# HSBC Holdings plc Strategic Report 2014
## Connecting customers to opportunities for 150 years

## Overview
1 Who we are
1 Our purpose
2 Cautionary statement regarding forward-looking statements
3 Highlights
4 Group Chairman’s Statement
7 Group Chief Executive’s Review

## Strategic objectives
9 Value creation and long-term sustainability
10 HSBC Values
11 Our strategy

## Business model
12 Market presence
13 Organisation
15 Governance
16 Global businesses
18 Employees
21 Risk overview

## Strategic priorities
26 Grow the business and dividends
26 Implement Global Standards
28 Streamline processes and procedures

## Outcomes
28 Financial performance
34 Remuneration
36 Sustainability

## Directors
40 Directors

## Supplementary information
42 Status of the Strategic Report 2014
42 Copies of the Annual Report and Accounts 2014
42 Shareholder enquiries and communications
43 Report of the auditor

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## Who we are
HSBC is one of the largest banking and financial services organisations in the world.

*   **Customers:** 51m
*   **Served by:** 266,000 employees (257,600 FTE)
*   **Through four global businesses:**
    *   Retail Banking and Wealth Management
    *   Commercial Banking
    *   Global Banking and Markets
    *   Global Private Banking
*   **Located in:** 73 countries and territories
*   **Across five geographical regions:**
    *   Europe
    *   Asia
    *   Middle East and North Africa
    *   North America
    *   Latin America
*   **Offices:** Over 6,100
*   **Global headquarters:** London
*   **Market capitalisation:** US$182bn
*   **Listed on stock exchanges in:**
    *   London
    *   Hong Kong
    *   New York
    *   Paris
    *   Bermuda
*   **Shareholders:** 216,000 in 127 countries and territories

## Our purpose
Our purpose is to be where the growth is, connecting customers to opportunities, enabling businesses to thrive and economies to prosper, and ultimately helping people to fulfil their hopes and realise their ambitions.

## Our strategic priorities
We aim to be the world’s leading and most respected international bank. We will achieve this by focusing on the needs of our customers and the societies we serve, thereby delivering long-term sustainable value to all our stakeholders.

In 2013, we announced a set of three interconnected and equally weighted priorities for 2014 to 2016 to help us deliver our strategy:
*   grow the business and dividends;
*   implement Global Standards; and
*   streamline processes and procedures.

Each priority is complementary and underpinned by initiatives being undertaken within our day-to-day business. Together they create value for our customers and shareholders, and contribute to the long-term sustainability of HSBC.

## How we measure performance
We track our progress in implementing our strategy with a range of financial and non-financial measures or key performance indicators. From 2015, we have revised our targets to better reflect the changing regulatory and operating environment.

## Rewarding performance
The remuneration of all staff within the Group, including executive Directors, is based on the achievement of financial and non-financial objectives. These objectives, which are aligned with the Group’s strategy, are detailed in individuals’ annual scorecards. To be considered for a variable pay award, an individual must have fully complied with HSBC Values.

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## Cautionary statement regarding forward-looking statements
The *Strategic Report 2014* contains certain forward-looking statements with respect to HSBC’s financial condition, results of operations, capital position and business.

Statements that are not historical facts, including statements about HSBC’s beliefs and expectations, are forward-looking statements. Words such as ‘expects’, ‘anticipates’, ‘intends’, ‘plans’, ‘believes’, ‘seeks’, ‘estimates’, ‘potential’ and ‘reasonably possible’, variations of these words and similar expressions are intended to identify forward-looking statements. These statements are based on current plans, estimates and projections, and therefore undue reliance should not be placed on them.

---

## Highlights

*   **Profit before tax** was down 17% to US$18.7bn on a reported basis. Adjusted profit before tax, excluding the effect of significant items and currency translation, was broadly unchanged at US$22.8bn.
*   **Reinforced HSBC’s capital strength.** Our CRD IV transitional common equity tier 1 ratio was 10.9% compared with 10.8% at the end of 2013.
*   **Dividends to shareholders** increased to US$9.6bn as capital strength created capacity for organic growth and allowed us to increase the dividends paid.

| Metric | 2010 | 2011 | 2012 | 2013 | 2014 |
| :--- | :--- | :--- | :--- | :--- | :--- |
| **Profit before taxation (reported basis) (US$bn)** | 19.0 | 21.9 | 20.6 | 22.6 | 18.7 |
| **Capital strength (CRD IV CET1 ratio transitional) (%)** | - | - | - | 10.8 | 10.9 |
| **Dividends per ordinary share (US$)** | 0.36 | 0.41 | 0.45 | 0.49 | 0.50 |
| **Cost efficiency ratio (%)** | 55.2 | 57.5 | 62.8 | 59.6 | 67.3 |
| **Return on average ordinary shareholders’ equity (%)** | 9.5 | 10.9 | 8.4 | 9.2 | 7.3 |
| **Share price (£)** | 6.51 | 4.91 | 6.47 | 6.62 | 6.09 |

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## Group Chairman’s Statement
HSBC’s performance in 2014 reflected another year of consolidation in the reshaping and strengthening of the Group against a backdrop of geopolitical and economic headwinds, many of which could not have been foreseen at the outset of the year.

---

## Group Chief Executive’s Review
2014 was a challenging year in which we continued to work hard to improve business performance while managing the impact of a higher operating cost environment.

---

## Strategic objectives: Value creation and long-term sustainability

```mermaid
graph TD
    Customers[Customers: Personal, corporate, governmental, institutional and high net worth customers and counterparties]
    Branches[Branches and offices]
    Networks[Networks]
    Markets[Markets]
    Products[Products and Income: Loans/credit, Deposits + investments, Financial services, Interest and fee income, Trading and other income]
    Costs[Costs: Loan losses, Salaries and other payments, Infrastructure and other costs, Taxes]
    Allocation[Allocation: Dividends, Variable pay, Retained profit]
    Employees[Employees]
    ThirdParties[Third parties]
    Governments[Governments]
    Shareholders[Shareholders]

    Customers --> Branches & Networks & Markets
    Branches & Networks & Markets --> Products
    Products --> Costs
    Costs --> Allocation
    Allocation --> Employees & ThirdParties & Governments & Shareholders
```

---

## HSBC Values
Embedding HSBC Values in every decision and every interaction with customers and with each other is a top priority for the Group and is shaping the way we do business.

### HSBC Values
*   **Be dependable and do the right thing**
    *   stand firm for what is right, deliver on commitments, be resilient and trustworthy;
    *   take personal accountability, be decisive, use judgement and common sense, empower others.
*   **Be open to different ideas and cultures**
    *   communicate openly, honestly and transparently, value challenge, learn from mistakes;
    *   listen, treat people fairly, be inclusive, value different perspectives.
*   **Be connected with our customers, communities, regulators and each other**
    *   build connections, be externally focused, collaborate across boundaries;
    *   care about individuals and their progress, show respect, be supportive and responsive.

---

## Our strategy
### Long-term trends
*   The world economy is becoming ever more interconnected, with growth in world trade and cross-border capital flows continuing to outstrip growth in average gross domestic product.
*   Of the world’s top 30 economies, we expect those of Asia, Latin America, the Middle East and Africa to have increased by around four-fold in size by 2050.

### Competitive advantages
HSBC’s competitive advantages come from:
*   our meaningful presence in and long-term commitment to our key strategic markets;
*   our business network, which covers over 85% of global trade and capital flows;
*   our balanced business portfolio centred on our global client franchise;
*   our strong ability to add to our capital base while also providing competitive rewards to our staff and good returns to our shareholders;
*   our stable funding base, with about US$1.4 trillion of customer accounts;
*   our local balance sheet strength and trading capabilities.

### A two-part approach
*   **A network of businesses connecting the world.**
*   **Wealth management and retail with local scale.**

---

## Business model: Market presence

### HSBC’s markets
*   **Home markets:** Hong Kong, UK
*   **Priority growth markets:**
    *   *Asia:* Australia, Mainland China, India, Indonesia, Malaysia, Singapore, Taiwan
    *   *Europe:* France, Germany, Switzerland, Turkey
    *   *Middle East and North Africa:* Egypt, Saudi Arabia, UAE
    *   *North America:* Canada, USA
    *   *Latin America:* Argentina, Brazil, Mexico
*   **Network markets:** Operations primarily focused on international clients and businesses of Commercial Banking and Global Banking and Markets.
*   **Small markets:** Markets where HSBC has profitable scale and focused operations; Representative Offices.

---

## Organisation
Our operating model is based on a matrix management structure comprising global businesses, geographical regions and global functions.

---

## Global businesses: Main business activities in 2014

| | RBWM | CMB | GB&M | GPB |
| :--- | :--- | :--- | :--- | :--- |
| **Liability driven** | Deposits, Account services | Deposits, Payments and cash management | Deposits, Payments and cash management, Balance sheet management | Deposits, Account services |
| **Asset driven** | Credit and lending | Credit and lending, International trade and receivables finance | Credit and lending, Asset and trade finance | Credit and lending |
| **Fee driven and other** | Asset management, Wealth solutions, Broking, Insurance | Commercial insurance and investments | Corporate finance, Markets, Securities services | Investment management, Financial advisory, Broking, Corporate finance, Alternative investments, Trusts |

---

## Risk overview
All our activities involve, to varying degrees, the measurement, evaluation, acceptance and management of risk or combinations of risks.

### Top and emerging risks

| Risk | Description | Mitigants |
| :--- | :--- | :--- |
| **Economic outlook and government intervention** | Weak economic growth globally. | Monitor developments in key markets. |
| **Increased geopolitical risk** | Political instability and civil unrest. | Monitor geopolitical and economic outlook. |
| **Regulatory developments** | Policies imposing new requirements. | Engage with governments and regulators. |
| **Regulatory investigations, fines, sanctions** | Financial service providers at risk of sanctions. | Enhance management of conduct. |
| **Dispute risk** | Legal proceedings. | Monitor judicial trends; enhance controls. |
| **Heightened execution risk** | Complexity of projects. | Strengthen prioritisation and governance. |
| **People risk** | Demands on human capital. | Review remuneration policy. |
| **Third-party risk management** | Third-party service providers. | Strengthen risk management processes. |
| **Internet crime and fraud** | Usage of internet and mobile channels. | Adapt controls and defences. |
| **Information security risk** | Targets of cyber attacks. | Invest in training and layered controls. |
| **Data management** | Regulatory data submissions. | Data Strategy Board. |
| **Model risk** | Incorrect model outputs. | Model development governance. |

---

## Financial performance: Reported results

| | 2014 (US$m) | 2013 (US$m) | 2012 (US$m) |
| :--- | :--- | :--- | :--- |
| Net interest income | 34,705 | 35,539 | 37,672 |
| Net fee income | 15,957 | 16,434 | 16,430 |
| Other income | 10,586 | 12,672 | 14,228 |
| **Net operating income$^{14}$** | **61,248** | **64,645** | **68,330** |
| LICs$^{15}$ | (3,851) | (5,849) | (8,311) |
| **Net operating income** | **57,397** | **58,796** | **60,019** |
| Total operating expenses | (41,249) | (38,556) | (42,927) |
| **Operating profit** | **16,148** | **20,240** | **17,092** |
| Income from associates$^{16}$ | 2,532 | 2,325 | 3,557 |
| **Profit before tax** | **18,680** | **22,565** | **20,649** |

---

## Remuneration: Executive Directors' 2014 compensation (£000)

| | Douglas Flint | Stuart Gulliver | Iain Mackay | Marc Moses |
| :--- | :--- | :--- | :--- | :--- |
| Base salary | 1,500 | 1,250 | 700 | 700 |
| Fixed pay allowance | - | 1,700 | 950 | 950 |
| Pension | 750 | 625 | 350 | 350 |
| **Fixed pay** | **2,250** | **3,575** | **2,000** | **2,000** |
| Annual incentive | - | 1,290 | 867 | 1,033 |
| GPSP | - | 2,112 | 1,131 | 1,131 |
| **Total fixed and variable** | **2,250** | **6,977** | **3,998** | **4,164** |
| Total single figure | 2,532 | 7,619 | 4,080 | 4,239 |

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## Sustainability
### Our 10-point sustainable operations strategy
1.  **Sustainability engagement:** encourage employees to deliver improved efficiency by 2020.
2.  **Supply chain collaboration:** sustainable savings through efficiency and innovation.
3.  **HSBC Eco-efficiency fund:** US$50m annually to develop new ways of working.
4.  **Energy:** reduce annual energy consumption per employee by 1MWh by 2020.
5.  **Waste:** use less, and recycle 100% of office waste and electronic waste.
6.  **Renewables:** aim to increase energy consumption from renewables to 25% by 2020.
7.  **Green buildings:** energy efficient, sustainable buildings.
8.  **Data centres:** energy efficiency rating of 1.5 by 2020.
9.  **Travel:** reduce travel emissions per employee.
10. **Paper:** paperless banking and 100% sustainably sourced paper by 2020.

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## Footnotes to Strategic Report
$^1$ On 1 January 2014, CRD IV came into force. Capital and RWAs at 31 December 2014 are calculated on this basis.
$^2$ Dividends recorded are declared in the year.
$^3$ The cost efficiency ratio is total operating expenses divided by net operating income before loan impairment charges.
$^4$ Return on average ordinary shareholders’ equity is profit attributable to shareholders divided by average ordinary shareholders’ equity.
$^{12}$ The sum of balances does not agree to consolidated amounts because inter-company eliminations are not presented here.
$^{14}$ Net operating income before loan impairment charges, also referred to as ‘revenue’.
$^{15}$ Loan impairment charges and other credit risk provisions.
$^{16}$ Share of profit in associates and joint ventures.
$^{21}$ Excludes movements in fair value of own debt and before variable pay.
$^{27}$ Excludes accounting gain on ill-health benefits in 2013.