HSBC HOLDINGS(HSBC) - 2023 Q4 - Annual Report

Strategic Report Performance in 2023 HSBC achieved a record $30.3 billion profit before tax in 2023, driven by strong revenue and higher interest rates, reaching 14.6% RoTE Key Financial Performance Indicators (2023 vs 2022) | Indicator | 2023 | 2022 | | :--- | :--- | :--- | | Profit before tax ($ billion) | 30.3 | 17.1 | | Return on average tangible equity (RoTE) | 14.6% | 10.0% | | Operating expenses (Target basis) | $31.6 billion (up 6%) | $32.7 billion (reported) | | Common equity tier 1 (CET1) capital ratio | 14.8% | 14.2% | | Dividend per share ($) | 0.61 | 0.32 | - Revenue increased by 30% to $66.1 billion, primarily due to a $5.4 billion rise in Net Interest Income (NII) from the higher interest rate environment and a $10.0 billion increase in non-interest income. The latter includes a $1.6 billion provisional gain on the acquisition of SVB UK and a $2.5 billion favourable year-on-year impact from the sale of the French retail banking operations[79][81] - A $3.0 billion impairment charge was recognized in 2023 related to the investment in Bank of Communications Co., Limited ('BoCom'), following a reassessment of its accounting value-in-use[79][81] - The Group announced a new share buy-back of up to $2.0 billion and intends to consider a special dividend of $0.21 per share following the completion of the sale of its Canadian banking business in Q1 2024[86][85] 2024 Outlook | Metric | 2024 Guidance | | :--- | :--- | | Return on average tangible equity (RoTE) | Mid-teens for 2024 | | Banking Net Interest Income (NII) ($ billion) | At least 41 | | Expected Credit Losses (ECL) | Around 40bps of average gross loans | | Target Basis Cost Growth | Approximately 5% | | CET1 Capital Ratio Target | 14% to 14.5% (medium-term) | | Dividend Payout Ratio Target | 50% for 2024 | Group Chairman's Statement Group Chairman highlighted record $30.3 billion profit in 2023, emphasizing shareholder returns, strategic disposals, and growth investments - Reported profit before tax for 2023 was $30.3 billion, an increase of $13.3 billion from 2022, driven by higher revenue and notable items[111] - Shareholder returns for 2023 included a total dividend of $0.61 per share and $7 billion in share buy-backs, with a further $2 billion buy-back announced. A special dividend of $0.21 per share is being considered upon completion of the Canada sale[112][113] - Strategic acquisitions in 2023 included Citi's retail wealth business in mainland China and SVB UK, described as an opportunistic deal with excellent strategic sense[118][121] - The first net zero transition plan was published, outlining a realistic and ambitious path to support clients' transition to a low-carbon future[120] - The economic outlook for 2024 is cautiously optimistic, with China's economy expected to maintain around 5% growth and significant opportunities in Asia and the Middle East[124][125] Group Chief Executive's Review Group Chief Executive highlighted 2023's record profit and 14.6% RoTE, driven by strong growth across all global businesses 2023 Performance Highlights | Metric | 2023 Value | | :--- | :--- | | Profit before tax ($ billion) | 30.3 | | Return on average tangible equity (RoTE) | 14.6% | | Total Shareholder Returns (Dividends & Buy-backs) ($ billion) | 19 (in respect of 2023) | - All three global businesses performed well on a constant currency basis: Commercial Banking profit before tax rose 76% to $13.3 billion, Global Banking and Markets profit was up 26% to $5.9 billion, and Wealth and Personal Banking profit increased by $6.1 billion to $11.5 billion[143][149] - Future growth will be driven by five key levers: growing international businesses, diversifying revenue (especially in wealth), continued growth in home markets (Hong Kong & UK), investing in technology (including AI and the new 'Zing' platform), and financing the net-zero transition[150][147][151][157] - The company attracted $84 billion in net new invested assets in its wealth business in 2023 and grew multi-jurisdictional wholesale revenue by 29% to $20.4 billion[147][154] Our Strategy HSBC's strategy is built on four pillars: Focus on international growth and wealth, Digitise operations, Energise culture, and Transition to net-zero - Focus: Grew wholesale multi-jurisdictional client revenue by 29% in 2023. Attracted $84 billion in net new invested assets. Maintained leadership in Hong Kong and the UK, with UK large corporate banking market penetration over 70%. Reshaped portfolio with exits from France retail and Greece, and acquisitions like SVB UK[165][169][177][186] - Digitise: Achieved 83% digitally active Commercial Banking customers. 75% of WPB international customer accounts were opened digitally. Piloting numerous generative AI use cases and launched 'Zing', an open-market cross-border payments platform[187][188][190] - Energise: Employee survey showed 73% of colleagues see the positive impact of the strategy. Reached 34.1% women in senior leadership roles, on track for the 35% target by 2025[192][193] - Transition: Published first net-zero transition plan in January 2024. Provided and facilitated a cumulative $294.4 billion in sustainable finance and investments since January 2020. Reduced own operational greenhouse gas emissions by 57.3% from a 2019 baseline[196][197][199] ESG Overview HSBC's ESG strategy focuses on net zero transition, building inclusion, resilience, and responsible actions, with key metrics in remuneration Key ESG Metrics and Targets (2023) | Metric | 2023 Performance | Target/Ambition | | :--- | :--- | :--- | | Sustainable Finance & Investment ($ billion) | 294.4 (cumulative since 2020) | $750 billion to $1 trillion by 2030 | | Operational GHG Emissions Reduction | 57.3% (from 2019 baseline) | Net zero by 2030 | | Women in Senior Leadership | 34.1% | 35% by 2025 | | Black Heritage in UK/US Senior Leadership | 3.0% | 3.4% by 2025 | | Employee Engagement Score | 77% | Maintain 72% | - Published its first net-zero transition plan in January 2024, detailing its sectoral approach and implementation plan[95] - Set combined on-balance sheet financed and facilitated emissions targets for the oil & gas and power & utilities sectors[95] - Provided significant support to UK customers facing cost-of-living pressures, including offering mortgage rate switches, term extensions, and financial well-being webinars[215][231] Remuneration Overview HSBC's remuneration strategy reflects strong 2023 performance, with a $3.774 billion variable pay pool and new structures for clarity Group Variable Pay Pool | Year | Variable Pay Pool ($ million) | | :--- | :--- | | 2023 | 3,774 | | 2022 | 3,359 | - The Group was certified as a global Living Wage employer for 2024 by the Fair Wage Network, ensuring fixed pay levels provide financial security[277] - The Group Chief Executive's 2023 annual incentive outcome was 70.24% of maximum opportunity, which included a 7.5% downward adjustment related to a PRA Notice[288][290] - A new variable pay structure will be introduced in 2024 for over 150,000 junior and middle management colleagues to provide more clarity on pay levels for on-target performance[283] Financial Overview HSBC's 2023 financial performance showed a 14.6% RoTE, $31.6 billion operating expenses, and a strong 14.8% CET1 ratio Key Group Financial Targets and Performance | Metric | 2023 Performance | 2024 Target/Outlook | | :--- | :--- | :--- | | Return on average tangible equity (RoTE) | 14.6% | Mid-teens | | Target basis operating expenses ($ billion) | 31.6 (+6% YoY) | Approx. 5% growth | | CET1 ratio | 14.8% | 14.0% to 14.5% range | | Dividend payout ratio | 50% | 50% | - Reported profit before tax was $30.3 billion, a 78% increase from $17.1 billion in 2022. This was driven by a 30% rise in revenue to $66.1 billion[307][320] - Net interest margin (NIM) increased to 1.66% from 1.42% in 2022, reflecting the higher interest rate environment[307] - Expected credit losses (ECL) were $3.4 billion, a slight reduction from $3.6 billion in 2022, and included $1.0 billion related to mainland China commercial real estate exposures[322][330] - The Group introduced Banking NII as a new alternative performance measure to better represent banking revenue directly impacted by interest rate changes. For 2024, banking NII is expected to be at least $41 billion[305][87] Risk Overview HSBC's risk framework addresses geopolitical, macroeconomic, and sectoral risks, maintaining a strong 14.8% CET1 ratio within appetite - Geopolitical tensions, particularly the Russia-Ukraine and Israel-Hamas wars, are a primary source of risk, with potential to disrupt supply chains and reverse the recent decline in inflation[424] - The complex relationship between China and other nations, including the US and UK, creates ongoing regulatory, reputational, and market risks from sanctions and trade restrictions[426] - Mainland China's commercial real estate sector remains distressed, and while authorities are providing support, the risk of a slow recovery is significant[429] Key Risk Appetite Metrics (2023) | Component | Measure | Risk Appetite | 2023 Performance | | :--- | :--- | :--- | :--- | | Capital | CET1 ratio – end point basis (%) | ≥13.0% | 14.8% | | ECL (WPB) | % of advances | ≤0.50% | 0.21% | | ECL (Wholesale) | % of advances | ≤0.45% | 0.40% | - Top externally driven risks include: Geopolitical and macroeconomic risks, Technology and cybersecurity risk, ESG risks, Financial crime risk, Digitalisation and technological advances, and Evolving regulatory environment[452][453] Financial Review Financial Summary HSBC's 2023 financial summary highlights $35.8 billion NII, 1.66% NIM, and $3.04 trillion total assets, impacted by IFRS 17 adoption - The Group adopted IFRS 17 'Insurance Contracts' on January 1, 2023, and restated 2022 comparative data. The transition reduced 2022 reported revenue by $1.1 billion and profit before tax by $0.5 billion[1054][1056] Consolidated Income Statement Highlights (2023 vs 2022) | Metric ($ million) | 2023 | 2022 (Restated) | | :--- | :--- | :--- | | Net interest income | 35,796 | 30,377 | | Total operating income | 66,058 | 50,620 | | ECL charge | (3,447) | (3,584) | | Profit before tax | 30,348 | 17,058 | | Profit for the year | 24,559 | 16,249 | - Net interest income (NII) increased by $5.4 billion (18%) to $35.8 billion in 2023, reflecting higher average interest rates. Net interest margin (NIM) increased by 24 basis points to 1.66%[1092][1096] - Total assets increased by $89 billion to $3.04 trillion at year-end 2023. Loans and advances to customers rose by $15 billion to $939 billion, while customer accounts grew by $41 billion to $1.61 trillion[1175][1184][1195] - Hyperinflationary accounting in Argentina and Türkiye had a significant impact, decreasing the Group's profit before tax by $1,297 million in 2023[1073] Global Businesses and Geographical Regions HSBC's global businesses and geographical regions showed strong financial performance in 2023, driven by growth across all segments Profit Before Tax by Global Business (2023 vs 2022, Constant Currency) | Global Business | 2023 PBT ($ million) | 2022 PBT ($ million) | YoY Change (%) | | :--- | :--- | :--- | :--- | | Wealth and Personal Banking (WPB) | 11,544 | 5,480 | >100% | | Commercial Banking (CMB) | 13,280 | 7,527 | 76% | | Global Banking and Markets (GBM) | 5,924 | 4,689 | 26% | | Corporate Centre | (400) | (1,155) | 65% (loss reduction) | - WPB: Revenue grew 31% to $27.3 billion. Wealth revenue rose 8% to $7.5 billion, supported by $84 billion in net new invested assets. Personal Banking revenue was up 28%, driven by higher net interest income[357][362][367][368] - CMB: Revenue increased 40% to $22.9 billion. This was significantly boosted by a $5.4 billion (78%) rise in Global Payments Solutions revenue and a $1.6 billion provisional gain on the acquisition of SVB UK[376][384][385] - GBM: Revenue grew 10% to $16.1 billion. Securities Services revenue was up 19% and Global Payments Solutions revenue increased 56%, both benefiting from higher interest rates. Capital Markets and Advisory revenue rose 41%[393][402][410] - Corporate Centre: Loss before tax narrowed to $0.4 billion from $1.2 billion. The improvement was driven by the non-recurrence of restructuring costs and adverse fair value movements from 2022, partly offset by a $3.0 billion impairment of the investment in BoCom[412][413][414][416] Risk Review Our Approach to Risk HSBC's risk management employs a 'three lines of defence' model, guided by a formal Risk Appetite Statement and robust stress testing - The Group's risk management is based on a 'three lines of defence' model: 1) Risk owners in business lines, 2) Independent Group Risk and Compliance function, and 3) Global Internal Audit for independent assurance[1554][1560] - The Risk Appetite Statement (RAS) defines risk levels and guides strategic decisions, financial planning, and capital allocation. Performance against the RAS is reported to the Group Risk Management Meeting[1532][1533] - Stress testing is a core tool used to assess resilience to adverse scenarios, inform capital and liquidity planning, and support recovery and resolution plans. The Group conducts internal stress tests and participates in regulatory exercises (e.g., BoE, FRB, HKMA)[1557][1563] - Key risk management enhancements in 2023 included strengthening frameworks for model risk (especially AI and climate), concentration risk, third-party risk, and regulatory reporting[1570] - The transition from Ibor benchmarks is nearly complete, with only a limited number of 'tough legacy' contracts remaining, primarily syndicated loans, expected to be remediated before September 2024[1567][1568] Top and Emerging Risks HSBC identifies top risks including geopolitical instability, cybersecurity threats, evolving ESG landscape, financial crime, and internal operational challenges - Geopolitical & Macroeconomic Risks: Elevated risks from the Russia-Ukraine and Israel-Hamas wars, complex US-China relations, and potential for renewed inflation. Mainland China's commercial real estate sector remains a significant concern[1573][1576][1583] - Technology & Cybersecurity Risk: Continuous threat of sophisticated cyber-attacks, including ransomware and phishing, targeting HSBC or its third-party suppliers. The risk landscape is evolving with ongoing geopolitical events[1593] - ESG Risks: Financial and non-financial risks from climate change, nature-related issues, and human rights. This includes credit risk from customers' transition failures, reputational risk from not meeting ESG targets, and regulatory compliance risk from evolving global standards[1595][1596][1601] - Financial Crime Risk: Heightened risk due to geopolitical challenges, complex sanctions, and the increasing sophistication of fraud, including scams using generative AI. The digitization of finance and digital assets present new challenges[1610][1611][1612] - Internally Driven Risks: Key internal risks include managing large volumes of data accurately and securely, risks from third-party suppliers, model risk from the increasing use of complex AI and climate models, and the execution risk of large-scale strategic change initiatives[1623][1625][1627][1636] Our Material Banking Risks HSBC manages material banking risks, including credit, treasury, market, and climate risks, through comprehensive frameworks and robust controls - Credit Risk: The risk of financial loss from counterparty failure. The ECL charge for 2023 was $3.4 billion, driven by stage 3 charges, including $1.0 billion related to mainland China's commercial real estate sector[1830][1861] - Treasury Risk: The risk of insufficient capital and liquidity. The Group maintained a strong capital position with a CET1 ratio of 14.8% and a liquidity coverage ratio (LCR) of 136%[2198][2255] - Market Risk: The risk of adverse impact from changes in market parameters. Trading portfolio VaR (99%, 1-day) was $182.4 million at year-end 2023[2338][1812] - Climate Risk: Financial and non-financial impacts from climate change. Managed through risk metrics, stress testing, and specific policies like the thermal coal phase-out and energy policies[1813][1825] - Resilience, Regulatory, Financial Crime, and Model Risks: These non-financial risks are managed through robust control frameworks, policies, and governance to ensure operational stability, compliance with evolving regulations, prevention of illicit activities, and sound decision-making based on reliable models[1814][1815][1816][1828] Environmental, Social and Governance (ESG) Review Our Approach to ESG HSBC's ESG approach is built on three pillars: net zero transition, building inclusion and resilience, and acting responsibly, guided by materiality - HSBC's ESG strategy is built on three pillars: Transition to net zero, Building inclusion and resilience, and Acting responsibly[458][468] - Published its first net-zero transition plan in January 2024, outlining its progress and future plans to achieve its climate ambitions[461][462] - Set combined on-balance sheet financed and facilitated emissions targets for the high-emitting oil and gas, and power and utilities sectors[461][463] - Material ESG topics are identified through stakeholder engagement and consideration of standards like TCFD, SASB, and the Hong Kong Stock Exchange's ESG Guide[470][471] Environmental HSBC's environmental strategy aims for net-zero by 2050, with $294.4 billion in sustainable finance and 57.3% operational GHG emissions reduction Sustainable Finance and Investment Progress ($ billion) | Year | Annual Contribution ($ billion) | Cumulative since 2020 ($ billion) | | :--- | :--- | :--- | | 2023 | 83.7 | 294.4 | | 2022 | 84.2 | 210.7 | | 2021 | 82.4 | 126.5 | | 2020 | 44.1 | 44.1 | - Published its first net-zero transition plan in January 2024, detailing its approach to transitioning industry, catalysing the new economy, and decarbonising trade[497][498] - Set 2030 financed emissions targets for seven sectors: oil and gas, power and utilities, cement, iron/steel/aluminium, aviation, automotive, and thermal coal mining. The oil & gas and power & utilities targets now combine on-balance sheet and facilitated emissions[577][578][610] Selected 2030 Financed Emissions Targets vs. 2022 Performance | Sector | Metric | 2022 Performance | 2030 Target | | :--- | :--- | :--- | :--- | | Oil & Gas (Combined) | Mt CO2e | 31.9 | -34% vs 2019 | | Power & Utilities (Combined) | tCO2e/GWh | 396.8 | 138.0 | - Reduced absolute operational GHG emissions (Scope 1, 2, and business travel) by 57.3% from a 2019 baseline, and sourced 58.4% of electricity from renewable sources in 2023[692][701] Social HSBC's social strategy focuses on inclusion, achieving 34.1% women in senior leadership, improving employee engagement, and supporting communities - Achieved 34.1% representation of women in senior leadership roles, on track for the 2025 goal of 35%. Black heritage representation in UK/US senior leadership reached 3.0%, against a 2025 goal of 3.4%[774][779][781] - The employee engagement score in the annual Snapshot survey increased by 3 percentage points to 77%, which is 7 points ahead of the financial services benchmark[817][821] - Launched a global framework to support colleagues experiencing menopause and continued to offer comprehensive mental, physical, and financial well-being programs[806][853][845][855] - Supported customer inclusion by providing no-cost accounts for vulnerable individuals and making branches 'safe spaces' for domestic abuse victims. The HSBC HK Mobile Banking app's simplified version has attracted over 477,000 unique users[885][898] - Total charitable giving in 2023 was $107.3 million, and employees volunteered over 181,800 hours during work time[903][901] Governance HSBC maintains high governance standards, with Board oversight of ESG, robust financial crime controls, and significant investment in cybersecurity - The Board has overall responsibility for ESG strategy, with oversight from the Group Audit Committee and Group Risk Committee. A new Sustainability Execution Committee was established in 2023 to oversee the operationalization of the sustainability strategy[912][918] - The bank actively manages five salient human rights issues, including the right to decent work and freedom from discrimination, by embedding them into risk management and supplier onboarding processes[921][922] - In 2023, HSBC monitored over 1.35 billion transactions per month for financial crime, filed over 96,000 suspicious activity reports, and screened 125 million customer records daily for sanctions exposure[992] - The Group's total tax contribution in 2023 was $17.6 billion, comprising $6.8 billion in taxes borne by HSBC and $10.8 billion in taxes collected on behalf of governments[1003] - Maintains a robust cybersecurity framework with a 'defence in depth' approach. Over 99% of employees completed mandatory cybersecurity training, and over 94% of IT developers hold security certifications[1034][1045]