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HSBC Holdings plc (HBC)

Q4 2011 and Full Year 2011 Earnings Call

February 27, 2012 6:00 am ET

Executives

Douglas Jardine Flint - Chairman, Chief Executive of Global Asset Management Arm and Director of Hsbc Finance Corporation

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

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

Analysts

Alastair Ryan - UBS Investment Bank, Research Division

Chris Manners - Morgan Stanley, Research Division

Rohith Chandra-Rajan - Barclays Capital, Research Division

Michael Helsby - BofA Merrill Lynch, Research Division

Christopher Wheeler - Mediobanca Securities, Research Division

Ian Gordon - Investec Securities (UK), Research Division

Ronit Ghose - Citigroup Inc, Research Division

Bruce Packard - Seymour Pierce Limited, Research Division

Alistair Scarff - BofA Merrill Lynch, Research Division

Robert Law - Nomura Securities Co. Ltd., Research Division

Gary Greenwood - Shore Capital Group Ltd., Research Division

Thomas Rayner - Exane BNP Paribas, Research Division

Raul Sinha - JP Morgan Chase & Co, Research Division

Presentation

Operator

Good morning, ladies and gentlemen, and welcome to the Investors and Analyst Conference Call for HSBC Holdings plc's 2011 Annual Results. For your information, this conference call is being recorded. And at this time I'll hand the call over to your host for today, Mr. Douglas Flint, Group Chairman.

Douglas Jardine Flint

Thank you very much. Hello, and a very warm welcome to everyone who has joined us today. As I was introduced, this is -- it's Douglas Flint, Group Chairman. With me is Stuart Gulliver, Group Chief Executive, and Iain Mackay, Group Finance Director.

Before we start, can I just say that at our board meeting on Friday, both I and the board expressed to management our satisfaction with the progress made during 2011. We have begun to execute the strategy that we set out in May last year, reshaping the group, positioning the business for growth and continuing to build sustainable long-term value for shareholders.

In a moment, Stuart will talk through you the highlights for the year, then Iain will take a detailed look at our financial performance. And finally, Stuart will cover the performance of the business against our strategic objectives in more detail.

Stuart, over to you.

Stuart T. Gulliver

Thanks, Douglas. We'll cover the detailed financials in a moment, but I want to start by pulling out the key points for 2011. As you can see, reported profit before tax was $21.9 billion, up 15% on 2010. But on an underlying basis, profit before tax was $17.7 billion, down 6% on 2010. We have increased dividends paid to our shareholders by 14% to $0.41, paying $7.3 billion to our owners. And as you will see later on, this is less than the amount we retained to strengthen the capital base of the bank and reinvest for the future, but more than the total variable pay for all of our staff worldwide. We think these proportions are correct. We also increased earnings per share by 26% to $0.92 compared with 2010.

Moving onto the key highlights. First, you may recall we announced an overhaul and redesign of HSBC last May, and I'm pleased to be able to say that we gained traction in the first 7 months of a 3-year journey, designed to simplify the structure and improve the management and control of the firm thereby improving returns and positioning HSBC for growth. We got off to a quick start, announcing the disposal or closure of 19 nonstrategic businesses, of which 16 were during 2011, including 2 large transactions in the United States. When completed, these transactions should represent a reduction of around $50 billion of risk-weighted assets and the transfer to the acquirers of the equivalent of around 12,000 full-time employees. The capital will be redeployed in our growth businesses.

We also have began to delayer the bank with 4 programs to improve our efficiency and effectiveness. These are designed not only to reduce costs and bureaucracy, but also to improve controls. All 3 aims are equally important.

Second, we positioned the business for growth. People, especially here in the U.K., often forget that the global economy actually continued to grow in 2011 with GDP in faster-growing markets rising by 6.1% and developed markets by 1.3%. Our businesses outside the U.K. accounted for 80% of revenues and over 90% of our profit before tax. And we grew revenues by 10% in the faster-growing markets.

In Commercial Banking, we saw record revenues and profits were up 30% compared to 2010 as we continue to establish our market leadership in global trade, which is a heritage business for HSBC.

Our operating expenses for the year were $41.5 billion that include notable items, restructuring costs and investment in faster-growing markets. The operating expenses increased $3.2 billion compared to 2010 and this breaks down as follows: $1.1 billion in higher staff costs, $1 billion increase in restructuring costs recorded in 2011 and $1 billion in other notable items.

The higher staff costs were driven largely by wage inflation in Asia Pacific and Latin America, and you will recall we said in May that we would meet these costs to ensure we remain competitive in our key markets. But most critically, our investments in markets such as Asia and Latin America and in Commercial Banking drove profit before tax growth, and had positive jaws, showing that this investment has indeed paid off.

Included in restructuring costs are staff-related expenses of $542 million, impairments of certain software projects of $325 million and with the remainder being premises-related.

Included under the other notable items are customer redress costs in the U.K. of $898 million, the U.K. bank levy of $570 million and a provision for U.S. mortgage foreclosure and servicing matters of $237 million, in part offset by U.K. pension credits of $587 million. Iain will cover all of this in more detail later.

And since we announced our strategy last May, we have already achieved sustainable cost savings of $900 million. This is equivalent to $1.3 billion on an annualized basis. We have also identified a strong pipeline of further sustainable savings to deliver towards the upper end of our target range of $2.5 billion to $3.5 billion by the end of 2013.

Third, our return on average shareholders equity was 10.9%, up from 9.5% in 2010, though this includes fair -- favorable fair value movements on our own debt. We have set an ROE target of 12% to 15% and remain confident, as I said at the third quarter interim, of hitting 12%, and the reason is quite straightforward. An ROE of 12% to 15% is supported by a pretax return on risk-weighted assets of 1.8% to 2.6%. The Hong Kong Shanghai Banking Corporation, at a 21.6% ROE, is well above that range and Commercial Banking was already firmly within its return on risk-weighted assets target range. The overall return of the group continues to be depressed by the capital deployed in the U.S. Consumer Finance business and in legacy credit businesses in Global Banking and Markets. Excluding these businesses, which are all in a runoff and the U.S. Cards business, which we are selling, the remainder of the group achieved a return of 2.2%, which is well within the target range of 12% to 15% ROE. So that is why we're therefore confident that we will hit our 12% to 15% by the end of 2013 as promised to our shareholders.

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