HSBC HOLDINGS PLC annual report, Q4 FY2019

Business context and reporting period

HSBC Holdings plc filed this Form 20-F on 19 February 2020 for the fiscal year ended 31 December 2019. It is an annual report, not a standalone fourth-quarter report; the filing does not provide a clear standalone Q4 income statement. Figures are in US dollars and financial statements are prepared under IFRS.

HSBC is a global banking and financial services group operating in 64 countries and territories, with more than 40 million customers. Its four global businesses are Retail Banking and Wealth Management (RBWM), Commercial Banking (CMB), Global Banking and Markets (GB&M), and Global Private Banking (GPB).

Financial performance and position

Reported profit before tax fell 33%, primarily because of a $7.3bn goodwill impairment. Adjusted profit before tax rose 5%, reflecting higher adjusted revenue and controlled expense growth, partly offset by increased credit-loss charges. Adjusted jaws were positive 3.1%; adjusted operating expenses rose 2.8%, while the adjusted cost efficiency ratio improved to 59.2% from 61.0%. Reported operating expenses increased 22% to $42.3bn, largely due to the impairment and customer redress costs.

Expected credit losses and other credit impairment charges were $2.8bn, up from $1.8bn; the charge was 0.27% of average gross customer loans versus 0.17%. Net interest income was broadly unchanged at $30.5bn as higher average interest-earning assets and yields were offset by increased funding costs.

Operating cash flow was $29.7bn (2018: $32.5bn); investing cash outflow was $35.3bn and financing cash outflow was $14.8bn. Cash and cash equivalents were $293.7bn at year-end, down from $312.9bn. Total assets were $2.72tn, up 6%; customer loans were $1.04tn and customer accounts were $1.44tn. The customer advances-to-accounts ratio was 72.0%.

The CET1 ratio rose to 14.7% from 14.0%; the total capital ratio was 20.4% and the leverage ratio was 5.3%. High-quality liquid assets were $601bn, and the liquidity coverage ratio was 150% (2018: 154%). Debt securities in issue were $104.6bn and subordinated liabilities were $24.6bn at year-end. The annual dividend in respect of 2019 remained $0.51 per ordinary share; the Board declared a fourth interim dividend of $0.21 per share after year-end.

Material changes versus 2018

• The $7.3bn goodwill impairment, primarily relating to GB&M and CMB in Europe, materially reduced reported earnings and reflected lower long-term growth assumptions and planned business reshaping.
• Adjusted revenue increased 5.9% and adjusted profit before tax increased 5%, while reported ordinary shareholder profit fell 53%.
• Credit-loss charges rose by about $1.0bn on a reported basis, with higher charges in CMB and RBWM.
• Assets, loans and customer deposits expanded; risk-weighted assets fell by $21.9bn to $843.4bn, supporting the higher CET1 ratio.
• IFRS 16 adoption increased assets and financial liabilities by about $5bn each, with no effect on net assets or retained earnings; comparatives were not restated.

Outlook, management commentary, risks and unusual items

Management said the Group would not meet its prior target of reported RoTE above 11% in 2020, citing a weaker revenue environment and lower interest-rate expectations. The February 2020 business update targets, by 2022, gross RWA reductions of more than $100bn with reinvestment intended to keep net RWAs broadly flat, an adjusted cost base of $31bn or less, and reported RoTE of 10%–12%. HSBC expects about $6bn of restructuring costs and $1.2bn of asset-disposal costs through 2022, with most restructuring costs in 2020–2021. It intends to sustain the dividend, maintain CET1 at 14%–15%, suspend share buy-backs in 2020 and 2021, and resume neutralising scrip issuance from 2022.

Plans include reshaping underperforming businesses in Europe and the US, reducing costs and simplifying the organisation, while investing in Asia, the Middle East, transaction banking and wealth management. The filing identifies execution, operational, governance, reputational and financial risks from restructuring.

The coronavirus outbreak was an emerging risk after year-end. Management warned that disruption in mainland China and Hong Kong could reduce lending and transaction volumes, raise expected credit losses, disrupt supply chains and affect insurance revenue, RWAs and capital. Other highlighted risks include Hong Kong social unrest, US-China trade tensions, UK-EU negotiations, low interest rates, cyber and operational resilience, financial crime, climate risk, and the transition from Libor and other benchmarks.

Unusual and contingent items include $1.3bn of customer redress costs, mainly UK payment protection insurance, and $0.8bn of restructuring and related costs in 2019. HSBC entered a US deferred prosecution agreement concerning its Swiss private bank in December 2019, agreeing to pay $192m; it also settled a Belgian investigation for €295m. The filing describes multiple ongoing legal and regulatory matters and states that aggregate potential exposure cannot practicably be estimated. Madoff-related claims could involve aggregate damages of up to or exceeding $500m, excluding costs and interest. The auditor issued an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective.

Most important facts for investors to verify

• Reconcile reported and adjusted results, especially the $7.3bn goodwill impairment and management’s significant-item adjustments.
• Review the assumptions and sensitivity of goodwill impairment tests and the BoCom investment valuation, which was not impaired despite a market value below carrying value.
• Track credit quality, ECL trends and the impact of coronavirus-related economic scenarios on Hong Kong, mainland China and supply-chain exposures.
• Assess feasibility, cost and timing of the 2022 RWA, expense and RoTE targets, including restructuring and disposal costs.
• Monitor capital, liquidity and funding metrics, dividend capacity, and the planned suspension of buy-backs.
• Check developments in legal proceedings, regulatory investigations, customer remediation and Libor transition; the filing does not provide a clear aggregate value for potential legal exposures.