Business Segments

9 Months Ended

Sep. 30, 2013

Segment Reporting [Abstract]

Business Segments

Business Segments

We have four distinct business segments that we utilize for management reporting and analysis purposes, which are aligned with HSBC's global businesses and business strategy. There have been no changes in the basis of our segmentation or measurement of segment profit as compared with the presentation in Note 25, "Business Segments," in our 2012 Form 10-K except as noted below.

Commercial Banking ("CMB") has historically held investments in low income housing tax credits. The financial benefit from these investments is obtained through lower taxes. Since business segment returns are measured on a pre-tax basis, a revenue share has historically been in place in the form of a funding credit to provide CMB with an exact and equal offset booked to the Other segment. Beginning in 2013, this practice has been eliminated and the low income housing tax credit investments and related financial impact are being recorded entirely in the Other segment. We have reclassified prior period results in both the CMB and Other segments to conform to the revised current year presentation.

Our segment results are presented in accordance with IFRSs (a non-U.S. GAAP financial measure) on a legal entity basis (“IFRSs Basis”) as operating results are monitored and reviewed, trends are evaluated and decisions about allocating resources, such as employees are made almost exclusively on an IFRSs basis since we report financial information to our parent, HSBC in accordance with IFRSs. We continue to monitor capital adequacy, establish dividend policy and report to regulatory agencies on a U.S. GAAP legal entity basis.

A summary of the significant differences between U.S. GAAP and IFRSs as they impact our results are presented in Note 25, "Business Segments," in our 2012 Form 10-K. Except as noted below, there have been no significant changes since December 31, 2012 in the differences between U.S. GAAP and IFRSs impacting our results. As it relates to loan impairment charges, prior to the second quarter of 2013, we concluded that for IFRSs the estimated average period of time from last current status to write-off for real estate secured loans collectively evaluated for impairment using a roll rate migration analysis was 10 months. In the second quarter of 2013, we updated our review under IFRSs to reflect the period of time after a loss event that a loan remains current before delinquency is observed. This review resulted in an estimated average period of time from a loss event occurring and its ultimate migration from current status through to delinquency and ultimately write-off for real estate secured loans collectively evaluated for impairment using a roll rate migration analysis of 12 months.

The following table summarizes the results for each segment on an IFRSs basis, as well as provides a reconciliation of total results under IFRSs to U.S. GAAP consolidated totals.

	IFRSs Consolidated Amounts
	RBWM			CMB		GBM			PB		Other			Adjustments/ Reconciling Items			Total			IFRSs Adjustments(4)			IFRSs Reclassi- fications(5)			U.S. GAAP Consolidated Totals
	(in millions)
Three Months Ended September 30, 2013
Net interest income(1)	$	205		$	181	$	78		$	46	$	(6	)	$	(2	)	$	502		$	(17	)	$	7		$	492
Other operating income	81			77		296			27		(45		)	2			438			(1		)	(5		)	432
Total operating income	286			258		374			73		(51		)	—			940			(18		)	2			924
Loan impairment charges(3)	44			26		(3		)	3		—			—			70			(11		)	(5		)	54
	242			232		377			70		(51		)	—			870			(7		)	7			870
Operating expenses(2)	301			169		255			62		52			—			839			9			7			855
Profit before income tax expense	$	(59	)	$	63	$	122		$	8	$	(103	)	$	—		$	31		$	(16	)	$	—		$	15
Three Months Ended September 30, 2012
Net interest income(1)	$	209		$	172	$	129		$	45	$	(13	)	$	(3	)	$	539		$	(22	)	$	(7	)	$	510
Other operating income	138			136		251			26		(164		)	3			390			5			12			407
Total operating income	347			308		380			71		(177		)	—			929			(17		)	5			917
Loan impairment charges(3)	72			6		6			2		—			—			86			(4		)	2			84
	275			302		374			69		(177		)	—			843			(13		)	3			833
Operating expenses(2)	368			154		249			57		844			—			1,672			(48		)	3			1,627
Profit before income tax expense	$	(93	)	$	148	$	125		$	12	$	(1,021	)	$	—		$	(829	)	$	35		$	—		$	(794	)
Nine Months Ended September 30, 2013
Net interest income(1)	$	626		$	523	$	312		$	140	$	(34	)	$	(9	)	$	1,558		$	(55	)	$	12		$	1,515
Other operating income	270			219		973			85		(10		)	9			1,546			53			(9		)	1,590
Total operating income	896			742		1,285			225		(44		)	—			3,104			(2		)	3			3,105
Loan impairment charges(3)	97			41		6			4		—			—			148			(15		)	9			142
	799			701		1,279			221		(44		)	—			2,956			13			(6		)	2,963
Operating expenses(2)	892			502		735			189		138			—			2,456			(18		)	(6		)	2,432
Profit before income tax expense	$	(93	)	$	199	$	544		$	32	$	(182	)	$	—		$	500		$	31		$	—		$	531
Balances at end of period:
Total assets	$	19,297		$	22,571	$	190,174		$	7,996	$	804		$	—		$	240,842		$	(53,563	)	$	96		$	187,375
Total loans, net	16,221			21,414		21,738			5,869		—			—			65,242			1,794			79			67,115
Goodwill	581			358		480			325		—			—			1,744			484			—			2,228
Total deposits	30,594			21,614		46,829			11,875		—			—			110,912			(4,491		)	6,500			112,921

	IFRSs Consolidated Amounts
	RBWM			CMB			GBM			PB			Other			Adjustments/ Reconciling Items			Total			IFRSs Adjustments(4)			IFRSs Reclassi- fications(5)			U.S. GAAP Consolidated Totals
	(in millions)
Nine Months Ended September 30, 2012
Net interest income(1)	$	653		$	502		$	439		$	137		$	(31	)	$	(10	)	$	1,690		$	(73	)	$	15		$	1,632
Other operating income	497			471			742			83			(234		)	10			1,569			41			60			1,670
Total operating income	1,150			973			1,181			220			(265		)	—			3,259			(32		)	75			3,302
Loan impairment charges(3)	174			(3		)	(2		)	(3		)	—			—			166			—			7			173
	976			976			1,183			223			(265		)	—			3,093			(32		)	68			3,129
Operating expenses(2)	1,010			487			744			178			1,628			—			4,047			(48		)	68			4,067
Profit before income tax expense	$	(34	)	$	489		$	439		$	45		$	(1,893	)	$	—		$	(954	)	$	16		$	—		$	(938	)
Balances at end of period:
Total assets	$	23,726		$	24,012		$	217,185		$	7,093		$	92		$	—		$	272,108		$	(73,460	)	$	(65	)	$	198,583
Total loans, net	16,334			19,066			32,559			5,290			—			—			73,249			(1,124		)	(11,310		)	60,815
Goodwill	581			358			480			325			—			—			1,744			484			—			2,228
Total deposits	35,494			22,012			44,669			12,319			—			—			114,494			(5,897		)	12,738			121,335

⁽¹⁾  Net interest income of each segment represents the difference between actual interest earned on assets and interest paid on liabilities of the segment adjusted for a funding charge or credit. Segments are charged a cost to fund assets (e.g. customer loans) and receive a funding credit for funds provided (e.g. customer deposits) based on equivalent market rates. The objective of these charges/credits is to transfer interest rate risk from the segments to one centralized unit in Treasury and more appropriately reflect the profitability of segments.

⁽²⁾  Expenses for the segments include fully apportioned corporate overhead expenses.

⁽³⁾  The provision assigned to the segments is based on the segments’ net charge offs and the change in allowance for credit losses.

⁽⁴⁾  Represents adjustments associated with differences between IFRSs and U.S. GAAP bases of accounting.

⁽⁵⁾  Represents differences in financial statement presentation between IFRSs and U.S. GAAP.