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HSBC Holdings (HBC)

2012 Earnings Call

March 04, 2013 6:00 am ET

Executives

Douglas Jardine Flint - Group Chairman

Stuart T. Gulliver - Chairman of Group Management Board, Group Chief Executive Officer and Executive Director

Iain James MacKay - Group Finance Director, Member of Group Management Board and Director

Analysts

Chirantan Barua - Sanford C. Bernstein & Co., LLC., Research Division

Raul Sinha - JP Morgan Chase & Co, Research Division

Chris Manners - Morgan Stanley, Research Division

Rohith Chandra-Rajan - Barclays Capital, Research Division

Chintan Joshi - Nomura Securities Co. Ltd., Research Division

Thomas Rayner - Exane BNP Paribas, Research Division

John-Paul Crutchley - UBS Investment Bank, Research Division

Ronit Ghose - Citigroup Inc, Research Division

Christopher Wheeler - Mediobanca Securities, Research Division

Michael Helsby - BofA Merrill Lynch, Research Division

Presentation

Operator

Good morning, ladies and gentlemen, and welcome to the Investors and Analyst Conference Call for HSBC Holdings plc's 2012 Annual Results. For your information, this conference is being recorded. At this time, I will hand over to your host, Mr. Douglas Flint, Group Chairman.

Douglas Jardine Flint

Hello, and welcome. With me are Stuart Gulliver, the Group Chief Executive; and Iain MacKay, the Group Finance Director.

Before we start, I'd like to say that the board feels that there is a great deal to be positive about in the group's performance in 2012. We also start 2013 in a strong position, with our capital base already in line with our current understanding of where we need to be in complying with Basel III and state[ph] as quantified by our regulator. Stuart and his team has made considerable progress in delivering on the strategy that was set out in May 2011 in shaping the group, positioning the business for organic growth and continuing to build long-term shareholder value. That progress, together with the capital position, has allowed the board not only to increase the dividend per share in respect of the year by 10% but to plan to increase the first 3 interim dividends per share in 2013 by 11% to $0.10 per share.

Stuart will now talk you through the highlights for the year. Iain will take a detailed look at financial performance. And finally, Stuart will cover strategy in more detail. Stuart, over to you.

Stuart T. Gulliver

Thanks, Douglas. So I want to start by pulling out the key points. At the Investor Day in May 2011, we undertook to grow, simplify and restructure the business and to strengthen our capital base. And we've delivered on all of these initiatives in 2012, and we're very well positioned to grow organically in 2013. Underlying revenue grew by 7% in 2012, particularly in Global Banking and Markets and in Commercial Banking. Revenues from the closer collaboration between Global Banking and Markets and Commercial Banking increased by 5%. We also continued to simplify and restructure HSBC, announcing the sale or closure of 26 businesses or non-core investments in 2012 and another 4 already in 2013, bringing the total to 47 disposals and closures since May of 2011. We also continued to eliminate unnecessary bureaucracy and streamline internal processes. This achieved an additional $2 billion in sustainable cost savings, taking our total annualized cost savings to $3.6 billion. It means that we surpassed the cumulative savings target that we set for ourselves in May 2011 1 year early. Our underlying cost did, in fact, grow by 11% to $49.1 -- $41.9 billion, largely due to $5.7 billion of notable items and considerable organic investment back into the business. Reported profit before tax was $20.6 billion, down 6% on 2011. But, of course, this included $5.2 billion of adverse fair value movements on our own debt. Underlying profit before tax was $16.4 billion, up 18% on 2011 and it's on an underlying basis that we measure our performance.

Let me explain the underlying. To be clear, the underlying number excludes the impact of fair value movements on our own debt and foreign currency translation differences, but it also excludes disposals and acquisitions, as well as the operating results for the businesses acquired or disposed off during the period. It does not exclude notable cost items. And those notable items affecting both reported and, therefore, the underlying numbers include fines and penalties of $1.9 billion paid to the U.S. authorities in relation to past inadequate compliance with anti-money laundering and sanction laws and cost of $2.3 billion in respect of U.K. customer redress. So the underlying is up 18% including those notable items.

Our return on equity at 8.4% was affected by a combination of the notable items, a higher tax charge and $5.2 billion of adverse movements in the fair value of our own debt. The fair value of our own debt compares with a favorable movement of $3.9 billion in 2011, so the total swing between the 2 years, 2011, 2012, on fair value of our own debt of $9.1 billion. Really importantly, our capital base has strengthened considerably. At the end of 2012, we had a core tier 1 capital ratio of 12.3%, up from 10.1% in December 2011. And this is driven by capital generation and a reduction in risk-weighted assets following disposals and the de-risking of the business. So we're going to have a Basel III common equity tier 1 ratio of 10.3% after some management actions in 2013, which we have certainty on, which gives us extremely strong capacity for organic growth. As a result, dividends declared in respect to 2012 were $0.45 per ordinary share, up 10% on 2011 with a fourth interim dividend for 2012 of $0.18 per ordinary share. The total dividend declared was $8.3 billion. And because we believe we're fully Basel-III-compliant, we have the confidence therefore to set the first 3 dividends for 2013 at a planned $0.10 per ordinary share, up 11%.

Here are the financial highlights, which reiterate much of what I've already covered. The main point here is that based on our current understanding, we're already well -- really well placed to comply with full Basel III capital rules.

This slide then illustrates where we're seeing growth, notably in Hong Kong, India, Canada and Brazil. Now the result in the Rest of Asia-Pacific was affected by adverse fair value movements of $553 million on the contingent forward sale contract related to the Ping An deal. This effect was offset when the Ping An deal completed in February of this year. You can clearly see the impact of customer redress provisions in Europe, particularly in the U.K. And the North American results benefited from lower loan impairment charges, partially offset by the fines and penalties levied by the U.S. authorities. These numbers also show a clear progress in the runoff of our legacy portfolios in the United States.

I will now hand over to Iain to talk through the financial performance.

Iain James MacKay

Thanks, Stuart. This slide shows the reported results, highlighting growth in revenues, a significant improvement in loan impairment charges, increased costs mainly due to notable items, considerable adverse movements in fair value from changes in credit spread in our own debt and an increase in the effective tax rate.

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