HSBC : Annual Report and Accounts 2020

HSBC Holdings plc

Annual Report and Accounts 2020

Opening up a world of opportunity

Contents

Strategic report

• 2 Highlights

• 4 Who we are

• 6 Group Chairman's statement

• 8 Group Chief Executive's review

• 12 Our strategy

• 16 How we do business

• 22 Board decision making and engagement with stakeholders

• 25 Remuneration

• 26 Financial overview

• 30 Global businesses

• 37 Risk overview

• 41 Long-term viability and going concern statement

Environmental, social and governance review

• 43 Our approach to ESG

• 44 Climate

• 52 Customers

• 62 Employees

• 70 Governance

Financial review

• 77 Financial summary

• 85 Global businesses and geographical regions

• 103 Reconciliation of alternative performance measures

Risk review

• 107 Our approach to risk

• 110 Top and emerging risks

• 116 Areas of special interest

• 118 Our material banking risks

Corporate governance report

• 196 Group Chairman's governance statement

• 198 Biographies of Directors and senior management

• 213 Board committees

• 229 Directors' remuneration report

Financial statements

• 267 Independent auditors' report

• 278 Financial statements

• 288 Notes on the financial statements

Additional information

371 Shareholder information 377 Abbreviations

We have changed how we are reporting this year

We have changed our Annual Report and Accounts to embed the content previously provided in our Environmental, Social and Governance Update, demonstrating that how we do business is as important as what we do.

This Strategic Report was approved by the Board on 23 February 2021.

Mark E Tucker Group Chairman

A reminder

The currency we report in is US dollars.

Adjusted measures

We supplement our IFRS figures with non-IFRS measures used by management internally that constitute alternative performance measures under European Securities and Markets Authority guidance and non-GAAP financial measures defined in and presented in accordance with US Securities and Exchange Commission rules and regulations. These measures are highlighted with the following symbol:

Further explanation may be found on page 28.

None of the websites referred to in this Annual Report and Accounts 2020 (including where a link is provided), and none of the information contained on such websites, are incorporated by reference in this report.

Cover image: Opening up a world of opportunity We connect people, ideas and capital across the world, opening up opportunities for our customers and the communities we serve.

Opening up a world of opportunity

Our ambition is to be the preferred international financial partner for our clients.

We have refined our purpose, ambition and values to reflect our strategy and to support our focus on execution.

Read more on our values, strategy and purpose on pages 4, 12 and 16.

Key themes of 2020

The Group has been - and continues to be - impacted by developments in the external environment, including:

Covid-19

The Covid-19 outbreak has significantly affected the global economic environment and outlook, resulting in adverse impacts on financial performance, downward credit migration and muted demand for lending.

Read more on page 38.

Progress in key areas

The Group continued to make progress in areas of strategic focus during 2020, including:

Supporting customers

We continued to support our customers during the Covid-19 outbreak, providing relief to wholesale and retail customers through both market-wide schemes and HSBC-specific measures.

Read more on page 17.

Financial performance

Reported profit after tax

$6.1bn

(2019: $8.7bn)

Basic earnings per share

$0.19

(2019: $0.30)

Common equity tier 1 capital ratio

15.9%

(2019: 14.7%)

Read more on our financial overview on page 26.

Market factors

Interest rate reductions and market volatility impacted financial performance during 2020. We expect low global interest rates to provide a headwind to improved profitability and returns.

Read more on page 26.

Strategic progress

We made good progress with our transformation programme in 2020. We have now set out the next phase of our strategic plan.

Read more on page 12.

Non-financial highlights

Gender diversity

30.3%

Women in senior leadership roles. (2019: 29.4%)

Customer satisfaction

7 out of 8

Wealth and Personal Banking markets sustained top-three rank and/or improved in customer satisfaction.

Geopolitical risk

Levels of geopolitical risk increased with heightened US-China tensions and the UK's trade negotiations with the EU notably impacting business and investor sentiment. We continue to monitor developments closely.

Read more on page 38.

Climate

In October 2020, we set out an ambitious plan to prioritise sustainable finance and investment that supports the global transition to a net zero carbon economy.

Read more on page 15.

Sustainable finance and investment

$93.0bn

Cumulative total provided and facilitated since 2017. (2019: $52.4bn)

5 out of 8

Commercial Banking markets sustained top-three rank and/or improved in customer satisfaction.

Read more on how we set and define our environmental, social and governance ('ESG') metrics on page 18.

Strategic report

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Strategic report

Highlights

Financial performance in 2020 was impacted by the Covid-19 outbreak, together with the resultant reduction in global interest rates. Nevertheless, performance in Asia remained resilient and our Global Markets business delivered revenue growth.

Delivery against our financial targets

Return on average tangible equity

3.1%

February 2020 target: in the range of 10% to 12% in 2022.

(2019: 8.4%)

Adjusted operating expenses

$31.5bn

Target: ≤$31bn in 2022.

(2019: $32.5bn)

Gross RWA reduction

$61.1bn

Target: >$100bn by end-2022.

Further explanation of performance against

Group financial targets may be found on page 26.

Financial performance (vs 2019)

• - Reported profit after tax down 30% to $6.1bn and reported profit before tax down 34% to $8.8bn from higher expected credit losses and other credit impairment charges ('ECL') and lower revenue, partly offset by a fall in operating expenses. Reported results in 2020 included a $1.3bn impairment of software intangibles, while reported results in 2019 included a $7.3bn impairment of goodwill. Adjusted profit before tax down 45% to $12.1bn.

• - Reported revenue down 10% to $50.4bn, primarily due to the progressive impact of lower interest rates across our global businesses, in part offset by higher revenue in Global Markets. Adjusted revenue down 8% to $50.4bn.

• - Net interest margin of 1.32% in 2020, down 26 basis points ('bps') from 2019, due to the impact of lower global interest rates.

• - Reported ECL up $6.1bn to $8.8bn, mainly due to the impact of the Covid-19 outbreak and the forward economic outlook. Allowance for ECL on loans and advances to customers up from $8.7bn at 31 December 2019 to $14.5bn at 31 December 2020.

• - Reported operating expenses down 19% to $34.4bn, mainly due to the non-recurrence of a $7.3bn impairment of goodwill. Adjusted operating expenses down 3% to $31.5bn, as cost-saving initiatives and lower performance-related pay and discretionary expenditure more than offset the growth in investment spend.

• - During 2020, deposits grew by $204bn on a reported basis and $173bn on a constant currency basis, with growth in all global businesses.

• - Common equity tier 1 ('CET1') ratio of 15.9%, up 1.2 percentage points from 14.7% at 31 December 2019, which included the impact of the cancellation of the fourth interim dividend of 2019 and changes to the capital treatment of software assets.

• - After considering the requirements set out in the UK Prudential Regulation Authority's ('PRA') temporary approach to shareholder distributions for 2020, the Board has announced an interim dividend for 2020 of $0.15 per ordinary share, to be paid in cash with no scrip alternative.

Outlook and strategic update

In February 2020, we outlined our plan to upgrade the return profile of our risk-weighted assets ('RWAs'), reduce our cost base and streamline the organisation. Despite the significant headwinds posed by the impact of the Covid-19 outbreak, we have made good progress in implementing our plan.

However, we recognise a number of fundamental changes, including the prospect of prolonged low interest rates, the significant increase in digital engagement from customers and the enhanced focus on the environment.

We have aligned our strategy accordingly. We intend to increase our focus on areas where we are strongest. We aim to increase and accelerate our investments in technology to enhance the capabilities we provide to customers and improve efficiency to drive down our cost base. We also intend to continue the transformation of our underperforming businesses. As part of our climate ambitions, we have set out our plans to capture the opportunities presented by the transition to a low-carbon economy.

We will continue to target an adjusted cost base of $31bn or less in 2022. This reflects a further reduction in our cost base, which has been broadly offset by the adverse impact of foreign currency translation due to the weakening US dollar towards the end of 2020. We will also continue to target a gross RWA reduction of over $100bn by the end of 2022. Given the significant changes in our operating environment during 2020, we no longer expect to reach our return on average tangible equity ('RoTE') target of between 10% and 12% in 2022 as originally planned. The Group will now target a RoTE of greater than or equal to 10% in the medium term.

We intend to maintain a CET1 ratio above 14%, managing in the range of 14% to 14.5% in the medium term and managing this range down in the longer term. The Board has adopted a policy designed to provide sustainable dividends going forward. We intend to transition towards a target payout ratio of between 40% and 55% of reported earnings per ordinary share ('EPS') from 2022 onwards, with the flexibility to adjust EPS for non-cash significant items such as goodwill or intangibles impairments. We will no longer offer a scrip dividend option, and will pay dividends entirely in cash.

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