TIDM57HB
RNS Number : 0785A
Hongkong & Shanghai Banking Corp Ld
21 March 2017
14 Investments in subsidiaries
The principal subsidiaries of the Bank are:
The group's
interest
in
issued
share
capital
/ registered
Place Principal or charter
of incorporation activity capital
Hang Seng Bank Limited
.................................................. Hong
............. Kong Banking 62.14%
HSBC Bank (China) Company
Limited .......................................... PRC(1) Banking 100%
HSBC Bank Malaysia Berhad
..................................................
....... Malaysia Banking 100%
HSBC Bank Australia Limited(2)
..................................................
.... Australia Banking 100%
HSBC Bank (Taiwan) Limited(2)
..................................................
.... Taiwan Banking 100%
HSBC Bank (Singapore) Limited.....................
................................ Singapore Banking 100%
HSBC Life (International)
Limited(2) ......................................
......... Bermuda Retirement 100%
benefits
and
life insurance
1 People's Republic of China
2 Held indirectly
All the above subsidiaries are included in the group's
consolidated financial statements. All these subsidiaries make
their financial statements up to 31 December.
The principal places of business are the same as the places of
incorporation except for HSBC Life (International) Limited which
operates mainly in Hong Kong.
The proportion of voting rights held is the same as the
proportion of ownership interest held.
The principal subsidiaries are regulated banking and insurance
entities in the Asia-Pacific region and, as such, are required to
maintain certain minimum levels of capital and liquid assets to
support their operations. The effect of these regulatory
requirements is to limit the extent to which the subsidiaries may
transfer funds to the Bank in the form of repayment of shareholder
loans or cash dividends.
Subsidiary with material non-controlling interest
2016 2015
Hang Seng Bank Limited
Ownership interest and voting rights
held by non-controlling interests
................................... 37.86% 37.86%
HK$m HK$m
Profit attributable to non-controlling
interests ....................................................................... 6,138 10,409
Accumulated non-controlling interests
of the subsidiary ......................................................... 50,601 51,231
Dividends paid to non-controlling
interests ............................................................................ 6,297 4,053
Summarised financial information
(before intra-group eliminations):
* Assets
.....................................................
.....................................................
....................... 1,377,242 1,334,429
* Liabilities
.....................................................
.....................................................
.................. 1,236,556 1,192,448
* Net operating income before loan impairment
.....................................................
............... 30,563 41,950
* Profit for the
year.................................................
.....................................................
......... 16,204 27,494
* Other comprehensive income
.....................................................
........................................ (582) (13,700)
* Total comprehensive income
.....................................................
........................................ 15,622 13,794
15 Interests in associates and joint ventures
2016 2015
HK$m HK$m
Share of net assets
.................................................................................................
.................... 121,985 118,328
Goodwill
.................................................................................................
................................... 3,787 4,042
Intangible assets
.................................................................................................
........................ 58 123
Deferred tax on intangible assets
................................................................................................ (14) (31)
Impairment
.................................................................................................
.............................. (24) (24)
------- -------
125,792 122,438
------- -------
At 31 December 2016, the group's interests in associates
amounted to HK$125,792m (2015: HK$121,929m).
(i) Principal associate
The group's
interest
in
issued share
Place of incorporation capital
Bank of Communications Co., People's Republic
Ltd. .......................................................... of China 19.03%
Bank of Communications Co., Ltd. is listed on recognised stock
exchanges. The fair value represents valuation based on the quoted
market price of the shares held (Level 1 in the fair value
hierarchy) and amounted to HK$79,160m at 31 December 2016 (2015:
HK$77,039m).
Bank of Communications Co., Limited ('BoCom')
The group's significant influence in BoCom was established via
representation on BoCom's Board of Directors, and a Technical
Cooperation and Exchange Programme ('TCEP'). Under the TCEP, a
number of HSBC staff have been seconded to assist in the
maintenance of BoCom's financial and operating policies.
Impairment testing
At 31 December 2016, the fair value of HSBC's investment in
BoCom had been below the carrying amount for approximately 56
months. As a result, the group performed an impairment test on the
carrying amount, which confirmed that there was no impairment at 31
December 2016.
At 31 December 2016 At 31 December 2015
------------------------------------- --------------------------------------------------
Carrying Fair Carrying Fair
VIU amount value VIU amount value
HK$bn HK$bn HK$bn HK$bn HK$bn HK$bn
Bank of
Communications
Co., Limited
........ 124.8 122.8 79.2 132.1 119.5 5 77.0
Basis of recoverable amount
The impairment test was performed by comparing the recoverable
amount of BoCom, determined by a value in use ('VIU') calculation,
with its carrying amount. The VIU calculation used discounted cash
flow projections based on management's estimates of earnings. Cash
flows beyond the short to medium-term were then extrapolated in
perpetuity using a long-term growth rate. An imputed capital
maintenance charge ('CMC') is calculated to reflect expected
regulatory capital requirements, and is deducted from forecast cash
flows. The principal inputs to the CMC calculation include
estimates of asset growth, the ratio of risk-weighted assets to
total assets, and the expected regulatory capital requirements.
Management judgement is required in estimating the future cash
flows of BoCom.
15 Interests in associates and joint ventures (continued)
Key assumptions in VIU calculation
-- Long-term profit growth rate: 5% (2015: 5%) for periods after
2019, which does not exceed forecast GDP growth in mainland
China.
-- Long-term asset growth rate: 4% (2015: 4%) for periods after
2019, which is the rate that assets are expected to grow to achieve
long-term profit growth of 5%.
-- Discount rate: 13% (2015: 13%) which is derived from a range
of values obtained by applying a capital asset pricing model
('CAPM') calculation for BoCom, using market data. Management also
compares rates derived from the CAPM with discount rates from
external sources and the Group's discount rate for evaluating
investments in mainland China. The discount rate used was within
the range of 10.2% to 15.0% (2015: 10.1% to 14.2%) indicated by the
CAPM and external sources.
-- Loan impairment charge as a percentage of customer advances:
a range from 0.72% to 0.87% (2015: 0.71% to 0.78%) in the short to
medium-term and are based on the forecasts disclosed by external
analysts. For periods after 2019, the ratio is 0.7% (2015: 0.7%),
slightly higher than the historical average.
-- Risk-weighted assets as a percentage of total assets: 62% for
all forecast periods (2015: 67% for all forecast periods). This is
consistent with medium-term forecasts disclosed by external
analysts.
-- Cost-income ratio: 40% (2015: 41%) in the short to
medium-term. The ratios were consistent with the short to
medium-term range forecasts of 39.9% to 40.2% (2015: 40.3% to
40.7%) disclosed by external analysts.
The following table shows the change to each key assumption in
the VIU calculation that on its own would reduce the headroom to
nil.
Key assumption Changes to key assumption
to reduce headroom to nil
* Long-term profit growth rate * Decrease by 10 basis points
* Long-term asset growth rate * Increase by 11 basis points
* Discount rate * Increase by 13 basis points
* Loan impairment charge as a percentage of customer * Increase by 2 basis points
advances
* Increase by 74 basis points
* Risk-weighted assets as a percentage of total assets
* Increase by 47 basis points
* Cost-income ratio
----------------------------------------------------------- ----------------------------------
The following table further illustrates the impact on VIU of
reasonably possible changes to key assumptions. This reflects the
sensitivity of the VIU to each key assumption on its own and it is
possible that more than one favourable and/or unfavourable change
may occur at the same time.
15 Interests in associates and joint ventures (continued)
Favourable change Unfavourable change
------------------------------- ---------------------------------------
Increase Decrease
in VIU VIU in VIU VIU
bps HK$bn HK$bn bps HK$bn HK$bn
At 31 December
2016
Long-term profit
growth rate
.. - - 124.8 -150 (25.7) 99.1
Long-term asset
growth rate
... -80 13.6 138.4 - - 124.8
Discount rate
................
......... -100 18.1 142.9 - - 124.8
2016
to 2019:
0.93%
2020
onwards:
Loan impairment
charge as a
percentage of
customer advances
.................
............. - - 124.8 0.80% (8.4) 116.4
Risk-weighted
assets as a
percentage of
total assets
.... -30 0.8 125.6 +170 (4.7) 120.1
Cost-income
ratio
.................
.. -170 7.3 132.1 +250 (10.6) 114.2
At 31 December
2015
Long-term profit
growth rate
.. +100 25.1 157.2 -210 (36.5) 95.6
Long-term asset
growth rate
... -50 9.1 141.2 +100 (21.4) 110.7
Discount rate
.................
......... -150 32.2 164.3 +110 (16.4) 115.7
2015
to 2018:
0.85%
2019
onwards:
Loan impairment
charge as a
percentage of
customer advances
................. 0.70%
............ throughout 1.1 133.2 0.75% (5.3) 126.8
Risk-weighted
assets as a
percentage of
total assets
.... -350 9.0 141.1 +10 (0.2) 131.9
Cost-income
ratio
.................
.. -250 11.5 143.6 +120 (5.4) 126.7
Considering the interrelationship of the changes set out in the
table above, management estimates that the reasonably possible
range of VIU is HK$84bn to HK$147bn.
15 Interests in associates and joint ventures (continued)
Selected financial information of BoCom
The statutory accounting reference date of BoCom is 31 December.
For the year ended 31 December 2016, the group included the
associate's results on the basis of financial statements made up
for the 12 months to 30 September 2016, but taking into account the
financial effect of significant transactions or events in the
period from 1 October 2016 to 31 December 2016.
At At
30 September 30 September
2016 2015
HK$m HK$m
Selected balance sheet information
of BoCom
Cash and balances at central banks
.................................................
...................................... 1,069,067 1,121,481
Loans and advances to banks and
other financial institutions
............................................... 786,695 859,625
Loans and advances to customers
.................................................
........................................ 4,390,644 4,344,068
Other financial assets
.................................................
.................................................
......... 2,413,593 1,896,670
Prepayment, accrued income and other
assets
.................................................
..................... 382,370 384,827
------------------------------- -------------------------------
Total assets
.................................................
.................................................
........................ 9,042,369 8,606,671
------------------------------- -------------------------------
Deposits by banks and other financial
institutions
.................................................
............... 2,306,842 2,024,465
Customer accounts
.................................................
.................................................
............. 5,280,905 5,362,887
Other financial liabilities
.................................................
.................................................
.... 542,533 363,737
Other liabilities
.................................................
.................................................
.................. 216,071 227,311
Total liabilities
.................................................
.................................................
................... 8,346,351 7,978,400
------------------------------- -------------------------------
Total equity
.................................................
.................................................
....................... 696,018 628,271
------------------------------- -------------------------------
Total equity attributable to:
* ordinary
shareholders...............................
..........
...........................................
..........
.......... 625,727 606,772
* non-controlling
interests..................................
..........
...........................................
..........
.. 3,417 3,687
- preference
shareholders.....................................
.................................................
............... 66,874 17,812
Reconciliation of BoCom's net assets
to carrying amount in the group's
consolidated
financial statements
The group's share of net assets
.................................................
........................................... 119,104 115,497
Add: Goodwill
.................................................
.................................................
..................... 3,681 3,934
Add: Intangible assets
.................................................
.................................................
......... 44 92
Carrying
amount...........................................
.................................................
....................... 122,829 119,523
------------------------------- -------------------------------
For the 12 months
ended
30 September
----------------------------------------------------------------
2016 2015
HK$m HK$m
Selected income statement information
of BoCom
Net interest income
.................................................
.................................................
........... 160,016 173,631
Net fee and commission income
.................................................
.......................................... 42,641 42,115
Loan impairment charges
.................................................
.................................................
... (33,252) (29,245)
Depreciation and amortisation
.................................................
............................................ (9,437) (7,842)
Tax expense
.................................................
.................................................
...................... (21,734) (23,073)
Profit for the year
.................................................
.................................................
............. 78,796 82,437
Other comprehensive income
.................................................
............................................. 6,795 2,919
Total comprehensive income
.................................................
.............................................. 85,591 85,356
Dividends received from BoCom
.................................................
......................................... 4,503 4,841
15 Interests in associates and joint ventures (continued)
(ii) Other associates
Summarised aggregate financial information in respect of
associates not individually material
2016 2015
HK$m HK$m
Carrying value
................................................................................................
................ 2,963 2,407
The group's share of:
* Assets 6,213 2,777
* Liabilities..........................................
.....................................................
..................... 3,357 370
* Profit or loss from continuing operations
.....................................................
.............. 167 229
* Total comprehensive
income...............................................
....................................... 167 229
Other expense related to investment
in an associate:
* Impairment of an associate
.....................................................
................................... 24 24
At 31 December 2016, the group's share of associates' contingent
liabilities incurred relating to the group's interest in associates
was HK$273,500m (2015: HK$303,980m).
During the year, Canara HSBC Oriental Bank of Commerce Life
Insurance Company Limited has been changed from a joint venture to
an associate.
16 Goodwill and intangible assets
Goodwill and intangible assets includes goodwill arising on
business combinations, the present value of in-force long-term
insurance business, and other intangible assets.
2016 2015
HK$m HK$m
Goodwill
...................................................................................................
............................. 6,201 6,344
Present value of in-force long-term
insurance business............................................................ 44,077 36,897
Other intangible assets
...................................................................................................
........ 6,658 6,327
------ ------
56,936 49,568
------ ------
a The present value of in-force long-term insurance business ('PVIF')
(i) PVIF specific assumptions
The following are the key long term assumptions used in the
computation of PVIF for Hong Kong, being the main life insurance
operations:
2016 2015
Weighted average risk free rate
................................................................................. 2.09% 1.82%
Weighted average risk discount
rate .......................................................................... 6.34% 6.81%
Expenses inflation
.................................................................................................... 3.00% 3.00%
16 Goodwill and intangible assets (continued)
(ii) Movement in PVIF for the year ended 31 December
2016 2015
HK$m HK$m
At 1
January.........................................................................
....................................... 36,897 32,389
Value of new business written
during the year ............................................................ 6,048 4,972
Movements arising from in-force
business:
* expected return
.....................................................
................................................ (2,622) (2,518)
* experience variances
.....................................................
........................................ 225 (136)
* changes in operating assumptions
.....................................................
.................... 2,675 752
Investment return variances
................................................................................
..... 2,004 1,592
Changes in investment assumptions
.......................................................................... (1,062) (9)
Other adjustments
................................................................................
..................... 38 36
------------------------ -------
Changes in
PVIF............................................................................
............................ 7,306 4,689
Exchange differences and other
................................................................................ (126) (181)
------------------------ -------
At 31 December
................................................................................
....................... 44,077 36,897
------------------------ -------
17 Property, plant and equipment
a Property, plant and equipment
2016 2015
-------------------------------- --------------------------------
Land Investment Land Investment
and and
buildings properties Equipment buildings properties Equipment
HK$m HK$m HK$m HK$m HK$m HK$m
Cost or valuation
At 1 January
.............................. 94,000 10,716 24,539 86,753 12,784 23,826
Exchange and
other adjustments (480) (2) (218) (580) (16) (581)
Additions
................................... 489 - 2,520 554 699 2,434
Disposals
.................................... (20) - (4,749) (28) - (1,091)
Elimination
of accumulated
depreciation
on revalued
land and buildings
.................... (2,575) - - (2,428) - -
Surplus on revaluation
................ 3,825 36 - 6,601 480 -
Reclassifications
......................... (105) (121) - 3,128 (3,231) (49)
--------- ---------- --------- --------- ---------- ---------
At 31 December
......................... 95,134 10,629 22,092 94,000 10,716 24,539
--------- ---------- --------- --------- ---------- ---------
Accumulated
depreciation
At 1 January
.............................. 167 - 19,024 74 - 18,610
Exchange and
other adjustments (3) - (167) 86 - (452)
Charge for the
year .................... 2,598 - 1,895 2,456 - 1,924
Disposals
.................................... (18) - (4,706) (25) - (1,054)
Elimination
of accumulated
depreciation
on revalued
land and buildings
.................... (2,575) - - (2,428) - -
Reclassifications
......................... - - - 4 - (4)
--------- ---------- --------- --------- ---------- ---------
-
At 31 December
......................... 169 - 16,046 167 - 19,024
--------- ---------- --------- --------- ---------- ---------
Net book value
at
31 December
.......................... 94,965 10,629 6,046 93,833 10,716 5,515
--------- ---------- --------- --------- ---------- ---------
Total at 31
December ................ 111,640 110,064
--------- ---------
17 Property, plant and equipment (continued)
b The carrying amount of land and buildings, had they been
stated at cost less accumulated depreciation, would have been as
follows:
2016 2015
HK$m HK$m
Cost less accumulated depreciation
.................................................................................. 21,967 22,027
------ ------
c Valuation of land and buildings and investment properties
The group's land and buildings and investment properties were
revalued in November 2016 and updated for any material changes at
31 December 2016. The basis of valuation for land and buildings and
investment properties
was open market value, depreciated replacement cost or surrender
value as noted in note 1(a)(vii). The resultant values are Level 3
in the fair value hierarchy. There were no transfers in to or out
of Level 3 during the year (2015: nil). The fair values for land
and buildings are determined by using direct comparison approach
which values the properties in their respective existing states and
uses, assuming sale with immediate vacant possession and by
making reference to comparable sales evidence. The valuations
take into account the characteristics of the properties
(unobservable inputs) which include the location, size, shape,
view, floor level, year of completion and other factors
collectively. The premium or discount applied to the
characteristics of the properties is within minus 20 percent and
plus 20 percent. In determining the open market value of investment
properties, expected future cash flows have been discounted to
their present values. The net book value of 'Land and buildings'
includes HK$12,249m
(2015: HK$12,627m) in respect of properties which were valued
using the depreciated replacement cost method or surrender
value.
Land and buildings and investment properties in Hong Kong, Macau
and mainland China, represent 96% by value of the group's
properties subject to valuation. The valuations were carried out by
DTZ Cushman & Wakefield Limited who have recent experience in
the location and type of properties and who are members of the Hong
Kong Institute of Surveyors. Properties in eleven countries,
representing 4% by value of the group's properties, were valued by
different independent professionally qualified valuers.
18 Prepayments, accrued income and other assets
2016 2015
HK$m HK$m
Prepayments and accrued income
.......................................................................................... 21,505 21,186
Bullion
.................................................................................................
.................................. 69,894 47,105
Acceptances and endorsements
.............................................................................................. 32,290 31,480
Reinsurers' share of liabilities
under insurance contracts (note
24).......................................... 11,368 8,543
Current tax assets
.................................................................................................
................. 3,537 1,013
Other accounts
.................................................................................................
..................... 32,636 24,735
------- -------
171,230 134,062
------- -------
Prepayments, accrued income and other assets included HK$84,162m
(2015: HK$76,035m) of financial assets, the majority of which were
measured at amortised cost.
19 Customer accounts
2016 2015
HK$m HK$m
Current
accounts.....................................................................................
.................................. 991,562 949,169
Savings
accounts.....................................................................................
.................................. 2,946,379 2,645,151
Other deposit
accounts.....................................................................................
........................ 962,063 1,045,756
--------- ---------
4,900,004 4,640,076
--------- ---------
20 Trading liabilities
2016 2015
HK$m HK$m
Certificates of deposit in issue
..................................................................
................................ 1,341 1,770
Other debt securities in issue
..................................................................
.................................. 24,361 18,387
Short positions in securities
..................................................................
................................... 79,048 60,488
Deposits by banks
..................................................................
.................................................. 9,557 12,504
Customer accounts
..................................................................
................................................. 74,163 98,702
---------------------- -----------------------
188,470 191,851
---------------------- -----------------------
Other debt securities in issue comprises of structured notes
issued, for which market risks are actively managed as part of
trading portfolios.
21 Financial liabilities designated at fair value
2016 2015
HK$m HK$m
Debt securities in issue
............................................................................
................................. 14,814 14,721
Liabilities to customers under investment
contracts ................................................................. 36,302 36,049
--------------- --------------------
51,116 50,770
--------------- --------------------
At 31 December 2016, the carrying amount of the debt securities
in issue was HK$58m higher than the contractual amount at maturity
(2015: HK$102m). At 31 December 2016, the accumulated gain in fair
value attributable to changes in credit risk for debt securities in
issue was HK$39m (2015: HK$26m loss).
22 Debt securities in issue
2016 2015
HK$m HK$m
Certificates of deposit
.......................................................................................
..................... 1,709 6,181
Other debt securities
.......................................................................................
....................... 23,526 34,678
------------------ ------
25,235 40,859
------------------ ------
23 Accruals and deferred income, other liabilities and
provisions
2016 2015
HK$m HK$m
Accruals and deferred income
................................................................................................ 24,409 25,425
Acceptances and endorsements
.............................................................................................. 32,290 31,480
Share based payment liability to
HSBC Holdings plc ............................................................... 1,945 1,769
Other liabilities
...................................................................................................
................... 39,676 27,043
Provisions for liabilities and charges
(note 25) ....................................................................... 1,167 1,203
99,487 86,920
------ ------
Accruals and deferred income, other liabilities and provisions
included HK$91,602m (2015: HK$78,221m) of financial liabilities
which were measured at amortised cost.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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