TIDMHSBA
RNS Number : 0419Q
HSBC Holdings PLC
23 February 2021
HSBC Holdings plc 2020 Annual Report and Accounts
In fulfilment of its obligations under section 4.1.3 and
6.3.5(1) of the Disclosure Guidance and Transparency Rules, HSBC
Holdings plc (the "Company") hereby releases the unedited full text
of its 2020 Annual Report and Accounts for the year ended 31
December 2020.
The document is now available on the Company's website at:
https://www.hsbc.com/investors/results-and-announcements/all-reporting/group
A copy of the above document has been submitted to the National
Storage Mechanism and will shortly be available for inspection at:
https://data.fca.org.uk/#/nsm/nationalstoragemechanism
HSBC Holdings plc
Annual Report and Accounts 2020
Opening up a world of opportunity
Contents
Strategic report
2 Highlights
4 Who we are
6 Group Chairman's statement
8 Group Chief Executive's review
12 Our strategy
16 How we do business
22 Board decision making and engagement with stakeholders
25 Remuneration
26 Financial overview
30 Global businesses
37 Risk overview
41 Long-term viability and going concern statement
Environmental, social and
governance review
43 Our approach to ESG
44 Climate
52 Customers
62 Employees
70 Governance
Financial review
77 Financial summary
85 Global businesses and geographical regions
103 Reconciliation of alternative performance measures
Risk review
107 Our approach to risk
110 Top and emerging risks
116 Areas of special interest
118 Our material banking risks
Corporate governance report
196 Group Chairman's governance statement
198 Biographies of Directors and senior management
213 Board committees
229 Directors' remuneration report
Financial statements
267 Independent auditors' report
278 Financial statements
288 Notes on the financial statements
Additional information
371 Shareholder information
377 Abbreviations
We have changed how we are reporting this year
We have changed our Annual Report and Accounts to embed the
content previously provided in our Environmental, Social and
Governance Update, demonstrating that how we do business is as
important as what we do.
This Strategic Report was approved by the Board on 23 February
2021.
Mark E Tucker
Group Chairman
A reminder
The currency we report in is US dollars.
Adjusted measures
We supplement our IFRS figures with non-IFRS measures used by
management internally that constitute alternative performance
measures under European Securities and Markets Authority guidance
and non-GAAP financial measures defined in and presented in
accordance with US Securities and Exchange Commission rules and
regulations. These measures are highlighted with the following
symbol: <>
Further explanation may be found on page 28.
None of the websites referred to in this Annual Report and
Accounts 2020 (including where a link is provided), and none of the
information contained on such websites, are incorporated by
reference in this report.
Cover image: Opening up a world of opportunity
We connect people, ideas and capital across the world, opening
up opportunities for our customers and the communities we
serve.
Opening up a world of opportunity
Our ambition is to be the preferred international financial
partner for our clients.
We have refined our purpose, ambition and values to reflect our
strategy and to support our focus on execution.
Read more on our values, strategy and purpose on pages 4, 12 and
16.
Key themes of 2020
The Group has been - and continues to be - impacted by
developments in the external environment, including:
Covid-19
The Covid-19 outbreak has significantly affected the global
economic environment and outlook, resulting in adverse impacts on
financial performance, downward credit migration and muted demand
for lending.
Read more on page 38.
Market factors
Interest rate reductions and market volatility impacted
financial performance during 2020. We expect low global interest
rates to provide a headwind to improved profitability and
returns.
Read more on page 26.
Geopolitical risk
Levels of geopolitical risk increased with heightened US-China
tensions and the UK's trade negotiations with the EU notably
impacting business and investor sentiment. We continue to monitor
developments closely.
Read more on page 38.
Progress in key areas
The Group continued to make progress in areas of strategic focus
during 2020, including:
Supporting customers
We continued to support our customers during the Covid-19
outbreak, providing relief to wholesale and retail customers
through both market-wide schemes and HSBC-specific measures.
Read more on page 17.
Strategic progress
We made good progress with our transformation programme in 2020.
We have now set out the next phase of our strategic plan.
Read more on page 12.
Climate
In October 2020, we set out an ambitious plan to prioritise
sustainable finance and investment that supports the global
transition to a net zero carbon economy.
Read more on page 15.
Financial performance
Reported profit after tax
$6.1bn
(2019: $8.7bn)
Basic earnings per share
$0.19
(2019: $0.30)
Common equity tier 1 capital ratio
15.9%
(2019: 14.7%)
Read more on our financial overview on page 26.
Non-financial highlights
Gender diversity
30.3%
Women in senior leadership roles.
(2019: 29.4%)
Sustainable finance and investment
$93.0bn
Cumulative total provided and facilitated since 2017.
(2019: $52.4bn)
Customer satisfaction
7 out of 8
Wealth and Personal Banking markets sustained top-three and/or
improved in customer satisfaction.
5 out of 8
Commercial Banking markets sustained top-three and/or improved
in customer satisfaction.
Read more on how we set and define our environmental, social and
governance ('ESG') metrics on page 18.
HSBC Holdings plc Annual Report and Accounts 2020 1
Highlights
Financial performance in 2020 was impacted by the Covid-19
outbreak, together with the resultant reduction in global interest
rates. Nevertheless, performance in Asia remained resilient and our
Global Markets business delivered revenue growth.
Delivery against our financial targets
Return on average tangible equity <>
3.1%
February 2020 target: in the range of 10% to 12% in 2022.
(2019: 8.4%)
Adjusted operating expenses <>
$31.5bn
Target: <=$31bn in 2022.
(2019: $32.5bn)
Gross RWA reduction
$61.1bn
Target: >$100bn by end-2022.
Further explanation of performance against Group financial
targets may be found on page 26.
Financial performance (vs 2019)
-- Reported profit after tax down 30% to $6.1bn and reported
profit before tax down 34% to $8.8bn from higher expected credit
losses and other credit impairment charges ('ECL') and lower
revenue, partly offset by a fall in operating expenses. Reported
results in 2020 included a $1.3bn impairment of software
intangibles, while reported results in 2019 included a $7.3bn
impairment of goodwill. Adjusted profit before tax down 45% to
$12.1bn.
-- Reported revenue down 10% to $50.4bn, primarily due to the
progressive impact of lower interest rates across our global
businesses, in part offset by higher revenue in Global Markets.
Adjusted revenue down 8% to $50.4bn.
-- Net interest margin of 1.32% in 2020, down 26 basis points
('bps') from 2019, due to the impact of lower global interest
rates.
-- Reported ECL up $6.1bn to $8.8bn, mainly due to the impact of
the Covid-19 outbreak and the forward economic outlook. Allowance
for ECL on loans and advances to customers up from $8.7bn at 31
December 2019 to $14.5bn at 31 December 2020.
-- Reported operating expenses down 19% to $34.4bn, mainly due
to the non-recurrence of a $7.3bn impairment of goodwill. Adjusted
operating expenses down 3% to $31.5bn, as cost-saving initiatives
and lower performance-related pay and discretionary expenditure
more than offset the growth in investment spend.
-- During 2020, deposits grew by $204bn on a reported basis and
$173bn on a constant currency basis, with growth in all global
businesses.
-- Common equity tier 1 ('CET1') ratio of 15.9%, up 1.2
percentage points from 14.7% at 31 December 2019, which included
the impact of the cancellation of the fourth interim dividend of
2019 and changes to the capital treatment of software assets.
-- After considering the requirements set out in the UK
Prudential Regulation Authority's ('PRA') temporary approach to
shareholder distributions for 2020, the Board has announced an
interim dividend for 2020 of $0.15 per ordinary share, to be paid
in cash with no scrip alternative .
Outlook and strategic update
In February 2020, we outlined our plan to upgrade the return
profile of our risk-weighted assets ('RWAs'), reduce our cost base
and streamline the organisation. Despite the significant headwinds
posed by the impact of the Covid-19 outbreak, we have made good
progress in implementing our plan.
However, we recognise a number of fundamental changes, including
the prospect of prolonged low interest rates, the significant
increase in digital engagement from customers and the enhanced
focus on the environment.
We have aligned our strategy accordingly. We intend to increase
our focus on areas where we are strongest. We aim to increase and
accelerate our investments in technology to enhance the
capabilities we provide to customers and improve efficiency to
drive down our cost base. We also intend to continue the
transformation of our underperforming businesses. As part of our
climate ambitions, we have set out our plans to capture the
opportunities presented by the transition to a low-carbon
economy.
We will continue to target an adjusted cost base of $31bn or
less in 2022. This reflects a further reduction in our cost base,
which has been broadly offset by the adverse impact of foreign
currency translation due to the weakening US dollar towards the end
of 2020. We will also continue to target a gross RWA reduction of
over $100bn by the end of 2022. Given the significant changes in
our operating environment during 2020, we no longer expect to reach
our return on average tangible equity ('RoTE') target of between
10% and 12% in 2022 as originally planned. The Group will now
target a RoTE of greater than or equal to 10% in the medium
term.
We intend to maintain a CET1 ratio above 14%, managing in the
range of 14% to 14.5% in the medium term and managing this range
down in the longer term. The Board has adopted a policy designed to
provide sustainable dividends going forward. We intend to
transition towards a target payout ratio of between 40% and 55% of
reported earnings per ordinary share ('EPS') from 2022 onwards,
with the flexibility to adjust EPS for non-cash significant items
such as goodwill or intangibles impairments. We will no longer
offer a scrip dividend option, and will pay dividends entirely in
cash.
2 HSBC Holdings plc Annual Report and Accounts 2020
Key financial metrics
For the year ended
Reported results Footnotes 2020 2019 2018
Reported revenue ($m) 50,429 56,098 53,780
Reported profit before tax ($m) 8,777 13,347 19,890
Reported profit after tax ($m) 6,099 8,708 15,025
Profit attributable to the ordinary shareholders
of the parent company ($m) 3,898 5,969 12,608
Cost efficiency ratio (%) 68.3 75.5 64.4
Basic earnings per share ($) 0.19 0.30 0.63
Diluted earnings per share ($) 0.19 0.30 0.63
Net interest margin (%) 1.32 1.58 1.66
Alternative performance measures
Adjusted revenue ($m) 50,366 54,944 52,098
Adjusted profit before tax ($m) 12,149 22,149 21,199
Adjusted cost efficiency ratio (%) 62.5 59.2 60.9
Expected credit losses and other credit
impairment charges ('ECL') as % of average
gross loans and advances to customers (%) 0.81 0.25 0.16
Return on average ordinary shareholders'
equity (%) 2.3 3.6 7.7
Return on average tangible equity (%) 1 3.1 8.4 8.6
At 31 December
Balance sheet 2020 2019 2018
Total assets ($m) 2,984,164 2,715,152 2,558,124
Net loans and advances to customers ($m) 1,037,987 1,036,743 981,696
Customer accounts ($m) 1,642,780 1,439,115 1,362,643
Average interest-earning assets ($m) 2,092,900 1,922,822 1,839,346
Loans and advances to customers as % of
customer accounts (%) 63.2 72.0 72.0
Total shareholders' equity ($m) 196,443 183,955 186,253
Tangible ordinary shareholders' equity
($m) 156,423 144,144 140,056
Net asset value per ordinary share at period
end ($) 8.62 8.00 8.13
Tangible net asset value per ordinary share
at period end ($) 2 7.75 7.13 7.01
Capital, leverage and liquidity
Common equity tier 1 capital ratio (%) 3 15.9 14.7 14.0
Risk-weighted assets ($m) 3 857,520 843,395 865,318
Total capital ratio (%) 3 21.5 20.4 20.0
Leverage ratio (%) 3 5.5 5.3 5.5
High-quality liquid assets (liquidity value)
($bn) 678 601 567
Liquidity coverage ratio (%) 139 150 154
Share count
Period end basic number of $0.50 ordinary
shares outstanding (millions) 20,184 20,206 19,981
Period end basic number of $0.50 ordinary
shares outstanding and dilutive potential
ordinary shares (millions) 20,272 20,280 20,059
Average basic number of $0.50 ordinary
shares outstanding (millions) 20,169 20,158 19,896
Dividend per ordinary share (in respect
of the period) ($) 4 0.15 0.30 0.51
For reconciliations of our reported results to an adjusted
basis, including lists of significant items, see page 85.
Definitions and calculations of other alternative performance
measures are included in our 'Reconciliation of alternative
performance measures' on page 103.
1 Profit attributable to ordinary shareholders, excluding
impairment of goodwill and other intangible assets and changes in
present value of in-force insurance contracts ('PVIF') (net of
tax), divided by average ordinary shareholders' equity excluding
goodwill, PVIF and other intangible assets (net of deferred
tax).
2 Excludes impact of $0.10 per share dividend in the first
quarter of 2019, following a June 2019 change in accounting
practice on the recognition of interim dividends, from the date of
declaration to the date of payment.
3 Unless otherwise stated, regulatory capital ratios and
requirements are based on the transitional arrangements of the
Capital Requirements Regulation in force at the time. These include
the regulatory transitional arrangements for IFRS 9 'Financial
Instruments', which are explained further on page 173. Leverage
ratios are calculated using the end point definition of capital and
the IFRS 9 regulatory transitional arrangements. Following the end
of the transition period after the UK's withdrawal from the EU, any
reference to EU regulations and directives (including technical
standards) should be read as a reference to the UK's version of
such regulation and/or directive, as onshored into UK law under the
European Union (Withdrawal) Act 2018, as amended.
4 The fourth interim dividend of 2019, of $0.21 per ordinary
share, was cancelled in response to a written request from the PRA.
2019 has been re-presented accordingly.
HSBC Holdings plc Annual Report and Accounts 2020 3
Who we are
About HSBC
With assets of $3.0tn and operations in 64 countries and
territories at 31 December 2020, HSBC is one of the largest banking
and financial services organisations in the world. More than 40
million customers bank with us and we employ around 226,000
full-time equivalent staff. We have around 194,000 shareholders in
130 countries and territories.
Our values
Our values help define who we are as an organisation, and are
key to our long-term success.
We value difference
Seeking out different perspectives
We succeed together
Collaborating across boundaries
We take responsibility
Holding ourselves accountable and taking the long view
We get it done
Moving at pace and making things happen
For further details on our strategy and purpose, see pages 12
and 16.
Our global businesses
We serve our customers through three global businesses. On pages
30 to 36 we provide an overview of our performance in 2020 for each
of our global businesses, as well as our Corporate Centre.
During the year, we simplified our organisational structure by
combining Global Private Banking and Retail Banking and Wealth
Management to form Wealth and Personal Banking. We also renamed our
Balance Sheet Management function as Markets Treasury to reflect
the activities it undertakes more accurately and its relationship
to our Group Treasury function more broadly. These changes followed
realignments within our internal reporting and include the
reallocation of Markets Treasury, hyperinflation accounting in
Argentina and HSBC Holdings net interest expense from Corporate
Centre to the global businesses.
Each of the chief executive officers of our global businesses
reports to our Group Chief Executive, who in turn reports to the
Board of HSBC Holdings plc.
For further information on how we are governed, see our
corporate governance report on page 195.
Wealth and Personal Banking ('WPB')
We help millions of our customers look after their day-to-day
finances and manage, protect and grow their wealth.
Commercial Banking ('CMB')
Our global reach and expertise help domestic and international
businesses around the world unlock their potential.
Global Banking and Markets ('GBM')
We provide a comprehensive range of financial services and
products to corporates, governments and institutions.
1 Calculation is based on adjusted revenue of our global
businesses excluding Corporate Centre, which is also excluded from
the total adjusted revenue number. Corporate Centre had negative
adjusted revenue of $262m in 2020.
Our global functions
Our business is supported by a number of corporate functions and
our Digital Business Services teams, formerly known as HSBC
Operations, Services and Technology. The global functions include
Corporate Governance and Secretariat, Communications, Finance,
Compliance, Human Resources, Internal Audit, Legal, Marketing, Risk
and Strategy. Digital Business Services provides real estate,
procurement, technology and operational services to the
business.
4 HSBC Holdings plc Annual Report and Accounts 2020
Our global reach
We aim to create long-term value for our shareholders and
capture opportunity. Our goal is to lead in wealth, with a
particular focus on Asia and the Middle East. Taking advantage of
our international network, we aspire to lead in cross-border
banking flows, and to serve mid-market corporates globally. We
continue to maintain a strong capital, funding and liquidity
position with a diversified business model.
Value of customer accounts by geography
North America 11%
Latin America 2%
Rest of Europe 8%
UK 30%
Middle East and North Africa 3%
Rest of Asia 11%
Hong Kong 32%
Mainland China 3%
See page 84 for further information on our customers and approach to geographical information.
Multi-award winning
We have won industry awards around the world for a variety of
reasons - ranging from the quality of the service we provide to
customers, to our efforts to support diversity and inclusion in the
workplace.
A selection of the awards recognising our support of customers
during the Covid-19 outbreak includes:
Euromoney Awards for Excellence 2020
Global Excellence in Leadership
Excellence in Leadership in Asia
Excellence in Leadership in the Middle East
Greenwich Associates 2020 - Standout Bank for Corporates in Asia
During Crisis
Most Distinctive in Helping to Mitigate Impact of Covid-19
We highlight a selection of our other recent wins below.
Euromoney Awards for Excellence 2020
World's Best Bank for Sustainable Finance
World's Best Bank for Transaction Services
Hong Kong's Best Bank
The Banker Innovation in Digital Banking Awards 2020
Best Digital Bank in Asia
Asia Insurance Industry Awards 2020
Life Insurance Company of the Year
PWM Wealth Tech Awards 2020
Best Global Private Bank for Digital Customer Experience
Stonewall
Stonewall Top Global Employers List - 2020
Engaging with our stakeholders
Customers
Employees
Investors
Communities
Regulators and governments
Suppliers
-- Building strong relationships with our stakeholders helps
enable us to deliver our strategy in line with our long-term
values, and operate the business in a sustainable way. Our
stakeholders are the people who work for us, bank with us, own us,
regulate us, and live in the societies we serve and the planet we
all inhabit. These human connections are complex and overlap. Many
of our employees are customers and shareholders, while our business
customers are often suppliers. We aim to serve, creating value for
our customers and shareholders. Our size and global reach mean our
actions can have a significant impact. We are committed to doing
business responsibly, and thinking for the long term. This is key
to delivering our strategy.
Our section 172 statement, detailing our Directors'
responsibility to stakeholders, can be found on page 22.
HSBC Holdings plc Annual Report and Accounts 2020 5
Group Chairman's statement
The past year brought unprecedented challenges, but our people
responded exceptionally well and our performance has been
resilient.
In 2020, we experienced economic and social upheaval on a scale
unseen in living memory. Even before the year began, the external
environment was being reshaped by a range of factors - including
the impact of trade tensions between the US and China, Brexit, low
interest rates and rapid technological development. The spread of
the Covid-19 virus made that environment all the more complex and
challenging.
The Covid-19 pandemic has severely impacted our customers, our
colleagues, our shareholders and the communities we serve. The
first priority was, and remains, dealing with the public health
crisis, but the economic crisis that unfolded simultaneously has
also been unprecedented in recent times. The financial services
industry has been at the forefront of helping businesses and
individuals through the difficulties they have faced, working with
governments and regulators towards expected recovery and future
growth. I am enormously proud of the professionalism, dedication
and energy that my colleagues around the world have demonstrated as
they helped ensure our customers received the support they needed -
all the while managing their own, at times extremely difficult,
situations at home. On behalf of the Board, I would like to express
my deepest thanks to them all for the exceptional way they are
responding to these most challenging circumstances.
Against this backdrop, HSBC demonstrated a resilient
performance. Reported profit before tax was $8.8bn, a fall of 34%,
and adjusted profit before tax was $12.1bn, down 45%. Within this,
Global Banking and Markets performed particularly well, while Asia
was once again by far the most profitable region. Deposits also
increased significantly across the Group, reinforcing the strength
of our funding and liquidity positions.
In response to a request from the UK's Prudential Regulation
Authority, we cancelled the fourth interim dividend for 2019. We
also announced that, until the end of 2020, we would make no
quarterly or interim dividend payments or accruals in respect of
ordinary shares. This was a difficult decision and we deeply regret
the impact it has had on our shareholders. We are therefore pleased
to restart dividend payments at the earliest opportunity. The Board
has announced an interim dividend of $0.15 for 2020, and adopted a
policy designed to provide sustainable dividends in the future.
Board of Directors
The confirmation of Noel Quinn as permanent Group Chief
Executive underlined the Board's belief that he is the best person
to lead the delivery of the strategic plan. We look forward to
working closely with Noel and the management team as they focus on
executing our strategic priorities in 2021.
Jamie Forese, Steve Guggenheimer and Eileen Murray joined the
Board as independent non-executive Directors in 2020. All three
have already demonstrated the valuable skills, expertise and
experience they bring across a wide range of areas, including
technology. We have also announced that Dame Carolyn Fairbairn will
join the Board as an independent non-executive Director. Carolyn
will bring a wealth of relevant experience, and her appointment
will be effective from 1 September 2021.
6 HSBC Holdings plc Annual Report and Accounts 2020
As reported in the Annual Report and Accounts 2019, Sir Jonathan
Symonds and Kathleen Casey retired from the Board last year. Today
we also announced that Laura Cha will step down from the Board
immediately after our 2021 Annual General Meeting ('AGM') in May. I
would like to thank Jon, Kathy and Laura for the enormous
contributions they made to HSBC during their years of service. We
are now in the advanced stages of a search for suitable candidates
to join and strengthen the Board, and I will update further on the
outcome of this search in due course.
Like the rest of the Group, the Board had to adapt its ways of
working in 2020. We met virtually for much of the year, which
brought benefits including less travel and more frequent, shorter
meetings. It will be important for us to consider how we retain
what has worked well over the last year once restrictions are
lifted and it becomes possible to travel once again.
The Board enjoys the constructive discussions that we have with
shareholders at the AGM in the UK and the Informal Shareholders'
Meeting in Hong Kong, so it was a matter of regret that we did not
meet in person in 2020. While we did maintain regular contact with
shareholders throughout the year, we will resume our face-to-face
engagement with shareholders in the UK, Hong Kong and more widely,
as soon as is practicable.
External environment
After the significant deterioration in global economic
conditions in the first half of the year due to the Covid-19
pandemic, there were signs of improvement in the second half,
especially in Asia. The most impressive economic recovery has been
in China - still the biggest driver of global growth - where
international trade is rebounding most strongly. The signing of the
Regional Comprehensive Economic Partnership should further boost
intra-regional activity across Asia, while the recent political
agreement between the EU and China on an investment deal should,
once ratified, bolster the already significant two-way investment
flows.
Covid-19 infection levels remain very high in Europe, the US and
Latin America, and new variants of the virus have spread quickly.
This has necessitated new lockdown measures in the UK and other
countries. While the deployment of multiple vaccines means we are
more optimistic about the future, there is clearly still some way
to go before life can return to something like normality. Recovery
will therefore take longer in these economies, with growth more
likely later in 2021 in these economies.
The agreement of a trade deal between the UK and EU prior to the
end of 2020 provides some certainty for cross-border trade.
However, the reduced access for financial services under these new
arrangements means that further work is needed to maintain the
level playing field that has existed until now. Given the many
benefits that the UK financial services industry brings to the UK
and EU economies, equivalence must be a key priority for both
parties.
The geopolitical environment remains challenging - in particular
for a global bank like HSBC - and we continue to be mindful of the
potential impact that it could have on our strategy. We continue to
engage fully and frequently with all governments as we seek to do
everything we possibly can to help our customers navigate an
increasingly complex world.
Capturing future opportunities
Given the external environment, it is vital we stay focused on
what we can control. The Board is confident there are many
opportunities ahead for a bank with HSBC's competitive strengths.
This makes it all the more important that we position ourselves to
capture them.
While we prioritised supporting our customers and our people
during the pandemic, we made good progress against the three
strategic priorities announced in February 2020 - reallocating
capital from underperforming parts of the business, reducing costs
and simplifying the organisation. In particular, the Board worked
closely with the management team over the course of the year on
plans to accelerate progress and investment in key areas of growth,
which include our Asian franchise, our wealth business and new
technology across the Group.
We are today unveiling the outcome of extensive consultation
with our people and customers on the Group's purpose and values.
Being clear about who we are, what we stand for and how this
connects to our strategy is an important part of how we align and
energise the organisation to create long-term value for all those
we work with and for - our investors, customers, employees,
suppliers and the communities we serve. The Board fully endorses
the outcome of this work.
Our commitment to create sustainable value is demonstrated by
the new climate ambitions we announced in October 2020. The most
significant contribution that HSBC can make to the fight against
climate change is to bring our customers with us on the transition
to a low-carbon future. Our goal of being net zero for our financed
emissions by 2050 sends an important signal to our investors, our
customers and our people - if our clients are prepared to change
their business models and make that transition, we will help and
support them to do so. HSBC was also delighted to be one of the
founding signatories of the Terra Carta, which was launched last
month by HRH The Prince of Wales' Sustainable Markets Initiative.
Further details about all of the steps we are taking towards a more
sustainable future are set out in the ESG review, which for the
first time is included within the Annual Report and Accounts
2020.
Finally, 2020 underlined once again that our people are the
driving force behind our business. I would like to reiterate how
enormously grateful I am to my colleagues for the great dedication
and care they showed to our customers and to each other during such
testing times. Further empowering and enabling them to do their
jobs and execute our strategic priorities is the key to our future
success.
Mark E Tucker
Group Chairman
23 February 2021
"There are many opportunities ahead for a bank with HSBC's
competitive strengths."
HSBC Holdings plc Annual Report and Accounts 2020 7
Group Chief Executive's review
With a blueprint for the future and a renewed purpose to guide
us, we are building a dynamic, efficient and agile global bank with
a digital-first mindset, capable of providing a world-leading
service to our customers and strong returns for our investors.
In 2020, HSBC had a very clear mandate - to provide stability in
a highly unstable environment for our customers, communities and
colleagues. I believe we achieved that in spite of the many
challenges presented by the Covid-19 pandemic and heightened
geopolitical uncertainty.
Our people delivered an exceptional level of support for our
customers in very tough circumstances, while our strong balance
sheet and liquidity gave reassurance to those who rely on us. We
achieved this while delivering a solid financial performance in the
context of the pandemic - particularly in Asia - and laying firm
foundations for our future growth. I am proud of everything our
people achieved and grateful for the loyalty of our customers
during a very turbulent year.
2020
Helping our customers emerge from the Covid-19 pandemic in a
sustainable position was our most pressing priority. We did this by
equipping our colleagues to work from home at the height of the
pandemic, and keeping the vast majority of our branches and all of
our contact centres open. Our investment in our digital
capabilities - both in 2020 and in previous years - enabled our
customers to access more services remotely, and we worked closely
with our regulators around the world to open new digital channels
in a safe and secure way. In total, we provided more than $26bn of
relief to our personal customers and more than $52bn to our
wholesale customers, both through government schemes and our own
relief initiatives. We also played a vital role in keeping capital
flowing for our clients, arranging more than $1.9tn of loan, debt
and equity financing for our wholesale customers during 2020.
Even in the middle of the pandemic, we continued to look to the
future. In October, we announced our ambition to become a net zero
bank by 2050, supporting customers through the transition to a
low-carbon economy and helping to unlock next-generation climate
solutions. If the Covid-19 pandemic provided a shock to the system,
a climate crisis has the potential to be much more drastic in its
consequences and longevity. We are therefore stepping up support
for our clients in a material way, working together to build a
thriving low-carbon economy and focusing our business on helping
achieve that goal.
The actions we outlined in February 2020 are largely on track or
ahead of where we intended them to be, despite the complications of
the pandemic. We renewed and re-energised the senior management
team, with around three-quarters of the Group Executive Committee
in post for just over a year or less. Our business is more
streamlined than it was a year ago, with three global businesses
instead of four and increased back-office consolidation. Costs are
down materially, with over $1bn of gross operating costs removed
during 2020. We are also already more than half-way towards our
target to reduce at least $100bn of gross risk-weighted assets by
2022.
Unfortunately, the changed interest-rate environment means we
are no longer able to achieve a return on tangible equity of 10% to
12% by 2022. We will now target a return on tangible equity of 10%
or above over the medium term.
The world around us changed significantly in 2020. Central bank
interest rates in many countries fell to record lows.
Pandemic-related lockdowns led to a rapid acceleration in the shift
from physical to digital banking. Like many businesses, we learned
that our people could be just as productive working from home as in
the office. Also, as the world resolved to build back responsibly
from the pandemic, governments, businesses and customers united to
accelerate a low-carbon transition that works for all.
8 HSBC Holdings plc Annual Report and Accounts 2020
"Helping our customers emerge from the Covid-19 pandemic in a
sustainable position was our most pressing priority."
All of these things caused us to adjust and reinforce elements
of our strategy to fit this new environment. The growth plans that
we have developed are a natural progression of our February 2020
plans. They aim to play to our strengths, especially in Asia; to
accelerate our technology investment plans to deliver better
customer service and increased productivity; to energise our
business for growth; and to invest further in our own low-carbon
transition and that of our customers. They are also designed to
deliver a 10% return on tangible equity over the medium term in the
current low interest-rate environment.
Our purpose
As we charted the next stage of HSBC's journey, we also
reflected on our purpose as a business. We consulted widely both
internally and externally, speaking to thousands of colleagues and
customers, and looked deeply into our history. The same themes came
up again and again.
HSBC has always focused on helping customers pursue the
opportunities around them, whether as individuals or businesses.
Sometimes those opportunities are clear and visible, and sometimes
they are far from obvious. Sometimes they arise in the next street,
and sometimes on the next continent. Sometimes they exist in the
status quo, and sometimes they are a product of great social or
economic change. But always, they represent a chance for our
customers to grow and to help those close to them - protecting,
nurturing, building.
'Opening up a world of opportunity' both captures this aim and
lays down a challenge for the future. Opportunity never stands
still. It changes and evolves with the world around us. It is our
job to keep making the most of it, and to find and capture it with
a spirit of entrepreneurialism, innovation and internationalism
that represents HSBC at its very best. This is the essence of what
our plans intend to deliver, and what we intend to keep delivering
for our customers, colleagues and communities as we navigate change
and complexity together.
Financial performance
The pandemic inevitably affected our 2020 financial performance.
The shutdown of much of the global economy in the first half of the
year caused a large rise in expected credit losses, and cuts in
central bank interest rates reduced revenue in rate-sensitive
business lines. We responded by accelerating the transformation of
the Group, further reducing our operating costs and moving our
focus from interest-rate sensitive business lines towards
fee-generating businesses. Our expected credit losses stabilised in
the second half of the year in line with the changed economic
outlook, but the revenue environment remained muted.
As a consequence, the Group delivered $8.8bn of reported profit
before tax, down 34% on 2019, and $12.1bn of adjusted profits, down
45%. Our Asia business was again the major contributor, delivering
$13bn of adjusted profit before tax in 2020.
Adjusted revenue was 8% lower than in 2019. This was due mainly
to the impact of interest rate cuts at the start of the year on our
deposit franchises in all three global businesses. By contrast, our
Global Markets business benefited from increased customer activity
due to market volatility throughout the year, growing adjusted
revenue by 27%.
We made strong progress in reducing our operating expenses. A
combination of our cost-saving programmes, cuts in
performance-related pay and lower discretionary spending due to the
Covid-19 pandemic helped to reduce our adjusted operating expenses
by $1.1bn or 3%.
HSBC Holdings plc Annual Report and Accounts 2020 9
Our investment plans remain essential to the future of the
business. We continued to invest heavily in technology while
managing costs down, spending $5.5bn during 2020.
Our funding, liquidity and capital remain strong. We grew
deposits by $173bn on a constant currency basis, with increases
across all three global businesses. Our common equity tier one
ratio was 15.9% on 31 December 2020.
Our shareholders
It was a difficult year for our shareholders. The Covid-19
pandemic and the impact of geopolitics weighed heavily on our share
price throughout 2020. In March, we cancelled the payment of our
fourth interim dividend for 2019 at the request of our lead
regulator, and also agreed not to make any quarterly or interim
dividend payments until the end of 2020. This particularly affected
shareholders who rely on our dividend for income. It was a priority
for the management team to get back to being able to pay dividends
by the end of the year, and we were pleased to be able to recommend
the payment of an interim dividend for 2020.
Dividends are hugely important, but so is capacity for growth.
To deliver both, we are adopting a new policy designed to provide
sustainable dividends, offering good income while giving management
the flexibility to reinvest capital to grow the firm over the
medium term. We will consider share buy-backs, over time and not in
the near term, where no immediate opportunity for capital
redeployment exists. We will also no longer offer a scrip dividend
option, and will pay dividends entirely in cash.
The last 12 months were tough, but I am highly focused on
turning our performance around in 2021 and beyond. I strongly
believe that the combination of our growth plans and our new
dividend policy will unlock greater value for our shareholders in
the years to come.
Opening up a world of opportunity
'Opening up a world of opportunity' is more than a purpose - it
is a statement of intent. Everything that we plan to do over the
next decade is designed to unlock opportunity for our stakeholders,
whether customers, colleagues, shareholders or communities. We
intend to do this by building a dynamic, efficient and agile global
bank with a digital-first mindset, capable of providing a
world-leading service to our customers and strong returns for our
investors. We will also need to focus intently on the areas where
we excel, and to foster a commercial and entrepreneurial culture
with a conviction to get things done. We believe we can achieve
this in four ways.
First, we plan to focus on and invest in the areas in which we
are strongest. In Wealth and Personal Banking, we aim to become a
market-leader for high net worth and ultra high net worth clients
in Asia and the Asian diaspora, and to invest in our biggest retail
markets where the opportunity is greatest. In Commercial Banking,
we want to remain a global leader in cross-border trade, and to
lead the world in serving mid-market corporates internationally. In
Global Banking and Markets, we intend to invest to capture trade
and capital flows into and across Asia, while connecting global
clients to Asia and the Middle East through our international
network.
Second, we intend to increase the pace at which we digitise HSBC
through higher levels of technology investment. This underpins
everything that we want to achieve. It is how we intend to win new
customers and retain them, to become more agile and efficient, to
create richer, seamless customer journeys, and to build strong and
innovative partnerships that deliver excellent benefits for our
customers. We have an opportunity to meet the growing market need
for sophisticated, robust and rapid payment solutions, and to lead
our industry in applying digital solutions to analogue services,
such as trade. We therefore intend to protect technology investment
throughout the cycle, even as we reduce spending elsewhere.
Third, we want to energise HSBC for growth through a strong
culture, simple ways of working, and by equipping our colleagues
with the future skills they need. Giving life to our purpose will
be critical to building the dynamic, entrepreneurial and inclusive
culture that we want to create, as will removing the remaining
structural barriers that sometimes stop our people from delivering
for our customers. We need to change the way we hire to build
skills and capabilities in areas that are different to what we have
needed historically, including data, artificial intelligence, and
sustainable business models. Our expanded HSBC University will also
help to upskill and reskill our people, while fostering more of the
softer skills that technology can never replace.
Fourth, we will seek to help our customers and communities to
capture the opportunities presented by the transition to a
low-carbon economy. Accelerating this transition is the right thing
to do for the environment, but also the right thing commercially.
We intend to build on our market-leading position in sustainable
finance, supporting our clients with $750bn to $1tn of sustainable
financing and investment over the next 10 years. We also intend to
unlock new climate solutions by building one of the world's leading
climate managers - HSBC Pollination Climate Asset Management - and
helping to transform sustainable infrastructure into a global asset
class. These will help us achieve our ambition to align our
portfolio of financed emissions to the Paris Agreement goal to
achieve net zero by 2050.
Championing inclusion
I believe passionately in building an inclusive organisation in
which everyone has the opportunity to fulfil their potential.
Failing to do so isn't just wrong, it is totally self-defeating. It
means you don't get the best out of the talent you have, and sends
the wrong signals to the people you want to recruit. An inclusive
environment is the foundation of a truly diverse organisation, with
all of the rewards that brings.
Response to Covid-19
Our operations have stayed highly resilient and we are
participating in several Covid-19 relief measures.
Approximately
85%
of our employees are now equipped to work from home.
We provided over
$26bn
of relief to our personal customers.
10 HSBC Holdings plc Annual Report and Accounts 2020
"I believe passionately in building an inclusive organisation in
which everyone has the opportunity to fulfil their potential."
There is much still to do, but we are moving in the right
direction. More than 30% of our senior leaders are female, in line
with the goal we set to achieve by the end of 2020. I want that
number to increase to at least 35% by 2025, and we have a number of
initiatives in place to help achieve it. In May, we launched a new
global ethnicity inclusion programme to better enable careers and
career progression for colleagues from ethnic minorities, and in
July, we made a series of commitments to address feedback from
Black colleagues in particular. These included a commitment to more
than double our number of Black senior leaders by 2025.
I am particularly proud that during a difficult year, which
included a large-scale redundancy programme, employee sentiment
improved within HSBC. Around 71% of my colleagues said that they
found HSBC to be a great place to work, up from 66% in 2019.
However, the view varies across employees from different groups. We
know, for example, that employees with disabilities or who identify
as ethnic minorities do not feel as engaged as others. I take these
gaps very seriously. Better demographic data globally will help us
benchmark and measure our progress more effectively, and we are
taking concerted steps to be able to capture that information where
possible.
2021 outlook
We have had a good start to 2021, and I am cautiously optimistic
for the year ahead. While a spike in Covid-19 infection rates led
to renewed lockdown measures in many places at the start of 2021,
the development of multiple vaccines gives us hope that the world
will return to some form of normality before long. Nonetheless, we
remain reactive to the ebb and flow of the Covid-19 virus and
prepared to take further steps to manage the economic impact where
necessary.
The geopolitical uncertainty that prevailed during 2020 remains
a prominent feature of our operating environment. We are hopeful
that this will reduce over the course of 2021, but mindful of the
potential impact on our business if levels remain elevated. We
remain focused on serving the needs of our customers, colleagues
and communities in all our markets.
Our people
I would like to pay tribute to my colleagues and all those who
supported them throughout a difficult year. HSBC is a community of
around 226,000 colleagues - but it relies just as much on the
family, friends and support networks that help them be the best
they can be. Our people did extraordinary things in 2020, but it
asked a lot of those around them. I am hugely grateful to everyone
who helped HSBC - whether directly or indirectly - in supporting
our customers, communities and each other over the last 12
months.
Noel Quinn
Group Chief Executive
23 February 2021
HSBC Holdings plc Annual Report and Accounts 2020 11
Our strategy
With continued delivery against our February 2020 commitments,
we are now in the next stage of our strategic plan, which responds
to the significant shifts during the year and aligns to our
refreshed purpose, values and ambition.
Progress on our 2020 commitments
In February 2020, we outlined our plan to upgrade our returns
profile through recycling risk-weighted assets ('RWAs') out of
low-return franchises into higher-performing ones, reducing our
cost base and streamlining our organisation.
During 2020, in spite of significant headwinds posed by the
impact of the Covid-19 outbreak across our network, we made
significant progress on delivering against the ambitions we
outlined. We delivered $1bn of cost programme saves. We also
reduced gross RWAs by $52bn, including $24bn from our
non-ring-fenced bank in Europe and the UK, and are currently on
track to meet the greater than $100bn target outlined by 2022.
We took bold steps to simplify our organisation, including the
merger of Retail Banking and Wealth Management and Global Private
Banking to form Wealth and Personal Banking. We also reduced
management layers in Global Banking and Markets and our
non-ring-fenced bank in Europe and the UK. We have built a strong
capital position, ending the year with a CET1 ratio of 15.9%. Our
return on tangible equity ('RoTE') of 3.1% was negatively impacted
by the Covid-19 outbreak and the challenging macroeconomic
environment, including lower interest rates and higher expected
credit losses.
Responding to the new environment
There was a set of fundamental shifts in 2020 that profoundly
impacted our organisation as well as the wider financial services
sector. We have adapted our strategy accordingly.
Low interest-rate environment
Interest rates are expected to remain lower for longer,
resulting in a more difficult revenue environment for the financial
services sector.
Evolution of major interbank rates(1)
Three-month interbank offered rates (%)
We are responding by targeting fee income growth in wealth and
wholesale banking products and improving cost efficiencies.
The new digital experience economy
Remote working and global lockdowns due to the Covid-19 outbreak
have increased our customers' propensity and preference to engage
digitally.
Digital banking usage up c.30%(2) in the industry
% customers increasing digital usage, mid-2020 vs
pre-Covid-19
HSBC customer trends
125%
Increase in HSBCnet mobile downloads(3)
253%
Increase in HSBCnet mobile payments(3)
We are responding by increasing investments in technology across
our customer platforms .
Increased focus on sustainability
The demand for sustainable solutions and green finance rose to
new highs in 2020.
Green, social and sustainability ('GSS') bond market(4)
$bn
GSS share of global debt capital markets 2.7% 3.6% 5.0%
Companies with disclosed climate action targets 228 (in 2018)
1,106 (in 2020)
under the Science Based Targets Initiative
We stepped up our climate ambitions - we aim to be a net zero
bank and support our clients in their transition with $750bn to
$1tn of financing.
1 Source: Datastream.
2 Source: Bain & Company Covid-19 Pulse Survey, July 2020;
Overall sample: 10,000.
3 Fourth quarter of 2020 vs fourth quarter of 2019.
4 Source: Dealogic.
12 HSBC Holdings plc Annual Report and Accounts 2020
Shifting capital to areas with the highest returns and
growth
We are responding to the changes in our operating environment,
and building on our 2020 commitments. Our strategy includes
accelerating the shift of capital to areas, principally Asia and
wealth, that have demonstrated the highest returns and where we
have sustainable advantage through scale. Our international network
remains a key competitive advantage and we will continue to support
cross-border banking flows between major trade corridors. Supported
by these shifts, we are aiming to reach mid-single-digit revenue
growth in the medium to long term(1) , with a higher proportion of
our revenue coming from fee and insurance income.
Capital allocation
Asia
(as a % of Group tangible equity(2) )
Wealth and Personal Banking
(as a % of Group tangible equity(3) )
Fees and insurance
(as a % of total revenue)
1 Medium term is three to four years; long term is five to six
years.
2 Based on tangible equity of the major legal entities excluding
associates, Holdings companies, consolidation adjustments, and any
potential inorganic actions.
3 WPB tangible equity as a share of tangible equity allocated to
the global businesses (excluding Corporate Centre). Excludes
Holdings companies, consolidation adjustments, and any potential
inorganic actions.
Group targets, dividend and capital policy
To support the ambitions of our strategy, we have revised our
Group targets, dividend and capital policy.
Adjusted costs in 2022
<=$31bn
(on December 2020 average exchange rate; or <=$30bn using
full year 2020 average exchange rate)
Gross RWA reduction by end of 2022(1)
>$100bn
CET1 ratio
>=14%
(manage in 14% to 14.5% range over the medium term(2) ; and
manage the range down further long term(2) )
Sustainable cash dividends with a payout ratio(3) of
40% to 55%
from 2022 onwards
RoTE over medium term <>
>=10%
(vs 10% to 12% in 2022 in February 2020 commitment)
We have increased our 2022 cost reduction target by $1bn and we
plan to keep costs stable from 2022. We also plan to reduce
tangible equity in the US and in our non-ring-fenced-bank in Europe
and the UK, and increase tangible equity in Asia and in Wealth and
Personal Banking. Dividends could be supplemented by buy-backs or
special dividends, over time and not in the near term(4) . We will
also no longer offer a scrip dividend option, and will pay
dividends entirely in cash. Given the significant changes in our
operating environment during 2020, we no longer expect to reach our
RoTE target of between 10% and 12% in 2022 as originally
planned.
1 Excludes any inorganic actions.
2 Medium term is three to four years; long term is five to six
years.
3 We intend to transition towards a target payout ratio of
between 40% and 55% of reported earnings per ordinary share ('EPS')
from 2022 onwards, with the flexibility to adjust EPS for non-cash
significant items, such as goodwill or intangibles impairments.
4 Should the Group find itself in an excess capital position
absent compelling investment opportunities to deploy that
excess.
HSBC Holdings plc Annual Report and Accounts 2020 13
Our strategy
We have embedded our purpose, values and ambition into our
strategy. Our purpose is 'Opening up a world of opportunity'. Our
values are: we value difference; we succeed together; we take
responsibility; and we get it done. Our ambition is to be the
preferred international financial partner for our clients. Our
strategy centres around four key areas: focus on our areas of
strengths; digitise at scale to adapt our operating model for the
future; energise our organisation for growth; and support the
transition to a net zero global economy.
Focus on our strengths
In our global businesses
In each of our global businesses, we will focus on areas where
we are strongest and have significant opportunities for growth. We
aim to invest approximately $6bn in Asia(1) , where we intend to
drive double-digit growth in profit before tax in the region in the
medium to long term(2) .
Wealth and Personal Banking
Our goal is to lead in wealth, with a particular focus on Asia
and the Middle East, while investing in our largest retail markets
such as Hong Kong and the UK. Over the medium to long term, we
intend to grow wealth revenue at more than 10% compound annual
growth rate, and grow Asia wealth assets under management faster
than the market. In support of these ambitions, we aim to: capture
opportunities to serve high and ultra high net worth segments
across Asia, especially in China, south-east Asia, Hong Kong and
Singapore; deploy our manufacturing capabilities at scale in
insurance and asset management; and build propositions that
facilitate client origination from our wholesale businesses.
We aim to invest more than
$3.5bn
in Asia over five years to 2025(1) .
Commercial Banking
Taking advantage of our international network, we aspire to lead
in supporting cross-border trade and in serving mid-market
corporates globally. We plan to accelerate international client
acquisition and deepen our share of wallet in cross-border
services. We aim to develop front-end ecosystems to drive
international mid-market client acquisition at scale. We plan to
improve SME propositions in key markets with digital sales and
service journeys. We will also continue to invest in our front-end
platforms for Global Liquidity and Cash Management, Global Trade
and Receivables Finance and Foreign Exchange to drive more fee
income and accelerate our asset distribution.
We aim to invest approximately
$2bn
across global platforms(3) over five years to 2025(1) .
Global Banking and Markets
We will continue to invest in Global Banking and Markets as a
leading international bank in Asia and the Middle East, with a
global network to support trade and capital flows. We aim to invest
in areas such as: enhancing digital platforms for our Asia wealth
propositions, including structured products and foreign exchange;
market access and execution capabilities in Global Markets and
Securities Services; and expansion of our investment banking
coverage across Asia. The next five years should see Global Banking
and Markets pivot to a less volatile and higher-returns model,
relying less on our balance sheet, and focusing more on the growing
capital markets opportunity in Asia and the Middle East.
We aim to invest approximately
$0.8bn
in Asia over five years to 2025(1) .
Continued execution of our transformation programme
To help create capacity for growth, we are refocusing our US
business, our non-ring-fenced bank in Europe and the UK, and our
Global Banking and Markets business.
A focused international business in the US
We will continue to invest in our substantial corporate and
institutional franchise in the US over the medium to long term,
including taking actions to further increase international
connectivity and revenue in other geographies where HSBC and our US
client base have a strong presence around the world including Asia,
the Middle East, the UK and continental Europe. We continue to
explore strategic options with respect to our US retail franchise,
looking to focus on our high net worth, Jade and Premier client
base and wealth management products, while reviewing other options
in respect of our retail banking presence.
Commercial Banking and Global Banking revenue(4) , $bn
Our non-ring-fenced bank in Europe and the UK
Our non-ring-fenced bank will focus on a wholesale footprint
that serves international customers both outbound and inbound
within our network. We intend to continue investing in our
transaction banking franchise that has strong linkage to Asia. We
are continuing with the strategic review of our retail banking
operations in France and are in negotiations in relation to a
potential sale, although no decision has yet been taken. If any
sale is implemented, given the underlying performance of the French
retail business, a loss on sale is expected. We simplified our
operating model, with shared services between our two hubs in
London and Paris. We plan to continue reducing complexity in our
RWA and cost consumption, and we aim to reduce costs(5) by
approximately 20% by 2022.
RWA(5) , $bn
Our Global Banking and Markets business
Our Global Banking and Markets business will refocus on Asia and
the Middle East. We aim to be the pre-eminent corporate and
investment bank in Asia, focusing on opportunities such as the
regionalisation of trade and capital flows and the rise in wealth
creation. We will focus on serving clients into and within Asia and
the Middle East, and providing global institutions with access to
developed and emerging markets. We are redeploying capital and
moving centres of excellence in Global Markets and Global Banking
closer to clients in Asia as we allocate investments to the
region.
Shifting allocation of RWAs, %
1 Consists of 'growth investment', which refers to investment in
strategic business growth (including the build-out of front-line
staff).
2 Medium term is three to four years; long term is five to six
years.
3 Commercial Banking platforms will be tested in Asia and rolled
out globally thereafter.
4 Including Global Liquidity and Cash Management and Global
Trade and Receivables Finance revenue.
5 Excludes any inorganic actions.
6 Gross RWA saves of $24.4bn achieved in 2020, largely offset by
changes in asset size and quality, and updates to models,
methodology and policy.
14 HSBC Holdings plc Annual Report and Accounts 2020
Digitise at scale
We plan to grow investments(1) at a compound annual growth rate
of approximately 7% to 10% from 2019 to 2022. We will focus our
investments in areas such as technology to improve our customers'
digital experiences while ensuring security and resilience. These
investments will be funded in part by using technology to drive
down costs, including a reduction in manual client processes and a
reduction in our commercial real estate footprint.
Investing in technology
We aim to deliver excellent customer experience throughout our
network, including through the use of straight-through processing
for payments, and through partnerships with big technology firms
and fintechs for innovation support. We also intend to build
platforms for higher front-end productivity, including arming our
front-line staff with data analytics and visualisation for key
insights. We plan to automate our middle and back office by, for
example, integrating machine-learning to improve analytics
capabilities. We also plan to build solutions to free up office
footprint, supported by a shift to a more agile way of working and
more efficiencies through reduced headcount.
Continuing to invest in technology capabilities
Technology spend, $bn
Driving down our cost base
We plan to deliver $5bn to $5.5bn of cost programme saves from
2020 to 2022, supporting a decline of our cost base to $31bn or
less by 2022 (using December 2020 average exchange rate) or $30bn
or less (using full year 2020 average exchange rate). We plan to
keep costs broadly stable from 2022, while increasing the
proportion of investment.
$1bn increase in our 2022 cost reduction target.
(<=$30bn based on full year 2020 exchange rate vs <=$31bn
in our February 2020 commitments)
We plan to deliver
$5bn to $5.5bn
of cost programme saves from 2020 to 2022.
(vs $4.5bn in February 2020 commitments)
We plan to spend approximately
$7bn
in costs to achieve to help deliver our cost saves.
(vs $6bn in February 2020 commitments)
1 'Investment' includes strategic business growth (including
build-out of front-line staff), and other strategic, regulatory,
and technology investment (including amortisation).
Energise for growth
We are moving to a leaner and simpler organisation that is
energised and fit for the future.
Inspire a dynamic culture
We intend to re-energise our culture to succeed with purpose and
bring our values to life. We also aim to adopt future ways of
working. To support these objectives, we secured inputs from
approximately 120,000 colleagues and engaged with over 2,500
customers to help shape our renewed purpose and values, which have
been embedded into our strategy. Furthermore, we are launching new
leadership expectations that help to: give life to our purpose;
unleash our organisation's potential; and see through our
actions.
Champion inclusion
We aim to increase diverse representation, particularly in the
senior levels of our organisation. In 2020, we achieved more than
30% of female senior leadership, and we intend to increase to more
than 35% by 2025. We endeavour to close the gaps in employee
engagement in under-represented groups. We are also focusing on the
quality and reporting of ethnicity data and benchmarking our
actions. Our progress to date includes race commitments to at least
double the number of Black employees in senior leadership roles
globally by 2025 and recognition within Stonewall's 2020 Top Global
Employers Index for LGBT+ staff.
Develop future skills
To energise our colleagues, we are setting out initiatives to
help develop their future skills and capabilities. We aim to deepen
the prevalence of digital, professional and enabling skills across
the organisation. Our accomplishments to date include expanding
HSBC University courses on future skills, digitalisation and
sustainability. Moreover, we are deploying third-party platforms
such as Degreed, for educational technology, and Gloat, for career
development.
Transition to net zero
Our ambition is to support the transition to a net zero global
economy.
Becoming a net zero bank
We are making changes both in our own operations and for our
customers through our financing portfolio. We aim to bring our
operations and supply chain to net zero by 2030 or sooner. We also
plan to align our financed emissions - the carbon emissions of our
portfolio of customers - to the Paris Agreement goal to achieve net
zero by 2050 or sooner.
Supporting our customers
Our aim is to provide between $750bn and $1tn of sustainable
finance and investment by 2030 to support our customers in their
transition to lower carbon emissions.
Unlocking new climate solutions
We are working with a range of partners to increase investment
in natural resources, clean technology and sustainable
infrastructure. We also plan to donate $100m to a programme that
will support climate solutions to scale over the next five
years.
We address the progress made on our commitments in a number of
different sections of this Annual Report and Accounts 2020 and
beyond. For more information on our climate strategy, please refer
to the below.
-- Our ESG review can be found on page 42.
-- A summary of our fourth Task Force on Climate-related
Financial Disclosures ('TCFD') can be found on page 20, and our
TCFD Update 2020 can be found at www.hsbc.com/esg.
HSBC Holdings plc Annual Report and Accounts 2020 15
How we do business
We conduct our business intent on supporting the sustained
success of our customers, people and other stakeholders.
Our approach
We recognise that it is important to be clear about who we are
and what we stand for to create long-term value for our
stakeholders. This will help us deliver our strategy and operate
our business in a way that is sustainable.
Following an extensive consultation with our people and
customers, we refined our purpose and values. Our new purpose is
'Opening up a world of opportunity' and we aim to be the preferred
international financial partner for our clients.
To achieve this in a way that is sustainable, we are guided by
our values: we value difference; we succeed together; we take
responsibility; and we get it done.
Our Covid-19 actions
Having a clear purpose and strong values has never been more
important, with the Covid-19 pandemic testing us all in ways we
could never have anticipated. As the world changed over the course
of 2020, we adapted to new ways of working and endeavoured to
provide support to our customers during this challenging
period.
We kept the majority of our branches and all of our contact
centres open. To help achieve this, we equipped 85% of our
colleagues to be able to work from home, and provided extra
resources and support to help them manage the mental and physical
health challenges of the pandemic.
We did not apply for government support packages for our
employees across the countries and territories in which we
operate.
On the following page, we have set out further ways that we
supported each of our stakeholders.
Fair outcomes
In 2020, we continued to promote and encourage good conduct
through our people's behaviours and the decisions we take during
these unprecedented times. We define conduct as delivering fair
outcomes for our customers and not disrupting the orderly and
transparent operation of financial markets. This is central to our
long-term success and ability to serve customers. We have clear
policies, frameworks and governance in place to protect them. For
further information on conduct, see page 187. Details on our
conduct framework are available at
www.hsbc.com/who-we-are/esg-and-responsible-business/our-conduct.
We believe diversity makes us stronger, and we are dedicated to
building a diverse and connected workforce. We achieved our target
of 30% women holding senior leadership roles, which are classified
as 0 to 3 in our global career band structure, by 2020. We want to
keep our focus and momentum and build more gender-balanced teams,
so we have set ourselves a target to achieve 35% women in senior
leadership roles by 2025.
We published ethnicity data in the UK and US and recognise we
need to take action. We aim to at least double the number of Black
employees in senior leadership roles globally by 2025.
Our climate ambition
In 2020, we announced our climate ambition to become net zero in
our operations and our supply chain by 2030, and align our financed
emissions to the Paris Agreement goal of net zero by 2050. We know
this is a journey and recognise that the current means of measuring
progress globally need improving to track reductions better.
We have changed how we report on ESG issues this year by
embedding the content previously provided in our stand-alone ESG
Update within this Annual Report and Accounts. This can be found in
the ESG review on page 42.
Our new purpose and values
HSBC was born across different cultures and has a long history
of connecting people, ideas and capital that make progress happen.
That is why we have been working hard to sharpen our strategic
focus, clarify our sense of purpose, and re-energise our
culture.
As we set out in this Annual Reports and Accounts 2020, we have
revised our purpose, values and ambition. This has followed an
extensive listening, talking and reflecting exercise involving tens
of thousands of colleagues, customers and other stakeholders. It
was the largest employee engagement programme in our history.
We plan to formally launch our purpose and values to HSBC
colleagues and other stakeholders in March 2021.
16 HSBC Holdings plc Annual Report and Accounts 2020
Supporting our stakeholders through Covid-19
The Covid-19 outbreak has created a great deal of uncertainty
and disruption for the people, businesses and communities we serve
around the world. It is affecting everyone in different ways, with
markets at different stages of the crisis. We are tailoring our
response to the different circumstances and situations in which our
stakeholders find themselves.
Customers
The Covid-19 outbreak has posed significant challenges for our customers.
Our immediate priority is to do what we can to provide them with support
and flexibility.
This has included offering payment relief and restructuring mortgage payments,
as well as extending relief loans or temporary credit limit increases
for borrowers. At 31 December 2020, we had active payment relief measures
impacting 87,000 accounts and $5.5bn in balances as part of market-wide
schemes and our own payment holidays programmes.
On the first day of a government cash payout scheme in Hong Kong, we received
one million registrations after we set up a simple digital and branch
registration process. At the end of 2020, the lending support we provided
to more than 237,000 wholesale customers globally was valued at $35.3bn,
both through government schemes and our own initiatives.
We have taken steps to keep many of our branches open while protecting
customers and our colleagues. However, with customers doing more of their
banking online, we have also deployed new technology to help enable them
to engage with us in new ways.
For further details on how we are helping our customers, including during
the Covid-19 outbreak, see the Customers section of the ESG review on
page 52.
Employees
The Covid-19 outbreak tested our colleagues in many ways and they adapted
at pace in this fast-changing environment.
In branches, we introduced social distancing measures, provided personal
protective equipment, reduced operating hours and offered virtual appointments.
For office workers, we made sure cybersecurity controls and software supported
home working.
For some of our colleagues, we changed their roles, asking them to undertake
activities that were outside their normal activities. This helped to keep
many of our colleagues working during these extraordinary times.
Our employee networks have held regular support calls for those experiencing
mental health challenges and 92,000 colleagues participated in our Covid-19
well-being survey, with 86% telling us they were confident in the approach
our leadership team was taking to managing the crisis.
For further details on how we are helping our colleagues, see the Employees
section of the ESG review on page 62.
Investors
The Covid-19 outbreak and the impact of geopolitics weighed heavily on
our share price throughout 2020. Central banks and governments also implemented
several measures in their response to the pandemic. In line with all other
large UK-based banks, and in response to a request from the UK's PRA,
we cancelled the fourth interim dividend for 2019. We also announced that,
until the end of 2020, we would make no quarterly or interim dividend
payments or accruals in respect of ordinary shares.
This was a difficult decision and we deeply regret the impact it has had
on shareholders. We are therefore pleased to restart dividend payments
at the earliest opportunity. The Board has announced an interim dividend
of $0.15 for 2020. Adopting a prudent approach now will help ensure the
dividend remains sustainable in the future.
We continued to engage virtually with investors. It was unfortunately
not possible for shareholders to attend the 2020 AGM in person due to
social distancing measures. Shareholders were instead encouraged to vote
by proxy and submit questions in advance with the answers published subsequently
on our website. We also maintained an active programme of shareholder
meetings and presentations.
Communities
Our $25m Covid-19 donation fund supported relief and recovery efforts
around the world, including immediate medical relief, access to food,
and care for the most vulnerable people.
Regulators and governments
We have proactively engaged with regulators and governments globally regarding
the policy changes issued in response to the Covid-19 outbreak to help
our customers and to contribute to an economic recovery.
Suppliers
We made early payments to thousands of our suppliers during the year to
support them through the pandemic.
HSBC Holdings plc Annual Report and Accounts 2020 17
Our ESG metrics and targets
We have established targets that guide how we do business,
including how we operate and how we serve our customers. These
targets are designed to help us to make our business - and those of
our customers - more environmentally sustainable. They also help us
to improve employee advocacy and diversity at senior levels as well
as strengthen our market conduct.
The 2020 annual incentive scorecards of the Group Chief
Executive, Group Chief Financial Officer and Group Managing
Directors had 30% weightings for measures linked to outcomes that
underpin the ESG metrics below. In addition, for executive
Directors, a 25% weighting is given to environment and
sustainability measures in the 2020 long-term incentive ('LTI')
scorecards, which have a three-year performance period ending on 31
December 2023. The targets for this measure are linked to our
climate ambition of achieving a reduction in our carbon footprint
and facilitating financing to help our clients in their transition
to net zero. For a summary of how all financial and non-financial
metrics link to executive remuneration outcomes, see pages 241 to
245 in the Director's remuneration report.
For a number of the metrics outlined below, 2020 was a
transition year. For further details, including the high-level
framework for how we are looking to measure the progress on our new
climate ambition, see the ESG
review on page 42. In 2021, we will introduce new metrics and targets aligned to our strategy.
Target Performance in 2020
Environmental
Sustainable finance Provide and $93.0bn
and investment facilitate(1) cumulative progress
$100bn since 2017(1)
by the end
of 2025
Reduce operational 2.0 1.76
CO2 emissions tonnes used tonnes used per
per full-time FTE(2)
equivalent
('FTE') by
the end of
2020(2)
Climate-related Continued We published our
disclosures implementation 4th
of the Financial TCFD, which can
Stability be found on page
Board's TCFD 20 and in the separate
TCFD Update on www.hsbc.com/esg.
We recognise there
is still work to
be done on how we
report climate-related
disclosures.
Social
Customer satisfaction Customer satisfaction 7 WPB markets sustained
improvements top-three rank and/or
in improved in customer
8 satisfaction(3)
scale markets(3)
5 CMB markets sustained
top-three rank and/or
improved in customer
satisfaction(3)
Employee advocacy 69% 71%
of employees of employees would
recommending recommend HSBC as
HSBC as a a great place to
great place work(4)
to work by
the end of
2020(4)
Employee gender 30% 30.3%
diversity women in senior women in senior
leadership leadership roles(5)
roles by the
end of 2020(5)
Governance
Achieve sustained 98% 93.2%
delivery of global of staff to of staff completed
conduct outcomes complete annual conduct training
and effective financial conduct training in 2020 (6)
crime risk management
1 The sustainable finance commitment and progress figure
includes green, social and sustainability activities. In October
2020, we announced a new target ambition to provide between $750bn
to $1tn of sustainable finance and investment by 2030. For further
details, see page 44 in the ESG review.
2 This carbon figure covers scope 1, scope 2 and scope 3
(travel) emissions. For further details, see
www.hsbc.com/our-approach/esg-information/esg-reporting-and-policies.
3 Our customer satisfaction performance is based on improving
from our 2017 baseline. Our scale markets are Hong Kong, the UK,
Mexico, the Pearl River Delta, Singapore, Malaysia, the UAE and
Saudi Arabia. For further details on how we are transitioning to a
new metric, see page 54 in the ESG review.
4 Our target was to improve employee advocacy by three points
each year through to 2020. Our employee advocacy score in 2019 was
66%. Performance is based on our employee Snapshot results. From
2021, our targets will be based on our employee engagement
index.
5 Senior leadership is classified as 0 to 3 in our global career
band structure.
6. The launch of conduct global mandatory training in 2020 was
delayed due to the Covid-19 outbreak and the completion date was
rolled over into 2021.
18 HSBC Holdings plc Annual Report and Accounts 2020
Our climate risk and reporting strategy
Every organisation has a role to play in limiting the impact of
climate change. We believe our most significant contribution will
be to align with the Paris Agreement goal of net zero global
greenhouse emissions by 2050, through financing the transformation
of businesses and infrastructure.
Central to our new climate ambition of becoming net zero in our
financed emissions by 2050 or sooner is the intensification of our
support for customers transitioning to a low-carbon economy. We aim
to mobilise between $750bn and $1tn of sustainable finance and
investment by 2030.
The Financial Stability Board's Task Force on Climate-related
Financial Disclosures ('TCFD') recommendations set an important
framework for understanding and analysing climate-related risks,
and we are committed to regular, transparent reporting to help
communicate and track our progress. We will advocate the same from
our customers, suppliers and the industry. However, this is a
journey and much work lies ahead as we develop our climate risk
management and metrics capabilities, and build on our 2020 climate
scenario analysis. This summary, together with our separate TCFD
Update 2020, forms our fourth TCFD disclosure.
We have made headway assessing climate's impact on our customers
and our operations - from the physical risk of increased severity
or shifts in weather events, and the potential transition risk from
changes to policy, technology and consumer behaviour. Working to
embed climate into our risk management framework, we are initially
focusing on five principal risk types most likely to be influenced
by climate risk. The table below sets out examples of how these
risk types might be impacted.
For further details of our climate ambition, see pages 45 to 50
in the ESG review. Our TCFD Update 2020 can be found at
www.hsbc.com/esg.
Climate risk impact Principal risk type Examples of potential impact
impacted
---------------------------------- ---------------------- -----------------------------------------
Extreme weather events Retail credit risk -- The cost of flood damage to
or chronic changes in Wholesale credit a customer's home leaves them
weather patterns impact risk unable to repay their mortgage
our assets, operations Resilience risk -- Hurricane damage to a customer's
or our customers' assets warehouse halts manufacturing
and leaves them unable to repay
their loan
-- One of our data centres is
flooded and we are unable to
service customers
Our business models Wholesale credit -- Failure to align to new regulations
or our customers' business risk leads to a loss of business and
models fail to align Reputational risk customers are unable to repay
to a low-carbon economy their loans
-- Our actions lead to negative
external perceptions of our organisation
We fail to effectively Reputational risk -- We fail to respond to customer
design and market climate-related Regulatory compliance demand or a regulatory change,
products across all risk leading to adverse stakeholder
global businesses or reaction
respond to regulatory
change
We have identified six sectors where we are most exposed to
transition risk and our level of lending activity in those sectors.
From our corporate questionnaire, we collate information about our
customers' climate transition strategies to assess their need and
readiness to adapt, and to identify potential business
opportunities. This supports our decision making and credit risk
management processes. Across 2019 and 2020, we received responses
from customers within the six high transition risk sectors, which
represented 41% of our exposure - an increase of seven percentage
points from 2019. The table below shows our lending activity in the
six sectors and insights from our questionnaire.
Within the power and utilities, and metals and mining sectors
shown in the table below, our direct exposure to thermal coal is
0.2% of the wholesale loans and advances figures.
Wholesale loan exposure to transition risk sectors and customer
questionnaire responses
Automotive Building Chemicals Metals Oil and Power Total
and construction and mining gas and utilities
---------------------------- ---------- ----------------- --------- ----------- ------- -------------- -------
Wholesale loan exposure <=3.1% <=4.0% <=3.4% <=2.5% <=3.4% <=3.2% <=19.6%
as % of total wholesale
loans and advances to
customers and banks
(1,2,3)
---------------------------- ---------- ----------------- --------- ----------- ------- -------------- -------
Proportion of sector
for which questionnaires
were completed(4) 42% 44% 32% 45% 42% 40% 41%
---------------------------- ---------- ----------------- --------- ----------- ------- -------------- -------
Proportion of questionnaire
responses that reported
having a board policy
or a management plan(4) 68% 81% 77% 54% 84% 93% 77%
---------------------------- ---------- ----------------- --------- ----------- ------- -------------- -------
Sector weight as proportion
of high transition risk
sector(4) 16% 20% 18% 13% 17% 16% 100%
----------------------------
1 Amounts shown in the table include green and other sustainable
finance loans, which support the transition to the low-carbon
economy. The methodology for quantifying our exposure to high
transition risk sectors and the transition risk metrics will evolve
over time as more data becomes available and is incorporated in our
risk management systems and processes.
2 Counterparties are allocated to the high transition risk
sectors via a two-step approach. Firstly, where the main business
of a group of connected counterparties is in a high transition risk
sector, all lending to the group is included irrespective of the
sector of each individual obligor within the group. Secondly, where
the main business of a group of connected counterparties is not in
a high transition risk sector, only lending to individual obligors
in the high transition risk sectors is included.
3 Total wholesale loans and advances to customers and banks
amount to $673bn (2019: $680bn).
4 All percentages are weighted by exposure.
HSBC Holdings plc Annual Report and Accounts 2020 19
Task Force on Climate-related Financial Disclosures ('TCFD')
The table below sets out the 11 TCFD recommendations and
summarises the progress we have made in the past 12 months.
TCFD recommendation Our progress in 2020
Governance
------------------------------------------------------------------
Describe the Board's
oversight of climate-related
risks and opportunities
Describe management's * The Board is responsible for our climate ambition and
role in assessing strategy and receives climate-focused updates twice a
and managing climate-related year.
risks and opportunities
* The Group Risk Committee provides oversight of
climate risks and opportunities through enterprise
risk reports, deep dives and updates.
* The Group Executive Committee manages our climate
ambition with management responsibilities integrated
into the relevant business and functional areas.
For further details of our governance approach, see
page 5 of our TCFD Update 2020.
Strategy
Describe the climate-related - We have identified our key climate risks over the
risks and opportunities short, medium and long term and identified the principal
the organisation has risk types as retail credit risk, wholesale credit
identified over the risk, resilience risk, reputational risk and regulatory
short, medium and compliance risk.(1)
long term
For further details of our climate risks and risk
types, see pages 3 and 22 of our TCFD Update 2020.
- We are prioritising climate-related financing and
investment, and in October announced our new climate
ambition to become a net zero bank, support customers
to thrive in the transition to a low-carbon economy,
and to unlock next generation climate solutions.
For further details of our climate ambition, see pages
45 to 50 in the ESG review.
Describe the impact - We have carried out various exercises to analyse
of climate risks and our resilience, including:
opportunities on the - using the Paris Agreement Capital Transition Assessment
organisation's businesses ('PACTA') tool to assess our customers' impact on climate
strategy and planning and help develop clear pathways to net zero financed
emissions. We have run a pilot on our automotive loan
book; and
- running a stress testing pilot to assess the impact
of different climate scenarios on our customers and
our own infrastructure.
Describe the resilience For further details of our scenario analysis and 'PACTA'
of the organisation's pilots, see pages 13 to 21 of our TCFD Update 2020.
strategy taking into
consideration different
climate-related scenarios,
including a 2 C or
lower scenario
Risk management
Describe the organisation's - In response to identifying our key climate risks,
processes for identifying we have reviewed our risk appetite and defined our
and assessing climate-related approach to managing these risks.
risks - We are reviewing our policies for managing a number
of principal risk types, initially resilience risk,
sustainability risk and regulatory compliance risk.
For further details of our climate risk management
approach, see page 48 in the ESG review and pages
22 to 24 of our TCFD Update 2020.
Describe the organisation's - We manage our asset management customers' climate
processes for managing risk in line with our fiduciary responsibilities to
climate-related risks protect and grow the assets.
Read more on our asset management approach to climate
risk in our policies and procedures on
www.assetmanagement.hsbc.co.uk/en/institutional-investor/about-us/responsible-investin
g/policies.
Describe how processes - The Trustee of our UK Pension Scheme manages climate
for identifying, assessing risk in line with its fiduciary responsibilities towards
and managing climate-related members.(2)
risks are integrated - We have established a dedicated climate risk programme
into the organisation's to accelerate the integration of climate risk into
overall risk management our Group-wide risk management framework, which includes
identification and assessment, management, and aggregation
and reporting.
Metrics and targets
------------------------------------------------------------------
Disclose the metrics
used by the organisation
to assess climate-related
risk and opportunities
in line with its strategy
and risk management
process
--------------------------
Describe the targets * We use several metrics to measure and track our
used by the organisation progress against key targets, and we will be refining
to manage climate-related our approach to financed emissions (scope 3),
risks and opportunities including carbon intensity, for specific portfolios.
and performance against
targets
* We set a new sustainable finance and investment
target of $750bn to $1tn by 2030, after reaching
$93.0bn of our $100bn by 2025 target. The $40.6bn
achieved in 2020 counts towards both the existing
2025 target and the new target.
* We continue to disclose our wholesale loan exposure
to the six high transition risk sectors, and use our
corporate customer transition risk questionnaire to
help inform our risk management.
* We include an environment measure in the scorecards
of our executive Directors and Group Managing
Directors. The long-term incentive scorecards of our
executive Directors (three-year performance period to
the end of December 2023) have a 25% weighting for
targets aligned to our climate ambitions.
Disclose scope 1, scope - We continue to disclose business travel, energy-related
2 and, if appropriate, emissions and renewable energy use, and aim to disclose
scope 3 greenhouse further details on our own scope 3 emissions in future
gas emissions and the reporting.
related risks
For further details of our climate metrics and targets,
see pages 45 to 50 in the ESG review.
1 Short term: less than one year; medium term: period to 2030;
long term: period to 2050.
2 For further details of our UK Pension Scheme's latest TCFD
statement, see
https://futurefocus.staff.hsbc.co.uk/-/media/project/futurefocus/information-centre/pensioner/other-information/2020-tcfd-statement.pdf.
20 HSBC Holdings plc Annual Report and Accounts 2020
Responsible business culture
We have the responsibility to protect our customers, our
communities and the integrity of the financial system. In this
section, we outline our requirements under the Non-Financial
Reporting Directive.
Environmental matters
In October 2020, we announced our ambition to achieve net zero
in our own operations and our supply chain by 2030 or sooner. We
also plan to align our financed emissions - the carbon emissions of
our portfolio of customers - to the Paris Agreement goal of net
zero by 2050 or sooner. For further details of our climate strategy
and carbon emission metrics, see the ESG review on page 44.
Employee matters
We are opening up a world of opportunity for our colleagues
through building an inclusive organisation that prioritises
well-being and prepares our colleagues for the future of work.
We expect colleagues to treat each other with dignity and
respect and take action where we find behaviour that falls short of
our expectations. We monitor how we perform on metrics that we
value and benchmark against our peers. We have a range of tools and
resources to help colleagues to take ownership of their development
journey.
We believe in the importance of listening to our people and seek
innovative ways to encourage employees to speak up. At times,
individuals may not feel comfortable speaking up through the usual
channels. Our global whistleblowing channel, HSBC Confidential, is
open to colleagues, past and present, to raise concerns either
confidentially or anonymously.
In 2018, we committed to reach 30% women in senior leadership
roles, which are classified as 0 to 3 in our global career band
structure, by 2020. At the end of 2020, we achieved 30.3% and have
now set ourselves a target to achieve 35% by 2025. In July 2020, we
set out global race commitments, which included a goal to at least
double the number of Black employees in senior roles over the next
five years. We are focusing on the quality and reporting of
ethnicity data to be more transparent about our representation and
accountable for the effectiveness of our actions. In 2020, we began
a three-year transformation programme. We work hard to ensure
colleagues impacted by change are supported.
The table below outlines high-level diversity metrics.
All employees Senior leadership(1) Directors
Male 48% 70% 64%
Female 52% 30% 36%
1 Senior leadership is classified as 0 to 3 in our global career
band structure.
For further details on how we look after our people, including
our diversity targets, transformation employee metrics and how we
encourage our employees to speak up, see the Employees section of
the ESG review on page 62.
Social matters
We have a responsibility to invest in the long-term prosperity
of the communities where we operate. We recognise that technology
is developing at a rapid pace and that a range of new and different
skills are now needed to succeed in the workplace. For this reason,
much of our focus is on programmes that develop employability and
financial capability. We also back initiatives that support
responsible business, and contribute to disaster relief efforts
based on need. In 2020, we contributed $112.7m to charitable
programmes and our employees volunteered 82,000 hours to community
activities during the working day.
Human rights
Our commitment to respecting human rights, principally as they
apply to our employees, our suppliers and through our financial
services lending, is set out in our Statement on Human Rights. This
statement, along with our statements under the UK's Modern Slavery
Act ('MSA') is available on
www.hsbc.com/our-approach/measuring-our-impact.
Anti-corruption and anti-bribery
HSBC requires compliance with all applicable anti-bribery and
corruption laws in all markets and jurisdictions in which we
operate. These laws include the UK Bribery Act, the US Foreign
Corrupt Practices Act, and the Hong Kong Prevention of Bribery
Ordinance, as well as other similar laws and regulations in the
countries where we operate. We have a global anti-bribery and
corruption policy, which gives practical effect to these laws and
regulations, but also requires compliance with the spirit of laws
and regulations to demonstrate HSBC's commitment to ethical
behaviours and conduct.
Non-financial information statement
This section primarily covers our non-financial information as required
by the regulations. Other related information can be found as follows:
For further details on our key performance indicators, see page 1.
For further details on our business model, see page 4.
For further details on our principal risks and how they are managed,
see pages 37 to 40.
Investing in the skills of the future
In 2020, we launched the global HSBC Future Skills Innovation
Challenge in partnership with Ashoka, a global network for social
entrepreneurs, to support innovations that help people become more
employable and financially capable. We received more than 200
submissions to the challenge, with 12 winners selected. Each winner
received a prize of up to $25,000 and additional support and
mentoring.
All winning entries provided solutions that address local
problems, such as digital platform Bamba, which helps domestic
workers gain access to the financial system in Mexico.
Thanks to our support to the challenge, we won The Banker's
global award for Banking in the Community in December 2020. The
award recognised the most innovative initiatives launched by
financial institutions that enrich and improve the societies in
which they operate.
HSBC Holdings plc Annual Report and Accounts 2020 21
Board decision making and engagement with stakeholders
Our Board is committed to effective engagement and seeks to
understand the interests of and impacts on relevant stakeholders
when making decisions.
Section 172 (1) statement
This section, from pages 22 to 24 forms our section 172
statement. It describes how the Directors have performed their duty
to promote the success of the company, including how they have
considered and engaged with stakeholders and, in particular, how
they have taken account of the matters set out in section 172(1)(a)
to (f) of the Companies Act 2006 .
Stakeholder engagement and Covid-19
There were no changes to the Board's identified key stakeholders
during the year, namely our customers, employees, investors,
communities, suppliers, and regulators and governments. In
overseeing the business, the Board sought to understand - and have
appropriate regard to - the interests and priorities of these
stakeholders, including in relation to material decisions that were
taken during the course of the year.
Events during the year called for careful consideration of the
needs and interests of the company's various stakeholders. A
specific area of focus arising from the Covid-19 pandemic included
our colleagues' mental and physical health, which the Board
monitored by way of frequent Snapshot and pulse surveys, and
discussions with senior management on the well-being of their
teams. Another area of Board focus, supported by guidance from
subject matter experts, was the evolving views and requirements of
our customers, investors, employees, communities and suppliers. The
effects of the Covid-19 outbreak on these stakeholders contributed
to the development of our Group strategy and purpose and values.
For further details of how the Board engaged with stakeholders in
adapting our Group strategy and refreshing our purpose and values,
see 'Board engagement with shareholders' on page 204.
The unique nature of the Covid-19 outbreak also brought
logistical challenges for interacting with stakeholders. For
instance, to protect and keep our shareholders and people safe and
in line with the advice from the UK Government, it was not possible
for shareholders to attend our AGM. Consequently, shareholders did
not have the opportunity to ask questions of the Board in person,
although alternative arrangements were made to publish responses to
written questions on our website. Similarly, it was not possible to
hold the Informal Shareholders' Meeting in Hong Kong nor for the
Board to undertake site visits due to travel restrictions. In
addition, the financial impact of the pandemic brought into sharp
focus the need to consider carefully the impact of decisions on a
range of stakeholders. For example, the decision to cancel the
fourth interim dividend for 2019 and suspend dividends for 2020
required consideration of the request from the Prudential
Regulation Authority to cancel the dividend, the impact the
decision would have on our shareholders and the important role that
HSBC has in helping its customers manage through the crisis.
Further details on the dividend cancellation are provided in
'Financial decisions' on page 209 and 'Dividends' on page 256.
Despite logistical challenges, the Board continued to engage
directly with many stakeholders, including employees, regulators
and shareholders, and was kept informed indirectly about relevant
stakeholder matters through management reports. Some of the ways in
which the Board engaged with - or received views - from its key
stakeholders during the year are provided below. Further details on
our stakeholders are provided in 'How we do business' on page
17.
Customers
Our business is centred around our
customers and clients. The greater
the understanding we have of their
needs and the challenges they face,
the better we can support them to
achieve their financial aims. Examples
of the Board engaging with customers
in 2020 included:
- monthly Group Chief Executive Board
reports, which included updates on
key customer sentiment and activities;
- reports from the Group Chief Executive
on meetings he held with customers
across the world, including pre-Covid-19
interactions and Covid-19 safe physical
meetings in the UK and Asia;
- regional and sector-based customer
insights developed through customer
interactions with senior management
and relationship managers, which were
incorporated into relevant Board reports;
and
- customer survey feedback, including
the results of our 2020 Navigator
survey and net promoter scores.
Employees
We want our organisation to continue
to be a positive place to work and
build careers. The success of the
Group's strategy is dependent upon
having motivated people with the expertise
and skills required to help deliver
our strategy. Examples of the Board's
engagement with our employees in 2020
included:
- 'Snapshot' survey updates on employee
sentiment and well-being, which were
published twice during the year;
- additional employee opinion surveys
to assess employee physical and mental
well-being;
- status surveys to assess how employees
might be affected by the Covid-19
outbreak so that they can be supported
appropriately;
- virtual and Covid-19 safe attendance
by our Board members at workforce
engagement events focused on our global
businesses, functions and employee
resource groups; and
- reports from members of senior management
on the welfare of their teams and
areas of expertise and skills that
required development to deliver the
strategy.
Investors
We seek to understand investor needs
through ongoing dialogue. Examples
of the Board engaging with investors
in 2020 included:
- virtual and Covid-19 safe regular
meetings with investors to understand
evolving views, trends and sentiment;
- reports from institutional investor
meetings attended by Directors; and
- regular updates from Investor Relations,
including a weekly update on market
activity and sentiment.
22 HSBC Holdings plc Annual Report and Accounts 2020
Communities
We play an important role in supporting
the communities in which we operate
through customers we serve and corporate
social responsibility activities. We
are, in turn, dependent on those communities.
Examples of the Board's engagement
with communities in 2020 included:
- regular climate and ESG-related updates
to the Board;
- economist updates to the Board on
the varying impact of the Covid-19
outbreak on the markets in which the
Group operates, helping to guide the
focus of the strategy and connect with
stakeholder groups;
- immunologist updates to the Board
on the varying impact of the Covid-19
outbreak in the geographies in which
the Group operates, providing insight
into what support may be required by
governments globally in support of
the recovery and from HSBC to our customers
and employees; and
- a Director-led roundtable in Latin
America to focus on geopolitical and
social matters influencing that region.
Regulators and governments
Constructive dialogue and relations
with the relevant authorities in the
markets we operate are critical to
support the effective functioning of
economies globally. Examples of the
Board's engagement with regulators
and governments in 2020 included:
- executive and non-executive Directors
'continuous assessment' meetings with
the PRA and other individual regulatory
meetings;
- the annual presentation by the PRA
to discuss the outcome and progress
of its Periodic Summary Meeting Letter;
- the presentation by the UK Financial
Conduct Authority ('FCA') of its Firm
Evaluation;
- reports from meetings with the supervisory
college of regulators; and
- regular dialogue with governments
across the world, including representation
on government-led forums.
Suppliers
Our suppliers provide the Group with
vital resources, expertise and services
to help us operate our business effectively.
We work with our suppliers to ensure
mutually beneficial relationships on
a global and local level. In some cases
our suppliers will also be our customers.
Examples of the Board's engagement
with suppliers in 2020 included:
- reports from the Group Chief Operating
Officer, which included updates on
third-party suppliers and operational
resilience; and
- Board level engagement at external
events such as the World Economic Forum
with the opportunity to engage with
suppliers across the globe.
Principal decisions
Examples of principal decisions made by the Board during 2020,
where the Directors had regard to the relevant matters set out in
section 172(1)(a)-(f) of the Companies Act 2006 when discharging
their duties, are set out below:
Appointment of Group In early 2020, Noel Quinn was appointed as Group
Chief Executive Chief Executive to lead the Group through the next
phase of its strategy and transformation.
The appointment followed a thorough and robust search
process, which considered the best internal and external
talent with the aim of identifying the most suitable
and able candidate to lead HSBC through its next
stage. For further details of the appointment process,
see the Nomination & Corporate Governance Report
on page 213.
In taking this decision, the Board considered among
other matters the ability of prospective candidates
to develop trusted, constructive and strong relations
with each of the Group's customers, colleagues, regulators
and members of the investor community. For instance,
the Board benefited from assessment criteria that
evaluated the ability of each candidate to develop
and maintain strong relations with the global workforce
while implementing strategic change.
Given the market sensitive implications of the appointment
and the requirement for absolute discretion and confidentiality
in relation to prospective candidates, it would not
have been appropriate to engage with all stakeholders
while the process was ongoing. The Group's principal
regulators were kept appraised of the progress with
the search. Towards the end of the process, the appointment
was approved by the Group's UK regulators, an important
step given that the role of Group Chief Executive
is a regulated position in the UK.
This detailed engagement, together with the various
interviews and assessments conducted during the process,
helped the Board determine that the appointment of
Noel was in the best interests of the Group as a
whole.
Dividend cancellation
On 31 March 2020, HSBC announced that, in response
to a written request from the Bank of England through
the PRA, the Board had cancelled the fourth interim
dividend for 2019. The Board also announced that
no quarterly or interim dividend payments, accruals
or share buy-backs would be paid in respect of ordinary
shares until the end of 2020.
Cancelling the dividend was an extremely difficult
decision for the Board. In reaching its decision,
the Board took into account a number of considerations
including the request from the PRA, the then current
and potential material impact on the global economy
as a result of the Covid-19 outbreak and the important
role that HSBC has in helping its customers manage
through the crisis and to have the resources to invest
when recovery occurs.
The Board recognised that while HSBC had a strong
capital, funding and liquidity position, there were
significant uncertainties in assessing the length
and impact of the Covid-19 outbreak. The Board also
noted HSBC's commitment to supporting customers in
the economies in which HSBC serves, particularly
Hong Kong and the UK.
These considerations were carefully balanced against
the impact the decision would have on HSBC's shareholders,
including retail shareholders in Hong Kong, the UK
and elsewhere.
At the time of the announcement in March, the Board
stated that it would review the ordinary share dividend
policy and payments in respect of 2020 once the full
impact of the outbreak was better understood and
economic forecasts for global growth in future years
were clearer.
We are therefore pleased to restart dividend payments
at the earliest opportunity and on 23 February 2021
the Board announced an interim dividend for 2020
of $0.15 per ordinary share. The Board has adopted
a policy designed to provide sustainable dividends
going forward. For more information on dividend decisions
for 2021 see 'Highlights' on page 2.
HSBC Holdings plc Annual Report and Accounts 2020 23
Adapted Group strategy
When Covid-19 was declared a global pandemic, the
Board determined that the assumptions underpinning
its February 2020 commitments were to be revisited.
As the extent and implications of the Covid-19 outbreak
began to emerge, the Board recognised the need to
consider the impact on the strategy of a prolonged
low interest-rate environment, as well as geopolitical,
technological and environmental challenges. These
fundamental shifts profoundly impacted our organisation
as well as the wider financial services sector. The
Board responded by aligning our strategy accordingly.
Customer insights were gathered through comprehensive
engagement with over 4,000 customers, led by Global
Banking and Markets, which helped inform the Board
of the likely wider medium- to long-term implications
and consumer and societal shifts arising from the
pandemic. These insights indicated that the Covid-19
outbreak had accelerated customers' behaviours and
preferences towards an increasingly digital, data-driven
and real-time service requirement, with service standards
set by sectors outside of financial services. Providing
a superior digitalised proposition supports our customers
to help achieve their full potential and create a
culture of innovation and accountability among our
colleagues.
The Board actively engaged with senior management
to consider the likely consequences of the strategic
actions proposed, while providing constructive challenge
and support in the development of its plans. The
insights gained reinforced the need to shift capital
away from underperforming businesses while investing
for growth and reducing our cost base. The Board
considered the views of the Group's brokers in challenging
the current strategy from an investment perspective.
In addition, the Board recognised the need for continued
and constructive engagement with our regulators to
address their concerns and priorities as the Group
transforms its business.
Employees were identified as a key stakeholder group
given that they needed to understand and implement
the Group strategy. The Board received updates on
senior talent and areas where skills need to be developed
further.
For further details of the Group's adapted strategy,
see 'Strategy and business performance' on page 209.
Purpose and values The strategic review prompted the Board to revise
the Group's purpose and values.
To support the Board in its decision making, a working
group was established to develop proposals, including
three non-executive Directors who supported and challenged
management's proposals.
An extensive programme of stakeholder engagement
across our main operating markets was undertaken
during the development of the revised purpose and
values involving interviews, focus groups and large-scale
surveys. This engagement sought to understand what
was important to and resonated with our employees
and customers (including next generation customers),
while identifying societal trends. The purpose and
value statements were tested for longevity and were
required to support a culture that could help deliver
the Group's strategy.
The insights gained from this stakeholder engagement
were used to shape, refine and enhance the proposals
presented to the Board for approval. In terms of
our values, there was a consistent message that we
should build on what was already working and avoid
passive language. Clear direction was provided that
the values should be simple, memorable, translate
and be easily understood in many countries, and represent
a clear guide to action. This feedback encouraged
the Board to adopt a fourth value focused on delivery
and decision making. As the stakeholder engagement
neared completion, an additional 7,000 colleagues
were consulted in the final assessment of the proposed
values. The primary view indicated that the revised
values represented a 'positive evolution' for HSBC.
The Board selected the purpose and values that it
considered best aligned to the Group's revised strategy,
would drive a culture to deliver that strategy, and
resonated most with stakeholder sentiment.
Our new purpose and values can be found on page 16.
Climate ambition During the year, the Board reviewed and approved
a new climate ambition for the Group.
In reviewing and approving a new climate ambition,
the Board acknowledged that ESG issues have developed
significantly over recent years, and such issues
are now recognised by stakeholders as key elements
and risks for businesses to manage.
In May 2020, the Board conducted a detailed review
of stakeholder expectations and was advised of key
stakeholders impacted by the proposed climate strategy
and the leading role HSBC was expected to take. This
included a comprehensive market update on current
positions taken by non-government organisations,
investors, competitors, regulators and increased
societal awareness.
As part of the review, HSBC's climate advisory panel
- consisting of representatives from non-government
organisations, clients and academics - was consulted
in the development and drafting of the new climate
ambition. Wider stakeholder engagement was undertaken
to help inform the Group's position from a customer
perspective including the HSBC Sustainable Financing
and Investment Survey 2020 and the HSBC Navigator
survey.
In the course of the Board's discussions, it considered
stakeholder feedback in the context of our business
mix and the need to work towards an orderly transition,
given current exposures to fossil fuels assets. The
Board acknowledged the opportunity to help support
our customers with their transition to lower carbon
emissions and to manage other expectations and matters
impacting our shareholders, employees and local communities.
In addition, the Board noted that HSBC had been recognised
as a leading bank for sustainable finance and acknowledged
increased competitive activity. As a result, it was
conscious of the need to maintain the Group's leadership
in this area.
In making its decision, the Board recognised investors'
expectations for HSBC to continue to make progress
on climate change, as it provides sustainable finance
and investment and gradually reduces exposure to
high-carbon assets on a timeline aligned with the
Paris Agreement.
24 HSBC Holdings plc Annual Report and Accounts 2020
Remuneration
Our remuneration policy supports the achievement of our
strategic objectives by aligning reward with our long-term
sustainable performance.
Our remuneration principles
Our performance and pay strategy aims to reward competitively
the achievement of long-term sustainable performance by attracting,
motivating and retaining the very best people, regardless of
gender, ethnicity, age, disability or any other factor unrelated to
performance or experience.
For further details of our principles and what we did during
2020 to ensure remuneration outcomes were consistent with those
principles, see page 233.
Variable pay
Our variable pay pool was $2,659m, a 20.4% decrease from 2019.
For details of how the Group Remuneration Committee sets the pool,
see page 229.
Remuneration for our executive Directors
Our remuneration policy for executive Directors was approved at
our AGM in 2019 and is intended to apply for three performance
years until the AGM in 2022. Details of the policy can be found in
the Directors' remuneration report on page 235.
Variable pay for our executive Directors is driven by scorecard
achievement. Targets in the scorecard are set according to our key
performance indicators to ensure linkages between our strategy and
remuneration policies and outcomes.
Executive Directors' annual incentive scorecard outcome
(% of maximum opportunity)
Group Chief Executive 64.50%
Group Chief Financial
Officer 63.75%
The table below shows the amount our executive Directors earned
in 2020. For details of Directors' pay and performance for 2020,
see the Directors' remuneration report on page 229.
Single figure of remuneration
(GBP000) 2020 2019 2020 2019
------------------------- ----- ----- ----- -------
Base salary(2) 1,266 503 738 719
------------------------- ----- ----- ----- -----
Fixed pay allowance 1,700 695 950 950
------------------------- ----- ----- ----- -----
Cash in lieu of pension 127 50 74 107
------------------------- ----- ----- ----- -----
Taxable benefits(3) 186 41 12 16
------------------------- ----- ----- ----- -----
Non-taxable benefits(3) 59 23 32 28
------------------------- ----- ----- ----- -----
Total fixed 3,338 1,312 1,806 1,820
------------------------- ----- ----- ----- -----
Annual incentive(4) 799 665 450 1,082
------------------------- ----- ----- ----- -----
Notional returns(5) 17 - - -
------------------------- ----- ----- ----- -----
Replacement award(6) - - 1,431 1,974
------------------------- ----- ----- ----- -----
Total variable 816 665 1,881 3,056
------------------------- ----- ----- ----- -----
Total fixed and variable 4,154 1,977 3,687 4,876
------------------------- ----- ----- ----- -----
1 Noel Quinn succeeded John Flint as interim Group Chief
Executive with effect from 5 August 2019 and was appointed
permanently into the role on 17 March 2020. The remuneration
included in the single figure table above for 2019 is in respect of
his services provided as an executive Director for that year.
2 As outlined on page 230, the executive Directors each donated
a quarter of their base salary for six months in 2020. The base
salary shown in the single figure of remuneration is the gross
salary before charitable donations.
3 Taxable benefits include the provision of medical insurance,
accommodation, car and tax return assistance (including any
associated tax due, where applicable). Non-taxable benefits include
the provision of life assurance and other insurance cover.
4 Under the policy approved by shareholders, executive Directors
can receive 50% of their annual incentive award in cash and the
remaining 50% in immediately vested shares subject to a one-year
retention period. As the executive Directors each decided not to
take an annual cash bonus, the 2020 annual incentive is the amount
after this waiver and will be delivered in immediately vested
shares subject to a one-year retention period. The total annual
incentives waived by the Group Chief Executive and Group Chief
Financial Officer were GBP799,000 and GBP450,000, respectively.
5 'Notional returns' refers to the notional return on deferred
cash for awards made in prior years. The deferred cash portion of
the annual incentive granted in prior years includes a right to
receive notional returns for the period between the grant date and
vesting date, which is determined by reference to a rate of return
specified at the time of grant. A payment of notional return is
made annually and the amount is disclosed on a paid basis in the
year in which the payment is made.
6 As set out in the 2018 Directors' remuneration report, in 2019
Ewen Stevenson was granted replacement awards to replace unvested
awards, which were forfeited as a result of him joining HSBC. The
awards, in general, match the performance, vesting and retention
periods attached to the awards forfeited, and will be subject to
any performance adjustments that would otherwise have been applied.
The values included in the table for 2019 relate to Ewen
Stevenson's 2015 and 2016 LTI awards granted by The Royal Bank of
Scotland Group plc ('RBS') for performance years 2014 and 2015,
respectively, and replaced with HSBC shares when Ewen Stevenson
joined HSBC. These awards are not subject to further performance
conditions and commenced vesting in March 2019. The total value is
an aggregate of GBP1,121,308 for the 2015 LTI and GBP852,652 for
the 2016 LTI. The 2016 LTI award value has been determined by
applying the performance assessment outcome of 27.5% as disclosed
in RBS's Annual Report and Accounts 2018 (page 70) to the maximum
number of shares subject to performance conditions. Values in the
table for 2020 relate to his 2017 LTI award granted by RBS for
performance year 2016, which was determined by applying the
performance assessment outcome of 56.25% as disclosed in RBS's
Annual Report and Accounts 2019 (page 91) to the maximum number of
shares subject to performance conditions. This resulted in a payout
equivalent to 78.09% of the RBS award shares that were forfeited
and replaced with HSBC shares. A total of 313,608 shares were
granted in respect of his 2017 LTI replacement award at a share
price of GBP6.643. The HSBC share price was GBP5.845 when the
awards ceased to be subject to performance conditions, with no
value attributable to share price appreciation.
HSBC Holdings plc Annual Report and Accounts 2020 25
Financial overview
In assessing the Group's financial performance, management uses
a range of financial measures that focus on the delivery of
sustainable returns for our shareholders and maintaining our
financial strength.
Executive summary
Financial performance in 2020 was impacted by the Covid-19
outbreak, together with the resultant reduction in global interest
rates. Reported profit before tax of $8.8bn decreased by 34%, while
adjusted profit before tax of $12.1bn decreased by 45%. The fall in
reported profit was due to an increase in our expected credit
losses and other credit impairment charges ('ECL') and a reduction
in reported revenue. These factors were partly mitigated by lower
reported operating expenses. Our return on average tangible equity
('RoTE') for 2020 was 3.1%. Given the significant changes in our
operating environment during 2020, we no longer expect to reach our
RoTE target of between 10% and 12% in 2022, as originally
planned.
During 2020, our operations in Asia continued to perform
resiliently, generating a reported profit before tax of $12.8bn,
representing 146% of Group reported profits. In addition, our
Global Markets business delivered revenue growth of 27% compared
with 2019.
Reported results in 2020 included a $1.3bn impairment of
capitalised software, primarily relating to businesses within HSBC
Bank plc, our non-ring-fenced bank in Europe, reflecting
underperformance and a deterioration in the future forecasts,
substantially relating to prior periods. During 2020, we also
incurred restructuring and other related costs of $2.1bn, in part
related to our strategic actions taken to address underperformance
in our US business and our non-ring-fenced bank in Europe and the
UK. Reported results in 2019 included a $7.3bn impairment of
goodwill, primarily in GBM and CMB, and customer redress programme
costs of $1.3bn.
We have made good progress in implementing the transformation
programme we announced in February 2020, despite the significant
headwinds posed by the Covid-19 outbreak. However, we recognise the
fundamental changes in our operating environment, including the
prospect of prolonged low interest rates, the significant increase
in digital engagement from customers and the enhanced focus on the
environment, and have aligned our strategy accordingly. The
implications for our Group financial targets are set out below.
Group financial targets
Return on average tangible equity <>
3.1%
2019: 8.4%
In our business update set out in February 2020, the Group
targeted a reported RoTE in the range of 10% to 12% in 2022.
Our RoTE for 2020 was 3.1%, a reduction of 530 basis points from
2019, primarily reflecting higher ECL and a reduction in revenue.
Given the significant changes in our operating environment during
2020, we no longer expect to reach our RoTE target of between 10%
and 12% in 2022, as originally planned.
We have adapted our strategy with an intention to increase
investment in our areas of strength to generate mid-single-digit
revenue growth, mainly from fees and volumes. We intend to drive
further reductions in our cost base by 2022 and aim for broadly
stable costs thereafter. As we progress with our transformation of
our underperforming businesses, we also expect to optimise the
capital allocation across the Group. Collectively through these
actions, together with a normalisation in our ECL charge closer to
levels seen prior to the Covid-19 pandemic, we will now target a
RoTE of greater than or equal to 10% in the medium term.
Adjusted operating expenses <>
$31.5bn
In February 2020, we announced a plan to substantially reduce
the cost base and accelerate the pace of change, with the aim of
becoming leaner, simpler and more competitive. In 2020, our
adjusted operating expenses were $31.5bn, a reduction of 3%
compared with 2019.
Our adjusted cost target for 2022 will remain $31bn or less.
This reflects a further reduction in our cost base, which has been
broadly offset by the adverse impact of foreign currency
translation due to the weakening US dollar towards the end of
2020.
We now plan to deliver $5bn to $5.5bn of cost saves for 2020 to
2022, while spending around $7bn in costs to achieve.
In the medium to long term, we aim to drive positive operating
leverage by growing revenue while maintaining a broadly stable cost
base.
Gross RWA reductions
$61.1bn
To improve the return profile of the Group, we have targeted a
gross RWA reduction of more than $100bn by 2022, mainly in
low-returning parts of the Group.
In 2020, we achieved gross RWA reductions of $51.5bn, taking our
cumulative RWA reductions to $61.1bn. We expect to achieve a
further $30bn of gross RWA reductions in 2021. In addition, we
continue to expect to incur total asset disposal costs of around
$1.2bn during the period 2020 to 2022.
Capital and dividend policy
We intend to maintain a CET1 ratio in excess of 14%, managing in
the range of 14% to 14.5% in the medium term. We will seek to
manage this range down in the longer term.
The Board has adopted a policy designed to provide sustainable
dividends going forward. We intend to transition towards a target
payout ratio of between 40% and 55% of reported earnings per
ordinary share ('EPS') from 2022 onwards, with the flexibility to
adjust EPS for non-cash significant items, such as goodwill or
intangibles impairments. The Group has decided to discontinue the
scrip dividend option as it is dilutive, including to dividend per
share progression over time.
26 HSBC Holdings plc Annual Report and Accounts 2020
Reported results
Reported profit
Reported profit after tax of $6.1bn was $2.6bn or 30% lower than
in 2019.
Reported profit before tax of $8.8bn was $4.6bn or 34% lower due
to a rise in reported ECL, primarily reflecting the impact of the
Covid-19 outbreak on the forward economic outlook, and a fall in
reported revenue, mainly from lower global interest rates. These
were partly offset by lower reported operating expenses, reflecting
the non-recurrence of a $7.3bn impairment of goodwill in 2019,
lower customer redress programme costs, a reduction of the variable
pay accrual and lower discretionary expenditure.
Results in 2020 included the impact of certain volatile items,
notably favourable market impacts in life insurance manufacturing
in WPB of $90m (2019: $129m favourable) and favourable movements on
our long-term debt and associated swaps in Corporate Centre of
$150m (2019: $147m favourable). These were partly offset by adverse
credit and funding valuation adjustments in GBM of $252m (2019:
$44m favourable). Additionally in 2019, results included disposal
gains in WPB and CMB of $157m.
Our operations across Asia delivered resilient performances in
2020, despite the impact of lower interest rates and higher ECL,
with reported profit before tax representing more than 146% of
Group profits. Outside of Asia, in addition to higher ECL and lower
interest rates, HSBC Bank plc and our US business incurred
restructuring costs and charges from the impairment of intangibles,
in part as a result of our strategic actions to address
underperformance. Reported profit in MENA for 2020 included our
share of an impairment by our associate, The Saudi British Bank
('SABB'), of $462m, while 2019 included a $0.8bn dilution gain
recognised on the completion of the merger of SABB with Alawwal
bank.
Reported revenue
Reported revenue of $50.4bn was $5.7bn or 10% lower than in
2019, primarily reflecting the progressive impact of lower global
interest rates on net interest income, notably in Retail Banking in
WPB and Global Liquidity and Cash Management ('GLCM') in CMB and
GBM. In WPB, revenue also reduced from lower unsecured lending, a
fall in credit card spending and lower sales in insurance. In GBM,
adverse valuation movements relating to the widening of credit
spreads in the first quarter partly reversed as spreads narrowed in
the subsequent quarters, and in WPB the adverse market impacts in
life insurance manufacturing in the first quarter more than
reversed over the same period.
These factors were partly offset by higher revenue in Global
Markets as market volatility remained elevated. Revenue relating to
Markets Treasury, which is allocated to our global businesses, also
increased, primarily due to increased disposal gains.
Reported revenue included net adverse movements in significant
items of $0.6bn, primarily from the non-recurrence of a $0.8bn
dilution gain in 2019 as discussed above. Significant items in 2020
included restructuring and other related costs of $0.2bn associated
with disposal losses related to RWA reductions, as well as a
property-related gain, both of which related to February 2020
business update commitments. Foreign currency translation
differences resulted in a further adverse movement of $0.5bn
compared with 2019.
We have observed reductions in the Hong Kong interbank offered
rate ('HIBOR') in the early part of 2021. This could put further
pressure on net interest income, and also noting uncertainty around
loan growth as economies recover from the Covid-19 pandemic.
Reported ECL
Reported ECL of $8.8bn were $6.1bn higher than in 2019, with
increases across all global businesses.
The ECL charge in 2020 reflected a significant increase in stage
1 and stage 2 allowances, notably in the first half of the year, to
reflect the deterioration in the forward economic outlook globally
as a result of the Covid-19 outbreak. The economic outlook
stabilised in the second half of 2020 and as a result stage 1 and
stage 2 allowances were broadly unchanged at 31 December 2020,
compared with 30 June 2020. Stage 3 charges also increased compared
with 2019, largely against wholesale exposures, including a
significant charge related to a CMB client in Singapore in the
first quarter of 2020.
While we expect the full year ECL charge for 2021 to be
materially lower than in 2020, the outlook is highly uncertain and
remains dependent on the future path of the Covid-19 outbreak,
including the successful deployment of mass vaccination programmes,
and the credit quality of our loan portfolio as government support
packages are gradually withdrawn.
Reported operating expenses
Reported operating expenses of $34.4bn were $7.9bn or 19% lower
than in 2019, primarily reflecting a net favourable movement in
significant items of $6.6bn, driven by the non-recurrence of a
$7.3bn impairment of goodwill in 2019 and lower customer redress
programme costs. Additionally, the reduction reflected lower
performance-related pay, reduced discretionary expenditure and the
impact of our cost-saving initiatives, partly offset by an increase
in investments in technology, inflation and impairments of certain
real estate assets.
The movement in significant items included:
-- a $1.1bn impairment of goodwill and other intangibles in
2020, primarily capitalised software related to the businesses
within HSBC Bank plc and to a lesser extent in the US. It reflected
underperformance and a deterioration in the future forecasts of
these businesses, in the case of HSBC Bank plc substantially
relating to prior periods. This compared with an impairment of
goodwill of $7.3bn in 2019, primarily related to lower long-term
economic growth assumptions in CMB and GBM, and the planned
reshaping of GBM; and
-- a net release in customer redress programme costs of $0.1bn
in 2020, compared with charges of $1.3bn in 2019.
These were partly offset by restructuring and other related
costs of $1.9bn in 2020, of which $0.9bn related to severance,
$0.2bn related to an impairment of software intangibles and $0.2bn
related to the impairment of tangible assets in France and the US.
This compared with restructuring and other related costs of $0.8bn
in 2019.
The reduction in reported operating expenses included favourable
foreign currency translation differences of $0.2bn.
2020 2019 2018
Reported results $m $m $m
-------------------------------------------------------- -------- -------- ----------
Net operating income before change in expected credit
losses and other credit impairment charges ('revenue') 50,429 56,098 53,780
-------------------------------------------------------- -------- -------- --------
Change in expected credit losses and other credit
impairment charges (8,817) (2,756) (1,767)
-------------------------------------------------------- -------- -------- --------
Net operating income 41,612 53,342 52,013
-------------------------------------------------------- -------- -------- --------
Total operating expenses (34,432) (42,349) (34,659)
-------------------------------------------------------- -------- -------- --------
Operating profit 7,180 10,993 17,354
-------------------------------------------------------- -------- -------- --------
Share of profit in associates and joint ventures 1,597 2,354 2,536
-------------------------------------------------------- -------- -------- --------
Profit before tax 8,777 13,347 19,890
-------------------------------------------------------- -------- -------- --------
Tax expense (2,678) (4,639) (4,865)
-------------------------------------------------------- -------- -------- --------
Profit after tax 6,099 8,708 15,025
-------------------------------------------------------- -------- -------- --------
Reported profit after tax
$6.1bn
(2019: $8.7bn)
Basic earnings per share
$0.19
(2019: $0.30)
2020 2019 2018
Reported results $m $m $m
-------------------------------------------------------- -------- -------- ----------
Net operating income before change in expected credit
losses and other credit impairment charges ('revenue') 50,429 56,098 53,780
-------------------------------------------------------- -------- -------- --------
Change in expected credit losses and other credit
impairment charges (8,817) (2,756) (1,767)
-------------------------------------------------------- -------- -------- --------
Net operating income 41,612 53,342 52,013
-------------------------------------------------------- -------- -------- --------
Total operating expenses (34,432) (42,349) (34,659)
-------------------------------------------------------- -------- -------- --------
Operating profit 7,180 10,993 17,354
-------------------------------------------------------- -------- -------- --------
Share of profit in associates and joint ventures 1,597 2,354 2,536
-------------------------------------------------------- -------- -------- --------
Profit before tax 8,777 13,347 19,890
-------------------------------------------------------- -------- -------- --------
Tax expense (2,678) (4,639) (4,865)
-------------------------------------------------------- -------- -------- --------
Profit after tax 6,099 8,708 15,025
-------------------------------------------------------- -------- -------- --------
HSBC Holdings plc Annual Report and Accounts 2020 27
Reported share of profit in associates and joint ventures
Reported share of profit in associates of $1.6bn was $0.8bn or
32% lower than in 2019. This included our share of impairment of
goodwill by SABB of $462m. In addition, our share of profit from
associates fell due to the impact of the Covid-19 outbreak and
lower global interest rates.
Tax expense
The tax expense of $2.7bn was $2.0bn lower than in 2019, and the
effective tax rate for 2020 of 30.5% was lower than the 34.8%
effective tax rate for 2019. An impairment of goodwill and
non-deductible customer redress charges increased the 2019
effective tax rate. These were not repeated in 2020. Additionally,
the non-taxable dilution gain arising on the merger of SABB with
Alawwal bank decreased the effective tax rate in 2019. Higher
charges in respect of the non-recognition of deferred tax assets,
particularly in the UK ($0.4bn) and France ($0.4bn), increased the
2020 effective tax rate.
Adjusted performance
Our reported results are prepared in accordance with IFRSs, as
detailed in the financial statements on page 288.
We also present alternative performance measures (non-GAAP
financial measures). These include adjusted performance, which we
use to align internal and external reporting, identify and quantify
items management believes to be significant, and provide insight
into how management assesses period-on-period performance.
Alternative performance measures are highlighted with the following
symbol:<>
To derive adjusted performance, we adjust for:
-- the year-on-year effects of foreign currency translation differences; and
-- the effect of significant items that distort year-on-year
comparisons, which are excluded to improve understanding of the
underlying trends in the business.
The results of our global businesses are presented on an
adjusted basis, which is consistent with how we manage and assess
global business performance.
For reconciliations of our reported results to an adjusted
basis, including lists of significant items, see page 85.
Definitions and calculations of other alternative performance
measures are included in our 'Reconciliation of alternative
performance measures' on page 103.
2020 vs
2020 2019 2018 2019
Adjusted results<> $m $m $m $m %
--------
Net operating income before
change in expected credit losses
and other credit impairment
charges ('revenue') 50,366 54,944 52,098 (4,578) (8)%
--------
Change in expected credit losses
and other credit impairment
charges (8,817) (2,627) (1,620) (6,190) >(200)
--------
Total operating expenses (31,459) (32,519) (31,723) 1,060 3%
--------
Operating profit 10,090 19,798 18,755 (9,708) (49)%
--------
Share of profit in associates
and joint ventures 2,059 2,351 2,444 (292) (12)%
--------
Profit before tax 12,149 22,149 21,199 (10,000) (45)%
Adjusted profit before tax<>
Adjusted profit before tax of $12.1bn was $10.0bn or 45% lower
than in 2019, primarily from a rise in adjusted ECL and a fall in
adjusted revenue. Adjusted ECL increased by $6.2bn, mainly from
charges in the first half of 2020 relating to the global impact of
the Covid-19 outbreak on the forward economic outlook. Adjusted
revenue decreased by $4.6bn or 8%, primarily from the progressive
impact of lower global interest rates in all our global businesses,
notably in our deposit franchises, partly offset by higher revenue
from Global Markets. Adjusted operating expenses decreased by
$1.1bn or 3% as we lowered performance-related pay and reduced
discretionary expenditure while continuing to invest in our
businesses.
Reconciliation of reported to adjusted profit before tax
2020 2019 2018
$m $m $m
--------------------------------------- ------ ------ --------
Reported profit before tax 8,777 13,347 19,890
--------------------------------------- ------ ------ ------
Currency translation - (122) (519)
--------------------------------------- ------ ------ ------
Significant items: 3,372 8,924 1,828
--------------------------------------- ------ ------ ------
- costs of structural reform - 158 361
---------------------------------------
- customer redress programmes (33) 1,444 93
---------------------------------------
- disposals, acquisitions and
investment in new businesses 10 (768) 165
---------------------------------------
- fair value movements on financial
instruments (264) (84) 100
---------------------------------------
- impairment of goodwill and
other intangibles 1,090 7,349 -
---------------------------------------
- past service costs of guaranteed
minimum pension benefits equalisation 17 - 228
---------------------------------------
- restructuring and other related
costs 2,078 827 66
---------------------------------------
- settlements and provisions
in connection with legal and
regulatory matters 12 (61) 816
---------------------------------------
- goodwill impairment (share
of profit in associates and
joint ventures) 462 - -
- currency translation on significant
items - 59 (1)
--------------------------------------- ------ ------ ------
Adjusted profit before tax 12,149 22,149 21,199
--------------------------------------- ------ ------ ------
28 HSBC Holdings plc Annual Report and Accounts 2020
Adjusted revenue<>
Adjusted revenue of $50.4bn was $4.6bn or 8% lower than in 2019,
reflecting falls in WPB (down $3.6bn) and CMB (down $1.9bn), partly
offset by higher revenue in GBM (up $0.4bn) and Corporate Centre
(up $0.4bn).
The reduction in adjusted revenue reflected the progressive
impact of lower global interest rates in many of the key markets in
which we operate. This had an adverse impact on revenue in Retail
Banking within WPB, and in GLCM within CMB and GBM, although we
grew deposit balances across these businesses compared with 2019.
In WPB, revenue also reduced as the impact of the Covid-19 outbreak
resulted in lower customer activity in unsecured lending, including
a fall in credit card spending, and a reduction in sales of
insurance and certain investment products. In GBM, adverse
valuation movements, primarily in the first quarter, partly
reversed in the subsequent quarters. This resulted in a net adverse
movement in credit and funding valuation adjustments of $0.3bn and
a reduction in revenue of $0.1bn in Principal Investments compared
with 2019. In life insurance manufacturing, the adverse market
impacts in the first quarter following the sharp fall in equity
markets more than reversed over the remainder of the year.
These reductions were partly offset by higher revenue in Global
Markets, as market volatility remained elevated, as well as in
Corporate Centre. Revenue relating to Markets Treasury, which is
allocated to our global businesses, also increased, primarily due
to higher disposal gains.
Adjusted ECL<>
Adjusted ECL , which removes the period-on-period effects of
foreign currency translation differences, were $8.8bn, an increase
of $6.2bn from 2019. This increase occurred in all global
businesses and mainly reflected charges related to the global
impact of the Covid-19 outbreak.
The ECL charge in 2020 reflected a significant increase in stage
1 and stage 2 allowances, notably in the first half of the year, to
reflect the deterioration in the forward economic outlook globally
as a result of the Covid-19 outbreak. The economic outlook
stabilised in the second half of 2020 and as a result, stage 1 and
stage 2 allowances were broadly unchanged at 31 December 2020,
compared with 30 June 2020. Stage 3 charges in 2020 increased
compared with 2019, with the rise largely related to wholesale
exposures, including a significant charge related to a CMB client
in Singapore in the first quarter of 2020.
Adjusted ECL as a percentage of average gross loans and advances
to customers was 0.81%, compared with 0.25% in 2019.
Adjusted operating expenses<>
Adjusted operating expenses of $31.5bn were $1.1bn or 3% lower
than in 2019, as we continued to review and reprioritise costs and
investments to help mitigate revenue headwinds. The decrease
primarily reflected a $0.5bn reduction in performance-related pay
and lower discretionary expenditure, including marketing (down
$0.3bn) and travel costs (down $0.3bn). In addition, our
cost-saving initiatives resulted in a reduction of $1.4bn, of which
$1.0bn related to our costs to achieve programme, and the UK bank
levy was $0.2bn lower than in 2019. These decreases were partly
offset by an increase in investments in technology to enhance our
digital and automation capabilities to improve how we serve our
customers, as well as inflation and volume-related increases. In
addition, the 2020 period included impairments of certain real
estate assets.
We are forecasting broadly stable adjusted operating expenses in
2021, relative to 2020.
During 2020, we reduced the number of employees expressed in
full-time equivalent staff ('FTE') and contractors by 11,011. This
included a 9,292 reduction in FTE to 226,059 at 31 December 2020,
while the number of contractors reduced by 1,719 to 5,692 at 31
December 2020.
Adjusted share of profit in associates and joint
ventures<>
Adjusted share of profit from associates of $2.1bn was $0.3bn or
12% lower than in 2019, primarily reflecting the impact of the
Covid-19 outbreak and lower global interest rates on the share of
profit we recognised from our associates .
Balance sheet and capital
Balance sheet strength
Total assets of $3.0tn were $269bn or 10% higher than at 31
December 2019 on a reported basis, and 7% higher on a constant
currency basis. The increase in total assets included growth in
cash balances and in financial investments, as well as from an
increase in derivative assets, mainly reflecting favourable
revaluation movements on interest rate derivatives. On a constant
currency basis, loans and advances to customers reduced by $25bn
during the year, despite mortgage growth in WPB.
Customer accounts of $1.6tn increased by $204bn, or $173bn on a
constant currency basis, as corporate customers consolidated their
funds and redeployed them into cash, while our personal customers
reduced spending, resulting in larger balances held in current and
savings accounts.
Distributable reserves
The distributable reserves of HSBC Holdings at 31 December 2020
were $31.3bn. Movements in 2020 included the retained earnings of
HSBC Holdings plc for the year, offset by distributions to and
redemptions of preference shares and other equity instruments.
Movements also included a $1.7bn return of capital from a
subsidiary, which had previously been considered as part of
distributable reserves.
Capital position
We actively manage the Group's capital position to support our
business strategy and meet our regulatory requirements at all
times, including under stress, while optimising our capital
efficiency. To do this, we monitor our capital position using a
number of measures. These include: our capital ratios, the impact
on our capital ratios as a result of stress, and the degree of
double leverage being run by HSBC Holdings. Double leverage is a
constraint on managing our capital position, given the complexity
of the Group's subsidiary structure and the multiple regulatory
regimes under which we operate. For further details, see page
169.
Our CET1 ratio at 31 December 2020 was 15.9%, up from 14.7% at
31 December 2019. This increase included the impact of the
cancellation of the fourth interim dividend of 2019 and changes to
the capital treatment of software assets.
Liquidity position
We actively manage the Group's liquidity and funding to support
our business strategy and meet regulatory requirements at all
times, including under stress. To do this, we monitor our position
using a number of risk appetite measures, including the liquidity
coverage ratio and the net stable funding ratio. At 31 December
2020, we held high-quality liquid assets of $678bn.
$2,984bn
15.9%
HSBC Holdings plc Annual Report and Accounts 2020 29
Wealth and Personal Banking
Contribution to Group adjusted profit before tax<>
% contribution
to Group
34%
WPB was formed in the second quarter of 2020 by combining our
Retail Banking and Wealth Management and Global Private Banking
businesses. Throughout the pandemic we supported our customers with
payment holidays and by keeping between 70% to 90% of our branches
open. Performance in 2020 was impacted by lower interest rates
across most markets, reduced customer activity and a rise in
adjusted ECL charges. However, we remain committed to serving our
customers and increased our net promoter scores in most of our
channels in the UK and Hong Kong.
We serve more than 38 million customers across the full spectrum
from retail customers to ultra high net worth individuals and their
families.
We offer locally-tailored products and services across multiple
channels for our customers' everyday banking needs, as well as
insurance, investment management, advisory and wealth solutions for
those with more sophisticated requirements. Our global presence
provides for customers with international needs.
2020 vs 2019
-------- ----------------
2020 2019 2018
Adjusted results<> $m $m $m $m %
-------- ------- -------
Net operating income 22,013 25,565 23,551 (3,552) (14)
--------------------------------- -------- -------- -------- ------- -----
Change in expected credit losses
and other credit impairment
charges (2,855) (1,348) (1,072) (1,507) (112)
--------------------------------- -------- -------- -------- ------- -----
Operating expenses (15,024) (15,388) (14,614) 364 2
--------------------------------- -------- -------- -------- ------- -----
Share of profit in associates
and JVs 6 54 32 (48) (89)
--------------------------------- -------- -------- -------- ------- -----
Profit before tax 4,140 8,883 7,897 (4,743) (53)
--------------------------------- -------- -------- -------- ------- -----
RoTE excluding significant
items and UK bank levy (%) 9.1 19.7 18.8
--------------------------------- -------- -------- -------- ------- -------
Financial planning delivered to your door
In 2020, we launched HSBC Pinnacle, a new financial planning
business in mainland China, which offers insurance solutions and
wealth services outside of branches, bringing them direct to new
customers. Our wealth planners can advise on life and health
protection, education savings, retirement and legacy planning -
supporting multiple needs in one tailored proposition.
Blending seamless digital experiences with the expertise and
great service of our people sits at the very heart of our
approach.
The pioneering business has plans to hire 3,000 wealth
professionals over a four-year period. By the end of 2020, almost
200 new colleagues were already helping customers in the cities of
Shanghai, Guangzhou, Hangzhou and Shenzhen. Pinnacle is vital to
our ambitions for growth and opportunity in one of the world's
largest insurance markets, and supports our ambition to be the
number one wealth manager in Asia in the medium to long term.
30 HSBC Holdings plc Annual Report and Accounts 2020
Financial performance
Adjusted profit before tax of $4.1bn was $4.7bn or 53% lower
than in 2019. Despite this, we achieved a RoTE of 9.1%. The
reduction in adjusted profit before tax reflected a fall in
adjusted revenue and an increase in adjusted ECL from the impact of
the Covid-19 outbreak. The reduction in revenue was mainly as a
result of lower global interest rates, which particularly affected
deposit margins, as well as from lower spending and reduced
customer demand for borrowing.
Adjusted revenue of $22.0bn was $3.6bn or 14% lower, which
included the non-recurrence of 2019 disposal gains in Argentina and
Mexico of $133m.
In Retail Banking, revenue of $12.9bn was down $2.7bn or
17%.
-- Net interest income was $2.3bn lower due to narrower margins
from lower global interest rates. This reduction was partly offset
by deposit balance growth of $67bn or 9%, particularly in Hong Kong
and the UK, and higher mortgage lending of $22bn or 6%, mainly in
the UK and Hong Kong.
-- Non-interest income fell by $0.4bn, driven by lower fee
income earned on unsecured lending products primarily due to lower
customer activity as a result of the Covid-19 outbreak.
In Wealth Management, revenue of $7.8bn was down $0.8bn or
9%.
-- In life insurance manufacturing, revenue fell by $0.6bn or
26%, mainly as the value of new business written reduced by $0.4bn
or 37% due to lower volumes following the Covid-19 outbreak, in
part mitigated by continued actions to support customers by
improving our digital channels. The reduction also included lower
favourable movement in market impacts of $38m (2020: $90m
favourable, 2019: $128m favourable), as the sharp adverse movement
we saw in the first quarter reversed over subsequent quarters.
-- In Global Private Banking, revenue was $0.1bn or 7% lower, as
net interest income fell as a result of lower global interest
rates, although investment revenue increased, reflecting market
volatility and higher fees from advisory and discretionary
mandates.
-- In investment distribution, revenue was $0.1bn or 2% lower,
reflecting adverse market conditions, which resulted in lower
mutual fund sales and a reduction in wealth insurance distribution.
This was partly offset by higher brokerage fees from increased
transaction volumes.
Adjusted ECL of $2.9bn were $1.5bn higher than in 2019,
reflecting the global impact of the Covid-19 outbreak on the
forward economic outlook across all regions, notably in the UK.
Adjusted operating expenses of $15.0bn were $0.4bn or 2% lower,
as a decrease in performance-related pay and reduced discretionary
expenditure more than offset the impact of inflation and our
continued investment in digital.
2020 vs 2019
----------------
2020 2019 2018
Management view of adjusted
revenue<> $m $m $m $m %
-------- ------
Retail Banking 12,938 15,655 14,746 (2,717) (17)
- net interest income 11,708 13,993 13,155 (2,285) (16)
- non-interest income 1,230 1,662 1,591 (432) (26)
Wealth Management 7,818 8,633 7,778 (815) (9)
- investment distribution 3,209 3,268 3,333 (59) (2)
- life insurance manufacturing 1,816 2,464 1,621 (648) (26)
- Global Private Banking 1,746 1,878 1,783 (132) (7)
net interest income 670 891 884 (221) (25)
non-interest income 1,076 987 899 89 9
- asset management 1,047 1,023 1,041 24 2
Other(1) 429 788 512 (359) (46)
Markets Treasury, HSBC Holdings
interest expense and Argentina
hyperinflation 828 489 515 339 69
Net operating income(2) 22,013 25,565 23,551 (3,552) (14)
1 'Other' includes the distribution and manufacturing (where
applicable) of retail and credit protection insurance, disposal
gains and other non-product specific income.
2 'Net operating income' means net operating income before
change in expected credit losses and other credit impairment
charges (also referred to as 'revenue').
Divisional highlights
$1.6tn
WPB wealth balances at 31 December 2020, up 12% from 31 December
2019.
$22bn
Growth in mortgage book in the UK (up 9%) and Hong Kong (up 5%)
since 31 December 2019. <>
$4.1bn
$22.0bn
HSBC Holdings plc Annual Report and Accounts 2020 31
Commercial Banking
Contribution to Group adjusted profit before tax<>
% contribution
to Group
15%
Throughout 2020, CMB continued to support our customers'
liquidity and working capital needs, growing deposit balances,
while our ongoing investment in technology enabled us to support
customers under exceptionally challenging conditions. Performance
in 2020 was adversely impacted by an increase in adjusted ECL
charges and lower global interest rates.
We support over 1.3 million business customers in 53 countries
and territories, ranging from small enterprises focused primarily
on their domestic markets to large companies operating
globally.
We help entrepreneurial businesses grow by supporting their
financial needs, facilitating cross-border trade and payment
services, and providing access to products and services offered by
other global businesses.
2020 vs 2019
2020 2019 2018
Adjusted results<> $m $m $m $m %
Net operating income 13,312 15,164 14,374 (1,852) (12)
--------------------------------- ------- ------- ------- -------- ------
Change in expected credit losses
and other credit impairment
charges (4,754) (1,162) (683) (3,592) >(200)
--------------------------------- ------- ------- ------- -------- --------
Operating expenses (6,689) (6,832) (6,307) 143 2
--------------------------------- ------- ------- ------- -------- ------
Share of profit in associates
and JVs (1) - - (1) -
--------------------------------- ------- ------- ------- -------- ------
Profit before tax 1,868 7,170 7,384 (5,302) (74)
--------------------------------- ------- ------- ------- -------- ------
RoTE excluding significant
items and UK bank levy (%) 1.3 13.0 13.2
--------------------------------- ------- ------- ------- -------- --------
Pioneering ecommerce solutions
Hong Kong-based SHOPLINE helps companies trade online through
its ecommerce shopping platform. Founded in 2013, it has expanded
to support over 250,000 merchants, which serve more than 80 million
customers across 10 regions in Asia. We partnered with SHOPLINE to
integrate advanced digital capabilities, such as our Business
Collect and PayMe for Business services, into their propositions.
These 'banking as a service' capabilities enable merchants to
access the latest collections technology with no additional
development required. Our collaboration with SHOPLINE embodies our
passion to support small and medium-sized enterprises through
innovation, enabling them to grow their platforms and ecosystems
across Asia and beyond.
32 HSBC Holdings plc Annual Report and Accounts 2020
Financial performance
Adjusted profit before tax of $1.9bn was $5.3bn or 74% lower
than in 2019. Adjusted ECL were higher, reflecting the impact of
the Covid-19 outbreak, and adjusted revenue fell, which was
primarily due to the impact of lower global interest rates.
Adjusted revenue of $13.3bn was $1.9bn or 12% lower.
-- In GLCM, revenue decreased by $1.8bn or 30% due to the impact
of the lower global interest rates, mainly in Hong Kong and the UK.
This was partly offset by a 16% increase in average deposit
balances, with growth across all regions, particularly in the UK
and the US.
-- In Global Trade and Receivables Finance ('GTRF'), revenue
decreased by $82m or 4% from lower lending balances and fees,
notably in Hong Kong and the UK, reflecting a reduction in global
trade volumes as a result of the Covid-19 outbreak. This was partly
offset by wider margins in the UK and Latin America.
-- In 'Markets products, Insurance and Investments and Other',
revenue was $0.4bn lower, reflecting the impact of lower interest
rates on income earned on capital held in the business, a fall in
revenue from Insurance, Investments and Markets products, as well
as a reduction in revaluation gains on shares. In addition, 2019
included a disposal gain of $24m in Latin America.
This was partly offset by:
-- In Credit and Lending, revenue increased by $0.2bn or 4%,
reflecting growth in average balances driven by the uptake of
government-backed lending schemes and from wider margins.
Adjusted ECL of $4.8bn were $3.6bn higher than in 2019. The
increase reflected the global impact of the Covid-19 outbreak on
the forward economic outlook, mainly in the UK and Asia. There were
also higher charges against specific customers in 2020,
particularly in the oil and gas and wholesale trade sectors,
including a significant charge related to a corporate exposure in
Singapore in the first quarter of 2020.
Adjusted operating expenses of $6.7bn were $0.1bn or 2% lower,
reflecting a decrease in performance-related pay and reduced
discretionary expenditure, while we continued to invest in our
digital and transaction banking capabilities to improve customer
experience.
In 2020, we delivered around $13bn of RWA reductions as part of
our transformation programme, which mitigated an increase from
asset quality deterioration.
2020 vs 2019
2020 2019 2018
Management view of adjusted
revenue<> $m $m $m $m %
-------- -------
Global Trade and Receivables
Finance 1,744 1,826 1,806 (82) (4)
------------------------------------- ------ ------ ------ -------- -----
Credit and Lending 5,640 5,421 5,162 219 4
------------------------------------- ------ ------ ------ -------- -----
Global Liquidity and Cash Management 4,178 5,932 5,625 (1,754) (30)
------------------------------------- ------ ------ ------ -------- -----
Markets products, Insurance
and Investments and Other(1) 1,596 2,023 1,836 (427) (21)
------------------------------------- ------ ------ ------ -------- -----
Markets Treasury, HSBC Holdings
interest expense and Argentina
hyperinflation 154 (38) (55) 192 >200%
------------------------------------- ------ ------ ------ -------- -------
Net operating income(2) 13,312 15,164 14,374 (1,852) (12)
------------------------------------- ------ ------ ------ -------- -----
1 Includes revenue from Foreign Exchange, insurance
manufacturing and distribution, interest rate management and Global
Banking products.
2 'Net operating income' means net operating income before
change in expected credit losses and other credit impairment
charges (also referred to as 'revenue').
Divisional highlights
$73.2bn
Growth in adjusted customer deposits in 2020. <>
+8%
Increase in international account openings.
$1.9bn
$13.3bn
HSBC Holdings plc Annual Report and Accounts 2020 33
Global Banking and Markets
Contribution to Group adjusted profit before tax<>
% contribution
to group
40%
GBM increased adjusted revenue as strong Global Markets
performance more than offset the impact of lower global interest
rates and adverse movements in credit and funding valuation
adjustments. In 2020, management actions delivered gross RWA
reductions of $37bn globally. Performance in Global Markets was
achieved with both a decrease in RWAs and no increase in trading
value at risk ('VaR').
We continue to invest in digital capabilities to provide value
to our clients and support them in the current environment.
We support major government, corporate and institutional clients
worldwide. Our product specialists deliver a comprehensive range of
transaction banking, financing, advisory, capital markets and risk
management services.
2020 vs 2019
--------------------------------- ------- ------- -------------------
2020 2019 2018
Adjusted results<> $m $m $m $m %
--------------------------------- ------- ------- --------- --------
Net operating income 15,303 14,869 15,056 434 3
--------------------------------- ------- ------- ------- --------- ------
Change in expected credit losses
and other credit impairment
charges (1,209) (153) 34 (1,056) >(200)
--------------------------------- ------- ------- ------- --------- --------
Operating expenses (9,264) (9,544) (9,316) 280 3
--------------------------------- ------- ------- ------- --------- ------
Share of profit in associates
and JVs - - - - -
--------------------------------- ------- ------- ------- --------- ------
Profit before tax 4,830 5,172 5,774 (342) (7)
--------------------------------- ------- ------- ------- --------- ------
RoTE excluding significant
items and UK bank levy (%) 6.7 9.8 9.5
--------------------------------- ------- ------- ------- --------- --------
Supporting Rolls-Royce with a capital markets drive
Rolls-Royce, the blue-chip FTSE 100 engineering company, needed
to raise additional liquidity in the fourth quarter of 2020 as a
consequence of the Covid-19 outbreak. We acted as joint global
coordinator on a GBP2bn fully underwritten rights issue, which
received strong support from Rolls-Royce shareholders with a 94%
take-up. The rights issue was part of a broader liquidity solution
that also incorporated raising additional debt, including a GBP2bn
unsecured notes offering where we acted as joint bookrunner, and a
GBP1bn term loan where we acted as lead arranger and bookrunner.
The rights issue was the largest equity capital markets transaction
we acted on in the UK in 2020 and demonstrates our expertise in
offering holistic solutions to our clients across both equity and
debt.
34 HSBC Holdings plc Annual Report and Accounts 2020
Financial performance
Adjusted profit before tax of $4.8bn was $0.3bn lower than in
2019, mainly due to higher adjusted ECL, which reflected the global
impact of the Covid-19 outbreak and included charges relating to
specific exposures, partly offset by higher adjusted revenue and
lower adjusted operating expenses.
Adjusted revenue of $15.3bn increased by $0.4bn compared with
2019. We grew adjusted revenue, which included adverse movements in
credit and funding valuation adjustments of $0.3bn, while reducing
net reported RWAs by $8bn, compared with 31 December 2019.
-- In Global Markets, revenue increased by $1.6bn or 27%, as
higher volatility levels and increased client activity, together
with wider spreads supported an improved FICC performance,
particularly in Foreign Exchange and Credit. Rates also performed
strongly due to increased trading activity in government bonds.
This was partly offset by:
-- In Securities Services, revenue fell by $0.2bn or 12% due to
lower global interest rates, mainly affecting Asia and Europe,
although fees increased.
-- In Global Banking, revenue decreased by $0.1bn or 2% ,
reflecting lower real estate and structured finance fee income and
losses on legacy corporate restructuring positions. However, we
grew capital markets revenue and net interest income increased from
corporate lending.
-- In GLCM, revenue decreased $0.7bn or 26% due to the impact of
lower global interest rates and a fall in transaction volumes that
reduced fee income, notably in the US and the UK, partly offset by
a 21% growth in average balances, across all regions, particularly
in the US, Asia and the UK.
-- In GTRF, revenue decreased by $33m or 4%, reflecting lower
fees in Europe due to management actions taken to reduce RWAs,
partly offset by repricing initiatives in Asia and Latin
America.
-- In Principal Investments, revenue fell by $0.1bn, reflecting
revaluation losses incurred in the first quarter of 2020, mainly in
Europe, as a result of the Covid-19 outbreak, which partly reversed
in the remainder of the period.
Adjusted ECL were $1.2bn, up $1.1bn compared with 2019 from
charges relating to the impact of the Covid-19 outbreak on the
forward economic outlook, particularly in Europe, MENA and North
and Latin America.
Adjusted operating expenses of $9.3bn were $0.3bn or 3% lower,
reflecting management's cost reduction initiatives and from lower
performance-related pay, which more than offset growth in
regulatory programme costs and investments in technology.
In 2020, net reported RWAs fell by $8bn. We delivered around
$37bn of RWA reductions in 2020, taking our cumulative reduction,
including accelerated saves relating to our transformation
programme, to $47bn. This mitigated RWA growth from asset quality
deterioration, elevated market volatility and from regulatory
changes.
2020 vs 2019
------------------
2020 2019 2018
Management view of adjusted revenue<> $m $m $m $m %
------- ---------
Global Markets 7,290 5,728 6,243 1,562 27
----------------------------------------- ------ ------ ------ ------- -------
- FICC 6,278 4,737 5,062 1,541 33
----------------------------------------- ------ ------ ------ ------- -------
Foreign Exchange 3,373 2,671 2,898 702 26
-----------------------------------------
Rates 1,734 1,451 1,416 283 20
-----------------------------------------
Credit 1,171 615 748 556 90
----------------------------------------- ------ ------ ------ ------- -------
- Equities 1,012 991 1,181 21 2
----------------------------------------- ------ ------ ------ ------- -------
Securities Services(1) 1,792 2,026 1,925 (234) (12)
----------------------------------------- ------ ------ ------ ------- -------
Global Banking(1) 3,804 3,875 3,983 (71) (2)
----------------------------------------- ------ ------ ------ ------- -------
Global Liquidity and Cash Management 2,021 2,722 2,563 (701) (26)
----------------------------------------- ------ ------ ------ ------- -------
Global Trade and Receivables Finance 769 802 784 (33) (4)
----------------------------------------- ------ ------ ------ ------- -------
Principal Investments 114 261 219 (147) (56)
----------------------------------------- ------ ------ ------ ------- -------
Credit and funding valuation adjustments (252) 41 (183) (293) >(200)%
----------------------------------------- ------ ------ ------ ------- ---------
Other(2) (575) (642) (579) 67 10
----------------------------------------- ------ ------ ------ ------- -------
Markets Treasury, HSBC Holdings interest
expense and Argentina hyperinflation 340 56 101 284 >200%
----------------------------------------- ------ ------ ------ ------- ---------
Net operating income(3) 15,303 14,869 15,056 434 3
----------------------------------------- ------ ------ ------ ------- -------
1 From 1 June 2020, revenue from Issuer Services, previously
reported in Securities Services, was reported within Global
Banking. This resulted in $96m additional revenue being recorded in
Global Banking for 2020. Comparatives have not been restated.
2 'Other' in GBM includes allocated funding costs. In addition,
notional tax credits are allocated to the businesses to reflect the
economic benefit generated by certain activities to reflect the
total operating income on an IFRS basis; the offset to these tax
credits is included within 'Other'.
3 'Net operating income' means net operating income before
change in expected credit losses and other credit impairment
charges (also referred to as 'revenue').
Divisional highlights
49%
Adjusted revenue generated in Asia in 2020. <>
$8bn
Reduction in reported RWAs compared with 31 December 2019.
$4.8bn
$15.3bn
HSBC Holdings plc Annual Report and Accounts 2020 35
Corporate Centre
During 2020, we began allocating the revenue and expenses
relating to Markets Treasury, the funding costs of HSBC Holdings
debt and the impacts of hyperinflation in Argentina to the global
businesses. This was to improve how we reflect revenue and expense
related to the global businesses generating or utilising these
activities. All comparatives have been restated accordingly.
The results of Corporate Centre now primarily comprise the share
of profit from our interests in our associates and joint ventures,
together with Central Treasury revenue, stewardship costs and
consolidation adjustments.
2020 vs 2019
--------------------------------- ----------------
2020 2019 2018
Adjusted results<> $m $m $m $m %
--------------------------------- ------- -------
Net operating income (262) (654) (883) 392 60
--------------------------------- ----- ----- ------- ------- -----
Change in expected credit losses
and other credit impairment
charges 1 36 101 (35) (97)
--------------------------------- ----- ----- ------- ------- -----
Operating expenses (482) (755) (1,486) 273 36
--------------------------------- ----- ----- ------- ------- -----
Share of profit in associates
and JVs 2,054 2,297 2,412 (243) (11)
--------------------------------- ----- ----- ------- ------- -----
Profit before tax 1,311 924 144 387 42
--------------------------------- ----- ----- ------- ------- -----
RoTE excluding significant
items and UK bank levy (%) 3.1 0.8 1.6
--------------------------------- ----- ----- ------- ------- -------
Financial performance
Adjusted profit before tax of $1.3bn was $0.4bn higher than in
2019.
Adjusted revenue increased by $0.4bn, which included
intersegment eliminations, largely related to movements in own
shares held by the global businesses, which offset an equivalent
adverse movement in these businesses. In addition, certain funding
costs that were retained in Corporate Centre during 2019 were
allocated to global businesses with effect from 1 January 2020.
Revenue in our legacy portfolios rose by $0.1bn due to the
non-recurrence of portfolio losses in 2019.
Adjusted operating expenses, which are stated after recovery of
costs from our global businesses, decreased by $0.3bn due to a
lower UK bank levy charge and a reduction in discretionary
expenditure.
Share of profit in associates and joint ventures decreased by
$0.2bn, primarily due to the impact of falling interest rates and
the Covid-19 outbreak.
2020 vs 2019
2020 2019 2018
Management view of adjusted revenue<> $m $m $m $m %
------ --------
Central Treasury(1) 156 179 (313) (23) (13)
-------------------------------------- ----- ----- ----- ------ ------
Legacy portfolios (17) (111) (83) 94 85
-------------------------------------- ----- ----- ----- ------ ------
Other(2) (401) (722) (487) 321 44
-------------------------------------- ----- ----- ----- ------ ------
Net operating income(3) (262) (654) (883) 392 60
-------------------------------------- ----- ----- ----- ------ ------
1 Central Treasury includes favourable valuation differences on
issued long-term debt and associated swaps of $150m (2019: gains of
$146m; 2018: losses of $313m).
2 In June 2020, we began allocating the revenue from Markets
Treasury, HSBC Holdings net interest expense and Argentina
hyperinflation out to the global businesses, to align them better
with their revenue and expense. The total Markets Treasury revenue
component of this allocation for 2020 was $2,809m (2019: $2,040m;
2018: $2,213m).
3 'Net operating income' means net operating income before
change in expected credit losses and other credit impairment
charges (also referred to as 'revenue').
36 HSBC Holdings plc Annual Report and Accounts 2020
Risk overview
Active risk management helps us to achieve our strategy, serve
our customers and communities and grow our business safely.
Managing risk
Unprecedented global economic events meant banks played an
expanded role in supporting society and customers in 2020. Many of
our customers' business models and income were impacted by the
global economic downturn caused by the Covid-19 outbreak, requiring
them to take significant levels of support from both governments
and banks.
Throughout the pandemic, we continued to support our customers
and adapted our operational processes. We maintained high levels of
service as our people, processes and systems responded to the
required changes.
The financial performance of our operations varied in different
geographies, but the balance sheet and liquidity of the Group
remained strong. This helped us to support our customers both
during periods of government imposed restrictions and when these
restrictions were eased.
To meet the additional challenges, we supplemented our existing
approach to risk management with additional tools and practices. We
increased our focus on the quality and timeliness of the data used
to inform management decisions, through measures such as early
warning indicators, prudent active risk management of our risk
appetite, and ensuring regular communication with our Board and key
stakeholders.
Our risk appetite
Our risk appetite defines our desired forward-looking risk
profile, and informs the strategic and financial planning process.
It provides an objective baseline to guide strategic decision
making, helping to ensure that planned business activities provide
an appropriate balance of return for the risk assumed, while
remaining within acceptable risk levels.
Our risk appetite also provides an anchor between our global
businesses and the Global Risk and Global Finance functions,
helping to enable our senior management to allocate capital,
funding and liquidity optimally to finance growth, while monitoring
exposure and the cost impacts of managing non-financial risks.
In 2020, we continued to evolve our risk appetite by
reallocating both financial and non-financial resources and
adapting aspects of our risk appetite statement to ensure we
remained able to support our customers and strategic goals against
the backdrop of the Covid-19 outbreak. We placed a specific
emphasis on capital and liquidity to ensure the Group could
withstand extreme but plausible stress, and had adequate capacity
to provide increasing levels of financial support to customers.
Associated non-financial risks were reviewed and, where applicable,
processes and controls were enhanced to accommodate material
increases in lending volumes and help our people manage the lending
process from a home environment. A particular focus was placed on
enhancing our risk appetite statement to provide early warnings of
credit deterioration, deliver a more holistic view of the Group's
resilience capabilities and develop a climate risk appetite
focusing on transition and physical risk. Significant work is also
underway to further develop our risk appetite framework, with
forward-looking statements informed by stress testing.
As seen in the key risk appetite metrics table, the financial
impact of the Covid-19 outbreak is apparent with RoTE and ECL
outside of appetite. These are subject to close monitoring and
management actions focusing on adapting our strategy in the context
of the pandemic and recovery. We have conducted reviews of our
portfolios that are highly vulnerable to general economic
conditions and additional review measures have been implemented for
new credit requests.
Key risk appetite metrics
------------------------------------------------------------------------------------------
Component Measure Risk appetite 2020
------------------- ------------------------------------------- -------------- --------
Returns Return on average tangible equity ('RoTE') >=6.5% 3.1%
------------------- ------------------------------------------- -------------- ----
Capital CET1 ratio - end point basis >=13.1% 15.9%
-------------------------------------------
Change in
expected
credit losses
and other Change in expected credit losses and other
credit impairment credit impairment charges
charges as a % of advances: retail <=0.50% 0.68%
------------------- ------------------------------------------- -------------- ----
Change in expected credit losses and other
credit impairment charges
as a % of advances: wholesale (GBM, CMB,
Global Private Banking) <=0.45% 0.89%
------------------------------------------- ---------------------------------- ----
Stress tests
We regularly conduct stress tests to assess the resilience of
our balance sheet and our capital adequacy, as well as to provide
actionable insights into how key elements of our portfolios may
behave during crises. We use the outcomes to calibrate our risk
appetite and to review the robustness of our strategic and
financial plans, helping to improve the quality of management's
decision making. Stress testing analysis assists management in
understanding the nature and extent of vulnerabilities to which the
Group is exposed. The results from the stress tests also drive
recovery and resolution planning to enhance the Group's financial
stability under various macroeconomic scenarios. The selection of
stress scenarios is based upon the identification and assessment of
our top and emerging risks identified and our risk appetite.
In 2020, the Bank of England ('BoE') and European Banking
Authority ('EBA') cancelled the requirement for all participating
banks to conduct their respective 2020 stress test exercises in
light of the emerging impacts of the Covid-19 outbreak.
Notwithstanding this, we conducted a range of internal stress tests
during 2020. These included stress tests covering several potential
Covid-19-related outcomes, incorporating assessments from credit
experts to assess the resilience of key balance sheet metrics
including capital adequacy and liquidity. We are regularly
reviewing the economic impacts for key economies and markets to
understand potential vulnerabilities in our balance sheet and to
identify appropriate mitigating actions. We continue to monitor
emerging geopolitical, economic and environmental risks impacting
the Group's capital adequacy and liquidity. Our balance sheet and
capital adequacy remain resilient based on regulatory and internal
stress test outcomes.
We also developed a framework for our climate stress testing and
scenario analysis capabilities. We conducted a pilot climate
scenario analysis on some of our portfolios exposed to climate
risk. The analysis was used to identify the most material drivers
of climate risk within our business, and create informed insights
of our climate exposures for use in our risk management and
business decision making.
HSBC Holdings plc Annual Report and Accounts 2020 37
Our operations
We remain committed to investing in the reliability and
resilience of our IT systems and critical services that support all
parts of our business. We do so to protect our customers,
affiliates and counterparties, and to help ensure that we minimise
any disruption to services that could result in reputational and
regulatory consequences. We continue to operate in a challenging
environment in which cyber threats are prevalent. To help defend
against these threats we continue to invest in business and
technical controls, such as our infrastructure, software solutions,
and system resilience and service continuity.
We have started to move forward with the implementation of our
business transformation plans. This follows a pause on some
elements during the first half of 2020 to help ensure our continued
safe operation and to support our people and communities during a
period of significant change due to the Covid-19 outbreak. We are
aiming to manage the risks of the restructuring safely, which
include execution, operational, governance, reputational, conduct
and financial risks. We put support in place to help our people,
particularly when we are unable to find alternative roles for them
as a result of the business transformation plans.
For further details on our risk management framework and risks
associated with our banking and insurance manufacturing operations,
see pages 118 and 119 respectively.
Risks related to Covid-19
The Covid-19 outbreak and its effect on the global economy have
impacted our customers and our performance, and the future effects
of the outbreak remain uncertain. The outbreak necessitated
governments to respond at unprecedented levels to protect public
health, local economies and livelihoods. It has affected regions at
different times and to varying degrees as it has developed. The
varying government support measures and restrictions in response
have added challenges, given the rapid pace of change and
significant operational demands. The speed at which countries and
territories will be able to unwind the government support measures
and restrictions and return to pre-Covid-19 economic levels will
vary based on the levels of infection, local governmental decisions
and access to and ability to roll out vaccines. There remains a
risk of subsequent waves of infection, as evidenced by the recently
emerged variants of the virus. Renewed outbreaks emphasise the
ongoing threat of Covid-19 even in countries that have recorded
lower than average cases so far. We continue to monitor the
situation.
The development of Covid-19 vaccines has raised hopes of
widespread immunisation being achieved by the end of 2021 and
government restrictions being eased. However, tensions could
increase as countries compete for access to the array of vaccines
either under development, approved or pending approval, while the
potential differences in protection offered by vaccines and the
speed and scale with which they can be manufactured and distributed
may further add to tensions.
The Covid-19 outbreak has led to a significant weakening in GDP
in many of our markets, although regions and sectors have rebounded
to differing levels from their previous low points. Economic
consensus forecasts have stabilised in recent months and monthly
changes to the forecasts have become smaller, with a partial
rebound broadly predicted for 2021. However, there is wide
dispersion in forecasts, and these have yet to incorporate fully
the adverse effect of the most recent stringent government
restrictions that have been imposed in an increasing number of
countries. Labour markets in several key economies (namely those of
the UK and EU) may take longer to recover, with unemployment rates
expected to rise in 2021 as government support measures are
discontinued or tapered off.
Notwithstanding the potential for recovery in 2021, GDP levels
are unlikely to return to pre-Covid-19 levels until later years in
many markets. Differing levels of vaccine access between markets
will also hamper economic recovery and could see individual markets
rebound at different paces.
While the longer-term effects of the outbreak on businesses are
uncertain, our financial position should allow us to continue to
help support our customers. The management of capital and liquidity
remains a key focus area and is being continually monitored both at
Group and entity levels.
The nature and scale of the Covid-19 crisis has necessitated
strong responses from governments, central banks and regulators,
and the outbreak has also resulted in changes in the behaviours of
our retail and wholesale customers. These factors have impacted the
performance of our expected credit loss models, requiring enhanced
monitoring of model outputs and use of compensating controls,
specifically management judgemental adjustments based on the expert
judgement of senior credit risk managers. In addition, we have
built up our operational capacity rapidly in response to government
and central bank support measures aimed at combating the impacts of
the Covid-19 outbreak, and have been responding to complex conduct
considerations and heightened risk of fraud related to these
external programmes.
For further details on our approach to the risks related to
Covid-19, see 'Areas of special interest' on page 116.
Geopolitical and macroeconomic risks
The geopolitical and economic landscape was dominated by the
Covid-19 outbreak for much of 2020 and the virus and its economic
impact is expected to remain the dominating factor of 2021. The
pandemic contributed to an increasingly fragmented trade and
regulatory environment, and impacted business and investor
sentiment during a period of heightened existing US-China tensions
and trade negotiations between the UK and the EU.
Central banks reduced interest rates in most financial markets
due to the adverse impact of the pandemic, which has in turn
increased the likelihood of negative interest rates. Prolonged low
interest rates and flatter interest rate curves in major financial
markets continue to present risks and concerns, such as our
readiness to accommodate zero or negative rates, the resulting
impacts on customers, and the financial implications on our net
interest income.
A range of tensions in US-China relations could have potential
ramifications for the Group and its customers. These tensions could
include divisions over Hong Kong, US funding of and trading with
strategic Chinese industries, claims of human rights violations,
and others. Some of these tensions have manifested themselves
through actions taken by the governments of the US and China in
2020 and early 2021. These tensions may affect the Group as a
result of the impact of sanctions, including sanctions that impact
the Group's customers, as well as regulatory, reputational and
market risks. The US has imposed a range of sanctions and trade
restrictions on Chinese persons and companies, focusing on entities
the US believes are involved in human rights violations,
information technology and communications equipment and services,
and military activities, among others. In response, China has
announced a number of sanctions and trade restrictions that target
or provide authority to target foreign officials and companies,
including those in the US. Certain measures are of particular
relevance, including the US Hong Kong Autonomy Act. It remains
unclear the extent to which the new US administration will affect
the current geopolitical tensions following the inauguration of
President Biden. We continue to monitor the situation.
Investor and business sentiment in some sectors in Hong Kong
remains dampened, although the financial services sector has
remained strong and has benefited from stable liquidity
conditions.
The financial impact to the Group of geopolitical risks in Asia
is heightened due to the strategic importance of the region, and
Hong Kong in particular, in terms of profitability and prospects
for growth.
For further details on our approach to geopolitical and
macroeconomic risks, see 'Top and emerging risks' on page 110.
38 HSBC Holdings plc Annual Report and Accounts 2020
UK withdrawal from the European Union
The UK left the EU on 31 January 2020 and entered a transition
period until 31 December 2020. A Trade and Cooperation Agreement
between the EU and the UK was agreed on 24 December 2020 and
ratified by the UK on 30 December 2020. The deal mainly focused on
goods and services but also covered a wide range of other areas,
including competition, state aid, tax, fisheries, transport, data
and security. However, it included limited elements on financial
services, and, as a result, did not change HSBC's planning in
relation to the UK's withdrawal from the EU.
The EU and UK agreed through a joint declaration to establish
structured regulatory cooperation on financial services, with the
aim of establishing a durable and stable relationship between
autonomous jurisdictions. Based on a shared commitment to preserve
financial stability, market integrity, and the protection of
investors and consumers, these arrangements are expected to allow
for:
-- bilateral exchanges of views and analysis relating to
regulatory initiatives and other issues of interest;
-- transparency and appropriate dialogue in the process of
adoption, suspension and withdrawal of equivalence decisions;
and
-- enhanced cooperation and coordination, including in international bodies as appropriate.
In the coming months, both parties are expected to enter
discussions with the aim of agreeing a memorandum of understanding
establishing the framework for this cooperation. The parties are
expected to discuss, inter alia, how to move forward on both sides
with financial equivalence determinations between the EU and
UK.
Our global presence and diversified customer base should help
mitigate the direct impacts on our financial position of the
absence of a comprehensive agreement on financial services between
the UK and EU. Our existing footprint in the EU, and in particular
our subsidiary in France, provides a strong foundation for us to
build upon. As part of our stress testing programme, a number of
internal macroeconomic and event-driven scenarios were assessed to
support our planning for, and evaluation of, the impact of the UK's
withdrawal from the EU. The results confirmed that we are well
positioned to withstand potential shocks. However, the UK's
withdrawal from the EU is likely to increase market volatility and
economic risk, particularly in the UK, which could adversely impact
our profitability and prospects for growth in this market.
For further details on our approach to the UK's withdrawal from
the EU, see 'Areas of special interest' on page 116.
Ibor transition
Throughout 2020, our interbank offered rate ('Ibor') transition
programme, which is tasked with the development of new replacement
near risk-free rate ('RFR') products and transition from legacy
Ibor products, has continued to implement the required IT and
operational changes necessary to facilitate an orderly transition
from Ibors to RFRs, or alternative benchmarks, such as policy
interest rates. These changes have enabled HSBC to meet regulatory
endorsed milestones related to product readiness and the clearing
house-led transition to RFR discounting. Additionally, to further
support our business and our customers, our programme's scope has
widened to include additional interest rate benchmarks, which now
have a plan for demise in the near future. The Ibor transition
programme now covers 12 interest rate benchmarks: five London
interbank offered rate ('Libor') currencies; four Asia-Pacific
benchmarks that reference US dollar Libor; the Euro Overnight Index
Average ('Eonia'); the Singapore interbank offered rate ('Sibor');
and Turkish Lira interbank offered rate ('TRLibor').
Global business lines, functions and, where appropriate, HSBC
entities have identified financial and non-financial risks related
to the transition and developed key actions to mitigate the
identified risks. These risks include those associated with the
continued sale of products referencing Ibor, through 2020. However,
HSBC has actively removed certain Ibor referencing products from
sale, and implemented processes and controls to manage the
continued sale of Ibor products to assist in meeting our clients'
needs. As products referencing Ibor continue to be sold, and RFR
products are developed, considerations relating to the
enforceability of Ibor fallback provisions and the evolution of RFR
market conventions have increased legal and compliance risks.
Furthermore, the impact of the Covid-19 outbreak has compressed
timelines for client engagement and potentially increased the
resilience risks associated with the rollout of new products,
transition of legacy contracts, and new RFR product sales.
For further details on our approach to Ibor transition, see 'Top
and emerging risks' on page 110.
Top and emerging risks
Our top and emerging risks report identifies forward-looking
risks so that they can be considered in determining whether any
incremental action is needed to either prevent them from
materialising or to limit their effect.
Top risks are those that may have a material impact on the
financial results, reputation or business model of the Group in the
year ahead. Emerging risks are those that have large unknown
components and may form beyond a one-year horizon. If any of these
risks were to occur, it could have a material adverse effect on
HSBC.
Our suite of top and emerging risks is subject to review by
senior governance forums. In January 2020, our top and emerging
risk themes were streamlined to interconnect appropriate thematic
risk issues that impact our portfolios and business. The themes
'geopolitical risk', 'the credit cycle' and 'economic outlook and
capital flows' were merged into a single theme under 'geopolitical
and macroeconomic risks'. We continue to monitor closely the
identified risks and ensure robust management actions are in place,
as required. In December 2020, change execution risk was added as a
new thematic risk due to the level of change in priorities
resulting from the Group transformation programme and other
regulatory or remediation programmes.
HSBC Holdings plc Annual Report and Accounts 2020 39
Risk Trend Mitigants
------------------------- ----- ------------------------------------------------------------
Externally driven
------------------------- -----
Geopolitical and ^ We monitor developments in geopolitical and macroeconomic
macroeconomic risk and assess what impacts these may have on our
risks portfolios. The Covid-19 outbreak, heightened US-China
geopolitical tensions and the UK's withdrawal from
the EU have resulted in an unprecedented global
economic slowdown, leading to a significant increase
in credit stress in our portfolio. We have increased
the frequency and depth of monitoring activities,
and performed stress tests and other sectoral reviews
to identify portfolios or customers who were experiencing,
or were likely to experience, financial difficulty
as a result.
------------------------- -----
Cyber threat and > We help protect HSBC and our customers by continuing
unauthorised access to strengthen our cyber defences, helping enable
to systems the safe execution of our business priorities and
the security of our customers' information. Our
data-driven approach, grounded in strong controls
that help to mitigate advanced cyber threats, enhances
our capability in threat detection, access controls
and resiliency.
-----
Regulatory compliance > We monitor regulatory developments closely and engage
risk environment, with regulators, as appropriate, to help ensure
including conduct that new regulatory requirements are implemented
effectively and in a timely way. In addition to
developments driven by the Covid-19 outbreak, we
are keeping abreast of the emerging regulatory agenda,
which is increasingly focused on diversity, sustainable
development, climate change, operational resilience
and digital services and innovation.
------------------------- -----
Financial crime ^ We continued to support the business and our customers
risk environment throughout the Covid-19 outbreak, while ensuring
that our controls remained effective to manage financial
crime risk. We progressed with our plans to improve
our fraud controls and continue to invest in both
advanced analytics and artificial intelligence ('AI'),
which remain key components of our next generation
of tools to fight financial crime. Additionally
we continued to update our policies and controls
in response to new, increasingly complex sanctions
and export control regulations, which reflected
heightened geopolitical tensions.
------------------------- -----
Ibor transition ^ We remain focused on providing alternative near
risk-free rate products, and the supporting processes
and systems, to replace all outstanding Ibor-linked
contracts that are on a demise path. We engage with
industry participants and regulatory working groups
to aid an orderly transition within the required
timelines. In light of delays in market and client
readiness caused by the Covid-19 outbreak, we are
engaging and prioritising clients for transition
of their outstanding contracts linked to Ibors that
already have a confirmed demise.
------------------------- -----
Climate-related ^ We continue to enhance the identification, oversight
risks and management of climate risk. In 2020, we enhanced
our climate risk appetite statement with quantitative
metrics to articulate the risks from climate change,
and formalised our overall approach to climate risk
management. We also started to integrate climate
risk into the Group-wide risk management framework
(see our TCFD Update 2020 for further information).
------------------------- -----
Internally driven
------------------------------------------------------------
IT systems infrastructure > We actively monitor and improve service resilience
and resilience across our technology infrastructure to minimise
service disruption to our customers, and enhance
our service management disciplines and change execution
capabilities. We continued to adapt our IT systems
during 2020 to support our customers and operations
during the Covid-19 outbreak.
------------------------- ----- ------------------------------------------------------------
Risks associated ^ We monitor workforce capacity and capability requirements
with workforce in line with our published growth strategy and any
capability, capacity emerging issues in the markets in which we operate.
and environmental We have put in place measures to help ensure that
factors with potential our people are supported and able to work safely
impact on growth during the Covid-19 outbreak. We are monitoring
people risks that may arise due to business transformation
to help ensure that we sensitively manage any redundancies
and support impacted employees.
------------------------- ----- ------------------------------------------------------------
Risks arising > We continue to enhance our third-party risk management
from the receipt programme to help ensure engagements comply with
of services from our third-party risk policy and required standards.
third parties We work closely with providers to monitor performance.
In 2021, we will continue to strengthen our third-party
risk framework and improve our technology, process
and people capabilities.
------------------------- ----- ------------------------------------------------------------
Model risk management ^ We continue to strengthen our oversight of models
and the second line of defence Model Risk Management
function. We are embedding a new model risk policy,
which includes updated controls around the monitoring
and use of models. We have developed new model risk
appetite measures, which we expect to implement
in the first quarter of 2021. A redevelopment of
our IFRS 9 and capital models is underway to reflect
the potential effects of the extreme economic shocks
and various government support measures as a consequence
of the Covid-19 outbreak.
------------------------- ----- ------------------------------------------------------------
Data management > We continue to enhance and advance our insights,
data aggregation, reporting and decisions through
ongoing improvement and investments in data governance,
data quality, data privacy, data architecture, and
analytics (including machine learning and AI capabilities).
Our work to modernise our data infrastructure also
continues, building on the Cloud to increase flexibility
and scalability and improve our fit-for-purpose
data while also respecting the evolving regulatory
landscape regarding the localisation of data. This
is a crucial component of effectively managing our
risk.
------------------------- -----
Change execution ^ We have established a global transformation programme
risk to oversee all initiatives mobilised to deliver
the commitments made to restructure the business
and reduce costs. The related execution risks are
being monitored and managed, recognising that many
initiatives impact our colleagues and require continued
investment in technology. We are working to strengthen
our change management practices to deliver changes
efficiently and safely.
^ Risk heightened during 2020
> Risk remained at the same level as 2019
40 HSBC Holdings plc Annual Report and Accounts 2020
Long-term viability and going concern statement
Under the UK Corporate Governance Code, the Directors are
required to provide a viability statement that must state whether
the Group will be able to continue in operation and meet its
liabilities, taking into account its current position and the
principal risks it faces. They must also specify the period covered
by, and the appropriateness of, this statement.
The Directors have specified a period of three years to 31
December 2023. They are satisfied that a forward-looking assessment
of the Group for this period is sufficient to enable a reasonable
statement of viability. In addition, this period is covered by the
Group's stress testing programmes, and its internal projections for
profitability, key capital ratios and leverage ratios.
Notwithstanding this, our stress testing programmes also cover
scenarios out to five years and our assessment of risks are beyond
three years where appropriate:
-- This period is representative of the time horizon to consider
the impact of ongoing regulatory changes in the financial services
industry.
-- Our updated business plan covers 2021-2025.
The Board, having made appropriate enquiries, is satisfied that
the Group as a whole has adequate resources to continue operations
for a period of at least 12 months from the date of this report,
and it therefore continues to adopt the going concern basis in
preparing the financial statements.
Based upon their assessment, the Directors have a reasonable
expectation that the Group will be able to continue in operation
and meet liabilities as they fall due over the next three
years.
In making their going concern and viability assessments, the
Directors have considered a wide range of detailed information
relating to present and potential conditions, including projections
for profitability, cash flows, capital requirements and capital
resources.
The Directors carried out a robust assessment of the emerging
and principal risks facing the Group to determine its long-term
viability, including those that would threaten its solvency and
liquidity. They determined that the principal risks are the Group's
top and emerging risks, as set out on page 39. These include risks
related to geopolitical and macroeconomic risks (including in
relation to Covid-19), which bring a heightened level of
uncertainty compared with previous years.
The Directors assessed that all of the top and emerging risks
identified are considered to be material and, therefore,
appropriate to be classified as the principal risks to be
considered in the assessment of viability. They also appraised the
impact that these principal risks could have on the Group's risk
profile, taking account of mitigating actions planned or taken for
each, and compared this with the Group's risk appetite as approved
by the Board. At 31 December 2020, there were seven heightened top
and emerging risks: geopolitical and macroeconomic risks; financial
crime risk environment; Ibor transition; climate-related risks;
risks associated with workforce capability, capacity and
environmental factors with potential impact on growth; model risk
management; and change executions risks.
In carrying out their assessment of the principal risks, the
Directors considered a wide range of information including:
-- details of the Group's business and operating models, and strategy;
-- details of the Group's approach to managing risk and allocating capital;
-- a summary of the Group's financial position considering
performance, its ability to maintain minimum levels of regulatory
capital, liquidity funding and the minimum requirements for own
funds and eligible liabilities over the period of the assessment.
Notable are the risks which the Directors believe could cause the
Group's future results or operations to adversely impact any of the
above;
-- enterprise risk reports, including the Group's risk appetite
profile (see page 107 of the Annual Report and Accounts 2020) and
top and emerging risks (see page 110 of the Annual Report and
Accounts 2020);
-- the impact on the Group due to the Covid-19 pandemic, the
UK's departure from the EU, tensions between the US and China and
the situation in Hong Kong;
-- reports and updates regarding regulatory and internal stress
testing. While the Bank of England and European Banking Authority
cancelled their industry-wide stress test exercises in 2020, a
number of internal stress tests were conducted in 2020, including
several potential Covid-19 related outcomes;
-- reports and updates from management on risk-related issues
selected for in-depth consideration;
-- reports and updates on regulatory developments;
-- legal proceedings and regulatory matters set out in Note 34
on the financial statements of the Annual Report and Accounts 2020;
and
-- reports and updates from management on the operational resilience of the Group.
Having considered all the factors outlined above, the Directors
confirm that they have a reasonable expectation that the Group will
be able to continue in operation and meet its liabilities as they
fall due over the period of the assessment up to 31 December
2023.
Aileen Taylor
Group Company Secretary and Chief Governance Officer
23 February 2021
HSBC Holdings plc Annual Report and Accounts 2020 41
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END
ACSEAEADASFFEFA
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February 23, 2021 11:29 ET (16:29 GMT)
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