FORM 6-K
 
SECURITIES AND EXCHANGE COMMISSION
 
Washington, D.C. 20549
 
 
 
Report of Foreign Private Issuer
 
Pursuant to Rule 13a - 16 or 15d - 16 of
 
the Securities Exchange Act of 1934
 
 
 
For the month of February
 
HSBC Holdings plc
 
42nd Floor, 8 Canada Square, London E14 5HQ, England
 
(Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F).
 
Form 20-F X Form 40-F  
 
(Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934).
 
Yes  No X
 
(If "Yes" is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82-   ).
 
 
 
 19 February 2019
 
 
 
HSBC HOLDINGS PLC
 
 
 
2018 RESULTS – HIGHLIGHTS
 
 
John Flint, Group Chief Executive, said:
 
“These are good results that demonstrate progress against the plan that I outlined in June 2018. Profits and revenue were both up despite a challenging fourth quarter, and our return on tangible equity is significantly higher than in 2017. This is an encouraging first step towards meeting our return on tangible equity target of more than 11% by 2020.”
 
 
 
 
Key highlights
 
Progress made against our eight strategic priorities, including accelerated growth from Asia and our international network, growth in our UK customer base, delivery of more sustainable finance, improved capital efficiency and investments in technology.
 
Reported profit before tax of $19.9bn in 2018 was 16% higher than in 2017, reflecting revenue growth in all of our global businesses. Adjusted profit before tax of $21.7bn in 2018 was 3% higher than in 2017, excluding the effects of foreign currency translation differences and movements in significant items.
 
Reported revenue of $53.8bn was 5% higher, notably driven by a rise in deposit revenue across our global businesses, primarily in Asia, as we benefited from wider margins and grew our balances. These increases were partly offset by lower revenue in Corporate Centre. Adjusted revenue of $53.9bn was 4% higher, excluding the effects of foreign currency translation differences and movements in significant items.
 
Reported operating expenses of $34.7bn were 1% lower, as higher costs, including investments made to grow the business and enhance our digital capabilities were more than offset by net favourable movements in significant items, mainly the non-recurrence of costs to achieve expenditure in 2017. Adjusted operating expenses of $33.0bn were 6% higher, excluding the effects of foreign currency translation differences and movements in significant items.
 
Adjusted jaws for 2018 was negative 1.2%, due to lower adjusted revenue in 4Q18 (down 8% on 3Q18), from weakness in markets. Operating expenses were higher from investments in business growth. We reiterate our commitment to the discipline of positive adjusted jaws.
 
Return on average tangible equity rose to 8.6% from 6.8%, up 1.8 percentage points.
 
Reported loans and advances to customers increased by $32bn. Excluding foreign currency translation differences, loans and advances grew by $66bn or 7% from 1 January 2018.
 
Common equity tier 1 (‘CET1’) ratio of 14.0% and CRD IV leverage ratio of 5.5%.
 
Maintained the dividend at $0.51 per ordinary share; total dividends in respect of the year of $10.2bn; confident of maintaining at this level.
 
 
Financial highlights and key ratios
 
 
 
Year ended 31 Dec
 
 
 
 
2018
 
2017
 
Change
 
 
Footnotes
 
$m
 
$m
 
%
 
Reported profit before tax
 
 
19,890
 
17,167
 
15.9
 
Adjusted profit before tax
 
1
 
21,719
 
21,133
 
2.8
 
Return on average ordinary shareholders’ equity (annualised)
 
 
7.7%
 
5.9%
 
 
Return on average tangible equity
 
 
8.6%
 
6.8%
 
 
Adjusted jaws
 
2
 
(1.2%)
 
 
 
 
For footnotes, see page 2.
 
We use adjusted performance to understand the underlying trends in the business. The main differences between reported and adjusted are foreign currency translation and significant items.
 
Capital and balance sheet
 
 
At 31 Dec
 
 
 
2018
 
2017
 
Change
 
 
%
 
%
 
 
Common equity tier 1 ratio
 
14.0
 
14.5
 
 
Leverage ratio
 
5.5
 
5.6
 
 
 
$m
 
$m
 
$m
 
Loans and advances to customers
 
981,696
 
962,964
 
18,732
 
 
Customer accounts
 
1,362,643
 
1,364,462
 
(1,819)
 

 
Risk-weighted assets (‘RWAs’)
 
865,318
 
871,337
 
(6,019)
 

 

 
 
 
    Highlights
 
 
 
  
 
Year ended 31 Dec
 
 
 
2018
 
2017
 
 
Footnotes
 
$m
 
$m
 
Reported
 
 
 
 
Revenue
 
3
 
53,780
 
51,445
 
 
Change in expected credit losses and other credit impairment charges
 
 
(1,767)
 
N/A
 
Loan impairment charges and other credit risk provisions
 
 
N/A
 
(1,769
 
)
 
Operating expenses
 
 
(34,659)
 
(34,884
 
)
 
Profit before tax
 
 
19,890
 
17,167
 
 
Adjusted
 
 
 
 
Revenue
 
3
 
53,940
 
51,661
 
 
Change in expected credit losses and other credit impairment charges
 
 
(1,767)
 
N/A
 
Loan impairment charges and other credit risk provisions
 
 
N/A
 
(1,713
 
)
 
Operating expenses
 
 
(32,990)
 
(31,231
 
)
 
Profit before tax
 
 
21,719
 
21,133
 
 
Significant items affecting adjusted performance
 
 
 
 
Revenue
 
 
 
 
Customer redress programmes
 
 
53
 
(108
 
)
 
Disposals, acquisitions and investment in new businesses
 
 
(113)
 
274
 
 
Fair value movements on financial instruments
 
 
(100)
 
(245
 
)
 
Operating expenses
 
 
 
 
Costs of structural reform
 
 
(361)
 
(420
 
)
 
Costs to achieve
 
 
 
(3,002
 
)
 
Customer redress programmes
 
 
(146)
 
(655
 
)
 
Disposals, acquisitions and investment in new businesses
 
 
(52
 
(53
 
)
 
Gain on partial settlement of pension obligation
 
 
 
188
 
 
Past service costs of guaranteed minimum pension benefits equalisation
 
 
(228)
 
 
 
Restructuring and other related costs
 
 
(66)
 
 
 
Settlements and provisions in connection with legal matters and other regulatory matters
 
 
(816)
 
198
 
 
 
1 Adjusted performance is computed by adjusting reported results for the year-on-year effects of foreign currency translation differences and significant items which distort year-on-year comparisons.
 
2 Includes UK bank levy.
 
3 Net operating income before loan impairment charges and other credit risk provisions, also referred to as revenue.
 
 
 
Statement by Mark E Tucker, Group Chairman
 
 
Our ability to meet our targets depends on being able to help our customers manage the present uncertainty and capture the opportunities that unquestionably exist.
 
HSBC is in a strong position. Our performance in 2018 demonstrated the underlying health of the business and the potential of the strategy that John Flint, our Group Chief Executive, announced in June.
 
Despite a challenging external environment in the fourth quarter, all of our global businesses delivered increased profits and the Group achieved a higher return on tangible equity in 2018. Asia again contributed a substantial portion of the Group’s profits, notably in Retail Banking and Wealth Management and Commercial Banking. Overall, the Group delivered reported profit before tax of $19.9bn, up 16% on 2017, and adjusted profit before tax of $21.7bn, up 3%.
 
This performance allows us to approve a fourth interim dividend of $0.21, bringing the total dividend for 2018 to $0.51.
 
The Board of Directors
 
There were a number of Board changes in 2018.
 
Jonathan Symonds became Deputy Group Chairman. Iain Mackay left the business after 11 years, with the last eight spent as Group Finance Director. My thanks go to Iain for his dedicated service to the Group, and in particular for the integral role he played in executing the Group strategy and improving the quality of our financial reporting. Ewen Stevenson joined the Board as Group Chief Financial Officer on 1 January this year.
 
We said goodbye to Phillip Ameen, Joachim Faber and John Lipsky, all of whom retired from the Board. I am very grateful to each of them for their invaluable advice and counsel. Their departures led to a reduction in the size of the Board as part of our ongoing work to simplify, clarify and strengthen governance arrangements.
 
We also cut the number of Board committees from seven to five and simplified subsidiary governance. I believe this creates clearer and stronger lines of authority and accountability, enabling the Board to devote more time to priority areas.
 
We welcome the new UK Corporate Governance Code, which places greater emphasis on how the Board considers the interests of all stakeholders in its discussions and decision making, and promotes a strong internal culture.
 
We see the new Code as an opportunity to further enhance our existing stakeholder engagement, ensuring that the business as a whole can continue to develop constructive and considerate relationships with all those with whom we work. We will include details of this in the Annual Report and Accounts 2019.
 
Connecting customers to opportunities
 
The financial targets that John announced in June remain appropriate, even as the global economic outlook becomes less predictable. Our ability to meet them depends on being able to help our customers manage the present uncertainty and capture the opportunities that unquestionably exist.
 
The system of global trade remains subject to political pressure, and differences between China and the US will likely continue to inform sentiment in 2019. However, the conclusion of major trade agreements – including the Comprehensive and Progressive Agreement for Trans-Pacific Partnership; the EU’s landmark bilateral agreements with Japan and Singapore; and the potential ratification of the US-Mexico-Canada Agreement in 2019 – provide important counterweights that could give impetus to international trade in the year ahead.
 
The fundamentals for growth in Asia remain strong in spite of a softer regional economic outlook. The structural and financial reforms underway across the region should continue to support economic development. China remains subject to domestic and external pressures, but we expect it to maintain strong growth. We also expect further financial liberalisation to form part of China’s response to changing external conditions. This will benefit domestic and international customers and investors.
 
The US economy and the influence of the Federal Reserve remain central to global sentiment. We expect policymakers to adopt a more cautious stance in 2019, even as the economy continues to grow. A slowdown in the pace of US interest rate rises could carry positive implications for Asian economies and businesses, as well as for US growth. Both the Mexican and Canadian economies are poised to grow at a steady pace.
 
Many of our UK customers are understandably cautious about the immediate future, given the prolonged uncertainty surrounding the UK’s exit from the European Union. HSBC UK, our new UK ring-fenced bank, has an important role in supporting our customers as they prepare for a range of possible outcomes. Our universal banking business in France will also help provide continuity to our customers in the UK and the rest of Europe. In Europe, as elsewhere, we are confident in our ability to help customers make the most of the opportunities they see.
 
There are more risks to global economic growth than this time last year, and we remain alive and responsive to all possibilities. Our strong balance sheet and revenue base equip us to navigate these risks and, most importantly, enable us to help our customers negotiate their own paths.
 
Fulfilling our potential
 
Enabling our people to do their jobs to the best of their ability is a priority for the Board, and for me personally. They are essential to our present and future success. The Board fully endorses the Group’s commitment to develop and support our people and we offer the Group Management Board our wholehearted support in realising that ambition.
 
I had the honour of officially opening the new headquarters of HSBC UK in Birmingham in December. As well as providing a new home for the UK ring-fenced bank, One Centenary Square houses the European hub of HSBC University, our global learning and development centre. Since then, we have opened new HSBC University hubs at our new premises in Dubai, and in Mexico City. These cutting-edge facilities form part of our response to the complex challenges our employees now face working for a global bank in an unpredictable environment. HSBC University aims not only to equip them with the right skills, but also to help them understand the culture that will continue to make HSBC a unique organisation.
 
 
Many thanks
 
My thanks go to John and each of the 235,000 people who work for HSBC. Their hard work, commitment and talent has been key to the Group’s progress in 2018. Our challenge and shared purpose is to build on that good work through the rest of 2019 and beyond. I have every confidence we can do so.
 
 
 
 
 
Review by John Flint, Group Chief Executive
 
 
Helping our people be at their best is the critical enabler of our business strategy and fundamental to delivering our financial targets.
 
In June 2018, I set out a plan to get HSBC growing again and to create value for shareholders. While this targets clear financial outcomes, it has our customers at its centre. We want to bring more of HSBC to more people and to serve them in the best possible way.
 
The eight strategic priorities that I outlined in June are the key to achieving these aims. We are seeking to connect more customers to our international network and high-growth markets. We are working to improve our capital efficiency and to turn our US business around. We are investing in technology and our digital capabilities to serve our customers better and stay competitive. We are also taking steps to support our people more effectively and help them be at their best.
 
I am encouraged by our progress so far. We are growing customer numbers and capturing market share in our scale markets and from our international network. Our US business is short of where we want it to be, but is moving in the right direction. Our investment in technology is making our business simpler, safer, and easier for our customers to use. We have launched new products and made strategic hires in mainland China and Hong Kong that are materially improving our service to international clients. We have also established our UK ring-fenced bank.
 
These were important factors in our 2018 financial performance. Revenue growth in our four global businesses helped deliver higher Group reported and adjusted profit before tax. Group return on tangible equity – our headline measure – was also up significantly from 6.8% in 2017 to 8.6%. This is a good first step towards meeting our return on tangible equity target of more than 11% by 2020.
 
Engaging our people
 
HSBC has a strong and proud culture. We understand our role and our purpose, and that HSBC exists to serve others. As Group Chief Executive, I have a responsibility to nurture and preserve those aspects of our culture that serve us well. I also recognise that I have a responsibility to improve aspects of our behaviours that may be impeding our performance.
 
In my first year in this role, I started a conversation throughout the bank about how we help our people be the best version of themselves. This is part of a broader ambition to create what we call the healthiest human system in our industry.
 
There is more that we can do to create an environment that is sufficiently supportive, protective and engaging. We need to have more open and honest conversations. This is the least that our people should be able to expect. If we cannot provide it, it hurts our ability to serve not just our customers, but all the stakeholder groups on whom our success depends. It also impedes our ability to deliver our strategy and our targets.
 
We have started by signalling to our people that creating a safe and supportive working environment is a strategic priority for the business. Leaders are being encouraged to model the right behaviours and provide direction on the type of behaviour we expect. We are also opening conversations around issues like mental health, well-being, bullying and harassment.
 
We are making material changes to the organisation that allow us to support our people more effectively. Our governance procedures are being simplified and strengthened to reduce complexity and make it easier for people to do their jobs. We are also helping our people work more flexibly. On learning and development, we have opened new HSBC University hubs around the world and improved access to digital training.
 
At an individual level, every person at HSBC is being encouraged to think about how we create the healthiest human system in our industry, and to play an active role in doing so. We are regularly collecting feedback from our people and it is informing the action we are taking.
 
The early signs are positive. In 2018, 66% of our employees said they would recommend HSBC as a great place to work, up from 64% the previous year. While this demonstrates an improvement in a relatively short space of time, it also shows that we have much further to go. This work will continue into 2019 and beyond. If we are successful, then we will materially improve all aspects of HSBC’s performance, including delivery of our strategy.
 
Business performance
 
All four global businesses grew adjusted revenue in 2018.
 
Retail Banking and Wealth Management had a very good year. Higher interest rates, rising customer numbers, and growth of more than $20bn in our UK and Hong Kong mortgage book all contributed to a strong rise in Retail Banking adjusted revenue. Despite a good performance in the first three quarters of the year, Wealth Management adjusted revenue fell slightly in 2018 due to the effects of market volatility in the fourth quarter.
 
Commercial Banking had an excellent 2018, delivering double-digit adjusted revenue growth on the back of an outstanding performance in Global Liquidity and Cash Management. Credit and Lending generated adjusted revenue growth from higher balances, despite lower margins from increased competition. Solid performances in Asia and Europe enabled Global Trade and Receivables Finance to grow adjusted revenue despite an increasingly difficult environment for trade.
 
Global Banking and Markets grew adjusted revenue in spite of considerably reduced market activity in the fourth quarter. Our market-leading transaction banking franchises generated strong increases in adjusted revenue, which exceeded the reduction in markets-related revenue from Rates, Credit, and Equities.
 
Global Private Banking returned to growth in 2018 on the back of new business won in Hong Kong. Adjusted revenue from deposits also increased on the back of interest rate rises.
 
Adjusted jaws was negative for 2018. While adjusted costs were broadly as we expected for the full year, adjusted revenue fell short due to market weakness in the fourth quarter. Positive jaws remains an important discipline in delivering our financial targets and we remain committed to it in 2019.
 
Expected credit losses were slightly higher than loan impairment charges in 2017, reflecting the uncertain economic outlook in the UK and heightened downside risks.
 
Our common equity tier 1 ratio of 14% was lower than at the same point in 2017, due mainly to adverse foreign exchange movements and the impact of higher lending.
 
We returned a total of $2bn to shareholders through share buy-backs in 2018, reflecting our desire to neutralise the impact of scrip dividends over the medium term. We remain committed to this policy, subject to regulatory approval.
 
Outlook
 
We have made a good start to 2019. Our Group revenue performance in January was ahead of our plan for the month and actual credit performance remained robust, albeit with some softening of credit performance in the UK. We continue to prepare for the UK’s departure from the EU in order to provide continuity for our customers in the UK and mainland Europe. Our well-established universal bank in France gives us a major advantage in this regard. Our immediate priority is to help our customers manage the present uncertainty.
 
Despite more challenging market conditions at the end of the year and a weaker global economic outlook, we are committed to the targets we announced in June. We remain alert to the downside risks of the current economic environment, especially those relating to the UK economy, global trade tensions and the future path of interest rates. We will be proactive in managing costs and investment to meet the risks to revenue growth where necessary, but we will not take short-term decisions that harm the long-term interests of the business.
 
We plan to achieve positive adjusted jaws in 2019 and remain focused on achieving a return on tangible equity of over 11% by 2020, while maintaining a stable dividend.
 
 
 
Financial summary
 
 
 
 
 
Year ended 31 Dec
 
 
 
2018
 
2017
 
 
Footnotes
 
$m
 
$m
 
For the year
 
 
 
 
Profit before tax
 
 
19,890
 
17,167
 
Profit attributable to:
 
 
 
 
– ordinary shareholders of the parent company
 
 
12,608
 
9,683
 
Dividends declared on ordinary shares
 
 
10,187
 
10,193
 
At the year-end
 
 
 
 
Total shareholders’ equity
 
 
186,253
 
190,250
 
Total regulatory capital
 
 
173,238
 
182,383
 
Customer accounts
 
 
1,362,643
 
1,364,462
 
Total assets
 
 
2,558,124
 
2,521,771
 
Risk-weighted assets
 
 
865,318
 
871,337
 
Per ordinary share
 
 
$
 
$
 
Basic earnings
 
 
0.63
 
0.48
 
Dividends
 
1
 
0.51
 
0.51
 
Net asset value
 
 
8.13
 
8.35
 
Tangible net asset value
 
 
7.01
 
7.26
 
Share information
 
 
 
 
Number of $0.50 ordinary shares in issue (millions)
 
 
20,361
 
20,321
 
Basic number of $0.50 ordinary shares outstanding (millions)
 
 
19,981
 
19,960
 
Basic number of $0.50 ordinary shares outstanding and dilutive potential ordinary shares (millions)
 
 
20,059
 
20,065
 
1 Dividends per ordinary share declared in the year.
 
 
 
Distribution of results by global business
 
 
 
Adjusted profit before tax
 
 
Year ended 31 Dec
 
 
2018         
 
2017    
 
 
$m
 
%
 
$m
 
%
 
Retail Banking and Wealth Management
 
7,080
 
32.6
 
6,479
 
30.6
 
 
Commercial Banking
 
7,669
 
35.3
 
6,829
 
32.3
 
 
Global Banking and Markets
 
6,078
 
28.0
 
5,848
 
27.7
 
 
Global Private Banking
 
344
 
1.6
 
296
 
1.4
 
 
Corporate Centre
 
548
 
2.5
 
1,681
 
8.0
 
 
Profit before tax
 
21,719
 
100.0
 
21,133
 
100.0
 
 

 
 
 
  Distribution of results by geographical region
 
   
 
Reported profit/(loss) before tax
 
 
Year ended 31 Dec
 
 
2018         
 
2017    
 
 
 $m
 
  %
 
$m
 
%
 
Europe
 
(815)
 
(4.1)
 
(1,864)
 
(10.9
 
)
 
Asia
 
17,790
 
89.5
 
15,329
 
89.3
 
 
Middle East and North Africa
 
1,557
 
7.8
 
1,501
 
8.7
 
 
North America
 
799
 
4.0
 
1,601
 
9.3
 
 
Latin America
 
559
 
2.8
 
600
 
3.5
 
 
Profit before tax
 
19,890
 
100.0
 
17,167
 
100.0
 
 
 
 
 
 
HSBC adjusted profit before tax and balance sheet data
 
 
 
2018
 
 
 
Retail Bankingand Wealth Management
 
CommercialBanking
 
GlobalBanking and Markets        
 
GlobalPrivate Banking           
 
Corporate Centre     
 
Total     
 
 
Footnotes
 
$m
 
$m
 
                        $m
 
       $m 
 
$m
 
$m 
 
Net operating income before change in expected credit losses and other credit impairment charges
 
1
 
21,935
 
14,885
 
15,512
 
1,785
 
(177)
 
53,940
 
 
– external
 
 
17,270
 
14,652
 
17,986
 
1,497
 
2,535
 
53,940
 
 
– inter-segment
 
 
4,665
 
233
 
(2,474
 
288
 
(2,712
 
 
 
of which: net interest income/(expense)
 
 
15,822
 
10,666
 
5,259
 
888
 
(2,199)
 
30,436
 
 
Change in expected credit losses and other credit impairment charges
 
(1,177)
 
(739)
 
26
 
8
 
115
 
(1,767
 
)
 
Net operating income
 
 
20,758
 
14,146
 
15,538
 
1,793
 
(62)
 
52,173
 
 
Total operating expenses
 
 
(13,711)
 
(6,477)
 
(9,460)
 
(1,449)
 
(1,893)
 
(32,990
 
)
 
Operating profit/(loss)
 
 
7,047
 
7,669
 
6,078
 
344
 
(1,955)
 
19,183
 
 
Share of profit in associates and joint ventures
 
 
33
 
 
 
 
2,503
 
2,536
 
 
Adjusted profit before tax
 
 
7,080
 
7,669
 
6,078
 
344
 
548
 
21,719
 
 
 
 

 

 

 

 
%
 
%
 
Share of HSBC’s adjusted profit before tax
 
 
32.6
 
35.3
 
28.0
 
1.6
 
2.5
 
100.0
 
 
Adjusted cost efficiency ratio
 
 
62.5
 
43.5
 
61.0
 
81.2
 
(1,069.5
 
61.2
 
 
Adjusted balance sheet data
 
 
   $m
 
$m 
 
$m
 
$m
 
$m
 
$m
 
Loans and advances to customers (net)
 
 
361,872
 
333,162
 
244,978
 
39,217
 
2,467
 
981,696
 
 
Interests in associates and joint ventures
 
 
397
 
 
 
 
22,010
 
22,407
 
 
Total external assets
 
 
476,784
 
360,216
 
1,012,272
 
43,790
 
665,062
 
2,558,124
 
 
Customer accounts
 
 
640,924
 
357,596
 
290,914
 
64,658
 
8,551
 
1,362,643
 
 
Adjusted risk-weighted assets (unaudited)
 
2
 
126,865
 
321,244
 
281,021
 
16,824
 
118,550
 
864,504
 
 
 
 
 
 
2017
 
Net operating income before loan impairment charges and other credit risk provisions
 
1
 
20,220
 
 
13,247
 
 
15,285
 
 
1,723
 
 
1,186
 
 
51,661
 
 
– external
 
 
17,024
 
 
13,378
 
 
16,557
 
 
1,453
 
 
3,249
 
 
51,661
 
 
– inter-segment
 
 
3,196
 
 
(131
 
)
 
(1,272
 
)
 
270
 
 
(2,063
 
)
 
 
 
of which: net interest income/(expense)
 
 
13,927
 
 
9,060
 
 
4,851
 
 
825
 
 
(481
 
)
 
28,182
 
 
Loan impairment charges and other credit risk provisions
 
 
(969
 
)
 
(465
 
)
 
(446
 
)
 
(16
 
)
 
183
 
 
(1,713
 
)
 
Net operating income
 
 
19,251
 
 
12,782
 
 
14,839
 
 
1,707
 
 
1,369
 
 
49,948
 
 
Total operating expenses
 
 
(12,786
 
)
 
(5,953
 
)
 
(8,991
 
)
 
(1,411
 
)
 
(2,090
 
)
 
(31,231
 
)
 
Operating profit/(loss)
 
 
6,465
 
 
6,829
 
 
5,848
 
 
296
 
 
(721
 
)
 
18,717
 
 
Share of profit in associates and joint ventures
 
 
14
 
 
 
 
 
 
 
 
2,402
 
 
2,416
 
 
Adjusted profit before tax
 
 
6,479
 
 
6,829
 
 
5,848
 
 
296
 
 
1,681
 
 
21,133
 
 
 
 
%      
 
%      
 
%      
 
%      
 
%      
 
%
 
Share of HSBC’s adjusted profit before tax
 
 
30.6
 
 
32.3
 
 
27.7
 
 
1.4
 
 
8.0
 
 
100.0
 
 
Adjusted cost efficiency ratio
 
 
63.2
 
 
44.9
 
 
58.8
 
 
81.9
 
 
176.2
 
 
60.5
 
 
Adjusted balance sheet data
 
 
$m      
 
$m      
 
$m     
 
$m      
 
$m      
 
$m
 
Loans and advances to customers (net)
 
 
332,261
 
 
305,213
 
 
244,476
 
 
39,597
 
 
7,294
 
 
928,841
 
 
Interests in associates and joint ventures
 
 
363
 
 
 
 
 
 
 
 
21,656
 
 
22,019
 
 
Total external assets
 
 
451,516
 
 
336,163
 
 
946,747
 
 
46,247
 
 
662,364
 
 
2,443,037
 
 
Customer accounts
 
 
621,092
 
 
351,617
 
 
273,080
 
 
64,957
 
 
10,883
 
 
1,321,629
 
 
Adjusted risk-weighted assets (unaudited)
 
2
 
118,131
 
 
289,824
 
 
293,135
 
 
15,795
 
 
128,795
 
 
845,680
 
 
 
1 Net operating income before change in expected credit losses and other credit impairment charges/Loan impairment charges and other credit risk provisions, also referred to as revenue.
 
2 Adjusted risk-weighted assets are calculated using reported risk-weighted assets adjusted for the effects of currency translation differences and significant items.
 
 
 
Consolidated income statement
 
 
for the year ended 31 December
 
 
2018 
 
2017
 
 
$m 
 
$m
 
Net interest income
 
30,489
 
28,176
 
– interest income
 
49,609
 
40,995
 
– interest expense
 
(19,120)
 
(12,819)
 
Net fee income
 
12,620
 
12,811
 
– fee income
 
16,044
 
15,853
 
– fee expense
 
(3,424)
 
(3,042)
 
Net income from financial instruments held for trading or managed on a fair value basis9, 10
 
9,531
 
8,426
 
Net income/(expense) from assets and liabilities of insurance businesses, including related derivatives, measured at fair value through profit or loss
 
(1,488)
 
2,836
 
Changes in fair value of long-term debt and related derivatives9
 
(97)
 
155
 
Changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss10
 
695
 
N/A      
 
Gains less losses from financial investments
 
218
 
1,150
 
Dividend income
 
75
 
106
 
Net insurance premium income
 
10,659
 
9,779
 
Other operating income/(expense)
 
885
 
337
 
Total operating income
 
63,587
 
63,776
 
Net insurance claims and benefits paid and movement in liabilities to policyholders
 
(9,807)
 
(12,331)
 
Net operating income before change in expected credit losses and other credit impairment charges15
 
53,780
 
51,445
 
Change in expected credit losses and other credit impairment charges
 
(1,767)
 
N/A 
 
Loan impairment charges and other credit risk provisions
 
       N/A 
 
(1,769
 
Net operating income
 
52,013
 
49,676
 
Employee compensation and benefits
 
(17,373)
 
(17,315)
 
General and administrative expenses
 
(15,353)
 
(15,707)
 
Depreciation and impairment of property, plant and equipment
 
(1,119)
 
(1,166)
 
Amortisation and impairment of intangible assets
 
(814)
 
(696)
 
Total operating expenses
 
(34,659)
 
(34,884)
 
Operating profit
 
17,354
 
14,792
 
Share of profit in associates and joint ventures
 
2,536
 
2,375
 
Profit before tax
 
19,890
 
17,167
 
Tax expense
 
(4,865)
 
(5,288)
 
Profit for the year
 
15,025
 
11,879
 
Attributable to:
 
 
 
– ordinary shareholders of the parent company
 
12,608
 
9,683
 
– preference shareholders of the parent company
 
90
 
90
 
– other equity holders
 
1,029
 
1,025
 
– non-controlling interests
 
1,298
 
1,081
 
Profit for the year
 
15,025
 
11,879
 
 
$
 

 
Basic earnings per ordinary share
 
0.63
 
0.48
 
Diluted earnings per ordinary share
 
0.63
 
0.48
 
 
For footnotes, see page 15.
 
Consolidated statement of comprehensive income
 
 
for the year ended 31 December
 
 
 
2018
 
2017
 
 
Footnotes
 
$m
 
$m
 
Profit for the year
 
 
15,025
 
 
11,879
 
 
Other comprehensive income/(expense)
 
 
 
 
Items that will be reclassified subsequently to profit or loss when specific conditions are met:
 
 
 
 
Available-for-sale investments
 
 
N/A
 
146
 
 
– fair value gains
 
 
N/A
 
1,227
 
 
– fair value gains reclassified to the income statement
 
 
N/A
 
(1,033
 
)
 
– amounts reclassified to the income statement in respect of impairment losses
 
 
N/A
 
93
 
 
– income taxes
 
 
N/A
 
(141
 
)
 
Debt instruments at fair value through other comprehensive income
 
 
(243
 
)
 
N/A     
 
– fair value losses
 
 
(168
 
)
 
N/A    
 
– fair value gain transferred to the income statement on disposal
 
 
(95
 
)
 
N/A    
 
– expected credit losses recognised in the income statement
 
 
(94
 
)
 
N/A   
 
– income taxes
 
 
114
 
 
N/A   
 
Cash flow hedges
 
 
19
 
 
(192
 
)
 
– fair value losses
 
 
(267
 
)
 
(1,046
 
)
 
– fair value gains reclassified to the income statement
 
 
317
 
 
833
 
 
– income taxes and other movements
 
 
(31
 
)
 
21
 
 
Share of other comprehensive income/(expense) of associates and joint ventures
 
 
(64
 
)
 
(43
 
)
 
– share for the year
 
 
(64
 
)
 
(43
 
)
 
Exchange differences
 
 
(7,156
 
)
 
9,077
 
 
– other exchange differences
 
 
(7,156
 
)
 
8,939
 
 
– income tax attributable to exchange differences
 
 
 
 
138
 
 
Items that will not be reclassified subsequently to profit or loss:
 
 
 
 
Remeasurement of defined benefit asset/liability
 
 
(329
 
)
 
2,419
 
 
– before income taxes
 
7
 
(388
 
)
 
3,440
 
 
– income taxes
 
 
59
 
 
(1,021
 
)
 
Changes in fair value of financial liabilities designated at fair value due to movement in own credit risk
 
 
2,847
 
 
(2,024
 
)
 
– before income taxes
 
 
3,606
 
 
(2,409
 
)
 
– income taxes
 
 
(759
 
)
 
385
 
 
Equity instruments designated at fair value through other comprehensive income
 
 
(27
 
)
 
N/A     
 
– fair value losses
 
 
(71
 
)
 
N/A    
 
– income taxes
 
 
44
 
 
N/A    
 
Effects of hyperinflation
 
 
283
 
 
N/A    
 
Other comprehensive income/(expense) for the year, net of tax
 
 
(4,670
 
)
 
9,383
 
 
Total comprehensive income for the year
 
 
10,355
 
 
21,262
 
 
Attributable to:
 
 
 
 
– ordinary shareholders of the parent company
 
 
8,083
 
 
18,914
 
 
– preference shareholders of the parent company
 
 
90
 
 
90
 
 
– other equity holders
 
 
1,029
 
 
1,025
 
 
– non-controlling interests
 
 
1,153
 
 
1,233
 
 
Total comprehensive income for the year
 
 
10,355
 
 
21,262
 
 
 
For footnotes, see page 15.
 
 
 
Consolidated balance sheet
 
 
 
 
 
At
 
 
31 Dec
 
1 Jan
 
31 Dec
 
 
2018
 
201814
 
2017
 
 
$m
 
$m
 
$m
 
Assets
 
 
 
 
Cash and balances at central banks
 
162,843
 
180,621
 
180,624
 
Items in the course of collection from other banks
 
5,787
 
6,628
 
6,628
 
Hong Kong Government certificates of indebtedness
 
35,859
 
34,186
 
34,186
 
Trading assets
 
238,130
 
254,410
 
287,995
 
Financial assets designated and otherwise mandatorily measured at fair value through profit or loss
 
41,111
 
39,746
 
N/A
 
Financial assets designated at fair value
 
N/A
 
N/A
 
29,464
 
Derivatives
 
207,825
 
219,818
 
219,818
 
Loans and advances to banks
 
72,167
 
82,559
 
90,393
 
Loans and advances to customers
 
981,696
 
949,737
 
962,964
 
Reverse repurchase agreements – non-trading
 
242,804
 
201,553
 
201,553
 
Financial investments
 
407,433
 
383,499
 
389,076
 
Prepayments, accrued income and other assets
 
110,571
 
114,777
 
67,191
 
Current tax assets
 
684
 
1,006
 
1,006
 
Interests in associates and joint ventures
 
22,407
 
21,802
 
22,744
 
Goodwill and intangible assets
 
24,357
 
23,374
 
23,453
 
Deferred tax assets
 
4,450
 
4,714
 
4,676
 
Total assets
 
2,558,124
 
2,518,430
 
2,521,771
 
Liabilities and equity
 
 
 
 
Liabilities
 
 
 
 
Hong Kong currency notes in circulation
 
35,859
 
34,186
 
34,186
 
Deposits by banks
 
56,331
 
64,492
 
69,922
 
Customer accounts
 
1,362,643
 
1,360,227
 
1,364,462
 
Repurchase agreements – non-trading
 
165,884
 
130,002
 
130,002
 
Items in the course of transmission to other banks
 
5,641
 
6,850
 
6,850
 
Trading liabilities
 
84,431
 
80,864
 
184,361
 
Financial liabilities designated at fair value
 
148,505
 
144,006
 
94,429
 
Derivatives
 
205,835
 
216,821
 
216,821
 
Debt securities in issue
 
85,342
 
66,536
 
64,546
 
Accruals, deferred income and other liabilities
 
97,380
 
99,926
 
45,907
 
Current tax liabilities
 
718
 
928
 
928
 
Liabilities under insurance contracts
 
87,330
 
85,598
 
85,667
 
Provisions
 
2,920
 
4,295
 
4,011
 
Deferred tax liabilities
 
2,619
 
1,614
 
1,982
 
Subordinated liabilities
 
22,437
 
25,861
 
19,826
 
Total liabilities
 
2,363,875
 
2,322,206
 
2,323,900
 
Equity
 
 
 
 
Called up share capital
 
10,180
 
10,160
 
10,160
 
Share premium account
 
13,609
 
10,177
 
10,177
 
Other equity instruments
 
22,367
 
22,250
 
22,250
 
Other reserves
 
1,906
 
6,643
 
7,664
 
Retained earnings
 
138,191
 
139,414
 
139,999
 
Total shareholders’ equity
 
186,253
 
188,644
 
190,250
 
Non-controlling interests
 
7,996
 
7,580
 
7,621
 
Total equity
 
194,249
 
196,224
 
197,871
 
Total liabilities and equity
 
2,558,124
 
2,518,430
 
2,521,771
 
 
For footnotes, see page 15.
 
 
 
Consolidated statement of cash flows
 
for the year ended 31 December
 
 
 
2018
 
2017
 
 
Footnotes
 
$m
 
$m
 
Profit before tax
 
 
19,890
 
17,167
 
 
Adjustments for non-cash items:
 
 
 
 
Depreciation and amortisation
 
 
1,933
 
1,862
 
 
Net (gain)/loss from investing activities
 
 
(126)
 
(1,152
 
)
 
Share of profits in associates and joint ventures
 
 
(2,536)
 
(2,375
 
)
 
(Gain)/Loss on disposal of subsidiaries, businesses, associates and joint ventures
 
 
 
(79
 
)
 
Change in expected credit losses gross of recoveries and other credit impairment charges
 
 
2,280
 
N/A
 
Loan impairment losses gross of recoveries and other credit risk provisions
 
 
N/A
 
2,603
 
 
Provisions including pensions
 
 
1,944
 
917
 
 
Share-based payment expense
 
 
450
 
500
 
 
Other non-cash items included in profit before tax
 
 
(1,303)
 
(381
 
)
 
Elimination of exchange differences
 
11
 
7,299
 
(21,289
 
)
 
Changes in operating assets and liabilities
 
 
 
 
Change in net trading securities and derivatives
 
 
10,716
 
(10,901
 
)
 
Change in loans and advances to banks and customers
 
 
(44,071)
 
(108,984
 
)
 
Change in reverse repurchase agreements – non-trading
 
 
(40,499)
 
(37,281
 
)
 
Change in financial assets designated and otherwise mandatorily measured at fair value
 
 
(1,515)
 
(5,303
 
)
 
Change in other assets
 
 
4,047
 
(6,570
 
)
 
Change in deposits by banks and customer accounts
 
 
(5,745)
 
102,211
 
 
Change in repurchase agreements – non-trading
 
 
35,882
 
41,044
 
 
Change in debt securities in issue
 
 
18,806
 
(1,369
 
)
 
Change in financial liabilities designated at fair value
 
 
4,500
 
8,508
 
 
Change in other liabilities
 
 
(2,644)
 
13,514
 
 
Dividends received from associates
 
 
910
 
740
 
 
Contributions paid to defined benefit plans
 
 
(332)
 
(685
 
)
 
Tax paid
 
 
(3,417)
 
(3,175
 
)
 
Net cash from operating activities
 
 
6,469
 
(10,478
 
)
 
Purchase of financial investments
 
 
(383,454)
 
(357,264
 
)
 
Proceeds from the sale and maturity of financial investments
 
 
370,357
 
418,352
 
 
Net cash flows from the purchase and sale of property, plant and equipment
 
 
(1,196)
 
(1,167
 
)
 
Net cash flows from disposal of customer and loan portfolios
 
 
(204)
 
6,756
 
 
Net investment in intangible assets
 
 
(1,848)
 
(1,285
 
)
 
Net cash flow on disposal of subsidiaries, businesses, associates and joint ventures2
 
 
4
 
165
 
 
Net cash from investing activities
 
 
(16,341)
 
65,557
 
 
Issue of ordinary share capital and other equity instruments
 
 
6,001
 
5,196
 
 
Cancellation of shares
 
 
(1,998)
 
(3,000
 
)
 
Net sales/(purchases) of own shares for market-making and investment purposes
 
 
133
 
(67
 
)
 
Purchase of treasury shares
 
 
 
 
 
Redemption of preference shares and other equity instruments
 
 
(6,078)
 
 
 
Subordinated loan capital issued
 
 
 
 
 
Subordinated loan capital repaid
 
12
 
(4,077)
 
(3,574
 
)
 
Dividends paid to shareholders of the parent company and non-controlling interests
 
 
(10,762)
 
(9,005
 
)
 
Net cash from financing activities
 
 
(16,781)
 
(10,450
 
)
 
Net increase/(decrease) in cash and cash equivalents
 
 
(26,653)
 
44,629
 
 
Cash and cash equivalents at 1 Jan
 
 
337,412
 
274,550
 
 
Exchange differences in respect of cash and cash equivalents
 
 
(9,677)
 
18,233
 
 
Cash and cash equivalents at 31 Dec
 
13
 
301,082
 
337,412
 
 
Cash and cash equivalents comprise:
 
 
 
 
– cash and balances at central banks
 
 
162,843
 
180,624
 
 
– items in the course of collection from other banks
 
 
5,787
 
6,628
 
 
– loans and advances to banks of one month or less
 
 
47,878
 
82,771
 
 
– reverse repurchase agreements with banks of one month or less
 
 
59,602
 
58,850
 
 
– treasury bills, other bills and certificates of deposit less than three months
 
 
30,613
 
15,389
 
 
– less: items in the course of transmission to other banks
 
 
(5,641)
 
(6,850
 
)
 
Cash and cash equivalents at 31 Dec
 
13
 
301,082
 
337,412
 
 
 
For footnotes, see page 15.
 
 
 
Consolidated statement of changes in equity
 
 
for the year ended 31 December
 
 
 
 
 
Other reserves
 
 
 
 
 
Called up share capital and share premium
 
Other equity instru-ments2,3
 
Retained earnings4,5
 
Financial assets at FVOCI reserve8
 
Cash flowhedging reserve
 
Foreignexchange reserve
 
Merger and other reserves6
 
Totalshare- holders’ equity
 
Non-controlling interests
 
Totalequity
 
 
$m
 
$m
 
$m
 
$m
 
$m
 
$m
 
$m
 
$m
 
$m
 
$m
 
As at 31 Dec 2017
 
20,337
 
22,250
 
139,999
 
(350)
 
(222)
 
(19,072)
 
27,308
 
190,250
 
7,621
 
197,871
 
Impact on transition to IFRS 9
 
 
 
(585)
 
(1,021)
 
 
 
 
(1,606)
 
(41)
 
(1,647)
 
At 1 Jan 2018
 
20,337
 
22,250
 
139,414
 
(1,371)
 
(222)
 
(19,072)
 
27,308
 
188,644
 
7,580
 
196,224
 
Profit for the year
 
 
 
13,727
 
 
 
 
 
13,727
 
1,298
 
15,025
 
Other comprehensive income(net of tax)
 
 
 
2,765
 
(245)
 
16
 
(7,061)
 
 
(4,525)
 
(145)
 
(4,670)
 
– debt instruments at fair value through other comprehensive income
 
 
 
 
(245)
 
 
 
 
(245)
 
2
 
(243)
 
– equity instruments designated at fair value through other comprehensive income
 
 
 
 
 
 
 
 
(27)
 
(27)
 
– cash flow hedges
 
 
 
 
 
16
 
 
 
16
 
3
 
19
 
– changes in fair value of financial liabilities designated at fair value upon initial recognition arising from changes in own credit risk
 
 
 
2,847
 
 
 
 
 
2,847
 
 
2,847
 
– remeasurement of defined benefit asset/liability7
 
 
 
(301)
 
 
 
 
 
(301)
 
(28)
 
(329)
 
– share of other comprehensive income of associates and joint ventures
 
 
 
(64)
 
 
 
 
 
(64)
 
 
(64)
 
 – effects of hyperinflation
 
 
 
283
 
 
 
 
 
283
 
 
283
 
– exchange differences
 
 
 
 
 
 
(7,061)
 
 
(7,061)
 
(95)
 
(7,156)
 
Total comprehensive income for the year
 
 
 
16,492
 
(245)
 
16
 
(7,061)
 
 
9,202
 
1,153
 
10,355
 
Shares issued under employee remuneration and share plans
 
721
 
 
(610)
 
 
 
 
 
111
 
 
111
 
Shares issued in lieu of dividends and amounts arising thereon
 
 
 
1,494
 
 
 
 
 
1,494
 
 
1,494
 
Capital securities issued
 
 
5,968
 
 
 
 
 
 
5,968
 
 
5,968
 
Dividends to shareholders
 
 
 
(11,547)
 
 
 
 
 
(11,547)
 
(710)
 
(12,257)
 
Redemption of securities
 
 
(5,851)
 
(237)
 
 
 
 
 
(6,088)
 
 
(6,088)
 
Transfers16
 
 
 
(2,200)
 
 
 
 
2,200
 
 
 
 
Cost of share-based payment arrangements
 
 
 
450
 
 
 
 
 
450
 
 
450
 
Cancellation of shares17,18
 
2,731
 
 
(4,998)
 
 
 
 
269
 
(1,998)
 
 
(1,998)
 
Other movements
 
 
 
(67)
 
84
 
 
 
 
17
 
(27)
 
(10)
 
At 31 Dec 2018
 
23,789
 
22,367
 
138,191
 
(1,532)
 
(206)
 
(26,133)
 
29,777
 
186,253
 
7,996
 
194,249
 
 
For footnotes, see page 15.
 
 
Consolidated statement of changes in equity (continued)
 
 
 
 
 
 
Other reserves
 
 
 
 
 
 
Called up share
capital and
share premium
 
Other equity instru-ments2
 
Retained
earnings4, 5
 
Available- for-
sale
fair value
reserve
 
Cash flow
hedging
reserve
 
Foreign
exchange
reserve
 
Merger
and other
reserves6
 
Total
share- holders’
equity
 
Non-controlling
interests
 
Total
equity
 
 
 
$m
 
$m
 
$m
 
$m
 
$m
 
$m
 
$m
 
$m
 
$m
 
$m
 
At 1 Jan 2017
 
22,715
 
17,110
 
136,795
 
(477)
 
(27)
 
(28,038)
 
27,308
 
175,386
 
7,192
 
182,578
 
 
Profit for the year
 
 
 
10,798
 
 
 
 
 
10,798
 
1,081
 
11,879
 
 
Other comprehensive income(net of tax)
 
 
 
328
 
131
 
(194)
 
8,966
 
 
9,231
 
152
 
9,383
 
 
– available-for-sale investments
 
 
 
 
131
 
 
 
 
131
 
15
 
146
 
 
– cash flow hedges
 
 
 
 
 
(194)
 
 
 
(194)
 
2
 
(192)
 
 
– changes in fair value of financial liabilities designated at fair value due to movement in own credit risk
 
 
 
(2,024)
 
 
 
 
 
(2,024)
 
 
(2,024)
 
 
– remeasurement of defined benefit asset/liability7
 
 
 
2,395
 
 
 
 
 
2,395
 
24
 
2,419
 
 
– share of other comprehensive income of associates and joint ventures
 
 
 
(43)
 
 
 
 
 
(43)
 
 
(43)
 
 
– exchange differences
 
 
 
 
 
 
8,966
 
 
8,966
 
111
 
9,077
 
 
Total comprehensive income for the year
 
 
 
11,126
 
131
 
(194)
 
8,966
 
 
20,029
 
1,233
 
21,262
 
 
Shares issued under employee remuneration and share plans
 
622
 
 
(566)
 
 
 
 
 
56
 
 
56
 
 
Shares issued in lieu of dividends and amounts arising thereon
 
 
 
3,206
 
 
 
 
 
3,206
 
 
3,206
 
 
Capital securities issued
 
 
5,140
 
 
 
 
 
 
5,140
 
 
5,140
 
 
Dividends to shareholders
 
 
 
(11,551)
 
 
 
 
 
(11,551)
 
(660)
 
(12,211)
 
 
Cost of share-based payment arrangements
 
 
 
500
 
 
 
 
 
500
 
 
500
 
 
Cancellation of shares1
 
(3,000)
 
 
 
 
 
 
 
(3,000)
 
 
(3,000)
 
 
Other movements
 
 
 
489
 
(4)
 
(1)
 
 
 
484
 
(144)
 
340
 
At 31 Dec 2017
 
20,337
 
22,250
 
139,999
 
(350)
 
(222)
 
(19,072)
 
27,308
 
190,250
 
7,621
 
197,871
 
 
For footnotes, see page 15.
 
 
 
1  In February 2017, HSBC announced a share buy-back of up to $1.0bn, which was completed in April 2017. In July 2017, HSBC announced a share buy-back of up to $2.0bn, which was completed in November 2017. Shares bought back from these two buy-back programmes have been cancelled.
 
2 During 2018, HSBC Holdings issued $4,150m, £1,000m and SGD750m of perpetual subordinated contingent convertible capital securities on which there were $60m of external issuance costs, $49m of intra-Group issuance costs and $11m of tax benefits. In 2017, HSBC Holdings issued $3,000m, SGD1,000m and €1,250m of perpetual subordinated contingent convertible capital securities, on which there were $14m of external issuance costs, $37m of intra-Group issuance costs and $10m of tax benefits. Under IFRSs these issuance costs and tax benefits are classified as equity.
 
3 During 2018, HSBC Holdings redeemed $2,200m 8.125% perpetual subordinated capital securities and its $3,800m 8.000% perpetual subordinated capital securities, Series 2, on which there were $172m of external issuance costs and $23m of intra-Group issuance costs wound down.
 
4 At 31 December 2018, retained earnings included 379,926,645 treasury shares (2017: 360,590,019). In addition, treasury shares are also held within HSBC’s Insurance business retirement funds for the benefit of policyholders or beneficiaries within employee trusts for the settlement of shares expected to be delivered under employee share schemes or bonus plans, and the market-making activities in Global Markets.
 
5 Cumulative goodwill amounting to $5,138m has been charged against reserves in respect of acquisitions of subsidiaries prior to 1 January 1998, including $3,469m charged against the merger reserve arising on the acquisition of HSBC Bank plc. The balance of $1,669m has been charged against retained earnings.
 
6 Statutory share premium relief under Section 131 of the Companies Act 1985 (the ‘Act’) was taken in respect of the acquisition of HSBC Bank plc in 1992, HSBC France in 2000 and HSBC Finance Corporation in 2003, and the shares issued were recorded at their nominal value only. In HSBC’s consolidated financial statements, the fair value differences of $8,290m in respect of HSBC France and $12,768m in respect of HSBC Finance Corporation were recognised in the merger reserve. The merger reserve created on the acquisition of HSBC Finance Corporation subsequently became attached to HSBC Overseas Holdings (UK) Limited (‘HOHU’), following a number of intra-Group reorganisations. During 2009, pursuant to Section 131 of the Companies Act 1985, statutory share premium relief was taken in respect of the rights issue and $15,796m was recognised in the merger reserve. The merger reserve includes a deduction of $614m in respect of costs relating to the rights issue, of which $149m was subsequently transferred to the income statement. Of this $149m, $121m was a loss arising from accounting for the agreement with the underwriters as a contingent forward contract. The merger reserve excludes the loss of $344m on a forward foreign exchange contract associated with hedging the proceeds of the rights issue.
 
7 During 2018, an actuarial gain of $1,180m has arisen as a result of the remeasurement of the defined benefit pension obligation of the HSBC Bank (UK) Pension Scheme. During 2017, an actuarial gain of $1,730m has arisen as a result of the remeasurement of the defined benefit pension obligation of the HSBC Bank (UK) Pension Scheme.
 
8 The $350m at 31 December 2017 represents the IAS 39 available-for-sale fair value reserve as at 31 December 2017.
 
9 Prior to 2018, foreign exchange exposure on some financial instruments designated at fair value was presented in the same line in the income statement as the underlying fair value movement on these instruments. In 2018, we have grouped the entire effect of foreign exchange exposure in profit or loss and presented it within ‘Net income from financial instruments held for trading or managed on a fair value basis’. Comparative data have been re-presented. There is no net impact on Total operating income and the impact on ‘changes in fair value of long-term debt and related derivatives’ is $(517)m for the year ended 31 December 2017 and $1,978m for the year ended 31 December 2016.
 
10 The classification and measurement requirements under IFRS 9, which was adopted from 1 January 2018, are based on an entity’s assessment of both the business model for managing the assets and the contractual cash flow characteristics of the assets. The standard contains a classification for items measured mandatorily at fair value through profit or loss as a residual category. Given its residual nature, the presentation of the income statement has been updated to separately present items in this category, which are of a dissimilar nature or function, in line with IAS 1 ‘Presentation of financial statements’ requirements. Comparative data has been re-presented. There is no net impact on total operating income.
 
11 Adjustment to bring changes between opening and closing balance sheet amounts to average rates. This is not done on a line-by-line basis, as details cannot be determined without unreasonable expense.
 
12 Subordinated liabilities changes during the year are attributable to repayments of $(4.1)bn (2017: $(3.6)bn) of securities. Non-cash changes during the year included foreign exchange (loss)/gain $(0.6)bn (2017: $(0.6)bn) and fair value losses of $(1.4)bn (2017: $(1.2)bn).
 
13 At 31 December 2018, $26,282m (2017: $39,830m; 2016: $35,501m) was not available for use by HSBC, of which $19,755m (2017: $21,424m) related to mandatory deposits at central banks.
 
14 Balances at 1 January 2018 have been prepared in accordance with accounting policies referred to on page 16. 31 December 2017 balances have not been re-presented.
 
15 Net operating income before change in expected credit losses and other credit impairment charges/Loan impairment charges and other credit risk provisions, also referred to as revenue.
 
16  Permitted transfers from the merger reserve to retained earnings were made when the investment in HSBC Overseas Holdings (UK) Limited was previously impaired. A part reversal of this impairment results in a transfer from retained earnings back to the merger reserve of $2,200m.
 
17 This includes a re-presentation of the cancellation of shares to retained earnings and capital redemption reserve in respect of the 2017 share buy-back, under which retained earnings have been reduced by $3,000m, called up capital and share premium increased by $2,731m and other reserves increased by $269m.
 
18 In May 2018, HSBC announced a share buy-back of up to $2.0bn, which was completed in August 2018.
 
 
 
 
1
 
Basis of preparation and significant accounting policies
 
 
The basis of preparation and summary of significant accounting policies applicable to the consolidated financial statements of HSBC and the separate financial statements of HSBC Holdings can be found in Note 1, or the relevant Note, in the Financial Statements in the Annual Report and Accounts 2018.
 
(a) Compliance with International Financial Reporting Standards
 
The consolidated financial statements of HSBC and the separate financial statements of HSBC Holdings have been prepared in accordance with International Financial Reporting Standards (‘IFRSs’) as issued by the International Accounting Standards Board (‘IASB’), including interpretations issued by the IFRS Interpretations Committee, and as endorsed by the European Union (‘EU’). At 31 December 2018, there were no unendorsed standards effective for the year ended 31 December 2018 affecting these consolidated and separate financial statements, and HSBC’s application of IFRSs results in no differences between IFRSs as issued by the IASB and IFRSs as endorsed by the EU.
 
Standards adopted during the year ended 31 December 2018
 
HSBC has adopted the requirements of IFRS 9 ‘Financial Instruments’ from 1 January 2018, with the exception of the provisions relating to the presentation of gains and losses on financial liabilities designated at fair value, which were adopted from 1 January 2017. This includes the adoption of ‘Prepayment Features with Negative Compensation (Amendments to IFRS 9)’, which is effective for annual periods beginning on or after 1 January 2019 with early adoption permitted. The effect of its adoption is not significant. IFRS 9 includes an accounting policy choice to remain with IAS 39 hedge accounting, which HSBC has exercised. The classification and measurement, and impairment requirements, are applied retrospectively by adjusting the opening balance sheet at the date of initial application. As permitted by IFRS 9, HSBC has not restated comparatives. Adoption reduced net assets at 1 January 2018 by $1,647m as set out in
 
Note 37 of the Annual Report and Accounts 2018.
 
In addition, HSBC has adopted the requirements of IFRS 15 ‘Revenue from contracts with customers’ and a number of interpretations and amendments to standards which have had an insignificant effect on the consolidated financial statements of HSBC and the separate financial statements of HSBC Holdings.
 
(b) Differences between IFRSs and Hong Kong Financial Reporting Standards
 
There are no significant differences between IFRSs and Hong Kong Financial Reporting Standards in terms of their application to HSBC, and consequently there would be no significant differences had the financial statements been prepared in accordance with Hong Kong Financial Reporting Standards. The ‘Notes on the financial statements’, taken together with the ‘Report of the Directors’, include the aggregate of all disclosures necessary to satisfy IFRSs and Hong Kong reporting requirements.
 
(c) Going concern
 
The financial statements are prepared on a going concern basis, as the Directors are satisfied that the Group and parent company have the resources to continue in business for the foreseeable future. In making this assessment, the Directors have considered a wide range of information relating to present and future conditions, including future projections of profitability, cash flows and capital resources.
 
2
 
Tax
 
 
 
Tax expense
 
 
2018
 
2017
 
 
$m
 
$m
 
Current tax1
 
4,195
 
4,264
 
– for this year
 
4,158
 
4,115
 
– adjustments in respect of prior years
 
37
 
149
 
Deferred tax
 
670
 
1,024
 
– origination and reversal of temporary differences
 
656
 
(228)
 
– effect of changes in tax rates
 
17
 
1,337
 
– adjustments in respect of prior years
 
(3)
 
(85)
 
Year ended 31 Dec
 
4,865
 
5,288
 
 
1 Current tax included Hong Kong profits tax of $1,532m (2017: $1,350m). The Hong Kong tax rate applying to the profits of subsidiaries assessable in Hong Kong was 16.5% (2017: 16.5%).
 
 
Tax reconciliation
 
The tax charged to the income statement differs from the tax charge that would apply if all profits had been taxed at the UK corporation tax rate as follows:
 
 
2018
 
2017
 
2016
 
 
$m
 
%
 
$m
 
%
 
$m
 
%
 
Profit before tax
 
19,890
 
 
17,167
 
 
7,112
 
 
Tax expense
 
 
 
 
 
 
 
– taxation at UK corporation tax rate of 19.00% (2017: 19.25%; 2016: 20.0%)
 
3,779
 
19.00
 
3,305
 
19.25
 
1,422
 
20.00
 
 
– impact of differently taxed overseas profits in overseas locations
 
264
 
1.3
 
407
 
2.3
 
43
 
0.6
 
 
Items increasing tax charge in 2018:
 
 
 
 
 
 
 
– local taxes and overseas withholding taxes
 
437
 
2.2
 
618
 
3.6
 
434
 
6.1
 
 
– UK tax losses not recognised
 
435
 
2.2
 
70
 
0.4
 
305
 
4.3
 
 
– other permanent disallowables
 
396
 
2.0
 
400
 
2.3
 
438
 
6.2
 
 
– UK banking surcharge
 
229
 
1.1
 
136
 
0.8
 
199
 
2.8
 
 
– bank levy
 
191
 
1.0
 
180
 
1.0
 
170
 
2.4
 
 
– non-deductible regulatory settlements
 
153
 
0.8
 
(132)
 
(0.8)
 
20
 
0.3
 
 
– impacts of hyperinflation
 
78
 
0.4
 
 
 
 
 
 
– adjustments in respect of prior period liabilities
 
34
 
0.2
 
64
 
0.4
 
256
 
3.6
 
 
– non-UK tax losses not recognised
 
32
 
0.2
 
33
 
0.2
 
147
 
2.1
 
 
– change in tax rates
 
17
 
0.1
 
49
 
0.3
 
(4)
 
(0.1
 
)
 
– non-deductible UK customer compensation
 
16
 
0.1
 
166
 
1.0
 
162
 
2.3
 
 
– deferred tax remeasurement due to US federal tax rate reduction
 
 
 
1,288
 
7.5
 
 
 
 
– non-deductible goodwill write-down
 
 
 
 
 
648
 
9.1
 
 
– non-deductible loss and taxes suffered on Brazil disposal
 
 
 
 
 
464
 
6.5
 
 
Items reducing tax charge in 2018:
 
 
 
 
 
 
 
– non-taxable income and gains
 
(691)
 
(3.5)
 
(766)
 
(4.4)
 
(577)
 
(8.1
 
)
 
– effect of profits in associates and joint ventures
 
(492)
 
(2.5)
 
(481)
 
(2.8)