HSBC 2010 Annual Report Download - page 91

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Overview Operating & Financial Review Governance Financial Statements Shareholder Information
instruments to which we have exposure, or threats of
downgrades, can exacerbate the effect. The liquidity
of those HSBC entities that utilise long-term
wholesale markets could be constrained by an
inability to access them due to a variety of
unforeseen market dislocations or interruptions.
The market conditions that the financial services
industry experienced during the recent financial
crisis highlighted the significant benefits of a
diversified core deposit base, leading to increased
competition for such deposits and the greater risk of
deposit migration between competitors.
Our GB&M business operates in many markets
affected by illiquidity and is subject to the threat of
extreme price volatility, either directly or indirectly,
through exposures to securities, loans, derivatives
and other commitments. Although market conditions
continued to moderate in 2010, it is difficult to
predict if this trend will continue and, if conditions
worsen, which of our markets, products and other
businesses will be affected. Any repeat of these
factors could have an adverse effect on our results.
Macro-economic and geopolitical
Prevailing economic and market conditions
may adversely affect our results
Our earnings are affected by global and local
economic and market conditions. Following the
problems experienced in financial markets in
2007-8, concerted government action in 2009 paved
the way for a general improvement in the economic
environment in 2010, though recovery was variable
between regions. The eurozone economies came
under greater pressure, the dominant concern being
over sovereign debt. The financial services industry
continued to face an unusually high degree of
uncertainty.
With unemployment remaining high, consumer
confidence weak in developed markets and amid
signs of emerging inflationary pressures, economic
conditions remain fragile and volatile. Some
countries may recover only slowly to past levels of
growth, with the possibility of a return to recessionary
conditions in more sluggish economies, while others
which are growing rapidly may need to undertake
major adjustments to counter the formation of asset
bubbles. This could have an adverse effect on our
operating results. In particular, we may face the
following challenges in connection with these events
to our operations and operating model:
• the demand for borrowing from creditworthy
customers may diminish if economic activity
slows;
• trade and capital flows may contract as a result
of protectionist measures being introduced in
certain markets, or on the emergence of
geopolitical risks;
• a prolonged period of low interest rates will
constrain, for example through margin
compression and low returns on assets, net
interest income we earn on our excess deposits;
• our ability to borrow from other financial
institutions or to engage in funding transactions
could be adversely affected by market disruption,
for example in the event of contagion from stress
in the eurozone sovereign and financial sectors;
• market developments may depress consumer
and business confidence, for example if growth
in the US or the UK were to be poor, adversely
affecting both asset prices and payment patterns
and leading to increases in delinquencies and
default rates, write-offs and loan impairment
charges beyond our expectations. The effect of
such conditions in 2010 and previous years on
our North American retail business is described
on page 110.
We are subject to political and economic
risks in the countries in which we operate
We responded effectively to the financial crisis and,
more recently, the sovereign debt problems within
the eurozone, where we continued during 2010 to
support our operations and carry out wider market
functions.
As an organisation which operates in 87
countries and territories, however, our results are
subject to the risk of loss from unfavourable political
developments, currency fluctuations, social
instability and changes in government policies on
such matters as expropriation, authorisations,
international ownership, interest-rate caps, foreign
exchange transferability and tax in the jurisdictions
in which we operate.
The ability of HSBC’s subsidiaries and affiliates
to pay dividends could be restricted by changes in
official banking measures, exchange controls and
other requirements. We prepare our accounts in US
dollars, but because a substantial portion of our
assets, liabilities, funds under management, revenues
and expenses are denominated in other currencies,
changes in foreign exchange rates have an effect on
our reported income, cash flows and shareholders’
equity.