FUNDAMENTALS OF

INTERNATIONAL
MANAGEMENT
COMPANY ANALYSIS: HSBC

By: Group 4
Akash Das 6B
Jayesh Chandra Gupta 23B
Krishna Kumar 26B
Soumyadeep Paul 51B
 CONTENTS
SL. No. Topic Page No.
1. HSBC: A brief Introduction 2

2. International Presence & Number of Employees 7

3. Conducting Business 8

4. Organization Structure 12

5. Organization Control 13

6. Competitors & Companys Position 18

7. SWOT Matrix for Development and Competitiveness 24

8. Problems Faced 25

9. Future Outlook 29

10. Summary and Conclusion 31

1
HSBC: A Brief Introduction
Hong Kong and Shanghai Banking Corporation
The Hong Kong and Shanghai Banking Corporation Limited is the founding member of the modern HSBC
Group. The company opened in Hong Kong on 3 March 1865 and in Shanghai one month later. Its founder
was Thomas Sutherland, the Hong Kong Superintendent for the Peninsular and Oriental Steam Navigation
Company. He established the bank as a response to the needs of the China coast business communities.
Hong Kongs growth as an entrept meant local businesses needed more sophisticated banking facilities,
but most transactions were still handled by European trading houses rather than banks. The bank was
created to correct this deficiency. Sutherlands banking prospectus attracted interest across Hong Kongs
business spectrum, including American and Indian trading houses and European firms. HSBCs founding
board was multicultural right from the start, including men of Scottish, German, Indian, American, English
and Norwegian descent. It was international in its business scope and customer-focused in its approach;
the early response from customers in Hong Kong and Shanghai was positive. Six of Hong Kongs 11 foreign
banks collapsed in early 1866 due to bank runs, which in turn brought down many other businesses. HSBC
weathered this financial storm by maintaining its payment period for bills of exchange when many banks
were slashing theirs. This brought the bank virtually immediate recognition as a leading financial
institution and built a reputation that endures to the present day, for resilience during crises.

Branching out:

Trade finance was a strong feature of the new banks local and international business. Following the flow
of commerce, it expanded rapidly, establishing branches in ports such as Yokohama (1866), Kolkata
(1867), Ho Chi Minh City (1870) and Manila (1875). By the end of its first decade of operations, HSBC was
represented in seven countries across Asia, Europe and North America. It financed the export of tea and
silk from China, cotton and jute from India, sugar from the Philippines, rice and silk from Vietnam and
bought silver in San Francisco. Thomas Jackson, HSBC Chief Manager between 1876 and 1902, dominated
this period of the banks growth. As the new century dawned with Jackson at the helm HSBC was the
foremost financial institution in Asia. But Jackson did not do it alone he was supported by an expert
team of international managers and local staff. The international officers were trained in London and Hong
Kong before taking up appointments across the globe. They were expected to be self-reliant, resilient and
decisive, acting as ambassadors for the bank wherever they went. Upon reaching upper management,
these bankers could call on their experiences in the varied settings of HSBCs operations to get the job
done. Equally important were the banks local staff, whose nationalities varied according to branch
location. In Hong Kong, the local staff comprised Chinese and Portuguese employees working as clerks,
shroffs and administrators, who ensured that daily operations ran smoothly. By the 1880s, it was acting
as a banker to the government of Hong Kong and as a sole or joint banker for British government accounts
in China, Japan, Penang and Singapore. The period saw the issuance of Chinas first public loan, the eight
per cent Foochow (Fuzhou) loan, in 1874. The bank issued many subsequent loans for government railway
and infrastructure projects. In addition to guiding the bank through troubled times, Jackson set an
example in commercial morality. In doing so, he won the confidence and loyalty of his staff and the citizens

2
they served and ensured that this once-small local bank became a prominent actor on the worlds financial
stage.

Interwar banking

In the years leading up to and immediately following the First World War, HSBC looked to consolidate and
expand within its Asian markets. In Singapore, the banks main business was the financing of rubber and
tin, which were the ports most important exports. As the tumult of the First World War receded, HSBC
approached the 1920s with a view to expanding in its Asian markets. The new Shanghai office anchored
HSBCs position as the dominant foreign bank in China throughout the 1920s, particularly in exchange
banking. The bank maintained its position in spite of growing political uncertainty, increasing competition
from modern Chinese banks and relatively modest trade growth. The Shanghai branch financed local tea
and silk exporters, bought and sold foreign exchange and made funds directly available to Chinese traders.

The Challenges

Although it was on a relatively even financial keel, the bank inevitably suffered alongside its customers
during the Great Depression. In 1931, its two main branches, Hong Kong and Shanghai, reported declining
earnings, while branches in India, Japan, China, Sri Lanka and Indonesia all suffered losses. Despite the
economic repercussions of the 1929 Wall Street Crash, HSBC decided to redevelop its head office in Hong
Kong once again. The aim was to enlarge the banks silver storage, accommodate more staff, and
strengthen ties with some of HSBCs oldest clients. This was a testament to the banks resilience and its
commitment to the citys future. The cutting-edge building was completed in 1935 and described by Hong
Kongs governor as up to date, not to say quite a few minutes ahead of the clock.

Crisis

The bank faced one of its most challenging times during the Second World War. As the Japanese Army
advanced through Asia from the beginning of December 1941, so the bank retreated branch by branch
until most of its network in the East was shut down. Many staff demonstrated immense courage, sticking
to their posts until the last moments to help customers to access cash or send money abroad. The majority
of the British staff were captured and interned in civilian camps, where their living conditions were
alleviated by the help of local staff. The bank had already taken steps to prepare for the worst: head offi
ce was moved to London on 16 December 1941, and the robust reserves built up during times of peace
cushioned the bank through times of war. With only the London, Indian and US branches still in operation,
the bank did its best to support the war effort and the families of interned staff. In 1943, the bank received
the terrible news that its Chief Manager, Sir Vandeleur Grayburn, had died in captivity in Hong Kong.

Recovery

Even in the midst of war, HSBCs management was always planning for the banks return to the East. As
soon as the war was over, the bank swung into action, and its support was instrumental in Hong Kongs
reconstruction lending money to restore public utilities, reopen the port for business and restart the
Star Ferry service. Head offi ce was relocated back to the territory in June 1946, and the bank busied itself
loaning funds to businesses whose machinery, warehouses and stock had been destroyed during the war,
even if they had no security to offer for these loans. In March 1947, the bank was able to announce at its
3
Annual General Meeting that nearly all branches had reopened and a dividend would be paid to
shareholders for the fi rst time since the beginning of the war.

From entrept to manufacturing centre

The 1950s was a decade of transformation in Asia, and HSBC had to respond nimbly to the ever-changing
business environment. The founding of the Peoples Republic of China in 1949 profoundly altered the
banks immediate business prospects in the country and during the early 1950s, HSBC began a gradual
withdrawal from China. Eventually, only the Shanghai branch remained, relocated from the Bund to a
modest office block. In other markets, such as Malaysia, the bank had to adapt to a changed political
environment as newly independent states emerged in the region.

Diversification

The closure of HSBCs branches in mainland China allowed the bank to devote more resources to Hong
Kong, but it also ran the risk of narrowing its range of interests. Under the leadership of Michael Turner,
the bank avoided this possibility by diversifying its business through a series of acquisitions and alliances.
Taking advantage of strong links across the Pacific with the Chinese diaspora, the bank opened a new
subsidiary in the USA The Hongkong and Shanghai Banking Corporation of California in 1955. Later in
the decade, the bank made two watershed acquisitions that introduced it to new markets and gave it a
first taste of working as a group of companies.

The Modern Financial centre

By the time HSBC celebrated its centenary in 1965, it was a very different institution from the business
that had opened 100 years previously. There were new types of customer the first generation of Chinese
entrepreneurs in Hong Kong; new branches a large network throughout the region and a new branch
opening every week in Hong Kong by the early 1970s and new staff; highly educated Chinese who began
to take on managerial roles. The growing branch network was linked by a ground-breaking computer
system that allowed customers to transact business easily in any office of the bank and which laid the
foundations for the sophisticated systems of today.

New opportunities

At the end of the 1970s, mainland China took its first steps in what would become the worlds largest
programme of national economic reform and modernisation. The early Special Economic Zones permitted
foreign trade and investment, and HSBC, with its long history in China, was keen to be involved in this
stage of the countrys development. In 1979, a representative office opened in Guangzhou, closely
followed by another in Beijing. The bank built up expertise in working with the mainland, especially as
many of its customers began to relocate their operations from Hong Kong to China. In 1984, HSBC became
the first foreign bank since 1949 to be granted a banking licence in China for its branch in Shenzhen.

Global business

4
By the end of the 1980s, HSBC was a financial powerhouse in the Asia-Pacific region with a strong foothold
in the US market. It needed a European element to transform the bank into a truly global operation. The
1990s and 2000s saw the further expansion of HSBCs footprint, especially in the emerging markets of
Latin America and Turkey and the mature economies of France, Switzerland and the USA. To bring clarity
to customers, investors and staff, HSBC introduced a unified brand for all its subsidiaries in 1998, and the
hexagon symbol was rolled out across the world. Despite its adventures overseas, HSBC retained a clear
focus on its place of birth. The bank weathered the Asian financial crisis of the late 1990s, doing its best
to help customers and governments maintain stability through this period of volatility. Growth in China
followed the establishment of the locally incorporated HSBC Bank China in 2007, and this organic growth
has been augmented by a series of alliances with Chinese financial institutions.

The way ahead

Drawing on its long experience, HSBC survived this period of extraordinary and unprecedented turbulence
in economies and markets around the world. In 2009, the bank announced a rights issue to raise
approximately USD17.7 billion to maintain its signature capital strength and enhance its ability to deal
with an uncertain world. Since 2011, HSBC has restructured and refocused its business to meet the
challenges of the post-crisis world. A programme of closures and disposals has made HSBC more nimble,
easier to manage and better placed to react to growth opportunities as they arise. As the centre of
economic gravity moves east, HSBC is one of the few truly international banks with a network that spans
the markets most relevant to international trade and capital flows. The bank has grown far beyond Sir
Thomas Sutherlands vision of a locally owned and managed institution that understood local needs for
regional trade finance.

In 2015, HSBC marked its 150th anniversary by recognising its staff for their essential contributions
through the ages, and its customers for their shared commitment and loyalty. As we enter the next
period of our history, I want to reiterate these messages of gratitude and underline our recognition that
such commitment and loyalty have to be earned. HSBC has also always recognised its responsibilities to
the communities it serves and so in this special year committed $150m of additional funding to
community projects around the world over three years.

Key Metrics for FY2015

External Benchmarks

2015 2014 2013

Interbrand top 100 brand position 37th 33rd 32nd

Interbrand (US$b) 11.6 13.1 12.2

Top 500 bank brands: The Banker magazine 9th 3rd 4th

FTSE4Good (since 2001) Member Member Member

5
Hang Seng Sustainability Index Member Member 1st
CDP (formerly Carbon Disclosure Project) -
B A A
Performance Band

Reported profit before tax

($bn)
Reported profit before tax ($bn)

Latin America 0.3

N.America 0.6

Middle East and N.Africa 1.5

Asia 15.8

Europe 0.6

Risk Weighted Assets ($bn)

Risk Weighted Assets ($bn)

Latin America 73.4

N.America 191.6

Middle East and N.Africa 60.4

Asia 459.7

Europe 337.4

6
HSBC: International Presence & Number of Employees
HSBC today has 6000 offices in 71 countries and territories worldwide.

It has a customer base of more than 47 million.

255,000 is the number of employees of HSBC

HDFC strongly believes in gender diversity as evident from the fact that more than half of the 255,000
employees are women.

HSBC reported more than $18.9 billion profit before tax in 2015.

Employees by Region (%)

16%
26%
Europe
8% Asia
3% Middle East and N.Africa
N.America
Latin America

47%

7
HSBC: Conducting Business
HSBC is an interconnected international bank. They server customers through four Global Businesses
and a technology services wing. These businesses work closely together and are supported by
operational and functional teams around the world.

Commercial Banking

HSBC Commercial Banking serves businesses ranging from small enterprises to large multinationals in
over 60 developed and faster-growing markets around the world. Whether it is working capital, trade
finance or payments and cash management solutions, they provide the tools and expertise that
businesses need to thrive. With a network covering three quarters of global commerce, HSBC is the
world's leading international trade and business bank.

Global Banking and Markets

HSBC Global Banking and Markets provides financial services and products to corporates, governments
and institutions. Through their international network, they connect emerging and mature markets,
covering key growth areas. For Clients, to achieve consistent, long-term performance is the key to
HSBCs success. Sector-focused Client Coverage teams include:

The Corporate Sector Group,

Financial Institutions Group, and
Resources and Energy Group.

The products and services include advisory, financing, prime services, research and analysis, securities
services, trading and sales, and transaction banking.

Global Private Banking

As part of the HSBC Group, HSBC Private Bank seeks to be the leading international private bank for
business owners and their families. It provides clients with wealth, business and family succession
solutions in the largest and fastest-growing markets around the world. With $17 billion of total assets
under management*, HSBC Private Bank is one of the largest international private banks.

*As at 31 December 2012

8
Retail Banking & Wealth Management

Retail Banking and Wealth Management serves more than 50 million customers worldwide with a
complete range of banking and wealth management services to enable them to manage their finances
and protect and build their financial futures. It is a global business that brings together management
responsibility for Retail Banking, Wealth Management, Insurance and Asset Management with a focus
on customer-centric propositions and innovative and efficient distribution channels.

HSBC Technology and Services

HSBC Technology and Services is a pivotal part of the Group, providing essential operational and
technical support to global businesses and helping improve customer service and efficiency.

GLOBAL FUNCTIONS
Global Communications

Global Communications designs and implements communications strategies which support HSBC's
business objectives, and enhance and protect the reputation among key stakeholders.

Company Secretary

The Company Secretarial function leads, develops and manages corporate governance throughout the
Group. As principal advisers to the boards of directors on corporate governance matters, the team also
holds responsibility for establishing and managing stock exchange listings, directing and managing
shareholder meetings and equity raisings, and representing Group interests in the development of laws
and regulations.

Global Finance

Global Finance is integral to HSBC's purpose and strategy, playing a valued role in managing costs and
deploying capital in the most effective way. The global team of finance professionals partner with the
business to provide trusted insights and forward-looking analysis, accuracy, efficiency and control to
frame and influence business decisions.

Global Sustainability

At HSBC, the term sustainability means achieving sustained profits for their shareholders, developing
long-lasting customer relationships, and managing the social and environmental impact of business.

9
Global Sustainability sets Group strategy on sustainability and focuses on managing the challenges of
climate change, managing the social and environmental risks of projects that HSBC finances and
identifying business opportunities that have an environmental or social dimension, overseeing global
philanthropic programmes which focus on education and the environment and managing HSBC's global
environmental footprint.

Human Resources

Human Resources leads the implementation of the Group's people strategy in line with business
objectives. It facilitates talent management, succession planning and employee mobility while defining
and overseeing frameworks that support employee performance management, reward, learning and
development, resourcing and engagement.

Global Internal Audit

Global Internal Audit provides independent, objective assurance to management and the Risk and Audit
committees as to whether the framework of risk management, control and governance processes, as
designed and represented by management, is adequate and functioning. The function comprises a
number of global teams (covering Global Businesses and Functions, Risk and HTS) and regional Audit
teams.

Global Legal

Global Legal plays an important role in protecting the Group's reputation by helping to future-proof the
organization through robust legal risk and issue advisory. Responsible for providing comprehensive legal
advice to senior management and all Global Businesses and Functions, the team offers a diverse range
of legal skills, jurisdictional experience and practice specialisms across all countries and territories in
which its businesses operate.

Global Marketing

Global Marketing uses creativity and business flair to help drive top-line revenue growth for Global
Businesses by optimizing marketplace opportunities, the brand strength and customer insight.

Global Risk

Global Risk is a thriving and expert risk management function supporting HSBC globally with all aspects
of risk management. The team actively manages a varied and dynamic range of risk types, including
security, fraud, information security, contingency, geopolitical, operational, credit, pension, insurance,
compliance, regulatory, market and reputation risks. All members of the Global Risk team use their

10
skills, insight and integrity to handle established threats and those they see emerging, acting to protect
and enable HSBC to deliver sustainable growth.

Global Strategy and Planning

Global Strategy and Planning helps inform strategic decision-making and acts as a catalyst and driver for
strategic change. The team constructively challenges the business with critical thinking and innovative
insight to improve the way HSBC does business.

11
HSBC: Organization Structure (International)

*structure taken from HSBC Internationals website.

12
Organization Control
The Board is responsible for maintaining and reviewing the effectiveness of risk management and
internal control systems and for determining the aggregate level and types of risks it is willing to take in
achieving its strategic objectives.

HSBCs key risk management and internal control procedures include the following:

Group Standards. The Global Standards Manual (GSM) brings together the common standards
and principles used in the conduct of all business, whatever its location or nature. The GSM
overlays all other manuals throughout the Group and is a fundamental component of the
Groups risk management structure. It establishes the high level standards and policies by which,
and within which, all members of the Group conduct their businesses. The GSM is mandatory
and applies to, and must be observed by, all businesses within the Group, regardless of the
nature or location of their activities.
Delegation of authority within limits set by the Board. Subject to certain matters reserved for
the Board, the Group Chief Executive has been delegated authority limits and powers within
which to manage the day-to-day affairs of the Group, including the right to sub-delegate those
limits and powers. Each relevant Group Managing Director or Group Executive Director has
delegated authority within which to manage the day-to-day affairs of the business or function
for which he or she is accountable. Delegation of authority from the Board requires those
individuals to maintain a clear and appropriate apportionment of significant responsibilities and
to oversee the establishment and maintenance of systems of control that are appropriate to
their business or function. Appointments to the most senior positions within HSBC require the
approval of the Board.
Risk identification and monitoring. Systems and procedures are in place to identify, control and
report on the material risk types facing HSBC as set out below:
o wholesale credit risk;
o retail credit risk;
o insurance risk;
o asset, liability and capital management risk;
o market risk;
o financial management risk;
o model risk;
o reputational risk;
o pension risk;
o strategic risk;
o sustainability risk; and
o operational risk (including accounting, tax, legal, regulatory compliance, financial crime
compliance, fiduciary, political, physical, internal, external, contingency, information
security, systems, operations, project and people risks).

Exposure to these risks is monitored by risk management committees, asset, liability and capital
management committees and executive committees in subsidiaries and, for the Group, in Risk
13
Management Meetings of the GMB (RMM) which are chaired by the Group Chief Risk Officer. The
RMM meets regularly to discuss enterprise-wide risk management matters. Asset, liability and capital
management matters are monitored by the Group ALCO, which reports to the RMM.

HSBCs operational risk profile and the effective implementation of the Groups operational risk
management framework are monitored by the Global Operational Risk Committee, which reports to the
RMM.

Model risks are monitored by the Model Oversight Committee which also reports to the RMM.

Changes in market conditions/practices. Processes are in place to identify new risks arising
from changes in market conditions/practices or customer behaviors, which could expose HSBC
to heightened risk of loss or reputational damage. The Group employs a top and emerging risks
framework at all levels of the organization, which enables it to identify current and forward-
looking risks and to take action which either prevents them materializing or limits their impact.
During 2015, attention was focused on:
o economic outlook and capital flows;
o geopolitical risk;
o turning of the credit cycle;
o regulatory developments affecting the business model and profitability;
o regulatory commitments and consent orders;
o regulatory focus on conduct of business and financial crime;
o dispute risk;
o people risk;
o execution risk;
o third-party risk management;
o model risk;
o cyber threat and unauthorized access to systems; and
o data management.
Strategic plans. Strategic plans are prepared for global businesses, global functions and
geographical regions within the framework of the Groups overall strategy. Annual Operating
Plans, informed by detailed analysis of risk appetite describing the types and quantum of risk
that the Group is prepared to take in executing its strategy, are prepared and adopted by all
major HSBC operating companies and set out the key business initiatives and the likely financial
effects of those initiatives.
Disclosure Committee. The Disclosure Committee reviews material public disclosures made by
HSBC Holdings for any material errors, misstatements or omissions. The membership of the
Disclosure Committee, which is chaired by the Group Company Secretary, includes the heads of
Finance, Legal, Risk, Communications and Investor Relations. The integrity of disclosures is
underpinned by structures and processes within the Global Finance and Global Risk functions
that support expert and rigorous analytical review of financial reporting complemented by
certified reviews by heads of global businesses, global functions and certain legal entities.

14
 Financial reporting. The Groups financial reporting process for preparing the consolidated
Annual Report and Accounts 2015 is controlled using documented accounting policies and
reporting formats, supported by a chart of accounts with detailed instructions and guidance on
reporting requirements, issued by Group Finance to all reporting entities within HSBC in advance
of each reporting period end. The submission of financial information from each reporting entity
to Group Finance is subject to certification by the responsible financial officer, and analytical
review procedures at reporting entity and Group levels.
Responsibility for risk management. Management are primarily accountable for measuring,
monitoring, mitigating and managing the risks and controls in their areas of responsibility.
Processes are in place to ensure weaknesses are escalated to senior management and
addressed, supported by the three lines of defence model.
IT operations. Centralized control is exercised over all IT developments and operations.
Common systems are employed for similar business processes wherever practicable.
Global function management. Management of the global functions are responsible for setting
policies, procedures and standards to control the principal risks detailed under Risk
identification and monitoring above.

Authorities to enter into credit and market risk exposures are delegated with limits to line
management of Group companies. The concurrence of the appropriate global function is
required, however, to credit proposals with specified higher risk characteristics. Credit and
market risks are measured and reported at subsidiary company level and aggregated for risk
concentration analysis on a Group-wide basis.
Internal Audit. The establishment and maintenance of appropriate systems of risk management
and internal control is the responsibility of business management. The Global Internal Audit
function, which is centrally controlled, provides independent and objective assurance in respect
of the adequacy of the design and operating effectiveness of the Groups framework of risk
management, control and governance processes across the Group, focusing on the areas of
greatest risk to HSBC using a risk-based approach. The Group Head of Internal Audit reports to
the Chairman of the GAC and administratively to the Group Chief Executive. Executive
management is responsible for ensuring that issues raised by the Global Internal Audit function
are addressed within an appropriate and agreed timetable. Confirmation to this effect must be
provided to Global Internal Audit.

Role of Board Committees

On behalf of the Board, the GAC has responsibility for overseeing risk management and internal controls
over financial reporting and the GRC has responsibility for overseeing risk management and internal
controls, other than over financial reporting.

During the year, the GRC and the GAC have kept under review the effectiveness of this system of
internal control and have reported regularly to the Board. In carrying out their reviews, the GRC and the
GAC received:
15
 regular business and operational risk assessments;
regular reports from the Group Chief Risk Officer and the Group Head of Internal Audit;
reports on the annual reviews of the risk control framework of HSBC Holdings which cover all
internal controls, both financial and non-financial;
half yearly confirmations to the GAC and GRC from audit and risk committees of principal
subsidiary companies regarding, in relation to audit committees, whether their financial
statements have been prepared in accordance with Group policies, present fairly the state of
affairs of the relevant principal subsidiary and are prepared on a going concern basis;
reports confirming if there have been any material losses, contingencies or uncertainties caused
by weaknesses in internal controls;
internal audit reports;
external audit reports;
prudential reviews; and
Regulatory reports.

The GRC and GAC have separately established governance frameworks for their respective oversight and
interaction with the audit and risk committees of key entities within the Group. These provide for
regular reporting, issues escalation and processes for the nomination and endorsement of subsidiary
committee appointments. These principles and processes have in turn been cascaded by these key
entities to their respective subsidiaries to provide clear vertical channels of governance.

The internal control responsibilities of the GAC and GRC are complemented by the activities of the
Conduct & Values Committee ('CVC') and the Financial System Vulnerabilities Committee ('FSVC') which,
respectively, oversee internal controls over conduct-related matters and financial crime compliance. The
GRC receives regular reports at each of its meetings on the activities of both the CVC and the FSVC. The
GRC monitors the status of top and emerging risks and considers whether the mitigating actions put in
place are appropriate. In addition, when unexpected losses have arisen or when incidents have occurred
which indicate gaps in the control framework or in adherence to Group policies, the GRC and the GAC
review special reports, prepared at the instigation of management, which analyse the cause of the issue,
the lessons learned and the actions proposed by management to address the issue.

Effectiveness of internal controls

The Directors, through the GRC and the GAC, have conducted an annual review of the effectiveness of
our system of risk management and internal control covering all material controls, including financial,
operational and compliance controls, risk management systems, the adequacy of resources,
qualifications and experience of staff of the accounting and financial reporting teams and the Global Risk
function, and their training programmes and budget. The annual review of effectiveness of our system
of risk management and internal control over financial reporting was conducted with reference to the
COSO framework. The annual review of other controls was undertaken using the risk management
framework on pages 102 to 103.

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The GRC and the GAC have received confirmation that executive management has taken or is taking the
necessary actions to remedy any failings or weaknesses identified through the operation of our
framework of controls. In particular, during the year it was determined that the control environment
associated with IT privileged access required significant improvement. Deficiencies were noted in the
design and operation of controls for the granting, release and monitoring of privileged access in a
number of systems. For the identified deficiencies management responded by implementing a
programme to determine the scale and nature of the deficiencies, remediate identified control
deficiencies and determine if privileged access had been misused during 2015. Management also
identified and assessed the effectiveness of relevant IT, business, monitoring and period-end mitigating
controls.

17
Competitors (and companys position)*
We will be comparing HSBCs position with Citigroup Inc, Bank of America and JP Morgan Chase & Co.

The first indicator used is Market Capitalization:

Mkt Cap, USD $bn

250 233.989

200

146.22
150 130.355
127.008
Mkt Cap, USD $bn
100

50

0
HSBC Citi BoA JPMC

Second indicator is Revenue:

Revenue $ bn (2015)
120.00

100.00 96.63

84.2
80.00 76.1

59.80
60.00
Revenue $ bn (2015)

40.00

20.00

0.00
HSBC Citi BoA JPMC

Third indicator is geographical segmentation:

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 Geographical Segmentation : Revenue in $bn, 2015
350

300

93.54
250

200

82.51 JPMC
BoA
150
Citi
HSBC
100 76.36

71.66

50 10.85
13.08 71.26
59.46
32.4 43.96
24.61 20.37 11.23 22.28
0 7.11 5.1 2.27 10.64 9.01
Asia Europe North Latin MENA EMEA other Foreign US Total Total
America America excluding non-US Revenue
North
America

Fourth Indicator, Product Segmentation: Percentage of revenue, 2015.

JPMC
7%
13% Consumer & Community Banking

45% Corporate & Investment Bank

35% Asset Management
Commercial Banking

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 HSBC
3%

12%
Retail Banking & Wealth Management
35%
Global Banking & Markets

21% Commercial Banking

Other
Global Private Banking

29%

Bank of America
3%
Consumer & Business Banking

18% Global Wealth and Investment

37% Management
Global Banking

21%
Global Markets

21% All Other

Citigroup Inc

11%

Citicorp
Citi Holdings

89%

Fifth Indicator, Credit Ratings:

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 Name S&P Rating Moody's Rating
HSBC A A1
BoA BBB+ Baa1
Citi BBB+ Baa1

Sixth Indicator, Asset Quality Comparison:

3.00%

2.50%
2.50%

2.00%

1.50% NPA to Tot Ast

1.10% NPA to Tot Ln
1.00%
1.00% 0.80%
0.50%
0.50% 0.30%

0.00%
HSBC BoA JPMC

Seventh Indicator, Market Data comparison:

HSBC:

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Citigroup Inc:

BoA:

JPMC:

Analysis of HSBCs Position

22
Top Holders

BLACKROCK 5.80%
JPMORGAN CHASE & CO 4.79%
LEGAL & GENERAL GROUP PLC 2.45%
VANGUARD GROUP 2.11%
NORGES BANK 1.82%
STATE STREET CORP 1.77%
ABERDEEN 1.21%

*All data taken from Bloomberg Terminal

SWOT Matrix for development and competitiveness

23
From the analysis of previous segment, competitors, we can create a SWOT matrix

Strength:

1. HSBCs strength is retail banking and wealth management, 35% of HSBCs revenue comes from
it. Thus is competes strongly with its competitors like BoA, JPMC etc.
2. According to credit rating chart, S&Ps and Moodys rating for HSBC is favorable as compared to
its competitors.

Weakness:

1. According to the asset quality comparison chart, HSBC has the highest NPA to Total Loan and
NPA to total asset, as compared to its competitors.
2. Revenue of HSBC has been falling from 68.33 Billion USD in 2012 to 59.80 Billion USD in 2015 (as
shown in the section analysis of HSBCs position)
3. EPS is expected to fall from 0.90 in 2013 to 0.58 in 2016.
4. There has been 25% fall in share price of HSBC from July 2015 to June 2016.
5. It has low revenue and market capitalization as compare to its competitors.

Opportunities:

1. 35% of HSBCs revenue comes from retail banking and wealth management (see product
segmentation chart). Also from geographical segmentation chart we can see that HSBC has good
penetration in Asian market, which has a huge demographic. Thus it can leverage Asian markets
to further augment its revenue.
2. Low revenue share from MENA and Latin America, presently a prospective market for the
future.

Threats:

1. Market data i.e. stock price for HSBCs competitors like BoA and JPMC has been relatively stable.
This might threaten the market position of HSBC.
2. HSBC recently closed around 80 branches in India due to non-viability of operation in this region.
Citigroup and others might try to capitalize on this situation.

Suggestion: There is a need to re-evaluate the strategy of HSBC. This is also in the light of recent
international agreement of information exchange for tax related purpose. Such agreements bite off the
strategy of HSBC, which is largely focused on HNIs as customers.

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Problems Faced
Global challenges:

A brief overview :

Global economic growth remained subdued with a number of headwinds present. The slowdown of the
mainland Chinese economy dampened global trade flows and caused volatility in currency and global
stock markets. Performance among developed markets was haphazard, with the US and UK performing
better than the Eurozone, where the risk of a Greek exit faded in the second half of the year and ECB
monetary policy remained supportive. However, this situation is in tenterhooks and difficult to speculate
on. Emerging market economies were affected by falling commodity prices as mainland Chinese demand
slowed along with the prospect of monetary policy normalisation in the US. This led to capital outflows
from emerging markets and a significant depreciation in several key currencies against the US dollar.
Against this backdrop, HSBC maintained an overall defensive risk profile in the trading businesses.
Defensive positions are characterised by low net open positions or the purchase of volatility protection
via options trades. Non-trading VaR increased during the year as higher interest rates, especially in US
dollars, caused the duration of non-trading assets to increase.

1) The Swiss bank tax evasion scandal

Last year. HSBC was engulfed in a mess called the tax evasion scandal. The ruckus started after an ex-
employee leaked a list of thousands of suspected tax evaders with private Swiss accounts to French
authorities in 2008. The International Consortium of Investigative Journalists and news organizations
dug through the files and found that the bank hid millions of dollars for wealthy people, including some
Canadian billionaires. Part of the probe focused on four clients who shifted Mediterranean and Israel-
based funds through the bank. Geneva's chief prosecutor Yves Bertossa told a news conference that
HSBC failed to detect money laundering through its private bank operations. Following this, the Geneva
authorities instructed HSBC to pay a record 40m Swiss francs for organisational deficiencies. It also
sentenced Herve Felciani, an IT expert to 5 years in prison by a Swiss court for aggravated industrial
espionage, data theft and violation of commercial and banking secrecy. At the time, the Financial
Conduct Authority said it was looking at the working practices inside the bank after admitting it had
learned about the details of the activities in the Swiss bank from the reports in the Guardian and other
publications. However, the FCA has now concluded that review and will not take formal action against
HSBC. Even though, HSBC has been acquitted of all charges as of now but its image has taken a beating.
Even the HSBC executives have admitted that it has an inability to block transactions that facilitate law
breaking. The Guardian said that it had substantial proof that gave out the fact that a confidential
meeting was held among independent lawyers monitoring HSBC as part of a 2012 deal with the U.S.
Department of Justice, which allowed the bank to pay a $1.9 billion fine and submit to monitoring in
exchange for deferred prosecution for the actions of its Mexican branch in laundering millions of dollars
in drug cartel money. He admitted the bank was shamed by the events at its Swiss unit and hit out at the
notion he should know what every one of the firms 257,000 employees was doing. He asserted that the
bank was being held to a higher standard of account than the church and armed forces.I would say that

25
a number of us, myself included, think that the practices at the Swiss private bank in the past are a
source of shame and reputational damage to HSBC. Yes, I think shame is an appropriate noun, said
Gulliver.One of the largest impacts has been on morale inside HSBC. All of us are subject to scrutiny
from our families, our friends and people we meet generally in our everyday lives.One of the main
challenges that the bank faces is to restore the image of the bank back to its old glory days

2) Compliance costs crippling global ambitions in countries

Tighter regulation in various regions of the world has made the scandal plagued banks sprawling empire
too expensive to manage. HSBC was forced to sell its Brazilian subsidiary in a landmark retreat from its
strategy of being the worlds local bank. The move is also another vote of no-confidence in one of the
worlds biggest emerging economies, a country that was supposed to become an engine of global
growth before a downturn in world demand for its biggest commodity exports exposed the scale of the
countrys economic mismanagement during the boom years. HSBC said its first-half profit growth was
driven by an investing frenzy in Hong Kong among individual customers prompted by China's soaring
markets earlier in the year.The bank admitted that the banking environment remained challenging and
the economic climate was particularly uncertain in China and the euro zone. The compliance issues and
the 2,200 people that the firm hired for fulfilling these issues acted as a huge bottleneck and costs shot
up in the first six months itself. As a response to increased regulatory costs, HSBC is trying to become
simpler and more transparent, aiming to shrink its risk-adjusted assets by 25%. Cutting costs remains a
challenge. Costs rose 7 percent from a year ago, which the bank said was due to high regulatory and
compliance costs and spending to grow revenues. HSBC said it added more than 2,200 compliance staff
in the first half alone The bank said earlier this year it will exit its under-performing operations in
Turkey and most of its other smaller operations due to cost issues.

3) The failing Chinese economy

HSBC has clearly had a tough time in the final three months of 2015, as volatile markets and a slowing
world economy hit their profits. HSBC's Asian subsidiary is more profitable than its operations in Europe
and the bank is ramping up operations in China. While HSBC has been forced to make massive
redundancies in Britain this year, and is shutting its operations in Turkey and Brazil as business in
emerging markets comes under increasing pressure, the bank said earlier this week as it reported
better than expected quarterly profits that it would step up investment banking in China through a
joint venture in a securities business. This is the particularly the case with the failing Chinese economy.
HSBC is implementing a pay and hiring freeze to control costs. Mr Gulliver said China "is reforming with
a clear purpose" and has two main priorities for developing its economy: better use of overseas direct
investment and sustainability with a focus on green technologies. The recent share-market volatility in
China has "little or no bearing on the long-term trends around China, in part because the majority of the
drivers of the economy remain state-owned and -financed, not capital market dependent," he said.
Their profits in the region will be an early indicator of the extent of the slowdown in the Chinese
economy.

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 4) Regular disruptions in the online banking system

There have been regular incidents of outages and the malfunctioning of the online banking system all
across the world. The personal banking website does not allow customers to log on while business
accounts run slowly. A spokesperson also admitted that it generates due to a complex technical issue
within the system. Business customers were experiencing "significantly reduced capacity", with all
services running much more slowly than normal speed. The personal banking website in some cases, did
not allow customers to log on. On Monday, up to 17 million personal and business customers were
locked out of their accounts for up to nine hours.

5) Job cuts in the global market :

HSBC will shed almost 50,000 jobs and take an axe to its investment bank, cutting the assets of Europe's
biggest lender by a quarter in a bid to simplify and improve its sluggish performance. The bank recently
stated that about half the staff cuts will come from the sale of businesses in Brazil and Turkey. The other
half will come from cutting about 10 per cent of the remaining 233,000 staff by consolidating IT and
back office operations and closing branches. Even dozens of senior jobs are being cut in the investment
bank division. HSBC said last June it would slash nearly one in five jobs, as Chief Executive Stuart Gulliver
seeks to combat sluggish growth across the lender's sprawling empire. Part of that cull involves cutting
back risk weighted assets in the investment banking and trading unit of the bank, known as global
banking and markets, by up to one third. The self-styled "world's local bank" will transfer the jobs to
India, Malaysia and China over the next two and a half years. Around 1,400 of the jobs will be lost in
HSBC call centres, most of the remaining cuts being in administration. The decision is part of a trend
sweeping British industry, with firms in the finance, airline and phone directory sectors shifting
administrative and call centre jobs to low-wage nations.

6) Oil and gas prices :

Oil and commodity prices have remained low since the middle of 2014 as a result of existing global
supply and demand imbalances, with significant price declines in late 2015 and early 2016. Continued
lower oil prices cause increased credit risks within oil-related industries together with fiscal and
financing challenges for energy exporters. The overall portfolio of exposures directly exposed to oil and
gas companies had drawn risk exposures amounting to about $29bn (2014: $34bn) with sub-sectoral
distributions as follows: integrated producers 48%, service companies 28%, pure producers 17% and
infrastructure companies 7%. The credit quality distribution of the oil and gas portfolio was as follows:
strong and good categories made up 56% of the portfolio, satisfactory 35%, sub-standard 7% and
impaired 2%. The majority of the exposures were located in North America, Asia and Europe. Oil and
gas related counterparties have responded rapidly to the changing economic outlook, cutting back on
capital expenditure as well as reducing operating expenses in order to manage cash flows and sustain

27
profitability. Large integrated producers remained resilient. Within the pure producers sector, the
higher cost entities such as shale and oil sands producers showed more evidence of stress, resulting in
credit grade deterioration. Similarly, service companies continued to be more vulnerable as producers
curtailed capital expenditures. This led to a fluctuation in the fortunes of HSBC in foreign markets.

7) Metal and mining :

Metals prices declined during 2015 although the pace and extent of the price decline was more gradual
than for oil and gas. Precious metals, copper, nickel and zinc prices are generally forecast to improve
slightly in 2016. The outlook for steel, aluminium and bulk metals is more negative due to a combination
of oversupply and reduction in demand. The low oil and gas prices benefit most metals and mining
customers given that they are large consumers of energy. Our total drawn risk exposure to metals and
mining was $18bn (steel and aluminium $9bn, copper, nickel and zinc $4bn, iron ore and metallurgical
coal $3bn, precious metals $2bn). Individually assessed loan impairments were $0.1bn. Given the
pressures in metals prices the metals and mining sector is under heightened management review.
8) Financial crime compliance and regulatory compliance :

HSBC continued to experience increased levels of compliance risk as regulators and other agencies
pursued investigations into historical activities. Examples include continued engagement with respect to
compliance with AML and sanctions law (historical investigations gave rise to the US DPA and related
FCA Direction), on-going interaction with regulators relating to mis-selling of the PPI policies and
allegations of pressure selling in the UK, investigations in relation to conduct in the foreign exchange
market, and benchmark interest rate and commodity price setting. The level of inherent compliance risk
remained high in 2015 as the industry continued to experience greater regulatory scrutiny and
heightened levels of regulatory oversight and supervision.

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Future Outlook
Along the lines of their core strategy, the main ambition is to be recognised as the worlds leading and
most respected international bank. They plan to achieve this by focusing on the needs of the customers
and the societies that they serve, thereby delivering long-term sustainable value to all for all the
stakeholders. We aim to provide an unparalleled international network to connect faster-growing and
developed markets. HSBC seeks to develop their wealth and retail banking businesses in markets where
we a profitable scale can be achieved. The strategy is built around long-term trends and reflects the
distinctive advantages.

Economic outlook for major economies

Expectations for growth and inflation have been revised lower since the start of the year, but the broad
cyclical environment hasnt changed too much. The lacklustre growth and low-flation is expected to
continue in the similar manner. This means that the interest rate cycle, when it comes, will be slow and
low.

In the US, the consensus is for 2% GDP growth in 2016. Meanwhile, labour market data is pointing to full
employment and underlying inflation measures are picking up steam. In turn, it is being thought that
this puts some pressure on corporate profits. It could also mean that, despite the relatively weak rate of
growth, some cyclical inflation pressures emerge.

The story in Europe looks a bit different. Weve seen very supportive policy from the ECB, some stronger
domestic demand signals, and robust credit growth. The near-term picture seems relatively positive and
we think it will be supportive for European risk assets in the near term. But 2016 growth is still only set
to be 1.5%. This underlines the European problem around potential growth. Some analysts estimate that
trend growth (the economys speed limit) is only around 1%. In the words of its Group Chief Executive,
HSBC is better balanced, better connected and better placed to capitalise on higher return businesses
than it was 12 months ago. Our universal banking model is generating higher income from collaboration
between businesses and our operating expenses and capital ratio are trending in the right direction.
Maintaining these trends while boosting revenue will be the principal challenge in the year ahead. The
current economic environment is uncertain but our diversified banking model low earnings volatility and
strong capital generation give us strength and resilience that will stand us in good stead.

Plan of action

HSBC is investing in areas of the business that extract the greatest gain from our international network
and market-leading strength in Asia. Investment in flagship transaction banking products helped to
increase our market share, particularly in Payments and Cash Management, Foreign Exchange and
Securities Services. The development of our Asia businesses is gaining momentum and we achieved
grow thin excess of GDP in seven out of eight of our priority Asia markets. We continue to expand our
business in the Pearl River Delta and reached a number of milestones in 2015, including the signing of an
agreement to form the first majority foreign-owned securities company in mainland China. When
approved, this will allow us to engage in the full spectrum of securities business in the country. We

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remain the worlds number one bank for offshore Renminbi services and increased revenue by 3% year-
on-year in this vitally important growth market

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Summary and Conclusion
The tale so far can be segmented into a very volatile quarter followed by a calmer, flatter phase of price
action during the next quarter. Recession concerns dominated market participants thinking during
January and February, but policy actions have been a key influence on sentiment since then. Investor
perceptions of risk have subsequently improved. Today, the odds that the market is offering us are
much less extreme than earlier in the year. The macro environment remains a fragile equilibrium a
combination of low growth and low inflation, with risks. Given heightened uncertainty around economic
policy and little margin of safety in risk asset pricing, there is scope for further bouts of volatility in
markets. Over the medium term, risk assets still look reasonably valued and relatively attractive.
Strategic exposures in credits and equities still make sense, especially when compared to the ultra-low
level of government bond yields and likely return from cash. However, from a tactical perspective, we
want to wait for better opportunities. Tactically, we think the watch-word is patient opportunism. At
the beginning of the year and until mid-February, global growth concerns were top of mind for
economists and market analysts. There were three drivers of this worry. First, the apparent
deterioration in US manufacturing data stoked fears of a spill-over into other sectors and a wider
recession in the US. Second, a backdrop of weak prices in key financial market indicators such as
government bond yields, commodity prices, and shipping indices was perceived as a bad omen for
global growth. Third, market participants were concerned about the increased uncertainty in the
outlook for China, and especially about RMB currency policy. A number of highly-respected analysts
feared a rapid depreciation of the RMB based on the perceived unsustainable debt situation,
deteriorating cyclical indicators, and the risk of a policy error. These were plausible-sounding worries,
and they drove a brutal sell-off in risky assets through to mid-February (Global HY fell -5%, Global
equities fell -11%). Weakness in some asset classes was exacerbated by high exposures to the energy
sector (e.g. US High Yield has a 15% weight), after the oil price fell a further 30% to a low of USD26 per
barrel (WTI).Since February, however, markets have bounced back and even moved to new highs for the
year.

As per the HSBCs report, it is facing several critical issues and to come out of it, it is also trying out
desperate measures like retrenchment in massive numbers and also to close its operations in various
other countries. Though the upper management has taken responsibility for issues like the Swiss
scandal, its response has remained lukewarm in other issues like system failures and cutting jobs.
Though its efforts to stabilize cannot be questioned, time alone will tell if these techniques can hold
water and help HSBC to overcome these underlying difficulties.

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