HSBC Holdings plc Annual Report and Accounts 2016 WorldReginfo - 917b38ff-bbdf-41ec-afbd-e800eab87e1e 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. WorldReginfo - 917b38ff-bbdf-41ec-afbd-e800eab87e1e Contents As a reminder Strategic Report 2 Highlights An overview of how we are structured, 4 Group Chairman’s Statement Reporting currency what we do and where, our strategic 7 Group Chief Executive’s Review We use US dollars. 10 Our strategy actions, the principal risks we face, and 12 Strategic actions Adjusted measures high-level performance information. The 14 Financial overview We supplement our IFRS section is introduced by both the Group 18 Global businesses figures with adjusted Chairman and the Group Chief Executive, 20 Regions measures used by and also explains the role of the Board. 22 How we do business 25 Tax management internally. This Strategic Report was approved 26 Risk overview These measures are by the Board on 21 February 2017. 28 Remuneration Strategic Report highlighted with the following symbol: Douglas Flint, Group Chairman Further explanation may be found on page 30. Financial Review 30 Financial summary Detailed reporting of our financial 44 Global businesses and Unless stated otherwise, performance, at Group level as well geographical regions as within our matrix structure. It also 64 Risk risk-weighted assets 127 Capital and capital are calculated includes our full risk report and and presented on a reporting on how we manage capital. transitional CRD IV basis as implemented by the Prudential Regulation Authority. Financial Review Our photo Corporate Governance 132 Corporate Governance Report competition Details of our Board of Directors 133 Biographies of Directors and senior management, and our and senior management winners 138 Board of Directors approach to corporate governance 140 Board committees In 2016, we ran a Group- and remuneration. 145 Internal control wide photo competition 146 Going concern and viability 147 Share capital and other disclosures which attracted over 6,200 150 Employees submissions from 1,100 153 Directors’ Remuneration Report employees. The joint overall 173 Directors’ Responsibility Statement winning photos are featured in this report. The image Corporate Governance on the inside front cover shows a rice farmer at harvest time in north-east Vietnam, and the photo Financial Statements 174 Report of the Independent on the inside back cover Our financial statements and related Auditors was taken at sunrise at notes and reports. 183 Financial Statements Situ (Lake) Patenggang, 194 Notes on the Financial Statements West Java, Indonesia. Financial Statements Cover image The Hong Kong-Zhuhai-Macau Other Information 274 Shareholder information Bridge is one of the most ambitious Important information for our 279 Forward-looking statements infrastructure projects in the Pearl shareholders, including contact and Certain defined terms River Delta. It will link three key information. Like any industry 280 Abbreviations cities, cutting transport costs and travelling times, and boosting and company, we have our set economic development. HSBC has of abbreviations and terminology. extended a HK$700m receivables Accordingly, we provide an finance facility to one of the explanation of the abbreviations companies building the bridge. used. A glossary of key terms Receivables finance is an area is available online at where HSBC has particular www.hsbc.com/investor-relations. expertise, and this facility is Information Shareholder the largest it has provided for infrastructure in the region. WorldReginfo - 917b38ff-bbdf-41ec-afbd-e800eab87e1e HSBC Holdings plc Annual Report and Accounts 2016 1 Strategic Report Highlights We are one of the most international banking and financial services organisations in the world. Group For year ended 31 Dec 2016 Reported profit before tax Adjusted profit before tax Reported revenue ($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. by $40m. – We increased market share in – 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, expenses. In 2016, we – Reported profit before 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 WorldReginfo - 917b38ff-bbdf-41ec-afbd-e800eab87e1e 2 HSBC Holdings plc Annual Report and Accounts 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 Strategic Report 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. Financial Review 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 Corporate Governance $115.1bn $275.9bn $300.4bn $15.3bn Geographical regions Financial Statements Reported profit/(loss) before tax Adjusted profit before tax Risk-weighted assets* ($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. Shareholder Information Information Shareholder WorldReginfo - 917b38ff-bbdf-41ec-afbd-e800eab87e1e HSBC Holdings plc Annual Report and Accounts 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.