HSBC HOLDINGS PLC annual report, Q4 FY2021

Business context and reporting period

HSBC Holdings plc filed this Form 20-F on 23 February 2022 for the fiscal year ended 31 December 2021. It is an annual report, not a standalone fourth-quarter filing. HSBC is a global banking and financial services group operating in 64 countries and territories; figures below are in US dollars unless stated otherwise. Financial statements are prepared under IFRS as issued by the IASB.

Key financial and operating metrics

At year-end, total assets were $2.96tn; net loans to customers $1.05tn; customer accounts (deposits) $1.71tn; and shareholders’ equity $198.3bn. Customer lending increased $8bn on a reported basis and $23bn at constant currency; customer accounts grew $68bn reported and $90bn at constant currency. Loans were 61.1% of customer accounts, down from 63.2%.

Operating cash flow was $104.3bn, compared with $182.2bn in 2020; investing cash flow was $27.5bn, versus an outflow of $22.4bn; financing cash flow was an outflow of $10.8bn, versus $4.6bn. Cash and cash equivalents ended the year at $574.0bn, up from $468.3bn. These consolidated cash-flow movements should be interpreted in the context of banking balance-sheet flows.

The CET1 capital ratio was 15.8% (2020: 15.9%); total capital ratio 21.2% (21.5%); leverage ratio 5.2% (5.5%); RWAs $838.3bn (down $19.2bn); high-quality liquid assets $717bn; and liquidity coverage ratio 138% (139%). Debt securities in issue were $78.6bn and subordinated liabilities $20.5bn; the filing does not provide a single summary figure for total debt.

Material changes versus the prior comparable period

• Reported profit before tax rose $10.1bn, mainly because ECL moved from a substantial charge to a net release, with higher associate profits also contributing. Adjusted profit before tax increased 79%.
• Revenue declined 2% reported and 3% adjusted, mainly reflecting lower interest income from low rates and lower Markets and Securities Services revenue against a strong 2020 comparison. Net interest margin fell 12 basis points, with stabilisation in the second half.
• Adjusted expenses decreased 1%, reflecting cost savings and a lower UK bank levy, partly offset by inflation, higher performance-related pay and technology investment. Reported expenses were broadly unchanged.
• All regions were profitable. Asia contributed $12.2bn, or about 65%, of reported profit before tax; UK Bank plc reported $4.8bn profit before tax, up $4.5bn.
• The Group reported a $0.9bn ECL release versus an $8.8bn charge in 2020. Fourth-quarter 2021 included a $450m net ECL charge, including higher allowances related to China commercial real estate.

Outlook, management commentary and risks

Management cited good momentum entering 2022 and forecast mid-single-digit lending growth. ECL charges were expected to normalise toward 30 basis points of average loans in 2022, based on then-current consensus forecasts and default experience; HSBC retained $0.6bn of Covid-related allowances at year-end. Adjusted operating expenses were targeted to remain in line with 2021 in 2022, with cost-to-achieve spending of $3.4bn expected to generate more than $2bn in savings. For 2023, management intended to limit adjusted expense growth to 0%–2% versus 2022.

HSBC expected mid-single-digit RWA growth in 2022, partly offset by further RWA savings, and anticipated its CET1 ratio would move into its 14%–14.5% operating range during 2022. If policy rates followed implied market consensus, management expected RoTE of at least 10% in 2023, one year earlier than previously anticipated. The dividend payout target from 2022 was 40%–55%; the Board also intended a further share buy-back of up to $1bn after completion of the existing programme of up to $2bn.

The Board approved a second interim dividend of $0.18 per share, bringing the 2021 dividend in respect of the year to $0.25 per share and a 40.3% payout ratio. A further buy-back of up to $1bn was intended, not completed as of the filing date. The planned sale of the French retail business was expected to produce a pre-tax loss of about $2.7bn in 2022, excluding transaction costs, when classified as held for sale; completion was then expected in 2023. The US mass-market retail exit was completed in February 2022.

Other notable items included $2.2bn of cost savings in 2021 and $3.3bn cumulatively since 2020, against $3.6bn of cumulative costs to achieve. A $587m goodwill impairment was recognised in Latin American Wealth and Personal Banking. IFRS 17, effective from 1 January 2023, was expected by management to reduce reported insurance-business profit by approximately two thirds on transition, subject to a range of outcomes and evolving estimates.

Principal risks include continuing Covid-19 effects and new variants, inflation and supply-chain disruption, China commercial real estate weakness, geopolitical and sanctions-related tensions, cyber and operational resilience, regulatory and legal matters, model uncertainty and climate-related risks. HSBC disclosed data and methodology limitations in several climate disclosures. PwC issued unqualified opinions on the financial statements and internal control over financial reporting.

Important facts for investors to verify

• Separate underlying earnings improvement from the unusually large swing in ECL, and review the remaining Covid-19 allowances and China commercial real estate exposures.
• Check the assumptions behind the 2022–2023 rate-sensitive NII and RoTE outlook, including the effect of deposit pricing and lower-yielding liquidity balances.
• Track progress and costs for restructuring, the French retail sale and the US exit; verify the timing and final accounting impact of the France loss.
• Confirm the timing and completion of announced capital returns and assess capital headroom against the planned RWA growth and 14%–14.5% CET1 operating range.
• Review IFRS 17 implementation estimates and the sensitivity of ECL, goodwill and associate valuations to economic assumptions.