HSBC 2011 Annual Report Download - page 39

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Overview Operating & Financial Review Corporate Governance Financial Statements Shareholder Information
Economic profit/(loss)
Our internal performance measures include
economic profit/(loss), a calculation which compares
the return on financial capital invested in HSBC by
our shareholders with the cost of that capital. We
price our cost of capital internally and the difference
between that cost and the post-tax profit attributable
to ordinary shareholders represents the amount of
economic profit/(loss) generated. In order to
concentrate on external factors rather than
measurement bases, we emphasise the trend in
economic profit/(loss) ahead of absolute amounts.
Our long-term cost of capital is reviewed
annually and is 11% for 2011; this remains
unchanged from 2010. The following commentary is
on a reported basis.
The return on invested capital increased by
1.5 percentage points to 10.2%, which was
0.8 percentage points lower than our benchmark cost
of capital. Our economic loss was US$1.3bn,
US$2.0bn less than the loss at 31 December 2010,
reflecting an increase in profit attributable to
shareholders. This was predominantly driven by a
significant increase in the fair value of own debt and
a lower tax charge.
The increase in average invested capital
reflected higher retained earnings and an increase in
average foreign exchange reserves, primarily due to
the effect of euro and sterling exchange rate
movements on our underlying assets.
2011 2010
US$m %
45 US$m %45
Average total shareholders’ equity ......................................................................... 156,129 138,224
Adjusted by:
Goodwill previously amortised or written off ................................................... 8,123 8,123
Property revaluation reserves ............................................................................. (914) (813)
Reserves representing unrealised losses on effective cash flow hedges ........... 287 100
Reserves representing unrealised losses on available-for-sale securities .......... 3,379 6,129
Preference shares and other equity instruments ................................................. (7,256) (5,473)
Average invested capital46 ...................................................................................... 159,748 146,290
Return on invested capital47 .................................................................................... 16,224 10.2 12,746 8.7
Benchmark cost of capital ...................................................................................... (17,572) (11.0) (16,092) (11.0)
Economic loss and spread ...................................................................................... (1,348) (0.8) (3,346) (2.3)
For footnotes, see page 95.
Reconciliation of RoRWA measures
In addition to measuring return on average risk
weighted assets (‘RoRWA’) we measure our
performance internally using underlying RoRWA,
which is underlying profit before tax as a percentage
of average risk weighted assets (‘RWA’s) adjusted
for the effects of foreign currency translation
differences. Underlying RoRWA adjusts
performance for certain items which distort year-on-
year performance as explained on page 16.
We also present underlying RoRWA adjusted
for the effect of legacy credit in GB&M (the legacy
credit portfolio is described on page 23) and the US
consumer finance business (the Cards and Retail
Services business along with the run-off portfolio
disclosed on page 88); together, the legacy
businesses. This excludes the results and RWAs
related to operations which are not regarded as
contributing to the longer-term performance of the
Group.
2011 2010
Pre-tax
return
Average
RWAs
RoRWA
Pre-tax
return
Average
RWAs
RoRWA
US$m US$bn % US$m US$bn %
Reported ........................................................... 21,872 1,154 1.9 19,037 1,098 1.7
Underlying ....................................................... 17,696 1,154 1.5 18,925 1,108 1.7
Legacy businesses ............................................ (2,847) 222 (1.3) (1,871) 215 (0.9)
Legacy credit in GB&M .............................. (436) 33 (1.3) 226 23 1.0
US consumer finance business .................... (2,411) 189 (1.3) (2,097) 192 (1.1)
Underlying (excluding legacy businesses) ...... 20,543 932 2.2 20,796 893 2.3