TIDMHSBA
RNS Number : 0680Q
HSBC Holdings PLC
23 February 2021
Financial statements
267 Independent auditors' report to the members of HSBC Holdings
plc
278 Financial statements
288 Notes on the financial statements
Supporting our customers through transition finance
We are supporting our customers to make progress towards their
commitments to cut greenhouse gas emissions, in line with the goals
of the Paris Agreement on climate change. We played a key role in
the world's first 'transition' Islamic bond, known as a sukuk, to
help reduce carbon emissions in the aviation industry. Etihad
Airways will use the $600m proceeds for energy-efficient aircraft
and research and development into sustainable aviation fuel.
This sukuk included a commitment from Etihad to purchase a set
amount of carbon offsets if it fails to meet its short-term target
to reduce the carbon intensity of its passenger fleet.
We acted as joint global coordinator and joint sustainability
structuring agent on the deal, as well as joint bookrunner and
dealer manager.
Independent auditors' report to the members of HSBC Holdings plc
Report on the audit of the financial statements
Opinion
In our opinion, HSBC Holdings plc's ('HSBC') group financial
statements(1) and company financial statements (the 'financial
statements'):
-- give a true and fair view of the state of the group's and of
the company's affairs as at 31 December 2020 and of the group's and
company's profit and the group's and company's cash flows for the
12 month period (the "year") then ended;
-- have been properly prepared in accordance with international
accounting standards in conformity with the requirements of the
Companies Act 2006; and
-- have been prepared in accordance with the requirements of the Companies Act 2006.
Our opinion is consistent with our reporting to the Group Audit
Committee ('GAC').
Separate opinion in relation to international financial
reporting standards adopted pursuant to Regulation (EC) No
1606/2002 as it applies in the European Union
As explained in note 1.1(a) to the financial statements, the
group, in addition to applying international accounting standards
in conformity with the requirements of the Companies Act 2006, has
also applied international financial reporting standards adopted
pursuant to Regulation (EC) No 1606/2002 as it applies in the
European Union.
In our opinion, the group financial statements have been
properly prepared in accordance with international financial
reporting standards adopted pursuant to Regulation (EC) No
1606/2002 as it applies in the European Union.
Separate opinion in relation to IFRSs as issued by the IASB
As explained in note 1.1(a) to the financial statements, the
group, in addition to applying international accounting standards
in conformity with the requirements of Companies Act 2006, has also
applied IFRSs as issued by the International Accounting Standards
Board (IASB).
In our opinion, the group financial statements have been
properly prepared in accordance with IFRSs as issued by the
IASB.
Basis for opinion
We conducted our audit in accordance with International
Standards on Auditing (UK) ('ISAs (UK)') and applicable law. Our
responsibilities under ISAs (UK) are further described in the
Auditors' responsibilities for the audit of the financial
statements section of our report. We believe that the audit
evidence we have obtained is sufficient and appropriate to provide
a basis for our opinion.
Independence
We remained independent of the group in accordance with the
ethical requirements that are relevant to our audit of the
financial statements in the UK, which includes the FRC's Ethical
Standard, as applicable to listed public interest entities, and we
have fulfilled our other ethical responsibilities in accordance
with these requirements.
To the best of our knowledge and belief, we declare that
non-audit services prohibited by the FRC's Ethical Standard were
not provided to the group.
Other than those disclosed in note 6 to the financial
statements, we have provided no non-audit services to the group in
the period under audit.
Our audit approach
Overview
This was the second year that it has been my responsibility to
form this opinion on behalf of PricewaterhouseCoopers LLP ('PwC'),
who you first appointed on 31 March 2015 in relation to that year's
audit. In addition to forming this opinion, in this report we have
also provided information on how we approached the audit, how it
changed from the previous year and details of the significant
discussions that we had with the GAC.
Given the impact of Covid-19, substantially all of our
interactions were undertaken virtually, including those between the
engagement team, with the teams for Significant Subsidiaries and
Operations Centres, and with HSBC Board members and management.
Similarly, substantially all of our audit testing was performed
remotely. For further details around the impact of Covid-19 on our
audit, please see the 'Impact of Covid-19' key audit matter
below.
Materiality
-- Overall group materiality: $900m (2019: $1,000m) based on 5%
of an adjusted profit before tax for the last three years.
-- Overall company materiality: $855m (2019: $900m) being an
amount capped below the overall group materiality.
1 We have audited the financial statements, included within the
Annual Report and Accounts (the 'Annual Report'), which comprise:
the consolidated and company balance sheets as at 31 December 2020,
the consolidated and company income statements and the consolidated
and company statements of comprehensive income for the year then
ended, the consolidated and company statements of cash flows for
the year then ended, the consolidated and company statements of
changes in equity for the year then ended, and the notes to the
financial statements, which include a summary of significant
accounting policies and other explanatory information. Certain
notes to the financial statements have been presented elsewhere in
the Annual Report and Accounts 2020, rather than in the notes to
the financial statements. These are cross-referenced from the
financial statements and are identified as '(Audited)'. The
relevant disclosures are included in the Risk review section on
pages 113 to 194 and the Directors' remuneration report disclosures
on pages 239 to 249.
Audit scope
The scope of our audit and the nature, timing and extent of
audit procedures performed were determined based on our risk
assessment, taking into account changes from the prior year, the
financial significance of subsidiaries and other qualitative
factors. We executed the planned approach and concluded based on
the results of our testing, ensuring that sufficient audit evidence
had been obtained to support our opinion.
Key audit matters
-- Impact of Covid-19 (group and company)
-- Expected credit losses - Impairment of loans and advances (group)
-- Investment in associate - Bank of Communications Company, Limited ('BoCom') (group)
-- Impairment of goodwill and intangible assets (group)
-- Valuation of financial instruments (group)
-- Impairment of investments in subsidiaries (company)
-- Valuation of defined benefit pensions obligations (group)
-- IT access management (group)
The scope of our audit
As part of designing our audit, we determined materiality and
assessed the risks of material misstatement in the financial
statements. In particular, we looked at where the directors made
subjective judgements, for example in respect of significant
accounting estimates that involved making assumptions and
considering future events that are inherently uncertain.
Capability of the audit in detecting irregularities, including
fraud
Irregularities, including fraud, are instances of non-compliance
with laws and regulations. We design procedures in line with our
responsibilities, outlined in the Auditors' responsibilities for
the audit of the financial statements section, to detect material
misstatements in respect of irregularities, including fraud. The
extent to which our procedures are capable of detecting
irregularities, including fraud, is detailed below.
Based on our understanding of the group and industry, we
identified that the principal risks of non-compliance with laws and
regulations related to breaches of financial crime laws &
regulations and regulatory compliance, including conduct of
business, and we considered the extent to which non-compliance
might have a material effect on the financial statements. We also
considered those laws and regulations that have a direct impact on
the preparation of the financial statements, such as the Companies
Act 2006 and the UK and Hong Kong listing rules. We evaluated
management's incentives and opportunities for fraudulent
manipulation of the financial statements (including the risk of
override of controls), and determined that the principal risks were
related to posting inappropriate journal entries to increase
revenue or reduce costs, creating fictitious trades to hide losses
or to improve financial performance, and management bias in
accounting estimates. The group engagement team shared this risk
assessment with the component auditors so that they could include
appropriate audit procedures in response to such risks in their
work. Audit procedures performed by the group engagement team
and/or component auditors included:
-- Review of correspondence with and reports to the regulators,
including the Prudential Regulation Authority ('PRA') and Financial
Conduct Authority ('FCA');
-- Reviewed reporting to the GAC and GRC in respect of compliance and legal matters;
-- Review a sample of legal correspondence with legal advisors;
-- Enquiries of management and review of internal audit reports
in so far as they related to the financial statements;
-- Obtain legal confirmations from legal advisors relating to
material litigation and compliance matters;
-- Assessment of matters reported on the group's whistleblowing
and 'Speak up' programmes and the results of management's
investigation of such matters; in so far as they related to the
financial statements;
-- Challenging assumptions and judgements made by management in
its significant accounting estimates, in particular in relation to
the determination of expected credit losses, and the impairment
assessments of goodwill, intangible assets, the investment in
BoCom, valuation of financial instruments, valuation of defined
benefit pensions obligations and investment in subsidiaries (see
related key audit matters below);
-- Obtaining confirmations from third parties to confirm the
existence of a sample of transactions; and
-- Identifying and testing journal entries, including those
posted with certain descriptions, posted and approved by the same
individual, backdated journals or posted by infrequent and
unexpected users.
There are inherent limitations in the audit procedures described
above. We are less likely to become aware of instances of
non-compliance with laws and regulations that are not closely
related to events and transactions reflected in the financial
statements. Also, the risk of not detecting a material misstatement
due to fraud is higher than the risk of not detecting one resulting
from error, as fraud may involve deliberate concealment by, for
example, forgery or intentional misrepresentations, or through
collusion.
Key audit matters
Key audit matters are those matters that, in the auditors'
professional judgement, were of most significance in the audit of
the financial statements of the current period and include the most
significant assessed risks of material misstatement (whether or not
due to fraud) identified by the auditors, including those which had
the greatest effect on: the overall audit strategy; the allocation
of resources in the audit; and directing the efforts of the
engagement team. These matters, and any comments we make on the
results of our procedures thereon, were addressed in the context of
our audit of the financial statements as a whole, and in forming
our opinion thereon, and we do not provide a separate opinion on
these matters. This is not a complete list of all risks identified
by our audit.
The impact of Covid-19 and valuation of financial instruments
are new key audit matters this year. Otherwise, the key audit
matters below are consistent with last year.
Impact of Covid-19 (group and company)
The impact of the Covid-19 pandemic has resulted in unprecedented economic
conditions and resulting government support programmes and regulatory
interventions to support businesses and people. The Covid-19 pandemic
has also changed the way that companies operate their businesses, with
one of the most substantial impacts being the transition to remote
working.
A substantial proportion of HSBC's employees have been working remotely
during 2020, with some consequential changes on their processes and
the control environment, some of which were relevant for financial
reporting purposes. Our audit team has also been working remotely for
most of 2020, as have most of our teams auditing the Significant Subsidiaries
and operational centres.
The impact of the Covid-19 pandemic and resulting uncertainty has impacted
a number of the estimates in the group financial statements and company
financial statements. The impact on the most significant accounting
judgements and our audit is set out in the following other key audit
matters in this opinion:
* Expected credit losses - Impairment on loans and
advances to customers;
* Investment in associate - BoCom;
* Impairment of goodwill and intangible assets;
* Valuation of financial instruments; and
* Impairment of investment in subsidiaries.
We discussed our assessment of the impact of Covid-19 on HSBC's operations
and control environment with the GAC. We also explained how we planned
to execute our audit with substantially all of our audit team working
remotely.
We engaged with the Board and management at HSBC in a manner consistent
with our previous audits, albeit remotely using video and telephone
calls. Substantially all of the information and audit evidence we need
for the HSBC audit is provided in electronic format. We shared information,
including the audit evidence provided to us by HSBC, using share-screen
functionality in video calls and our secure encrypted information sharing
software. Where we would have previously inspected physical evidence,
for example our stock counts of precious metals, these audit procedures
were performed virtually.
We understood and assessed the transition of HSBC employees to working
remotely on the control environment relevant to financial reporting,
and reflected this in our audit approach for new or changed processes
and controls.
Where the group undertook new business activities as a result of Covid-19,
for example, the government sponsored lending programmes, we assessed
the audit risks and designed appropriate audit procedures.
We were not able to visit any of the audit teams for the Significant
Subsidiaries and operational centres during our 2020 audit. However,
consistent with our experience with HSBC, we engaged with and directed
these teams in a manner consistent with our previous audits using video
conferencing and telephone calls. This included 'virtual visits' to
certain locations, in which we met with both the audit teams and local
management. To ensure we were satisfied with the audits performed by
the audit teams for the Significant Subsidiaries, we evaluated and
reviewed audit evidence by remotely reviewing electronic audit files
or using share-screen functionality in video conferencing.
GAC Report, page 218.
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Expected credit losses - Impairment of loans and advances (group)
Determining expected credit losses ('ECL') involves management judgement
and is subject to a high degree of estimation uncertainty, both of
which have significantly increased as a result of Covid-19.
Management makes various assumptions when estimating ECL. The significant
assumptions that we focus on in our audit included those with greater
levels of management judgement and for which variations had the most
significant impact on ECL. Specifically these included,
* forward looking economic scenarios and their
likelihoods;
* customer risk ratings ('CRRs'), and probability of
defaults; and
* the recoverability of credit impaired wholesale
exposures.
The modelling methodologies that use these assumptions, as well as
other data, to estimate ECL are complex and not standardised. The modelling
methodologies are developed using historical experience, which can
result in limitations in their reliability to appropriately estimate
ECL. These limitations are often addressed with adjustments, which
are inherently judgemental and subject to estimation uncertainty.
The impact of the Covid-19 pandemic has resulted in unprecedented economic
conditions that vary across countries and industry sectors. Covid-19
related government support programmes and regulatory interventions
have impacted economic factors such as GDP and unemployment, and consequently
the extent and timing of customer defaults.
These factors have increased the uncertainty around judgements made
in determining the severity and likelihood of macroeconomic variable
('MEV') forecasts across the different economic scenarios used in ECL
models. Furthermore, these conditions are outside the bounds of historical
experience used to develop the models and where models produce plausible
results, resulting in significantly greater limitations in their reliability
to estimate ECLs.
Management has made significant adjustments to ECL to address these
limitations through management judgemental adjustments to modelled
outcomes. The nature and extent of these limitations and the resulting
changes to ECL varies across retail and wholesale portfolios globally.
In addition, certain models have been redeveloped during 2020.
The determination of CRRs is based on quantitative scorecards, with
qualitative adjustments for relevant factors. The extent of qualitative
adjustments has increased due to Covid-19. The uncertainty caused by
Covid-19 also increases judgement involved in estimating expected cash
flows and collateral valuations for specific impairments on credit
impaired wholesale exposures.
We held discussions with the GAC covering governance and controls over
ECL, with a significant focus on the impact of Covid-19. We also discussed
a number of other areas, including:
* the severity and likelihood of MEV forecasts in
economics scenarios, across countries for the impact
of Covid-19, and specifically for the UK and Hong
Kong in relation to the geopolitical risks relating
to the UK's withdrawal from the EU and US-China
relations;
* the determination and migration of customer risk
ratings;
* assumptions around the recoverability of significant
wholesale exposures;
* the identification and assessment of model
limitations and resulting changes and adjustments to
ECL, in particular for approaches adopted in response
to Covid-19;
* models that were redeveloped during the year;
* model validation and monitoring; and
* the disclosures made to explain ECL, in particular
the impact of Covid-19 on determining ECL and the
resulting estimation uncertainty.
We assessed the design of governance and controls over the estimation
of ECLs, as well as testing how effectively they operated. We observed
management's review and challenge governance forums for (1) the determination
of MEV forecasts and their likelihood for different economic scenarios,
and (2) the assessment of ECL for Retail and Wholesale portfolios,
including the assessment of model limitations and approval of any resulting
adjustments to modelled outcomes.
We also tested controls over:
* model validation and monitoring;
* credit reviews that determine CRRs for wholesale
customers;
* the input of critical data into source systems and
the flow and transformation of critical data from
source systems to the impairment models; and
* the calculation and approval of management
judgemental adjustments to modelled outcomes.
We involved our economic experts in assessing the reasonableness of
the severity and likelihood of MEV forecasts. These assessments considered
the sensitivity of ECLs to variations in the severity and likelihood
of MEVs for different economic scenarios.
We involved our modelling experts in assessing the appropriateness
of modelling methodologies that were redeveloped during the year, and
for a sample of those models, we independently reperformed the modelling
for certain aspects of the ECL calculation. We also assessed the appropriateness
of modelling methodologies that did not change during the year, giving
specific consideration to Covid-19 and whether management judgemental
adjustments were needed. In addition, we performed testing over:
* the compliance of ECL methodologies and assumptions
with the requirements of IFRS9;
* a sample of critical data used in the year end ECL
calculation and to estimate management judgemental
adjustments;
* critical data, assumptions and discounted cash flows
for a sample of credit impaired wholesale exposures;
and
* a sample of CRRs applied to wholesale exposures,
including our credit experts assessing a sample by
comparing to external sources.
We evaluated and tested the Credit Risk disclosures made in the Annual
Report and Accounts 2020.
* Credit risk disclosures, page 119.
* GAC Report, page 220.
* Note 1.2(d): Financial instruments measured at
amortised cost, page 292.
* Note 1.2(i): Impairment of amortised cost and FVOCI
financial assets, page 293.
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Investment in associate - BoCom (group)
At 31 December 2020, the market value of the investment in BoCom, based
on the share price, was $13.7bn lower than the carrying value of $21.2bn.
This is an indicator of potential impairment. An impairment test was
performed by management, with supporting sensitivity analysis, using
a value in use ('VIU') model. The VIU was $0.6bn in excess of the carrying
value. On this basis, management concluded no impairment was required
and the share of BoCom's profits has been recognised in the consolidated
income statement.
The methodology in the VIU model is dependent on various assumptions,
both short term and long term in nature. These assumptions, which are
subject to estimation uncertainty, are derived from a combination of
management's judgement, analysts' forecasts and market data. The significant
assumptions that we focused our audit on were those with greater levels
of management judgement and for which variations had the most significant
impact on the VIU. Specifically, these included
* discount rates;
* forecast operating income;
* long term growth rates;
* future expected credit losses;
* effective tax rates; and
* regulatory capital requirements.
We discussed the appropriateness of the VIU methodology and significant
assumptions with the GAC, giving consideration to the macroeconomic
environment, as well as Covid-19 and the outlook for the Chinese banking
market. We considered reasonably possible alternatives for the significant
assumptions. We also discussed the disclosures made in relation to
BoCom, including the use of sensitivity analysis to explain estimation
uncertainty and the conditions that would result in an impairment being
recognised.
We tested controls in place over significant assumptions and the model
used to determine the VIU. We assessed the appropriateness of the methodology
used, and the mathematical accuracy of the calculations, to estimate
the VIU. In respect of the significant assumptions, our testing included
the following:
* Challenging the basis for determining significant
assumptions and, where relevant, their
interrelationships;
* Obtaining and evaluating evidence where available for
critical data relating to significant assumptions,
from a combination of historic experience, external
market information, third-party sources including
analyst reports, information from BoCom management
and historical publicly available BoCom financial
information;
* Assessing the sensitivity of the VIU to reasonable
variations in significant assumptions, both
individually and in aggregate; and
* Determining a reasonable range for the discount rate
used within the model, with the assistance of our
valuation experts, and comparing it to the discount
rate used by management.
We observed meetings in April, May, September and November 2020 between
management and senior BoCom executive management, held specifically
to identify facts and circumstances impacting assumptions relevant
to the determination of the VIU.
We evaluated and tested the disclosures made in the Annual Report and
Accounts 2020 in relation to BoCom.
* GAC Report, page 221.
* Note 1.2(a): Critical accounting estimates and
judgements, page 291.
* Note 18 Interests in associates and joint ventures,
page 331.
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Impairment of goodwill and intangible assets (group)
The impact of the Covid-19 pandemic has resulted in unprecedented economic
conditions, impacting the performance of HSBC in both 2020 and the
outlook into 2021 and beyond. This is considered by management to be
an indicator of impairment.
An impairment test was performed by management, with supporting sensitivity
analysis, using the higher of value in use ('VIU') and fair value less
cost to sell. Management predominantly used VIU in its impairment tests,
unless it believed that fair value less cost to sell would result in
a higher recoverable amount for any cash generating unit ('CGU'). The
impairment test resulted in impairment charges of $1.3bn and $41m for
software intangibles and goodwill being recognised respectively for
certain CGUs. For the remaining CGUs, where the recoverable amount
was higher than the carrying value, no impairment was recorded. The
remaining goodwill and software intangibles on the balance sheet at
31 December 2020 are $5.9bn and $4.5bn respectively.
The methodology in the models is dependent on various assumptions,
both short term and long term in nature. These assumptions, which are
subject to estimation uncertainty, are derived from a combination of
management's judgement, experts engaged by management and market data.
The significant assumptions that we focused our audit on were those
with greater levels of management judgement and for which variations
had the most significant impact on the recoverable amount. Specifically,
these included HSBC's annual operating plan (AOP) for 2021 to 2025
including revenue forecasts and cost reduction targets, regulatory
capital requirements, long term growth rates and discount rates.
We discussed the appropriateness of methodologies used and significant
assumptions with the GAC, giving consideration to the macroeconomic
environment, as well as Covid-19 and HSBC's strategy. We considered
reasonably possible alternatives for significant assumptions. We also
discussed the disclosures made in relation to goodwill and software
intangibles, including the use of sensitivity analysis to explain estimation
uncertainty and the conditions that would result in an impairment being
recognised.
We tested controls in place over significant assumptions and the model
used to determine VIUs and fair values. We assessed the appropriateness
of the CGUs and the methodology used, and the mathematical accuracy
of the calculations, to estimate the recoverable amounts. In respect
of the significant assumptions, our testing included the following:
* challenging the achievability of management's AOP and
the prospects for HSBC's businesses;
* obtaining and evaluating evidence where available for
critical data relating to significant assumptions,
from a combination of historic experience and
external market and other financial information;
* assessing whether the cash flows included in the
model were in accordance with the relevant accounting
standard;
* assessing the sensitivity of the VIU to reasonable
variations in significant assumptions, both
individually and in aggregate; and
* determining a reasonable range for the discount rate
used within the model, with the assistance of our
valuation experts, and comparing it to the discount
rate used by management.
We evaluated and tested the disclosures made in the Annual Report and
Accounts 2020 in relation to goodwill and software intangibles.
* GAC Report, page 221.
* Note 1.2(a): Critical accounting estimates and
judgements, page 290.
* Note 1.2(n): Critical accounting estimates and
judgements, page 299.
* Note 21: Goodwill and intangible assets, page 338.
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Valuation of financial instruments (group)
The financial instruments held by the group range from those that are
traded daily on active markets with quoted prices, to more complex
and bespoke positions. The valuation of financial instruments can require
the use of prices or inputs which are not readily observable in the
market. Where significant pricing inputs are unobservable, the financial
instruments are classified as Level 3 (L3), per the IFRS 13 fair value
hierarchy. Determining unobservable inputs in fair value measurement
involves management judgement and is subject to a high degree of estimation
uncertainty.
The most material L3 financial instruments which are dependent on
unobservable inputs are the group's holding of $11.0bn of private equity
(PE) investments held by the Global Banking and Markets and the Insurance
businesses. The group also holds $758m of similar investments in the
pension scheme assets for HSBC (UK) Bank plc. Covid-19 has resulted
in markets being more volatile. The level of judgement surrounding
the valuation of PE investments increases in times of heightened market
volatility.
Fair value of the group's PE investments is estimated using commonly
accepted valuation methodologies, which are set out in the International
Private Equity and Venture Capital Valuation Guidelines and includes
the use of net asset value (NAV) statements from fund managers, the
price of recent investments, the use of market comparables or discounted
cash flow models. The fair value of most PE investments are based on
NAV statements provided by fund managers.
We discussed with the GAC the appropriateness of the PE valuation approaches
for PE investments. We also discussed the governance and controls over
determining fair values, in particular, when markets are more volatile.
We tested controls in place, including those relating to the assessment
of valuations based on NAV statements and the fund managers that provide
them.
For fair values based on NAV statements from fund managers, we inspected
NAV statements and engaged our valuation experts to test management's
assessment of the reliability of those valuations. For these valuations,
we also:
* compared fair value movements to movements in
relevant market information, such as industry
indices;
* agreed NAV statements from fund managers to audited
fund financial statements where they were available;
and
* performed back testing of fair values to any recent
transactions.
We evaluated the adequacy and extent of disclosures made in the Annual
Report and Accounts 2020 in relation to valuation of L3 financial instruments.
* GAC Report, page 221.
* Note 1.2(c): Critical accounting estimates and
judgements, page 292.
* Note 12: Fair values of financial instruments carried
at fair value, page 314.
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Impairment of investments in subsidiaries (company)
The impact of the Covid-19 pandemic has resulted in unprecedented economic
conditions, impacting the performance of HSBC in both 2020 and the
outlook into 2021 and beyond. This is considered by management to be
an indicator of impairment on the investment in subsidiaries.
Management compared the net assets to the carrying value of each subsidiary.
Where the net assets did not support the carrying value or the subsidiary
made a loss during the period, management estimated the recoverable
amount using the higher of value in use ('VIU') or fair value less
cost to sell. Management predominantly used VIU in its impairment tests,
unless it believed that fair value would result in a higher recoverable
amount for any subsidiary. The impairment test resulted in impairment
charges of $435m in relation to HSBC Overseas Holdings (UK) limited.
The remaining investment in subsidiaries was $158bn at 31 December
2020.
The methodology in the models used to estimate the recoverable amount
is dependent on various assumptions, both short term and long term
in nature. These assumptions, which are subject to estimation uncertainty,
are derived from a combination of management's judgement, experts engaged
by management and market data. The significant assumptions that we
focused our audit on were those with greater levels of management judgement
and for which variations had the most significant impact on the recoverable
amount. Specifically, these included HSBC's AOP for 2021 to 2025 including
revenue forecasts and cost reduction targets, regulatory capital requirements,
long term growth rates and discount rates.
We discussed the appropriateness of methodologies used and significant
assumptions with the GAC, giving consideration to the macroeconomic
environment, as well as Covid-19 and HSBC's strategy. We considered
reasonably possible alternatives for significant assumptions. We also
discussed the disclosures made in relation to investment in subsidiaries,
including the use of sensitivity analysis to explain estimation uncertainty
and the conditions that would result in an impairment being recognised.
We tested controls in place over significant assumptions and the model
used to determine the recoverable amounts. We assessed the appropriateness
of the methodology used, and the mathematical accuracy of the calculations,
to estimate the recoverable amounts. In respect of the significant
assumptions, our testing included the following:
* challenging the achievability of management's AOP and
the prospects for HSBC's businesses;
* obtaining and evaluating evidence where available for
critical data relating to significant assumptions,
from a combination of historic experience and
external market and other financial information;
* assessing whether the cash flows included in the
model were in accordance with the relevant accounting
standard;
* assessing the sensitivity of the VIU to reasonable
variations in significant assumptions, both
individually and in aggregate; and
* determining a reasonable range for the discount rate
used within the model, with the assistance of our
valuation experts, and comparing it to the discount
rate used by management.
We evaluated and tested the disclosures made in the Annual Report and
Accounts 2020 in relation to investment in subsidiaries.
* Note 19: Investments in subsidiaries, page 335.
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Valuation of defined benefit pensions obligations (group)
The group has a defined benefit obligation of $44bn, of which $33bn
relates to HSBC Bank (UK) pension scheme.
The valuation of the defined benefit obligation for HSBC Bank (UK)
is dependent on a number of actuarial assumptions. Management uses
an actuarial expert to determine the valuation of the defined benefit
obligation. The expert uses a valuation methodology that requires a
number of market based inputs and other financial and demographic assumptions.
The significant assumptions that we focused our audit on were those
with greater levels of management judgement and for which variations
had the most significant impact on the liability. Specifically, these
included the discount rate, inflation rate and mortality rate.
We discussed with the GAC the methodologies and significant assumptions
used by management to determine the value of the defined benefit obligation.
We tested controls in place over the methodologies and the significant
assumptions. We also evaluated the objectivity and competence of management's
expert involved in the valuation of the defined benefit obligation.
We assessed the appropriateness of the methodology used, and the mathematical
accuracy of the calculations, to estimate the liability. In respect
of the significant assumptions, our actuarial experts understood the
judgements made by management and management's actuarial expert in
determining the significant assumptions, and compared these assumptions
to our independently compiled expected ranges based on market observable
indices and our market experience. We also tested the members data
used in calculating the obligation.
We evaluated and tested the disclosures made in the Annual Report
and Accounts 2020 in relation to defined benefit pension obligation.
* GAC Report, page 221.
* Note 1.2(k): Critical accounting estimates and
judgements, page 298.
* Note 5: Employee compensation and benefits, page 301.
-------------------------------------------------------------------------------
IT access management (group)
HSBC has operations across a number of countries supporting a wide
range of products and services, resulting in an IT environment that
is large, complex and increasingly reliant on third parties. HSBC's
financial reporting processes rely upon a significant element of this
IT environment, both within Finance and the business and operations
more broadly.
Access management controls are an important part of the IT environment
to ensure both access and changes made to systems and data are appropriate.
Our audit approach planned to rely extensively on the effectiveness
of IT access management controls.
As part of our audit work in prior periods, control deficiencies were
identified in relation to IT access management for systems and data
relevant to financial reporting. Management has an ongoing remediation
programme to address these matters.
The significance of IT access management to our audit was discussed
at GAC meetings during the year, as well as progress on management's
remediation programme, control deficiencies identified and our related
audit responses.
IT access management controls were tested for systems and data relevant
to financial reporting that we planned to rely upon as part of our
audit. Specifically we tested controls over:
* authorising new access requests;
* the timely removal of access rights;
* periodic monitoring of the appropriateness of access
rights to systems and data;
* restricting highly privileged access to appropriate
personnel;
* the accuracy of information about IT users to
facilitate access management;
* segregation of access across IT and business
functions;
* changes made to systems and data; and
* understanding and assessing reliance on third parties,
including Service Organisation controls reports.
We also independently assessed password policies and system configurations,
and performed substantive audit procedures in relation to access right
removal, privileged access, IT user information and segregation of
duties.
We performed further testing where control deficiencies were identified,
including:
* where inappropriate access was identified, we
understood and assessed the nature of the access, and
obtained additional evidence on the appropriateness
of activities performed; and,
* we identified and tested compensating business
controls and performed other audit procedures where
IT compensating controls were not sufficient to
address the audit risk.
* Effectiveness of internal controls, page 260.
----------------------------------------------------------------------------
Materiality
The scope of our audit was influenced by our application of
materiality. We set certain quantitative thresholds for
materiality. These, together with qualitative considerations,
helped us to determine the scope of our audit and the nature,
timing and extent of our audit procedures on the individual
financial statement line items and disclosures and in evaluating
the effect of misstatements, both individually and in aggregate on
the financial statements as a whole.
Based on our professional judgement, we determined materiality
for the financial statements as a whole as follows:
Overall materiality $900m (2019: $1,000m). $855m (2019: $900m).
-------------------- -------------------------------------------- -----------------------------
How we determined 5% of a three year average of adjusted 0.75% of total assets.
it profit before tax. This would result
in an overall materiality
of $1.9bn and was
therefore reduced
below this materiality
for the group.
-------------------- -------------------------------------------- -----------------------------
Rationale for We believe a standard benchmark of 5% A benchmark of total
benchmark applied of adjusted profit before tax is an assets has been used
appropriate quantitative indicator of as the company's
materiality, although certain items primary purpose is
could also be material for qualitative to act as a holding
reasons. This benchmark is standard company with investments
for listed entities and consistent with in the group's subsidiaries,
the wider industry. not to generate operating
We selected adjusted profit because, profits and therefore
as discussed on page 77, management a profit based measure
believes it better reflects the performance is not relevant.
of the group. We excluded the adjustments
made by management on page 311 for certain
customer redress programmes and fair
value movements of financial instruments,
as in our opinion they are recurring
items that form part of ongoing business
performance.Whilst adjusted profit before
tax is still considered the most suitable
benchmark, we have used a three year
average to reflect the significant impact
Covid-19 has had on performance in 2020.
-------------------- -------------------------------------------- -----------------------------
We use performance materiality to reduce to an appropriately low
level the probability that the aggregate of uncorrected and
undetected misstatements exceeds overall materiality. Specifically,
we use performance materiality in determining the scope of our
audit and the nature and extent of our testing of account balances,
classes of transactions and disclosures, for example in determining
sample sizes. Our performance materiality was 75% of overall
materiality, amounting to $675m (2019: $750m) for the group
financial statements and $641m (2019: $675m) for the company
financial statements. In determining the performance materiality,
we considered a number of factors - the history of misstatements,
our risk assessment and aggregation risk, and the effectiveness of
controls.
For each component in the scope of our group audit, we allocated
a materiality that is less than our overall group materiality. The
range of materiality allocated across components was between $60m
and $855m. Certain components were audited to a local statutory
audit materiality that was less than the materiality we allocated
them.
We agreed with the GAC that we would report to them
misstatements identified during our group and company audit above
$45m (2019: $50m), as well as misstatements below those amounts
that, in our view, warranted reporting for qualitative reasons.
How we tailored the audit scope
We tailored the scope of our audit to ensure that we performed
enough work to be able to give an opinion on the financial
statements as a whole, reflecting the structure of the group and
the company, the processes and controls relevant to financial
reporting, and the industry in which they operate. Our audit
approach incorporated a number of key aspects:
(1) Audit approach to HSBC's global businesses
We designed audit approaches for the products and services that
substantially make up HSBC's global businesses, such as lending,
deposits and derivatives. These global business approaches were
designed by partners and team members who are specialists in the
relevant businesses. These approaches were provided to the audit
partners and teams around the world that contributed to the group
audit.
(2) Audit work for Significant Subsidiaries:
Through our risk assessment and scoping we identified certain
entities (collectively the Significant Subsidiaries) for which we
obtained audit opinions. We obtained full scope audit opinions for
Hongkong and Shanghai Banking Corporation Limited, HSBC Bank plc,
HSBC UK Bank plc, HSBC North America Holdings Ltd, HSBC Bank Canada
and HSBC Mexico S.A. We obtained audit opinions over specific
balances for HSBC Global Services (UK) Limited and HSBC Group
Management Services Limited and HSBC Bank Middle East Limited - UAE
Operations. The audits for HSBC Bank plc, HSBC UK Bank plc, HSBC
Global Services (UK) Limited and HSBC Group Management Services
Limited were performed by other PwC teams in the UK. All other
audits were performed by other PwC network firms.
We worked with the Significant Subsidiaries in 2020 to develop
an approach for rotating certain smaller locations in and out of
scope over a number of reporting periods. These locations, which
are subject to local external audits, are individually relatively
small compared to the group. Notwithstanding their size, the
rotational approach is designed to ensure that over time these
locations are subject to audit work as part of the group audit.
India was removed from the scope of the Hongkong and Shanghai
Banking Corporation audit for 2020 and Singapore was included.
We asked the partners and teams reporting to us on the
Significant Subsidiaries to work to assigned materiality levels
reflecting the size of the operations they audited. The performance
materiality levels ranged from $45m to $641m. Certain Significant
Subsidiaries were audited to a local statutory audit materiality
that was less than our overall group materiality.
We were in active dialogue throughout the year with the partners
and teams responsible for the audits of the Significant
Subsidiaries. This included consideration of how they planned and
performed their work, including their use of the global business
approaches. We attended Audit Committee meetings for some of
Significant Subsidiaries. We also attended meetings with management
in each of these Significant Subsidiaries at the year-end.
The audit of The Hongkong and Shanghai Banking Corporation in
Hong Kong relied upon work performed by other teams in Hong Kong
and the PwC network firms in Malaysia, mainland China and
Singapore. Similarly, the audit of HSBC Bank plc and HSBC UK Bank
plc in the UK relied upon work performed by other teams in the UK
and the PwC network firms in France and Germany. We considered how
the audit partners and teams for the Significant Subsidiaries
instructed and provided oversight to the work performed in these
locations. Collectively, PwC network firms completed audit
procedures covering 88% of assets and 73% of total operating
income.
(3) Audit work performed at Operations Centres
A significant amount of the operational processes and controls
which are critical to financial reporting are undertaken in
operations centres run by Digital Business Services ('DBS') across
12 different locations. Financial reporting processes are performed
in HSBC's four Finance Operations Centres. We coordinated and
provided oversight on the audit work performed by PwC teams in the
UK, Poland, China, Sri Lanka, Malaysia, India and the Philippines.
This work was relied upon by us, as well as the PwC teams auditing
the Significant Subsidiaries.
(4) Audit procedures undertaken at a group level and on the
company
We ensured that appropriate further work was undertaken for the
HSBC group and company. This work included auditing, for example,
the impairment assessment of goodwill and intangible assets, the
consolidation of the group's results, the preparation of the
financial statements, certain disclosures within the Directors'
remuneration report, litigation provisions and exposures, taxation,
and management's entity level and oversight controls relevant to
financial reporting. Subsidiaries' balances that were not
identified as part of a Significant Subsidiary were subject to
procedures which mitigated the risk of material misstatement,
including testing of entity level controls, information technology
general controls, testing at the Operations Centre, analytical
review procedures and understanding and assessing the outcome of
local external audits.
(5) Using the work of others
We continued to make use of evidence provided by others. This
included testing of controls performed by Global Internal Audit and
management themselves in some low risk areas. We used the work of
PwC experts, for example, valuation experts for our work around the
assumptions used in the impairment assessment over goodwill and
actuaries on the estimates used in determining pension liabilities.
An increasing number of controls are operated on behalf of HSBC by
third parties. We rely on audit evidence that is scoped and
provided by other auditors that are engaged by those third parties.
For example, we obtain a report evidencing the testing of external
systems and controls supporting HSBC's payroll and HR
processes.
Conclusions relating to going concern
Our evaluation of the directors' assessment of the group's and
the company's ability to continue to adopt the going concern basis
of accounting included:
-- Performing a risk assessment to identify factors that could
impact the going concern basis of accounting, including the impact
of Covid-19 and geopolitical risks.
-- Understanding and evaluating the group's financial forecasts
and the group's stress testing of liquidity and regulatory capital,
including the severity of the stress scenarios that were used.
-- Reading and evaluating the adequacy of the disclosures made
in the financial statements in relation to going concern.
Based on the work we have performed, we have not identified any
material uncertainties relating to events or conditions that,
individually or collectively, may cast significant doubt on the
group's and the company's ability to continue as a going concern
for a period of at least twelve months from when the financial
statements are authorised for issue.
In auditing the financial statements, we have concluded that the
directors' use of the going concern basis of accounting in the
preparation of the financial statements is appropriate.
However, because not all future events or conditions can be
predicted, this conclusion is not a guarantee as to the group's and
the company's ability to continue as a going concern.
In relation to the group's and the company's reporting on how
they have applied the UK Corporate Governance Code, we have nothing
material to add or draw attention to in relation to the directors'
statement in the financial statements about whether the directors
considered it appropriate to adopt the going concern basis of
accounting.
Our responsibilities and the responsibilities of the directors
with respect to going concern are described in the relevant
sections of this report.
Reporting on other information
The other information comprises all of the information in the
Annual Report other than the financial statements and our auditors'
report thereon. The directors are responsible for the other
information. Our opinion on the financial statements does not cover
the other information and, accordingly, we do not express an audit
opinion or, except to the extent otherwise explicitly stated in
this report, any form of assurance thereon.
In connection with our audit of the financial statements, our
responsibility is to read the other information and, in doing so,
consider whether the other information is materially inconsistent
with the financial statements or our knowledge obtained in the
audit, or otherwise appears to be materially misstated. If we
identify an apparent material inconsistency or material
misstatement, we are required to perform procedures to conclude
whether there is a material misstatement of the financial
statements or a material misstatement of the other information. If,
based on the work we have performed, we conclude that there is a
material misstatement of this other information, we are required to
report that fact. We have nothing to report based on these
responsibilities.
With respect to the Strategic Report and Report of the
Directors', we also considered whether the disclosures required by
the UK Companies Act 2006 have been included.
Based on our work undertaken in the course of the audit, the
Companies Act 2006 requires us also to report certain opinions and
matters as described below.
Strategic Report and Report of the Directors
In our opinion, based on the work undertaken in the course of
the audit, the information given in the Strategic Report and Report
of the Directors' for the year ended 31 December 2020 is consistent
with the financial statements and has been prepared in accordance
with applicable legal requirements.
In light of the knowledge and understanding of the group and
company and their environment obtained in the course of the audit,
we did not identify any material misstatements in the Strategic
Report and Report of the Directors.
Directors' Remuneration
In our opinion, the part of the Directors' Remuneration Report
to be audited has been properly prepared in accordance with the
Companies Act 2006.
Corporate governance statement
The Listing Rules require us to review the directors' statements
in relation to going concern, longer-term viability and that part
of the corporate governance statement relating to the company's
compliance with the provisions of the UK Corporate Governance Code
specified for our review. Our additional responsibilities with
respect to the corporate governance statement as other information
are described in the Reporting on other information section of this
report.
Based on the work undertaken as part of our audit, we have
concluded that each of the following elements of the corporate
governance statement is materially consistent with the financial
statements and our knowledge obtained during the audit and we have
nothing material to add or draw attention to in relation to:
-- The directors' confirmation that they have carried out an
assessment of the emerging and principal risks;
-- The disclosures in the Annual Report and Accounts that
describe those principal risks, what procedures are in place to
identify emerging risks and an explanation of how these are being
managed or mitigated;
-- The directors' statement in the financial statements about
whether they considered it appropriate to adopt the going concern
basis of accounting in preparing them, and their identification of
any material uncertainties to the group's and company's ability to
continue to do so over a period of at least twelve months from the
date of approval of the financial statements;
-- The directors' explanation as to their assessment of the
group's and company's prospects, the period this assessment covers
and why the period is appropriate; and
-- The directors' statement as to whether they have a reasonable
expectation that the company will be able to continue in operation
and meet its liabilities as they fall due over the period of its
assessment, including any related disclosures drawing attention to
any necessary qualifications or assumptions.
Our review of the directors' statement regarding the longer-term
viability of the group was substantially less in scope than an
audit and only consisted of making inquiries and considering the
directors' process supporting their statement; checking that the
statement is in alignment with the relevant provisions of the UK
Corporate Governance Code; and considering whether the statement is
consistent with the financial statements and our knowledge and
understanding of the group and company and their environment
obtained in the course of the audit.
In addition, based on the work undertaken as part of our audit,
we have concluded that each of the following elements of the
corporate governance statement is materially consistent with the
financial statements and our knowledge obtained during the
audit:
-- The directors' statement that they consider the Annual
Report, taken as a whole, is fair, balanced and understandable, and
provides the information necessary for the members to assess the
group's and company's position, performance, business model and
strategy;
-- The section of the Annual Report that describes the review of
effectiveness of risk management and internal control systems;
and
-- The section of the Annual Report describing the work of the GAC.
We have nothing to report in respect of our responsibility to
report when the directors' statement relating to the company's
compliance with the Code does not properly disclose a departure
from a relevant provision of the Code specified under the Listing
Rules for review by the auditors.
Responsibilities for the financial statements and the audit
Responsibilities of the directors for the financial
statements
As explained more fully in the Directors' responsibilities
statement, the directors are responsible for the preparation of the
financial statements in accordance with the applicable framework
and for being satisfied that they give a true and fair view. The
directors are also responsible for such internal control as they
determine is necessary to enable the preparation of financial
statements that are free from material misstatement, whether due to
fraud or error.
In preparing the financial statements, the directors are
responsible for assessing the group's and the company's ability to
continue as a going concern, disclosing, as applicable, matters
related to going concern and using the going concern basis of
accounting unless the directors either intend to liquidate the
group or the company or to cease operations, or have no realistic
alternative but to do so.
Auditors' responsibilities for the audit of the financial
statements
Our objectives are to obtain reasonable assurance about whether
the financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an
auditors' report that includes our opinion. Reasonable assurance is
a high level of assurance, but is not a guarantee that an audit
conducted in accordance with ISAs (UK) will always detect a
material misstatement when it exists. Misstatements can arise from
fraud or error and are considered material if, individually or in
the aggregate, they could reasonably be expected to influence the
economic decisions of users taken on the basis of these financial
statements.
Our audit testing might include testing complete populations of
certain transactions and balances, possibly using data auditing
techniques. However, it typically involves selecting a limited
number of items for testing, rather than testing complete
populations. We will often seek to target particular items for
testing based on their size or risk characteristics. In other
cases, we will use audit sampling to enable us to draw a conclusion
about the population from which the sample is selected.
A further description of our responsibilities for the audit of
the financial statements is located on the FRC's website at:
www.frc.org.uk/auditorsresponsibilities. This description forms
part of our auditors' report.
Use of this report
This report, including the opinions, has been prepared for and
only for the company's members as a body in accordance with Chapter
3 of Part 16 of the Companies Act 2006 and for no other purpose. We
do not, in giving these opinions, accept or assume responsibility
for any other purpose or to any other person to whom this report is
shown or into whose hands it may come save where expressly agreed
by our prior consent in writing.
Other required reporting
Companies Act 2006 exception reporting
Under the Companies Act 2006 we are required to report to you
if, in our opinion:
-- we have not obtained all the information and explanations we require for our audit; or
-- adequate accounting records have not been kept by the
company, or returns adequate for our audit have not been received
from branches not visited by us; or
-- certain disclosures of directors' remuneration specified by law are not made; or
-- the financial statements and the part of the Directors'
Remuneration Report to be audited are not in agreement with the
accounting records and returns.
We have no exceptions to report arising from this
responsibility.
Appointment
Following the recommendation of the GAC, we were appointed by
the members on 31 March 2015 to audit the financial statements for
the year ended 31 December 2015 and subsequent financial periods.
The period of total uninterrupted engagement is six years, covering
the years ended 31 December 2015 to 31 December 2020.
Scott Berryman (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
London
23 February 2021
Financial statements
Page
Consolidated income statement 278
----
Consolidated statement of comprehensive
income 279
----
Consolidated balance sheet 280
----
Consolidated statement of cash
flows 281
----
Consolidated statement of changes
in equity 283
----
HSBC Holdings income statement 284
----
HSBC Holdings statement of comprehensive
income 284
----
HSBC Holdings balance sheet 285
----
HSBC Holdings statement of cash
flows 286
----
HSBC Holdings statement of changes
in equity 287
----------------------------------------- ----
Consolidated income statement
for the year ended 31 December
2020 2019 2018
Notes* $m $m $m
----------------------------------------------------- ------ -------- -------- ----------
Net interest income 27,578 30,462 30,489
----------------------------------------------------- ------ -------- -------- --------
- interest income(1,2) 41,756 54,695 49,609
----------------------------------------------------- ------
- interest expense(3) (14,178) (24,233) (19,120)
----------------------------------------------------- ------ -------- -------- --------
Net fee income 2 11,874 12,023 12,620
----------------------------------------------------- ------ -------- -------- --------
- fee income 15,051 15,439 16,044
----------------------------------------------------- ------
- fee expense (3,177) (3,416) (3,424)
----------------------------------------------------- ------ -------- -------- --------
Net income from financial instruments held
for trading or managed on a fair value basis 3 9,582 10,231 9,531
----------------------------------------------------- ------ -------- -------- --------
Net income/(expense) from assets and liabilities
of insurance businesses, including related
derivatives, measured at fair value through
profit or loss 3 2,081 3,478 (1,488)
----------------------------------------------------- ------ -------- -------- --------
Changes in fair value of designated debt and
related derivatives(4) 3 231 90 (97)
----------------------------------------------------- ------ -------- -------- --------
Changes in fair value of other financial instruments
mandatorily measured at fair value through
profit or loss 3 455 812 695
----------------------------------------------------- ------ -------- -------- --------
Gains less losses from financial investments 653 335 218
----------------------------------------------------- ------ -------- -------- --------
Net insurance premium income 4 10,093 10,636 10,659
----------------------------------------------------- ------ -------- -------- --------
Other operating income 527 2,957 960
----------------------------------------------------- ------ -------- -------- --------
Total operating income 63,074 71,024 63,587
----------------------------------------------------- ------ -------- -------- --------
Net insurance claims and benefits paid and
movement in liabilities to policyholders 4 (12,645) (14,926) (9,807)
----------------------------------------------------- ------ -------- -------- --------
Net operating income before change in expected
credit losses and other credit impairment charges 50,429 56,098 53,780
----------------------------------------------------- ------ -------- -------- --------
Change in expected credit losses and other
credit impairment charges (8,817) (2,756) (1,767)
----------------------------------------------------- ------ -------- -------- --------
Net operating income 41,612 53,342 52,013
----------------------------------------------------- ------ -------- -------- --------
Employee compensation and benefits 5 (18,076) (18,002) (17,373)
----------------------------------------------------- ------ -------- -------- --------
General and administrative expenses (11,115) (13,828) (15,353)
----------------------------------------------------- ------ -------- -------- --------
Depreciation and impairment of property, plant
and equipment and right-of-use assets(5) (2,681) (2,100) (1,119)
----------------------------------------------------- ------ -------- -------- --------
Amortisation and impairment of intangible assets (2,519) (1,070) (814)
----------------------------------------------------- ------ -------- -------- --------
Goodwill impairment 21 (41) (7,349) -
----------------------------------------------------- ------ -------- -------- --------
Total operating expenses (34,432) (42,349) (34,659)
----------------------------------------------------- ------ -------- -------- --------
Operating profit 7,180 10,993 17,354
----------------------------------------------------- ------ -------- -------- --------
Share of profit in associates and joint ventures 18 1,597 2,354 2,536
----------------------------------------------------- ------ -------- -------- --------
Profit before tax 8,777 13,347 19,890
----------------------------------------------------- ------ -------- -------- --------
Tax expense 7 (2,678) (4,639) (4,865)
----------------------------------------------------- ------ -------- -------- --------
Profit for the year 6,099 8,708 15,025
----------------------------------------------------- ------ -------- -------- --------
Attributable to:
----------------------------------------------------- ------ -------- -------- ----------
- ordinary shareholders of the parent company 3,898 5,969 12,608
----------------------------------------------------- ------ -------- -------- --------
- preference shareholders of the parent company 90 90 90
----------------------------------------------------- ------ -------- -------- --------
- other equity holders 1,241 1,324 1,029
----------------------------------------------------- ------ -------- -------- --------
- non-controlling interests 870 1,325 1,298
----------------------------------------------------- ------ -------- -------- --------
Profit for the year 6,099 8,708 15,025
----------------------------------------------------- ------ -------- -------- --------
$ $ $
----------------------------------------------------- ------ -------- -------- ----------
Basic earnings per ordinary share 9 0.19 0.30 0.63
----------------------------------------------------- ------ -------- -------- --------
Diluted earnings per ordinary share 9 0.19 0.30 0.63
----------------------------------------------------- ------ -------- -------- --------
* For Notes on the financial statements, see page 288.
1 Interest income includes $35,293m (2019: $45,708m) of interest
recognised on financial assets measured at amortised cost and
$5,614m (2019: $8,259m) of interest recognised on financial assets
measured at fair value through other comprehensive income.
2 Interest revenue calculated using the effective interest
method comprises interest recognised on financial assets measured
at either amortised cost or fair value through other comprehensive
income.
3 Interest expense includes $12,426m (2019: $21,922m) of
interest on financial instruments, excluding interest on financial
liabilities held for trading or designated or otherwise mandatorily
measured at fair value.
4 The debt instruments, issued for funding purposes, are
designated under the fair value option to reduce an accounting
mismatch.
5 Includes depreciation of the right-of-use assets of $1,029m
(2019: $912m). Right-of-use assets have been recognised from 1
January 2019 following the adoption of IFRS 16. Comparatives have
not been restated.
Consolidated statement of comprehensive income
for the year ended 31 December
2020 2019 2018
$m $m $m
----------------------------------------------------------- ------ ------- ---------
Profit for the year 6,099 8,708 15,025
----------------------------------------------------------- ------ ------- -------
Other comprehensive income/(expense)
----------------------------------------------------------- ------ ------- ---------
Items that will be reclassified subsequently to
profit or loss when specific conditions are met:
----------------------------------------------------------- ------ ------- ---------
Debt instruments at fair value through other comprehensive
income 1,750 1,152 (243)
----------------------------------------------------------- ------ ------- -------
- fair value gains/(losses) 2,947 1,793 (168)
-----------------------------------------------------------
- fair value gains transferred to the income statement
on disposal (668) (365) (95)
-----------------------------------------------------------
- expected credit (recoveries)/losses recognised
in the income statement 48 109 (94)
-----------------------------------------------------------
- income taxes (577) (385) 114
----------------------------------------------------------- ------ ------- -------
Cash flow hedges 471 206 19
----------------------------------------------------------- ------ ------- -------
- fair value gains/(losses) (157) 551 (267)
-----------------------------------------------------------
- fair value (gains)/losses reclassified to the
income statement 769 (286) 317
-----------------------------------------------------------
- income taxes (141) (59) (31)
----------------------------------------------------------- ------ ------- -------
Share of other comprehensive income/(expense) of
associates and joint ventures (73) 21 (64)
----------------------------------------------------------- ------ ------- -------
- share for the year (73) 21 (64)
Exchange differences 4,855 1,044 (7,156)
Items that will not be reclassified subsequently
to profit or loss:
----------------------------------------------------------- ------ ------- ---------
Remeasurement of defined benefit asset/liability 834 13 (329)
----------------------------------------------------------- ------ ------- -------
- before income taxes 1,223 (17) (388)
-----------------------------------------------------------
- income taxes (389) 30 59
----------------------------------------------------------- ------ ------- -------
Changes in fair value of financial liabilities
designated at fair value upon initial recognition
arising from changes in own credit risk 167 (2,002) 2,847
----------------------------------------------------------- ------ ------- -------
- before income taxes 190 (2,639) 3,606
-----------------------------------------------------------
- income taxes (23) 637 (759)
----------------------------------------------------------- ------ ------- -------
Equity instruments designated at fair value through
other comprehensive income 212 366 (27)
----------------------------------------------------------- ------ ------- -------
- fair value gains/(losses) 212 364 (71)
-----------------------------------------------------------
- income taxes - 2 44
----------------------------------------------------------- ------ ------- -------
Effects of hyperinflation 193 217 283
----------------------------------------------------------- ------ ------- -------
Other comprehensive income/(expense) for the period,
net of tax 8,409 1,017 (4,670)
----------------------------------------------------------- ------ ------- -------
Total comprehensive income for the year 14,508 9,725 10,355
----------------------------------------------------------- ------ ------- -------
Attributable to:
----------------------------------------------------------- ------ ------- ---------
- ordinary shareholders of the parent company 12,146 6,838 8,083
----------------------------------------------------------- ------ ------- -------
- preference shareholders of the parent company 90 90 90
----------------------------------------------------------- ------ ------- -------
- other equity holders 1,241 1,324 1,029
----------------------------------------------------------- ------ ------- -------
- non-controlling interests 1,031 1,473 1,153
----------------------------------------------------------- ------ ------- -------
Total comprehensive income for the year 14,508 9,725 10,355
----------------------------------------------------------- ------ ------- -------
Consolidated balance sheet
At
----------------------
31 Dec 31 Dec
2020 2019
Notes* $m $m
------------------------------------------------------ ------ --------- -----------
Assets
------------------------------------------------------ ------ --------- -----------
Cash and balances at central banks 304,481 154,099
------------------------------------------------------ ------ --------- ---------
Items in the course of collection from other banks 4,094 4,956
------------------------------------------------------ ------ --------- ---------
Hong Kong Government certificates of indebtedness 40,420 38,380
------------------------------------------------------ ------ --------- ---------
Trading assets 11 231,990 254,271
------------------------------------------------------ ------ --------- ---------
Financial assets designated and otherwise mandatorily
measured at fair value through profit or loss 14 45,553 43,627
------------------------------------------------------ ------ --------- ---------
Derivatives 15 307,726 242,995
------------------------------------------------------ ------ --------- ---------
Loans and advances to banks 81,616 69,203
------------------------------------------------------ ------ --------- ---------
Loans and advances to customers 1,037,987 1,036,743
------------------------------------------------------ ------ --------- ---------
Reverse repurchase agreements - non-trading 230,628 240,862
------------------------------------------------------ ------ --------- ---------
Financial investments 16 490,693 443,312
------------------------------------------------------ ------ --------- ---------
Prepayments, accrued income and other assets 22 156,412 136,680
------------------------------------------------------ ------ --------- ---------
Current tax assets 954 755
------------------------------------------------------ ------ --------- ---------
Interests in associates and joint ventures 18 26,684 24,474
------------------------------------------------------ ------ --------- ---------
Goodwill and intangible assets 21 20,443 20,163
------------------------------------------------------ ------ --------- ---------
Deferred tax assets 7 4,483 4,632
------------------------------------------------------ ------ --------- ---------
Total assets 2,984,164 2,715,152
------------------------------------------------------ ------ --------- ---------
Liabilities and equity
------------------------------------------------------ ------ --------- -----------
Liabilities
------------------------------------------------------ ------ --------- -----------
Hong Kong currency notes in circulation 40,420 38,380
------------------------------------------------------ ------ --------- ---------
Deposits by banks 82,080 59,022
------------------------------------------------------ ------ --------- ---------
Customer accounts 1,642,780 1,439,115
------------------------------------------------------ ------ --------- ---------
Repurchase agreements - non-trading 111,901 140,344
------------------------------------------------------ ------ --------- ---------
Items in the course of transmission to other banks 4,343 4,817
------------------------------------------------------ ------ --------- ---------
Trading liabilities 23 75,266 83,170
------------------------------------------------------ ------ --------- ---------
Financial liabilities designated at fair value 24 157,439 164,466
------------------------------------------------------ ------ --------- ---------
Derivatives 15 303,001 239,497
------------------------------------------------------ ------ --------- ---------
Debt securities in issue 25 95,492 104,555
------------------------------------------------------ ------ --------- ---------
Accruals, deferred income and other liabilities 26 128,624 118,156
------------------------------------------------------ ------ --------- ---------
Current tax liabilities 690 2,150
------------------------------------------------------ ------ --------- ---------
Liabilities under insurance contracts 4 107,191 97,439
------------------------------------------------------ ------ --------- ---------
Provisions 27 3,678 3,398
------------------------------------------------------ ------ --------- ---------
Deferred tax liabilities 7 4,313 3,375
------------------------------------------------------ ------ --------- ---------
Subordinated liabilities 28 21,951 24,600
------------------------------------------------------ ------ --------- ---------
Total liabilities 2,779,169 2,522,484
------------------------------------------------------ ------ --------- ---------
Equity
------------------------------------------------------ ------ --------- -----------
Called up share capital 31 10,347 10,319
------------------------------------------------------ ------ --------- ---------
Share premium account 31 14,277 13,959
------------------------------------------------------ ------ --------- ---------
Other equity instruments 22,414 20,871
------------------------------------------------------ ------ --------- ---------
Other reserves 8,833 2,127
------------------------------------------------------ ------ --------- ---------
Retained earnings 140,572 136,679
------------------------------------------------------ ------ --------- ---------
Total shareholders' equity 196,443 183,955
------------------------------------------------------ ------ --------- ---------
Non-controlling interests 8,552 8,713
------------------------------------------------------ ------ --------- ---------
Total equity 204,995 192,668
------------------------------------------------------ ------ --------- ---------
Total liabilities and equity 2,984,164 2,715,152
------------------------------------------------------ ------ --------- ---------
* For Notes on the financial statements, see page 288.
The accompanying notes on pages 288 to 370 and the audited
sections in: 'Risk' on pages 106 to 194 (including 'Measurement
uncertainty and sensitivity analysis of ECL estimates' on pages 127
to 135), and 'Directors' remuneration report' on pages 229 to 255
form an integral part of these financial statements.
These financial statements were approved by the Board of
Directors on 23 February 2021 and signed on its behalf by:
Mark E Tucker Ewen Stevenson
Group Chief Financial
Group Chairman Officer
Consolidated statement of cash flows
for the year ended 31 December
2020 2019 2018
$m $m $m
------------------------------------------------------ --------- --------- -----------
Profit before tax 8,777 13,347 19,890
------------------------------------------------------ --------- --------- ---------
Adjustments for non-cash items:
------------------------------------------------------ --------- --------- -----------
Depreciation, amortisation and impairment 5,241 10,519 1,933
------------------------------------------------------ --------- --------- ---------
Net gain from investing activities (541) (399) (126)
------------------------------------------------------ --------- --------- ---------
Share of profits in associates and joint ventures (1,597) (2,354) (2,536)
------------------------------------------------------ --------- --------- ---------
Gain on disposal of subsidiaries, businesses,
associates and joint ventures - (929) -
------------------------------------------------------ --------- --------- ---------
Change in expected credit losses gross of recoveries
and other credit impairment charges 9,096 3,012 2,280
------------------------------------------------------ --------- --------- ---------
Provisions including pensions 1,164 2,423 1,944
------------------------------------------------------ --------- --------- ---------
Share-based payment expense 433 478 450
------------------------------------------------------ --------- --------- ---------
Other non-cash items included in profit before
tax (906) (2,297) (1,303)
------------------------------------------------------ --------- --------- ---------
Elimination of exchange differences(1) (25,749) (3,742) 4,930
------------------------------------------------------ --------- --------- ---------
Changes in operating assets and liabilities
------------------------------------------------------ --------- --------- -----------
Change in net trading securities and derivatives 13,150 (18,910) 20,855
------------------------------------------------------ --------- --------- ---------
Change in loans and advances to banks and customers (14,131) (53,760) (44,071)
------------------------------------------------------ --------- --------- ---------
Change in reverse repurchase agreements - non-trading 9,950 (7,390) (25,399)
------------------------------------------------------ --------- --------- ---------
Change in financial assets designated and otherwise
mandatorily measured at fair value (1,962) (2,308) (1,515)
------------------------------------------------------ --------- --------- ---------
Change in other assets (19,610) (21,863) 6,766
------------------------------------------------------ --------- --------- ---------
Change in deposits by banks and customer accounts 226,723 79,163 (5,745)
------------------------------------------------------ --------- --------- ---------
Change in repurchase agreements - non-trading (28,443) (25,540) 35,882
------------------------------------------------------ --------- --------- ---------
Change in debt securities in issue (9,075) 19,268 18,806
------------------------------------------------------ --------- --------- ---------
Change in financial liabilities designated at
fair value (6,630) 20,068 4,500
------------------------------------------------------ --------- --------- ---------
Change in other liabilities 20,323 23,124 (2,187)
------------------------------------------------------ --------- --------- ---------
Dividends received from associates 761 633 910
------------------------------------------------------ --------- --------- ---------
Contributions paid to defined benefit plans (495) (533) (332)
------------------------------------------------------ --------- --------- ---------
Tax paid (4,259) (2,267) (3,417)
------------------------------------------------------ --------- --------- ---------
Net cash from operating activities 182,220 29,743 32,515
------------------------------------------------------ --------- --------- ---------
Purchase of financial investments (496,669) (445,907) (399,458)
------------------------------------------------------ --------- --------- ---------
Proceeds from the sale and maturity of financial
investments 476,990 413,186 386,056
------------------------------------------------------ --------- --------- ---------
Net cash flows from the purchase and sale of
property, plant and equipment (1,446) (1,343) (1,196)
------------------------------------------------------ --------- --------- ---------
Net cash flows from purchase/(disposal) of customer
and loan portfolios 1,362 1,118 (204)
------------------------------------------------------ --------- --------- ---------
Net investment in intangible assets (2,064) (2,289) (1,848)
------------------------------------------------------ --------- --------- ---------
Net cash flow from acquisition and disposal of
subsidiaries, businesses, associates and joint
ventures (603) (83) 4
------------------------------------------------------ --------- --------- ---------
Net cash from investing activities (22,430) (35,318) (16,646)
------------------------------------------------------ --------- --------- ---------
Issue of ordinary share capital and other equity
instruments 1,497 - 6,001
------------------------------------------------------ --------- --------- ---------
Cancellation of shares - (1,000) (1,998)
------------------------------------------------------ --------- --------- ---------
Net sales/(purchases) of own shares for market-making
and investment purposes (181) 141 133
------------------------------------------------------ --------- --------- ---------
Redemption of preference shares and other equity
instruments (398) - (6,078)
------------------------------------------------------ --------- --------- ---------
Subordinated loan capital repaid(2) (3,538) (4,210) (4,077)
------------------------------------------------------ --------- --------- ---------
Dividends paid to shareholders of the parent
company and non-controlling interests (2,023) (9,773) (10,762)
------------------------------------------------------ --------- --------- ---------
Net cash from financing activities (4,643) (14,842) (16,781)
------------------------------------------------------ --------- --------- ---------
Net increase/(decrease) in cash and cash equivalents 155,147 (20,417) (912)
------------------------------------------------------ --------- --------- ---------
Cash and cash equivalents at 1 Jan 293,742 312,911 323,718
------------------------------------------------------ --------- --------- ---------
Exchange differences in respect of cash and cash
equivalents 19,434 1,248 (9,895)
------------------------------------------------------ --------- --------- ---------
Cash and cash equivalents at 31 Dec(3) 468,323 293,742 312,911
------------------------------------------------------ --------- --------- ---------
Cash and cash equivalents comprise:
------------------------------------------------------ --------- --------- -----------
- cash and balances at central banks 304,481 154,099 162,843
------------------------------------------------------ --------- --------- ---------
- items in the course of collection from other
banks 4,094 4,956 5,787
------------------------------------------------------ --------- --------- ---------
- loans and advances to banks of one month or
less 51,788 41,626 39,460
------------------------------------------------------ --------- --------- ---------
- reverse repurchase agreements with banks of
one month or less 65,086 65,370 74,702
------------------------------------------------------ --------- --------- ---------
- treasury bills, other bills and certificates
of deposit less than three months 30,023 20,132 21,685
------------------------------------------------------ --------- --------- ---------
- cash collateral and net settlement accounts 17,194 12,376 14,075
------------------------------------------------------ --------- --------- ---------
- less: items in the course of transmission to
other banks (4,343) (4,817) (5,641)
------------------------------------------------------ --------- --------- ---------
Cash and cash equivalents at 31 Dec(3) 468,323 293,742 312,911
------------------------------------------------------ --------- --------- ---------
Interest received was $45,578m (2019: $58,627m; 2018: $45,291m),
interest paid was $17,740m (2019: $27,384m; 2018: $14,172m) and
dividends received (excluding dividends received from associates,
which are presented separately above) were $1,158m (2019: $2,369m;
2018: $1,702m).
1 Adjustment to bring changes between opening and closing
balance sheet amounts to average rates. This is not done on a
line-by-line basis, as details cannot be determined without
unreasonable expense.
2 Subordinated liabilities changes during the year are
attributable to repayments of $(3.5)bn (2019: $(4.2)bn; 2018:
$(4.1)bn) of securities. Non-cash changes during the year included
foreign exchange gains/(losses) of $0.5bn (2019: $0.6bn; 2018:
$(0.6)bn) and fair value gains/(losses) of $1.1bn (2019: $1.4bn;
2018: $(1.4)bn).
3 At 31 December 2020, $41,912m (2019: $35,735m; 2018: $26,282m)
was not available for use by HSBC, of which $16,935m (2019:
$19,353m; 2018: $19,755m) related to mandatory deposits at central
banks.
Consolidated statement of changes in equity
for the year ended 31 December
Other reserves
-------------------------------------------
Called
up
share Financial
capital assets Cash Merger Total
and Other at flow Foreign and share- Non-
share equity Retained FVOCI hedging exchange other holders' controlling Total
premium instru-ments earnings(3,4) reserve reserve reserve reserves(4,5) equity interests equity
$m $m $m $m $m $m $m $m $m $m
At 1 Jan 2020 24,278 20,871 136,679 (108) (2) (25,133) 27,370 183,955 8,713 192,668
------------------------------------------------------------ ------- ------------ ------------- --------- ------- -------- ------------- -------- ----------- --------
Profit for the year - - 5,229 - - - - 5,229 870 6,099
------------------------------------------------------------ ------- ------------ ------------- --------- ------- -------- ------------- -------- ----------- --------
Other comprehensive
income (net of tax) - - 1,118 1,913 459 4,758 - 8,248 161 8,409
------------------------------------------------------------ ------- ------------ ------------- --------- ------- -------- ------------- -------- ----------- --------
* debt instruments at fair value through other
comprehensive income - - - 1,746 - - - 1,746 4 1,750
------------------------------------------------------------
* equity instruments designated at fair value through
other comprehensive income - - - 167 - - - 167 45 212
------------------------------------------------------------
- cash flow hedges - - - - 459 - - 459 12 471
------------------------------------------------------------
* changes in fair value of financial liabilities
designated at fair value upon initial recognition
arising from changes in own credit risk - - 167 - - - - 167 - 167
------------------------------------------------------------
* remeasurement of defined benefit asset/liability - - 831 - - - - 831 3 834
------------------------------------------------------------
* share of other comprehensive income of associates and
joint ventures - - (73) - - - - (73) - (73)
- effects of hyperinflation - - 193 - - - - 193 - 193
------------------------------------------------------------
- exchange differences - - - - - 4,758 - 4,758 97 4,855
------------------------------------------------------------ ------- ------------ ------------- --------- ------- -------- ------------- -------- ----------- --------
Total comprehensive
income for the year - - 6,347 1,913 459 4,758 - 13,477 1,031 14,508
------------------------------------------------------------ ------- ------------ ------------- --------- ------- -------- ------------- -------- ----------- --------
Shares issued under
employee remuneration
and share plans 346 - (339) - - - - 7 - 7
Capital securities
issued(1) - 1,500 (3) - - - - 1,497 - 1,497
------------------------------------------------------------ ------- ------------ ------------- --------- ------- -------- ------------- -------- ----------- --------
Dividends to shareholders - - (1,331) - - - - (1,331) (692) (2,023)
------------------------------------------------------------ ------- ------------ ------------- --------- ------- -------- ------------- -------- ----------- --------
Redemption of securities(2) - - (1,450) - - - - (1,450) - (1,450)
------------------------------------------------------------ ------- ------------ ------------- --------- ------- -------- ------------- -------- ----------- --------
Transfers(6) - - 435 - - - (435) - - -
------------------------------------------------------------ ------- ------------ ------------- --------- ------- -------- ------------- -------- ----------- --------
Cost of share-based
payment arrangements - - 434 - - - - 434 - 434
Other movements - 43 (200) 11 - - - (146) (500) (646)
------------------------------------------------------------ ------- ------------ ------------- --------- ------- -------- ------------- -------- ----------- --------
At 31 Dec 2020 24,624 22,414 140,572 1,816 457 (20,375) 26,935 196,443 8,552 204,995
------------------------------------------------------------ ------- ------------ ------------- --------- ------- -------- ------------- -------- ----------- --------
At 1 Jan 2019 23,789 22,367 138,191 (1,532) (206) (26,133) 29,777 186,253 7,996 194,249
------------------------------------------------------------ ------- ------------ ------------- --------- ------- -------- ------------- -------- ----------- --------
Profit for the year - - 7,383 - - - - 7,383 1,325 8,708
------------------------------------------------------------ ------- ------------ ------------- --------- ------- -------- ------------- -------- ----------- --------
Other comprehensive
income (net of tax) - - (1,759) 1,424 204 1,000 - 869 148 1,017
------------------------------------------------------------ ------- ------------ ------------- --------- ------- -------- ------------- -------- ----------- --------
* debt instruments at fair value through other
comprehensive income - - - 1,146 - - - 1,146 6 1,152
------------------------------------------------------------
* equity instruments designated at fair value through
other comprehensive income - - - 278 - - - 278 88 366
------------------------------------------------------------
- cash flow hedges - - - - 204 - - 204 2 206
------------------------------------------------------------
* changes in fair value of financial liabilities
designated at fair value upon initial recognition
arising from changes in own credit risk - - (2,002) - - - - (2,002) - (2,002)
------------------------------------------------------------
* remeasurement of defined benefit asset/liability - - 5 - - - - 5 8 13
------------------------------------------------------------
* share of other comprehensive income of associates and
joint ventures - - 21 - - - - 21 - 21
------------------------------------------------------------
- effects of hyperinflation - - 217 - - - - 217 - 217
- exchange differences - - - - - 1,000 - 1,000 44 1,044
------------------------------------------------------------ ------- ------------ ------------- --------- ------- -------- ------------- -------- ----------- --------
Total comprehensive
income for the year - - 5,624 1,424 204 1,000 - 8,252 1,473 9,725
------------------------------------------------------------ ------- ------------ ------------- --------- ------- -------- ------------- -------- ----------- --------
Shares issued under
employee remuneration
and share plans 557 - (495) - - - - 62 - 62
------------------------------------------------------------ ------- ------------ ------------- --------- ------- -------- ------------- -------- ----------- --------
Shares issued in lieu
of dividends and amounts
arising thereon - - 2,687 - - - - 2,687 - 2,687
------------------------------------------------------------ ------- ------------ ------------- --------- ------- -------- ------------- -------- ----------- --------
Dividends to shareholders - - (11,683) - - - - (11,683) (777) (12,460)
------------------------------------------------------------ ------- ------------ ------------- --------- ------- -------- ------------- -------- ----------- --------
Redemption of securities(2) - (1,496) (12) - - - - (1,508) - (1,508)
------------------------------------------------------------ ------- ------------ ------------- --------- ------- -------- ------------- -------- ----------- --------
Transfers(6) - - 2,475 - - - (2,475) - - -
------------------------------------------------------------ ------- ------------ ------------- --------- ------- -------- ------------- -------- ----------- --------
Cost of share-based
payment arrangements - - 478 - - - - 478 - 478
------------------------------------------------------------ ------- ------------ ------------- --------- ------- -------- ------------- -------- ----------- --------
Cancellation of shares(7) (68) - (1,000) - - - 68 (1,000) - (1,000)
------------------------------------------------------------ ------- ------------ ------------- --------- ------- -------- ------------- -------- ----------- --------
Other movements - - 414 - - - - 414 21 435
------------------------------------------------------------ ------- ------------ ------------- --------- ------- -------- ------------- -------- ----------- --------
At 31 Dec 2019 24,278 20,871 136,679 (108) (2) (25,133) 27,370 183,955 8,713 192,668
------------------------------------------------------------ ------- ------------ ------------- --------- ------- -------- ------------- -------- ----------- --------
Consolidated statement of changes in equity (continued)
for the year ended 31 December
Other reserves
-------------------------------------------
Called
up
share Financial
capital assets Cash Merger Total
and Other at flow Foreign and share- Non-
share equity Retained FVOCI hedging exchange other holders' controlling Total
premium instru-ments earnings(3,4) reserve reserve reserve reserves(5) equity interests equity
$m $m $m $m $m $m $m $m $m $m
------------------------------------------------------------ ------- ------------ ------------- --------- ------- -------- ------------- -------- ----------- ----------
At 1 Jan 2018 20,337 22,250 139,414 (1,371) (222) (19,072) 27,308 188,644 7,580 196,224
------------------------------------------------------------ ------- ------------ ------------- --------- ------- -------- ------------- -------- ----------- --------
Profit for the year - - 13,727 - - - - 13,727 1,298 15,025
------------------------------------------------------------ ------- ------------ ------------- --------- ------- -------- ------------- -------- ----------- --------
Other comprehensive
income (net of tax) - - 2,765 (245) 16 (7,061) - (4,525) (145) (4,670)
------------------------------------------------------------ ------- ------------ ------------- --------- ------- -------- ------------- -------- ----------- --------
* debt instruments at fair value through other
comprehensive income - - - (245) - - - (245) 2 (243)
------------------------------------------------------------
* equity instruments designated at fair value through
other comprehensive income - - - - - - - - (27) (27)
------------------------------------------------------------
- cash flow hedges - - - - 16 - - 16 3 19
------------------------------------------------------------
* changes in fair value of financial liabilities
designated at fair value due to movement in own
credit risk - - 2,847 - - - - 2,847 - 2,847
------------------------------------------------------------
* remeasurement of defined benefit asset/liability - - (301) - - - - (301) (28) (329)
------------------------------------------------------------
* share of other comprehensive income of associates and
joint ventures - - (64) - - - - (64) - (64)
- effects of hyperinflation - - 283 - - - - 283 - 283
------------------------------------------------------------
- exchange differences - - - - - (7,061) - (7,061) (95) (7,156)
------------------------------------------------------------ ------- ------------ ------------- --------- ------- -------- ------------- -------- ----------- --------
Total comprehensive
income for the year - - 16,492 (245) 16 (7,061) - 9,202 1,153 10,355
------------------------------------------------------------ ------- ------------ ------------- --------- ------- -------- ------------- -------- ----------- --------
Shares issued under
employee remuneration
and share plans 721 - (610) - - - - 111 - 111
------------------------------------------------------------ ------- ------------ ------------- --------- ------- -------- ------------- -------- ----------- --------
Shares issued in lieu
of dividends and amounts
arising thereon - - 1,494 - - - - 1,494 - 1,494
------------------------------------------------------------ ------- ------------ ------------- --------- ------- -------- ------------- -------- ----------- --------
Capital securities
issued(1) - 5,968 - - - - - 5,968 - 5,968
------------------------------------------------------------ ------- ------------ ------------- --------- ------- -------- ------------- -------- ----------- --------
Dividends to shareholders - - (11,547) - - - - (11,547) (710) (12,257)
------------------------------------------------------------ ------- ------------ ------------- --------- ------- -------- ------------- -------- ----------- --------
Redemption of securities(2) - (5,851) (237) - - - - (6,088) - (6,088)
------------------------------------------------------------ ------- ------------ ------------- --------- ------- -------- ------------- -------- ----------- --------
Transfers(6) - - (2,200) - - - 2,200 - - -
------------------------------------------------------------ ------- ------------ ------------- --------- ------- -------- ------------- -------- ----------- --------
Cost of share-based
payment arrangements - - 450 - - - - 450 - 450
------------------------------------------------------------ ------- ------------ ------------- --------- ------- -------- ------------- -------- ----------- --------
Cancellation of shares(7) 2,731 - (4,998) - - - 269 (1,998) - (1,998)
------------------------------------------------------------ ------- ------------ ------------- --------- ------- -------- ------------- -------- ----------- --------
Other movements - - (67) 84 - - - 17 (27) (10)
------------------------------------------------------------ ------- ------------ ------------- --------- ------- -------- ------------- -------- ----------- --------
At 31 Dec 2018 23,789 22,367 138,191 (1,532) (206) (26,133) 29,777 186,253 7,996 194,249
------------------------------------------------------------ ------- ------------ ------------- --------- ------- -------- ------------- -------- ----------- --------
1 During 2020 HSBC Holdings issued $1,500m of perpetual
subordinated contingent convertible securities. In 2018, HSBC
Holdings issued $4,150m, GBP1,000m and SGD750m of perpetual
subordinated contingent convertible capital securities on which
there were $60m of external issuance costs, $49m of intra-Group
issuance costs and $11m of tax benefits. Under IFRSs these issuance
costs and tax benefits are classified as equity.
2 During 2020, HSBC Holdings called $1,450m 6.20% non-cumulative
US dollar preference shares. For further details, see Note 31 in
the Annual Report and Accounts 2020. In 2019, HSBC Holdings
redeemed $1,500m 5.625% perpetual subordinated capital securities
on which there were $12m of external issuance costs. In 2018, HSBC
Holdings redeemed $2,200m 8.125% perpetual subordinated capital
securities and its $3,800m 8.000% perpetual subordinated capital
securities, Series 2, on which there were $172m of external
issuance costs and $23m of intra-Group issuance costs wound down.
Under IFRSs external issuance costs are classified as equity.
3 At 31 December 2020, retained earnings included 509,825,249
treasury shares (2019: 432,108,782; 2018: 379,926,645). In
addition, treasury shares are also held within HSBC's Insurance
business retirement funds for the benefit of policyholders or
beneficiaries within employee trusts for the settlement of shares
expected to be delivered under employee share schemes or bonus
plans, and the market-making activities in Global Markets.
4 Cumulative goodwill amounting to $5,138m has been charged
against reserves in respect of acquisitions of subsidiaries prior
to 1 January 1998, including $3,469m charged against the merger
reserve arising on the acquisition of HSBC Bank plc. The balance of
$1,669m has been charged against retained earnings.
5 Statutory share premium relief under section 131 of the
Companies Act 1985 (the 'Act') was taken in respect of the
acquisition of HSBC Bank plc in 1992, HSBC Continental Europe in
2000 and HSBC Finance Corporation in 2003, and the shares issued
were recorded at their nominal value only. In HSBC's consolidated
financial statements, the fair value differences of $8,290m in
respect of HSBC Continental Europe and $12,768m in respect of HSBC
Finance Corporation were recognised in the merger reserve. The
merger reserve created on the acquisition of HSBC Finance
Corporation subsequently became attached to HSBC Overseas Holdings
(UK) Limited ('HOHU'), following a number of intra-Group
reorganisations. During 2009, pursuant to section 131 of the
Companies Act 1985, statutory share premium relief was taken in
respect of the rights issue and $15,796m was recognised in the
merger reserve.
6 Permitted transfers from the merger reserve to retained
earnings were made when the investment in HSBC Overseas Holdings
(UK) Limited was previously impaired. In 2018, a part reversal of
this impairment resulted in a transfer from retained earnings back
to the merger reserve of $2,200m. In 2019, an additional impairment
of $2,475m was recognised and a permitted transfer of this amount
was made from the merger reserve to retained earnings. During 2020,
a further impairment of $435m was recognised and a permitted
transfer of this amount was made from the merger reserve to
retained earnings.
7 For further details, see Note 31 in the Annual Report and
Accounts 2020. In August 2019, HSBC announced a share buy-back of
up to $1.0bn, which was completed in September 2019. In May 2018,
HSBC announced a share buy-back of up to $2.0bn, which was
completed in August 2018.
HSBC Holdings income statement
for the year ended 31 December
2020 2019 2018
Notes* $m $m $m
----------------------------------------------------- ------ ------- ------- ---------
Net interest expense (2,632) (2,554) (1,112)
----------------------------------------------------- ------ ------- ------- -------
- interest income 473 1,249 2,193
----------------------------------------------------- ------
- interest expense (3,105) (3,803) (3,305)
----------------------------------------------------- ------ ------- ------- -------
Fee (expense)/income (12) (2) 0
----------------------------------------------------- ------ ------- ------- -------
Net income from financial instruments held
for trading or managed on a fair value basis 3 801 1,477 245
----------------------------------------------------- ------ ------- ------- -------
Changes in fair value of designated debt and
related derivatives(1) 3 (326) (360) (77)
----------------------------------------------------- ------ ------- ------- -------
Changes in fair value of other financial instruments
mandatorily measured at fair value through
profit or loss 3 1,141 1,659 43
----------------------------------------------------- ------ ------- ------- -------
Gains less losses from financial investments - - 4
----------------------------------------------------- ------ ------- ------- -------
Dividend income from subsidiaries(2) 8,156 15,117 55,304
----------------------------------------------------- ------ ------- ------- -------
Other operating income 1,889 1,293 960
----------------------------------------------------- ------ ------- ------- -------
Total operating income 9,017 16,630 55,367
----------------------------------------------------- ------ ------- ------- -------
Employee compensation and benefits 5 (56) (37) (37)
----------------------------------------------------- ------ ------- ------- -------
General and administrative expenses (4,276) (4,772) (4,507)
----------------------------------------------------- ------ ------- ------- -------
Impairment of subsidiaries (435) (2,562) 2,064
----------------------------------------------------- ------ ------- ------- -------
Total operating expenses (4,767) (7,371) (2,480)
----------------------------------------------------- ------ ------- ------- -------
Profit before tax 4,250 9,259 52,887
----------------------------------------------------- ------ ------- ------- -------
Tax (charge)/credit (165) (218) (62)
----------------------------------------------------- ------ ------- ------- -------
Profit for the year 4,085 9,041 52,825
----------------------------------------------------- ------ ------- ------- -------
* For Notes on the financial statements, see page 288.
1 The debt instruments, issued for funding purposes, are
designated under the fair value option to reduce an accounting
mismatch.
2 The 2018 year included $44,893m (2020 and 2019: nil) return on
capital from HSBC Finance (Netherlands) resulting from
restructuring the Group's Asia operation to meet resolution and
recovery requirements.
HSBC Holdings statement of comprehensive income
for the year ended 31 December
2020 2019 2018
$m $m $m
--------------------------------------------------- ----- ----- --------
Profit for the year 4,085 9,041 52,825
--------------------------------------------------- ----- ----- ------
Other comprehensive income/(expense)
Items that will not be reclassified subsequently
to profit or loss:
--------------------------------------------------- ----- ----- --------
Changes in fair value of financial liabilities
designated at fair value upon initial recognition
arising from changes in own credit risk 176 (396) 865
--------------------------------------------------- ----- ----- ------
- before income taxes 176 (573) 1,090
---------------------------------------------------
- income taxes - 177 (225)
--------------------------------------------------- ----- ----- ------
Other comprehensive income/(expense) for the
year, net of tax 176 (396) 865
--------------------------------------------------- ----- ----- ------
Total comprehensive income for the year 4,261 8,645 53,690
--------------------------------------------------- ----- ----- ------
HSBC Holdings balance sheet
31 Dec 31 Dec
2020 2019
Notes* $m $m
--------------------------------------------------- ------ ------- ---------
Assets
--------------------------------------------------- ------ ------- ---------
Cash and balances with HSBC undertakings 2,913 2,382
--------------------------------------------------- ------ ------- -------
Financial assets with HSBC undertakings designated
and otherwise mandatorily measured at fair value 65,253 61,964
--------------------------------------------------- ------ ------- -------
Derivatives 15 4,698 2,002
--------------------------------------------------- ------ ------- -------
Loans and advances to HSBC undertakings 10,443 10,218
--------------------------------------------------- ------ ------- -------
Financial investments 17,485 16,106
--------------------------------------------------- ------ ------- -------
Prepayments, accrued income and other assets 1,445 559
--------------------------------------------------- ------ ------- -------
Current tax assets - 203
--------------------------------------------------- ------ ------- -------
Investments in subsidiaries 160,660 161,473
--------------------------------------------------- ------ ------- -------
Intangible assets 276 333
--------------------------------------------------- ------ ------- -------
Total assets at 31 Dec 263,173 255,240
--------------------------------------------------- ------ ------- -------
Liabilities and equity
--------------------------------------------------- ------ ------- ---------
Liabilities
--------------------------------------------------- ------ ------- ---------
Amounts owed to HSBC undertakings 330 464
--------------------------------------------------- ------ ------- -------
Financial liabilities designated at fair value 24 25,664 30,303
--------------------------------------------------- ------ ------- -------
Derivatives 15 3,060 2,021
--------------------------------------------------- ------ ------- -------
Debt securities in issue 25 64,029 56,844
--------------------------------------------------- ------ ------- -------
Accruals, deferred income and other liabilities 4,865 1,915
--------------------------------------------------- ------ ------- -------
Subordinated liabilities 28 17,916 18,361
--------------------------------------------------- ------ ------- -------
Current tax liabilities 71 -
--------------------------------------------------- ------ ------- -------
Deferred tax liabilities 438 288
--------------------------------------------------- ------ ------- -------
Total liabilities 116,373 110,196
--------------------------------------------------- ------ ------- -------
Equity
--------------------------------------------------- ------ ------- ---------
Called up share capital 31 10,347 10,319
--------------------------------------------------- ------ ------- -------
Share premium account 14,277 13,959
--------------------------------------------------- ------ ------- -------
Other equity instruments 22,414 20,743
--------------------------------------------------- ------ ------- -------
Merger and other reserves 34,757 37,539
--------------------------------------------------- ------ ------- -------
Retained earnings 65,005 62,484
--------------------------------------------------- ------ ------- -------
Total equity 146,800 145,044
--------------------------------------------------- ------ ------- -------
Total liabilities and equity at 31 Dec 263,173 255,240
--------------------------------------------------- ------ ------- -------
* For Notes on the financial statements, see page 288.
The accompanying notes on pages 288 to 370 and the audited
sections in: 'Risk' on pages 106 to 194 (including 'Measurement
uncertainty and sensitivity analysis of ECL estimates' on pages 127
to 135), and 'Directors' remuneration report' on pages 229 to 255
form an integral part of these financial statements.
These financial statements were approved by the Board of
Directors on 23 February 2021 and signed on its behalf by:
Mark E Tucker Ewen Stevenson
Group Chief Financial
Group Chairman Officer
HSBC Holdings statement of cash flows
for the year ended 31 December
2020 2019 2018
$m $m $m
------------------------------------------------------------- -------- -------- ----------
Profit before tax 4,250 9,259 52,887
------------------------------------------------------------- -------- -------- --------
Adjustments for non-cash items 442 2,657 (46,878)
------------------------------------------------------------- -------- -------- --------
- depreciation, amortisation and impairment/expected
credit losses 87 72 70
-------------------------------------------------------------
- share-based payment expense 1 1 -
-------------------------------------------------------------
* other non-cash items included in profit before tax(1) 354 2,584 (46,948)
------------------------------------------------------------- -------- -------- --------
Changes in operating assets and liabilities
------------------------------------------------------------- -------- -------- ----------
Change in loans to HSBC undertakings (327) 41,471 7,293
------------------------------------------------------------- -------- -------- --------
Change in financial assets with HSBC undertakings
designated and otherwise mandatorily measured at
fair value (3,289) (38,451) (7,305)
------------------------------------------------------------- -------- -------- --------
Change in net trading securities and net derivatives (1,657) (1,433) 758
------------------------------------------------------------- -------- -------- --------
Change in other assets (633) (437) 231
------------------------------------------------------------- -------- -------- --------
Change in financial investments 449 (70) -
------------------------------------------------------------- -------- -------- --------
Change in debt securities in issue 3,063 1,899 (1,094)
------------------------------------------------------------- -------- -------- --------
Change in financial liabilities designated at fair
value 1,258 1,227 (740)
------------------------------------------------------------- -------- -------- --------
Change in other liabilities 1,366 437 (1,883)
------------------------------------------------------------- -------- -------- --------
Tax received 270 459 301
------------------------------------------------------------- -------- -------- --------
Net cash from operating activities 5,192 17,018 3,570
------------------------------------------------------------- -------- -------- --------
Purchase of financial investments (11,652) (19,293) -
------------------------------------------------------------- -------- -------- --------
Proceeds from the sale and maturity of financial
investments 9,342 6,755 -
------------------------------------------------------------- -------- -------- --------
Net cash outflow from acquisition of or increase
in stake of subsidiaries (2,558) (3,721) (8,992)
------------------------------------------------------------- -------- -------- --------
Repayment of capital from subsidiaries 1,516 - 3,627
------------------------------------------------------------- -------- -------- --------
Net investment in intangible assets (33) (44) (121)
------------------------------------------------------------- -------- -------- --------
Net cash from investing activities (3,385) (16,303) (5,486)
------------------------------------------------------------- -------- -------- --------
Issue of ordinary share capital and other equity
instruments 1,846 500 6,652
------------------------------------------------------------- -------- -------- --------
Redemption of other equity instruments - - (6,093)
------------------------------------------------------------- -------- -------- --------
Cancellation of shares - (1,006) (1,998)
------------------------------------------------------------- -------- -------- --------
Subordinated loan capital repaid (1,500) (4,107) (1,972)
------------------------------------------------------------- -------- -------- --------
Debt securities issued 15,951 10,817 19,513
------------------------------------------------------------- -------- -------- --------
Debt securities repaid (16,577) - (1,025)
------------------------------------------------------------- -------- -------- --------
Dividends paid on ordinary shares - (7,582) (8,693)
------------------------------------------------------------- -------- -------- --------
Dividends paid to holders of other equity instruments (1,331) (1,414) (1,360)
------------------------------------------------------------- -------- -------- --------
Net cash from financing activities (1,611) (2,792) 5,024
------------------------------------------------------------- -------- -------- --------
Net increase/(decrease) in cash and cash equivalents 196 (2,077) 3,108
------------------------------------------------------------- -------- -------- --------
Cash and cash equivalents at 1 January 5,980 8,057 4,949
------------------------------------------------------------- -------- -------- --------
Cash and cash equivalents at 31 Dec 6,176 5,980 8,057
------------------------------------------------------------- -------- -------- --------
Cash and cash equivalents comprise:
------------------------------------------------------------- -------- -------- ----------
- cash at bank with HSBC undertakings 2,913 2,382 3,509
------------------------------------------------------------- -------- -------- --------
- loans and advances to banks of one month or less 249 102 4,548
------------------------------------------------------------- -------- -------- --------
- treasury and other eligible bills 3,014 3,496 -
------------------------------------------------------------- -------- -------- --------
Interest received was $1,952m (2019: $2,216m; 2018: $2,116m),
interest paid was $3,166m (2019: $3,819m; 2018: $3,379m) and
dividends received were $8,156m (2019: $15,117m; 2018:
$10,411m).
1 The 2018 year included $44,893m (2020 and 2019: nil) return on
capital from HSBC Finance (Netherlands) resulting from
restructuring the Group's Asia operation to meet resolution and
recovery requirements.
HSBC Holdings statement of changes in equity
for the year ended 31 December
Other reserves
Financial
Called assets Merger
up Other at and Total
share Share equity Retained FVOCI other shareholders'
capital premium instruments earnings(1) reserve reserves equity
$m $m $m $m $m $m $m
------------------------------------------------------ ------- ------- ----------- ----------- --------- -------- ---------------
At 1 Jan 2020 10,319 13,959 20,743 62,484 - 37,539 145,044
------------------------------------------------------ ------- ------- ----------- ----------- --------- -------- -------------
Profit for the year - - - 4,085 - - 4,085
------------------------------------------------------ ------- ------- ----------- ----------- --------- -------- -------------
Other comprehensive income (net
of tax) - - - 176 - - 176
------------------------------------------------------ ------- ------- ----------- ----------- --------- -------- -------------
* changes in fair value of financial liabilities
designated at fair value due to movement in own
credit risk - - - 176 - - 176
------------------------------------------------------ ------- ------- ----------- ----------- --------- -------- -------------
Total comprehensive income for
the year - - - 4,261 - - 4,261
------------------------------------------------------ ------- ------- ----------- ----------- --------- -------- -------------
Shares issued under employee
share plans 28 318 - 2,540 - (2,347) 539
------------------------------------------------------ ------- ------- ----------- ----------- --------- -------- -------------
Capital securities issued - - 1,500 (15) - - 1,485
------------------------------------------------------ ------- ------- ----------- ----------- --------- -------- -------------
Dividends to shareholders - - - (1,331) - - (1,331)
------------------------------------------------------ ------- ------- ----------- ----------- --------- -------- -------------
Redemption of capital securities - - - (1,450) - - (1,450)
------------------------------------------------------ ------- ------- ----------- ----------- --------- -------- -------------
Transfers(4) - - - 435 - (435) -
------------------------------------------------------ ------- ------- ----------- ----------- --------- -------- -------------
Other movements(5) - - 171 (1,919) - - (1,748)
------------------------------------------------------ ------- ------- ----------- ----------- --------- -------- -------------
At 31 Dec 2020 10,347 14,277 22,414 65,005 - 34,757 146,800
------------------------------------------------------ ------- ------- ----------- ----------- --------- -------- -------------
At 1 Jan 2019 10,180 13,609 22,231 61,434 - 39,899 147,353
------------------------------------------------------ ------- ------- ----------- ----------- --------- -------- -------------
Profit for the year - - - 9,041 - - 9,041
------------------------------------------------------ ------- ------- ----------- ----------- --------- -------- -------------
Other comprehensive income (net
of tax) - - - (396) - - (396)
------------------------------------------------------ ------- ------- ----------- ----------- --------- -------- -------------
* changes in fair value of financial liabilities
designated at fair value due to movement in own
credit risk - - - (396) - - (396)
------------------------------------------------------ ------- ------- ----------- ----------- --------- -------- -------------
Total comprehensive income for
the year - - - 8,645 - - 8,645
------------------------------------------------------ ------- ------- ----------- ----------- --------- -------- -------------
Shares issued under employee
share plans 36 521 - (56) - - 501
------------------------------------------------------ ------- ------- ----------- ----------- --------- -------- -------------
Shares issued in lieu of dividends
and amounts arising thereon 171 (171) - 2,687 - - 2,687
------------------------------------------------------ ------- ------- ----------- ----------- --------- -------- -------------
Cancellation of shares(2) (68) - - (1,000) - 68 (1,000)
------------------------------------------------------ ------- ------- ----------- ----------- --------- -------- -------------
Capital securities issued - - - - - - -
------------------------------------------------------ ------- ------- ----------- ----------- --------- -------- -------------
Dividends to shareholders - - - (11,683) - - (11,683)
------------------------------------------------------ ------- ------- ----------- ----------- --------- -------- -------------
Redemption of capital securities - - (1,488) (20) - - (1,508)
------------------------------------------------------ ------- ------- ----------- ----------- --------- -------- -------------
Transfers(4) - - - 2,475 - (2,475) -
------------------------------------------------------ ------- ------- ----------- ----------- --------- -------- -------------
Other movements - - - 2 - 47 49
------------------------------------------------------ ------- ------- ----------- ----------- --------- -------- -------------
At 31 Dec 2019 10,319 13,959 20,743 62,484 - 37,539 145,044
------------------------------------------------------ ------- ------- ----------- ----------- --------- -------- -------------
At 31 Dec 2017 10,160 10,177 22,107 23,903 59 37,381 103,787
------------------------------------------------------ ------- ------- ----------- ----------- --------- -------- -------------
Impact on transition to IFRS
9 - - - 949 (59) - 890
------------------------------------------------------ ------- ------- ----------- ----------- --------- -------- -------------
At 1 Jan 2018 10,160 10,177 22,107 24,852 - 37,381 104,677
------------------------------------------------------ ------- ------- ----------- ----------- --------- -------- -------------
Profit for the year - - - 52,825 - - 52,825
------------------------------------------------------ ------- ------- ----------- ----------- --------- -------- -------------
Other comprehensive income (net
of tax) - - - 865 - - 865
------------------------------------------------------ ------- ------- ----------- ----------- --------- -------- -------------
* changes in fair value of financial liabilities
designated at fair value due to movement in own
credit risk - - - 865 - - 865
------------------------------------------------------ ------- ------- ----------- ----------- --------- -------- -------------
Total comprehensive income for
the year - - - 53,690 - - 53,690
------------------------------------------------------ ------- ------- ----------- ----------- --------- -------- -------------
Shares issued under employee
share plans 42 679 - - - - 721
------------------------------------------------------ ------- ------- ----------- ----------- --------- -------- -------------
Shares issued in lieu of dividends
and amounts arising thereon 83 (83) - 1,494 - - 1,494
------------------------------------------------------ ------- ------- ----------- ----------- --------- -------- -------------
Cancellation of shares(3) (105) 2,836 - (4,998) - 269 (1,998)
------------------------------------------------------ ------- ------- ----------- ----------- --------- -------- -------------
Capital securities issued - - 5,967 - - - 5,967
------------------------------------------------------ ------- ------- ----------- ----------- --------- -------- -------------
Dividends to shareholders - - - (11,547) - - (11,547)
------------------------------------------------------ ------- ------- ----------- ----------- --------- -------- -------------
Redemption of capital securities - - (5,843) (236) - - (6,079)
------------------------------------------------------ ------- ------- ----------- ----------- --------- -------- -------------
Transfers(4) - - - (2,200) - 2,200 -
------------------------------------------------------ ------- ------- ----------- ----------- --------- -------- -------------
Other movements - - - 379 - 49 428
------------------------------------------------------ ------- ------- ----------- ----------- --------- -------- -------------
At 31 Dec 2018 10,180 13,609 22,231 61,434 - 39,899 147,353
------------------------------------------------------ ------- ------- ----------- ----------- --------- -------- -------------
Dividends per ordinary share at 31 December 2020 were nil (2019:
$0.51; 2018: $0.51).
1 At 31 December 2020, retained earnings includ ed 326,766,253
($2,521m) treasury shares (2019: 326,191,804 ($2,543m); 2018:
326,503,319 ($2,546m)).
2 In August 2019, HSBC announced a share buy-back of up to
$1.0bn, which was completed in September 2019.
3 The 2018 year included a re-presentation of the cancellation
of shares to retained earnings and capital redemption reserve in
respect of the 2018 share buy-back, under which retained earnings
has been reduced by $3,000m, share premium increased by $2,836m and
other reserves increased by $164m.
4 At 31 December 2020, an impairment of $435m of HSBC Overseas
Holdings (UK) Limited (2019: $2,475m) was recognised and a
permitted transfer of $435m (2019: $2,475m) was made from the
merger reserve to retained earnings. In 2018, a part reversal of
the impairment of HSBC Overseas Holdings (UK) Limited resulted in a
transfer from retained earnings back to the merger reserve of
$2,200m.
5 Includes an adjustment to retained earnings for a repayment of
capital by a subsidiary of $1,650m, which had been recognised as
dividend income in 2019.
Notes on the financial statements
Page Page
Basis of preparation and significant
1 accounting policies 288 21 Goodwill and intangible assets 352
------------------------------------ ---- ----------------------------------- ----
Prepayments, accrued income
2 Net fee income 304 22 and other assets 355
------------------------------------ ---- ----------------------------------- ----
Net income/(expense) from
financial instruments measured
at fair value through profit
3 or loss 23 Trading liabilities 355
----------------------------------- ----
Financial liabilities designated
305 24 at fair value 355
----------------------------------- ----
4 Insurance business 305 25 Debt securities in issue 356
------------------------------------ ---- ----------------------------------- ----
Employee compensation and Accruals, deferred income
5 benefits 307 26 and other liabilities 356
------------------------------------ ---- ----------------------------------- ----
6 Auditors' remuneration 313 27 Provisions 357
------------------------------------ ---- ----------------------------------- ----
7 Tax 313 28 Subordinated liabilities 358
------------------------------------ ---- ----------------------------------- ----
Maturity analysis of assets,
liabilities and off-balance
8 Dividends 315 29 sheet commitments
------------------------------------ ----
9 Earnings per share 317 362
------------------------------------ ----
Offsetting of financial assets
10 Segmental analysis 318 30 and financial liabilities 367
------------------------------------ ---- ----------------------------------- ----
Called up share capital and
11 Trading assets 321 31 other equity instruments 368
------------------------------------ ---- ----------------------------------- ----
Fair values of financial instruments Contingent liabilities, contractual
12 carried at fair value 321 32 commitments and guarantees 370
------------------------------------ ---- ----------------------------------- ----
Fair values of financial instruments
13 not carried at fair value 329 33 Finance lease receivables 372
------------------------------------ ---- ----------------------------------- ----
Financial assets designated
and otherwise mandatorily
measured at fair value through Legal proceedings and regulatory
14 profit or loss 34 matters 372
----------------------------------- ----
331 35 Related party transactions 376
----------------------------------- ----
Events after the balance sheet
15 Derivatives 332 36 date 378
------------------------------------ ---- ----------------------------------- ----
HSBC Holdings' subsidiaries,
16 Financial investments 339 37 joint ventures and associates 378
------------------------------------ ---- ----------------------------------- ----
Assets pledged, collateral
17 received and assets transferred 341
------------------------------------ ----
Interests in associates and
18 joint ventures 342
------------------------------------ ----
19 Investments in subsidiaries 347
------------------------------------ ----
20 Structured entities 349
------------------------------------ ----
1 Basis of preparation and significant accounting policies
--------------------------------------------------------
1.1 Basis of preparation
(a) Compliance with International Financial Reporting Standards
The consolidated financial statements of HSBC and the separate
financial statements of HSBC Holdings comply with international
accounting standards in conformity with the requirements of the
Companies Act 2006 and have also applied international financial
reporting standards adopted pursuant to Regulation (EC) No
1606/2002 as it applies in the European Union. These financial
statements are also prepared in accordance with International
Financial Reporting Standards ('IFRSs') as issued by the
International Accounting Standards Board ('IASB'), including
interpretations issued by the IFRS Interpretations Committee, as
there are no applicable differences from IFRSs as issued by the
IASB for the periods presented. 'Interest Rate Benchmark Reform -
Phase 2', which amends IFRS 9, IAS 39 'Financial Instruments,' IFRS
7 'Financial Instruments,' IFRS 4 'Insurance Contracts' and IFRS 16
'Leases', was adopted for use in the UK and the EU in January 2021
and has been early adopted as set out below. Therefore, there were
no unendorsed standards effective for the year ended 31 December
2020 affecting these consolidated and separate financial
statements.
Standards adopted during the year ended 31 December 2020
Interest Rate Benchmark Reform - Phase 2
Interest Rate Benchmark Reform Phase 2: Amendments to IFRS 9,
IAS 39, IFRS 7, IFRS 4 and IFRS 16 issued in August 2020 represents
the second phase of the IASB's project on the effects of interest
rate benchmark reform, addressing issues affecting financial
statements when changes are made to contractual cash flows and
hedging relationships as a result of the reform.
Under these amendments, changes made to a financial instrument
measured at other than fair value through profit or loss that are
economically equivalent and required by interest rate benchmark
reform do not result in the derecognition or a change in the
carrying amount of the financial instrument, but instead require
the effective interest rate to be updated to reflect the change in
the interest rate benchmark. In addition, hedge accounting will not
be discontinued solely because of the replacement of the interest
rate benchmark if the hedge meets other hedge accounting
criteria.
These amendments apply from 1 January 2021 with early adoption
permitted. HSBC adopted the amendments from 1 January 2020 and made
the additional disclosures as required by the amendments. Further
information is included in Note 15 and in 'Financial instruments
impacted by Ibor reform' on page 113.
Other changes
In addition, HSBC adopted a number of interpretations and
amendments to standards, which had an insignificant effect on the
consolidated financial statements of HSBC and the separate
financial statements of HSBC Holdings.
In 2018, HSBC adopted IFRS 9 and made voluntary presentation
changes, including to certain financial liabilities, which contain
both deposit and derivative components, and to cash collateral,
margin and settlement accounts. The impact of this is included in
the HSBC Holdings statement of changes in equity for that year
end.
Other than as noted above, accounting policies have been
consistently applied.
(b) Differences between IFRSs and Hong Kong Financial Reporting Standards
There are no significant differences between IFRSs and Hong Kong
Financial Reporting Standards in terms of their application to
HSBC, and consequently there would be no significant differences
had the financial statements been prepared in accordance with Hong
Kong Financial Reporting Standards. The 'Notes on the financial
statements', taken together with the 'Report of the Directors',
include the aggregate of all disclosures necessary to satisfy IFRSs
and Hong Kong reporting requirements.
(c) Future accounting developments
Minor amendments to IFRSs
The IASB has not published any minor amendments effective from 1
January 2021 that are applicable to HSBC. However, the IASB has
published a number of minor amendments to IFRSs that are effective
from 1 January 2022 and 1 January 2023. HSBC expects they will have
an insignificant effect, when adopted, on the consolidated
financial statements of HSBC and the separate financial statements
of HSBC Holdings.
New IFRSs
IFRS 17 'Insurance Contracts'
IFRS 17 'Insurance Contracts' was issued in May 2017, with
amendments to the standard issued in June 2020. The standard sets
out the requirements that an entity should apply in accounting for
insurance contracts it issues and reinsurance contracts it holds.
Following the amendments, IFRS 17 is effective from 1 January 2023.
The Group is in the process of implementing IFRS 17. Industry
practice and interpretation of the standard are still developing.
Therefore, the likely numerical impact of its implementation
remains uncertain. However, we have the following expectations as
to the impact compared with the Group's current accounting policy
for insurance contracts, which is set out in policy 1.2(j)
below:
-- Under IFRS 17, there will be no PVIF asset recognised; rather
the estimated future profit will be included in the measurement of
the insurance contract liability as the contractual service margin
('CSM') and gradually recognised in revenue as services are
provided over the duration of the insurance contract. The PVIF
asset will be eliminated to equity on transition, together with
other adjustments to assets and liabilities to reflect IFRS 17
measurement requirements and any consequential amendments to
financial assets in the scope of IFRS 9;
-- IFRS 17 requires increased use of current market values in
the measurement of insurance liabilities. Depending on the
measurement model, changes in market conditions for certain
products (measured under the General Measurement Approach) are
immediately recognised in profit or loss, while for other products
(measured under the Variable Fee Approach) they will be included in
the measurement of CSM.
-- In accordance with IFRS 17, directly attributable costs will
be included in the results of insurance services as profit is
recognised over the duration of insurance contracts. Costs that are
not directly attributable will remain in operating expenses. This
will result in a reduction in operating expenses compared with the
current accounting policy.
(d) Foreign currencies
HSBC's consolidated financial statements are presented in US
dollars because the US dollar and currencies linked to it form the
major currency bloc in which HSBC transacts and funds its business.
The US dollar is also HSBC Holdings' functional currency because
the US dollar and currencies linked to it are the most significant
currencies relevant to the underlying transactions, events and
conditions of its subsidiaries, as well as representing a
significant proportion of its funds generated from financing
activities.
Transactions in foreign currencies are recorded at the rate of
exchange on the date of the transaction. Assets and liabilities
denominated in foreign currencies are translated at the rate of
exchange at the balance sheet date, except non-monetary assets and
liabilities measured at historical cost, which are translated using
the rate of exchange at the initial transaction date. Exchange
differences are included in other comprehensive income or in the
income statement depending on where the gain or loss on the
underlying item is recognised. In the consolidated financial
statements, the assets and liabilities of branches, subsidiaries,
joint ventures and associates whose functional currency is not US
dollars are translated into the Group's presentation currency at
the rate of exchange at the balance sheet date, while their results
are translated into US dollars at the average rates of exchange for
the reporting period. Exchange differences arising are recognised
in other comprehensive income. On disposal of a foreign operation,
exchange differences previously recognised in other comprehensive
income are reclassified to the income statement.
(e) Presentation of information
Certain disclosures required by IFRSs have been included in the
sections marked as ('Audited') in this Annual Report and Accounts
2020 as follows:
-- disclosures concerning the nature and extent of risks
relating to insurance contracts and financial instruments are
included in the 'Risk review' on pages 106 to 194;
-- the 'Own funds disclosure' included in the 'Risk review' on page 174; and
-- disclosures relating to HSBC's securitisation activities and
structured products are included in the 'Risk review' on pages 106
to 194.
HSBC follows the UK Finance Disclosure Code ('the UKF Disclosure
Code'). The UKF Disclosure Code aims to increase the quality and
comparability of UK banks' disclosures and sets out five disclosure
principles together with supporting guidance agreed in 2010. In
line with the principles of the UKF Disclosure Code, HSBC assesses
good practice recommendations issued from time to time by relevant
regulators and standard setters, and will assess the applicability
and relevance of such guidance, enhancing disclosures where
appropriate.
(f) Critical accounting estimates and judgements
The preparation of financial information requires the use of
estimates and judgements about future conditions. In view of the
inherent uncertainties and the high level of subjectivity involved
in the recognition or measurement of items, highlighted as the
'critical accounting estimates and judgements' in section 1.2 below
(including impairment of non-financial assets for the first time),
it is possible that the outcomes in the next financial year could
differ from those on which management's estimates are based. This
could result in materially different estimates and judgements from
those reached by management for the purposes of these financial
statements. Management's selection of HSBC's accounting policies
that contain critical estimates and judgements reflects the
materiality of the items to which the policies are applied and the
high degree of judgement and estimation uncertainty involved.
(g) Segmental analysis
HSBC's Chief Operating Decision Maker is the Group Chief
Executive, who is supported by the rest of the Group Executive
Committee ('GEC'), which operates as a general management committee
under the direct authority of the Board. Operating segments are
reported in a manner consistent with the internal reporting
provided to the Group Chief Executive and the GEC.
Measurement of segmental assets, liabilities, income and
expenses is in accordance with the Group's accounting policies.
Segmental income and expenses include transfers between segments,
and these transfers are conducted at arm's length. Shared costs are
included in segments on the basis of the actual recharges made.
(h) Going concern
The financial statements are prepared on a going concern basis,
as the Directors are satisfied that the Group and parent company
have the resources to continue in business for the foreseeable
future. In making this assessment, the Directors have considered a
wide range of information relating to present and future
conditions, including future projections of profitability, cash
flows, capital requirements and capital resources. These
considerations include stressed scenarios that reflect the
increasing uncertainty that the global Covid-19 outbreak has had on
HSBC's operations, as well as considering potential impacts from
other top and emerging risks, and the related impact on
profitability, capital and liquidity.
1.2 Summary of significant accounting policies
(a) Consolidation and related policies
Investments in subsidiaries
Where an entity is governed by voting rights, HSBC consolidates
when it holds - directly or indirectly - the necessary voting
rights to pass resolutions by the governing body. In all other
cases, the assessment of control is more complex and requires
judgement of other factors, including having exposure to
variability of returns, power to direct relevant activities, and
whether power is held as agent or principal.
Business combinations are accounted for using the acquisition
method. The amount of non-controlling interest is measured either
at fair value or at the non-controlling interest's proportionate
share of the acquiree's identifiable net assets. This election is
made for each business combination.
HSBC Holdings' investments in subsidiaries are stated at cost
less impairment losses.
Goodwill
Goodwill is allocated to cash-generating units ('CGUs') for the
purpose of impairment testing, which is undertaken at the lowest
level at which goodwill is monitored for internal management
purposes. HSBC's CGUs are based on geographical regions subdivided
by global business, except for Global Banking and Markets, for
which goodwill is monitored on a global basis.
Impairment testing is performed at least once a year, or
whenever there is an indication of impairment, by comparing the
recoverable amount of a CGU with its carrying amount.
Goodwill is included in a disposal group if the disposal group
is a CGU to which goodwill has been allocated or it is an operation
within such a CGU. The amount of goodwill included in a disposal
group is measured on the basis of the relative values of the
operation disposed of and the portion of the CGU retained.
Critical accounting estimates and judgements
The review of goodwill and non-financial assets (see Note 1.2(n)) for
impairment reflects management's best estimate of the future cash flows
of the CGUs and the rates used to discount these cash flows, both of
which are subject to uncertain factors as follows:
* The accuracy of forecast cash flows is subject to a * The future cash flows of the CGUs are sensitive to
high degree of uncertainty in volatile market the cash flows projected for the periods for which
conditions. Where such circumstances are determined detailed forecasts are available and to assumptions
to exist, management re-tests goodwill for impairment regarding the long-term pattern of sustainable cash
more frequently than once a year when indicators of flows thereafter. Forecasts are compared with actual
impairment exist. This ensures that the assumptions performance and verifiable economic data, but they
on which the cash flow forecasts are based continue reflect management's view of future business
to reflect current market conditions and management's prospects at the time of the assessment
best estimate of future business prospects
* The rates used to discount future expected cash flows
can have a significant effect on their valuation, and
are based on the costs of capital assigned to
individual CGUs. The cost of capital percentage is
generally derived from a capital asset pricing model,
which incorporates inputs reflecting a number of
financial and economic variables, including the
risk-free interest rate in the country concerned and
a premium for the risk of the business being
evaluated. These variables are subject to
fluctuations in external market rates and economic
conditions beyond management's control
* Key assumptions used in estimating goodwill and
non-financial asset impairment are described in Note
21
=========================================================== ===========================================================
HSBC sponsored structured entities
HSBC is considered to sponsor another entity if, in addition to
ongoing involvement with the entity, it had a key role in
establishing that entity or in bringing together relevant
counterparties so the transaction that is the purpose of the entity
could occur. HSBC is generally not considered a sponsor if the only
involvement with the entity is merely administrative.
Interests in associates and joint arrangements
Joint arrangements are investments in which HSBC, together with
one or more parties, has joint control. Depending on HSBC's rights
and obligations, the joint arrangement is classified as either a
joint operation or a joint venture. HSBC classifies investments in
entities over which it has significant influence, and that are
neither subsidiaries nor joint arrangements, as associates.
HSBC recognises its share of the assets, liabilities and results
in a joint operation. Investments in associates and interests in
joint ventures are recognised using the equity method. The
attributable share of the results and reserves of joint ventures
and associates is included in the consolidated financial statements
of HSBC based on either financial statements made up to 31 December
or pro-rated amounts adjusted for any material transactions or
events occurring between the date the financial statements are
available and 31 December.
Investments in associates and joint ventures are assessed at
each reporting date and tested for impairment when there is an
indication that the investment may be impaired. Goodwill on
acquisitions of interests in joint ventures and associates is not
tested separately for impairment, but is assessed as part of the
carrying amount of the investment.
Critical accounting estimates and judgements
The most significant critical accounting estimates relate to the assessment
of impairment of our investment in Bank of Communications Co. Limited
('BoCom'), which involves estimations of value in use:
* Management's best estimate of BoCom's earnings are
based on management's explicit forecasts over the
short to medium term and the capital maintenance
charge, which is management's forecast of the
earnings that need to be withheld in order for BoCom
to meet regulatory requirements over the forecast
period, both of which are subject to uncertain
factors
* Key assumptions used in estimating BoCom's value in
use, the sensitivity of the value in use calculations
to different assumptions and a sensitivity analysis
that shows the changes in key assumptions that would
reduce the excess of value in use over the carrying
amount (the 'headroom') to nil are described in Note
18
===========================================================================
(b) Income and expense
Operating income
Interest income and expense
Interest income and expense for all financial instruments,
excluding those classified as held for trading or designated at
fair value, are recognised in 'Interest income' and 'Interest
expense' in the income statement using the effective interest
method. However, as an exception to this, interest on debt
instruments issued by HSBC for funding purposes that are designated
under the fair value option to reduce an accounting mismatch and on
derivatives managed in conjunction with those debt instruments is
included in interest expense.
Interest on credit-impaired financial assets is recognised using
the rate of interest used to discount the future cash flows for the
purpose of measuring the impairment loss.
Non-interest income and expense
HSBC generates fee income from services provided at a fixed
price over time, such as account service and card fees, or when
HSBC delivers a specific transaction at a point in time, such as
broking services and import/export services. With the exception of
certain fund management and performance fees, all other fees are
generated at a fixed price. Fund management and performance fees
can be variable depending on the size of the customer portfolio and
HSBC's performance as fund manager. Variable fees are recognised
when all uncertainties are resolved. Fee income is generally earned
from short-term contracts with payment terms that do not include a
significant financing component.
HSBC acts as principal in the majority of contracts with
customers, with the exception of broking services. For most
brokerage trades, HSBC acts as agent in the transaction and
recognises broking income net of fees payable to other parties in
the arrangement.
HSBC recognises fees earned on transaction-based arrangements at
a point in time when it has fully provided the service to the
customer. Where the contract requires services to be provided over
time, income is recognised on a systematic basis over the life of
the agreement.
Where HSBC offers a package of services that contains multiple
non-distinct performance obligations, such as those included in
account service packages, the promised services are treated as a
single performance obligation. If a package of services contains
distinct performance obligations, such as those including both
account and insurance services, the corresponding transaction price
is allocated to each performance obligation based on the estimated
stand-alone selling prices.
Dividend income is recognised when the right to receive payment
is established. This is the ex-dividend date for listed equity
securities, and usually the date when shareholders approve the
dividend for unlisted equity securities.
Net income/(expense) from financial instruments measured at fair
value through profit or loss includes the following:
-- 'Net income from financial instruments held for trading or
managed on a fair value basis': This comprises net trading income,
which includes all gains and losses from changes in the fair value
of financial assets and financial liabilities held for trading and
other financial instruments managed on a fair value basis, together
with the related interest income, expense and dividends, excluding
the effect of changes in the credit risk of liabilities managed on
a fair value basis. It also includes all gains and losses from
changes in the fair value of derivatives that are managed in
conjunction with financial assets and liabilities measured at fair
value through profit or loss.
-- 'Net income/(expense) from assets and liabilities of
insurance businesses, including related derivatives, measured at
fair value through profit or loss': This includes interest income,
interest expense and dividend income in respect of financial assets
and liabilities measured at fair value through profit or loss; and
those derivatives managed in conjunction with the above that can be
separately identifiable from other trading derivatives.
-- 'Changes in fair value of designated debt instruments and
related derivatives': Interest paid on debt instruments and
interest cash flows on related derivatives is presented in interest
expense where doing so reduces an accounting mismatch.
-- 'Changes in fair value of other financial instruments
mandatorily measured at fair value through profit or loss': This
includes interest on instruments that fail the solely payments of
principal and interest test, see (d) below.
The accounting policies for insurance premium income are
disclosed in Note 1.2(j).
(c) Valuation of financial instruments
All financial instruments are initially recognised at fair
value. Fair value is the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. The fair value
of a financial instrument on initial recognition is generally its
transaction price (that is, the fair value of the consideration
given or received). However, if there is a difference between the
transaction price and the fair value of financial instruments whose
fair value is based on a quoted price in an active market or a
valuation technique that uses only data from observable markets,
HSBC recognises the difference as a trading gain or loss at
inception (a 'day 1 gain or loss'). In all other cases, the entire
day 1 gain or loss is deferred and recognised in the income
statement over the life of the transaction until the transaction
matures, is closed out, the valuation inputs become observable or
HSBC enters into an offsetting transaction. The fair value of
financial instruments is generally measured on an individual basis.
However,
in cases where HSBC manages a group of financial assets and
liabilities according to its net market or credit risk exposure,
the fair value of the group of financial instruments is measured on
a net basis but the underlying financial assets and liabilities are
presented separately in the financial statements, unless they
satisfy the IFRS offsetting criteria.
Critical accounting estimates and judgements
The majority of valuation techniques employ only observable market data.
However, certain financial instruments are classified on the basis of
valuation techniques that feature one or more significant market inputs
that are unobservable, and for them, the measurement of fair value is
more judgemental:
=======================================================================================================================
* An instrument in its entirety is classified as valued * Details on the Group's level 3 financial instruments
using significant unobservable inputs if, in the and the sensitivity of their valuation to the effect
opinion of management, a significant proportion of of applying reasonable possible alternative
the instrument's inception profit or greater than 5% assumptions in determining their fair value are set
of the instrument's valuation is driven by out in Note 12
unobservable inputs
* 'Unobservable' in this context means that there is
little or no current market data available from which
to determine the price at which an arm's length
transaction would be likely to occur. It generally
does not mean that there is no data available at all
upon which to base a determination of fair value
(consensus pricing data may, for example, be used)
=========================================================== ==========================================================
(d) Financial instruments measured at amortised cost
Financial assets that are held to collect the contractual cash
flows and which contain contractual terms that give rise on
specified dates to cash flows that are solely payments of principal
and interest are measured at amortised cost. Such financial assets
include most loans and advances to banks and customers and some
debt securities. In addition, most financial liabilities are
measured at amortised cost. HSBC accounts for regular way amortised
cost financial instruments using trade date accounting. The
carrying value of these financial assets at initial recognition
includes any directly attributable transactions costs. If the
initial fair value is lower than the cash amount advanced, such as
in the case of some leveraged finance and syndicated lending
activities, the difference is deferred and recognised over the life
of the loan through the recognition of interest income.
HSBC may commit to underwriting loans on fixed contractual terms
for specified periods of time. When the loan arising from the
lending commitment is expected to be held for trading, the
commitment to lend is recorded as a derivative. When HSBC intends
to hold the loan, the loan commitment is included in the impairment
calculations set out below.
Non-trading reverse repurchase, repurchase and similar
agreements
When debt securities are sold subject to a commitment to
repurchase them at a predetermined price ('repos'), they remain on
the balance sheet and a liability is recorded in respect of the
consideration received. Securities purchased under commitments to
resell ('reverse repos') are not recognised on the balance sheet
and an asset is recorded in respect of the initial consideration
paid. Non-trading repos and reverse repos are measured at amortised
cost. The difference between the sale and repurchase price or
between the purchase and resale price is treated as interest and
recognised in net interest income over the life of the
agreement.
Contracts that are economically equivalent to reverse repo or
repo agreements (such as sales or purchases of debt securities
entered into together with total return swaps with the same
counterparty) are accounted for similarly to, and presented
together with, reverse repo or repo agreements.
(e) Financial assets measured at fair value through other comprehensive income
Financial assets held for a business model that is achieved by
both collecting contractual cash flows and selling and which
contain contractual terms that give rise on specified dates to cash
flows that are solely payments of principal and interest are
measured at fair value through other comprehensive income
('FVOCI'). These comprise primarily debt securities. They are
recognised on the trade date when HSBC enters into contractual
arrangements to purchase and are normally derecognised when they
are either sold or redeemed. They are subsequently remeasured at
fair value and changes therein (except for those relating to
impairment, interest income and foreign currency exchange gains and
losses) are recognised in other comprehensive income until the
assets are sold. Upon disposal, the cumulative gains or losses in
other comprehensive income are recognised in the income statement
as 'Gains less losses from financial instruments'. Financial assets
measured at FVOCI are included in the impairment calculations set
out below and impairment is recognised in profit or loss.
(f) Equity securities measured at fair value with fair value
movements presented in other comprehensive income
The equity securities for which fair value movements are shown
in other comprehensive income are business facilitation and other
similar investments where HSBC holds the investments other than to
generate a capital return. Gains or losses on the derecognition of
these equity securities are not transferred to profit or loss.
Otherwise, equity securities are measured at fair value through
profit or loss (except for dividend income, which is recognised in
profit or loss).
(g) Financial instruments designated at fair value through profit or loss
Financial instruments, other than those held for trading, are
classified in this category if they meet one or more of the
criteria set out below and are so designated irrevocably at
inception:
-- the use of the designation removes or significantly reduces an accounting mismatch;
-- a group of financial assets and liabilities or a group of
financial liabilities is managed and its performance is evaluated
on a fair value basis, in accordance with a documented risk
management or investment strategy; and
-- the financial liability contains one or more non-closely related embedded derivatives.
Designated financial assets are recognised when HSBC enters into
contracts with counterparties, which is generally on trade date,
and are normally derecognised when the rights to the cash flows
expire or are transferred. Designated financial liabilities are
recognised when HSBC enters into contracts with counterparties,
which is generally on settlement date, and are normally
derecognised when extinguished. Subsequent changes in fair values
are recognised in the income statement in 'Net income from
financial instruments held for trading or managed on a fair value
basis' or 'Net income/(expense) from assets and liabilities of
insurance businesses, including related derivatives, measured at
fair value through profit or loss' except for the effect of changes
in the liabilities' credit risk, which is presented in 'Other
comprehensive income', unless that treatment would create or
enlarge an accounting mismatch in profit or loss.
Under the above criterion, the main classes of financial
instruments designated by HSBC are:
-- Debt instruments for funding purposes that are designated to
reduce an accounting mismatch: The interest and/or foreign exchange
exposure on certain fixed-rate debt securities issued has been
matched with the interest and/or foreign exchange exposure on
certain swaps as part of a documented risk management strategy.
-- Financial assets and financial liabilities under unit-linked
and non-linked investment contracts: A contract under which HSBC
does not accept significant insurance risk from another party is
not classified as an insurance contract, other than investment
contracts with discretionary participation features ('DPF'), but is
accounted for as a financial liability. Customer liabilities under
linked and certain non-linked investment contracts issued by
insurance subsidiaries are determined based on the fair value of
the assets held in the linked funds. If no fair value designation
was made for the related assets, at least some of the assets would
otherwise be measured at either fair value through other
comprehensive income or amortised cost. The related financial
assets and liabilities are managed and reported to management on a
fair value basis. Designation at fair value of the financial assets
and related liabilities allows changes in fair values to be
recorded in the income statement and presented in the same
line.
-- Financial liabilities that contain both deposit and
derivative components: These financial liabilities are managed and
their performance evaluated on a fair value basis.
(h) Derivatives
Derivatives are financial instruments that derive their value
from the price of underlying items such as equities, interest rates
or other indices. Derivatives are recognised initially and are
subsequently measured at fair value through profit or loss.
Derivatives are classified as assets when their fair value is
positive or as liabilities when their fair value is negative. This
includes embedded derivatives in financial liabilities, which are
bifurcated from the host contract when they meet the definition of
a derivative on a stand-alone basis.
Where the derivatives are managed with debt securities issued by
HSBC that are designated at fair value, the contractual interest is
shown in 'Interest expense' together with the interest payable on
the issued debt.
Hedge accounting
When derivatives are not part of fair value designated
relationships, if held for risk management purposes they are
designated in hedge accounting relationships where the required
criteria for documentation and hedge effectiveness are met. HSBC
uses these derivatives or, where allowed, other non-derivative
hedging instruments in fair value hedges, cash flow hedges or
hedges of net investments in foreign operations as appropriate to
the risk being hedged.
Fair value hedge
Fair value hedge accounting does not change the recording of
gains and losses on derivatives and other hedging instruments, but
results in recognising changes in the fair value of the hedged
assets or liabilities attributable to the hedged risk that would
not otherwise be recognised in the income statement. If a hedge
relationship no longer meets the criteria for hedge accounting,
hedge accounting is discontinued and the cumulative adjustment to
the carrying amount of the hedged item is amortised to the income
statement on a recalculated effective interest rate, unless the
hedged item has been derecognised, in which case it is recognised
in the income statement immediately.
Cash flow hedge
The effective portion of gains and losses on hedging instruments
is recognised in other comprehensive income and the ineffective
portion of the change in fair value of derivative hedging
instruments that are part of a cash flow hedge relationship is
recognised immediately in the income statement within 'Net income
from financial instruments held for trading or managed on a fair
value basis'. The accumulated gains and losses recognised in other
comprehensive income are reclassified to the income statement in
the same periods in which the hedged item affects profit or loss.
When a hedge relationship is discontinued, or partially
discontinued, any cumulative gain or loss recognised in other
comprehensive income remains in equity until the forecast
transaction is recognised in the income statement. When a forecast
transaction is no longer expected to occur, the cumulative gain or
loss previously recognised in other comprehensive income is
immediately reclassified to the income statement.
Net investment hedge
Hedges of net investments in foreign operations are accounted
for in a similar way to cash flow hedges. The effective portion of
gains and losses on the hedging instrument is recognised in other
comprehensive income and other gains and losses are recognised
immediately in the income statement. Gains and losses previously
recognised in other comprehensive income are reclassified to the
income statement on the disposal, or part disposal, of the foreign
operation.
Derivatives that do not qualify for hedge accounting
Non-qualifying hedges are derivatives entered into as economic
hedges of assets and liabilities for which hedge accounting was not
applied.
(i) Impairment of amortised cost and FVOCI financial assets
Expected credit losses ('ECL') are recognised for loans and
advances to banks and customers, non-trading reverse repurchase
agreements, other financial assets held at amortised cost, debt
instruments measured at FVOCI, and certain loan commitments and
financial guarantee contracts. At initial recognition, allowance
(or provision in the case of some loan commitments and financial
guarantees) is required for ECL resulting from default events that
are possible within the next 12 months, or less, where the
remaining life is less than 12 months ('12-month ECL'). In the
event of a significant increase in credit risk, allowance (or
provision) is required for ECL resulting from all possible default
events over the expected life of the financial instrument
('lifetime ECL'). Financial assets where
12-month ECL is recognised are considered to be 'stage 1';
financial assets that are considered to have experienced a
significant increase in credit risk are in 'stage 2'; and financial
assets for which there is objective evidence of impairment so are
considered to be in default or otherwise credit impaired are in
'stage 3'. Purchased or originated credit-impaired financial assets
('POCI') are treated differently, as set out below.
Credit impaired (stage 3)
HSBC determines that a financial instrument is credit impaired
and in stage 3 by considering relevant objective evidence,
primarily whether:
-- contractual payments of either principal or interest are past due for more than 90 days;
-- there are other indications that the borrower is unlikely to
pay, such as when a concession has been granted to the borrower for
economic or legal reasons relating to the borrower's financial
condition; and
-- the loan is otherwise considered to be in default.
If such unlikeliness to pay is not identified at an earlier
stage, it is deemed to occur when an exposure is 90 days past due,
even where regulatory rules permit default to be defined based on
180 days past due. Therefore, the definitions of credit impaired
and default are aligned as far as possible so that stage 3
represents all loans that are considered defaulted or otherwise
credit impaired.
Interest income is recognised by applying the effective interest
rate to the amortised cost amount, i.e. gross carrying amount less
ECL allowance.
Write-off
Financial assets (and the related impairment allowances) are
normally written off, either partially or in full, when there is no
realistic prospect of recovery. Where loans are secured, this is
generally after receipt of any proceeds from the realisation of
security. In circumstances where the net realisable value of any
collateral has been determined and there is no reasonable
expectation of further recovery, write-off may be earlier.
Renegotiation
Loans are identified as renegotiated and classified as credit
impaired when we modify the contractual payment terms due to
significant credit distress of the borrower. Renegotiated loans
remain classified as credit impaired until there is sufficient
evidence to demonstrate a significant reduction in the risk of
non-payment of future cash flows and retain the designation of
renegotiated until maturity or derecognition.
A loan that is renegotiated is derecognised if the existing
agreement is cancelled and a new agreement is made on substantially
different terms, or if the terms of an existing agreement are
modified such that the renegotiated loan is a substantially
different financial instrument. Any new loans that arise following
derecognition events in these circumstances are considered to be
POCI and will continue to be disclosed as renegotiated loans.
Other than originated credit-impaired loans, all other modified
loans could be transferred out of stage 3 if they no longer exhibit
any evidence of being credit impaired and, in the case of
renegotiated loans, there is sufficient evidence to demonstrate a
significant reduction in the risk of non-payment of future cash
flows over the minimum observation period, and there are no other
indicators of impairment. These loans could be transferred to stage
1 or 2 based on the mechanism as described below by comparing the
risk of a default occurring at the reporting date (based on the
modified contractual terms) and the risk of a default occurring at
initial recognition (based on the original, unmodified contractual
terms). Any amount written off as a result of the modification of
contractual terms would not be reversed.
Loan modifications other than renegotiated loans
Loan modifications that are not identified as renegotiated are
considered to be commercial restructuring. Where a commercial
restructuring results in a modification (whether legalised through
an amendment to the existing terms or the issuance of a new loan
contract) such that HSBC's rights to the cash flows under the
original contract have expired, the old loan is derecognised and
the new loan is recognised at fair value. The rights to cash flows
are generally considered to have expired if the commercial
restructure is at market rates and no payment-related concession
has been provided. Mandatory and general offer loan modifications
that are not borrower-specific, for example market-wide customer
relief programmes, have not been classified as renegotiated loans
and generally have not resulted in derecognition, but their stage
allocation is determined considering all available and supportable
information under our ECL impairment policy.
Significant increase in credit risk (stage 2)
An assessment of whether credit risk has increased significantly
since initial recognition is performed at each reporting period by
considering the change in the risk of default occurring over the
remaining life of the financial instrument. The assessment
explicitly or implicitly compares the risk of default occurring at
the reporting date compared with that at initial recognition,
taking into account reasonable and supportable information,
including information about past events, current conditions and
future economic conditions. The assessment is unbiased,
probability-weighted, and to the extent relevant, uses
forward-looking information consistent with that used in the
measurement of ECL. The analysis of credit risk is multifactor. The
determination of whether a specific factor is relevant and its
weight compared with other factors depends on the type of product,
the characteristics of the financial instrument and the borrower,
and the geographical region. Therefore, it is not possible to
provide a single set of criteria that will determine what is
considered to be a significant increase in credit risk, and these
criteria will differ for different types of lending, particularly
between retail and wholesale. However, unless identified at an
earlier stage, all financial assets are deemed to have suffered a
significant increase in credit risk when 30 days past due. In
addition, wholesale loans that are individually assessed, which are
typically corporate and commercial customers, and included on a
watch or worry list, are included in stage 2.
For wholesale portfolios, the quantitative comparison assesses
default risk using a lifetime probability of default ('PD'), which
encompasses a wide range of information including the obligor's
customer risk rating ('CRR'), macroeconomic condition forecasts and
credit transition probabilities. For origination CRRs up to 3.3,
significant increase in credit risk is measured by comparing the
average PD for the remaining term estimated at origination with the
equivalent estimation at the reporting date. The quantitative
measure of significance varies depending on the credit quality at
origination as follows:
0.1-1.2 15bps
------- -----
2.1-3.3 30bps
------- -----
For CRRs greater than 3.3 that are not impaired, a significant
increase in credit risk is considered to have occurred when the
origination PD has doubled. The significance of changes in PD was
informed by expert credit risk judgement, referenced to historical
credit migrations and to relative changes in external market
rates.
For loans originated prior to the implementation of IFRS 9, the
origination PD does not include adjustments to reflect expectations
of future macroeconomic conditions since these are not available
without the use of hindsight. In the absence of this data,
origination PD must be approximated assuming through-the-cycle
('TTC') PDs and TTC migration probabilities, consistent with the
instrument's underlying modelling approach and the CRR at
origination. For these loans, the quantitative comparison is
supplemented with additional CRR deterioration-based thresholds, as
set out in the table below:
0.1 5 notches
------- ---------
1.1-4.2 4 notches
------- ---------
4.3-5.1 3 notches
------- ---------
5.2-7.1 2 notches
------- ---------
7.2-8.2 1 notch
------- ---------
8.3 0 notch
------- ---------
Further information about the 23-grade scale used for CRR can be
found on page 121.
For certain portfolios of debt securities where external market
ratings are available and credit ratings are not used in credit
risk management, the debt securities will be in stage 2 if their
credit risk increases to the extent they are no longer considered
investment grade. Investment grade is where the financial
instrument has a low risk of incurring losses, the structure has a
strong capacity to meet its contractual cash flow obligations in
the near term, and adverse changes in economic and business
conditions in the longer term may, but will not necessarily, reduce
the ability of the borrower to fulfil their contractual cash flow
obligations.
For retail portfolios, default risk is assessed using a
reporting date 12-month PD derived from credit scores, which
incorporates all available information about the customer. This PD
is adjusted for the effect of macroeconomic forecasts for periods
longer than
12 months and is considered to be a reasonable approximation of
a lifetime PD measure. Retail exposures are first segmented into
homogeneous portfolios, generally by country, product and brand.
Within each portfolio, the stage 2 accounts are defined as accounts
with an adjusted 12-month PD greater than the average 12-month PD
of loans in that portfolio 12 months before they become 30 days
past due. The expert credit risk judgement is that no prior
increase in credit risk is significant. This portfolio-specific
threshold identifies loans with a PD higher than would be expected
from loans that are performing as originally expected, and higher
than what would have been acceptable at origination. It therefore
approximates a comparison of origination to reporting date PDs.
Unimpaired and without significant increase in credit risk
(stage 1)
ECL resulting from default events that are possible within the
next 12 months ('12-month ECL') are recognised for financial
instruments that remain in stage 1.
Purchased or originated credit impaired
Financial assets that are purchased or originated at a deep
discount that reflects the incurred credit losses are considered to
be POCI. This population includes the recognition of a new
financial instrument following a renegotiation where concessions
have been granted for economic or contractual reasons relating to
the borrower's financial difficulty that otherwise would not have
been considered. The amount of change-in-lifetime ECL is recognised
in profit or loss until the POCI is derecognised, even if the
lifetime ECL are less than the amount of ECL included in the
estimated cash flows on initial recognition.
Movement between stages
Financial assets can be transferred between the different
categories (other than POCI) depending on their relative increase
in credit risk since initial recognition. Financial instruments are
transferred out of stage 2 if their credit risk is no longer
considered to be significantly increased since initial recognition
based on the assessments described above. Except for renegotiated
loans, financial instruments are transferred out of stage 3 when
they no longer exhibit any evidence of credit impairment as
described above. Renegotiated loans that are not POCI will continue
to be in stage 3 until there is sufficient evidence to demonstrate
a significant reduction in the risk of non-payment of future cash
flows, observed over a minimum one-year period and there are no
other indicators of impairment. For loans that are assessed for
impairment on a portfolio basis, the evidence typically comprises a
history of payment performance against the original or revised
terms, as appropriate to the circumstances. For loans that are
assessed for impairment on an individual basis, all available
evidence is assessed on a case-by-case basis.
Measurement of ECL
The assessment of credit risk and the estimation of ECL are
unbiased and probability-weighted, and incorporate all available
information that is relevant to the assessment including
information about past events, current conditions and reasonable
and supportable forecasts of future events and economic conditions
at the reporting date. In addition, the estimation of ECL should
take into account the time value of money.
In general, HSBC calculates ECL using three main components: a
probability of default, a loss given default ('LGD') and the
exposure at default ('EAD').
The 12-month ECL is calculated by multiplying the 12-month PD,
LGD and EAD. Lifetime ECL is calculated using the lifetime PD
instead. The 12-month and lifetime PDs represent the probability of
default occurring over the next 12 months and the remaining
maturity of the instrument respectively.
The EAD represents the expected balance at default, taking into
account the repayment of principal and interest from the balance
sheet date to the default event together with any expected
drawdowns of committed facilities. The LGD represents expected
losses on the EAD given the event of default, taking into account,
among other attributes, the mitigating effect of collateral value
at the time it is expected to be realised and the time value of
money.
HSBC leverages the Basel II IRB framework where possible, with
recalibration to meet the differing IFRS 9 requirements as set out
in the following table:
PD
* Through the cycle (represents long-run average PD * Point in time (based on current conditions, adjusted
throughout a full economic cycle) to take into account estimates of future conditions
that will impact PD)
* The definition of default includes a backstop of 90+
days past due, although this has been modified to * Default backstop of 90+ days past due for all
180+ days past due for some portfolios, particularly portfolios
UK and US mortgages
----- ----------------------------------------------------------- ------------------------------------------------------------
EAD
* Cannot be lower than current balance * Amortisation captured for term products
----- ----------------------------------------------------------- ------------------------------------------------------------
LGD
* Downturn LGD (consistent losses expected to be * Expected LGD (based on estimate of loss given default
suffered during a severe but plausible economic including the expected impact of future economic
downturn) conditions such as changes in value of collateral)
* Regulatory floors may apply to mitigate risk of * No floors
underestimating downturn LGD due to lack of
historical data
* Discounted using the original effective interest rate
of the loan
* Discounted using cost of capital
* Only costs associated with obtaining/selling
* All collection costs included collateral included
----- ----------------------------------------------------------- ------------------------------------------------------------
Other
* Discounted back from point of default to balance
sheet date
----- ----------------------------------------------------------- ------------------------------------------------------------
While 12-month PDs are recalibrated from Basel II models where
possible, the lifetime PDs are determined by projecting the
12-month PD using a term structure. For the wholesale methodology,
the lifetime PD also takes into account credit migration, i.e. a
customer migrating through the CRR bands over its life.
The ECL for wholesale stage 3 is determined on an individual
basis using a discounted cash flow ('DCF') methodology. The
expected future cash flows are based on the credit risk officer's
estimates as at the reporting date, reflecting reasonable and
supportable assumptions and projections of future recoveries and
expected future receipts of interest. Collateral is taken into
account if it is likely that the recovery of the outstanding amount
will include realisation of collateral based on the estimated fair
value of collateral at the time of expected realisation, less costs
for obtaining and selling the collateral. The cash flows are
discounted at a reasonable approximation of the original effective
interest rate. For significant cases, cash flows under four
different scenarios are probability-weighted by reference to the
economic scenarios applied more generally by the Group and the
judgement of the credit risk officer in relation to the likelihood
of the workout strategy succeeding or receivership being required.
For less significant cases, the effect of different economic
scenarios and work-out strategies is approximated and applied as an
adjustment to the most likely outcome.
Period over which ECL is measured
Expected credit loss is measured from the initial recognition of
the financial asset. The maximum period considered when measuring
ECL (be it 12-month or lifetime ECL) is the maximum contractual
period over which HSBC is exposed to credit risk. For wholesale
overdrafts, credit risk management actions are taken no less
frequently than on an annual basis and therefore this period is to
the expected date of the next substantive credit review. The date
of the substantive credit review also represents the initial
recognition of the new facility. However, where the financial
instrument includes both a drawn and undrawn commitment and the
contractual ability to demand repayment and cancel the undrawn
commitment does not serve to limit HSBC's exposure to credit risk
to the contractual notice period, the contractual period does not
determine the maximum period considered. Instead, ECL is measured
over the period HSBC remains exposed to credit risk that is not
mitigated by credit risk management actions. This applies to retail
overdrafts and credit cards, where the period is the average time
taken for stage 2 exposures to default or close as performing
accounts, determined on a portfolio basis and ranging from between
two and six years. In addition, for these facilities it is not
possible to identify the ECL on the loan commitment component
separately from the financial asset component. As a result, the
total ECL is recognised in the loss allowance for the financial
asset unless the total ECL exceeds the gross carrying amount of the
financial asset, in which case the ECL is recognised as a
provision.
Forward-looking economic inputs
HSBC applies multiple forward-looking global economic scenarios
determined with reference to external forecast distributions
representative of our view of forecast economic conditions. This
approach is considered sufficient to calculate unbiased expected
loss in most economic environments. In certain economic
environments, additional analysis may be necessary and may result
in additional scenarios or adjustments, to reflect a range of
possible economic outcomes sufficient for an unbiased estimate. The
detailed methodology is disclosed in 'Measurement uncertainty and
sensitivity analysis of ECL estimates' on page 127.
Critical accounting estimates and judgements
The calculation of the Group's ECL under IFRS 9 requires the Group to
make a number of judgements, assumptions and estimates. The most significant
are set out below:
======================================================================================================================
* Defining what is considered to be a significant * The sections marked as audited on pages 127 to 141,
increase in credit risk 'Measurement uncertainty and sensitivity analysis of
ECL estimates' set out the assumptions used in
determining ECL and provide an indication of the
* Determining the lifetime and point of initial sensitivity of the result to the application of
recognition of overdrafts and credit cards different weightings being applied to different
economic assumptions
* Selecting and calibrating the PD, LGD and EAD models
,
which support the calculations, including making
reasonable and supportable judgements about how
models react to current and future economic
conditions
* Selecting model inputs and economic forecasts,
including determining whether sufficient and
appropriately weighted economic forecasts are
incorporated to calculate unbiased expected loss
* Making management adjustments to account for late
breaking events, model and data limitations and
deficiencies, and expert credit judgements
========================================================== ==========================================================
(j) Insurance contracts
A contract is classified as an insurance contract where HSBC
accepts significant insurance risk from another party by agreeing
to compensate that party on the occurrence of a specified uncertain
future event. An insurance contract may also transfer financial
risk, but is accounted for as an insurance contract if the
insurance risk is significant. In addition, HSBC issues investment
contracts with discretionary participation features ('DPF'), which
are also accounted for as insurance contracts as required by IFRS 4
'Insurance Contracts'.
Net insurance premium income
Premiums for life insurance contracts are accounted for when
receivable, except in unit-linked insurance contracts where
premiums are accounted for when liabilities are established.
Reinsurance premiums are accounted for in the same accounting
period as the premiums for the direct insurance contracts to which
they relate.
Net insurance claims and benefits paid and movements in
liabilities to policyholders
Gross insurance claims for life insurance contracts reflect the
total cost of claims arising during the year, including claim
handling costs and any policyholder bonuses allocated in
anticipation of a bonus declaration.
Maturity claims are recognised when due for payment. Surrenders
are recognised when paid or at an earlier date on which, following
notification, the policy ceases to be included within the
calculation of the related insurance liabilities. Death claims are
recognised when notified.
Reinsurance recoveries are accounted for in the same period as
the related claim.
Liabilities under insurance contracts
Liabilities under non-linked life insurance contracts are
calculated by each life insurance operation based on local
actuarial principles. Liabilities under unit-linked life insurance
contracts are at least equivalent to the surrender or transfer
value, which is calculated by reference to the value of the
relevant underlying funds or indices.
Future profit participation on insurance contracts with DPF
Where contracts provide discretionary profit participation
benefits to policyholders, liabilities for these contracts include
provisions for the future discretionary benefits to policyholders.
These provisions reflect the actual performance of the investment
portfolio to date and management's expectation of the future
performance of the assets backing the contracts, as well as other
experience factors such as mortality, lapses and operational
efficiency, where appropriate. The benefits to policyholders may be
determined by the contractual terms, regulation, or past
distribution policy.
Investment contracts with DPF
While investment contracts with DPF are financial instruments,
they continue to be treated as insurance contracts as required by
IFRS 4. The Group therefore recognises the premiums for these
contracts as revenue and recognises as an expense the resulting
increase in the carrying amount of the liability.
In the case of net unrealised investment gains on these
contracts, whose discretionary benefits principally reflect the
actual performance of the investment portfolio, the corresponding
increase in the liabilities is recognised in either the income
statement or other comprehensive income, following the treatment of
the unrealised gains on the relevant assets. In the case of net
unrealised losses, a deferred participating asset is recognised
only to the extent that its recoverability is highly probable.
Movements in the liabilities arising from realised gains and losses
on relevant assets are recognised in the income statement.
Present value of in-force long-term insurance business
HSBC recognises the value placed on insurance contracts and
investment contracts with DPF, which are classified as long-term
and in-force at the balance sheet date, as an asset. The asset
represents the present value of the equity holders' interest in the
issuing insurance companies' profits expected to emerge from these
contracts written at the balance sheet date. The present value of
in-force business ('PVIF') is determined by discounting those
expected future profits using appropriate assumptions in assessing
factors such as future mortality, lapse rates and levels of
expenses, and a risk discount rate that reflects the risk premium
attributable to the respective contracts. The PVIF incorporates
allowances for both non-market risk and the value of financial
options and guarantees. The PVIF asset is presented gross of
attributable tax in the balance sheet and movements in the PVIF
asset are included in 'Other operating income' on a gross of tax
basis.
(k) Employee compensation and benefits
Share-based payments
HSBC enters into both equity-settled and cash-settled
share-based payment arrangements with its employees as compensation
for the provision of their services.
The vesting period for these schemes may commence before the
legal grant date if the employees have started to render services
in respect of the award before the legal grant date, where there is
a shared understanding of the terms and conditions of the
arrangement. Expenses are recognised when the employee starts to
render service to which the award relates.
Cancellations result from the failure to meet a non-vesting
condition during the vesting period, and are treated as an
acceleration of vesting recognised immediately in the income
statement. Failure to meet a vesting condition by the employee is
not treated as a cancellation, and the amount of expense recognised
for the award is adjusted to reflect the number of awards expected
to vest.
Post-employment benefit plans
HSBC operates a number of pension schemes including defined
benefit, defined contribution and post-employment benefit
schemes.
Payments to defined contribution schemes are charged as an
expense as the employees render service.
Defined benefit pension obligations are calculated using the
projected unit credit method. The net charge to the income
statement mainly comprises the service cost and the net interest on
the net defined benefit asset or liability, and is presented in
operating expenses. Remeasurements of the net defined benefit asset
or liability, which comprise actuarial gains and losses, return on
plan assets excluding interest and the effect of the asset ceiling
(if any, excluding interest), are recognised immediately in other
comprehensive income. The net defined benefit asset or liability
represents the present value of defined benefit obligations reduced
by the fair value of plan assets (see policy (c)), after applying
the asset ceiling test, where the net defined benefit surplus is
limited to the present value of available refunds and reductions in
future contributions to the plan.
The cost of obligations arising from other post-employment plans
are accounted for on the same basis as defined benefit pension
plans.
Critical accounting estimates and judgements
The most significant critical accounting estimates relate to the determination
of key assumptions applied in calculating the defined benefit pension
obligation for the principal plan.
* A range of assumptions could be applied, and
different assumptions could significantly alter the
defined benefit obligation and the amounts recognised
in profit or loss or OCI.
* The calculation of the defined benefit pension
obligation includes assumptions with regard to the
discount rate, inflation rate, pension payments and
deferred pensions, pay and mortality. Management
determines these assumptions in consultation with the
plan's actuaries.
* Key assumptions used in calculating the defined
benefit pension obligation for the principal plan and
the sensitivity of the calculation to different
assumptions are described in Note 5
==============================================================================
(l) Tax
Income tax comprises current tax and deferred tax. Income tax is
recognised in the income statement except to the extent that it
relates to items recognised in other comprehensive income or
directly in equity, in which case the tax is recognised in the same
statement as the related item appears.
Current tax is the tax expected to be payable on the taxable
profit for the year and on any adjustment to tax payable in respect
of previous years. HSBC provides for potential current tax
liabilities that may arise on the basis of the amounts expected to
be paid to the tax authorities.
Deferred tax is recognised on temporary differences between the
carrying amounts of assets and liabilities in the balance sheet,
and the amounts attributed to such assets and liabilities for tax
purposes. Deferred tax is calculated using the tax rates expected
to apply in the periods in which the assets will be realised or the
liabilities settled.
Current and deferred tax are calculated based on tax rates and
laws enacted, or substantively enacted, by the balance sheet
date.
Critical accounting estimates and judgements
The recognition of deferred tax assets depends on judgements
==============================================================
* Assessing the probability and sufficiency of future
taxable profits, taking into account the future
reversal of existing taxable temporary differences
and tax planning strategies including corporate
reorganisations
============================================================
(m) Provisions, contingent liabilities and guarantees
Provisions
Provisions are recognised when it is probable that an outflow of
economic benefits will be required to settle a present legal or
constructive obligation that has arisen as a result of past events
and for which a reliable estimate can be made.
Critical accounting estimates and judgements
The recognition and measurement of provisions requires the Group to make
a number of judgements, assumptions and estimates. The most significant
are set out below:
========================================================================================================================
* Determining whether a present obligation exists. * Provisions for legal proceedings and regulatory
Professional advice is taken on the assessment of matters remain very sensitive to the assumptions used
litigation and similar obligations in the estimate. There could be a wider range of
possible outcomes for any pending legal proceedings,
investigations or inquiries. As a result it is often
* Provisions for legal proceedings and regulatory not practicable to quantify a range of possible
matters typically require a higher degree of outcomes for individual matters. It is also not
judgement than other types of provisions. When practicable to meaningfully quantify ranges of
matters are at an early stage, accounting judgements potential outcomes in aggregate for these types of
can be difficult because of the high degree of provisions because of the diverse nature and
uncertainty associated with determining whether a circumstances of such matters and the wide range of
present obligation exists, and estimating the uncertainties involved
probability and amount of any outflows that may
arise. As matters progress, management and legal
advisers evaluate on an ongoing basis whether * Provisions for customer remediation also require
provisions should be recognised, revising previous significant levels of estimation. The amounts of
estimates as appropriate. At more advanced stages, it provisions recognised depend on a number of different
is typically easier to make estimates around a better assumptions, the most significant of which are the
defined set of possible outcomes uphold rate and average redress for complaints yet to
be worked. More information about these assumptions
is included in Note 27
=========================================================== ===========================================================
Contingent liabilities, contractual commitments and
guarantees
Contingent liabilities
Contingent liabilities, which include certain guarantees and
letters of credit pledged as collateral security, and contingent
liabilities related to legal proceedings or regulatory matters, are
not recognised in the financial statements but are disclosed unless
the probability of settlement is remote.
Financial guarantee contracts
Liabilities under financial guarantee contracts that are not
classified as insurance contracts are recorded initially at their
fair value, which is generally the fee received or present value of
the fee receivable.
HSBC Holdings has issued financial guarantees and similar
contracts to other Group entities. HSBC elects to account for
certain guarantees as insurance contracts in HSBC Holdings'
financial statements, in which case they are measured and
recognised as insurance liabilities. This election is made on a
contract-by-contract basis, and is irrevocable.
(n) Impairment of non-financial assets
Software under development is tested for impairment at least
annually. Other non-financial assets are property, plant and
equipment, intangible assets (excluding goodwill) and right-of-use
assets. They are tested for impairment at the individual asset
level when there is indication of impairment at that level, or at
the CGU level for assets that do not have a recoverable amount at
the individual asset level. In addition, impairment is also tested
at the CGU level when there is indication of impairment at that
level. For this purpose, CGUs are considered to be the principal
operating legal entities divided by global business.
Impairment testing compares the carrying amount of the
non-financial asset or CGU with its recoverable amount, which is
the higher of the fair value less costs of disposal or the value in
use. The carrying amount of a CGU comprises the carrying value of
its assets and liabilities, including non-financial assets that are
directly attributable to it and non-financial assets that can be
allocated to it on a reasonable and consistent basis. Non-financial
assets that cannot be allocated to an individual CGU are tested for
impairment at an appropriate grouping of CGUs. The recoverable
amount of the CGU is the higher of the fair value less costs of
disposal of the CGU, which is determined by independent and
qualified valuers where relevant, and the value in use, which is
calculated based on appropriate inputs (see Note 21).
When the recoverable amount of a CGU is less than its carrying
amount, an impairment loss is recognised in the income statement to
the extent that the impairment can be allocated on a pro-rata basis
to the non-financial assets by reducing their carrying amounts to
the higher of their respective individual recoverable amount or
nil. Impairment is not allocated to the financial assets in a
CGU.
Impairment loss recognised in prior periods for non-financial
assets is reversed when there has been a change in the estimate
used to determine the recoverable amount. The impairment loss is
reversed to the extent that the carrying amount of the
non-financial assets would not exceed the amount that would have
been determined (net of amortisation or depreciation) had no
impairment loss been recognised in prior periods.
Critical accounting estimates and judgements
The review of goodwill and other non-financial assets for impairment
reflects management's best estimate of the future cash flows of the
CGUs and the rates used to discount these cash flows, both of which
are subject to uncertain factors as described in the Critical accounting
estimates and judgements in Note 1.2(a).
=========================================================================
2 Net fee income
--------------
Net fee income by global business
2020
Wealth Global
and Banking
Personal Commercial and Corporate
Banking Banking Markets Centre Total
$m $m $m $m $m
---------------------------- --------- ---------- -------- --------- ---------
Funds under management 1,686 126 477 - 2,289
---------------------------- --------- ---------- -------- --------- -------
Cards 1,564 360 25 - 1,949
---------------------------- --------- ---------- -------- --------- -------
Broking income 862 61 616 - 1,539
---------------------------- --------- ---------- -------- --------- -------
Credit facilities 93 740 626 - 1,459
---------------------------- --------- ---------- -------- --------- -------
Account services 431 598 264 - 1,293
---------------------------- --------- ---------- -------- --------- -------
Underwriting 5 9 1,002 (1) 1,015
---------------------------- --------- ---------- -------- --------- -------
Global custody 189 22 723 - 934
---------------------------- --------- ---------- -------- --------- -------
Unit trusts 881 18 - - 899
---------------------------- --------- ---------- -------- --------- -------
Remittances 77 313 288 (1) 677
---------------------------- --------- ---------- -------- --------- -------
Imports/exports - 417 160 - 577
---------------------------- --------- ---------- -------- --------- -------
Insurance agency commission 307 17 1 - 325
---------------------------- --------- ---------- -------- --------- -------
Other 1,123 893 2,369 (2,290) 2,095
---------------------------- --------- ---------- -------- --------- -------
Fee income 7,218 3,574 6,551 (2,292) 15,051
---------------------------- --------- ---------- -------- --------- -------
Less: fee expense (1,810) (349) (3,284) 2,266 (3,177)
---------------------------- --------- ---------- -------- --------- -------
Net fee income 5,408 3,225 3,267 (26) 11,874
---------------------------- --------- ---------- -------- --------- -------
2019(1) 2018
--------------------------------------------------- ---------
Wealth Global
and Banking
Personal Commercial and Corporate
Banking Banking Markets Centre Total Total
$m $m $m $m $m $m
---------------------------- --------- ---------- -------- --------- ------- ---------
Funds under management 1,597 120 460 - 2,177 2,221
---------------------------- --------- ---------- -------- --------- ------- -------
Cards 1,602 358 15 - 1,975 1,956
---------------------------- --------- ---------- -------- --------- ------- -------
Broking income 485 40 532 - 1,057 1,210
---------------------------- --------- ---------- -------- --------- ------- -------
Credit facilities 90 785 743 - 1,618 1,723
---------------------------- --------- ---------- -------- --------- ------- -------
Account services 991 654 365 (7) 2,003 2,177
---------------------------- --------- ---------- -------- --------- ------- -------
Underwriting 3 6 821 (1) 829 723
---------------------------- --------- ---------- -------- --------- ------- -------
Global custody 135 18 564 - 717 736
---------------------------- --------- ---------- -------- --------- ------- -------
Unit trusts 1,011 22 2 - 1,035 1,038
---------------------------- --------- ---------- -------- --------- ------- -------
Remittances 77 362 311 (3) 747 778
---------------------------- --------- ---------- -------- --------- ------- -------
Imports/exports 1 497 164 - 662 709
---------------------------- --------- ---------- -------- --------- ------- -------
Insurance agency commission 356 20 1 - 377 404
---------------------------- --------- ---------- -------- --------- ------- -------
Other 1,284 887 2,353 (2,282) 2,242 2,369
---------------------------- --------- ---------- -------- --------- ------- -------
Fee income 7,632 3,769 6,331 (2,293) 15,439 16,044
---------------------------- --------- ---------- -------- --------- ------- -------
Less: fee expense (1,998) (380) (3,292) 2,254 (3,416) (3,424)
---------------------------- --------- ---------- -------- --------- ------- -------
Net Fee income 5,634 3,389 3,039 (39) 12,023 12,620
---------------------------- --------- ---------- -------- --------- ------- -------
1 A change in reportable segments was made in 2020. Comparative
data have been re-presented accordingly. For further guidance, see
Note 10: Segmental Analysis on page 311.
Net fee income includes $5,858m of fees earned on financial
assets that are not at fair value through profit or loss, other
than amounts included in determining the effective interest rate
(2019: $6,647m; 2018: $7,522m), $1,260m of fees payable on
financial liabilities that are not at fair value through profit or
loss, other than amounts included in determining the effective
interest rate (2019: $1,450m; 2018: $1,682m), $3,426m of fees
earned on trust and other fiduciary activities (2019: $3,110m;
2018: $3,165m) and $267m of fees payable relating to trust and
other fiduciary activities (2019: $237m; 2018: $175m).
3 Net income from financial instruments measured at fair value through
profit or loss
--------------------------------------------------------------------
2020 2019 2018
Footnotes $m $m $m
----------------------------------------------------- --------- ------- ------- ---------
Net income/(expense) arising on:
----------------------------------------------------- --------- ------- ------- ---------
Net trading activities 11,074 16,121 6,982
----------------------------------------------------- --------- ------- ------- -------
Other instruments managed on a fair value
basis (1,492) (5,890) 2,549
----------------------------------------------------- --------- ------- ------- -------
Net income from financial instruments held
for trading or managed on a fair value basis 9,582 10,231 9,531
----------------------------------------------------- --------- ------- ------- -------
Financial assets held to meet liabilities
under insurance and investment contracts 2,481 3,830 (1,585)
----------------------------------------------------- --------- ------- ------- -------
Liabilities to customers under investment
contracts (400) (352) 97
----------------------------------------------------- --------- ------- ------- -------
Net income/(expense) from assets and liabilities
of insurance businesses, including related
derivatives, measured at fair value through
profit or loss 2,081 3,478 (1,488)
Derivatives managed in conjunction with HSBC's
issued debt securities 2,619 2,561 (626)
----------------------------------------------------- --------- ------- ------- -------
Other changes in fair value (2,388) (2,471) 529
----------------------------------------------------- --------- ------- ------- -------
Changes in fair value of designated debt and
related derivatives 1 231 90 (97)
----------------------------------------------------- --------- ------- ------- -------
Changes in fair value of other financial instruments
mandatorily measured at fair value through
profit or loss 455 812 695
----------------------------------------------------- --------- ------- ------- -------
Year ended 31 Dec 12,349 14,611 8,641
----------------------------------------------------- --------- ------- ------- -------
1 The debt instruments, issued for funding purposes, are
designated under the fair value option to reduce an accounting
mismatch.
HSBC Holdings
2020 2019 2018
$m $m $m
------------------------------------------------------------- ------- ------- -------
Net income/(expense) arising on:
------------------------------------------------------------- ------- ------- -------
- trading activities (336) (559) (176)
------------------------------------------------------------- ------- ------- -----
- other instruments managed on a fair value basis 1,137 2,036 421
------------------------------------------------------------- ------- ------- -----
Net income from financial instruments held for
trading or managed on a fair value basis 801 1,477 245
------------------------------------------------------------- ------- ------- -----
Derivatives managed in conjunction with HSBC Holdings-issued
debt securities 694 764 (337)
------------------------------------------------------------- ------- ------- -----
Other changes in fair value (1,020) (1,124) 260
------------------------------------------------------------- ------- ------- -----
Changes in fair value of designated debt and related
derivatives (326) (360) (77)
------------------------------------------------------------- ------- ------- -----
Changes in fair value of other financial instruments
mandatorily measured at fair value through profit
or loss 1,141 1,659 43
------------------------------------------------------------- ------- ------- -----
Year ended 31 Dec 1,616 2,776 211
------------------------------------------------------------- ------- ------- -----
4 Insurance business
------------------
Net insurance premium income
Investment
Linked contracts
Non-linked life with
insurance insurance DPF(1) Total
$m $m $m $m
--------------------------------------------- ---------- ----------- ---------- ---------
Gross insurance premium income 8,321 579 1,563 10,463
--------------------------------------------- ---------- ----------- ---------- -------
Reinsurers' share of gross insurance premium
income (362) (8) - (370)
--------------------------------------------- ---------- ----------- ---------- -------
Year ended 31 Dec 2020 7,959 571 1,563 10,093
--------------------------------------------- ---------- ----------- ---------- -------
Gross insurance premium income 9,353 489 2,266 12,108
--------------------------------------------- ---------- ----------- ---------- -------
Reinsurers' share of gross insurance premium
income (1,465) (7) - (1,472)
--------------------------------------------- ---------- ----------- ---------- -------
Year ended 31 Dec 2019 7,888 482 2,266 10,636
--------------------------------------------- ---------- ----------- ---------- -------
Gross insurance premium income 8,616 422 2,300 11,338
--------------------------------------------- ---------- ----------- ---------- -------
Reinsurers' share of gross insurance premium
income (672) (7) - (679)
--------------------------------------------- ---------- ----------- ---------- -------
Year ended 31 Dec 2018 7,944 415 2,300 10,659
--------------------------------------------- ---------- ----------- ---------- -------
1 Discretionary participation features.
Net insurance claims and benefits paid and movement in liabilities to
policyholders
Investment
Linked contracts
Non-linked life with
insurance insurance DPF(1) Total
$m $m $m $m
-------------------------------------------- ---------- ---------- ---------- ---------
Gross claims and benefits paid and movement
in liabilities 10,050 1,112 1,853 13,015
-------------------------------------------- ---------- ---------- ---------- -------
- claims, benefits and surrenders paid 3,695 900 2,083 6,678
--------------------------------------------
- movement in liabilities 6,355 212 (230) 6,337
-------------------------------------------- ---------- ---------- ---------- -------
Reinsurers' share of claims and benefits
paid and movement in liabilities (366) (4) - (370)
-------------------------------------------- ---------- ---------- ---------- -------
- claims, benefits and surrenders paid (430) (10) - (440)
--------------------------------------------
- movement in liabilities 64 6 - 70
-------------------------------------------- ---------- ---------- ---------- -------
Year ended 31 Dec 2020 9,684 1,108 1,853 12,645
-------------------------------------------- ---------- ---------- ---------- -------
Gross claims and benefits paid and movement
in liabilities 11,305 1,217 3,810 16,332
-------------------------------------------- ---------- ---------- ---------- -------
* claims, benefits and surrenders paid 3,783 900 1,921 6,604
--------------------------------------------
- movement in liabilities 7,522 317 1,889 9,728
-------------------------------------------- ---------- ---------- ---------- -------
Reinsurers' share of claims and benefits
paid and movement in liabilities (1,402) (4) - (1,406)
-------------------------------------------- ---------- ---------- ---------- -------
- claims, benefits and surrenders paid (411) (17) - (428)
--------------------------------------------
- movement in liabilities (991) 13 - (978)
-------------------------------------------- ---------- ---------- ---------- -------
Year ended 31 Dec 2019 9,903 1,213 3,810 14,926
-------------------------------------------- ---------- ---------- ---------- -------
Gross claims and benefits paid and movement
in liabilities 8,943 (446) 1,724 10,221
-------------------------------------------- ---------- ---------- ---------- -------
- claims, benefits and surrenders paid 3,852 1,088 1,869 6,809
--------------------------------------------
- movement in liabilities 5,091 (1,534) (145) 3,412
-------------------------------------------- ---------- ---------- ---------- -------
Reinsurers' share of claims and benefits
paid and movement in liabilities (605) 191 - (414)
-------------------------------------------- ---------- ---------- ---------- -------
- claims, benefits and surrenders paid (311) (181) - (492)
--------------------------------------------
- movement in liabilities (294) 372 - 78
-------------------------------------------- ---------- ---------- ---------- -------
Year ended 31 Dec 2018 8,338 (255) 1,724 9,807
-------------------------------------------- ---------- ---------- ---------- -------
1 Discretionary participation features.
1
Liabilities under insurance contracts
Investment
Linked contracts
Non-linked life with
insurance insurance DPF(1) Total
Footnotes $m $m $m $m
------------------------------------------ --------- ----------- ----------- ---------- ---------
Gross liabilities under insurance
contracts at 1 Jan 2020 65,324 6,151 25,964 97,439
------------------------------------------ --------- ----------- ----------- ---------- -------
Claims and benefits paid (3,695) (900) (2,083) (6,678)
------------------------------------------ --------- ----------- ----------- ---------- -------
Increase in liabilities to policyholders 10,050 1,112 1,853 13,015
------------------------------------------ --------- ----------- ----------- ---------- -------
Exchange differences and other movements 2 785 86 2,544 3,415
------------------------------------------ --------- ----------- ----------- ---------- -------
Gross liabilities under insurance
contracts at 31 Dec 2020 72,464 6,449 28,278 107,191
------------------------------------------ --------- ----------- ----------- ---------- -------
Reinsurers' share of liabilities under
insurance contracts (3,434) (14) - (3,448)
------------------------------------------ --------- ----------- ----------- ---------- -------
Net liabilities under insurance contracts
at 31 Dec 2020 69,030 6,435 28,278 103,743
------------------------------------------ --------- ----------- ----------- ---------- -------
Gross liabilities under insurance
contracts at 1 Jan 2019 57,283 5,789 24,258 87,330
------------------------------------------ --------- ----------- ----------- ---------- -------
Claims and benefits paid (3,804) (900) (1,900) (6,604)
------------------------------------------ --------- ----------- ----------- ---------- -------
Increase in liabilities to policyholders 11,326 1,217 3,789 16,332
------------------------------------------ --------- ----------- ----------- ---------- -------
Exchange differences and other movements 2 519 45 (183) 381
------------------------------------------ --------- ----------- ----------- ---------- -------
Gross liabilities under insurance
contracts at 31 Dec 2019 65,324 6,151 25,964 97,439
------------------------------------------ --------- ----------- ----------- ---------- -------
Reinsurers' share of liabilities under
insurance contracts (3,521) (71) - (3,592)
------------------------------------------ --------- ----------- ----------- ---------- -------
Net liabilities under insurance contracts
at 31 Dec 2019 61,803 6,080 25,964 93,847
------------------------------------------ --------- ----------- ----------- ---------- -------
1 Discretionary participation features.
2 'Exchange differences and other movements' includes movements
in liabilities arising from net unrealised investment gains
recognised in other comprehensive income.
The key factors contributing to the movement in liabilities to
policyholders included movements in the market value of assets
supporting policyholder liabilities, death claims, surrenders,
lapses, new business, the declaration of bonuses and other amounts
attributable to policyholders.
5 Employee compensation and benefits
----------------------------------
2020 2019 2018
$m $m $m
------------------------- ------ ------ --------
Wages and salaries 15,752 15,581 14,751
------------------------- ------ ------ ------
Social security costs 1,378 1,472 1,490
------------------------- ------ ------ ------
Post-employment benefits 946 949 1,132
------------------------- ------ ------ ------
Year ended 31 Dec 18,076 18,002 17,373
------------------------- ------ ------ ------
Average number of persons employed by HSBC during the year by global
business
2020 2019(1) 2018(1)
---------------------------------------- ---------- ---------- -----------
Wealth and Personal Banking 144,615 148,680 144,109
---------------------------------------- ---------- ---------- ---------
Commercial Banking 45,631 46,584 48,983
---------------------------------------- ---------- ---------- ---------
Global Banking and Markets 49,055 51,313 49,217
---------------------------------------- ---------- ---------- ---------
Corporate Centre 411 478 541
---------------------------------------- ---------- ---------- ---------
Year ended 31 Dec 239,712 247,055 242,850
---------------------------------------- ---------- ---------- ---------
1 A change in reportable segments was made in 2020. Comparative
data have been re-presented accordingly. For further guidance, see
Note 10: Segmental analysis on page 311.
Average number of persons employed by HSBC during the year by geographical
region
2020 2019 2018
-------------------------------------------- ----------- ---------- ------------
Europe 64,886 66,392 67,007
-------------------------------------------- ----------- ---------- ----------
Asia 129,923 133,624 127,992
-------------------------------------------- ----------- ---------- ----------
Middle East and North Africa 9,550 9,798 9,798
-------------------------------------------- ----------- ---------- ----------
North America 15,430 16,615 17,350
-------------------------------------------- ----------- ---------- ----------
Latin America 19,923 20,626 20,703
-------------------------------------------- ----------- ---------- ----------
Year ended 31 Dec 239,712 247,055 242,850
-------------------------------------------- ----------- ---------- ----------
Reconciliation of total incentive awards granted to income statement
charge
2020 2019 2018
$m $m $m
----------------------------------------------------- ------ ----- -------
Total incentive awards approved for the current
year 2,659 3,341 3,473
----------------------------------------------------- ------ ----- -----
Less: deferred bonuses awarded, expected to be
recognised in future periods (239) (337) (351)
----------------------------------------------------- ------ ----- -----
Total incentives awarded and recognised in the
current year 2,420 3,004 3,122
----------------------------------------------------- ------ ----- -----
Add: current year charges for deferred bonuses
from previous years 286 327 322
----------------------------------------------------- ------ ----- -----
Other 2 (55) (70)
----------------------------------------------------- ------ ----- -----
Income statement charge for incentive awards 2,708 3,276 3,374
----------------------------------------------------- ------ ----- -----
Share-based payments
'Wages and salaries' includes the effect of share-based payments
arrangements, of which $434m was equity settled (2019: $478m; 2018:
$450m), as follows:
2020 2019 2018
$m $m $m
--------------------------------------------------- ---- ---- ----
Conditional share awards 411 521 499
--------------------------------------------------- ---- ---- ----
Savings-related and other share award option plans 51 30 23
--------------------------------------------------- ---- ---- ----
Year ended 31 Dec 462 551 522
--------------------------------------------------- ---- ---- ----
HSBC share awards
Deferred share An assessment of performance over the relevant period
awards (including ending on 31 December is used to determine the amount
annual incentive of the award to be granted.
awards, LTI awards * Deferred awards generally require employees to remain
delivered in shares) in employment over the vesting period and are
and Group Performance generally not subject to performance conditions after
Share Plans ('GPSP') the grant date. An exception to these are the LTI
awards, which are subject to performance conditions.
* Deferred share awards generally vest over a period of
three, five or seven years.
* Vested shares may be subject to a retention
requirement post-vesting. GPSP awards are retained
until cessation of employment.
* Awards are subject to a malus provision prior to
vesting.
* Awards granted to Material Risk Takers from 2015
onwards are subject to clawback post-vesting.
---------------------- ------------------------------------------------------------
International The plan was first introduced in Hong Kong in 2013 and
Employee Share now includes employees based in 27 jurisdictions.
Purchase Plan * Shares are purchased in the market each quarter up to
('ShareMatch') a maximum value of GBP750, or the equivalent in local
currency.
* Matching awards are added at a ratio of one free
share for every three purchased.
* Matching awards vest subject to continued employment
and the retention of the purchased shares for a
maximum period of two years and nine months.
---------------------- ------------------------------------------------------------
Movement on HSBC share awards
2020 2019
Number Number
(000s) (000s)
-------------------------------------------------- -------- ----------
Conditional share awards outstanding at 1 Jan 97,055 94,897
-------------------------------------------------- -------- --------
Additions during the year 72,443 71,858
-------------------------------------------------- -------- --------
Released in the year (60,673) (67,737)
-------------------------------------------------- -------- --------
Forfeited in the year (5,352) (1,963)
-------------------------------------------------- -------- --------
Conditional share awards outstanding at 31 Dec 103,473 97,055
-------------------------------------------------- -------- --------
Weighted average fair value of awards granted ($) 7.28 7.89
-------------------------------------------------- -------- --------
HSBC share option plans
Savings-related
share option * From 2014, employees eligible for the UK plan could
plans ('Sharesave') save up to GBP500 per month with the option to use
the savings to acquire shares.
* These are generally exercisable within six months
following either the third or fifth anniversary of
the commencement of a three-year or five-year
contract, respectively.
* The exercise price is set at a 20% (2019: 20%)
discount to the market value immediately preceding
the date of invitation.
-------------------- ----------------------------------------------------------
Calculation of fair values
The fair values of share options are calculated using a
Black-Scholes model. The fair value of a share award is based on
the share price at the date of the grant.
Movement on HSBC share option plans
Savings-related
share option
plans
---------------------
Number WAEP(1)
Footnotes (000s) GBP
---------------------------------------------------- --------- ---------- ---------
Outstanding at 1 Jan 2020 65,060 4.81
---------------------------------------------------- --------- ---------- -------
Granted during the year 2 111,469 2.63
---------------------------------------------------- --------- ---------- -------
Exercised during the year 3 (1,387) 4.48
---------------------------------------------------- --------- ---------- -------
Expired during the year (43,032) 4.81
---------------------------------------------------- --------- ---------- -------
Forfeited during the year (1,158) 4.88
---------------------------------------------------- --------- ---------- -------
Outstanding at 31 Dec 2020 130,952 2.97
---------------------------------------------------- --------- ---------- -------
- of which exercisable 8,170 4.50
---------------------------------------------------- --------- ---------- -------
Weighted average remaining contractual life (years) 3.68
---------------------------------------------------- --------- ---------- ---------
Outstanding at 1 Jan 2019 57,065 4.92
---------------------------------------------------- --------- ---------- -------
Granted during the year 2 32,130 4.69
---------------------------------------------------- --------- ---------- -------
Exercised during the year 3 (11,806) 4.40
---------------------------------------------------- --------- ---------- -------
Expired during the year (11,321) 5.46
---------------------------------------------------- --------- ---------- -------
Forfeited during the year (1,008) 4.99
---------------------------------------------------- --------- ---------- -------
Outstanding at 31 Dec 2019 65,060 4.81
---------------------------------------------------- --------- ---------- -------
* of which exercisable 2,149 4.53
---------------------------------------------------- --------- ---------- -------
Weighted average remaining contractual life (years) 2.77
---------------------------------------------------- --------- ---------- ---------
1 Weighted average exercise price.
2 The weighted average fair value of options granted during the year was $0.47 (2019: $1.36).
3 The weighted average share price at the date the options were
exercised was $7.08 (2019: $7.99).
Post-employment benefit plans
The Group operates pension plans throughout the world for its
employees. 'Pension risk management processes' on page 172 contains
details of the policies and practices associated with these pension
plans, some of which are defined benefit plans. The largest defined
benefit plan is the HBUK section of the HSBC Bank (UK) Pension
Scheme ('the principal plan'), created as a result of the HSBC Bank
(UK) Pension Scheme being fully sectionalised in 2018 to meet the
requirements of the Banking Reform Act.
HSBC holds on its balance sheet the net surplus or deficit,
which is the difference between the fair value of plan assets and
the discounted value of scheme liabilities at the balance sheet
date for each plan. Surpluses are only recognised to the extent
that they are recoverable through reduced contributions in the
future or through potential future refunds from the schemes. In
assessing whether a surplus is recoverable, HSBC has considered its
current right to obtain a future refund or a reduction in future
contributions together with the rights of third parties such as
trustees.
The principal plan
The principal plan has a defined benefit section and a defined
contribution section. The defined benefit section was closed to
future benefit accrual in 2015, with defined benefits earned by
employees at that date continuing to be linked to their salary
while they remain employed by HSBC. The plan is overseen by an
independent corporate trustee, who has a fiduciary responsibility
for the operation of the plan. Its assets are held separately from
the assets of the Group.
The investment strategy of the plan is to hold the majority of
assets in bonds, with the remainder in a diverse range of
investments. It also includes some interest rate swaps to reduce
interest rate risk and inflation swaps to reduce inflation
risk.
The latest funding valuation of the plan at 31 December 2019 was
carried out by Colin G Singer of Willis Towers Watson Limited, who
is a Fellow of the UK Institute and Faculty of Actuaries, using the
projected unit credit method. At that date, the market value of the
plan's assets was GBP31.1bn ($41.1bn) and this exceeded the value
placed on its liabilities on an ongoing basis by GBP2.5bn ($3.3bn),
giving a funding level of 109%. These figures include defined
contribution assets amounting to GBP2.4bn ($3.2bn). The main
differences between the assumptions used for assessing the defined
benefit liabilities for this funding valuation and those used for
IAS 19 are more prudent assumptions for discount rate, inflation
rate and life expectancy. The next funding valuation will have an
effective date of 31 December 2022.
Although the plan was in surplus at the valuation date, HSBC
continues to make further contributions to the plan to support a
lower-risk investment strategy over the longer term. The remaining
contribution is GBP160m ($218m) to be paid in 2021. The main
employer of the principal plan is HSBC UK Bank plc, with additional
support from HSBC Holdings plc. The HSBC Bank (UK) Pension Scheme
is fully sectionalised and no entities outside the ring fence
participate in the HBUK section. The sectionalisation, which took
place in 2018, did not materially affect the overall funding
position of the plan.
The actuary also assessed the value of the liabilities if the
plan were to have been stopped and an insurance company asked to
secure all future pension payments. This is generally larger than
the amount needed on the ongoing basis described above because an
insurance company would use more prudent assumptions and include an
explicit allowance for the future administrative expenses of the
plan. Under this approach, the amount of assets needed was
estimated to be GBP33bn ($44bn) at 31 December 2019.
Guaranteed minimum pension equalisation
Following a judgment issued by the High Court of Justice of
England and Wales in 2018, we estimated the financial effect of
equalising benefits in respect of guaranteed minimum pension
('GMP') equalisation, and any potential conversion of GMPs into
non-GMP benefits, to be an approximate 0.9% increase in the
principal plan's liabilities, or GBP187m ($239m). This was
recognised in the income statement in 2018. A further judgment by
the High Court on 20 November 2020 ruled that GMPs should also be
equalised for those who had previously transferred benefits from
the principal plan to another arrangement, with GBP13m ($17m)
consequently being recognised in 2020. We continue to assess the
impact of GMP equalisation.
Income statement charge
2020 2019 2018
$m $m $m
-------------------------------------------------- ---- ---- -------
Defined benefit pension plans 146 176 355
-------------------------------------------------- ---- ---- -----
Defined contribution pension plans 775 758 756
-------------------------------------------------- ---- ---- -----
Pension plans 921 934 1,111
-------------------------------------------------- ---- ---- -----
Defined benefit and contribution healthcare plans 25 15 21
-------------------------------------------------- ---- ---- -----
Year ended 31 Dec 946 949 1,132
-------------------------------------------------- ---- ---- -----
Net assets/(liabilities) recognised on the balance sheet in respect of
defined benefit plans
Fair Present Effect
value value of
of of defined limit
plan benefit on plan
assets obligations surpluses Total
$m $m $m $m
--------------------------------------------- ------- ------------ ---------- ---------
Defined benefit pension plans 52,990 (43,995) (44) 8,951
--------------------------------------------- ------- ------------ ---------- -------
Defined benefit healthcare plans 114 (639) - (525)
--------------------------------------------- ------- ------------ ---------- -------
At 31 Dec 2020 53,104 (44,634) (44) 8,426
--------------------------------------------- ------- ------------ ---------- -------
Total employee benefit liabilities (within
Note 26 'Accruals, deferred income and
other liabilities') (2,025)
--------------------------------------------- ------- ------------ ---------- -------
Total employee benefit assets (within
Note 22 'Prepayments, accrued income and
other assets') 10,450
--------------------------------------------- ------- ------------ ---------- -------
Defined benefit pension plans 47,567 (40,582) (16) 6,969
--------------------------------------------- ------- ------------ ---------- -------
Defined benefit healthcare plans 121 (580) - (459)
--------------------------------------------- ------- ------------ ---------- -------
At 31 Dec 2019 47,688 (41,162) (16) 6,510
--------------------------------------------- ------- ------------ ---------- -------
Total employee benefit liabilities (within
Note 26 'Accruals, deferred income and
other liabilities') (1,771)
--------------------------------------------- ------- ------------ ---------- -------
Total employee benefit assets (within
Note 22 'Prepayments, accrued income and
other assets') 8,280
--------------------------------------------- ------- ------------ ---------- -------
HSBC Holdings
Employee compensation and benefit expense in respect of HSBC
Holdings' employees in 2020 amounted to $56m (2019: $37m). The
average number of persons employed during 2020 was 59 (2019: 60).
Employees who are members of defined benefit pension plans are
principally members of either the HSBC Bank (UK) Pension Scheme or
the HSBC International Staff Retirement Benefits Scheme. HSBC
Holdings pays contributions to such plans for its own employees in
accordance with the schedules of contributions determined by the
trustees of the plans and recognises these contributions as an
expense as they fall due.
Defined benefit pension plans
Net asset/(liability) under defined benefit pension plans
Present value Effect of
Fair value of defined the asset Net defined
of plan assets benefit obligations ceiling benefit asset/(liability)
Principal(1) Other Principal(1) Other Principal(1) Other Principal(1) Other
plan plans plan plans plan plans plan plans
$m $m $m $m $m $m $m $m
------------------------------------------------------------ ------------ ------ ------------ -------- ------------ ----- ------------ -----------
At 1 Jan 2020 37,874 9,693 (30,158) (10,424) - (16) 7,716 (747)
------------------------------------------------------------ ------------ ------ ------------ -------- ------------ ----- ------------ ---------
Service cost - - (68) (172) - - (68) (172)
------------------------------------------------------------ ------------ ------ ------------ -------- ------------ ----- ------------ ---------
* current service cost - - (28) (184) - - (28) (184)
------------------------------------------------------------
* past service cost and gains/(losses) from settlements - - (40) 12 - - (40) 12
------------------------------------------------------------ ------------ ------ ------------ -------- ------------ ----- ------------ ---------
Net interest income/(cost)
on the net defined benefit
asset/(liability) 726 233 (575) (245) - - 151 (12)
------------------------------------------------------------ ------------ ------ ------------ -------- ------------ ----- ------------ ---------
Remeasurement effects recognised
in other comprehensive income 3,173 879 (2,118) (547) - (26) 1,055 306
------------------------------------------------------------ ------------ ------ ------------ -------- ------------ ----- ------------ ---------
- return on plan assets (excluding
interest income) 3,173 692 - - - - 3,173 692
------------------------------------------------------------
- actuarial gains/(losses)(2) - - (2,118) (428) - - (2,118) (428)
------------------------------------------------------------
- other changes - 187 - (119) - (26) - 42
------------------------------------------------------------ ------------ ------ ------------ -------- ------------ ----- ------------ ---------
Exchange differences 1,446 249 (1,100) (387) - (2) 346 (140)
------------------------------------------------------------ ------------ ------ ------------ -------- ------------ ----- ------------ ---------
Benefits paid (1,148) (652) 1,148 727 - - - 75
------------------------------------------------------------ ------------ ------ ------------ -------- ------------ ----- ------------ ---------
Other movements(4) 434 83 (134) 58 - - 300 141
------------------------------------------------------------ ------------ ------ ------------ -------- ------------ ----- ------------ ---------
At 31 Dec 2020 42,505 10,485 (33,005) (10,990) - (44) 9,500 (549)
------------------------------------------------------------ ------------ ------ ------------ -------- ------------ ----- ------------ ---------
At 1 Jan 2019 34,074 8,725 (26,616) (9,967) - (35) 7,458 (1,277)
------------------------------------------------------------ ------------ ------ ------------ -------- ------------ ----- ------------ ---------
Service cost - - (64) (246) - - (64) (246)
------------------------------------------------------------ ------------ ------ ------------ -------- ------------ ----- ------------ ---------
* current service cost - - (40) (183) - - (40) (183)
------------------------------------------------------------
* past service cost and losses from settlements - - (24) (63) - - (24) (63)
------------------------------------------------------------ ------------ ------ ------------ -------- ------------ ----- ------------ ---------
Net interest income/(cost)
on the net defined benefit
asset/(liability) 939 269 (728) (293) - - 211 (24)
------------------------------------------------------------ ------------ ------ ------------ -------- ------------ ----- ------------ ---------
Remeasurement effects recognised
in other comprehensive income 2,205 867 (2,548) (521) - 20 (343) 366
------------------------------------------------------------ ------------ ------ ------------ -------- ------------ ----- ------------ ---------
- return on plan assets (excluding
interest income) 2,205 870 - - - - 2,205 870
------------------------------------------------------------
- actuarial gains/(losses)(2,3) - - (2,548) (507) - - (2,548) (507)
------------------------------------------------------------
- other changes(3) - (3) - (14) - 20 - 3
------------------------------------------------------------ ------------ ------ ------------ -------- ------------ ----- ------------ ---------
Exchange differences 1,300 181 (1,036) (180) - (1) 264 -
------------------------------------------------------------ ------------ ------ ------------ -------- ------------ ----- ------------ ---------
Benefits paid (1,014) (620) 1,014 694 - - - 74
------------------------------------------------------------ ------------ ------ ------------ -------- ------------ ----- ------------ ---------
Other movements(4) 370 271 (180) 89 - - 190 360
------------------------------------------------------------ ------------ ------ ------------ -------- ------------ ----- ------------ ---------
At 31 Dec 2019 37,874 9,693 (30,158) (10,424) - (16) 7,716 (747)
------------------------------------------------------------ ------------ ------ ------------ -------- ------------ ----- ------------ ---------
1 For further details of the principal plan, see page 303.
2 Actuarial gains/(losses) for our principal plan includes
losses relating to financial assumptions of $3,179m (2019:
$3,049m), gains relating to demographic assumptions of $86m (2019:
$186m) and experience adjustments of $975m (2019: $315m). Actuarial
gains/(losses) for our other plans includes losses relating to
financial assumptions of $564m (2019: $847m), gains relating to
demographic assumptions of $49m (2019: $94m) and experience
adjustments of $87m (2019: $246m).
3 The comparatives have been re-presented to reclassify gains
and losses relating to demographic and experience assumptions in
other plans from 'other changes' to 'actuarial gains and
losses'.
4 Other movements include contributions by HSBC, contributions
by employees, administrative costs and taxes paid by plan.
HSBC expects to make $376m of contributions to defined benefit
pension plans during 2021. Benefits expected to be paid from the
plans to retirees over each of the next five years, and in
aggregate for the five years thereafter, are as follows:
Benefits expected to be paid from plans
2021 2022 2023 2024 2025 2026-2030
$m $m $m $m $m $m
------------------------ ----- ----- ----- ----- ----- -----------
The principal plan(1,2) 1,274 1,312 1,352 1,393 1,434 7,840
------------------------- ----- ----- ----- ----- ----- ---------
Other plans(1) 495 520 486 472 470 2,322
------------------------- ----- ----- ----- ----- ----- ---------
1 The duration of the defined benefit obligation is 17.4 years
for the principal plan under the disclosure assumptions adopted
(2019: 18.1 years) and 13.5 years for all other plans combined
(2019: 13.2 years).
2 For further details of the principal plan, see page 303.
Fair value of plan assets by asset classes
31 Dec 2020 31 Dec 2019
Quoted No quoted Quoted No quoted
market market market market
price price price price
in active in active Thereof in active in active Thereof
Value market market HSBC(1) Value market market HSBC(1)
$m $m $m $m $m $m $m $m
-------------- ------ ---------- ---------- -------- ------ ---------- ---------- ----------
The principal
plan(2)
-------------- ------ ---------- ---------- -------- ------ ---------- ---------- ----------
Fair value of
plan assets 42,505 37,689 4,816 973 37,874 33,921 3,953 1,183
-------------- ------ ---------- ---------- -------- ------ ---------- ---------- --------
- equities 268 7 261 - 662 312 350 -
--------------
- bonds 36,198 35,479 719 - 31,699 31,699 - -
--------------
- derivatives 1,973 - 1,973 973 2,052 - 2,052 1,183
--------------
- other 4,066 2,203 1,863 - 3,461 1,910 1,551 -
-------------- ------ ---------- ---------- -------- ------ ---------- ---------- --------
Other plans
-------------- ------ ---------- ---------- -------- ------ ---------- ---------- ----------
Fair value of
plan assets 10,485 9,512 973 54 9,693 8,702 991 239
-------------- ------ ---------- ---------- -------- ------ ---------- ---------- --------
- equities 1,484 1,069 415 3 2,065 1,455 610 2
--------------
- bonds 7,624 7,143 481 10 6,608 6,376 232 8
--------------
- derivatives (57) - (57) - - - - -
--------------
- other 1,434 1,300 134 41 1,020 871 149 229
-------------- ------ ---------- ---------- -------- ------ ---------- ---------- --------
1 The fair value of plan assets includes derivatives entered
into with HSBC Bank plc as detailed in Note 35. These derivatives
are presented within the principal plan at 31 December 2020.
Comparatives have been re-presented.
2 For further details on the principal plan, see page 303.
Post-employment defined benefit plans' principal actuarial
financial assumptions
HSBC determines the discount rates to be applied to its
obligations in consultation with the plans' local actuaries, on the
basis of current average yields of high-quality (AA-rated or
equivalent) debt instruments with maturities consistent with those
of the defined benefit obligations.
Key actuarial assumptions for the principal plan(1)
Rate of increase Rate of pay
Discount rate Inflation rate for pensions increase
% % % %
------------------------- ------------- -------------- ---------------- -------------
UK
------------------------- ------------- -------------- ---------------- -------------
At 31 Dec 2020 1.45 3.05 3.00 2.75
------------------------- ------------- -------------- ---------------- -----------
At 31 Dec 2019 2.00 3.10 2.90 3.65
------------------------- ------------- -------------- ---------------- -----------
1 For further details on the principal plan, see page 303.
Mortality tables and average life expectancy at age 60(1) for the principal
plan
Life expectancy Life expectancy
at age 60 for at age 60 for
Mortality a male member a female member
table currently: currently:
Aged 60 Aged 40 Aged 60 Aged 40
---------------------- --------------- ---------- ---------- ---------- ----------
UK
---------------------- --------------- ---------- ---------- ---------- ----------
At 31 Dec 2020 SAPS S3(2) 27.0 28.5 28.1 29.7
---------------------- --------------- ---------- ---------- ---------- ----------
At 31 Dec 2019 SAPS S2(3) 28.0 29.4 28.2 29.8
---------------------- --------------- ---------- ---------- ---------- ----------
1 For further details of the principal plan, see page 303.
2 Self-administered pension scheme ('SAPS') S3 table (males:
'Normal health pensioners, Light' version; females: 'Normal health
pensioners, Heavy' version) with a multiplier of 1 for both male
and female pensioners. Improvements are projected in accordance
with the continual mortality investigation ('CMI') 2019 core
projection model with a long-term rate of improvement of 0.25% per
annum and a long-term rate of improvement of 1.25% per annum.
Separate tables have been applied to lower-paid pensioners and
dependant members.
3 Self-administered pension scheme ('SAPS') S2 table (males:
'Normal health pensioners' version; females: 'All pensioners'
version) with a multiplier of 0.94 for male and 1.15 for female
pensioners. Improvements are projected in accordance with the
continual mortality investigation ('CMI') 2019 core projection
model with an initial addition to improvements of 0.25% per annum
and a long-term rate of improvement of 1.25% per annum. Separate
tables have been applied to lower-paid pensioners and dependant
members.
The effect of changes in key assumptions on the principal plan(1)
Impact on HBUK section of the
HSBC Bank (UK) Pension Scheme
obligation
----------------------------------------
Financial impact Financial impact
of increase of decrease
2020 2019 2020 2019
$m $m $m $m
------------------------------------------- -------- -------- -------- ----------
Discount rate - increase/decrease of 0.25% (1,383) (1,305) 1,475 1,395
------------------------------------------- -------- -------- -------- --------
Inflation rate - increase/decrease of
0.25% 871 781 (830) (738)
------------------------------------------- -------- -------- -------- --------
Pension payments and deferred pensions
- increase/decrease of 0.25% 1,307 1,100 (1,222) (1,026)
------------------------------------------- -------- -------- -------- --------
Pay - increase/decrease of 0.25% 60 73 (59) (72)
------------------------------------------- -------- -------- -------- --------
Change in mortality - increase of 1 year 1,453 1,267 N/A N/A
------------------------------------------- -------- -------- -------- ----------
1 For further details of the principal plan, see page 303.
The above sensitivity analyses are based on a change in an
assumption while holding all other assumptions constant. In
practice, this in unlikely to occur, and changes in some of the
assumptions may be correlated. When calculating the sensitivity of
the defined benefit obligation to significant actuarial assumptions
the same method (present value of the defined benefit obligation
calculated with the projected unit credit method at the end of the
reporting period) has been applied as when calculating the defined
benefit asset recognised in the balance sheet. The methods and
types of assumptions used in preparing the sensitivity analysis did
not change compared with the prior period.
Directors' emoluments
Details of Directors' emoluments, pensions and their interests
are disclosed in the Directors' remuneration report on page
229.
6 Auditor's remuneration
----------------------
2020 2019 2018
$m $m $m
-------------------------- ---- ---- ----
Audit fees payable to PwC 92.9 85.2 86.6
--------------------------- ---- ---- ----
Other audit fees payable 1.0 0.9 0.9
--------------------------- ---- ---- ----
Year ended 31 Dec 93.9 86.1 87.5
--------------------------- ---- ---- ----
Fees payable by HSBC to PwC
2020 2019 2018
Footnotes $m $m $m
----------------------------------------- --------- ----- ----- -------
Fees for HSBC Holdings' statutory audit 1 21.9 15.7 16.4
----------------------------------------- --------- ----- ----- -----
Fees for other services provided to HSBC 108.3 95.0 103.1
----------------------------------------- --------- ----- ----- -----
- audit of HSBC's subsidiaries 71.0 69.5 70.2
----------------------------------------- ---------
- audit-related assurance services 2 17.2 10.0 11.4
----------------------------------------- ---------
- other assurance services 3,4 20.1 12.2 13.5
----------------------------------------- ---------
- taxation compliance services - 1.6 1.4
----------------------------------------- ---------
- taxation advisory services - - 0.1
----------------------------------------- ---------
- other non-audit services 3 - 1.7 6.5
----------------------------------------- --------- ----- ----- -----
Year ended 31 Dec 130.2 110.7 119.5
----------------------------------------- --------- ----- ----- -----
1 Fees payable to PwC for the statutory audit of the
consolidated financial statements of HSBC and the separate
financial statements of HSBC Holdings. They include amounts payable
for services relating to the consolidation returns of HSBC
Holdings' subsidiaries, which are clearly identifiable as being in
support of the Group audit opinion.
2 Including services for assurance and other services that
relate to statutory and regulatory filings, including interim
reviews.
3 Including permitted services relating to attestation reports
on internal controls of a service organisation primarily prepared
for and used by third party end user, including comfort
letters.
4 Includes reviews of PRA regulatory reporting returns in 2020.
No fees were payable by HSBC to PwC as principal auditor for the
following types of services: internal audit services and services
related to litigation, recruitment and remuneration.
Fees payable by HSBC's associated pension schemes to PwC
2020 2019 2018
$000 $000 $000
------------------------------------------------ ---- ---- ------
Audit of HSBC's associated pension schemes 316 250 172
Year ended 31 Dec 316 250 172
------------------------------------------------- ---- ---- ----
No fees were payable by HSBC's associated pension schemes to PwC
as principal auditor for the following types of services: internal
audit services, other assurance services, services related to
corporate finance transactions, valuation and actuarial services,
litigation, recruitment and remuneration, and information
technology.
In addition to the above, the estimated fees paid to PwC by
third parties associated with HSBC amounted to $12.3m (2019:
$17.2m; 2018: $14.0m). In these cases, HSBC was connected with the
contracting party and may therefore have been involved in
appointing PwC. These fees arose from services such as auditing
mutual funds managed by HSBC and reviewing the financial position
of corporate concerns that borrow from HSBC.
Fees payable for non-audit services for HSBC Holdings are not
disclosed separately because such fees are disclosed on a
consolidated basis for the Group.
7 Tax
---
Tax expense
2020 2019 2018
Footnotes $m $m $m
---------------------------------------------------- --------- ----- ----- -------
Current tax 1 2,700 3,768 4,195
---------------------------------------------------- --------- ----- ----- -----
- for this year 2,883 3,689 4,158
---------------------------------------------------- ---------
- adjustments in respect of prior years (183) 79 37
---------------------------------------------------- --------- ----- ----- -----
Deferred tax (22) 871 670
---------------------------------------------------- --------- ----- ----- -----
- origination and reversal of temporary differences (341) 684 656
---------------------------------------------------- ---------
- effect of changes in tax rates 58 (11) 17
---------------------------------------------------- ---------
- adjustments in respect of prior years 261 198 (3)
---------------------------------------------------- --------- ----- ----- -----
Year ended 31 Dec 2 2,678 4,639 4,865
---------------------------------------------------- --------- ----- ----- -----
1 Current tax included Hong Kong profits tax of $888m (2019:
$1,413m; 2018: $1,532m). The Hong Kong tax rate applying to the
profits of subsidiaries assessable in Hong Kong was 16.5% (2019:
16.5%; 2018: 16.5%).
2 In addition to amounts recorded in the income statement, a tax
charge of $7m (2019: charge of $6m) was recorded directly to
equity.
Tax reconciliation
The tax charged to the income statement differs from the tax
charge that would apply if all profits had been taxed at the UK
corporation tax rate as follows:
2020 2019 2018
$m % $m % $m %
------------------------------------------ ----- ----- ------ ----- ------ -------
Profit before tax 8,777 13,347 19,890
------------------------------------------ ----- ----- ------ ----- ------ -------
Tax expense
------------------------------------------ ----- ----- ------ ----- ------ -------
Taxation at UK corporation tax
rate of 19.00% (2019: 19.00%; 2018:
19.00%) 1,668 19.0 2,536 19.0 3,779 19.0
------------------------------------------ ----- ----- ------ ----- ------ -----
Impact of differently taxed overseas
profits in overseas locations 178 2.0 253 1.9 264 1.3
------------------------------------------ ----- ----- ------ ----- ------ -----
Items increasing tax charge in
2020:
------------------------------------------ ----- ----- ------ ----- ------ -------
- non-UK movements in unrecognised
deferred tax 608 6.9 12 0.1 32 0.2
------------------------------------------ ----- ----- ------ ----- ------ -----
- UK tax losses not recognised 444 5.1 364 2.7 435 2.2
------------------------------------------ ----- ----- ------ ----- ------ -----
- other permanent disallowables 322 3.6 481 3.6 396 2.0
- local taxes and overseas withholding
taxes 228 2.6 484 3.6 437 2.2
------------------------------------------ ----- ----- ------ ----- ------ -----
- bank levy 202 2.3 184 1.4 191 1.0
------------------------------------------ ----- ----- ------ ----- ------ -----
- adjustments in respect of prior
period liabilities 78 0.9 277 2.1 34 0.2
------------------------------------------ ----- ----- ------ ----- ------ -----
- impacts of hyperinflation 65 0.7 29 0.2 78 0.4
------------------------------------------ ----- ----- ------ ----- ------ -----
- impact of changes in tax rates 58 0.6 (11) (0.1) 17 0.1
------------------------------------------ ----- ----- ------ ----- ------ -----
- non-deductible regulatory settlements 33 0.4 5 - 153 0.8
------------------------------------------ ----- ----- ------ ----- ------ -----
- non-deductible goodwill write-down - - 1,421 10.7 - -
Items reducing tax charge in 2020:
------------------------------------------ ----- ----- ------ ----- ------ -------
- non-taxable income and gains (515) (5.8) (844) (6.3) (691) (3.5)
------------------------------------------ ----- ----- ------ ----- ------ -----
- deductions for AT1 coupon payments (310) (3.5) (263) (2.0) - -
------------------------------------------ ----- ----- ------ ----- ------ -----
- effect of profits in associates
and joint ventures (250) (2.8) (467) (3.5) (492) (2.5)
------------------------------------------ ----- ----- ------ ----- ------ -----
- UK banking surcharge (113) (1.3) 29 0.2 229 1.1
------------------------------------------ ----- ----- ------ ----- ------ -----
- non-deductible UK customer compensation (18) (0.2) 382 2.9 16 0.1
------------------------------------------ ----- ----- ------ ----- ------ -----
- non-taxable gain on dilution
of shareholding in SABB - - (181) (1.3) - -
- other items - - (52) (0.4) (13) (0.1)
------------------------------------------ ----- ----- ------ ----- ------ -----
Year ended 31 Dec 2,678 30.5 4,639 34.8 4,865 24.5
------------------------------------------ ----- ----- ------ ----- ------ -----
The Group's profits are taxed at different rates depending on
the country or territory in which the profits arise. The key
applicable tax rates for 2020 include Hong Kong (16.5%), the US
(21%) and the UK (19%). If the Group's profits were taxed at the
statutory rates of the countries in which the profits arose, then
the tax rate for the year would have been 21.00% (2019: 20.90%).
The effective tax rate for the year of 30.5% (2019: 34.8%) was
lower than for 2019. The effective tax rate for 2019 included a
non-deductible impairment of goodwill of $7.3bn (10.7% increase in
effective tax rate) and a higher level of non-deductible customer
compensation (3.1% increase in effective tax rate compared with
2020), both of which are non-recurring items. This was partly
offset by the impact of non-recognition of deferred tax, mainly in
the UK ($0.4bn) and France ($0.4bn), being greater in 2020 than
2019 (9.2% increase in effective tax rate compared with 2019).
Following an amendment to IAS 12 effective 1 January 2019, the
income tax consequences of distributions, including AT1 coupon
payments, were recorded in the income statement tax expense. The
2018 reconciliation has not been restated.
Accounting for taxes involves some estimation because the tax
law is uncertain and its application requires a degree of
judgement, which authorities may dispute. Liabilities are
recognised based on best estimates of the probable outcome, taking
into account external advice where appropriate. We do not expect
significant liabilities to arise in excess of the amounts provided.
HSBC only recognises current and deferred tax assets where recovery
is probable.
Movement of deferred tax assets and liabilities
Unused
tax
losses Derivatives,
Loan and FVOD(1)
impairment tax and other Insurance Expense Fixed Retirement
provisions credits investments business provisions assets obligations Other Total
Footnotes $m $m $m $m $m $m $m $m $m
-------------- --------- ---------- ------- ------------ --------- ---------- ------ ----------- ------- ---------
Assets 983 1,414 979 - 650 1,002 - 422 5,450
-------------- --------- ---------- ------- ------------ --------- ---------- ------ ----------- ------- -------
Liabilities - - (558) (1,621) - - (1,613) (401) (4,193)
-------------- --------- ---------- ------- ------------ --------- ---------- ------ ----------- ------- -------
At 1 Jan 2020 983 1,414 421 (1,621) 650 1,002 (1,613) 21 1,257
-------------- --------- ---------- ------- ------------ --------- ---------- ------ ----------- ------- -------
Income
statement 295 355 (274) (32) (81) (112) (190) 61 22
-------------- --------- ---------- ------- ------------ --------- ---------- ------ ----------- ------- -------
Other
comprehensive
income - - (23) - - - (387) (660) (1,070)
-------------- --------- ---------- ------- ------------ --------- ---------- ------ ----------- ------- -------
Equity - - - - - - - - -
-------------- --------- ---------- ------- ------------ --------- ---------- ------ ----------- ------- -------
Foreign
exchange
and other
adjustments (36) 52 (281) 31 (4) 11 (116) 304 (39)
-------------- --------- ---------- ------- ------------ --------- ---------- ------ ----------- ------- -------
At 31 Dec 2020 1,242 1,821 (157) (1,622) 565 901 (2,306) (274) 170
-------------- --------- ---------- ------- ------------ --------- ---------- ------ ----------- ------- -------
Assets 2 1,242 1,821 548 - 565 901 - 960 6,037
-------------- --------- ---------- ------- ------------ --------- ---------- ------ ----------- ------- -------
Liabilities 2 - - (705) (1,622) - - (2,306) (1,234) (5,867)
-------------- --------- ---------- ------- ------------ --------- ---------- ------ ----------- ------- -------
Assets 982 1,156 492 - 629 1,151 - 738 5,148
-------------- --------- ---------- ------- ------------ --------- ---------- ------ ----------- ------- -------
Liabilities - - (376) (1,271) - - (1,387) (283) (3,317)
-------------- --------- ---------- ------- ------------ --------- ---------- ------ ----------- ------- -------
At 1 Jan 2019 982 1,156 116 (1,271) 629 1,151 (1,387) 455 1,831
Income
statement 45 266 (386) (303) (18) (185) (149) (141) (871)
-------------- --------- ---------- ------- ------------ --------- ---------- ------ ----------- ------- -------
Other
comprehensive
income - - 544 - - - 30 (391) 183
-------------- --------- ---------- ------- ------------ --------- ---------- ------ ----------- ------- -------
Equity - - - - - - - - -
-------------- --------- ---------- ------- ------------ --------- ---------- ------ ----------- ------- -------
Foreign
exchange
and other
adjustments (44) (8) 147 (47) 39 36 (107) 98 114
-------------- --------- ---------- ------- ------------ --------- ---------- ------ ----------- ------- -------
At 31 Dec 2019 983 1,414 421 (1,621) 650 1,002 (1,613) 21 1,257
-------------- --------- ---------- ------- ------------ --------- ---------- ------ ----------- ------- -------
Assets 2 983 1,414 979 - 650 1,002 - 422 5,450
-------------- --------- ---------- ------- ------------ --------- ---------- ------ ----------- ------- -------
Liabilities 2 - - (558) (1,621) - - (1,613) (401) (4,193)
-------------- --------- ---------- ------- ------------ --------- ---------- ------ ----------- ------- -------
1 Fair value of own debt.
2 After netting off balances within countries, the balances as
disclosed in the accounts are as follows: deferred tax assets
$4,483m (2019: $4,632m) and deferred tax liabilities $4,313m (2019:
$3,375m).
In applying judgement in recognising deferred tax assets,
management has critically assessed all available information,
including future business profit projections and the track record
of meeting forecasts.
The Group's net deferred tax asset of $0.2bn (2019: $1.3bn)
included $2.4bn (2019: $2.8bn) of deferred tax assets relating to
the US, of which $1.0bn related to US tax losses that expire in 13
to 17 years. Management expects the US deferred tax asset to be
substantially recovered in seven to eight years, with the majority
recovered in the first five years. During 2020, the Group
derecognised $250m of deferred tax asset relating to US state tax
losses as management did not consider there to be sufficient
evidence of future taxable profits against which to recover these
losses before they expire. Management's assessment of the likely
availability of future taxable profits against which to recover the
US deferred tax assets takes into consideration the reversal of
existing taxable temporary differences, past business performance
and forecasts of future business performance. The most recent
financial forecasts approved by management cover a five-year period
and the forecasts have been extrapolated beyond five years by
assuming that performance remains constant after the fifth
year.
The Group's net deferred tax asset of $0.2bn (2019: $1.3bn) also
included a net UK deferred tax asset of $0.6bn (2019: liability of
$0.5bn), of which $0.5bn related to UK banking tax losses created
in 2020. The net UK deferred tax asset of $0.6bn excludes the
deferred tax liability arising on the UK pension scheme surplus,
the reversal of which is not taken into account when estimating
future taxable profits. The UK deferred tax asset is supported by
forecasts of taxable profit, also taking into consideration the
history of profitability in the combined UK banking entities and
the fact that the loss arising in 2020 arose due to an identifiable
and non-recurring reason, being the economic impacts of
Covid-19.
Unrecognised deferred tax
The amount of gross temporary differences, unused tax losses and
tax credits for which no deferred tax asset is recognised in the
balance sheet was $15.6bn (2019: $9.9bn). This amount included
unused UK corporation tax losses of $9.3bn (2019: $7.3bn) which
were not recognised due to uncertainty regarding the availability
of sufficient future taxable profits against which to recover them.
Of the total amounts unrecognised, $11.5bn (2019: $7.4bn) had no
expiry date, $0.7bn (2019: $1.3bn) was scheduled to expire within
10 years and the remaining balance is expected to expire after 10
years.
Deferred tax is not recognised in respect of the Group's
investments in subsidiaries and branches where HSBC is able to
control the timing of remittance or other realisation and where
remittance or realisation is not probable in the foreseeable
future. The aggregate temporary differences relating to
unrecognised deferred tax liabilities arising on investments in
subsidiaries and branches is $12.1bn (2019: $13.4bn) and the
corresponding unrecognised deferred tax liability was $0.7bn (2019:
$1.0bn).
8 Dividends
---------
Dividends to shareholders of the parent company
2020 2019 2018
Settled Settled Settled
Per in Per in Per in
share Total scrip share Total scrip share Total scrip
$ $m $m $ $m $m $ $m $m
-------------------------- ------ ----- ------- ------ ------ ------- ------ ------ ---------
Dividends paid on ordinary
shares
-------------------------- ------ ----- ------- ------ ------ ------- ------ ------ ---------
In respect of previous
year:
-------------------------- ------ ----- ------- ------ ------ ------- ------ ------ ---------
- fourth interim dividend - - - 0.21 4,206 1,160 0.21 4,197 393
-------------------------- ------ ----- ------- ------ ------ ------- ------ ------ -------
In respect of current
year:
-------------------------- ------ ----- ------- ------ ------ ------- ------ ------ ---------
- first interim dividend - - - 0.10 2,013 375 0.10 2,008 213
-------------------------- ------ ----- ------- ------ ------ ------- ------ ------ -------
- second interim dividend - - - 0.10 2,021 795 0.10 1,990 181
-------------------------- ------ ----- ------- ------ ------ ------- ------ ------ -------
- third interim dividend - - - 0.10 2,029 357 0.10 1,992 707
-------------------------- ------ ----- ------- ------ ------ ------- ------ ------ -------
Total - - - 0.51 10,269 2,687 0.51 10,187 1,494
-------------------------- ------ ----- ------- ------ ------ ------- ------ ------ -------
Total dividends on
preference
shares classified as
equity (paid quarterly) 62.00 90 62.00 90 62.00 90
-------------------------- ------ ----- ------- ------ ------ ------- ------ ------ ---------
Total coupons on capital
securities classified
as equity 1,241 1,324 1,270
-------------------------- ------ ----- ------- ------ ------ ------- ------ ------ ---------
Dividends to shareholders 1,331 11,683 11,547
-------------------------- ------ ----- ------- ------ ------ ------- ------ ------ ---------
Total coupons on capital securities classified as equity
2020 2019 2018
----- -------
Total Total Total
Footnotes First Per security $m $m $m
call
date
------------------------------------------ --------- -------- ------------ ----- ----- -------
1,
Perpetual subordinated capital securities 3
------------------------------------------ --------- -------- ------------ ----- ----- -------
$2,200m issued at 8.125% Apr 2013 $0.000 - - 89
------------------------------------------ --------- -------- ------------ ----- ----- -----
$3,800m issued at 8.000% Dec 2015 $0.000 - - 76
------------------------------------------ --------- -------- ------------ ----- ----- -----
Perpetual subordinated contingent 2,
convertible securities 3
------------------------------------------ --------- -------- ------------ ----- ----- -------
$1,500m issued at 5.625% 4 Nov 2019 $56.250 - 84 84
------------------------------------------ --------- -------- ------------ ----- ----- -----
$2,000m issued at 6.875% Jun 2021 $68.750 138 138 138
------------------------------------------ --------- -------- ------------ ----- ----- -----
$2,250m issued at 6.375% Sep 2024 $63.750 143 143 143
------------------------------------------ --------- -------- ------------ ----- ----- -----
$2,450m issued at 6.375% Mar 2025 $63.750 156 156 156
------------------------------------------ --------- -------- ------------ ----- ----- -----
$3,000m issued at 6.000% May 2027 $60.000 180 180 180
------------------------------------------ --------- -------- ------------ ----- ----- -----
$2,350m issued at 6.250% Mar 2023 $62.500 147 147 73
------------------------------------------ --------- -------- ------------ ----- ----- -----
$1,800m issued at 6.500% Mar 2028 $65.000 117 117 59
------------------------------------------ --------- -------- ------------ ----- ----- -----
$1,500m issued at 4.600% 5 Jun 2031 $46.000 - - -
------------------------------------------ --------- -------- ------------ ----- ----- -----
EUR1,500m issued at 5.250% Sep 2022 EUR52.500 90 88 95
------------------------------------------ --------- -------- ------------ ----- ----- -----
EUR1,000m issued at 6.000% Sep 2023 EUR60.000 67 66 72
------------------------------------------ --------- -------- ------------ ----- ----- -----
July
EUR1,250m issued at 4.750% 2029 EUR47.500 67 68 70
------------------------------------------ --------- -------- ------------ ----- ----- -----
GBP1,000m issued at 5.875% Sep 2026 GBP58.750 74 75 -
------------------------------------------ --------- -------- ------------ ----- ----- -----
SGD1,000m issued at 4.700% Jun 2022 SGD47.000 35 34 35
------------------------------------------ --------- -------- ------------ ----- ----- -----
SGD750m issued at 5.000% Sep 2023 SGD50.000 27 28 -
------------------------------------------ --------- -------- ------------ ----- ----- -----
Total 1,241 1,324 1,270
------------------------------------------ --------- -------- ------------ ----- ----- -----
1 Discretionary coupons are paid quarterly on the perpetual
subordinated capital securities, in denominations of $25 per
security.
2 Discretionary coupons are paid semi-annually on the perpetual
subordinated contingent convertible securities, in denominations of
each security's issuance currency 1,000 per security.
3 For further details of these securities, see Note 31.
4 This security was called by HSBC Holdings on 22 November 2019
and was redeemed and cancelled on 17 January 2020. Between the date
of exercise of the call option and the redemption, this security
was considered to be a subordinated liability. For further details
on additional tier 1 securities, see Note 31.
5 This security was issued by HSBC Holdings on 17 December 2020.
The first call date commences six calendar months prior to the
reset date of 17 June 2031.
1
After the end of the year, the Directors approved an interim
dividend in respect of the financial year ended 31 December 2020 of
$0.15 per ordinary share, a distribution of approximately $3,055m.
The interim dividend will be payable on 29 April 2021 to holders on
the Principal Register in the UK, the Hong Kong Overseas Branch
Register or the Bermuda Overseas Branch Register on 12 March 2021.
No liability was recorded in the financial statements in respect of
the interim dividend for 2020.
On 4 January 2021, HSBC paid a coupon on its EUR1,250m
subordinated capital securities, representing a total distribution
of EUR30m ($36m). No liability was recorded in the balance sheet at
31 December 2020 in respect of this coupon payment.
9 Earnings per share
------------------
Basic earnings per ordinary share is calculated by dividing the
profit attributable to ordinary shareholders of the parent company
by the weighted average number of ordinary shares outstanding,
excluding own shares held. Diluted earnings per ordinary share is
calculated by dividing the basic earnings, which require no
adjustment for the effects of dilutive potential ordinary shares,
by the weighted average number of ordinary shares outstanding,
excluding own shares held, plus the weighted average number of
ordinary shares that would be issued on conversion of dilutive
potential ordinary shares.
Profit attributable to the ordinary shareholders of the parent company
2020 2019 2018
$m $m $m
--------------------------------------------------- ------- ------- ---------
Profit attributable to shareholders of the parent
company 5,229 7,383 13,727
--------------------------------------------------- ------- ------- -------
Dividend payable on preference shares classified
as equity (90) (90) (90)
--------------------------------------------------- ------- ------- -------
Coupon payable on capital securities classified as
equity (1,241) (1,324) (1,029)
--------------------------------------------------- ------- ------- -------
Year ended 31 Dec 3,898 5,969 12,608
--------------------------------------------------- ------- ------- -------
Basic and diluted earnings per share
2020 2019 2018
Number Per Number Per Number Per
Profit of shares share Profit of shares share Profit of shares share
Footnotes $m (millions) $ $m (millions) $ $m (millions) $
---------- --------- ------ ---------- ------ ------ ---------- ------ ------ ---------- --------
Basic 1 3,898 20,169 0.19 5,969 20,158 0.30 12,608 19,896 0.63
---------- --------- ------ ---------- ------ ------ ---------- ------ ------ ---------- ------
Effect of
dilutive
potential
ordinary
shares 73 75 87
---------- --------- ------ ---------- ------ ------ ---------- ------ ------ ---------- --------
Diluted 1 3,898 20,242 0.19 5,969 20,233 0.30 12,608 19,983 0.63
---------- --------- ------ ---------- ------ ------ ---------- ------ ------ ---------- ------
1 Weighted average number of ordinary shares outstanding (basic) or assuming dilution (diluted).
The number of anti-dilutive employee share options excluded from
the weighted average number of dilutive potential ordinary shares
is 14.6 million (2019: 1.1 million; 2018: nil).
10 Segmental analysis
------------------
The Group Chief Executive, supported by the rest of the Group
Executive Committee ('GEC'), is considered the Chief Operating
Decision Maker ('CODM') for the purposes of identifying the Group's
reportable segments. Global business results are assessed by the
CODM on the basis of adjusted performance that removes the effects
of significant items and currency translation from reported
results. Therefore, we present these results on an adjusted basis
as required by IFRSs. The 2019 and 2018 adjusted performance
information is presented on a constant currency basis. The 2019 and
2018 income statements are converted at the average rates of
exchange for 2020, and the balance sheets at 31 December 2019 and
31 December 2018 at the prevailing rates of exchange on 31 December
2020.
Our operations are closely integrated and, accordingly, the
presentation of data includes internal allocations of certain items
of income and expense. These allocations include the costs of
certain support services and global functions to the extent that
they can be meaningfully attributed to global businesses. While
such allocations have been made on a systematic and consistent
basis, they necessarily involve a degree of subjectivity. Costs
that are not allocated to global businesses are included in
Corporate Centre.
Where relevant, income and expense amounts presented include the
results of inter-segment funding along with inter-company and
inter-business line transactions. All such transactions are
undertaken on arm's length terms. The intra-Group elimination items
for the global businesses are presented in Corporate Centre.
Change in reportable segments
Effective from the second quarter of 2020, we made the following
realignments within our internal reporting to the GEC and CODM:
-- We simplified our matrix organisational structure by
combining Global Private Banking and Retail Banking and Wealth
Management to form Wealth and Personal Banking.
-- We reallocated our reporting of Markets Treasury,
hyperinflation accounting in Argentina and HSBC Holdings net
interest expense from Corporate Centre to the global
businesses.
Comparative data have been re-presented accordingly.
Our global businesses
We provide a comprehensive range of banking and related
financial services to our customers in our three global businesses.
The products and services offered to customers are organised by
these global businesses.
-- Wealth and Personal Banking ('WPB') provides a full range of
retail banking and wealth products to our customers from personal
banking to ultra high net worth individuals. Typically, customer
offerings include retail banking products, such as current and
savings accounts, mortgages and personal loans, credit cards, debit
cards and local and international payment services. We also provide
wealth management services, including insurance and investment
products, global asset management services, investment management
and Private Wealth Solutions for customers with more sophisticated
and international requirements.
-- Commercial Banking ('CMB') offers a broad range of products
and services to serve the needs of our commercial customers,
including small and medium-sized enterprises, mid-market
enterprises and corporates. These include credit and lending,
international trade and receivables finance, treasury management
and liquidity solutions (payments and cash management and
commercial cards), commercial insurance and investments. CMB also
offers customers access to products and services offered by other
global businesses, such as Global Banking and Markets, which
include foreign exchange products, raising capital on debt and
equity markets and advisory services.
-- Global Banking and Markets ('GBM') provides tailored
financial solutions to major government, corporate and
institutional clients and private investors worldwide. The
client-focused business lines deliver a full range of banking
capabilities including financing, advisory and transaction
services, a markets business that provides services in credit,
rates, foreign exchange, equities, money markets and securities
services, and principal investment activities.
HSBC adjusted profit before tax and balance sheet data
2020
------------------------------------------------------------
Global
Wealth Banking
and Personal Commercial and Corporate
Banking Banking Markets Centre Total
Footnotes $m $m $m $m $m
Net operating income/(expense)
before change in expected credit
losses and other credit impairment
charges 1 22,013 13,312 15,303 (262) 50,366
------------------------------------- --------- ------------- ---------- --------- --------- ---------
- external 19,990 13,741 18,162 (1,527) 50,366
------------------------------------- ---------
- inter-segment 2,023 (429) (2,859) 1,265 -
------------------------------------- --------- ------------- ---------- --------- --------- ---------
of which: net interest
income/(expense) 15,090 9,317 4,518 (1,326) 27,599
------------------------------------- --------- ------------- ---------- --------- --------- ---------
Change in expected credit losses
and other credit impairment
(charges)/recoveries (2,855) (4,754) (1,209) 1 (8,817)
------------------------------------- --------- ------------- ---------- --------- --------- ---------
Net operating income/(expense) 19,158 8,558 14,094 (261) 41,549
------------------------------------- --------- ------------- ---------- --------- --------- ---------
Total operating expenses (15,024) (6,689) (9,264) (482) (31,459)
------------------------------------- --------- ------------- ---------- --------- --------- ---------
Operating profit/(loss) 4,134 1,869 4,830 (743) 10,090
------------------------------------- --------- ------------- ---------- --------- --------- ---------
Share of profit in associates
and joint ventures 6 (1) - 2,054 2,059
------------------------------------- --------- ------------- ---------- --------- --------- ---------
Adjusted profit before tax 4,140 1,868 4,830 1,311 12,149
------------------------------------- --------- ------------- ---------- --------- --------- ---------
% % % % %
------------------------------------- --------- ------------- ---------- --------- --------- -----------
Share of HSBC's adjusted profit
before tax 34.1 15.4 39.7 10.8 100.0
------------------------------------- --------- ------------- ---------- --------- --------- ---------
Adjusted cost efficiency ratio 68.3 50.2 60.5 (184.0) 62.5
------------------------------------- --------- ---------- --------- --------- ---------
Adjusted balance sheet data $m $m $m $m $m
------------------------------------- --------- ------------- ---------- --------- --------- -----------
Loans and advances to customers
(net) 469,186 343,182 224,364 1,255 1,037,987
------------------------------------- --------- ------------- ---------- --------- --------- ---------
Interests in associates and joint
ventures 447 14 143 26,080 26,684
------------------------------------- --------- ------------- ---------- --------- --------- ---------
Total external assets 881,918 570,295 1,347,440 184,511 2,984,164
------------------------------------- --------- ------------- ---------- --------- --------- ---------
Customer accounts 834,759 470,428 336,983 610 1,642,780
------------------------------------- --------- ------------- ---------- --------- --------- ---------
HSBC adjusted profit before tax and balance sheet data (continued)
2019(2)
------------------------------------------------------------
Global
Wealth Banking
and Personal Commercial and Corporate
Banking Banking Markets Centre Total
Footnotes $m $m $m $m $m
Net operating income/(expense)
before change in expected credit
losses and other credit impairment
charges 1 25,565 15,164 14,869 (654) 54,944
------------------------------------- --------- ------------- ---------- --------- --------- ---------
- external 21,252 16,094 20,314 (2,716) 54,944
------------------------------------- ---------
- inter-segment 4,313 (930) (5,445) 2,062 -
------------------------------------- --------- ------------- ---------- --------- --------- ---------
of which: net interest
income/(expense) 17,423 10,957 5,223 (3,264) 30,339
------------------------------------- --------- ------------- ---------- --------- --------- ---------
Change in expected credit losses
and other credit impairment
(charges)/recoveries (1,348) (1,162) (153) 36 (2,627)
------------------------------------- --------- ------------- ---------- --------- --------- ---------
Net operating income/(expense) 24,217 14,002 14,716 (618) 52,317
------------------------------------- --------- ------------- ---------- --------- --------- ---------
Total operating expenses (15,388) (6,832) (9,544) (755) (32,519)
------------------------------------- --------- ------------- ---------- --------- --------- ---------
Operating profit/(loss) 8,829 7,170 5,172 (1,373) 19,798
------------------------------------- --------- ------------- ---------- --------- --------- ---------
Share of profit in associates
and joint ventures 54 - - 2,297 2,351
------------------------------------- --------- ------------- ---------- --------- --------- ---------
Adjusted profit before tax 8,883 7,170 5,172 924 22,149
------------------------------------- --------- ------------- ---------- --------- --------- ---------
% % % % %
------------------------------------- --------- ------------- ---------- --------- --------- -----------
Share of HSBC's adjusted profit
before tax 40.1 32.4 23.4 4.2 100.0
------------------------------------- --------- ------------- ---------- --------- --------- ---------
Adjusted cost efficiency ratio 60.2 45.1 64.2 (115.4) 59.2
------------------------------------- --------- ------------- ---------- --------- --------- ---------
Adjusted balance sheet data $m $m $m $m $m
------------------------------------- --------- ------------- ---------- --------- --------- -----------
Loans and advances to customers
(net) 455,618 353,781 252,131 1,166 1,062,696
------------------------------------- --------- ------------- ---------- --------- --------- ---------
Interests in associates and joint
ventures 449 14 16 24,941 25,420
------------------------------------- --------- ------------- ---------- --------- --------- ---------
Total external assets 793,100 523,585 1,310,772 156,354 2,783,811
------------------------------------- --------- ------------- ---------- --------- --------- ---------
Customer accounts 768,151 397,182 304,094 780 1,470,207
------------------------------------- --------- ------------- ---------- --------- --------- ---------
1 Net operating income before change in expected credit losses
and other credit impairment charges, also referred to as
revenue.
2 A change in reportable segments was made in 2020. Comparative
data have been re-presented accordingly.
HSBC adjusted profit before tax and balance sheet data (continued)
2018(2)
------------------------------------------------------------
Global
Wealth Banking
and Personal Commercial and Corporate
Banking Banking Markets Centre Total
Footnotes $m $m $m $m $m
------------------------------------- --------- ------------- ---------- --------- --------- -----------
Net operating income/(expense)
before change in expected credit
losses and other credit impairment
charges 1 23,551 14,374 15,056 (883) 52,098
------------------------------------- --------- ------------- ---------- --------- --------- ---------
- external 19,096 14,675 18,780 (453) 52,098
------------------------------------- ---------
- inter-segment 4,455 (301) (3,724) (430) -
------------------------------------- --------- ------------- ---------- --------- --------- ---------
of which: net interest
income/(expense) 16,418 10,220 4,880 (2,070) 29,448
------------------------------------- --------- ------------- ---------- --------- --------- ---------
Change in expected credit losses
and other credit impairment
(charges)/recoveries (1,072) (683) 34 101 (1,620)
------------------------------------- --------- ------------- ---------- --------- --------- ---------
Net operating income/(expense) 22,479 13,691 15,090 (782) 50,478
------------------------------------- --------- ------------- ---------- --------- --------- ---------
Total operating expenses (14,614) (6,307) (9,316) (1,486) (31,723)
------------------------------------- --------- ------------- ---------- --------- --------- ---------
Operating profit/(loss) 7,865 7,384 5,774 (2,268) 18,755
------------------------------------- --------- ------------- ---------- --------- --------- ---------
Share of profit in associates
and joint ventures 32 - - 2,412 2,444
------------------------------------- --------- ------------- ---------- --------- --------- ---------
Adjusted profit before tax 7,897 7,384 5,774 144 21,199
------------------------------------- --------- ------------- ---------- --------- --------- ---------
% % % % %
------------------------------------- --------- ------------- ---------- --------- --------- -----------
Share of HSBC's adjusted profit
before tax 37.3 34.8 27.2 0.7 100.0
------------------------------------- --------- ------------- ---------- --------- --------- ---------
Adjusted cost efficiency ratio 62.1 43.9 61.9 (168.3) 60.9
------------------------------------- --------- ------------- ---------- --------- --------- ---------
Adjusted balance sheet data $m $m $m $m $m
------------------------------------- --------- ------------- ---------- --------- --------- -----------
Loans and advances to customers
(net) 419,231 344,855 253,319 1,599 1,019,004
------------------------------------- --------- ------------- ---------- --------- --------- ---------
Interests in associates and joint
ventures 399 - - 22,753 23,152
------------------------------------- --------- ------------- ---------- --------- --------- ---------
Total external assets 741,222 520,403 1,261,807 128,021 2,651,453
------------------------------------- --------- ------------- ---------- --------- --------- ---------
Customer accounts 729,902 372,551 306,438 831 1,409,722
------------------------------------- --------- ------------- ---------- --------- --------- ---------
1 Net operating income before change in expected credit losses
and other credit impairment charges, also referred to as
revenue.
2 A change in reportable segments was made in 2020. Comparative
data have been re-presented accordingly.
Reported external net operating income is attributed to
countries and territories on the basis of the location of the
branch responsible for reporting the results or advancing the
funds:
2020 2019 2018
Footnotes $m $m $m
------------------------------------------------------------ --------- ------ ------ --------
Reported external net operating income by country/territory 1 50,429 56,098 53,780
------------------------------------------------------------ --------- ------ ------ ------
* UK 9,163 9,011 10,340
------------------------------------------------------------ ---------
* Hong Kong 15,783 18,449 17,162
------------------------------------------------------------ ---------
* US 4,474 4,471 4,379
------------------------------------------------------------ ---------
* France 1,753 1,942 1,898
------------------------------------------------------------ ---------
* other countries 19,256 22,225 20,001
------------------------------------------------------------ --------- ------ ------ ------
1 Net operating income before change in expected credit losses
and other credit impairment charges, also referred to as
revenue.
Adjusted results reconciliation
2020 2019 2018
Significant Currency Significant Currency Significant
Adjusted items Reported Adjusted translation items Reported Adjusted translation items Reported
Footnotes $m $m $m $m $m $m $m $m $m $m $m
-------------- --------- -------- ----------- -------- -------- ----------- ----------- -------- -------- ----------- ----------- ----------
Revenue 1 50,366 63 50,429 54,944 471 683 56,098 52,098 1,854 (172) 53,780
-------------- --------- -------- ----------- -------- -------- ----------- ----------- -------- -------- ----------- ----------- --------
ECL (8,817) - (8,817) (2,627) (129) - (2,756) (1,620) (147) - (1,767)
-------------- --------- -------- ----------- -------- -------- ----------- ----------- -------- -------- ----------- ----------- --------
Operating
expenses (31,459) (2,973) (34,432) (32,519) (223) (9,607) (42,349) (31,723) (1,280) (1,656) (34,659)
-------------- --------- -------- ----------- -------- -------- ----------- ----------- -------- -------- ----------- ----------- --------
Share of
profit
in associates
and joint
ventures 2,059 (462) 1,597 2,351 3 - 2,354 2,444 92 - 2,536
-------------- --------- -------- ----------- -------- -------- ----------- ----------- -------- -------- ----------- ----------- --------
Profit/(loss)
before tax 12,149 (3,372) 8,777 22,149 122 (8,924) 13,347 21,199 519 (1,828) 19,890
-------------- --------- -------- ----------- -------- -------- ----------- ----------- -------- -------- ----------- ----------- --------
1 Net operating income before change in expected credit losses
and other credit impairment charges, also referred to as
revenue.
Adjusted balance sheet reconciliation
2020 2019 2018
---------
Reported
and Currency Currency
adjusted Adjusted translation Reported Adjusted translation Reported
$m $m $m $m $m $m $m
--------------------- --------- --------- ------------ --------- --------- ------------ -----------
Loans and advances to
customers (net) 1,037,987 1,062,696 (25,953) 1,036,743 1,019,004 (37,308) 981,696
--------------------- --------- --------- ------------ --------- --------- ------------ ---------
Interests in
associates
and joint ventures 26,684 25,420 (946) 24,474 23,152 (745) 22,407
--------------------- --------- --------- ------------ --------- --------- ------------ ---------
Total external assets 2,984,164 2,783,811 (68,659) 2,715,152 2,651,453 (93,329) 2,558,124
--------------------- --------- --------- ------------ --------- --------- ------------ ---------
Customer accounts 1,642,780 1,470,207 (31,092) 1,439,115 1,409,722 (47,079) 1,362,643
--------------------- --------- --------- ------------ --------- --------- ------------ ---------
Adjusted profit reconciliation
2020 2019 2018
Footnotes $m $m $m
--------------------------------------------------- --------- ------- ------- ---------
Year ended 31 Dec
--------------------------------------------------- --------- ------- ------- ---------
Adjusted profit before tax 12,149 22,149 21,199
--------------------------------------------------- --------- ------- ------- -------
Significant items (3,372) (8,924) (1,828)
--------------------------------------------------- --------- ------- ------- -------
- customer redress programmes (revenue) (21) (163) 53
--------------------------------------------------- ---------
- disposals, acquisitions and investment in
new businesses (revenue) (10) 768 (113)
--------------------------------------------------- ---------
- fair value movements on financial instruments 1 264 84 (100)
--------------------------------------------------- ---------
- restructuring and other related costs (revenue) 2 (170) - -
--------------------------------------------------- ---------
- costs of structural reform 3 - (158) (361)
- customer redress programmes (operating expenses) 54 (1,281) (146)
--------------------------------------------------- ---------
- disposals, acquisitions and investment in
new businesses (operating expenses) - - (52)
- impairment of goodwill and other intangible
assets (1,090) (7,349) -
--------------------------------------------------- ---------
- past service costs of guaranteed minimum
pension benefits equalisation (17) - (228)
--------------------------------------------------- ---------
- restructuring and other related costs (operating
expenses) 4 (1,908) (827) (66)
--------------------------------------------------- ---------
- settlements and provisions in connection
with legal and other regulatory matters (12) 61 (816)
--------------------------------------------------- ---------
- impairment of goodwill (share of profit in
associates and joint ventures) 5 (462) - -
--------------------------------------------------- ---------
- currency translation on significant items (59) 1
--------------------------------------------------- --------- ------- ------- -------
Currency translation 122 519
--------------------------------------------------- --------- ------- ------- -------
Reported profit before tax 8,777 13,347 19,890
--------------------------------------------------- --------- ------- ------- -------
1 Includes fair value movements on non-qualifying hedges and
debt valuation adjustments on derivatives.
2 Comprises losses associated with the RWA reduction commitments
and gains relating to the business update in February 2020.
3 Comprises costs associated with preparations for the UK's exit
from the European Union, costs to establish the UK ring-fenced bank
(including the UK ServCo group) and costs associated with
establishing an intermediate holding company in Hong Kong.
4 Includes impairment of software intangible assets of $189m (of
the total software intangible asset impairment of $1,347m) and
impairment of tangible assets of $197m.
5 During the year, The Saudi British Bank ('SABB'), an associate
of HSBC, impaired the goodwill that arose following the merger with
Alawwal bank in 2019. HSBC's post-tax share of the goodwill
impairment was $462m.
11 Trading assets
--------------
2020 2019
Footnotes $m $m
---------------------------------- --------- ------- ---------
Treasury and other eligible bills 24,035 21,789
---------------------------------- --------- ------- -------
Debt securities 102,846 126,043
---------------------------------- --------- ------- -------
Equity securities 77,643 78,827
---------------------------------- --------- ------- -------
Trading securities 204,524 226,659
---------------------------------- --------- ------- -------
Loans and advances to banks 1 8,242 8,402
---------------------------------- --------- ------- -------
Loans and advances to customers 1 19,224 19,210
---------------------------------- --------- ------- -------
Year ended 31 Dec 231,990 254,271
---------------------------------- --------- ------- -------
1 Loans and advances to banks and customers include reverse
repos, stock borrowing and other accounts.
Trading securities(1)
------- ---------
2020 2019
Footnotes $m $m
--------------------------------------- --------- ------- ---------
US Treasury and US Government agencies 2 17,393 25,722
--------------------------------------- --------- ------- -------
UK Government 8,046 10,040
--------------------------------------- --------- ------- -------
Hong Kong Government 6,500 9,783
--------------------------------------- --------- ------- -------
Other governments 70,580 72,456
--------------------------------------- --------- ------- -------
Asset-backed securities 3 4,253 4,691
--------------------------------------- --------- ------- -------
Corporate debt and other securities 20,109 25,140
--------------------------------------- --------- ------- -------
Equity securities 77,643 78,827
--------------------------------------- --------- ------- -------
At 31 Dec 204,524 226,659
--------------------------------------- --------- ------- -------
1 Included within these figures are debt securities issued by
banks and other financial institutions of $10,876m (2019:
$17,846m), of which $1,298m (2019: $2,637m) are guaranteed by
various governments.
2 Includes securities that are supported by an explicit guarantee issued by the US Government.
3 Excludes asset-backed securities included under US Treasury and US Government agencies.
1
12 Fair values of financial instruments carried at fair value
----------------------------------------------------------
Control framework
Fair values are subject to a control framework designed to
ensure that they are either determined or validated by a function
independent of the risk taker.
Where fair values are determined by reference to externally
quoted prices or observable pricing inputs to models, independent
price determination or validation is used. For inactive markets,
HSBC sources alternative market information, with greater weight
given to information that is considered to be more relevant and
reliable. Examples of the factors considered are price
observability, instrument comparability, consistency of data
sources, underlying data accuracy and timing of prices.
For fair values determined using valuation models, the control
framework includes development or validation by independent support
functions of the model logic, inputs, model outputs and
adjustments. Valuation models are subject to a process of due
diligence before becoming operational and are calibrated against
external market data on an ongoing basis.
Changes in fair value are generally subject to a profit and loss
analysis process and are disaggregated into high-level categories
including portfolio changes, market movements and other fair value
adjustments.
The majority of financial instruments measured at fair value are
in GBM. GBM's fair value governance structure comprises its Finance
function, Valuation Committees and a Valuation Committee Review
Group. Finance is responsible for establishing procedures governing
valuation and ensuring fair values are in compliance with
accounting standards. The fair values are reviewed by the Valuation
Committees, which consist of independent support functions. These
committees are overseen by the Valuation Committee Review Group,
which considers all material subjective valuations.
Financial liabilities measured at fair value
In certain circumstances, HSBC records its own debt in issue at
fair value, based on quoted prices in an active market for the
specific instrument. When quoted market prices are unavailable, the
own debt in issue is valued using valuation techniques, the inputs
for which are either based on quoted prices in an inactive market
for the instrument or are estimated by comparison with quoted
prices in an active market for similar instruments. In both cases,
the fair value includes the effect of applying the credit spread
that is appropriate to HSBC's liabilities. The change in fair value
of issued debt securities attributable to the Group's own credit
spread is computed as follows: for each security at each reporting
date, an externally verifiable price is obtained or a price is
derived using credit spreads for similar securities for the same
issuer. Then, using discounted cash flow, each security is valued
using a Libor-based discount curve. The difference in the
valuations is attributable to the Group's own credit spread. This
methodology is applied consistently across all securities.
Structured notes issued and certain other hybrid instruments are
included within trading liabilities and are measured at fair value.
The credit spread applied to these instruments is derived from the
spreads at which HSBC issues structured notes.
Gains and losses arising from changes in the credit spread of
liabilities issued by HSBC, recorded in other comprehensive income,
reverse over the contractual life of the debt, provided that the
debt is not repaid at a premium or a discount.
Fair value hierarchy
Fair values of financial assets and liabilities are determined
according to the following hierarchy:
-- Level 1 - valuation technique using quoted market price.
These are financial instruments with quoted prices for identical
instruments in active markets that HSBC can access at the
measurement date.
-- Level 2 - valuation technique using observable inputs. These
are financial instruments with quoted prices for similar
instruments in active markets or quoted prices for identical or
similar instruments in inactive markets and financial instruments
valued using models where all significant inputs are
observable.
-- Level 3 - valuation technique with significant unobservable
inputs. These are financial instruments valued using valuation
techniques where one or more significant inputs are
unobservable.
--
Financial instruments carried at fair value and bases of valuation
2020 2019
Level Level Level Level Level Level
1 2 3 Total 1 2 3 Total
$m $m $m $m $m $m $m $m
--------------------------------- ------- ------- ------ ------- ------- ------- ----- ---------
Recurring fair value measurements
at 31 Dec
--------------------------------- ------- ------- ------ ------- ------- ------- ----- ---------
Assets
--------------------------------- ------- ------- ------ ------- ------- ------- ----- ---------
Trading assets 167,980 61,511 2,499 231,990 186,653 62,639 4,979 254,271
--------------------------------- ------- ------- ------ ------- ------- ------- ----- -------
Financial assets designated
and otherwise mandatorily
measured at fair value through
profit or loss 19,711 14,365 11,477 45,553 18,626 15,525 9,476 43,627
--------------------------------- ------- ------- ------ ------- ------- ------- ----- -------
Derivatives 2,602 302,454 2,670 307,726 1,728 239,131 2,136 242,995
--------------------------------- ------- ------- ------ ------- ------- ------- ----- -------
Financial investments 303,654 94,746 3,654 402,054 261,341 93,018 3,218 357,577
--------------------------------- ------- ------- ------ ------- ------- ------- ----- -------
Liabilities
--------------------------------- ------- ------- ------ ------- ------- ------- ----- ---------
Trading liabilities 53,290 21,814 162 75,266 66,925 16,192 53 83,170
--------------------------------- ------- ------- ------ ------- ------- ------- ----- -------
Financial liabilities designated
at fair value 1,267 150,866 5,306 157,439 9,549 149,901 5,016 164,466
--------------------------------- ------- ------- ------ ------- ------- ------- ----- -------
Derivatives 1,788 297,025 4,188 303,001 1,331 235,864 2,302 239,497
--------------------------------- ------- ------- ------ ------- ------- ------- ----- -------
Balances from 2019 have been re-presented to disclose a
consistent application of the levelling methodology, primarily for
private debt and equity and real estate investments during the
period. This resulted in $15.1bn and $2.9bn moving into Levels 2
and 3, respectively, from Level 1. The change has impacted the
disclosure for 'Financial investments' and 'Financial assets
designated and otherwise mandatorily measured at fair value'.
Transfers between Level 1 and Level 2 fair values
Assets Liabilities
Designated
and otherwise
mandatorily Designated
Financial Trading measured at Trading at fair
investments assets fair value Derivatives liabilities value Derivatives
$m $m $m $m $m $m $m
-------------- ------------ ------- ------------- ----------- ------------ ---------- -------------
At 31 Dec 2020
-------------- ------------ ------- ------------- ----------- ------------ ---------- -------------
Transfers from
Level
1 to Level 2 4,514 3,891 245 - 155 7,414 -
-------------- ------------ ------- ------------- ----------- ------------ ---------- -----------
Transfers from
Level
2 to Level 1 7,764 5,517 328 1 433 - -
At 31 Dec 2019
Transfers from
Level
1 to Level 2 7,965 3,304 - 24 278 - -
-------------- ------------ ------- ----------- ------------ ---------- -----------
Transfers from
Level
2 to Level 1 4,184 2,726 673 111 220 - 117
-------------- ------------ ------- ----------- ------------ ---------- -----------
Balances from 2019 have been re-presented to disclose a
consistent application of the levelling methodology.
Transfers between levels of the fair value hierarchy are deemed
to occur at the end of each quarterly reporting period. Transfers
into and out of levels of the fair value hierarchy are primarily
attributable to observability of valuation inputs and price
transparency.
Fair value adjustments
We adopt the use of fair value adjustments when we take into
consideration additional factors not incorporated within the
valuation model that would otherwise be considered by a market
participant. We classify fair value adjustments as either
'risk-related' or 'model-related'. The majority of these
adjustments relate to GBM. Movements in the level of fair value
adjustments do not necessarily result in the recognition of profits
or losses within the income statement. For example, as models are
enhanced, fair value adjustments may no longer be required.
Similarly, fair value adjustments will decrease when the related
positions are unwound, but this may not result in profit or
loss.
Global Banking and Markets fair value adjustments
2020 2019
Corporate Corporate
GBM Centre GBM Centre
$m $m $m $m
Type of adjustment
Risk-related 1,170 28 1,118 47
- bid-offer 514 - 506 1
- uncertainty 106 1 115 1
- credit valuation adjustment 445 27 355 38
- debt valuation adjustment (120) - (126) -
- funding fair value adjustment 204 - 241 7
- other 21 - 27 -
Model-related 74 - 71 3
- model limitation 70 - 68 3
- other 4 - 3 -
Inception profit (Day 1 P&L reserves) 104 - 72 -
At 31 Dec 1,348 28 1,261 50
We reallocated our reporting of Markets Treasury and the funding
costs of HSBC Holdings debt from Corporate Centre to the global
businesses. Comparative data have been re-presented
accordingly.
Fair value adjustment changes were mainly driven by an increase
in inception profit (Day 1 P&L reserves), and an increase in
credit valuation adjustment ('CVA') due to widening credit spreads
and changes to derivative exposures caused by interest rates
moves.
Bid-offer
IFRS 13 'Fair value measurement' requires the use of the price
within the bid-offer spread that is most representative of fair
value. Valuation models will typically generate mid-market values.
The bid-offer adjustment reflects the extent to which bid-offer
costs would be incurred if substantially all residual net portfolio
market risks were closed using available hedging instruments or by
disposing of or unwinding the position.
Uncertainty
Certain model inputs may be less readily determinable from
market data and/or the choice of model itself may be more
subjective. In these circumstances, an adjustment may be necessary
to reflect the likelihood that market participants would adopt more
conservative values for uncertain parameters and/or model
assumptions than those used in HSBC's valuation model.
Credit and debt valuation adjustments
The credit valuation adjustment ('CVA') is an adjustment to the
valuation of over-the-counter ('OTC') derivative contracts to
reflect the possibility that the counterparty may default and that
HSBC may not receive the full market value of the transactions.
The debt valuation adjustment ('DVA') is an adjustment to the
valuation of OTC derivative contracts to reflect the possibility
that HSBC may default, and that it may not pay the full market
value of the transactions.
HSBC calculates a separate CVA and DVA for each legal entity,
and for each counterparty to which the entity has exposure. With
the exception of central clearing parties, all third-party
counterparties are included in the CVA and DVA calculations, and
these adjustments are not netted across Group entities.
HSBC calculates the CVA by applying the probability of default
('PD') of the counterparty, conditional on the non-default of HSBC,
to HSBC's expected positive exposure to the counterparty and
multiplying the result by the loss expected in the event of
default. Conversely, HSBC calculates the DVA by applying the PD of
HSBC, conditional on the non-default of the counterparty, to the
expected positive exposure of the counterparty to HSBC and
multiplying the result by the loss expected in the event of
default. Both calculations are performed over the life of the
potential exposure.
For most products HSBC uses a simulation methodology, which
incorporates a range of potential exposures over the life of the
portfolio, to calculate the expected positive exposure to a
counterparty. The simulation methodology includes credit mitigants,
such as counterparty netting agreements and collateral agreements
with the counterparty.
The methodologies do not, in general, account for 'wrong-way
risk'. Wrong-way risk is an adverse correlation between the
counterparty's probability of default and the mark-to-market value
of the underlying transaction. The risk can either be general,
perhaps related to the currency of the issuer country, or specific
to the transaction concerned. When there is significant wrong-way
risk, a trade-specific approach is applied to reflect this risk in
the valuation.
Funding fair value adjustment
The funding fair value adjustment ('FFVA') is calculated by
applying future market funding spreads to the expected future
funding exposure of any uncollateralised component of the OTC
derivative portfolio. The expected future funding exposure is
calculated by a simulation methodology, where available, and is
adjusted for events that may terminate the exposure, such as the
default of HSBC or the counterparty. The FFVA and DVA are
calculated independently.
Model limitation
Models used for portfolio valuation purposes may be based upon a
simplified set of assumptions that do not capture all current and
future material market characteristics. In these circumstances,
model limitation adjustments are adopted.
Inception profit (Day 1 P&L reserves)
Inception profit adjustments are adopted when the fair value
estimated by a valuation model is based on one or more significant
unobservable inputs. The accounting for inception profit
adjustments is discussed in Note 1.
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February 23, 2021 11:31 ET (16:31 GMT)
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