HSBC BANK CANADA FIRST QUARTER 2013 INTERIM REPORT

Transcription

1 HSBC BANK CANADA FIRST QUARTER INTERIM REPORT Profit for the quarter ended was $189m, a decrease of 14% compared with the same period in. Profit attributable to common shareholders was $171m for the quarter ended, a decrease of 15% compared with the same period in. Return on average common equity was 16.3% for the quarter ended compared with 19.8% for the same period in. The cost efficiency ratio improved to 45.0% for the quarter ended compared with 50.5% for the same period in. Total assets were $84.4bn at compared with $80.7bn at. Total assets under administration increased to $20.4bn at from $18.3bn at. Common equity tier 1 capital ratio was 11.1%, tier 1 ratio 13.9% and total capital ratio 15.9% at 31 March determined in accordance with regulatory guidelines and the Basel III capital adequacy framework adopted with effect from 1 January. Abc

2 Corporate Profile, a subsidiary of HSBC Holdings plc, is the leading international bank in Canada. With around 6,600 offices in over 80 countries and territories and assets of US$2,681bn at, the HSBC Group is one of the world s largest banking and financial services organizations. Table of Contents 2 Corporate profile 3 Shareholder Information 3 Caution Concerning Forward-Looking Statements 4 Management s Discussion and Analysis 4 Financial Highlights 5 Basis of preparation of financial information 5 Use of non-ifrs financial measures 6 Overview 6 Analysis of Consolidated Financial Results for the First Quarter 9 Analysis of Consolidated Financial Results for the First Quarter by Customer Groups 13 Quarterly summary of Condensed Consolidated Statements of Income (Unaudited) 13 Critical Accounting Policies and Impact of Estimates and Judgements 14 Financial Instruments including Off-Balance Sheet Arrangements 14 Management s Responsibility for Financial Information 15 Related Party Transactions 15 Outstanding Shares and Securities 15 Credit Ratings 16 Risk Management 21 Capital 22 Consolidated Financial Statements (Unaudited) 29 Notes on the Consolidated Financial Statements (Unaudited) DIVIDENDS AND DISTRIBUTION DATES: Dividend record and payable dates for the bank s preferred shares, subject to approval by the Board, are: Copyright All rights reserved No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of. Published by, Vancouver Printed by Western Printers, Burnaby Record Date Payable Date 14 June 30 June 13 September 30 September 13 December 2014 Record Date Payable Date 14 March Distribution dates on our HSBC HaTS are 30 June and. 2

3 Shareholder Information Shareholder Information PRINCIPAL ADDRESSES: Vancouver: 885 West Georgia Street Vancouver, British Columbia Canada V6C 3E9 Tel: (604) Fax: (604) Toronto: 70 York Street Toronto, Ontario Canada M5J 1S9 Tel: (416) Fax: (416) MEDIA ENQUIRIES: Vancouver (English) (604) Toronto (English) (416) Toronto (French) (416) WEBSITE: OTHER AVAILABLE INFORMATION: The bank s continuous disclosure materials, including interim and annual filings, are available on the bank s website and on the Canadian Securities Administrators web site at HSBC BANK CANADA SECURITIES ARE LISTED ON THE TORONTO STOCK EXCHANGE: Class 1 Preferred Shares Series C (HSB.PR.C) Class 1 Preferred Shares Series D (HSB.PR.D) Class 1 Preferred Shares Series E (HSB.PR.E) TRANSFER AGENT AND REGISTRAR: Computershare Investor Services Inc. Shareholder Service Department 9 th Floor, 100 University Avenue Toronto, Ontario Canada M5J 2Y1 Tel: 1 (800) SHAREHOLDER CONTACT: For change of address, shareholders are requested to write to the bank s transfer agent, Computershare Investor Services Inc., at their mailing address. Other shareholder inquiries may be directed to Shareholder Relations by writing to: Shareholder Relations Finance Department 4 th Floor 2910 Virtual Way Vancouver, British Columbia Canada V5M 0B2 Shareholder Relations: Chris Young (604) Harry Krentz (604) Caution Concerning Forward-Looking Statements This document contains forward-looking information, including statements regarding the business and anticipated actions of. These statements can be identified by the fact that they do not pertain strictly to historical or current facts. Forward-looking statements often include words such as anticipates, estimates, expects, projects, intends, plans, believes, and words and terms of similar substance in connection with discussions of future operating or financial performance. By their very nature, these statements require us to make a number of assumptions and are subject to a number of inherent risks and uncertainties that may cause actual results to differ materially from those contemplated by the forwardlooking statements. We caution you to not place undue reliance on these statements as a number of risk factors could cause our actual results to differ materially from the expectations expressed in such forward-looking statements. These risk factors many of which are beyond our control and the effects of which are difficult to predict that could cause such differences include: capital management, credit, liquidity and funding, market, structural, and operational risks all of which are discussed in the Risk Management section in Management s Discussion and Analysis of our Annual Report and Accounts. Additional risk factors include: the impact of changes in laws and regulations including relating to the Dodd-Frank Wall Street Reform and Consumer Protection Act and the regulations issued and to be issued thereunder, the Basel Committee on Banking Supervision s global standards for capital and liquidity reform, over-the-counter derivatives reform in Canada; technological changes and security; global capital market activity; the effects of changes in government monetary and economic policies; changes in prevailing interest rates; inflation levels; and the general business and economic market conditions in Canada and in geographic areas where we operate. Canada is an extremely competitive banking environment, and pressures on our net interest spread may arise from actions taken by individual banks or other financial institutions acting alone. Varying economic conditions may also affect equity and foreign exchange markets, which could also have an impact on our revenues. We caution you that the risk factors disclosed above are not exhaustive, and there could be other uncertainties and potential risk factors not considered here which may adversely affect our results and financial condition. Any forward-looking statements in this document speak only as of the date of this document. We do not undertake any obligation to, and expressly disclaim any obligation to, update or alter our forward-looking statements, whether as a result of new information, subsequent events or otherwise, except as required under applicable securities legislation. 3

4 Management s Discussion and Analysis Financial Highlights (in $ millions, except where otherwise stated) For the period () Profit before income tax expense Net operating income before loan impairment charges and other credit risk provisions Profit attributable to common shareholders At period-end () Shareholders equity... 5,218 4,958 5,146 Loan and advances to customers (net of impairment allowances)... 46,003 45,395 45,572 Customer accounts... 48,184 47,037 48,304 Capital measures (1) Common equity tier 1 capital ratio (%) Tier 1 ratio (%) Total capital ratio (%) Assets-to-capital multiple Risk-weighted assets ()... 36,171 36,460 36,668 Performance ratios (%) (2) Return on average common equity Post-tax return on average total assets Post-tax return on average risk-weighted assets (1) Credit coverage ratios (%) Loan impairment charges as a percentage of total operating income Loan impairment charges as a percentage of average gross customer advances and acceptances Total impairment allowances outstanding as a percentage of impaired loans and acceptances at the period end Efficiency and revenue mix ratios (%) (2) Cost efficiency ratio Adjusted cost efficiency ratio As a percentage of total operating income: - net interest income net fee income net trading income Financial ratios (%) (2) Ratio of customer advances to customer accounts Average total shareholders equity to average total assets Total assets under administration () (2) Funds under management... 19,290 17,294 18,327 Custodial accounts... 1, ,133 Total assets under administration... 20,411 18,255 19,460 1 Effective 1 January, regulatory information is determined in accordance with the Basel III capital adequacy framework. Comparative regulatory information for periods, were not restated and are determined in accordance with the Basel II capital adequacy framework. Refer to the Risk Management section of this document for further information relating to the adoption of the Basel III capital adequacy framework. 2 Refer to the Use of non-ifrs financial measures section of this document for a discussion of non-ifrs financial measures. 4

5 Management s Discussion and Analysis (continued) Basis of preparation of financial information ( the bank, we, our ) is an indirectly wholly owned subsidiary of HSBC Holdings plc ( HSBC Holdings ). Throughout Management s Discussion and Analysis ( MD&A ), the HSBC Holdings Group is defined as the HSBC Group or the Group. The MD&A is dated 8 May, the date that our unaudited consolidated financial statements and MD&A for the first quarter of were approved by our Board of Directors ( the Board ). We prepare our unaudited consolidated financial statements in accordance with International Financial Reporting Standards ( IFRS ). The information in this MD&A is derived from our unaudited consolidated financial statements or from the information used to prepare them. The abbreviations and $bn represent millions and billions of Canadian dollars, respectively. All tabular amounts are in millions of dollars except where otherwise stated. The references to notes throughout this MD&A refer to notes on the unaudited consolidated financial statements for the first quarter ended. Use of non-ifrs financial measures The bank uses certain non-ifrs financial measures to assess its performance. Non-IFRS financial measures are not defined by IFRS and do not have standardized meanings that would ensure consistency and comparability between companies using these measures. The following non-ifrs financial measures are used throughout this document and are defined below: Return on average common equity Profit attributable to common shareholders on an annualized basis divided by average common equity, which is calculated using month-end balances of common equity for the period. Post-tax return on average assets Profit attributable to common shareholders on an annualized basis divided by average assets, which is calculated using average daily balances for the period. Post-tax return on average risk-weighted assets Profit attributable to common shareholders on an annualized basis divided by the average monthly balances of risk-weighted assets for the period. Risk-weighted assets are calculated using guidelines issued by the Office of the Superintendent of Financial Institutions Canada ( OSFI ) in accordance with the Basel III capital adequacy framework (: Risk weighted assets are calculated using the guidelines issued by OSFI in accordance with the Basel II capital adequacy framework). Cost efficiency ratio Calculated as total operating expenses for the period divided by net operating income before loan impairment charges and other credit risk provisions for the period. Adjusted cost efficiency ratio Cost efficiency ratio adjusted to exclude gains and losses from financial instruments designated at fair value from net operating income before loan impairment charges. Net interest income, net fee income and net trading income as a percentage of total operating income Net interest income, net fee income and net trading income for the period divided by net operating income before loan impairment charges and other credit risk provisions for the period. Ratio of customer advances to customer accounts Loans and advances to customers divided by customer accounts, using period-end balances. Average total shareholders equity to average total assets Average shareholders equity is calculated using month-end balances of total shareholders equity for the period and average total assets are calculated using average daily balances for the period. Assets under administration These are assets administered by the bank on behalf of our customers. The bank does not recognise these assets on its consolidated statement of financial position because our customers are the beneficial owners. Liquid assets These assets include high grade financial investments and reverse repurchase agreements of which a certain amount is pledged as collateral to secure recognized liabilities and contingent obligations within payment and depository clearing systems. 5

6 Management s Discussion and Analysis (continued) Overview recorded profit of $189m for the first quarter of, a decrease of $30m, or 14%, compared with the first quarter of, and an increase of $35m, or 23%, compared with the fourth quarter of. Profit attributable to common shareholders was $171m for the first quarter of, a decrease of $30m, or 15%, compared with the first quarter of, and an increase of $34m, or 25%, compared with the fourth quarter of. The first quarter of included a gain on the sale of the full service brokerage business of $84m and a restructuring charge of $36m mostly relating to the wind-down of the consumer finance business. Excluding the impact of these items and their effect on income tax expense, profit increased by $17m, or 8%, compared with the same quarter last year. The increase is mainly due to reduced operating expenses from strict cost control and continued delivery of organizational cost effectiveness programmes, which resulted in sustainable cost savings. Additionally contributing to the increase were higher gains on the disposal of available-for-sale financial investments, and a growth in trading income of C$5m as a result of a change in valuation estimation methodology on derivatives. The increase is partially offset by lower net interest income mainly due to lower average retail and consumer finance loan balances following the strategic refocus of these businesses and continued pressure on net interest spread in a prolonged low interest rate environment. The fourth quarter of included a $42m charge resulting from the write down in the value of investment property. Excluding the charge resulting from the write down, profit in the first quarter of increased by $66m compared with the prior quarter mainly due to higher gains on the disposal of available-for-sale financial investments, partially offset by higher specific provisions for commercial exposures notably in the energy and real estate sectors. Commenting on the results, Paulo Maia, President and Chief Executive Officer of, said: We ve enjoyed a good start to, as a result of our focus on building our core businesses, deepening client relationships, and continued improvements in the efficiency of our operations in Canada, consistent with HSBC's global strategy. Our success is driven by our ability to connect internationally-minded Canadian businesses and individuals to opportunities around the world. Analysis of Consolidated Financial Results for the First Quarter Net interest income Net interest income for the first quarter of was $336m, a decrease of $62m, or 16%, compared with the first quarter of, and a decrease of $12m, or 3%, compared with the fourth quarter of. The decreases are mainly due to lower average retail and consumer finance loan balances following the strategic refocus of these businesses and continued pressure on net interest spread in a prolonged low interest rate environment. Net fee income Credit facilities Funds under management Account services Credit cards Immigrant Investor Program Remittances Corporate finance Brokerage commissions Insurance Trade finance import/export Trustee fees Other Fee income Less: fee expense... (20) (25) (24) Net fee income

7 Management s Discussion and Analysis (continued) Net fee income for the first quarter of was $146m, an increase of $3m, or 2%, compared with the first quarter of, and a decrease of $8m, or 5%, compared with the fourth quarter of. The increase compared with the same quarter last year was due to a growth in authorized commercial credit facilities and higher funds under management. The decrease compared with the prior quarter is mainly due to a reduction in fee income from credit cards associated with lower transaction volume and a decrease in corporate finance fees. Net trading income Net trading income for the first quarter of was $57m, an increase of $17m, or 43% compared with the first quarter of, and an increase of $12m, or 27%, compared with the fourth quarter of. Net trading income increased compared to both the first and fourth quarters of as a result of a change in estimation methodology in respect of credit and debit valuation adjustments on derivative contracts to reflect evolving market practises. In addition higher global customer trading volumes in foreign exchange products and improved performance in rates and credit products contributed to the increase. Net trading income in the first quarter of included losses caused by the narrowing of credit spreads on the carrying value of our own debt instruments classified as trading. Other items of income Net expense from financial instruments designated at fair value... (3) (14) (3) Gains less losses from financial investments Other operating income/(expense) (26) Gain on the sale of the full service retail brokerage business Other items of income (21) Net expense from financial instruments designated at fair value for the first quarter of was $3m, compared with a net expense of $14m in the first quarter of, and was unchanged compared with the fourth quarter of. The bank designates certain subordinated debentures to be recorded at fair value. Income and expense are largely as a result of the widening or narrowing of credit spreads decreasing or increasing the fair value of these subordinated debentures, respectively. Gains less losses from financial investments for the first quarter of were $35m, an increase of $18m and $31m respectively compared with the first quarter of and fourth quarter of. The increases in gains less losses from financial investments are due to higher gains on the disposal of available-for-sale financial investments driven by balance sheet management activities. Other operating income/(expense) for the first quarter of was $13m, unchanged compared with the first quarter of, and an increase of $39m compared with the fourth quarter of. The fourth quarter of included a $42m charge resulting from the write down in the value of investment property. Gain on the sale of the full service retail brokerage business. The sale of the full service retail brokerage business closed on 1 January and resulted in a gain of $84m, net of assets written off and directly related costs. In the fourth quarter of, the bank satisfied certain conditions relating to the sale of the full service retail brokerage business for which we recognized an increase to the gain of $4m. Loan impairment charges and other credit risk provisions Loan impairment charges and other credit risk provisions for the first quarter of were $56m, an increase of $8m, or 17%, compared with the first quarter of, and an increase of $23m, compared with the fourth quarter of. The increases are primarily due to higher specific provisions for commercial exposures notably in the energy and real estate sectors, partially offset by a reduction in collective consumer finance provisions due to improved delinquency performance. 7

8 Management s Discussion and Analysis (continued) Operating expenses Employee compensation and benefits General and administrative expenses Depreciation of property, plant and equipment Amortization and impairment of intangible assets Total operating expenses (excluding restructuring charges) Restructuring charges Total operating expenses Total operating expenses (excluding restructuring charges) for the first quarter of were $263m, a decrease of $45m, or 15%, compared with the first quarter of, and a decrease of $15m, or 5%, compared with the fourth quarter of. The decreases in total operating expenses compared with both quarters are mainly due to strict cost control and continued delivery of our organizational cost effectiveness programmes, which resulted in sustainable cost savings. Cost reductions relating to the wind-down of the bank s consumer finance business as well as reduced activities and expenses related to the delivery of technology services to HSBC Group companies also contributed to a further decrease in total operating expense compared with the same quarter last year. Restructuring charges of $36m were recognized in the first quarter of mainly relating to the wind-down of the bank s consumer finance business. Income taxes Income tax expense. The effective tax rate in the first quarter of was 30.0%, compared with 25.2% in the first quarter of and 29.9% in the fourth quarter of. The lower effective tax rate in the first quarter of was largely due to a lower effective tax rate applied to the gain on the sale of the full service retail brokerage business. Statement of Financial Position Total assets at were $84.4bn, an increase of $3.7bn from $80.7bn at, mainly due to increases of $1.7bn in trading assets, $1.2bn in loans and advances to banks, $0.4bn in loans and advances to customers and $0.4bn in customers liability under acceptances. The growth in trading assets is due to a higher holding of government and agency bonds as a result of increased trading activity in the rates business and a higher holding in pending settlement trading accounts. Loans and advances to banks and loans and advances to customers increased as a result of an increase in reverse repurchase agreements. Excluding the increase in reverse repurchase agreements, loans and advances to banks increased marginally by $0.1bn and loans and advances to customers decreased by $0.5bn. Liquid assets increased to $25.9bn at, compared to $24.3bn at mainly as a result of strong deposit growth and debt issues mostly invested in short term investments. Refer to the Use of non-ifrs financial measures for a definition of liquid assets. Total liabilities at were $78.9bn, an increase of $3.6bn from $75.3bn at, mainly due to increases of $1.7bn in debt securities in issue, $1.3bn in trading liabilities and $0.4bn in acceptances. The increase in debt securities in issue is due to an additional $1.5bn of medium term notes and bearer deposits issued during the first quarter of. The increase in trading liabilities is driven by an increase in short position securities to manage interest rate risk and a higher holding in pending settlement trading accounts. 8

9 Management s Discussion and Analysis (continued) Analysis of Consolidated Financial Results for the First Quarter by Customer Groups Commercial Banking Net interest income Net fee income Net trading income Other operating income/(expense) (40) Net operating income before loan impairment charges and other credit risk provisions Loan impairment charges and other credit risk provisions... (39) (11) (6) Net operating income Total operating expenses... (88) (97) (97) Operating profit Share of profit in associates Profit before income tax expense Overview Profit before income tax expense was $123m for the first quarter of, a decrease of $34m, or 22%, compared with the first quarter of, and an increase of $3m, or 3%, compared with the fourth quarter of. The fourth quarter of included a $42m charge resulting from the write down in the value of investment property. Excluding the impact of the write down, profit before income tax expense decreased compared with the same quarter last year and compared with the prior quarter due to higher specific impairment provisions in the energy and real estate sectors and lower net interest spread, partially offset by reduced operating expenses as a result of strict cost control and continued delivery of our organizational cost effectiveness programmes, which resulted in sustainable cost savings. Financial performance Net interest income for the first quarter of was $161m, a decrease of $19m, or 11%, compared with the first quarter of, and a decrease of $16m, or 9%, compared with the fourth quarter of. The decreases are mainly due to continued pressure on net interest spread in a prolonged low interest rate environment partially offset by a growth in average loan balances. Net fee income for the first quarter of was $75m, an increase of $4m, or 6%, compared with the first quarter of, and a decrease of $2m, or 3%, compared with the fourth quarter of. The increase in net fee income compared with the same quarter last year is mainly driven by growth in authorized credit facilities and transaction volume. The decrease in net fee income compared with the prior quarter is as a result of lower volumes of guarantees. Net trading income for the first quarter of was $8m, unchanged compared with the first quarter of and marginally higher compared with the fourth quarter of. Other operating income/(expense) for the first quarter of was $2m, a decrease of $3m and an increase of $42m respectively compared with the first quarter of and fourth quarter of. The fourth quarter of included a $42m charge resulting from the write down in the value of investment property. Loan impairment charges and other credit risk provisions for the first quarter of were $39m, an increase of $28m and $33m respectively compared with the first quarter of and fourth quarter of. The increases in loan impairment charges and other risk provisions are due to higher specific provisions notably in the energy and real estate sectors. Total operating expenses for the first quarter of were $88m, a decrease of $9m, or 9%, compared with both the first and fourth quarter of. The decreases are as a result of strict cost control and continued delivery of our organizational cost effectiveness programmes, which resulted in sustainable cost savings. 9

10 Management s Discussion and Analysis (continued) Global Banking and Markets Net interest income Net fee income Net trading income Gains less losses from financial investments Other operating income/(expense)... (1) 1 Gain on the sale of the full service retail brokerage business... 8 Net operating income before loan impairment charges and other credit risk provisions Loan impairment charges and other credit risk provisions... 2 Net operating income Total operating expenses... (29) (25) (27) Profit before income tax expense Overview Profit before income tax expense was $103m for the first quarter of, an increase of $17m, or 20%, compared with the first quarter of and an increase of $34m, or 49%, compared with the fourth quarter of. The increase in profit before income tax compared with the same quarter last year is due to higher gains on the disposal of available-for-sale investments and improved trading income as a result of a change in valuation estimation methodology on derivatives, higher global customer trading volumes in foreign exchange products and improved performance in rates and credit products. The increase is partially offset by a $8m gain on the sale of the full service retail brokerage business included in the same quarter last year. The increase in profit before income tax compared with the prior quarter is due to higher gains on the disposal of availablefor-sale investments and improved trading income as a result of a change in valuation estimation methodology on derivatives, higher global customer trading volumes in foreign exchange products and improved performance in rates and credit products. The increase is partially offset by reduced net fee income driven by lower derivative sales and debt capital market fees. Financial performance Net interest income for the first quarter of was $42m, a decrease of $4m, or 9%, compared with the first quarter of, and an increase of $2m, or 5%, compared with the fourth quarter of. The decrease in net interest income compared with the same quarter last year is due to reduced net interest spread. The increase in net interest income compared with the prior quarter is due to a growth in volume, partially offset by reduced net interest spread. Net fee income for the first quarter of was $18m, marginally decreased compared with the first quarter of and a decrease of $6m, or 25% compared with the fourth quarter of. The decrease was driven by lower derivative sales and debt capital market fees. Net trading income for the first quarter of was $37m, increases of $15m and $9m respectively compared with the first quarter of and fourth quarter of. Net trading income increased compared with both the first and fourth quarter of as a result of a change in estimation methodology in respect of credit and debit valuation adjustments on derivative contracts to reflect evolving market practises. In addition contributing to the increase was higher global customer trading volumes in foreign exchange products and improved performance in rates and credit products. Net trading income in the first quarter of included losses caused by the narrowing of credit spreads on the carrying value of our own debt instruments classified as trading. Gains less losses from financial investments for the first quarter of was $33m, increases of $16m and $30m respectively compared with the first quarter of and fourth quarter of. The increases in gains less losses from financial investments are due to higher gains on the disposal of available-for-sale financial investments driven by balance sheet management activities. Total operating expenses for the first quarter of were $29m, an increase of $4m, or 16%, compared with the first quarter of, and an increase of $2m, or 7% compared with the fourth quarter of. 10

11 Management s Discussion and Analysis (continued) Retail Banking and Wealth Management Net interest income Net fee income Net trading income Other operating income Gain on the sale of the full service retail brokerage business Net operating income before loan impairment charges and other credit risk provisions Loan impairment charges and other credit risk provisions... (7) (6) (8) Net operating income Total operating expenses (excluding restructuring charges)... (118) (128) (126) Restructuring charges... (2) Profit before income tax expense Overview Profit before income tax expense for the first quarter of was $14m, a decrease of $78m compared with first quarter of, and an increase of $11m compared with the fourth quarter of. Profit before income tax in benefitted from a gain on the sale of the full service retail brokerage business partially offset by related restructuring charges. Excluding these items, profit before income tax expense decreased by $4m compared with the same quarter last year and increased by $15m compared with the prior quarter. The remaining decrease in profit before income tax expense compared with the same quarter last year is due to reduced net interest income driven by narrowing net interest spread and a decline in average loan balances partially offset by reduced operating expenses as a result of strict cost control and continued delivery of our organizational cost effectiveness programmes, which resulted in sustainable cost savings. The remaining increase in profit before income tax expense compared with the prior quarter is due to higher net interest income as a result of lower wholesale funding driven by strong growth in customer deposits, partially offset by a decline in average loan balances, and reduced operating expenses as a result of strict cost control and continued delivery of our organizational cost effectiveness programmes, which resulted in sustainable cost savings. Financial performance Net interest income for the first quarter of was $89m, a decrease of $16m, or 15%, compared with the first quarter of, and an increase of $7m, or 9%, compared with the fourth quarter of. The first quarter of benefitted from refund interest received from the Canada Revenue Agency. Excluding the refund interest, net interest income decreased by $8m compared with the same quarter last year due to narrowing net interest spread and a decline in average loan balances. Net interest income increased compared to the prior quarter as a result of lower wholesale funding driven by strong growth in customer deposits partially offset by a decline in average loan balances. Net fee income for the first quarter of was $43m, marginally changed compared with the first quarter of and with the fourth quarter of. Net trading income for the first quarter of was $4m, marginally higher compared with the first quarter of and with the fourth quarter of. Loan impairment charges and other credit risk provisions for the first quarter of were $7m, marginally changed compared with the first quarter of and with the fourth quarter of. Total operating expenses (excluding restructuring charges) for the first quarter of were $118m, a decrease of $10m, or 8%, compared with the first quarter of, and a decrease of $8m, or 6%, compared with the fourth quarter of. The decreases are as a result of strict cost control and continued delivery of our organizational cost effectiveness programmes, which resulted in sustainable cost savings. 11

12 Management s Discussion and Analysis (continued) Consumer Finance Net interest income Net fee income Gains less losses from financial investments Other operating income Net operating income before loan impairment charges and other credit risk provisions Loan impairment charges and other credit risk provisions... (12) (31) (19) Net operating income Total operating expenses (excluding restructuring charges)... (18) (38) (19) Restructuring charges... (34) Profit/(loss) before income tax expense (17) 30 Overview Profit before income tax expense was $35m for the first quarter of, an increase of $52m compared with the first quarter of, and an increase of $5m compared with the fourth quarter of. In the first quarter of, $34m in restructuring costs were incurred following the decision in March to wind-down the consumer finance business in Canada. Excluding the restructuring costs, profit before income tax expense increased by $18m compared with the same quarter last year and $5m compared with the prior quarter mainly due to lower operating expenses and loan impairment charges, partially offset by lower net interest income as a result of declining average loan balances. Financial performance Net interest income for the first quarter of was $52m, a decrease of $21m and $5m respectively compared with the first quarter of and fourth quarter of. The decrease in net interest income is mainly due to declining customer loan balances as a result of the wind-down of the business. Net fee income for the first quarter of was $10m, marginally lower compared with the first quarter of and marginally higher compared with the fourth quarter of. Loan impairment charges and other credit risk provisions for the first quarter of were $12m, a decrease of $19m, or 61%, compared with the first quarter of, and a decrease of $7m, or 37%, compared with the fourth quarter of. The decrease in loan impairment charges and other credit risk provisions compared with is due to a reduction in collective provisions driven by lower average loan balances following the wind-down of the business as well as reduced delinquency. Total operating expenses (excluding restructuring charges) for the first quarter of were $18m, a decrease of $20m, or 53%, compared with the first quarter of, and marginally lower compared with the fourth quarter of. The decrease in total operating expenses compared with the same quarter last year is due to reduced staff, infrastructure charges and other overhead expenses as a result of the wind-down of the business. Other Net interest expense... (8) (6) (8) Net trading income Net loss from financial instruments designated at fair value... (3) (14) (3) Other operating income Net operating income/(expense)... 4 (8) 5 Total operating expenses... (10) (20) (9) Loss before income tax expense... (6) (28) (4) 12

13 Management s Discussion and Analysis (continued) Activities or transactions which do not relate directly to the above business segments are reported in Other. The main items reported under Other include gains and losses from the impact of changes in credit spreads on our own subordinated debentures designated at fair value and revenue and expense related to information technology services provided to HSBC Group companies on an arm s length basis. Profit before income tax expense for the first quarter of was a loss of $6m, compared with losses of $28m and $4m respectively for the first quarter of and the fourth quarter of. The variances from comparative periods are primarily due to the impact of the items noted above. Quarterly summary of Condensed Consolidated Statements of Income (Unaudited) The following table presents a summary of quarterly consolidated results for the last eight quarters: 30 September 30 June September June 2011 Total revenue (1) Profit for the period Profit attributable to common shareholders Profit attributable to preferred shareholders Profit attributable to non-controlling interests Basic earnings per common share Total revenue is reported as net operating income before loan impairment charges and other credit risk provisions on the consolidated income statement. Refer to the Quarterly Summary of Condensed Consolidated Statements of Income section of our Annual Report and Accounts for more information regarding quarterly trends in revenue and expenses for and Comparative information has been adjusted for the effect of the adoption of the revised IAS 19 Employee benefits. Refer to the Accounting and Reporting Changes section below for further information. Critical Accounting Policies and Impact of Estimates and Judgements Refer to the Critical Accounting Policies and Impact of Estimates and Judgements section of our Annual Report and Accounts for accounting policies that are deemed critical to the bank s results and financial position, in terms of materiality of the items which the policy is applied, or which involve a high degree of judgement including the use of assumptions and estimates. Accounting and Reporting Changes Effective 1 January, the bank adopted IAS 19 Employee Benefits, which was applied retrospectively. The most significant impact for the bank is the replacement of interest cost and expected return on plan assets by a finance cost component comprising the net interest on the net defined benefit liability or asset. This finance cost component is determined by applying the same discount rate used to measure the defined benefit obligation to the net defined benefit liability or asset. The difference between the actual return on plan assets and the return included in the finance cost component in the income statement is presented in other comprehensive income. The effect of this change is to increase the pension expense by the difference between the current expected return on plan assets and the return calculated by applying the relevant discount rate. However, there is no material impact on either plan assets as the difference between the estimated and the actual return on plan assets is recorded through the statement of other comprehensive income. There is a no material impact on plan liabilities. In addition, unvested amounts related to past service events are no longer amortized and recognized in the income statement over the vesting period, but recognized in full on the date of the past service event as a charge or a credit to income. Refer to note 2 for further information related to the restatement of comparative information. 13

14 Management s Discussion and Analysis (continued) Effective 1 January, the bank adopted IFRS 10 Consolidated Financial Statements ( IFRS 10 ) and IFRS 12 Disclosure of Interests in Other Entities ( IFRS 12 ), which were applied retrospectively. Under IFRS 10, there is one approach for determining if an investor controls an investee for all entities, based on the concept of power, variability of returns and their linkage. This replaced the previous approach which emphasises legal control or exposure to risks and rewards, depending on the nature of the entity. IFRS 12 includes the disclosure requirements for subsidiaries and associates and introduces new requirements for unconsolidated structured entities. The bank determined that its consolidated group structure remained unchanged under IFRS 10, and as a result, the consolidated financial statements are unaffected. Effective 1 January, the bank adopted IFRS 13 Fair Value Measurement ( IFRS 13 ), which was applied prospectively. IFRS 13 establishes a single source of guidance for all fair value measurements required or permitted by IFRSs. The standard clarifies the definition of fair value as an exit price, which is defined as a price at which an orderly transaction to sell the asset or to transfer the liability would take place between market participants at the measurement date under current market conditions, and enhances disclosures about fair value measurement. The adoption of IFRS 13 did not have a material impact on the bank s consolidated financial statements. Effective 1 January, the bank adopted changes to IAS 1 Presentation of Financial Statements ( IAS 1 ) relating to the presentation of items of other comprehensive income, which was applied retrospectively. As a result of the adoption of changes within IAS 1, items presented within the consolidated statement of comprehensive income are grouped into those that will and those that will not be subsequently reclassified to income. Financial Instruments including Off-Balance Sheet Arrangements During the normal course of business, the bank makes extensive use of financial instruments including funding loans, purchasing securities and other investments, accepting deposits and entering into various derivative instrument contracts. These arrangements were described in the Off-Balance Sheet Arrangements section of our Annual Report and Accounts. As a result of changing market practices in response to regulatory and accounting changes, as well as general market developments, the banks revised its methodology for estimating the credit valuation adjustment and debit valuation adjustment for derivatives from 1 January. Refer to note 1(b)(iii) for further information relating to the revision. There have been no other changes in the basis of calculating the fair value of financial instruments from, and there have been no significant changes in the fair value of financial instruments that arose from factors other than normal economic, industry and market conditions. For financial instruments, including derivatives, valued using significant nonobservable market inputs (level 3), assumptions and methodologies used in our models are continually reviewed and revised to arrive at better estimates of fair value. Management s Responsibility for Financial Information A rigorous and comprehensive financial governance framework is in place at the bank and its subsidiaries at both the management and board levels. Each year, our Annual Report and Accounts contains a statement signed by the Chief Executive Officer (CEO) and Chief Financial Officer (CFO) outlining management s responsibility for financial information contained in the report. Certifications, signed by the CEO and CFO, were filed with the Canadian Securities Administrators in March when our Annual Report and Accounts and other annual disclosure documents were filed. In those filings, the CEO and CFO certify, as required in Canada by National Instrument (Certification of Disclosure in Issuers Annual and Interim Filings), the appropriateness of the financial disclosures in the annual filings, the design and effectiveness of disclosure controls and procedures as well as the design and effectiveness of internal controls over financial reporting to provide reasonable assurance regarding the reliability of financial reporting in accordance with IFRS. The CEO and CFO have signed certifications relating to the appropriateness of the financial disclosures in interim filings with securities regulators, including this MD&A and the accompanying unaudited interim consolidated financial statements for the quarter ended 31 March, and their responsibility for the design and maintenance of disclosure controls and procedures and internal controls over financial reporting to provide reasonable assurance regarding the reliability of financial reporting in accordance with IFRS. There have been no changes in internal controls over financial reporting during the quarter ended that have materially affected or are reasonably likely to affect internal control over financial reporting. As in prior quarters, the bank s Audit and Risk Committee reviewed this document, including the attached unaudited interim consolidated financial statements, and approved the document prior to its release. A comprehensive discussion of the bank s businesses, strategies and objectives can be found in Management s Discussion and Analysis in our Annual Report and Accounts, which can be accessed on the bank s web site at Readers are also encouraged to visit the site to view other quarterly financial information. 14

15 Management s Discussion and Analysis (continued) Related Party Transactions Related party transaction policies and practices are unchanged from those outlined in the Related Party Transactions section in our Annual Report and Accounts. All transactions with related parties continue to be priced and accounted for as if they were provided in an open market on an arm s length basis or, where no market exists, at fair value. Transactions with related parties are detailed in note 12 to the accompanying consolidated financial statements. Outstanding Shares and Securities Dividend or distribution (1) At 8 May Number of issued shares and securities Carrying value $ per share or security Thousands Common shares ,668 1,225 Preferred Shares Class 1 - Series C , Series D , Series E , Preferred Shares Class 2 - Series B , HSBC Canada Asset Trust Securities (HSBC HaTS ) (2) - Series Cash dividends on preference shares are non-cumulative and are payable quarterly. Cash distributions on HSBC HaTS TM are non-cumulative and are payable semi-annually. 2 Reported in non-controlling interests in the consolidated statement of financial position. During the first quarter of, the bank declared and paid $90m in dividends on common shares, an increase of $7m from the same period in. Regular quarterly dividends of cents per share have been declared on Class 1 Preferred Shares Series C, cents per share on Class 1 Preferred Shares Series D, cents per share on Class 1 Preferred Shares Series E and 7.75 cents per share on Class 2 Preferred Shares Series B. Dividends will be paid on 30 June, for shareholders of record on 14 June. Credit Ratings Standard & Poor s ( S&P ) and DBRS maintain credit ratings of our debt and securities. The ratings are made within the rating agencies normal classification system for each type of debt or security. Our credit ratings influence our ability to secure cost-efficient wholesale funding. Our investment grade ratings were confirmed by S&P in December and amended downward one notch by DBRS in February concurrent with similar rating actions on our ultimate parent, HSBC Holdings. Our investment grade ratings are comparable to those assigned to Canadian banks. Our ratings are as follows: S&P DBRS Short-term instruments...a-1+ Deposits and senior debt...aa Subordinated debt...a Preferred shares...p-1 (Low) (1) HSBC Canada Asset Trust Securities (HSBC HaTS TM )...P-1 (Low) (1) 1 Based on S&P s Canadian national preferred share scale. Ratings are A on S&P s global preferred share scale. R-1 (Middle) AA (Low) A (High) Pfd-2 BBB (High) 15

16 Management s Discussion and Analysis (continued) Risk Management All of our business activities involve the measurement, evaluation, acceptance and management of some degree of risk, or combinations of risks. Risk management is the identification, analysis, evaluation and management of the factors that could adversely affect our resources, operations, reputation and financial results. The most important risk categories that we are exposed to include capital management, credit, liquidity and funding, market, structural and operational risk. A discussion of our risk management activities including both quantitative and qualitative factors is included in the Risk Management section of our Annual Report and Accounts. There have been no changes in our processes and no material changes in quantitative factors during the first quarter ended. Refer to the Capital section of the MD&A for a more information on our regulatory capital and regulatory capital ratios. Credit risk Credit risk is the risk of financial loss if a customer or counterparty fails to meet its contractual obligations. It arises principally from direct lending, trade finance and the leasing business, but also from certain off-balance sheet products such as guarantees and counterparty credit risk on derivatives, and from our holdings of certain types of securities, particularly debt securities. Loan portfolio diversity Concentration of credit risk may arise when the ability of a number of borrowers or counterparties to meet their contractual obligations are similarly affected by external factors. Examples of concentration risk would include geographic, industry and environmental factors. Therefore, diversification of credit risk is a key concept by which we are guided. In assessing and monitoring the credit risk, we aggregate exposures by product type, industry and geographic area. Exposures are measured at exposure at default ( EAD ) as defined under the Basel III capital adequacy framework ( : as defined under the Basel II capital adequacy framework), which presents the amounts of loss the bank may be exposed to in the case of default of a customer. The following table demonstrates the diversification of our loan portfolios by product type: Loan portfolio by product type Exposure at default At Exposure at default At Wholesale loan portfolios Sovereign Drawn exposures... 20,659 20,083 Undrawn commitments Derivatives ,781 20,191 Banks Drawn exposures... 3,448 3,591 Repurchase type transactions Derivatives... 2,363 2,127 Other off-balance sheet exposures ,310 6,102 Corporate Drawn exposures... 26,693 26,330 Undrawn commitments... 10,720 11,124 Repurchase type transactions Derivatives... 1,064 1,070 Other off-balance sheet exposures... 2,369 2,277 41,068 40,932 Total wholesale loan portfolios... 68,159 67,225 16