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HSBC Holdings plc (HBC)

Q2 2011 Earnings Call

August 01, 2011 6:45 am ET


Iain MaCkay -

Stuart Gulliver - Chairman of Group Management Board, Group Chief Executive, Executive Director, Chairman of Europe Middle East & Global Businesses, Chairman of HSBC Private Banking Holdings (Suisse) SA, Chairman of HSBC Bank Middle East Limited, Chairman of HSBC France, Chairman of The Hongkong & Shanghai Banking Corporation Limited and Head of Investment Bank

Douglas Flint - Chairman, Member of Group Management Board, Chairman of Nomination Committee, Chief Executive of Global Asset Management Arm and Director of HSBC Finance Corporation


Jon Kirk - Redburn Partners LLP

Leigh Goodwin - Citigroup Inc

Alastair Ryan - UBS Investment Bank

Cormac Leech - Canaccord Genuity

Thomas Rayner - Exane BNP Paribas

Sunil Garg - JP Morgan Chase & Co

Simon Samuels - Barclays Capital

Robert Law - Nomura Securities Co. Ltd.

Rohith Chandra-Rajan - Barclays Capital

Michael Trippitt - Oriel Securities Ltd.

Michael Helsby - BofA Merrill Lynch

Christopher Wheeler - Mediobanca Securities

Ian Smillie - RBS Research



This conference call and subsequent discussion may contain certain forward-looking statements with respect to the financial condition, results of operations and business of the group. These forward-looking statements represent the group's expectations or belief concerning future events and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those exposed (sic) [expressed] or implied in such statements.

Additional detailed information concerning important factors that could cause actual results to differ materially is available in our interim results statement. Past performance cannot be relied on as a guide to future performance. [Operator Instructions]

Douglas Flint

Good evening from Hong Kong, and a very warm welcome to welcome to our 2011 interim results webcast and conference call. I'm Douglas Flint, Group Chairman. With me are the Group Chief Executive, Stuart Gulliver; and the Group Finance Director, Iain Mackay. Iain is to take you briefly through HSBC's encouraging first-half performance, hopefully, to allow maximum time for your questions. Stuart will start with the highlights. Iain will then run through the financials, then Stuart will finish by looking in more detail business performance.

Before I hand over to Stuart, can I just say a couple of words about the geopolitical and regulatory situation? It goes without saying that the current geopolitical and regulatory environment remained a challenging backdrop against which to operate and to plan the business.

We are continuing to take our responsibility very seriously, indeed, and are engaging constructively and transparently with national or international assets to improve financial stability and the resilience of the international financial system. At the same time, we're emphasizing the need to maintain and protect the supplied credit to the real economy to preserve the growth agenda. The key point is that we keep wanting to continue to make is that there needs to be an increasingly robust cost-benefit justification for each incremental measure on top of the already considerable aggregate reform program already in place. Those of you on the webcast, could you take a moment to read the usual cautionary words on your screens, and for the avoidance of doubt, all the dollar figures in the presentation are in U.S. dollars unless stated otherwise.

Stuart, over to you.

Stuart Gulliver

Thanks, Douglas. Solid improvement in financial performance in the first half of 2011, and we've launched a range of initiatives to improve capital allocation, to improve cost efficiency and to grow the business in the right direction. And we've seen an improvement in revenue trends with higher revenues in each of our fast-growing regions, going into the second half and the position of financial strength and with capacity to grow.

Reported profit before tax increased 3% to $11.5 billion. Earnings per share increased 34% to $0.51 per share. The dividend in effect of the period were 12.5% higher as we signaled earlier in the year. On the right hand side of the slide, you can see our key financial ratios. Reported return on equity of 12.3% and the cost efficiency ratio for the half year rose compared to the first half of 2010 to 57.5%, but declined from 59.9% in the second half. Significantly, the cost efficiency ratio in the second quarter was lower than each of the previous 3 quarters. Advance-deposit ratio rose to 78.7% from 78.1% at the end of 2010, bringing considerable room for further growth. We continue to generate capital, strengthening our core Tier 1 ratio to 10.8%.

Now Iain will take you through the financials.

Iain MaCkay

Thank you, Stuart. I'll start with our headline numbers on a reported basis. There are 4 points I want to highlight. Profit before tax, excluding changes in the fair value of own of debt increased by 16% or $1.6 billion to $11.6 billion. Revenue growth in certain key markets, combined with continuing reductions in loan impairment charges, was partially offset by increased costs. Including the unfavorable change in fair value of own debt, reported profit was up 3%. The tax rate benefited from the non-recurrence of significant taxable gain in the first half of 2010, as well as deferred tax assets recognized in the U.S. during the first quarter of 2011.

Underlying financial performance also improved. EBT was significantly up against both halves of last year, 13% against the first half and 20% against the second. On this slide, we've drawn out the notable factors from underlying business performance, taking the income line first. There are number of economic hedges in place to manage interest rates and currency characteristics of senior unsubordinated debt instruments issued by HSBC Holdings and certain of its subsidiaries. These do not qualify for hedge accounting and generated adverse changes of $1.1 billion in the first half of last year with $314 million in the first half of this. Importantly, these have no impact on cash flow or economic performance.

Turning to the refinement of our present value of in-force assets within our insurance businesses, we recognized a gain of $243 million in the period. Turning now to expense line notable items. These included $611 million of provisions in the U.K. relating to customer redress programs mainly PPI, a pension being of $587 million in the U.K. as we re-base indexation against the consumer price index as opposed to the retail price index. With $477 million charge against restructuring costs, notably including the impairment of software development costs mainly within suspended One HSBC programs, minding for some $270 million. Finally, you can see the effect of the tax items I've already mentioned.

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