Group Chairman’s Statement

Douglas Flint Group Chairman

“ 145 years after we were founded, Hong Kong and the rest of Asia remain at the heart of HSBC’s strength and identity and our commitment to the region is unwavering.”

When I took on the role of Chairman I fully acknowledge that our scale, the I firmly believe that HSBC has the less than 90 days ago, I was acutely trust that our depositors place in us people, the financial strength and the aware of the challenges facing our and our relevance to our personal and organisational structure best able to industry. I was conscious too of the corporate clients – for their financing, deliver all of the above and it is a need to demonstrate to all of our banking, investment and risk privilege to have the opportunity to stakeholders that HSBC understands management needs – all depend upon serve as Group Chairman as we enter the responsibilities that accompany the our maintaining our reputation and a fresh chapter in our history. systemic significance which continued our integrity. Before I go any further, I want to pay success has built for HSBC in many of I also understand how important it is tribute to both Stephen Green and the markets in which we operate, not for you, our shareholders, that HSBC , who stepped down least those in Asia, given their historical builds sustainable long-term value at the end of last year from their roles significance to the Group. 145 years that is reflected through the share as Group Chairman and Group Chief after we were founded, Hong Kong price and rebuilds, as quickly as Executive after, respectively, 28 and 37 and the rest of Asia remain at the competing regulatory demands allow, years’ service to HSBC. It fell to them to heart of HSBC’s strength and identity the dividend that was reduced during be at the helm as HSBC navigated its and our commitment to the region the financial crisis. way through the worst financial crisis is unwavering.

6 HSBC Holdings plc Annual Review 2010 “ Everything we do is governed by the imperative of upholding HSBC’s corporate reputation and character at the highest level and adding further strength to our brand…”

since the 1930s. Mike led from the quarterly dividends for 2011. The final In the interest of full transparency, we front in addressing the problems in our dividend for 2010, payable on 5 May have today published on our website consumer finance subsidiary in the 2011 to shareholders on the register the respective roles and responsibilities United States and in reshaping HSBC’s on 17 March 2011, will be 12 cents of the Group Chairman, the Deputy organisational structure and operational per ordinary share, up from 10 cents Chairman and Senior Independent practices in order to better and more at the same point last year. For the Director and the Group Chief Executive. efficiently serve an increasingly remainder of 2011, we plan to pay Board changes interconnected world. Stephen’s quarterly dividends of nine cents for I have already paid tribute to the personal reputation for integrity and each of the first three quarters contributions of Stephen Green and probity stood out and distinguished compared with eight cents in respect Michael Geoghegan. has HSBC during a period of intense of the equivalent quarters of 2010. indicated that he will step down at the disaffection with the banking industry. A new leadership team next AGM and, on behalf of the Board, For their contribution over many years We enter 2011 with a new leadership I want to thank him for his immense we owe them a deep debt of gratitude team, but only in the sense of changed contribution in many roles over 33 years. and wish them both well. roles. Everyone has worked together Vincent will retain an association with Our performance in 2010 over many years and there is immense the Group by taking on an advisory role The ‘Group Chief Executive’s Business experience to draw on both from within to the Group Chief Executive on regional Review’ sets out clearly how HSBC HSBC and from earlier careers at peer matters. will join the Board on delivered a much improved balance organisations. is leading 1 March; Laura has been Deputy Chair of profits in 2010. It is reassuring to the management team as Group Chief of The Hongkong and Shanghai Banking see our Personal Financial Services Executive. His clear objective is to Corporation Limited for four years and businesses returning to profitability in deliver sustainable long-term value brings a wealth of experience of China; aggregate and Commercial Banking for shareholders consistently in a fuller details of her background and growing significantly, largely in manner that maintains the confidence experience are set out on page 23. emerging markets. These achievements of all other key stakeholders in our Regulatory update augmented another year of strong businesses including depositors, There was much progress made during performance in Global Banking and counterparties, long-term creditors, 2010 on the regulatory reform agenda. Markets. customers, employees, regulators Although there is still a great deal to do, and governments. His review on Earnings per share improved strongly, the shape of capital requirements was pages 11 to 17 gives an insight into rising by 115 per cent to reach broadly clarified and an implementation his immediate priorities. US$0.73 per share. timetable stretching out to 2019 was Everything we do is governed by the agreed to allow time for the industry The Group’s capital position also imperative of upholding HSBC’s to adjust progressively. A minimum strengthened with the core tier 1 ratio, corporate reputation and character at common equity tier 1 ratio of 7 per cent, the ratio most favoured by regulators the highest level and adding further including a capital conservation buffer, as it comprises equity capital after strength to our brand; we deeply regret has been agreed. HSBC already meets regulatory adjustments and deductions, that a number of weaknesses in this threshold requirement. The ‘Group increasing from 9.4 per cent to regulatory compliance were highlighted Chief Executive’s Business Review’ 10.5 per cent, largely due to profit in 2010 and we are resolved to remedy addresses how these revised retention throughout the year. these and reinforce the high standards requirements will impact our targeted As a consequence of this strong capital we demand of ourselves. return on equity. generation, together with greater clarity For my part, I shall be focusing on During 2011, the debate will be on the direction of regulatory reform of engaging at the highest level in the dominated by consideration of the capital requirements and an improving regulatory reform debates that will, in calibration of minimum liquidity economic backdrop in the developed large part, shape our future. I shall also standards. Although it is clear that world – particularly in the United States lead the Board in the stewardship and liquidity and funding weaknesses – the Board has approved increases in review of performance of our financial were key elements contributing to the both the final dividend payment in and human resources. crisis, HSBC agrees with the industry respect of 2010 and the planned

HSBC Holdings plc Annual Review 2010 7 Group Chairman’s Statement (continued) Our Board: one team

Douglas Flint, CBE Stuart Gulliver Vincent Cheng, GBS, OBE , CBE Iain Mackay Group Chairman Group Chief Executive Chairman, HSBC Bank (China) Company Chairman, Europe, Middle East, Africa, Group Finance Director Limited and HSBC Bank () Limited Latin America and Commercial Banking

James Hughes-Hallett, SBS Sam Laidlaw , CM Narayana Murthy, CBE Non-executive Director Non-executive Director Non-executive Director Non-executive Director Non-executive Director

consensus that the revised A second debate of importance to HSBC’s position is that systemic requirements in these areas are HSBC’s shareholders in 2011 will importance should not be determined overly conservative and could lead to concern the designation of ‘Systemically by size alone. It is clear, however, that, unnecessary deleveraging at a time of Important Financial Institutions’ (SIFIs). on almost any basis, HSBC would be fragile economic recovery in much of Consideration is being given in the classified as systemically important. the developed world. It will be a near regulatory community to mandating For this reason we are engaging fully in impossibility for the industry to expand higher capital requirements, together the debate around the consequences business lending at the same time as with more intense supervision, for of designation as a SIFI. In particular, increasing the amount of deposits institutions classified as SIFIs. We agree we draw attention to the benefits of our deployed in government bonds while, with heightened supervision but it is corporate organisation through separate for many banks but not HSBC, reducing not clear that the reduced shareholder subsidiaries in mitigation against the dependency on liquidity returns that would follow the imposition imposition of incremental capital for support arrangements. It is to be hoped of incremental capital would be SIFIs based on size alone. that the observation period, which compensated for by improved stability. In October 2010, the UK government starts this year and precedes the formal Classification as a SIFI with a confirmed its intention to raise the sum introduction of the new requirements, requirement to hold incremental capital of £2.5 billion (US$3.9 billion) through will inform a recalibration of these would, however, probably lead others a levy on bank balance sheets, and minimum liquidity standards. to favour SIFIs as counterparties, and recently announced it will accelerate may therefore have the unintended the full impact of this levy to 2011. consequence of further concentrating We take no issue with the right of the the industry.

8 HSBC Holdings plc Annual Review 2010 Laura Cha, GBS , GBS, OBE John Coombe Rona Fairhead Non-executive Director Non-executive Director Non-executive Director Non-executive Director Non-executive Director

Sir Simon Robertson John Thornton Sir Brian Williamson, CBE Ralph Barber David Shaw Deputy Chairman, senior Non-executive Director Non-executive Director Group Company Secretary Adviser to the Board independent non-executive Director

UK government to raise a levy on the deductible, as akin to a distribution of deposit, investment and retirement banking industry, particularly when profits. For this reason, we intend to add services are but a few of the activities having had to risk taxpayers’ money to future shareholder dividends that through which banking groups to rescue a number of important UK would otherwise be paid, any amount contribute to today’s financial system. institutions. However, as the proposed saved in the event that the levy is Society cannot function without an levy is to be applied to the consolidated restructured or relieved in due course. effective financial system that balance sheet, it applies beyond the delivers value to those it serves at an The role of banks in society legal boundary of the domestic intermediation cost that is proportionate The recent crisis has caused a proper institution to include overseas to the value created. Somehow, many introspection as to the role that banks operations conducted through participants and not just banks, lost play in society and at HSBC we separately capitalised subsidiaries. sight of this basic principle in the run-up welcome this. Banking is not simply This therefore constitutes an additional to the recent financial crisis and the about money. It is about helping cost of basing a growing multinational consequences for all have, inevitably, individuals and organisations within banking group in the UK. been far reaching. There is no doubt that society to meet personal and corporate the scale of regulatory reform will bring We intend to clarify in each set of objectives by facilitating access to many challenges, but it will also open results going forward the impact of the financial capital and protecting value new opportunities. levy, split between UK and overseas for those who make capital available. operations, and Stuart Gulliver covers Payment mechanisms, the provision of At HSBC, we shall not forget what this in more detail in his review. long-term credit, trade finance, hedging happened to precipitate the scale of We regard the levy, which is not and other risk management products, reform now underway. Although the

HSBC Holdings plc Annual Review 2010 9 Group Chairman’s Statement (continued)

“ oOur duty t shareholders is to build sustainable value in the economic and competitive environment in which we operate and our principal resource for achieving this is human talent.”

financial turmoil arising from the events Our duty to shareholders is to build of 2007-2008 has largely moderated, in sustainable value in the economic and large part as a result of co-ordinated competitive environment in which we government action and support to the operate and our principal resource financial system, we enter 2011 with for achieving this is human talent. humility, ready to apply right across Under the governance of the Board, HSBC all of the lessons learned, we will continue to operate and apply notwithstanding that HSBC itself neither remuneration policies and practices that sought nor received support from any take full recognition of best practice and government. are aligned with the long-term interests of shareholders. Society has a right to ask if banks ‘get it’. At HSBC, we do – and we are HSBC’s people focused on embedding the necessary Finally, I want to pay tribute to my changes in our business model for 307,000 colleagues. So many of HSBC’s long-term sustainable value creation. people have exemplified commitment But we also do not forget that value and endeavour again in 2010, helping our creation depends upon HSBC recruiting, customers and clients to meet their training and retaining the right talent in financial objectives while taking on order to manage the risks we accept the additional burden of preparing for through intermediating customer flows; regulatory change. This has been done design solutions to address complex against a backdrop of continuing financial problems; build enduring broad-based fiscal support to many relationships with core customers; economies, with public opinion build confidence in the Group’s financial consistently and highly critical of our strength; and create the strategic industry. As I look forward, it is the options that offer the next generation combination of the capabilities of fresh opportunities to continue building HSBC’s people, their determination to sustainable value. do the right thing for our customers and their deep sense of responsibility to the In this globalised world, there is intense communities they serve that makes me competition for the best people and, confident that HSBC will play a leading given our long history within and role in rebuilding the trust that our connections into the faster-growing industry has lost and, by doing so, developing markets, our best people will build sustainable value for you, are highly marketable. It would be our shareholders. irresponsible to allow our comparative advantages to wither by ignoring the market forces that exist around compensation, even though we understand how sensitive this subject is. Reform in this area can only be achieved if there is concerted international agreement on limiting the Douglas Flint quantum of pay as well as harmonising Group Chairman pay structures but there appears to be no appetite to take the initiative on this. 28 February 2011

10 HSBC Holdings plc Annual Review 2010