HSBC Holdings plc Annual Report and Accounts 2019 Connecting customers to opportunities HSBC aims 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. We aim to deliver long-term value for our shareholders through... ...our extensive ...our access to ...and our balance sheet international network... high-growth markets... strength. We are a leading international Our global footprint and market- We continue to maintain a bank, serving more than leading transaction banking strong capital, funding and 40 million personal, wealth franchise provide extensive liquidity position with a and corporate customers. access to faster-growing diversified business model. markets, particularly in Asia and the Middle East. Reported revenue by global business RBWM 41% CMB 27% GB&M 27% GPB 3% Corporate Centre 2% Total assets Common equity tier 1 ratio Reported revenue by region $2.7tn 14.7% (2018: $2.6tn) (2018: 14.0%) Asia 49% Europe 29% North America 11% Latin America 5% Middle East and North Africa 6% HSBC Holdings plc Annual Report and Accounts 2019 Contents Strategic report 2 Highlights 4 HSBC at a glance 6 Group Chairman’s statement 8 Group Chief Executive’s review 10 Global trends and strategic advantages 12 Delivering our strategy 14 How we do business 26 Financial overview 30 Global businesses 38 Risk overview 41 Long-term viability and going concern statement 42 Board engagement with our stakeholders This Strategic Report was approved by the Board 44 Remuneration on 18 February 2020. Financial review 47 Financial summary 56 Global businesses and Mark E Tucker geographical regions Group Chairman 72 Other information 73 Risk 152 Capital A reminder The currency we report in is US dollars. Corporate governance 156 Corporate governance report Adjusted measures 158 Biographies of Directors and We supplement our IFRS figures with senior management alternative performance measures used by 171 Board committees management internally. These measures are 184 Directors’ remuneration report highlighted with the following symbol: 211 Share capital and other disclosures Further explanation may be found on page 28. 214 Internal control 215 Employees 219 Directors’ responsibility statement None of the websites referred to in this Annual Financial statements Report and Accounts 2019 (including where a link is provided), and none of the information 220 Report of the independent auditors contained on such websites, are incorporated 228 Financial statements by reference in this report. 240 Notes on the financial statements Additional information HSBC Holdings plc Cover image: Connecting Annual Report and Accounts 2019 our customers through 323 Shareholder information blockchain 327 Forward-looking statements/ For centuries, international Certain defined terms trade has been reliant on paper 329 Abbreviations documents – from letters of credit to bills of lading. Today, HSBC is leading the way towards paperless trade finance. We are working with our clients, financial institutions and fintech partners to pioneer digitisation of trade, which has made doing business simpler and faster, improving the working capital efficiency for our customers. Paperless trade is becoming a reality. We have used a blockchain-based letter of credit platform, built on R3 Corda blockchain technology, to complete digital trade transactions for shipments of iron ore from Australia to mainland China, and soybeans from Argentina to Malaysia. By investing in digital solutions such as blockchain technology, we can help to increase the velocity of trade globally. HSBC Holdings plc Annual Report and Accounts 2019 1 Strategic report Highlights The macroeconomic environment and interest rate outlook have changed since we set our strategic priorities and financial targets in June 2018. While much of our business has held up Financial performance 2020 business update well, particularly in Asia and the markets served by our international network, (vs 2018) underperformance in other areas had a negative impact on our returns. – Reported profit attributable to ordinary In our business update, we have set out shareholders down 53% to $6.0bn, our plans to improve the Group’s returns We have tempered our revenue growth materially impacted by a goodwill by 2022 to allow us to meet our growth expectations and adjusted our business plan impairment of $7.3bn. Reported profit ambition and sustain our current dividend accordingly. Our 2020 business update aims before tax down 33% to $13.3bn. policy. We intend to reduce capital and costs to increase returns for investors, create the Reported revenue up 4% and reported in our underperforming businesses to enable capacity to invest in the future and build operating expenses up 22% due to a continued investment in businesses with a platform for sustainable growth. goodwill impairment of $7.3bn. stronger returns and growth prospects. – Goodwill impairment of $7.3bn, We also plan to simplify our complex We continue to monitor the recent primarily $4.0bn related to Global organisational structure, including a reduction coronavirus outbreak, which is causing Banking and Markets (‘GB&M’) and in Group and central costs, while improving economic disruption in Hong Kong $2.5bn in Commercial Banking (‘CMB’) the capital efficiency of the Group. and mainland China and may impact in Europe. This reflected lower long-term The Group will target: performance in 2020. economic growth rate assumptions, and additionally for GB&M, the planned – a gross risk-weighted asset (‘RWA’) reshaping of the business. reduction of over $100bn by the end Delivery against our June – Adjusted revenue up 5.9% to $55.4bn of 2022, with these RWAs to be reinvested, 2018 financial targets and adjusted profit before tax up 5% resulting in broadly flat RWAs between to $22.2bn, reflecting good revenue 2019 and 2022; growth in Retail Banking and Wealth – a reduced adjusted cost base of $31bn Return on average tangible equity Management (‘RBWM’), Global Private or below in 2022, underpinned by a new Banking (‘GPB’) and CMB, together cost reduction plan of $4.5bn; and with improved cost control. – a reported RoTE in the range of 10% – Adjusted revenue in Asia up 7% to $30.5bn 8.4% to 12% in 2022, with the full benefit of and adjusted profit before tax up 6% Target: >11% by 2020 our cost reductions and redeployed RWAs to $18.6bn. Within this, there was a resilient (2018: 8.6%) flowing into subsequent years. performance in Hong Kong, with adjusted profit before tax up 5% to $12.1bn. To achieve our targets, we expect to incur Adjusted jaws – Adjusted expected credit losses and restructuring costs of around $6bn and asset other credit impairment charges (‘ECL’) disposal costs of around $1.2bn during up $1.1bn to $2.8bn from higher charges the period to 2022, with the majority of in CMB and RBWM. restructuring costs incurred in 2020 and 2021. 3.1% – Positive adjusted jaws of 3.1%, Target: positive adjusted jaws reflecting improving cost discipline. We intend to sustain the dividend and (2018: (1.2)%) Adjusted operating expense growth maintain a common equity tier 1 (‘CET1’) of 2.8%, well below the growth rate in ratio in the range of 14% to 15%, and 2018 (compared with 2017). plan to be at the top end of this range by the end of 2022. Dividends per ordinary share – Return on average tangible equity in respect of 2019 (‘RoTE’) down 20 basis points (‘bps’) We plan to suspend share buy-backs to 8.4%, supported by a resilient Hong for 2020 and 2021, given the high level Kong performance. of restructuring expected to be undertaken $0.51 – Earnings per share of $0.30, including over the next two years. We intend to a $0.36 per share impact of the goodwill return to neutralising scrip dividend Target: sustain impairment. issuance from 2022 onwards. (2018: $0.51) Further explanation of performance against Group financial targets may be found on page 26. 2 HSBC Holdings plc Annual Report and Accounts 2019 Highlights Strategic report Key financial metrics For the year ended Reported results 2019 2018 2017 Reported revenue ($m) 56,098 53,780 51,445 Reported profit before tax ($m)1 13,347 19,890 17,167 Reported profit after tax ($m)1 8,708 15,025 11,879 Profit attributable to the ordinary shareholders of the parent company ($m)1 5,969 12,608 9,683 Basic earnings per share ($)1 0.30 0.63 0.48 Diluted earnings per share ($)1 0.30 0.63 0.48 Return on average ordinary shareholders’ equity (%)1 3.6 7.7 5.9 Return on average tangible equity (%) 8.4 8.6 6.8 Net interest margin (%) 1.58 1.66 1.63 Adjusted results Adjusted revenue ($m) 55,409 52,331 50,173 Adjusted profit before tax ($m) 22,212 21,182 20,556 Adjusted jaws (%) 3.1 (1.2) 1.0 Cost efficiency ratio (%) 59.2 61.0 60.3 Expected credit losses and other credit impairment charges (‘ECL’) as % of average 0.27 0.17 0.18 gross loans and advances to customers (%) At 31 December Balance sheet 2019 2018 2017 Total assets ($m) 2,715,152 2,558,124 2,521,771 Net loans and advances to customers ($m) 1,036,743 981,696 962,964 Customer accounts ($m) 1,439,115 1,362,643 1,364,462 Average interest-earning assets ($m) 1,922,822 1,839,346 1,726,120 Loans and advances to customers as % of customer accounts (%) 72.0 72.0 70.6 Total shareholders’ equity ($m) 183,955 186,253 190,250 Tangible ordinary shareholders’ equity ($m) 144,144 140,056 144,915 Net asset value per ordinary share at period end ($)2 8.00 8.13 8.35 Tangible net asset value per ordinary share at period