HSBC 2012 Annual Report Download - page 86

HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
Geographical regions > Europe
84
to lower commissions paid as a result of the run-off
and subsequent disposal of the insurance businesses
in Ireland. These increases were partly offset by a
fall in brokerage fees in GPB, reflecting a reduction
in client transaction volumes, due in part to lower
market volatility. Fees from assets under
management and account services also declined, as
challenging market conditions in the latter half of
2011 led to a fall in average client assets in 2012,
coupled with a reduction in client numbers as we
repositioned our target client base.
Net trading income increased by 27%, primarily
due to significantly higher Rates trading revenues
in the UK and France, and higher Credit trading
revenues, mainly in the UK, as spreads tightened and
investor sentiment improved following stimuli by
central banks. This was despite significant adverse
fair value movements in Rates, including a charge
from own credit spreads on structured liabilities as
spreads tightened which compared with a gain
reported in 2011, together with a charge as a result
of a change in estimation methodology in respect of
credit valuation adjustments on derivative assets (see
Note 15 on the Financial Statements). Revenues in
our legacy credit portfolio increased due to price
appreciation and redemption at par of certain assets.
Foreign Exchange income was also stronger due to
higher income from GB&M’s ongoing collaboration
with CMB, and increased volumes from
improvements in our electronic pricing and
distribution capabilities, although this was partly
offset by the effect of less volatile markets in 2012.
In addition, trading income benefited from the
change in estimation methodology for debit
valuation adjustments on derivative liabilities
(see Note 15 on the Financial Statements).
There were lower adverse fair value movements
on non-qualifying hedges, driven by favourable fair
value movements on non-qualifying hedges in
HSBC Holdings, compared with adverse fair value
movements in 2011, reflecting the less pronounced
decline in long-term US interest rates relative to
sterling and euro interest rates than in 2011. This
was partly offset by higher adverse movements on
non-qualifying hedges in European operating entities
as interest rates fell.
Adverse foreign exchange movements were
reported on assets held as economic hedges of
foreign currency debt designated at fair value
compared with favourable movements in 2011.
These offset favourable foreign exchange
movements on the foreign currency debt which are
reported in ‘Net expense from financial instruments
designated at fair value’.
Net expense from financial instruments
designated at fair value increased by US$4.8bn.
Excluding adverse fair value movements due to the
change in credit spreads on our own debt held at
fair value, net income from financial instruments
designated at fair value of US$1.9bn in 2012
compared with a net expense of US$374m in
2011. This reflected favourable foreign exchange
movements on foreign currency debt designated
at fair value issued as part of our overall funding
strategy compared with adverse movements in 2011,
with an offset reported in ‘Net trading income’. In
addition, net investment gains were recognised on
the fair value of assets held to meet liabilities under
insurance and investment contracts as market
conditions improved, compared with net investment
losses in 2011. The corresponding movement in
liabilities to customers is recorded under ‘Net
insurance claims incurred and movement in
liabilities to policyholders’ to the extent that
these investment gains or losses are attributable to
policyholders holding unit-linked insurance policies
and insurance or investment contracts with DPF.
Gains less losses from financial investments
decreased by US$133m. This was driven by higher
impairments in GB&M in the UK of available-for-
sale equity securities due to significant write-downs
in 2012 on three holdings, two of which were in our
direct investment business in run-off. The decline
was also driven by losses on the disposal of legacy
assets, also in GB&M in the UK (see page 27),
together with the non-recurrence of gains in 2011 on
the disposal of available-for-sale debt securities in
our Insurance business in RBWM. These factors
were partly offset by higher gains on the disposal of
available-for-sale debt securities in Balance Sheet
Management, mainly in the UK, as part of structural
interest rate risk management activities, coupled
with a rise in disposal gains in Principal Investments
in GB&M.
Net earned insurance premiums decreased by
6%. This mainly reflected lower life insurance sales
in RBWM in France as a result of the adverse
economic environment and increased competition
from other banking products. The run-off and
subsequent disposal of the insurance businesses in
Ireland in 2012 also contributed to the decline. This
was partly offset by a rise in net earned premiums
in the UK due, in part, to the sale of a unit-linked
insurance product through two new third party
platforms.
Other operating income decreased by US$95m.
GB&M incurred losses on the sale of certain
syndicated loans in the UK. In addition, gains in