TIDMHSBA

RNS Number : 2692H

HSBC Holdings PLC

02 August 2021

HSBC Holdings plc

Interim Report 2021

In fulfilment of its obligations under sections 4.2.2, 6.3.3(2) and 6.3.5(1) of the Disclosure Guidance and Transparency Rules, HSBC Holdings plc (the "Company") hereby releases the unedited full text of its 2021 Interim Report (the "Interim Report") for the half-year ended 30 June 2021.

The document is now available on the Company's website at:

https://www.hsbc.com/investors/results-and-announcements/all-reporting/group

HSBC Holdings plc

Interim Report 2021

Opening up a world

of opportunity

Contents

Overview

   2              Highlights 
   4              Group Chief Executive's review 
   8              Our strategy 
   10            How we do business 
   12            Financial overview 
   16            Global businesses 
   23            Risk overview 

Interim management report

   27            Financial summary 
   34            Global businesses 
   42            Geographical regions 
   52            Reconciliation of alternative performance measures 
   55            Risk 
   55             - Key developments in the first half of 2021 
   55            - Areas of special interest 
   59            - Credit risk 
   85            - Treasury risk 
   93            - Market risk 
   95            - Insurance manufacturing operations risk 

Interim condensed financial statements

   97            Directors' responsibility statement 
   98            Independent review report to HSBC Holdings plc 
   99            Interim condensed financial statements 
   105          Notes on the interim condensed financial statements 

Additional information

   126          Shareholder information 
   131          Forward-looking statements 
   132          Certain defined terms 
   133          Abbreviations 

A reminder

The currency we report in is US dollars.

Adjusted measures

We supplement our IFRSs figures with non-IFRSs measures used by management internally that constitute alternative performance measures under European Securities and Markets Authority guidance and non-GAAP financial measures defined in and presented in accordance with US Securities and Exchange Commission rules and regulations. These measures are highlighted with the following symbol: <>

Further explanation may be found on page 14.

In this document we use the following abbreviations to refer to reporting periods:

   1H21       First half of 2021                     2Q21       Second quarter of 2021 
   2H20       Second half of 2020                                1Q21       First quarter of 2021 

1H20 First half of 2020 2Q20 Second quarter of 2020 1Q20 First quarter of 2020

Cover image: Opening up a world of opportunity

We connect people, ideas and capital across the world, opening up opportunities for our customers and the communities we serve.

Our global businesses

We serve customers through three global businesses. On pages 16 to 22 we provide an overview of our performance in the first half of 2021 for each of the global businesses, as well as our Corporate Centre.

Wealth and Personal Banking ('WPB')

We help millions of our customers look after their day-to-day finances and manage, protect and grow their wealth.

Commercial Banking ('CMB')

Our global reach and expertise help domestic and international businesses around the world unlock their potential.

Global Banking and Markets ('GBM')

We provide a comprehensive range of financial services and products to corporates, governments and institutions.

Opening up a world of opportunity

Our ambition is to be the preferred international financial partner for our clients.

In February 2021, we refined our purpose, ambition and values to reflect our strategy and to support our focus on execution.

Read more on our purpose and values on page 16 of our Annual Report and Accounts 2020.

Our values

Our values help define who we are as an organisation, and are key to our long-term success.

We value difference

Seeking out different perspectives

We succeed together

Collaborating across boundaries

We take responsibility

Holding ourselves accountable and taking the long view

We get it done

Moving at pace and making things happen

For further details on how we are embedding our values, see page 10.

Key themes

Global performance

Performance demonstrated our continued strength in Asia and a material recovery in profitability in our other regions, which benefited from net ECL releases. All of our regions were profitable for the first time since 1H18.

Read more on page 12.

Economic outlook

Economic forecasts have improved as countries emerge from the Covid-19 pandemic, although uncertainties remain as countries respond at different speeds, government support measures unwind and new virus strains test the efficacy of vaccination programmes .

Read more on page 2.

Growth signals

While the impacts of low global interest rates and the Covid-19 pandemic are expected to provide headwinds to improved profitability and returns, there are emerging signs of unsecured personal lending and commercial lending growth.

Read more on page 8.

Progress in key areas

Growth and transformation

We have made good progress in areas of strength and expanded our digital capabilities. In addition, we are improving the way we work to energise the organisation for growth.

Read more on page 8.

Strategic transactions

We have announced the potential sale of our retail banking business in France, as well as the exit of domestic mass market retail banking in the US.

Read more on page 8.

Climate

We continue to make progress with our environmental, social and governance ('ESG') agenda, including towards the climate commitments we announced in October 2020.

Read more on page 10.

Performance in 1H21

Reported profit after tax

$8.4bn

(1H20: $3.1bn)

Basic earnings per share

$0.36

(1H20: $0.10)

Gender diversity

31.1%

Women in senior leadership roles.

Target: 35% by 2025.

(31 December 2020: 30.3%)

Sustainable finance and investments

$87.4bn

Cumulative total provided and facilitated since 1 January 2020. Target: $750bn to $1tn by end-2030.

(31 December 2020: $44.1bn)

Read more on our financial overview on page 12.

Our data dictionary, which includes a definition of sustainable finance and investments, can be found at www.hsbc.com/who-we-are/esg-and-responsible-business/esg-reporting-centre .

Highlights

Performance in the first half of 2021 reflected an improvement in global economic conditions. While uncertainties remain, the outlook is more positive with evidence of growth in strategic areas.

Financial performance (1H21 vs 1H20)

-- Reported profit after tax increased by $5.3bn to $8.4bn and reported profit before tax increased by $6.5bn to $10.8bn. A fall in revenue reflected 2020 interest rate reductions and lower Markets and Securities Services ('MSS') revenue relative to a strong 1H20. This was more than offset by releases in our expected credit losses and other credit impairment charges ('ECL'). Reported profit in 1H20 included an impairment of software intangibles of $1.2bn, mainly in Europe.

-- All regions profitable in 1H21, notably HSBC UK Bank plc reported profit before tax of over $2.1bn in the period. Despite interest rate headwinds, there was continued strength in Asia and a material recovery in profitability in all other regions, reflecting a net release in ECL as the economic outlook improved.

-- Reported revenue down 4% to $25.6bn, primarily reflecting 2020 interest rate reductions and lower MSS revenue in Global Banking and Markets ('GBM'). These reductions were partly offset by net favourable movements in market impacts in life insurance manufacturing and valuation adjustments in GBM.

-- In 1H21, lending increased by $21.5bn on a reported basis, reflecting growth in Wealth and Personal Banking ('WPB') and Commercial Banking ('CMB'). Deposits grew by $26.3bn on a reported basis, with increases in all global businesses.

-- Net interest margin ('NIM') of 1.21% in 1H21, down 22 basis points ('bps') from 1H20. NIM in 2Q21 of 1.20% remained stable compared with 1Q21.

-- Reported ECL were a net release of $0.7bn, compared with a $6.9bn charge in 1H20. The net release in 1H21 primarily reflected an improvement in the economic outlook since 2020. The reduction also reflected low levels of stage 3 charges in 1H21, as well as the non-recurrence of a large charge in 1H20 related to a corporate exposure in Singapore.

-- Reported and adjusted operating expenses increased 3%, primarily due to a higher performance-related pay accrual as profitability improved, as well as continued investment, partly offset by the impact of our cost-saving initiatives.

-- Return on average tangible equity ('RoTE') (annualised) of 9.4%, up 5.6 percentage points compared with 1H20.

-- Common equity tier 1 ('CET1') ratio of 15.6%, down 0.3 percentage points from 31 December 2020, reflecting an increase in RWAs from lending growth and a decrease in CET1 capital including the impact of foreseeable dividends.

-- The Board has announced an interim dividend for 1H21 of $0.07 per ordinary share, to be paid in cash with no scrip alternative.

Financial performance (2Q21 vs 2Q20)

-- Reported profit after tax up $3.2bn to $3.9bn and reported profit before tax up $4.0bn to $5.1bn. Reported revenue was down 4%, mainly due to lower revenue in MSS, as well as the impact of lower interest rates. This was more than offset by net releases in reported ECL and lower reported operating expenses.

Outlook for 2021

-- The execution of our strategy continues at pace, including the announcement of transactions in relation to our retail operations in France and mass market retail operations in the US.

-- Despite continued revenue headwinds, notably in fixed income markets relative to strong comparative periods, as well as low interest rates and Covid-19 impacts, there are emerging signs of unsecured personal lending and commercial lending growth. We expect mid-single-digit lending growth for the full year, which is expected to translate into low-single-digit RWA growth as we progress with our RWA reduction actions.

-- Given current consensus economics and default experience, ECL charges for 2021 are expected to be materially lower than our medium-term range of 30bps to 40bps of average loans and possibly a net release for the year. Uncertainty remains as countries emerge from the pandemic at different speeds, government support measures unwind and new virus strains test the efficacy of vaccination programmes. To reflect this uncertainty, at 30 June 2021 around $2.4bn remained of the stage 1 and stage 2 ECL allowance uplift we made during 2020. For further details, see 'Measurement uncertainty and sensitivity analysis of ECL estimates' on page 62.

-- Our cost reduction programme remains on track. We expect adjusted operating expenses for 2021 to be broadly in line with 2020, excluding the benefit from a reduced bank levy. This remains subject to final decisions on performance-related pay, which will primarily reflect the performance of the Group.

-- The Group maintains a strong capital position and is well placed to fund growth and step up capital returns. Reflecting the current improved economic outlook and operating environment in many of our markets, we now expect to move to within our target dividend payout ratio range of 40% to 55% of reported earnings per ordinary share in 2021.

Delivery against our financial targets

Return on average tangible equity (annualised) <>

9.4%

Target: >=10% in the medium term.

(1H20: 3.8%)

Adjusted operating expenses <>

$16.2bn

Target: <=$31bn in 2022 (based on average December 2020 FX rates).

(1H20: $15.7bn)

Gross risk-weighted asset ('RWA') reduction

$84.5bn

Updated target: $110bn by end-2022.

CET1 capital ratio

15.6%

Target: >14%, managing in range of 14% to 14.5% in medium term.

(31 December 2020: 15.9%)

Interim dividend per ordinary share for 1H21

$0.07

Further explanation of performance against Group financial targets may be found on page 12.

Key financial metrics

 
                                                                Half-year to 
                                                   --------------------------------------- 
Reported results                                   30 Jun 2021  30 Jun 2020    31 Dec 2020 
-------------------------------------------------  -----------  -----------  ------------- 
Reported revenue ($m)                                   25,551       26,745       23,684 
-------------------------------------------------  -----------  -----------  ----------- 
Reported profit before tax ($m)                         10,839        4,318        4,459 
-------------------------------------------------  -----------  -----------  ----------- 
Reported profit after tax ($m)                           8,422        3,125        2,974 
-------------------------------------------------  -----------  -----------  ----------- 
Profit attributable to the ordinary shareholders 
 of the parent company ($m)                              7,276        1,977        1,921 
-------------------------------------------------  -----------  -----------  ----------- 
Cost efficiency ratio (%)                                 66.9         61.8         75.6 
-------------------------------------------------  -----------  -----------  ----------- 
Basic earnings per share ($)                              0.36         0.10         0.10 
-------------------------------------------------  -----------  -----------  ----------- 
Diluted earnings per share ($)                            0.36         0.10         0.09 
-------------------------------------------------  -----------  -----------  ----------- 
Net interest margin (%)(1)                                1.21         1.43         1.32 
-------------------------------------------------  -----------  -----------  ----------- 
 
Alternative performance measures <> 
-------------------------------------------------  -----------  -----------  ------------- 
Adjusted revenue ($m)                                   25,797       27,597       24,523 
-------------------------------------------------  -----------  -----------  ----------- 
Adjusted profit before tax ($m)                         11,950        5,654        6,680 
-------------------------------------------------  -----------  -----------  ----------- 
Adjusted cost efficiency ratio (%)                        62.9         56.9         69.1 
-------------------------------------------------  -----------  -----------  ----------- 
Annualised expected credit losses and other 
 credit impairment charges ('ECL') as a 
 % of average gross loans and advances to 
 customers (%)                                          (0.14)         1.34         0.38 
-------------------------------------------------  -----------  -----------  ----------- 
Return on average ordinary shareholders' 
 equity (annualised) (%)                                   8.4          2.4          2.3 
-------------------------------------------------  -----------  -----------  ----------- 
Return on average tangible equity (annualised) 
 (%)(1,2)                                                  9.4          3.8            3.1 
-------------------------------------------------  -----------  -----------  ------------- 
 
                                                                    At 
Balance sheet                                      30 Jun 2021  30 Jun 2020    31 Dec 2020 
-------------------------------------------------  -----------  -----------  ------------- 
Total assets ($m)                                    2,976,005    2,922,798    2,984,164 
-------------------------------------------------  -----------  -----------  ----------- 
Net loans and advances to customers ($m)             1,059,511    1,018,681    1,037,987 
-------------------------------------------------  -----------  -----------  ----------- 
Customer accounts ($m)                               1,669,091    1,532,380    1,642,780 
-------------------------------------------------  -----------  -----------  ----------- 
Average interest-earning assets ($m)(1)              2,188,991    2,034,939    2,092,900 
-------------------------------------------------  -----------  -----------  ----------- 
Loans and advances to customers as % of 
 customer accounts (%)                                    63.5         66.5         63.2 
-------------------------------------------------  -----------  -----------  ----------- 
Total shareholders' equity ($m)                        198,218      187,036      196,443 
-------------------------------------------------  -----------  -----------  ----------- 
Tangible ordinary shareholders' equity 
 ($m)                                                  157,985      147,879      156,423 
-------------------------------------------------  -----------  -----------  ----------- 
Net asset value per ordinary share at period 
 end ($)(3)                                               8.69         8.17         8.62 
-------------------------------------------------  -----------  -----------  ----------- 
Tangible net asset value per ordinary share 
 at period end ($)                                        7.81         7.34         7.75 
-------------------------------------------------  -----------  -----------  ----------- 
 
Capital, leverage and liquidity 
-------------------------------------------------  -----------  -----------  ------------- 
Common equity tier 1 capital ratio (%)(4)                 15.6         15.0         15.9 
-------------------------------------------------  -----------  -----------  ----------- 
Risk-weighted assets ($m)(4)                           862,292      854,552      857,520 
-------------------------------------------------  -----------  -----------  ----------- 
Total capital ratio (%)(4)                                21.0         20.7         21.5 
-------------------------------------------------  -----------  -----------  ----------- 
Leverage ratio (%)(4)                                      5.3          5.3          5.5 
-------------------------------------------------  -----------  -----------  ----------- 
High-quality liquid assets (liquidity value) 
 ($bn)                                                     659          654          678 
-------------------------------------------------  -----------  -----------  ----------- 
Liquidity coverage ratio (%)                               134          148          139 
-------------------------------------------------  -----------  -----------  ----------- 
 
Share count 
-------------------------------------------------  -----------  -----------  ------------- 
Period end basic number of $0.50 ordinary 
 shares outstanding (millions)                          20,223       20,162       20,184 
-------------------------------------------------  -----------  -----------  ----------- 
Period end basic number of $0.50 ordinary 
 shares outstanding and dilutive potential 
 ordinary shares (millions)                             20,315       20,198       20,272 
-------------------------------------------------  -----------  -----------  ----------- 
Average basic number of $0.50 ordinary 
 shares outstanding (millions)                          20,211       20,162       20,176 
-------------------------------------------------  -----------  -----------  ----------- 
Dividend per ordinary share (in respect 
 of the period) ($)                                       0.07            -         0.15 
-------------------------------------------------  -----------  -----------  ----------- 
 

For reconciliations of our reported results to an adjusted basis, including lists of significant items, see page 35. Definitions and calculation of other alternative performance measures are included in our 'Reconciliation of alternative performance measures' on page 52.

1 For these metrics, half-year to 31 December 2020 is calculated on a full-year basis and not a 2H20 basis.

2 Profit attributable to ordinary shareholders, excluding impairment of goodwill and other intangible assets and changes in present value of in-force insurance contracts ('PVIF') (net of tax), divided by average ordinary shareholders' equity excluding goodwill, PVIF and other intangible assets (net of deferred tax).

3 The definition of net asset value per ordinary share is total shareholders' equity less non-cumulative preference shares and capital securities, divided by the number of ordinary shares in issue excluding shares the company has purchased and are held in treasury.

4 Unless otherwise stated, regulatory capital ratios and requirements are based on the transitional arrangements of the Capital Requirements Regulation in force at the time. These include the regulatory transitional arrangements for IFRS 9 'Financial Instruments', which are explained further on page 88. Leverage ratios are calculated using the end point definition of capital and the IFRS 9 regulatory transitional arrangements. Following the end of the transition period after the UK's withdrawal from the EU, any reference to EU regulations and directives (including technical standards) should be read as a reference to the version onshored into UK law under the European Union (Withdrawal) Act 2018, as amended.

Group Chief Executive's review

We are implementing our growth and transformation plans with pace and purpose, building on the progress of 2020 with the aim of delivering a world-leading service to our customers and strong returns for our investors.

In February this year, we launched an updated purpose for HSBC. 'Opening up a world of opportunity' was the product of wide consultation with our colleagues and customers around the world. Since then, I have spoken with thousands of my colleagues across HSBC to discuss how we live that purpose every day.

I have been excited by the energy of those conversations. Our purpose and the values that underpin it - we value difference, we succeed together, we take responsibility, and we get it done - have resonated strongly, not just as a means of guiding our behaviour, but in articulating what our people want us to be as a business. Many expressed great pride in our heritage and culture, but also belief in the need to adapt to meet present and future challenges. Above all though, there was a strong desire to learn from and embed the lessons of the past 18 months, which is a conviction that my senior management team and I all share.

This spirit was evident in a good first-half performance. The customer-centricity that characterised our response to the Covid-19 pandemic remained to the fore, driven by increased collaboration and the benefits of our continued digital investment. This enabled us not just to better serve our existing customers, but also to attract new clients, win new mandates and strengthen our lending pipelines. We also generated strong momentum behind our growth and transformation plans, with good delivery against all four pillars - focus on our strengths, digitise at scale, energise for growth, and transition to net zero.

Our biggest challenge has remained the Covid-19 pandemic, which continues to threaten our customers, colleagues and communities. This was especially true in India, where the devastating spread of the Delta variant was a stark reminder of the danger that the virus continues to pose. India is both a growth market and an important service hub for the Group, and around 39,000 of our people are based there. While measures were already in place to enable a large majority of these colleagues to work from home, we took urgent steps to help them and their dependants to receive a vaccine, and provided financial support to local organisations delivering the relief effort on the ground. Operationally, we were able to maintain an unbroken service due to the continuity measures in place since March 2020. This was a testament both to the extraordinary efforts of our people, and the resilience of our systems and processes.

We received a strong endorsement of our recent progress in May, through the upgrade of our MSCI ESG rating from 'average' to 'leader'. Among other things, MSCI recognised the significant increase in our employee engagement and talent development scores during 2020; the extensive involvement of our Board in incorporating climate considerations into our business strategy; our strong performance in customer complaints handling and financial education; and our achievement of the highest possible rating for corporate governance. We will work hard to maintain this rating in the coming quarters.

"Our purpose and the values that underpin it have resonated strongly, not just as a means of guiding our behaviour, but in articulating what our people want us to be as a business."

Financial performance

Recovering economic growth in many of our main markets had a positive impact on our first-half financial performance. The improved economic outlook enabled us to begin releasing expected credit losses, which was the main driver of our improved profitability. The adverse impact of central bank interest rate cuts in 2020 continued to flow through to our interest-rate sensitive business lines, although our net interest income has now stabilised. A combination of increased fee income and cost-programme savings helped to compensate for the resulting reduction in revenue, and we strengthened our lending pipelines in our retail and wholesale businesses in the first half of the year.

As a consequence, the Group delivered $10.8bn of reported profit before tax, up 151% on the first half of 2020, and $12bn of adjusted profits, up 111%. We were profitable in every region in the first six months of the year.

Adjusted revenue was 7% lower than the same period last year. This was due mainly to the impact of interest rate cuts during 2020 on our deposit franchises in all three global businesses. However, our lending pipeline began to translate into business growth in the second quarter and we further strengthened that pipeline during the half-year.

Our cost reduction programmes continued to mitigate the cost of increased technology investment, although our adjusted operating expenses rose by 3% due to an increase in performance-related pay. We spent around $3.0bn on technology in the first half of the year, up 4% on the same period last year.

Our funding, liquidity and capital remain strong. We grew deposits by $27bn on a constant currency basis, with growth in all three global businesses. Our common equity tier one ratio was 15.6% on 30 June 2021. As a consequence, we are able to pay an interim dividend of $0.07 per ordinary share for the first half of the year.

Focus on our strengths

We made good progress in restructuring our portfolio of businesses in the first half of the year, investing in businesses that we intend to grow and withdrawing from areas in which we lack the scale to compete.

In particular, we took firm steps to resolve the future of our businesses in the US and continental Europe. In the US, we entered into agreements to sell our mass market retail business in the country, and in continental Europe, we entered into a memorandum of understanding with My Money Group aimed at selling our retail banking activities in France. Both of these followed a period of extensive strategic review, and are important milestones in the transformation of the Group. They will help enable both our US and continental Europe businesses to become more focused, simpler and sustainably profitable, and to better serve the international needs of our wholesale and wealth management customers.

In Asia, we continued to put in place the building blocks for future growth. We further grew our Pinnacle digital wealth management business in mainland China, recruiting more than 350 new wealth managers and accelerating our coverage expansion to five cities - Beijing, Shanghai, Guangzhou, Shenzhen and Hangzhou. We also improved our ability to serve the wealth needs of customers in Asia and the Asian diaspora by expanding our digital wealth capabilities in Hong Kong, Malaysia and Singapore, and reorganising our wealth businesses in continental Europe and the US to better connect international customers to the global wealth opportunity. The benefits of our investment in Asia wealth were evident in the first six months of 2021 through strong customer acquisition, increased fee income and significant growth in wealth balances.

"We are seeking to energise HSBC for growth through a strong sense of purpose and simpler ways of working, and by equipping our colleagues with the future skills they need."

Digitise at scale

Our technology investment continues to improve the experiences of our customers and colleagues, and to boost efficiency while reducing our cost base. In the first half of the year, we launched a number of new, scalable digital capabilities for our customers and rolled out more of our existing capabilities to new markets.

For our personal customers, our digital Global Money Account allows our international customers to hold, manage and send funds in various currencies without paying any fees. Having launched this successfully in the US in 2020, we expanded it successfully into the UAE and Singapore in the first half of the year, with more to follow during 2021.

For our business customers, we launched HSBC Global Wallet, a new multi-currency digital wallet which allows businesses to hold, send and receive cash in multiple currencies using a single global account. Launched initially for customers in Singapore, the UK and the US, we intend to roll out new features and currencies to the platform in the second half of the year.

We also launched HSBC Kinetic for business customers in the UK. Kinetic is designed to be a truly mobile-first banking service, as opposed to a bank account with mobile features. Built on insights from more than 3,000 small business owners, it allows customers to manage their finances entirely through their smartphone. More than 10,000 businesses have now signed up, benefiting from online onboarding in 15 minutes, the ability to apply for lending products with instant lending decisions, and a number of critical insight capabilities.

Energise for growth

We are seeking to energise HSBC for growth through a strong sense of purpose and simpler ways of working, and by equipping our colleagues with the future skills they need. This includes embedding the lessons of the past 18 months to help build a dynamic, entrepreneurial and inclusive culture.

We are moving to a hybrid working model wherever possible, giving our people the flexibility to work in a way that suits both them and their customers. We will need less office space as a result, and we have plans to reduce our global office footprint by more than 3.6 million square feet - or around 20% - by the end of 2021. We are also relocating three of our global business CEOs to Asia on a permanent basis, taking them closer to our customers and to the core of our business.

We continue to simplify the organisation wherever we can. In the first half, we reduced the number of full-time equivalent employees by around 3,500. We also announced changes to our senior leadership bands to help ensure clarity of scope and accountability, and to empower our leaders to make decisions to accelerate our transformation and drive growth.

I am conscious that our current operating environment remains challenging for many colleagues and their families. While our employee engagement scores have remained above pre-pandemic levels, we have continued to see a rise in fatigue and anxiety among employees. To help tackle this, we have provided a variety of well-being resources to support our people, including mindfulness training. This is something that I continue to monitor closely, particularly as our people adapt to our new hybrid working model.

Transition to net zero

We took a number of important steps towards our net zero ambitions in the first half of the year, and strengthened our position as a market leader of sustainable finance.

I was particularly pleased that 99.7% of our shareholders backed our special resolution on climate change at our AGM in May. This was a strong endorsement of our climate strategy, which has at its core a commitment to support our customers on their transitions to a low-carbon future. The resolution commits us to setting out the next steps in our transition, including through short- and medium-term sector-based targets; to phasing out financing of coal power and thermal coal mining by 2030 in EU and OECD countries, and by 2040 globally; and to reporting annually on our progress. Above all, it signals a unity of purpose between our business and our investors, which is vital as we confront the shared challenge of the low-carbon transition.

I have always said that partnership lies at the heart of the low-carbon transition. Part of our approach has been to attempt to forge new partnerships to find new solutions and accelerate progress, whether with our customers, governments or our peers in the banking sector. In April, we became a founding member of the Net-Zero Banking Alliance ('NZBA'), which aims to deliver the banking sector's ambition to align its climate commitments with the Paris Agreement goals in a collaborative, rigorous and transparent way. Through the NZBA, we also joined the Glasgow Financial Alliance for Net Zero, which combines the leading initiatives across the financial system to accelerate the transition to net zero emissions by 2050 at the latest.

In May, we launched a five-year partnership with World Resources Institute and WWF, backed by $100m of philanthropic funding from HSBC. The Climate Solutions Partnership seeks to unlock barriers to finance for companies and projects that tackle climate change, bringing emerging climate solutions to commercial viability and scale. By combining our resources, knowledge and insight with our partners on the ground, we are aiming to make a real-world impact in a targeted way, with a focus on scaling up climate innovation and nature-based solutions, and helping to transition the energy sector in Asia towards renewables.

We strengthened our position in the ESG bond market in the first half, participating in more issuances than in the whole of 2020. First-half mandates included the world's first sovereign sustainable sukuk bond; the first sovereign green bonds issued by the UK and Canada; and a pioneering sustainability-linked bond for an energy company with the cost of financing tied to the reduction of its entire carbon footprint, including the emissions of products sold.

Our people

None of the achievements of the last six months would have been possible without the commitment and hard work of my colleagues. I do not underestimate the challenges that many still face as a consequence of the Covid-19 pandemic, which remains a presence in all of our lives. I am especially grateful to my colleagues in parts of the world where Covid-19 remains prevalent, and who have continued to go to extraordinary lengths for their customers and colleagues in extremely challenging circumstances.

We have had a good start to the year, but there is much more to do to deliver our ambitions for HSBC. We have a firm platform on which to build over the remainder of 2021.

Noel Quinn

Group Chief Executive

2 August 2021

Our strategy

We are implementing our strategy across the four strategic pillars aligned to our purpose, values and ambition announced in February 2021.

Progress on our 2021 commitments

In February 2021, we refreshed our strategy, in recognition of the fundamental shifts in the operating environment and to help achieve our ambition to be the preferred international financial partner for our clients. We have since made good progress across our four strategic pillars: focus on our areas of strength; digitise at scale to adapt our operating model for the future; energise our organisation for growth; and support the transition to a net zero global economy.

In the first half of 2021, we put in place strong building blocks for future growth, primarily in Asia, in terms of the reallocation of resources, growth in lending balances and our client pipeline. At the same time, we have accelerated the pace of execution of our strategy, with the announcements of the exit of domestic mass market retail banking in the US, as well as the potential sale of our retail banking business in France.

Focus on our strengths

In our global businesses

In each of our global businesses, we focus on delivering growth in areas where we have distinctive capabilities and have significant opportunities.

Wealth and Personal Banking

We expanded our Wealth franchise, with a particular focus on Asia. In 1H21, our reported global wealth balances grew to approximately $1.7tn, an 18% increase compared with 1H20, with client assets and funds under management growing by 23%. In 1H21, our Asia wealth balances reached $810bn. We recruited approximately 600 Asia wealth front-line FTEs, and our Asia affluent and high net worth customer base grew 7%, compared with 1H20, to 1.7 million customers. Wealth revenue in Asia increased by 26% compared with 1H20, including the benefit of $359m of insurance market impacts, and we also rolled out Pinnacle, our digital financial planning wealth platform, to five cities in mainland China with more locations in the pipeline.

Commercial Banking

A strong lending pipeline and investment in digital solutions have started to translate into growth. Customer lending grew by 2% during 1H21 to $351bn, largely driven by an increase of 8% in Asia, with $6.7bn of net adjusted lending growth in trade finance, primarily in Hong Kong and mainland China. In Asia, lending approval limits, which includes renewal and refinancing activity, have also doubled since 2H20. Furthermore, we have invested heavily in digital services and platforms. We introduced Global Wallet, a digital wallet that allows businesses to hold, send and receive cash in multiple currencies, in Singapore, the UK and the US.

Global Banking and Markets

We made good progress on capital repositioning to drive growth. At 30 June 2021, overall reported RWAs were 8% lower than at 30 June 2020, driven by a reduction in products and domestic clients not aligned to our strategy. In the same period, RWAs allocated to Asia increased by 6%. This supports our focus on serving international clients into and within these high-growth regions. In 1H21, we also delivered $184m of cost saves, as part of the Group-wide cost reduction programme. We have increased collaboration revenue with our other global businesses by 6% compared with 1H20, with approximately $0.8bn generated with WPB, and approximately $1.3bn with CMB.

Reshaping our portfolio

To help create capacity for growth, we are refocusing our US business and HSBC Bank plc, our UK non-ring-fenced bank and Europe. In May 2021, we announced the exit of the domestic mass market retail business, including branches, in the US, and the potential sale of our retail banking business in France. We have seen rebounds in profits in both markets even as we reshape our portfolio.

Our US business

The transformation of the US business has continued at pace, with reported profit before tax of $0.4bn in 1H21, compared with a loss before tax of $0.1bn in 1H20, and adjusted profit before tax of $0.5bn in 1H21, up from $0.1bn in 1H20. We have reduced reported RWAs by $15bn or 16% since 30 June 2020, and completed the migration of our Fixed Income derivatives trading book from New York to London. We also delivered approximately $100m of cost saves in 1H21, achieving a total of $450m cost reduction since 2020, to operate under a simpler, leaner model. Furthermore, we announced the sale of our mass market retail banking business, subject to regulatory approval, to focus on our international corporate and wealth business. This sale would include approximately 1 million clients and 90 out of our existing 148 branches.

US adjusted costs <>

$bn

HSBC Bank plc (UK non-ring-fenced bank and Europe)

We saw progress in our transformation programme, with $1.1bn of reported profit before tax in 1H21, compared with a loss before tax of $1.6bn in 1H20, and adjusted profit before tax of $1.4bn, an uplift from a loss before tax of $0.6bn in 1H20. We also saw a reduction of approximately 16% of adjusted RWAs and 3% of the adjusted cost base compared with 1H20. We are on track to simplify our continental European operating model into an integrated business, and have refocused our wholesale client portfolio to align to our ambition to be the leading international wholesale bank in Europe, with a particular focus on the East, and to better serve our targeted customers. We signed a memorandum of understanding, relating to the potential sale of our retail banking operations in France, marking a significant step in the transformation of our European franchise.

HSBC Bank plc adjusted RWAs <>

$bn

1 Reported RWAs at 30 June 2020 were $171bn with foreign currency translation differences of $11bn.

Digitise at scale

Investing in technology

We continued to invest in technology to help deliver excellent customer service and improve productivity across our organisation. In 1H21, we spent $3bn on technology, an increase of 18% since 1H18.

To improve our operational proficiency, we are increasingly using the Cloud in our back-office functions, which helps to increase resilience and reduce maintenance costs, through partnerships with big technology firms such as Google and Amazon. The number of live services processed on the Cloud has approximately doubled from 1H20 to 1H21. For our customers, we reduced manual intervention in our payments processing, with the straight-through-processing rate increasing to 96.7%. We also enhanced the First Direct customer journey by improving the account opening speed from 10 days to 10 minutes.

During 1H21, we accelerated the roll-out of our digital services. In 1H21, Kinetic, our digital business banking platform, reached 10,000 customers and received a 4.8 out of 5.0 iOS app store rating in the UK. Global Money, our multi-currency account for retail customers, has expanded into Singapore and the UAE, following the US launch in 4Q20. As of July 2021, Global Money served approximately 45,000 users across the UAE and the US. We also continue to invest in transforming our trade platform to drive growth and improve customer experience.

Technology spend (adjusted) <>

$bn

Energise for growth

Since we launched our refreshed purpose and values in February 2021, we have been applying our values in how we work across the organisation. Our most recent all-employee survey in June showed employee engagement decreased slightly after significant gains in 2020, but has remained above 2019 levels. We are moving towards a more hybrid way of working. Since the start of 2020, we have exited or downsized 77 buildings, resulting in a 10% reduction in our global office footprint. We are also progressing well against our aspirational target of 35% women in senior leadership roles by 2025, reaching 31.1% in 1H21. In addition, we are the founding member of the World Economic Forum's Partnering for Racial Justice in Business, and a signatory to the United Nations LGBTI Standards of Conduct for Business.

We are growing our Asia talent base and cementing our leadership in the region to accelerate the execution of our strategy. We commenced the relocation of key executives to Hong Kong, including the CEOs of WPB, CMB and Asset Management, and a co-CEO of GBM. We appointed new co-CEOs of Asia-Pacific, bringing in a breadth of regional experience, to support our leadership's strategic focus on geographies where we want to grow, including Greater China, the ASEAN region and India. For recruiting plans, we hired more than 650 new graduates - comprising 52% women and representing 48 different nationalities - in 17 markets.

Transition to net zero

Becoming a net zero bank

Within the wider financial services sector, we joined various initiatives, including the Net-Zero Banking Alliance as a founding member, the Glasgow Financial Alliance for Net Zero, Sustainable Markets Initiative, and the Partnership for Carbon Accounting Financials. Within our organisation, we are developing climate stress testing capabilities and are actively participating in the Bank of England's climate change biennial exploratory scenario exercise. We invited suppliers representing 60% of our total supplier spend to participate in CDP (formerly the Carbon Disclosure Project). For our colleagues, we expanded our network of employee-led sustainability champions, with more than 30,000 colleagues across 70 teams, and included a sustainability module in our mandatory learning.

Supporting our customers

Our aim is to provide $750bn to $1tn of sustainable finance and investments by 2030 to help our customers transition to lower carbon emissions. Since 1 January 2020, cumulatively we have provided and facilitated $87.4bn of sustainable finance and investments. In 1H21, we also participated in carrying out more green, social, sustainability and sustainability-linked bonds for clients than we did in the whole of 2020. We were named the joint structuring adviser for the UK's and Canada's inaugural sovereign green bond issuances, and were awarded Euromoney's Best Bank for Sustainable Finance in Asia and the Middle East in July 2021.

Unlocking new climate solutions

In May 2021, we formed the Climate Solutions Partnership with the World Resources Institute and WWF, backed by $100m of our philanthropic capital to accelerate support for innovative solutions tackling climate change. We launched our first in-market green mortgage product in the UAE, and a lower carbon bond fund in mainland China and Taiwan. To promote client engagement, we launched a Business Plan for the Planet campaign globally, to help businesses transition to a sustainable model, and published a guide to net zero for companies in the UK.

How we do business

We conduct our business intent on opening up opportunities to ensure the sustained success of our customers, people and other stakeholders.

Our approach

Our purpose, 'Opening up a world of opportunity', explains why we exist and guides us in what we do every day. In the first half of 2021, we encouraged all our colleagues to explore what 'Opening up a world of opportunity' meant to them personally and how it can help us collectively contribute to delivering our strategy.

Our refreshed values define the principles that guide our individual and organisational behaviours. They influence the way we work together and the choices we make. We are embedding the values throughout our organisation, and our leaders and colleagues are regularly encouraged to reflect on what our values mean in day-to-day actions and decisions. This was most clearly demonstrated when many of our colleagues in India volunteered their own time to support each other and their families during the second wave of the Covid-19 pandemic in India (see below).

We recognise the important role we play in 'Opening up a world of opportunity' for our customers, investors, our people and communities, and in building a more sustainable, inclusive world.

Fair outcomes

We continued to promote and encourage good conduct through our people's behaviour and the decisions that we take. We also launched our simplified conduct approach to align to the Group's new purpose and values, in particular the value 'We take responsibility'. Our new conduct approach encourages colleagues to recognise the impact each of us has on our customers and the financial markets in which we operate, and sets out a number of conduct outcomes to be achieved. As we implement our new approach during 2021, we will continue to enhance our existing policies, frameworks and governance approach. Further details on our conduct approach are available at www.hsbc.com/who-we-are/esg-and-responsible-business/our-conduct.

Bringing together diverse people, ideas and perspectives helps us open up opportunities and build a more inclusive company. We are working to accelerate the development and progression of women and ethnically diverse employees into more senior roles. We are progressing well against our aspirational target of 35% women in senior leadership roles by 2025. We are also building the foundations that will help enable us to accelerate towards our goal to at least double the number of Black senior leaders globally by 2025. In early 2021, we made it possible for 91% of our global workforce to be able to declare their ethnicity in our HR information system. We are now using this data to uncover areas of largest opportunity.

Our climate ambition

The Board provided further details on our ambition to become a net zero bank with a special resolution on climate change at our Annual General Meeting ('AGM') in May, which was approved by 99.7% of shareholders. The resolution commits the Group to set, disclose and implement a strategy with short- and medium-term targets to align its provision of finance across all sectors, starting in 2021 with oil and gas, and power and utilities, with the goals and timelines of the Paris Agreement. We also committed to publish and implement a policy to phase out the financing of coal-fired power and thermal coal mining by 2030 in EU and OECD countries, and by 2040 in other markets. For the purposes of the resolution, 'finance' and 'financing' means providing project finance or direct lending to, or underwriting capital markets transactions for, corporate clients of our Global Banking and Commercial Banking businesses. Our progress against our commitments will be reported annually, including a summary of the methodology, scenarios and core assumptions used.

We recognise the critical need for industry collaboration to accelerate climate action and lower global emissions. As part of our efforts, the Group Chief Executive, Noel Quinn, chairs the Financial Services Task Force ('FSTF'), part of HRH The Prince of Wales' Sustainable Markets Initiative. The FSTF brings together 11 of the world's largest banks to amplify and accelerate action on climate-related initiatives.

We became a founding signatory of the Net-Zero Banking Alliance, convened by the United Nations Environment Programme Finance Initiative and co-launched by the FSTF. The members of the alliance are committed to aligning their lending and investment portfolios with net zero emissions by 2050, and setting an intermediate target for 2030 or sooner using robust, science-based guidelines. Net-Zero Banking Alliance is a member alliance of the Glasgow Financial Alliance for Net Zero, which combines the leading initiatives across the financial system to accelerate the transition to net zero emissions by 2050. We also joined the Partnership for Carbon Accounting Financials to help us measure our financed emissions and provide transparent and comparable disclosures.

Living our values - We succeed together

We set up a Covid-19 taskforce to help colleagues and their families who needed critical support during the second wave of the pandemic in India. Many colleagues volunteered, using the collective energy of our network to assist a wider group of people in this time of crisis. The taskforce provided 24/7 support and worked in collaboration with partners to mobilise resources to provide hospital beds, oxygen and medicines. Our offices were set up to manage vaccination drives for employees and their families. The volunteers played a critical role, providing moral support and counsel to colleagues during a period of anxiety and national emergency. In addition to the actions of our people, we pledged financial assistance of around $10m for the ongoing Covid-19 relief efforts in India.

Delivering for our stakeholders

Having a clear purpose and strong values has never been more important, with the pandemic testing us all in ways we could never have anticipated. As the world changed over the course of the past 18 months, we adapted to new ways of working and endeavoured to provide support to our customers during this challenging period.

We recognise that the world is at different stages of the pandemic, with some countries going through a peak while others are on a trajectory to recovery. We look to support our stakeholders, taking this into account.

In the adjacent table, we set out how we have supported our stakeholders - our customers, employees, investors, communities, governments and regulators, and suppliers - during the first half of 2021.

 
 
 
Customers        -- Our provision of financial relief to our customers 
                  to support them during the pandemic reduced during 
                  the first half of 2021, as forbearance programmes began 
                  to come to an end (for further details of our customer 
                  relief programmes, see page 74). We have put a contact 
                  and communications strategy in place in all of our 
                  markets to engage with customers to help them understand 
                  and decide on their options following the expiry of 
                  their Covid-19 relief measures. 
 
                  -- We remain committed to removing barriers to financial 
                  services to help more people access opportunities. 
                  In the UK, we launched a campaign to raise awareness 
                  of our No Fixed Address service, which offers financial 
                  support to those who are homeless, in partnership with 
                  the charity Shelter. In Hong Kong, we launched basic 
                  banking services for ethnic minority groups who do 
                  not understand English or Chinese. 
 
Employees        -- Our most recent all-employee survey in June showed 
                  employee engagement decreased slightly after significant 
                  gains in 2020, but remained above 2019 levels. We have 
                  continued to see a rise in fatigue and anxiety among 
                  employees and in response, provided a variety of well-being 
                  resources including mindfulness training. We continued 
                  to monitor our colleagues' preferences for returning 
                  to office and branch locations, including increasing 
                  support for a more flexible, hybrid approach in the 
                  future. 
                  -- We continue to focus on managing change well for 
                  our people, providing targeted career transition support 
                  and a service through which in 1H21 we redeployed approximately 
                  25% of employees who were impacted by our business 
                  change programme. 
 
                  -- In support of our programme to build skills for 
                  the future, our learning experience platform is now 
                  live to more than 70,000 employees and we have launched 
                  a trial of our Talent Marketplace for 10,300 employees 
                  in India, with plans to grow both. 
 
Investors        -- We continue to engage investors virtually, but will 
                  endeavour to accommodate in-person meetings once it 
                  is safe to do so. In May, we were able to offer a hybrid 
                  AGM, with both in-person and virtual attendees. 
                  -- We were encouraged by the constructive engagement 
                  with ShareAction, the Investor Forum and our institutional 
                  shareholders, to help develop our AGM resolution on 
                  climate change, and we were extremely pleased that 
                  99.7% of our shareholders voted in favour of the climate 
                  change resolution. 
                  -- We were also pleased to reinstate the $0.15 interim 
                  dividend for 2020, paid in April 2021. We acknowledge 
                  that dividends are important to all of our shareholders, 
                  and announced an updated dividend policy based on a 
                  payout ratio approach in February 2021. Reflecting 
                  the current improved economic outlook and operating 
                  environment in many of our markets, we now intend to 
                  transition towards a target payout ratio of between 
                  40% and 55% of our reported earnings per share from 
                  2021 onwards while retaining the flexibility to adjust 
                  for non-cash significant items. Should we achieve our 
                  targets, the dividend is expected to progressively 
                  increase over the coming years, in line with growth 
                  in our earnings per share. The Board has announced 
                  an interim dividend for the first half of 2021 of $0.07 
                  per ordinary share. 
 
Communities      -- During 2021 we announced a donation of $10m towards 
                  Covid-19 relief efforts in India, as well as $1.5m 
                  to UNICEF supporting work to deliver vaccines to countries 
                  on behalf of the Covax facility. This is in addition 
                  to the $25m that we donated to support relief and recovery 
                  efforts around the world during 2020. 
 
Governments      -- We continue to work closely with governments in 
 and regulators   our major markets to ensure a sustainable economic 
                  recovery. We have participated in a number of government-backed 
                  Covid-19 support schemes, providing vital funds to 
                  businesses and households affected by the pandemic. 
                  We have also provided support to governments seeking 
                  to raise revenue through bond issuance programmes. 
                  We continue to engage with our regulators regarding 
                  their supervisory and policy objectives. 
 
Suppliers        -- We invited companies representing 60% of our total 
                  spend on suppliers to participate in the CDP (formerly 
                  the Carbon Disclosure Project) supply chain programme, 
                  which helps to improve our understanding of their carbon 
                  emissions and zero carbon ambitions. 
 

Financial overview

In assessing the Group's financial performance, management uses a range of financial measures that focus on the delivery of sustainable returns for our shareholders and maintaining our financial strength.

Executive summary

Performance in the first half of 2021 benefited from the improved economic outlook and resultant release in ECL allowances, which significantly improved our profitability. While the low interest-rate environment continued to impact revenue, net interest margin remained broadly stable in the last quarter and we are starting to see the positive impact of our strategy.

Reported profit before tax of $10.8bn increased by $6.5bn compared with 1H20, and our annualised return on average tangible equity ('RoTE') for 1H21 was 9.4%, compared with 3.8% in 1H20. The increase in reported profit was driven by a net release of reported ECL and included the non-recurrence of a $1.2bn impairment of capitalised software in 1H20. Reported revenue fell, reflecting the full impact of 2020 interest rate reductions, as well as lower revenue in GBM, notably in Markets and Securities Services ('MSS'), relative to a strong 1H20. Adjusted profit before tax of $12.0bn increased by $6.3bn.

In 1H21, all of our regions were profitable. Despite the impact of lower global interest rates, our operations in Asia continued to deliver a strong performance. In addition, there was a material recovery in profitability in all other regions, primarily reflecting a net release in ECL following the improved economic outlook.

The Group maintained its strong capital position, with a CET1 ratio of 15.6% at 30 June 2021, and continued to grow both lending and deposit balances. In respect of 1H21, the Board has announced an interim dividend of $0.07 per ordinary share.

Delivery against Group financial targets

Return on average tangible equity (%) <>

9.4%

(1H20: 3.8%)

In February 2021, we updated our reported annualised RoTE target following the significant changes to the operating environment in 2020. The Group is now targeting a RoTE of greater than or equal to 10% in the medium term.

In 1H21, we achieved a RoTE (annualised) of 9.4%, compared with 3.8% in 1H20. The improvement in RoTE was driven by the favourable impact of lower ECL.

Adjusted operating expenses <>

$16.2bn

(1H20: $15.7bn)

The Group is targeting an adjusted cost base of $31bn or less in 2022 (based on average December 2020 rates of foreign exchange, or $31.5bn based on average June 2021 rates). In 1H21, adjusted operating expenses were $16.2bn, an increase of 3% compared with 1H20, primarily due to a higher performance-related pay accrual.

Our cost reduction programme is on track to deliver cost saves of between $5bn and $5.5bn in the period from 2020 to 2022 and expect to spend around $7bn in costs to achieve.

Cumulatively, our cost programmes have generated savings of $2.0bn, with costs to achieve of $2.7bn.

Gross RWA reductions

$84.5bn

In February 2020, we announced our intention to improve our return profile through a targeted gross RWA reduction of $100bn by 2022, mainly in low-returning parts of the Group. During 1H21, we updated the list of clients we are remediating and also implemented other methodology changes to better align the tracking and reporting of reductions to how the RWA reduction programme is managed. In line with these changes, we have also increased our gross RWA reduction target to $110bn by 2022. We intend to update executive scorecards accordingly.

At 30 June 2021, the Group had delivered cumulative gross RWA reductions of $84.5bn, including accelerated saves of $9.6bn made in 2019.

Capital and dividends

We intend to maintain a CET1 ratio in excess of 14%, managing in the range of 14% to 14.5% in the medium term. We will seek to manage this range down in the longer term.

At 30 June 2021, our CET1 ratio was 15.6%, down 0.3 percentage points from 31 December 2020. This reflected an increase in RWAs from lending growth and a decrease in CET1 capital, including the impact of foreseeable dividends on ordinary shares of $3.5bn. This dividend accrual, equal to 47.5% of 1H21 basic earnings per ordinary share ('EPS') of $0.36, is not a forecast and represents the mid-point of our target payout ratio of 40% to 55% of reported EPS. The Group's strong capital position means it is well placed to fund growth and step up capital returns. Our dividend policy aims to deliver sustainable cash dividends, while retaining the flexibility to invest and grow the business in the future, supplemented by additional shareholder distributions, if appropriate. Reflecting the current improved economic outlook and operating environment in many of our markets, we now expect to move to within our target payout ratio in 2021. In line with our dividend policy, we will retain the flexibility to adjust EPS for non-cash significant items. Additionally, in 2022, we intend to adjust EPS to exclude the forecast loss on the sale of our retail banking operations in France.

The Board has announced an interim dividend for 1H21 of $0.07 per ordinary share, to be paid in cash with no scrip alternative.

CET1 ratio

15.6%

Interim dividend per ordinary share for 1H21

$0.07

*Medium term is three to four years; long term is five to six years.

Reported results

 
                                          Half-year to                 Quarter ended 
                                  30 Jun    30 Jun    31 Dec    30 Jun   30 Jun   31 Mar 
                                   2021      2020      2020      2021     2020     2021 
Reported results                   $m         $m       $m        $m        $m       $m 
--------------------------------  --------  --------  --------  -------  -------  --------- 
Net operating income before 
 change in expected credit 
 losses and other credit 
 impairment charges ('revenue')     25,551    26,745    23,684   12,565   13,059   12,986 
--------------------------------  --------  --------  --------  -------  -------  ------- 
ECL                                    719   (6,858)   (1,959)      284  (3,832)      435 
--------------------------------  --------  --------  --------  -------  -------  ------- 
Net operating income                26,270    19,887    21,725   12,849    9,227   13,421 
--------------------------------  --------  --------  --------  -------  -------  ------- 
Total operating expenses          (17,087)  (16,527)  (17,905)  (8,560)  (8,675)  (8,527) 
--------------------------------  --------  --------  --------  -------  -------  ------- 
Operating profit/(loss)              9,183     3,360     3,820    4,289      552    4,894 
--------------------------------  --------  --------  --------  -------  -------  ------- 
Share of profit in associates 
 and joint ventures                  1,656       958       639      771      537      885 
--------------------------------  --------  --------  --------  -------  -------  ------- 
Profit before tax                   10,839     4,318     4,459    5,060    1,089    5,779 
--------------------------------  --------  --------  --------  -------  -------  ------- 
Tax expense                        (2,417)   (1,193)   (1,485)  (1,206)    (472)  (1,211) 
--------------------------------  --------  --------  --------  -------  -------  ------- 
Profit/(loss) after tax              8,422     3,125     2,974    3,854      617    4,568 
--------------------------------  --------  --------  --------  -------  -------  ------- 
 

Reported performance - 1H21 vs 1H20

Reported profit

Reported profit after tax of $8.4bn in 1H21 was $5.3bn higher than in 1H20.

Reported profit before tax of $10.8bn was $6.5bn higher than in 1H20. Reported revenue fell, reflecting the continued impact of lower global interest rates and a decline in revenue in GBM's MSS business following lower market volatility and client activity in 1H21, compared with a notably strong 1H20. These decreases were partly offset by the favourable impact on certain volatile items in WPB and GBM.

The reduction in reported revenue was more than offset by a net release of reported ECL in 1H21 due to an improvement in the forward economic outlook, notably in the UK, compared with the significant build-up of stage 1 and stage 2 allowances in 1H20. In addition, our reported share of profit from associates and joint ventures in Corporate Centre increased. Reported operating expenses increased, primarily from a higher performance-related pay accrual, continued investment in our digital capabilities and higher restructuring and other related costs, which more than offset a reduction due to the non-recurrence of a 1H20 impairment of $1.2bn of capitalised software related principally to businesses within HSBC Bank plc.

In 1H21, all of our regions were profitable. Despite the impact of lower global interest rates, our Asia business continued to deliver a strong performance. In addition, there was a material recovery in profitability in all other regions, primarily reflecting a net release in ECL as the economic outlook improved, notably in HSBC UK Bank plc, where reported profit before tax increased to over $2.1bn .

The net favourable mark-to-market movements on certain volatile items discussed above resulted from the following:

-- In WPB, favourable market impacts in life insurance manufacturing of $413m compared with adverse movements in 1H20 of $334m.

-- In GBM, MSS included favourable credit and funding valuation adjustments of $35m (1H20: $355m adverse). In Principal Investments, valuation gains of $237m compared with losses of $12m in 1H20.

These were partly offset:

-- In Corporate Centre, 1H21 included adverse fair value movements on our long-term debt and associated swaps of $54m (1H20: $195m favourable).

IFRS 17 'Insurance Contracts' sets the requirements that an entity should apply in accounting for insurance contracts it issues and reinsurance contracts it holds. IFRS 17 is effective from 1 January 2023 and could have a significant impact on the revenue of our insurance business. For further details, see 'Future accounting developments' on page 289 of the Annual Report and Accounts 2020.

Reported revenue

Reported revenue of $25.6bn was $1.2bn or 4% lower than in 1H20. The reduction primarily reflected a fall in net interest income as a result of the impact of lower global interest rates, notably affecting our deposit franchises in WPB and in Global Liquidity and Cash Management ('GLCM') in CMB and GBM. While we grew average interest-earning assets, interest-bearing liabilities also increased, resulting in continued downward pressure on NIM. In GBM's MSS business, revenue decreased in Global Foreign Exchange and Global Debt Markets, as trading volatility and client activity in 1H21 was lower, although activity increased in Equities and Securities Services. There were also favourable movements in credit and funding valuation adjustments.

The reduction in revenue was partly offset by favourable market impacts in life insurance manufacturing, which compared with adverse movements in 1H20, as discussed above. GBM revenue also benefited from valuation gains in Principal Investments, compared with small losses in 1H20.

The reduction in reported revenue also included adverse fair value movements on financial instruments of $0.5bn, which were more than offset by favourable foreign currency translation differences of $1.1bn.

Reported ECL

Reported ECL were a net release of $0.7bn in 1H21, compared with a charge of $6.9bn in 1H20. The net release in 1H21 reflected an improvement in the economic outlook, notably in the UK. This compared with the significant build-up of stage 1 and stage 2 allowances in 1H20 due to the worsening economic outlook at the onset of the Covid-19 outbreak. The reduction in ECL also reflected low levels of stage 3 charges, as well as the non-recurrence of a significant charge in 1H20 related to a corporate exposure in Singapore.

Given current consensus economics and default experience, ECL charges for 2021 are expected to be materially lower than our medium-term range of 30bps to 40bps of average loans and possibly a net release for the year. Uncertainty remains as countries emerge from the pandemic at different speeds, government support measures unwind and new virus strains test the efficacy of vaccination programmes.

For further details on the calculation of ECL, including the measurement uncertainties and significant judgements applied to such calculations, the impact of alternative/additional scenarios and post-model adjustments, see pages 62 to 70.

Reported operating expenses

Reported operating expenses of $17.1bn were $0.6bn or 3% higher than in 1H20. This primarily reflected higher performance-related pay of $0.9bn, which is accrued based on the profile of our expected profit performance. In addition, investment in technology, including investments in our digital capabilities, increased by $0.3bn. Our Asia wealth investment also rose by $0.1bn. These increases were partly offset by a $0.9bn impact of our cost-saving initiatives.

The increase in reported operating expenses also included adverse foreign currency translation differences of $0.9bn and an increase in restructuring and other related costs of $0.3bn, of which $0.1bn related to severance payments. However, these items were broadly offset by the non-recurrence of a $1.2bn impairment of intangible assets in Europe in 1H20, of which $0.2bn was within restructuring and other related costs.

Reported share of profit in associates and joint ventures

Reported share of profit in associates of $1.7bn was $0.7bn or 73% higher, primarily reflecting an increased share of profit from Bank of Communications Co., Limited ('BoCom'), a recovery in asset valuations of a UK associate relative to 1H20, and a higher share of profit from The Saudi British Bank ('SABB').

In relation to BoCom, we continue to be subject to a risk of impairment in the carrying value of our investment. For further details of our impairment review process, see Note 10 on the interim condensed financial statements.

Tax expense

The effective tax rate for 1H21 of 22.3% was lower than the 27.6% for 1H20. The effective tax rate for 1H21 was increased due to the impact of substantively enacted legislation to increase the UK statutory tax rate from 1 April 2023. The 1H20 effective tax rate was high, due mainly to the non-recognition of deferred tax on losses in the UK.

Reported performance - 2Q21 vs 2Q20

Reported profit

Reported profit after tax of $3.9bn in 2Q21 was $3.2bn higher than in 2Q20.

Reported profit before tax of $5.1bn was $4.0bn higher. This rise reflected a net release of reported ECL provisions and included the non-recurrence of a $1.2bn impairment in 2Q20 of capitalised software intangibles in Europe. These factors were partly offset by lower reported revenue.

Reported revenue of $12.6bn was $0.5bn or 4% lower, driven by a decrease in GBM, notably in MSS, reflecting lower market volatility and client activity compared with a strong 2Q20, and a fall in Principal Investments revenue due to the non-recurrence of revaluation gains recognised in 2Q20. These were compounded by the impact of interest rate reductions adversely affecting our deposit franchises within WPB and in the GLCM business in CMB and GBM.

ECL were a net release of $0.3bn, which compared with a charge of $3.8bn in 2Q20, as the significant build-up of stage 1 and stage 2 allowances in 2Q20 due to the worsening economic outlook at the onset of the Covid-19 outbreak was partially released in 2Q21. In addition, there were low levels of stage 3 charges during 2Q21.

Reported operating expenses of $8.6bn were $0.1bn or 1% lower, reflecting the non-recurrence of a $1.2bn impairment of software intangibles in Europe in 2Q20. This was partly offset by higher performance-related pay and continued investment in technology, and included adverse foreign currency translation differences of $0.6bn.

Reported share of profit in associates and joint ventures increased by $0.2bn, primarily reflecting an increased share of profit from SABB.

Adjusted results

Our reported results are prepared in accordance with International Financial Reporting Standards ('IFRSs') as detailed in the notes on the interim condensed financial statements on page 105.

We also present alternative performance measures (non-GAAP financial measures). These include adjusted performance, which we use to align internal and external reporting, identify and quantify items management believes to be significant, and provide insight into how management assesses period-on-period performance. Alternative performance measures are highlighted with the following symbol: <>

To derive adjusted performance, we adjust for:

- the period-on-period effects of foreign currency translation differences; and

- the effect of significant items that distort period-on-period comparisons, which are excluded to improve understanding of the underlying trends in the business.

The results of our global businesses are presented on an adjusted basis, which is consistent with how we manage and assess global business performance.

For reconciliations of our reported results to an adjusted basis, including lists of significant items, see page 35. Definitions and calculation of other alternative performance measures are included in our 'Reconciliation of alternative performance measures' on page 52.

 
                                        Half-year to                1H21 vs 1H20 
 
                                  30 Jun    30 Jun    31 Dec 
                                    2021      2020      2020 
Adjusted results <>                   $m        $m        $m             $m       % 
                                --------  --------  --------      ---------  ------ 
Revenue                           25,797    27,597    24,523        (1,800)   (7) 
------------------------------  --------  --------  --------      ---------  ---- 
ECL                                  719   (7,287)   (2,031)          8,006    >100 
------------------------------  --------  --------  --------      ---------  ------ 
Total operating expenses        (16,222)  (15,705)  (16,951)          (517)   (3) 
------------------------------  --------  --------  --------      ---------  ---- 
Operating profit                  10,294     4,605     5,541          5,689    >100 
------------------------------  --------  --------  --------      ---------  ------ 
Share of profit in associates 
 and joint ventures                1,656     1,049     1,139            607    58 
------------------------------  --------  --------  --------      ---------  ---- 
Profit before tax                 11,950     5,654     6,680          6,296    >100 
------------------------------  --------  --------  --------      ---------  ------ 
 

Adjusted performance - 1H21 vs 1H20

Adjusted profit before tax <>

Adjusted profit before tax of $12.0bn was $6.3bn higher than in 1H20.

Adjusted revenue fell, mainly reflecting the continued impact of lower global interest rates and a reduction in MSS revenue in GBM from lower market volatility and client activity, despite the favourable impact of certain volatile items in WPB and GBM. However, this decrease was more than offset by a net release of adjusted ECL in 1H21 due to an improvement in the economic outlook, notably in the UK, compared with the significant build-up of stage 1 and stage 2 allowances in 1H20. Adjusted operating expenses were higher, while our share of profit from associates and joint ventures increased.

Reconciliation of reported to adjusted profit before tax

 
                                                  Half-year to 
                                     --------------------------------------- 
                                     30 Jun 2021  30 Jun 2020    31 Dec 2020 
                                              $m           $m             $m 
                                     -----------  -----------  ------------- 
Reported profit before tax                10,839        4,318        4,459 
-----------------------------------               -----------  ----------- 
Currency translation                           -        (108)          125 
-----------------------------------  -----------  -----------  ----------- 
Significant items:                         1,111        1,444        2,096 
- customer redress programmes 
 (total)                                     (1)           24         (57) 
----------------------------------- 
- disposals, acquisitions 
 and investment in new businesses 
 (total)                                       -            8            2 
----------------------------------- 
- fair value movements on 
 financial instruments                       194        (299)           35 
----------------------------------- 
- impairment of goodwill 
 and other intangible assets                   -        1,025           65 
----------------------------------- 
- restructuring and other 
 related costs (total)                       918          554        1,524 
----------------------------------- 
- settlements and provisions 
 in connection with legal 
 and regulatory matters                        -            5            7 
----------------------------------- 
- past service costs of guaranteed 
 minimum pension benefits 
 equalisation                                  -            -           17 
----------------------------------- 
- goodwill impairment (share 
 of profit in associates and 
 joint ventures)                               -            -          462 
----------------------------------- 
- currency translation on 
 significant items                             -          127           41 
-----------------------------------  -----------  -----------  ----------- 
Adjusted profit before tax                11,950        5,654        6,680 
-----------------------------------  -----------  -----------  ----------- 
 

Adjusted revenue <>

Adjusted revenue of $25.8bn was $1.8bn or 7% lower than in 1H20. The reduction was primarily in net interest income due to the impact of lower global interest rates, mainly affecting our deposit franchises within WPB and in GLCM in CMB and GBM. In GBM's MSS business, revenue decreased in Global Foreign Exchange and Global Debt Markets, reflecting lower market volatility and client activity, although activity increased in Equities and Securities Services. In addition, there was a net favourable movement in credit and funding valuation adjustments of $411m. These decreases were in part mitigated by net favourable movements in market impacts in life insurance manufacturing in WPB of $764m. In addition, GBM adjusted revenue benefited from favourable revaluations in Principal Investments, compared with losses in 1H20.

Adjusted ECL <>

Adjusted ECL, which removes the period-on-period effects of foreign currency translation differences, were a net release of $0.7bn compared with a charge of $7.3bn in 1H20. These reflected releases as a result of an improvement in the economic outlook, notably in the UK. This compared with the significant build-up of stage 1 and stage 2 allowances in 1H20 due to the worsening economic outlook at the onset of the Covid-19 outbreak. The reduction in ECL also reflected low levels of stage 3 charges in 1H21, as well as the non-recurrence of a significant charge in 1H20 related to a corporate exposure in Singapore.

Adjusted operating expenses <>

Adjusted operating expenses of $16.2bn were $0.5bn or 3% higher than in 1H20. This primarily reflected higher performance-related pay of $0.9bn, which is accrued based on the profile of our expected profit performance. In addition, investment in technology, including investments in our digital capabilities, increased by $0.3bn. Our Asia wealth investment also rose by $0.1bn. These increases were partly offset by a $0.9bn impact of our cost-saving initiatives.

We expect adjusted operating expenses for 2021 to be broadly in line with 2020, excluding the benefit from a reduced bank levy. This remains subject to final decisions on performance-related pay, which will primarily reflect the performance of the Group.

The number of employees expressed in full-time equivalent staff ('FTE') at 30 June 2021 was 222,550, a decrease of 3,509 compared with 31 December 2020. The number of contractors at 30 June 2021 was 7,401, an increase of 1,709 , primarily reflecting increases associated with our growth and transformation initiatives.

Adjusted share of profit in associates and joint ventures<>

Adjusted share of profit from associates and joint ventures of $1.7bn was $0.6bn or 58% higher than in 1H20, including an increased share of profit from BoCom, a recovery in asset valuations of a UK associate relative to 1H20, and a higher share of profit from SABB.

Balance sheet and capital

Balance sheet strength

Total assets of $3.0tn were broadly in line with 31 December 2020. Cash balances increased as we redeployed our commercial surplus and as customer accounts rose, which was largely offset by adverse revaluation movements on derivative assets.

Loans and advances to customers of $1.1tn were $22bn higher, or $23bn on a constant currency basis, as customers used short-term borrowing to fund investments in initial public offerings, as well as from higher mortgage balances in the UK and Hong Kong. Customer accounts of $1.7tn increased by $26bn, or $27bn on a constant currency basis, from reduced customer spending.

Distributable reserves

The distributable reserves of HSBC Holdings at 30 June 2021 were $31.6bn, compared with $31.3bn at 31 December 2020. The increase was primarily driven by profits generated of $4.2bn net of ordinary dividend and additional tier 1 coupon payments of $3.7bn.

Capital position

We actively manage the Group's capital position to support our business strategy and meet our regulatory requirements at all times, including under stress, while optimising our capital efficiency. To do this, we monitor our capital position using a number of measures. These include our capital ratios, the impact on our capital ratios as a result of stress, and the degree of double leverage being run by HSBC Holdings. Double leverage is a constraint on managing our capital position, given the complexity of the Group's subsidiary structure and the multiple regulatory regimes under which we operate. For further details, see page 86.

Our CET1 ratio at 30 June 2021 was 15.6%, down from 15.9% at 31 December 2020, reflecting an increase in RWAs from lending growth and a decrease in CET1 capital including the impact of foreseeable dividends.

Liquidity position

We actively manage the Group's liquidity and funding to support our business strategy and meet regulatory requirements at all times, including under stress. To do this, we monitor our position using a number of risk appetite measures, including the liquidity coverage ratio ('LCR') and the net stable funding ratio. During 1H21, we revised our approach to calculate the Group's LCR to reflect the requirements of the EC Delegated Act. At 30 June 2021, the Group's LCR was 134% and we held high-quality liquid assets of $659bn. For further details, see page 91.

Wealth and Personal Banking

Contribution to Group 1H21 adjusted profit before tax<>

 
% contribution 
 to Group 
     32% 
 

WPB customer deposits, lending and wealth sales increased in 1H21, as markets began to emerge from the pandemic. We continued to support customers through payment holidays, short-term credit facilities and access to cash. Performance in 1H21 was favourably impacted by a release of ECL provisions and strong wealth sales in Asia, although revenue was affected by the impact of lower interest rates, despite strong balance sheet growth. Aligned with our strategy, we continued investing in our digital capabilities and people to expand our Wealth franchise in Asia, and address our customers' international needs.

We serve more than 39 million customers across the full spectrum from retail customers to ultra high net worth individuals and their families.

We offer locally-tailored products and services across multiple channels for our customers' everyday banking needs, as well as insurance, investment management, advisory and wealth solutions for those with more sophisticated requirements. Our global presence provides for customers with international needs.

 
                           Half-year to               1H21 vs 1H20 
 
                      30 Jun   30 Jun   31 Dec 
                        2021     2020     2020 
Adjusted results 
 <>                       $m       $m       $m            $m       % 
                     -------  -------  -------      --------  ------ 
Net operating 
 income               11,401   11,694   11,019         (293)   (3) 
-------------------  -------  -------  -------      --------  ---- 
ECL                       52  (2,328)    (685)         2,380    >100 
-------------------  -------  -------  -------      --------  ------ 
Operating expenses   (7,600)  (7,695)  (7,871)            95     1 
-------------------  -------  -------  -------      --------  ---- 
Share of profit 
 in associates 
 and JVs                  11      (8)       15            19    >100 
-------------------  -------  -------  -------      --------  ------ 
Profit before 
 tax                   3,864    1,663    2,478         2,201    >100 
-------------------  -------  -------  -------      --------  ------ 
RoTE excluding 
 significant items 
 (annualised, 
 YTD) (%)               17.9      6.0      9.1 
-------------------  -------  -------  -------      --------  ------ 
 

During the first half of 2021, we announced the potential sale of our retail banking business in France, as well as the exit of domestic mass market retail banking in the US, including our Personal and Advance propositions and retail business banking. In 1H21, the reported and adjusted profit before tax contributions of these businesses to the WPB segment was not significant.

-- In 1H21, our retail banking business in France contributed approximately 2% of WPB reported and adjusted revenue and approximately 35% of France WPB reported and adjusted revenue of $618m. At 30 June 2021, this business had loans and advances to customers of $25.6bn (31 December 2020: $25.5bn), customer accounts of $23.5bn (31 December 2020: $22.4bn) and RWAs of $7bn (31 December 2020: $7bn).

-- In 1H21, we entered into sale agreements with Citizens Bank and Cathay Bank in the US. The proposed transaction contributed approximately 1% of WPB reported and adjusted revenue and approximately 15% of US WPB reported and adjusted revenue. At 30 June 2021, these elements had loans and advances to customers of $2.6bn (31 December 2020: $3bn), customer accounts of $9.9bn (31 December 2020: $10bn) and RWAs of approximately $1bn (31 December 2020: approximately $1bn) relating to them. At 30 June 2021, the loans and advances to customers and customer accounts were classified as held for sale and reported on the Group's balance sheet as 'other assets' and 'other liabilities'.

 
                                                                         1H21 vs 
                                              Half-year to                 1H20 
 
                                         30 Jun  30 Jun  31 Dec 
                                           2021    2020    2020 
Management view of adjusted revenue(1) 
 <>                                          $m      $m      $m           $m        % 
                                         ------  ------  ------      -------  ------- 
Wealth                                    4,822   3,700   4,268        1,122     30 
---------------------------------------  ------  ------  ------      -------  ----- 
- investment distribution                 1,851   1,638   1,628          213     13 
---------------------------------------  ------  ------  ------      -------  ----- 
- life insurance manufacturing            1,439     583   1,237          856    >100% 
---------------------------------------  ------  ------  ------      -------  ------- 
- Global Private Banking                    935     960     840         (25)    (3) 
---------------------------------------  ------  ------  ------      -------  ----- 
   net interest income                      320     388     303         (68)   (18) 
---------------------------------------  ------  ------  ------      -------  ----- 
   non-interest income                      615     572     537           43      8 
---------------------------------------  ------  ------  ------      -------  ----- 
- asset management                          597     519     563           78     15 
---------------------------------------  ------  ------  ------      -------  ----- 
Personal Banking                          6,144   7,195   6,229      (1,051)   (15) 
---------------------------------------  ------  ------  ------      -------  ----- 
- net interest income                     5,456   6,577   5,577      (1,121)   (17) 
---------------------------------------  ------  ------  ------      -------  ----- 
- non-interest income                       688     618     652           70     11 
---------------------------------------  ------  ------  ------      -------  ----- 
Other(2)                                    435     799     522        (364)   (46) 
---------------------------------------  ------  ------  ------      -------  ----- 
Net operating income(3)                  11,401  11,694  11,019        (293)    (3) 
 

1 With effect from the first quarter of 2021, certain items within the management view of adjusted revenue have been renamed. 'Wealth Management' has been renamed 'Wealth' and 'Retail Banking' has been renamed 'Personal Banking'.

2 'Other' includes Markets Treasury, HSBC Holdings interest expense and Argentina hyperinflation. It also includes the distribution and manufacturing (where applicable) of retail and credit protection insurance, disposal gains and other non-product specific income.

3 'Net operating income' means net operating income before change in expected credit losses and other credit impairment charges (also referred to as 'revenue').

Financial performance

Adjusted profit before tax of $3.9bn in 1H21 was $2.2bn higher than in 1H20. This reflected a release of adjusted ECL in 1H21 as the economic outlook improved, compared with the significant build-up of allowances in 1H20. The impact of lower global interest rates resulted in a decrease in net interest income, which was largely offset by an increase in Wealth revenue due to a net favourable movement of $764m in market impacts in insurance and growth in investment distribution.

Adjusted revenue of $11.4bn was $0.3bn or 3% lower.

In Personal Banking, revenue of $6.1bn was down $1.1bn or 15%.

-- Net interest income was $1.1bn lower due to narrower margins as global interest rates fell in 2020 as a result of the Covid-19 outbreak. This reduction was partly mitigated by deposit balance growth of $32bn or 4%, mainly in the UK and Hong Kong, and higher mortgage lending of $24bn or 7%, particularly in the UK.

-- Non-interest income increased by $70m or 11%, reflecting growth from mortgages in the UK and Hong Kong, partly offset by lower income on unarranged overdrafts. Since March 2020, we moved from charging fees on unarranged overdrafts to an interest-based charging model, consistent with market practice.

In Wealth, net revenue of $4.8bn was up $1.1bn or 30%.

-- In life insurance manufacturing, revenue was $0.9bn higher, which included a net favourable movement in market impacts of $764m. In 1H21, there was a favourable movement of $413m, compared with an adverse movement in 1H20 of $351m, as equity markets performance continued to improve after the sharp fall in March 2020. The value of new business written was $0.1bn higher, as we broadened how we engage with customers, including through our improved digital capabilities, to mitigate the ongoing impact of the Covid-19 pandemic.

-- Investment distribution revenue was $0.2bn or 13% higher, reflecting strong equity market conditions in Hong Kong, which resulted in higher mutual fund sales and growth in brokerage fees as transaction volumes increased.

-- In Global Private Banking, revenue was $25m or 3% lower, as net interest income fell by $68m or 18% as a result of the impact of lower global interest rates. This was partly offset by growth in non-interest income of $43m or 8%, as investment revenue increased, reflecting higher fees from advisory and discretionary mandates and increased market volatility.

Adjusted ECL were a net release of $0.1bn, compared with a charge of $2.3bn in 1H20. ECL reflected releases in 1H21 as the economic outlook improved. This compared with the significant build-up of allowances in 1H20 as a result of the Covid-19 outbreak.

Adjusted operating expenses of $7.6bn were $0.1bn or 1% lower, as the benefits of our cost-saving initiatives funded our continued investment in Wealth in Asia and offset a higher performance-related pay accrual.

Divisional highlights

$1.7tn

WPB wealth balances at 30 June 2021. This was an 18% year-on-year increase, and a 5% increase from 31 December 2020.

$24bn

Growth in mortgage book, notably in the UK (up 9%) and Hong Kong (up 6%) since 30 June 2020.

Adjusted profit before tax <>

($bn)

$3.9bn

Adjusted net operating income <>

($bn)

$11.4bn

Commercial Banking

Contribution to Group 1H21 adjusted profit before tax<>

 
% contribution 
 to Group 
     28% 
 

CMB supported our customers' liquidity and working capital needs, growing lending and deposit balances, while our ongoing investment in technology has helped enable us to support customers under exceptionally challenging conditions. Performance in 1H21 was favourably impacted by the release of ECL provisions, partly offset by the impact of lower interest rates globally on revenue.

We support approximately 1.3 million business customers in 53 countries and territories, ranging from small enterprises focused primarily on their domestic markets to large companies operating globally.

We help entrepreneurial businesses grow by supporting their financial needs, facilitating cross-border trade and payment services, and providing access to products and services offered by other global businesses.

 
                           Half-year to               1H21 vs 1H20 
 
                      30 Jun   30 Jun   31 Dec 
                        2021     2020     2020 
Adjusted results 
 <>                       $m       $m       $m            $m       % 
                     -------  -------  -------      --------  ------ 
Net operating 
 income                6,651    7,326    6,489         (675)   (9) 
-------------------  -------  -------  -------      --------  ---- 
ECL                      249  (3,751)  (1,265)         4,000    >100 
-------------------  -------  -------  -------      --------  ------ 
Operating expenses   (3,525)  (3,457)  (3,491)          (68)   (2) 
-------------------  -------  -------  -------      --------  ---- 
Share of profit 
 in associates 
 and JVs                   1        -      (1)             1     - 
-------------------  -------  -------  -------      --------  ---- 
Profit before 
 tax                   3,376      118    1,732         3,258    >100 
-------------------  -------  -------  -------      --------  ------ 
RoTE excluding 
 significant items 
 (annualised, 
 YTD) (%)               11.1    (1.6)      1.3 
-------------------  -------  -------  -------      --------  ------ 
 
 
                                                                               1H21 vs 
                                                     Half-year to                1H20 
 
                                                30 Jun  30 Jun  31 Dec 
                                                  2021    2020    2020 
Management view of adjusted revenue <>              $m      $m      $m         $m       % 
                                                ------  ------  ------      -----  ------ 
Global Trade and 
 Receivables Finance                               933     925     869          8     1 
----------------------------------------------  ------  ------  ------      -----  ---- 
Credit and Lending                               2,965   2,885   2,988         80     3 
----------------------------------------------  ------  ------  ------      -----  ---- 
Global Liquidity and Cash Management             1,741   2,411   1,865      (670)  (28) 
----------------------------------------------  ------  ------  ------      -----  ---- 
Markets products, Insurance and Investments, 
 and Other(1)                                    1,012   1,105     767       (93)   (8) 
----------------------------------------------  ------  ------  ------      -----  ---- 
- of which: share of revenue from Markets 
 and Securities Services and Banking products      524     492     465         32     7 
----------------------------------------------  ------  ------  ------      -----  ---- 
Net operating income(2)                          6,651   7,326   6,489      (675)   (9) 
----------------------------------------------  ------  ------  ------      -----  ---- 
 

1 Includes CMB's share of revenue from the sale of Markets and Securities Services and Banking products to CMB customers. GBM's share of revenue from the sale of these products to CMB customers is included within the corresponding lines of the GBM management view of adjusted revenue. Also includes allocated revenue from Markets Treasury, HSBC Holdings interest expense and Argentina hyperinflation.

2 'Net operating income' means net operating income before change in expected credit losses and other credit impairment charges (also referred to as 'revenue').

Financial performance

Adjusted profit before tax of $3.4bn was $3.3bn higher than in 1H20. This reflected a release of adjusted ECL in 1H21 as the economic outlook improved, compared with 1H20 where we had a significant build-up of allowances, along with a notable charge related to a corporate exposure in Singapore. This was partly offset by a decline in adjusted revenue due to the impact of lower global interest rates.

Adjusted revenue of $6.7bn was $0.7bn or 9% lower.

-- In GLCM, revenue decreased by $0.7bn or 28%, reflecting the impact of lower global interest rates, mainly in Hong Kong and the UK. This was partly offset by a 19% increase in average deposit balances, with growth particularly in the UK, Hong Kong and the US, as well as from a 5% increase in fee income.

-- In Markets products, Insurance and Investments, and Other, revenue reduced by $93m or 8%, reflecting the impact of lower global interest rates on income earned on capital held in the business. This reduction was partly offset by higher collaboration revenue from GBM, in Markets and Capital Markets and Advisory.

These decreases were partly offset:

-- In Credit and Lending, revenue increased by $80m or 3%, reflecting wider margins, notably in the UK, North America and Latin America, partly offset by lower average balances, as customers' funding requirements fell in the second half of 2020 due to the Covid-19 restrictions. During 2021, balances grew in Asia, although this was partly offset by a reduction in Europe.

-- In Global Trade and Receivables Finance, revenue was up by $8m or 1%, driven by a 5% growth in fee income across all regions from a recovery in global trade volumes during 2021, partly offset by lower average balances. However, during 2021 there was strong growth in lending balances in all regions, particularly in Asia.

Adjusted ECL were a net release of $0.2bn, compared with a charge of $3.8bn in 1H20. ECL in 1H21 included a release of stage 1 and stage 2 allowances as the economic outlook improved, notably in the UK. This compared with the significant build-up of allowances in 1H20 as a result of the adverse economic outlook due to the Covid-19 outbreak. The reduction in ECL also reflected minimal stage 3 charges in 1H21, compounded by a significant charge in 1Q20 related to a corporate exposure in Singapore.

Adjusted operating expenses of $3.5bn were $68m or 2% higher, primarily reflecting an increase in the performance-related pay accrual and continued investment in our digital and transactional banking capabilities. These increases were partly offset by continued cost discipline, and the impact of our cost-saving initiatives.

Divisional highlights

$4.2bn

Net new money from CMB clients referred to Global Private Banking during 2021, including $3.2bn or 75% in Asia.

12%

Increase in international account openings, compared with 1H20.

Adjusted profit before tax <>

($bn)

$3.4bn

Adjusted net operating income <>

($bn)

$6.7bn

Global Banking and Markets

Contribution to Group 1H21 adjusted profit before tax<>

 
% contribution 
 to Group 
     28% 
 

GBM adjusted profit before tax increased, reflecting a net release in ECL in 1H21. While adjusted revenue fell, there was continued momentum in Equities, Capital Markets and our Securities Services business, where assets under custody reached over $10tn for the first time. We also continued to invest in technology to support our clients and to improve our operational resilience.

We support major government, corporate and institutional clients worldwide. Our product specialists deliver a comprehensive range of transaction banking, financing, advisory, capital markets and risk management services.

 
                           Half-year to               1H21 vs 1H20 
 
                      30 Jun   30 Jun   31 Dec 
                        2021     2020     2020 
Adjusted results 
 <>                       $m       $m       $m            $m       % 
                     -------  -------  -------      --------  ------ 
Net operating 
 income                7,878    8,574    7,323         (696)   (8) 
-------------------  -------  -------  -------      --------  ---- 
ECL                      414  (1,195)     (95)         1,609    >100 
-------------------  -------  -------  -------      --------  ------ 
Operating expenses   (4,985)  (4,813)  (4,916)         (172)   (4) 
-------------------  -------  -------  -------      --------  ---- 
Share of profit 
 in associates 
 and JVs                   -        -        -             -     - 
-------------------  -------  -------  -------      --------  ---- 
Profit before 
 tax                   3,307    2,566    2,312           741    29 
-------------------  -------  -------  -------      --------  ---- 
RoTE excluding 
 significant items 
 (annualised, 
 YTD) (%)               10.7      7.7      6.7 
-------------------  -------  -------  -------      --------  ------ 
 

Financial performance

Adjusted profit before tax of $3.3bn was $0.7bn higher than in 1H20. This mainly reflected releases of ECL allowances, compared with the significant build-up of allowances in 1H20, despite a decrease in adjusted revenue.

Adjusted revenue of $7.9bn decreased by $0.7bn compared with 1H20.

-- In Markets and Securities Services, revenue decreased by $0.6bn or 12%, reflecting lower market volatility and a reduction in client activity in Global Foreign Exchange and Global Debt Markets, in the context of a strong performance in 1H20. In Securities Financing, income fell by $0.1bn or 25% due to margin compression. In addition, in Securities Services revenue fell by $0.1bn or 6% due to lower global interest rates, while fees increased by 15%, as assets under custody surpassed $10tn for the first time and transaction volumes increased in Asia and Europe. These decreases more than offset favourable movements in credit and funding valuation adjustments of $0.4bn and a strong performance in structured derivatives in Equities, reflecting strong client activity in Wealth, particularly in Asia.

-- In Banking, revenue decreased by $0.3bn or 8%, mainly in GLCM, which fell by $0.2bn or 20% due to the impact of lower global interest rates, although fee income increased. Credit and Lending revenue fell by $41m or 3% due to lower net interest income reflecting strategic actions to reduce RWAs, and as 1H20 included elevated drawdowns due to the Covid-19 outbreak. The reduction in 'Other' reflected the non-recurrence of gains in 1H20 due to widening credit spreads on portfolio hedges. These decreases were partly offset by an increase in Capital Markets and Advisory from a strong performance in leveraged finance and advisory, despite lower investment grade underwriting fees, reflecting a strong first half of 2020.

-- In GBM Other, Principal Investments revenue increased by $0.2bn, reflecting revaluation gains on several funds, mainly in Europe.

 
                                                  Half-year to              1H21 vs 1H20 
------------------------------------------- 
                                             30 Jun  30 Jun  31 Dec 
                                               2021    2020    2020 
Management view of adjusted revenue(1, 
 2) <>                                           $m      $m      $m           $m  % 
-------------------------------------------  ------  ------  ------      -------  --------- 
Markets and Securities Services               4,432   5,029   4,028        (597)     (12) 
------------------------------------------- 
- Securities Services                           924     985     862         (61)      (6) 
-------------------------------------------  ------  ------  ------      -------  ------- 
- Global Debt Markets                           713   1,040     426        (327)     (31) 
-------------------------------------------  ------  ------  ------      -------  ------- 
- Global Foreign Exchange                     1,680   2,486   1,679        (806)     (32) 
-------------------------------------------  ------  ------  ------      -------  ------- 
- Equities                                      642     313     540          329      >100% 
-------------------------------------------  ------  ------  ------      -------  --------- 
- Securities Financing                          438     581     414        (143)     (25) 
-------------------------------------------  ------  ------  ------      -------  ------- 
- Credit and funding valuation adjustments       35   (376)     107          411      >100% 
------------------------------------------- 
Banking                                       3,291   3,563   3,230        (272)      (8) 
------------------------------------------- 
- Global Trade and Receivables Finance          358     364     348          (6)      (2) 
-------------------------------------------  ------  ------  ------      -------  ------- 
- Global Liquidity and Cash Management          892   1,115     932        (223)     (20) 
-------------------------------------------  ------  ------  ------      -------  ------- 
- Credit and Lending                          1,312   1,353   1,354         (41)      (3) 
------------------------------------------- 
- Capital Markets and Advisory                  610     534     545           76       14 
-------------------------------------------  ------  ------  ------      -------  ------- 
- Other(3)                                      119     197      51         (78)     (40) 
-------------------------------------------  ------  ------  ------      -------  ------- 
GBM Other                                       155    (18)      65          173      >100% 
------------------------------------------- 
- Principal Investments                         237    (11)     124          248      >100% 
-------------------------------------------  ------  ------  ------      -------  --------- 
- Other(4)                                     (82)     (7)    (59)         (75)    >(100)% 
-------------------------------------------  ------  ------  ------      -------  --------- 
Net operating income(5)                       7,878   8,574   7,323        (696)      (8) 
 

1 With effect from the first quarter of 2021, management view of adjusted revenue has been revised to align with changes to the management responsibilities of the business and how we assess business performance. Comparative data have been re-presented accordingly.

2 From 1 June 2020, revenue from Issuer Services, previously reported in Securities Services, was reported in Banking. This resulted in $80m of revenue being recorded in Securities Services in 1H20. Comparatives have not been re-presented.

3 Includes portfolio management, earnings on capital and other capital allocations on all Banking products.

4 Includes notional tax credits and Markets Treasury, HSBC Holdings interest expense and Argentina hyperinflation.

5 'Net operating income' means net operating income before change in expected credit losses and other credit impairment charges (also referred to as 'revenue').

Adjusted ECL were a net release of $0.4bn, compared with a charge of $1.2bn in 1H20. ECL in 1H21 reflected the release of stage 1 and stage 2 allowances as the economic outlook improved, and benefited from a net release of provisions against specific stage 3 customers. This compared with the significant build-up of allowances in 1H20 as a result of the Covid-19 outbreak.

Adjusted operating expenses of $5.0bn were $0.2bn or 4% higher, from an increased performance-related pay accrual of approximately $0.3bn and higher technology investment. These were partly offset by the impact of our cost-saving initiatives.

Divisional highlights

48%

Percentage of adjusted revenue generated in Asia in 1H21 (1H20: 49%).

$10tn

Assets under custody in Securities Services, our highest ever balance.

Adjusted profit before tax <>

($bn)

$3.3bn

Adjusted net operating income <>

($bn)

$7.9bn

Corporate Centre

Contribution to Group 1H21 adjusted profit before tax<>

 
% contribution 
 to Group 
     12% 
 

Corporate Centre performance was broadly in line with 1H20 and included higher share of profit from associates and joint ventures.

The results of Corporate Centre primarily comprise the share of profit from our interests in our associates and joint ventures. It also includes Central Treasury, stewardship costs and consolidation adjustments.

 
Adjusted results<>                                   1H21 vs 
                          Half-year to                 1H20 
------------------- 
                     30 Jun  30 Jun  31 Dec 
                       2021    2020    2020 
                         $m      $m      $m         $m         % 
-------------------  ------  ------  ------      -----  -------- 
Net operating 
 income               (133)       3   (308)      (136)    >(100) 
-------------------  ------  ------  ------      -----  -------- 
ECL                       4    (13)      14         17      >100 
-------------------  ------  ------  ------      -----  -------- 
Operating expenses    (112)     260   (673)      (372)    >(100) 
-------------------  ------  ------  ------      -----  -------- 
Share of profit 
 in associates 
 and JVs              1,644   1,057   1,125        587      56 
-------------------  ------  ------  ------      -----  ------ 
Profit before 
 tax                  1,403   1,307     158         96       7 
-------------------  ------  ------  ------      -----  ------ 
RoTE excluding 
 significant items 
 (annualised, 
 YTD) (%)               5.1     4.7     3.1 
-------------------  ------  ------  ------      -----  -------- 
 

Financial performance

Adjusted profit before tax of $1.4bn was $96m or 7% higher than in 1H20, as higher income from the share of profit in associates and joint ventures was partly offset by the fall in adjusted revenue and higher adjusted operating expenses.

Adjusted revenue decreased by $136m, mainly in Central Treasury, from a net adverse fair value movement of $249m relating to the economic hedging of interest rate and exchange rate risk on our long-term debt with associated swaps. This was partly offset by higher revenue from our legacy portfolios, as 1H20 included valuation losses as a result of the Covid-19 outbreak.

Adjusted operating expenses, which are stated after recovery of costs from our global businesses, increased by $372m due to a reduction in recoveries from our global businesses, higher expenditure on regulatory projects and a higher performance-related pay accrual.

Adjusted share of profit from associates and joint ventures of $1.6bn increased by $0.6bn. This reflected increases in the share of profit from BoCom, and also from SABB, reflecting improved market conditions and a better economic outlook. Additionally, the share of profit increased in Europe by $0.2bn, mainly from a UK associate, reflecting a recovery in asset valuations relative to 1H20.

 
                                           Half-year to               1H21 vs 1H20 
 
                                      30 Jun  30 Jun  31 Dec 
                                        2021    2020    2020 
Management view of adjusted revenue 
 <>                                       $m      $m      $m             $m          % 
                                      ------  ------  ------      ---------  --------- 
Central Treasury(1)                     (54)     201    (44)          (255)    >(100)% 
------------------------------------  ------  ------  ------      ---------  --------- 
Legacy portfolios                         16    (52)      31             68      >100% 
Other(2)                                (95)   (146)   (295)             51       35 
------------------------------------  ------  ------  ------      ---------  ------- 
Net operating income(3)                (133)       3   (308)          (136)    >(100)% 
------------------------------------  ------  ------  ------      ---------  --------- 
 

1 Central Treasury includes adverse valuation differences on issued long-term debt and associated swaps of $54m (1H20: gains of $195m; 2H20: losses of $44m).

2 Revenue from Markets Treasury, HSBC Holdings net interest expense and Argentina hyperinflation are allocated out to the global businesses, to align them better with their revenue and expense. The total Markets Treasury revenue component of this allocation for 1H21 was $1,320m (1H20: $1,582m; 2H20: $1,287m).

3 'Net operating income' means net operating income before change in expected credit losses and other credit impairment charges (also referred to as 'revenue').

Risk overview

Active risk management helps us to achieve our strategy, serve our customers and communities and grow our business safely.

Managing risk

Banks continued to play an expanded role in supporting society and customers during the first half of 2021 due to the unprecedented global economic events caused by the Covid-19 outbreak. Many of our customers' business models and income were impacted by the global economic downturn, requiring them to take significant levels of support from both governments and banks.

Throughout the pandemic, we have continued to support our customers and adapted our operational processes. We have maintained high levels of service as our people, processes and systems responded to the required changes.

The financial performance of our operations varied in different geographies, but our balance sheet and liquidity remained strong. This helped us to support our customers both during periods of government-imposed restrictions and when these restrictions were eased.

To help meet the additional challenges created by the Covid-19 pandemic, we supplemented our approach to risk management with additional tools and practices, and these continue to be in place today. We increased our focus on the quality and timeliness of the data used to inform management decisions, through measures such as early warning indicators, prudent active risk management of our risk appetite, and ensuring regular communication with our Board and key stakeholders.

Our risk appetite

Our risk appetite defines our desired forward-looking risk profile, and informs the strategic and financial planning process. It provides an objective baseline to guide strategic decision making, helping to ensure that planned business activities provide an appropriate balance of return for the risk assumed, while remaining within acceptable risk levels. Risk appetite supports senior management in allocating capital, funding and liquidity optimally to finance growth, while monitoring exposure to non-financial risks.

Capital and liquidity remain at the core of our risk appetite framework, with forward-looking statements informed by stress testing. We continue to develop our climate risk appetite as we engage with businesses on including climate risk in decision making and starting to embed climate risk appetite into business planning.

During the first half of 2021, metrics monitoring the change in expected credit losses and other credit impairment charges returned to within their defined risk appetite thresholds. This was achieved by adapting our strategy in the context of the Covid-19 pandemic and recovery; enhancing our risk monitoring; developing management actions, such as reviews of our portfolios that are highly vulnerable to general economic conditions; and implementing additional review measures for new credit requests.

Key risk appetite metrics

 
                                                      Risk 
Component      Measure                            appetite      1H21 
-------------  -------------------------------  ----------  -------- 
               CET1 ratio - end point 
Capital         basis                              >=13.0%  15.6% 
-------------  -------------------------------  ----------  ---- 
Change 
 in expected 
 credit 
 losses        Change in expected credit 
 and other      losses and other credit 
 credit         impairment charges 
 impairment     as a % of advances: Retail 
 charges        (WPB)                              <=0.50%     0.13% 
-------------  -------------------------------  ----------  -------- 
 Change in expected credit 
  losses and other credit 
  impairment charges 
  as a % of advances: Wholesale 
  (GBM, CMB)                                       <=0.45%     0.10% 
 -------------------------------  ------------------------  -------- 
 

Stress tests

We regularly conduct stress tests to assess the resilience of our balance sheet and our capital adequacy, as well as to provide actionable insights into how key elements of our portfolios may behave during crises. We use the outcomes to calibrate our risk appetite and to review the robustness of our strategic and financial plans, helping to improve the quality of management's decision making. Stress testing analysis assists management in understanding the nature and extent of vulnerabilities to which the Group is exposed. The results from the stress tests also drive recovery and resolution planning to help enhance the Group's financial stability under various macroeconomic scenarios. The selection of stress scenarios is based upon the identification and assessment of our top and emerging risks identified and our risk appetite.

In 2021, the Bank of England ('BoE') required all major UK banks to conduct a solvency stress test to assess whether the capital buffers that banks had built during the Covid-19 outbreak are large enough to deal with how a prevailing stress period could unfold. This exercise differed from previous BoE stress tests, which were used to determine the capital requirements for participating banks. The 2021 solvency stress test incorporated a 'double dip' scenario, whereby an economy faces a recession and then a partial or full recovery for a short period of time before entering a second recessionary period. Additionally, it represented an intensification of the macroeconomic shocks seen in 2020, with economic weaknesses persisting across the world, leading to ongoing weaknesses in global GDP.

In addition to the BoE requirement for the solvency stress test, we conducted our own internal stress test, which explored potential impacts for key vulnerabilities to which the Group is exposed, including geopolitical impacts and the Covid-19 outbreak. The internal stress test considered the impacts of various risk scenarios across all risk types and on capital resources. The results of the internal stress test were shared with senior management, and showed that after taking appropriate actions, the Group would remain adequately capitalised.

We have also continued to build our climate stress testing and scenario analysis capabilities in preparation for regulatory stress tests and to further enhance our understanding of our climate risk exposures for use in risk management and business decision making.

Our operations

We remain committed to investing in the reliability and resilience of our IT systems and critical services that support all parts of our business. We do so to protect our customers, affiliates and counterparties, and to help ensure that we minimise any disruption to services that could result in reputational and regulatory consequences. We continue to operate in a challenging environment in which cyber threats are prevalent. We continue to invest in business and technical controls to defend against these threats.

We are making progress with the implementation of our business transformation plans, while seeking to ensure that we are able to manage safely the risks of the restructuring, which include execution, operational, governance, reputational, conduct and financial risks. We have put in place support to help our people, particularly when we are unable to find alternative roles for them.

For further details on our risk management framework and risks associated with our banking and insurance manufacturing operations, see pages 107 and 118 of the Annual Report and Accounts 2020, respectively.

Risks related to Covid-19

The Covid-19 outbreak and its effect on the global economy have continued to impact our customers, and the future effects of the pandemic remain uncertain. The economic impact of the pandemic has affected regions at different times and to varying degrees.

The varying government support measures and restrictions put in place in response to the outbreak have created additional challenges, given the rapid pace of change and significant operational demands. The speed at which countries and territories are able to return to pre-Covid-19 levels of economic activity will vary based on the levels of continuing government support offered, the level of infection, and ability of governments to roll out vaccines across each country. Renewed outbreaks, including as a result of the emergence of new variants of the virus, emphasise the ongoing threat of Covid-19. A full return to pre-pandemic levels of social interaction across all our key markets is unlikely in the short to medium term, despite the easing of government restrictions in some countries. We continue to monitor the situation.

While the approval and roll-out of vaccines during the first half of 2021 raised hopes that government restrictions will be lifted across developed markets by the end of 2021, there has been significant divergence in the speed at which vaccines have been deployed across countries. Most developed countries are now offering vaccines to a large proportion of their populations, although take-up rates vary both within countries and across age groups. Many less developed countries have struggled to secure supplies and are at a much earlier stage of their vaccination programmes. There remains uncertainty regarding the efficacy and side effects of the vaccines over various time horizons, particularly as new variants of the virus emerge. Tensions have been evident and may persist as countries compete for access to the array of vaccines either under development, pending approval or already approved.

The operational support functions on which the Group relies are based in a number of countries worldwide, some of which, notably India, have been particularly affected by the Covid-19 outbreak and have recently experienced a significant increase in infection rates. As a result of the pandemic, business continuity responses have been implemented and the majority of service level agreements have been maintained in locations where the Group operates. We continue to monitor the situation closely, in particular in those countries and regions where Covid-19 infections are most prevalent.

The outbreak has also resulted in changes in the behaviours of our retail and wholesale customers, leading some to require payment holidays and others to miss or delay payments on loan balances. Alongside the number of government support measures in place, these factors have impacted the performance of our ECL models, requiring enhanced monitoring of model outputs and use of compensating controls. These include management judgemental adjustments based on the expert judgement of senior credit risk managers and the recalibration of key loss models to take into account the impacts of Covid-19 on critical model inputs. In addition, we have been responding to complex conduct considerations and heightened risk of fraud related to the varying government support measures and restrictions. The continued economic uncertainty from the Covid-19 outbreak could adversely impact our revenue assumptions, notably volume growth.

For further details on our approach to the risks related to Covid-19, see 'Areas of special interest' on page 55.

Geopolitical and macroeconomic risks

The trade and regulatory environment is increasingly fragmented, as markets lay out plans to recover from the Covid-19 outbreak and look to strengthen supply chain networks. Heightened geopolitical tensions will continue to impact business sentiment, while the relationship between the UK and the EU may take time to settle following the UK's departure from the EU, despite the signing of the Trade and Cooperation Agreement at the end of 2020. Central bank interest rates remain at historically low levels, although a vaccine-led economic recovery and rising inflation indicators have contributed to an increase in interest rate yields and a steepening of yield curves in our major markets in the first half of 2021. Monetary policies have remained very accommodative during this period, but rising inflation is posing a policy dilemma for some central banks.

Potential changes to tax legislation and tax rates in the countries in which we operate could increase the Group's effective tax rate in future periods, as governments in many countries seek revenue sources to pay for the Covid-19 support packages that they have implemented. An OECD initiative to introduce a global minimum tax rate reached agreement on the key principles and could significantly increase the Group's tax charge if implemented.

Geopolitical tensions could have potential ramifications for the Group and its customers. Developments in Hong Kong, the US approach to strategic competition with China, supply chain restrictions, claims of human rights violations, diplomatic tensions between China and the UK, the EU, India and other countries, alongside other potential areas of tension may affect the Group by creating regulatory, reputational and market risks. The US and recently the UK, EU, Canada and other US allies acting in concert have imposed various sanctions and trade restrictions on Chinese persons and companies, and the US continues to advance development of its framework for strategic competition with China. Certain US measures are of particular relevance, including the Hong Kong Autonomy Act and Executive Order 13959, as amended, as are the promulgation and use of US, EU and UK human rights-based sanctions. China has subsequently announced a number of sanctions and trade restrictions and promulgated laws in response to foreign sanctions and trade restrictions against China. There is also increasing discussion in the US and Europe on multilateral efforts to address certain issues with China, which may create a more complex operating environment for the Group and its customers. We continue to carefully monitor and seek to manage the potential implications of these developments.

The financial impact to the Group of geopolitical risks in Asia is heightened due to the strategic importance of the region, and Hong Kong in particular, in terms of profitability and prospects for growth. Business sentiment in some sectors in Hong Kong remains dampened, although the financial services sector has remained strong and has benefited from stable liquidity conditions.

For further details on our approach to geopolitical and macroeconomic risks, see 'Areas of special interest' on page 55.

Ibor transition

During the first half of 2021, our interbank offered rate ('Ibor') transition programme - which is tasked with the development of new near risk-free rate ('RFR') products and the transition from legacy Ibor products - has continued to engage with our clients, and to implement the required IT and operational changes necessary to facilitate an orderly transition from Ibors to RFRs, or alternative benchmarks, such as policy interest rates. In March 2021, the interest rate benchmark administrator, ICE Benchmark Administration Limited ('IBA'), announced that the publication of 24 of the 35 main Libor currency interest rate benchmark settings would cease at the end of 2021 and that US dollar Libor will continue to be published for the most widely used settings until 30 June 2023. Therefore, the Group's transition programme is focusing on client engagement for Ibors demising in 2021. Additionally, the Group has met industry guidelines on the cessation of new Ibor contract issuance in Ibors demising in 2021, including but not limited to, the end of the first and second quarter cessation dates for new sterling Libor-linked products.

For Ibors demising in 2021, HSBC plans to transition all viable legacy Ibor contracts by 30 September 2021 to the extent possible, in line with RFR working group guidelines. However, the Group's transition plans are dependent on the readiness of our customers and the market, which is likely to result in operational activities potentially extending beyond 30 September 2021, and being concentrated into the latter part of 2021. All required contractual repapering and rebooking activities will be managed through bilateral and bulk transition processes, with fallback provisions negotiated where active transition is not achieved. However, to allow for a smooth transition of all contracts, we may also need to rely on some jurisdictional legislative solutions, such as the proposed 'synthetic'-based Libor methodology in the UK.

For further details on our approach to Ibor transition, see 'Areas of special interest' on page 57.

Top and emerging risks

Our top and emerging risks report identifies forward-looking risks so that they can be considered in determining whether any incremental action is needed to either prevent them from materialising or to limit their effect.

Top risks are those that may have a material impact on the financial results, reputation or business model of the Group in the year ahead. Emerging risks are those that have large unknown components and may form beyond a one-year horizon. If any of these risks were to occur, they could have a material effect on HSBC.

Our suite of top and emerging risks is subject to regular review by senior governance forums. We continue to monitor closely the identified risks and ensure robust management actions are in place, as required.

Our current top and emerging risks are summarised on the next page and discussed in more detail on page 110 of the Annual Report and Accounts 2020.

 
Risk                       Trend  Mitigants 
-------------------------  -----  -------------------------------------------------------------- 
Externally driven 
-------------------------  ----- 
Geopolitical and           >      We continue to closely monitor emerging risks posed 
 macroeconomic                     by an evolving geopolitical landscape, as well as 
 risks                             macroeconomic risks, and adopt commensurate procedures 
                                   and controls based on an assessment of the impacts 
                                   these may have on our portfolios. In spite of a 
                                   rapid economic recovery during the first half of 
                                   2021 in many of our markets and a reduced credit 
                                   stress in our portfolios, we maintain heightened 
                                   monitoring activities to identify sectors and customers 
                                   experiencing financial difficulties as a result 
                                   of the Covid-19 outbreak. In light of continued 
                                   geopolitical tensions, we continue to assess those 
                                   sectors likely to be particularly impacted by a 
                                   resulting proliferation of laws and regulatory actions. 
-------------------------  ----- 
Cyber threat and           >      We protect HSBC and our customers by strengthening 
 unauthorised access               our cyber defences, helping us to execute our business 
 to systems                        priorities safely and keep our customers' information 
                                   secure. We focus on controls to prevent, detect 
                                   and mitigate the impacts of persistent and increasingly 
                                   advanced cyber threats with a specific emphasis 
                                   on vulnerability management, malware defences, protections 
                                   against unauthorised access and third-party risk. 
                                   We closely monitor the continued dependency on widespread 
                                   remote working and online facilities. 
-------------------------  ----- 
Regulatory developments    >      We closely monitor for regulatory developments to 
 including conduct,                ensure they are interpreted and implemented effectively 
 with adverse impact               and in a timely way. We also engage with regulators, 
 on business model                 policy makers and standard setters as appropriate, 
 and profitability                 to help shape new regulatory requirements. Key themes 
                                   currently driving the regulatory compliance agenda 
                                   include: consumer protection and customer vulnerability; 
                                   the impact of digital services and innovation; and 
                                   ESG matters, with a particular focus on climate 
                                   risk. 
-------------------------  ----- 
Financial crime            >      We continued to support our customers and the business 
 risk environment                  throughout the Covid-19 pandemic, while making improvements 
                                   to our financial crime controls. We updated and 
                                   refreshed our fraud controls. We continued to invest 
                                   in advanced analytics and artificial intelligence 
                                   as key elements of our next generation of tools 
                                   to fight financial crime. 
-------------------------  ----- 
Ibor transition            ^      We remain focused on completing the provision of 
                                   alternative near-RFR products - and the supporting 
                                   processes and systems - to replace all outstanding 
                                   Ibor-linked contracts that are on a demise path, 
                                   within the required timelines. Due to delays in 
                                   market readiness, we are preparing for an increased 
                                   risk that the transition of outstanding contracts 
                                   will be concentrated in the latter part of 2021. 
-------------------------  ----- 
Climate-related            ^      We have established a climate risk team to support 
 risks                             our climate strategy and to respond to regulatory 
                                   expectations. We have integrated climate risk into 
                                   the Group risk management framework and enhanced 
                                   our climate risk appetite statement with quantitative 
                                   metrics. We are developing a training programme 
                                   for all levels of employees across the Group. We 
                                   continue to roll out customer transition risk questionnaires, 
                                   assess physical risk to our mortgage portfolio, 
                                   and build scenario analysis capabilities in preparation 
                                   for regulatory stress tests. 
-------------------------  ----- 
Internally driven 
-------------------------------- 
IT systems infrastructure  >      We continue to monitor and improve IT systems and 
 and resilience                    network resilience to minimise service disruption 
                                   and improve customer experience. To support the 
                                   business strategy, we strengthened our end-to-end 
                                   service management, build and deployment controls 
                                   and system monitoring capabilities. 
-------------------------  ----- 
Risks associated           >      We monitor workforce capacity and capability requirements 
 with workforce                    in line with our published growth strategy. We have 
 capability, capacity              put in place measures to support our people to work 
 and environmental                 safely during the Covid-19 outbreak, and to integrate 
 factors with potential            them back into the workplace as government restrictions 
 impact on growth                  ease. We monitor people risks that may arise due 
                                   to business transformation to help sensitively manage 
                                   redundancies and support impacted employees. 
-------------------------  ----- 
Risks arising              >      The impacts of the Covid-19 pandemic on the delivery 
 from the receipt                  of services to the Group are being closely monitored, 
 of services from                  with businesses and functions taking appropriate 
 third parties                     action where needed. We have continued to enhance 
                                   our third-party risk management programme to help 
                                   ensure engagements comply with our third-party risk 
                                   policy and required standards. 
-------------------------  ----- 
Model risk management      >      We continue to strengthen our oversight of models. 
                                   A new model risk policy, including updated controls 
                                   around the monitoring and use of models, has been 
                                   implemented. We are redeveloping our capital models 
                                   to reflect the evolving regulatory requirements, 
                                   and in some cases the potential effects of the Covid-19 
                                   outbreak. In addition, Ibor models impacted by the 
                                   switch to new alternative measures are being redeveloped. 
                                   We have enhanced the oversight of models used in 
                                   Sarbanes-Oxley processes in light of potential impacts 
                                   from the uncertain external environment on the model 
                                   outcomes. 
-------------------------  ----- 
Data management            >      We continue to remediate the control environment 
                                   for data-related risks with focused investments 
                                   in data governance, data usage, data integrity, 
                                   data privacy and information lifecycle management. 
                                   In the first half of 2021, our data strategy was 
                                   refreshed to align to three pillars: protect, connect 
                                   and unlock. 
-------------------------  ----- 
Change execution           ^      We continue to monitor and manage our change execution 
 risk                              risk, including our capacity and resources to meet 
                                   the increased levels of change for 2021 associated 
                                   with the delivery of our strategic transformation 
                                   and regulatory requirements. We are working to deliver 
                                   sustainable change efficiently and safely, with 
                                   a new change framework launched in May 2021. 
 
   ^              Risk heightened during the first half of 2021 
   >              Risk remained at the same level as 2020 

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