenced bank, and $2.1bn of restructuring and related costs. The 2019 comparison included a $7.3bn goodwill impairment and $1.3bn of customer redress charges. HSBC’s share of a goodwill impairment at associate SABB was $462m in 2020.
Material changes versus the prior comparable period
- Reported profit before tax declined 34%; adjusted profit before tax fell 45%, reflecting lower revenue and a sharp rise in ECL.
- Net interest margin declined 26 basis points as global rate cuts compressed deposit and lending returns.
- Adjusted costs decreased 3%, while reported costs fell 19%, largely because the 2019 goodwill impairment did not recur.
- Customer deposits grew strongly, while constant-currency customer lending contracted. CET1 rose, supported in part by the cancelled 2019 fourth interim dividend and changes in software-asset capital treatment.
- Performance varied by business: Asia remained the largest profit contributor; GBM adjusted revenue rose 3%, including 27% growth in Global Markets. WPB adjusted profit before tax fell 53% to $4.1bn, and CMB fell 74% to $1.9bn.
Outlook, management commentary and risks
Management described 2020 as a resilient performance amid the pandemic and emphasized customer support, cost reduction, capital reallocation, technology investment and a stronger focus on Asia and wealth. HSBC reported more than $26bn of personal-customer relief and more than $52bn of wholesale-customer support during the year. It also arranged more than $1.9tn of loan, debt and equity financing for wholesale customers.
For 2021, management expected adjusted operating expenses to be broadly stable versus 2020 and the full-year ECL charge to be materially lower, while stressing that the outlook remained highly uncertain and dependent on the pandemic, vaccination, economic recovery and withdrawal of government support. The Group no longer expects to achieve its former 10%–12% RoTE target in 2022; it now targets RoTE of at least 10% in the medium term. Other targets include adjusted costs of $31bn or less in 2022, gross RWA reductions exceeding $100bn by end-2022, and a CET1 ratio above 14% (managed within 14%–14.5% in the medium term). Management targets medium- to long-term mid-single-digit revenue growth.
The Board approved a $0.15-per-share interim dividend for 2020, payable in cash on April 29, 2021, with no scrip alternative. The Group will not pay quarterly dividends during 2021; from 2022 it intends to transition toward a 40%–55% payout ratio, with flexibility to adjust reported EPS for certain non-cash significant items. Buy-backs or special dividends are not expected in the near term. HSBC aims to provide $750bn–$1tn of sustainable finance and investment by 2030, align financed emissions to net zero by 2050 or sooner, and achieve net-zero operations and supply chain by 2030 or sooner.
Key risks include a prolonged or renewed Covid-19 downturn, credit deterioration as support schemes unwind, prolonged low or negative rates, US–China and Hong Kong geopolitical tensions, the UK–EU financial-services relationship, climate transition and physical risks, cyber and operational resilience, financial crime, model uncertainty and execution risk from restructuring. ECL estimates involve substantial judgement and management adjustments; the filing notes that model performance was affected by unprecedented economic shocks and government support. HSBC continued to review its French retail operations and was negotiating a potential sale; any sale was expected to result in a loss. It was also exploring strategic options for its US retail franchise. Legal and regulatory proceedings remain a potential source of material costs; outcomes are difficult to predict. PwC issued an unqualified audit opinion on the financial statements and internal control over financial reporting, while identifying ECL measurement, the BoCom impairment assessment, goodwill and intangible-asset impairment, and Level 3 financial instrument valuation as critical audit matters.
Important facts for investors to verify
- Track whether credit losses decline as forecast, particularly as payment relief and government support expire; review ECL staging, management overlays and vulnerable-sector exposures.
- Assess whether deposit growth, lending activity and margins can support recovery under prolonged low rates, including the effect on net interest income.
- Monitor delivery of the cost, RWA, capital and medium-term RoTE targets, and distinguish reported outcomes from adjusted non-IFRS measures.
- Confirm the timing and sustainability of cash dividends, including the 2021 regulatory approach and the planned payout ratio from 2022.
- Follow strategic reviews and execution risks in France, the US and the European non-ring-fenced bank, including potential disposal losses and restructuring costs.
- Review the assumptions and sensitivities for BoCom, goodwill, software impairments, ECL and other material estimates, as well as legal and regulatory contingencies.