HSBC 2012 Annual Report Download - page 7

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Overview Operating & Financial Review Corporate Governance Financial Statements Shareholder Information
low interest rates continued to constrain the value of
our liquid balance sheet and customer redress costs
continued to weigh heavily in the UK.
The Group Chief Executive’s Business Review
covers financial performance and progress on
strategy delivery in more detail.
Reported results include the benefit of profits
arising from the significant disposals made in the
year as well as bearing the burden of the fines and
penalties levied as part of the settlement with US
regulatory and law enforcement agencies and
increased customer redress provisions in the UK.
When the Board assesses management performance
as part of reward measurement, these disposal gains
are eliminated but the legal settlement and customer
redress costs are not.
Looking through the reported results to
underlying financial performance, the Board viewed
positively the 2012 outcome.
Although earnings per share of US$0.74 were
20% lower than 2011, this largely reflected a
US$9.1bn negative swing in the fair value of our
own debt as credit spreads tightened, together with
a higher tax rate.
With the Group’s capital position strengthened
from retained profits and from capital released from
the divestments made in the year, the Board has
approved a 29% increase in the final dividend in
respect of the year to US$0.18 per share, US$0.04
higher than the final dividend in respect of 2011.
Total dividends in respect of 2012 of US$8.3bn,
amounted to US$0.45 per share, US$0.9bn higher
than in 2011. The Board also intends to increase
the quarterly dividends in respect of the first three
quarters of 2013 by US$0.01 per share to US$0.10
per share.
Shareholders’ equity at the end of 2012 stood at
US$175bn, US$17bn or some 10 % higher than at
the beginning of the year. The core tier 1 capital
ratio strengthened from 10.1% to 12.3% and the
Group remains on track to deliver compliance with
the more onerous Basel III requirements in the
accelerated timetable being sought by UK regulators.
During 2012, the UK government increased the
rate of levy applied on the global balance sheets of
UK domiciled banks. The cost to HSBC of the
revised levy for the current year was US$571m of
which US$295m related to non-UK banking activity.
The 2012 levy, which is not tax deductible, is the
equivalent of US$0.03 per ordinary share and, as
indicated last year, would otherwise have been
available for distribution to shareholders or used to
strengthen the capital base further.
Progress on regulatory reform
2012 was a further year of progress in delivering key
elements of the regulatory reform agenda mandated
by the G20 in response to the financial crisis. After
a long consultation period, the proposed Liquidity
Coverage Ratio within the Basel III framework was
recalibrated to better match industry experience, and
so strengthen bank liquidity without unnecessarily
constraining credit formation.
The list of banks to be designated as globally
significant was announced and, as expected, HSBC
was one of four placed in the highest category.
Good progress was made on clarifying the possible
approaches to resolving the failure of a bank with
operations in multiple jurisdictions. One approach
was directly applicable to the subsidiarised model
favoured by HSBC.
On structural reform of banking entities, the
Liikanen Group in Europe produced its report for
consideration while draft alternatives have been
proposed in France and Germany. In the UK,
the Government substantially accepted the
recommendations of the Independent Commission
on Banking in a policy paper and a draft Financial
Services (Banking Reform) Bill is expected to be
approved in the first half of 2013. Thereafter, the
government has signalled its intention to pass
secondary legislation by the end of this parliament
in 2015, with final implementation of the new
regime by 2019.
The key structural change being legislated
remains the separation of certain banking activities
for personal and small business customers into a
ring-fenced bank with its own financial and
governance arrangements. The recently appointed
Parliamentary Commission on Banking Standards in
the UK has reviewed the proposed legislation and
inter alia recommended strengthening the ring fence
by empowering regulators to force full separation in
the event of attempts to frustrate the objectives of the
ring fence.
Ongoing work remains extensive. Major areas
of policy development covering augmenting loss
absorbency through bailing-in certain categories of
creditor, addressing the systemic impact of central
clearing counterparties, establishing a banking union
within the eurozone and revisiting the risk weighting
of assets to enhance transparency and consistency,
are among the most important.
On top of this, the UK Parliamentary
Commission on Banking Standards is currently
examining all aspects of conduct, behaviour and