HSBC Holdings plc Strategic Report 2016 Connecting customers to opportunities

Our purpose is to be where the growth is, enabling businesses to thrive and economies to prosper, and ultimately helping people to fulfil their hopes and realise their ambitions. Contents

As a reminder Overview 2 Highlights This Strategic Report was approved 4 Group Chairman’s Statement Reporting currency by the Board on 21 February 2017. 7 Group Chief Executive’s Review We use US dollars. Adjusted measures We supplement our IFRS figures with adjusted Douglas Flint, Group Chairman measures used by management internally. These measures are Strategy 10 Our strategy highlighted with the 12 Strategic actions following symbol:

14 Reported results Further explanation may Financial overview 15 Adjusted performance be found on page 30 of the 17 Balance sheet and capital Annual Report and Accounts 2016. 17 Delivery against Group financial targets Unless stated otherwise, risk-weighted assets and capital are calculated and presented on a Global businesses 18 Retail Banking and transitional CRD IV Wealth Management basis as implemented 18 Commercial Banking by the Prudential 19 Global Banking and Markets 19 Global Private Banking Regulation Authority. 19 Corporate Centre

Our photo Regions 20 Europe 20 Asia competition 21 Middle East and North Africa winners 21 North America 21 Latin America In 2016, we ran a Group- wide photo competition which attracted over 6,200 submissions from 1,100 How we do business 22 Building lasting employees. The joint overall business relationships 24 Empowering people winning photos are featured 25 Ensuring sustainable outcomes in this report. The image 25 Tax on the inside front cover shows a rice farmer at harvest time in north-east Vietnam, and the photo Risk overview 26 Managing risk on the inside back cover 26 Top and emerging risks was taken at sunrise at Situ (Lake) Patenggang, West Java, Indonesia. Remuneration 28 Remuneration principles 28 Embedding our values in our remuneration framework 29 How we set out variable pay pool 29 Remuneration for our executive Directors

Supplementary information 30 Status of the Strategic Report 2016 30 Copies of the Annual Report Cover image and Accounts 2016 The Hong Kong-Zhuhai-Macau 30 Shareholder enquiries Bridge is one of the most ambitious and communications infrastructure projects in the Pearl 32 Report of the auditors River Delta. It will link three key 32 Certain defined terms cities, cutting transport costs and travelling times, and boosting economic development. HSBC has extended a HK$700m receivables finance facility to one of the companies building the bridge. Receivables finance is an area where HSBC has particular expertise, and this facility is the largest it has provided for infrastructure in the region.

HSBC Holdings plc Strategic Report 2016 1 Strategic Report

Highlights

We are one of the most international banking and financial services organisations in the world.

Group

For year ended 31 Dec 2016 Reported profit before tax Adjusted profit before tax Reported revenue ($bn) ($bn) ($bn) 2016 7.1 2016 19.3 2016 48.0 2015 18.9 2015 19.5 2015 59.8 2014 18.7 2014 21.6 2014 61.2

(2015: $18.9bn) (2015: $19.5bn) (2015: $59.8bn) $7.1bn $19.3bn $48.0bn At 31 Dec 2016 Risk-weighted assets Common equity tier 1 ratio Total assets ($bn) (%) ($bn) 2016 857 2016 13.6 2016 2,375 2015 1,103 2015 11.9 2015 2,410 2014 1,220 2014 10.9 2014 2,634

(2015: $1,103bn) (2015: 11.9%) (2015: $2,410bn) $857bn 13.6% $2,375bn

Our operating model ––Investment in costs to achieve business in Europe, costs to Markets (‘GB&M’). Retail consists of four global of $4.0bn to date has achieve of $3.1bn, adverse fair Banking and Wealth businesses, a Corporate generated annual run rate value movements of $1.8bn Management (‘RBWM’) Centre and five geographical savings of $3.7bn. arising from changes in credit and GPB were impacted regions, supported by 11 ––We now expect to deliver spreads on our own debt by challenging global functions. annualised cost savings of designated at fair value, and market conditions. the impact of our sale of During the year, we changed around $6bn by the end of ––Adjusted operating expenses operations in Brazil. our reportable segments from 2017, around $1bn above the fell by $1.2bn or 4%, reflecting regions to global businesses. top end of our original target, ––Reported revenue of $48.0bn our cost-saving initiatives and We also moved certain business while continuing to invest in was down $11.8bn. Loan focus on cost management. portfolios and functions into the regulatory programmes and impairment charges and other We continued to invest in newly created Corporate Centre. compliance. We will invest credit risk provisions (‘LICs’) regulatory programmes an equivalent total of around fell by $0.3bn and reported and compliance. For further details, $6bn over the same timeframe. operating expenses rose Capital see page 19. ––We increased market share in by $40m. ––Our capital position further Performance highlights a number of key markets and ––Adjusted profit before tax strengthened during the year, for 2016 international product areas, of $19.3bn, down $0.2bn, with a common equity tier 1 including trade finance in reflected lower revenue (‘CET1’) ratio at 31 December Strategy execution Hong Kong and Singapore. and higher LICs, partly offset 2016 of 13.6%, up from 11.9% ––Following our sale of Financial performance by a reduction in operating at 31 December 2015, mainly operations in Brazil, ––Reported profit before expenses. In 2016, we due to RWA reduction we completed a $2.5bn tax of $7.1bn was $11.8bn achieved positive adjusted initiatives and the change share buy-back. lower than in 2015, and jaws of 1.2%. in the regulatory treatment ––We further reduced our was adversely impacted ––Adjusted revenue fell by of our holding in Bank of risk-weighted assets (‘RWAs’) by significant items of $12.2bn. $1.3bn or 2% despite Communications Co., as a result of our sale of These included a $3.2bn write- improved performance in Limited (‘BoCom’). operations in Brazil and off of goodwill in our Global Commercial Banking (‘CMB’) other management actions. Private Banking (‘GPB’) and Global Banking and

2 HSBC Holdings plc Strategic Report 2016 Key highlights

0.8% 1.2% $0.51 Return on equity Adjusted jaws Dividends per ordinary (see page 17) share in respect of 2016

Our global businesses

Retail Banking and Commercial Global Banking Global Private Wealth Management Banking and Markets Banking (‘RBWM’) (‘CMB’) (‘GB&M’) (‘GPB’) We help millions of people We support approximately We provide financial We help high net worth across the world to manage two million business services and products to individuals and their their finances, buy their customers in 54 countries companies, governments families to grow, manage homes, and save and with banking products and institutions. Our and preserve their wealth. invest for the future. and services to help comprehensive range Our Insurance and Asset them operate and grow. of products and solutions, Management businesses Our customers range across capital financing, support all our global from small enterprises advisory and transaction businesses in meeting focused primarily on their banking services, can their customers’ needs. domestic markets, through be combined and to large companies customised to meet operating globally. clients’ specific objectives. Adjusted profit before tax $5.3bn $6.1bn $5.6bn $0.3bn

Risk-weighted assets $115.1bn $275.9bn $300.4bn $15.3bn

Geographical regions

Reported profit/(loss) before tax Adjusted profit before tax Risk-weighted assets* ($bn) ($bn) ($bn)

Europe (6.8) 1.6 1 298.4

Asia 13.8 14.2 2 334.0 Middle East and 1.5 1.6 North Africa 3 59.1 North America 0.2 1.3 4 150.7

Latin America (1.6) 0.6 5 34.3

* RWAs are non-additive across geographical regions due to market risk diversification effects within the Group.

HSBC Holdings plc Strategic Report 2016 3 Strategic Report

Group Chairman’s Statement

The Group has improved its productivity, embraced technological change and continues to reinforce its standards of business conduct. It has a strong capital position and is gaining market share in important areas.

The Group’s reported profit before tax amounted to $7.1bn, some 62% lower than the prior year. This decline principally reflected the impact of significant items, most of which had no impact on capital, even though they were material in accounting terms. On the adjusted basis used to measure management and business performance, profit before tax was $19.3bn, broadly in line with the $19.5bn achieved in the prior year. This outcome was largely driven by improved cost performance as prior year initiatives gained traction and substantially offset lower revenues, while loan impairment charges were marginally higher. Earnings per share of $0.07 compared with $0.65 in 2015. The Group’s core capital position improved materially. A change to the regulatory treatment of our associate in mainland China, continued Douglas Flint Group Chairman run-off of legacy assets, planned reduction in certain segments of our trading books and inadequately remunerated assets, together with capital released from business disposals, notably 2016 will be long remembered for its significant and our operations in Brazil, drove this improvement. largely unexpected economic and political events. This created the capacity to return $2.5bn of capital These foreshadowed changes to the established by way of a share buy-back, which was completed geopolitical and economic relationships that have in December. We met our objective of maintaining defined interactions within developed economies the annual dividend in respect of the year at $0.51, and between them and the rest of the world. The as indicated at the interim stage. This was delivered uncertainties created by such changes temporarily through the declaration today of a fourth interim influenced investment activity and contributed dividend of $0.21. Reflecting on the strength to volatile financial market conditions. Against of the Group’s capital position, the Board also this background, HSBC’s performance in 2016 approved a further share buy-back of up to $1bn, was broadly satisfactory. Encouragingly, operating which is expected to commence shortly. performance in the second half of the year was much stronger than expected and compared with the prior Strategic actions are now bearing fruit year, as businesses and financial markets responded In reviewing performance in 2016, the Board more optimistically than predicted to these events. noted with approval the traction now evidenced from management actions to reshape the Group and address the challenges brought about by ‘Greater focus on the trade and investment the continuing low interest rate environment. corridors where HSBC has strong market Greater focus on the trade and investment corridors where HSBC has strong market positioning generated solid market share gains positioning generated solid market share gains and broader product penetration’ and broader product penetration, particularly in servicing outbound China investment flows. This is recognised in the leading industry awards highlighted in Stuart Gulliver’s review.

4 HSBC Holdings plc Strategic Report 2016 Group Chairman’s Statement

Significant investment in technology and process systemically important bank (‘G-SIB’). This involved redesign is now not only delivering greater cost removing or mitigating residual constraints on the efficiency but also is poised to markedly enhance clarity of the Group’s core college of regulators’ our ability to detect and prevent financial crime. approach to winding down the Group, should In addition, 2017 will see the progressive launch this ever be necessary. While clearly we do of applications that will materially improve our not envisage such circumstances as other customers’ digital experience, enhance their than extremely remote, completion of a online security and bring greater personalisation comprehensive resolution framework is a of product offerings. necessary pillar supporting HSBC’s ability to continue to operate as one of the world’s G-SIBs. While there is still a long way to go, it was Indeed, our strategy is built around maintaining encouraging to see the significant improvement the scale and the reach of our international in performance across all business units in network, which in 2016 again demonstrated its Mexico following the substantial repositioning resilience and competitive advantages. of the Group’s operations there. This contributed to the Group’s success in replacing substantially Tangible benefits accrue to our shareholders all of the revenues given up through continuing from the detailed work done with our regulators run-off of legacy portfolios, risk mitigation in to demonstrate the strength of our capital position areas exposed to higher threat of financial crime and the effectiveness of our resolution planning. and reduction in trading books. Beyond supporting the maintenance of our dividend, in 2016 management’s efforts created Furthermore, HSBC is safer today from the threat the capacity to return capital to shareholders of financial crime because of the investments by way of a share buy-back and demonstrated we have been making in our Global Standards justification for a reduction in the additional programme. The Board remains fully committed capital buffer applied to HSBC as a G-SIB. to our work in this area in 2017 and beyond. Regulatory matters UK referendum on EU membership Not a great deal has changed since we reported It was extremely disappointing that the regulatory at the interim stage, given that the UK has still to community was unable to achieve its targeted trigger its formal exit notice and so no negotiations completion of the Basel III framework in January have taken place. We welcomed, however, the 2017 on the consensual basis expected. It is now additional clarity given to the Government’s almost 10 years since the commencement of the position in the recent speech by the Prime Minister. global financial crisis and it is time to draw a line The scale of the challenge of negotiating across the under further regulatory changes, particularly since entire economic landscape, as well as addressing there is no doubt that our industry is more strongly the legislative and other public policy adjustments capitalised, better governed and more risk aware that will be required, has become clearer. We than it was a decade ago. Finalisation of the believe there is now, as a consequence, a widely structure and calibration of the capital framework shared recognition that an implementation phase is crucial to give banks certainty over prospective between the current position and the one that capital allocations in support of lending and market is ultimately negotiated will be necessary; we activities. This is particularly important at this time strongly endorse this view. when public policy is focusing on encouraging greater support for longer-dated assets, including Since the referendum we have focused on infrastructure, and seeking to build out the capital advising clients on the implications of leaving markets of Europe and emerging markets. It is the EU for their businesses. We have also been hugely important that regulators and policy makers responding to UK Government outreach seeking now move as quickly as possible to finalise the guidance on which elements of the current capital framework in line with their stated EU-based legal and regulatory arrangements commitment to deliver that framework without it should focus on to preserve the essential role a significant, broad-based increase in capital that financial markets based in the UK play in requirements. Equally important is the avoidance supporting European trade and investment activity. of fragmentation in the global regulatory For our own part, we have broadly all the licences architecture as the new US administration and infrastructure needed to continue to support reconsiders its participation in international our clients once the UK leaves the EU. This largely regulatory forums. The best outcome would be derives from our position in France where we early global agreement on unresolved issues, are the sixth largest bank with a full range of followed by an extended period of regulatory capabilities. Current contingency planning suggests stability to allow familiarity and experience to be we may need to relocate some 1,000 roles from gained from what has been put in place. London to Paris progressively over the next two We made further progress in 2016 on completing years, depending on how negotiations develop. the resolution planning required of us as a global

HSBC Holdings plc Strategic Report 2016 5 Strategic Report | Group Chairman’s Statement

Board changes Countering these factors are signs of a cyclical upturn. Global purchasing manager indices are We welcomed Jackson Tai to the Board on at their strongest for some time, the US economy 12 September last year. Jack brings a rare looks robust and growth in China has held up combination of hands-on banking expertise, well, defying the concerns reflected in the market top level governance experience and a deep retrenchment seen in the first quarter of 2016. knowledge of Asia and China. These attributes Additionally, commodity prices have risen, were accumulated in a 25-year career at reflecting optimism regarding growth in J.P. Morgan & Co., both in the US and in Asia, infrastructure investment as well as agreement and subsequently in senior roles at DBS, the reached to cut oil supply. These factors also imply leading Singapore-based regional banking group, reflation across the major economies and rising where Jack latterly led its regional expansion as interest rates, which would benefit HSBC’s Vice Chairman and CEO. Jack was appointed a conservative balance sheet structure. member of the Financial System Vulnerabilities Committee and the Group Risk Committee. At the forthcoming AGM we shall bid farewell to our two longest-serving independent directors, ‘We enter 2017 with the restructuring namely, our Senior Independent Director, Rachel of the Group essentially completed, Lomax, and Sam Laidlaw. Rachel during her tenure has served on the Audit, Risk and Nomination and with a strong capital position Committees, and took responsibility as the first Chair of the Conduct & Values Committee to and a conservative balance sheet’ establish its terms of reference and its agenda. Sam served on, and latterly chaired, both the Remuneration and Nomination Committees. However, it is fair to reflect that the upgrades to Together, Rachel and Sam have also been leading economic growth we are now forecasting are the process to manage my own succession. Their largely the partial reversal of downgrades made combined knowledge of regulatory and public last year when uncertainty was elevated as a result policy, business leadership, corporate governance of the unexpected political events. Forecast global and consumer issues has been invaluable to the growth remains slightly lower than its long-term Board. On behalf of all shareholders, I want to trend with risks largely to the downside. thank them for their dedication and commitment. We enter 2017 with the restructuring of the Group Chairman succession essentially completed, and with a strong capital In the Circular inviting shareholders to the 2016 position and a conservative balance sheet. We are AGM, I indicated that the process to find my own gaining market share in areas of importance to successor had been initiated with the intention of HSBC as others scale back and our offerings having this concluded during 2017. This process become more competitive. Much of the heavy remains on track and an announcement will be investment in reshaping the Group to improve made in due course. productivity, embrace technological change and reinforce global standards of business conduct Outlook has been made. We have recently upgraded our forecasts for global As ever, we owe a huge amount to our 235,000 economic growth reflecting the likelihood of a shift colleagues who have delivered this change at the in US fiscal policy and a broader based cyclical same time as working tirelessly to meet customers’ recovery. As in recent years, incremental growth is expectations of them. On behalf of the Board, expected to be driven by emerging economies in I want to thank them all for their dedication which HSBC is well represented. Risks to this and commitment. central scenario, however, remain high. In particular, we highlight the threat of populism impacting policy choices in upcoming European elections, possible protectionist measures from the new US administration impacting global trade, uncertainties facing the UK and the EU as they enter Brexit negotiations, and the impact of a Douglas Flint stronger dollar on emerging economies with Group Chairman high debt levels. 21 February 2017

6 HSBC Holdings plc Strategic Report 2016 Group Chief Executive’s Review

Group Chief Executive’s Review

The strength of our network gives us an unrivalled ability to help clients navigate complexity and uncover new opportunities.

border mergers and acquisitions. HSBC was recognised as the ‘World’s Best Investment Bank’ and ‘World’s Best Bank for Corporates’ at the Euromoney Awards for Excellence 2016. Commercial Banking performed well, particularly in the UK and Hong Kong, growing adjusted revenue in spite of a slow-down in global trade. Gains in Global Liquidity and Cash Management, and Credit and Lending, exceeded the reduction in trade finance revenue. Global Trade and Receivables Finance continued to capture market share in major markets including Hong Kong and Singapore, maintaining our position as the world’s number one trade finance bank. Retail Banking and Wealth Management performance was mixed. Overall adjusted revenue was down, due largely to the impact of reduced client activity in Hong Kong on our Wealth Stuart Gulliver Group Chief Executive Management businesses. At the same time, strong mortgage balance growth in the UK, Hong Kong and mainland China, and higher current account We made good progress in 2016. The and savings balances in the UK and Hong Kong, implementation of our strategic actions is well helped increase revenue in Retail Banking. These advanced and our global universal business model increased balances should support revenue growth performed well in challenging conditions. Our in 2017 and beyond. reported profit before tax reflected a number of large significant items, including a write-off of all We have considered it appropriate to write off the remaining goodwill in Global Private Banking in the remaining goodwill in the European private Europe, an accounting loss on the sale of our Brazil banking business. This goodwill relates principally business, and investments to achieve our cost- to the original purchase of Safra Republic Holdings saving target. Our adjusted profits were broadly in 1999. The restructuring of Global Private unchanged year on year following solid Banking is now largely complete, and although performances by our global businesses. These Global Private Banking is now much smaller enabled us to capture market share in strategic than it was three years ago, it is deliberately product areas and build a platform for future positioned for sustainable growth with a focus growth. We delivered positive adjusted jaws in 2016. on serving the personal wealth management needs of the leadership and owners of the Performance Group’s corporate clients. Global Banking and Markets recovered from a Our cost-reduction programmes continue to sector-wide slow start to generate higher adjusted bring down our adjusted operating expenses. revenue than for 2015. Our Markets businesses The traction that these programmes have gained in performed well in challenging conditions, the last 18 months has enabled us to increase the particularly in Fixed Income products. Our amount of costs that we are able to remove from transaction banking businesses also grew revenue, the business. We now expect to deliver annualised especially Global Liquidity and Cash Management. cost savings of around $6bn by the end of 2017, We made market share gains in Fixed Income in and will invest an equivalent total of around $6bn Europe, and achieved our best ever league table over the same time-frame in order to achieve this. rankings in global debt capital markets and cross-

HSBC Holdings plc Strategic Report 2016 7 Strategic Report | Group Chief Executive’s Review

Delivering value for shareholders These savings should more than compensate for additional investment in regulatory programmes In December, we completed the $2.5bn equity and compliance. buy-back that we commenced at the half-year. We are also now in a position to retire more of We continue to make strong progress in the capital that previously supported the Brazil implementing our strategic actions to improve business. Having received the appropriate returns and gain maximum value from our regulatory clearances, we will therefore execute international network. We are on course to a further share buy-back of up to $1bn in the first complete the majority of these actions by the half of 2017. This will bring the total value of shares end of 2017 (see pages 12 to 13), in line with our repurchased since last August to $3.5bn. targets. Our targeted reduction of risk-weighted assets is 97% complete, and the success of our We will continue to contemplate further share cost saving programmes means that we now buy-backs as circumstances permit, and expect to exceed our cost reduction target. we remain confident of sustaining the annual dividend at the current level for the foreseeable The turnaround of our Mexico business future through the long-term earnings capacity continues to accelerate. Improved lending and of the business. deposit balances, interest rate rises and better collaboration between businesses helped generate A business fit for the future significantly higher profits compared with 2015. We also made significant market share gains, While our strategic actions are improving our particularly in consumer lending. network, we are also anticipating and adapting to the social, economic and technological trends We have continued to enhance our business that are changing our operating environment and in Asia-Pacific, launching our first exclusively our customers’ needs and expectations. HSBC-branded credit card in mainland China, growing assets under management and insurance The adoption of rapidly evolving digital new business premiums, and increasing loans technologies by our customers is arguably the in the Pearl River Delta. We also extended our most transformative force for the financial services leadership of the offshore renminbi bond market industry. Through our global network, we are able and achieved our best ranking for China outbound to identify and respond to digital trends across mergers and acquisitions since 2003. 70 countries and territories, applying the technologies that provide the greatest benefit to We are better protected from financial crime our customers. We are investing $2.1bn in digital because of the investment we have made in transformation in Retail Banking and Wealth our Global Standards programme. Our Monitor Management, Commercial Banking, and Global has raised certain concerns, but we have Banking and Markets between 2015 and the continued to progress and our commitment end of 2020, and we have already launched remains unwavering. By the end of this year, we innovative ways to make banking faster, easier are on track to have our anti-money laundering and safer. HSBC is now the biggest financial and sanctions policy framework in place and to services user of biometrics globally, and we have introduced major compliance IT systems continue to roll out voice recognition and across the Group. Beyond 2017, we will continue fingerprint technology across our network. In 2016, to work to fine tune those systems and to ensure we enhanced our internet and mobile banking that our improvements are fully integrated into platforms in several of our key markets, including our day-to-day risk management practices. the UK and Hong Kong, and launched innovation Our strong common equity tier 1 ratio of 13.6% labs around the world dedicated to the application reinforces our ability to support the dividend, of artificial intelligence, data management and invest in the business and manage the continuing improvements in cybersecurity. These labs, uncertain regulatory environment. together with our fintech partnerships, will help us use technology to deliver better banking for our customers.

8 HSBC Holdings plc Strategic Report 2016 Group Chief Executive’s Review

If digital technology is mankind’s greatest of the world’s busiest trade routes, we are perfectly opportunity, preventing climate change is its placed to help modernise and digitise long- greatest challenge. The Paris Agreement of standing trade finance methods, many of which December 2015 reflected a new consensus on would still be recognisable to HSBC’s founders. the need to strengthen the global response to We are already working with a broad coalition climate change. Major injections of capital are of partners around the world to make the promise now required to finance new technologies, of blockchain technology a reality with regards infrastructure and the transition of traditional to trade finance. HSBC has already helped develop industries from high to low carbon, and to cover a blockchain prototype for a letter of credit that the costs of climate adaptation. As the principal confirms the possibility of sharing information intermediaries between entrepreneurs, businesses between all parties on a private distributed and investors, banks have a responsibility to help ledger. In early 2017, we signed a memorandum direct this flow of capital. We are already working of understanding with six other banks to make with our clients and with investors to help them domestic and cross-border commerce easier allocate capital and direct finance towards lower- for European SMEs using blockchain technology. carbon, carbon-resilient activities, and in 2016 We are also seeking to create ways of financing we established a Sustainable Financing Unit to the growing services trade, which we estimate coordinate this work across business lines. will account for a quarter of global trade by 2030. Headquartered in London, but with resources At a time when international politics threaten to in New York and Hong Kong, this new unit will increase rather than decrease the cost of trade, support colleagues tasked with creating and we will continue to invest both time and resources delivering innovative climate products, and help to find ways of making trade finance cheaper, them uncover new sources of sustainable finance. faster, simpler and more secure for our customers. Looking forward ‘The changes we have made since 2011 have We anticipate new challenges in 2017 from equipped HSBC to improve returns and gain geopolitical developments, heightened trade barriers and regulatory uncertainty. However, the maximum value from our international network’ changes we have made since 2011 have equipped HSBC to manage the complexity of today’s global business environment. HSBC is a strong and We are also seeking to influence client practices resilient business with a global universal business and to build the data, the tools and the model geared to find growth opportunities in a transparency necessary to embed understanding low-growth world. If globalisation continues to of climate risk into the way that markets function. retreat, as seems likely, we are in a strong position In 2016, HSBC Global Research expanded its to capitalise on the regional opportunities that this coverage of environment, social and corporate will present, particularly in Asia and Europe. Most governance factors to give our clients the importantly, the strength of our network gives us information they need to inform their investment an unrivalled ability to help our clients navigate decisions. This builds on the work of the world- that same complexity and overcome their own leading HSBC Climate Change Centre for challenges, whether exploring new markets or Excellence, which in 2017 celebrates 10 years making the transition to a low-carbon economy. of delivering market-leading information on climate policy to clients across the globe. Work is also underway to expand the Group’s disclosure of non-financial data to meet the needs of shareholders and other stakeholders. Stuart Gulliver We are investing to adapt to the changing face Group Chief Executive of trade. As the world’s largest trade finance bank 21 February 2017 with more than 150 years’ experience at both ends

HSBC Holdings plc Strategic Report 2016 9 Strategic Report

Our strategy

We have developed a long-term strategy that reflects our purpose and enables us to capture value from our international network.

Two-part long-term strategy

Develop our Invest in wealth and international network retail businesses with local scale To facilitate international trade and capital flows and To make the most of global social mobility, wealth serve our clients, with potential to help them grow creation and long-term demographic changes from small enterprises into large multinationals. in our priority markets.

Value of the network and our strategy

Access to global Lower risk profile and volatility Strong capital and funding base growth opportunities from our diversified, universal banking model CET1 ratio of 13.6%, supported by Our unparalleled network increased shareholders’ equity to covers countries accounting for Our 10-year profit before tax meet new regulatory requirements more than 90% of global GDP, volatility of 0.9x compares since the end of 2010. trade and capital flows. We have favourably with our peers. a leading presence in large and Four interconnected, global Transaction banking product fast-growing economies. businesses share balance sheets revenue of $14.7bn on an adjusted and liquidity in addition to strong Our priority markets cover both basis leads the industry. More than commercial links. sides of 11 of the world’s 15 largest 45% of our client revenue comes trade corridors for goods and from businesses and individuals Stable shareholder returns services forecast for 2030, and with an international presence. Industry leading dividend – represent at least one side of the Business synergies of $10.5bn, approximately $55bn declared from other four corridors. Six of the 15 equivalent to 22% of reported 2011 to 2016, as well as circa corridors are within Asia and five revenue reflect products and $2.5bn of share repurchases. connect countries between two services provided across our geographical regions. global businesses.

10 HSBC Holdings plc Strategic Report 2016 Our strategy

Long-term trends

Our strategy positions us Increasing connectivity and Business to consumer cross-border to capitalise on several global flows of trade, finance e-commerce transactions long-term trends. and data are key drivers of ($tn) GDP growth. 2015 0.3 2020 1.0

Source: McKinsey Global Institute, Digital globalization: The new era of global flows (2016)

Economic weight is shifting Shipping volumes, measured by to Asian and Middle Eastern weight of goods unloaded economies, which are expected to grow GDP 1990: 4,126m 2015: 10,033m metric tonnes metric tonnes threefold by 2050. Key Emerging 33% and transition 62% markets Developed markets Source: United Nations Conference on Trade and Development

The middle class is expected Size of middle class population to grow from one-third to (bn) two-thirds of the world’s 2010 28% 1.8 population by 2030, while the 2020 54% 3.2 number of people over age 60 2030 66% 5.0 is expected to more than Key double by 2050. Asia Rest of the world

Source: OECD Development Centre, Emerging Middle Class in Developing Countries (2010)

Client examples

ATN International (‘ATNI’): Mubea: Tangle Teezer: Grupo Aeroportuario US, telecommunications Germany, automotive UK, consumer goods (‘GACM’): and renewable energy Mexico, infrastructure Automotive parts UK-based hairbrush International portfolio manufacturer operating manufacturer with its first Responsible for the of businesses in US and across 20 countries in product launch in 2008, construction, administration elsewhere. ATNI sought Europe, Asia and the and a range of products and operation of Mexico out HSBC’s international Americas. HSBC expanded now sold in more than 70 City’s new international capabilities while pursuing its relationship with Mubea markets. Since 2009, HSBC airport. In 2016, we advised renewable energy to also serve its subsidiaries has helped Tangle Teezer and coordinated financing investments in India. in the US and Mexico, and expand internationally for GACM including a In 2016, we helped ATNI provide centralised through our knowledge $1bn 30-year green bond with custodian services international cash and and capabilities around the issuance, the largest green and provided finance liquidity management. world. In 2016, we assisted bond in Latin America, and structuring advice for its it in developing its presence the first emerging market Singaporean and Indian in the US, China and green bond to receive a subsidiaries. We provide Hong Kong. Green Bond Assessment ATNI with trade, cash grade from Moody’s. management, foreign exchange and other services.

HSBC Holdings plc Strategic Report 2016 11 Strategic Report

Strategic actions

We are well on our way towards achieving the actions outlined in our June 2015 Investor Update.

Capturing value from our international network In June 2015, we outlined a series set for the end of 2017. We expect cloud-based treasury services for of strategic actions to make the most to achieve total cost savings of $6.0bn businesses and exploring blockchain of our competitive advantages and through one-off investments (‘costs technology to support documentary respond to a changing environment. to achieve’) of $6.0bn. The additional trade transactions. savings will fund increased costs These actions are focused on We remain recognised as the leading related to regulatory programmes improving efficiency in how we use bank for international renminbi (‘RMB’) and compliance. In 2016, operating our resources, and on investing for products and services. We were the first expenses fell by 4% on an adjusted growth in line with our strategy. Each bank to facilitate overseas institutional basis compared with 2015, facilitated action has targets defined to the end investment into the China interbank bond by increased efficiency in our processes. of 2017. The table opposite contains a market since access was expanded in For example, we launched a new summary of our progress in 2016 with early 2016. We were also the first to be customer-facing digital portal to additional details provided below. appointed custodian bank in the two standardise and accelerate the newly active RMB qualified foreign onboarding process in 26 markets Resizing and simplifying institutional investor (‘RQFII’) markets covering more than 70% of CMB our business of the US and Thailand this year. corporate clients, and we decreased the We have made significant progress in number of manual payments by 80%. Finally, we continue to strengthen resizing and simplifying our business. our efforts to protect customers In 2016, management actions reduced Redeploying capital to grow and the wider financial system from RWAs in GB&M and legacy credit by our business financial crime. In 2016, this included $46bn and we completed asset sales At the heart of our business is our further upgrades to our systems, as totalling $10.1bn from our US international network. We are focusing well as additional training for our consumer and mortgage lending efforts to grow our businesses by employees. Further detail can be found (‘CML’) run-off portfolio. looking at customers’ needs across under the Financial Crime Risk section As part of our initiative to optimise products, geographies and supply of www.hsbc.com/financial-crime-risk. our network, we completed the sale chains. In 2016, revenue from of HSBC Bank Brazil on 1 July 2016. transaction banking products was up We will continue to serve the 2% despite difficult macroeconomic international and cross-border conditions. We grew revenues in our needs of our large corporate clients Global Liquidity and Cash Management in Brazil through HSBC Brasil S.A. – (GLCM) business. In 2016, we were Selected awards and Banco de Investimento. named ‘Best Bank for Corporates’ by recognition 2016 Euromoney and ‘Best Supply-Chain In the NAFTA region, we grew Euromoney Awards for Excellence 2016 Trade adjusted revenue in Mexico by 18% Finance Bank Global’ by the Finance . Best Bank for Corporates compared with 2015, supported by Awards market share gains in RBWM across We continue to invest for growth in Best Investment Bank key lending products and a doubling Asia. In December, we launched our Euromoney Cash Management of personal loans issued. In the US, own HSBC-branded credit cards in Survey 2016 we grew adjusted revenue in GB&M mainland China with a full range of Best Global Cash Manager and RBWM compared with 2015 digital features. We increased the (Non-Financial Institutions) and continued to support our clients number of new RBWM clients in China’s #1 Global For All Transactions internationally. Revenues from Pearl River Delta by 51% compared (Financial Institutions) international subsidiaries of our with 2015, and grew our mortgage Trade Finance Awards 2016 US clients increased by 11% loan books by more than 51%. We grew compared with 2015. revenues from international subsidiaries Best Supply-Chain Finance Bank Global We have made good progress in our of our ASEAN-region commercial Asiamoney Offshore RMB Poll 2016 cost-saving programme and are on banking clients, and in Singapore Best Overall Offshore RMB track to exceed our exit rate target our innovation lab is developing Products / Services

12 HSBC Holdings plc Strategic Report 2016 Strategic actions

Progress against strategic actions

Actions to resize and simplify the Group Targeted Strategic actions outcome by the Progress Key performance indicators Status end of 2017 Reduce Group ––Group RWA ––Further reduction of $143.2bn in 2016, ––RWA reduction from management risk-weighted reduction notably in GB&M actions: circa $267bn (circa 97% assets (‘RWAs’) $290bn of 2015–17 target on a constant by circa $290bn ––GB&M RWAs of $300.4bn, 37% of the currency basis) ––Return GB&M Group total to Group target profitability; <1/3 of Group RWAs Optimise global ––Reduced ––Completed our sale of Brazil operations ––Present in 70 countries and network footprint on 1 July 2016; maintained a Brazil territories at end of 2016 (down presence to serve large corporate from 73 at end of 2014) clients’ international needs Rebuild NAFTA ––US profit before ––Successfully achieved a non-objection ––US (excluding CML run-off portfolio) – region profitability tax circa $2bn to our US capital plan, which includes a adjusted profit before tax: $0.4bn dividend payment to HSBC Holdings plc (down 22% on 2015) ––Mexico profit in 2017, as part of the Comprehensive before tax circa Capital Analysis and Review (‘CCAR’) ––Mexico adjusted profit before tax: $0.6bn $0.3bn (up 354% on 2015) 1 ––Mexico market share gains across key RBWM lending products Set up UK ring- ––Completed ––Appointed Chair and CEO of HSBC UK; ––Implementation in progress fenced bank by 2018 other senior appointments in progress ––Migration of key roles underway with circa 35% of Birmingham positions filled Deliver $4.5‑5.0bn ––2017 exit rate ––$2.2bn cost savings realised in 2016 ––Adjusted costs (excluding Brazil) of cost savings to equal 2014 down 4% on 2015 operating ––Positive jaws in 2016 compared with 2015 expenses ––FTE reduction of circa 900 in 2016

Actions to redeploy capital and invest Deliver growth ––Revenue growth ––GLCM revenue up 6% on 2015 driven by ––Transaction banking revenue: above GDP from of international growth in deposits and the effect of US $14.7bn (up 2% on 2015) international network above rate rises network GDP ––Revenue synergies: $10.5bn – ––Global Trade and Receivables Finance (down 5% on 2015) (‘GTRF’) revenue down 7% on 2015, reflecting a decline in market conditions Investments in ––Market share ––Awarded Asia’s ‘Best Investment Bank’ ––Guangdong loans: $4.7bn (up 16% Asia – prioritise gains and Asia’s ‘Best Bank for Financing’ by on 2015) and accelerate Euromoney Awards for Excellence 2016 ––Circa 10% ––ASEAN adjusted revenue: $3.1bn growth per ––Launched digital banking platform (HSBCnet) (down 2% on 2015) annum in for SMEs in Guangdong allowing faster assets under payment services with Hong Kong ––Asset Management assets under management management distributed in Asia: in Asia ––Growing business around China’s Belt and $143bn (up 11% on 2015) Road initiative, including energy sector deals linking China to Malaysia and Egypt ––Insurance manufacturing annualised new business premiums in Asia: $2.3bn (up 13% on 2015) Grow business ––$2.0–2.5bn ––52% RQFII custodian market share ––RMB internationalisation revenue, from renminbi revenue (in Securities Services); ranked first from offshore business partly or (‘RMB’) by market share in all active RQFII markets wholly denominated in RMB as well internationalisation as selected products in mainland – ––Joint lead manager for China’s Ministry of China: $1.25bn (down 25% on 2015) Finance RMB3bn bond in the UK, the first sovereign RMB bond issued outside China Global Standards ––Implementation ––Continued progress towards putting in place ––By end 2017: AML and sanctions – safeguarding completed an effective and sustainable AML and policy framework in place; major against financial sanctions compliance programme, including compliance IT systems introduced crime3 through the creation of a new Financial Crime across the Group, including for Risk function and improvements in technology customer due diligence, transaction and systems to manage financial crime risk monitoring and sanctions screening 2

1 ––Post-2017: Policy framework and On track to achieve equivalent profit before tax target on a local currency basis; associated operational processes US dollar target set using the 2014 average exchange rate. fully integrated in day-to-day financial 2 As set out under ‘Key performance indicators’. crime risk management practices in 3 Further detail on the Monitor and the US deferred prosecution agreement and related agreements an effective and sustainable way; IT and consent orders can be found on pages 82 and 66, respectively, of the Annual Report and systems continue to be fine-tuned Accounts 2016.

HSBC Holdings plc Strategic Report 2016 13 Strategic Report

Financial overview

Reported results

2016 2015 2014 This table shows our reported results for Reported results the last three years, ended 31 December $m $m $m 2016, 2015 and 2014. Net interest income 29,813 32,531 34,705 Reported profit before tax Net fee income 12,777 14,705 15,957 Reported profit before tax of $7.1bn Net trading income 9,452 8,723 6,760 was $11.8bn or 62% lower than in Other income (4,076) 3,841 3,826 2015. This was primarily due to net Net operating income before loan impairment adverse movements relating to 59,800 61,248 charges and other credit risk provisions (‘revenue’) 47,966 significant items and the unfavourable Loan impairment charges and other credit risk provisions effects of foreign currency translation, (3,400) (3,721) (3,851) which are described in more detail on (‘LICs’) page 30 of the Annual Report and Net operating income 44,566 56,079 57,397 Accounts 2016. Excluding significant Total operating expenses (39,808) (39,768) (41,249) items and currency translation, profit before tax fell by $0.2bn. Operating profit 4,758 16,311 16,148 Reported revenue Share of profit in associates and joint ventures 2,354 2,556 2,532 Profit before tax 7,112 18,867 18,680 Reported revenue of $48.0bn was $11.8bn or 20% lower than in 2015, These factors contributed to a fall ––a $3.2bn write-off of goodwill in in part due to a net unfavourable in reported revenue in all our global our GPB business in Europe; and movement in significant items of businesses and Corporate Centre. $7.6bn, which included: ––costs to achieve of $3.1bn compared Excluding significant items and the with $0.9bn in 2015; partly offset by ––adverse fair value movements of adverse effects of foreign currency ––a reduction of $1.0bn in settlements $1.8bn arising from changes in credit translation differences between the and provisions in connection with spreads on our own debt designated periods, revenue fell by $1.3bn or 2%. legal matters. at fair value, compared with favourable movements of $1.0bn in 2015; Reported LICs In addition, the reported results include ––a $3.6bn reduction in revenue resulting Reported LICs of $3.4bn were the operating expenses incurred in our from our sale of operations in Brazil to $0.3bn lower than in 2015 as reductions Brazil business of $1.1bn compared with Banco Bradesco S.A., which includes in RBWM and CMB more than offset $2.5bn in 2015. a $1.7bn accounting loss recognised an increase in GB&M. The reduction Excluding significant items and the on the sale; and included favourable effects of foreign adverse effects of foreign currency ––the non-recurrence of a $1.4bn gain on currency translation differences translation differences between the the sale of part of our shareholding in between the periods of $0.2bn, and periods, operating expenses fell by Industrial Bank Co. Limited (‘Industrial the impact of LICs incurred in the $1.2bn. Reductions in all our global Bank’) in 2015; partly offset by disposed Brazil operations of $0.7bn businesses reflected the effects of ––a $0.6bn gain on the disposal of our compared with $0.9bn in 2015. our cost-saving initiatives. membership interest in Visa Europe Reported operating expenses in the second quarter of 2016 and Reported income a $0.1bn gain on disposal of our Reported operating expenses of from associates membership interest in Visa US $39.8bn were $40m or 0.1% higher Reported income from associates in the fourth quarter of 2016. than in 2015. This includes favourable and joint ventures of $2.4bn effects of currency translation In addition, foreign currency translation decreased by $0.2bn. differences of $2.1bn between differences between the periods had the periods, and an increase in On 21 February 2017, the Board an adverse effect of $3.0bn. significant items of $3.3bn, including: announced a fourth interim dividend of $0.21 per ordinary share.

14 HSBC Holdings plc Strategic Report 2016 Financial overview

Adjusted performance

Our reported results are prepared To derive adjusted performance, For reconciliations of our reported results to in accordance with IFRSs as detailed we adjust for: an adjusted basis, including lists of significant in the Financial Statements on page items, see page 47 of the Annual Report and ––the year-on-year effects of foreign Accounts 2016. 194 of the Annual Report and Accounts currency translation differences; and 2016. We also present adjusted performance measures to align internal ––the effect of significant items that and external reporting, identify and distort year-on-year comparisons quantify items management believes and are excluded in order to to be significant, and provide insight understand better the underlying into how management assesses trends in the business. period-on-period performance. Adjusted performance measures are highlighted with the following symbol:

Adjusted results 2016 2015 Adjusted results $m $m This table shows our adjusted results Net operating income before loan impairment charges and other for 2016 and 2015. These are discussed 50,153 51,419 in more detail on the following pages. credit risk provisions (revenue) Loan impairment charges and other credit risk provisions (‘LICs’) (2,652) (2,604)

Total operating expenses (30,556) (31,730) Operating profit 16,945 17,085

Share of profit in associates and joint ventures 2,355 2,443

Profit before tax 19,300 19,528

Adjusted profit before tax Movement in adjusted profit before tax compared with 2015 On an adjusted basis, profit before tax of $19.3bn was $0.2bn or 1.2% lower 2016 ($m) Adverse Favourable (%) than in 2015. This primarily reflected Revenue 50,153 (1,266) (2) lower revenue, higher LICs and a LICs (2,652) (48) (2) reduction in our share of profits from associates. This was partly offset by Operating expenses (30,556) 1,174 4 a decrease in operating expenses. Share of profits in associates and joint ventures 2,355 (88) (4)

Profit before tax 19,300 (228) (1)

HSBC Holdings plc Strategic Report 2016 15 Strategic Report | Financial overview

Adjusted performance continued

Movement in adjusted revenue compared with 2015 reductions were partly offset by the impact of inflation and our continued 2016 2015 Variance % investment in regulatory programmes $m $m $m and compliance. RBWM 18,925 19,242 (317) (2) Run-the-bank costs of $26.9bn were CMB 12,887 12,753 134 1 $0.3bn lower, and change-the-bank costs of $2.7bn were $0.4bn lower, GB&M 14,919 14,566 353 2 both compared with 2015. Within these, GPB 1,757 1,965 (208) (11) our total expenditure on regulatory programmes and compliance, Corporate Centre 1,665 2,893 (1,228) (42) comprising both run-the-bank Total 50,153 51,419 (1,266) (2) and change-the-bank elements, was $3.0bn, up $0.4bn or 14% compared with 2015. This reflected the ongoing Adjusted revenue Asia resulted in a reduction in implementation of our Global Standards Equities revenue. Adjusted revenue of $50.2bn was programme to enhance our financial $1.3bn or 2% lower. The reduction ––In CMB, revenue rose (up $0.1bn), crime risk controls and capabilities, reflected the following: notably in GLCM reflecting balance and to meet our external commitments. growth and wider spreads in Hong ––In RBWM, lower revenue (down Kong. Revenue also increased in In the fourth quarter of 2016, $0.3bn) was mainly a result of a fall Credit and Lending as a result of loan our adjusted operating expenses in income in our Wealth Management growth in the UK. increased compared with the third business. The reduction resulted from quarter reflecting a small number For further details on the performance of our lower investment distribution income global businesses, see page 18. of specific items. This included the compared with a strong performance write-off of software. in 2015, notably in the first half of the The number of employees expressed year, and adverse market impacts in Adjusted LICs in full-time equivalent staff (‘FTEs’) Insurance Manufacturing. By contrast, Adjusted LICs of $2.7bn were $48m at 31 December 2016 was 235,175, a revenue grew in savings and deposits, higher than in 2015, reflecting increases decrease of 20,028 from 31 December as we grew balances in Hong Kong, in GB&M resulting from a small number 2015. This included a 19,145 reduction the UK and Mexico, and from wider of individually assessed LICs within the following our disposal of operations in spreads in Hong Kong and oil and gas, and metals and mining Brazil. Excluding Brazil, the decrease in Latin America. sectors, notably in the first half of 2016 FTEs was 883, as a reduction of 17,855 ––In GPB, lower revenue (down $0.2bn) in the US. LICs also increased in RBWM, FTEs realised across global businesses reflected reduced brokerage and particularly in Mexico. These increases and global functions was partly offset trading activity due to the continued were largely offset by a reduction in by investment in our Global Standards repositioning of the business, together LICs in CMB. Programme of 5,694 FTEs, costs to with adverse market sentiment and achieve FTEs of 8,073 and investment Adjusted operating expenses unfavourable market conditions. for growth. ––In Corporate Centre, revenue fell Adjusted operating expenses of $30.6bn For further details on the categorisation of (down $1.2bn), partly due to the were $1.2bn or 4% lower than in 2015. run-the-bank and change-the-bank costs, see US CML portfolio (down $0.5bn) This primarily reflected cost savings page 38 of the Annual Report and Accounts 2016. as a result of continued run-off of $2.2bn realised in 2016, with run-rate Adjusted income from and portfolio sales. Revenue also savings of around $3.7bn since the associates and joint ventures fell in Central Treasury as a result of commencement of our cost-saving higher adverse fair value movements programme. The fall in operating Adjusted income from associates and relating to the economic hedging expenses also included a reduction of joint ventures of $2.4bn fell by $0.1bn of our long-term debt ($0.2bn) $0.5bn in the UK bank levy. These compared with 2015. and higher interest expense on our debt ($0.2bn). Adjusted operating expenses ($bn) These were partly offset: 1.4 2015 2016 0.9 ––In GB&M, revenue increased (up 30.3 Key $31.7bn $30.6bn 29.7 $0.4bn) despite adverse movements Bank levy in credit and funding valuation Adjusted operating adjustments of $0.3bn. In Rates and 1.4 expenses Credit, higher revenue reflected growth (0.1) 1.0 (excluding 7.6 7.6 7.4 in market share in Europe. 7.1 7.3 7.1 7.1 7.0 bank levy) We also increased revenue in Global Liquidity and Cash Management (‘GLCM’) from balance growth and wider spreads. By contrast lower 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 2015 2016 trading volumes in Europe and

16 HSBC Holdings plc Strategic Report 2016 Financial overview

Balance sheet and capital Balance sheet strength Distributable reserves Total reported assets were $2.4tn, 1% lower than at The distributable reserves of HSBC Holdings at 31 December 31 December 2015 on a reported basis, and 5% higher 2016 were $42bn, and at 31 December 2015 were $47bn. The on a constant currency basis. We have maintained the reduction was driven by our share buy-back ($2.5bn) and the strength of our balance sheet, as targeted asset growth effects of dividends paid ($11bn), which more than offset was partly offset by reductions in our legacy portfolios and profits of $7bn. the completion of our sale of operations in Brazil to Banco Bradesco S.A. We also issued more than $30bn of senior Capital strength debt during the year from HSBC Holdings plc (‘HSBC We manage our capital in an effort to ensure we exceed Holdings’) to build up the Group’s total loss absorbing current regulatory requirements and are well placed to meet capacity in line with anticipated regulatory requirements. those expected in the future. We monitor our position using capital ratios. These measure capital relative to a regulatory assessment of risks taken. We quantify how these risks relate to our businesses using RWAs. Our CET1 ratio at 31 December 2016 was 13.6%, up from 11.9% at 31 December 2015. Details of these risks are included on page 127 of the Annual Report and Accounts 2016.

Delivery against Group financial targets

Return on equity Return on equity Our medium-term target is to achieve a return on equity (%) (‘RoE’) of more than 10%. In 2016, we achieved an RoE of 2016 0.8 0.8% compared with 7.2% in 2015. In 2016, significant items, 2015 7.2 which included a write-off of goodwill in GPB in Europe, costs 2014 7.3 to achieve and adverse fair value movements arising from changes in credit spread on our own debt designated at fair value, had a significant effect on our reported RoE. Together with the UK bank levy, significant items reduced the return achieved by 6.9 percentage points.

Adjusted revenue down Adjusted jaws Jaws measures the difference between the rates of change for revenue and costs. Positive jaws occurs when the figure 2.5% Adjusted jaws for the annual percentage change in revenue is higher than, or less negative than, the corresponding rate for costs. We calculate adjusted jaws using adjusted revenue and costs. Adjusted costs down +1.2% Our target is to maintain positive adjusted jaws. In 2016, adjusted revenue fell by 2.5%, whereas our adjusted operating expenses reduced by 3.7%. Adjusted jaws was 3.7% therefore positive 1.2%.

Dividends

Total dividends declared in respect of the year In the current uncertain environment, we plan to sustain the ($bn) annual dividend in respect of the year at its current level for 2016 10.1 the foreseeable future. Growing our dividend in the future will 2015 10.0 depend on the overall profitability of the Group, delivering 2014 9.6 further release of less efficiently deployed capital and meeting regulatory capital requirements in a timely manner. Actions to address these points were core elements of our Investor Update in June 2015.

HSBC Holdings plc Strategic Report 2016 17 Strategic Report

Global businesses Commentary is on an adjusted basis, which is the GAAP measure for our global businesses. We manage our products and services globally The comparative period has been restated to reflect changes to reportable through our global businesses. segments, as described on page 44 of the Annual Report and Accounts 2016.

Retail Banking and Wealth Management (‘RBWM’) RBWM serves close to 36 million customers Banking revenue was more than offset by offset by transformation and other worldwide through four main business a fall in Wealth Management. The reduction cost-saving initiatives. areas: Retail Banking, Wealth Management, in Wealth Management (down 0.5bn) was Asset Management and Insurance. driven by decreased investment distribution Key events: revenue as a result of lower mutual fund RBWM provides services to individuals ––Our retail banking revenue rose by 1%, and retail securities turnover due to weaker under the HSBC Premier and Advance with increases in current account and market sentiment. This compared with propositions aimed at mass affluent and savings partly offset by falls in credit card a strong performance in the first half of emerging affluent customers who value and mortgage revenue, reflecting spread 2015. In addition, insurance manufacturing international connectivity and benefit from compression, mainly in the UK. revenue fell, reflecting adverse market our global reach and scale. For customers ––In the UK, growth in mortgage balances impacts ($345m), although this was partly who have simpler everyday banking needs, was facilitated by our expansion into the offset by the value of new business. RBWM offers a full range of banking mortgage intermediary market, with 12 However, in Retail Banking revenue rose products and services reflecting local brokers added in 2016, which accounted $0.2bn or 1%, as revenue increased in requirements. for 7% of our new mortgage originations current accounts and savings (up $0.4bn) during 2016. Higher Retail Banking revenue, from growth in balances, notably in Hong Kong and the UK. We also benefited but challenging market conditions Profit before tax ($bn) in Wealth Management from wider deposit spreads in Hong Kong 2016 2015 2014 and Mexico. By contrast, revenue in ––Adjusted profit before tax of $5.3bn was personal lending fell (down $0.2bn), despite Adjusted 5.3 $0.4bn or 6% lower compared with 2015. growth in balances of $9bn or 3%, notably 5.7 This was driven by lower revenue in Hong Kong, the UK and Mexico, driven 6.2 in our Wealth Management business, by spread compression (mainly in the UK). together with higher LICs. By contrast, ––LICs increased by $0.1bn, notably in lower operating expenses reflected our Change in adjusted Mexico, reflecting growth in unsecured continued focus on cost management. profit before tax lending balances. ––Adjusted revenue of $18.9bn was ––Operating expenses were 1% lower as $0.3bn or 2% lower, as growth in Retail inflation and investments were more than -6%

Commercial Banking (‘CMB’) CMB serves approximately two million driven by increased balances and wider Key events: customers in 54 countries and territories. spreads in Hong Kong. Revenue in Credit ––Despite the fall in global trade, we gained Our customers range from small enterprises and Lending also increased (up $0.1bn), market share in key markets, including trade focused primarily on their domestic markets reflecting continued loan growth in finance in Hong Kong and Singapore, and through to corporates operating globally. the UK. This was partly offset by lower Receivables Finance in the UK. revenue in Global Trade and Receivables It supports our customers with tailored Finance (‘GTRF’). ––HSBC was named ‘2016 Best Trade Bank financial products and services to allow in the World’ by Trade and Forfaiting Review, them to operate efficiently and to grow. ––LICs reduced by $0.4bn as 2016 included lower levels of individually assessed LICs, as and won the ‘Best Global Cash Manager Services provided include working capital, well as a net release of collective allowances for Non-Financial Institutions’ at the term loans, payment services and primarily relating to charges made in the Euromoney Awards 2016. international trade facilitation, among other fourth quarter of 2015, notably in the oil services, as well as expertise in mergers Profit before tax ($bn) and gas sector. 2016 2015 2014 and acquisitions, and access ––Operating expenses reduced compared with Adjusted to financial markets. 2015 as the effect of inflation was more than 6.1 offset by ongoing cost discipline and the 5.4 Revenue growth in a challenging impact of our transformation initiatives. This market 6.1 helped us achieve positive jaws of 2.1%. ––Adjusted profit before tax of $6.1bn ––Management initiatives drove a further was 12% higher than in 2015 primarily Change in adjusted reduction in RWAs of $23bn in 2016, leading profit before tax because of lower LICs, and revenue to a cumulative reduction of $46bn since growth despite challenges in global trade. our Investor Update in 2015, $18bn above ––Adjusted revenue rose by $0.1bn or 1%. our target. This included growth of $0.2bn in GLCM +12%

18 HSBC Holdings plc Strategic Report 2016 Global businesses

Global Banking and Markets (‘GB&M’) GB&M serves approximately 4,100 clients relating to movements on our own credit Key events: in more than 50 countries and territories. spreads on structured liabilities. Excluding ––Through 2016, we continued to focus It supports major government, corporate these, revenue rose $650m or 5%, mainly on delivery of our RWA reductions, and and institutional clients worldwide. Our in Rates and Credit, as we gained market achieved a reduction of $8bn, which product specialists continue to deliver a share in Europe. In GLCM, revenue included $39bn through management comprehensive range of transaction banking, increased as we grew average balances initiatives, partly offset by business growth. financing, advisory, capital markets and risk and benefited from wider spreads. By management services. contrast, revenue fell in Equities, reflecting ––‘World’s Best Investment Bank’ – lower trading volumes in Europe and Asia. Euromoney Awards for Excellence 2016 Markets revenue up despite challenging ––LICs increased (up $0.4bn), predominantly Profit before tax ($bn) market conditions driven by a small number of individually 2016 2015 2014 ––Adjusted profit before tax of $5.6bn was assessed exposures within the oil and gas, Adjusted 5.6 and metals and mining sectors, notably $63m higher than in 2015, as revenue 5.5 increased and operating expenses in the first half of 2016 in the US. 4.9 decreased, reflecting transformational cost ––Operating expenses fell by $93m, reflecting savings, partly offset by an increase in LICs. reduced performance-related pay, Change in adjusted ––Adjusted revenue of $14.9bn rose $353m disciplined cost management, efficiency profit before tax or 2%, despite adverse movements in improvements including technology Credit and Funding valuation adjustments delivery rationalisation, and FTE reductions. compared with favourable movements in These reductions more than offset the 2015 (net effect, down $297m), primarily investments we made in the business. +1%

Global Private Banking (‘GPB’) GPB serves high net worth individuals and ––Adjusted revenue of $1.8bn fell by $0.2bn ––We recognised a $3.2bn write-off relating families, including those with international or 11%, as brokerage and trading activity to the goodwill of the business in Europe, banking needs, through 13 booking centres in both Europe and Asia decreased. This which is not reflected in the adjusted covering our priority markets. reflected the continued impact of client performance. For additional information, repositioning, in addition to adverse market refer to Note 20 on page 238 of the Annual Our products and services include Investment sentiment and unfavourable market Report and Accounts 2016. Management, incorporating advisory, conditions throughout the year. discretionary and brokerage services; Private Profit before tax ($bn) Wealth Solutions, comprising trusts and estate ––Operating expenses decreased by $0.1bn, 2016 2015 2014 planning, designed to protect wealth and primarily as a result of reduced FTEs and Adjusted 0.3 cost-saving initiatives. preserve it for future generations; and 0.4 a full range of private banking services. Key events: 0.5 Lower revenue reflecting repositioning ––There was negative net new money of $17bn, and adverse market conditions reflecting the repositioning of the business. Change in adjusted profit before tax ––Adjusted profit before tax of $0.3bn fell However, we attracted positive net new by $0.1bn as revenue decreased, partly money in key markets targeted for growth, offset by a reduction in costs. notably in the UK, Channel Islands and Hong Kong. -25%

Corporate Centre During 2016, we established the Corporate ($0.5bn) as a result of lower average lending Key events: Centre, to better reflect the way we manage balances and portfolio sales. Revenue ––Completed asset sales of $10bn from our businesses. Corporate Centre comprises also fell in Central Treasury as a result our US CML run-off portfolio. As at Central Treasury, including Balance Sheet of higher adverse fair value movements 31 December 2016, gross lending Management (‘BSM’), our legacy businesses, relating to the economic hedging of balances in this portfolio were $5.7bn. interests in associates and joint ventures, our long-term debt ($0.2bn) and higher central stewardship costs that support our interest expense ($0.2bn). Profit before tax ($bn) 2016 2015 2014 businesses and the UK bank levy. ––LICs were broadly unchanged as increased charges in the US CML portfolio were Adjusted 2.0 Lower revenue due to continued disposal broadly offset by higher releases of credit 2.5 of legacy portfolios and Central Treasury, risk provisions in the legacy credit portfolio. partly offset by a reduction in costs 3.8 ––Operating expenses were $0.8bn lower, ––Adjusted profit before tax of $2.0bn was partly reflecting the benefits of Change in adjusted $0.5bn or 19% lower, driven by a fall in transformational savings in our technology, profit before tax revenue and lower income from associates, operations and other functions, and a lower partly offset by lower operating expenses, UK bank levy charge (down $0.5bn). notably a reduced charge relating to the UK bank levy. ––Income from associates was $0.1bn -19% lower, primarily in Saudi Arabia. ––Revenue fell by $1.2bn, partly driven For further details on the financial performance by reductions in our US CML portfolio of our global businesses, see pages 45 to 51 of the Annual Report and Accounts 2016.

HSBC Holdings plc Strategic Report 2016 19 Strategic Report

Regions Europe Asia We serve clients in Europe with a broad range HSBC’s history is founded on financing trade of services, and facilitate international trade with Asia, and the continent remains central We coordinate and investment. London is the strategic hub to our strategy. We aim to grow our business for GB&M. in China’s Pearl River Delta and the ASEAN activities across region, and we continue to strengthen our Reported loss before tax included leadership position in the internationalisation significant items of $8.4bn global businesses of China’s renminbi currency. and supporting ––Reported loss before tax was $6.8bn. This compared with a reported profit Lower revenue, notably in Wealth functions through before tax of $688m in 2015, with the fall Management, offset by cost driven by a net adverse movement in management initiatives a regional structure. significant items, including and the write-off ––Reported profit before tax was $13.8bn, of goodwill relating to our GPB business, $2.0bn lower than for 2015, notably due adverse fair value movements arising from to the non-recurrence of a gain of $1.4bn changes in credit spreads on our own debt on the disposal of part of our shareholding designated at fair value compared with in Industrial Bank. favourable movements in 2015, and higher ––On an adjusted basis, profit before tax costs to achieve. was broadly unchanged, as a decrease in ––On an adjusted basis, profit before tax of revenue was offset by a reduction in costs. $1.6bn fell by $0.5bn or 26%, as revenue ––Reported revenue fell by $2.0bn, driven decreased by $0.9bn (5%), partly offset by by the non-recurrence of the gain on lower costs (down by $369m or 2%), which Industrial Bank, as noted above, and the included a reduction of $0.5bn related to the adverse effects of currency translation UK bank levy, and a reduction in LICs of differences of $0.3bn. Adjusted revenue $37m (8%). decreased by $253m (1%). Lower adjusted ––Reported revenue fell by $5.0bn, primarily revenue in RBWM resulted from investment as a result of adverse movements of $1.8bn distribution income falling, reflecting weaker arising from changes in credit spread on market sentiment compared with a strong our own debt, compared with favourable performance in the first half of 2015. This movements of $0.8bn in 2015, and the was partly offset by wider deposit spreads adverse effects of currency translation and deposit balance growth. In GB&M, differences ($1.6bn). Adjusted revenue fell adjusted revenue also declined, mainly in by $945m or 5%, reflecting a reduction Equities and Foreign Exchange, partly offset in RBWM of $465m (7%), notably in life by increases in Rates. By contrast, revenue insurance manufacturing in France as in Corporate Centre increased, notably as a result of adverse market updates, and income from Balance Sheet Management, in GPB reflecting the repositioning of the within Central Treasury, rose. business. In Corporate Centre, lower ––Reported costs decreased by $104m, adjusted revenue (down $0.8bn), partly as an increase in costs to achieve of reflected higher adverse fair value $354m was partly offset by the favourable movements of $0.2bn relating to the effects of currency translation differences economic hedging of our long-term debt, of $177m. Adjusted costs decreased by and higher interest expense of $0.2bn. $227m (2%), notably as a result of cost These reductions were partly offset by management initiatives, which more than growth in revenue in GB&M ($0.2bn), offset the effects of inflation and our notably in Rates, GLCM and Global Banking, investment growing our business in China’s and in CMB ($0.2bn), in Credit and Lending. Pearl River Delta and the ASEAN region. ––Reported costs rose by $2.6bn, primarily reflecting a write-off of goodwill relating to our GPB business of $3.2bn and an increase of $1.5bn in costs to achieve, partly offset by the favourable effects of currency translation of $1.3bn. Adjusted costs fell by $0.4bn (2%). Excluding the reduction in the UK bank levy ($0.5bn), costs rose by 1% driven by higher charges from our global service and technology centres due to increased transformation activities relating to IT transformation and process improvement.

Profit before tax ($bn) Profit before tax ($bn) 2016 2015 2016 2015 Reported (6.8) Reported 13.8 0.7 15.8 Adjusted 1.6 Adjusted 14.2 2.1 14.2

20 HSBC Holdings plc Strategic Report 2016 Regions

Middle East and North America Latin America North Africa The US is a key partner in global trade, and We are focusing on growing our business HSBC is the longest-serving international the US dollar remains the primary currency in Mexico, where we are among the top five bank in the region, with one of the largest for global trade and payments. We support banks by assets and our branch network networks there, offering a universal banking our North American customers within the has a market share of more than 10%. On model and playing a vital role in facilitating NAFTA region and around the world, helping 1 July 2016, we completed our sale of international trade. Our priority markets in them grow their businesses. operations in Brazil, but we will continue to provide access to the region for large the region are Saudi Arabia, Egypt and the Continued run-off of the US CML multinational companies. United Arab Emirates (‘UAE’). portfolio led to a fall in revenue, Strong performance reflecting robust partly offset by cost reductions Continued progress in strategic cost management and lower LICs across all businesses initiatives with a strong business performance ––Reported profit before tax was $1.5bn, ––Reported profit before tax was $185m, and was broadly unchanged from 2015. and fell by $429m from 2015, partly ––Reported loss before tax was $1.6bn. reflecting the net adverse effects of This compared with a profit of $310m ––On an adjusted basis, profit before tax significant items, notably higher costs to in 2015, with the loss driven by a number increased by $178m (13%), primarily achieve of $298m. of significant items, primarily the accounting reflecting a reduction in costs of $142m, –– Adjusted profit before tax fell by $208m loss on our sale of Brazil operations which and a decrease in LICs of $135m, partly totalled $1.7bn. offset by lower share of profit in associates (14%) from the continued reduction in and joint ventures. our US CML run-off portfolio. ––On an adjusted basis, profit before tax rose ––Reported revenue fell $592m, and included by $0.4bn due to higher revenue, partly ––Reported revenue fell by $210m, offset by higher LICs and costs. primarily due to the adverse effects of the adverse effects of significant items currency translation differences ($182m). ($57m) and currency translation of $59m. ––Reported revenue fell by $3.9bn, partly Adjusted revenue decreased marginally, Movements in significant items were driven by the accounting loss on our sale mainly reflecting reductions in RBWM in primarily driven by minimal fair value of Brazil operations ($1.7bn). The reported Turkey as we restructured our business movements arising from changes in credit results also include the revenue earned there, and in CMB in the UAE, mainly within spread on our own debt in 2016, compared in our Brazil business of $1.5bn in 2016, GTRF, in part reflecting customer exits. This with favourable movements of $219m compared with $3.3bn in 2015, and the was partly offset by GB&M with growth in in 2015, although these movements were adverse effects of currency translation GLCM, which benefited from interest rate partly offset by a gain of $116m recorded differences of $0.9m. However, adjusted rises across the region, in Global Banking on our sale of Visa US shares in 2016 and revenue was $0.7bn (29%) higher than mainly driven by infrastructure and real lower losses on disposal in our CML run-off for 2015. We increased revenue in RBWM estate fee income in the UAE and Egypt, portfolio of $77m. Adjusted revenue was in Mexico with lending growth and an and Securities Services due to higher $475m lower, primarily from a decrease increase in market share across core retail balances and spreads. in income in the US CML run-off portfolio portfolios, and in Argentina, reflecting wider in Corporate Centre. By contrast, adjusted spreads and growth in deposits, together ––Reported LICs fell by $154m with adjusted revenue in GB&M increased by 6%, notably with higher income from insurance. LICs decreasing by $135m, mainly in CMB as a result of increased income in Rates Revenue also increased in GB&M, partly in the UAE due to lower charges and the and Credit driven by higher client flows due to increased client activity, and in CMB release of provisions taken in 2015, notably and collateralised financing activity. from lending and deposit balance growth. relating to exposures in the oil and gas sector. ––LICs increased by $188m on a reported ––Reported LICs fell by $266m, primarily ––Costs were $137m lower on a reported basis and $191m on an adjusted basis, driven by a reduction in Brazil ($184m) basis, and $142m (9%) lower on an adjusted primarily as a result of a small number of and favourable effects of currency basis, mainly in the UAE and Turkey due individually assessed charges in the mining translation ($120m). By contrast, adjusted to cost-saving initiatives, which more sector in GB&M, as well as higher charges LICs rose by $38m due to higher LICs than offset our continued investment in the US CML run-off portfolio. In CMB, in RBWM in Mexico of $124m reflecting in compliance. there were net collectively assessed growth in unsecured lending and a rise in ––Share of profit in associates and joint releases in 2016, compared with charges delinquency rates, partly offset by lower ventures fell by $70m (14%), mainly in 2015, relating to exposures in the oil LICs in CMB and GB&M. due to higher impairment charges in and gas sector. ––Reported costs fell by $1.7bn, and included Saudi British Bank and lower revenue ––Reported costs fell by $353m, although this $1.1bn of costs relating to Brazil in 2016, in HSBC Saudi Arabia reflecting lower included a rise of $298m in costs to achieve compared with $2.5bn in 2015. These also asset management and investment banking in significant items, partly offset by a included the favourable effects of currency revenues. This was partly offset by revenue reduction in fines, penalties and charges translation differences ($0.6bn). Excluding growth in Saudi British Bank and well- in relation to legal matters of $128m. these factors, adjusted costs increased by managed costs in both associates. Adjusted costs fell by $460m, reflecting $0.3bn (or 16%), although this was below lower staff costs across all businesses. the average rate of inflation in the region as we continued to control our costs.

Profit before tax ($bn) Profit before tax ($bn) Profit before tax ($bn) 2016 2015 2016 2015 2016 2015 Reported 1.5 Reported 0.2 Reported (1.6) 1.5 0.6 0.3 Adjusted 1.6 Adjusted 1.3 Adjusted 0.6 1.4 1.5 0.2

HSBC Holdings plc Strategic Report 2016 21 Strategic Report

How we do business

We conduct our business intent on supporting the sustained success of our customers, people and communities.

Building lasting business relationships

We serve more than 37 million unarranged overdraft charges. In the Complaint types customers around the world, ranging UAE, we automated pricing for foreign (RBWM) from individuals to the largest exchange to provide clients with 24% companies. We are committed to consistent and competitive rates for 34% conducting our business in a way cross-currency payments. We also that delivers fair value to customers enhanced our investment advice and supports them in realising processes and introduced tools their ambitions. and guidelines to make all our 11% customer communication clear Conduct and ensuring and easy to understand. 31% fair outcomes Key These and related initiatives are guided Product – features and policy Operating with high standards of by our Conduct Framework, which Product – fees and charges conduct is central to our long-term focuses on delivering fair customer Other product-related complaints Service complaints success and ability to serve outcomes and improved market customers. In 2016, we continued to integrity through our behaviours. The embed good conduct practice across Conduct Framework guides activities to all our businesses, with a range of strengthen our business, and increases initiatives to further improve the our understanding and awareness of service and experience we offer how the decisions we make affect to customers. customers and other stakeholders. For example, in the UK we have Additional detail on the Conduct Framework is introduced a simplified overdraft available online at www.hsbc.com/conduct. For charging structure with real time further details on regulatory compliance risk and on conduct-related costs included in significant notifications to prompt customers items, see pages 81 and 62, respectively, of the whenever they are at risk of incurring Annual Report and Accounts 2016.

22 HSBC Holdings plc Strategic Report 2016 How we do business

Our values

Our values define who we are as an organisation and make us distinctive. Open We are open to different ideas and cultures, and value diverse perspectives. Connected We are connected to our customers, communities, regulators and each other, caring about individuals and their progress. Dependable We are dependable, standing firm for what is right and delivering on commitments.

Increasing quality of service Innovation and technology retail customers manage all of their finances more effectively through We rely on customer feedback to Our customers increasingly use digital a single interface. help determine where we can make channels to interact, including mobile improvements. In RBWM, we conducted banking. We are investing in innovation Sustainable finance more than 1.6 million customer surveys in and technology to serve customers 2016 across multiple points of customer better and enhance security around We recognise that reducing global interaction, including live online chat. financial transactions and customer carbon dioxide emissions is a critical We also improved the speed and quality data. In 2016, we introduced voice challenge for society. We seek to be of complaint resolution with more than biometric identification technology a leader in managing climate change two-thirds of retail customer complaints for retail customers globally. HSBC risk while developing opportunities resolved on first contact, an improvement is one of the first large-scale global with our customers. We continue to of 9% compared with 2015. users of this technology. facilitate investment in areas such as infrastructure and renewable energy that Customer feedback helps us to identify In the UK, we also launched a mobile help lower carbon dioxide emissions. and address root causes of complaints. application for commercial banking For example, we increased capacity in customers that allows them to digitally In 2016, for example, we helped issue our call centres in response to concerns verify their identity. Since its launch, the largest-ever renewable energy bond about long waiting times in the UK. nearly 80% of the customers able to in Canada to support a solar power We also addressed the most common use this digital channel have chosen farm. In the UK, we provided financing complaints related to fees and charges to do so. We have also adjusted our and asset management expertise to through increased staff training and branch network to reflect changing support deployment of energy smart customer communication. As a result, customer needs and concluded our retail meters throughout the country. In complaints of this type reduced branch review in the UK, with a further December, we established a team significantly in a number of our markets, reduction of 117 branches in 2016. dedicated to sustainable finance within including a 35% reduction in Hong Kong the business in order to engage clients In Hong Kong, we launched a research and a 27% reduction in France. more effectively in assessing and and development lab in partnership with responding to potential impacts from the government to promote technology climate change. development for the financial sector. Areas of focus include biometrics, data analytics, cybersecurity and internet finance. Separately, we are developing a mobile application to help

HSBC Holdings plc Strategic Report 2016 23 Strategic Report | How we do business

255,000 $137m workday hours charitable giving volunteered in 2016

Empowering people

Valuing diversity The programme is supported through Employees (FTEs) by region a behaviour recognition scheme and Building a more diverse and inclusive 7% the launch of Our Charter, a framework workforce is critical to developing a 9% for good decision-making. sustainable and successful business. Our approach aims to increase and To further strengthen our culture and 5% leverage diversity of thought to improve promote positive behaviours, we have workforce agility, enhance our risk developed culture change plans that are 53% management capability, drive innovation regularly discussed in global and local and grow markets. management forums. The plans emphasise enabling a speak-up culture, 26% Our diversity and inclusion ambitions principles-based judgement and other focus on attracting, developing and behaviours that are key to supporting retaining talent that reflects our the Group’s strategic objectives such as customers and the communities where Key managing financial crime risk. In 2016, Asia we do business, and deploying that our employees completed more than Europe talent effectively to anticipate and Middle East and North Africa eight million courses in person or through address expectations. Our seven global North America online learning in order to build skills and Latin America employee networks support this reinforce behaviours more broadly. strategy and focus on gender, age, ethnicity, LGBT+, faith, working parents We have a wellbeing programme that Exchange meeting insights and carers, and ability. We have provides benefits and services to support (% of employees who believe Exchange continued our focus on improving employees’ wellness. For example, we allows them to talk freely about issues gender balance within senior leadership. offer free, confidential counselling to important to them) address personal issues at home or Supporting our employees work. We also allow employees who We believe that if someone is worth have been at HSBC for five years or more talking to, they are worth listening to. to apply to take a sabbatical. Above 84% Employee retention Exchange meetings are our way of all, we aim to provide a working doing that: meetings with no agendas environment where colleagues can talk and where managers are participants openly about wellbeing issues, including rather than leaders. These meetings anxiety and stress. Such measures are 81.7% bring people together to listen to each particularly valuable amid the demands other, and allow people to express of multiple change programmes and Gender diversity statistics Male Female themselves without interruption or financial crime remediation initiatives. rebuttal. Our employee surveys indicate Holdings Board 14 (70%) Whistleblowing 6 (30%) that Exchange participants respond Group Management 11 (92%) positively by 11% more than others We operate a global whistleblowing Board 1 (8%) when asked if there is honest, platform, HSBC Confidential, which Senior 6,551 (75%) two-way communication. allows staff to report matters of concern employees 2,230 (25%) confidentially. During 2016, employees All employees 116,077 (48%) Similarly, our At Our Best programme have raised more than 1,100 cases. 125,230 (52%) reinforces the habits required for a Common themes among the cases strong culture, including asking for raised included concerns regarding staff feedback, being mindful of one’s own behaviour and recruitment practices, emotions and deploying tools for allegations of fraud perpetrated by staff, making better decisions. In 2016, nearly and weaknesses in incentive 100,000 employees attended an At Our arrangements and information security. Best training course, and a further 18,000 managers attended similar training centred on managing teams.

24 HSBC Holdings plc Strategic Report 2016 How we do business

Ensuring sustainable outcomes Tax

Our Global Sustainability function works electricity we use from new wind Taxes paid by region with our global businesses, global and solar sources. In total, we have $0.9bn functions and our regions to manage agreements in place to meet 23% of environmental and social issues that our global electricity needs from these $0.3bn $2.4bn affect the Group and on which we can sources by 2018. $0.2bn have an impact. Key issues are reviewed We report our carbon dioxide emissions on $7.4bn below and further details are available page 62 of the Annual Report and Accounts 2016. online at www.hsbc.com/sustainability. Sustainability performance data for 2016 Sustainable investment will be available in spring 2017. Our Global Research team has expanded $2.8bn $0.8bn its environmental, social and governance Key Climate change research offering, hiring analysts to UK Rest of Europe We have committed to supporting the specifically cover social and governance Asia global shift to a low-carbon economy. drivers, and to cover the fast-growing Middle East and North Africa Our award-winning Global Research green bond market. North America Latin America team published 60 reports on Our Global Asset Management Taxes paid by HSBC relate to HSBC's own sustainability topics in 2016. These business published a new climate tax liabilities including tax on profits earned, included the implications of the Paris change policy to encourage the employer taxes, bank levy and other Agreement on climate change. transition to a low-carbon economy duties/levies such as stamp duty. In light of the Paris Agreement, we and increase the climate resilience reviewed our mining and metals policy, of clients’ investments. Our approach to tax and included restrictions on lending to new thermal coal mines, in addition to Human rights We apply the spirit and the letter of the our existing policies on coal-fired power We have issued our first statement law in all territories where we operate. plants and deforestation. We also added as required by the UK’s Modern We have adopted the UK Code of more specific guidance on human Slavery Act, which can be found Practice for the Taxation of Banks. As a rights impacts that could arise in the at www.hsbc.com. consequence, we pay our fair share of mining sector. tax in the countries in which we operate. We updated our supplier code of We continue to strengthen our For more information about our sustainability conduct to take account of revised processes to help ensure our banking risk policies see page 84 of the Annual Report legislation on modern slavery and and Accounts 2016. services are not associated with any human rights. More than 240 of our arrangements known or suspected to We completed a number of GB&M and largest suppliers have already accepted facilitate tax evasion. HSBC continues CMB client transactions that help lower this code. to apply global initiatives to improve carbon dioxide emissions in areas tax transparency such as: including infrastructure and renewable Community investment ––the US Foreign Account Tax energy. In 2016, HSBC was the third- In 2016, we contributed $137m to Compliance Act (‘FATCA’); ranked bookrunner for green, social charitable programmes, and our and sustainability bonds that exceeded employees volunteered 255,000 ––the OECD Standard for Automatic $250m excluding self-led transactions hours in community activities during Exchange of Financial Account by Dealogic. We also published a report the working day. Information (also known as the on our own green bond, issued in 2015. Common Reporting Standard); Our flagship environmental partnership, ––the Capital Requirements Directive IV We scored the highest grade in a global the HSBC Water Programme, exceeded index run by CDP, a not-for-profit (‘CRD IV’) Country by Country its five-year targets at the end of 2016. Reporting; and organisation that rates companies and Building on this success, we are governments on how they are tackling extending the programme for a further ––the OECD Base Erosion and Profit the climate change challenge. We also three years. Shifting (‘BEPS’) initiative. published an HSBC Statement on We do not expect BEPS or similar Climate Change, providing a summary In 2016, we renewed our commitments initiatives adopted by national of our approach and initiatives. to our two flagship global education programmes, the HSBC Youth governments to adversely impact We are reducing the amount of energy Opportunities Programme and Junior HSBC’s results. Further financial we consume, and increasing the Achievement More than Money, for and tax information for the countries proportion from renewable sources. another three years. These programmes in which we operate will be published By the end of 2016, more than 17% of help young people access education in 2017 in a CRD IV Country by Country our electricity was from wind or solar and realise their potential. report at www.hsbc.com/tax. farms, compared with 9% in 2015. We signed additional agreements in 2016 to increase the percentage of the

HSBC Holdings plc Strategic Report 2016 25 Strategic Report

Risk overview

We actively manage risk to protect and enable the business.

Managing risk

HSBC has maintained a conservative It is articulated in our Risk Appetite participated in the annual stress test and consistent approach to risk Statement, which is approved by by the Bank of England, our lead throughout its history, helping the Board. Key elements include: regulator, and again exceeded its to ensure we protect customers’ requirements comfortably. This reflected ––risks that we accept as part of doing funds, lend responsibly and support our conservative risk appetite, and business, such as credit risk and economies. By carefully aligning our our diversified geographical and market risk; risk appetite to our strategy, we aim to business mix. It also reflected our deliver long-term shareholder returns. ––risks that we incur as part of doing ongoing strategic actions, including business, such as operational risk, the sale of our operations in Brazil, RWA All employees are responsible for the which are actively managed to remain reductions in GB&M and continued management of risk, with the ultimate below an acceptable tolerance; and sales from our US CML run-off portfolio. accountability residing with the Board. ––risks for which we have zero tolerance, Our internal stress test scenarios include We have a strong risk culture, which such as knowingly engaging in potential macroeconomic, geopolitical is embedded through clear and activities where foreseeable and operational risk events, and events consistent communication and reputational risk has not that are applicable to HSBC. The results appropriate training for all employees. been considered. help management understand material A comprehensive risk management risks and consider potential mitigants. framework is applied throughout the We operate a comprehensive stress Group, with effective governance testing programme to help ensure the strength and resilience of HSBC, taking Our risk management framework and risks and corresponding risk management associated with our banking and insurance tools. This framework is underpinned part in regulators’ as well as our own internal stress tests. In 2016, we manufacturing operations are described on pages by our risk culture and reinforced 68 and 82, respectively, of the Annual Report and by the HSBC Values and our Global Accounts 2016. Standards programme. Our Global Risk function oversees Key risk appetite metrics the framework, and is led by the Component Measure Risk appetite 2016 Group Chief Risk Officer, an executive Director. It is independent from the Returns Return on average ordinary shareholders’ equity ≥10.0% 0.8% global businesses, including our sales Capital Common equity tier 1 ratio – CRD IV end point basis ≥11.0% 13.6% and trading functions, to provide HSBC consolidated balance sheet challenge, appropriate oversight, Liquidity advances-to-deposits ratio ≤90% 67.7% and balance in risk/reward decisions. Loan impairment charges as % of advances: RBWM ≤0.50% 0.37% HSBC’s risk appetite defines its Loan impairment desired forward-looking risk profile, Loan impairment charges as % of advances: charges wholesale (CMB, GB&M and GPB) ≤0.45% 0.27% and informs the strategic and financial planning process.

Top and emerging risks

Our top and emerging risks framework risks were to occur, they could have thematic issue have already materialised helps enable us to identify current and a material effect on HSBC. and are therefore reported through other forward-looking risks so that we may reporting channels. In addition, three During 2016, we made two changes take action to either prevent them thematic risks were renamed to better to our top and emerging risks to reflect materialising or limit their effect. reflect the challenges facing HSBC. our assessment of their effect on HSBC. We use the new names in the table Top risks are those that may have a Firstly, ‘IT systems infrastructure and that follows. material impact on the financial results, resilience’ was added as a new risk Our current top and emerging risks are reputation or business model of the due to the need to ensure core banking summarised on the next page and discussed Group in the year ahead. Emerging systems remain robust as digital and in more detail on page 64 of the Annual Report risks are those that have large mobile banking services continue to and Accounts 2016. unknown components and may form evolve. Secondly, ‘Dispute risk’ was Our approach to identifying and monitoring beyond a one-year horizon. If these removed as the key drivers of this top and emerging risks is described on page 70 of the Annual Report and Accounts 2016.

26 HSBC Holdings plc Strategic Report 2016 Risk overview

Risk Trend Mitigants Externally driven Economic outlook We are actively monitoring our wholesale credit and trading portfolios to identify areas of and capital flows stress following the UK electorate’s vote to leave the European Union. We have also undertaken stress tests on our businesses and portfolios to assess potential impacts under a range of possible exit scenarios. Geopolitical risk We have increased physical security at our premises where the risk of terrorism is heightened and have enhanced our major incident response capabilities. Turning of the credit cycle A number of sectors remain under enhanced monitoring with risk appetite and new lending significantly curtailed, including our oil and gas and commodities lending portfolios. Cyber threat and We have brought all cybersecurity initiatives together under one programme in order to unauthorised access strengthen our resilience and defence capabilities. We have revised our cybersecurity risk to systems appetite to reflect our evolving defence approach. Regulatory and technological We are actively engaged with regulators and policy makers to help ensure that new regulatory developments with adverse requirements are considered fully and can be implemented in an effective manner. We have impact on business model established a specialist digital solutions team to lead our response to new technologies. and profitability Regulatory focus on We created a new function, Financial Crime Risk, which brings together all areas of financial conduct of business crime risk management at HSBC and continued to enhance our management of conduct in areas and financial crime including the treatment of potentially vulnerable customers, market surveillance, employee training and performance management. US deferred prosecution We are continuing to take concerted action to remediate anti-money laundering and sanctions agreement and related compliance deficiencies and to implement Global Standards. agreements and consent orders Internally driven IT systems infrastructure We have invested in specialist teams and are upgrading our systems capability to enhance data and resilience and digital capabilities and help ensure strong delivery quality and resilience to customers. Impact of organisational We have increased our focus on resource planning and employee retention and well-being, and change and regulatory are developing initiatives to equip line managers with skills to both manage change and support demands on employees their employees. Execution risk The Group Change Committee monitored the progress of the high priority programmes across the Group that support the strategic actions, reviewing progress on deliverables and addressing resource prioritisation issues as they arose. Third-party risk management To help enable a consistent risk assessment of the third-party services that the Group utilises, we are implementing a framework to provide a holistic view of third-party risks, which assesses third parties against key criteria, combined with associated control monitoring, testing and assurance throughout the third-party lifecycle. Enhanced model risk We have implemented a new global policy on model risk management and updated the model management expectations governance framework to address key internal and regulatory requirements. Additional resources have also been recruited to support the independent model review function. Data management We continued to enhance our data governance, quality and architecture to help enable consistent data aggregation, reporting and management.

Risk heightened during 2016 Risk remained at the same level as 2015 Thematic risk renamed during 2016

HSBC Holdings plc Strategic Report 2016 27 Strategic Report

Remuneration

Our remuneration policy supports the achievement of our strategic objectives by balancing reward for short- and long-term sustainable performance.

Remuneration principles The remuneration strategy for our employees is based on a series of key principles. What we do What we don’t do ––Focus on total compensation ––Reward inappropriate or excessive with a strong link between pay risk taking or short-term performance and performance at the expense of long-term ––Judge not only what is achieved, company sustainability but also how it is achieved, in line ––Use only a formulaic approach to with the HSBC Values determine bonuses for our executives ––Operate a thorough performance ––Award discretionary bonuses to management and HSBC Values employees rated unacceptable against assessment process the HSBC Values and behaviours ––Recognise and reward our employees –– Allow our employees to hedge against for outstanding positive behaviour their unvested or retained awards ––Design our policy to align ––Offer employment contracts with a compensation with long-term notice period of more than 12 months stakeholder interests ––Have pre-arranged individual ––Apply consequence management severance agreements to strengthen the alignment between risk and reward

Embedding our values in our remuneration framework Instilling the right behaviours, and Pay Outcomes driving and encouraging actions that are aligned to organisational values Positive ––Individuals who exhibit exceptional conduct and behaviours adjustments are awarded positive variable pay adjustments during the year. and expectations, are essential. We therefore have a number of programmes Global ––Ensures clear messaging to employees on the impact of any to reinforce our values. consequence inappropriate conduct as part of reward communications, with management consistency in approach and actions taken depending on the policy severity of the misconduct. Global ––Our global recognition programme is now available in more than recognition 50 countries. programme ––In 2016, approximately 600,000 recognitions were made with a total value of $8.1m. Performance ––Employees set objectives, which connect business, team and individual management goals and are guided by expected behaviours aligned to our core values. ––All employees receive a behaviour rating based on their adherence to HSBC Values to ensure performance is judged not only on what is achieved, but also on how it is achieved. ––Employees and managers are encouraged to hold frequent conversations throughout the year, exploring alternative ways to stay connected outside the regular performance management cycle using a mix of informal and formal check-ins on a range of topics, including performance, development and wellbeing.

28 HSBC Holdings plc Strategic Report 2016 Remuneration

How we set our variable pay pool When deciding on the variable pay pool, the Remuneration Committee Our variable pay pool for 2016 considers a number of factors, which are set out in the following table: Our variable pay pool is $3,035m, a decrease of 12.3% compared with 2015. Performance and ––Our variable pay pool takes into account our performance risk appetite in the context of our risk appetite. statement Variable pay pool ($m) 2016 2015 Countercyclical ––To dampen effects of economic cycles, the variable pay 3,035 funding pool’s size has a floor and a ceiling, and we also limit the Group methodology payout ratio as performance increases to prevent the risk 3,462 of inappropriate behaviour. Of which Global 954 Banking and Markets Distribution of ––Our funding methodology ensures that the distribution of 1,086 profits post-tax profit between capital, shareholders and variable pay is appropriate, and that the majority of post-tax profit is allocated to capital and shareholders. Commerciality ––We face challenges arising from being headquartered in and affordability the UK, which has more stringent reward practices. We take into account these challenges in determining the size of the variable pay pool to ensure we can continue to attract and retain talent in key markets.

Remuneration for our executive Directors Our remuneration policy for executive Directors was approved at our The table below shows the amount our 2016 Annual General Meeting and implemented for the first time in 2016. executive Directors earned in 2016. Full details of our remuneration policy can be found online in our For details of Directors’ pay and performance for 2016, Directors’ Remuneration Policy Supplement 2016. see the Directors’ Remuneration Report on page 153 of the Annual Report and Accounts 2016. (Audited)

Non- Base Fixed pay Annual Taxable Notional (in £000) Pension GPSP/LTI 1 Sub-total taxable Total salary allowance incentive benefits returns benefits

2016 1,500 — 450 — — 1,950 100 86 — 2,136 Douglas Flint 2015 1,500 — 750 — — 2,250 151 95 — 2,496

2016 1,250 1,700 375 1,695 — 5,020 557 71 27 5,675 Stuart Gulliver 2015 1,250 1,700 625 1,072 1,969 6,616 662 53 9 7,340

2016 700 950 210 987 — 2,847 52 37 17 2,953 Iain Mackay 2015 700 950 350 1,068 1,101 4,169 54 28 5 4,256

2016 700 950 210 1,005 — 2,865 15 38 18 2,936 Marc Moses 2015 700 950 350 827 1,101 3,928 6 29 5 3,968

1 Executive Directors received Group Performance Share Plan (‘GPSP’) awards for 2015. For 2016, executive Directors will receive a long-term incentive (‘LTI’) award, with a performance period ending in 2019, which will be included in the single figure table for the financial year ending on 31 December 2019. If target performance is achieved for this award, LTI payout would be 50% of grant value. In this case, the 2016 total single figure for year-on-year comparison would be (in £000) £7,670 for Stuart Gulliver, £4,069 for Iain Mackay and £4,052 for Marc Moses.

HSBC Holdings plc Strategic Report 2016 29 Strategic Report

Supplementary information

Status of the Strategic Copies of the Annual Report and Accounts 2016 Report 2016 This is a part of HSBC Holdings plc’s Further copies of the Strategic Report US Communications Annual Report and Accounts 2016 and 2016 and the Annual Report and HSBC Bank USA, N.A. is not the Group’s statutory accounts. Accounts 2016 may be obtained from: 1 West 39th Street, 9th Floor It does not contain the full text of the New York, NY 10018 External Affairs Directors’ Report, and it does not USA HSBC Holdings plc contain sufficient information to allow 8 Canada Square The Strategic Report 2016 and the as full an understanding of the results London E14 5HQ Annual Report and Accounts 2016 and state of affairs of the Group and United Kingdom may also be downloaded from the of its policies and arrangements HSBC website, www.hsbc.com. concerning Directors’ remuneration Communications (Asia) as would be provided by the full The Hongkong and Shanghai Annual Report and Accounts 2016. Banking Corporation Limited 1 Queen’s Road Central Hong Kong

Shareholder enquiries and communications Enquiries Any enquiries relating to your share certificates or dividend cheques The Registrars offer an online facility, shareholdings on the share register, should be sent to the Registrars at Investor Centre, which enables for example, transfers of shares, an address given below. shareholders to manage their change of name or address, lost shareholding electronically.

Principal Register Hong Kong Overseas Branch Register Holders of shares through Computershare Investor Services PLC Computershare Hong Kong Investor Euroclear France The Pavilions Services Limited HSBC France Bridgwater Road Rooms 1712-1716, 17th Floor 103 avenue des Champs Elysées Bristol BS99 6ZZ Hopewell Centre 75419 Paris Cedex 08 United Kingdom 183 Queen’s Road East France Hong Kong Telephone: +44 (0) 870 702 0137 Telephone: +33 1 40 70 22 56 Telephone: +852 2862 8555 Email via website: Email: ost-agence-des-titres-hsbc-reims. www.investorcentre.co.uk/contactus Email: [email protected] [email protected] Investor Centre: Investor Centre: www.investorcentre.com/hk Website: www.hsbc.fr www.investorcentre.co.uk

Holders of ADSs Bermuda Overseas Branch Register The Bank of New York Mellon Investor Relations Team Depositary Receipts HSBC Bank Bermuda Limited PO Box 43006 6 Front Street Providence Hamilton HM 11 RI 02940-3006 Bermuda USA Telephone: +1 441 299 6737 Telephone (US): +1 877 283 5786 Email: [email protected] Telephone (international): +1 201 680 6825 Investor Centre: Email: [email protected] www.investorcentre.co.uk/bm Website: www.bnymellon.com/shareowner

30 HSBC Holdings plc Strategic Report 2016 Supplementary information

Shareholder enquiries and communications (continued) Enquiries (continued) Persons whose shares are held on example, your stockbroker, investment administration thereof) must continue their behalf by another person may manager, custodian or other person to be directed to the registered have been nominated to receive who manages the investment on shareholder and not HSBC’s Registrars. communications from HSBC pursuant your behalf). The only exception is where HSBC, to section 146 of the UK Companies Act in exercising one of its powers under 2006 (‘nominated person’). The main Any changes or queries relating the UK Companies Act 2006, writes point of contact for a nominated person to a nominated person’s personal to nominated persons directly for remains the registered shareholder (for details and holding (including any a response.

Electronic communications Shareholders may at any time choose corporate communications in printed to section 146 of the UK Companies to receive corporate communications form, please write or send an email Act 2006 (‘nominated person’). The in printed form or to receive notifications (quoting your shareholder reference main point of contact for a nominated of their availability on HSBC’s website. number) to the appropriate Registrars person remains the registered To receive future notifications of at an address given on the previous shareholder (for example, your the availability of a corporate page. Printed copies will be provided stockbroker, investment manager, communication on HSBC’s website without charge. custodian or other person who manages the investment on your behalf). Any by email, or revoke or amend an A Chinese translation of this and future changes or queries relating to a instruction to receive such notifications documents may be obtained on request nominated person’s personal details and by email, go to www.hsbc.com/ from the Registrars. Please also contact holding (including any administration ecomms. If you provide an email the Registrars if you have received a thereof) must continue to be directed address to receive electronic Chinese translation of this document to the registered shareholder and not communications from HSBC, we will and do not wish to receive such HSBC’s Registrars. The only exception also send notifications of your dividend translations in future. entitlements by email. If you received is where HSBC, in exercising one of its a notification of the availability of this Persons whose shares are held on powers under the UK Companies Act document on HSBC’s website and their behalf by another person may 2006, writes to nominated persons would like to receive a printed copy, have been nominated to receive directly for a response. or if you would like to receive future communications from HSBC pursuant

HSBC Holdings plc Strategic Report 2016 31 Strategic Report

Report of the auditors The auditors’ report on the full accounts Report 2016 and the Annual Report and for the year ended 31 December 2016 Accounts 2016 and the Directors’ Report was unqualified, and their statement are consistent with the accounts) of the under section 496 (whether the Strategic Companies Act 2006 was unqualified.

Certain defined terms Unless the context requires otherwise, Republic of China is referred to as HSBC Holdings classified as equity. ‘HSBC Holdings’ means HSBC Holdings ‘Hong Kong’. When used in the terms The abbreviations ‘$m’, ‘$bn’ and ‘$tn’ plc and ‘HSBC’, the ‘Group’, ‘we’, ‘us’ ‘shareholders’ equity’ and ‘total represent millions, billions (thousands and ‘our’ refer to HSBC Holdings shareholders’ equity’, ‘shareholders’ of millions) and trillions of US dollars, together with its subsidiaries. Within means holders of HSBC Holdings respectively. this document, the Hong Kong Special ordinary shares and those preference Administrative Region of the People’s shares and capital securities issued by

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