TIDMHSBA
RNS Number : 0668Q
HSBC Holdings PLC
23 February 2021
Personal lending
This section presents further disclosures related to personal
lending. It provides details of the regions, countries and products
that are driving the change observed in personal loans and advances
to customers, with the impact of foreign exchange separately
identified. Additionally, Hong Kong and UK mortgage book LTV data
is provided.
This section also provides a reconciliation of the opening 1
January 2020 to 31 December 2020 closing gross carrying/nominal
amounts and associated allowance for ECL.
Further product granularity is also provided by stage, with
geographical data presented for loans and advances to customers,
loan and other credit-related commitments and financial
guarantees.
At 31 December 2020, total personal lending for loans and
advances to customers of $461bn increased by $26.5bn compared with
31 December 2019. This increase included favourable foreign
exchange movements of $11.5bn. Excluding foreign exchange
movements, there was growth of $15.1bn, primarily driven by $10.1bn
in Europe and $3.4bn in Asia. The allowance for ECL attributable to
personal lending, excluding off-balance sheet loan commitments and
guarantees, and foreign exchange movements, increased $1.6bn to
$4.7bn at 31 December 2020.
Excluding foreign exchange movements, total personal lending was
primarily driven by mortgage growth, which grew by $21.5bn.
Mortgages grew $12.3bn in the UK; $6.4bn in Asia, notably $4.7bn in
Hong Kong and $1.6bn in Australia; and $1.8bn in Canada. The
allowance for ECL, excluding foreign exchange, attributable to
mortgages of $0.8bn increased $0.2bn compared with
31 December 2019.
The quality of both our Hong Kong and UK mortgage books remained
high, with low levels of impairment allowances. The average LTV
ratio on new mortgage lending in Hong Kong was 61%, compared with
an estimated 45% for the overall mortgage portfolio. The average
LTV ratio on new lending in the UK was 70%, compared with an
estimated 51% for the overall mortgage portfolio.
Excluding foreign exchange movements, other personal lending
balances at 31 December 2020 declined by $6.5bn compared with 31
December 2019. The decline was attributable to a $3.8bn decline in
credit cards and a $2.4bn decline in loans and overdrafts.
The $3.8bn decrease in credit card lending was attributable to
declines of $2.1bn in the UK, $0.5bn in Hong Kong and $0.3bn in the
US. The $2.4bn decrease in loans and overdrafts was attributable to
declines of $1.1bn in Hong Kong, $1.4bn in the UK, $0.5bn in
Singapore and $0.3bn in MENA. These declines were partly offset by
growth of $1bn in France, primarily in other personal lending
guaranteed by Crédit Logement and $0.5bn in Switzerland.
The allowance for ECL, excluding foreign exchange, attributable
to other personal lending of $4.0bn increased $1.4bn compared with
31 December 2019. Excluding foreign exchange, the allowance for ECL
attributable to credit cards increased by $0.7bn while loans and
overdrafts increased by $0.7bn.
Total personal lending for loans and advances to customers at amortised
cost by stage distribution
Gross carrying amount Allowance for ECL
-------
Stage Stage Stage Total Stage Stage Stage Total
1 2 3 1 2 3
$m $m $m $m $m $m $m $m
-------------------------------------------------- ------- ------ ----- ------- ----- ------- ------- ---------
By portfolio
-------------------------------------------------- ------- ------ ----- ------- ----- ------- ------- ---------
First lien residential
mortgages 336,666 12,233 3,383 352,282 (125) (188) (442) (755)
-------------------------------------------------- ------- ------ ----- ------- ----- ------- ------- -------
- of which: interest
only (including offset) 29,143 3,074 351 32,568 (9) (19) (88) (116)
-------------------------------------------------- ------- ------ ----- ------- ----- ------- ------- -------
* affordability (including US adjustable rate
mortgages) 13,265 2,209 606 16,080 (11) (11) (5) (27)
-------------------------------------------------- ------- ------ ----- ------- ----- ------- ------- -------
Other personal lending 93,468 12,831 2,228 108,527 (702) (2,214) (1,060) (3,976)
-------------------------------------------------- ------- ------ ----- ------- ----- ------- ------- -------
- other 74,174 7,288 1,489 82,951 (305) (914) (665) (1,884)
--------------------------------------------------
- credit cards 17,327 5,292 680 23,299 (386) (1,281) (380) (2,047)
--------------------------------------------------
- second lien residential
mortgages 593 100 51 744 (3) (9) (10) (22)
--------------------------------------------------
- motor vehicle finance 1,374 151 8 1,533 (8) (10) (5) (23)
-------------------------------------------------- ------- ------ ----- ------- ----- ------- ------- -------
At 31 Dec 2020 430,134 25,064 5,611 460,809 (827) (2,402) (1,502) (4,731)
-------------------------------------------------- ------- ------ ----- ------- ----- ------- ------- -------
By geography
-------------------------------------------------- ------- ------ ----- ------- ----- ------- ------- ---------
Europe 200,120 11,032 2,511 213,663 (247) (1,271) (826) (2,344)
-------------------------------------------------- ------- ------ ----- ------- ----- ------- ------- -------
- of which: UK 163,338 9,476 1,721 174,535 (223) (1,230) (545) (1,998)
-------------------------------------------------- ------- ------ ----- ------- ----- ------- ------- -------
Asia 178,175 7,969 1,169 187,313 (234) (446) (241) (921)
-------------------------------------------------- ------- ------ ----- ------- ----- ------- ------- -------
- of which: Hong Kong 118,252 5,133 206 123,591 (102) (237) (48) (387)
-------------------------------------------------- ------- ------ ----- ------- ----- ------- ------- -------
MENA 4,879 403 251 5,533 (54) (112) (152) (318)
-------------------------------------------------- ------- ------ ----- ------- ----- ------- ------- -------
North America 40,387 4,613 1,378 46,378 (93) (200) (132) (425)
-------------------------------------------------- ------- ------ ----- ------- ----- ------- ------- -------
Latin America 6,573 1,047 302 7,922 (199) (373) (151) (723)
-------------------------------------------------- ------- ------ ----- ------- ----- ------- ------- -------
At 31 Dec 2020 430,134 25,064 5,611 460,809 (827) (2,402) (1,502) (4,731)
-------------------------------------------------- ------- ------ ----- ------- ----- ------- ------- -------
Total personal lending for loans and other credit-related commitments
and financial guarantees by stage distribution
Nominal amount Allowance for ECL
Stage Stage Stage Total Stage Stage Stage Total
1 2 3 1 2 3
$m $m $m $m $m $m $m $m
---------------------------- --------- ------- ----- -------- ------- ----- ----- --------
Europe 56,920 719 96 57,735 (22) (2) - (24)
---------------------------- --------- ------- ----- -------- ------- ----- ----- ------
- of which: UK 54,348 435 92 54,875 (21) (2) - (23)
---------------------------- --------- ------- ----- -------- ------- ----- ----- ------
Asia 156,057 790 11 156,858 - - - -
---------------------------- --------- ------- ----- -------- ------- ----- ----- ------
- of which: Hong Kong 118,529 10 10 118,549 - - - -
---------------------------- --------- ------- ----- -------- ------- ----- ----- ------
MENA 2,935 46 8 2,989 (1) - - (1)
---------------------------- --------- ------- ----- -------- ------- ----- ----- ------
North America 15,835 124 38 15,997 (11) - - (11)
---------------------------- --------- ------- ----- -------- ------- ----- ----- ------
Latin America 3,462 28 1 3,491 (5) - - (5)
---------------------------- --------- ------- ----- -------- ------- ----- ----- ------
At 31 Dec 2020 235,209 1,707 154 237,070 (39) (2) - (41)
---------------------------- --------- ------- ----- -------- ------- ----- ----- ------
Total personal lending for loans and advances to customers at amortised
cost by stage distribution (continued)
Gross carrying amount Allowance for ECL
------- ---------
Stage Stage Stage Total Stage Stage Stage Total
1 2 3 1 2 3
$m $m $m $m $m $m $m $m
-------------------------------------------------- ------- ------ ----- ------- ----- ------- ------- ---------
By portfolio
-------------------------------------------------- ------- ------ ----- ------- ----- ------- ------- ---------
First lien residential
mortgages 312,031 7,077 3,070 322,178 (39) (68) (422) (529)
-------------------------------------------------- ------- ------ ----- ------- ----- ------- ------- -------
- of which: interest
only (including offset) 31,201 1,602 376 33,179 (6) (15) (91) (112)
-------------------------------------------------- ------- ------ ----- ------- ----- ------- ------- -------
* affordability (including US adjustable rate
mortgages) 14,222 796 514 15,532 (3) (3) (3) (9)
-------------------------------------------------- ------- ------ ----- ------- ----- ------- ------- -------
Other personal lending 101,638 8,674 1,781 112,093 (544) (1,268) (793) (2,605)
-------------------------------------------------- ------- ------ ----- ------- ----- ------- ------- -------
- other 77,031 4,575 1,193 82,799 (229) (451) (491) (1,171)
--------------------------------------------------
- credit cards 22,285 3,959 524 26,768 (310) (801) (284) (1,395)
--------------------------------------------------
- second lien residential
mortgages 750 84 55 889 (1) (6) (10) (17)
--------------------------------------------------
- motor vehicle finance 1,572 56 9 1,637 (4) (10) (8) (22)
-------------------------------------------------- ------- ------ ----- ------- ----- ------- ------- -------
At 31 Dec 2019 413,669 15,751 4,851 434,271 (583) (1,336) (1,215) (3,134)
-------------------------------------------------- ------- ------ ----- ------- ----- ------- ------- -------
By geography
-------------------------------------------------- ------- ------ ----- ------- ----- ------- ------- ---------
Europe 186,561 6,854 2,335 195,750 (112) (538) (578) (1,228)
-------------------------------------------------- ------- ------ ----- ------- ----- ------- ------- -------
- of which: UK 153,313 5,455 1,612 160,380 (104) (513) (370) (987)
-------------------------------------------------- ------- ------ ----- ------- ----- ------- ------- -------
Asia 173,523 5,855 717 180,095 (223) (339) (170) (732)
-------------------------------------------------- ------- ------ ----- ------- ----- ------- ------- -------
- of which: Hong Kong 117,013 2,751 189 119,953 (90) (220) (44) (354)
-------------------------------------------------- ------- ------ ----- ------- ----- ------- ------- -------
MENA 5,671 247 299 6,217 (50) (58) (189) (297)
-------------------------------------------------- ------- ------ ----- ------- ----- ------- ------- -------
North America 41,148 1,930 1,238 44,316 (56) (119) (141) (316)
-------------------------------------------------- ------- ------ ----- ------- ----- ------- ------- -------
Latin America 6,766 865 262 7,893 (142) (282) (137) (561)
-------------------------------------------------- ------- ------ ----- ------- ----- ------- ------- -------
At 31 Dec 2019 413,669 15,751 4,851 434,271 (583) (1,336) (1,215) (3,134)
-------------------------------------------------- ------- ------ ----- ------- ----- ------- ------- -------
Total personal lending for loans and other credit-related commitments
and financial guarantees by stage distribution (continued)
Nominal amount Allowance for ECL
Stage Stage Stage Total Stage Stage Stage Total
1 2 3 1 2 3
$m $m $m $m $m $m $m $m
---------------------------- --------- ------- ----- -------- ------- ----- ----- --------
Europe 51,575 604 110 52,289 (10) (2) - (12)
---------------------------- --------- ------- ----- -------- ------- ----- ----- ------
- of which: UK 49,322 493 105 49,920 (8) (1) - (9)
---------------------------- --------- ------- ----- -------- ------- ----- ----- ------
Asia 149,336 682 9 150,027 - - - -
---------------------------- --------- ------- ----- -------- ------- ----- ----- ------
- of which: Hong Kong 115,025 27 3 115,055 - - - -
---------------------------- --------- ------- ----- -------- ------- ----- ----- ------
MENA 3,150 46 53 3,249 - - - -
---------------------------- --------- ------- ----- -------- ------- ----- ----- ------
North America 13,919 256 20 14,195 (1) - - (1)
---------------------------- --------- ------- ----- -------- ------- ----- ----- ------
Latin America 4,312 43 3 4,358 (3) - - (3)
---------------------------- --------- ------- ----- -------- ------- ----- ----- ------
At 31 Dec 2019 222,292 1,631 195 224,118 (14) (2) - (16)
---------------------------- --------- ------- ----- -------- ------- ----- ----- ------
Exposure to UK interest-only mortgage loans
The following information is presented for HSBC branded UK
interest-only mortgage loans with balances of $15.0bn. This
excludes offset mortgages in the first direct brand and Private
Bank mortgages.
At the end of 2020, the average LTV ratio in the portfolio was
41% and 99% of mortgages had an LTV ratio of 75% or less.
Of the interest-only mortgages that expired in 2018, 89% were
repaid within 12 months of expiry with a total of 98% being repaid
within 24 months of expiry. For interest-only mortgages expiring
during 2019, 89% were fully repaid within 12 months of expiry.
The profile of maturing UK interest-only loans is as
follows:
UK interest-only mortgage loans
$m
---------------------------------------- --------
Expired interest-only mortgage loans 169
---------------------------------------- ------
Interest-only mortgage loans by maturity
---------------------------------------- --------
- 2021 356
---------------------------------------- ------
- 2022 392
---------------------------------------- ------
- 2023 500
---------------------------------------- ------
- 2024 407
---------------------------------------- ------
- 2025-2029 3,317
---------------------------------------- ------
- Post 2029 9,914
---------------------------------------- ------
At 31 Dec 2020 15,055
---------------------------------------- ------
Exposure to offset mortgage in first direct
The offset mortgage in first direct is a flexible way for our
customers to take control of their finances. It works by grouping
together the customer's mortgage, savings and current accounts
to off-set their credit and debit balances against their
mortgage exposure which at the end of 2020 is of $8.6bn with an
average LTV ratio of 37%.
Personal lending - reconciliation of changes in gross carrying/nominal
amount and allowances for loans and advances to
customers including loan commitments and financial guarantees
(Audited)
--------- -----------
Non-credit impaired Credit impaired
Stage 1 Stage 2 Stage 3 Total
Gross Gross Gross Gross
carrying/ Allowance carrying/ Allowance carrying/ carrying/
nominal for nominal for nominal Allowance nominal Allowance
amount ECL amount ECL amount for ECL amount for ECL
$m $m $m $m $m $m $m $m
------------------- --------- --------- --------- --------- --------- --------- --------- -----------
At 1 Jan 2020 635,961 (597) 17,382 (1,338) 5,046 (1,215) 658,389 (3,150)
------------------- --------- --------- --------- --------- --------- --------- --------- ---------
Transfers of
financial
instruments (16,019) (629) 13,370 1,181 2,649 (552) - -
Net remeasurement
of ECL
arising from
transfer of
stage - 431 - (555) - (8) - (132)
------------------- --------- --------- --------- --------- --------- --------- --------- ---------
Net new and further
lending/repayments 30,891 101 (5,407) 408 (677) 150 24,807 659
------------------- --------- --------- --------- --------- --------- --------- --------- ---------
Change in risk
parameters
- credit quality - (147) - (2,025) - (1,258) - (3,430)
------------------- --------- --------- --------- --------- --------- --------- --------- ---------
Changes to models
used
for ECL
calculation - (3) - (9) - 5 - (7)
------------------- --------- --------- --------- --------- --------- --------- --------- ---------
Assets written off - - - - (1,409) 1,407 (1,409) 1,407
------------------- --------- --------- --------- --------- --------- --------- --------- ---------
Foreign exchange
and other 14,513 (22) 1,425 (67) 153 (32) 16,091 (121)
At 31 Dec 2020 665,346 (866) 26,770 (2,405) 5,762 (1,503) 697,878 (4,774)
------------------- --------- --------- --------- --------- --------- --------- --------- ---------
ECL income
statement change
for the period 382 (2,181) (1,111) (2,910)
------------------- --------- --------- --------- --------- --------- --------- --------- ---------
Recoveries 280
------------------- --------- --------- --------- --------- --------- --------- --------- ---------
Other (25)
------------------- --------- --------- --------- --------- --------- --------- --------- ---------
Total ECL income
statement
change for the
period (2,655)
------------------- --------- --------- --------- --------- --------- --------- --------- ---------
As shown in the above table, the allowance for ECL for loans and
advances to customers and banks and relevant loan commitments and
financial guarantees increased $1,624m during the period from
$3,150m at 31 December 2019 to $4,774m at 31 December 2020.
This increase was primarily driven by:
-- $3,430m relating to underlying credit quality changes,
including the credit quality impact of financial instruments
transferring between stages;
-- $132m relating to the net remeasurement impact of stage transfers;
-- foreign exchange and other movements of $121m; and
-- $7m due to changes to models used for ECL calculation.
These were partly offset by:
-- $1,407m of assets written off;
-- $659m relating to volume movements, which included the ECL
allowance associated with new originations, assets derecognised and
further lending/repayments.
The ECL charge for the period of $2,910m presented in the above
table consisted of $3,430m relating to underlying credit quality
changes, including the credit quality impact of financial
instruments transferring between stages, $132m relating to the
net remeasurement impact of stage transfers and $7m in changes
to models used for ECL calculation. This was partly offset by $659m
relating to underlying net book volume movements.
Personal lending - reconciliation of changes in gross carrying/nominal
amount and allowances for loans and advances to customers
including loan commitments and financial guarantees (continued)
(Audited)
Non-credit impaired Credit impaired
Stage 1 Stage 2 Stage 3 Total
----------------------
Gross Gross Gross Gross
carrying/ carrying/ carrying/ carrying/
nominal Allowance nominal Allowance nominal Allowance nominal Allowance
amount for ECL amount for ECL amount for ECL amount for ECL
$m $m $m $m $m $m $m $m
------------------- --------- --------- --------- --------- --------- --------- --------- -----------
At 1 Jan 2019 580,784 (547) 16,838 (1,266) 4,993 (1,148) 602,615 (2,961)
------------------- --------- --------- --------- --------- --------- --------- --------- ---------
Transfers of
financial
instruments (4,751) (374) 2,645 858 2,106 (484) - -
------------------- --------- --------- --------- --------- --------- --------- --------- ---------
Net remeasurement
of ECL
arising from
transfer
of stage - 446 - (408) - (76) - (38)
------------------- --------- --------- --------- --------- --------- --------- --------- ---------
Net new and further
lending/repayments 50,946 3 (2,348) 453 (758) 281 47,840 737
------------------- --------- --------- --------- --------- --------- --------- --------- ---------
Change in risk
parameters
- credit quality - (100) - (1,015) - (1,190) - (2,305)
------------------- --------- --------- --------- --------- --------- --------- --------- ---------
Changes to models
used
for ECL
calculation - (6) - 60 - 14 - 68
------------------- --------- --------- --------- --------- --------- --------- --------- ---------
Assets written off - - - - (1,345) 1,345 (1,345) 1,345
------------------- --------- --------- --------- --------- --------- --------- --------- ---------
Foreign exchange
and other 8,982 (19) 247 (20) 50 43 9,279 4
------------------- --------- --------- --------- --------- --------- --------- --------- ---------
At 31 Dec 2019 635,961 (597) 17,382 (1,338) 5,046 (1,215) 658,389 (3,150)
------------------- --------- --------- --------- --------- --------- --------- --------- ---------
ECL income
statement change
for the period 343 (910) (971) (1,538)
------------------- --------- --------- --------- --------- --------- --------- --------- ---------
Recoveries 314
------------------- --------- --------- --------- --------- --------- --------- --------- ---------
Other 4
------------------- --------- --------- --------- --------- --------- --------- --------- ---------
Total ECL income
statement
change for the
period (1,220)
------------------- --------- --------- --------- --------- --------- --------- --------- ---------
Personal lending - credit risk profile by internal PD band for loans
and advances to customers at amortised cost
Gross carrying Allowance for ECL
amount
-------
PD Stage Stage Stage Stage Stage Stage ECL
range(1) 1 2 3 Total 1 2 3 Total coverage
% $m $m $m $m $m $m $m $m %
------------ -------- ------- ------ ----- ------- ----- ------- ------- ------- -----------
First lien
residential
mortgages 336,666 12,233 3,383 352,282 (125) (188) (442) (755) 0.2
------------ -------- ------- ------ ----- ------- ----- ------- ------- ------- ---------
0.000 to
- Band 1 0.250 284,252 1,283 - 285,535 (36) (3) - (39) -
------------ -------- ---------
0.251 to
- Band 2 0.500 16,259 302 - 16,561 (9) (3) - (12) 0.1
------------ -------- ---------
0.501 to
- Band 3 1.500 27,055 1,755 - 28,810 (64) (8) - (72) 0.2
------------ -------- ---------
1.501 to
- Band 4 5.000 8,858 5,134 - 13,992 (15) (32) - (47) 0.3
------------ -------- ---------
5.001 to
- Band 5 20.000 238 1,806 - 2,044 (1) (41) - (42) 2.1
------------ -------- ---------
20.001
to
- Band 6 99.999 4 1,953 - 1,957 - (101) - (101) 5.2
------------ -------- ---------
- Band 7 100.000 - - 3,383 3,383 - - (442) (442) 13.1
------------ -------- ------- ------ ----- ------- ----- ------- ------- ------- ---------
Other
personal
lending 93,468 12,831 2,228 108,527 (702) (2,214) (1,060) (3,976) 3.7
------------ -------- ------- ------ ----- ------- ----- ------- ------- ------- ---------
0.000 to
- Band 1 0.250 41,565 589 - 42,154 (96) (8) - (104) 0.2
------------ -------- ---------
0.251 to
- Band 2 0.500 13,053 518 - 13,571 (31) (63) - (94) 0.7
------------ -------- ---------
0.501 to
- Band 3 1.500 23,802 1,280 - 25,082 (108) (37) - (145) 0.6
------------ -------- ---------
1.501 to
- Band 4 5.000 11,787 2,175 - 13,962 (270) (112) - (382) 2.7
------------ -------- ---------
5.001 to
- Band 5 20.000 3,234 5,288 - 8,522 (197) (821) - (1,018) 11.9
------------ -------- ---------
20.001
to
- Band 6 99.999 27 2,981 - 3,008 - (1,173) - (1,173) 39.0
------------ -------- ---------
- Band 7 100.000 - - 2,228 2,228 - - (1,060) (1,060) 47.6
------------ -------- ------- ------ ----- ------- ----- ------- ------- ------- ---------
At 31 Dec
2020 430,134 25,064 5,611 460,809 (827) (2,402) (1,502) (4,731) 1.0
------------ -------- ------- ------ ----- ------- ----- ------- ------- ------- ---------
First lien
residential
mortgages 312,031 7,077 3,070 322,178 (39) (68) (422) (529) 0.2
--------------- --------- ------- ------ ----- ------- ----- ------- ------- ------- ----
0.000 to
- Band 1 0.250 268,490 284 - 268,774 (16) - - (16) -
--------------- --------- ----
0.251 to
- Band 2 0.500 22,293 301 - 22,594 (4) - - (4) -
--------------- --------- ----
0.501 to
- Band 3 1.500 17,247 2,313 - 19,560 (13) (3) - (16) 0.1
--------------- --------- ----
1.501 to
- Band 4 5.000 3,796 1,970 - 5,766 (5) (7) - (12) 0.2
--------------- --------- ----
5.001 to
- Band 5 20.000 198 1,383 - 1,581 (1) (23) - (24) 1.5
--------------- --------- ----
20.001 to
- Band 6 99.999 7 826 - 833 - (35) - (35) 4.2
--------------- --------- ----
- Band 7 100.000 - - 3,070 3,070 - - (422) (422) 13.7
--------------- --------- ------- ------ ----- ------- ----- ------- ------- ------- ----
Other personal
lending 101,638 8,674 1,781 112,093 (544) (1,268) (793) (2,605) 2.3
--------------- --------- ------- ------ ----- ------- ----- ------- ------- ------- ----
0.000 to
- Band 1 0.250 46,533 60 - 46,593 (120) - - (120) 0.3
--------------- --------- ----
0.251 to
- Band 2 0.500 16,435 65 - 16,500 (38) (26) - (64) 0.4
--------------- --------- ----
0.501 to
- Band 3 1.500 25,160 317 - 25,477 (110) (13) - (123) 0.5
--------------- --------- ----
1.501 to
- Band 4 5.000 10,951 3,483 - 14,434 (144) (329) - (473) 3.3
--------------- --------- ----
5.001 to
- Band 5 20.000 2,421 3,434 - 5,855 (132) (440) - (572) 9.8
--------------- --------- ----
20.001 to
- Band 6 99.999 138 1,315 - 1,453 - (460) - (460) 31.7
--------------- --------- ----
- Band 7 100.000 - - 1,781 1,781 - - (793) (793) 44.5
--------------- --------- ------- ------ ----- ------- ----- ------- ------- ------- ----
At 31 Dec 2019 413,669 15,751 4,851 434,271 (583) (1,336) (1,215) (3,134) 0.7
--------------- --------- ------- ------ ----- ------- ----- ------- ------- ------- ----
1 12-month point in time adjusted for multiple economic scenarios.
Collateral on loans and advances
(Audited)
The following table provides a quantification of the value of
fixed charges we hold over specific assets where we have a history
of enforcing, and are able to enforce, collateral in satisfying a
debt in the event of the borrower failing to meet its contractual
obligations, and where the collateral is cash or can be realised by
sale in an established market. The collateral valuation excludes
any adjustments for obtaining and selling the collateral and, in
particular, loans shown as not collateralised or partially
collateralised may also benefit from other forms of credit
mitigants.
Personal lending - residential mortgage loans including loan commitments
by level of collateral for key countries/territories by stage
(Audited)
Of which:
-------------------------------------------------------------------
Total UK Hong Kong
Gross Gross Gross
carrying/nominal ECL carrying/nominal ECL carrying/nominal
amount coverage amount coverage amount ECL coverage
$m % $m % $m %
---------------- ------------------ ----------- ------------------ ----------- ------------------ --------------
Stage 1
---------------- ------------------ ----------- ------------------ ----------- ------------------ --------------
Fully
collateralised 354,102 - 159,562 - 90,733 -
---------------- ---------------- --------- ---------------- --------- ---------------- ------------
LTV ratio:
---------------- ----------- ----------- --------------
- less than 50% 174,370 - 76,535 - 54,866 -
---------------- --------- --------- ------------
- 51% to 60% 60,180 - 23,967 - 14,253 -
---------------- --------- --------- ------------
- 61% to 70% 48,159 - 23,381 - 6,042 -
---------------- --------- --------- ------------
- 71% to 80% 40,395 0.1 20,846 - 4,288 -
---------------- --------- --------- ------------
- 81% to 90% 23,339 0.1 12,936 - 6,837 -
---------------- --------- --------- ------------
- 91% to 100% 7,659 0.1 1,897 0.1 4,447 -
---------------- ---------------- --------- ---------------- --------- ---------------- ------------
Partially
collateralised
(A): 973 0.4 289 - 336 -
---------------- ---------------- ----------- ---------------- --------- ---------------- ------------
LTV ratio:
---------------- ----------- ----------- --------------
- 101% to 110% 592 0.4 84 - 334 -
---------------- ----------- --------- ------------
- 111% to 120% 101 0.5 45 - - -
---------------- ----------- --------- ------------
- greater than
120% 280 0.3 160 - 2 -
---------------- ---------------- ----------- ---------------- --------- ---------------- ------------
- collateral
value on A 847 212 328
---------------- ---------------- ----------- ---------------- ----------- ---------------- --------------
Total 355,075 - 159,851 - 91,069 -
---------------- ---------------- --------- ---------------- --------- ---------------- ------------
Stage 2
---------------- ------------------ ----------- ------------------ ----------- ------------------ --------------
Fully
collateralised 12,252 1.5 4,229 1.4 1,802 -
---------------- ---------------- ----------- ---------------- ----------- ---------------- ------------
LTV ratio:
---------------- ----------- ----------- --------------
- less than 50% 6,694 1.1 2,442 1.2 1,256 -
---------------- ----------- ----------- ------------
- 51% to 60% 2,223 1.1 730 1.3 253 -
---------------- ----------- ----------- ------------
- 61% to 70% 1,779 1.6 606 1.3 83 -
---------------- ----------- ----------- ------------
- 71% to 80% 987 2.8 244 2.9 111 -
---------------- ----------- ----------- ------------
- 81% to 90% 400 4.9 139 3.6 60 -
---------------- ----------- ----------- ------------
- 91% to 100% 169 5.7 68 3.3 39 -
---------------- ---------------- ----------- ---------------- ----------- ---------------- ------------
Partially
collateralised
(B): 53 13.6 4 3.3 9 -
---------------- ---------------- ----------- ---------------- ----------- ---------------- ------------
LTV ratio:
---------------- ----------- ----------- --------------
- 101% to 110% 28 11.9 3 1.5 9 -
---------------- ----------- ----------- ------------
- 111% to 120% 9 16.8 - - - -
---------------- ----------- ----------- ------------
- greater than
120% 16 14.8 1 8.5 - -
---------------- ---------------- ----------- ---------------- ----------- ---------------- ------------
- collateral
value on B 47 4 9
---------------- ---------------- ----------- ---------------- ----------- ---------------- --------------
Total 12,305 1.5 4,233 1.4 1,811 -
---------------- ---------------- ----------- ---------------- ----------- ---------------- ------------
Stage 3
---------------- ------------------ ----------- ------------------ ----------- ------------------ --------------
Fully
collateralised 3,083 9.8 1,050 12.3 63 -
---------------- ---------------- ----------- ---------------- ----------- ------------------ ------------
LTV ratio:
---------------- ----------- ----------- --------------
- less than 50% 1,472 8.0 676 10.9 53 -
---------------- ----------- ----------- ------------
- 51% to 60% 505 8.7 144 15.1 6 -
---------------- ----------- ----------- ------------
- 61% to 70% 435 9.2 112 12.9 - -
---------------- ----------- ----------- ------------
- 71% to 80% 378 11.5 81 13.7 2 -
---------------- ----------- ----------- ------------
- 81% to 90% 195 17.3 28 22.4 2 -
---------------- ----------- ----------- ------------
- 91% to 100% 98 24.3 9 17.8 - -
---------------- ---------------- ----------- ---------------- ----------- ---------------- ------------
Partially
collateralised
(C): 328 42.7 17 22.9 - -
---------------- ---------------- ----------- ---------------- ----------- ---------------- ------------
LTV ratio:
---------------- ----------- ----------- --------------
- 101% to 110% 75 30.4 9 16.7 - -
---------------- ----------- ----------- ------------
- 111% to 120% 56 38.8 5 17.6 - -
---------------- ----------- ----------- ------------
- greater than
120% 197 48.5 3 50.3 - -
---------------- ---------------- ----------- ---------------- ----------- ---------------- ------------
- collateral
value on C 228 10 1
---------------- ---------------- ----------- ---------------- ----------- ---------------- --------------
Total 3,411 13.0 1,067 12.5 63 -
---------------- ---------------- ----------- ---------------- ----------- ------------------ ------------
At 31 Dec 2020 370,791 0.2 165,151 0.1 92,943 -
---------------- ---------------- ----------- ---------------- ----------- ---------------- ------------
Personal lending - residential mortgage loans including loan commitments
by level of collateral for key countries/territories by stage
(continued)
(Audited)
Of which:
------------------------------------------------------------------
Total UK Hong Kong
Gross Gross Gross
carrying/nominal ECL carrying/nominal ECL carrying/nominal ECL
amount coverage amount coverage amount coverage
$m % $m % $m %
---------------- ------------------- ----------- ------------------- ----------- ------------------- -----------
Stage 1
---------------- ------------------- ----------- ------------------- ----------- ------------------- -----------
Fully
collateralised 326,510 - 143,772 - 86,049 -
---------------- ----------------- --------- ----------------- --------- ----------------- ---------
LTV ratio:
---------------- ----------- ----------- -----------
- less than 50% 168,923 - 70,315 - 57,043 -
---------------- --------- --------- ---------
- 51% to 60% 55,287 - 21,898 - 13,169 -
---------------- --------- --------- ---------
- 61% to 70% 44,208 - 19,903 - 6,478 -
---------------- --------- --------- ---------
- 71% to 80% 33,049 - 17,649 - 3,195 -
---------------- --------- --------- ---------
- 81% to 90% 18,157 - 11,127 - 3,685 -
---------------- --------- --------- ---------
- 91% to 100% 6,886 - 2,880 - 2,479 -
---------------- ----------------- --------- ----------------- --------- ----------------- ---------
Partially
collateralised
(A): 1,384 0.1 326 - 284 -
---------------- ----------------- --------- ----------------- --------- ----------------- ---------
LTV ratio:
---------------- ----------- ----------- -----------
- 101% to 110% 843 0.1 89 - 281 -
---------------- --------- --------- ---------
- 111% to 120% 195 0.2 48 - 1 -
---------------- --------- --------- ---------
- greater than
120% 346 0.1 189 - 2 -
---------------- ----------------- --------- ----------------- --------- ----------------- ---------
- collateral
value on A 1,232 232 279
---------------- ----------------- ----------- ----------------- ----------- ----------------- -----------
Total 327,894 - 144,098 - 86,333 -
---------------- ----------------- --------- ----------------- --------- ----------------- ---------
Stage 2
---------------- ------------------- ----------- ------------------- ----------- ------------------- -----------
Fully
collateralised 7,087 0.9 1,941 1.0 1,116 -
---------------- ----------------- --------- ----------------- --------- ----------------- ---------
LTV ratio:
---------------- ----------- ----------- -----------
- less than 50% 3,781 0.5 1,146 0.7 892 -
---------------- --------- --------- ---------
- 51% to 60% 923 1.1 233 1.5 95 -
---------------- --------- --------- ---------
- 61% to 70% 909 1.2 262 1.2 59 -
---------------- --------- --------- ---------
- 71% to 80% 894 1.1 231 1.0 32 -
---------------- --------- --------- ---------
- 81% to 90% 425 1.6 36 2.9 25 -
---------------- --------- --------- ---------
- 91% to 100% 155 4.4 33 1.8 13 -
---------------- ----------------- --------- ----------------- --------- ----------------- ---------
Partially
collateralised
(B): 76 7.2 23 1.8 1 -
---------------- ----------------- --------- ----------------- --------- ----------------- ---------
LTV ratio:
---------------- ----------- ----------- -----------
- 101% to 110% 45 5.4 20 1.5 1 -
---------------- --------- --------- ---------
- 111% to 120% 10 11.1 1 4.8 - -
---------------- --------- --------- ---------
- greater than
120% 21 9.0 2 3.0 - -
---------------- ----------------- --------- ----------------- --------- ----------------- ---------
- collateral
value on B 69 20 1
---------------- ----------------- ----------- ----------------- ----------- ----------------- -----------
Total 7,163 1.0 1,964 1.0 1,117 -
---------------- ----------------- --------- ----------------- --------- ----------------- ---------
Stage 3
---------------- ------------------- ----------- ------------------- ----------- ------------------- -----------
Fully
collateralised 2,725 9.0 1,177 9.9 44 0.5
---------------- ----------------- --------- ----------------- --------- ----------------- ---------
LTV ratio:
---------------- ----------- ----------- -----------
- less than 50% 1,337 7.1 711 7.8 39 0.5
---------------- --------- --------- ---------
- 51% to 60% 410 7.0 159 10.0 3 0.2
---------------- --------- --------- ---------
- 61% to 70% 358 7.9 136 10.6 - -
---------------- --------- --------- ---------
- 71% to 80% 309 13.4 100 18.9 1 -
---------------- --------- --------- ---------
- 81% to 90% 178 13.8 47 12.3 1 -
---------------- --------- --------- ---------
- 91% to 100% 133 21.8 24 26.3 - -
---------------- ----------------- --------- ----------------- --------- ----------------- ---------
Partially
collateralised
(C): 371 47.6 25 27.3 - -
---------------- ----------------- --------- ----------------- --------- ----------------- ---------
LTV ratio:
---------------- ----------- ----------- -----------
- 101% to 110% 97 36.4 11 19.1 - -
---------------- --------- --------- ---------
- 111% to 120% 62 37.8 6 22.7 - -
---------------- --------- --------- ---------
- greater than
120% 212 55.6 8 42.0 - -
---------------- ----------------- --------- ----------------- --------- ----------------- ---------
- collateral
value on C 305 24 -
---------------- ----------------- ----------- ----------------- ----------- ----------------- -----------
Total 3,096 13.7 1,202 10.3 44 0.5
---------------- ----------------- --------- ----------------- --------- ----------------- ---------
At 31 Dec 2019 338,153 0.2 147,264 0.1 87,494 -
---------------- ----------------- --------- ----------------- --------- ----------------- ---------
Supplementary information
Wholesale lending - loans and advances to customers at amortised cost
by country/territory
Gross carrying amount Allowance for ECL
Corporate Of which: Non-bank Corporate Of which: Non-bank
and real financial and real financial
commercial estate(1) institutions Total commercial estate(1) institutions Total
$m $m $m $m $m $m $m $m
------------ ---------- ---------- ------------ ------- ---------- ---------- ------------ ---------
Europe 179,104 26,505 22,176 201,280 (3,918) (632) (185) (4,103)
------------ ---------- ---------- ------------ ------- ---------- ---------- ------------ -------
- UK 128,933 18,890 16,165 145,098 (2,958) (574) (147) (3,105)
------------
- France 32,278 5,740 3,557 35,835 (645) (40) (26) (671)
------------
- Germany 8,309 364 1,156 9,465 (125) - (3) (128)
------------
-
Switzerland 1,489 576 513 2,002 (14) - - (14)
------------
- other 8,095 935 785 8,880 (176) (18) (9) (185)
------------ ---------- ---------- ------------ ------- ---------- ---------- ------------ -------
Asia 257,942 82,359 31,637 289,579 (2,766) (162) (38) (2,804)
------------ ---------- ---------- ------------ ------- ---------- ---------- ------------ -------
- Hong Kong 162,039 64,216 18,406 180,445 (1,180) (83) (15) (1,195)
------------
- Australia 9,769 1,813 1,348 11,117 (95) (2) - (95)
------------
- India 7,223 1,951 3,075 10,298 (90) (18) (4) (94)
------------
- Indonesia 3,699 81 246 3,945 (229) (2) 0 (229)
------------
- mainland
China 28,443 6,251 7,128 35,571 (187) (23) (18) (205)
------------
- Malaysia 7,228 1,968 123 7,351 (86) (27) - (86)
------------
- Singapore 18,859 4,637 362 19,221 (782) (2) - (782)
------------
- Taiwan 6,115 50 60 6,175 0 - - 0
------------
- other 14,567 1,392 889 15,456 (117) (5) (1) (118)
------------ ---------- ---------- ------------ ------- ---------- ---------- ------------ -------
Middle East
and
North
Africa
(excluding
Saudi
Arabia) 24,625 1,839 379 25,004 (1,512) (187) (9) (1,521)
------------ ---------- ---------- ------------ ------- ---------- ---------- ------------ -------
- Egypt 2,162 37 13 2,175 (157) (7) (3) (160)
------------
- UAE 13,485 1,690 170 13,655 (1,019) (176) (2) (1,021)
------------
- other 8,978 112 196 9,174 (336) (4) (4) (340)
------------ ---------- ---------- ------------ ------- ---------- ---------- ------------ -------
North
America 53,386 14,491 9,292 62,678 (637) (73) (23) (660)
------------ ---------- ---------- ------------ ------- ---------- ---------- ------------ -------
- US 30,425 7,722 7,708 38,133 (367) (38) (3) (370)
------------
- Canada 22,361 6,645 1,440 23,801 (243) (27) (9) (252)
------------
- other 600 124 144 744 (27) (8) (11) (38)
------------ ---------- ---------- ------------ ------- ---------- ---------- ------------ -------
Latin
America 12,031 1,833 1,096 13,127 (661) (113) (10) (671)
------------ ---------- ---------- ------------ ------- ---------- ---------- ------------ -------
- Mexico 10,244 1,832 1,083 11,327 (589) (113) (10) (599)
------------
- other 1,787 1 13 1,800 (72) - - (72)
------------ ---------- ---------- ------------ ------- ---------- ---------- ------------ -------
At 31 Dec
2020 527,088 127,027 64,580 591,668 (9,494) (1,167) (265) (9,759)
------------ ---------- ---------- ------------ ------- ---------- ---------- ------------ -------
Europe 175,215 26,587 26,497 201,712 (2,304) (354) (81) (2,385)
------------------------- ------- ------- ------ ------- ------- ----- ----- -------
- UK 126,760 18,941 18,545 145,305 (1,629) (303) (26) (1,655)
-------------------------
- France 27,885 5,643 4,899 32,784 (423) (28) (52) (475)
-------------------------
- Germany 9,771 390 1,743 11,514 (60) - - (60)
-------------------------
- Switzerland 1,535 554 406 1,941 (1) - - (1)
-------------------------
- other 9,264 1,059 904 10,168 (191) (23) (3) (194)
------------------------- ------- ------- ------ ------- ------- ----- ----- -------
Asia 267,709 85,556 32,157 299,866 (1,449) (94) (52) (1,501)
------------------------- ------- ------- ------ ------- ------- ----- ----- -------
- Hong Kong 168,380 67,856 19,776 188,156 (750) (51) (40) (790)
-------------------------
- Australia 11,428 1,993 1,743 13,171 (70) (3) - (70)
-------------------------
- India 6,657 1,565 2,622 9,279 (49) (3) (1) (50)
-------------------------
- Indonesia 4,346 63 353 4,699 (222) (1) (2) (224)
-------------------------
- mainland China 26,594 5,304 5,911 32,505 (198) (29) (8) (206)
-------------------------
- Malaysia 6,914 1,597 230 7,144 (40) (2) - (40)
-------------------------
- Singapore 19,986 5,235 618 20,604 (60) (2) - (60)
-------------------------
- Taiwan 6,384 28 82 6,466 (2) - - (2)
-------------------------
- other 17,020 1,915 822 17,842 (58) (3) (1) (59)
------------------------- ------- ------- ------ ------- ------- ----- ----- -------
Middle East and
North Africa (excluding
Saudi Arabia) 23,447 1,816 288 23,735 (1,087) (181) (13) (1,100)
------------------------- ------- ------- ------ ------- ------- ----- ----- -------
- Egypt 1,889 35 16 1,905 (132) - (3) (135)
-------------------------
- UAE 13,697 1,695 122 13,819 (683) (179) (7) (690)
-------------------------
- other 7,861 86 150 8,011 (272) (2) (3) (275)
------------------------- ------- ------- ------ ------- ------- ----- ----- -------
North America 59,680 15,128 10,078 69,758 (274) (43) (11) (285)
------------------------- ------- ------- ------ ------- ------- ----- ----- -------
- US 34,477 8,282 8,975 43,452 (116) (14) (2) (118)
-------------------------
- Canada 24,427 6,556 979 25,406 (136) (10) (4) (140)
-------------------------
- other 776 290 124 900 (22) (19) (5) (27)
------------------------- ------- ------- ------ ------- ------- ----- ----- -------
Latin America 14,448 1,665 1,685 16,133 (324) (8) (3) (327)
------------------------- ------- ------- ------ ------- ------- ----- ----- -------
- Mexico 12,352 1,664 1,625 13,977 (221) (8) (3) (224)
-------------------------
- other 2,096 1 60 2,156 (103) - - (103)
------------------------- ------- ------- ------ ------- ------- ----- ----- -------
At 31 Dec 2019 540,499 130,752 70,705 611,204 (5,438) (680) (160) (5,598)
------------------------- ------- ------- ------ ------- ------- ----- ----- -------
1 Real estate lending within this disclosure corresponds solely
to the industry of the borrower. Commercial real estate on page 150
includes borrowers in multiple industries investing in
income-producing assets and to a lesser extent, their construction
and development.
Personal lending - loans and advances to customers at amortised cost
by country/territory
Gross carrying amount Allowance for ECL
First First
lien Of which: lien Of which:
residential Other credit residential Other credit
mortgages personal cards Total mortgages personal cards Total
$m $m $m $m $m $m $m $m
----------------- ----------- --------- --------- ------- ----------- --------- --------- ---------
Europe 162,630 51,033 8,471 213,663 (364) (1,980) (859) (2,344)
----------------- ----------- --------- --------- ------- ----------- --------- --------- -------
- UK 154,839 19,696 8,064 174,535 (236) (1,762) (852) (1,998)
-----------------
- France(1) 3,623 23,982 358 27,605 (43) (120) (5) (163)
-----------------
- Germany - 368 - 368 - - - -
-----------------
- Switzerland 1,195 6,641 - 7,836 - (79) - (79)
-----------------
- other 2,973 346 49 3,319 (85) (19) (2) (104)
----------------- ----------- --------- --------- ------- ----------- --------- --------- -------
Asia 141,581 45,732 11,186 187,313 (80) (841) (563) (921)
----------------- ----------- --------- --------- ------- ----------- --------- --------- -------
- Hong Kong 91,997 31,594 7,573 123,591 - (387) (265) (387)
-----------------
- Australia 20,320 602 514 20,922 (12) (47) (45) (59)
-----------------
- India 933 544 215 1,477 (9) (45) (34) (54)
-----------------
- Indonesia 71 288 167 359 - (37) (26) (37)
-----------------
- mainland China 9,679 1,155 644 10,834 (6) (81) (73) (87)
-----------------
- Malaysia 2,797 2,964 841 5,761 (41) (102) (35) (143)
-----------------
- Singapore 7,394 6,537 375 13,931 - (55) (17) (55)
-----------------
- Taiwan 5,407 1,069 277 6,476 - (15) (5) (15)
-----------------
- other 2,983 979 580 3,962 (12) (72) (63) (84)
----------------- ----------- --------- --------- ------- ----------- --------- --------- -------
Middle East and
North
Africa
(excluding Saudi
Arabia) 2,192 3,341 863 5,533 (43) (275) (142) (318)
----------------- ----------- --------- --------- ------- ----------- --------- --------- -------
- Egypt - 360 89 360 - (8) (3) (8)
-----------------
- UAE 1,841 1,158 432 2,999 (37) (163) (92) (200)
-----------------
- other 351 1,823 342 2,174 (6) (104) (47) (110)
----------------- ----------- --------- --------- ------- ----------- --------- --------- -------
North America 41,826 4,552 1,373 46,378 (159) (266) (193) (425)
----------------- ----------- --------- --------- ------- ----------- --------- --------- -------
- US 18,430 2,141 1,091 20,571 (26) (226) (182) (252)
-----------------
- Canada 22,241 2,230 244 24,471 (36) (31) (10) (67)
-----------------
- other 1,155 181 38 1,336 (97) (9) (1) (106)
----------------- ----------- --------- --------- ------- ----------- --------- --------- -------
Latin America 4,053 3,869 1,406 7,922 (109) (614) (290) (723)
----------------- ----------- --------- --------- ------- ----------- --------- --------- -------
- Mexico 3,901 3,351 1,119 7,252 (107) (578) (268) (685)
-----------------
- other 152 518 287 670 (2) (36) (22) (38)
----------------- ----------- --------- --------- ------- ----------- --------- --------- -------
At 31 Dec 2020 352,282 108,527 23,299 460,809 (755) (3,976) (2,047) (4,731)
----------------- ----------- --------- --------- ------- ----------- --------- --------- -------
Europe 145,382 50,368 10,246 195,750 (266) (962) (438) (1,228)
------------------------- ------- ------- ------ ------- ----- ------- ------- -------
- UK 137,985 22,395 9,816 160,380 (159) (828) (434) (987)
-------------------------
- France(1) 3,520 21,120 376 24,640 (39) (101) (3) (140)
-------------------------
- Germany - 325 - 325 - - - -
-------------------------
- Switzerland 1,183 6,165 - 7,348 (6) (17) - (23)
-------------------------
- other 2,694 363 54 3,057 (62) (16) (1) (78)
------------------------- ------- ------- ------ ------- ----- ------- ------- -------
Asia 131,864 48,231 12,144 180,095 (42) (690) (463) (732)
------------------------- ------- ------- ------ ------- ----- ------- ------- -------
- Hong Kong 86,892 33,061 8,043 119,953 (1) (353) (242) (354)
-------------------------
- Australia 16,997 693 603 17,690 (5) (34) (33) (39)
-------------------------
- India 1,047 528 219 1,575 (5) (21) (15) (26)
-------------------------
- Indonesia 67 329 204 396 - (24) (18) (24)
-------------------------
- mainland China 8,966 1,190 656 10,156 (2) (74) (68) (76)
-------------------------
- Malaysia 2,840 3,200 980 6,040 (22) (73) (33) (95)
-------------------------
- Singapore 6,687 7,033 452 13,720 (1) (60) (19) (61)
-------------------------
- Taiwan 5,286 1,004 297 6,290 0 (14) (4) (14)
-------------------------
- other 3,082 1,193 690 4,275 (6) (37) (31) (43)
------------------------- ------- ------- ------ ------- ----- ------- ------- -------
Middle East and North
Africa (excluding Saudi
Arabia) 2,303 3,914 1,042 6,217 (62) (235) (111) (297)
------------------------- ------- ------- ------ ------- ----- ------- ------- -------
- Egypt - 346 88 346 - (3) (1) (3)
-------------------------
- UAE 1,920 1,462 517 3,382 (59) (121) (54) (180)
-------------------------
- other 383 2,106 437 2,489 (3) (111) (56) (114)
------------------------- ------- ------- ------ ------- ----- ------- ------- -------
North America 39,065 5,251 1,742 44,316 (122) (194) (142) (316)
------------------------- ------- ------- ------ ------- ----- ------- ------- -------
- US 17,870 2,551 1,424 20,421 (8) (160) (134) (168)
-------------------------
- Canada 19,997 2,495 271 22,492 (21) (25) (7) (46)
-------------------------
- other 1,198 205 47 1,403 (93) (9) (1) (102)
------------------------- ------- ------- ------ ------- ----- ------- ------- -------
Latin America 3,564 4,329 1,594 7,893 (37) (524) (241) (561)
------------------------- ------- ------- ------ ------- ----- ------- ------- -------
- Mexico 3,419 3,780 1,308 7,199 (31) (488) (224) (519)
-------------------------
- other 145 549 286 694 (6) (36) (17) (42)
------------------------- ------- ------- ------ ------- ----- ------- ------- -------
At 31 Dec 2019 322,178 112,093 26,768 434,271 (529) (2,605) (1,395) (3,134)
------------------------- ------- ------- ------ ------- ----- ------- ------- -------
1 Included in other personal lending at 31 December 2020 is
$20,625m (31 December 2019: $17,585m) guaranteed by Crédit
Lodgement.
Change in reportable segments
Effective from 30 June 2020, we made the following realignments
within our internal reporting:
-- We simplified our matrix organisational structure by merging
Global Private Banking and Retail Banking and Wealth Management to
form Wealth and Personal Banking ('WPB'). As a result, the gross
carrying/nominal values and the associated allowance for ECL of
Global Private Banking and Retail Banking and Wealth Management
have been merged into WPB.
-- We reallocated Markets Treasury from Corporate Centre to the
global businesses. As a result, Market Treasury's gross
carrying/nominal values and the associated allowance for ECL have
been transferred from the Corporate Centre into the other global
businesses.
Comparative data have been re-presented accordingly. There is no
impact upon total gross carrying/nominal values, total allowance
for ECL or the staging of financial instruments.
Summary of financial instruments to which the impairment requirements
in IFRS 9 are applied - by global business
Gross carrying/nominal amount Allowance for ECL
Stage Stage Stage POCI Total Stage Stage Stage POCI Total
1 2 3 1 2 3
$m $m $m $m $m $m $m $m $m $m
--------------- --------- ------- ------ ---- --------- ------- ------- ------- ----- ----------
Loans and
advances to
customers at
amortised
cost 869,920 163,185 19,095 277 1,052,477 (1,974) (4,965) (7,439) (112) (14,490)
--------------- --------- ------- ------ ---- --------- ------- ------- ------- ----- --------
- WPB 442,641 25,694 5,753 - 474,088 (854) (2,458) (1,590) - (4,902)
---------------
- CMB 238,517 101,960 10,408 212 351,097 (917) (2,029) (4,874) (96) (7,916)
---------------
- GBM 187,564 35,461 2,934 65 226,024 (203) (465) (975) (16) (1,659)
---------------
- Corporate
Centre 1,198 70 - - 1,268 - (13) - - (13)
--------------- --------- ------- ------ ---- --------- ------- ------- ------- ----- --------
Loans and
advances to
banks at
amortised cost 79,654 2,004 - - 81,658 (33) (9) - - (42)
--------------- --------- ------- ------ ---- --------- ------- ------- ------- ----- --------
- WPB 16,837 519 - - 17,356 (2) (2) - - (4)
---------------
- CMB 12,253 222 - - 12,475 (2) - - - (2)
---------------
- GBM 33,361 1,166 - - 34,527 (23) (7) - - (30)
---------------
- Corporate
Centre 17,203 97 - - 17,300 (6) - - - (6)
--------------- --------- ------- ------ ---- --------- ------- ------- ------- ----- --------
Other financial
assets
measured at
amortised
cost 768,216 3,975 177 40 772,408 (80) (44) (42) (9) (175)
--------------- --------- ------- ------ ---- --------- ------- ------- ------- ----- --------
- WPB 167,053 1,547 50 39 168,689 (41) (22) (7) (9) (79)
---------------
- CMB 111,299 1,716 65 1 113,081 (17) (19) (25) - (61)
---------------
- GBM 391,967 705 56 - 392,728 (22) (3) (10) - (35)
---------------
- Corporate
Centre 97,897 7 6 - 97,910 - - - - -
--------------- --------- ------- ------ ---- --------- ------- ------- ------- ----- --------
Total gross
carrying
amount
on-balance
sheet at 31
Dec 2020 1,717,790 169,164 19,272 317 1,906,543 (2,087) (5,018) (7,481) (121) (14,707)
--------------- --------- ------- ------ ---- --------- ------- ------- ------- ----- --------
Loans and other
credit-related
commitments 604,485 54,217 1,080 1 659,783 (290) (365) (78) (1) (734)
--------------- --------- ------- ------ ---- --------- ------- ------- ------- ----- --------
- WPB 232,027 2,591 136 - 234,754 (41) (2) - - (43)
---------------
- CMB 111,800 29,150 779 1 141,730 (157) (203) (72) (1) (433)
---------------
- GBM 260,527 22,476 165 - 283,168 (92) (160) (6) - (258)
---------------
- Corporate
Centre 131 - - - 131 - - - - -
--------------- --------- ------- ------ ---- --------- ------- ------- ------- ----- --------
Financial
guarantees 14,090 4,024 269 1 18,384 (37) (62) (26) - (125)
--------------- --------- ------- ------ ---- --------- ------- ------- ------- ----- --------
- WPB 1,048 23 2 - 1,073 - - - - -
---------------
- CMB 5,556 2,519 146 1 8,222 (19) (36) (12) - (67)
---------------
- GBM 7,482 1,482 121 - 9,085 (17) (26) (14) - (57)
---------------
- Corporate
Centre 4 - - - 4 (1) - - - (1)
--------------- --------- ------- ------ ---- --------- ------- ------- ------- ----- --------
Total nominal
amount
off-balance
sheet at 31
Dec 2020 618,575 58,241 1,349 2 678,167 (327) (427) (104) (1) (859)
--------------- --------- ------- ------ ---- --------- ------- ------- ------- ----- --------
WPB 159,988 625 154 39 160,806 (27) (10) (15) (8) (60)
---------------
CMB 95,182 313 51 10 95,556 (22) (3) (2) (2) (29)
---------------
GBM 136,909 126 93 - 137,128 (24) (1) (3) - (28)
---------------
Corporate
Centre 5,838 389 - - 6,227 (17) (6) (1) - (24)
--------------- --------- ------- ------ ---- --------- ------- ------- ------- ----- --------
Debt
instruments
measured
at FVOCI at
31 Dec 2020 397,917 1,453 298 49 399,717 (90) (20) (21) (10) (141)
--------------- --------- ------- ------ ---- --------- ------- ------- ------- ----- --------
Summary of financial instruments to which the impairment requirements
in IFRS 9 are applied - by global business (continued)(1)
Gross carrying/nominal Allowance for ECL
amount
Stage Stage Stage POCI Total Stage Stage Stage POCI Total
1 2 3 1 2 3
$m $m $m $m $m $m $m $m $m $m
--------------- --------- ------ ------ ---- --------- ------- ------- ------- ---- ---------
Loans and
advances to
customers at
amortised
cost 951,583 80,182 13,378 332 1,045,475 (1,297) (2,284) (5,052) (99) (8,732)
--------------- --------- ------ ------ ---- --------- ------- ------- ------- ---- -------
- WPB 424,342 16,797 5,131 - 446,270 (602) (1,330) (1,312) - (3,244)
---------------
- CMB 297,364 46,423 6,649 212 350,648 (520) (765) (3,190) (68) (4,543)
---------------
- GBM 228,770 16,934 1,598 120 247,422 (173) (177) (550) (31) (931)
---------------
- Corporate
Centre 1,107 28 - - 1,135 (2) (12) - - (14)
--------------- --------- ------ ------ ---- --------- ------- ------- ------- ---- -------
Loans and
advances to
banks at
amortised cost 67,769 1,450 - - 69,219 (14) (2) - - (16)
--------------- --------- ------ ------ ---- --------- ------- ------- ------- ---- -------
- WPB 14,636 393 - - 15,029 (1) (1) - - (2)
---------------
- CMB 8,842 219 - - 9,061 (2) - - - (2)
---------------
- GBM 30,391 818 - - 31,209 (9) (1) - - (10)
---------------
- Corporate
Centre 13,900 20 - - 13,920 (2) - - - (2)
--------------- --------- ------ ------ ---- --------- ------- ------- ------- ---- -------
Other financial
assets
measured at
amortised
cost 613,200 1,827 151 1 615,179 (38) (38) (42) - (118)
--------------- --------- ------ ------ ---- --------- ------- ------- ------- ---- -------
- WPB 109,423 548 41 - 110,012 (21) (30) (5) - (56)
---------------
- CMB 64,586 904 51 1 65,542 (10) (7) (26) - (43)
---------------
- GBM 361,541 374 37 - 361,952 (7) (1) (11) - (19)
---------------
- Corporate
Centre 77,650 1 22 - 77,673 - - - - -
--------------- --------- ------ ------ ---- --------- ------- ------- ------- ---- -------
Total gross
carrying
amount
on-balance
sheet at
31 Dec 2019 1,632,552 83,459 13,529 333 1,729,873 (1,349) (2,324) (5,094) (99) (8,866)
--------------- --------- ------ ------ ---- --------- ------- ------- ------- ---- -------
Loans and other
credit-related
commitments 577,631 21,618 771 9 600,029 (137) (133) (59) - (329)
--------------- --------- ------ ------ ---- --------- ------- ------- ------- ---- -------
- WPB 213,093 1,945 185 - 215,223 (15) (1) - - (16)
---------------
- CMB 117,703 11,403 558 9 129,673 (69) (65) (56) - (190)
---------------
- GBM 246,805 8,270 28 - 255,103 (53) (67) (3) - (123)
---------------
- Corporate
Centre 30 - - - 30 - - - - -
--------------- --------- ------ ------ ---- --------- ------- ------- ------- ---- -------
Financial
guarantees 17,684 2,340 186 4 20,214 (16) (22) (10) - (48)
--------------- --------- ------ ------ ---- --------- ------- ------- ------- ---- -------
- WPB 972 4 1 - 977 - - - - -
---------------
- CMB 7,446 1,442 105 4 8,997 (9) (12) (6) - (27)
---------------
- GBM 9,263 894 80 - 10,237 (7) (10) (4) - (21)
---------------
- Corporate
Centre 3 - - - 3 - - - - -
--------------- --------- ------ ------ ---- --------- ------- ------- ------- ---- -------
Total nominal
amount
off-balance
sheet at
31 Dec 2019 595,315 23,958 957 13 620,243 (153) (155) (69) - (377)
--------------- --------- ------ ------ ---- --------- ------- ------- ------- ---- -------
WPB 144,632 378 - - 145,010 (13) (81) - - (94)
---------------
CMB 85,353 62 - 1 85,416 (5) (19) - - (24)
---------------
GBM 118,571 68 - - 118,639 (9) (16) - - (25)
---------------
Corporate
Centre 6,093 506 - - 6,599 (12) (11) - - (23)
--------------- --------- ------ ------ ---- --------- ------- ------- ------- ---- -------
Debt
instruments
measured
at FVOCI at
31 Dec 2019 354,649 1,014 - 1 355,664 (39) (127) - - (166)
--------------- --------- ------ ------ ---- --------- ------- ------- ------- ---- -------
1 2019 figures are restated for the change in reportable segments.
Loans and advances to customers and banks metrics
Of Of
which: which:
Gross stage stage
carrying 3 and Allowance 3 and Change
amount POCI for ECL POCI in ECL Write-offs Recoveries
$m $m $m $m $m $m $m
---------------------------------- --------- -------- --------- -------- ------- ---------- ------------
First lien residential mortgages 352,282 3,383 (755) (442) (259) (92) 35
---------------------------------- --------- -------- --------- -------- ------- ---------- ----------
Other personal lending 108,527 2,228 (3,976) (1,060) (2,363) (1,315) 245
---------------------------------- --------- -------- --------- -------- ------- ---------- ----------
Personal lending 460,809 5,611 (4,731) (1,502) (2,622) (1,407) 280
- agriculture, forestry and
fishing 7,445 332 (207) (150) (28) (3) -
----------------------------------
- mining and quarrying 11,947 813 (365) (220) (513) (311) -
----------------------------------
- manufacturing 93,906 2,163 (1,588) (945) (652) (375) 7
----------------------------------
- electricity, gas, steam
and air-conditioning supply 16,200 53 (73) (8) (7) (14) -
----------------------------------
- water supply, sewerage,
waste management and remediation 3,174 47 (37) (22) (8) - -
----------------------------------
- construction 14,600 777 (590) (430) (151) (135) 13
----------------------------------
* wholesale and retail trade,
repair of motor vehicles
and motorcycles 90,663 3,208 (2,532) (2,032) (1,560) (280) 11
----------------------------------
- transportation and storage 29,433 780 (493) (240) (308) (62) 1
----------------------------------
- accommodation and food 26,071 537 (491) (130) (365) (28) -
----------------------------------
- publishing, audiovisual
and broadcasting 19,979 164 (189) (59) (94) (2) -
----------------------------------
- real estate 127,027 1,908 (1,167) (738) (424) (47) 4
----------------------------------
- professional, scientific
and technical activities 24,072 531 (398) (193) (219) (36) 1
----------------------------------
- administrative and support
services 26,423 977 (534) (315) (298) (61) -
----------------------------------
- public administration and
defence, compulsory social
security 2,008 3 (14) (1) (5) - -
----------------------------------
- education 2,122 29 (41) (9) (26) (6) 1
----------------------------------
- health and care 5,510 269 (186) (120) (127) (2) 1
----------------------------------
- arts, entertainment and
recreation 3,437 236 (158) (87) (170) (2) -
----------------------------------
- other services 13,110 410 (408) (249) (360) (168) 4
----------------------------------
- activities of households 802 - (1) - - - -
----------------------------------
- extra-territorial organisations
and bodies activities 10 - - - 1 - 1
----------------------------------
- government 8,538 1 (9) (1) 2 (5) -
----------------------------------
- asset-backed securities 611 - (13) - 1 - -
---------------------------------- --------- -------- --------- -------- ------- ---------- ----------
Corporate and commercial 527,088 13,238 (9,494) (5,949) (5,311) (1,537) 44
---------------------------------- --------- -------- --------- -------- ------- ---------- ----------
Non-bank financial institutions 64,580 523 (265) (100) (146) (30) 2
---------------------------------- --------- -------- --------- -------- ------- ---------- ----------
Wholesale lending 591,668 13,761 (9,759) (6,049) (5,457) (1,567) 46
---------------------------------- --------- -------- --------- -------- ------- ---------- ----------
Loans and advances to customers 1,052,477 19,372 (14,490) (7,551) (8,079) (2,974) 326
----------------------------------
Loans and advances to banks 81,658 - (42) - (23) - -
---------------------------------- --------- -------- --------- -------- ------- ---------- ----------
At 31 Dec 2020 1,134,135 19,372 (14,532) (7,551) (8,102) (2,974) 326
---------------------------------- --------- -------- --------- -------- ------- ---------- ----------
First lien residential mortgages 322,178 3,070 (529) (422) (107) (139) 54
-------------------------------------------- --------- ------ ------- ------- ------- ------- ---
Other personal lending 112,093 1,781 (2,605) (793) (1,114) (1,206) 260
-------------------------------------------- --------- ------ ------- ------- ------- ------- ---
Personal lending 434,271 4,851 (3,134) (1,215) (1,221) (1,345) 314
- agriculture, forestry and
fishing 6,696 280 (182) (140) (15) (6) -
--------------------------------------------
- mining and quarrying 14,435 323 (226) (134) (31) (4) -
--------------------------------------------
- manufacturing 104,380 1,717 (1,210) (856) (392) (332) 8
--------------------------------------------
- electricity, gas, steam
and air-conditioning supply 15,040 175 (80) (25) 14 (54) 2
--------------------------------------------
* water supply, sewerage, waste managem
ent and
remediation 3,501 30 (28) (18) (4) - -
--------------------------------------------
- construction 15,287 884 (564) (499) (171) (191) 12
--------------------------------------------
* wholesale and retail trade, repair of
motor vehicles
and motorcycles 94,681 1,633 (1,184) (936) (330) (389) 13
--------------------------------------------
- transportation and storage 25,580 617 (237) (158) (93) (37) -
--------------------------------------------
- accommodation and food 24,656 263 (146) (63) (49) (81) -
--------------------------------------------
- publishing, audiovisual
and broadcasting 19,971 162 (87) (34) (17) (31) -
--------------------------------------------
- real estate 130,752 1,330 (680) (475) (34) (168) 6
--------------------------------------------
- professional, scientific
and technical activities 24,122 350 (209) (145) (47) (10) 1
--------------------------------------------
- administrative and support
services 25,714 527 (270) (179) (80) (22) -
--------------------------------------------
* public administration and defence, co
mpulsory social
security 2,377 - (8) - - - -
--------------------------------------------
- education 1,900 16 (18) (6) 6 (3) -
--------------------------------------------
- health and care 4,465 111 (57) (28) (6) (13) 1
--------------------------------------------
- arts, entertainment and
recreation 2,824 30 (25) (11) 3 (4) -
--------------------------------------------
- other services 14,276 192 (199) (133) (79) (102) 2
--------------------------------------------
- activities of households 791 - - - - - -
--------------------------------------------
- extra-territorial organisations
and bodies activities 2 - - - 2 - 1
--------------------------------------------
- government 8,313 7 (14) (6) (8) - -
--------------------------------------------
- asset-backed securities 736 - (14) - - - -
-------------------------------------------- --------- ------ ------- ------- ------- ------- ---
Corporate and commercial 540,499 8,647 (5,438) (3,846) (1,331) (1,447) 46
-------------------------------------------- --------- ------ ------- ------- ------- ------- ---
Non-bank financial institutions 70,705 212 (160) (90) (71) (5) 1
-------------------------------------------- --------- ------ ------- ------- ------- ------- ---
Wholesale lending 611,204 8,859 (5,598) (3,936) (1,402) (1,452) 47
-------------------------------------------- --------- ------ ------- ------- ------- ------- ---
Loans and advances to customers 1,045,475 13,710 (8,732) (5,151) (2,623) (2,797) 361
--------------------------------------------
Loans and advances to banks 69,219 - (16) - (6) - -
-------------------------------------------- --------- ------ ------- ------- ------- ------- ---
At 31 Dec 2019 1,114,694 13,710 (8,748) (5,151) (2,629) (2,797) 361
-------------------------------------------- --------- ------ ------- ------- ------- ------- ---
HSBC Holdings
(Audited)
Risk in HSBC Holdings is overseen by the HSBC Holdings Asset and
Liability Management Committee ('Holdings ALCO'). The major risks
faced by HSBC Holdings are credit risk, liquidity risk and market
risk (in the form of interest rate risk and foreign exchange
risk).
Credit risk in HSBC Holdings primarily arises from transactions
with Group subsidiaries and its investments in those
subsidiaries.
In HSBC Holdings, the maximum exposure to credit risk arises
from two components:
-- financial instruments on the balance sheet (see page 285); and
-- financial guarantees and similar contracts, where the maximum
exposure is the maximum that we would have to pay if the guarantees
were called upon (see Note 32).
In the case of our derivative balances, we have amounts with a
legally enforceable right of offset in the case of counterparty
default that are not included in the carrying value. These offsets
also include collateral received in cash and other financial
assets.
The total offset relating to our derivative balances was $1.7bn
at 31 December 2020 (2019: $0.1bn).
The credit quality of loans and advances and financial
investments, both of which consist of intra-Group lending and US
Treasury bills and bonds, is assessed as 'strong', with 100% of the
exposure being neither past due nor impaired (2019: 100%). For
further details of credit quality classification, see page 121.
Treasury risk
Page
Overview 180
---------------------------------- ----
Treasury risk management 180
---------------------------------- ----
Capital risk in 2020 184
Structural foreign exchange risk
in 2020 194
---------------------------------- ----
Interest rate risk in the banking
book in 2020 194
---------------------------------- ----
Overview
Treasury risk is the risk of having insufficient capital,
liquidity or funding resources to meet financial obligations and
satisfy regulatory requirements, together with the financial risks
arising from the provision of pensions and other post-employment
benefits to staff and their dependants. Treasury risk also includes
the risk to our earnings or capital due to structural foreign
exchange exposures and changes in market interest rates.
Treasury risk arises from changes to the respective resources
and risk profiles driven by customer behaviour, management
decisions or the external environment.
Approach and policy
(Audited)
Our objective in the management of treasury risk is to maintain
appropriate levels of capital, liquidity, funding, foreign exchange
and market risk to support our business strategy, and meet our
regulatory and stress testing-related requirements.
Our approach to treasury management is driven by our strategic
and organisational requirements, taking into account the
regulatory, economic and commercial environment. We aim to maintain
a strong capital and liquidity base to support the risks inherent
in our business and invest in accordance with our strategy, meeting
both consolidated and local regulatory requirements at all
times.
Our policy is underpinned by our risk management framework, our
internal capital adequacy assessment process ('ICAAP') and our
internal liquidity adequacy assessment process ('ILAAP'). The risk
framework incorporates a number of measures aligned to our
assessment of risks for both internal and regulatory purposes.
These risks include credit, market, operational, pensions,
structural foreign exchange, banking book foreign exchange risk and
interest rate risk in the banking book.
The ICAAP and ILAAP provide an assessment of the Group's capital
and liquidity adequacy with consideration of HSBC's risk metrics,
business model, strategy, performance and planning, risks to
capital, and the implications of stress testing to capital.
For further details, refer to our Pillar 3 Disclosures at 31
December 2020.
Treasury risk management
Key developments in 2020
In 2020, we established the Treasury Risk Management function.
This function is a dedicated second line of defence, providing
independent oversight of treasury activities across capital risk,
liquidity and funding risk, structural foreign exchange risk,
banking book foreign exchange risk, and interest rate risk in the
banking book, together with pension risk. The approach to treasury
risk management is evolving. This will operate across the Group
focusing on both adequacy of capital and sufficiency of returns. In
2020, we carried out several initiatives focused on treasury
risk:
-- We focused on the management of capital and liquidity to
ensure we responded to the unprecedented customer and capital
demands arising from the Covid-19 outbreak.
-- In response to a written request from the PRA, we cancelled
the fourth interim dividend for 2019 of $0.21 per ordinary share.
Similar requests were also made to other UK incorporated banking
groups. We also announced that we would make no quarterly or
interim dividend payments or accruals in respect of ordinary shares
until the end of 2020. In December 2020, the PRA announced a
temporary approach to shareholder distributions for 2020. After
considering the requirements of the temporary approach, the Board
announced an interim dividend for 2020 of $0.15 per ordinary
share.
-- In our response to the Covid-19 outbreak, we liaised with
governments, central banks and regulatory authorities globally, to
ensure there was continued support and provision of financial
services to the real economy. The Bank of England's Financial
Policy Committee announced a reduction of the UK countercyclical
buffer rate to 0% effective from March 2020. This change was
reflected in the Group's risk appetite statement, and together with
other regulatory relief, resulted in a reduction to Group common
equity tier 1 ('CET1') and leverage ratio requirements.
-- We implemented the acceleration of some of the beneficial
elements of the amendments to the Capital Requirements Regulation
('CRR II') that were originally scheduled for June 2021. The
relevant changes impacting the fourth quarter of 2020 positions
included a resetting of the transitional provisions in relation to
recognising IFRS 9 provisions and the application of the revised
small and medium-sized enterprises ('SME') supporting factor. It
also included changes in the capital treatment of software
intangible assets and the netting of the leverage ratio exposure
measure of regular-way purchases and sales. Additionally, there
were changes that enabled more favourable prudential treatment for
investments in infrastructure, beneficial changes to prudent
valuation adjustments and exemptions of market risk back-testing
exceptions that arose due to the extraordinary market
dislocations.
-- The Group's CET1 ratio was 15.9% at 31 December 2020 and the
leverage ratio was 5.5%. The Group also continues to maintain the
appropriate resources required for the risks to which it is
exposed, while continuing to support local economies. This has been
further informed by additional internal stress tests carried out in
response to the Covid-19 outbreak. Capital risk management
practices continued to be enhanced across the Group through the
Treasury Risk Management function, focusing on both adequacy of
capital and sufficiency of returns.
-- The Group's liquidity levels were impacted by the drawdown of
committed facilities and buy-backs of short-term debt. However,
this was offset by increases in deposits, use of central bank
facilities where appropriate, and the ability to issue in the
short-term markets as they stabilised. As a result of these
liability enhancing actions, the Group and all entities had
significant surplus liquidity, resulting in heightened liquidity
coverage ratios throughout 2020. At 31 December 2020, all of the
Group's material operating entities were above regulatory minimum
levels of liquidity and funding.
-- Declines in interest rates and the flattening of interest
rate yield curves combined to put downwards pressure on net
interest income ('NII'). Balance sheet composition changed, with a
significant build-up of liquidity that was deployed in short-term
investments, which were predominantly cash,
hold-to-collect-and-sell securities and reverse repos. This factor,
together with the lower level of interest rates, increased the
sensitivity of NII to future changes in interest rates. In the
scenario where interest rates fall significantly from current
levels, contractual floors would dampen the effect on the average
rate that would be paid on liabilities whereas the asset side of
the balance sheet would be more likely to reprice lower, reducing
commercial margin.
-- During 2020 we worked with the fiduciaries of all our pension
plans to ensure robust and timely actions were taken in response to
the Covid-19 outbreak, including the smooth transition to remote
working for plan providers and dealing appropriately with affected
plan members. Our de-risking programmes provided protection against
the volatility in financial markets that resulted from the
outbreak's economic impact.
For quantitative disclosures on capital ratios, own funds and
RWAs, see pages 173 to 174. For quantitative disclosures on
liquidity and funding metrics, see pages 176 to 178. For
quantitative disclosures on interest rate risk in the banking book,
see pages 179 to 180.
Governance and structure
The Global Head of Treasury Risk Management and Global Risk
Analytics is the accountable risk steward for all treasury risks,
the Group Head of Performance and Reward is the risk owner for
pensions and the Group Treasurer is the risk owner for remaining
treasury risks.
Capital and liquidity are the responsibility of the Group
Executive Committee and directly addressed by the Group Risk
Committee ('GRC'). Treasury risks are generally managed through the
Holdings Asset and Liability Management Committee ('ALCO') and
local ALCOs and overseen by the Risk Management Meeting
('RMM').
The Asset, Liability and Capital Management ('ALCM') function is
responsible for managing interest rate risk in the banking book. It
maintains the transfer pricing framework and informs the Holdings
ALCO of the Group's overall banking book interest rate exposure.
Banking book interest rate positions may be transferred to be
managed by the Markets Treasury business, previously known as
Balance Sheet Management, within the market risk limits approved by
the RMM. Effective governance of Markets Treasury is supported by
the dual reporting lines it has to the Chief Executive Officer of
Global Banking and Markets and to the Group Treasurer, with the
Global Risk function acting as a second line of defence.
Pension risk is managed by a network of local and regional
pension risk forums. The Global Pensions Oversight Forum provides
oversight of all pension plans sponsored by HSBC globally and is
co-chaired by the Group Treasurer and the Global Head of Treasury
Risk Management and Global Risk Analytics.
Capital, liquidity and funding risk management processes
Assessment and risk appetite
Our capital management policy is underpinned by a capital
management framework and our ICAAP. The framework incorporates key
capital risk appetites for CET1, total capital, minimum
requirements for own funds and eligible liabilities ('MREL'), and
double leverage. The ICAAP is an assessment of the Group's capital
position, outlining both regulatory and internal capital resources
and requirements resulting from HSBC's business model, strategy,
risk profile and management, performance and planning, risks to
capital, and the implications of stress testing. Our assessment of
capital adequacy is driven by an assessment of risks. These risks
include credit, market, operational, pensions, insurance,
structural foreign exchange and interest rate risk in the banking
book. The Group ICAAP supports the determination of the
consolidated capital risk appetite and target ratios as well as
enables the assessment and determination of capital requirements by
regulators. Subsidiaries prepare ICAAPs based on their local
regulatory regimes in order to determine their own risk appetites
and ratios.
HSBC Holdings is the provider of equity capital to its
subsidiaries and also provides them with non-equity capital where
necessary. These investments are substantially funded by HSBC
Holdings' own capital issuance and profit retention.
HSBC Holdings seeks to maintain a prudent balance between the
composition of its capital and its investments in subsidiaries,
including management of double leverage. Double leverage reflects
the extent to which equity investments in operating entities are
funded by holding company debt. Where Group capital requirements
are less than the aggregate of operating entity capital
requirements, double leverage can be used to improve Group capital
efficiency provided it is managed appropriately and prudently in
accordance with risk appetite. Double leverage is a constraint on
managing our capital position, given the complexity of the Group's
subsidiary structure and the multiple regulatory regimes under
which we operate. As a matter of long-standing policy, the holding
company retains a substantial portfolio of high-quality liquid
assets ('HQLA'), which at 31 December 2020 was in excess of $14bn.
The portfolio of HQLA helps to mitigate holding company cash flow
risk arising from double leverage, and underpins the strength of
support the holding company can offer its subsidiaries in times of
stress. Further mitigation is provided by additional tier 1 ('AT1')
securities issued in excess of the regulatory requirements of our
subsidiaries.
We maintain a comprehensive liquidity and funding risk
management framework ('LFRF'), which aims to enable us to withstand
very severe liquidity stresses. The LFRF comprises policies,
metrics and controls designed to ensure that Group and entity
management have oversight of our liquidity and funding risks in
order to manage them appropriately. We manage liquidity and funding
risk at an operating entity level to ensure that obligations can be
met in the jurisdiction where they fall due, generally without
reliance on other parts of the Group. Operating entities are
required to meet internal minimum requirements and any applicable
regulatory requirements at all times. These requirements are
assessed through the ILAAP, which ensures that operating entities
have robust strategies, policies, processes and systems for the
identification, measurement, management and monitoring of liquidity
risk over an appropriate set of time horizons, including intra-day.
The ILAAP informs the validation of risk tolerance and the setting
of risk appetite. It also assesses the capability to manage
liquidity and funding effectively in each major entity. These
metrics are set and managed locally but are subject to robust
global review and challenge to ensure consistency of approach and
application of the LFRF across the Group.
Planning and performance
Capital and risk-weighted asset ('RWA') plans form part of the
annual operating plan that is approved by the Board. Capital and
RWA forecasts are submitted to the Group Executive Committee on a
monthly basis, and capital and RWAs are monitored and managed
against the plan. The responsibility for global capital allocation
principles rests with the Group Chief Financial Officer supported
by the Group Capital Management Meeting. This is a specialist forum
addressing capital management, reporting into Holdings ALCO.
Through our internal governance processes, we seek to strengthen
discipline over our investment and capital allocation decisions,
and to ensure that returns on investment meet management's
objectives. Our strategy is to allocate capital to businesses and
entities to support growth objectives where returns above internal
hurdle levels have been identified and in order to meet their
regulatory and economic capital needs. We evaluate and manage
business returns by using a return on average tangible equity
measure.
Funding and liquidity plans form part of the annual operating
plan that is approved by the Board. The critical Board-level
appetite measures are the liquidity coverage ratio ('LCR') and net
stable funding ratio ('NSFR'). An appropriate funding and liquidity
profile is managed through a wider set of measures:
-- a minimum LCR requirement;
-- a minimum NSFR requirement or other appropriate metric;
-- a legal entity depositor concentration limit;
-- three-month and 12-month cumulative rolling term contractual
maturity limits covering deposits from banks, deposits from
non-bank financial institutions and securities issued;
-- a minimum LCR requirement by currency;
-- intra-day liquidity;
-- the application of liquidity funds transfer pricing; and
-- forward-looking funding assessments.
The LCR and NSFR metrics are to be supplemented by an internal
liquidity metric in 2021.
Risks to capital and liquidity
Outside the stress testing framework, other risks may be
identified that have the potential to affect our RWAs and/or
capital position. Downside and Upside scenarios are assessed
against our capital management objectives and mitigating actions
are assigned as necessary. We closely monitor future regulatory
changes and continue to evaluate the impact of these upon our
capital requirements. This includes the UK's implementation of
amendments to the Capital Requirements Regulation, the Basel III
Reforms, and the regulatory impact from the UK's withdrawal from
the EU, as well as other regulatory statements including changes to
IRB modelling requirements.
We currently estimate that these regulatory changes could
potentially increase RWAs, before any mitigating actions, by
approximately 5% over 2022-23. We plan to take action to
substantially mitigate a significant proportion of the
increase.
The Basel III Reforms introduce an output floor that will be
introduced in 2023 with a five-year transitional provision. We
estimate that there will be an additional RWA impact as a result of
the output floor from 2027.
In parallel with regulatory developments in the EU, the UK's PRA
is reviewing the requirements for the capitalisation of structural
foreign exchange risk to align to a Pillar 1 approach.
There remains a significant degree of uncertainty in the impact
of the regulatory changes due to the number of national discretions
and the need for further supporting technical standards to be
developed. Furthermore, the impact does not take into consideration
the possibility of offsets against Pillar 2, which may arise as
shortcomings within Pillar 1 are addressed.
We have applied the revised regulatory treatment of software
assets that became law in the EU following its publication in
December 2020. We are aware that the PRA intends to consult on this
change with a view to returning to full deduction. In line with the
PRA's guidance, we have therefore excluded the capital benefit of
$2.1bn from our decisions about distributions.
Regulatory reporting processes and controls
There is a continued focus on the quality of regulatory
reporting by the PRA and other regulators globally. We continue to
strengthen our processes and controls, including commissioning
independent external reviews of various aspects of regulatory
reporting. As a result, there may be impacts on some of our
regulatory ratios such as the CET1 and LCR. We continue to keep the
PRA and other relevant regulators informed of adverse findings from
external reviews and our progress in strengthening the control
environment.
Further details can be found in the 'Regulatory developments'
section of the Group's Pillar 3 Disclosures at 31 December
2020.
Stress testing and recovery planning
The Group uses stress testing to evaluate the robustness of
plans and risk portfolios, and to meet the requirements for stress
testing set by supervisors. Stress testing also informs the ICAAP
and ILAAP and supports recovery planning in many jurisdictions. It
is an important output used to evaluate how much capital and
liquidity the Group requires in setting risk appetite for capital
and liquidity risk. It is also used to re-evaluate business plans
where analysis shows capital, liquidity and/or returns do not meet
their target.
In addition to a range of internal stress tests, we are subject
to supervisory stress testing in many jurisdictions. These include
the programmes of the Bank of England, the US Federal Reserve
Board, the European Banking Authority, the European Central Bank
and the Hong Kong Monetary Authority, as well as stress tests
undertaken in other jurisdictions. The results of regulatory stress
testing and our internal stress tests are used when assessing our
internal capital requirements through the ICAAP. The outcomes of
stress testing exercises carried out by the PRA and other
regulators feed into the setting of regulatory minimum ratios and
buffers.
The Group and subsidiaries have established recovery plans,
which set out potential options management could take in a range of
stress scenarios that could result in a breach of our internal
capital buffers. This is to help ensure that our capital and
liquidity position can be recovered even in an extreme stress
event.
During 2020, in light of the Covid-19 outbreak, we carried out
additional internal testing on baseline and stressed scenarios. The
results of these stress tests were considered in determining
capital actions to manage the Group's position.
Additionally, further stress testing was carried out to include
scenarios relating to the impact of the UK's withdrawal from the EU
and elevated tensions between the US and China.
All entities monitor internal and external triggers that could
threaten their capital, liquidity or funding positions. Entities
have established recovery plans providing detailed actions that
management would consider taking in a stress scenario should their
positions deteriorate and threaten to breach risk appetite and
regulatory minimum levels.
Details of HSBC's liquidity and funding risk management
framework ('LFRF') can be found in the Group's Pillar 3 Disclosures
at 31 December 2020.
Measurement of interest rate risk in the banking book
processes
Assessment and risk appetite
Interest rate risk in the banking book is the risk of an adverse
impact to earnings or capital due to changes in market interest
rates. It is generated by our non-traded assets and liabilities,
specifically loans, deposits and financial instruments that are not
held for trading intent or held in order to hedge positions held
with trading intent. Interest rate risk that can be economically
hedged may be transferred to the Markets Treasury business. Hedging
is generally executed through interest rate derivatives or
fixed-rate government bonds. Any interest rate risk that Markets
Treasury cannot economically hedge is not transferred and will
remain within the global business where the risks originate.
The ALCM function uses a number of measures to monitor and
control interest rate risk in the banking book, including:
-- net interest income sensitivity;
-- economic value of equity sensitivity; and
-- hold-to-collect-and-sell stressed value at risk.
--
Net interest income sensitivity
A principal part of our management of non-traded interest rate
risk is to monitor the sensitivity of expected net interest income
('NII') under varying interest rate scenarios (i.e. simulation
modelling), where all other economic variables are held constant.
This monitoring is undertaken at an entity level by local ALCOs,
where entities forecast both one-year and five-year NII
sensitivities across a range of interest rate scenarios.
Projected NII sensitivity figures represent the effect of pro
forma movements in projected yield curves based on a static balance
sheet size and structure. The exception to this is where the size
of the balances or repricing is deemed interest rate sensitive, for
example, non-interest-bearing current account migration and
fixed-rate loan early prepayment. These sensitivity calculations do
not incorporate actions that would be taken by Markets Treasury or
in the business that originates the risk to mitigate the effect of
interest rate movements.
The NII sensitivity calculations assume that interest rates of
all maturities move by the same amount in the 'up-shock' scenario.
The sensitivity calculations in the 'down-shock' scenarios reflect
no floors to the shocked market rates. However, customer
product-specific interest rate floors are recognised where
applicable. This is a change from the NII sensitivity methodology
applied in the Annual Report and Accounts 2019, where market rates
were floored to zero, unless the central bank rate was already
negative as in the case of the euro, Swiss franc and Japanese
yen.
Economic value of equity sensitivity
Economic value of equity ('EVE') represents the present value of
the future banking book cash flows that could be distributed to
equity providers under a managed run-off scenario. This equates to
the current book value of equity plus the present value of future
NII in this scenario. EVE can be used to assess the economic
capital required to support interest rate risk in the banking book.
An EVE sensitivity represents the expected movement in EVE due to
pre-specified interest rate shocks, where all other economic
variables are held constant. Operating entities are required to
monitor EVE sensitivities as a percentage of capital resources.
Hold-to-collect-and-sell stressed value at risk
Hold-to-collect-and-sell stressed value at risk ('VaR') is a
quantification of the potential losses to a 99% confidence level of
the portfolio of securities held under a held-to-collect-and-sell
business model in the Markets Treasury business. The portfolio is
accounted for at fair value through other comprehensive income
together with the derivatives held in designated hedging
relationships with these securities. This is quantified based on
the worst losses over a one-year period going back to the beginning
of 2007 and the assumed holding period is 60 days.
Hold-to-collect-and-sell stressed VaR uses the same models as
those used for trading book capitalisation and covers only the
portfolio managed by Markets Treasury under this business
model.
Other Group risks
Structural foreign exchange exposures
Structural foreign exchange exposures represent net investments
in subsidiaries, branches and associates, the functional currencies
of which are currencies other than the US dollar. An entity's
functional currency is normally that of the primary economic
environment in which the entity operates.
Exchange differences on structural exposures are recognised in
other comprehensive income ('OCI'). We use the US dollar as our
presentation currency in our consolidated financial statements
because the US dollar and currencies linked to it form the major
currency bloc in which we transact and fund our business.
Therefore, our consolidated balance sheet is affected by exchange
differences between the US dollar and all the non-US dollar
functional currencies of underlying subsidiaries.
Our structural foreign exchange exposures are managed with the
primary objective of ensuring, where practical, that our
consolidated capital ratios and the capital ratios of individual
banking subsidiaries are largely protected from the effect of
changes in exchange rates. We hedge structural foreign exchange
exposures only in limited circumstances.
For further details of our structural foreign exchange
exposures, see page 179.
Banking book foreign exchange exposures
Banking book foreign exchange exposures arise from transactions
in the banking book generating profit and loss or OCI reserves in a
currency other than the reporting currency of the operating entity.
Transactional foreign exchange exposure is transferred to Markets
and Securities Services or Markets Treasury and managed within
limits, with the exception of both exposure generating OCI reserves
and limited residual foreign exchange exposure arising from timing
differences or for other reasons.
HSBC Holdings risk management
As a financial services holding company, HSBC Holdings has
limited market risk activities. Its activities predominantly
involve maintaining sufficient capital resources to support the
Group's diverse activities; allocating these capital resources
across the Group's businesses; earning dividend and interest income
on its investments in the businesses; payment of operating
expenses; providing dividend payments to its equity shareholders
and interest payments to providers of debt capital; and maintaining
a supply of short-term liquid assets for deployment under
extraordinary circumstances.
The main market risks to which HSBC Holdings is exposed are
banking book interest rate risk and foreign currency risk. Exposure
to these risks arises from short-term cash balances, funding
positions held, loans to subsidiaries, investments in long-term
financial assets and financial liabilities including debt capital
issued. The objective of HSBC Holdings' market risk management
strategy is to manage volatility in capital resources, cash flows
and distributable reserves that could be caused by movements in
market parameters. Market risk for HSBC Holdings is monitored by
Holdings ALCO in accordance with its risk appetite statement.
HSBC Holdings uses interest rate swaps and cross-currency
interest rate swaps to manage the interest rate risk and foreign
currency risk arising from its long-term debt issues.
During 2020, HSBC Holdings undertook a variety of liability
management exercises, including the issuance of fixed-rate eligible
liabilities. Group Treasury generally hedged out the fixed-rate
interest rate risk on these liabilities in previous years, but as
major interest rate markets remained at very low levels during
2020, this was assessed on a case-by-case basis and in some cases
the decision was made to retain the fixed-rate risk.
For quantitative disclosures on interest rate risk in the
banking book, see pages 179 to 180.
Pension risk management processes
Our global pensions strategy is to move from defined benefit to
defined contribution plans, where local law allows and it is
considered competitive to do so. In 2020 we reviewed our risk
appetite metrics and in 2021 we will continue to enhance and expand
these to further assist the internal monitoring of our de-risking
programmes.
In defined contribution pension plans, the contributions that
HSBC is required to make are known, while the ultimate pension
benefit will vary, typically with investment returns achieved by
investment choices made by the employee. While the market risk to
HSBC of defined contribution plans is low, the Group is still
exposed to operational and reputational risk.
In defined benefit pension plans, the level of pension benefit
is known. Therefore, the level of contributions required by HSBC
will vary due to a number of risks, including:
-- investments delivering a return below that required to provide the projected plan benefits;
-- the prevailing economic environment leading to corporate
failures, thus triggering write-downs in asset values (both equity
and debt);
-- a change in either interest rates or inflation expectations,
causing an increase in the value of plan liabilities; and
-- plan members living longer than expected (known as longevity risk).
Pension risk is assessed using an economic capital model that
takes into account potential variations in these factors. The
impact of these variations on both pension assets and pension
liabilities is assessed using a one-in-200-year stress test.
Scenario analysis and other stress tests are also used to support
pension risk management. To fund the benefits associated with
defined benefit plans, sponsoring Group companies, and in some
instances employees, make regular contributions in accordance with
advice from actuaries and in consultation with the plan's trustees
where relevant. These contributions are normally set to ensure that
there are sufficient funds to meet the cost of the accruing
benefits for the future service of active members. However, higher
contributions are required when plan assets are considered
insufficient to cover the existing pension liabilities.
Contribution rates are typically revised annually or once every
three years, depending on the plan.
The defined benefit plans invest contributions in a range of
investments designed to limit the risk of assets failing to meet a
plan's liabilities. Any changes in expected returns from the
investments may also change future contribution requirements. In
pursuit of these long-term objectives, an overall target allocation
is established between asset classes of the defined benefit plan.
In addition, each permitted asset class has its own benchmarks,
such as stock-market or property valuation indices or liability
characteristics. The benchmarks are reviewed at least once every
three to five years and more frequently if required by local
legislation or circumstances. The process generally involves an
extensive asset and liability review.
In addition, some of the Group's pension plans hold longevity
swap contracts. These arrangements provide long-term protection to
the relevant plans against costs resulting from pensioners or their
dependants living longer than initially expected. The most sizeable
plan to do this is the HSBC Bank (UK) Pension Scheme, which holds
longevity swaps covering approximately three-quarters of the plan's
pensioner liabilities (50% with The Prudential Insurance Company of
America and 25% with Swiss Re).
Capital risk in 2020
Capital overview
Capital adequacy metrics
At
----------------
31 Dec 31 Dec
2020 2019
Risk-weighted assets
('RWAs') ($bn)
-------------------------- ------ --------
Credit risk 691.9 676.6
-------------------------- ------ ------
Counterparty credit
risk 42.8 44.1
-------------------------- ------ ------
Market risk 28.5 29.9
-------------------------- ------ ------
Operational risk 94.3 92.8
-------------------------- ------ ------
Total RWAs 857.5 843.4
-------------------------- ------ ------
Capital on a transitional
basis ($bn)
-------------------------- ------ --------
Common equity tier
1 ('CET1') capital 136.1 124.0
-------------------------- ------ ------
Tier 1 capital 160.2 148.4
-------------------------- ------ ------
Total capital 184.4 172.2
-------------------------- ------ ------
Capital ratios on a
transitional basis
(%)
-------------------------- ------ --------
Common equity tier
1 ratio 15.9 14.7
-------------------------- ------ ------
Tier 1 ratio 18.7 17.6
-------------------------- ------ ------
Total capital ratio 21.5 20.4
-------------------------- ------ ------
Capital on an end point
basis ($bn)
-------------------------- ------ --------
Common equity tier
1 ('CET1') capital 136.1 124.0
-------------------------- ------ ------
Tier 1 capital 158.5 144.8
-------------------------- ------ ------
Total capital 173.2 159.3
-------------------------- ------ ------
Capital ratios on an
end point basis (%)
-------------------------- ------ --------
Common equity tier
1 ratio 15.9 14.7
-------------------------- ------ ------
Tier 1 ratio 18.5 17.2
-------------------------- ------ ------
Total capital ratio 20.2 18.9
-------------------------- ------ ------
Liquidity coverage
ratio ('LCR')
-------------------------- ------ --------
Total high-quality
liquid assets ($bn) 677.9 601.4
-------------------------- ------ ------
Total net cash outflow
($bn) 487.3 400.5
-------------------------- ------ ------
LCR ratio (%) 139.1 150.2
-------------------------- ------ ------
Following the end of the transition period following the UK's
withdrawal from the EU, any reference to EU regulations and
directives (including technical standards) should be read as a
reference to the UK's version of such regulation or directive, as
onshored into UK law under the European Union (Withdrawal) Act
2018, as amended.
Capital figures and ratios in the previous table are calculated
in accordance with the revised Capital Requirements Regulation and
Directive, as implemented ('CRR II'). The table presents them under
the transitional arrangements in CRR II for capital instruments and
after their expiry, known as the end point. The end point figures
in the table above include the benefit of the regulatory
transitional arrangements in CRR II for IFRS 9, which are more
fully described below.
Where applicable, they also reflect government relief schemes
intended to mitigate the impact of the Covid-19 outbreak.
Regulatory transitional arrangements for IFRS 9 'Financial
Instruments'
We have adopted the regulatory transitional arrangements in CRR
II for IFRS 9, including paragraph four of article 473a. Our
capital and ratios are presented under these arrangements
throughout the table above, including in the end point figures.
Without their application, our CET1 ratio would be 15.7%.
The IFRS 9 regulatory transitional arrangements allow banks to
add back to their capital base a proportion of the impact that
IFRS 9 has upon their loan loss allowances during the first five
years of use. The impact is defined as:
-- the increase in loan loss allowances on day one of IFRS 9 adoption; and
-- any subsequent increase in ECL in the non-credit-impaired
book thereafter.
Any add-back must be tax affected and accompanied by a
recalculation of exposure and RWAs. The impact is calculated
separately for portfolios using the standardised ('STD') and
internal ratings-based ('IRB') approaches. For IRB portfolios,
there is no add-back to capital unless loan loss allowances exceed
regulatory 12-month expected losses.
The EU's CRR II 'Quick Fix' relief package enacted in June 2020
increased from 70% to 100% the relief that banks may take for loan
loss allowances recognised since 1 January 2020 on the
non-credit-impaired book.
In the current period, the add-back to CET1 capital amounted to
$1.6bn under the STD approach with a tax impact of $0.4bn. At 31
December 2019, the add-back to the capital base under the STD
approach was $1.0bn with a tax impact of $0.2bn.
Own funds
Own funds disclosure
(Audited)
---------- ----------
At
----------------------
31 Dec 31 Dec
2020 2019
Ref* $m $m
---- ---------------------------------------------------------- ---------- ----------
Common equity tier 1 ('CET1') capital: instruments
and reserves
---- ---------------------------------------------------------- ---------- ----------
Capital instruments and the related share premium
1 accounts 23,219 22,873
---- ---------------------------------------------------------- -------- --------
- ordinary shares 23,219 22,873
---- ---------------------------------------------------------- -------- --------
2 Retained earnings 128,665 127,188
---- ---------------------------------------------------------- -------- --------
Accumulated other comprehensive income (and other
3 reserves)(1) 9,768 1,735
---- ---------------------------------------------------------- -------- --------
Minority interests (amount allowed in consolidated
5 CET1) 4,079 4,865
---- ---------------------------------------------------------- -------- --------
Independently reviewed interim net profits net of
5a any foreseeable charge or dividend (252) (3,381)
---- ---------------------------------------------------------- -------- --------
6 Common equity tier 1 capital before regulatory adjustments 165,479 153,280
Total regulatory adjustments to common equity tier
28 1 (29,429) (29,314)
---- ---------------------------------------------------------- -------- --------
29 Common equity tier 1 capital 136,050 123,966
36 Additional tier 1 capital before regulatory adjustments 24,183 24,453
---- ---------------------------------------------------------- -------- --------
Total regulatory adjustments to additional tier 1
43 capital (60) (60)
---- ---------------------------------------------------------- -------- --------
44 Additional tier 1 capital 24,123 24,393
---- ---------------------------------------------------------- -------- --------
45 Tier 1 capital 160,173 148,359
51 Tier 2 capital before regulatory adjustments 25,722 25,192
---- ---------------------------------------------------------- -------- --------
57 Total regulatory adjustments to tier 2 capital (1,472) (1,401)
---- ---------------------------------------------------------- -------- --------
58 Tier 2 capital 24,250 23,791
---- ---------------------------------------------------------- -------- --------
59 Total capital 184,423 172,150
---- ---------------------------------------------------------- -------- --------
* The references identify the lines prescribed in the European
Banking Authority ('EBA') template, which are applicable and where
there is a value.
1 Following the call and subsequent redemption of HSBC Holdings'
non-cumulative preference shares, the remaining share premium that
related to such preference shares is now treated as an 'other
reserve' and included in CET1.
Throughout 2020, we complied with the PRA's regulatory capital
adequacy requirements, including those relating to stress testing.
At 31 December 2020, our CET1 ratio increased to 15.9% from 14.7%
at 31 December 2019.
CET1 capital increased during the year by $12.1bn, mainly as a
result of:
-- the cancellation of the fourth interim dividend of $3.4bn for 2019;
-- favourable foreign currency translation differences of $3.4bn;
-- capital generation of $2.8bn net of dividends relating to other equity instruments;
-- a fall of $2.1bn in the deduction for other intangible assets
due to changes to the capital treatment of software assets;
-- a $1.8bn increase in fair value through other comprehensive income reserve; and
-- a $1.8bn fall in the deduction for excess expected loss.
These increases were partly offset by:
-- an interim dividend for 2020 of $3.1bn; and
-- a $0.8bn fall in allowable non-controlling interest in CET1.
This partly reflected the acquisition in May 2020 of additional
shares representing 18.66% of the capital of HSBC Trinkaus and
Burkhardt from Landesbank Baden-Württemberg, the principal minority
shareholder.
We have applied the revised regulatory treatment of software
assets, which became a UK requirement in December 2020.
Subsequently, the PRA announced its intention to consult on a
reversal of this change in due course and recommended firms do not
base their distribution decision on any capital increase from
applying this requirement. As a result, we have not considered the
related capital benefit in our distributions. The impact of the
change on our CET1 ratio was 0.2 percentage points.
Our Pillar 2A requirement at 31 December 2020, as per the PRA's
Individual Capital Requirement based on a point-in-time assessment,
was equivalent to 3.0% of RWAs, of which 1.7% was met by CET1.
Risk-weighted assets
RWAs by global business
Corporate
WPB CMB GBM Centre Total
$bn $bn $bn $bn $bn
------------------------- ----- ----- ----- --------- -------
Credit risk 135.9 300.0 168.6 87.4 691.9
------------------------- ----- ----- ----- --------- -----
Counterparty credit risk 0.7 0.2 41.2 0.7 42.8
------------------------- ----- ----- ----- --------- -----
Market risk 1.6 0.9 22.9 3.1 28.5
------------------------- ----- ----- ----- --------- -----
Operational risk 34.6 26.6 32.4 0.7 94.3
------------------------- ----- ----- ----- --------- -----
At 31 Dec 2020 172.8 327.7 265.1 91.9 857.5
------------------------- ----- ----- ----- --------- -----
RWAs by geographical region
North Latin
Europe Asia MENA America America Total
Footnotes $bn $bn $bn $bn $bn $bn
------------------------- --------- ------ ----- ---- -------- -------- -------
Credit risk 211.2 307.3 50.2 96.1 27.1 691.9
------------------------- --------- ------ ----- ---- -------- -------- -----
Counterparty credit risk 23.7 10.7 1.4 5.3 1.7 42.8
------------------------- --------- ------ ----- ---- -------- -------- -----
Market risk 1 23.5 20.9 2.4 4.7 1.2 28.5
------------------------- --------- ------ ----- ---- -------- -------- -----
Operational risk 25.9 45.3 6.2 11.7 5.2 94.3
------------------------- --------- ------ ----- ---- -------- -------- -----
At 31 Dec 2020 284.3 384.2 60.2 117.8 35.2 857.5
------------------------- --------- ------ ----- ---- -------- -------- -----
1 RWAs are non-additive across geographical regions due to
market risk diversification effects within the Group.
RWA movement by global business by key driver
Credit risk, counterparty
credit risk and operational
risk
Corporate Market Total
WPB CMB GBM Centre risk RWAs
$bn $bn $bn $bn $bn $bn
--------------------------- ------- -------- -------- --------- ------ --------
RWAs at 1 Jan 2020 161.4 325.1 248.7 78.3 29.9 843.4
--------------------------- ------- -------- -------- --------- ------ ------
Asset size 2.2 (12.3) (3.1) 2.4 1.1 (9.7)
--------------------------- ------- -------- -------- --------- ------ ------
Asset quality 0.3 14.5 9.3 0.4 - 24.5
--------------------------- ------- -------- -------- --------- ------ ------
Model updates 2.7 0.9 (2.2) - (2.0) (0.6)
--------------------------- ------- -------- -------- --------- ------ ------
Methodology and policy 2.6 (8.6) (13.9) 6.2 (0.5) (14.2)
--------------------------- ------- -------- -------- --------- ------ ------
Acquisitions and disposals - - - 1.0 - 1.0
--------------------------- ------- -------- -------- --------- ------ ------
Foreign exchange movements 2.0 7.2 3.4 0.5 - 13.1
--------------------------- ------- -------- -------- --------- ------ ------
Total RWA movement 9.8 1.7 (6.5) 10.5 (1.4) 14.1
--------------------------- ------- -------- -------- --------- ------ ------
RWAs at 31 Dec 2020 171.2 326.8 242.2 88.8 28.5 857.5
--------------------------- ------- -------- -------- --------- ------ ------
RWA movement by geographical region by key driver
Credit risk, counterparty
credit risk and operational
risk
North Latin Market Total
Europe Asia MENA America America risk RWAs
$bn $bn $bn $bn $bn $bn $bn
--------------------------- ------- ------ ----- -------- -------- ------ --------
RWAs at 1 Jan 2020 257.9 345.9 55.5 117.6 36.6 29.9 843.4
--------------------------- ------- ------ ----- -------- -------- ------ ------
Asset size (9.9) 3.4 1.1 (6.1) 0.7 1.1 (9.7)
--------------------------- ------- ------ ----- -------- -------- ------ ------
Asset quality 7.2 10.9 1.3 4.6 0.5 - 24.5
--------------------------- ------- ------ ----- -------- -------- ------ ------
Model updates 1.7 0.3 - (0.6) - (2.0) (0.6)
--------------------------- ------ ----- -------- -------- ------ ------
Methodology and policy (6.8) (3.0) (0.2) (3.2) (0.5) (0.5) (14.2)
--------------------------- ------- ------ ----- -------- -------- ------ ------
Acquisitions and disposals - - 1.0 - - - 1.0
--------------------------- ------- ------ ----- -------- -------- ------ ------
Foreign exchange movements 10.7 5.8 (0.9) 0.8 (3.3) - 13.1
--------------------------- ------- ------ ----- -------- -------- ------ ------
Total RWA movement 2.9 17.4 2.3 (4.5) (2.6) (1.4) 14.1
--------------------------- ------- ------ ----- -------- -------- ------ ------
RWAs at 31 Dec 2020 260.8 363.3 57.8 113.1 34.0 28.5 857.5
--------------------------- ------- ------ ----- -------- -------- ------ ------
Risk-weighted assets ('RWAs') rose by $14.1bn during the year,
including an increase of $13.1bn due to foreign currency
translation differences. The $1.0bn increase (excluding foreign
currency translation differences) is described in the commentary
below. During the period we recognised RWA reductions through our
transformation programme of $51.5bn. These are included within the
movements described below, primarily under asset size movements and
methodology and policy changes.
Asset size
The $9.7bn fall in RWAs due to asset size movements was due to
reductions in CMB and GBM, partly offset by increases in Corporate
Centre, WPB and market risk.
The $12.3bn decrease in CMB RWAs was primarily due to management
initiatives under our transformation programme, most notably in
Europe, North America and Asia.
The $3.1bn fall in GBM RWAs was driven by $16.4bn of reductions
under the transformation programme, largely in North America,
Europe, Asia and Latin America. This was partly offset by lending
growth, mostly in Asia and MENA, and mark-to-market movements in
counterparty credit risk RWAs.
In Asia, an increase in the value of material holdings and
lending growth in the property market drove increases in Corporate
Centre and WPB RWAs of $2.4bn and $2.2bn respectively.
Market risk RWAs increased by $1.1bn, largely due to market
conditions, partly offset by management initiatives.
Asset quality
Changes in asset quality led to an RWA increase of $24.5bn,
mostly in CMB and GBM. This included credit migration of
$29.7bn, largely caused by the Covid-19 outbreak. These
downgrades were mostly in Asia, North America and Europe, partly
offset by decreases due to portfolio mix changes.
Model updates
The $0.6bn fall in RWAs due to model updates comprised decreases
in GBM and market risk, partly offset by increases in WPB and
CMB.
The $2.2bn reduction in GBM RWAs was due to corporate model
updates in our major regions, most significantly in North
America.
Market risk RWAs fell by $2.0bn primarily as a result of changes
to the calculation of risks not in VaR, and the implementation of a
new model for an options portfolio.
The increases in WPB and CMB credit risk RWAs were mainly due to
updates to French, Hong Kong and North American models.
Methodology and policy
The $14.2bn reduction in RWAs due to methodology and policy
changes included reductions as a result of risk parameter
refinements and regulatory responses to the Covid-19 outbreak,
offset by changes in approach to credit risk exposures.
GBM and CMB reduced RWAs by $23.8bn, of which $11.5bn were under
the transformation programme. These reductions stem from a variety
of actions, including risk parameter refinements, improved
collateral linkage, and data enhancement.
Changes under the CRR 'Quick Fix' relief package also reduced
CMB and GBM RWAs. Implementation of the revised small and
medium-sized enterprise supporting factor led to a $3.4bn fall in
RWAs for CMB while the new infrastructure supporting factor caused
a $0.5bn fall in GBM. Partly offsetting these reductions, the
recent change in the regulatory treatment of software assets caused
a $2.3bn increase in Corporate Centre RWAs.
At the start of 2020, we implemented two changes that led to a
$6.4bn increase in our wholesale credit risk exposures. Application
of the new securitisation framework to the pre-existing book caused
RWAs to rise by $3.4bn, mainly in Corporate Centre and GBM.
Following the conclusion of discussions with the PRA, we also
transferred several UK corporate portfolios onto a Foundation IRB
approach, causing a $3bn rise in RWAs in CMB and GBM.
Corporate Centre and WPB RWAs increased by $5bn as a result of
updates to exposures in Asia and the French retail business.
The $0.5bn fall in market risk largely comprised reductions from
updates to the calculation of stressed VaR and foreign exchange
risk, partly offset by increases due to risks not in VaR.
Acquisitions and disposals
The increase in our shareholding of The Saudi British Bank from
29.2% to 31.0% led to $1.0bn additional Corporate Centre RWAs.
Leverage ratio(1)
At
-------------------------------
31 Dec 31 Dec
2020 2019
Ref* Footnotes $bn $bn
----- ------------------------------------------------------ --------- ----------------- ------------
20 Tier 1 capital 158.5 144.8
----- ------------------------------------------------------ --------- --------------- ----------
21 Total leverage ratio exposure 2,897.1 2,726.5
----- ------------------------------------------------------ --------- --------------- ----------
% %
----- ------------------------------------------------------ --------- ----------------- ------------
22 Leverage ratio 5.5 5.3
----- ------------------------------------------------------ --------- --------------- ----------
EU-23 Choice of transitional arrangements for the definition Fully phased-in Fully
of the capital measure phased-in
----- ------------------------------------------------------ --------- ----------------- ------------
UK leverage ratio exposure - quarterly average 2 2,555.5 2,535.4
----- ------------------------------------------------------ --------- --------------- ----------
% %
----- ------------------------------------------------------ --------- ----------------- ------------
UK leverage ratio - quarterly average 2 6.1 5.8
----- ------------------------------------------------------ --------- --------------- ----------
UK leverage ratio - quarter end 2 6.2 5.7
----- ------------------------------------------------------ --------- --------------- ----------
* The references identify the lines prescribed in the EBA template.
1 The CRR II regulatory transitional arrangements for IFRS 9 are applied in both leverage ratio calculations.
2 UK leverage ratio denotes the Group's leverage ratio
calculated under the PRA's UK leverage framework. This measure
excludes qualifying central bank balances and loans under the UK
Bounce Back Loan Scheme from the calculation of exposure.
Our leverage ratio calculated in accordance with the Capital
Requirements Regulation was 5.5% at 31 December 2020, up from 5.3%
at 31 December 2019, due to an increase in tier 1 capital, offset
by an increase in exposure primarily due to growth in central bank
deposits and financial investments. The change in treatment of
software assets benefited our leverage ratio by 0.1 percentage
points.
At 31 December 2020, our UK minimum leverage ratio requirement
of 3.25% under the PRA's UK leverage framework was supplemented by
an additional leverage ratio buffer of 0.7% and a countercyclical
leverage ratio buffer of 0.1%. These additional buffers translated
into capital values of $17.9bn and $1.8bn respectively. We exceeded
these leverage requirements.
Pillar 3 disclosure requirements
Pillar 3 of the Basel regulatory framework is related to market
discipline and aims to make financial services firms more
transparent by requiring publication of wide-ranging information on
their risks, capital and management. Our Pillar 3 Disclosures at 31
December 2020 is published on our website,
www.hsbc.com/investors.
Liquidity and funding risk in 2020
Liquidity metrics
At 31 December 2020, all of the Group's material operating
entities were above regulatory minimum liquidity and funding
levels.
Each entity maintains sufficient unencumbered liquid assets to
comply with local and regulatory requirements. The liquidity value
of these liquidity assets for each entity is shown in the following
table along with the individual LCR levels on a European Commission
('EC') basis. This basis may differ from local LCR measures due to
differences in the way non-EU regulators have implemented the Basel
III standards.
Each entity maintains sufficient stable funding relative to the
required stable funding assessed using the NSFR or other
appropriate metrics.
Given our continued focus on the quality of regulatory
reporting, liquidity reporting processes are undergoing a detailed
review, which may lead to impacts on some of our regulatory ratios,
including LCR and NSFR. All entities are above regulatory minimums
and are expected to continue to remain above risk appetite.
The Group liquidity and funding position at the end of 2020 is
analysed in the following sections.
Operating entities' liquidity
At 31 December 2020
----------------------------------
LCR HQLA Net outflows NSFR
Footnotes % $bn $bn %
---------------------------------------------- --------- ----- ----- ------------ ------
HSBC UK Bank plc (ring-fenced bank) 1 198 121 61 164
---------------------------------------------- --------- ----- ----- ------------ ----
HSBC Bank plc (non-ring-fenced bank) 2 136 138 102 124
---------------------------------------------- --------- ----- ----- ------------ ----
The Hongkong and Shanghai Banking Corporation
- Hong Kong branch 3 195 146 75 146
---------------------------------------------- --------- ----- ----- ------------ ----
The Hongkong and Shanghai Banking Corporation
- Singapore branch 3 162 16 10 135
---------------------------------------------- --------- ----- ----- ------------ ----
Hang Seng Bank 212 50 24 151
---------------------------------------------- --------- ----- ----- ------------ ----
HSBC Bank China 232 24 10 158
---------------------------------------------- --------- ----- ----- ------------ ----
HSBC Bank USA 130 106 82 130
---------------------------------------------- --------- ----- ----- ------------ ----
HSBC Continental Europe 4 143 48 34 130
---------------------------------------------- --------- ----- ----- ------------ ----
HSBC Middle East - UAE branch 280 11 4 164
---------------------------------------------- --------- ----- ----- ------------ ----
HSBC Canada 4 165 30 18 136
---------------------------------------------- --------- ----- ----- ------------ ----
HSBC Mexico 198 10 5 139
---------------------------------------------- --------- ----- ----- ------------ ----
Operating entities' liquidity (continued)
At 31 December 2019
-----------------------------
LCR HQLA Net outflows NSFR
Footnotes % $m $m %
---------------------------------------------- --------- --- ---- ------------ ----
HSBC UK Bank plc (ring-fenced bank) 1 165 75 45 150
---------------------------------------------- --------- --- ---- ------------ ----
HSBC Bank plc (non-ring-fenced bank) 2 142 103 72 106
---------------------------------------------- --------- --- ---- ------------ ----
The Hongkong and Shanghai Banking Corporation
- Hong Kong branch 3 163 109 67 128
---------------------------------------------- --------- --- ---- ------------ ----
The Hongkong and Shanghai Banking Corporation
- Singapore branch 3 147 14 10 120
---------------------------------------------- --------- --- ---- ------------ ----
Hang Seng Bank 185 42 23 148
---------------------------------------------- --------- --- ---- ------------ ----
HSBC Bank China 180 21 11 151
---------------------------------------------- --------- --- ---- ------------ ----
HSBC Bank USA 125 73 59 122
---------------------------------------------- --------- --- ---- ------------ ----
HSBC Continental Europe 4 152 44 29 117
---------------------------------------------- --------- --- ---- ------------ ----
HSBC Middle East - UAE branch 202 11 5 159
---------------------------------------------- --------- --- ---- ------------ ----
HSBC Canada 4 124 18 14 124
---------------------------------------------- --------- --- ---- ------------ ----
HSBC Mexico 208 9 4 136
---------------------------------------------- --------- --- ---- ------------ ----
1 HSBC UK Bank plc refers to the HSBC UK liquidity group, which
comprises four legal entities: HSBC UK Bank plc (including the
Dublin branch), Marks and Spencer Financial Services plc, HSBC
Private Bank (UK) Ltd and HSBC Trust Company (UK) Limited, managed
as a single operating entity, in line with the application of UK
liquidity regulation as agreed with the PRA.
2 HSBC Bank plc includes oversea branches and special purpose
entities consolidated by HSBC for financial statements
purposes.
3 The Hongkong and Shanghai Banking Corporation - Hong Kong
branch and The Hongkong and Shanghai Banking Corporation -
Singapore branch represent the material activities of The Hongkong
and Shanghai Banking Corporation. Each branch is monitored and
controlled for liquidity and funding risk purposes as a stand-alone
operating entity.
4 HSBC Continental Europe and HSBC Canada represent the
consolidated banking operations of the Group in France and Canada,
respectively. HSBC Continental Europe and HSBC Canada are each
managed as single distinct operating entities for liquidity
purposes.
At 31 December 2020, all of the Group's principal operating
entities were well above regulatory minimum levels.
The most significant movements in 2020 are explained below:
-- HSBC UK Bank plc improved its liquidity ratio to 198%, mainly
driven by growth in commercial and retail deposits.
-- HSBC Bank plc and HSBC Continental Europe maintained a strong
liquidity position, with an increase in HQLA mainly due to deposit
growth. However the LCR declined, reflecting a reassessment of
potential outflows, particularly with respect to committed
facilities.
-- The Hongkong and Shanghai Banking Corporation - Hong Kong
branch, Hang Seng Bank and HSBC Bank China remained in a strong
liquidity position, mainly as result of an increase in customer
deposits.
-- HSBC Bank USA remained in a strong liquidity position, mainly
driven by an increase in deposits and a reduction in illiquid
assets.
-- HSBC Bank Middle East - UAE branch remained in a strong
liquidity position, with a liquidity ratio of 280%.
-- HSBC Canada increased its LCR to 165%, mainly driven by
increased customer deposits and covered bond issuance.
Liquid assets
At 31 December 2020, the Group had a total of $678bn of highly
liquid unencumbered LCR eligible liquid assets (31 December 2019:
$601bn) held in a range of asset classes and currencies. Of these,
90% were eligible as level 1 (31 December 2019: 90%).
The following tables reflect the composition of the liquidity
pool by asset type and currency at 31 December 2020:
Liquidity pool by asset type
Liquidity Cash Level Level
pool 1(1) 2(1)
$bn $bn $bn $bn
-------------------- --------- ---- ----- -------
Cash and balance
at central bank 307 307 - -
-------------------- --------- ---- ----- -----
Central and local
government bonds 312 - 263 49
-------------------- --------- ---- ----- -----
Regional government
public sector
entities 12 - 11 1
-------------------- --------- ---- ----- -----
International
organisation
and multilateral
developments
banks 14 - 14 -
-------------------- --------- ---- ----- -----
Covered bonds 11 - 3 8
-------------------- --------- ---- ----- -----
Other 22 - 10 12
-------------------- --------- ---- ----- -----
Total at 31 Dec
2020 678 307 301 70
-------------------- --------- ---- ----- -----
Total at 31 Dec
2019 601 158 383 60
-------------------- --------- ---- ----- -------
1 As defined in EU regulations, level 1 assets means 'assets of
extremely high liquidity and credit quality', and level 2 assets
means 'assets of high liquidity and credit quality'.
Liquidity pool by currency
$ GBP EUR HK$ Other Total
$bn $bn $bn $bn $bn $bn
---------------- ---- ---- ---- ---- ------ --------
Liquidity pool
at 31 Dec 2020 218 176 117 74 93 678
---------------- ---- ---- ---- ---- ------ ------
Liquidity pool
at 31 Dec 2019 179 117 93 47 165 601
---------------- ---- ---- ---- ---- ------ ------
Consolidated liquidity metrics
At 31 December 2020, the total HQLA held at entity level
amounted to $857bn (31 December 2019: $646bn), an increase of
$211bn, reflecting the increases in entity liquidity positions
described above. Consistent with prior periods, the application of
requirements under the EC Delegated Act resulted in an adjustment
of $179bn (31 December 2019: $45bn) to reflect the limitations in
the fungibility of entity liquidity around the Group. As a
consequence, the Group consolidated LCR was 139% at
31 December 2020 (31 December 2019: 150%). The $179bn of HQLA
remains available to cover liquidity risk in the relevant
entities.
The methodology used in the Group consolidated LCR in relation
to the treatment of part of the Group's HQLA is currently under
review. Upon implementation of this revised approach it is
anticipated that the Group's consolidated LCR will reduce, although
remain within appetite. The liquidity position of the entities is
unaffected by this change and remains the key focus.
At
---------------------
31 30 Jun 31 Dec
Dec 2020 2019
2020
$bn $bn $bn
---------------------------- ----- ------ ------
High-quality liquid
assets (in entities) 857 784 646
---------------------------- ----- ------ ------
EC Delegated Act adjustment (179) (130) (45)
---------------------------- ----- ------ ------
Group LCR HQLA 678 654 601
---------------------------- ----- ------ ------
Net outflows 487 443 400
---------------------------- ----- ------ ------
Liquidity coverage
ratio 139% 148% 150%
---------------------------- ----- ------ ------
Sources of funding
Our primary sources of funding are customer current accounts and
savings deposits payable on demand or at short notice. We issue
secured and unsecured wholesale securities to supplement customer
deposits, meet regulatory obligations and to change the currency
mix, maturity profile or location of our liabilities.
The following 'Funding sources' and 'Funding uses' tables
provide a view of how our consolidated balance sheet is funded. In
practice, all the principal operating entities are required to
manage liquidity and funding risk on a stand-alone basis.
The tables analyse our consolidated balance sheet according to
the assets that primarily arise from operating activities and the
sources of funding primarily supporting these activities. Assets
and liabilities that do not arise from operating activities are
presented at a net balancing source or deployment of funds.
In 2020, the level of customer accounts continued to exceed the
level of loans and advances to customers. The positive funding gap
was predominantly deployed in liquid assets.
Funding sources
(Audited)
2020 2019
$m $m
---------------------------- --------- -----------
Customer accounts 1,642,780 1,439,115
---------------------------- --------- ---------
Deposits by banks 82,080 59,022
---------------------------- --------- ---------
Repurchase agreements
- non-trading 111,901 140,344
---------------------------- --------- ---------
Debt securities in issue 95,492 104,555
---------------------------- --------- ---------
Cash collateral, margin
and settlement accounts 78,565 71,002
Subordinated liabilities 21,951 24,600
---------------------------- --------- ---------
Financial liabilities
designated at fair value 157,439 164,466
---------------------------- --------- ---------
Liabilities under insurance
contracts 107,191 97,439
---------------------------- --------- ---------
Trading liabilities 75,266 83,170
---------------------------- --------- ---------
- repos 11,728 558
----------------------------
- stock lending 4,597 9,702
----------------------------
- other trading liabilities 58,941 72,910
---------------------------- --------- ---------
Total equity 204,995 192,668
---------------------------- --------- ---------
Other balance sheet
liabilities 406,504 338,771
---------------------------- --------- ---------
At 31 Dec 2,984,164 2,715,152
---------------------------- --------- ---------
Funding uses
(Audited)
2020 2019
Footnotes $m $m
------------------------------------------------------- --------- --------- -----------
Loans and advances
to customers 1,037,987 1,036,743
------------------------------------------------------- --------- --------- ---------
Loans and advances
to banks 81,616 69,203
------------------------------------------------------- --------- --------- ---------
Reverse repurchase
agreements - non-trading 230,628 240,862
------------------------------------------------------- --------- --------- ---------
Prepayments, accrued
income and other
assets 1 76,859 63,891
------------------------------------------------------- --------- --------- ---------
* cash collateral, margin and settlement accounts 76,859 63,891
------------------------------------------------------- --------- --------- ---------
Assets held for
sale 299 123
------------------------------------------------------- --------- --------- ---------
Trading assets 231,990 254,271
------------------------------------------------------- --------- --------- ---------
- reverse repos 13,990 13,659
------------------------------------------------------- ---------
- stock borrowing 8,286 7,691
------------------------------------------------------- ---------
- other trading
assets 209,714 232,921
------------------------------------------------------- --------- --------- ---------
Financial investments 490,693 443,312
------------------------------------------------------- --------- --------- ---------
Cash and balances
with central banks 304,481 154,099
------------------------------------------------------- --------- --------- ---------
Other balance sheet
assets 529,611 452,648
------------------------------------------------------- --------- --------- ---------
At 31 Dec 2,984,164 2,715,152
------------------------------------------------------- --------- --------- ---------
1 Includes only those financial instruments that are subject to
the impairment requirements of IFRS 9. 'Prepayments, accrued income
and other assets', as presented within the consolidated balance
sheet on page 280, includes both financial and non-financial
assets.
Wholesale term debt maturity profile
The maturity profile of our wholesale term debt obligations is
set out in the following table.
The balances in the table are not directly comparable with those
in the consolidated balance sheet because the table presents gross
cash flows relating to principal payments and not the balance sheet
carrying value, which includes debt securities and subordinated
liabilities measured at fair value.
Wholesale funding cash flows payable by HSBC under financial liabilities
by remaining contractual maturities
Due
Due over
over 3
1 month months Due Due Due Due
but but over over over over
Due not not 6 months 9 months 1 year 2 years
not more more but but but but
more than than not more not more not more not more Due
than 3 6 than than than than over
1 month months months 9 months 1 year 2 years 5 years 5 years Total
$m $m $m $m $m $m $m $m $m
------------- -------- ------- ------- -------- -------- -------- -------- -------- ---------
Debt
securities
issued 18,057 16,848 20,314 15,208 7,561 20,768 49,948 59,911 208,615
------------- -------- ------- ------- -------- -------- -------- -------- -------- -------
- unsecured
CDs and
CP 4,048 8,440 9,977 6,186 2,945 1,474 1,454 1,546 36,070
-------------
- unsecured
senior
MTNs 9,625 3,363 3,915 4,684 2,005 9,295 35,834 49,209 117,930
-------------
- unsecured
senior
structured
notes 2,075 1,539 1,451 1,242 1,241 3,702 4,979 6,765 22,994
-------------
- secured
covered
bonds - - 28 - 750 2,514 3,917 - 7,209
-------------
- secured
asset-backed
commercial
paper 1,094 - - - - - - - 1,094
-------------
- secured ABS 19 119 171 45 41 410 1,865 646 3,316
-------------
- others 1,196 3,387 4,772 3,051 579 3,373 1,899 1,745 20,002
------------- -------- ------- ------- -------- -------- -------- -------- -------- -------
Subordinated
liabilities 618 - 237 - 12 12 6,081 22,941 29,901
------------- -------- ------- ------- -------- -------- -------- -------- -------- -------
-
subordinated
debt
securities 618 - 237 - 12 12 6,081 21,085 28,045
-------------
- preferred
securities - - - - - - - 1,856 1,856
------------- -------- ------- ------- -------- -------- -------- -------- -------- -------
At 31 Dec
2020 18,675 16,848 20,551 15,208 7,573 20,780 56,029 82,852 238,516
------------- -------- ------- ------- -------- -------- -------- -------- -------- -------
Debt
securities
issued 17,728 19,758 15,654 16,284 16,132 35,836 57,387 53,768 232,547
------------- -------- ------- ------- -------- -------- -------- -------- -------- -------
- unsecured
CDs and
CP 4,913 12,280 11,020 8,745 11,509 1,156 2,095 1,578 53,296
-------------
- unsecured
senior
MTNs 8,198 2,462 695 4,595 1,753 25,121 42,316 38,812 123,952
-------------
- unsecured
senior
structured
notes 1,698 1,386 1,711 1,003 923 3,579 6,102 9,596 25,998
-------------
- secured
covered
bonds - - - - 1,139 749 3,661 1,159 6,708
-------------
- secured
asset-backed
commercial
paper 1,933 - - - - - - - 1,933
-------------
- secured ABS - - 248 161 - 205 911 741 2,266
-------------
- others 986 3,630 1,980 1,780 808 5,026 2,302 1,882 18,394
------------- -------- ------- ------- -------- -------- -------- -------- -------- -------
Subordinated
liabilities 1,523 - 22 2,000 - 754 2,424 26,809 33,532
------------- -------- ------- ------- -------- -------- -------- -------- -------- -------
-
subordinated
debt
securities 1,500 - 22 2,000 - 754 2,424 24,587 31,287
-------------
- preferred
securities 23 - - - - - - 2,222 2,245
------------- -------- ------- ------- -------- -------- -------- -------- -------- -------
At 31 Dec
2019 19,251 19,758 15,676 18,284 16,132 36,590 59,811 80,577 266,079
------------- -------- ------- ------- -------- -------- -------- -------- -------- -------
Structural foreign exchange risk in 2020
Structural foreign exchange exposures represent net investments
in subsidiaries, branches and associates, the functional currencies
of which are currencies other than the US dollar. Exchange
differences on structural exposures are recognised in 'Other
comprehensive income'.
Net structural foreign exchange exposures
2020 2019
Footnotes $m $m
----------------------- --------- ------- ---------
Currency of structural
exposure
----------------------- --------- ------- ---------
Hong Kong dollars 47,623 46,527
----------------------- --------- ------- -------
Pound sterling 1 35,285 33,383
----------------------- --------- ------- -------
Chinese renminbi 32,165 28,847
----------------------- --------- ------- -------
Euros 15,672 14,881
----------------------- --------- ------- -------
Canadian dollars 5,123 4,416
----------------------- --------- ------- -------
Indian rupees 4,833 4,375
----------------------- --------- ------- -------
Mexican pesos 4,139 4,600
----------------------- --------- ------- -------
Saudi riyals 3,892 4,280
----------------------- --------- ------- -------
UAE dirhams 3,867 4,105
----------------------- --------- ------- -------
Malaysian ringgit 2,771 2,695
----------------------- --------- ------- -------
Singapore dollars 2,473 2,256
----------------------- --------- ------- -------
Australian dollars 2,357 1,898
----------------------- --------- ------- -------
Taiwanese dollars 2,036 1,957
----------------------- --------- ------- -------
Indonesian rupiah 1,726 1,665
----------------------- --------- ------- -------
Swiss francs 1,444 1,188
----------------------- --------- ------- -------
Korean won 1,368 1,245
----------------------- --------- ------- -------
Thai baht 991 910
----------------------- --------- ------- -------
Egyptian pound 889 875
----------------------- --------- ------- -------
Others, each less
than $700m 6,858 7,029
----------------------- --------- ------- -------
At 31 Dec 175,512 167,132
----------------------- --------- ------- -------
1 At 31 December 2020, we had forward foreign exchange contracts
of $11.2bn (2019: $10.5bn) in order to manage our sterling
structural foreign exchange exposure.
Shareholders' equity would decrease by $2,427m (2019: $2,298m)
if euro and sterling foreign currency exchange rates weakened by 5%
relative to the US dollar.
Interest rate risk in the banking book in 2020
Net interest income sensitivity
The following tables set out the assessed impact to a
hypothetical base case projection of our NII (excluding insurance)
under the following scenarios:
-- an immediate shock of 25 basis points ('bps') to the current
market-implied path of interest rates across all currencies on
1 January 2021 (effects over one year and five years); and
-- an immediate shock of 100bps to the current market-implied
path of interest rates across all currencies on 1 January 2021
(effects over one year and five years).
The sensitivities shown represent our assessment of the change
to a hypothetical base case NII, assuming a static balance sheet
and no management actions from the Markets Treasury business. They
incorporate the effect of interest rate behaviouralisation, managed
rate product pricing assumptions and customer behaviour, including
prepayment of mortgages or customer migration from
non-interest-bearing to interest-bearing deposit accounts under the
specific interest rate scenarios. Market uncertainty and our
competitors' behaviours also need to be factored in when analysing
these results. The scenarios represent interest rate shocks to the
current market implied path of rates.
The NII sensitivity analysis performed in the case of a
down-shock does not include floors to the shocked market rates for
wholesale assets and liabilities including those denominated in US
dollars and sterling. Floors have however been maintained for
deposits and loans to customers where this is contractual or where
negative rates would not be applied. This is a change from the NII
sensitivity approach published in the Annual Report and Accounts
2019, where market rates were floored to zero, unless the central
bank rate was already negative, as in the case of the euro, Swiss
franc and Japanese yen. This reflects the increased risk of
negative market interest rates going forward.
As such, the one-year and five-year NII sensitivities in the
down-shock scenarios have increased in December 2020 at Group level
when compared with December 2019. This was driven by the change in
approach, changes in the forecasted yield curves and changes in
balance sheet composition. The NII sensitivities are forecasted for
the whole period of one and five years each quarter.
The NII sensitivities shown are indicative and based on
simplified scenarios. Immediate interest rate rises of 25bps and
100bps would increase projected NII for the 12 months to 31
December 2021 by $1,647m and $5,348m, respectively. Conversely,
falls of 25bps and 100bps would decrease projected NII for the 12
months to 31 December 2021 by $1,508m and $4,854m,
respectively.
The sensitivity of NII for 12 months increased by $2,550m in the
plus 100bps parallel shock and increased by $(1,542)m in the minus
100bps parallel shock, comparing December 2021 with December
2020.
The increase in the sensitivity of NII for 12 months in the plus
100bps parallel shock was mainly driven by the growth of rate
insensitive customer deposits, against an increase in rate
sensitive assets due to a general build-up of liquidity throughout
the Group, which has been deployed in short-term investments
(predominantly cash, held-to-collect-and-sell securities, and
reverse repos) as well as shortening of Markets Treasury's
positioning in view of the significant drop in interest rates.
The change in NII sensitivity for five years is also driven by
the factors above.
The tables do not include Markets Treasury management actions or
changes in MSS net trading income that may further limit the
impact.
The limitations of this analysis are discussed within the
'Treasury risk management' section on page 169.
NII sensitivity to an instantaneous change in yield curves (12 months)
Currency
---------------------------------------
$ HK$ GBP EUR Other Total
$m $m $m $m $m $m
--------------------------------------- ----- ------- ------- ----- ------- ---------
Change in Jan 2021 to Dec 2021 (based
on balance sheet at 31 December 2020)
--------------------------------------- ----- ------- ------- ----- ------- ---------
+25bps parallel 223 423 555 126 320 1,647
--------------------------------------- ----- ------- ------- ----- ------- -------
-25bps parallel (227) (343) (548) (88) (302) (1,508)
--------------------------------------- ----- ------- ------- ----- ------- -------
+100bps parallel 546 1,267 1,811 502 1,222 5,348
--------------------------------------- ----- ------- ------- ----- ------- -------
-100bps parallel (565) (749) (1,906) (299) (1,335) (4,854)
--------------------------------------- ----- ------- ------- ----- ------- -------
Change in Jan 2020 to Dec 2020 (based
on balance sheet at 31 December 2019)
--------------------------------------- ----- ------- ------- ----- ------- ---------
+25bps parallel 59 198 278 116 202 853
--------------------------------------- ----- ------- ------- ----- ------- -------
-25bps parallel (91) (255) (332) 11 (182) (849)
--------------------------------------- ----- ------- ------- ----- ------- -------
+100bps parallel (16) 504 1,123 441 746 2,798
--------------------------------------- ----- ------- ------- ----- ------- -------
-100bps parallel (490) (1,023) (1,049) (23) (726) (3,311)
--------------------------------------- ----- ------- ------- ----- ------- -------
The net interest income sensitivities arising from the scenarios
presented in the tables above are not directly comparable. This is
due to timing differences relating to interest rate changes and the
repricing of assets and liabilities.
NII sensitivity to an instantaneous change in yield curves (5 years)
Year Year Year Year Year Total
1 2 3 4 5
$m $m $m $m $m $m
--------------------------------------- ------- ------- ------- ------- ------- ----------
Change in Jan 2021 to Dec 2021 (based
on balance sheet at 31 December 2020)
--------------------------------------- ------- ------- ------- ------- ------- ----------
+25bps parallel 1,647 1,866 1,930 2,028 2,100 9,571
--------------------------------------- ------- ------- ------- ------- ------- --------
-25bps parallel (1,508) (1,986) (2,307) (2,045) (2,113) (9,959)
--------------------------------------- ------- ------- ------- ------- ------- --------
+100bps parallel 5,348 6,538 7,083 7,444 7,736 34,149
--------------------------------------- ------- ------- ------- ------- ------- --------
-100bps parallel (4,854) (6,174) (7,087) (7,660) (8,323) (34,098)
--------------------------------------- ------- ------- ------- ------- ------- --------
Change in Jan 2020 to Dec 2020 (based
on balance sheet at 31 December 2019)
--------------------------------------- ------- ------- ------- ------- ------- ----------
+25bps parallel 853 1,158 1,348 1,449 1,523 6,331
--------------------------------------- ------- ------- ------- ------- ------- --------
-25bps parallel (849) (1,205) (1,402) (1,562) (1,649) (6,667)
--------------------------------------- ------- ------- ------- ------- ------- --------
+100bps parallel 2,798 4,255 4,915 5,155 5,454 22,577
--------------------------------------- ------- ------- ------- ------- ------- --------
-100bps parallel (3,311) (4,621) (5,289) (5,766) (6,164) (25,151)
--------------------------------------- ------- ------- ------- ------- ------- --------
Sensitivity of capital and reserves
Hold-to-collect-and-sell stressed VaR is a quantification of the
potential losses to a 99% confidence level of the portfolio of
securities held under a hold-to-collect-and-and-sell business model
in the Markets Treasury business. The portfolio is accounted for at
fair value through other comprehensive income together with the
derivatives held in designated hedging relationships with these
securities. The mark-to-market of this portfolio therefore has an
impact on CET1. Stressed VaR is quantified based on the worst
losses over a one-year period going back to the beginning of 2007
and the assumed holding period is 60 days. At December 2020, the
stressed VaR of the portfolio was $2.94bn (2019: $3.2bn).
Alongside our monitoring of the stressed VaR of this portfolio,
we also monitor the sensitivity of reported cash flow hedging
reserves to interest rate movements on a yearly basis by assessing
the expected reduction in valuation of cash flow hedges due to
parallel movements of plus or minus 100bps in all yield curves.
Although we allow rates to go negative in this assessment, we apply
a floor on the shocks in the minus 100bps scenario set at the lower
of either minus 50bps or the central bank deposit rate. These
particular exposures form only a part of our overall interest rate
exposure.
The following table describes the sensitivity of our cash flow
hedge reported reserves to the stipulated movements in yield curves
at the year end. The sensitivities are indicative and based on
simplified scenarios.
Comparing December 2020 with December 2019, the sensitivity of
the cash flow hedging reserve reduced by $37m in the plus 100bps
scenario and reduced by $323m in the minus 100bps scenario. The
reduction in the minus 100bps scenario was mainly driven by the
significant downwards movement in sterling yields during 2020,
which meant that the floor at minus 50bps had an impact across the
yield curve.
Sensitivity of cash flow hedging reported reserves to interest rate movements
$m
--------------------------------------------------------------------- ---------
At 31 Dec 2020
--------------------------------------------------------------------- ---------
+100 basis point parallel move in all yield curves (665)
--------------------------------------------------------------------- ---------
As a percentage of total shareholders' equity (0.34)%
--------------------------------------------------------------------- ---------
-100 basis point parallel move in all yield curves 409
--------------------------------------------------------------------- ---------
As a percentage of total shareholders' equity 0.21%
--------------------------------------------------------------------- ---------
At 31 Dec 2019
--------------------------------------------------------------------- ---------
+100 basis point parallel move in all yield curves (702)
--------------------------------------------------------------------- ---------
As a percentage of total shareholders' equity (0.38)%
--------------------------------------------------------------------- ---------
-100 basis point parallel move in all yield curves 732
--------------------------------------------------------------------- ---------
As a percentage of total shareholders' equity 0.4%
--------------------------------------------------------------------- ---------
Third-party assets in Markets Treasury
For our Markets Treasury governance framework, see page 170.
Third-party assets in Markets Treasury increased by 40% compared
with 31 December 2019. Commercial surplus went up in 2020 due to an
increase in client deposits and lower credit growth. This was
partly reflected in the increase of $135bn in 'Cash and balances at
central banks'.
The increase of $42bn across 'Loans and advances to banks' and
'Reverse repurchase agreements' was driven by the short-term
investment of part of this surplus. The remainder was invested in
high-quality liquid assets, contributing to the increase of $39bn
in 'Financial Investments'.
Third-party assets in Markets Treasury
2020 2019
$m $m
----------------------------------- ------- ---------
Cash and balances at central banks 263,656 129,114
----------------------------------- ------- -------
Trading assets 392 268
----------------------------------- ------- -------
Loans and advances:
----------------------------------- ------- ---------
- to banks 34,555 24,466
----------------------------------- ------- -------
- to customers 1,167 310
----------------------------------- ------- -------
Reverse repurchase agreements 61,693 29,868
----------------------------------- ------- -------
Financial investments 391,017 351,842
----------------------------------- ------- -------
Other 8,724 7,655
----------------------------------- ------- -------
At 31 Dec 761,204 543,523
----------------------------------- ------- -------
Defined benefit pension plans
Market risk arises within our defined benefit pension plans to
the extent that the obligations of the plans are not fully matched
by assets with determinable cash flows.
For details of our defined benefit plans, including asset
allocation, see Note 5 on the financial statements, and for pension
risk management, see page 172.
Additional market risk measures applicable only to the parent
company
HSBC Holdings monitors and manages foreign exchange risk and
interest rate risk. In order to manage interest rate risk, HSBC
Holdings uses the projected sensitivity of its NII to future
changes in yield curves and the interest rate repricing gap
tables.
During 2020, HSBC Holdings undertook a variety of liability
management exercises, replacing approximately $11.5bn of short-term
fixed-rate debt and their corresponding hedges with longer term
fixed-rate debt of five to 10 years. As major interest rate markets
remained at very low levels during 2020, we left this replacement
debt unhedged. In addition to these exercises, approximately $4bn
of debt matured in 2020 and we issued $2.5bn of new debt. The
impact of this can be observed in the 'Repricing gap analysis of
HSBC Holdings' table below, where the gap switched from a net
liability to a net asset profile in the 'Up to 1 year' bucket, with
a concurrent liability gap increase in the '5 to 10 years' bucket.
Additionally it can be observed in the NII sensitivity tables,
where NII now increases as interest rates rise.
Foreign exchange risk
HSBC Holdings' foreign exchange exposures derive almost entirely
from the execution of structural foreign exchange hedges on behalf
of the Group as its business-as-usual foreign exchange exposures
are managed within tight risk limits. At 31 December 2020, HSBC
Holdings had forward foreign exchange contracts of $11.2bn (2019:
$10.5bn) to manage the Group's sterling structural foreign exchange
exposure.
Sensitivity of net interest income
HSBC Holdings monitors NII sensitivity over a five-year time
horizon, reflecting the longer-term perspective on interest rate
risk management appropriate to a financial services holding
company. These sensitivities assume that any issuance where HSBC
Holdings has an option to reimburse at a future call date is called
at this date. The table below sets out the effect on HSBC Holdings'
future NII over a five-year time horizon of incremental 25bps
parallel falls or rises in all yield curves at the beginning of
each quarter during the 12 months from 1 January 2021.
The NII sensitivities shown are indicative and based on
simplified scenarios. Immediate interest rate rises of 25bps and
100bps would increase projected NII for the 12 months to 31
December 2021 by $23m and $90m, respectively. Conversely, falls of
25bps and 100bps would decrease projected NII for the 12 months to
31 December 2021 by $23m and $96m, respectively.
NII sensitivity to an instantaneous change in yield curves (12 months)
$ HK$ GBP EUR Other Total
$m $m $m $m $m $m
------------------------------------------------ ------- --- ----- ---- ----- -------
Change in Jan 2021 to Dec 2021 (based
on balance sheet at 31 December 2020)
------------------------------------------------ ------- --- ----- ---- ----- -------
+25bps 13 - 8 2 - 23
------------------------------------------------ ------- --- ----- ---- ----- -----
* 25bps (12) - (8) (3) - (23)
------------------------------------------------ ------- --- ----- ---- ----- -----
+100bps 50 - 33 7 - 90
------------------------------------------------ ------- --- ----- ---- ----- -----
* 100bps (51) - (32) (13) - (96)
------------------------------------------------ ------- --- ----- ---- ----- -----
Change in Jan 2020 to Dec 2020 (based
on balance sheet at 31 December 2019)
------------------------------------------------ ------- --- ----- ---- ----- -------
+25bps (30) - 7 2 - (21)
------------------------------------------------ ------- --- ----- ---- ----- -----
* 25bps 30 - (7) - - 23
------------------------------------------------ ------- --- ----- ---- ----- -----
+100bps (120) - 30 (6) - (96)
------------------------------------------------ ------- --- ----- ---- ----- -----
* 100bps 120 - (21) - - 99
------------------------------------------------ ------- --- ----- ---- ----- -----
NII sensitivity to an instantaneous change in yield curves (5 years)
Year Year Year Year Year Total
1 2 3 4 5
$m $m $m $m $m $m
---------------------------------------- ---- ----- ----- ----- ----- -------
Change in Jan 2021 to Dec 2021 (based
on balance sheet at 31 December 2020)
---------------------------------------- ---- ----- ----- ----- ----- -------
+25bps 23 40 43 39 31 176
---------------------------------------- ---- ----- ----- ----- ----- -----
* 25bps (23) (42) (46) (41) (32) (184)
---------------------------------------- ---- ----- ----- ----- ----- -----
+100bps 91 159 171 156 126 702
---------------------------------------- ---- ----- ----- ----- ----- -----
* 100bps (95) (169) (189) (169) (139) (761)
---------------------------------------- ---- ----- ----- ----- ----- -----
Change in Jan 2020 to Dec 2020 (based -
on balance sheet at 31 December 2019)
---------------------------------------- ---- ----- ----- ----- ----- -------
+25bps (21) (14) (13) (14) (17) (79)
---------------------------------------- ---- ----- ----- ----- ----- -----
* 25bps 23 12 8 9 13 65
---------------------------------------- ---- ----- ----- ----- ----- -----
+100bps (96) (64) (53) (54) (72) (339)
---------------------------------------- ---- ----- ----- ----- ----- -----
* 100bps 99 61 41 38 43 282
---------------------------------------- ---- ----- ----- ----- ----- -----
The figures represent hypothetical movements in NII based on our
projected yield curve scenarios, HSBC Holdings' current interest
rate risk profile and assumed changes to that profile during the
next five years.
The sensitivities represent our assessment of the change to a
hypothetical base case based on a static balance sheet assumption,
and do not take into account the effect of actions that could be
taken to mitigate this interest rate risk.
Interest rate repricing gap table
The interest rate risk on the fixed-rate securities issued by
HSBC Holdings is not included within the Group VaR, but is managed
on a repricing gap basis. The following 'Repricing gap analysis of
HSBC Holdings' table analyses the full-term structure of interest
rate mismatches within HSBC Holdings' balance sheet where debt
issuances are reflected based on either the next repricing date if
floating rate or the maturity/call date (whichever is first) if
fixed rate.
Repricing gap analysis of HSBC Holdings
From From
over over More
Up to 1 to 5 to than Non-interest
Total 1 year 5 years 10 years 10 years bearing
Footnotes $m $m $m $m $m $m
---------------------------- --------- --------- -------- -------- --------- --------- --------------
Cash at bank and in hand:
---------------------------- --------- --------- -------- -------- --------- --------- --------------
- balances with HSBC
undertakings 2,913 2,913 - - - -
---------------------------- --------- --------- -------- -------- --------- --------- ------------
Derivatives 4,698 - - - - 4,698
---------------------------- --------- --------- -------- -------- --------- --------- ------------
Loans and advances to HSBC
undertakings 75,696 25,610 22,190 20,398 2,000 5,498
---------------------------- --------- --------- -------- -------- --------- --------- ------------
Financial investments in
HSBC undertakings 17,485 15,112 2,771 - - (398)
---------------------------- --------- --------- -------- -------- --------- --------- ------------
Investments in subsidiaries 156,485 5,381 7,660 1,500 - 141,944
---------------------------- --------- --------- -------- -------- --------- --------- ------------
Other assets 1,721 257 - - - 1,464
---------------------------- --------- --------- -------- -------- --------- --------- ------------
Total assets 258,998 49,273 32,621 21,898 2,000 153,206
---------------------------- --------- --------- -------- -------- --------- --------- ------------
Amounts owed to HSBC
undertakings (330) (330) - - - -
---------------------------- --------- --------- -------- -------- --------- --------- ------------
Financial liabilities
designated
at fair values (25,664) (1,827) (6,533) (13,535) (750) (3,019)
---------------------------- --------- --------- -------- -------- --------- --------- ------------
Derivatives (3,060) - - - - (3,060)
---------------------------- --------- --------- -------- -------- --------- --------- ------------
Debt securities in issue (64,029) (9,932) (29,026) (22,063) (2,000) (1,008)
---------------------------- --------- --------- -------- -------- --------- --------- ------------
Other liabilities (5,375) - - - - (5,375)
---------------------------- --------- --------- -------- -------- --------- --------- ------------
Subordinated liabilities (17,916) - (3,839) (1,780) (10,463) (1,834)
---------------------------- --------- --------- -------- -------- --------- --------- ------------
Total equity (142,624) (1,464) (11,439) (9,198) (120,523)
---------------------------- --------- --------- -------- -------- --------- --------- ------------
Total liabilities and equity (258,998) (13,553) (50,837) (46,576) (13,213) (134,819)
---------------------------- --------- --------- -------- -------- --------- --------- ------------
Off-balance sheet items
attracting interest rate
sensitivity (20,324) 11,562 2,492 6,200 70
---------------------------- --------- --------- -------- -------- --------- --------- ------------
Net interest rate risk
gap at 31 Dec 2020 15,396 (6,654) (22,186) (5,013) 18,457
---------------------------- --------- --------- -------- -------- --------- --------- ------------
Cumulative interest rate
gap 15,396 8,742 (13,444) (18,457) -
---------------------------- --------- --------- -------- -------- --------- --------- ------------
Cash at bank and in hand:
---------------------------- --------- --------- -------- -------- --------- --------- --------------
- balances with HSBC
undertakings 2,382 2,382 - - - -
---------------------------- --------- --------- -------- -------- --------- --------- ------------
Derivatives 2,002 - - - - 2,002
---------------------------- --------- --------- -------- -------- --------- --------- ------------
Loans and advances to HSBC
undertakings 72,182 19,976 21,084 24,739 2,000 4,383
---------------------------- --------- --------- -------- -------- --------- --------- ------------
Financial investments in
HSBC undertakings 16,106 13,054 3,006 - - 46
---------------------------- --------- --------- -------- -------- --------- --------- ------------
Investments in subsidiaries 163,948 5,035 5,118 3,924 - 149,871
---------------------------- --------- --------- -------- -------- --------- --------- ------------
Other assets 1,095 102 - - - 993
---------------------------- --------- --------- -------- -------- --------- --------- ------------
Total assets 257,715 40,549 29,208 28,663 2,000 157,295
---------------------------- --------- --------- -------- -------- --------- --------- ------------
Amounts owed to HSBC
undertakings (464) (464) - - - -
---------------------------- --------- --------- -------- -------- --------- --------- ------------
Financial liabilities
designated
at fair values (30,303) - (14,628) (14,698) (750) (227)
---------------------------- --------- --------- -------- -------- --------- --------- ------------
Derivatives (2,021) - - - - (2,021)
---------------------------- --------- --------- -------- -------- --------- --------- ------------
Debt securities in issue (56,844) (15,446) (22,336) (15,154) (2,000) (1,908)
---------------------------- --------- --------- -------- -------- --------- --------- ------------
Other liabilities (2,203) - - - - (2,203)
---------------------------- --------- --------- -------- -------- --------- --------- ------------
Subordinated liabilities (18,361) - (2,000) (2,543) (11,284) (2,534)
---------------------------- --------- --------- -------- -------- --------- --------- ------------
Total equity (147,519) (2,950) (10,707) (9,975) - (123,887)
---------------------------- --------- --------- -------- -------- --------- --------- ------------
Total liabilities and equity (257,715) (18,860) (49,671) (42,370) (14,034) (132,780)
---------------------------- --------- --------- -------- -------- --------- --------- ------------
Off-balance sheet items
attracting interest rate
sensitivity (30,363) 16,789 6,796 6,469 309
---------------------------- --------- --------- -------- -------- --------- --------- ------------
Net interest rate risk
gap at 31 Dec 2019 1 (8,674) (3,674) (6,911) (5,565) 24,824
---------------------------- --------- --------- -------- -------- --------- --------- ------------
Cumulative interest rate
gap (8,674) (12,348) (19,259) (24,824) -
---------------------------- --------- --------- -------- -------- --------- --------- ------------
1 Investments in subsidiaries and equity have been allocated
based on call dates for any callable bonds. The prior year figures
have been amended to reflect this.
Market risk
Page
Market risk management 198
----------------------------------- ----
Market risk in 2020 199
----------------------------------- ----
Trading portfolios 200
----------------------------------- ----
Non-trading portfolios 201
----------------------------------- ----
Market risk balance sheet linkages 203
----------------------------------- ----
Overview
Market risk is the risk that movements in market factors, such
as foreign exchange rates, interest rates, credit spreads, equity
prices and commodity prices, will reduce our income or the value of
our portfolios. Exposure to market risk is separated into two
portfolios: trading portfolios and non-trading portfolios.
Market risk management
Key developments in 2020
There were no material changes to our policies and practices for
the management of market risk in 2020.
Governance and structure
The following diagram summarises the main business areas where
trading and non-trading market risks reside, and the market risk
measures used to monitor and limit exposures.
Non-trading
Trading risk risk
* Foreign exchange and commodities * Interest rates(1)
* Interest rates * Credit spreads
* Credit spreads * Foreign exchange
* Equities
GBM GBM, ALCM, CMB
and WPB
Value at risk Value at risk
| Sensitivity | Sensitivity
| Stress testing | Stress testing
---------------------------------------- ------------------------
1 The interest rate risk on the fixed-rate securities issued by
HSBC Holdings is not included in the Group value at risk. The
management of this risk is described on page 181.
Where appropriate, we apply similar risk management policies and
measurement techniques to both trading and non-trading portfolios.
Our objective is to manage and control market risk exposures to
optimise return on risk while maintaining a market profile
consistent with our established risk appetite.
Market risk is managed and controlled through limits approved by
the Group Chief Risk Officer for HSBC Holdings. These limits are
allocated across business lines and to the Group's legal entities.
The majority of HSBC's total value at risk ('VaR') and almost all
trading VaR reside in GBM. Each major operating entity has an
independent market risk management and control sub-function, which
is responsible for measuring, monitoring and reporting market risk
exposures against limits on a daily basis. Each operating entity is
required to assess the market risks arising in its business and to
transfer them either to its local Markets and Securities Services
or Markets Treasury unit for management, or to separate books
managed under the supervision of the local ALCO. The Traded Risk
function enforces the controls around trading in permissible
instruments approved for each site as well as changes that follow
completion of the new product approval process. Traded Risk also
restricts trading in the more complex derivative products to
offices with appropriate levels of product expertise and robust
control systems.
Key risk management processes
Monitoring and limiting market risk exposures
Our objective is to manage and control market risk exposures
while maintaining a market profile consistent with our risk
appetite.
We use a range of tools to monitor and limit market risk
exposures including sensitivity analysis, VaR and stress
testing.
Sensitivity analysis
Sensitivity analysis measures the impact of individual market
factor movements on specific instruments or portfolios, including
interest rates, foreign exchange rates and equity prices. We use
sensitivity measures to monitor the market risk positions within
each risk type. Granular sensitivity limits are set for trading
desks with consideration of market liquidity, customer demand and
capital constraints, among other factors.
Value at risk
(Audited)
VaR is a technique for estimating potential losses on risk
positions as a result of movements in market rates and prices over
a specified time horizon and to a given level of confidence. The
use of VaR is integrated into market risk management and calculated
for all trading positions regardless of how we capitalise them. In
addition, we calculate VaR for non-trading portfolios to have a
complete picture of risk. Where we do not calculate VaR explicitly,
we use alternative tools as summarised in the 'Stress testing'
section below.
Our models are predominantly based on historical simulation that
incorporates the following features:
-- historical market rates and prices, which are calculated with
reference to foreign exchange rates, commodity prices, interest
rates, equity prices and the associated volatilities;
-- potential market movements that are calculated with reference
to data from the past two years; and
-- calculations to a 99% confidence level and using a one-day holding period.
The models also incorporate the effect of option features on the
underlying exposures. The nature of the VaR models means that an
increase in observed market volatility will lead to an increase in
VaR without any changes in the underlying positions.
VaR model limitations
Although a valuable guide to risk, VaR is used with awareness of
its limitations. For example:
-- The use of historical data as a proxy for estimating future
market moves may not encompass all potential market events,
particularly those that are extreme in nature.
-- The use of a one-day holding period for risk management
purposes of trading and non-trading books assumes that this short
period is sufficient to hedge or liquidate all positions.
-- The use of a 99% confidence level by definition does not take
into account losses that might occur beyond this level of
confidence.
-- VaR is calculated on the basis of exposures outstanding at
the close of business and therefore does not reflect intra-day
exposures.
Risk not in VaR framework
The risks not in VaR ('RNIV') framework captures and capitalises
material market risks that are not adequately covered in the VaR
model.
Risk factors are reviewed on a regular basis and are either
incorporated directly in the VaR models, where possible, or
quantified through either the VaR-based RNIV approach or a stress
test approach within the RNIV framework. While VaR-based RNIVs are
calculated by using historical scenarios, stress-type RNIVs are
estimated on the basis of stress scenarios whose severity is
calibrated to be in line with the capital adequacy requirements.
The outcome of the VaR-based RNIV approach is included in the
overall VaR calculation but excluded from the VaR measure used for
regulatory back-testing. In addition, the stressed VaR measure also
includes risk factors considered in the VaR-based RNIV
approach.
Stress-type RNIVs include a deal contingent derivatives capital
charge to capture risk for these transactions and a de-peg risk
measure to capture risk to pegged and heavily managed
currencies.
Stress testing
Stress testing is an important procedure that is integrated into
our market risk management framework to evaluate the potential
impact on portfolio values of more extreme, although plausible,
events or movements in a set of financial variables. In such
scenarios, losses can be much greater than those predicted by VaR
modelling.
Stress testing is implemented at legal entity, regional and
overall Group levels. A set of scenarios is used consistently
across all regions within the Group. The risk appetite around
potential stress losses for the Group is set and monitored against
a referral limit.
Market risk reverse stress tests are designed to identify
vulnerabilities in our portfolios by looking for scenarios that
lead to loss levels considered severe for the relevant portfolio.
These scenarios may be quite local or idiosyncratic in nature, and
complement the systematic top-down stress testing.
Stress testing and reverse stress testing provide senior
management with insights regarding the 'tail risk' beyond VaR, for
which our appetite is limited.
Trading portfolios
Trading portfolios comprise positions held for client servicing
and market-making, with the intention of short-term resale and/or
to hedge risks resulting from such positions.
Back-testing
We routinely validate the accuracy of our VaR models by
back-testing the VaR metric against both actual and hypothetical
profit and loss. Hypothetical profit and loss excludes non-modelled
items such as fees, commissions and revenue of intra-day
transactions.
The number of back-testing exceptions is used to gauge how well
the models are performing. We consider enhanced internal monitoring
of a VaR model if more than five profit exceptions or more than
five loss exceptions occur in a 250-day period.
We back-test our VaR at set levels of our Group entity
hierarchy.
Market risk in 2020
Global financial conditions worsened rapidly with the onset of
the Covid-19 outbreak from mid-February 2020. Market volatility
reached extreme levels across most asset classes and equity prices
fell sharply. In credit markets, spreads and yields reached
multi-year highs. The gold market experienced Covid-19-related
disruption in refining and transportation, affecting the relative
pricing of gold futures contracts. Oil prices collapsed due to
rising oversupply as demand reduced materially from the economic
slowdown. Financial markets stabilised from April onwards, as
governments in several developed countries announced economic
recovery programmes and key central banks intervened to provide
liquidity and support asset prices. Global equity markets
substantially recovered from their losses in March and credit
spreads reverted towards pre-Covid-19 levels. During the second
half of 2020 markets remained susceptible to further bouts of
volatility triggered by increases in Covid-19 cases and various
geopolitical risks. Market sentiment improved after positive
vaccine news and the US presidential elections in November 2020,
adding momentum to the performance of risky assets.
We managed market risk prudently during 2020. Sensitivity
exposures remained within appetite as the business pursued its core
market-making activity in support of our customers during the
outbreak. We also undertook hedging activities to protect the
business from potential future deterioration in credit conditions.
Market risk continued to be managed using a complementary set of
exposure measures and limits, including stress and scenario
analysis.
Trading portfolios
Value at risk of the trading portfolios
Trading VaR was predominantly generated by the
Markets and Securities Services business. The Fixed Income
business continued to be the key driver of trading VaR up to the
end of 2020, although with a lower contribution than in the first
half of the year. Interest rate risks from market-making activities
were the main drivers of trading VaR.
Trading VaR at 31 December 2020 was higher than at
31 December 2019. The moderate increase in trading VaR during
the year and a spike in the first half of the year were due
primarily to higher levels of market volatility reached in March
and April 2020, as a result of the economic impact of the Covid-19
outbreak. Trading VaR did not change significantly during the
second half of the year and VaR remained in line with the normal
range observed in 2019. Overall market risk in the trading book was
actively managed during the year.
The daily levels of total trading VaR during 2020 are set out in
the graph below.
Daily VaR (trading portfolios), 99% 1 day ($m)
The Group trading VaR for the year is shown in the table
below.
Trading VaR, 99% 1 day(1)
(Audited)
-------------- -------- ------ ------- ------------------- ----------
Foreign
exchange Interest Credit Portfolio
and commodity rate Equity spread diversification(2) Total(3)
$m $m $m $m $m $m
------------------ -------------- -------- ------ ------- ------------------- ----------
Balance at 31 Dec
2020 13.7 20.3 21.5 24.3 (36.4) 43.4
------------------ -------------- -------- ------ ------- ------------------- --------
Average 11.0 26.6 27.3 21.6 (38.3) 48.1
------------------ -------------- -------- ------ ------- ------------------- --------
Maximum 25.7 43.5 42.0 44.1 69.3
------------------ -------------- -------- ------ ------- ------------------- --------
Minimum 5.6 19.1 13.6 12.6 33.6
------------------ -------------- -------- ------ ------- ------------------- --------
Balance at 31 Dec
2019 7.7 28.2 15.7 15.2 (26.4) 40.3
------------------ -------------- -------- ------ ------- ------------------- --------
Average 6.9 29.9 16.2 23.7 (29.0) 47.8
------------------ -------------- -------- ------ ------- ------------------- --------
Maximum 13.5 36.5 24.9 33.2 59.3
------------------ -------------- -------- ------ ------- ------------------- --------
Minimum 4.1 22.9 12.4 11.7 33.3
------------------ -------------- -------- ------ ------- ------------------- --------
1 Trading portfolios comprise positions arising from the
market-making and warehousing of customer-derived positions.
2 Portfolio diversification is the market risk dispersion effect
of holding a portfolio containing different risk types. It
represents the reduction in unsystematic market risk that occurs
when combining a number of different risk types - such as interest
rate, equity and foreign exchange - together in one portfolio. It
is measured as the difference between the sum of the VaR by
individual risk type and the combined total VaR. A negative number
represents the benefit of portfolio diversification. As the maximum
and minimum occurs on different days for different risk types, it
is not meaningful to calculate a portfolio diversification benefit
for these measures.
3 The total VaR is non-additive across risk types due to diversification effects.
Back-testing
During 2020, the Group experienced three loss back-testing
exceptions against actual profit and losses, with no additional
back-testing exceptions in the second half of 2020. The Group also
experienced 10 loss back-testing exceptions against hypothetical
profit and losses, including one back-testing exception in the
second half of the year. The high number of hypothetical
back-testing exceptions that occurred from March 2020 was primarily
due to the extreme market volatility resulting from the economic
impact of the Covid-19 outbreak, which was significantly greater
than the volatility used in the model calibration.
In recognition of the exceptional market environment in 2020,
the PRA granted an exemption from the higher VaR multiplier for
market risk RWA purposes arising from six out of 10 VaR
back-testing exceptions that occurred after the onset of the
Covid-19 outbreak. These six back-testing exceptions were granted
on the basis that they were not the result of inherent model
weaknesses but were driven by larger than normal market volatility
in the first half of 2020 caused by the Covid-19 outbreak.
The hypothetical profit and loss reflects the profit and loss
that would be realised if positions were held constant from the end
of one trading day to the end of the next. This measure of profit
and loss does not align with how risk is dynamically hedged, and is
not therefore indicative of the actual performance of the
business.
Accordingly, of the 10 loss back-testing exceptions against
hypothetical profit and losses, only two corresponded to actual
profit and loss exceptions.
Despite the high number of loss exceptions, performance of the
VaR model was in line with expectations when considered in the
context of the extraordinary market movements observed in March and
April 2020. During this period, market risk continued to be managed
using a complementary set of exposure measures and limits,
including stress and scenario analysis. This ensured that the
business was prudently managed and performed well across the
period.
Non-trading portfolios
Non-trading portfolios comprise positions that primarily arise
from
the interest rate management of our retail and commercial
banking assets and liabilities, financial investments measured at
fair value through other comprehensive income, debt instruments
measured at amortised cost, and exposures arising from our
insurance operations.
Value at risk of the non-trading portfolios
The VaR for non-trading activity at 31 December 2020 was higher
than at 31 December 2019. The increase arose primarily from the
effect of higher levels of market volatility observed in March and
April 2020 due to the economic impact of the Covid-19 outbreak.
Although the size of interest rate and credit exposures did not
change significantly during the year, increased volatility of
yields and spreads led to an increase in VaR and a reduction of the
diversification benefit effects across these exposures.
Non-trading VaR includes the interest rate risk in the banking
book transferred to and managed by Markets Treasury and the
non-trading financial instruments held by Markets Treasury. The
management of interest rate risk in the banking book is described
further in the 'Net interest income sensitivity' section.
The daily levels of total non-trading VaR over the last year are
set out in the graph below.
Daily VaR (non-trading portfolios), 99% 1 day ($m)
The Group non-trading VaR for the year is shown in the table
below.
Non-trading VaR, 99% 1 day
(Audited)
Interest Credit Portfolio
rate spread diversification(1) Total(2)
$m $m $m $m
----------------------- -------- ------- ------------------- ----------
Balance at 31 Dec 2020 166.6 87.0 (5.7) 247.8
----------------------- -------- ------- ------------------- --------
Average 150.2 82.5 (42.0) 190.7
----------------------- -------- ------- ------------------- --------
Maximum 196.4 133.4 - 274.6
----------------------- -------- ------- ------------------- --------
Minimum 59.0 44.2 - 79.7
----------------------- -------- ------- ------------------- --------
Balance at 31 Dec 2019 96.2 62.5 (28.2) 130.5
----------------------- -------- ------- ------------------- --------
Average 65.9 44.2 (25.6) 84.5
----------------------- -------- ------- ------------------- --------
Maximum 100.1 81.2 0 132.8
----------------------- -------- ------- ------------------- --------
Minimum 49.2 26.6 0 60.9
----------------------- -------- ------- ------------------- --------
1 Portfolio diversification is the market risk dispersion effect
of holding a portfolio containing different risk types. It
represents the reduction in unsystematic market risk that occurs
when combining a number of different risk types - such as interest
rate, equity and foreign exchange - together in one portfolio. It
is measured as the difference between the sum of the VaR by
individual risk type and the combined total VaR. A negative number
represents the benefit of portfolio diversification. As the maximum
and minimum occurs on different days for different risk types, it
is not meaningful to calculate a portfolio diversification benefit
for these measures.
2 The total VaR is non-additive across risk types due to diversification effects.
Non-trading VaR excludes equity risk on securities held at fair
value, structural foreign exchange risk and interest rate risk on
fixed-rate securities issued by HSBC Holdings. HSBC's management of
market risks in non-trading books is described further in the
Treasury Risk section.
Market risk balance sheet linkages
The following balance sheet lines in the Group's consolidated
position are subject to market risk:
Trading assets and liabilities
The Group's trading assets and liabilities are in almost all
cases originated by GBM. These assets and liabilities are treated
as traded risk for the purposes of market risk management, other
than a limited number of exceptions, primarily in Global Banking
where the short-term acquisition and disposal of the assets are
linked to other non-trading-related activities such as loan
origination.
Derivative assets and liabilities
We undertake derivative activity for three primary purposes: to
create risk management solutions for clients, to manage the
portfolio risks arising from client business, and to manage and
hedge our own risks. Most of our derivative exposures arise from
sales and trading activities within GBM. The assets and liabilities
included in trading VaR give rise to a large proportion of the
income included in net income from financial instruments held for
trading or managed on a fair value basis. Adjustments to trading
income such as valuation adjustments are not measured by the
trading VaR model.
For information on the accounting policies applied to financial
instruments at fair value, see Note 1 on the financial
statements
Resilience risk
Overview
Resilience risk is the risk that we are unable to provide
critical services to our customers, affiliates and counterparties,
as a result of sustained and significant operational disruption.
Resilience risk arises from failures or inadequacies in processes,
people, systems or external events.
Resilience risk management
Key developments in 2020
In line with the increasing expectations from customers,
regulators and the Board, and in response to a continually evolving
threat landscape that the wider industry faces, we combined
Operational Risk and Resilience Risk to form a new Operational and
Resilience Risk sub-function. This sub-function provides robust
non-financial risk steward oversight of the management of risk by
the Group businesses, functions, legal entities and critical
business services. It also provides effective and timely
independent challenge. We carried out several initiatives during
the year:
-- We developed regional hubs accountable for core Operational and Resilience Risk activities.
-- We implemented teams aligned to businesses and functions,
which were focused on emerging risks as well as material products
and services.
-- We deployed risk management oversight of the most material
transformation programmes across the Group.
-- We implemented central services including governance, reporting and transformation.
-- We created a stand-alone assurance capability that provides
independent review and evaluation of end-to-end processes, risks
and key controls.
We prioritise our efforts on material risks and areas undergoing
strategic growth, aligning our location strategy to this need. We
also remotely provide oversight and stewardship, including support
of chief risk officers, in territories where we have no physical
presence.
Governance and structure
The Operational and Resilience Risk target operating model
provides a globally consistent view across resilience risks,
strengthening our risk management oversight while operating
effectively as part of a simplified non-financial risk structure.
We view resilience risk across seven risk types related to: third
parties and supply chains; information, technology and
cybersecurity; payments and manual processing; physical security;
business interruption and contingency risk; building
unavailability; and workplace safety.
A principal senior management meeting for operational and
resilience risk governance is the Non-Financial Risk Management
Board, chaired by the Group Chief Risk Officer, with an escalation
path to the Group Risk Management Meeting.
Key risk management processes
Operational resilience is our ability to anticipate, prevent,
adapt, respond to, recover and learn from internal or external
disruption, protecting customers, the markets we operate in and
economic stability. Resilience is determined by assessing whether
we are able to continue to provide our most important services,
within an agreed level. We accept we will not be able to prevent
all disruption but we prioritise investment to continually improve
the response and recovery strategies for our most important
business services.
Business operations continuity
As a result of the Covid-19 outbreak, we successfully
implemented business continuity responses and continue to maintain
the majority of service level agreements. We did not experience any
major impacts to the supply chain from our third-party service
providers due to the pandemic. The risk of damage or theft to our
physical assets or criminal injury to our colleagues remains
unchanged and no significant incidents impacted our buildings or
people.
Regulatory compliance risk
Overview
Regulatory compliance risk is the risk that we fail to observe
the letter and spirit of all relevant laws, codes, rules,
regulations and standards of good market practice, which as a
consequence incur fines and penalties and suffer damage to our
business.
Regulatory compliance risk arises from the risks associated with
breaching our duty to our customers and inappropriate market
conduct, as well as breaching regulatory licensing, permissions and
rules.
Regulatory compliance risk management
Key developments in 2020
In 2020, we made changes to our wider approach to the governance
and structure of the Compliance function and continued to raise
standards related to the conduct of our business, as set out
below.
Governance and structure
In May, we introduced a new operating model to transform the
Compliance function. We created a new Group capability called Group
Regulatory Conduct, which was formed from the regulatory compliance
and regulatory affairs capabilities, and the monitor liaison office
team. The Group Head of Regulatory Conduct continues to report to
the Group Chief Compliance Officer. The Group Regulatory Conduct
capability works with the newly appointed regional chief compliance
officers and their respective teams to help them identify and
manage regulatory compliance risks across the Group. They also work
together to ensure good conduct outcomes and provide
enterprise-wide support on the regulatory agenda.
Key risk management processes
The Group Regulatory Conduct capability is responsible for
setting global policies, standards and risk appetite to guide the
Group's management of regulatory compliance. It also devises clear
frameworks and support processes to protect against regulatory
compliance risks. The capability provides oversight, review and
challenge to the regional chief compliance officers and their teams
to help them identify, assess and mitigate regulatory compliance
risks, where required. The Group's regulatory compliance risk
policies are regularly reviewed. Global policies and procedures
require the prompt identification and escalation of any actual or
potential regulatory breach. Relevant reportable events are
escalated to the Group RMM and the GRC, as appropriate.
Conduct of business
In 2020, we continued to promote and encourage good conduct
through our people's behaviour and decision making to deliver fair
outcomes for our customers, and to maintain financial market
integrity. During 2020:
-- We continued to champion a strong conduct and
customer-focused culture. We implemented a number of measures
throughout the Covid-19 outbreak to support our customers in
financial difficulties. We also maintained service and supported
colleagues in unprecedented conditions.
-- We continued our focus on culture and behaviours, adapting
our controls and risk management processes to reflect significant
levels of remote working throughout the year.
-- We continued to invest significant resources to improve our
compliance systems and controls relating to our activities in
Global Markets and to ensure market integrity. These included
enhancements to: pricing and disclosure, order management and trade
execution; trade; voice and audio surveillance; front office
supervision; and the enforcement and discipline framework for
employee misconduct.
-- We continued to emphasise - and worked to create - an
environment in which employees are encouraged and feel safe to
speak up. We placed a particular focus on the importance of
well-being during the pandemic through regular top-down
communications, virtual town halls, videos and podcasts.
-- We continued to embed conduct within our business line
processes. We also considered and sought to mitigate the conduct
impacts of the Group's strategic transformation programme and other
key business change programmes, including those relating to the
UK's departure from the EU and the Ibor transition.
-- We delivered our sixth annual global mandatory training
course on conduct to reinforce the importance of conduct for all
colleagues.
-- We are refreshing our approach to conduct arrangements across
the Group with a view to ensuring that the arrangements remain
appropriate for the nature of our business.
The Board continues to maintain oversight of conduct matters
through the GRC.
Further details can be found under the 'Our conduct' section of
www.hsbc.com/our-approach/risk-and-responsibility.
Financial crime risk
Overview
Financial crime risk is the risk of knowingly or unknowingly
helping parties to commit or to further illegal activity through
HSBC, including money laundering, fraud, bribery and corruption,
tax evasion, sanctions breaches, and terrorist and proliferation
financing. Financial crime risk arises from day-to-day banking
operations involving customers, third parties and employees.
Financial crime risk management
Key developments in 2020
In 2020, we continued to strengthen our fight against financial
crime and to enhance our financial crime risk management
capability. Amid the challenges posed by the Covid-19 outbreak, we
introduced a number of financial crime risk management measures
during this period to support the business and our customers. These
included:
-- We supported the most vulnerable customers and those in
financial difficulty, including by increasing the awareness of
fraud during this period.
-- The Compliance function proactively engaged with other parts
of the organisation to ensure financial crime risks were considered
as part of Covid-19-related decisions.
-- Compliance colleagues were seconded to other parts of the
organisation to assist with supporting the establishment of
government relief measures.
-- We supported customers and the organisation through policy
exceptions, including by allowing email instructions instead of
face-to-face meetings, and introducing virtual onboarding.
We consistently review the effectiveness of our financial crime
risk management framework, which includes consideration of
geopolitical and wider economic factors. The sanctions regulatory
environment remained changeable and uncertain during the course of
2020 due to the ongoing geopolitical tensions between the US and
China, the end of the transition period following the UK's
departure from the EU, and the increasing divergence in sanctions
policies between the US and the EU on Iran and Russia. Our policy
is to comply with all applicable sanctions regulations in the
jurisdictions in which we operate, and we continue to monitor the
geopolitical landscape for ongoing developments. We also continued
to progress several key financial crime risk management
initiatives, including:
-- We continued to strengthen our anti-fraud capabilities,
focusing on threats posed by new and existing technologies, and
have delivered a comprehensive fraud training programme across the
Group.
-- We continued to invest in the use of artificial intelligence
('AI') and advanced analytics techniques to manage financial crime
risk, and we published our principles for the ethical use of Big
Data and AI.
-- We continued to work on strengthening our ability to combat
money laundering and terrorist financing. In particular, we focused
on the use of technology to enhance our risk management processes
while minimising the impact to the customer. We also continued to
develop our approach of intelligence-led financial crime risk
management, in part, through enhancements to our automated
transaction monitoring systems.
Governance and structure
Since establishing a global framework of financial crime risk
management committees in 2018, we have continued to strengthen and
review the effectiveness of our governance framework to manage
financial crime risk. Formal governance committees are held across
all countries, territories, regions and global businesses, and are
chaired by the respective chief executive officers. They help to
enable compliance with the letter and the spirit of all applicable
financial crime laws and regulations, as well as our own standards,
values and policies relating to financial crime risks. At a Group
level, the Financial Crime Risk Management Meeting, chaired by the
Group Chief Compliance Officer, has served as the pinnacle of this
governance structure, ultimately responsible for the management of
financial crime risk. As a reflection of the growing maturity and
effectiveness of our financial crime risk management, this meeting
was integrated with the Group Risk Management Meeting in January
2021. During the course of 2021, we will review the management of
financial crime risk across the Group to identify other areas that
could be simplified.
During 2020, we redesigned and delivered an integrated operating
model for our Compliance function, with the accompanying
restructure providing greater accountability to our regional
Compliance teams. These teams, led by regional chief compliance
officers, will support the Group Chief Compliance Officer in
aligning the way in which we manage all compliance risks, including
financial crime risk, to the needs and aims of the wider business.
They will also support making our compliance risk management
processes and procedures more efficient and effective.
Key risk management processes
We continued to deliver a programme to further enhance the
policies and controls around identifying and managing the risks of
bribery and corruption across our business. Recognising that the
fight against financial crime is a constant challenge, we
maintained our investment in operational controls and new
technology to deter and detect criminal activity in the banking
system. We continued to simplify our governance and policy
frameworks, and our management information reporting process, which
demonstrates the effectiveness of our financial crime controls. We
remain committed to enhancing our risk assessment capabilities and
to delivering more proactive risk management, including our ongoing
investment in the next generation of capabilities to fight
financial crime by applying advanced analytics and AI.
We are committed to working in partnership with the wider
industry and the public sector in managing financial crime risk,
protecting the integrity of the financial system, and helping to
protect the communities we serve. We are a strong advocate of
public-private partnerships and participate in a number of
information-sharing initiatives around the world. We are a
constructive partner to national governments and international
standard setters, and support reforms being undertaken in key
markets such as the UK and the EU where the Group is represented on
the joint public-private Economic Crime Strategic Board and the
Centre for European Policy Studies taskforce on anti-money
laundering, respectively. We also work closely with peer banks in
Singapore, and with the Monetary Authority of Singapore. In the US,
we are a member of the Bank Secrecy Act Advisory Group, which has
put forward recommendations for reform that have been supported by
the US Treasury and the Financial Crimes Enforcement Network.
We have been an advocate for a more effective international
framework for managing financial crime risk, whether through
engaging directly with intergovernmental bodies such as the
Financial Action Task Force, or via our key role in industry groups
such as the Wolfsberg Group and the Institute of International
Finance.
Skilled Person/Independent Consultant
In December 2012, HSBC Holdings entered into a number of
agreements, including an undertaking with the UK Financial Services
Authority (replaced with a Direction issued by the UK Financial
Conduct Authority ('FCA') in 2013 and again in 2020), as well as a
cease-and-desist order with the US Federal Reserve Board ('FRB'),
both of which contained certain forward-looking anti-money
laundering ('AML') and sanctions-related obligations. HSBC also
agreed to retain an independent compliance monitor (who was, for
FCA purposes, a 'Skilled Person' under section 166 of the Financial
Services and Markets Act and, for FRB purposes, an 'Independent
Consultant') to produce periodic assessments of the Group's AML and
sanctions compliance programme.
In 2020, HSBC's engagement with the independent compliance
monitor, acting in his roles as both Skilled Person and Independent
Consultant, concluded. The role of FCA Skilled Person was assigned
to a new individual in the second quarter of 2020. Separately, a
new FRB Independent Consultant will be appointed pursuant to the
cease-and-desist order.
The new Skilled Person has a narrower mandate to assess the
remaining areas that require further work in order for HSBC to
transition fully to business-as-usual financial crime risk
management. The review is ongoing and is expected to complete later
in 2021. The new Independent Consultant is expected to carry out
the eighth annual review for the FRB during 2021.
In accordance with the Direction issued by the FCA to HSBC
Holdings in 2020, the Group Risk Committee retains oversight of
matters relating to anti-money laundering, sanctions, terrorist
financing and proliferation financing. Throughout 2020, the Group
Risk Committee received regular updates on the Skilled Person's and
the Independent Consultant's reviews.
Model risk
Overview
Model risk is the potential for adverse consequences from
business decisions informed by models, which can be exacerbated by
errors in methodology, design or the way they are used. Model risk
arises in both financial and non-financial contexts whenever
business decision making includes reliance on models.
Key developments in 2020
In 2020, we carried out a number of initiatives to further
develop and embed the Model Risk Management sub-function,
including:
-- We appointed a Group Chief Model Risk Officer, which is a
senior role reporting to the Group Chief Risk Officer.
-- We updated the model risk policy and introduced model risk
standards to enable a more risk-based approach to model risk
management while retaining a consistent approach.
-- Working with the businesses and functions, new model risk
controls were developed in the risk control library. These controls
formed the basis for model risk control assessments that have been
implemented for businesses and functions.
-- We updated the target operating model for Model Risk
Management, referring to internal and industry best practice and
added risk stewards for key businesses, functions and legal
vehicles. The risk stewards will also provide close monitoring of
changes in model behaviour, working closely with business and
function model owners and sponsors.
-- The independent model validation team began a transformation
programme that will use advanced analytics and new workflow tools,
with the objective of providing a more risk-based, efficient and
effective management of model validation processes.
-- The consequences of the Covid-19 outbreak on model
performance and reliability resulted in enhanced monitoring of
models and related model adjustments. Dramatic changes to model
inputs such as GDP and unemployment rates made the model results
unreliable. Model performance limitations have been most pronounced
for IFRS 9 models, which calculate expected credit losses. As a
result, greater reliance has been placed on management underlays
and overlays based on business judgement to derive expected credit
losses.
-- New IFRS 9 models for portfolios that required the largest
model overlays during 2020 have been redeveloped, validated and
implemented in the fourth quarter of 2020. Limited new data was
available for the use in the recalibrations, therefore judgemental
post-model adjustments were required to allow for the economic
effects of the pandemic not captured by the models.
Governance and structure
We placed greater focus on our model risk activities during
2020, and to reflect this, we elevated Model Risk Management to a
function in its own right within the Global Risk structure.
Previously, structured as a sub-function within the Global Risk
Strategy function, the team now reports directly to the Group Chief
Risk Officer. Regional Model Risk Management teams support and
advise all areas of the Group.
Key risk management processes
We use a variety of modelling approaches, including regression,
simulation, sampling, machine learning and judgemental scorecards
for a range of business applications. These activities include
customer selection, product pricing, financial crime transaction
monitoring, creditworthiness evaluation and financial reporting.
Global responsibility for managing model risk is delegated from the
RMM to the Group Model Risk Committee, which is chaired by the
Group Chief Risk Officer. This committee regularly reviews our
model risk management policies and procedures, and requires the
first line of defence to demonstrate comprehensive and effective
controls based on a library of model risk controls provided by
Model Risk Management.
Model Risk Management also reports on model risk to senior
management on a regular basis through the use of the risk map, risk
appetite metrics and top and emerging risks.
We regularly review the effectiveness of these processes,
including the model oversight committee structure, to help ensure
appropriate understanding and ownership of model risk is embedded
in the businesses and functions.
Insurance manufacturing operations
risk
Page
Overview 206
----------------------------------- ----
Insurance manufacturing operations
risk management 206
----------------------------------- ----
Measurement 207
----------------------------------- ----
Key risk types 209
----------------------------------- ----
- Market risk 209
----------------------------------- ----
- Credit risk 210
----------------------------------- ----
- Capital and liquidity risk 210
----------------------------------- ----
- Insurance risk 211
----------------------------------- ----
Overview
The majority of the risk in our insurance business derives from
manufacturing activities and can be categorised as financial risk
or insurance risk. Financial risks include market risk, credit risk
and liquidity risk. Insurance risk is the risk, other than
financial risk, of loss transferred from the holder of the
insurance contract to HSBC, the issuer.
HSBC's bancassurance model
We operate an integrated bancassurance model that provides
insurance products principally for customers with whom we have a
banking relationship.
The insurance contracts we sell relate to the underlying needs
of our banking customers, which we can identify from our
point-of-sale contacts and customer knowledge. For the products we
manufacture, the majority of sales are of savings, universal life
and credit and term life contracts.
We choose to manufacture these insurance products in HSBC
subsidiaries based on an assessment of operational scale and risk
appetite. Manufacturing insurance allows us to retain the risks and
rewards associated with writing insurance contracts by keeping part
of the underwriting profit and investment income within the
Group.
We have life insurance manufacturing subsidiaries in eight
countries and territories, which are Hong Kong, France, Singapore,
the UK, mainland China, Malta, Mexico and Argentina. We also have a
life insurance manufacturing associate in India.
Where we do not have the risk appetite or operational scale to
be an effective insurance manufacturer, we engage with a small
number of leading external insurance companies in order to provide
insurance products to our customers through our banking network and
direct channels. These arrangements are generally structured with
our exclusive strategic partners and earn the Group a combination
of commissions, fees and a share of profits. We distribute
insurance products in all of our geographical regions.
Insurance products are sold worldwide through branches, direct
channels and third-party distributors.
Insurance manufacturing operations risk management
Key developments in 2020
There were no material changes to the insurance risk management
framework in 2020. Policies and practices for the management of
risks associated with the selling of insurance contracts outside of
bancassurance channels were enhanced in response to this being an
increasing area of importance for the insurance business. Also,
enhancements were made to the capital risk framework for insurance
operations to better align to the Group's capital risk
framework.
Governance and structure
(Audited)
Insurance risks are managed to a defined risk appetite, which is
aligned to the Group's risk appetite and risk management framework,
including its three lines of defence model. For details of the
Group's governance framework, see page 107. The Global Insurance
Risk Management Meeting oversees the control framework globally and
is accountable to the WPB Risk Management Meeting on risk matters
relating to the insurance business.
The monitoring of the risks within our insurance operations is
carried out by insurance risk teams. Specific risk functions,
including Wholesale Credit and Market Risk, Operational and
Resilience Risk, and Compliance, support Insurance Risk teams in
their respective areas of expertise.
Stress and scenario testing
(Audited)
Stress testing forms a key part of the risk management framework
for the insurance business. We participate in local and Group-wide
regulatory stress tests, as well as internally-developed stress and
scenario tests, including Group internal stress test exercises.
These have highlighted that a key risk scenario for the
insurance business is a prolonged low interest-rate environment. In
order to mitigate the impact of this scenario, the insurance
operations have taken a number of actions, including repricing some
products to reflect lower interest rates, launching less capital
intensive products, investing in more capital efficient assets and
developing investment strategies to optimise the expected returns
against the cost of economic capital.
Key risk management processes
Market risk
(Audited)
All our insurance manufacturing subsidiaries have market risk
mandates that specify the investment instruments in which they are
permitted to invest and the maximum quantum of market risk that
they may retain. They manage market risk by using, among others,
some or all of the techniques listed below, depending on the nature
of the contracts written:
-- We are able to adjust bonus rates to manage the liabilities
to policyholders for products with discretionary participating
features ('DPF'). The effect is that a significant portion of the
market risk is borne by the policyholder.
-- We use asset and liability matching where asset portfolios
are structured to support projected liability cash flows. The Group
manages its assets using an approach that considers asset quality,
diversification, cash flow matching, liquidity, volatility and
target investment return. It is not always possible to match asset
and liability durations due to uncertainty over the receipt of all
future premiums, the timing of claims and because the forecast
payment dates of liabilities may exceed the duration of the longest
dated investments available. We use models to assess the effect of
a range of future scenarios on the values of financial assets and
associated liabilities, and ALCOs employ the outcomes in
determining how best to structure asset holdings to support
liabilities.
-- We use derivatives to protect against adverse market
movements to better match liability cash flows.
-- For new products with investment guarantees, we consider the
cost when determining the level of premiums or the price
structure.
-- We periodically review products identified as higher risk,
such as those that contain investment guarantees and embedded
optionality features linked to savings and investment products, for
active management.
-- We design new products to mitigate market risk, such as
changing the investment return sharing portion between
policyholders and the shareholder.
-- We exit, to the extent possible, investment portfolios whose risk is considered unacceptable.
-- We reprice premiums charged on new contracts to policyholders.
Credit risk
(Audited)
Our insurance manufacturing subsidiaries are responsible for the
credit risk, quality and performance of their investment
portfolios. Our assessment of the creditworthiness of issuers and
counterparties is based primarily upon internationally recognised
credit ratings and other publicly available information.
Investment credit exposures are monitored against limits by our
insurance manufacturing subsidiaries and are aggregated and
reported to the Group Insurance Credit Risk and Group Credit Risk
functions. Stress testing is performed on investment credit
exposures using credit spread sensitivities and default
probabilities.
We use a number of tools to manage and monitor credit risk.
These include a credit report containing a watch-list of
investments with current credit concerns, primarily investments
that may be at risk of future impairment or where high
concentrations to counterparties are present in the investment
portfolio. Sensitivities to credit spread risk are assessed and
monitored regularly.
Liquidity risk
(Audited)
Risk is managed by cash flow matching and maintaining sufficient
cash resources, investing in high credit-quality investments with
deep and liquid markets, monitoring investment concentrations and
restricting them where appropriate, and establishing committed
contingency borrowing facilities.
Insurance manufacturing subsidiaries complete quarterly
liquidity risk reports and an annual review of the liquidity risks
to which they are exposed.
Insurance risk
HSBC Insurance primarily uses the following techniques to manage
and mitigate insurance risk:
-- a formalised product approval process covering product
design, pricing and overall proposition management (for example,
management of lapses by introducing surrender charges);
-- underwriting policy;
-- claims management processes; and
-- reinsurance which cedes risks above our acceptable thresholds
to an external reinsurer thereby limiting our exposure.
--
Insurance manufacturing operations risk in 2020
Measurement
(Audited)
The risk profile of our insurance manufacturing businesses is
measured using an economic capital approach. Assets and liabilities
are measured on a market value basis, and a capital requirement is
defined to ensure that there is a less than one-in-200 chance of
insolvency over a one-year time horizon, given the risks to which
the businesses are exposed. The methodology for the economic
capital calculation is largely aligned to the pan-European Solvency
II insurance capital regulations. The economic capital coverage
ratio (economic net asset value divided by the economic capital
requirement) is a key risk appetite measure.
The Covid-19 outbreak caused sales of insurance products to be
lower than forecast in 2020, although we responded by expanding
digital and remote servicing capabilities. To date there has been
limited impact on claims or lapse behaviours, although this remains
under close monitoring. The largest effect on insurance entities
came from volatility in the financial markets and the material fall
in interest rates, which impact levels of capital and
profitability. Businesses responded by executing de-risking
strategies followed by subsequent re-risking of positions as
markets recovered. Enhanced monitoring of risks and pricing
conditions continues.
The following tables show the composition of assets and
liabilities by contract type and by geographical region.
Balance sheet of insurance manufacturing subsidiaries by type of contract(1)
(Audited)
------ ----------- ------------ ----------- ---------
Shareholder
assets
With Other and
DPF Unit-linked contracts(2) liabilities Total
Footnotes $m $m $m $m $m
------------------------------------------------------------ --------- ------ ----------- ------------ ----------- ---------
Financial assets 84,478 8,802 18,932 8,915 121,127
------------------------------------------------------------ --------- ------ ----------- ------------ ----------- -------
- trading assets - - - - -
------------------------------------------------------------ ---------
* financial assets designated and otherwise mandatorily
measured at fair value through profit or loss 26,002 8,558 3,508 1,485 39,553
------------------------------------------------------------ ---------
- derivatives 262 3 13 3 281
------------------------------------------------------------ ---------
- financial investments at amortised
cost 39,891 30 13,984 4,521 58,426
------------------------------------------------------------ ---------
- financial investments at fair
value through other comprehensive
income 12,531 - 459 1,931 14,921
------------------------------------------------------------ ---------
- other financial assets 3 5,792 211 968 975 7,946
------------------------------------------------------------ --------- ------ ----------- ------------ ----------- -------
Reinsurance assets 2,256 65 1,447 2 3,770
------------------------------------------------------------ --------- ------ ----------- ------------ ----------- -------
PVIF 4 - - - 9,435 9,435
------------------------------------------------------------ --------- ------ ----------- ------------ ----------- -------
Other assets and investment properties 2,628 1 227 721 3,577
------------------------------------------------------------ --------- ------ ----------- ------------ ----------- -------
Total assets 89,362 8,868 20,606 19,073 137,909
------------------------------------------------------------ --------- ------ ----------- ------------ ----------- -------
Liabilities under investment contracts
designated at fair value - 2,285 4,100 - 6,385
------------------------------------------------------------ --------- ------ ----------- ------------ ----------- -------
Liabilities under insurance contracts 84,931 6,503 15,827 - 107,261
------------------------------------------------------------ --------- ------ ----------- ------------ ----------- -------
Deferred tax 5 145 5 25 1,400 1,575
------------------------------------------------------------ --------- ------ ----------- ------------ ----------- -------
Other liabilities - - - 7,244 7,244
------------------------------------------------------------ --------- ------ ----------- ------------ ----------- -------
Total liabilities 85,076 8,793 19,952 8,644 122,465
------------------------------------------------------------ --------- ------ ----------- ------------ ----------- -------
Total equity - - - 15,444 15,444
------------------------------------------------------------ --------- ------ ----------- ------------ ----------- -------
Total liabilities and equity at
31 Dec 2020 85,076 8,793 19,952 24,088 137,909
------------------------------------------------------------ --------- ------ ----------- ------------ ----------- -------
Financial assets 73,929 7,333 17,514 8,269 107,045
------------------------------------------------------------- ------ ----- ------ ------ -------
- trading assets - - - - -
-------------------------------------------------------------
* financial assets designated and otherwise mandatorily
measured at fair value through profit or loss 21,652 7,119 3,081 2,426 34,278
-------------------------------------------------------------
- derivatives 202 (6) 9 3 208
-------------------------------------------------------------
- financial investments at amortised
cost 35,299 18 13,436 4,076 52,829
-------------------------------------------------------------
- financial investments at fair
value through other comprehensive
income 12,447 - 445 1,136 14,028
-------------------------------------------------------------
- other financial assets 3 4,329 202 543 628 5,702
------------------------------------------------------------- ------ ----- ------ ------ -------
Reinsurance assets 2,208 72 1,563 1 3,844
------------------------------------------------------------- ------ ----- ------ ------ -------
PVIF 4 - - - 8,945 8,945
------------------------------------------------------------- ------ ----- ------ ------ -------
Other assets and investment properties 2,495 2 211 602 3,310
------------------------------------------------------------- ------ ----- ------ ------ -------
Total assets 78,632 7,407 19,288 17,817 123,144
------------------------------------------------------------- ------ ----- ------ ------ -------
Liabilities under investment contracts
designated at fair value - 2,011 3,881 - 5,892
------------------------------------------------------------- ------ ----- ------ ------ -------
Liabilities under insurance contracts 77,147 6,151 14,141 - 97,439
------------------------------------------------------------- ------ ----- ------ ------ -------
Deferred tax 5 197 23 6 1,297 1,523
------------------------------------------------------------- ------ ----- ------ ------ -------
Other liabilities - - - 4,410 4,410
------------------------------------------------------------- ------ ----- ------ ------ -------
Total liabilities 77,344 8,185 18,028 5,707 109,264
------------------------------------------------------------- ------ ----- ------ ------ -------
Total equity - - - 13,879 13,879
------------------------------------------------------------- ------ ----- ------ ------ -------
Total liabilities and equity at
31 Dec 2019 77,344 8,185 18,028 19,586 123,143
------------------------------------------------------------- ------ ----- ------ ------ -------
1 Balance sheet of insurance manufacturing operations are shown
before elimination of inter-company transactions with HSBC
non-insurance operations.
2 'Other Contracts' includes term insurance, credit life
insurance, universal life insurance and investment contracts not
included in the 'Unit-linked' or 'With DPF' columns.
3 Comprise mainly loans and advances to banks, cash and
inter-company balances with other non-insurance legal entities.
4 Present value of in-force long-term insurance business.
5 'Deferred tax' includes the deferred tax liabilities arising on recognition of PVIF.
Balance sheet of insurance manufacturing subsidiaries by geographical
region(1,2)
(Audited)
Latin
Europe Asia America Total
Footnotes $m $m $m $m
------------------------------------------------------------- --------- ------ ------ -------- ---------
Financial assets 34,768 85,259 1,100 121,127
------------------------------------------------------------- --------- ------ ------ -------- -------
- trading assets - - - -
------------------------------------------------------------- ---------
* financial assets designated and otherwise mandatorily
measured at fair value through profit or loss 17,184 22,099 270 39,553
------------------------------------------------------------- ---------
- derivatives 107 174 - 281
------------------------------------------------------------- ---------
- financial investments - at amortised
cost 531 57,420 475 58,426
------------------------------------------------------------- ---------
- financial investments - at fair value
through other comprehensive income 13,894 706 321 14,921
------------------------------------------------------------- ---------
- other financial assets 3 3,052 4,860 34 7,946
------------------------------------------------------------- --------- ------ ------ -------- -------
Reinsurance assets 245 3,521 4 3,770
------------------------------------------------------------- --------- ------ ------ -------- -------
PVIF 4 884 8,390 161 9,435
------------------------------------------------------------- --------- ------ ------ -------- -------
Other assets and investment properties 1,189 2,332 56 3,577
------------------------------------------------------------- --------- ------ ------ -------- -------
Total assets 37,086 99,502 1,321 137,909
------------------------------------------------------------- --------- ------ ------ -------- -------
Liabilities under investment contracts
designated at fair value 1,288 5,097 - 6,385
------------------------------------------------------------- --------- ------ ------ -------- -------
Liabilities under insurance contracts 31,153 74,994 1,114 107,261
------------------------------------------------------------- --------- ------ ------ -------- -------
Deferred tax 5 204 1,348 23 1,575
------------------------------------------------------------- --------- ------ ------ -------- -------
Other liabilities 2,426 4,800 18 7,244
------------------------------------------------------------- --------- ------ ------ -------- -------
Total liabilities 35,071 86,239 1,155 122,465
------------------------------------------------------------- --------- ------ ------ -------- -------
Total equity 2,015 13,263 166 15,444
------------------------------------------------------------- --------- ------ ------ -------- -------
Total liabilities and equity at 31 Dec
2020 37,086 99,502 1,321 137,909
Financial assets 31,613 74,237 1,195 107,045
------------------------------------------------------------- --------- ------ ------ -------- -------
- trading assets - - - -
------------------------------------------------------------- ---------
* financial assets designated and otherwise mandatorily
measured at fair value through profit or loss 15,490 18,562 226 34,278
------------------------------------------------------------- ---------
- derivatives 84 124 - 208
------------------------------------------------------------- ---------
- financial investments - at amortised
cost 100 52,186 543 52,829
------------------------------------------------------------- ---------
- financial investments - at fair value
through other comprehensive income 13,071 582 375 14,028
------------------------------------------------------------- ---------
- other financial assets 3 2,868 2,783 51 5,702
------------------------------------------------------------- --------- ------ ------ -------- -------
Reinsurance assets 237 3,604 3 3,844
------------------------------------------------------------- --------- ------ ------ -------- -------
PVIF 4 945 7,841 159 8,945
------------------------------------------------------------- --------- ------ ------ -------- -------
Other assets and investment properties 1,085 2,176 49 3,310
------------------------------------------------------------- --------- ------ ------ -------- -------
Total assets 33,880 87,858 1,406 123,144
------------------------------------------------------------- --------- ------ ------ -------- -------
Liabilities under investment contracts
designated at fair value 1,139 4,753 - 5,892
------------------------------------------------------------- --------- ------ ------ -------- -------
Liabilities under insurance contracts 28,437 67,884 1,118 97,439
------------------------------------------------------------- --------- ------ ------ -------- -------
Deferred tax 5 229 1,275 19 1,523
------------------------------------------------------------- --------- ------ ------ -------- -------
Other liabilities 2,212 2,172 26 4,410
------------------------------------------------------------- --------- ------ ------ -------- -------
Total liabilities 32,017 76,084 1,163 109,264
------------------------------------------------------------- --------- ------ ------ -------- -------
Total equity 1,862 11,774 243 13,879
------------------------------------------------------------- --------- ------ ------ -------- -------
Total liabilities and equity at 31 Dec
2019 33,879 87,858 1,406 123,143
------------------------------------------------------------- --------- ------ ------ -------- -------
1 HSBC has no insurance manufacturing subsidiaries in the Middle
East and North Africa or North America.
2 Balance sheet of insurance manufacturing operations are shown
before elimination of inter-company transactions with HSBC
non-insurance operations.
3 Comprise mainly loans and advances to banks, cash and
inter-company balances with other non-insurance legal entities.
4 Present value of in-force long-term insurance business.
5 'Deferred tax' includes the deferred tax liabilities arising on recognition of PVIF.
Key risk types
The key risks for the insurance operations are market risks, in
particular interest rate and equity, and credit risks, followed by
insurance underwriting risk and operational risks. Liquidity risk,
while significant for the bank, is minor for our insurance
operations.
Market risk
(Audited)
Description and exposure
Market risk is the risk of changes in market factors affecting
HSBC's capital or profit. Market factors include interest rates,
equity and growth assets and foreign exchange rates.
Our exposure varies depending on the type of contract issued.
Our most significant life insurance products are contracts with
discretionary participating features ('DPF') issued in France and
Hong Kong. These products typically include some form of capital
guarantee or guaranteed return on the sums invested by the
policyholders, to which discretionary bonuses are added if allowed
by the overall performance of the funds. These funds are primarily
invested in bonds, with a proportion allocated to other asset
classes to provide customers with the potential for enhanced
returns.
DPF products expose HSBC to the risk of variation in asset
returns, which will impact our participation in the investment
performance.
In addition, in some scenarios the asset returns can become
insufficient to cover the policyholders' financial guarantees, in
which case the shortfall has to be met by HSBC. Amounts are held
against the cost of such guarantees, calculated by stochastic
modelling.
The cost of such guarantees is accounted for as a deduction from
the present value of in-force ('PVIF') asset, unless the cost of
such guarantees is already explicitly allowed for within the
insurance contract liabilities under the local rules.
The following table shows the total reserve held for the cost of
guarantees, the range of investment returns on assets supporting
these products and the implied investment return that would enable
the business to meet the guarantees.
The cost of guarantees increased to $1,105m (2019: $693m)
primarily due to the reduction in swap rates in France and Hong
Kong, partly offset by the impact of modelling changes in France
and Hong Kong.
For unit-linked contracts, market risk is substantially borne by
the
policyholder, but some market risk exposure typically remains,
as fees earned are related to the market value of the linked
assets.
Financial return guarantees
(Audited)
2020 2019
Long-term Long-term
Investment investment Investment investment
returns returns returns returns
implied on relevant Cost of implied on relevant Cost of
by guarantee portfolios guarantees by guarantee portfolios guarantees
% % $m % % $m
---------------------- ------------- ------------ ----------- ------------- ------------ -------------
Capital 0.0 0.7-3.2 277 0.0 1.3-3.9 110
----------------------- ------------- ------------ ----------- ------------- ------------ -----------
Nominal annual return 0.1-1.9 2.3-3.6 515 0.1-2.0 3.0-4.5 118
----------------------- ------------- ------------ ----------- ------------- ------------ -----------
Nominal annual return 2.0-3.9 2.0-4.5 180 2.0-4.0 2.4-4.5 355
----------------------- ------------- ------------ ----------- ------------- ------------ -----------
Nominal annual return 4.0-5.0 2.0-4.2 133 4.1-5.0 2.3-4.1 110
----------------------- ------------- ------------ ----------- ------------- ------------ -----------
At 31 Dec 1,105 693
----------------------- ------------- ------------ ----------- ------------- ------------ -----------
Sensitivities
Changes in financial market factors, from the economic
assumptions in place at the start of the year, had a positive
impact on reported profit before tax of $102m (2019: $124m). The
following table illustrates the effects of selected interest rate,
equity price and foreign exchange rate scenarios on our profit for
the year and the total equity of our insurance manufacturing
subsidiaries.
Where appropriate, the effects of the sensitivity tests on
profit after tax and equity incorporate the impact of the stress on
the PVIF.
Due in part to the impact of the cost of guarantees and hedging
strategies, which may be in place, the relationship between the
profit and total equity and the risk factors is non-
linear, particularly in a low interest-rate environment.
Therefore, the results disclosed should not be extrapolated to
measure sensitivities to different levels of stress. For the same
reason, the impact of the stress is not necessarily symmetrical on
the upside and downside. The sensitivities are stated before
allowance for management actions, which may mitigate the effect of
changes in the market environment. The sensitivities presented
allow for adverse changes in policyholder behaviour that may arise
in response to changes in market rates. The differences between the
impacts on profit after tax and equity are driven by the changes in
value of the bonds measured at fair value through other
comprehensive income, which are only accounted for in equity.
Sensitivity of HSBC's insurance manufacturing subsidiaries to market
risk factors
(Audited)
2020 2019
Effect Effect
on Effect on Effect
profit on profit on
after total after total
tax equity tax equity
$m $m $m $m
------------------------------------------------------ ------- ------- ------- ---------
+100 basis point parallel shift in yield
curves (67) (188) 43 (37)
------------------------------------------------------ ------- ------- ------- -------
* 100 basis point parallel shift in yield curves (68) 58 (221) (138)
------------------------------------------------------ ------- ------- ------- -------
10% increase in equity prices 332 332 270 270
------------------------------------------------------ ------- ------- ------- -------
10% decrease in equity prices (338) (338) (276) (276)
------------------------------------------------------ ------- ------- ------- -------
10% increase in US dollar exchange rate
compared with all currencies 84 84 41 41
------------------------------------------------------ ------- ------- ------- -------
10% decrease in US dollar exchange rate
compared with all currencies (84) (84) (41) (41)
------------------------------------------------------ ------- ------- ------- -------
Credit risk
(Audited)
Description and exposure
Credit risk is the risk of financial loss if a customer or
counterparty fails to meet their obligation under a contract. It
arises in two main areas for our insurance manufacturers:
-- risk associated with credit spread volatility and default by
debt security counterparties after investing premiums to generate a
return for policyholders and shareholders; and
-- risk of default by reinsurance counterparties and
non-reimbursement for claims made after ceding insurance risk.
The amounts outstanding at the balance sheet date in respect of
these items are shown in the table on page 191.
The credit quality of the reinsurers' share of liabilities under
insurance contracts is assessed as 'satisfactory' or higher (as
defined on page 121), with 100% of the exposure being neither past
due nor impaired (2019: 100%).
Credit risk on assets supporting unit-linked liabilities is
predominantly borne by the policyholder. Therefore, our exposure is
primarily related to liabilities under non-linked insurance and
investment contracts and shareholders' funds. The credit quality
of insurance financial assets is included in the table on page
138.
The risk associated with credit spread volatility is to a large
extent mitigated by holding debt securities to maturity, and
sharing a degree of credit spread experience with
policyholders.
Capital and liquidity risk
(Audited)
Description and exposure
Liquidity risk is the risk that an insurance operation, though
solvent, either does not have sufficient financial resources
available to meet its obligations when they fall due, or can secure
them only at excessive cost.
The following table shows the expected undiscounted cash flows
for insurance liabilities at 31 December 2020. The liquidity risk
exposure is wholly borne by the policyholder in the case of
unit-linked business and is shared with the policyholder for
non-linked insurance.
The profile of the expected maturity of insurance contracts at
31 December 2020 remained comparable with 2019.
The remaining contractual maturity of investment contract
liabilities is included in Note 29 on page 347.
Expected maturity of insurance contract liabilities
(Audited)
Expected cash flows (undiscounted)
---------------------------------------------------
Within 1-5 years 5-15 years Over 15 Total
1 year years
$m $m $m $m $m
----------------------------- -------- --------- ---------- ------- ---------
Unit-linked 1,407 3,097 2,976 2,099 9,579
----------------------------- -------- --------- ---------- ------- -------
With DPF and Other contracts 8,427 30,156 51,383 75,839 165,805
----------------------------- -------- --------- ---------- ------- -------
At 31 Dec 2020 9,834 33,253 54,359 77,938 175,384
----------------------------- -------- --------- ---------- ------- -------
Unit-linked 1,296 3,153 2,654 1,955 9,058
----------------------------- -------- --------- ---------- ------- -------
With DPF and Other contracts 7,907 26,906 50,576 71,731 157,120
----------------------------- -------- --------- ---------- ------- -------
At 31 Dec 2019 9,203 30,059 53,230 73,686 166,178
----------------------------- -------- --------- ---------- ------- -------
Insurance risk
Description and exposure
Insurance risk is the risk of loss through adverse experience,
in either timing or amount, of insurance underwriting parameters
(non-economic assumptions). These parameters include mortality,
morbidity, longevity, lapses and unit costs.
The principal risk we face is that, over time, the cost of the
contract, including claims and benefits, may exceed the total
amount of premiums and investment income received.
The tables on pages 191 and 192 analyse our life insurance risk
exposures by type of contract and by geographical region.
The insurance risk profile and related exposures remain largely
consistent with those observed at 31 December 2019.
Sensitivities
(Audited)
The following table shows the sensitivity of profit and total
equity to reasonably possible changes in non-economic assumptions
across all our insurance manufacturing subsidiaries.
Mortality and morbidity risk is typically associated with life
insurance contracts. The effect on profit of an increase in
mortality or morbidity depends on the type of business being
written. Our largest exposures to mortality and morbidity risk
exist in Hong Kong.
Sensitivity to lapse rates depends on the type of contracts
being written. For a portfolio of term assurance, an increase in
lapse rates typically has a negative effect on profit due to the
loss of future income on the lapsed policies. However, some
contract lapses have a positive effect on profit due to the
existence of policy surrender charges. We are most sensitive to a
change in lapse rates on unit-linked and universal life contracts
in Hong Kong and DPF contracts in France.se rate risk is the
exposure to a change in the cost of administering insurance
contracts. To the extent that increased expenses cannot be passed
on to policyholders, an increase in expense rates will have a
negative effect on our profits.
Sensitivity analysis
(Audited)
2020 2019
$m $m
------------------------------------------------------------ ----- -------
Effect on profit after tax and total equity at 31 Dec
------------------------------------------------------------ ----- -------
Effect on profit after tax and total equity at 10% increase
in mortality and/or morbidity rates (93) (88)
------------------------------------------------------------ ----- -----
Effect on profit after tax and total equity at 10% decrease
in mortality and/or morbidity rates 98 88
------------------------------------------------------------ ----- -----
Effect on profit after tax and total equity at 10% increase
in lapse rates (111) (99)
------------------------------------------------------------ ----- -----
Effect on profit after tax and total equity at 10% decrease
in lapse rates 128 114
------------------------------------------------------------ ----- -----
Effect on profit after tax and total equity at 10% increase
in expense rates (117) (106)
------------------------------------------------------------ ----- -----
Effect on profit after tax and total equity at 10% decrease
in expense rates 115 105
------------------------------------------------------------ ----- -----
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END
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