HSBC increases long-term structured products issuance

Derivatives assets at HSBC increased in 2014, driven by yield curve movements and increased market volatility in foreign exchange, according to a release accompanying the bank’s 2014 results announcement. “The decline in equity derivative assets and liabilities reflects the inclusion of variation margin on cash-settled exchange-traded equity derivatives within gross fair value rather than ‘offsetting’,” stated the bank. “This change has no impact upon total derivatives assets.”

The bank reported that its unsecured senior structured notes exposure at December 31, 2014 had increased by $4bn on the year to $26.6bn, with almost all of the increase in longer-term notes. HSBC recorded $6.8bn of structured note issuance that is due in more than five years (2013: $5bn); $8.4bn ($6bn) is due in two to five years; $4.8bn ($3.7bn) in one and two years; $980m ($1.7bn) in nine months to one year; $1.1bn ($1.6bn) in six to nine months; $2bn ($1.9bn) in three to six months; $1bn ($1.4bn) in one to two months; and $1.4bn ($987m) due within one month.

The bank also noted that “Level 3 structured notes principally comprise equity-linked notes which are issued by HSBC and provide the counterparty with a return that is linked to the performance of certain equity securities and other portfolios. The notes are classified as Level 3 due to the unobservability of parameters such as long-dated equity volatilities and correlations between equity prices, between equity prices and interest rates and between interest rates and foreign exchange rates.”

In the retail structured products market, HSBC was the top performer globally last year, according to SRP data. The UK bank sold over $9bn of tranche-based products across all markets and held a 3% market share globally. It dominated the non-retail, leverage and flow markets with over $68.6bn and a 13% market share, followed by Standard Chartered (5% market share), Bank of China (4%) and Citi (4%).

In North America, HSBC sold $3.2bn worth of products and held a 7% market share and was the third most active issuer with 1,091 products marketed; and in Asia Pacific, the UK bank led the sales ranking with over $64bn and 18% market share having brought 766 products to market. In Europe, HSBC’s activity was marginal and did not appear in the top 10 issuers ranking despite marketing over 43,000 structured products.

Net trading income included a favourable movement of $15m (2013: unfavourable movement of $66m; 2012: unfavourable movement of $629m) associated with changes in the fair value of issued structured notes and other hybrid instrument liabilities arising from movements in HSBC issuance spreads, stated the bank.

Revenues from "investment distribution", which comprises mutual funds (HSBC-manufactured and third-party), structured products and securities trading, as well as wealth insurance distribution (HSBC-manufactured and third-party life, pension and investment insurance products) was $3.4bn, compared with $3.5bn in 2013, with $1.6bn relating to life insurance manufacturing and $1.1bn to asset management.

The bank reported a decline in investment distribution income, mainly as a result of lower fees in the UK, in part reflecting the introduction by the Financial Conduct Authority of the Retail Distribution Review (RDR) in 2013, as well as a change in product mix in Brazil.

Revenue was lower in retail banking and wealth management, due primarily to a continuing repositioning, stated the bank. The bank’s global asset management attracted net new money of $29bn.

HSBC’s reported profit before tax in 2014 was $18.7bn, $3.9bn lower than in the previous year. This reflected lower gains from disposals and reclassifications, and the negative effect of other significant items, including fines, settlements, UK customer redress and associated provisions, totalling $3.7bn.

Adjusted profit before tax, which excludes the year-on-year effects of currency translation differences and significant items, was $22.8bn, broadly unchanged on 2013.

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