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Final Results - Part 1

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RNS Number : 4900G

Standard Chartered PLC

04 March 2015

Standard Chartered PLC - Highlights

For the year ended 31 December 2014

Reported results

· Operating income¹ of $18,234 million is down 2 per cent from 2013

· Profit before tax² of $5,193 million is down 25 per cent from 2013

· Customer advances down 3 per cent to $289 billion, customer deposits up 6 per cent to $414 billion

Performance metrics⁴

· Dividend per share at 86.00 cents per share, the same level as 2013

· Normalised earnings per share declined 28 per cent to 145.9 cents from 204.0 cents in 2013

· Normalised return on ordinary shareholders' equity of 7.8 per cent (2013: 11.2 per cent)

Capital and liquidity metrics

· Common Equity Tier 1 (CET 1) of 10.7 per cent on an end point basis under CRD IV rules⁵, 10.5 per cent on a transitional basis

· Advances-to-deposits ratio of 69.7 per cent (2013: 75.7 per cent)

· Liquid asset ratio of 32.2 per cent (2013: 29.8 per cent)

Key messages

· 2014 performance impacted by the challenging market environment, de-risking and disposal actions

· Loan impairment increased 32 per cent primarily in Corporate and Institutional and Commercial Clients

· Reallocated $8.5 billion risk weighted assets from low returning relationships and announced 15 business disposals

· Strong balance sheet with healthy liquidity, leverage, and capital ratios

Programme of actions

· Significant leadership changes

· CET1 target of 11-12 per cent in 2015 and thereafter

· Return on Equity target greater than 10 per cent in the medium term

· $1.8 billion of cost savings over the next 3 years

· $25 - $30 billion in Risk Weighted Assets savings over the next 2 years

· Sustain momentum on raising the bar on conduct

Commenting on these results, the Chairman of Standard Chartered PLC, Sir John Peace, said:

"2014 was a challenging year and our performance was disappointing, but it was also a year when we took decisive action to refocus our strategy and to reposition the Group for the future and to restore shareholder value."

Commenting on these results, the Chief Executive Officer of Standard Chartered PLC, Peter Sands, said:

"We are reshaping the Bank to respond to the way our world has changed and to ensure we fulfil our aspiration to bank the people and companies driving trade, investment and the creation of wealth across Asia, Africa and the Middle East. I leave Standard Chartered proud of what we have achieved and confident about what the future holds for this extraordinary institution"

¹Excluding own credit adjustment

²Excludes, own credit adjustment, goodwill impairment and the civil monetary penalty incurred in 2014

³Profit attributable to ordinary shareholders is after the deduction of dividends payable to the holders of those non-cumulative redeemable preference shares classified as equity (see note 10 on page 79)

⁴Results on a normalised basis reflect the results of Standard Chartered PLC and its subsidiaries (the 'Group') excluding items set out on note 11 on page 79

⁵See additional information on Capital pages 57-63

Standard Chartered PLC - Stock Code: 02888

Standard Chartered PLC - Table of contents

	Page
Summary of results	3
Chairman's statement	4
Group Chief Executive's review	6
Group Finance Director's Review	10
Segmental analysis	17
Geographic analysis	25
Balance sheet	31
Risk review	33
Capital	57
Financial statements
Consolidated income statement	64
Consolidated statement of comprehensive income	65
Consolidated balance sheet	66
Consolidated statement of changes in equity	67
Consolidated cash flow statement	68
Notes to financial statements	69
Statement of directors' responsibilities	96
Additional information	97
Financial calendar	98
Forward looking statement and basis of preparation	99
Index	100

Standard Chartered PLC - Summary of results

For the year ended 31 December 2014

		2014	2013
		$million	$million

Results
Operating income¹		18,234	18,671
Impairment losses on loans and advances and other credit risk provisions		(2,141)	(1,617)
Goodwill impairment		(758)	(1,000)
Other impairment		(403)	(129)
Profit before taxation, goodwill impairment, own credit adjustment and civil monetary penalty		5,193	6,958
Profit before taxation		4,235	6,064
Profit attributable to parent company shareholders		2,613	4,090
Profit attributable to ordinary shareholders²		2,512	3,989


Balance sheet
Total assets		725,914	674,380
Total equity		46,738	46,841
Loans and advances to customers		288,599	296,015
Customer deposits		414,189	390,971
Total capital base (CRD IV) transitional		57,099	56,369


Information per ordinary share		Cents	Cents
Earnings per share - normalised ³		145.9	204.0
- basic		102.2	164.4
Dividend per share ⁴		86.00	86.00

Net asset value per share		1,833.6	1,872.8
Tangible net asset value per share		1,610.9	1,597.5


Ratios
Return on ordinary shareholders' equity - normalised basis ³		7.8%	11.2%
Advances to deposits ratio		69.7%	75.7%
Liquid assets ratio		32.2%	29.8%
Cost to income ratio - normalised basis ³		58.9%	54.4%
Return on risk weighted assets ⁵		1.6%	2.2%
Capital ratios⁶
Common Equity Tier 1 (CRD IV) transitional		10.5%	10.9%
Common Equity Tier 1 (CRD IV) end point basis		10.7%	11.2%
Total capital (CRD IV) transitional		16.7%	17.0%
Leverage ratio⁷		4.5%	4.7%

¹	Excludes own credit adjustment of $100 million (2013: $106 million)
²	Profit attributable to ordinary shareholders is after the deduction of dividends payable to the holders of those non-cumulative redeemable preference shares classified as equity (see note 10 on page 79)
³ ⁴	Results on a normalised basis reflect the results of Standard Chartered PLC and its subsidiaries (the 'Group') excluding items presented in note 11 on page 79 Represents the recommended final dividend per share for the respective years together with the interim dividend per share declared and paid in those years. Further details are set out in note 10 on page 78
⁵	Return on risk weighted assets is operating profit (excluding civil monetary penalty, goodwill impairment and own credit) divided by average risk weighted assets. 2013 risk-weighted assets are on a Basel II basis and 2014 on a CRD IV basis
⁶	See additional information on Capital on pages 57-63
⁷	The Leverage end point ratio at 31 December 2013 is not directly comparable; its calculation was on a different basis, following prevailing PRA guidance for the year

Standard Chartered PLC - Chairman's statement

Resolved to restore shareholder value

2014 was a challenging year, and our performance was disappointing, but it was also a year when we took decisive action to refocus our strategy and to reposition the Group for the future.

· Profit before taxation, goodwill, own credit and the civil monetary penalty was down 25 per cent to $5.2 billion

· Statutory profit before taxation was down 30 per cent at $4.2 billion

· Income excluding own credit fell 2 per cent to $18.2 billion

· Normalised earnings per share declined 28 per cent to 145.9 cents

The Board continues to believe that there are significant opportunities for the Group in the medium to long term across our footprint, and that is why we have been careful not to take any knee-jerk actions which may damage the long-term prospects of the business.

However, at the same time, we need to be mindful that there are significant factors impacting our current performance which cannot be ignored: the imperative to build capital levels across the industry; the need for ongoing investment in enhancing our systems and processes associated with conduct and compliance; and the need to change the shape of our business to fit the demands of the current economic and regulatory landscape.

As a consequence of this, the Board has recently endorsed a number of priority areas. The first of these was to provide clarity on our governance, leadership and succession plans, and we are going further by highlighting a number of other priorities: taking steps to build on our capital levels, enhancing our return on equity and continuing to improve our conduct and compliance capabilities.

The Board is determined to reshape the business to restore the Group's performance and to fully realise the opportunities in our markets. At the same time, we are determined to continue to raise the bar on conduct and compliance to ensure that Here for good, our brand promise, is firmly embedded in the DNA of the Group worldwide.

Whilst we are comfortable with our current capital position, the Board does want to improve our capital trajectory, so we are taking actions around risk-weighted assets, cost reductions and business disposals, all of which are aimed at strengthening both our Common Equity Tier 1 ratio and our trajectory going forward.

We believe that we have identified strong levers to manage capital accretion over time and therefore the Board is recommending a final dividend for 2014 of 57.20 cents resulting in a total annual dividend of 86.00 cents which is the same level of dividend per share as 2013.

For several years, we have significantly increased the amount paid out to shareholders by way of dividend, while at the same time consecutively reducing the amount paid out in bonuses, despite increasing staff numbers over this period. In 2014, we are again proposing to pay out more to our shareholders by way of dividends than we pay out in bonuses.

This disciplined approach to managing variable compensation has created significant competitive pressures in some of our key markets. We are, of course, mindful of the external sentiment in some markets on bankers' pay, and conscious of our disappointing performance in 2014, but it is essential that we remain able pay competitively in the markets where we operate and where wage inflation, on average, is around 5 per cent.

Our people are much sought after by our competition, and we are acutely conscious of the importance of retaining and attracting the best talent as we look to execute on our strategy. It also goes without saying that, consistent with past practice, we will only reward our people for good performance as well as for their good behaviours.

Taking all these factors into account and reflecting our performance in 2014, the bonus pool is down on 2013 by 9 per cent, and 27 per cent lower than in 2011. In light of the disappointing performance of the Group, those executive directors on the PLC Board throughout the year came to the conclusion that they should show leadership by not taking any variable compensation for 2014.

I would like to take this opportunity to thank Peter on behalf of the Board for the immense contribution he has made to the success of the Group over the past 13 years, both as Group Chief Executive andas Group Finance Director. Since becoming Group Chief Executive in 2006, the Group has more than doubled in size and has been consistently profitable. His leadership and insight, over a period of huge change and challenge for the entire industry, ensures that he leaves the Group well placed to achieve its full potential as one of the world's leading financial institutions.

I would also like to thank Jaspal for his very considerable contributions to the business over the past 16 years, and the other long-serving Board members who are stepping down this year and who have done so much to help position this great bank for the future.

We are extremely fortunate to have Bill Winters, one of the most accomplished and respected bankers in the world today, taking over as Group Chief Executive from Peter in June to drive the Group's next chapter of growth. Bill brings substantial financial experience from leading a very successful global business, and has an exceptional understanding of the global regulatory and conduct environment. He is also a proven leader with a strong track record in nurturing and developing talent. I am thrilled that Bill is joining the Group at this strategically important time and we wish him well in his new role.

We are therefore confident that we are taking the right actions to restore shareholder value.

I would like to thank our clients, customers and shareholders for their support during 2014 and, above all, our great people for their hard work and ongoing commitment to Standard Chartered.

Sir John Peace

Chairman

4 March 2015

Standard Chartered PLC - Group Chief Executive's review

Taking action to deliver sustainable, profitable growth and improved returns

2014 was a tough year, our performance was disappointing and we are acutely aware of the impact of this for you, our shareholders. We faced a perfect storm: negative sentiment towards emerging markets, a sharp drop in commodity prices, persistent low interest rates and surplus liquidity, low volatility, and a welter of regulatory challenges.

As a result, we saw intense pressure on margins and volumes, a significant uptick in impairment and a sharp increase in regulatory related cost. Of course, it was not all about external factors. Some of the decisions we took in the past look less good now than they did at the time, such as Korea which in 2014 made a loss before tax of $145 million. Not everything we did was as well executed as it should have been, for example the upgrade of our transaction surveillance systems back in 2007 - shortcomings here ultimately resulted in the civil penalty of $300 million that we paid in August 2014.

We have taken a range of actions in response to the way our world has changed. We have overhauled our strategy, making it sharper and more focused. We have reconfigured the organisation to align it better with our strategic priorities. We have attacked our cost base. We have redeployed capital. We have disposed of, or are in the process of disposing of, 15 underperforming and non-strategic businesses. We have de-risked portfolios and segments, such as unsecured lending or correspondent banking, and we have stepped up the pace of our programme to raise the bar on conduct. While some of these changes actually made our 2014 performance worse, since we sacrificed income or increased investment, I am confident that the way we are reshaping the Group will get us back to a trajectory of profitable, sustainable growth, delivering returns above our cost of capital and driving the share price.

I should make clear that we are not counting on the world to do us favours. While we do expect a gradual return to a more normal interest rate environment, and this year we have already seen more volatility in currency markets, we are not counting on headwinds turning to tailwinds to boost our performance. We are focused on the levers we control, the things we can do, to improve returns and return to growth.

Our performance priorities are clear. First, we must dispel the concerns about capital, hence the clear target of achieving a Common Equity Tier 1 (CET1) ratio of 11 to 12 per cent for 2015 and thereafter. Second, we must improve returns, hence we are setting a target return on equity of over 10 per cent in the medium term, so that we are delivering sustainably above our cost of capital. This will take a bit of time to achieve, not least because the actions we are taking to strengthen the CET1 ratio make this more difficult. Each of these elements fits into an overall agenda of action, all of which is captured in the scorecards of the individual client and product groups, functions and geographies across the Group.

Capital

On capital, we start from a strong position. In terms of our CET1 ratio, at 10.7 per cent on an end-point basis, we have a 200 basis points (bps) buffer relative to known regulatory requirements. We weathered the Bank of England stress tests comfortably. We are strongly placed from a leverage and Total Loss Absorbency Capacity perspective.

However, we understand market concerns about forward trajectory given the uncertainties about how regulatory requirements will evolve. Although it is impossible to be definitive, a combination of 'risk-weighted assets (RWA) inflation' and escalating expectations do point to a continuing upward drift in requirements. That is why we have put such focus on capital accretion, so that we can absorb regulatory changes and fund growth, while also improving the CET1 ratio. We accreted some 50 basis points in 2014, 20 basis points in the first half and 30 in the second half. To achieve this, we cut some $9 billion of low-returning RWA, largely from Corporate & Institutional Clients, and saved another $2 billion from disposals.

We now plan to pull these levers even harder. Over the next two years, we plan to cut a further $25 to $30 billion of RWA from low-returning client relationships and underperforming businesses. We are making good progress on this already. By taking these actions we are confident that we can achieve our target CET1 ratio of 11 to 12 per cent in 2015 and thereafter.

Costs

In 2014, we kept a tight grip on costs. Headline expenses went up 5 per cent, but over half of this increase was due to the UK bank levy and restructuring costs attached to the very cost actions we are taking. Underlying expenses went up less than 3 per cent, driven largely by increased spend on regulatory and conduct priorities. In November, we announced a $400 million target for cost savings in 2015. We are more than on track to achieve this target, and the $400 million number relates to our underlying business, so it excludes cost saved from business exits and disposals. Combined with the impact of such actions, we are on track for savings to headline costs exceeding $600 million in 2015.

The progress we have made in attacking the cost base underpins our confidence in achieving $1.8 billion in cost savings over the period from 2015 to 2017. Some of the remaining savings will come from the full-year impact of actions we have already taken, for example our decision to exit equities, which will give us a $100 million of savings in 2016. Some will be the result of further peripheral-business exits or withdrawals that we are currently pursuing, but most will be from achieving sustainable efficiency improvements in our big markets and core business activities.

We are stepping up the pace of digitisation, automating and reengineering key processes and standardising technology platforms. For example, the only way we will get the cost-income ratio in the Retail Clients segment down to our target of 55 per cent is through accelerated digitisation of products, channels and internal processes. And the only way we can manage the ever-increasing complexity of regulation efficiently is through technology, so we are not cutting back on technology investment, but actually increasing this in order to achieve sustainable improvements in productivity.

Asset quality

It should be no surprise that impairment increased in 2014. GDP growth in key markets has been slower, commodity prices fell sharply, and we faced some specific challenges in particular markets, such as the Personal Debt Rehabilitation Scheme (PDRS) in Korea or fraud in China. Of course, we could have fared better. With hindsight there were clients and situations we should have avoided, but

we were never going to be entirely immune to the shift in the credit environment. The actions we have taken to de-risk are having an impact - in India, in China, in our commodities book, and in our unsecured portfolio in the Retail Clients segment. There are still many uncertainties in our markets, but I am very comfortable with our provisioning and with the shape and quality of the book.

In the Retail Clients segment, whilst impairment remains at an elevated level, the indicators suggest some improvement, most notably in Korea. Looking at the early data for this year, PDRS filings are now less than half of what they were six months ago. In the Corporate & Institutional Clients and Commercial Clients segments, the signals are more mixed, but most of what we are dealing with now, and provisioning for, are accounts that have been troubling for some time. The inflow of new problem accounts into early alerts, Credit Grade 12 or Non-Performing Loans has slowed. Whilst it would certainly be premature to call the peak, we do not see signs of further deterioration.

The annualised income impact of the exits and disposals in 2014 and those planned for 2015 is some $450 million, although this depends on the timing of the completion of certain transactions. We will strip this out of our reporting of underlying performance for 2015. On top of this, de-risking and RWA savings in 2014, and the $25-30 billion of incremental RWA savings we plan for 2015 and 2016 will create a further drag on income, offset by our ability to redeploy into more attractively returning assets.

Income growth

In the Retail Clients segment, the priority has been to get cost down, shift the focus to more affluent clients and accelerate digitisation, as well as to de-risk from a conduct and credit perspective. It is all about getting the platform in more robust shape to support sustainable growth. Retail Clients income was up 2 per cent year-on-year in 2014, but up 5 per cent in the second half of 2014 compared to the first half, driven by Wealth Management and the shift towards more affluent Priority and Business clients. These will continue to be the key drivers of income growth. Indeed, we aim to increase the percentage of income from Priority and Business clients to 43 per cent in 2015 from 38 per cent in 2014.

In the Private Banking Clients segment, income growth was 4 per cent on a headline basis, or 6 per cent excluding disposals. We see Private Banking Clients as a steady and sustainable source of growth, although at this stage it is obviously very small in the overall scheme of the Group. In 2015, we are looking at on-boarding some 2,000 new clients, achieving double-digit assets under management growth.

The Commercial Clients segment is also quite small, but represents another huge opportunity, and after a year of restructuring and remediation, with income down 22 per cent, our priority for 2015 is to get back to a growth trajectory, strengthening the front line, leveraging the network and growing the client base. We are aiming for more than 3,000 new-to-bank clients in 2015.

Given that the Corporate & Institutional Clients segment contributes around 60 per cent of the Group's income, this is the crux of the issue. Income fell 2 per cent in 2014, impacted by a combination of de-risking and RWA actions, as well as pressure on margins and the impact of low commodity prices and low volatility. This overall picture disguises some areas of strong growth. Institutional investors, for example, saw 18 per cent income growth at attractive returns in 2014. This is a big opportunity. As for Corporates, right now it is all about improving return rather than income growth per se, and achieving this is all about leveraging the network and deepening relationships to drive non-funded income, hence our focus on increasing the number of markets and products per client. We are looking to take the product-client ratio from 6.3 in 2014 to over 6.5 and the market-client ratio from 2.8 in 2014 to over 3. We are also focusing on non-financing income, targeting to increase the current proportion of 41 per cent to more than 43 per cent. These metrics are the key to driving good income growth that lifts our return on RWA in this segment.

Step back from the segments and look at our markets and the scale of the income opportunity is evident. Despite all the turbulence and shifts in sentiment, the underlying drivers of economic growth - demographics, urbanisation and investment in infrastructure - remain immensely strong, and demand for financial services is rising rapidly. Our challenge is to capture these opportunities in a disciplined, return-focused way to drive shareholder value.

Conduct

We have launched a comprehensive programme called Raising the Bar on Conduct, which encompasses every aspect of conduct, and touches every person in the Group. We recognise that we cannot claim to be Here for good unless we make every effort to ensure that good conduct informs every interaction and is embedded in every decision we make - from strategy to client on-boarding, product design and remuneration. Among the more critical elements of this programme, I would highlight:

· Our Financial Crime Risk Mitigation Programme, which encompasses over 50 separate projects and initiatives to remediate and reinforce our controls and capabilities in this vital arena. This is a massive multi-year investment programme. Playing a stronger role in the fight against financial crime is a strategic imperative for Standard Chartered

· To complement stronger controls, we are de-risking our client portfolios. For example, we have exited a significant number of our correspondent banking relationships, mainly in Latin America and Central Europe. We have also exited around 70,000 small and medium-sized enterprise relationships over the past 18 months, and we are putting strict limits on the types of new client that we are prepared to take on in certain geographies and sectors.

· To reinforce our governance, we have established a Board-level Financial Crime Risk Committee, with a combination of experienced independent non-executive directors and expert advisors.

Conclusion

The actions we have taken, and are taking, on capital, cost, risk and conduct are all part of a package. We are reshaping the Group to respond to the way our world has changed. We are reshaping the Group to ensure we can fulfil our aspiration to bank the people and companies driving trade, investment and the creation of wealth across Asia, Africa and the Middle East. And we are reshaping the Group to get back to sustainable, profitable growth, delivering returns above our cost of capital.

This will be my last Group Chief Executive's review, and it is obviously one of the more challenging sets of numbers I have had to explain. In my 13 years at the Group, I have seen lots of ups and downs. Standard Chartered today is very different from the bank I first joined as Finance Director in 2002. That year we made about a $1 billion in profits, and in 2006, the year I became Group Chief Executive, we made about $3 billion. Since then, of course, we have navigated the global financial crisis, roughly doubled in size, and confronted all sorts of new challenges. The world of banking has changed far more dramatically than most people realise, and it is only part way through a fundamental transformation.

I will leave Standard Chartered proud of what we have achieved and confident about what the future holds for this extraordinary institution. In Bill Winters, I have a successor just right for the task. I am delighted to be passing the baton on to a banker of such calibre, to a leader of such strengths. Bill will inherit a bank with a superb client franchise, a unique network and an exceptionally strong balance sheet. Perhaps even more importantly, he will inherit a fantastic team of people - professional and collaborative, and truly believing in, and committed to being, Here for good.

I would like to take this opportunity to say thank you to our clients, and to all the people of Standard Chartered. The past couple of years have been pretty tough, but we have demonstrated resilience and an ability to adapt and reinvent. I know that Standard Chartered will once again show the world what a great bank this is.

Peter Sands

Group Chief Executive

4 March 2015

Standard Chartered PLC - Group Finance Director's review

Performance summary
	2014	2013	Better / (worse)
	$million	$million	%
Client income¹	16,623	16,872	(1)
Other income	1,611	1,799	(10)
Operating income¹	18,234	18,671	(2)
Other operating expenses	(10,198)	(9,946)	(3)
Restructuring costs	(181)	(12)	nm
UK bank levy	(366)	(235)	(56)
Total operating expenses	(10,745)	(10,193)	(5)
Operating profit before impairment losses and taxation¹	7,489	8,478	(12)
Impairment losses on loans and advances and other credit risk provisions	(2,141)	(1,617)	(32)
Other impairment	(403)	(129)	(212)
Profit from associates and joint ventures	248	226	10
Profit before taxation (excluding goodwill impairment, civil monetary penalty and own credit adjustment)	5,193	6,958	(25)
Own credit adjustment	100	106	(6)
Civil monetary penalty	(300)	-	-
Goodwill impairment	(758)	(1,000)	24
Profit before taxation	4,235	6,064	(30)

Normalised earnings per share (cents)	145.9	204.0	(28)
Dividend per share (cents)	86.00	86.00	-
Common Equity Tier 1 on a transitional basis	10.5%	10.9%
¹ Excludes $100 million (2013: $106 million) benefit relating to own credit adjustment

Group performance

2014 performance was disappointing, impacted by a challenging market environment and by the significant programme of restructuring and repositioning actions taken during the year. Reported profit before tax was down 30 per cent to $4,235 million compared to 2013.

The Group's results have also been affected by the following items which are less reflective of the underlying performance of the franchise:

We have incurred restructuring costs of $181 million in the year. Approximately a quarter relates to redundancy programs in Korea with the balance reflecting the realignment of the client segments and product groups under the new organisation structure, including a number of business exits.

The UK bank levy has risen a significant 56 per cent to $366 million.

In August the Group reached a settlement with the US authorities of $300 million. See note 23 on page 93 for further details.

And more recently, the Group carried out a detailed review of the outlook for its Korean business. Whilst we are encouraged by the Personal Debt Rehabilitation Scheme (PDRS) trends - and hence the opportunity to improve upon the business' recent disappointing financial performance - it is nonetheless currently loss making and hence we are writing off the remaining goodwill of $726 million - on top of the $1 billion write-down last year. We have also impaired a further $32 million of goodwill relating to the closure of the Group's cash equities business. These write-offs have no cash flow impact and do not affect Group capital ratios, as goodwill is already fully deducted for prudential purposes.

The main normalising items are therefore the goodwill impairment, US settlement and the own credit adjustment.

On this basis adjusted profit before tax for the year was $5.2 billion, down 25 per cent.

Normalised earnings per share were down 28 per cent to 146 cents and normalised Return on Equity was 7.8 per cent.

The balance sheet remains in good shape. Our Basel III transitional Common Equity Tier 1 ratio of 10.5 per cent is flat in the second half despite absorbing 30 basis points of headwinds including model changes and the further foreseeable dividend as well as having taken greater provisions on our commodities exposure.

Standard Chartered PLC - Group Finance Director's review continued
Client segments income
Income and profit by client segment
	2014
	Corporate & Institutional¹	Commercial	Private Banking	Retail	Corporate items²	Total
	$million	$million	$million	$million	$million	$million
Operating income¹	10,431	1,182	612	6,009	-	18,234
Profit before taxation¹	4,140	218	149	1,052	(366)	5,193
¹Excludes $100 million relating to an own credit adjustment (OCA)
²Includes $366 million related to the UK bank levy

	2013
	Corporate & Institutional¹	Commercial	Private Banking	Retail	Corporate items	Total
	$million	$million	$million	$million	$million	$million
Operating income¹	10,656	1,511	586	5,918	-	18,671
Profit before taxation¹	5,257	647	173	1,116	(235)	6,958
¹Excludes $106 million relating to own credit adjustment (OCA)
²Includes $235 million related to the UK bank levy

Notwithstanding decisions to de-risk the Group's portfolio in areas such as Retail unsecured, and commodity financing, we restricted the reduction in the top line to 2 per cent. The biggest reduction in our year on year income performance was in the Commercial Clients segment, where income fell by $329 million. This was driven by current year Private Equity valuation reductions relative to realised gains in the previous year, weaker demand for Renminbi products in Financial Markets, as well as exiting a significant number of relationships whose risk and return equation no longer met our requirements.

Income from Corporate and Institutional clients was down 2 per cent, or $225 million. Continued weakness in Financial Markets and management actions taken to optimise returns on the balance sheet, offset gains on the exit of a number of Private Equity investments. The business has shown early progress on the metrics set out in November 2014 with an improvement in the client-market ratio from 2.6 to 2.8 and the client -product ratio increasing from 5.9 to 6.3. Risk weighted assets increased by 10 per cent, primarily due to the impact of Basel III and policy methodology and model changes. Excluding this impact, risk weighted assets were flat.

Income from Private Banking Clients was up 4 per cent driven by a strong performance in Greater China. We have exited a number of subscale businesses during the year and excluding the impact of these discontinued operations, income from Private Banking Clients was up 6 per cent, driven by net new money inflows of $6 billion. The business has also increased the number of relationship managers during the year and added 1,300 new clients including early successes from the internal client referral program.

Retail Clients income of just over $6 billion was up 2 per cent compared to 2013. Strong growth in income from the Priority segment, up 16 per cent, offset a decline in Personal and Preferred segment income, which was down 5 per cent. This is consistent with our strategy to focus on more affluent segments and de-risk our unsecured portfolios, particularly in Korea. We continue to reshape our business in Korea and during the year have exited 60 branches and almost 300 staff. Excluding Korea, Retail Clients income was up 4 per cent.

Standard Chartered PLC - Group Finance Director's review continued
Product Income
	2014	2013	Better / (worse)
	$million	$million	%
Transaction Banking	3,802	3,911	(3)
Financial Markets¹	3,400	3,856	(12)
Corporate Finance	2,487	2,519	(1)
Lending and Portfolio Management	1,026	1,065	(4)
Wealth Management	1,701	1,449	17
Retail Products	4,840	5,046	(4)
Asset and Liability Management	653	548	19
Principal Finance	325	277	17
Total Operating Income¹	18,234	18,671	(2)
¹Excludes $100 million (2013: $106 million) relating to own credit adjustment

Transaction Banking income of $3.8 billion was down 3 per cent year on year. Trade Finance, which accounts for just over half of Transaction Banking income, was down 5 per cent. Margins have remained broadly stable though average assets were down 4 per cent in the second half of 2014, reflecting a slower trade environment and continued assertive management of low returning risk weighted assets.

Cash Management and Custody, which accounts for the remaining Transaction Banking income, was flat year on year. Margins were driven lower by the significant liquidity that persists across our key markets but this was offset by good growth in average balances and record clearing levels as we continue to win multi-country transaction banking mandates.

Income from Financial Markets was down $456 million year on year. In Foreign Exchange, strong volume growth in Cash FX, up 47 per cent and FX Options, up 89 per cent, has been offset by ongoing spread compression. In Rates, low volatility and low interest rates continues to impact both volumes and spreads.

Corporate Finance income was down 1 per cent year on year as high levels of liquidity resulted in increased repayment levels.

Lending and Portfolio Management income fell 4 per cent reflecting lower average balances as we exited lower returning relationships.

Wealth Management income was up 17 per cent and is benefitting, in particular, from the Prudential bancassurance partnership as well as an accelerating shift towards servicing High Net Worth individuals in the Retail clients segment.

Income from Retail Products was down 4 per cent or $206 million year on year impacted predominantly by the continued de-risking of the unsecured portfolio. Within this, income from Cards, Personal Loans and unsecured lending was down 8 per cent, or $212 million year on year following a 14 per cent reduction in balances to $20.5 billion. Income from mortgages was down $59 million or 6 per cent as property market cooling measures muted volume growth in a number of markets.

Asset and Liability Management income was up 19 per cent to $653 million and benefitted from more efficient deployment of surplus Renminbi customer deposits, the majority of which was recorded in the first half of 2014. Income of $233 million is more reflective of the underlying performance during the second half of 2014.

Finally, Principal Finance income was up 17 per cent year on year. The gains on the exit of a number of Private Equity investments at positive multiples more than offset lower revaluations.

Standard Chartered PLC - Group Finance Director's review continued
Expenses
	2014	2013	(Better) / worse	(Better) / worse
	$million	$million	$million	%
Staff costs (includes variable compensation)	6,653	6,558	95	1
Premises costs	910	877	33	4
General administrative expenses	1,996	1,797	199	11
Depreciation and amortisation	639	714	(75)	(11)
Other operating expenses¹	10,198	9,946	252	3
Staff numbers (Average)	88,935	88,257
Normalised Cost to income ratio	58.9%	54.4%
¹Excluding restructuring costs, UK bank levy and the civil monetary penalty

Other operating expenses of $10.2 billion increased by less than 3 per cent. Within this, depreciation and amortisation benefited by $121 million compared to 2013 due to a change in the period over which certain technology assets are depreciated.

During the year we have faced further regulatory cost increases of $237 million, without which costs would have been flat.

To offset these cost increases as well as inflation of nearly $400 million, the Group has delivered cost efficiencies in 2014 of some $200 million which are now doubling to over $400 million as our target for 2015. We are working on a pipeline of further sustainable productivity improvements in 2016 and 2017.

Taken as a whole, these represent a significant programme of initiatives that will deliver sustainable cost savings of some $1.8 billion over the next three years.

Impairment
	2014	2013	(Better) / worse	(Better) / worse
	$million	$million	$million	%
Corporate and Institutional Clients	991	488	503	103
Commercial Clients	212	157	55	35
Private Clients	-	8	(8)	(100)
Retail Clients	938	964	(26)	(3)
Impairment losses on loans and advances and other credit risk provisions	2,141	1,617	524	32
Other impairment¹	403	129	274	212
Gross non-performing loans as a % of closing advances	2%	2%
Loan impairment / average loan book (bps)	72	56
Collateral held against impaired loans	$1,472m	$1,259m
Cover ratio	52%	54%
Mortgage portfolio loan to value (LTV)	49%	50%
Retail secured/unsecured ratio	81%	79%
C&I and Commercial maturity - within 1 year	65%	64%

¹Excluding goodwill impairment

Loan impairment was up $524 million, or 32 per cent, to $2.1 billion.

Over 40 per cent of this arises in the Retail Clients segment which was 3 per cent lower benefitting from improved PDRS in Korea.

The remaining $1.2 billion of loan impairment arises in the Corporate and Institutional and Commercial Clients segments where further weakness in commodity markets has impacted a small number of exposures that were already on our watch list and that we have been closely monitoring for some time.

Other impairment, excluding goodwill, was $403 million. The main increase in the year included the impairment on the China warehouse fraud and impairment of certain strategic and associate investments.

Commodities

Our total commodities exposure is $55 billion, or 10 per cent of the Group's total net exposure. The vast majority of our commodities exposure is trade related, evidenced by the short tenor of the book, with 74 per cent being less than one year. This allows us to act quickly to changes in the external environment. Our commodities portfolio is down $6 billion in the second half of 2014 alone as we actively managed the portfolio.

When thinking about vulnerability to a sustained bear market, there are some important factors to consider:

· 60 per cent of our exposure is to global majors or large state owned enterprises or investment grade, which we expect to prove highly resilient, even through a sustained downturn;

· A further, 32 per cent is either short term or Trade Finance related and less than one year in tenor - again highly resilient;

· 4 per cent is to fund structured Project or Corporate Finance with a very high degree of collateral;

· This leaves 4 per cent of the portfolio, potentially more vulnerable to prolonged weakness in commodity prices.

We have conducted an in-depth review of our Traders portfolio and as a result, we have exited 150 relationships since early 2013, have reduced exposures since 30 June 2014 by $2 billion or 6 per cent and have focused on commodity traders with sound internal risk management capabilities and good access to other liquidity sources.

Two years ago we identified which clients in our Producers portfolio might be potentially vulnerable to a sharp correction in commodity prices. We have managed these names since, reducing exposure, taking additional collateral, and exiting relationships where necessary. Whilst we have seen non-performing loan (NPL) formation reflecting the extremely low level of some commodity prices, refreshed stress tests have identified no new names to add to this list.

Oil represents around half of our commodities exposure. 98 per cent of our oil producer exposure is either to state owned enterprises or to low cost of extraction companies who have a breakeven price below the current market price. When reviewing these we have conservatively allowed no slowdown in these companies' capital expenditure, no refinancing and no depletion of cash balances for a period of one year. We do not have exposures to higher cost of extraction parts of the industry.

The final point of context for our portfolio is that many of our markets benefit from lower commodity prices. Even oil producing markets like Ghana are net importers of oil and markets like India are receiving a real boost from lower prices.

In conclusion, we have conducted a thorough review of our commodities exposure and the main areas of potential vulnerability lie in a very small proportion of our portfolio, which we have been actively managing.

Portfolio credit quality

A number of observations about the credit quality of the Group overall are set out below:

· The book is becoming increasingly diverse - No industry accounts for more than 16 per cent of Corporate loans and advances to customers and our top 20 exposures have reduced as a percentage of Common Equity Tier 1;

· The book remains predominantly short dated with nearly two thirds of Corporate and Institutional and Commercial clients exposure less than one year;

· We are holding increased levels of collateral, up 4 per cent with high levels of collateralisation for longer term and non-investment grade loans;

· Over 40 per cent of the corporate portfolio is investment grade and this mix is improving;

· While Early Alerts are not always the most accurate predictor of subsequent impairment, it is nonetheless encouraging that recent Early Alerts trends have been stable;

· Delinquency rates in our retail book have started to improve following continued de-risking of the unsecured book and an improving PDRS trend in Korea;

· CG 12 accounts are stable compared to the half year;

· Whilst NPLs are up 10 per cent since the first half of 2014 the increase is related to accounts we have been actively managing for some time;

· And finally, Market risk is predominantly client driven and remains low in absolute terms.

In summary, the current elevated level of loan impairment reflects increases arising from India and China as well as our Commodity exposures in these and some other markets including Indonesia and Africa. We flagged these areas of risk early and have been proactively managing them for some time.

Standard Chartered PLC - Group Finance Director's reviewcontinued

Summary Group Balance Sheet
	2014	2013	Increase / (decrease)	Increase / (decrease)
	$million	$million	$million	%
Total assets	725,914	674,380	51,534	8
Total equity	46,738	46,841	(103)	-
Loans and advances to customers	288,599	296,015	(7,416)	(3)
Deposits by banks	55,323	44,526	10,797	24
Customer deposits	414,189	390,971	23,218	6
Advances to deposits ratio	69.7%	75.7%
Liquid asset ratio	32.2%	29.8%

The balance sheet is in good shape, diversified, well structured, and highly liquid with total deposits up 8 per cent year on year, rising $29 billion or 6 per cent in the second half of 2014. We already more than meet the minimum Basel III requirements for both the Net Stable Funding Ratio and the Liquidity Coverage Ratio.

Loans and advances to customers are down $16 billion or 5 per cent in the second half, driven by continued de-risking of the retail unsecured portfolio, reducing exposure to the energy, mining and quarrying sectors, more assertive management of low returning relationships, high levels of liquidity resulting in early repayments, and currency translation. On a constant currency basis loans and advances to customers are flat compared to 2013.

Our Advances to Deposits ratio is now below 70 per cent and our Liquid Asset Ratio is 32.2 per cent.

Total assets rose 8 per cent, compared to 2013 mainly from increased cash and balances with central banks reflecting higher surplus liquidity.

In summary, we finished the year with our balance sheet in good shape.

Capital
Capital ratios and risk-weighted assets	2014	2013
Common Equity Tier 1 (CET 1) transitional	10.5%	10.9%
Common Equity Tier 1 (CET 1) end point	10.7%	11.2%
Total Capital transitional	16.7%	17.0%
Leverage ratio end point	4.5%	4.7%
Total risk weighted assets transitional	341,648	331,296

The Group's transitional CET1 ratio of 10.5 per cent is flat in the second half of 2014 compared to the first half of the year. This is after absorbing a combined 30 basis point deduction for model, methodology and policy changes, and the foreseeable dividend, as well as other one-off items such as the settlement with US authorities and the impact of the increased UK bank levy. This is a clear demonstration of the Group's strong underlying organic equity generation of some 50 basis points in the year, above our historic trend of 30 basis points. Our end point CET1 ratio of 10.7 per cent is 200 basis points above our known minimum requirement with capacity to absorb future add-ons such as the countercyclical buffer as it is phased in.

We have maintained a strong level of Total Loss Absorbing Capacity, or TLAC, above 20 per cent and our leverage ratio at 4.5 per cent is significantly ahead of our 2019 requirement. We currently plan to issue AT1 capital in 2015 as we look to manage total capital efficiency and build our AT1 levels over time to amount permitted by applicable regulations.

We are in an environment where we need to manage capital requirements dynamically over time, balancing it with growth whilst delivering returns to shareholders.

Financial Priorities

Our financial priorities are to accrete capital to a CET1 ratio of between 11 and 12 per cent in 2015 and thereafter and to deliver Return on Equity (RoE) of over 10 per cent in the medium term.

These priorities replace the flexed financial framework set out in November 2013. They set out our objective to organically strengthen the capital ratio in the short term and to drive profitable growth that will build sustainable returns over the medium term.

The regulatory environment continues to evolve, typically requiring the industry to hold increasing levels of capital. Against this backdrop, the Group will prioritise actions that organically enhance the CET1 ratio while acknowledging there will be an impact on RoE. Based on our current best view of the regulatory outlook we are very confident in our ability to reach a CET1 ratio of between 11 and 12 per cent in 2015 and thereafter.

Building the Group's RoE to an attractive level, sustainably over the cost of equity is key to delivering long term value to shareholders and remains our focus.

Summary

2015 will be about accelerating management action and executing the plans we set out in November 2014 for the four client segments.

· We are prioritising organic capital accretion through a series of planned asset disposals and business exits as well as continued management of low retuning relationships, we expect to release $25-30 billion in risk weighted assets over the next two years.

· To protect returns, we are targeting $1.8 billion of sustainable cost savings over the next three years.

Combined these represent a significant programme of initiatives that will create a platform from which we can build the returns to an attractive level.

Whilst 2014 was a difficult year, we are determined to restore the Group's performance levels.

A Halford

Group Finance Director

4 March 2015

Segmental Analysis

Corporate and Institutional Clients

Corporate and Institutional (C&I) clients comprises Global Corporates, Local Corporates and Financial Institutions.

Operating profit down 21 per cent impacted by de-risking activities, challenging market conditions and increased impairments:

· Financial Markets income down 11 per cent, impacted by challenging industry-wide conditions, RMB band widening and lower Rates income in North East Asia

· Higher Loan impairments and Other impairments due to commodity financing exposures in Greater China. Other impairment was also driven by write-downs on strategic investments in Europe

· De-risking of certain Local Corporate and correspondent banking clients resulted in a material drag to income but an improved risk profile for the business

Progress against strategic objectives

· Good progress on reshaping our business to address the challenges we face, in particular the derisking of certain client portfolios which resulted in improved risk profile

· Successful reallocation of resources to higher returning businesses, including an $8.5 billion RWA reduction on target group of clients, delivering revenue and income return on risk weighted assets (RoRWA) uplift

· Continued strong cost management despite the impact of restructuring charges in the fourth quarter. C&I is on-track to deliver its target cost efficiencies in 2015

· Record Investors segment performance with income up 18 per cent from growth in Europe and Greater China

· Deeper and broader client penetration, with average number of products per client up 6 per cent to 6.3 and average number of markets per client up 7 per cent to 2.8. The percentage of clients generating 80 per cent of our income increased to 19.7 per cent, up from 17.7 per cent in 2013

Financial performance
The following table provides an analysis of financial performance for Corporate and Institutional Clients:
	2014	2013	Better/ (worse)
	$million	$million	%
Transaction Banking	3,223	3,253	(1)
Financial Markets¹	3,192	3,594	(11)
Corporate Finance	2,462	2,486	(1)
Lending and Portfolio Management	767	767	-
Asset and Liability Management	429	375	14
Principal Finance	358	181	98
Operating income¹	10,431	10,656	(2)
Operating expenses	(5,191)	(4,954)	(5)
Loan impairment	(991)	(488)	(103)
Other impairment	(307)	(113)	(172)
Profit from associates and joint ventures	198	156	27
Operating profit¹	4,140	5,257	(21)
Client income¹	9,174	9,312	(1)
Customer loans and advances	157,970	160,906	(2)
Customer deposits	244,731	211,051	16
Risk weighted assets	244,595	221,660	10
Return on risk weighted assets	1.8%	2.4%
¹Excludes $100 million (2013: $106 million) in respect of own credit adjustment

C&I delivered a resilient income performance in 2014 despite the challenging market conditions and the impact of management actions to reshape the business, in particular the derisking of certain client portfolios.

Operating income fell 2 per cent compared with 2013. Client income, constituting over 85 per cent of operating income, declined 1 per cent, or $138 million, to $9,174 million. Excluding the impact of derisking, client income rose 1 per cent and operating income was flat.

Income from Financial Institution clients rose 9 per cent, driven by a record performance from our Investors segment. Local Corporates income fell 3 per cent compared to 2013 impacted by derisking actions. Excluding the impact of derisking, income was resilient, up 2 per cent, led by growth in our aircraft leasing business. Global Corporates income fell 4 per cent reflecting lower syndicated loan volumes and a reduced contribution from leveraged finance

Own account income fell 6 per cent as higher ALM and Principal Finance income was more than offset by lower Financial Markets income.

Income from Transaction Banking was down by 1 per cent reflecting lower global volumes in trade finance. Despite intense competition, we maintained Trade margins, while market share rose slightly. Income from Cash Management & Custody rose 3 per cent with increased fee income reflecting record US dollar clearing volumes and strong growth in our Securities Services business.

Financial Markets income fell 11 per cent compared to 2013 driven by low market volatility leading clients to reduce hedging activity and by a decline in capital market income. 2014 performance was also impacted by factors specific to our footprint including RMB band widening and lower structured notes income in North East Asia. These factors were partially offset by strong growth in Cash FX volumes.

Segmental Analysis continued

Corporate Finance income fell 1 per cent, with strong growth in M&A advisory fees offset by increased levels of repayments.

Principal Finance income almost doubled compared to 2013 primarily as a result of increased levels of realised gains on investment exits. ALM income rose 14 per cent, driven by robust accrual income.

Operating expenses were up $237 million, or 5 per cent, to $5,191 million driven by increased regulatory and compliance costs and restructuring charges in the fourth quarter of 2014. This was partially offset by a reduction in variable compensation costs.

Loan impairment increased by $503 million, or 103 per cent, to $991 million driven by specific impairments in Greater China and ASEAN, largely in respect of lending secured by Commodities. We are actively managing our commodity credit exposure and a detailed breakdown of our portfolio is on page 34.

Other impairment was higher by $194 million at $307 million, largely due to commodity financing positions in Greater China and impairments against certain strategic investments within the Europe region.

Operating profit fell by $1,117 million, or 21 per cent, to $4,140 million.

Balance sheet

Customer loans and advances fell 2 per cent, impacted by declining commodity prices, lower market-wide trade levels and derisking activities.

Risk weighted assets (RWA) increased by 10 per cent primarily due to the impact of Basel III and policy, methodology and model changes. Excluding this impact, RWAs were flat with actions to manage RWA's offsetting asset growth and the impact of credit migration. Operating profit return on RWA declined from 2.4 per cent to 1.8 per cent.

Customer deposits increased 16 per cent compared to 2013 largely reflecting increased term deposits and higher Cash Management balances with an improved CASA ratio.

Segmental Analysis continued

Commercial Clients

The Commercial client segment was established in 2014 and serves medium-sized businesses who are managed by dedicated relationship managers.

2014 was a year of transition with significant management action taken to reposition the business, including an extensive client due diligence (CDD) remediation programme. Operating profit fell 66 per cent due to weaker income from Principal Finance and Financial Markets, the impact of client exits and from increased impairment:

· Principal Finance income fell due to lower mark to market valuations, while the decline in Financial Markets income was driven by RMB band widening.

· As we worked through our CDD remediation programme, we exited or moved clients to other client segments if their risk profile did not fit into the Commercial Clients model. We also exited our SME business in the UAE in line with the New York DFS order.

· Total impairment rose 45 per cent driven by a small number of specific loan impairments and a write-down on a strategic investment.

Progress against strategic objectives

· We addressed potential operational and credit risk by derisking the client base and upgrading our level of client due diligence. These derisking actions included an extensive client due diligence (CDD) remediation programme and significant number of client exits.

· As part of our ongoing commitment to raising the bar on CDD quality, we successfully migrated 74 per cent of our client base onto an electronic platform.

· We began to build a globally consistent and enhanced operating platform, which included moving towards a globally consistent organisational model and appointing new Commercial Clients heads in all our 20 countries.

· These actions have impacted 2014 performance but have created a more robust and competitively differentiated platform from which to grow the business going forward.

Financial performance
The following table provides an analysis of financial performance for Commercial Clients:
	2014	2013	Better/ (worse)
	$million	$million	%
Transaction Banking	560	640	(13)
Financial Markets	208	262	(21)
Corporate Finance	25	33	(24)
Lending and Portfolio Management	259	298	(13)
Wealth Management	121	140	(14)
Retail Products	10	5	100
Asset and Liability Management	32	37	(14)
Principal Finance	(33)	96	(134)
Operating income	1,182	1,511	(22)
Operating expenses	(739)	(731)	(1)
Loan impairment	(212)	(157)	(35)
Other impairment	(35)	(13)	(169)
Profit from associates and joint ventures	22	37	(41)
Operating profit	218	647	(66)
Client income	1,128	1,321	(15)
Customer loans and advances	14,651	17,802	(18)
Customer deposits	22,787	33,705	(32)
Risk weighted assets	24,652	25,696	(4)
Return on risk weighted assets	0.9%	2.5%

Segmental Analysis continued

Operating income fell 22 per cent compared to 2013 and client income fell 15 per cent. Financial Markets income fell 21 per cent as the RMB band widening actions in the first half of 2014 reduced client demand for hedging, disrupting the flow of FX revenues in the Greater China region.

Income from both Transaction Banking and Lending declined 13 per cent impacted by CDD remediation, de-risking and client exits as well by the weaker market-wide trade volumes.

Other income was down due to lower income from Principal Finance as a result of lower mark-to-market valuations and reduced levels of realisations compared to 2013.

Expenses rose 1 per cent with increased costs from CDD remediation offset by a reduction in business volume related costs.

Loan impairment increased by $55 million to $212 million, driven by a small number of exposures in Hong Kong and China. Other impairment rose $22 million due to the impairment of an associate investment.

Operating profit fell by $429 million, or 66 per cent, to $218 million.

Balance sheet

Customer loans and advances decreased by 18 per cent as a result of client exits as a part of CDD remediation and lower Trade balances.

Risk weighted assets fell 4 per cent as the impact of client exits during the year more than offset policy, methodology and model changes. Despite this fall, the return on risk weighted assets declined from 2.5 per cent to 0.9 per cent primarily due to lower income performance.

Customer deposits fell 32 per cent reflecting client exits, increased levels of competition in Hong Kong and Singapore and optimisation of our funding mix. Commercial clients, however, remain a net liquidity generator for the Group.

Segmental Analysis continued

Private Banking Clients

The Private Banking client segment is dedicated to providing high net worth clients with a highly personalised service and a comprehensive suite of products and services tailored to meet their financial needs.

Operating profit fell 14 per cent due to the exit of our Geneva and Korean businesses and an impairment of a strategic investment. Operating profit rose 11 per cent excluding these items, reflecting a strong underlying income performance in Greater China and ASEAN regions coupled with disciplined cost control.

Progress against strategic objectives

· In 2014, we set a new strategy for Private Banking, taking a number of actions to align the business to Standard Chartered's corporate client base and markets.

· We exited peripheral Private Banking businesses, focussing the business on the international wealth centres of Hong Kong, Singapore and London. We increased the number of relationship managers despite exiting our Geneva business.

· We added 1,300 clients in 2014. We now have an internal referral pilot scheme in place aimed at capturing client opportunities across the Private Banking, Commercial and C&I segments.

· We deepened client relationships and saw improved investment product penetration up from 46 per cent to 51 per cent of AUM. This will continue to be a focus in 2015.

· In 2014, we defined and started to execute on a three-year technology and operations programme to upgrade client experience and improve front office productivity.

Financial performance
The following table provides an analysis of financial performance for Private Banking Clients:
	2014	2013	Better / (worse)
	$million	$million	%
Transaction Banking	1	3	(67)
Wealth Management	406	378	7
Retail Product	189	196	(4)
Asset and Liability Management	16	9	78
Operating income	612	586	4
Operating expenses	(447)	(407)	(10)
Loan impairment	-	(8)	100
Other impairment	(16)	-	-
Profit from associates and joint ventures	-	2	(100)
Operating profit	149	173	(14)
Client income	586	566	4
Customer loans and advances	18,056	17,159	5
Customer deposits	29,621	32,212	(8)
Risk weighted assets	7,409	5,634	32
Return on risk weighted assets	2.3%	3.0%

Operating income and client income rose 4 per cent compared to 2013 or 6 per cent excluding the impact of business exits in Korea (2013) and Geneva (2014).

The growth in income was driven by strong performances by the Greater China and ASEAN regions with good growth in both assets under management and Lending. This was partly offset by client de-leveraging in Europe and margin compression in Deposits. 2014 saw good momentum in net new money with assets under management (AUM) increasing 3 per cent to $60 billion. Excluding the impact of business exits, AuM increased 8 per cent as a result of a refocused approach to client asset acquisition.

Expenses were up $40 million, or 10 per cent, compared to 2013 primarily due to costs related to the exit of the Geneva business. Excluding these costs, expenses rose 3 per cent.

Other impairment increased to $16 million following a write-down of an associate investment, impacted by business exists and other impairment charge.

Operating profit fell by $24 million or 14 per cent.

Balance sheet

Customer loans and advances increased by 5 per cent reflecting good growth in Wealth lending. Mortgages were broadly flat compared to 2013 due to client deleveraging.

Risk-weighted assets have increased by 32 per cent compared to 2013 primarily due to policy, methodology and model changes and growth in Wealth Management lending. Operating profit return on risk weighted assets fell to 2.3 per cent from 3.0 per cent.

Customer deposits fell 8 per cent as we exited higher cost Time Deposit products, coupled with the impact of closing Geneva.

Segmental Analysis continued

Retail Clients

Retail Clients serves Priority, Personal and Business Clients.

Operating Profit fell by 6 per cent with 2 per cent growth in income offset by higher expenses:

· Retail Products income fell 4 per cent as a result of continued de-risking of the unsecured lending portfolio.

· Income from Wealth Management rose 26 per cent benefitting from the renewal of a multi-country distribution agreement with Prudential.

· Expenses were up 4 per cent driven by restructuring charges.

Progress against strategic objectives

· In 2014, Retail Clients reconfirmed its strategy of focusing on affluent clients.

· The shift to the affluent segment accelerated, with the share of revenue from Priority and Business Clients increasing to 40 per cent in 2014 from 37 per cent in 2013.

· A significant repositioning and restructuring programme was initiated to improve expense efficiency and the business is on-track to deliver its target efficiency saves in 2015.

· Continued progress on derisking the unsecured lending portfolio.

· Strengthening of conduct continued to be a key focus. During 2014, Retail Clients exited its third-party sales force to improve controls.

Financial performance
The following tables provide an analysis of financial performance for Retail Clients:
	2014	2013	Better / (worse)
	$million	$million	%
Transaction Banking	18	15	20
Wealth Management	1,174	931	26
Retail Products	4,641	4,845	(4)
Assets and Liability Management	176	127	39
Operating income	6,009	5,918	2
Operating expenses	(4,002)	(3,866)	(4)
Loan impairment	(938)	(964)	3
Other impairment	(45)	(3)	nm
Profit from associates and joint ventures	28	31	(10)
Operating profit	1,052	1,116	(6)
Client income	5,735	5,673	1
Customer loans and advances	97,922	100,148	(2)
Customer deposits	117,050	114,003	3
Risk weighted assets	64,992	69,261	(6)
Return on risk weighted assets	1.6%	1.6%

Operating income rose 2 per cent to $6,009 million with client income up 1 per cent compared to 2013. Income growth during the year was impacted by continued de-risking of the unsecured lending portfolio in select markets, this was more than offset by strong growth in Wealth Management income.

Wealth Management income grew 26 per cent with strong growth from bancassurance products, benefitting from the renewal of a multi-country distribution agreement with Prudential in the current year. Non-bancassurance revenue rose 9 per cent, with AuM up 11 per cent. CCPL income declined 8 per cent, or $212 million, driven by regulatory changes, rate caps and continued de-risking of the personal lending portfolio which impacted Korea and Thailand in particular. Income from Mortgages and Auto also declined mainly due to property cooling measures in Hong Kong and Singapore and the continued run-off of the auto financing book. Income from Deposits increased with strong growth in CASA volumes and the exit of higher cost Time Deposits.

Expenses were up 4 per cent at $4,002 million driven by restructuring costs.

Loan impairment was down 3 per cent at $938 million due to lower levels of unsecured lending impairments in Korea as the level of PDRS filings declined. This was partly offset by higher charges in Thailand.

Other impairment rose $42 million primarily due to an impairment of an associate investment.

Operating profit fell by $64 million, or 6 per cent, to $1,052 million.

Balance Sheet

Loans and advances to customers fell by 2 per cent with the unsecured lending portfolio down $2.2 billion compared to 2013 from continued de-risking of the personal lending portfolio, regulatory changes and currency translation impact. This decline was partly offset by the growth of mortgages in Korea and Hong Kong.

Risk weighted assets fell by 6 per cent reflecting the de-risking actions. Operating profit return on risk weighted assets was flat at 1.6 per cent.

Customer deposits rose 3 per cent driven by growth in CASA funding which was partly offset by a reduction in higher cost Time Deposits.

Segmental Analysis continued
Operating income by product and segment
Income by product and client segment is set out below:
	2014
	Total	Corporate & Institutional	Commercial	Private Banking	Retail
	$million	$million	$million	$million	$million
Transaction Banking	3,802	3,223	560	1	18
Trade	1,956	1,635	302	1	18
Cash Management and Custody	1,846	1,588	258	-	-
Financial Markets	3,400	3,192	208	-	-
Foreign Exchange	1,321	1,166	155	-	-
Rates	749	721	28	-	-
Commodities and Equities	495	482	13	-	-
Capital Markets	437	434	3	-	-
Credit and Other¹	398	389	9	-	-
Corporate Finance	2,487	2,462	25	-	-
Lending and Portfolio Management	1,026	767	259	-	-
Wealth Management	1,701	-	121	406	1,174
Retail Products	4,840	-	10	189	4,641
Cards, Personal Loans and Unsecured Lending	2,576	-	-	-	2,576
Deposits	1,222	-	10	132	1,080
Mortgage and Auto	938	-	-	56	882
Other Retail Products	104	-	-	1	103
Asset and Liability Management	653	429	32	16	176
Principal Finance	325	358	(33)	-	-
Total Operating income¹	18,234	10,431	1,182	612	6,009
¹Excludes $100 million relating to own credit adjustment
	2013
	Total	Corporate & Institutional	Commercial	Private Banking	Retail
	$million	$million	$million	$million	$million
Transaction Banking	3,911	3,253	640	3	15
Trade	2,069	1,715	336	3	15
Cash Management and Custody	1,842	1,538	304	-	-
Financial Markets	3,856	3,594	262	-	-
Foreign Exchange	1,413	1,195	218	-	-
Rates	917	900	17	-	-
Commodities and Equities	507	492	15	-	-
Capital Markets	558	553	5	-	-
Credit and Other¹	461	454	7	-	-
Corporate Finance	2,519	2,486	33	-	-
Lending and Portfolio Management	1,065	767	298	-	-
Wealth Management	1,449	-	140	378	931
Retail Products	5,046	-	5	196	4,845
Cards, Personal Loans and Unsecured Lending	2,788	-	-	-	2,788
Deposits	1,193	-	5	140	1,048
Mortgage and Auto	997	-	-	54	943
Other Retail Products	68	-	-	2	66
Asset and Liability Management	548	375	37	9	127
Principal Finance	277	181	96	-	-
Total Operating income¹	18,671	10,656	1,511	586	5,918
¹Excludes $106 million relating to own credit adjustment

Segmental Analysis continued

Transaction Banking:

Income fell 3 per cent with Trade income down 5 per cent and Cash Management and Custody income flat compared to 2013. Trade balance sheet volumes were lower as a result of management actions and the continuing slow trade environment which saw overall market volumes decline. This was in part offset by a marginal increase in Trade NIM. Cash volumes were up year on year driven by record clearing levels, supporting fee growth. Custody income benefitted from the continued roll-out of our global platform and to a lesser extent the acquisition of a custodial business in South Africa in the second half of 2013.

Financial Markets: Income decreased 12 per cent compared to 2013 driven by low market volatility leading clients to reduce hedging activity and also from the impact of RMB band widening in the first quarter of the year.

Rates income fell 18 per cent reflecting lower levels of client hedging due to the continuing low interest rate environment which impacted structured products in particular.

FX income fell 7 per cent year on year due to lower spreads reflecting low levels of volatility across our markets although pockets of volatility returned in the second half of the year. Volumes remained strong, however, and Cash FX notional increased by 47 per cent compared to 2013. Income from FX options was adversely impacted by the RMB band widening which reduced client demand for hedging.

Capital Markets income fell 22 per cent impacted by margin

compression, lower fees and negative mark-to-market movements on syndicated loans.

Corporate Finance: Income fell 1 per cent with significant market challenges and high liquidity resulting in increased repayment levels. This was partially offset by a significant rise in M&A advisory fees and increased origination activity in our financing businesses.

Lending and Portfolio Management: Income fell 4 per cent reflecting lower average balances as we exited lower returning relationships.

Wealth Management: Income growth of 17 per cent driven by strong growth in bancassurance income, which benefitted from the renewal of a strategic multi-year bancassurance partnership in the second half of the year. AuM also grew strongly primarily in Hong Kong and Singapore due to a stronger value proposition and favourable market conditions in the first half of the year. This was partly offset by lower income from structured products which was impacted by low levels of volatility.

Retail Products: Income fell 4 per cent compared to 2013 due to de-risking actions, regulatory changes and adverse mortgage market conditions in certain markets. De-risking actions included the exit of personal loans originations in riskier segments in Korea and Thailand and the replacement of third-party sales channels with internal staff. Mortgage transactions were lower due to property cooling measures by the government in Hong Kong and Singapore. Deposits income increased 2 per cent as we replaced higher cost Time Deposits with higher margin CASA products.

Asset and Liability Management: Income rose 19 per cent reflecting improved accrual income which more than offset lower income from securities sales.

Principal Finance:income was up 17 per cent benefitting from increased levels of realised gains from investment exits, partially offset by lower mark to market valuations. The majority of the realisations in 2014 benefits the Corporate & Institutional client segment compared to the Commercial client segment in 2013.

Geographic Analysis
Performance by geography
The following tables provide an analysis of operating profit by geographic regions:
	2014
	Greater China	North East Asia	South Asia	ASEAN	MENAP	Africa	Americas	Europe	Total
	$million	$million	$million	$million	$million	$million	$million	$million	$million
Operating income¹	5,446	1,459	1,855	3,716	1,843	1,829	861	1,225	18,234
Operating profit/(loss)^{1, 2}	2,101	(125)	806	916	769	673	171	(118)	5,193
¹Excludes $100 million in respect of own credit adjustment (Greater China $94 million, ASEAN ($3) million and Europe $9 million)
²Excludes $300 million civil monetary penalty in Americas, $32 million for goodwill impairment charge in Greater China and $726 million goodwill impairment charge in North East Asia
	2013
	Greater China	North East Asia	South Asia	ASEAN	MENAP	Africa	Americas	Europe	Total
	$million	$million	$million	$million	$million	$million	$million	$million	$million
Operating income¹	5,198	1,639	2,040	4,011	1,865	1,751	858	1,309	18,671
Operating profit/(loss)^{1, 2}	2,331	(3)	897	1,620	858	619	311	325	6,958
¹Excludes $106 million in respect of own credit adjustment (Greater China $(1) million, North East Asia $2 million, ASEAN $45 million and Europe $60 million)
²Excludes $1 billion relating to goodwill impairment charge on Korea business in North East Asia

Greater China
The following table provides an analysis of performance in the Greater China region:
	2014	2013	Better / (worse)
	$million	$million	%
Client income¹	5,029	4,846	4
Other Income	417	352	18
Operating income¹	5,446	5,198	5
Operating expenses	(2,911)	(2,772)	(5)
Loan impairment	(469)	(242)	(94)
Other impairment²	(142)	1	nm
Profit from associates and joint ventures	177	146	21
Operating profit	2,101	2,331	(10)
Net Interest margin (%)	1.7	1.8
Customer loans and advances³	89,646	89,846	-
Customer deposits³	151,644	145,282	4
Risk weighted assets	66,585	63,284	5
¹Excludes $94 million (2013: $(1) million) in respect of own credit adjustment
²Excludes $32 million goodwill impairment in 2014
³Based on the location of the customers rather than booking location

Income in Greater China was up $248 million, or 5 per cent, to $5,446 million.

Income growth remains broad based and resilient across most client segments as well as across major product categories. In Retail, income grew 10 per cent, in Private Banking, income was up 18 per cent, in Corporate & Institutional, income grew 7 per cent while in Commercial Clients, income was lower by 26 per cent year on year.

There was strong growth in Assets under Management, driving Wealth Management income up compared to 2013. Income from retail deposits also grew strongly, benefitting from improved spreads as well as good growth in balances. This was partly offset by a decline in CCPL income as we derisked the portfolio.

Income from Corporate Finance increased, driven by the continued expansion of the leasing portfolios. There was also good growth achieved in Capital Markets from higher deal flows.

Financial Markets income rose marginally with good growth achieved in own account, particularly ALM, offsetting lower derivatives sales income. Derivatives sales income had been affected by low market volatilities resulting in spread compression affecting Rates and Foreign Exchange while volumes remained good. The RMB band widening in the first quarter of 2014 also resulted in lower income from FX options compared to 2013 as client hedging reduced.

Corporate lending income rose as volumes increased.

Cash Management income increased with slight improvements in margins. In Trade, however, income declined due to lower volumes as trade flows slowed although margins improved.

Geographic Analysis continued

Costs remain well managed and operating expenses grew 5 per cent. Excluding the impact of higher depreciation from our leasing business, expenses rose 4 per cent. We continued to invest to improve our infrastructure and opened a flagship wealth management centre in Hong Kong. We expanded our workforce, increasing front-line staff as well as in compliance areas.

Loan impairment was $227 million higher at $469 million and other impairment rose $143 million to $142 million. Loan impairment rose primarily due to higher provisions taken on the corporate exposures in China, and also includes provisions on commodities financing transactions. Other impairment primarily relates to charges against commodities transactions.

As a result of higher impairment charges, operating profit fell $230 million, or 10 per cent, to $2,101 million.

Balance sheet

Customer loans and advances were flat compared to 2013. Growth in Retail balances was offset by lower lending to Commercial clients as we derisked the portfolio.

Risk weighted assets rose 5 per cent.

Customer deposits rose 4 per cent as we grew CASA balances across the region, with reduced reliance on higher cost structured deposits.

North East Asia
The following table provides an analysis of performance in the North East Asia region:
	2014	2013	Better / (worse)
	$million	$million	%
Client income¹	1,323	1,462	(10)
Other income	136	177	(23)
Operating income¹	1,459	1,639	(11)
Operating expenses	(1,179)	(1,186)	1
Loan impairment	(394)	(427)	8
Other impairment²	(11)	(29)	62
Operating loss	(125)	(3)	nm
Net interest margin (%)	2.0	2.1
Customer loans and advances³	29,582	30,618	(3)
Customer deposits³	32,616	34,059	(4)
Risk weighted assets	23,990	26,701	(10)
¹Excludes $2 million benefit in respect of own credit adjustment in 2013
²Excludes $726 million (2013: $1 billion) relating to goodwill impairment charge on Korea business
³Based on the location of the customers rather than booking location

Income was down $180 million or 11 per cent, to $1,459 million. Korea represents over 94 per cent of income within this region.

Client income fell 10 per cent reflecting both difficult market conditions and the impact of management action to return the franchise to profitability. Retail Clients income fell 10 per cent, the majority of this reduction was due to a loss of unsecured income as we continued to de-risk the personal lending portfolio in light of high credit losses. Corporate and Institutional Clients income fell 14 per cent. The majority of the decrease came from reduced Financial Markets income driven by lower sales of structured products. Reduced client activity also impacted Transaction Banking, where Trade income fell due to lower volumes and Cash Management income was impacted by a reduction in the size and tenor of balances.

Income earned from Korean businesses elsewhere in the Group's network grew 3 per cent.

Expenses were marginally lower by 1 per cent at $1,179 million. We have continued to progress an aggressive campaign of cost reduction, with two Special Retirement Plan exercises in Korea helping to drive headcount down to its lowest level since 2010 for a cost of $52 million. In addition a further 50 retail branches were closed in Korea during the year reducing the network footprint from 343 to 283.

Loan impairment fell by $33 million, or 8 per cent. In Retail Clients loan impairment related to the Personal Debt Rehabilitation Scheme (PDRS) filings fell reflecting the impact of the maintenance of tightened credit underwriting criteria. In December 2014 the adverse impact of PDRS filings on the franchise were at their lowest level since December 2012 and reflect a sustained improvement.

The operating loss in the region increased by $122 million compared to 2013 to a loss of $125 million. However, there was a marked improvement in the second half of the year as the operating loss improved by $107 million to a loss of $9 million compared to the first half. This reflects stronger second half income driven by increased Private Equity realisations and the fact that restructuring charges were predominantly phased into the first half of the year.

Balance sheet

Customer loans and advances reduced by 3 per cent, the continued decline in unsecured lending balances more than offsetting the growth in mortgage assets which grew as we took advantage of a relaxation in regulatory restrictions on mortgage lending.

Risk weighted assets fell 10 per cent primarily due to the continuing derisking actions on the unsecured portfolio.

Customer deposits fell 4 per cent with increased CASA balances offset by reducing Time Deposits.

Geographic Analysis continued

South Asia
The following table provides an analysis of performance in the South Asia region:
	2014	2013	Better / (worse)
	$million	$million	%
Client income	1,725	1,770	(3)
Other income	130	270	(52)
Operating income	1,855	2,040	(9)
Operating expenses	(793)	(823)	4
Loan impairment	(183)	(215)	15
Other impairment	(73)	(105)	30
Operating profit	806	897	(10)
Net interest margin (%)	3.8	3.9
Customer loans and advances¹	22,859	25,608	(11)
Customer deposits¹	15,533	16,128	(4)
Risk weighted assets	26,522	26,721	(1)
¹Based on the location of the customers rather than booking location

Income fell $185 million, or 9 per cent, to $1,855 million. On a constant currency basis, income fell 6 per cent. Around 78 per cent of the income in this region is from India, which continues to focus on partnering with global corporate to leverage the Group's network.

Client income was 3 per cent lower compared to 2013 primarily due to reduced income from Transaction Banking and FM products. Transaction Banking income fell due to lower average balances across Trade and Cash Management, as we consciously reduced low returning exposures. The fall in FM income reflected lower spreads and reduced fee income due to a smaller number of deals in Capital Markets in the current year. This was partly offset by higher Lending income as margins improved. Income from CCPL fell as margins and balances declined as we derisked the unsecured portfolio. Own account income also fell due to lower derisking activity in the current year and lower Principal Finance realisations.

Operating expenses across the region fell $30 million, or 4 per cent, to $793 million, as we continued to manage costs tightly.

Loan impairment fell $32 million, or 15 per cent, to $183 million and though lower than last year, remains at elevated levels reflective of the stress in the banking sector.

Other impairment fell 30 per cent to $73 million due to reduced Private Equity impairments in the current year.

Operating profit fell $91 million to $806 million.

Balance sheet

Customer lending (which includes lending to India clients that are booked in other regions) fell 11 per cent compared to 2013. Onshore lending rose 3 per cent with portfolio growth impacted by the current economic environment. Lending booked offshore fell 22 per cent due to maturities and lower deal origination.

Onshore risk weighted assets were flat compared to 2013 as derisking actions offset portfolio growth.

Onshore customer deposits fell 4 per cent as there was a continued focus on generating low cost CASA with higher cost deposits being run-off.

ASEAN
The following table provides an analysis of performance in the ASEAN region:
	2014	2013	Better / (worse)
	$million	$million	%
Client income¹	3,482	3,646	(4)
Other income	234	365	(36)
Operating income¹	3,716	4,011	(7)
Operating expenses	(2,078)	(2,075)	-
Loan impairment	(698)	(396)	(76)
Other impairment	(86)	2	nm
Profit from associates and joint ventures	62	78	(21)
Operating profit	916	1,620	(43)
Net interest margin (%)	1.8	1.8
Customer loans and advances²	78,541	82,852	(5)
Customer deposits²	94,208	95,908	(2)
Risk weighted assets	82,603	80,377	3
¹Excludes $(3) million (2013: $45 million) in respect of own account credit adjustment
²Based on the location of the customers rather than booking location

Geographic Analysis continued

Operating income was down $295 million, or 7 per cent, to $3,716 million.

Client income decreased by 4 percent compared to 2013 due to difficult market conditions and regulatory headwinds, together with margin compression. Wealth Management income increased, benefitting from the renewed multi-year bancassurance partnership with Prudential and growth in secured lending. Transaction Banking income fell due to increased competition amidst market slow down and soft commodities pricing. FM income was also down due to continued margin compression and fall in Commodities business as a result of global decline in oil prices. Corporate Finance income fell as higher income from the M&A advisory business was offset by high liquidity in the market. Income from Retail products fell as regulatory measures impacted major ASEAN markets such as Singapore, Malaysia and Indonesia and we took actions to derisk our sales model in Thailand. Own account income was impacted by challenging market conditions of sustained low volatility and stable interest rate environment.

Operating expenses were flat at $2,078 million, reflecting enhanced productivity and tight management of discretionary costs.

Loan impairment was up by $302 million, or 76 per cent, to $698 million. Although impairment levels in Singapore fell, this was more than offset by higher provisions on a small number of corporate clients in Indonesia, Thailand and Malaysia, in part due to weaker commodity markets, and Personal Loan deterioration in Thailand and Indonesia.

Other impairment was up by $88 million, to $86 million, which relates primarily to the impairment of an associate investment.

As a result, ASEAN delivered an operating profit of $916 million, down 43 per cent compared to 2013.

Balance sheet

Customer loans and advances fell 5 per cent largely as we reduced exposures to low returning clients and reflecting lower Trade balances.

Risk weighted assets rose 3 per cent largely due to policy and model methodology changes.

Customer deposits fell 2 per cent, with the proportion of CASA balances increasing as more expensive term deposits were rolled off.

Middle East, North Africa and Pakistan (MENAP)
The following table provides an analysis of performance in the MENAP region:
	2014	2013	Better / (worse)
	$million	$million	%
Client income	1,625	1,663	(2)
Other income	218	202	8
Operating income	1,843	1,865	(1)
Operating expenses	(984)	(960)	(3)
Loan impairment	(89)	(47)	(89)
Other impairment	(1)	-	nm
Operating profit	769	858	(10)
Net interest margin (%)	2.8	2.9
Customer loans and advances¹	22,775	23,535	(3)
Customer deposits¹	22,447	22,520	-
Risk weighted assets	29,775	29,402	1
¹Based on the location of the customers rather than booking location

Geographic Analysis continued

Operating income fell $22 million, or 1 per cent, to $1,843 million. Client income fell 2 per cent across the region primarily due to high levels of liquidity, the absence of market volatility and the resurgence of competition from regional banks. Strong performances in our markets across the region have largely offset a softer performance in the UAE.

Continued spread compression as a result of the low volatility, low interest rate environment offset good levels of customer activity in FX and Rates. Transaction Banking income rose slightly, as margin compression in Cash Management was offset by higher average balances. Income from Corporate Finance was lower, as deal flow slowed, and Lending income was impacted by repayments and continued balance sheet optimisation as we adhered to our criteria for risk and return. Volumes in CCPL and Mortgages increased as market conditions improved, offsetting margin compression from competitive pricing and surplus liquidity.

Own account income rose due to lower income from commodities and EM rates which was more than offset by higher income from de-risking activities in ALM.

Operating expenses in the region were $24 million, or 3 per cent, higher at $984 million predominantly driven by incremental costs from our newly launched Iraq operations and restructuring provisions.

Loan impairment increased by $42 million to $89 million.

Operating profit was down $89 million, or 10 per cent, to $769 million.

Balance sheet

Customer loans and advances fell 3 per cent primarily as a result of material repayments as origination activities were impacted by excess market liquidity.

Risk weighted assets increased 1 per cent and customer deposits remained broadly flat as CASA outflows were offset by increased term deposits.

Africa
The following table provides an analysis of performance in the Africa region:
	2014	2013	Better / (worse)
	$million	$million	%
Client income	1,539	1,560	(1)
Other income	290	191	52
Operating income	1,829	1,751	4
Operating expenses	(990)	(862)	(15)
Loan impairment	(175)	(270)	35
Other impairment	(1)	-	nm
Profit from associates and joint ventures	10	-	nm
Operating profit	673	619	9
Net interest margin (%)	4.7	5.6
Customer loans and advances¹	13,103	13,122	-
Customer deposits¹	11,224	11,686	(4)
Risk weighted assets	20,289	19,729	3
¹Based on the location of the customers rather than booking location

Operating income in Africa grew 4 per cent to $1,829 million, with client income falling 1 per cent. There was significant currency depreciation against the US dollar across a number of markets during the year and on a constant currency basis, income rose 15 per cent and client income was up 8 per cent.

Transaction Banking income fell due to ongoing margin compression, currency depreciation and the impact of falling commodity prices which reduced overall trade average balances. This was partly offset by an increase in Cash Management volumes. FM income rose with strong volume growth partly offset by margin compression as competition intensified across the region. Corporate Finance income remains well diversified with an increase in deals closed of 7 per cent year on year.

Retail demonstrated good performance as income grew largely driven by Wealth Management and Mortgages & Auto Loans. Growth in unsecured lending continued to focus on employee banking relationships, with margin compression partly offsetting volume growth.

Operating expenses in Africa were 15 per cent higher than 2013 (or 25 per cent higher on a constant currency basis). The growth was primarily as a result of restructuring costs, flow through of prior year investments, investments in new markets and inflationary pressures.

Loan impairment fell $95 million, or 35 per cent, mainly attributable to lower specific provisions in the Corporate & Institutional client segment.

Operating profit rose 9 per cent compared to 2013 to $673 million. On a constant currency basis, operating profit grew 20 per cent.

Balance sheet

The overall shape of the balance sheet remains strong, with customer loans broadly flat compared to 2013.

Risk weighted assets grew 3 per cent.

Customer deposits fell 4 per cent as we repositioned away from Time Deposits and increased the proportion of funding derived from CASA.

Geographic Analysis continued

Americas
The following table provides an analysis of performance in the Americas region:
	2014	2013	Better / (worse)
	$million	$million	%
Client income	802	799	-
Other income	59	59	-
Operating income	861	858	-
Operating expenses¹	(668)	(536)	(25)
Loan impairment	(21)	(11)	(91)
Other impairment	(1)	-	nm
Operating profit	171	311	(45)
Net interest margin (%)	0.6	0.7
Customer loans and advances²	10,952	10,429	5
Customer deposits²	34,019	15,406	121
Risk weighted assets	13,692	12,454	10
¹Excludes $300 million in respect of civil monetary penalty in 2014
²Based on the location of the customers rather than booking location

Operating income was resilient at $861 million, flat to 2013, with increased client activity and higher volumes in Trade and Cash Management and across FX products. Transaction Banking revenues were flat year on year as a strong increase in client business volumes was more than offset by lower margins due to excess liquidity and decreased spreads on cash liabilities due to low USD interest rates. Lending income rose as a result of increased volumes and financing fees earned from clients. Corporate Finance income also increased as margins improved and pipeline deals executed.

Own account income was impacted by low volatility and reduced bid-offer spreads, and lower commodity prices. This was offset by improved FX and Rates income as increased volumes helped offset spread compression and by improved ALM income on higher reinvestment yields.

Operating expenses were $132 million, or 25 per cent, higher at $668 million primarily driven by increase of regulatory compliance costs. Staff costs also increased due to restructuring initiatives.

Operating profit fell $140 million, or 45 per cent, to $171 million.

Balance sheet

Customer loans and advances increased 5 per cent with almost three-quarters of the portfolio having a tenor of less than one year.

Customer Deposits increased strongly primarily due to efforts to improve liability mix by growing corporate Time Deposits.

Europe
The following table provides an analysis of performance in the Europe region:
	2014	2013	Better / (worse)
	$million	$million	%
Client income¹	1,098	1,126	(2)
Other Income	127	183	(31)
Operating income¹	1,225	1,309	(6)
Operating expenses	(1,142)	(979)	(17)
Loan impairment	(112)	(9)	nm
Other impairment	(88)	2	nm
Profit from associates and joint ventures	(1)	2	nm
Operating (loss)/profit	(118)	325	(136)
Net interest margin (%)	0.8	1.0
Customer loans and advances²	21,141	20,005	6
Customer deposits²	52,498	49,982	5
Risk weighted assets	89,592	74,389	20
¹Excludes $9 million (2013: $60 million) in respect of own credit adjustment
²Based on the location of the customers rather than booking location

Income was down $84 million, or 6 per cent to $1,225 million.

Client income declined $28 million, or 2 per cent to $1,098 million, largely as a result of derisking actions. Transaction Banking income was up on strong growth from Trade Loans to FI clients. Financial Markets income increased as FX volumes grew strongly on the roll-out of an e-commerce electronic trading platform, and debt capital markets income increased on rising bond markets. Income from other Financial Market products declined as low levels of market volatility reduced client hedging requirements and investment opportunities. Corporate

Geographic Analysis continued

Finance income was down reflecting net repayments, increased competition and margin compression. In the Advisory business, the volume of deals was broadly flat year on year, but average fees declined. Income from Wealth Management and Retail products provided to Private Banking clients was down due to lower advisory fees and real estate lending in a challenging investment and market trading environment.

Own Account income declined 31 per cent primarily due to low FX volatility, falling commodity prices and the impact of higher holdings of liquid assets.

Operating expenses rose $163 million, or 17 per cent, to $1,142 million driven by an increase in the UK bank levy of $131 million to $366 million and costs incurred in restructuring our presence in Europe through exiting the Private Banking operations in Geneva, selling the Retail Business in Germany and closing the offices in Russia and Austria.

Loan Impairment was higher by $103 million to $112 million, with higher provisions against commodity clients.

Other impairment increased $90 million to $88 million following provisions against strategic and associate investments and a share of a commodity fraud loss.

Operating profit fell by $443 million to a loss of $118 million.

Balance sheet

Customer loans and advances booked in the region increased 6 per cent as we continued to reduce exposures to low returning clients and the impact of lower Trade volumes and Corporate Finance repayments.

Risk weighted assets increased 20 per cent primarily due to policy, methodology and model changes coupled with credit migration.

Customer deposits rose 5 per cent as we continued to build our liquid assets.

Group summary consolidated balance sheet

	2014	2013	Increase / (decrease)	Increase / (decrease)
	$million	$million	$million	%
Assets
Cash and balances at central banks	97,282	54,534	42,748	78
Loans and advances to banks¹	87,500	86,169	1,331	2
Loans and advances to customers¹	288,599	296,015	(7,416)	(3)
Investment securities¹	129,347	124,277	5,070	4
Derivative financial instruments	65,834	61,802	4,032	7
Other assets	57,352	51,583	5,769	11
Total assets	725,914	674,380	51,534	8
Liabilities
Deposits by banks¹	55,323	44,526	10,797	24
Customer accounts¹	414,189	390,971	23,218	6
Debt securities in issue¹	80,788	71,412	9,376	13
Derivative financial instruments	63,313	61,236	2,077	3
Subordinated liabilities and other borrowed funds	22,947	20,397	2,550	13
Other liabilities¹	42,616	38,997	3,619	9
Total liabilities	679,176	627,539	51,637	8
Equity	46,738	46,841	(103)	-
Total liabilities and shareholders' funds	725,914	674,380	51,534	8
¹Includes balances held at fair value through profit or loss

Group Balance sheet overview

Balance sheet

The Group's balance sheet remains resilient and well diversified. We continue to be highly liquid and primarily deposit funded, with an advances to deposits ratio of 69.7 per cent, down from the previous year-end position of 75.7 per cent. We continue to be a net lender into the interbank market, particularly in Hong Kong, Singapore and within the Americas and Europe regions. The Group's funding structure remains conservative, with limited levels of refinancing over the next few years.

The Group remains well capitalised although our Common Equity Tier 1 ratio (on a transitional basis) fell to 10.5 per cent from 10.9 per cent at the year end primarily due to the timing of dividend payments and higher risk-weighted assets.

The profile of our balance sheet remains stable, with over 70 per cent of our financial assets held at amortised cost, and 58 per cent of total assets have a residual maturity of less than one year. The Group continues to have low exposure to problem asset classes.

Cash and balances at central banks

Cash balances rose by $43 billion reflecting higher surplus liquidity which was held primarily in Europe and the Americas.

Loans and advances to banks and customers

Loans to banks and customers fell by $6.1 billion.

Loans to C&I and Commercial clients remain well diversified by geography and client segment. During 2014 we continued to reshape the portfolio, derisking and exiting low returning clients which contributed to the reduction in loan balances compared to 2014. This was primarily concentrated in the ASEAN region where lending fell $6.1 billion, and across the 'Energy', 'Mining and Quarrying' and 'Transport, Telecoms and Utilities' sectors.

Retail client lending fell 2 per cent, with unsecured lending falling $2 billion as we derisked the portfolio, primarily impacting Korea and Thailand. This was partly offset by an increase in secured Wealth products across the ASEAN region. Mortgages rose 1 per cent with property cooling measures across a number of markets impacting growth.

Loans to banks increased by 2 per cent with strong growth in the ASEAN region offset by lower balances in Europe as we repositioned liquidity across our footprint markets.

Investment securities

Investment securities rose by $5 billion as we re-positioned our liquid assets, reducing holdings of Treasury Bills and increasing investments in highly rated corporate debt securities in line with the eligibility criteria for liquid asset buffers. The maturity profile of these assets is largely consistent with prior years, with just under 40 per cent of the book having a residual maturity of less than twelve months. Equity investments also reduced as we realised a number of Principal Finance investments.

Derivatives

Customer appetite for derivative transactions has reduced reflecting low levels of volatility in the market which has reduced client hedging needs. Notional values increased since the last year end reflecting a higher volume of short-dated transactions with Financial Institutions as a result of lower levels of volatility. Unrealised positive mark-to-market positions were $4 billion higher at $66 billion. Our risk positions continue to be largely balanced, resulting in a corresponding increase in negative mark to market positions. Of the $63 billion mark to market positions, $44 billion was available for offset due to master netting agreements.

Deposits

Customer accounts rose 6 per cent while deposits by banks rose 24 per cent, largely due to higher clearing balances. During the year, we focussed on building up the proportion of CASA customer deposits, and exiting or replacing higher cost Time Deposits across a number of markets. CASA continues to be core of the customer deposit base, constituting over 50 per cent of customer deposits.

Debt securities in issue, subordinated liabilities and other borrowed funds

We continued to see good demand for our name across debt instruments. Subordinated liabilities rose $2.6 billion, as we replaced maturing debt. Debt securities in issue grew by $9 billion, primarily in short-dated certificates of deposit.

Equity

Total shareholders' equity was $0.1 billion lower at $47 billion reflecting profit accretion for the year which was offset by dividend payments (net of scrip) of $1.5 billion and the negative impact of foreign currency translation of $1 billion.

Risk Review

The Risk and Capital Review is divided into the following four sections:

· Risk overview is an update on the key risk themes of the Group

· Principal Uncertainties sets out the key external factors that could impact the Group in the coming year

· Risk Profileprovides an analysis of our risk exposures across all major risk types

· Capitalprovides an analysis of the Group's capital ratios and movements in capital requirements

Risk overview

In 2014, the Group continued to face external challenges such as slower economic growth in its core markets of China and India and a sustained fall in the prices of a number of commodities. These are, in effect, a continuation of themes from 2012 and 2013. The Group has been disciplined in its approach and in taking risk mitigation actions during this period in anticipation of a potential sustained downturn or dislocation in these markets.

The Group's loan impairment has increased by $524 million, or 32 per cent, to $2.1 billion. Over 40 per cent of the Group's loan impairment arises in the Retail Clients segment which has shown signs of stabilisation through 2014 and, whilst still elevated, is 5 per cent lower in the second half of the year. Korea loan impairment represents over 30 per cent of Retail loan impairment and is benefitting from management actions to tighten underwriting standards during 2013 and 2014, and was down $47 million or 13 per cent.

The loan impairment charge in Corporate & Institutional Clients (C&I) and Commercial Clients (CC) segments increased by $558 million to $1.2 billion, compared to 2013. This represents 67 basis points (bps) (2013: 36 bps) of average customer loans and advances which are at an elevated level for 2014 in the context of a prolonged slow down in the Group's core markets of China, India and in Commodities. Of the $1.2 billion of loan impairment, $565 million relates to commodity clients which is predominantly is due to a small number of commodity exposures that were already on our watch list since 2013 and have been negatively impacted by the further decline in commodity prices. Most of these clients are in mining sectors such as coal, copper, and iron ore which experienced a fall in prices in 2014. Of the remainder, $76 million is related to the commodity fraud in China (part of the total of $215 million including other impairment).

Net Non-performing loans (NPLs) are higher by $585 million compared to 2013. This increase is primarily in the C&I and CC segments and is driven by a small number exposures in metals and mining sector.

Prices of certain commodities (notably coal, iron ore and oil) have dropped significantly in 2014. This has not highlighted any additional material vulnerability over and above that was identified through the Group's stress testing program in 2013. However, the risks heightened on the relatively small parts of our portfolio

that we had identified as vulnerable in previous stress tests and this has manifested itself in the increased loan impairment referred to above. The Group has continued to successfully take risk mitigation actions with respect to these vulnerabilities throughout 2014. Portfolio trends in the second half of 2014 were stable over the first half of 2014 (see portfolio indicators on page 34).

The Retail Clients segment is focused on secured lending and wealth management. The new customer acquisition for unsecured business is focused on Priority, High Value customer and Employee banking segments, and customers with low indebtedness. This is in line with the Group's strategic priorities and is expected to reduce loan impairment volatility going forward. The portfolio indicators on bankruptcy filings under the Korean government's Personal Debt Rehabilitation Scheme (PDRS) are stabilising and showing some improvement.

An overview of our C&I and CC segments are presented together as these segments have similar risk characteristics.

The C&I and CC section covers the following:

· Portfolio indicators

· Commodities

· Oil and gas and related exposures

· China

· India

· Europe

The Retail Clients section covers the following:

· Mortgage portfolio and rising interest rates

· Unsecured portfolio

· Korea PDRS

Risk Review continued

Corporate and Institutional Clients and Commercial Clients

Exposures to C&I and CC segment are presented in this Risk Overview section on a net exposure basis (unless stated otherwise), which comprises loans and advances to banks and customers, investment securities, derivative exposures after master netting agreements, cash and balances at central banks, other assets, contingent liabilities and documentary credits. This represents a comprehensive view of credit risk exposures for C&I and CC segments. As at 31 December 2014, the net exposure for C&I and CC segments was $572 billion (2013: $525 billion), of which loans and advances to customers and banks was $260 billion (2013: $265 billion). The year on year increase in net exposure resulted principally from an increase in cash and balances at central banks to $97 billion (2013: $55 billion) and investment securities to $129 billion (2013: $124 billion).

	31.12.14	30.06.14	31.12.13	30.06.13
	$billion	$billion	$billion	$billion
Net exposure	572	547	525	510
Loans and advances to Customers and Banks	260	277	265	251

Geographic analysis presented in this section is based on country of credit responsibility. This differs from the financial booking location, in that all global exposures to a client group are reported in the primary country of the parent entity. This represents a more complete view of credit risk exposure to client groups from a particular country and is aligned to our credit risk management approach. This differs from the geographic analysis in the Risk Profile section (see page 40), in which loans and advances are reported based on the financial booking location.

Portfolio indicators

Throughout 2014 our C&I and CC portfolio remained diversified across industry sectors and geographies. There has been a slight increase in the proportion of C&I and CC exposures which are short-term to 65 per cent (2013: 64 per cent). The collateralisation level for Corporate and Non Bank Financial Institutions has increased by 2 per cent. The collateral in absolute terms for these segments has increased by 4 per cent.

We have a structured approach to portfolio analysis and stress testing to ensure we regularly take a view of likely economic downside risks which could manifest themselves in the next 12 to 18 months, and take proactive actions to limit potential vulnerabilities within our portfolio.

Although the C&I and CC impairments are at an elevated level, which is mainly related to a few accounts that have been on our watch list, the portfolio indicators have stabilised since H1 2014 with some portfolios showing an improving trend.

C&I and CC portfolio	31.12.14	30.06.14	31.12.13	30.06.13
C&I and CC portfolio	$billion	$billion	$billion	$billion
Per cent of net exposure to customers that is Investment grade	42%	40%	40%	38%
Per cent of L&A to Customers that is Investment grade	38%	38%	35%	39%
Early Alert (net exposure)	9.2	9.0	11.3	12.9
Credit Grade 12	4.7	5.3	2.0	1.7
Past Due but not impaired	2.2	3.4	3.8	1.4
Performing Other renegotiated/forborne loans	4.9	5.6	5.3	4.8
Gross NPLs	6.6	6.2	5.5	4.7

Commodities

The commodities credit exposure arises from the pursuit of our strategy in our core markets where commodities form a very significant proportion of the trade flows within and to our footprint countries. The commodities portfolio of $54.9 billion represented 10 per cent of the C&I and CC net exposure. Of the $54.9 billion net exposure, $41 billion were loans and advances. We have been actively managing this portfolio in light of a sustained fall in the prices of a number of commodities reducing our net exposure to the commodities sector, primarily in the Commodity Producers credit portfolio, by $6.9 billion, or 11 per cent, in 2014. The tenor profile of the portfolio remains short, with 74 per cent having a remaining maturity of less than one year, which provides us further flexibility to rebalance or reduce our exposure to clients or sectors that are particularly vulnerable.

Derivative trades in commodities are undertaken in support of client hedging, and commodities related market risk continues to be very low.

Commodities Credit Portfolio	31.12.14	30.06.14	31.12.13	30.06.13
Commodities Credit Portfolio	$billion	$billion	$billion	$billion
Commodity Producers	24.3	28.1	30.1	30.4
Commodity Traders	30.6	32.6	31.7	27.3
Net exposure	54.9	60.7	61.8	57.7
Tenor <1 year	74%	76%	75%	75%

Overall the quality of the commodities portfolio remains good as 60 per cent of the exposures are attributable either to Investment Grade clients or to Global Majors or Large State Owned Enterprises (SOEs). A further 32 per cent are short term in nature and hence give us the flexibility to respond promptly to events and rebalance or reduce our exposure to clients or vulnerable sub-sectors where necessary. A further 4 per cent are tightly structured secured project and Corporate Finance exposures.

The Commodity Producers and Commodity Traders credit portfolios are further analysed below:

Commodity Producers credit portfolio: 63 per cent of the net exposure of $24.3 billion was attributable to clients that were either rated investment grade or are Global Majors or Large SOEs. Of the remaining portfolio, 21 per cent is short term trade related and 9 per cent is tightly structured and secured project and corporate finance exposure. The Group holds $3.9 billion of collateral and third party guarantees against the exposures attributable to non Global Majors and non Large SOE clients.

Energy, primarily Oil and Gas, constitutes 54 per cent of the Commodity Producers credit portfolio (see Oil and Gas producers section). The exposure to metals that have had significant price falls is very small - Copper producers is 0.5 per cent and Iron ore is 0.3 per cent of C&I and CC net exposure respectively. 73 per cent of these exposures are to clients that are either investment grade rated or are low cost producers that are part of diversified groups.

Commodity Producers Credit Portfolio	31.12.14	30.06.14	31.12.13	30.06.13
Net exposure ($ billion)	24.3	28.1	30.1	30.4
Investment Grade / Global Majors / Large SOEs	63%	66%	61%	66%
Rest of the portfolio with Tenor < 1 year
Rest of the portfolio with Tenor < 1 year	21%	20%	24%	22%

Commodity Traders credit portfolio: 58 per cent of the net exposure of $30.6 billion was attributable to clients that are either rated investment grade or are Global Majors or Large SOEs. 88 per cent of the net exposures are short term. 93 per cent of the exposures to sub investment grade non Global Majors/ non Large SOE clients are short term trade exposure liquidated by underlying transaction flows.

Commodity Traders Credit Portfolio	31.12.14	30.06.14	31.12.13	30.06.13
Net exposures ($ billion)	30.6	32.6	31.7	27.3
Investment Grade / Global Majors / Large SOEs	58%	58%	57%	53%
Rest of the portfolio with Tenor < 1 year
Rest of the portfolio with Tenor < 1 year	40%	39%	40%	43%

Owned inventory: In 2014 the Group incurred a write-down in the value of commodity assets of $193 million (H1 2014: $153 million) on account of a warehouse fraud in China. Of this, $139 million was related to Structured Inventory Product (SIP) assets which were reported as Other Impairment. Under the SIP product, the Group provides financing to clients by purchasing commodities from them while agreeing to sell them back at a fixed price in future. The Group owns the commodities inventory and the price risk is hedged. In this portfolio of $3.1 billion (H1 2014: $3.9 billion), the Group takes neither credit risk on the client nor market risk on the price of commodities.

24 per cent of the owned inventory portfolio is stored in warehouses in China. The Group has now inspected all warehouses other than those that were locked down by the authorities in China in response to the fraud, and no new issues have emerged. In some cases we have transferred commodities to more secure warehouses. 74 per cent of the value of our SIP inventory is either in exchange controlled locations, such as London Metals Exchange warehouses, or in low risk jurisdictions like US, Western Europe, Singapore and Hong Kong.

Oil and Gas and related exposures

As at 31 December 2014 the Group's net exposure to Oil and Gas and related sectors was $28.6 billion. This comprises of Oil and Gas Producers (45 per cent), Refineries (22 per cent), Supporting Activities (28 per cent) and other corporate clients with oil and gas related hedges (5 per cent).

Oil and Gas Producers: As at 31 December 2014 the Oil and Gas Producers exposure was $12.9 billion ($11.1 billion direct, $1.8 billion to Traders whose parent Group is oil producer). 98 per cent of this ($12.6 billion) was to clients with either a breakeven oil price below $50 per barrel or to Large SOEs. The breakeven prices have been calculated on a Debt Service Coverage ratio of 'one'. Debt Service Coverage ratio has been computed based on the amount of cash flow available to meet the annual interest and principal payments on debt if oil prices remain at the breakeven level for a period of up to 12 months. This analysis is conservative as it does not take into consideration refinancing options available to clients or their ability to defer capital expenditure to conserve cash.

Petroleum Refineries: As at 31 December 2014, the net exposure to Petroleum Refineries was $6.4 billion. The profitability of refiners is driven by gross refining margins and is not directly related to the crude oil prices. The gross refining margins have held steady despite the fall in crude oil prices.

Support Activities: As at 31 December 2014, the Support Activities portfolio consisted of $4.2 billion in shipping finance (including operating leases) and $3.7 billion relates to oilfield equipment manufacturers and other service providers.

The Shipping Finance portfolio consisted of Tankers ($1.6 billion), Offshore Support Vessels ($0.7 billion), Rigs and Drill Ships ($1.2 billion) and Floating Production Storage and Offloading ($0.7 billion). The net exposures to these sub-sectors are either to investment grade clients or backed by strong balance sheet or corporate guarantees. The exposures have high levels of collateralisation in the form of new/young vessels. 70 per cent of the exposures to oil field equipment manufacturers and service providers are investment grade.

Corporate clients with oil related hedges: The Group's counterparty credit risk exposure to corporate clients with oil related hedges has increased to $1.5 billion from $0.4 billion as oil prices have dropped over the last six months. Approximately 70 per cent of that increase is accounted for by six investment grade clients. All clients have continued to meet their trade settlement and collateral obligations as per the Credit Support Annexe (CSAs) to the International Swaps and Derivatives Association (ISDA).

China

The Group's total net exposure to China is $71 billion, down 10 per cent from 2013, of which $24 billion is financially booked in China and $47 billion in other locations. Of the total net exposure of $71 billion, $50 billion is loans and advances to customer and banks. 56 per cent of the total net exposure is attributable to Financial Institutions and 14 per cent is to the Central Government.

China's economic growth continued to slow down in response to the structural rebalancing of the economy towards consumption driven growth. The Group's growth in China over the last five years has focused on Financial Institutions as a result of the internationalisation of Renminbi. This has driven the growth in interbank placements and trade exposures (approximately 65 per cent of the exposure). The portfolio is short dated with 84 per cent having tenor of less than one year.

98 per cent of the Financial Institutions exposure is investment grade while 71 per cent is to the top five Chinese banks. The Group has internal caps on its exposure to Chinese banks and keeps the portfolio tenor short dated (80 per cent exposure to banks has a tenor of less than six months) and highly rated.

The corporate portfolio in China represented 34 per cent of total net exposure as at 31 December 2014 and has shown a modest deterioration in the weighted average credit grade of the portfolio given the slowdown in the economy. This deterioration was driven by credit migration of only 1.5 per cent of the corporate portfolio to the lowest performing credit grade (Grade 12), which is spread across 16 clients and 10 industries.

The following section presents details of the China Commodity portfolio for which the Group has been proactive in managing its exposures. We reduced exposures for the clients that are sub investment grade and are non Global Majors or non Large SOEs. Further, we have performed stress tests on our Commercial Real Estate portfolio and Non-SOEs portfolio and initiated actions to exit some clients in the process.

China commodities credit portfolio

Commodity exposures in China continue to be actively managed in response to slowdown in China and sustained fall in commodity prices. Our portfolio management actions were focused on the metals and mining sector where 23 client relationships have been exited and the net exposure reduced to $1.7 billion in last 12 months ($2.5 billion in 2013).

China Commodities Credit Portfolio	31.12.14	30.06.14	31.12.13	30.06.13
China Commodities Credit Portfolio	$billion	$billion	$billion	$billion
Commodity Producers	4.1	5.1	4.9	6.0
Commodity Traders	5.3	6.6	6.1	4.8
Net exposure	9.4	11.7	11.0	10.8
Tenor <1 year	94%	96%	89%	93%

China Commodity Producers credit portfolio: 79 per cent of the net exposure of $4.1 billion was attributable to clients that were either rated investment grade or were Global Majors or Large SOEs. 97 per cent of the remainder had a tenor less than one year, with the balance being accounted for by tightly structured secured project and corporate finance exposures.

China Commodity Producers Portfolio	31.12.14	30.06.14	31.12.13	30.06.13
Net exposure ($billion)	4.1	5.1	4.9	6.0
Investment Grade / Global Majors / Large SOEs	79%	70%	66%	68%
Rest of the portfolio with Tenor < 1 year
Rest of the portfolio with Tenor < 1 year	20%	28%	28%	26%

China Commodity Traders credit portfolio: 43 per cent of the net exposure of $5.3 billion was to clients that are either investment grade or to Global Majors and to Large SOEs. 93 per cent of the remainder had a tenor of less than one year. This sub investment portfolio is collateralized with cash $1.3 billion and third party guarantees $0.5 billion.

China Commodity Traders Credit Portfolio	31.12.14	30.06.14	31.12.13	30.06.13
Net exposure ($ billion)	5.3	6.6	6.1	4.8
Investment Grade / Global Majors / Large SOEs	43%	51%	49%	41%
Rest of the portfolio with Tenor < 1 year
Rest of the portfolio with Tenor < 1 year	53%	48%	48%	55%

India

India has faced a slowdown in economic growth since 2012, relative to the higher rates of previous years, combined with high indebtedness in some corporate sectors and tighter market liquidity conditions. We have been actively managing our India C&I and CC portfolio and exposures have reduced significantly since 2012. C&I and CC exposure reduced by a further 17 per cent to $35 billion over the course of 2014 (2013: $42 billion).

Since the general elections in April and May 2014, the economic outlook in India has been more positive as reflected by buoyant stock markets, an improving investment climate and increased demand for capital markets issuances. The drop in oil prices is also expected to provide a stimulus to the broader economy. However, the positive sentiment post the elections may take time to be reflected in client financials. Although we see no indication of further credit deterioration in our C&I and CC portfolios, we continue to closely monitor and reduce our exposure to weaker clients.

Europe

We have no direct sovereign exposure (as defined by the European Banking Authority (EBA)) to Greece, Ireland, Italy, Portugal or Spain. Our net exposure in these countries was less than $1.2 billion as at 31 December 2014 and was primarily to banks and related to trade finance and financial markets transactions. Our total net exposure to Greece was $6 million and we continue to monitor and respond to the recent developments around the potential Greek exit from the eurozone. Additionally we estimate minimal direct impact of the quantitative easing in the eurozone.

The direct exposures to Russian corporate clients are small, and are fully covered by export credit agency guarantees. Trading exposures denominated in Russian roubles are with major banks and are collateralised with USD cash.

The appreciation of the Swiss franc in January 2015 did not have a significant effect on the Group's clients. There were no instances of failed margin calls or failed trades.

Risk reviewcontinued

Retail Clients

The Retail Clients loans and advances portfolio remains diversified by geography and product. The portfolio composition remains unchanged over the year with mortgages accounting for 64 per cent (2013: 63 per cent) of the Retail portfolio. 64 per cent of the portfolio has tenor greater than five years on account of mortgages. 80 per cent (2013: 78 per cent) of Retail loans are fully secured and the overall loan to value ratio on our mortgage portfolio is 49 per cent (2013: 50 per cent).

Retail Clients loan impairment is stable at 94bps of average loans and advances (2013: 95bps) in spite of continued high levels of bankruptcy filings under the government's PDRS in Korea. The portfolio indicators such as 30 days and 90 days past due flow rates are broadly stable.

Mortgage portfolio and rising interest rates in key markets

The Retail Clients mortgage portfolio is well positioned in case of a fall in house prices or an increase in interest rates. In assessing prospective borrowers' ability to service debts, we assume stress interest rates well above prevailing rates. The average LTV ratio of the mortgage portfolio was less than 50 per cent with only 5 per cent of the portfolio having an LTV greater than 80 per cent. The value of exposures with an LTV greater than 100 per cent is minimal, and relates mainly to old vintages in the UAE. Majority of the residential mortgage portfolio is for owner occupation. We have stress tested our portfolio for a drop in property prices ranging from 15 per cent (such as Korea where prices have come off its peaks) to 30 per cent (Singapore, Hong Kong) and for a significant increase in interest rates in our key markets. The portfolio continues to remain resilient to these stress scenarios.

Unsecured portfolio

We are managing the Retail Clients Unsecured Portfolio against the backdrop of changes in regulatory environment in key markets and in order to manage overall customer indebtedness. Overall portfolio growth slowed in 2014 as a result of de-risking actions taken across many markets including Korea.

The portfolio performance indicators are continuously monitored with losses remaining stable.

The unsecured strategy is guided by a new decision framework to enable the new originations towards the Priority, High value customers, Employee banking segments, and customers with lower indebtedness.

The factors which underpin our confidence about the Retail unsecured portfolio are:

· The Credit Card and Personal Loan portfolio is profitable on a standalone basis and is diversified across markets

· Our new strategic focus on high value client segments and deepening client relationships

· The implementation of the unsecured risk decision framework which aims to:

o shape the business to deliver optimum risk-adjusted returns with a controlled level of volatility

o enhance the resilience and sustainability of the portfolio in slowdown scenarios

o leverage bureau data for enhanced credit decisioning and management with 94 per cent bureau coverage across our unsecured markets

Korea Personal Debt Rehabilitation Scheme

Korea has been the biggest source of the Group's elevated Retail Client impairment in the last two years. Although the levels of PDRS applications remain high, the actions taken to tighten underwriting standards since the beginning of 2014, have resulted in considerably lower match rates of our portfolio with PDRS filings. During the last six months, after adjusting for seasonally expected reductions, there has been an improvement in the Group's PDRS related impairment. The portfolio indicators are improving.

Risk reviewcontinued

Principal uncertainties

We are in the business of taking selected risks to generate shareholder value, and we seek to contain and mitigate these risks to ensure they remain within our risk appetite and are adequately compensated.

The key uncertainties we face in the coming year are set out below. This should not be regarded as a complete and comprehensive statement of all potential risks and uncertainties that we may experience.

Risk	Description	Mitigants
Deteriorating macroeconomic conditions in footprint countries	Deteriorating macroeconomic conditions can have an impact on our performance via their influence on personal expenditure and consumption patterns; demand for business products and services; the debt service burden of consumers and businesses; the general availability of credit for retail and corporate borrowers; and the availability of capital and liquidity funding for our business	We balance risk and return, taking account of changing conditions through the economic cycle We monitor economic trends in our markets very closely and continuously review the suitability of our risk policies and controls
Regulatory changes	The nature and impact of future changes in economic policies, laws and regulations are not predictable and may run counter to our strategic interests. These changes could also affect the volatility and liquidity of financial markets, and more generally the way we conduct business and manage capital and liquidity	We review key regulatory developments in order to anticipate changes and their potential impact on our performance Both unilaterally and through our participation in industry groups, we respond to consultation papers and discussions initiated by regulators and governments. The focus of these activities is to develop the framework for a stable and sustainable financial sector and global economy
Regulatory compliance	Although we seek to comply with all applicable laws and regulations, we are and may be subject to regulatory reviews and investigations by governmental and regulatory bodies, including in relation to US sanctions compliance and anti-money laundering controls. We cannot currently predict the nature or timing of the outcome of these matters. For sanctions compliance violations, there is a range of potential penalties which could ultimately include substantial monetary penalties, additional compliance and remediation requirements and/or additional business restrictions Regulators and other agencies in certain markets are conducting investigations into a number of areas of regulatory compliance and market conduct, including sales and trading, involving a range of financial products, and submissions made to set various market interest rates and other financial benchmarks, such as foreign exchange. Further details of material settlements and ongoing investigations are set out in Note 23 on page 93	We have established a Board-level Financial Crime Risk Committee and, since 2013 we have a Financial Crime Risk Mitigation Programme, which is a comprehensive, multi-year programme designed to review and enhance many aspects of our existing approach to money laundering prevention and to combating terrorism finance and the approach to sanctions compliance and the prevention of bribery and corruption We are contributing to industry proposals to strengthen financial benchmarks processes in certain markets and continue to review our practices and processes in the light of the investigations, reviews and industry proposals We are cooperating with all relevant ongoing reviews, requests for information and investigations In meeting regulatory expectations and demonstrating active risk management, the Group also takes steps to restrict or restructure or otherwise to mitigate higher risk business activities which could include divesting or closing businesses that exist beyond risk tolerances.

Risk reviewcontinued

Risk	Description	Mitigants
Financial markets dislocation	Financial markets volatility or a sudden dislocation could affect our performance, through its impact on the mark-to-market valuations of assets in our available-for-sale and trading portfolios or the availability of capital or liquidity Financial markets instability also increases the likelihood of default by our corporate customers and financial institution counterparties	We stress test our market risk exposures to highlight the potential impact of extreme market events on those exposures and to confirm that they are within authorised stress triggers. Stress scenarios are regularly updated to reflect changes in risk profile and economic events. Where necessary, overall reductions in market risk exposure are enforced We assess carefully the performance of our financial institution counterparties, rate them internally according to their systemic importance and adjust our exposure accordingly We maintain robust processes to assess the suitability and appropriateness of products and services we provide to our clients and customers
Geo-political events	We face a risk that geo-political tensions or conflict in our footprint could impact trade flows, our customers' ability to pay and our ability to manage capital across borders	We actively monitor the political situation in all of our principal markets and conduct regular stress tests of the impact of such events on our portfolios, which inform assessments of risk appetite and any need to take mitigating action
Risk of fraud and other criminal acts	The banking industry has long been a target for third parties seeking to defraud, to disrupt legitimate economic activity, or to facilitate other illegal activities. The risk posed by such criminal activity is growing as criminals become more sophisticated and as they take advantage of the increasing use of technology and the internet. The incidence of cyber crime is rising, becoming more globally co-ordinated, and is a challenge for all organisations	We seek to be vigilant to the risk of internal and external crime in our management of people, processes, systems and in our dealings with customers and other stakeholders We have a broad range of measures in place to monitor and mitigate this risk. Controls are embedded in our policies and procedures across a wide range of the Group's activities, such as origination, recruitment, physical and information security We have a broad set of techniques, tools and activities to detect and respond to cyber crime, in its many forms. We actively collaborate with our peers, regulators and other expert bodies as part of our response to this risk
Exchange rate movements	Changes in exchange rates affect the value of our assets and liabilities denominated in foreign currencies, as well as the earnings reported by our non-US dollar denominated branches and subsidiaries Sharp currency movements can also impact trade flows and the wealth of clients, both of which could have an impact on our performance	We actively monitor exchange rate movements and adjust our exposure accordingly Under certain circumstances, we may take the decision to hedge our foreign exchange exposures in order to protect our capital ratios from the effects of changes in exchange rates

Risk reviewcontinued

Risk profile

The balance sheet and income statement information presented within the "Risk Profile" is based on the booking location of the instrument and not the location of its customer. Accordingly, where income statement information is presented by geographic region, the accounts will differ to the "Financial Review" which is based on its customer location. The "Client segment by geographic region" table on page 41 provides a split of loans and advances to customers and banks by both booking and customer location.

Credit portfolio

The following pages provide detail of credit exposure split as follows:

o Loan portfolio overview, which provides analysis of the loan portfolio by client segment, by geographic region, by industry and retail product, and by loan maturity (pages 41-43)

o Credit risk mitigation, which provides analysis of collateral held by client segment and collateral type, and details of loan to value ratios and other forms of credit risk mitigation (pages 44-46)

o Credit quality, which provides an analysis of the loan portfolio by credit grade (pages 48-49)

o Problem credit management and provisioning, which provides an analysis of non-performing loans and impaired loans (pages 50-52)

Credit risk is the potential for loss due to the failure of a counterparty to meet its obligations to pay the Group in accordance with agreed terms. Credit exposures arise from both the banking and trading books.

Our credit portfolio remains well diversified and predominantly short-term, with high levels of collateralisation for longer term and non-investment grade loans. We have consistently maintained our focus on chosen clients in our core markets and our disciplined approach to risk management.

Restatement of prior year

In January 2014, Group announced a change to its organisation structure effective 1 April 2014. To aid historic comparisons the Group's results restate segmental information for 31 December 2013 under the new client segments and global products groups, and the geographic regions. During the year, industry classifications for Corporate and Institutional Clients segment and Commercial Clients segment were aligned to internal classification resulting in a re-presentation for 2013. In addition, all the geographic disclosures from pages 41 to 43 are presented on a booking location basis. Certain geographic balances in 2013, which were presented on a customer location have been re-presented accordingly.
Loan portfolio

This section provides qualitative and quantitative information on the Group's exposure to credit risk for loans and advances to banks and customers, including the impact of credit risk mitigation and problem credit management. Our credit portfolio remains well diversified and predominantly short-term.

The loan portfolio summarised by segment and by credit quality (neither past due nor impaired; past due; and impaired) on pages 48 and 49. The Group manages its loan portfolio between those assets that are performing in line with their contractual terms (whether original or renegotiated) and those that are non-performing. Corporate & Institutional Clients (C&I) and Commercial Clients (CC) exposures are typically managed on an individual basis and consequently credit grade migration is a key component of credit risk management. In Retail, where loans are typically managed on a portfolio basis, delinquency trends are monitored consistently as part of risk management. In both businesses, credit risk is mitigated to some degree through collateral, further details of which are set out on page 44.

This section covers a summary of the Group's loan portfolio broadly analysed by business and geography, along with an analysis of the maturity profile, credit quality and provisioning of the loan book.

Client segment by geographic region analysis

Loans and advances to customers (net of individual impairment and portfolio impairment provisions) decreased by $7.4 billion since December 2013. This reduction was primarily within the CC segment ($3.2 billion) and the C&I segment ($2.9 billion) as a result of portfolio management actions in key markets and sectors experiencing a prolonged slow down. The growth in this period was largely in financing, insurance and business services.

The growth in loans to banks of $1.3 billion since December 2013 was primarily across ASEAN ($5.6 billion) and Greater China ($0.8 billion) offset by a reduction in Europe of $3.8 billion. This is mostly due to liquidity management activity of the Group. Given the nature of the book, it is predominantly short term and the maturity profile remains consistent period on period.

The Private Banking Client segment grew by $0.9 billion from December 2013 primarily through its operations in Singapore and Hong Kong.

For the Private Banking and Retail client segments, client loans are analysed by product. The reduction in unsecured lending, which includes CCPL, was mainly in North East Asia region. This was partly offset by growth in Mortgages, especially in Hong Kong although regulatory cooling measures in several markets tempered the related growth opportunities.

Overall the regional split of our loans and advances to customers is very similar to 2013 and our loan portfolio remains well diversified across our footprint countries, with our largest single country representing 22 per cent of loans and advances to customers and banks.

Loan Portfolio continued
Client segment by geographic region
	2014
	Greater China	North East Asia	South Asia	ASEAN	MENAP	Africa	Americas	Europe	Total
	$million	$million	$million	$million	$million	$million	$million	$million	$million
Corporate and Institutional	37,253	7,882	8,093	37,419	12,136	5,894	10,964	38,657	158,298
Commercial	5,395	3,176	2,036	2,234	1,106	669	-	74	14,690
Private banking	3,494	-	167	9,732	274	-	-	4,391	18,058
Retail	41,408	18,633	4,272	27,220	4,869	1,845	-	2	98,249
	87,550	29,691	14,568	76,605	18,385	8,408	10,964	43,124	289,295
Portfolio impairment provision	(98)	(75)	(56)	(201)	(78)	(47)	(9)	(132)	(696)
Total loans and advances to customers^1,2	87,452	29,616	14,512	76,404	18,307	8,361	10,955	42,992	288,599
Intra-segmental balance	2,194	(34)	8,347	2,137	4,468	4,742	(3)	(21,851)	-
Total loans and advances to customers^1,3	89,646	29,582	22,859	78,541	22,775	13,103	10,952	21,141	288,599
Total loans and advances to banks^1,2	28,758	5,997	488	12,388	1,603	940	12,661	24,665	87,500

	2013
	Greater China	North East Asia	South Asia	ASEAN	MENAP	Africa	Americas	Europe	Total
	$million	$million	$million	$million	$million	$million	$million	$million	$million
Corporate and Institutional	37,428	7,297	7,394	41,649	12,192	5,658	10,681	38,894	161,193
Commercial	6,406	3,109	2,340	3,249	1,274	672	-	791	17,841
Private banking	3,003	33	131	9,020	250	-	-	4,723	17,160
Retail	40,936	20,283	4,295	28,337	4,708	1,696	-	262	100,517
	87,773	30,722	14,160	82,255	18,424	8,026	10,681	44,670	296,711
Portfolio impairment provision	(146)	(107)	(53)	(152)	(85)	(68)	(6)	(79)	(696)
Total loans and advances to customers^1,2	87,627	30,615	14,107	82,103	18,339	7,958	10,675	44,591	296,015
Intra-segmental balance	2,219	3	11,501	749	5,196	5,164	(246)	(24,586)	-
Total loans and advances to customers^1,3	89,846	30,618	25,608	82,852	23,535	13,122	10,429	20,005	296,015
Total loans and advances to banks^1,2	27,905	6,561	575	6,776	2,097	742	13,067	28,446	86,169

¹ Amounts net of individual impairment provision and include financial instruments held at fair value through profit or loss (see note 12 on page 80)

²The disclosures in the risk profile section are presented on the basis of booking location and not customer location

³ These balances are based on the location of the customer

Industry and Retail products analysis by geographic region

In the Corporate and Institutional Clients and Commercial Clients portfolio, our largest industry exposure remained Energy, which constitutes 16 per cent of corporate loans and advances (2013: 17 per cent. The Energy industry lending is spread across five sub-sectors and over 380 client groups, and 55 per cent mature within one year.

The Manufacturing sector makes up 15 per cent of the Corporate and Institutional and Commercial Clients loans and advances (2013: 16 per cent). The Manufacturing industry group is spread across a diverse range of industries, including Automobiles & Components, Capital goods, Pharmaceuticals Biotech & life sciences, Technology hardware & equipments, Chemicals, paper products and packaging, with lending spread over 4,390 clients.

Lending to Financing, Insurance and non-banking clients is mostly to investment grade institutions and is part of the liquidity management of the Group.

The Group provides loans to commercial real estate (CRE) counterparties of $16.1 billion (2013: $16.9) billon, which represents less than 6 per cent of total customer loans and advances and less than 3 per cent of assets. Loans greater than 5 years are less than 10 per cent of the CRE portfolio.

$6.8 billion of this lending is to counterparties where the source of repayment is substantially derived from rental or sale of real estate and is secured by real estate collateral. The remaining CRE loans comprise working capital loans to real estate corporates, loans with non-property collateral, unsecured loans and loans to real estate entities of diversified conglomerates.

Industry and Retail products analysis by geographic region

	2014
	Greater China	North East Asia	South Asia	ASEAN	MENAP	Africa	Americas	Europe	Total
	$million	$million	$million	$million	$million	$million	$million	$million	$million
Industry:
Energy	1,470	310	123	9,006	1,228	533	3,206	11,347	27,223
Manufacturing	9,456	2,419	2,452	4,337	2,239	1,031	1,031	3,838	26,803
Financing, insurance and non-banking	5,856	995	431	5,497	1,136	628	3,507	7,336	25,386
Transport, telecom and utilities	3,715	1,602	922	3,706	1,210	662	612	6,176	18,605
Food and household products	2,589	313	929	5,034	1,381	1,346	1,438	1,302	14,332
Commercial real estate	6,876	2,190	1,503	3,798	1,133	79	-	485	16,064
Mining and Quarrying	3,383	649	922	2,186	512	764	273	4,123	12,812
Consumer durables	5,076	659	1,291	1,170	1,385	439	404	1,752	12,176
Construction	1,169	486	897	1,178	1,352	252	20	1,095	6,449
Trading Companies & Distributors	1,419	400	232	932	719	418	56	114	4,290
Government	536	368	5	1,206	230	19	220	165	2,749
Other	1,103	667	422	1,603	717	392	197	998	6,099
Retail Products:
Mortgages	34,381	12,918	2,366	20,724	1,853	345	-	1,320	73,907
CCPL and other unsecured lending	6,673	4,407	987	4,850	2,096	1,425	-	51	20,489
Auto	-	-	40	631	339	6	-	-	1,016
Secured Wealth Products	3,466	74	70	9,385	805	-	-	1,455	15,255
Other	382	1,234	976	1,362	50	69	-	1,567	5,640
	87,550	29,691	14,568	76,605	18,385	8,408	10,964	43,124	289,295
Portfolio impairment provision	(98)	(75)	(56)	(201)	(78)	(47)	(9)	(132)	(696)
Total loans and advances to customers¹	87,452	29,616	14,512	76,404	18,307	8,361	10,955	42,992	288,599

Total loans and advances to banks¹	28,758	5,997	488	12,388	1,603	940	12,661	24,665	87,500
¹The disclosures in the risk profile section are presented on the basis of booking location and not customer location

The unsecured portion of the Retail products portfolio has reduced from 21 to 19 per cent of the Retail loans and advances and is spread across multiple products in over 30 markets. There has otherwise been no significant change in the shape of our retail products portfolio. The decrease in North East Asia and ASEAN unsecured lending was a result of de-risking portfolio management actions taken in Korea.

Industry and Retail product analysis by geographic region continued

	2013
	Greater China	North East Asia	South Asia	ASEAN	MENAP	Africa	Americas	Europe	Total
	$million	$million	$million	$million	$million	$million	$million	$million	$million
Industry¹:
Energy	1,999	356	160	10,491	1,496	345	3,434	12,260	30,541
Manufacturing	9,975	3,314	2,311	4,355	1,775	1,278	1,387	3,683	28,078
Financing, insurance and non-banking	5,087	402	152	2,136	1,543	344	1,966	3,942	15,572
Transport, telecom and utilities	3,814	1,199	912	4,751	1,123	475	880	7,152	20,306
Food and household products	3,243	302	808	8,538	1,109	1,608	1,386	1,553	18,547
Commercial real estate	6,743	2,097	1,426	3,954	1,302	89	-	1,318	16,929
Mining and Quarrying	3,712	720	835	2,738	500	945	762	5,758	15,970
Consumer durables	5,344	637	1,432	1,338	1,358	230	529	2,137	13,005
Construction	1,198	478	955	864	1,803	178	20	777	6,273
Trading Companies & Distributors	1,167	354	321	2,739	706	419	124	109	5,939
Government	141	-	7	1,483	215	11	48	115	2,020
Other	1,411	547	415	1,511	536	408	145	881	5,854
Retail Products:
Mortgages	32,940	12,821	2,298	21,636	1,753	293	-	1,355	73,096
CCPL and other unsecured lending	7,672	5,586	1,161	5,617	2,102	1,399	-	271	23,808
Auto	-	1	44	914	321	4	-	-	1,284
Secured Wealth Products	2,821	105	63	7,721	603	-	-	1,532	12,850
Other	506	1,803	860	1,469	179	-	-	1,822	6,639
	87,773	30,722	14,160	82,255	18,424	8,026	10,681	44,670	296,711
Portfolio impairment provision	(146)	(107)	(53)	(152)	(85)	(68)	(6)	(79)	(696)
Total loans and advances to customers²	87,627	30,615	14,107	82,103	18,339	7,958	10,675	44,591	296,015

Total loans and advances to banks¹	27,905	6,561	575	6,776	2,097	742	13,067	28,446	86,169

¹During 2014, industry classifications for Corporate and Institutional and Commercial clients segments have been aligned to internal classifications, resulting in a re-presentation of industry classifications for 2013

²The disclosures in the risk profile section are presented on the basis of booking location and not customer location

Credit risk mitigation

Potential credit losses from any given account, customer or portfolio are mitigated using a range of tools such as collateral, netting arrangements, credit insurance, credit derivatives and guarantees. The reliance that can be placed on these mitigants is carefully assessed in light of issues such as legal certainty and enforceability, market valuation correlation and counterparty risk of the guarantor.

Collateral

The requirement for collateral is not a substitute for the ability to pay, which is the primary consideration for any lending decision.

As a result of reinforcing our collateralisation requirements, the fair value of collateral held has increased by 4 per cent since 2013.

The collateral values in the below table are adjusted where appropriate in accordance with our risk mitigation policy and for the effect of over-collateralisation. Exposures for 53 per cent of clients that have placed collateral with the Group are over-collateralised. The average amount of over collateralisation is 42 per cent.

The unadjusted market value of collateral in respect of Corporate and Institutional and Commercial Clients without adjusting for over-collateralisation, was $212 billion (2013: $190 billion).

We have remained conservative in the way we assess the value of collateral, which is calibrated to a severe downturn and back-tested against our prior experience. On average across all types of collateral, the value ascribed approximately half of its current market value.

The decrease of commodities from 6 per cent to 3 per cent of collateral balances is a direct result of our overall reduction in commodity-related exposure. The increase of reverse repo and securities collateral from 27 per cent to 36 per cent represents an increase in the deployment of liquidity by ALM to Corporate & Institutional Clients and Commercial Clients.

The average loan to value (LTV) ratio of the commercial real estate portfolio has remained relatively stable at 39.9 per cent, compared with 41.1 per cent in 2013. The proportion of loans with an LTV greater than 80 per cent has remained below 1 per cent during the same period.

In the Retail and Private Banking Client segments, a secured loan is one where the borrower pledges an asset as collateral which the Group is able to take possession in the event that the borrower defaults.

The collateral levels for Retail have remained stable compared to 2013.

For Retail, all secured loans are considered fully secured if the fair value of the collateral is equal to or greater than the loan at the time of origination. 19 per cent of the Group's retail product exposures are unsecured, compared to 21 per cent in 2013.

See details on page 45, which presents a detailed analysis of loans to individuals by product, split between fully secured, partially secured and unsecured.

For Mortgage loans, the value of property held as security significantly exceeds the value of mortgage loans. LTV ratios measure the ratio of the current mortgage outstanding to the current fair value of the properties on which they are secured. The overall LTV ratio on our mortgage portfolio is less than 50 per cent, relatively unchanged since the end of 2013. Our major mortgage markets of Hong Kong, Korea and Taiwan have an average LTV of less than 50 per cent. Compared with December 2013, the proportion of the portfolio with LTVs in excess of 100 per cent, primarily within the MENAP region, has declined from 6.3 per cent to 4.1 per cent due to improving economic conditions, particularly in the UAE.

See details on page 46, which presents an analysis of loan to value ratios by geography for the mortgage portfolio.

For loans and advances to banks and customers (including those held at fair value through profit or loss), the table below sets out the fair value of collateral held by the Group adjusted where appropriate in accordance with the risk mitigation policy and for the effect of over-collateralisation.

	Collateral			Amount Outstanding¹
		Of which			Of which
	Total	Past due but not individually impaired loans	Individually impaired loans	Total	Past due but not individually impaired loans	Individually impaired loans
	$million	$million	$million	$million	$million	$million
As at 31 December 2014
Corporate & Institutional²	64,343	228	837	245,800	1,847	6,094
Commercial	6,034	927	253	14,690	454	1,068
Private Banking	12,905	220	40	18,058	140	91
Retail	76,194	2,053	360	98,249	2,928	846
Total	159,476	3,428	1,490	376,797	5,369	8,099
As at 31 December 2013
Corporate & Institutional²	61,484	623	642	247,364	3,331	5,018
Commercial	6,422	454	156	17,841	519	963
Private Banking	13,435	149	65	17,160	85	93
Retail	71,585	2,305	396	100,517	3,360	898
Total	152,926	3,531	1,259	382,882	7,295	6,972

¹ Includes loans held at fair value through profit or loss

²Includes loans and advances to banks

Corporate and Institutional and Commercial Clients

Collateral held against Corporate and Institutional and Commercial Client exposures amounted to $70 billion (2013: $68 billion).

Our underwriting standards encourage taking specific charges on assets and we consistently seek high quality, investment grade secured collateral. 46 per cent of collateral held is comprised of physical assets or is property based, with the remainder held largely in cash and investment securities.

Non-tangible collateral - such as guarantees and letters of credit - may also be held against corporate exposures although the financial effect of this type of collateral is less significant in terms

of recoveries. However this type of collateral is considered when determining probability of default and other credit related factors.

Collateral taken for longer term and non-investment grade loans continues to be high at 59 per cent (63 per cent in 2013). Collateral is also held against off-balance sheet exposures including undrawn commitments and trade related instruments.

The proportion of highly rated securities of 24 per cent on collateral increased from 14 per cent compared to December 2013 due to higher levels of reverse repurchase transactions.

The following table provides an analysis of the types of collateral held against Corporate and Institutional and Commercial Clients loan exposures:


		2014	2013
		$million	$million
	Property	16,438	18,490
	Plant, machinery and other stock	5,498	6,059
	Cash	12,594	13,444
	Reverse repo & Securities	25,641	18,353
	AAA	4	45
	AA- to AA+	17,188	9,651
	BBB- to BBB+	3,062	2,758
	Lower than BBB-	997	865
	Unrated	4,390	5,034
	Commodities	2,426	4,038
	Ships and aircraft	7,780	7,522
Total value of collateral		70,377	67,906

Commercial real estate (CRE)

The Group has lending to CRE counterparties of $16.1 billion (2013: $16.9 billion). Of this, $6.8 billion is to counterparties where the source of repayment is substantially derived from rental or sale of real estate and is secured by real estate collateral. The remaining CRE lending comprises working capital loans to real estate corporates, loan with non-property collateral, unsecured loans and loans to real estate entities of diversified conglomerates.

Retail and Private Banking Clients loan portfolio

The following tables present an analysis of loans to individuals by product split between fully secured, partially secured and unsecured:


		2014				2013
		Fully secured	Partially secured	Unsecured	Total¹	Fully secured	Partially secured	Unsecured	Total¹
		$million	$million	$million	$million	$million	$million	$million	$million
Loans to individuals
Mortgages		73,907	-	-	73,907	73,096	-	-	73,096
Credit card and personal loans		4	-	20,485	20,489	5	-	23,803	23,808
Auto		1,016	-	-	1,016	1,284	-	-	1,284
Secured wealth products		15,255	-	-	15,255	12,850	-	-	12,850
Other		2,783	1,494	1,363	5,640	4,729	1,462	448	6,639
		92,965	1,494	21,848	116,307	91,964	1,462	24,251	117,677
Percentage of total loans		80%	1%	19%		78%	1%	21%
¹	Amounts net of individual impairment provisions

Credit risk mitigation continued

Mortgage loan-to-value ratios by geographic region

The following table provides an analysis of loan to value (LTV) ratios by geography for the mortgages portfolio.


	2014
	Greater China	North East Asia	South Asia	ASEAN	MENAP	Africa	Americas	Europe	Total
	%	%	%	%	%	%	%	%	%
Average Portfolio loan to value	44.0	50.0	38.7	56.4	61.4	58.2	-	51.5	49.3
Loans to individuals - Mortgages ($million)	34,381	12,918	2,366	20,724	1,853	345	-	1,320	73,907

	2013
	Greater China	North East Asia	South Asia	ASEAN	MENAP	Africa	Americas	Europe	Total
	%	%	%	%	%	%	%	%	%
Average Portfolio loan to value	45.6	49.3	40.5	56.0	62.1	64.3	-	57.8	49.9
Loans to individuals - Mortgages ($million)	32,940	12,821	2,298	21,636	1,753	293	-	1,355	73,096

Credit quality analysis

An overall breakdown of the loan portfolio by client segment is set out on pages 48 and 49, differentiating between the performing and non performing book.

Within the performing book, there is an analysis:

· By credit grade, which plays a central role in the quality assessment and monitoring of risk in pages 48 and 49

· Of loans and advances past due but not impaired: a loan is considered past due if payment of principal or interest has not been made on its contractual due date

· Of loans and advances where an impairment provision has been raised - these represent certain forborne accounts which have complied with their revised contractual terms for more than 180 days and on which no loss of principal is expected

Non-performing loans are analysed, net of individual impairment provisions between what is past due but not impaired and what is impaired.

Credit grade migration

Performing loans that are neither past due nor impaired constitutes 97 per cent of customer loans and this is consistent with past periods (2013: 96 per cent). Overall credit quality has also remained stable, with the average credit grade of the corporate loan portfolio remaining at 8B, unchanged since 2013.

All loans are assigned a credit grade, which is reviewed periodically and amended in light of changes in the borrower's circumstances or behaviour. Credit grades 1-12 are assigned to performing clients or accounts, while credit grades 13 and 14 are assigned to non-performing or defaulted clients.

Credit grade migration trends have also been stable across most countries, although there has been some deterioration in India and China, related to the slower economic growth in those countries (see details on pages 35- 36). The increase in CG12 balances in 2014 is principally due to the downgrade of a small number of connected exposures. Excluding this, the credit grade composition across all client segments is consistent with the prior year. In respect of loans to banks, the credit quality composition is also consistent with prior periods with most of the growth in this period being in Credit Grade 1 to 5.

Retail Clients credit quality composition remained stable over last year. The increase in Credit Grade 1 to 5 was mainly due a rerating of the mortgage portfolio in Hong Kong.

Performing loans and advances "past due but not impaired" are $1.9 billion lower than 2013, with decreases across all categories. The past due balances arise substantially in the "up to 30 days past due" category. In the Retail client segment, these primarily relate to loans where there is a temporary timing difference in payments. In the Corporate & Institutional and Commercial Client segments, across all past due categories approximately 74 per cent of the amounts past due were regularised by 31 January 2015.

Non performing loans

Non-performing loans (net of individual impairment provisions) are higher by $585 million. This increase is primarily in the Corporate & Institutional Clients and Commercial Clients segments and is driven by a small number of large exposures financially booked in Europe, Greater China and ASEAN. Details and further analysis of gross and net non-performing loans by client segment and by geography are provided on pages 50 and 51.

A non-performing loan is any loan that is more than 90 days past due or is otherwise individually impaired. This excludes loans renegotiated at or after 90 days past due, but on which there has been no default in interest or principal payments for more than 180 days since renegotiation, and against which no loss of principal is expected. These loans may have a provision reflecting the time value of money and if so, are reported as part of forborne loans. Renegotiated and forborne loans included in these amounts are consistent with the level seen as at 31 December 2013.

Other renegotiated and forborne loans are relatively stable since 2013.

Loan impairment

The total loan impairment losses and other credit risk provisions on loans and advances charge for 2014 has increased by $524 million, or 32 per cent, to $2.1 billion compared to 2013. This represents 72 basis points of average customer loans and advances.

In Corporate and Institutional Clients and Commercial Clients, total loan impairment provisions on balance sheet have increased by $415 million, or 18 per cent, compared to 31 December 2013. The provisions were due to a small number of exposures in Europe, ASEAN and Greater China. Loan impairment for Corporate and Institutional and Commercial Clients represents 67 basis points of average customer loans and advances.

In Retail Clients, total individual impairment provisions were marginally lower than 2013. Impairments from Korea Personal Debt Rehabilitation Scheme (PDRS) filings remain broadly stable and there were modest improvements in some other markets. Portfolio impairment provisions also reduced as we reduced high risk personal loans exposure. We remain disciplined in our approach to risk management and proactive in our collection efforts to minimise account delinquencies.

Other impairment, excluding goodwill impairment, has increased by $274 million to $403 million reflecting the write-down of commodity assets arising from a fraud in Greater China and certain strategic and associate investments.

Portfolio impairment provision

A Portfolio Impairment Provision (PIP) is held to cover the inherent risk of losses which, although not identified, are known through experience to be present in any loan portfolio. PIP balances have remained the same in 2014. The increase in PIP balances in the Corporate & Institutional and Commercial Client segments is offset by the decrease in the PIP balance of for the Retail Client segment reflecting the impact of de-risking and classification of assets as held for sale.

Cover ratio

The cover ratio measures the proportion of total impairment provisions to gross non-performing loans, and is a metric commonly used in considering impairment trends. This metric does not allow for variations in the composition of non-performing loans and should be used in conjunction with other credit risk information provided, including the level of collateral cover.

The cover ratio before collateral for Retail Clients increased to 91 per cent (2013: 86 per cent). The cover ratio before collateral for Corporate and Institutional Clients was lower at 46 per cent compared to 2013. The Commercial Clients and Private Banking segment cover ratios before collateral also increased to 51 per cent and 67 per cent respectively since 2013.

The balance of non-performing loans not covered by individual impairment provisions represents the adjusted value of collateral held and the Group's estimate of the net outcome of any workout or recovery strategy. The cover ratio after taking into account collateral but excluding portfolio impairment provisions for Corporate and Institutional Clients is 55 per cent (2013: 56 per cent) and for Commercial Clients is 71 per cent (2013: 59 per cent).

As highlighted on page 44, collateral provides risk mitigation to some degree in all client segments and better supports the credit quality and cover ratio assessments post impairment provisions. Details are provided on page 50.

Credit quality analysis continued
By Client segment
	2014
		Loans to Customers
	Loans to banks	Corporate and Institutional	Commercial	Private Banking	Retail Clients	Total
	$million	$million	$million	$million	$million	$million
Performing Loans
Neither past due nor impaired
- Grades 1-5	79,001	65,551	775	3,115	65,467	134,908
- Grades 6-8	6,456	61,863	5,413	14,648	14,472	96,396
- Grades 9-11	1,871	20,879	7,377	120	14,050	42,426
- Grade 12	28	4,545	126	3	944	5,618
	87,356	152,838	13,691	17,886	94,933	279,348
of the above, renegotiated loans	-	4,277	17	-	262	4,556
Past due but not impaired
- Up to 30 days past due	40	1,467	344	139	2,187	4,137
- 31 - 60 days past due	-	183	60	1	400	644
- 61 - 90 days past due	3	154	23	-	179	356
	43	1,804	427	140	2,766	5,137
of the above, renegotiated loans	-	106	10	-	61	177
Impaired forborne loans, net of provisions	-	479	-	-	153	632

Total performing loans	87,399	155,121	14,118	18,026	97,852	285,117

Non-performing Loans
Past due but not impaired
- 91 - 120 days past due	-	-	2	-	96	98
-121 - 150 days past due	-	-	25	-	66	91
	-	-	27	-	162	189

Individually impaired loans, net of provisions	103	3,177	545	32	235	3,989
of the above, forborne loans	-	1,072	48	-	225	1,345

Total non-performing loans, net of individual impairment	103	3,177	572	32	397	4,178

Total loans and advances	87,502	158,298	14,690	18,058	98,249	289,295
Portfolio impairment provision	(2)	(328)	(39)	(2)	(327)	(696)
Total net loans and advances	87,500	157,970	14,651	18,056	97,922	288,599

The following table sets out loans and advances held at fair value through profit and loss which are included within the table above

Neither past due nor impaired
- Grades 1-5	3,293	1,651	-	-	-	1,651
- Grades 6-8	317	1,415	-	-	-	1,415
- Grades 9-11	-	320	-	-	-	320
- Grade 12	-	100	-	-	-	100
	3,610	3,486	-	-	-	3,486
Past due but not impaired
- Up to 30 days past due	-	-	-	-	-	-

Individually impaired loans	-	418	-	-	-	418

Credit quality analysis continued
	2013
		Loans to Customers
	Loans to banks	Corporate and Institutional	Commercial	Private Banking	Retail Clients	Total
	$million	$million	$million	$million	$million	$million
Performing Loans
Neither past due nor impaired
- Grades 1-5	73,862	61,425	1,326	3,709	54,141	120,601
- Grades 6-8	10,325	66,195	6,812	13,169	24,988	111,164
- Grades 9-11	1,825	25,614	8,348	87	15,236	49,285
- Grade 12	35	1,661	295	69	2,342	4,367
	86,047	154,895	16,781	17,034	96,707	285,417
of the above, renegotiated loans	-	4,208	26	-	388	4,622
Past due but not impaired
- Up to 30 days past due	17	2,463	422	42	2,548	5,475
- 31 - 60 days past due	-	272	59	38	418	787
- 61 - 90 days past due	-	579	33	4	202	818
	17	3,314	514	84	3,168	7,080
of the above, renegotiated loans	-	583	-	-	-	583
Impaired forborne loans, net of provisions	-	474	1	-	150	625

Total performing loans	86,064	158,683	17,296	17,118	100,025	293,122

Non-performing Loans
Past due but not impaired
- 91 - 120 days past due	-	-	-	-	115	115
-121 - 150 days past due	-	-	5	1	77	83
	-	-	5	1	192	198

Individually impaired loans, net of provisions	107	2,510	540	41	300	3,391
of the above, forborne loans	-	801	61	-	461	1,323

Total non-performing loans, net of individual impairment	107	2,510	545	42	492	3,589

Total loans and advances	86,171	161,193	17,841	17,160	100,517	296,711
Portfolio impairment provision	(2)	(287)	(39)	(1)	(369)	(696)
Total net loans and advances	86,169	160,906	17,802	17,159	100,148	296,015

The following table sets out loans and advances held at fair value through profit and loss which are included within the table above

Neither past due nor impaired
- Grades 1-5	2,271	1,026	-	-	-	1,026
- Grades 6-8	196	3,321	-	-	-	3,321
- Grades 9-11	-	211	-	-	-	211
- Grade 12	-	25	-	-	-	25
	2,467	4,583	-	-	-	4,583
Past due but not impaired
- Up to 30 days past due	-	405	-	-	-	405

Individually impaired loans	-	319	-	-	-	319

Problem credit management and provisioning

Non-performing loans by client segment

The table below presents a movement of the gross non- performing loans to banks and customers, together with the provisions held, for all segments and the respective cover ratios.

		2014
		Corporate and Institutional	Commercial	Private Banking	Retail	Total
		$million	$million	$million	$million	$million

Gross non-performing loans at 31 December		5,510	1,095	90	797	7,492
Individual impairment provisions¹		(2,230)	(523)	(58)	(400)	(3,211)
Net non-performing loans		3,280	572	32	397	4,281
Portfolio impairment provision (PIP)		(330)	(39)	(2)	(327)	(698)
Total		2,950	533	30	70	3,583
Cover ratio		46%	51%	67%	91%	52%
Collateral ($million)		809	253	40	360	1,462
Cover ratio (after collateral excl. PIP)		55%	71%	nm²	95%	62%
		2013
		Corporate and Institutional	Commercial	Private Banking	Retail	Total
		$million	$million	$million	$million	$million

Gross non-performing loans at 31 December		4,541	959	94	885	6,479
Individual impairment provisions¹		(1,924)	(414)	(52)	(393)	(2,783)
Net non-performing loans		2,617	545	42	492	3,696
Portfolio impairment provision (PIP)		(289)	(39)	(1)	(369)	(698)
Total		2,328	506	41	123	2,998
Cover ratio		49%	47%	56%	86%	54%
Collateral ($million)		614	156	65	396	1,231
Cover ratio (after collateral excl. PIP)		56%	59%	nm²	89%	62%
	¹ The difference to total individual impairment provision reflects provisions against performing forborne loans that are not included within non- performing loans as they have been performing for 180 days ² not meaningful

Non-performing loans by geographic region

Gross non-performing loans increased by $1,013 million, or 16 per cent, since 2013. These increases were primarily driven by a small number of large exposures in Europe, ASEAN and Greater China.

The following tables set out the total non-performing loans to banks and customers on the basis of the geographic regions:


	31.12.2014
	Greater China	North East Asia	South Asia	ASEAN	MENAP	Africa	Americas	Europe	Total
	$million	$million	$million	$million	$million	$million	$million	$million	$million
Loans and advances
Gross non-performing¹	668	448	1,159	1,396	1,643	478	37	1,663	7,492
Individual impairment provision²	(321)	(288)	(450)	(519)	(936)	(115)	-	(582)	(3,211)
Net non-performing loans	347	160	709	877	707	363	37	1,081	4,281
Portfolio impairment provision	(98)	(75)	(56)	(202)	(79)	(47)	(9)	(132)	(698)
Total	249	85	653	675	628	316	28	949	3,583
Cover ratio	63%	81%	44%	52%	62%	34%	24%	43%	52%

Problem credit management and provisioning continued

Non-performing loans by geographic region continued


	30.06.2014
	Greater China	North East Asia	South Asia	ASEAN	MENAP	Africa	Americas	Europe	Total
	$million	$million	$million	$million	$million	$million	$million	$million	$million
Loans and advances
Gross non-performing¹	515	644	1,131	1,230	1,733	471	1	1,460	7,185
Individual impairment provision²	(244)	(353)	(397)	(481)	(1,113)	(90)	(1)	(377)	(3,056)
Net non-performing loans	271	291	734	749	620	381	-	1,083	4,129
Portfolio impairment provision	(142)	(105)	(65)	(174)	(70)	(65)	(6)	(107)	(734)
Total	129	186	669	575	550	316	(6)	976	3,395
Cover ratio	75%	71%	41%	53%	68%	33%	nm³	33%	53%

	31.12.2013
	Greater China	North East Asia	South Asia	ASEAN	MENAP	Africa	Americas	Europe	Total
	$million	$million	$million	$million	$million	$million	$million	$million	$million
Loans and advances
Gross non-performing¹	460	574	1,040	1,117	1,935	291	5	1,057	6,479
Individual impairment provision²	(149)	(322)	(386)	(435)	(1,105)	(90)	(5)	(291)	(2,783)
Net non-performing loans	311	252	654	682	830	201	-	766	3,696
Portfolio impairment provision	(146)	(107)	(53)	(153)	(86)	(68)	(6)	(79)	(698)
Total	165	145	601	529	744	133	(6)	687	2,998
Cover ratio	64%	75%	42%	53%	62%	54%	nm³	35%	54%

¹	The disclosures in the risk profile section are presented on the basis of booking location and not customer location. Prior periods are re-presented on this basis
²	The difference to total individual impairment provision reflects provisions against restructured loans that are not included within non-performing loans as they have been performing for 180 days
³	not meaningful

Individual and portfolio impairment provisions

The following tables set out the movements in total individual and portfolio impairment provisions.


	2014			2013
	Individual impairment provisions	Portfolio impairment provisions	Total	Individual impairment provisions	Portfolio impairment provisions	Total
	$million	$million	$million	$million	$million	$million
Provisions held at 1 January	2,849	698	3,547	2,433	724	3,157
Exchange translation differences	(61)	(21)	(82)	(81)	(16)	(97)
Amounts written off	(1,517)	-	(1,517)	(1,173)	-	(1,173)
Releases of acquisition fair values	(5)	-	(5)	(3)	-	(3)
Recoveries of amounts previously written off	217	-	217	211	-	211
Discount unwind	(100)	-	(100)	(93)	-	(93)
Transferred to assets held for sale	(104)	(17)	(121)	(42)	(25)	(67)
New provisions	2,483	202	2,685	2,007	170	2,177
Recoveries/provisions no longer required	(387)	(164)	(551)	(410)	(155)	(565)
Net impairment charge against profit	2,096	38	2,134	1,597	15	1,612
Provisions held at 31 December	3,375	698	4,073	2,849	698	3,547

Individually impaired loans by client segment

Individually impaired loans were lower in Retail Clients, compared to 2013 at $1.0 billion. Corporate and Institutional Clients gross individually impaired loans increased by $1.1 billion, or 21 per cent since 2013. Individual impairment provisions increases were primarily in Europe, Greater China and ASEAN as a result of a small number of Corporate and Institutional Clients exposures.

The amounts written off primarily relate to Retail Clients, which generate a higher level of write-offs as unsecured lending balances are written off once they are more than 150 days past due.

The following table shows movement in individually impaired loans and provisions for each of client segments:

	2014
	Corporate and Institutional	Commercial	Private Banking	Retail	Total
	$million	$million	$million	$million	$million
Gross impaired loans at 31 December	6,094	1,068	91	846	8,099

Provisions held at 1 January	1,927	422	52	448	2,849
Exchange translation differences	(44)	(5)	-	(12)	(61)
Amounts written off	(417)	(97)	7	(1,010)	(1,517)
Releases of acquisition fair values	(4)	(1)	-	-	(5)
Recoveries of amounts previously written off	-	2	-	215	217
Discount unwind	(58)	(16)	-	(26)	(100)
Transferred to assets held for sale	(1)	-	-	(103)	(104)
New provisions	955	251	-	1,277	2,483
Recoveries/provisions no longer required	(23)	(33)	-	(331)	(387)
Net individual impairment charge against profit	932	218	-	946	2,096
Individual impairment provisions held at 31 December	2,335	523	59	458	3,375
Net individually impaired loans	3,759	545	32	388	4,724

	2013
	Corporate and Institutional	Commercial	Private Banking	Retail	Total
	$million	$million	$million	$million	$million
Gross impaired loans at 31 December	5,018	963	93	898	6,972

Provisions held at 1 January	1,639	345	44	405	2,433
Exchange translation differences	(60)	(16)	-	(5)	(81)
Amounts written off	(82)	(52)	-	(1,039)	(1,173)
Releases of acquisition fair values	-	(2)	-	(1)	(3)
Recoveries of amounts previously written off	13	-	-	198	211
Discount unwind	(57)	(14)	-	(22)	(93)
Transferred to assets held for sale	-	-	-	(42)	(42)
New provisions	517	189	8	1,293	2,007
Recoveries/provisions no longer required	(43)	(28)	-	(339)	(410)
Net individual impairment charge against profit	474	161	8	954	1,597
Individual impairment provisions held at 31 December	1,927	422	52	448	2,849
Net individually impaired Loans	3,091	541	41	450	4,123

Country cross-border risk

Country cross-border risk is the risk that we will be unable to obtain payment from our customers or third parties on their contractual obligations as a result of certain actions taken by foreign governments, chiefly relating to convertibility and transferability of foreign currency. Country cross border risk assets are those where the main source of repayment or security is derived from a country other than that were the asset is booked.

The profile of our country cross-border exposures as at 31 December 2014 remained consistent with our strategic focus on core franchise countries, and with the scale of the larger markets in which we operate. Changes in the pace of economic activity had an impact on growth of cross-border exposure for certain territories.

Cross-border exposure to China remains predominantly short-term (74 per cent of such exposure had a tenor of less than 12-months), including very short-dated interbank and treasury exposures. Progressing internationalisation of the RMB contributed to the growth in cross-border exposure to China, with short-term cross-border exposure increasing throughout 2014 in response to the deployment of renminbi customer deposits. Short-dated trade finance activity and an expansion of our corporate client base also increased cross-border exposure to China.

We took steps to diversify the placement of surplus liquidity away from Chinese banks during 2014, resulting in an increase in short-term cross-border exposure to other countries, particularly Hong Kong, Korea and Malaysia, as noted further below.

Trade finance activity and short dated lending to corporate, commercial and private banking clients drove an increase in short-term cross-border exposure to Singapore.

The overall size of the cross border exposure to India reflects our competitive advantage in offering US dollar facilities in the domestic market, and the facilitation of overseas investment and trade flows supported by parent companies in India. During 2014, efforts to prioritise business that offered higher returns contributed to the lower cross-border exposure. Other factors that led to decreased exposure in India were maturing corporate client facilities and a reduction in new business due to a moderation in the business environment.

Increased trade finance activity and interbank placements of foreign currency liquidity resulted in increased cross-border exposure to South Korea during 2014, with growth in medium-term exposure driven by offshore transactions to support South Korean clients across the Group's footprint.

Cross-border exposure to the United Arab Emirates declined during 2014, due to decreases in trade financing transactions and short dated exposures arising from financial markets activity.

Growth in short-term cross-border activity in Indonesia was attributable to an expansion of the corporate client base, and growth in international trade finance. Successful syndication and distribution of risk on new longer dated transactions resulted in a decline in medium-term cross-border exposure. The country cross-border exposure to Indonesia arising from Permata, a joint venture in which the Group holds 44.56 per cent, is counted at the value of the Group's equity in the joint venture.

Overall cross-border exposure to Nigeria increased, driven by project financing and foreign currency funding of Nigerian corporate and institutional clients. Exposure with a tenor greater than one year declined as a result of a focus on shorter dated transactions and the successful syndication and distribution of term facilities.

Cross-border exposure to Malaysia increased in 2014 in response to growth in trade finance activity amidst rising intra-region trade flows with ASEAN member countries, and with China and India. Higher short-dated cross-border exposure to Malaysia was also representative of increased interbank money market positions booked offshore.

The decrease in cross-border exposure to Brazil is attributable to a moderation in economic growth, and slowing trade and investment flows with our core markets.

Cross-border exposure to developed countries in which we do not have a major presence predominantly relates to short-dated money market treasury activities, which can change significantly from period to period. Exposure also represents global corporate business for customers with interests in our footprint. This is a key factor to explaining the significant cross-border exposure to the US.

The table below, which is based on our internal cross-border country risk reporting requirements, shows cross-border exposures that exceed one per cent of total assets:

	2014			2013
	Less than one year	More than one year	Total	Less than one year	More than one year	Total
	$million	$million	$million	$million	$million	$million
China	42,098	14,790	56,888	35,833	14,449	50,282
US	26,406	10,672	37,078	19,001	7,287	26,288
Hong Kong	22,104	8,684	30,788	21,164	8,210	29,374
Singapore	21,422	5,930	27,352	19,328	5,749	25,077
India	8,551	15,015	23,566	12,566	18,295	30,861
Korea	9,581	8,216	17,797	9,093	7,415	16,508
United Arab Emirates	6,955	8,752	15,707	6,281	10,997	17,278
Indonesia	4,172	4,058	8,230	3,959	4,958	8,917
Nigeria	4,543	3,301	7,844	2,318	4,072	6,390
Malaysia	4,115	3,488	7,603	3,878	3,396	7,274
Brazil	5,297	2,228	7,525	6,175	2,002	8,177

Market risk

Market risk is the potential for loss of earnings or economic value due to adverse changes in financial market rates or prices. The Group's exposure to market risk arises predominantly from providing clients access to financial markets, facilitation of which entails the Group's taking moderate market risk positions. All trading teams support client activity; there are no proprietary trading teams. Hence, income earned from market risk related activities is broadly stable. Market risk also arises in the non-trading book from the requirement to hold a large liquid assets buffer of high quality liquid debt securities and from the translation of non-US dollar denominated assets, liabilities and earnings.

The primary categories of market risk for the Group are:

• interest rate risk: arising from changes in yield curves, credit spreads and implied volatilities on interest rate options;

• currency exchange rate risk: arising from changes in exchange rates and implied volatilities on foreign exchange options;

• commodity price risk: arising from changes in commodity prices and commodity option implied volatilities; covering energy, precious metals, base metals and agriculture;

• equity price risk: arising from changes in the prices of equities, equity indices, equity baskets and implied volatilities on related options.

Market risk in 2014

Market risk VaR changes

The average levels of VaR in 2014 were slightly higher than in 2013. Total VaR increased 5 per cent with trading VaR increasing 9 per cent and non trading VaR rising 3 per cent. The increases were driven by rises in interest rate risk and equity risk, offset by decreases in foreign exchange risk and commodity risk.

The actual levels of VaR at 31 December were considerably lower in 2014 than in 2013 with all asset class risks being reduced except trading book equities which was higher by 11 per cent.

Daily value at risk (VaR at 97.5%, one day)
	2014				2013
	Average	High⁴	Low⁴	Actual⁵	Average	High⁴	Low⁴	Actual⁵
Trading and Non-trading	$million	$million	$million	$million	$million	$million	$million	$million
Interest rate risk²	25.8	36.8	19.0	22.0	25.0	37.4	18.2	23.3
Foreign exchange risk	3.6	6.7	2.2	4.7	4.2	7.6	2.3	7.0
Commodity risk	1.4	2.9	0.7	0.7	1.5	2.6	0.9	1.5
Equity risk	17.9	20.0	15.1	16.4	15.4	18.4	13.0	18.3
Total³	34.4	47.4	25.2	26.5	32.8	44.8	22.1	38.5
	2014				2013
	Average	High⁴	Low⁴	Actual⁵	Average	High⁴	Low⁴	Actual⁵
Trading¹	$million	$million	$million	$million	$million	$million	$million	$million
Interest rate risk²	9.3	21.3	5.7	5.7	9.1	15.0	6.5	8.1
Foreign exchange risk	3.6	6.7	2.2	4.7	4.2	7.6	2.3	7.0
Commodity risk	1.4	2.9	0.7	0.7	1.5	2.6	0.9	1.5
Equity risk	1.6	2.4	1.3	2.0	1.5	2.1	1.1	1.8
Total³	10.6	20.8	7.1	7.6	9.8	14.9	7.3	9.1

¹	Trading book for market risk is defined in accordance with the EU Capital Requirements Regulation (CRDIV/CRR) Part 3 Title I Chapter 3 which restricts the positions permitted in the trading book. This regulatory definition is narrower than the accounting definition of the trading book within IAS39 'Financial Instruments: Recognition and Measurement'
²	Interest rate risk VaR includes credit spread risk arising from securities held for trading or available-for-sale
³	The total VaR shown in the tables above is not a sum of the component risks due to offsets between them
⁴	Highest and lowest VaR for each risk factor are independent and usually occur on different days
⁵	Actual one day VaR at year end date

Backtesting

Regulatory backtesting is applied at both Group and Solo levels. In 2014 exceptions due to exceptional market volatility occurred on three days: one at Group level (none in 2013) and three at Solo level (one in 2013).

These occasions followed notable central bank action with impact n Group footprint market:

· 21 February: the People's Bank of China widened the Renminbi trading band resulting in sharp movement in the Renminbi foreign exchange market (Solo level only).

· 24 November: after the People's Bank of China had cut Renminbi interest rates for the first time since 2012, there were sharp movements in both Renminbi interest rate and FX markets (Solo level only).

· 16 December: the Russian Rouble dropped in value after the Central Bank of Russia suddenly increased Rouble interest rates. This induced wider reaction in other interest rate markets, notably India and Brazil (Group and Solo levels).

Three exceptions due to market events are within the 'green zone' applied internationally to internal models by bank supervisors.

Liquidity risk

Liquidity risk is the risk that we either do not have sufficient financial resources available to meet our obligations as they fall due, or can only access these financial resources at excessive cost.

Liquidity in 2014

The liquidity position of the group stayed strong in 2014 and we continued to enjoy inflows of customer deposits and maintained good assets to wholesale market.

Conditions in the bank wholesale debt markets were generally positive in 2014, supported by strong investor demand. In 2014, the Group issued $10 billion of term debt securities, $5.3 billion of senior debt and $4.7 billion of Tier 2 subordinated debt (2013:$9.5 billion of which $4 billion was senior debt and $5.5 billion was Tier 2 subordinated debt).

Liquidity metrics

We monitor key liquidity metrics on a regular basis, both on a country basis and in aggregate across the Group. The key metrics are:

Liquid asset ratio (LAR)

The Liquid Asset Ratio (LAR) ensures that a proportion of the Group's total assets are held in liquid assets, on a consolidated currency basis.

Liquid assets are the total cash (less restricted balances), treasury bills, loans and advances to banks (less deposits by banks) and debt securities (less illiquid securities).

Illiquid securities are debt securities that cannot be sold or exchanged easily for cash without substantial loss in value.

LAR limits (minimum LAR level acceptable) is set and monitored at Group level in order to ensure that an adequate proportion of the balance sheet shall always remain highly liquid. In addition, the Group keeps sufficient liquid assets to survive a number of severe stress scenarios, both internal and regulatory.

The Group LAR (32.2 percent) increased from the previous year (29.8 percent) reflecting an increase in liquid assets held mainly in the Americas and Europe.

The following table sets out an analysis of the Group's liquid assets

		2014	2013
		$million	$million
Cash and balances at central banks		97,282	54,534
Restricted balances		(10,073)	(9,946)
Loans and advances to banks - net of non-performing loans		87,397	86,062
Deposits by banks		(55,323)	(44,526)
Treasury bills		25,901	31,404
Debt securities		95,677	86,073
of which :
	Issued by governments	38,035	33,874
	Issued by banks	33,605	32,171
	Issued by corporate and other entities	24,037	20,028
Illiquid securities and Other Assets		(6,816)	(2,744)
Liquid assets		234,045	200,857
Total assets		725,914	674,380
Liquid assets to total asset ratio (%)		32.2%	29.8%

Advances to deposits ratio

This is defined as the ratio of total loans and advances to customers relative to total customer deposits. A low advances to deposits ratio demonstrates that customer deposits exceed customer loans as result of the emphasis placed on generating a high level of funding from customers. Customer deposits tend to be more stable than wholesale funding and a core portion of these deposits are likely to remain with the bank for the medium term.

	2014 $million	2013 $million
Loans and advances to customers¹	288,599	296,015
Customer accounts	414,189	390,971
Advances to deposits ratio	69.7%	75.7%
¹see note 12 to the financial statements on page 80

Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR)

The Group monitors the LCR in line with the Capital Requirements Regulation (CRR), the Regulation that implements BCBS238 in Europe. The Group also monitors NSFR in line with BCBS271, pending implementation in Europe. As at 31 December 2014 both the Group LCR and NSFR were above 100 per cent.

Encumbered assets

Encumbered assets represent those on balance sheet assets pledged or used as collateral in respect of certain of the Group's liabilities. Hong Kong government certificates of indebtedness which secure the equivalent amount of Hong Kong currency notes in circulation, and cash collateral pledged against derivatives are included within other assets. Taken together these encumbered assets represent 2.8 per cent (2013: 2.7 per cent) of total assets, continuing the Group's historical low level of encumbrance.

The following table provides a reconciliation of the Group's encumbered assets to total assets.


				2014				2013
			Unencumbered assets					Unencumbered assets
			Not readily available to secure funding		Readily available to secure funding	Encumbered assets	Total assets	Not readily available to secure funding	Readily available to secure funding	Encumbered assets	Total assets
			$million		$million	$million	$million	$million	$million	$million	$million
Cash and balances at central banks			10,073		87,209	-	97,282	9,946	44,588	-	54,534
Derivative financial instruments			65,834		-	-	65,834	61,802	-	-	61,802
Loans and advances to banks¹			49,389		38,111	-	87,500	49,279	36,890	-	86,169
Loans and advances to customers¹			288,568		-	31	288,599	295,236	-	779	296,015
Investment securities¹			41,762		82,120	5,465	129,347	48,699	72,062	3,516	124,277
Other assets			23,640		-	15,049	38,689	19,870	-	13,700	33,570
Current tax assets			362		-	-	362	234	-	-	234
Prepayments and accrued income			2,647		-	-	2,647	2,510	-	-	2,510
Interests in associates and joint ventures			1,962		-	-	1,962	1,767	-	-	1,767
Goodwill and intangible assets			5,190		-	-	5,190	6,070	-	-	6,070
Property, plant and equipment			7,984		-	-	7,984	6,903	-	-	6,903
Deferred tax assets			518		-	-	518	529	-	-	529
Total			497,929		207,440	20,545	725,914	502,845	153,540	17,995	674,380
	¹	Includes assets held at fair value through profit or loss.

In addition to the above the Group received $27,910 million (2013: $15,906 million) as collateral under reverse repurchase agreements that was eligible for repledging. Of this the Group sold $2,252 million (2013: $1,804 million) under repurchase agreements.

Readily available to secure funding

Readily available to secure funding includes unencumbered assets that can be sold outright or under repo within a few days, in line with regulatory definitions. The Group's readily available assets comprise of cash and balances at central banks, loans and advances to banks and investment securities.

Assets classified as not readily available to secure funding include:

· Assets which have no restrictions for funding and collateral purposes, such as loans and advances to customers, which are not acquired or originated with the intent of generating liquidity value; and

· Assets that cannot be encumbered, such as derivatives, goodwill and intangible and deferred tax assets

This information is provided by RNS

The company news service from the London Stock Exchange

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