TIDMHSBA
RNS Number : 1463X
HSBC Holdings PLC
26 August 2020
Risk
Page
Key developments in the first
half of 2020 50
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Areas of special interest 50
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Credit risk 54
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Capital and liquidity risk 77
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Market risk 84
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Insurance manufacturing operations
risk 87
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We recognise that the primary role of risk management is to
protect our customers, business, colleagues, shareholders and the
communities that we serve, while ensuring we are able to support
our strategy and provide sustainable growth. As we move forward
with the transformation programme announced in February, it will be
critical that we actively manage the execution risks arising from
our transformation plans.
We use a comprehensive and newly updated risk management
framework across the organisation and all risk types, underpinned
by the Group's culture and values. This outlines the key
principles, policies and practices that we employ in managing
material risks, both financial and non-financial.
All our people are responsible for the management of risk, with
the ultimate accountability residing with the Board. Our Global
Risk function, led by the Group Chief Risk Officer, plays an
important role in reinforcing the Group's culture and values. It
focuses on creating an environment that encourages our people to
speak up and do the right thing.
Global Risk is independent from the global businesses, including
our sales and trading functions, to provide challenge, oversight
and appropriate balance in risk/reward decisions.
A summary of our current policies and practices regarding the
management of risk is set out in the 'Risk management' section on
pages 73 to 76 of the Annual Report and Accounts 2019.
Key developments in the first half
of 2020
We have actively managed the risks resulting from the Covid-19
outbreak and its impacts on our customers and operations during the
first half of 2020, as well as other key risks described in this
section.
We supplemented our existing approach to risk management with
additional tools and practices to mitigate and manage risks. We
increased our focus on the quality and timeliness of the data used
to inform management decisions, such as through increased frequency
of governance touch points informed by early warning indicators and
prudent active risk management of our risk appetite.
In addition, we enhanced our risk management in the following
areas:
-- In January 2020, we simplified our approach and articulation
of risk management through the combination of our enterprise risk
management framework and our operational risk management
framework.
-- Capital risk management practices continued to be enhanced
across the Group through the Capital Risk Management function,
focusing on both adequacy of capital and sufficiency of
returns.
-- The global model risk policy and associated standards were
revised to improve how we manage model risk and meet enhanced
external expectations. The new policy will be implemented over a
six-month period commencing 1 May 2020.
-- We continued to focus on simplifying our approach to
non-financial risk management. We are driving more effective
oversight and better end-to-end identification and management of
non-financial risks.
-- We combined the second line of defence Operational Risk and
second line of defence Resilience Risk sub-functions. By bringing
the two teams together, we expect to benefit from improved
stewardship, better risk management capabilities and better
outcomes for our customers.
-- We continued to improve the effectiveness of our financial
crime controls in accordance with our specific regulatory
obligations. We continued to invest in both advanced analytics and
artificial intelligence, which remain key components of our next
generation of tools to fight financial crime.
Areas of special interest
During the first half of 2020, a number of areas were considered
as part of our top and emerging risks because of the effect they
have on the Group. In this section we have focused on geopolitical
and macroeconomic risk, risks related to Covid-19, risks to our
operations and portfolios in Asia-Pacific, the UK's withdrawal from
the EU, model risk and interbank offered rate ('Ibor')
transition.
Geopolitical and macroeconomic risk
The Covid-19 outbreak dominated the political and economic
landscape for the first six months of 2020. The twin shocks of a
public health emergency and the resultant economic fallout have
been felt around the world, and hit both advanced and emerging
markets. The closure of borders threatened medical and food
supplies for many markets, and there is the potential for countries
and territories to focus efforts on building resilient supply
chains closer to home to be less vulnerable to global shocks.
The Covid-19 outbreak has heightened existing US-China tensions.
US executive branch and congressional action has put pressure on
the initial 'phase one' provisions under the trade agreement signed
in January. Frictions span an increasing range of issues, including
trade, technology and human rights. The Covid-19 outbreak has
accelerated US efforts to reduce reliance on China in strategic
industries such as sensitive technology, pharmaceuticals and
precursor chemicals.
Hong Kong also emerged as an additional source of tension in
US-China relations, with potential ramifications for the Group,
including the impact of sanctions, as well as regulatory,
reputational and market risks for the Group. While Hong Kong has
experienced lower levels of social unrest in 2020, disagreements
over the interpretation of the 'one country, two systems' model may
continue to drive protest activity in the lead up to Hong Kong's
legislative council elections. For further details see 'Risks to
our operations in Asia-Pacific'.
While UK-China relations have historically been shaped by strong
trade and investment, there are also emerging challenges. Following
the passage of the Hong Kong national security law, the UK has
offered residency rights and a path to citizenship to eligible
British National (Overseas) passport holders in Hong Kong. In
addition, both the UK and Hong Kong have suspended their
extradition treaties with each other. The rollout of the UK 5G
telecommunications network has also complicated relations. On 14
July, new restrictions on Chinese company Huawei were announced
under the Telecoms Security Bill. These issues have the potential
to impact bilateral commercial relationships adversely.
Emerging and frontier markets are suffering particularly heavily
from the Covid-19 outbreak, in light of healthcare shortcomings,
widespread labour informality, exposure to commodities production
and often weak policy frameworks and buffers. Multilateral
institutions have mobilised support for the weaker frontier
markets, with the World Bank and G-20 marshalling efforts to
implement a standstill on debt to public sector institutions. The
International Monetary Fund has also, to date, lent $25bn in
emergency funds to over 70 countries. However, negotiations on debt
to the private sector will prove more difficult, and may result in
sovereign debt restructuring and defaults for several countries.
Most developed markets are expected to recover from the crisis,
albeit after some permanent business closures and job losses. The
majority of developed markets are also expected to not achieve
pre-crisis growth rates or activity levels for the foreseeable
future. These countries and territories should be able to shoulder
the higher public deficits and debts necessary to offset private
sector weaknesses, given the continuing low cost of servicing
public debt. However, a group of weaker developed markets,
including some members of the EU, entered the Covid-19 crisis on
weak economic and fiscal footing and suffered high healthcare and
economic costs. Although eurozone progress in mutualisation of the
debt should help support recoveries and keep debt servicing costs
down in the near term, there are concerns that permanently higher
debt burdens will eventually lead to economies questioning their
sustainability.
Following the UK's departure from the EU, an end to the
transition period on 31 December 2020 without a free-trade
agreement or an extension of the negotiating period would likely
lead to a reversion of UK-EU trade to WTO rules from 2021. The
absence of formal arrangements could further set back the expected
gradual recovery of the UK and EU economies from recessions caused
by the Covid-19 outbreak.
The contraction in the global economy has had varying effects on
our customers, with many of them experiencing financial
difficulties. This has resulted in an increase in expected credit
losses ('ECL') and risk-weighted assets ('RWAs'). For further
details on customer relief programmes, see page 66. For further
details on RWAs, see page 79.
Risks related to Covid-19
The Covid-19 pandemic and its effect on the global economy have
impacted our customers and our performance, and the future effects
of the pandemic are uncertain. The outbreak necessitated
governments to respond at unprecedented levels to protect public
health, local economies and livelihoods. It has affected regions at
different times and varying degrees as it has developed. The
varying government measures in response have added challenges,
given the rapid pace of change and significant operational demands.
The speed at which countries and territories will be able to unwind
their lockdown measures and return to pre-Covid-19 economic levels
will vary based on the levels of infection and local political
decisions. There remains a risk of subsequent waves of
infection.
Government restrictions imposed around the world to limit the
spread of Covid-19 resulted in a sharp contraction in global
economic activity in the first half of 2020. At the same time
governments also took steps designed to soften the extent of the
damage to investment, trade and labour markets. Economic activity
is expected to gradually recover in the second half of the year but
there is significant uncertainty associated with the pace and scale
of recovery. In our Central scenario, GDP contracts sharply in 2020
in all our major markets, except China, reflective of the
widespread nature of government restrictions. GDP growth in China
is expected to be positive in 2020, although the growth rate is
expected to be significantly lower compared with previous years.
Strong recovery in economic activity in our major markets is
expected in 2021, but this is contingent on the successful
containment of the virus and the evolution of other top risks,
including the UK's relationship with the EU following the
transition period, political unrest in Hong Kong and tensions
between the US and China. It also relies on the willingness and
ability of households and businesses to return towards pre-crisis
spending levels. While GDP is expected to grow strongly in our
major markets in 2021, the Central scenario projects a more gradual
decline in the unemployment rate in these key markets. For further
details on our central scenario see 'Measurement uncertainty and
sensitivity analysis' on page 56.
There is a material risk of a renewed drop in economic activity.
The economic fallout from Covid-19 risks increasing inequality
across markets that have already suffered from social unrest. This
will leave the burden on governments and central banks to maintain
or increase fiscal and monetary stimulus. After financial markets
suffered a sharp fall in the early phases of the spread of
Covid-19, they rebounded but still remain volatile. Depending on
the degree to which global economic growth suffers permanent
losses, financial asset prices may suffer a further sharp fall.
Governments and central banks in major economies have deployed
extensive measures to support their local populations. Measures
implemented by governments included income support to households
and funding support to businesses. Central bank measures included
cuts to policy rates, support to funding markets and asset
purchases. These measures are expected to be unwound gradually as
government restrictions ease and as economic activity increases.
Central banks are expected to maintain record-low interest rates
for a considerable period of time and the debt burden of
governments is expected to rise significantly.
We initiated market-specific measures to support our personal
and business customers through these challenging times. These
included mortgage assistance, payment holidays, the waiving of
certain fees and charges, and liquidity relief for businesses
facing market uncertainty and supply chain disruption. We are also
working closely with governments, and supporting national schemes
that focus on the parts of the economy most impacted by Covid-19.
In the UK, this included providing access to the various government
support schemes from the beginning. In Hong Kong, we provided
prompt liquidity relief to businesses facing market uncertainty and
supply chain pressures. For further details of our customer relief
programmes, see page 66.
Central bank and government actions and support measures taken
in response to the Covid-19 outbreak, and our responses to those,
have created, and may in the future create restrictions in relation
to capital. This has limited and may in the future limit
management's flexibility in managing the business and taking action
in relation to capital distribution and capital allocation. For
example, in response to a written request from the Prudential
Regulation Authority ('PRA'), we cancelled the fourth interim
dividend for 2019 of $0.21 per ordinary share. Similar requests
were also made to other UK incorporated banking groups. We also
announced that until the end of 2020, we will make no quarterly or
interim dividend payments or accruals in respect of ordinary
shares. We also plan to suspend share buy-backs in respect of
ordinary shares in 2020 and 2021.
It is recognised that all of the above measures and actions, and
our responses to those, expose the Group to heightened risks. The
rapid introduction and varying nature of the government support
schemes, as well as customer expectations, can lead to risks as the
Group implements large-scale changes in a short period of time.
This has led to increased operational risks, including complex
conduct considerations, increased reputational risk and increased
risk of fraud. These risks are likely to be heightened further as
and when those government support schemes are unwound. Central bank
and government actions and support measures, and our responses to
those, have also led to increased litigation risk, including
lawsuits that have been and may continue to be brought in
connection with our cancellation of the fourth interim dividend for
2019.
At 30 June 2020, our CET1 ratio was 15.0%, compared with 14.7%
at 31 December 2019, and our liquidity coverage ratio ('LCR') was
148%. Our capital, funding and liquidity position is expected to
help us to continue supporting our customers throughout the
Covid-19 outbreak.
In many of our markets, the Covid-19 outbreak has led to a
weakening in GDP, a key input used for calculating ECL, and there
remains the risk of more adverse economic scenarios given its
ongoing impact. Furthermore, ECL will also increase from other
parts of our business impacted by the disruption to supply chains.
The impact will vary by sectors of the economy, with heightened
risk to the oil and gas, transport and discretionary consumer
sectors being observed in the first stages of the outbreak. The
impact of the outbreak on the long-term prospects of businesses in
these sectors is uncertain and may lead to significant ECL charges
on specific exposures, which may not be fully captured in ECL
estimates. In addition, in times of crisis, fraudulent activity is
often more prevalent, leading to potentially significant ECL
charges.
The significant changes in economic and market drivers, customer
behaviours and government actions caused by Covid-19 have also
impacted the performance of financial models. These include retail
and wholesale credit models such as IFRS loss models, as well as
capital models, traded risk models and models used in the
asset/liability management process. This has required more ongoing
monitoring and more frequent testing across the Group, particularly
for credit models. It also has resulted in the use of compensating
controls, specifically as underlays on top of model outputs to
provide a more appropriate assessment. By their nature, such
compensating controls require a significant degree of management
judgement and assumptions to be applied, and there is a risk that
future actual results/performance may differ from such judgements
and assumptions.
The performance and usage of models over the next 12 to 18
months will continue to be impacted by the consequences of the
Covid-19 outbreak. It is too early in the current situation to be
certain of the magnitude of change required for models at HSBC.
However, it is likely that capital, credit risk and IFRS 9 models
will need to be recalibrated, or in some cases may need to be
replaced with the development of alternative models. The
effectiveness of the existing models will depend in large part on
the depth and length of the economic downturn faced by the world's
economies.
As a result of the Covid-19 outbreak, business continuity plans
have been implemented. Despite high levels of working from home,
the majority of our service level agreements, both internal and
external, are being maintained. We have experienced no major
impacts to the supply chain from our third-party service providers.
The risk of damage or theft to our physical assets or criminal
injury to our employees remains unchanged. No significant incidents
have impacted our buildings or staff. Expedited decisions to ensure
the continuity of critical customer services are being documented
through governance.
There remain significant uncertainties in assessing the duration
of the Covid-19 outbreak and its impact, and how this will evolve
through 2020 and beyond. The actions taken by the various
governments and central banks, in particular in the UK, mainland
China, Hong Kong and the US, provide an indication of the potential
severity of the downturn and post-recovery environment, which from
a commercial, regulatory and risk perspective could be
significantly different to past crises and persist for a prolonged
period. A prolonged period of significantly reduced economic
activity as a result of the impact of the outbreak would have a
materially adverse effect on our financial condition, results of
operations, prospects, liquidity, capital position and credit
ratings. This would, in turn, have an impact on our ability to meet
our financial targets as set out in our business update in February
2020 and also adversely affect our future dividend policy. We
continue to monitor the situation closely, and given the novel or
prolonged nature of the outbreak, additional mitigating actions may
be required.
Risks to our operations and portfolios in Asia-Pacific
The global Covid-19 outbreak has fuelled existing tensions
within the US-China bilateral relationship. Disagreements over
trade, technology, human rights and the status of Hong Kong could
result in people, sanctions, regulatory, reputational and market
risks for the Group. The extent to which both countries can
overcome these tensions and coordinate their responses to the
outbreak is likely to have an important bearing on the
post-Covid-19 global economy and geopolitical order.
The rapid rollout of 5G in 2020 and its importance to future
standard setting and economic growth is likely to lead to
heightened corporate and national competition over ownership of the
relevant technologies.
Hong Kong has also emerged as an additional source of tension in
US-China relations, with potential ramifications for the Group. In
June, China passed the Hong Kong national security law, which is
now in force in Hong Kong. In response, the US took steps to
terminate the preferential treatment afforded to Hong Kong under
the 1992 Hong Kong Policy Act. Additionally, the US President
signed into law the Hong Kong Autonomy Act and issued an Executive
Order, providing authority to impose primary sanctions against
entities and individuals determined to have undermined Hong Kong's
autonomy. The Act also provides authority to impose secondary
sanctions against non-US financial institutions determined to have
conducted a significant transaction for any individual or entity
subject to primary sanctions under the Act. Disagreements over the
interpretation of the 'one country, two systems' model is likely to
affect protest activity in Hong Kong, and may prompt further US
executive branch or congressional action. Tensions in the UK-China
relationship have been heightened over disagreements about future
UK 5G networks and Hong Kong. In response to the introduction of
the Hong Kong national security law, the UK has offered residency
rights and a path to citizenship to eligible British National
(Overseas) passport holders in Hong Kong. The UK and Hong Kong
extradition treaties have also recently been suspended.
As geopolitical tensions rise, the compliance by multinational
corporations with their legal or regulatory obligations in one
jurisdiction may be seen as supporting the law or policy objectives
of that jurisdiction over another jurisdiction, creating additional
risks for the Group. Geopolitical tensions will continue to present
challenges for HSBC.
Process of UK withdrawal from the EU
The UK left the EU on 31 January 2020 and entered a transition
period until 31 December 2020, during which negotiations have been
taking place on the future relationship. At this stage it remains
unclear what that relationship will look like, potentially leaving
firms with little time to adapt to changes, which may enter into
force on 1 January 2021.
Our programme to manage the impact of the UK leaving the EU has
now been largely completed. The programme base case scenario
assumes the UK exits the transition period without the existing
passporting or regulatory equivalence framework that supports
cross-border business. Priority has been given to ensuring we can
continue to service our European Economic Area ('EEA')-based
customers once this framework falls away, with three main areas of
activity:
-- extension of our product and balance sheet capabilities in
continental Europe, mainly in HSBC France and its branches in the
Netherlands and Ireland;
-- migration of HSBC Bank plc's EEA clients to HSBC France and
other affiliates within the EU; and
-- the transfer of HSBC Bank plc's EEA branch businesses to HSBC France.
These objectives were largely completed by the end of 2019. The
current priority is to complete the migration of remaining
customers to one of our entities in the EU.
Product offering and client migration
To accommodate customer migrations and new business after the
UK's departure from the EU, we expanded and enhanced our existing
product offering in France, the Netherlands and Ireland.
The UK's departure from the EU's financial services regulatory
framework at the end of the transition period without alternative
equivalence-type arrangements, or a trade deal being in place, is
likely to have an impact on our clients' operating models,
including their working capital requirements, investment decisions
and access to financial markets infrastructure. Our priority is to
provide continuity of service, while minimising the level of change
for our customers.
Due to our base case scenario we are required to migrate some
EEA-incorporated clients from the UK to HSBC France, or another EEA
entity. This has now mostly been completed for clients we expect
can no longer be serviced from the UK. We are working in close
collaboration with any remaining clients to make the transition as
smooth as possible before the end of December 2020. We have been in
close contact with these clients since the beginning of the
transition period and will support them in the final phase of their
migration to one of our entities in the EU. We are also considering
the application of regulatory regimes in certain EU member states
that allow cross-border business with third-country firms and the
extent to which those may permit continued servicing of some EEA
clients from the UK following the transition period.
Employees
The migration of EEA-incorporated clients requires us to
strengthen our local teams in the EU, and France in particular.
Given the scale and capabilities of our existing business in
France, we are well prepared to take on additional roles and
activities. Looking beyond the transfer of roles to the EU, we are
also providing support to our employees who are UK citizens
resident in EEA countries, and employees who are citizens of an EU
member state resident in the UK.
Across the programme, we have made good progress in terms of
ensuring we are prepared for the UK leaving the transition period
under the terms described above. However, there remain execution
risks, many of them linked to the uncertain outcome of
negotiations.
Model risk
The economic consequences of the Covid-19 outbreak on
macroeconomic variables that are used in models are outside of the
bounds for which IFRS 9 models have been built and calibrated to
operate. Moreover, the complexities of current governmental support
programmes and regulatory guidance on the treatment of customer
impacts, such as forbearance, payment holidays and the
unpredictable pathways of the Covid-19 outbreak, have not
previously been factored into the modelling. Consequently, IFRS 9
models under the current economic conditions are generating outputs
that do not accurately assess the actual level of credit quality.
Therefore, overlays based on expert analysis are necessary to
reflect ECL.
In the short term, the focus is on refining model inputs and
outputs in a consistent and explainable manner, including the use
of model overlays. Wider ranging model changes for risk and loss
models will take time to develop and need more real data on which
models can be trained to be meaningful. Given the remaining
significant uncertainties of Covid-19 and its impacts, it is too
early to determine if model recalibration or redevelopment will be
required.
Ibor transition
The Financial Stability Board has observed that the decline in
interbank short-term unsecured funding poses structural risks for
interest rate benchmarks that reference these markets. In response,
regulators and central banks in various jurisdictions have convened
national working groups to identify alternative benchmark rates
(near risk-free rates or RFRs) for these Ibors and, where
appropriate, to facilitate an orderly transition to these
rates.
Following the announcement by the UK's Financial Conduct
Authority ('FCA') in July 2017 that it will no longer persuade or
require banks to submit rates for London interbank offered rate
('Libor') after 2021, the national working groups for the affected
currencies were tasked with facilitating an orderly transition of
the relevant Libors to their chosen RFRs. The euro working group is
also responsible for facilitating an orderly transition of the Euro
Overnight Index Average ('Eonia') to the euro short-term rate
('EURSTER') as a result of Eonia not being made compliant with the
EU Benchmark Regulation.
Regulators have reiterated that firms cannot rely on Libor being
published after the end of 2021 but acknowledge that Covid-19 may
impact on transition plans.
National working groups, regulators and governments have also
recognised that certain Libor contracts genuinely have no, or
inappropriate, alternatives and no realistic ability to be
renegotiated or amended prior to Libor's cessation. In response,
the US government and the European Commission intend to implement
legislation that gives market participants the confidence to
transition these 'tough legacy' contracts to the recommended
benchmark replacement without the fear of legal repercussions.
Similarly, in June 2020, the UK government announced that it would
grant powers to the FCA to enable continued publication of a Libor
number using a different and more robust methodology and inputs,
and therefore reduce disruption to any holders of these tough
legacy contracts. However, there is no certainty as to whether the
FCA will exercise these powers or what form the revised methodology
would take, and the FCA has consequently encouraged users of Libor
to renegotiate or amend as many contracts as possible before
Libor's cessation.
HSBC established the Ibor transition programme with the
objective of facilitating an orderly transition from Libor and
Eonia for HSBC and its clients. During the first half of 2020, our
Libor transition has continued to develop, as detailed below.
Develop RFR product capabilities
Our global businesses continue to develop their capabilities to
offer RFR-based products and the supporting processes and systems.
The Covid-19 outbreak has impacted the speed with which we are able
to develop these capabilities and many of our customers' readiness
to adopt RFR-based products. Consequently, the sale of Libor and
Eonia contracts with maturities beyond 2021, known as legacy
contracts, will continue for longer than initially anticipated.
This is likely to increase the volume of legacy contracts that will
need to be transitioned.
Transition legacy contracts
The programme is also continuing to develop the capability to
transition legacy Libor and Eonia contracts on a larger scale. The
Covid-19 outbreak has also affected the pace with which many of our
customers will have been preparing to adopt RFR-based products.
Therefore, it has likely affected the pace at which they will
transition their legacy contracts to RFRs. Consequently, we expect
legacy contract transition to occur over a shortened time period.
In combination with the greater number of legacy contracts
requiring transition, this increases the overall level of execution
risk on the transition process, which could potentially increase
the level of conduct and operational risks.
In addition to the heightened conduct and operational risks, the
process of adopting new reference rates may expose the Group to an
increased level of financial risk, such as potential earnings
volatility resulting from contract modifications and changes in
hedge accounting relationships. Furthermore, the transition to RFRs
could have a range of adverse impacts on our business, including
legal proceedings or other actions regarding the interpretation and
enforceability of provisions in Ibor-based contracts and regulatory
investigations or reviews in respect of our preparation and
readiness for the replacement of Ibor with RFRs. We continue to
engage with industry participants, the official sector and our
clients to support an orderly transition and the mitigation of the
risks resulting from the transition.
Credit risk
Page
Overview 54
Credit risk in the first half
of 2020 54
Summary of credit risk 54
Measurement uncertainty and sensitivity
analysis of ECL estimates 56
Reconciliation of changes in
gross carrying/nominal amount
and allowances for loans and
advances to banks and customers 62
Credit quality of financial instruments 64
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Customer relief programmes 66
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Personal lending 68
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Wholesale lending 70
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Supplementary information 73
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Change in reportable segments 73
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Overview
Credit risk is the risk of financial loss if a customer or
counterparty fails to meet an obligation under a contract. Credit
risk arises principally from direct lending, trade finance and
leasing business, but also from certain other products, such as
guarantees and derivatives.
Credit risk in the first half of 2020
During 1H20, due to the unique market conditions in the Covid-19
outbreak, we expanded operational practices to provide short-term
support to customers under the current policy framework. For
further details of market-specific measures to support our personal
and business customers, see page 66. There have been no material
changes to credit risk policy.
A summary of our current policies and practices for the
management of credit risk is set out in 'Credit risk management' on
page 84 of the Annual Report and Accounts 2019.
Gross loans and advances to customers of $1,032bn decreased from
$1,045bn at 31 December 2019. This decrease included adverse
foreign exchange movements of $31bn. Loans and advances to banks of
$77bn increased from $69bn at 31 December 2019. This included
adverse foreign exchange movements of $2bn.
The change in expected credit losses and other credit impairment
charges ('ECL') in the income statement for the period was $6.9bn.
For further details, see the financial summary on page 25.
Summary of credit risk
The following disclosure presents the gross carrying/nominal
amount of financial instruments to which the impairment
requirements in IFRS 9 are applied and the associated allowance for
ECL. The following tables analyse loans by industry sector and
represent the concentration of exposures on which credit risk is
managed.
The allowance for ECL increased from $9.4bn at 31 December 2019
to $14.5bn at 30 June 2020.
The allowance for ECL at 30 June 2020 comprised $13.5bn in
respect of assets held at amortised cost, $0.7bn in respect of loan
commitments and financial guarantees, and $0.2bn in respect of debt
instruments measured at fair value through other comprehensive
income ('FVOCI').
Summary of financial instruments to which the impairment requirements
in IFRS 9 are applied
At 30 Jun 2020 At 31 Dec 2019
Gross carrying/nominal Allowance Gross carrying/nominal Allowance
amount for ECL(1) amount for ECL(1)
Footnotes $m $m $m $m
---------- ---------------------- ----------- ---------------------- -------------
Loans and advances to
customers
at amortised cost 1,031,908 (13,227) 1,045,475 (8,732)
- personal 422,184 (4,401) 434,271 (3,134)
------------------------
- corporate and
commercial 540,308 (8,537) 540,499 (5,438)
------------------------ ----------
- non-bank financial
institutions 69,416 (289) 70,705 (160)
------------------------ ---------- ---------------------- ----------
Loans and advances to
banks at amortised
cost 77,069 (54) 69,219 (16)
---------- ---------------------- ----------
Other financial assets
measured
at amortised cost 751,872 (243) 615,179 (118)
- cash and balances at
central banks 249,683 (10) 154,101 (2)
- items in the course
of collection
from other banks 6,289 - 4,956 -
- Hong Kong Government
certificates
of indebtedness 39,519 - 38,380 -
- reverse repurchase
agreements
- non-trading 226,345 - 240,862 -
- financial investments 89,923 (142) 85,788 (53)
------------------------
- prepayments, accrued
income and
other assets 2 140,113 (91) 91,092 (63)
------------------------ ---------- ---------------------- ---------- ---------------------- ----------
Total gross carrying
amount on-balance
sheet 1,860,849 (13,524) 1,729,873 (8,866)
------------------------ ---------- ---------------------- ---------- ---------------------- ----------
Loans and other
credit-related
commitments 648,156 (622) 600,029 (329)
---------- ---------------------- ---------- ---------------------- ----------
- personal 231,336 (28) 223,314 (15)
- corporate and
commercial 278,350 (562) 278,524 (307)
- financial 138,470 (32) 98,191 (7)
---------- ---------------------- ----------
Financial guarantees 18,328 (119) 20,214 (48)
---------- ---------------------- ----------
- personal 750 (1) 804 (1)
- corporate and
commercial 13,484 (110) 14,804 (44)
- financial 4,094 (8) 4,606 (3)
---------- ---------------------- ----------
Total nominal amount
off-balance
sheet 3 666,484 (741) 620,243 (377)
2,527,333 (14,265) 2,350,116 (9,243)
------------------------ ---------- ---------------------- ---------- ---------------------- ----------
Memorandum
Memorandum allowance
allowance for
Fair value for ECL(4) Fair value ECL(4)
$m $m $m $m
---------------------- -------------
Debt instruments
measured at fair
value through other
comprehensive
income 402,331 (242) 355,664 (166)
------------------------ ---------- ---------------------- ---------- ---------------------- ----------
1 Total ECL is recognised in the loss allowance for the
financial asset unless total ECL exceeds the gross carrying amount
of the financial asset, in which case the ECL is recognised as a
provision.
2 Includes only those financial instruments that are subject to
the impairment requirements of IFRS 9. 'Prepayments, accrued income
and other assets', as presented within the consolidated balance
sheet on page 94, includes both financial and non-financial
assets.
3 Represents the maximum amount at risk should the contracts be
fully drawn upon and clients default.
4 Debt instruments measured at FVOCI continue to be measured at
fair value with the allowance for ECL as a memorandum item. Change
in ECL is recognised in 'Change for expected credit losses and
other credit impairment charges' in the income statement.
The following table provides an overview of the Group's credit
risk by stage and industry, and the associated ECL coverage. The
financial assets recorded in each stage have the following
characteristics:
-- Stage 1: These financial assets are unimpaired and without a
significant increase in credit risk for which a 12-month allowance
for ECL is recognised.
-- Stage 2: A significant increase in credit risk has been
experienced on these financial assets since initial recognition
for which a lifetime ECL is recognised.
-- Stage 3: There is objective evidence of impairment and the
financial assets are therefore considered to be in default or
otherwise credit impaired for which a lifetime ECL is
recognised.
-- POCI: Financial assets that are purchased or originated at a
deep discount are seen to reflect the incurred credit losses on
which a lifetime ECL is recognised.
Summary of credit risk (excluding debt instruments measured at FVOCI)
by stage distribution and ECL coverage by industry sector at
30 June 2020
Gross carrying/nominal Allowance for
amount(1) ECL ECL coverage %
--------- -------- --------
Stage Stage Stage Stage Stage Stage Stage Stage Stage
1 2 3 POCI(2) Total 1 2 3 POCI(2) Total 1 2 3 POCI(2) Total
$m $m $m $m $m $m $m $m $m $m % % % % %
--------- ------- ------ ------- --------- ------- ------- ------- ---------- -------- ----- ----- ----- ------- --------
Loans
and advances
to customers
at amortised
cost 852,678 161,795 17,139 296 1,031,908 (1,906) (4,553) (6,669) (99) (13,227) 0.2 2.8 38.9 33.4 1.3
- personal 390,032 27,031 5,121 - 422,184 (897) (2,115) (1,389) - (4,401) 0.2 7.8 27.1 - 1.0
* corporate and commercial 406,194 122,319 11,499 296 540,308 (966) (2,306) (5,166) (99) (8,537) 0.2 1.9 44.9 33.4 1.6
* non-bank financial institutions 56,452 12,445 519 - 69,416 (43) (132) (114) - (289) 0.1 1.1 22.0 - 0.4
Loans
and advances
to banks
at amortised
cost 71,693 5,367 9 - 77,069 (26) (23) (5) - (54) - 0.4 55.6 - 0.1
---------------------------------------
Other
financial
assets
measured
at amortised
cost 744,724 6,915 232 1 751,872 (96) (63) (84) - (243) - 0.9 36.2 - -
---------------------------------------
Loans
and other
credit-related
commitments 594,400 52,698 1,055 3 648,156 (193) (339) (90) - (622) - 0.6 8.5 - 0.1
---------------------------------------
- personal 228,688 2,430 218 - 231,336 (26) (2) - - (28) - 0.1 - - -
---------------------------------------
* corporate and commercial 232,598 44,942 807 3 278,350 (159) (316) (87) - (562) 0.1 0.7 10.8 - 0.2
---------------------------------------
- financial 133,114 5,326 30 - 138,470 (8) (21) (3) - (32) - 0.4 10.0 - -
---------------------------------------
Financial
guarantees 13,129 4,903 295 1 18,328 (28) (73) (18) - (119) 0.2 1.5 6.1 - 0.6
- personal 743 5 2 - 750 - (1) - - (1) - 20.0 - - 0.1
* corporate and commercial 8,976 4,222 285 1 13,484 (27) (66) (17) - (110) 0.3 1.6 6.0 - 0.8
---------------------------------------
- financial 3,410 676 8 - 4,094 (1) (6) (1) - (8) - 0.9 12.5 - 0.2
---------------------------------------
At 30
Jun 2020 2,276,624 231,678 18,730 301 2,527,333 (2,249) (5,051) (6,866) (99) (14,265) 0.1 2.2 36.7 32.9 0.6
--------------------------------------- --------- ------- ------ ------- --------- ------ ------ ------ ---- --- ------- ----- ----- ----- ------- ------
1 Represents the maximum amount at risk should the contracts be
fully drawn upon and clients default.
2 Purchased or originated credit impaired ('POCI').
Unless identified at an earlier stage, all financial assets are
deemed to have suffered a significant increase in credit risk when
they are 30 days past due ('DPD') and are transferred from stage 1
to stage 2. The following disclosure presents the ageing of stage 2
financial assets by those less than 30 and greater than 30 DPD and
therefore presents those financial assets classified as stage 2 due
to ageing (30 DPD) and those identified at an earlier stage (less
than 30 DPD).
Stage 2 days past due analysis at 30 June 2020
Gross carrying amount Allowance for ECL ECL coverage %
Of Of Of
which: which: Of which: Of which: which: Of which:
1 to 30 and 1 to
Stage 29 > Stage 1 to 30 and Stage 29 30 and
2 DPD(1,2) DPD(1,2) 2 29 DPD(1,2) > DPD(1,2) 2 DPD(1,2) > DPD(1,2)
$m $m $m $m $m $m % % %
------- -------- -------- -------- ----------- ----------- ------ ----------
Loans and
advances
to customers
at
amortised
cost 161,795 3,068 2,152 (4,553) (271) (422) 2.8 8.8 19.6
- personal 27,031 1,556 1,650 (2,115) (210) (340) 7.8 13.5 20.6
- corporate
and
commercial 122,319 1,402 477 (2,306) (60) (82) 1.9 4.3 17.2
--------------
- non-bank
financial
institutions 12,445 110 25 (132) (1) - 1.1 0.9 -
--------------
Loans and
advances
to banks at
amortised
cost 5,367 - - (23) - - 0.4 - -
--------------
Other
financial
assets
measured
at amortised
cost 6,915 6 (2) (63) - - 0.9 - -
-------------- ------- -------- ------- ------- ------- ------- ------ -------- --------
1 Days past due ('DPD'). Up-to-date accounts in stage 2 are not shown in amounts.
2 The days past due amounts presented above are on a contractual
basis and include the benefit of any customer relief payment
holidays granted.
Summary of credit risk (excluding debt instruments measured at FVOCI)
by stage distribution and ECL coverage by industry sector at
31 December 2019
Gross carrying/nominal Allowance for ECL coverage
amount(1) ECL %
--------- ------- -------
Stage Stage Stage Stage Stage Stage Stage Stage Stage
1 2 3 POCI(2) Total 1 2 3 POCI(2) Total 1 2 3 POCI(2) Total
$m $m $m $m $m $m $m $m $m $m % % % % %
Loans and
advances
to customers
at amortised
cost 951,583 80,182 13,378 332 1,045,475 (1,297) (2,284) (5,052) (99) (8,732) 0.1 2.8 37.8 29.8 0.8
--------------------------------------- ------
- personal 413,669 15,751 4,851 - 434,271 (583) (1,336) (1,215) - (3,134) 0.1 8.5 25.0 - 0.7
---------------------------------------
* corporate and commercial 472,253 59,599 8,315 332 540,499 (672) (920) (3,747) (99) (5,438) 0.1 1.5 45.1 29.8 1.0
---------------------------------------
* non-bank financial institutions 65,661 4,832 212 - 70,705 (42) (28) (90) - (160) 0.1 0.6 42.5 - 0.2
--------------------------------------- ----- ----- ----- ------- -----
Loans and
advances
to banks
at amortised
cost 67,769 1,450 - - 69,219 (14) (2) - - (16) - 0.1 - - -
---------------------------------------
Other financial
assets
measured
at amortised
cost 613,200 1,827 151 1 615,179 (38) (38) (42) - (118) - 2.1 27.8 - -
Loans and
other credit-related
commitments 577,631 21,618 771 9 600,029 (137) (133) (59) - (329) - 0.6 7.7 - 0.1
---------------------------------------
- personal 221,490 1,630 194 - 223,314 (13) (2) - - (15) - 0.1 - - -
---------------------------------------
* corporate and commercial 259,138 18,804 573 9 278,524 (118) (130) (59) - (307) - 0.7 10.3 - 0.1
---------------------------------------
- financial 97,003 1,184 4 - 98,191 (6) (1) - - (7) - 0.1 - - -
--------------------------------------- --------- ------- ------ ------- --------- ------ ------ ------ ---- --- ------ ----- ----- ----- ------- -----
Financial
guarantees 17,684 2,340 186 4 20,214 (16) (22) (10) - (48) 0.1 0.9 5.4 - 0.2
---------------------------------------
- personal 802 1 1 - 804 (1) - - - (1) 0.1 - - - 0.1
---------------------------------------
* corporate and commercial 12,540 2,076 184 4 14,804 (14) (21) (9) - (44) 0.1 1.0 4.9 - 0.3
---------------------------------------
- financial 4,342 263 1 - 4,606 (1) (1) (1) - (3) - 0.4 100.0 - 0.1
--------------------------------------- --------- ------- ------ ------- --------- ------ ------ ------ ---- --- ------ ----- ----- ----- ------- -----
At 31 Dec
2019 2,227,867 107,417 14,486 346 2,350,116 (1,502) (2,479) (5,163) (99) (9,243) 0.1 2.3 35.6 28.6 0.4
--------------------------------------- --------- ------- ------ ------- --------- ------ ------ ------ ---- ------ ----- ----- ----- ------- -----
1 Represents the maximum amount at risk should the contracts be
fully drawn upon and clients default.
2 Purchased or originated credit impaired ('POCI').
Stage 2 days past due analysis at 31 December 2019
Gross carrying amount Allowance for ECL ECL coverage %
Stage Of Of Stage Stage Of
2 which: which: 2 Of which: Of which: 2 which: Of which:
1 to 30 and 1 to 1 to
29 > 29 30 and 29 30 and
DPD(1) DPD(1) DPD(1) > DPD(1) DPD(1) > DPD(1)
$m $m $m $m $m $m % % %
Loans and
advances
to customers
at amortised
cost 80,182 2,471 1,676 (2,284) (208) (247) 2.8 8.4 14.7
--------------
- personal 15,751 1,804 1,289 (1,336) (178) (217) 8.5 9.9 16.8
--------------
- corporate
and
commercial 59,599 657 385 (920) (30) (30) 1.5 4.6 7.8
--------------
- non-bank
financial
institutions 4,832 10 2 (28) - - 0.6 - -
-------------- ------- ------- -------
Loans and
advances
to banks at
amortised
cost 1,450 - - (2) - - 0.1 - -
--------------
Other
financial
assets
measured
at amortised
cost 1,827 14 30 (38) - - 2.1 - -
-------------- ------- ------- ------- ------- -------- -------- ------- ------- -------
1 Days past due ('DPD'). Up-to-date accounts in stage 2 are not shown in amounts.
Measurement uncertainty and sensitivity analysis of ECL
estimates
The recognition and measurement of ECL involves the use of
significant judgement and estimation. We form multiple economic
scenarios based on economic forecasts, apply these assumptions to
credit risk models to estimate future credit losses, and
probability-weight the results to determine an unbiased ECL
estimate.
Methodology
Our methodology in relation to the adoption and generation of
economic scenarios is described on page 92 of the Annual Report and
Accounts 2019. There have been no significant changes during the
1H20 period. While in keeping with HSBC's methodology, the
exceptional nature of the current economic environment has led to
extensive application of management's judgement in determining the
range of possible outcomes, the number and severity of scenarios
selected and the probability weights assigned.
Description of consensus economic scenarios
The economic assumptions presented in this section have been
formed by HSBC, with reference to external forecasts specifically
for the purpose of calculating ECL. The emergent nature of the
Covid-19 outbreak at the end of 2019 meant that, consistent with
other banks, HSBC's view of the distribution of risks, as disclosed
in the Annual Report and Accounts 2019, did not, on a
forward-looking basis, consider the impact of the virus. Our
consensus Central scenario at the 2019 year-end projected moderate
growth over a five-year horizon, with strong prospects for
employment and a gradual increase in policy interest rates by
central banks in the major economies of Europe and North America.
The onset of the virus has led to a fundamental reassessment of our
central forecast and the distribution of risks.
Economic forecasts are subject to a high degree of uncertainty
in the current environment. Limitations of forecasts and economic
models require a greater reliance on management judgement in
addressing both the error inherent in economic forecasts and in
assessing associated ECL outcomes.
The main factors that affect uncertainty across our key markets
are:
-- epidemiological concerns, including a possible resurgence of
Covid-19 later in 2020 and in 2021;
-- the ability of new or continued restrictions in individual
markets to affect global growth due to deep cross-border trade and
financial linkages;
-- the ability of governments and central banks to continue to
limit the economic damage through support measures;
-- the potential for other geopolitical and macroeconomic risks
to affect growth and economic stability as the world recovers from
Covid-19-related restrictions; and
-- market-specific differences in the progression of Covid-19
and the associated responses by public authorities that imply
differentiation in the degree of uncertainty across our key
markets. Earlier progression of Covid-19 in Hong Kong and in
mainland China meant that economic forecasts for these markets
demonstrated greater stability over the course of 2Q20 compared
with the UK, where a rapidly evolving situation has led to a higher
degree of uncertainty.
Economic forecasts and data released since the creation of
scenarios in May confirmed the view of elevated uncertainty in some
markets such as in the UK, where monthly GDP and unemployment data
suggested a larger degree of estimation error than usual in
short-term forecasts. The volatility in economic data and forecasts
received since the generation of scenarios has been considered by
management and is reflected in management's choice of scenarios, in
probability weights and in its assessment of ECL outcomes.
The scenarios used to calculate ECL in the Interim Report 2020
are described below.
The consensus Central scenario
HSBC's Central scenario features a 'V-shaped' shock to economic
activity, as characterised by a deep, initial contraction in GDP,
followed by a sharp recovery. This V-shape in activity reflects the
unique nature of this downturn and is driven by restrictions on
mobility and activity imposed by governments to reduce the spread
of Covid-19. The Central scenario further assumes that the
stringent restrictions on activity, employed across several
countries and territories in the first half of 2020, will not be
repeated, allowing economic activity to rebound. Minimal long-term
damage to economic prospects is expected, allowing economic growth
across our key markets to return to forecast trend rates.
Cross-region differences in the depth of the contraction, and the
speed and scale of subsequent recovery, reflect timing differences
in the progression of the Covid-19 outbreak, national level
differences in restrictions imposed and the scale of support
measures.
Global GDP is expected to contract by 3.9% in 2020 and grow by
4.8% in 2021 in the Central scenario. The average rate of global
GDP growth is expected to be 2.7% over the forecast period
2020-2025, which is slightly lower than the average growth rate
over the 2015-2019 period.
The unique circumstances surrounding the current fall in
economic activity make it difficult to compare current prospects
for global economic activity with previous recessions. However, we
note that the depth of the contraction in economic activity and the
subsequent recovery are both expected to be sharper than
experienced during the last global economic downturn of 2008-2009
across our key markets (see chart below).
Across the key markets, we note:
-- Economic activity has fallen significantly in 1H20 across our
major markets. The earlier outbreak of the virus in China and Hong
Kong suggests that the trough in economic activity in these markets
occurred in 1Q20, while in other major markets, the lowest point in
activity is expected to have occurred in 2Q20. The Central scenario
projects an annual contraction in GDP across almost all our major
markets in 2020, the only exception being China, where annual GDP
growth is expected to be positive, despite the strong fall in
activity experienced in the first quarter of the year. GDP is
expected to be positive across all our major markets in 2021.
-- The unemployment rate is expected to rise sharply in most of
our major markets, before reverting gradually to pre-crisis levels
over the forecast horizon.
-- Inflation is expected to fall sharply in 2020 in line with
the slowdown in economic activity, before increasing to gradually
converge to central bank targets in our key markets over the
forecast period.
-- Governments have provided extensive support to households and
corporates in our key markets. Fiscal deficits are expected to
increase sharply in 2020 before reducing in the later years of the
projection period. Sovereign indebtedness is expected to increase
sharply as a result.
-- Major central banks have lowered their main policy interest
rates, implemented emergency support measures for funding markets,
and either restarted or increased quantitative easing programmes,
in order to support economies and the financial system. Interest
rate policy is expected to be highly accommodative over the
projection horizon.
-- The West Texas Intermediate oil price is forecast to average
$37 per barrel over the projection period.
The Central scenario was first created with forecasts available
in May, and subsequently updated in June to reflect significant
changes to forecasts. The UK unemployment rate was the only
variable to have been amended as a result of this update.
Probability weights assigned to the Central scenario reflect both
the higher level of uncertainty in the current global economic
environment and relative differences across markets. Weights
assigned to the Central scenario vary from 55% to 70%.
The following table describes key macroeconomic variables and
the probabilities assigned in the consensus Central scenario.
Central scenario (3Q20-2Q25)
Hong Mainland
UK US Kong China Canada France UAE Mexico
% % % % % % % %
GDP growth
Annual
average
growth rate:
2020 (7.8) (5.2) (4.8) 1.4 (7.1) (8.7) (2.7) (7.4)
-------- -------- -------- ---------- -------- --------- ------ --------
Annual
average
growth rate:
2021 5.9 4.1 4.2 8.1 5.5 7.2 3.1 2.5
-------------- -------- -------- --- -------- ---------- -------- --- --------- ------ --------
1Q22-2Q25:
average
growth 1.9 2.4 2.3 5.3 2.1 1.7 3.0 2.3
-------------- -------- -------- --- -------- ---------- -------- --- --------- ------ --------
3Q20-2Q22:
worst (8.6) (6.6) (2.6) (8.2) (8.9) (2.9) (8.8)
quarter (3Q20) (3Q20) (3Q20) 3.3 (4Q21) (3Q20) (3Q20) (3Q20) (3Q20)
-------------- ------------ ------------- ------------ ---------- ------------- ------------- ------- ------------
Unemployment
rate
------------ ------------- ------------ ---------- ------------- ------------- ------- ------------
Annual
average:
2020 6.8 9.5 4.6 4.5 10 9.8 N/A 5.3
------------ ------------- ------------ ---------- ------------- ------------- ------- ------------
Annual
average:
2021 6.3 7.3 4.1 4.2 8.1 10.0 N/A 5.1
-------------- ------------ ------------- ------------ ---------- ------------- ------------- ------- ------------
1Q22-2Q25:
average 4.7 5.6 3.7 3.9 6.5 8.9 N/A 4.5
-------------- ------------ ------------- ------------ ---------- ------------- ------------- ------- ------------
3Q20-2Q22:
worst
quarter 8.1 (3Q20) 11.0 (3Q20) 4.8 (3Q20) 4.6 (3Q20) 11.1 (3Q20) 10.6 (3Q20) N/A 6.1 (3Q20)
-------------- ------------ ------------- ------------ ---------- ------------- ------------- ------- ------------
House price
index
------------ ------------- ------------ ---------- ------------- ------------- ------- ------------
Annual
average
growth rate:
2020 (2.2) 1.7 (7.9) 1.8 0.2 (0.5) (13.0) 4.8
-------- -------- --- -------- ---------- -------- --- --------- ------ --------
Annual
average
growth rate:
2021 0.9 (2.6) 0.4 2.6 2.1 (0.3) (10.2) 2.9
-------------- -------- -------- -------- ---------- -------- --- --------- ------ --------
1Q22-2Q25:
average
growth 3.7 2.3 3.4 5.4 3.4 3.4 2.1 5.3
-------------- -------- -------- --- -------- ---------- -------- --- --------- ------ --------
3Q20-2Q22:
worst (3.4) (3.6) (11.5) (4.0) (3.9) (18.2)
quarter (4Q20) (2Q21) (3Q20) 1.3 (1Q21) (1Q21) (4Q20) (4Q20) 2.5 (1Q21)
-------------- ------------ ------------- ------------ ---------- ------------- ------------- ------- ------------
10-year bond
yield
-------------- ------------ ------------- ------------ ---------- ------------- ------------- ------- ------------
Annual
average:
2020 0.5 0.9 1.2 N/A 0.8 0.0 N/A 7.1
------------ ------------- ------------ ---------- ------------- ------------- ------- ------------
Annual
average:
2021 0.8 1.2 1.7 N/A 1.1 0.2 N/A 6.8
-------------- ------------ ------------- ------------ ---------- ------------- ------------- ------- ------------
1Q22-2Q25:
average 1.6 2.2 2.2 N/A 1.9 0.9 N/A 7.4
-------------- ------------ ------------- ------------ ---------- ------------- ------------- ------- ------------
3Q20-2Q22:
worst
quarter 0.4 (3Q20) 0.8 (3Q20) 1.2 (3Q20) N/A 0.7 (3Q20) 0.0 (3Q20) N/A 6.6 (4Q21)
-------------- ------------ ------------- ------------ ---------- ------------- ------------- ------- ------------
Probability 60 70 70 70 70 70 60 55
-------------- ------------ ------------- ------------ ---------- ------------- ------------- ------- ------------
Note: N/A - not required in credit models.
GDP growth: Historical comparison
Note: Real GDP shown as year-on-year percentage change.
The consensus Upside scenario
Compared with the consensus Central scenario, the consensus
Upside scenario features a faster recovery in economic activity
during the first two years, before converging to long-run trends.
Despite this feature, the scenario forecasts 2020 as a year in
which global GDP growth contracts and several quarters elapse
before economic activity reaches the level attained at the end of
2019, prior to the onset of the Covid-19 outbreak.
The scenario is consistent with a number of key upside risk
themes. These include orderly global abatement of Covid-19 via
successful containment and/or the development of a vaccine,
deescalation of tensions between the US and China, continued
support from fiscal and monetary policy, positive resolution of
economic uncertainty in the UK, stronger oil prices and
deescalation of geopolitical tensions in Hong Kong.
Probability weights assigned to the Upside scenario range from
0% to 10%. These weights reflect management's view of the
potential for more positive outcomes relative to the Central
scenario in our key markets.
The consensus Downside scenario
Global real GDP growth contracts significantly in 2020 in the
Downside scenario, accompanied by a sharp increase in unemployment,
and falls in asset and consumer prices, before gradually recovering
towards its long-run trend. Compared with the Central scenario, the
recovery in economic activity is considerably weaker.
The scenario is consistent with our key downside risks. These
include renewed outbreaks of Covid-19 and/or slower easing of
restriction of travel and activity, an intensification of tensions
between the US and China, a worsening of economic uncertainty in
the UK, further risks to economic growth in Hong Kong and weaker
commodity prices.
A broad range of weights has been assigned to the consensus
Downside scenario. These range from 0% to 35% and reflect
management's view of the dispersion of risks and severity across
key markets.
UK management Downside scenario
The consensus Downside scenario was replaced with a management
Downside scenario for the UK only, to reflect management's view of
the dispersion of risks. Management took the view that this
scenario provided a better representation of risks that lie in
between the Central and the alternative Downside scenario. In this
scenario, UK GDP falls 9.6% in 2020 and UK unemployment peaks at
8.5% in 2021. This scenario has been assigned a 20%
probability.
Alternative Downside scenario
An alternative Downside scenario has been created to reflect
management's view of extreme risks. This 'U-shaped' scenario
assumes that a number of HSBC's top risks crystallise
simultaneously and results in an extremely severe and prolonged
recession. This scenario has been assigned a 5% probability across
all markets except the UK where it has been assigned a 10%
weighting.
The range of macroeconomic projections across the various
scenarios are shown in the table below:
Outer scenario ranges (3Q20-2Q25)
Hong Mainland
UK US Kong China Canada France UAE Mexico
% % % % % % % %
---------- ----------- ---------- ----------- ------------ ------------ ---------- ------------
GDP growth (8.3) (6.0) (1.5) to 3.9 to (8.1) (8.7) (2.3) to (7.9)
to (16.7) to (12.8) (15.8) (7.2) to (14.3) to (22.0) (13.3) to (14.8)
(3Q20) (3Q20) (3Q20) (4Q21) (3Q20) (3Q20) (3Q20) (3Q20)
(1Q21) (3Q20) (3Q20) (3Q20) (2Q21) (3Q20) (2Q21) (1Q21)
---------- ----------- ---------- ----------- ------------ ------------ ---------- ------------
8.0 to
10.5 10.5 to 4.5 to 4.5 to 11 to 10 to 5.8 to
Unemployment (3Q20) 18.2 (3Q20) 8.0 (3Q20) 6.1 (3Q20) 19.5 (3Q20) 11.5 (3Q20) 7.3 (3Q20)
rate (2Q21) (3Q20) (1Q21) (1Q22) (3Q20) (1Q21) N/A (4Q21)
---------- ----------- ---------- ----------- ------------ ------------ ---------- ------------
House price (2.8) (1.7) (10.3) 3.3 to (1.3) (2.4) (13.9) 3.2 to
index to (24.7) to (15.6) to (26.3) (25.8) to (27.6) to (13.4) to (25.7) (16.0)
(3Q20) (1Q21) (3Q20) (3Q20) (3Q20) (4Q20) (3Q20) (4Q20)
(2Q21) (2Q21) (1Q21) (3Q21) (2Q21) (3Q21) (2Q21) (2Q21)
---------- ----------- ---------- ----------- ------------ ------------ ---------- ------------
10-year bond 0.5 to 0.8 to 1.2 to N/A 0.7 to 0.1 to N/A 7.2 to
yield (1.7) (0.2) (0.8) (0.2) (0.5) 10.2 (4Q20)
(3Q20) (3Q20) (3Q20) (3Q20) (3Q20) (4Q20)
(3Q21) (2Q21) (1Q21) (2Q21) (2Q22)
---------- ----------- ---------- ----------- ------------ ------------ ---------- ------------
Consensus
Upside
scenario:
Probability 10 5 5 10 10 10 0 5
---------- ----------- ---------- ----------- ------------ ------------ ---------- ------------
Consensus
Downside
scenario:
Probability 0 20 20 15 15 15 35 35
---------- ----------- ---------- ----------- ------------ ------------ ---------- ------------
UK management
Downside
scenario:
Probability 20
---------- ----------- ---------- ----------- ------------ ------------ ---------- ------------
Alternative
Downside
scenario:
Probability 10 5 5 5 5 5 5 5
-------------- ---------- ----------- ---------- ----------- ------------ ------------ ---------- ------------
Note: The worst point refers to the quarter that is either the
trough or peak in the respective variable. The figures provided
represent the worst point across all four outer scenarios: the
consensus Upside, the consensus Downside, the UK management
Downside and the alternative Downside. These figures should not be
directly compared with the annual averages presented in the
previous table for the Central scenario. N/A - not required in
credit models.
US GDP growth
UK GDP growth
Note: Real GDP shown as year-on-year percentage change.
Hong Kong GDP growth
Mainland China GDP growth
Critical accounting estimates and judgements
The calculation of ECL under IFRS 9 involves significant
judgements, assumptions and estimates, as set out in the Annual
Report and Accounts 2019 under 'Critical accounting estimates and
judgements'. The level of estimation uncertainty and judgement has
increased since 31 December 2019 as a result of the economic
effects of the Covid-19 outbreak, including significant judgements
relating to:
-- the selection and weighting of economic scenarios, given
rapidly changing economic conditions in an unprecedented manner,
uncertainty as to the effect of government and central bank support
measures designed to alleviate adverse economic impacts, and a
widening in the distribution of economic forecasts. The key
judgement is whether the economic effects of the pandemic are more
likely to be temporary or prolonged, and the shape of recovery;
-- estimating the economic effects of those scenarios on ECL,
where there is no observable historical trend that can be reflected
in the models that will accurately represent the effects of the
economic changes of the severity and speed brought about by the
Covid-19 outbreak. Modelled assumptions and linkages between
economic factors and credit losses may underestimate or
overestimate ECL in these conditions, and there is significant
uncertainty in the estimation of parameters such as collateral
values and loss severity; and
-- the identification of customers experiencing significant
increases in credit risk and credit impairment, particularly where
those customers have accepted payment deferrals and other reliefs
designed to address short-term liquidity issues, or have extended
those deferrals, given limitations in the available credit
information on these customers. The use of segmentation techniques
for indicators of significant increases in credit risk involves
significant estimation uncertainty.
How economic scenarios are reflected in ECL
The methodologies for the application of forward economic
guidance into the calculation of ECL for wholesale and retail loans
and portfolios are set out on page 95 of the Annual Report and
Accounts 2019. These models are based largely on historical
observations and correlations with default rates.
The severe projections at 30 June 2020 of macroeconomic
variables are outside the historical observations on which IFRS 9
models have been built and calibrated to operate. Moreover, the
complexities of governmental support programmes and regulatory
guidance on treatment of customer impacts (such as forbearance and
payment holidays) and the unpredictable pathways of the pandemic
have never been modelled. Consequently, HSBC's IFRS 9 models, in
some cases, generate outputs that appear overly conservative when
compared with other economic and credit metrics. Post-model
adjustments are required to ensure that an appropriate amount of
ECL impairment is recognised.
These data and model limitations have been addressed in the
short term using in-model and post-model adjustments. This includes
refining model inputs and outputs and using post-model adjustments
based on management judgement and higher level quantitative
analysis for impacts that are difficult to model. To ensure a
consistent framework, we identified the model segments where
results were overly conservative based on historical benchmarks and
defined the worst economic inputs where the model output is
considered reliable. For example, in the case of probability of
default ('PD') models for bank and sovereign exposures, based on
the historical calibration data, the model was defined as producing
meaningful results when the GDP growth input is not worse than five
standard deviations below the long-term average. Re-running the
models with these capped economic limits established boundary
conditions used by credit experts as a starting point for further
adjustments based on their own structured judgement and granular
analysis. For the wholesale portfolio, this analysis produced a
'credit experts best estimate' to act as a benchmark against the
modelled outcomes, and inform post-model adjustments. In the short
term, the focus is on refining model inputs and outputs in a
consistent and explainable manner, using post-model adjustments.
Wider-ranging model changes will take time to develop and need more
real data on which models can be trained.
Models will be recalibrated over time once the full impacts of
Covid-19 are observed, but that will not occur in 2020. Therefore,
we anticipate significant in-model and post-model adjustments for
the foreseeable future.
Post-model adjustments
In the context of IFRS 9, post-model adjustments are short-term
increases or decreases to the ECL at either a customer or portfolio
level to account for late breaking events, model deficiencies and
expert credit judgement applied following management review and
challenge. We have internal governance in place to regularly
monitor post-model adjustments and, where possible, to reduce the
reliance on these through model recalibration or redevelopment, as
appropriate. Depending on the path of the Covid-19 outbreak and the
shape of the economic recovery, we anticipate the composition of
modelled ECL and post-model adjustments may be revised
significantly over 2020, particularly when the economy resumes
positive GDP growth and the uncertainty over long-term unemployment
abates.
Post-model adjustments made in estimating the reported ECL at 30
June 2020 are set out in the following table. The table includes
adjustments in relation to data and model limitations resulting
from Covid-19 economic conditions, and as a result of the regular
process of model development and implementation. It shows the
adjustments applicable to the scenario-weighted ECL numbers.
Adjustments in relation to Downside scenarios are more significant,
as results are subject to greater uncertainty.
Net post-model Retail Wholesale Total
reductions in
ECL ($bn)
------------------------- ------ --------- -------
Low-risk counterparties
and economies
(banks, sovereigns
and government
entities) 0.4 1.1 1.5
------------------------- ------ --------- -----
Corporate lending
adjustments - 2.8 2.8
------------------------- ------ --------- -----
Retail lending
adjustments 0.2 - 0.2
------------------------- ------ --------- -----
Total 0.6 3.9 4.5
------------------------- ------ --------- -----
Post-model adjustments at 31 December 2019 were an increase of
$75m for the wholesale portfolio and $131m for the retail
portfolio.
The adjustments relating to low-credit-risk exposures are mainly
to highly rated banks, sovereigns and US government-sponsored
entities, where modelled credit factors do not fully reflect the
underlying fundamentals of these entities or the effect of
government support and economic programmes in the Covid-19
environment.
Adjustments to corporate exposures principally reflect the
outcome of the 'credit experts best estimate' review on wholesale
corporate exposures. Post-model adjustments, both positive and
negative, have been made where modelled rating migration, and ECL
outputs based on historical relationships, produced results that
were overly sensitive. This can be the case when using economic
inputs that are well outside the range of historical experience.
For retail lending, the net impact of model adjustments was much
less significant. The adjustment, under low-risk counterparties and
economies, was to reduce ECL on insurance portfolios due to model
over-prediction of downgrades in the bank and sovereign
portfolios.
The main retail lending post-model adjustment was in relation to
the UK where modelled PD outputs for the Downside scenarios were
adjusted to address model limitations, so as to be consistent with
longer-term relationships between unemployment and defaults.
Economic scenarios sensitivity analysis of ECL estimates
Management considered the sensitivity of the ECL outcome against
the economic forecasts as part of the ECL governance process by
recalculating the ECL under each scenario described above for
selected portfolios, applying a 100% weighting to each scenario in
turn. The weighting is reflected in both the determination of a
significant increase in credit risk and the measurement of the
resulting ECL.
The ECL calculated for the Upside and Downside scenarios should
not be taken to represent the upper and lower limits of possible
ECL outcomes. The impact of defaults that might occur in future
under different economic scenarios is captured by recalculating ECL
for loans in stages 1 and 2 at the balance sheet date. The
population of stage 3 loans (in default) at the balance sheet date
is unchanged in these sensitivity calculations. Stage 3 ECL would
only be sensitive to changes in forecasts of future economic
conditions if the loss-given default ('LGD') of a particular
portfolio was sensitive to these changes.
There is a particularly high degree of estimation uncertainty in
numbers representing tail risk scenarios when assigned a 100%
weighting.
For wholesale credit risk exposures, the sensitivity analysis
excludes ECL and financial instruments related to defaulted
obligors because the measurement of ECL is relatively more
sensitive to credit factors specific to the obligor than future
economic scenarios. Therefore, it is impracticable to separate the
effect of macroeconomic factors in individual assessments.
For retail credit risk exposures, the sensitivity analysis
includes ECL for loans and advances to customers related to
defaulted obligors. This is because the retail ECL for secured
mortgage portfolios including loans in all stages is sensitive to
macroeconomic variables.
Wholesale and retail sensitivity
The wholesale and retail sensitivity analysis is stated
inclusive of post-model adjustments, as appropriate to each
scenario. The results tables exclude portfolios held by insurance
business and small portfolios
In both the wholesale and retail analysis, the comparative
period results for alternative Downside scenarios are not directly
comparable to the current period, because they reflect different
risk profiles relative with the Consensus scenarios for the period
end.
Wholesale analysis
IFRS 9 ECL sensitivity to future economic conditions(1)
Mainland
UK US Hong Kong China Canada Mexico UAE France
ECL coverage of
financial instruments
subject to significant
measurement uncertainty
at 30 June 2020(2) $m $m $m $m $m $m $m $m
------------------------------
Reported ECL 1,729 407 537 157 239 218 227 121
------- ------- --------- -------- ------ ------ ------ -------
Consensus scenarios
------------------------------ ------- ------- --------- -------- ------ ------ ------ ---------
Central scenario 1,538 336 449 122 208 171 186 104
------- ------- --------- -------- ------ ------ ------ -------
Upside scenario 1,350 226 348 76 151 137 126 98
------- ------- --------- -------- ------ ------ ------ -------
Downside scenario(3) 2,027 570 687 211 294 255 262 187
------- ------- --------- -------- ------ ------ ------ -------
Alternative scenarios
------- ------- --------- -------- ------ ------ ------ ---------
Alternative Downside
scenario 2,933 1,059 1,706 1,273 647 574 711 304
------- ------- --------- -------- ------ ------ ------ -------
Gross carrying amount/nominal
amount(4) 406,516 213,202 433,950 108,954 81,583 27,860 45,614 136,810
------------------------------ ------- ------- --------- -------- ------ ------ ------ -------
ECL coverage of
financial instruments
subject to significant
measurement uncertainty
at 31 December 2019(2)
Reported ECL 725 148 328 124 80 69 97 55
Consensus scenarios
------------------------------- -------- ------- ------- ------- ------ ------ ------ ---------
Central scenario 536 149 243 118 79 68 97 53
-------- ------- ------- ------- ------ ------ ------ -------
Upside scenario 480 132 241 95 63 48 89 50
-------- ------- ------- ------- ------ ------ ------ -------
Downside scenario 635 161 244 106 108 99 108 79
------- ------- ------- ------ ------ ------ -------
Alternative scenarios
-------- ------- ------- ------- ------ ------ ------ ---------
UK alternative Downside
scenario 1 1,050
-------- ------- ------- ------- ------ ------ ------ ---------
Tail risk scenarios
(UK alternative
Downside scenarios 1,900
2 and 3) - 2,100
-------- ------- ------- ------- ------ ------ ------ ---------
Asia-Pacific alternative
Downside scenario 550 150
------------------------------- -------- ------- ------- ------- ------ ------ ------ ---------
Hong Kong alternative
Downside scenario 700
------------------------------- -------- ------- ------- ------- ------ ------ ------ ---------
Gross carrying amount/nominal
amount(4) 346,035 203,610 418,102 104,004 74,620 32,632 42,304 124,618
------------------------------- -------- ------- ------- ------- ------ ------ ------ -------
1 ECL sensitivities exclude portfolios utilising less complex modelling approaches.
2 ECL sensitivity includes off-balance sheet financial
instruments that are subject to significant measurement
uncertainty.
3 For the UK, this is the UK management Downside scenario.
4 Includes low credit-risk financial instruments, such as debt
instruments at FVOCI, which have high carrying values but low ECL
under all the scenarios.
In the wholesale portfolio, at 30 June 2020, the alternative
Downside scenario reflected the most significant levels of ECL
sensitivity, in absolute terms, in the UK, Hong Kong and mainland
China due to potential for deterioration of the credit quality on
those markets and levels of exposure.
ECL sensitivities demonstrated an increase from the 2019
year-end across all countries and territories, primarily due to the
deterioration of economic forecasts under all scenarios.
The UK observed the highest sensitivity when compared with 4Q19,
mainly due to the deterioration of economic forecasts, with an
emphasis on the unemployment rate in the June 2020 economic
forecasts.
The higher ECL sensitivities can all be observed for the
alternative Downside scenario, which represents a prolonged
recovery period and sharper impact relative to other scenarios.
Retail analysis
IFRS 9 ECL sensitivity to future economic conditions(1)
Hong
UK Mexico Kong UAE France US Malaysia Singapore Australia Canada
ECL of loans
and advances
to customers
at 30
June 2020(2) $m $m $m $m $m $m $m $m $m $m
------- ------ ------- ----- ------ ------ -------- --------- --------- --------
Reported ECL 1,704 631 385 250 138 129 122 70 61 46
-------
Consensus
scenarios
------------- ------- ------ ------- ----- ------ ------ -------- --------- --------- --------
Central
scenario 1,592 595 349 237 137 118 120 70 48 42
------- ------ ------- ----- ------ ------ -------- --------- --------- ------
Upside
scenario 1,364 540 319 210 135 107 114 67 32 38
------- ------ ------- ----- ------ ------ -------- --------- --------- ------
Downside
scenario(3) 1,912 683 418 265 146 163 126 80 83 49
------- ------ ------- ----- ------ ------ -------- --------- --------- ------
Alternative
scenarios
------- ------ ------- ----- ------ ------ -------- --------- --------- --------
Alternative
Downside
scenario 2,253 814 772 310 144 236 160 119 216 124
------ ------- ----- ------ ------ -------- --------- --------- ------
Gross
carrying
amount 139,599 6,293 100,916 3,188 23,453 15,849 5,360 7,701 18,115 21,746
------------- ------- ------ ------- ----- ------ ------ -------- --------- --------- ------
ECL of loans and
advances
to customers at
31
December 2019(2)
----------------- ----------- ----- ------- ----- ------ ------ ----- ----- ------ --------
Reported ECL 936 584 349 174 133 90 94 60 38 39
Consensus
scenarios
Central scenario 773 583 296 173 133 90 94 58 37 39
Upside scenario 686 526 282 158 132 84 85 57 32 36
Downside
scenario 918 652 306 193 133 98 106 58 45 41
Alternative
scenarios
UK alternative
Downside
scenario 1 1,200
Tail risk
scenarios
(UK alternative
Downside
scenarios 2 and
3) 1,500-1,700
Asia-Pacific
alternative
Downside
scenario 530 110 80 50
Hong Kong
alternative
Downside
scenario 540
Gross carrying
amount 149,576 7,681 101,689 3,391 23,017 15,470 5,839 8,164 17,258 22,344
----------------- ----------- ----- ------- ----- ------ ------ ----- ----- ------ ------
1 ECL sensitivities exclude portfolios utilising less complex modelling approaches.
2 ECL sensitivity includes only on-balance sheet financial
instruments to which IFRS 9 impairment requirements are
applied.
3 For the UK, this is the UK management Downside scenario.
In the retail portfolio at 30 June 2020, the alternative
Downside scenario reflected the most significant level of ECL
sensitivity, in absolute terms, in the UK, Mexico and Hong Kong due
to the levels of exposure and credit quality of those markets.
Across all countries and territories, primarily due to the
worsening of the economic forecasts, ECL sensitivities demonstrated
an increase from the 2019 year-end. In the UK, there was an
increase in ECL sensitivity observed in all scenarios compared with
4Q19. This was primarily due to the worsening of the unemployment
rates in the June 2020 economic forecasts. The alternative Downside
scenario ECL sensitivity is reflective of a significantly more
pessimistic view of the economy and external environment.
Group ECL sensitivity results
The ECL income statement charge for the first half of 2020 was
$6.9bn, of which $3.0bn related to stage 3 financial instruments.
The ECL impact of the scenarios and judgemental management
adjustments are highly sensitive to movements in economic
forecasts, including the efficacy of government support measures.
Based upon the sensitivity tables presented above, if the Group ECL
balance (excluding wholesale stage 3, which is assessed
individually) was estimated solely on the basis of the Central
scenario, Downside scenario or the alternative Downside scenario at
30 June 2020, it would increase/(decrease) as presented in the
below table.
Retail Wholesale
(2) (2)
Total Group ECL $bn $bn
Reported ECL 4.0 4.3
Scenarios
-------------------------
100% consensus Central
scenario (0.2) (0.5)
------------------------- ----- --------
100% consensus Downside
scenario(1) 0.4 1.0
100% alternative
Downside scenario 1.9 6.8
------------------------- ----- --------
1 For the UK, this is the UK management Downside scenario.
2 On same basis as wholesale and retail sensitivity analysis.
Reconciliation of changes in gross carrying/nominal amount and
allowances for loans and advances to banks and customers
The following disclosure provides a reconciliation by stage of
the Group's gross carrying/nominal amount and allowances for loans
and advances to banks and customers, including loan commitments and
financial guarantees. Movements are calculated on a quarterly basis
and therefore fully capture stage movements between quarters. If
movements were calculated on a year-to-date basis they would only
reflect the opening and closing position of the financial
instrument.
The transfers of financial instruments represent the impact of
stage transfers upon the gross carrying/nominal amount and
associated allowance for ECL.
The net remeasurement of ECL arising from stage transfers
represents the increase or decrease due to these transfers, for
example, moving from a 12-month (stage 1) to a lifetime (stage 2)
ECL measurement basis. Net remeasurement excludes the underlying
customer risk rating ('CRR')/probability of default ('PD')
movements of the financial instruments transferring stage. This is
captured, along with other credit quality movements in the 'changes
in risk parameters - credit quality' line item.
Changes in 'New financial assets originated or purchased',
'assets derecognised (including final repayments)' and 'changes to
risk parameters - further lending/repayments' represent the impact
from volume movements within the Group's lending portfolio.
Reconciliation of changes in gross carrying/nominal amount and allowances
for loans and advances to banks and customers including
loan commitments and financial guarantees
Non-credit impaired Credit impaired
Stage 1 Stage 2 Stage 3 POCI Total
Gross Gross Gross Gross Gross
carrying/ Allowance carrying/ Allowance carrying/ carrying/ carrying/
nominal for nominal for nominal Allowance nominal Allowance nominal Allowance
amount ECL amount ECL amount for ECL amount for ECL amount for ECL
$m $m $m $m $m $m $m $m $m $m
---------- ----------- --------- ----------- ----------- ----------- ----------- ----------- ---------- -----------
At 1 Jan 2020 1,561,613 (1,464) 105,551 (2,441) 14,335 (5,121) 345 (99) 1,681,844 (9,125)
--------- ------- -------- ------- ------- ------- ----- ---- ----- --- --------- --------
Transfers of
financial instruments: (138,661) (148) 131,316 498 7,345 (350) - - - -
* transfers from stage 1 to stage 2 (175,849) 489 175,849 (489) - - - - - -
* transfers from stage 2 to stage 1 39,559 (638) (39,559) 638 - - - - - -
- transfers to
stage 3 (2,724) 11 (5,434) 392 8,158 (403) - - - -
- transfers from
stage 3 353 (10) 460 (43) (813) 53 - - - -
----------------------------------------- --------- ------- -------- ------- ------- ------- ----- ---- ----- ---- --------- --------
Net remeasurement
of ECL arising
from transfer
of stage - 355 - (558) - (712) - - - (915)
----------------------------------------- --------- ------- -------- ------- ------- ------- ----- ---- ----- ---- --------- --------
Changes due to
modifications
not derecognised - - - - - - - - - -
--------- ------- -------- ------- ------- ------- ----- ---- ----- ---- --------- --------
New financial
assets originated
or purchased 215,501 (291) - - - - 12 - 215,513 (291)
--------- ------- -------- ------- ------- ------- ----- ---- ----- ---- --------- --------
Asset derecognised
(including final
repayments) (163,342) 52 (12,522) 203 (1,064) 176 (20) 1 (176,948) 432
----------------------------------------- --------- ------- -------- ------- ------- ------- ----- --- ----- ---- --------- --------
Changes to risk
parameters -
further lending/repayments 13,119 (169) 2,831 (221) (300) 63 (31) (1) 15,619 (328)
Change in risk
parameters -
credit quality - (620) - (2,561) - (2,266) - (3) - (5,450)
--------- ------- -------- ------- ------- ------- ----- ---- ----- --- --------- --------
Changes to models
used for ECL
calculation - 30 - (63) - (9) - - - (42)
--------- ------- -------- ------- ------- ------- ----- ---- ----- ---- --------- --------
Assets written
off - - - - (1,249) 1,249 - - (1,249) 1,249
Credit-related
modifications
that resulted
in derecognition - - - - (1) - - - (1) -
----------------------------------------- --------- ------- -------- ------- ------- ------- ----- ---- ----- ---- --------- --------
Foreign exchange (43,145) 90 (2,672) 162 (588) 196 (13) 4 (46,418) 452
----------------------------------------- --------- ------- -------- ------- ------- ------- ----- --- ----- ---- --------- --------
Other 36 12 93 (7) 16 (8) 7 (1) 152 (4)
----------------------------------------- --------- ------- -------- ------- ------- ------- ----- ---- ----- --- --------- --------
At 30 Jun 2020 1,445,121 (2,153) 224,597 (4,988) 18,494 (6,782) 300 (99) 1,688,512 (14,022)
----------------------------------------- --------- ------- -------- ------- ------- ------- ----- ---- ----- --- --------- --------
ECL income statement
change for the
period(1) (643) (3,200) (2,748) (3) (6,594)
Recoveries 127
----------------------------------------- ---------- ----------- --------- ----------- ----------- ----------- ----------- ----------- ---------- --------
Other 3
--------
Total ECL income
statement change
for the period (6,464)
----------------------------------------- ---------- ----------- --------- ----------- ----------- ----------- ----------- ----------- ---------- --------
1 In addition to the $2.8bn stage 3 (personal: $0.6bn,
wholesale: $2.2bn) and POCI ECL income statement charge for the
period presented above, the Group also recognised a stage 3 and
POCI ECL income statement charge of $0.2bn in respect of other
financial assets measured at amortised cost, performance and other
guarantees and debt instruments measured at FVOCI.
6 months
ended 30
At 30 Jun 2020 Jun 2020
Gross carrying/nominal Allowance
amount for ECL ECL charge
$m $m $m
---------------------- --------- ------------
As above 1,688,512 (14,022) (6,464)
Other financial assets measured at amortised
cost 751,872 (243) (127)
Non-trading reverse purchase agreement commitments 86,949 - -
Performance and other guarantees - - (157)
---------------------------------------------------- ---------------------- -------- ---------
Summary of financial instruments to which
the impairment requirements in IFRS 9 are
applied/Summary consolidated income statement 2,527,333 (14,265) (6,748)
Debt instruments measured at FVOCI 402,331 (242) (110)
---------------------------------------------------- ---------------------- -------- ---------
Total allowance for ECL/total income statement
ECL charge for the period n/a (14,507) (6,858)
---------------------------------------------------- ---------------------- -------- ---------
As shown in the previous table, the allowance for ECL for loans
and advances to customers and banks and relevant loan commitments
and financial guarantees increased $4,897m during the period, from
$9,125m at 31 December 2019 to $14,022m at 30 June 2020.
This increase was primarily driven by:
-- $5,450m relating to underlying credit quality changes,
including the credit quality impact of financial instruments
transferring between stages;
-- $915m relating to the net remeasurement impact of stage transfers;
-- $187m relating to volume movements, which included the ECL
allowance associated with new originations, assets derecognised and
further pending repayment; and
-- $42m relating to changes to models used for ECL calculation.
These increases were partly offset by:
-- $1,249m of assets written off; and
-- foreign exchange and other movements of $448m.
The ECL charge for the period of $6,594m presented in the
previous table consisted of $5,450m relating to underlying credit
quality changes, including the credit quality impact of financial
instruments transferring between stage; $915m relating to the net
remeasurement impact of stage transfers; $187m relating to
underlying net book volume; and $42m relating to changes to models
used for ECL calculation.
Reconciliation of changes in gross carrying/nominal amount and allowances
for loans and advances to banks and customers including
loan commitments and financial guarantees
Non-credit impaired Credit impaired
Stage 1 Stage 2 Stage 3 POCI Total
Gross Gross Gross Gross Gross
carrying/ Allowance carrying/ Allowance carrying/ carrying/ carrying/
nominal for nominal for nominal Allowance nominal Allowance nominal Allowance
amount ECL amount ECL amount for ECL amount for ECL amount for ECL
$m $m $m $m $m $m $m $m $m $m
---------- ----------- --------- ----------- ----------- ----------- ----------- ----------- ---------- -----------
At 1 Jan 2019 1,502,976 (1,449) 95,104 (2,278) 14,232 (5,135) 334 (194) 1,612,646 (9,056)
--------- ------- -------- ------- ------- ------- ----- ---- ------ --------- -------
Transfers of
financial instruments: (36,244) (543) 31,063 1,134 5,181 (591) - - - -
* transfers from stage 1 to stage 2 (108,434) 487 108,434 (487) - - - - - -
* transfers from stage 2 to stage 1 73,086 (1,044) (73,086) 1,044 - - - - - -
- transfers to
stage 3 (1,284) 59 (5,022) 665 6,306 (724) - - - -
- transfers from
stage 3 388 (45) 737 (88) (1,125) 133 - - - -
----------------------------------------- --------- ------- -------- ------- ------- ------- ----- ---- ------ --- --------- -------
Net remeasurement
of ECL arising
from transfer
of stage - 669 - (676) - (114) - - - (121)
----------------------------------------- --------- ------- -------- ------- ------- ------- ----- ---- ------ --- --------- -------
New financial
assets originated
or purchased 504,064 (534) - - - - 135 (21) 504,199 (555)
----------------------------------------- --------- ------- -------- ------- ------- ------- ----- ---- ------ --------- -------
Assets derecognised
(including final
repayments) (352,961) 112 (19,909) 553 (2,712) 656 (26) 8 (375,608) 1,329
----------------------------------------- --------- ------- -------- ------- ------- ------- ----- --- ------ --- --------- -------
Changes to risk
parameters -
further lending/repayment (72,239) 291 (2,560) 67 402 (6) 28 12 (74,369) 364
----------------------------------------- --------- ------- -------- ------- ------- ------- ----- ---- ------ --- --------- -------
Changes in risk
parameters -
credit quality - 2 - (1,208) - (2,704) - (51) - (3,961)
--------- ------- -------- ------- ------- ------- ----- ---- ------ --------- -------
Changes to models
used for ECL
calculation - (6) - 4 - 14 - - - 12
--------- ------- -------- ------- ------- ------- ----- ---- ------ --- --------- -------
Assets written
off - - - - (2,657) 2,657 (140) 140 (2,797) 2,797
Credit-related
modifications
that resulted
in derecognition - - - - (268) 125 - - (268) 125
----------------------------------------- --------- ------- -------- ------- ------- ------- ----- ---- ------ --- --------- -------
Foreign exchange 16,838 (9) 1,201 (40) 160 (31) 1 1 18,200 (79)
----------------------------------------- --------- ------- -------- ------- ------- ------- ----- ---- ------ --- --------- -------
Other (821) 3 652 3 (3) 8 13 6 (159) 20
----------------------------------------- --------- ------- -------- ------- ------- ------- ----- ---- ------ --- --------- -------
At 31 Dec 2019 1,561,613 (1,464) 105,551 (2,441) 14,335 (5,121) 345 (99) 1,681,844 (9,125)
----------------------------------------- --------- ------- -------- ------- ------- ------- ----- ---- ------ --------- -------
ECL income statement
change for the
period 534 (1,260) (2,154) (52) (2,932)
Recoveries 361
-----------
Others (20)
----------------------------------------- ---------- ----------- --------- ----------- ----------- ----------- ----------- ----------- ---------- -------
Total ECL income
statement change
for the period(1) (2,591)
----------------------------------------- ---------- ----------- --------- ----------- ----------- ----------- ----------- ----------- ---------- -------
12 months
ended
31 Dec
At 31 Dec 2019 2019
Gross carrying/nominal Allowance
amount for ECL ECL charge
$m $m $m
---------------------- --------- ------------
As above 1,681,844 (9,125) (2,591)
Other financial assets measured at amortised
cost 615,179 (118) (26)
Non-trading reverse purchase agreement commitments 53,093 - -
Performance and other guarantees - - (34)
---------------------------------------------------- ---------------------- -------- ---------
Summary of financial instruments to which
the impairment requirements in IFRS 9 are
applied/Summary consolidated income statement 2,350,116 (9,243) (2,651)
Debt instruments measured at FVOCI 355,664 (166) (105)
---------------------------------------------------- ---------------------- -------- ---------
Total allowance for ECL/total income statement
ECL charge for the period n/a (9,409) (2,756)
---------------------------------------------------- ---------------------- -------- ---------
1 The 31 December 2019 total ECL income statement change of
$2,591m is attributable to $1,136m for the six months ended 30 June
2019 and $1,455m to the six months ended 31 December 2019.
Credit quality of financial instruments
We assess the credit quality of all financial instruments that
are subject to credit risk. The credit quality of financial
instruments is a point-in-time assessment of PD, whereas stages 1
and 2 are determined based on relative deterioration of credit
quality since initial recognition. Accordingly, for
non-credit-impaired financial instruments, there is no direct
relationship between the credit quality assessment and stages 1 and
2, though typically the lower credit quality bands exhibit a higher
proportion in stage 2.
The five credit quality classifications each encompass a range
of granular internal credit rating grades assigned to wholesale and
personal lending businesses and the external ratings attributed by
external agencies to debt securities, as shown in the following
table. Personal lending credit quality is disclosed based on a
12-month point-in-time PD adjusted for multiple economic scenarios.
The credit quality classifications for wholesale lending are
unchanged and are based on internal credit risk ratings.
Credit quality classification
Sovereign Other debt
debt securities securities Wholesale lending
and bills and bills and derivatives Retail lending
12-month
Basel 12 month
External External probability Internal probability-
credit credit Internal of default credit weighted
Footnotes rating rating credit rating % rating PD %
---------------- ---------- --------------- -------------- -------------- -------------- -------- -------------
Quality 1,
classification 2
----------
BBB and A- and CRR 1 to Band 1 0.000 -
Strong above above CRR 2 0 - 0.169 and 2 0.500
Good BBB- to BBB+ to CRR 3 0.170 - Band 3 0.501 -
BB BBB- 0.740 1.500
BB- to BB+ to CRR 4 to 0.741 - Band 4 1.501 -
Satisfactory B and unrated B and unrated CRR 5 4.914 and 5 20.000
CRR 6 to 4.915 - 20.001 -
Sub-standard B- to C B- to C CRR 8 99.999 Band 6 99.999
---------------- ---------- --------------- -------------- -------------- -------------- -------- -------------
CRR 9 to
Credit impaired Default Default CRR 10 100 Band 7 100
---------------- ---------- --------------- -------------- -------------- -------------- -------- -------------
1 Customer risk rating ('CRR').
2 12-month point-in-time probability-weighted probability of default ('PD').
Distribution of financial instruments to which the impairment requirements
in IFRS 9 are applied, by credit quality and stage allocation
Gross carrying/nominal amount
Allowance
Sub- Credit for
Strong Good Satisfactory standard impaired Total ECL Net
Footnotes $m $m $m $m $m $m $m $m
Loans and
advances to
customers at
amortised
cost 493,586 243,340 248,791 28,756 17,435 1,031,908 (13,227) 1,018,681
---------------- --------- ------- ------------ -------- -------- --------- -------- ---------
- stage 1 480,945 203,612 160,839 7,282 - 852,678 (1,906) 850,772
- stage 2 12,641 39,728 87,952 21,474 - 161,795 (4,553) 157,242
- stage 3 - - - - 17,139 17,139 (6,669) 10,470
- POCI - - - - 296 296 (99) 197
---------------- --------- --------- ------- ------------ -------- -------- --------- -------- ---------
Loans and
advances to
banks at
amortised cost 69,599 4,039 2,382 1,040 9 77,069 (54) 77,015
--------- ------- ------------ -------- -------- --------- -------- ---------
- stage 1 66,544 2,919 2,142 88 - 71,693 (26) 71,667
- stage 2 3,055 1,120 240 952 - 5,367 (23) 5,344
- stage 3 - - - - 9 9 (5) 4
- POCI - - - - - - - -
--------- --------- ------- ------------ -------- -------- --------- -------- ---------
Other financial
assets
measured at
amortised
cost 665,256 60,821 24,788 774 233 751,872 (243) 751,629
--------- --------- ------- ------------ -------- -------- --------- -------- ---------
- stage 1 664,153 58,654 21,716 201 - 744,724 (96) 744,628
- stage 2 1,103 2,167 3,072 573 - 6,915 (63) 6,852
- stage 3 - - - - 232 232 (84) 148
- POCI - - - - 1 1 - 1
--------- --------- ------- ------------ -------- -------- --------- -------- ---------
Loan and other
credit-related
commitments 407,827 149,477 81,707 8,087 1,058 648,156 (622) 647,534
--------- --------- ------- ------------ -------- -------- --------- -------- ---------
- stage 1 400,182 131,509 60,334 2,375 - 594,400 (193) 594,207
- stage 2 7,645 17,968 21,373 5,712 - 52,698 (339) 52,359
- stage 3 - - - - 1,055 1,055 (90) 965
- POCI - - - - 3 3 - 3
--------- --------- ------- ------------ -------- -------- --------- -------- ---------
Financial
guarantees 6,348 5,393 5,068 1,223 296 18,328 (119) 18,209
--------- --------- ------- ------------ -------- -------- --------- -------- ---------
- stage 1 5,918 4,290 2,590 331 - 13,129 (28) 13,101
- stage 2 430 1,103 2,478 892 - 4,903 (73) 4,830
- stage 3 - - - - 295 295 (18) 277
- POCI - - - - 1 1 - 1
At 30 Jun 2020 1,642,616 463,070 362,736 39,880 19,031 2,527,333 (14,265) 2,513,068
---------------- --------- --------- ------- ------------ -------- -------- --------- -------- ---------
Debt
instruments at
FVOCI 1
---------
- stage 1 369,864 9,395 9,533 - - 388,792 (124) 388,668
----------------
- stage 2 2,812 616 387 962 - 4,777 (18) 4,759
- stage 3 - - - - 280 280 (100) 180
- POCI - - - - - - - -
---------------- --------- --------- ------- ------------ -------- -------- --------- -------- ---------
At 30 Jun 2020 372,676 10,011 9,920 962 280 393,849 (242) 393,607
---------------- --------- --------- ------- ------------ -------- -------- --------- -------- ---------
Distribution of financial instruments to which the impairment requirements
in IFRS 9 are applied, by credit quality and stage allocation
(continued)
Gross carrying/notional amount
Credit Allowance
Strong Good Satisfactory Sub-standard impaired Total for ECL Net
Footnotes $m $m $m $m $m $m $m $m
Loans and
advances
to customers
at amortised
cost 524,889 258,402 228,485 20,007 13,692 1,045,475 (8,732) 1,036,743
- stage 1 523,092 242,631 181,056 4,804 - 951,583 (1,297) 950,286
- stage 2 1,797 15,771 47,429 15,185 - 80,182 (2,284) 77,898
- stage 3 - - - - 13,378 13,378 (5,052) 8,326
- POCI - - - 18 314 332 (99) 233
---------------- --------- --------- ------- ------------ ------------ -------- --------- -------- ---------
Loans and
advances
to banks at
amortised
cost 60,636 5,329 1,859 1,395 - 69,219 (16) 69,203
- stage 1 60,548 5,312 1,797 112 - 67,769 (14) 67,755
- stage 2 88 17 62 1,283 - 1,450 (2) 1,448
- stage 3 - - - - - - - -
- POCI - - - - - - - -
--------- ------- ------------ ------------ -------- --------- -------- ---------
Other financial
assets
measured at
amortised
cost 537,253 54,505 22,766 503 152 615,179 (118) 615,061
--------- ------- ------------ ------------ -------- --------- -------- ---------
- stage 1 536,942 54,058 21,921 279 - 613,200 (38) 613,162
- stage 2 311 447 845 224 - 1,827 (38) 1,789
- stage 3 - - - - 151 151 (42) 109
- POCI - - - - 1 1 - 1
---------------- --------- --------- ------- ------------ ------------ -------- --------- -------- ---------
Loan and other
credit-related
commitments 369,424 146,988 77,499 5,338 780 600,029 (329) 599,700
- stage 1 368,711 141,322 66,283 1,315 - 577,631 (137) 577,494
- stage 2 713 5,666 11,216 4,023 - 21,618 (133) 21,485
- stage 3 - - - - 771 771 (59) 712
- POCI - - - - 9 9 - 9
---------------- --------- --------- ------- ------------ ------------ -------- --------- -------- ---------
Financial
guarantees 7,441 6,033 5,539 1,011 190 20,214 (48) 20,166
- stage 1 7,400 5,746 4,200 338 - 17,684 (16) 17,668
- stage 2 41 287 1,339 673 - 2,340 (22) 2,318
- stage 3 - - - - 186 186 (10) 176
- POCI - - - - 4 4 - 4
At 31 Dec 2019 1,499,643 471,257 336,148 28,254 14,814 2,350,116 (9,243) 2,340,873
---------------- --------- --------- ------- ------------ ------------ -------- --------- -------- ---------
Debt
instruments
at FVOCI 1
---------------- ---------
- stage 1 333,072 10,941 6,902 - - 350,915 (39) 350,876
- stage 2 86 25 320 544 - 975 (127) 848
- stage 3 - - - - - - - -
- POCI - - - - 1 1 - 1
---------------- --------- ------- ------------ ------------ -------- --------- -------- ---------
At 31 Dec 2019 333,158 10,966 7,222 544 1 351,891 (166) 351,725
---------------- --------- --------- ------- ------------ ------------ -------- --------- -------- ---------
1 For the purposes of this disclosure, gross carrying value is
defined as the amortised cost of a financial asset, before
adjusting for any loss allowance. As such, the gross carrying value
of debt instruments at FVOCI will not reconcile to the balance
sheet as it excludes fair value gains and losses.
Customer relief programmes
In response to the Covid-19 outbreak, governments and regulators
around the world have introduced a number of support measures for
both personal and wholesale customers in market-wide schemes. The
following table presents the number of personal accounts/wholesale
customers and the associated drawn loan
values of customers under these schemes and HSBC-specific
measures for major markets at 30 June 2020. In relation to personal
lending, the majority of relief measures, including payment
holidays, relate to existing lending, while in wholesale lending
the relief measures comprise of payment holidays, refinancing of
existing facilities and new lending under government-backed
schemes.
Personal lending
Hong Other major
UK Kong US markets(1,2,3) Total
------ ------ ----- --------------- --------
Market-wide schemes
Number of accounts granted mortgage
customer relief 000s 65 - - 45 110
Drawn loan value of accounts granted
mortgage customer relief $m 13,550 - - 3,759 17,309
Number of accounts granted other personal
lending customer relief 000s 153 - - 219 372
Drawn loan value of accounts granted
other personal lending customer relief $m 1,594 - - 2,180 3,774
HSBC-specific measures
Number of accounts granted mortgage
customer relief 000s - 3 3 18 24
Drawn loan value of accounts granted
mortgage customer relief $m - 1,231 1,322 2,655 5,208
Number of accounts granted other personal
lending customer relief 000s - 1 19 200 220
Drawn loan value of accounts granted
other personal lending customer relief $m - 95 150 1,184 1,429
Total personal lending to major markets
under market-wide schemes and HSBC-specific
measures
Number of accounts granted mortgage
customer relief 000s 65 3 3 63 134
------ ------ ----- --------------- ------
Drawn loan value of accounts granted
mortgage customer relief $m 13,550 1,231 1,322 6,414 22,517
Number of accounts granted other personal
lending customer relief 000s 153 1 19 419 592
Drawn loan value of accounts granted
other personal lending customer relief $m 1,594 95 150 3,364 5,203
---------------------------------------------- ----- ------ ------ ----- --------------- ------
Market-wide schemes and HSBC-specific
measures - mortgage relief as a proportion
of total mortgages % 10.3% 1.4% 7.2% 9.0% 7.2%
---------------------------------------------- ------ ------ ----- --------------- --------
Market-wide schemes and HSBC-specific
measures - other personal lending
relief as a proportion of total other
personal lending loans and advances % 8.7% 0.3% 6.5% 7.1% 5.2%
---------------------------------------------- ----- ------ ------ ----- --------------- --------
Wholesale lending
Hong Other major
UK Kong US markets(1) Total
---------------------------------------------- ----- ------ ------ ----- --------------- --------
Market-wide schemes
----------------------------------------------
Number of customers under market-wide
measures 000s 130 7 4 6 147
Drawn loan value of customers under
market-wide schemes $m 6,696 18,711 1,197 6,736 33,340
HSBC-specific schemes
----------------------------------------------
Number of customers under HSBC-specific
measures 000s 5 4 - 16 25
Drawn loan value of customers under
HSBC-specific measures $m 3,998 6,216 1,229 7,873 19,316
Total wholesale lending to major markets
under market-wide schemes and HSBC-specific
measures
Number of customers(4) 000s 135 11 4 22 172
------ ------ ----- --------------- ------
Drawn loan value $m 10,694 24,927 2,426 14,609 52,656
---------------------------------------------- ----- ------ ------ ----- --------------- ------
Market-wide schemes and HSBC-specific
measures as a proportion of total
wholesale lending loans and advances % 7.7% 13.2% 5.0% 7.5% 9.2%
---------------------------------------------- ----- ------ ------ ----- --------------- --------
1 Other major markets include Australia, Canada, mainland China,
Egypt, France, Germany, India, Indonesia, Malaysia, Mexico,
Singapore, Switzerland, Taiwan and UAE.
2 In Malaysia, personal lending customers are granted an
automatic moratorium programme for all eligible retail customers.
At 30 June 2020, the number of accounts under this moratorium was
133,000 with an associated drawn balance of $4,023m.
3 In Mexico, there were 115,000 personal lending accounts under
customer relief with an associated drawn balance of $954m.
4 Within total wholesale customers, there are 2,000 customers
under both market-wide and HSBC-specific schemes.
The initial granting of customer relief does not automatically
trigger a migration to stage 2 or 3. However, information provided
by payment deferrals is considered in the context of other
reasonable and supportable information. This forms part of the
overall assessment for significant increase in credit risk and
credit impairment to identify loans for which lifetime ECL is
appropriate. An extension in payment deferral does not
automatically result in stage 2 or stage 3. The key accounting and
credit risk judgement to ascertain whether a significant increase
in credit risk has occurred is whether the economic effects of the
Covid-19 outbreak on the customer are likely to be temporary over
the lifetime of the loan, and whether they indicate that a
concession is being made in respect of financial difficulty that
would be consistent with stage 3.
Market-wide schemes
The following narrative provides further details on the major
government and regulatory schemes offered in the UK, Hong Kong and
the US.
UK personal lending
Mortgages
Customer relief granted on UK mortgages primarily consists of
payment holidays or partial payment deferrals.
Relief is offered for an initial period of three months and may
be extended for a further three months in certain circumstances. No
payment is required from the customer during this period (though
with a partial payment deferral the customer has expressed a desire
to make a contribution) and interest continues to be charged as
usual. The customers' arrears status is not worsened from
utilisation of these schemes.
Other personal lending payment holidays
Customer relief is granted for an initial period of three months
and may be extended for a further three months. The maximum relief
value is up to the due payment amount during the period.
UK wholesale lending
The primary relief granted under government schemes consists of
the Bounce Back Loan Scheme, Coronavirus Business Interruption Loan
Scheme and Coronavirus Large Business Interruption Loan Scheme. The
key features of these schemes are as follows:
-- The Bounce Back Loan Scheme provides small and medium-sized
enterprises ('SME') with loans of up to GBP50,000 for a maximum
period of six years. Interest is charged at 2.5% and the government
pays the fees and interest for the first 12 months. No capital
repayment is required by the customer for the first 12 months of
the scheme. A government guarantee of 100% is provided under the
scheme.
-- The Coronavirus Business Interruption Loan Scheme provides
SMEs that have a turnover of less than GBP45m with loans of up to
GBP5m for a maximum period of six years. Interest is charged
between 3.49% and 3.99% above the UK base rate and no capital
repayment is required by the customer for the first 12 months of
the scheme. A government guarantee of up to 80% is provided under
the scheme.
-- The Coronavirus Large Business Interruption Loan Scheme
provides medium and large-sized enterprises that have a turnover in
excess of GBP45m with loans of up to GBP200m. The interest rate and
tenor of the loan are negotiated on commercial terms. A government
guarantee of 80% is provided under the scheme.
Hong Kong wholesale lending
Pre-approved Principal Payment Holiday Scheme for Corporate
Customers
The above scheme enables eligible customers to apply for a
payment holiday of six months (or 90 days for trade finance) with
no change to the existing interest rate charge.
US wholesale lending
Paycheck Protection Program
The CARES Act created the Paycheck Protection Program ('PPP')
loan guarantee programme to provide small businesses with support
to cover payroll and certain other expenses. Loans made under the
PPP are fully guaranteed by the Small Business Administration,
whose guarantee is backed by the full faith and credit of the US.
PPP-covered loans also afford customers forgiveness up to the
principal amount of the PPP-covered loan, plus accrued interest, if
the loan proceeds are used to retain workers and maintain payroll
or to make certain mortgage interest, lease and utility payments,
and certain other criteria are satisfied. The Small Business
Administration will reimburse PPP lenders for any amount of a
PPP-covered loan that is forgiven, and PPP lenders will not be
liable for any representations made by PPP borrowers in connection
with their requests for loan forgiveness. Lenders receive
pre-determined fees for processing and servicing PPP loans.
HSBC-specific measures
UK personal lending
Overdrafts
HSBC has offered all customers a GBP500 interest-free overdraft
for a duration of three months.
UK wholesale lending
HSBC is offering capital repayment holidays to CMB customers.
Relief is offered on a preferred term of six months. However, some
are granted for three months with the option of an extension.
Interest continues to be paid as usual.
Hong Kong personal lending
Mortgages
Customer relief granted on Hong Kong mortgages consists of
deferred principal repayment of up to 12 months. This relief
programme is available to existing HSBC mortgage loan customers who
have a good repayment record during the past six months.
Hong Kong wholesale lending
Temporary relief measures for CMB customers
The above scheme enables eligible customers to apply for a
payment holiday of up to six months with no change to the existing
interest rate charge.
US total personal lending
Customer relief granted on US mortgages and other personal
lending consists of deferrals of up to 12 months and up to six
months respectively
Personal lending
This section provides further details on the regions, countries
and products driving the decrease in personal loans and advances to
customers. Additionally, Hong Kong and UK mortgage book
loan-to-value ('LTV') data is provided.
Further product granularity is also provided by stage, with
geographical data presented for loans and advances to customers,
loan and other credit-related commitments, and financial guarantee
and similar contracts.
At 30 June 2020, total personal lending for loans and advances
to customers of $422.2bn decreased by $12.1bn compared with
31 December 2019. This decrease included adverse exchange
movements of $14.3bn. Excluding foreign exchange movements, there
was growth of $2.2bn, primarily driven by $1.2bn in Europe, $0.7bn
in North America and $0.6bn in Asia.
The allowance for ECL attributable to personal lending,
excluding off-balance sheet loan commitments and guarantees,
increased by $1.3bn to $4.4bn at 30 June 2020. This included
favourable foreign exchange movements of $0.2bn.
Excluding foreign exchange movements, total personal lending was
primarily driven by mortgage growth, which grew by $7.4bn.
Mortgages grew in the UK by $3.3bn, driven by stronger acquisition
performance, including the expanded use of broker relationships. In
Asia, mortgages grew $2.7bn, notably $2.0bn in Hong Kong and $1.1bn
in Australia, as a result of business growth initiatives. The
allowance for ECL attributable to mortgages increased by $0.3bn to
$0.8bn at 30 June 2020.
The quality of both our Hong Kong and UK mortgage books remained
high, with negligible defaults and impairment allowances. The
average LTV ratio on new mortgage lending in Hong Kong was 59%,
compared with an estimated 43% for the overall mortgage portfolio.
The average LTV ratio on new lending in the UK was 68%, compared
with an estimated 51% for the overall mortgage portfolio.
Excluding foreign exchange movements, other personal lending
balances at 30 June 2020 decreased by $5.2bn compared with
31 December 2019. The decrease was attributable to a $4.1bn
decrease in credit card balances and to a lesser extent loans and
overdrafts, which decreased by $1.0bn. The decrease in credit card
balances was driven by $2.1bn in the UK and $1.4bn in Asia, notably
$0.8bn in Hong Kong. These decreases in drawn credit cards
partially contributed to an increase in total off-balance sheet
loan commitments and guarantees, which grew by $8.0bn to $232.1bn
at 30 June 2020. This increase included $4.9bn of adverse foreign
exchange movements.
Excluding foreign exchange movements, the allowance for ECL
attributable to other personal lending, excluding loan commitments
and guarantees, increased by $1.2bn to $3.6bn at 30 June 2020. The
main drivers of this increase was loans and overdrafts and credit
cards in the UK with increases of $0.4bn and $0.2bn respectively.
There was also an increase in Asia of $0.2bn, notably $0.1bn in
loans and overdrafts and $0.1bn in credit cards.
Total personal lending for loans and advances to customers by stage
distribution
Gross carrying amount Allowance for ECL
------- ---------
Stage Stage Stage Stage Stage Stage
1 2 3 Total 1 2 3 Total
$m $m $m $m $m $m $m $m
------- ------ ----- ------- ----- ------- ------- ---------
By portfolio
------- ------ ----- ------- ----- ------- ------- ---------
First lien residential
mortgages 299,392 15,648 3,045 318,085 (102) (298) (406) (806)
------- ------ ----- ------- ---- ------ ------ ------
- of which:
interest only (including
offset) 28,428 1,383 348 30,159 (8) (17) (81) (106)
-----------------------------------------
affordability (including
US adjustable rate
mortgages) 12,667 2,590 534 15,791 (6) (6) (5) (17)
----------------------------------------- ------- ------ ----- ------- ---- ------ ------ ------
Other personal lending 90,640 11,383 2,076 104,099 (795) (1,817) (983) (3,595)
------- ------ ----- ------- ---- ------ ------ ------
- other 72,069 6,794 1,287 80,150 (358) (735) (599) (1,692)
- credit cards 16,449 4,441 726 21,616 (428) (1,063) (366) (1,857)
* second lien residential mortgages 673 84 53 810 (2) (10) (11) (23)
- motor vehicle finance 1,449 64 10 1,523 (7) (9) (7) (23)
----------------------------------------- ------- ------ ----- ------- ---- ------ ------ ------
At 30 Jun 2020 390,032 27,031 5,121 422,184 (897) (2,115) (1,389) (4,401)
----------------------------------------- ------- ------ ----- ------- ---- ------ ------ ------
By geography
------- ------ ----- ------- ----- ------- ------- ---------
Europe 174,021 9,683 2,416 186,120 (245) (1,081) (733) (2,059)
----------------------------------------- ------- ------ ----- ------- ---- ------ ------ ------
- of which: UK 140,171 8,421 1,640 150,232 (230) (1,048) (469) (1,747)
------- ------ ----- ------- ---- ------ ------ ------
Asia 167,690 11,313 853 179,856 (284) (412) (210) (906)
------- ------ ----- ------- ---- ------ ------ ------
- of which: Hong Kong 116,657 4,504 224 121,385 (101) (234) (59) (394)
----------------------------------------- ------- ------ ----- ------- ---- ------ ------ ------
MENA 5,005 480 278 5,763 (63) (148) (182) (393)
------- ------ ----- ------- ---- ------ ------ ------
North America 37,788 4,749 1,337 43,874 (138) (171) (145) (454)
------- ------ ----- ------- ---- ------ ------ ------
Latin America 5,528 806 237 6,571 (167) (303) (119) (589)
----------------------------------------- ------- ------ ----- ------- ---- ------ ------ ------
At 30 Jun 2020 390,032 27,031 5,121 422,184 (897) (2,115) (1,389) (4,401)
----------------------------------------- ------- ------ ----- ------- ---- ------ ------ ------
Total personal lending for loans and other credit-related commitments
and financial guarantees by stage distribution
Nominal amount Allowance for ECL
Stage Stage Stage Total Stage Stage Stage Total
1 2 3 1 2 3
$m $m $m $m $m $m $m $m
---------- ------- ----- ---------- ---------- ----- ----- -------
Europe 50,714 1,050 138 51,902 (20) (2) - (22)
---------- ------- ----- ---------- ------ ---- ----- ----
of which: UK 48,112 921 121 49,154 (19) (1) - (20)
--------------------------- ---------- ------- ----- ---------- ------ ---- ----- ----
Asia 157,180 1,047 11 158,238 - (1) - (1)
---------- ------- ----- ---------- ------ ---- ----- ----
of which: Hong Kong 120,624 27 10 120,661 - - - -
--------------------------- ---------- ------- ----- ---------- ------ ---- ----- ----
MENA 3,175 55 50 3,280 (1) - - (1)
---------- ------- ----- ---------- ------ ---- ----- ----
North America 14,980 243 20 15,243 (2) - - (2)
---------- ------- ----- ---------- ------ ---- ----- ----
Latin America 3,382 40 1 3,423 (3) - - (3)
--------------------------- ---------- ------- ----- ---------- ------ ---- ----- ----
At 30 Jun 2020 229,431 2,435 220 232,086 (26) (3) - (29)
--------------------------- ---------- ------- ----- ---------- ------ ---- ----- ----
Total personal lending for loans and advances to customers by stage
distribution
Gross carrying amount Allowance for ECL
------- ---------
Stage Stage Stage Total Stage Stage Stage Total
1 2 3 1 2 3
$m $m $m $m $m $m $m $m
------- ------ ----- ------- ----- ------- ------- ---------
By portfolio
------- ------ ----- ------- ----- ------- ------- ---------
First lien residential
mortgages 312,031 7,077 3,070 322,178 (39) (68) (422) (529)
------- ------ ----- ------- ---- ------ ------ ------
- of which:
interest only (including
offset) 31,201 1,602 376 33,179 (6) (15) (91) (112)
-----------------------------------------
affordability (including
US adjustable rate
mortgages) 14,222 796 514 15,532 (3) (3) (3) (9)
----------------------------------------- ------- ------ ----- ------- ---- ------ ------ ------
Other personal lending 101,638 8,674 1,781 112,093 (544) (1,268) (793) (2,605)
------- ------ ----- ------- ---- ------ ------ ------
- other 77,031 4,575 1,193 82,799 (229) (451) (491) (1,171)
- credit cards 22,285 3,959 524 26,768 (310) (801) (284) (1,395)
* second lien residential mortgages 750 84 55 889 (1) (6) (10) (17)
- motor vehicle finance 1,572 56 9 1,637 (4) (10) (8) (22)
----------------------------------------- ------- ------ ----- ------- ---- ------ ------ ------
At 31 Dec 2019 413,669 15,751 4,851 434,271 (583) (1,336) (1,215) (3,134)
----------------------------------------- ------- ------ ----- ------- ---- ------ ------ ------
By geography
------- ------ ----- ------- ----- ------- ------- ---------
Europe 186,561 6,854 2,335 195,750 (112) (538) (578) (1,228)
----------------------------------------- ------- ------ ----- ------- ---- ------ ------ ------
* of which: UK 153,313 5,455 1,612 160,380 (104) (513) (370) (987)
------- ------ ----- ------- ---- ------ ------ ------
Asia 173,523 5,855 717 180,095 (223) (339) (170) (732)
------- ------ ----- ------- ---- ------ ------ ------
* of which: Hong Kong 117,013 2,751 189 119,953 (90) (220) (44) (354)
----------------------------------------- ------- ------ ----- ------- ---- ------ ------ ------
MENA 5,671 247 299 6,217 (50) (58) (189) (297)
------- ------ ----- ------- ---- ------ ------ ------
North America 41,148 1,930 1,238 44,316 (56) (119) (141) (316)
------- ------ ----- ------- ---- ------ ------ ------
Latin America 6,766 865 262 7,893 (142) (282) (137) (561)
----------------------------------------- ------- ------ ----- ------- ---- ------ ------ ------
At 31 Dec 2019 413,669 15,751 4,851 434,271 (583) (1,336) (1,215) (3,134)
----------------------------------------- ------- ------ ----- ------- ---- ------ ------ ------
Total personal lending for loans and other credit-related commitments
and financial guarantees by stage distribution
Nominal amount Allowance for ECL
Stage Stage Stage Total Stage Stage Stage Total
1 2 3 1 2 3
$m $m $m $m $m $m $m $m
--------- ------ ----- -------- ---------- ----- ----- -------
Europe 51,575 604 110 52,289 (10) (2) - (12)
--------- ------ ----- -------- ------ ---- ----- ----
* of which: UK 49,322 493 105 49,920 (8) (1) - (9)
-------------------------------- --------- ------ ----- -------- ------ ---- ----- ----
Asia 149,336 682 9 150,027 - - - -
--------- ------ ----- -------- ------ ---- ----- ----
* of which: Hong Kong 115,025 27 3 115,055 - - - -
-------------------------------- --------- ------ ----- -------- ------ ---- ----- ----
MENA 3,150 46 53 3,249 - - - -
--------- ------ ----- -------- ------ ---- ----- ----
North America 13,919 256 20 14,195 (1) - - (1)
--------- ------ ----- -------- ------ ---- ----- ----
Latin America 4,312 43 3 4,358 (3) - - (3)
-------------------------------- --------- ------ ----- -------- ------ ---- ----- ----
At 31 Dec 2019 222,292 1,631 195 224,118 (14) (2) - (16)
-------------------------------- --------- ------ ----- -------- ------ ---- ----- ----
Wholesale lending
This section provides further details on the regions, countries
and industries driving the increase in wholesale loans and advances
to customers and banks, with the impact of foreign exchange
separately identified. Industry granularity is also provided by
stage, with geographical data presented for loans and advances to
customers, banks, other credit commitments, financial guarantees
and similar contracts.
At 30 June 2020, wholesale lending for loans and advances to
banks and customers of $686.8bn increased by $6.4bn since
31 December 2019. This included adverse foreign exchange
movements of $18.1bn.
Excluding foreign exchange movements, the total wholesale
lending growth was driven by a $14.3bn increase in corporate and
commercial balances and $9.6bn increase in loans and advances to
banks.
The primary driver of the increase in corporate and commercial
balances was $7.2bn in Europe, notably $3.5bn in the UK and $2.7bn
in France. Additionally, corporate and commercial balances in North
America and MENA grew $4.8bn and $2.2bn respectively.
Loan commitments and financial guarantees grew $38.3bn since 31
December 2019 to $434.4bn at 30 June 2020, including a $33.9bn
increase related to unsettled reverse repurchase agreements. This
also included adverse foreign exchange movements of $8.5bn.
The allowance for ECL attributable to loans and advances to
banks and customers of $8.9bn at 30 June 2020 increased from $5.6bn
at 31 December 2019. This included favourable foreign exchange
movements of $0.2bn.
Excluding foreign exchange movements, the total increase in the
wholesale ECL allowance for loans and advances to customers and
banks was driven by $3.3bn in corporate and commercial balances.
The primary driver of this increase in corporate and commercial
allowance for ECL was $1.2bn in Europe, notably $1.1bn in the UK.
There was an increase of $1.1bn in Asia, notably $0.7bn in
Singapore and $0.2bn in Hong Kong. Additionally, there were
increases of $0.5bn and $0.3bn in North America and MENA,
respectively.
Total wholesale lending for loans and advances to banks and customers
by stage distribution
Gross carrying amount Allowance for ECL
-------
Stage Stage Stage Stage Stage Stage
1 2 3 POCI Total 1 2 3 POCI Total
$m $m $m $m $m $m $m $m $m $m
------- ---------
Corporate and commercial 406,194 122,319 11,499 296 540,308 (966) (2,306) (5,166) (99) (8,537)
------- ------- ------ ---- ------- ------ ------ ------ --- ------
* agriculture, forestry and fishing 5,620 782 293 2 6,697 (13) (31) (142) (1) (187)
* mining and quarrying 10,811 2,719 1,308 12 14,850 (52) (134) (371) (11) (568)
* manufacturing 72,719 27,694 1,589 123 102,125 (153) (435) (869) (46) (1,503)
* electricity, gas, steam and air-conditioning supply 11,987 3,144 175 1 15,307 (30) (40) (24) - (94)
* water supply, sewerage, waste management and
remediation 2,291 966 29 - 3,286 (7) (15) (17) - (39)
- construction 8,982 5,136 723 31 14,872 (40) (142) (396) (30) (608)
* wholesale and retail trade, repair of motor vehicles
and motorcycles 64,461 25,558 2,972 10 93,001 (150) (311) (1,749) (2) (2,212)
* transportation and storage 18,293 7,733 664 12 26,702 (77) (145) (235) - (457)
* accommodation and food 14,723 10,109 330 1 25,163 (59) (196) (82) (1) (338)
* publishing, audiovisual and broadcasting 16,635 3,860 66 29 20,590 (41) (98) (16) (5) (160)
- real estate 110,646 14,737 1,426 1 126,810 (150) (302) (525) - (977)
* professional, scientific and technical activities 18,842 6,786 517 - 26,145 (48) (100) (170) - (318)
* administrative and support services 19,959 7,312 682 74 28,027 (50) (163) (260) (3) (476)
* public administration and defence, compulsory social
security 2,405 565 3 - 2,973 (3) (8) (1) - (12)
- education 1,781 661 13 - 2,455 (8) (25) (6) - (39)
- health and care 4,064 1,497 244 - 5,805 (13) (42) (118) - (173)
* arts, entertainment and recreation 1,692 980 42 - 2,714 (8) (38) (10) - (56)
- other services 11,445 1,134 422 - 13,001 (53) (60) (174) - (287)
- activities of
households 707 244 - - 951 - (1) - - (1)
* extra-territorial organisations and bodies activities 9 - - - 9 - - - - -
- government 7,484 689 1 - 8,174 (11) (8) (1) - (20)
- asset-backed securities 638 13 - - 651 - (12) - - (12)
------------------------------------------------------------- ------- ------- ------ ---- ------- ------ ------ ------ --- ------
Non-bank financial
institutions 56,452 12,445 519 - 69,416 (43) (132) (114) - (289)
------ ------ ------ --- ------
Loans and advances
to banks 71,693 5,367 9 - 77,069 (26) (23) (5) - (54)
------------------------------------------------------------- ------- ------- ------ ---- ------- ------ ------ ------ --- ------
At 30 Jun 2020 534,339 140,131 12,027 296 686,793 (1,035) (2,461) (5,285) (99) (8,880)
------------------------------------------------------------- ------- ------- ------ ---- ------- ------ ------ ------ --- ------
By geography
Europe 165,295 38,744 6,229 132 210,400 (444) (1,188) (1,980) (48) (3,660)
------- ------- ------ ---- ------- ------ ------ ------ --- ------
- of which: UK 110,296 28,906 4,262 74 143,538 (376) (1,042) (1,267) (35) (2,720)
------- ------- ------ ---- ------- ------ ------ ------ --- ------
Asia 276,436 71,147 2,541 117 350,241 (273) (578) (1,695) (34) (2,580)
------- ------- ------ ---- ------- ------ ------ ------ --- ------
- of which: Hong
Kong 165,429 43,919 874 47 210,269 (153) (314) (496) (24) (987)
------------------------------------------------------------- ------- ------- ------ ---- ------- ------ ------ ------ --- ------
MENA 22,959 7,450 1,879 17 32,305 (83) (195) (1,093) (12) (1,383)
North America 57,321 18,484 1,005 - 76,810 (119) (342) (306) - (767)
Latin America 12,328 4,306 373 30 17,037 (116) (158) (211) (5) (490)
------------------------------------------------------------- ------- ------- ------ ---- ------- ------ ------ ------ --- ------
At 30 Jun 2020 534,339 140,131 12,027 296 686,793 (1,035) (2,461) (5,285) (99) (8,880)
------------------------------------------------------------- ------- ------- ------ ---- ------- ------ ------ ------ --- ------
Total wholesale lending for loans and other credit-related commitments
and financial guarantees by stage distribution(1)
Nominal amount Allowance for ECL
Stage Stage Stage POCI Total Stage Stage Stage POCI Total
1 2 3 1 2 3
$m $m $m $m $m $m $m $m $m $m
------- ------ ----- ---- ------- ----- ----- ----- ---- -------
Corporate and commercial 241,574 49,164 1,092 4 291,834 (186) (382) (104) - (672)
------- ------ ----- ---- ------- ---- ---- ---- ---- ----
Financial 136,524 6,002 38 - 142,564 (9) (27) (4) - (40)
--------------------------- ------- ------ ----- ---- ------- ---- ---- ---- ---- ----
At 30 Jun 2020 378,098 55,166 1,130 4 434,398 (195) (409) (108) - (712)
--------------------------- ------- ------ ----- ---- ------- ---- ---- ---- ---- ----
By geography
Europe 205,781 27,797 913 4 234,495 (89) (166) (83) - (338)
------- ------ ----- ---- ------- ---- ---- ---- ---- ----
* of which: UK 74,777 16,431 541 3 91,752 (77) (132) (41) - (250)
------- ------ ----- ---- ------- ---- ---- ---- ---- ----
Asia 58,773 11,181 63 - 70,017 (36) (99) (14) - (149)
------- ------ ----- ---- ------- ---- ---- ---- ---- ----
* of which: Hong Kong 30,271 3,100 3 - 33,374 (16) (43) (3) - (62)
------- ------ ----- ---- ------- ---- ---- ---- ---- ----
MENA 5,219 1,306 25 - 6,550 (11) (33) (5) - (49)
----- ----
North America 106,302 14,592 96 - 120,990 (45) (108) (3) - (156)
----- ----
Latin America 2,023 290 33 - 2,346 (14) (3) (3) - (20)
--------------------------- ------ ----- ---- ---- ---- ---- ----
At 30 Jun 2020 378,098 55,166 1,130 4 434,398 (195) (409) (108) - (712)
--------------------------- ------- ------ ----- ---- ------- ---- ---- ---- ---- ----
1 Included in loans and other credit-related commitments and
financial guarantees is $87bn relating to unsettled reverse
repurchase agreements, which once drawn are classified as 'Reverse
repurchase agreements - non-trading'.
Total wholesale lending for loans and advances to banks and customers
by stage distribution
Gross carrying amount Allowance for ECL
-------
Stage Stage Stage POCI Total Stage Stage Stage POCI Total
1 2 3 1 2 3
$m $m $m $m $m $m $m $m $m $m
------- ---------
Corporate and commercial 472,253 59,599 8,315 332 540,499 (672) (920) (3,747) (99) (5,438)
------- ------ ----- ---- ------- ---- ---- ------ --- ------
* agriculture, forestry and fishing 5,416 1,000 278 2 6,696 (13) (29) (139) (1) (182)
* mining and quarrying 9,923 4,189 311 12 14,435 (22) (70) (122) (12) (226)
* manufacturing 88,138 14,525 1,581 136 104,380 (143) (211) (806) (50) (1,210)
* electricity, gas, steam and air-conditioning supply 13,479 1,386 175 - 15,040 (14) (41) (25) - (80)
* water supply, sewerage, waste management and
remediation 2,963 508 30 - 3,501 (6) (4) (18) - (28)
- construction 10,520 3,883 852 32 15,287 (16) (49) (467) (32) (564)
* wholesale and retail trade, repair of motor vehicles
and motorcycles 83,151 9,897 1,625 8 94,681 (111) (137) (934) (2) (1,184)
* transportation and storage 22,604 2,359 588 29 25,580 (42) (37) (158) - (237)
* accommodation and food 20,109 4,284 262 1 24,656 (37) (46) (62) (1) (146)
* publishing, audiovisual and broadcasting 18,103 1,706 141 21 19,971 (30) (23) (33) (1) (87)
- real estate 122,972 6,450 1,329 1 130,752 (108) (97) (475) - (680)
* professional, scientific and technical activities 21,085 2,687 350 - 24,122 (31) (33) (145) - (209)
* administrative and support services 21,370 3,817 438 89 25,714 (33) (58) (179) - (270)
* public administration and defence, compulsory social
security 1,889 488 - - 2,377 (1) (7) - - (8)
- education 1,700 184 16 - 1,900 (7) (5) (6) - (18)
- health and care 3,543 811 111 - 4,465 (9) (20) (28) - (57)
* arts, entertainment and recreation 2,537 257 30 - 2,824 (6) (8) (11) - (25)
- other services 13,143 941 191 1 14,276 (35) (31) (133) - (199)
- activities of
households 725 66 - - 791 - - - - -
* extra-territorial organisations and bodies activities 2 - - - 2 - - - - -
- government 8,159 147 7 - 8,313 (6) (2) (6) - (14)
- asset-backed securities 722 14 - - 736 (2) (12) - - (14)
------------------------------------------------------------- ------- ------ ----- ---- ------- ---- ---- ------ --- ------
Non-bank financial
institutions 65,661 4,832 212 - 70,705 (42) (28) (90) - (160)
---- ---- ------ --- ------
Loans and advances
to banks 67,769 1,450 - - 69,219 (14) (2) - - (16)
------------------------------------------------------------- ------- ------ ----- ---- ------- ---- ---- ------ --- ------
At 31 Dec 2019 605,683 65,881 8,527 332 680,423 (728) (950) (3,837) (99) (5,614)
------------------------------------------------------------- ------- ------ ----- ---- ------- ---- ---- ------ --- ------
By geography
Europe 190,528 20,276 4,671 129 215,604 (318) (458) (1,578) (45) (2,399)
------- ------ ----- ---- ------- ---- ---- ------ --- ------
* of which: UK 131,007 16,253 3,343 79 150,682 (252) (385) (989) (32) (1,658)
------- ------ ----- ---- ------- ---- ---- ------ --- ------
Asia 308,305 32,287 1,419 148 342,159 (228) (253) (986) (38) (1,505)
------- ------ ----- ---- ------- ---- ---- ------ --- ------
* of which: Hong Kong 182,501 23,735 673 48 206,957 (118) (172) (475) (28) (793)
------------------------------------------------------------- ------- ------ ----- ---- ------- ---- ---- ------ --- ------
MENA 25,470 3,314 1,686 18 30,488 (55) (85) (946) (12) (1,098)
North America 64,501 7,495 458 - 72,454 (45) (96) (141) - (282)
Latin America 16,879 2,509 293 37 19,718 (82) (58) (186) (4) (330)
------------------------------------------------------------- ------- ------ ----- ---- ------- ---- ---- ------ --- ------
At 31 Dec 2019 605,683 65,881 8,527 332 680,423 (728) (950) (3,837) (99) (5,614)
------------------------------------------------------------- ------- ------ ----- ---- ------- ---- ---- ------ --- ------
Total wholesale lending for loans and other credit-related commitments
and financial guarantees by stage distribution(1)
Nominal amount Allowance for ECL
Stage Stage Stage POCI Total Stage Stage Stage POCI Total
1 2 3 1 2 3
$m $m $m $m $m $m $m $m $m $m
Corporate and commercial 271,678 20,880 757 13 293,328 (132) (151) (68) - (351)
Financial 101,345 1,447 5 - 102,797 (7) (2) (1) - (10)
--------------------------- ------- ------ ----- ---- ------- ---- ---- ---- ---- ----
At 31 Dec 2019 373,023 22,327 762 13 396,125 (139) (153) (69) - (361)
--------------------------- ------- ----- ---- ------- ---- ---- ----
By geography
Europe 190,604 7,852 645 13 199,114 (60) (43) (56) - (159)
------- ------ ----- ---- ------- ---- ---- ---- ---- ----
* of which: UK 76,013 4,193 494 9 80,709 (48) (32) (31) - (111)
Asia 60,759 3,762 8 - 64,529 (43) (33) (4) - (80)
------- ------ ----- ---- ------- ---- ---- ---- ---- ----
* of which: Hong Kong 27,047 2,114 5 - 29,166 (14) (23) (2) - (39)
--------------------------- ------- ----- ---- ------- ---- ---- ----
MENA 5,690 621 31 - 6,342 (12) (13) (4) - (29)
North America 112,812 9,933 77 - 122,822 (22) (62) (5) - (89)
Latin America 3,158 159 1 - 3,318 (2) (2) - - (4)
--------------------------- ------- ------ ----- ---- ------- ---- ---- ---- ---- ----
At 31 Dec 2019 373,023 22,327 762 13 396,125 (139) (153) (69) - (361)
--------------------------- ------- ----- ---- ------- ---- ---- ----
1 Included in loans and other credit-related commitments and
financial guarantees is $53bn relating to unsettled reverse
repurchase agreements, which once drawn are classified as 'Reverse
repurchase agreements - non-trading'.
Supplementary information
The following disclosure presents the gross carrying/nominal
amount of financial instruments to which the impairment
requirements in IFRS 9 are applied by global business and the
associated allowance for ECL.
Change in reportable segments
Effective from 30 June 2020, we made the following realignments
within our internal reporting:
-- We simplified our matrix organisational structure by merging
Global Private Banking and Retail Banking and Wealth Management to
form Wealth and Personal Banking ('WPB'). The impact of this change
is to merge the Global Private Banking's and Retail Banking and
Wealth Management's gross carrying/nominal values and the
associated allowance for ECL into WPB.
-- We reallocated Balance Sheet Management from Corporate Centre
to the global businesses. The impact of this change is to transfer
the Balance Sheet Management's gross carrying/nominal values and
the associated allowance for ECL from Corporate Centre into the
other global businesses.
Comparative data have been re-presented accordingly. There is no
impact upon total gross carrying/nominal values, total allowance
for ECL or the staging of financial instruments.
Summary of financial instruments to which the impairment requirements
in IFRS 9 are applied - by global business
Gross carrying/nominal amount Allowance for ECL
Stage Stage Stage Stage Stage Stage
1 2 3 POCI Total 1 2 3 POCI Total
$m $m $m $m $m $m $m $m $m $m
Loans and
advances
to customers
at amortised
cost 852,678 161,795 17,139 296 1,031,908 (1,906) (4,553) (6,669) (99) (13,227)
------- ------ ---- ------ ------ ------ --- -------
- WPB 399,922 28,625 5,452 - 433,999 (924) (2,123) (1,467) - (4,514)
- CMB 246,831 95,965 8,682 209 351,687 (768) (1,938) (4,343) (70) (7,119)
- GBM 204,704 37,141 3,005 87 244,937 (214) (480) (859) (29) (1,582)
- Corporate
Centre 1,221 64 - - 1,285 - (12) - - (12)
--------- ------- ------ ---
Loans and
advances
to banks at
amortised
cost 71,693 5,367 9 - 77,069 (26) (23) (5) - (54)
--------- ------- ------ ---
- WPB 14,888 589 - - 15,477 (4) (2) - - (6)
- CMB 10,302 345 - - 10,647 (2) (3) - - (5)
- GBM 31,367 4,140 9 - 35,516 (13) (17) (5) - (35)
- Corporate
Centre 15,136 293 - - 15,429 (7) (1) - - (8)
--------- ------- ------ ---
Other financial
assets
measured at
amortised
cost 744,724 6,915 232 1 751,872 (96) (63) (84) - (243)
--------- ------- ------ ---
- WPB 147,136 1,804 110 - 149,050 (62) (32) (46) - (140)
- CMB 86,603 3,290 62 1 89,956 (15) (25) (27) - (67)
- GBM 426,407 1,692 43 - 428,142 (19) (6) (11) - (36)
- Corporate
Centre 84,578 129 17 - 84,724 - - - - -
Total gross
carrying
amount
on-balance
sheet at 30
Jun 2020 1,669,095 174,077 17,380 297 1,860,849 (2,028) (4,639) (6,758) (99) (13,524)
--------- ------- ------ ---- ------ ------ ------ --- -------
Loans and other
credit-related
commitments 594,400 52,698 1,055 3 648,156 (193) (339) (90) - (622)
--------- ------- ------ ---
- WPB 218,348 3,627 208 - 222,183 (27) (5) - - (32)
- CMB 96,980 30,578 747 3 128,308 (101) (204) (50) - (355)
- GBM 278,848 18,493 100 - 297,441 (65) (130) (40) - (235)
- Corporate
Centre 224 - - - 224 - - - - -
Financial
guarantees 13,129 4,903 295 1 18,328 (28) (73) (18) - (119)
------- ------
- WPB 896 46 2 - 944 - - - - -
- CMB 4,971 3,014 164 1 8,150 (11) (47) (16) - (74)
- GBM 7,261 1,843 129 - 9,233 (17) (26) (2) - (45)
- Corporate
Centre 1 - - - 1 - - - - -
Total nominal
amount
off-balance
sheet
at 30 Jun 2020 607,529 57,601 1,350 4 666,484 (221) (412) (108) - (741)
--------- ------- ------ ---- ------ ------ ------ --- -------
WPB 160,143 3,476 176 - 163,795 (41) (6) (81) - (128)
CMB 98,425 497 55 - 98,977 (25) (2) (14) - (41)
GBM 133,565 275 49 - 133,889 (35) (1) (4) - (40)
Corporate
Centre 4,821 849 - - 5,670 (23) (9) (1) - (33)
------- ------
Debt
instruments
measured at
FVOCI
at 30 Jun 2020 396,954 5,097 280 - 402,331 (124) (18) (100) - (242)
--------- ------- ------ ---
Summary of financial instruments to which the impairment requirements
in IFRS 9 are applied - by global business (continued)(1)
Gross carrying/nominal
amount Allowance for ECL
Stage Stage Stage Stage Stage Stage
1 2 3 POCI Total 1 2 3 POCI Total
$m $m $m $m $m $m $m $m $m $m
Loans and
advances to
customers at
amortised
cost 951,583 80,182 13,378 332 1,045,475 (1,297) (2,284) (5,052) (99) (8,732)
- WPB 424,342 16,797 5,131 - 446,270 (602) (1,330) (1,312) - (3,244)
- CMB 297,364 46,423 6,649 212 350,648 (520) (765) (3,190) (68) (4,543)
- GBM 228,770 16,934 1,598 120 247,422 (173) (177) (550) (31) (931)
- Corporate
Centre 1,107 28 - - 1,135 (2) (12) - - (14)
--------- ------
Loans and
advances to
banks at
amortised cost 67,769 1,450 - - 69,219 (14) (2) - - (16)
--------- ------ ---------
- WPB 14,636 393 - - 15,029 (1) (1) - - (2)
- CMB 8,842 219 - - 9,061 (2) - - - (2)
- GBM 30,391 818 - - 31,209 (9) (1) - - (10)
- Corporate
Centre 13,900 20 - - 13,920 (2) - - - (2)
--------- ------
Other financial
assets
measured at
amortised
cost 613,200 1,827 151 1 615,179 (38) (38) (42) - (118)
--------- ------ ---------
- WPB 109,423 548 41 - 110,012 (21) (30) (5) - (56)
- CMB 64,586 904 51 1 65,542 (10) (7) (26) - (43)
- GBM 361,541 374 37 - 361,952 (7) (1) (11) - (19)
- Corporate
Centre 77,650 1 22 - 77,673 - - - - -
Total gross
carrying
amount
on-balance
sheet at
31 Dec 2019 1,632,552 83,459 13,529 333 1,729,873 (1,349) (2,324) (5,094) (99) (8,866)
--------- ------
Loans and other
credit-related
commitments 577,631 21,618 771 9 600,029 (137) (133) (59) - (329)
--------- ------ ---------
- WPB 213,093 1,945 185 - 215,223 (15) (1) - - (16)
- CMB 117,703 11,403 558 9 129,673 (69) (65) (56) - (190)
- GBM 246,805 8,270 28 - 255,103 (53) (67) (3) - (123)
- Corporate
Centre 30 - - - 30 - - - - -
Financial
guarantees 17,684 2,340 186 4 20,214 (16) (22) (10) - (48)
---------
- WPB 972 4 1 - 977 - - - - -
- CMB 7,446 1,442 105 4 8,997 (9) (12) (6) - (27)
- GBM 9,263 894 80 - 10,237 (7) (10) (4) - (21)
- Corporate
Centre 3 - - - 3 - - - - -
Total nominal
amount
off-balance
sheet at
31 Dec 2019 595,315 23,958 957 13 620,243 (153) (155) (69) - (377)
--------- ------
WPB 144,632 378 - - 145,010 (13) (81) - - (94)
CMB 85,353 62 - 1 85,416 (5) (19) - - (24)
GBM 118,571 68 - - 118,639 (9) (16) - - (25)
Corporate
Centre 6,093 506 - - 6,599 (12) (11) - - (23)
---------
Debt
instruments
measured
at FVOCI at
31 Dec 2019 354,649 1,014 - 1 355,664 (39) (127) - - (166)
--------- ------
1 2019 figures are restated for the change in reportable segments.
Wholesale lending - loans and advances to customers at amortised cost
by country/territory
Gross carrying amount Allowance for ECL
Corporate Of which: Non-bank Corporate Of which: Non-bank
and real financial and real financial
commercial estate(1) institutions Total commercial estate(1) institutions Total
$m $m $m $m $m $m $m $m
---------- --------- ------------ ------- ------------ ------------ -------------- ---------
Europe 173,614 24,803 24,680 198,294 (3,429) (497) (196) (3,625)
- UK 121,692 17,703 17,856 139,548 (2,570) (444) (130) (2,700)
- France 30,550 5,292 4,204 34,754 (541) (30) (59) (600)
- Germany 10,608 405 1,436 12,044 (121) - (3) (124)
- Switzerland 1,396 336 340 1,736 (2) - - (2)
- other 9,368 1,067 844 10,212 (195) (23) (4) (199)
---------- --------- ------------ ------- -------- -------- --------- ------
Asia 265,105 83,623 33,259 298,364 (2,520) (152) (57) (2,577)
- Hong Kong 167,960 66,928 20,833 188,793 (956) (56) (28) (984)
- Australia 10,931 1,951 1,554 12,485 (82) (11) - (82)
- India 7,076 1,761 3,043 10,119 (82) (23) (7) (89)
- Indonesia 3,974 58 196 4,170 (254) (1) (1) (255)
- mainland China 27,838 5,528 5,832 33,670 (217) (44) (19) (236)
- Malaysia 7,347 1,749 256 7,603 (65) (6) - (65)
- Singapore 18,347 4,123 671 19,018 (754) (6) (1) (755)
- Taiwan 5,374 14 36 5,410 0 - - 0
- other 16,258 1,511 838 17,096 (110) (5) (1) (111)
---------- --------- ------------ ------- -------- -------- --------- ------
Middle East and
North
Africa
(excluding Saudi
Arabia) 25,311 1,996 311 25,622 (1,364) (191) (16) (1,380)
- Egypt 2,214 36 14 2,228 (147) (4) (3) (150)
- UAE 14,820 1,837 190 15,010 (893) (183) (10) (903)
- other 8,277 123 107 8,384 (324) (4) (3) (327)
---------- --------- ------------ ------- -------- -------- --------- ------
North America 63,296 14,618 9,863 73,159 (751) (95) (13) (764)
- US 39,828 8,376 8,286 48,114 (418) (45) (3) (421)
- Canada 22,597 5,982 1,450 24,047 (299) (26) (5) (304)
- other 871 260 127 998 (34) (24) (5) (39)
---------- --------- ------------ ------- -------- -------- --------- ------
Latin America 12,982 1,770 1,303 14,285 (473) (42) (7) (480)
- Mexico 10,910 1,768 1,270 12,180 (353) (42) (7) (360)
- other 2,072 2 33 2,105 (120) - - (120)
----------------- ---------- --------- ------------ ------- --------
At 30 Jun 2020 540,308 126,810 69,416 609,724 (8,537) (977) (289) (8,826)
----------------- ---------- --------- ------------ ------- -------- -------- --------- ------
Europe 175,215 26,587 26,497 201,712 (2,304) (354) (81) (2,385)
- UK 126,760 18,941 18,545 145,305 (1,629) (303) (26) (1,655)
- France 27,885 5,643 4,899 32,784 (423) (28) (52) (475)
- Germany 9,771 390 1,743 11,514 (60) - - (60)
- Switzerland 1,535 554 406 1,941 (1) - - (1)
- other 9,264 1,059 904 10,168 (191) (23) (3) (194)
------- ------- ------ ------- ------ ----
Asia 267,709 85,556 32,157 299,866 (1,449) (94) (52) (1,501)
- Hong Kong 168,380 67,856 19,776 188,156 (750) (51) (40) (790)
- Australia 11,428 1,993 1,743 13,171 (70) (3) - (70)
- India 6,657 1,565 2,622 9,279 (49) (3) (1) (50)
- Indonesia 4,346 63 353 4,699 (222) (1) (2) (224)
- mainland China 26,594 5,304 5,911 32,505 (198) (29) (8) (206)
- Malaysia 6,914 1,597 230 7,144 (40) (2) - (40)
- Singapore 19,986 5,235 618 20,604 (60) (2) - (60)
- Taiwan 6,384 28 82 6,466 (2) - - (2)
- other 17,020 1,915 822 17,842 (58) (3) (1) (59)
------- ------ ------- ------ ----
Middle East and North
Africa (excluding Saudi
Arabia) 23,447 1,816 288 23,735 (1,087) (181) (13) (1,100)
- Egypt 1,889 35 16 1,905 (132) - (3) (135)
- UAE 13,697 1,695 122 13,819 (683) (179) (7) (690)
- other 7,861 86 150 8,011 (272) (2) (3) (275)
------- ------- ------ ------- ------ ----
North America 59,680 15,128 10,078 69,758 (274) (43) (11) (285)
- US 34,477 8,282 8,975 43,452 (116) (14) (2) (118)
- Canada 24,427 6,556 979 25,406 (136) (10) (4) (140)
- other 776 290 124 900 (22) (19) (5) (27)
------- ------- ------ ------- ------ ----
Latin America 14,448 1,665 1,685 16,133 (324) (8) (3) (327)
- Mexico 12,352 1,664 1,625 13,977 (221) (8) (3) (224)
- other 2,096 1 60 2,156 (103) - - (103)
------------------------- ------- ------- ------ ------- ------
At 31 Dec 2019 540,499 130,752 70,705 611,204 (5,438) (680) (160) (5,598)
-------------------------
1 Real estate lending within this disclosure corresponds solely
to the industry of the borrower.
Personal lending - loans and advances to customers at amortised cost
by country/territory
Gross carrying amount Allowance for ECL
First First
lien Of which: lien Of which:
residential Other credit residential Other credit
mortgages personal cards Total mortgages personal cards Total
$m $m $m $m $m $m $m $m
----------- --------- --------- ------- ------------- --------- --------- ---------
Europe 139,270 46,850 7,395 186,120 (434) (1,625) (649) (2,059)
- UK 132,005 18,227 7,046 150,232 (318) (1,429) (644) (1,747)
- France(1) 3,434 21,733 303 25,167 (40) (107) (3) (147)
- Germany - 308 - 308 - - - -
- Switzerland 1,127 6,247 - 7,374 (3) (70) - (73)
- other 2,704 335 46 3,039 (73) (19) (2) (92)
----------- --------- --------- ------- --------- -------- ------
Asia 134,104 45,752 10,719 179,856 (63) (843) (566) (906)
---------
- Hong Kong 89,284 32,101 7,276 121,385 (1) (393) (262) (394)
- Australia 17,727 577 498 18,304 (12) (51) (49) (63)
- India 919 590 206 1,509 (8) (28) (20) (36)
- Indonesia 66 277 156 343 - (38) (27) (38)
- mainland China 8,892 1,114 615 10,006 (4) (97) (85) (101)
- Malaysia 2,646 2,859 801 5,505 (28) (96) (49) (124)
- Singapore 6,473 6,208 330 12,681 - (70) (23) (70)
- Taiwan 5,232 1,004 241 6,236 - (15) (5) (15)
- other 2,865 1,022 596 3,887 (10) (55) (46) (65)
----------- --------- --------- ------- -------- -------- ------
Middle East and
North
Africa
(excluding Saudi
Arabia) 2,263 3,500 819 5,763 (71) (322) (161) (393)
----------- --------- --------- ------- --------- -------- -------- ------
- Egypt - 336 80 336 - (7) (3) (7)
- UAE 1,900 1,282 408 3,182 (66) (189) (104) (255)
- other 363 1,882 331 2,245 (5) (126) (54) (131)
----------- --------- --------- ------- --------- -------- -------- ------
North America 39,323 4,551 1,446 43,874 (144) (310) (242) (454)
- US 18,341 2,295 1,199 20,636 (16) (276) (235) (292)
- Canada 19,814 2,073 212 21,887 (26) (26) (6) (52)
- other 1,168 183 35 1,351 (102) (8) (1) (110)
----------- --------- --------- ------- --------- -------- -------- ------
Latin America 3,125 3,446 1,237 6,571 (94) (495) (239) (589)
- Mexico 2,982 2,968 990 5,950 (93) (455) (218) (548)
- other 143 478 247 621 (1) (40) (21) (41)
----------------- ----------- --------- --------- ------- --------- -------- -------- ------
At 30 Jun 2020 318,085 104,099 21,616 422,184 (806) (3,595) (1,857) (4,401)
----------------- ----------- --------- --------- ------- --------- -------- -------- ------
Europe 145,382 50,368 10,246 195,750 (266) (962) (438) (1,228)
- UK 137,985 22,395 9,816 160,380 (159) (828) (434) (987)
- France(1) 3,520 21,120 376 24,640 (39) (101) (3) (140)
- Germany - 325 - 325 - - - -
- Switzerland 1,183 6,165 - 7,348 (6) (17) - (23)
- other 2,694 363 54 3,057 (62) (16) (1) (78)
------- ------- ------ ------- ------ ------
Asia 131,864 48,231 12,144 180,095 (42) (690) (463) (732)
- Hong Kong 86,892 33,061 8,043 119,953 (1) (353) (242) (354)
- Australia 16,997 693 603 17,690 (5) (34) (33) (39)
- India 1,047 528 219 1,575 (5) (21) (15) (26)
- Indonesia 67 329 204 396 - (24) (18) (24)
- mainland China 8,966 1,190 656 10,156 (2) (74) (68) (76)
- Malaysia 2,840 3,200 980 6,040 (22) (73) (33) (95)
- Singapore 6,687 7,033 452 13,720 (1) (60) (19) (61)
- Taiwan 5,286 1,004 297 6,290 0 (14) (4) (14)
- other 3,082 1,193 690 4,275 (6) (37) (31) (43)
-------
Middle East and North
Africa (excluding Saudi
Arabia) 2,303 3,914 1,042 6,217 (62) (235) (111) (297)
- Egypt - 346 88 346 - (3) (1) (3)
- UAE 1,920 1,462 517 3,382 (59) (121) (54) (180)
- other 383 2,106 437 2,489 (3) (111) (56) (114)
------- ------- ------ ------- ------ ------ ------
North America 39,065 5,251 1,742 44,316 (122) (194) (142) (316)
- US 17,870 2,551 1,424 20,421 (8) (160) (134) (168)
- Canada 19,997 2,495 271 22,492 (21) (25) (7) (46)
- other 1,198 205 47 1,403 (93) (9) (1) (102)
------- ------- ------ ------- ------ ------ ------
Latin America 3,564 4,329 1,594 7,893 (37) (524) (241) (561)
- Mexico 3,419 3,780 1,308 7,199 (31) (488) (224) (519)
- other 145 549 286 694 (6) (36) (17) (42)
------------------------- ------- ------- ------- ------ ------
At 31 Dec 2019 322,178 112,093 26,768 434,271 (529) (2,605) (1,395) (3,134)
-------------------------
1 Included in other personal lending as at 30 June 2020 is
$18,406m (31 December 2019: $17,585m) guaranteed by Crédit
Logement.
Capital and liquidity risk
Page
Overview 77
--------------------------------------- ----
Capital risk management 77
Capital risk in the first half
of 2020 78
Capital overview 78
Regulatory transitional arrangements
for IFRS 9
'Financial Instruments' 78
Own funds 79
Risk-weighted assets 79
----
Leverage ratio 81
----
Regulatory disclosures 82
--------------------------------------- ----
Liquidity and funding risk management 82
--------------------------------------- ----
Liquidity and funding risk in
the first half of 2020 82
--------------------------------------- ----
Operating entities liquidity 82
--------------------------------------- ----
Sources of funding 83
--------------------------------------- ----
Overview
Capital and liquidity risk is the risk of having insufficient
capital, liquidity or funding resources to meet financial
obligations and satisfy regulatory requirements, including pension
risk.
Capital and liquidity risk arises from changes to the respective
resources and risk profiles driven by customer behaviour,
management decisions or the external environment.
A summary of our current policies and practices regarding the
management of capital and liquidity risk is set out on pages 130
and 131 of the Annual Report and Accounts 2019.
Capital risk management
Overview
Capital risk is the risk that we fail to meet our regulatory
capital requirements either at Group, subsidiary or branch
level.
Key developments in the first half of 2020
The management of capital was a key focus in the first half of
2020 to ensure the Group responded to unprecedented customer and
capital demands arising from the Covid-19 outbreak.
In response to a written request from the PRA, we cancelled the
fourth interim dividend for 2019 of $0.21 per ordinary share.
Similar requests were also made to other UK incorporated banking
groups. We also announced that until the end of 2020 we will make
no quarterly or interim dividend payments or accruals in respect of
ordinary shares. We also plan to suspend share buy-backs in respect
of ordinary shares in 2020 and 2021.
Governments, central banks and regulatory authorities globally
have responded to the Covid-19 outbreak to ensure continued support
and provision of financial services to the real economy. The
Financial Policy Committee announced a reduction of the UK
countercyclical buffer rate to 0% effective from March 2020. This
change was reflected in the Group's risk appetite statement, and
together with other regulatory relief, resulted in a reduction to
Group CET1 and leverage ratio requirements.
In the EU, the relief measures include an acceleration of some
of the beneficial elements of the amendments to the Capital
Requirements Regulation ('CRR II') that were originally scheduled
for June 2021. The relevant changes impacting 1H20 positions
included a resetting of the transitional provisions in relation to
recognising IFRS 9 provisions and netting the leverage ratio
exposure measure of regular-way purchases and sales. Additionally,
there were beneficial changes to prudent valuation adjustments and
market risk back-testing exemptions.
In 1H20, all entities remained within the CET1 risk appetite and
the Group continues to maintain the appropriate resources required
to adequately support risks to which it is exposed. This has been
further informed by additional internal stress tests carried out in
response to the Covid-19 outbreak. Capital risk management
practices continued to be enhanced across the Group through the
capital risk management function, focusing on both adequacy of
capital and sufficiency of returns.
Approach and policy
The objectives of our capital management policy are to maintain
a strong capital base to support the risks inherent in our business
and invest in accordance with our strategy, meeting both
consolidated and local regulatory capital requirements at all
times.
Our capital management policy is underpinned by a capital
management framework and our internal capital adequacy assessment
process ('ICAAP'). The framework incorporates key capital risk
appetites for CET1, total capital, minimum required eligible
liabilities ('MREL') and double leverage. The ICAAP is an
assessment of the Group's capital position, outlining both
regulatory and internal capital resources and requirements
resulting from HSBC's business model, strategy, risk profile and
management, performance and planning, risks to capital, and the
implications of stress testing. Our assessment of capital adequacy
is driven by an assessment of risks. These risks include credit,
market, operational, pensions, insurance, structural foreign
exchange and interest rate risk in the banking book. The Group
ICAAP supports the determination of the consolidated risk appetite
and target ratios as well as enables the assessment and
determination of capital requirements by regulators. Subsidiaries
prepare ICAAPs based on their local regulatory regimes in order to
determine their own risk appetites and ratios.
The holding company has a portfolio of high-quality liquid
assets ('HQLA'). This mitigates holding company cash flow risk
arising from double leverage and underpins the strength of support
it can offer to its subsidiaries in times of stress.
Planning and performance
Capital and risk-weighted asset ('RWA') plans form part of the
annual operating plan that is approved by the Board. Capital and
RWA forecasts are submitted to the Group Executive Committee on a
monthly basis, and capital and RWAs are monitored and managed
against the plan. The responsibility for global capital allocation
principles rests with the Group Chief Financial Officer, supported
by the Group Capital Management Meeting. This is a specialist forum
addressing capital management, reporting into the Holdings Asset
and Liability Management Committee. Through our internal governance
processes, we strengthen discipline over our investment and capital
allocation decisions, and aim to ensure that returns on investment
meet the Group's management objectives. Our strategy is to allocate
capital to businesses and entities to support growth objectives and
local economies where returns above internal hurdle levels have
been identified and in order to meet their regulatory and economic
capital needs. We evaluate and manage business returns by using a
return on average tangible equity measure.
Risks to capital
Outside the stress testing framework, other risks may be
identified that have the potential to affect our RWAs and/or
capital position. Downside and Upside scenarios are assessed
against our capital management objectives and mitigating actions
are assigned as necessary. We closely monitor and consider future
regulatory change. We continue to evaluate the impact upon our
capital requirements of regulatory developments, including the CRR
II amendments, the Basel III reforms package and the UK's
withdrawal from the EU.
As part of the CRR II amendments in response to the Covid-19
outbreak, the EU accelerated the application of the revised small
and medium-sized enterprises ('SME') supporting factor and the new
infrastructure supporting factor. The accelerated application of
the revised SME and infrastructure supporting factors will be
implemented by the Group in the second half of 2020. Finalisation
of the changes to the treatment of software intangible assets are
also expected in the second half of 2020.
The Basel Committee has recommended a one-year delay in
effective date, which means Basel III reforms are now expected to
impact from 1 January 2023.
Stress testing and recovery planning
In addition to a range of internal stress tests, we are subject
to supervisory stress testing in many jurisdictions. Supervisory
stress testing requirements are increasing in the granularity with
which the results are required. These exercises include the
programmes of the UK PRA, the US Federal Reserve Board, the
European Banking Authority ('EBA'), the European Central Bank
('ECB') and the Hong Kong Monetary Authority, as well as stress
tests undertaken in other jurisdictions. We take into account the
results of regulatory stress testing and our internal stress tests
when assessing our internal capital requirements. The outcome of
stress testing exercises carried out by the PRA also feeds into a
PRA buffer under Pillar 2 requirements.
The Group and its subsidiaries have recovery plans that set out
potential options that management could take in a range of stress
scenarios that could result in a breach of our internal capital
buffers. This is to help ensure that our capital position can be
recovered even in an extreme stress.
During 1H20, in light of the Covid-19 outbreak, we carried out
additional internal testing on a baseline and stressed scenario.
The results of these stress tests were considered in determining
capital actions to manage the Group's position.
Capital risk in the first half of 2020
Capital overview
Capital adequacy metrics
At
30 Jun 31 Dec
2020 2019
Risk-weighted assets
('RWAs') ($bn)
Credit risk 686.7 676.6
Counterparty credit
risk 43.1 44.1
Market risk 35.2 29.9
Operational risk 89.6 92.8
------
Total RWAs 854.6 843.4
------ ------
Capital on a transitional
basis ($bn)
Common equity tier
1 ('CET1') capital 128.4 124.0
------ ------
Tier 1 capital 152.5 148.4
------
Total capital 177.2 172.2
------
Capital ratios on a
transitional basis
(%)
Common equity tier
1 ratio 15.0 14.7
Tier 1 ratio 17.8 17.6
------
Total capital ratio 20.7 20.4
------ ------
Capital on an end point
basis ($bn)
Common equity tier
1 ('CET1') capital 128.4 124.0
------
Tier 1 capital 149.4 144.8
------
Total capital 164.4 159.3
------
Capital ratios on an
end point basis (%)
Common equity tier
1 ratio 15.0 14.7
Tier 1 ratio 17.5 17.2
------ ------
Total capital ratio 19.2 18.9
------
Liquidity coverage
ratio ('LCR')
Total high-quality
liquid assets ($bn) 654.4 601.4
Total net cash outflow
($bn) 442.9 400.5
LCR ratio (%) 147.8 150.2
------ ------
Capital figures and ratios in the table above are calculated in
accordance with the revisions to the Capital Requirements
Regulation and Directive, as implemented ('CRR II'). The table
presents them under the transitional arrangements in CRR II for
capital instruments and after their expiry, known as the end point.
The end point figures in the table above include the benefit of the
regulatory transitional arrangements in CRR II for IFRS 9, which
are more fully described below.
Where applicable, they also reflect government relief schemes
intended to mitigate the impact of the Covid-19 outbreak.
Regulatory transitional arrangements for IFRS 9 'Financial
Instruments'
We have adopted the regulatory transitional arrangements in CRR
II for IFRS 9, including paragraph four of article 473a. Our
capital and ratios are presented under these arrangements
throughout the table above, including in the end point figures.
Without their application, our CET1 ratio would be 14.9%.
The IFRS 9 regulatory transitional arrangements allow banks to
add back to their capital base a proportion of the impact that IFRS
9 has upon their loan loss allowances during the first five years
of use. The impact is defined as:
-- the increase in loan loss allowances on day one of IFRS 9 adoption; and
-- any subsequent increase in ECL in the non-credit-impaired book thereafter.
Any add-back must be tax affected and accompanied by a
recalculation of capital deduction thresholds, exposure and RWAs.
The impact is calculated separately for portfolios using the
standardised ('STD') and internal ratings based ('IRB') approaches.
For IRB portfolios, there is no add-back to capital unless loan
loss allowances exceed regulatory 12-month expected losses.
The EU's CRR 'Quick Fix' relief package enacted in June 2020
increased from 70% to 100% the relief that banks may take for loan
loss allowances recognised since 1 January 2020 on the
non-credit-impaired book.
In the current period, the add-back to CET1 capital amounted to
$1.4bn under the STD approach with a tax impact of $0.3bn. At
31 December 2019, the add-back to the capital base under the STD
approach was $1.0bn with a tax impact of $0.2bn.
Own funds
Own funds disclosure
At
30 Jun 31 Dec
2020 2019
Ref(*) $m $m
6 Common equity tier 1 capital before regulatory adjustments 159,557 153,280
28 Total regulatory adjustments to common equity tier
1 (31,111) (29,314)
29 Common equity tier 1 capital 128,446 123,966
------- -------
36 Additional tier 1 capital before regulatory adjustments 24,091 24,453
43 Total regulatory adjustments to additional tier 1 capital (60) (60)
44 Additional tier 1 capital 24,031 24,393
------- -------
45 Tier 1 capital 152,477 148,359
-------
51 Tier 2 capital before regulatory adjustments 26,181 25,192
57 Total regulatory adjustments to tier 2 capital (1,416) (1,401)
58 Tier 2 capital 24,765 23,791
------- -------
59 Total capital 177,242 172,150
-------
60 Total risk-weighted assets 854,552 843,395
-------
Capital ratios % %
61 Common equity tier 1 ratio 15.0 14.7
62 Tier 1 ratio 17.8 17.6
------- -------
63 Total capital ratio 20.7 20.4
-------
* The references identify the lines prescribed in the EBA template.
At 30 June 2020, our common equity tier 1 ('CET1') capital ratio
increased to 15.0% from 14.7% at 31 December 2019. CET1 capital
increased in 1H20 by $4.5bn, mainly as a result of:
-- the cancellation of the 4Q19 unpaid dividend of $3.4bn at the PRA's request;
-- a $1.8bn increase as a result of lower deductions for excess
expected loss. ECL against IRB exposures rose by $4.3bn compared
with 31 December 2019, while regulatory expected losses rose by
$2.5bn;
-- capital generation of $1.7bn through profits, net of
dividends relating to other equity instruments; and
-- a $1.5bn increase in the fair value through other comprehensive income reserve.
These increases were partly offset by:
-- foreign currency translation differences of $3.7bn; and
-- a $0.8bn fall in the allowable non-controlling interest in
the CET1. This partly reflected the acquisition in May 2020 of
additional shares representing 18.66% of the capital of HSBC
Trinkaus & Burkhardt AG from Landesbank Baden-Württemberg, the
principal minority shareholder.
At 30 June 2020, our Pillar 2A requirement was 3.1% of RWAs, of
which 1.7% was met by CET1. This is based on a point-in-time view
as per the PRA's Individual Capital Requirement assessment, and set
as a nominal amount based on RWAs at 31 December 2019.
Throughout the first half of 2020, we complied with the PRA's
regulatory capital adequacy requirements.
Risk-weighted assets
RWAs by global business
Corporate
WPB CMB GBM Centre Total
$bn $bn $bn $bn $bn
Credit risk 127.1 304.6 176.4 78.6 686.7
Counterparty credit risk 0.6 0.2 41.1 1.2 43.1
Market risk 1.2 0.7 29.7 3.6 35.2
Operational risk 32.9 25.4 30.4 0.9 89.6
----- ----- ----- --------- -----
At 30 Jun 2020 161.8 330.9 277.6 84.3 854.6
----- ----- ----- --------- -----
RWAs by geographical region
North Latin
Europe Asia MENA America America Total
Footnotes $bn $bn $bn $bn $bn $bn
Credit risk 206.6 299.2 49.5 105.0 26.4 686.7
Counterparty credit
risk 22.7 9.8 1.3 7.6 1.7 43.1
Market risk 1 26.4 20.8 1.7 6.3 1.1 35.2
---------- ------ ----- ---- -------- -------- -----
Operational risk 22.8 44.9 6.1 11.7 4.1 89.6
---------- ------ ----- ---- -------- -------- -----
At 30 Jun 2020 278.5 374.7 58.6 130.6 33.3 854.6
---------- ------ ----- ---- -------- -------- -----
1 Market risk RWAs are non-additive across geographical regions
due to diversification effects within the Group.
RWA movement by global businesses by key driver
Credit risk, counterparty credit
risk and operational risk
Market Total
WPB CMB GBM Corporate Centre risk RWAs
$bn $bn $bn $bn $bn $bn
RWAs at 1 Jan 2020 161.4 325.1 248.7 78.3 29.9 843.4
------- ------- -------------- ----- -----
Asset size 2.4 3.1 8.7 1.0 8.1 23.3
Asset quality 0.5 11.1 4.7 0.5 - 16.8
Model updates 0.7 0.6 (0.8) - (1.0) (0.5)
------- ------- -------------- ----- -----
Methodology and policy 0.6 0.4 (7.1) 1.5 (1.8) (6.4)
Foreign exchange movements (5.0) (10.1) (6.3) (0.6) - (22.0)
------- ------- -------------- ----- -----
Total RWA movement (0.8) 5.1 (0.8) 2.4 5.3 11.2
------- ------- -------------- ----- -----
RWAs at 30 Jun 2020 160.6 330.2 247.9 80.7 35.2 854.6
------- ------- -------------- ----- -----
RWA movement by geographical region by key driver
Credit risk, counterparty credit
risk and operational risk
North Latin Market Total
Europe Asia MENA America America risk RWAs
$bn $bn $bn $bn $bn $bn $bn
RWAs at 1 Jan 2020 257.9 345.9 55.5 117.6 36.6 29.9 843.4
----------------------------
Asset size 0.8 7.4 1.9 3.2 1.9 8.1 23.3
Asset quality 3.9 5.9 0.6 6.1 0.3 - 16.8
Model updates (0.3) 0.6 - 0.2 - (1.0) (0.5)
Methodology and policy 1.3 (3.6) (0.4) (1.4) (0.5) (1.8) (6.4)
Foreign exchange movements (11.5) (2.3) (0.7) (1.4) (6.1) - (22.0)
Total RWA movement (5.8) 8.0 1.4 6.7 (4.4) 5.3 11.2
----------------------------
RWAs at 30 Jun 2020 252.1 353.9 56.9 124.3 32.2 35.2 854.6
Risk-weighted assets ('RWAs') rose by $11.2bn during the first
half of the year, including a reduction of $22.0bn due to foreign
currency translation differences. The $33.2bn increase (excluding
foreign currency translation differences) comprised the movements
described by the following comments.
Asset size
The $23.3bn increase in RWAs was predominantly due to lending
growth in GBM, CMB and WPB during 1Q20, and an $8.1bn increase in
market risk RWAs. Increases in GBM credit risk and market risk RWAs
were partly offset by reductions under management initiatives.
GBM RWAs rose by $8.7bn, with $12.2bn coming from lending growth
- mostly in Europe, Asia and MENA. This was partly offset by active
portfolio management measures of $4.6bn in the same regions. GBM
counterparty credit risk RWAs rose by $1.2bn, largely as a result
of mark-to-market movements. This was after the effect of
management initiatives.
In CMB, the RWA increase of $3.1bn mainly resulted from lending
growth in all regions, partly offset by a $3.3bn reduction of RWAs
through management actions in Europe and Asia.
WPB's RWA increase of $2.4bn was mainly driven by continued
growth in the property market in Asia, coupled with movements in
other asset classes.
The $1.0bn increase in Corporate Centre RWAs was mostly due to
an increase in the value of significant holdings in Asia.
Market risk RWAs increased by $8.1bn. Most of this was due to
market conditions, partly offset by management initiatives of
$3.6bn.
Asset quality
Changes in asset quality led to an RWA increase of $16.8bn,
mainly in CMB and GBM.
In CMB, a $11.1bn RWA increase included credit migration impacts
of $4.6bn in Europe, $5.0bn in North America, and $2.8bn in Asia.
These were partly offset by decreases totalling $1.5bn due to
portfolio mix changes.
In GBM, a $4.7bn rise in RWAs was mainly due to credit migration
impacts of $2.6bn in North America and $2.6bn in Asia, partly
offset by portfolio mix changes.
Model updates
The $0.5bn decrease due to model updates was largely due to a
fall of $1.0bn in GBM market risk RWAs, as a result of a temporary
adjustment to the calculation of risks not in VaR, and a $0.8bn
decrease in GBM credit risk RWAs, mostly due to global corporate
model updates. These were partly offset by increases of $1.3bn in
WPB and CMB, mainly due to updates to Hong Kong and North American
credit models.
Methodology and policy
The $6.4bn fall in RWAs included reductions due to management
initiatives and increases caused by changes in approach to
wholesale credit risk exposures.
With effect from 1 January 2020, we implemented two changes in
approach that led to a $6.4bn increase in our wholesale credit risk
exposures. Application of the new securitisation framework to the
pre-existing book caused RWAs to rise by $3.4bn, mainly in
Corporate Centre and GBM. Following the conclusion of discussions
with the PRA, we also transferred several UK corporate portfolios
onto a Foundation IRB approach, causing a $3bn rise in RWAs in CMB
and GBM.
Within GBM and CMB, management initiatives reduced credit risk
RWAs by $11.1bn. These included risk parameter refinements,
improved collateral linkage and a change in the treatment of
undrawn private equity fund commitments.
The $1.8bn fall in market risk RWAs mostly related to changes in
the calculation of foreign exchange risk.
Credit risk summary by approach
At 30 Jun 2020 At 31 Dec 2019
Exposure RWA Exposure
value RWAs density value RWAs RWA density
$bn $bn % $bn $bn %
IRB advanced approach 1,467.5 398.3 27 1,537.6 452.6 29
-------- ----- -------- -------- ----- -----------
- central governments and central
banks 404.4 41.3 10 343.5 36.3 11
- institutions 75.4 12.3 16 66.2 10.8 16
- corporates 524.2 268.1 51 654.3 327.7 50
- total retail 463.5 76.6 17 473.6 77.8 16
- of which: - - -
secured by mortgages on immovable
property SME 1.4 0.5 34 3.4 1.5 45
secured by mortgages on immovable
property non-SME 331.4 43.4 13 315.7 40.4 13
qualifying revolving retail 77.3 17.5 23 80.2 18.8 23
other SME 5.4 3.9 73 6.2 4.7 76
other non-SME 48.0 11.3 24 68.1 12.4 18
-------- ----- -------- -------- ----- -----------
IRB securitisation positions 6.1 1.8 29 20.2 3.7 19
IRB non-credit obligation assets 62.7 13.6 22 62.4 13.3 21
IRB foundation approach 184.1 103.9 56 54.9 32.3 59
-------- ----- -------- -------- ----- -----------
- central governments and central
banks 0.3 0.1 24 0.1 - 20
- institutions 0.7 0.2 24 0.6 0.2 26
- corporates 183.1 103.6 57 54.2 32.1 59
-------- ----- -------- -------- ----- -----------
Standardised approach 489.1 169.1 35 397.9 174.7 45
- central governments and central
banks 274.1 10.0 4 185.5 11.2 6
- regional governments or local authorities 9.4 1.6 17 8.9 1.6 18
- public sector entities 15.7 - - 16.4 - -
- multilateral development banks - - - 0.1 - -
- international organisations 1.4 - - 1.6 - -
- institutions 0.9 0.6 64 1.6 0.9 58
- corporates 70.0 65.9 94 76.8 72.5 94
- retail 18.7 13.6 73 19.5 14.4 74
- secured by mortgages on immovable
property 31.1 11.6 37 32.5 12.0 37
- exposures in default 3.0 3.5 114 3.6 4.1 114
- items associated with particularly
high risk 4.4 6.5 150 5.3 7.9 150
- securitisation positions 28.1 8.6 31 16.3 4.6 28
- collective investment undertakings 0.4 0.4 100 0.4 0.4 100
- equity 17.0 37.3 220 16.5 36.3 220
- other items 14.9 9.5 64 12.9 8.8 68
Total 2,209.5 686.7 31 2,073.0 676.6 33
-------- ----- -------- -------- ----- -----------
Leverage ratio
30 Jun 31 Dec
2020 2019
Ref* $bn $bn
----------------- -----------------
20 Tier 1 capital 149.4 144.8
21 Total leverage ratio exposure 2,801.4 2,726.5
--------------- ---------------
% %
----------------- -----------------
22 Leverage ratio 5.3 5.3
---------------
EU-23 Choice of transitional arrangements for the definition
of the capital measure Fully phased-in Fully phased-in
------ -----------------
UK leverage ratio exposure - quarterly average(1) 2,565.8 2,535.4
--------------- ---------------
% %
----------------- -----------------
UK leverage ratio - quarterly average 5.7 5.8
--------------- ---------------
UK leverage ratio - quarter end 5.9 5.7
--------------- ---------------
* The references identify the lines prescribed in the EBA template.
1 UK leverage ratio denotes the Group's leverage ratio
calculated under the PRA's UK leverage framework and excludes
qualifying central bank balances from the calculation of
exposure.
Our leverage ratio calculated in accordance with the Capital
Requirements Regulation was 5.3% at 30 June 2020, unchanged from
5.3% at 31 December 2019. The impact of the $4.6bn increase in tier
1 capital was offset by a $74.9bn rise in leverage exposure
comprising:
-- balance sheet growth of $122.8bn, mainly in cash and balances
at central banks and financial investments.
This was partly offset by:
-- the $33.0bn impact of the CRR 'Quick Fix' relief permitting
the netting in leverage exposure of regular-way purchases and sales
awaiting settlement under certain conditions; and
-- the $14.9bn decrease in off-balance sheet exposure.
The Group's UK leverage ratio at 30 June 2020 was 5.9%. This
measure excludes qualifying central bank balances and loans under
the UK Bounce Back Loan scheme from the calculation of
exposure.
At 30 June 2020, our UK minimum leverage ratio requirement of
3.25% was supplemented by an additional leverage ratio buffer of
0.7% and a countercyclical leverage ratio buffer of 0.1%. These
additional buffers translated into capital values of $17.9bn and
$1.8bn, respectively. We exceeded these leverage requirements.
Regulatory disclosures
Pillar 3 disclosure requirements
Pillar 3 of the Basel regulatory framework is related to market
discipline and aims to make financial services firms more
transparent by requiring publication of wide-ranging information on
their risks, capital and management. Our Pillar 3 Disclosures at 30
June 2020 is expected to be published on or around 10 August 2020
at www.hsbc.com/investors.
Liquidity and funding risk management
Overview
Liquidity risk is the risk that we do not have sufficient
financial resources to meet our obligations as they fall due.
Liquidity risk arises from mismatches in the timing of cash flows.
Funding risk is the risk that we cannot raise funding or can only
do so at excessive cost.
Key developments in the first half of 2020
The management of liquidity risk was enhanced during the first
half of 2020 in response to the Covid-19 outbreak to ensure the
Group anticipated, monitored and responded to the impacts both at
Group and entity level. Liquidity levels were impacted by the
drawdown of committed facilities and buy-backs of short-term debt.
However, this was offset by increases in deposits, use of central
bank facilities where appropriate and the ability to issue in the
short-term markets as they stabilised. As a result of these
liability enhancing actions, the Group and all entities had
significant surplus liquidity, resulting in heightened liquidity
coverage ratios ('LCR') ratios in the first half of 2020.
Liquidity and funding risk in the first half of 2020
Liquidity metrics
At 30 June 2020, all of the Group's material operating entities
were above regulatory minimum levels.
Each entity maintains sufficient unencumbered liquid assets to
comply with local and regulatory requirements. The liquidity value
of these liquidity assets for each entity is shown in the following
table along with the individual LCR levels on a European Commission
('EC') basis. This basis may differ from local LCR measures due to
differences in the way non-EU regulators have implemented the Basel
III standards.
Each entity maintains a sufficient stable funding profile and it
is assessed by using the net stable funding ratio ('NSFR') or other
appropriate metrics.
The Group liquidity and funding position at 30 June 2020 is
analysed in the following sections.
Operating entities' liquidity
At 30 June 2020
LCR HQLA Net outflows NSFR
Footnotes % $bn $bn %
HSBC UK Bank plc (ring-fenced bank) 1 187 95 51 158
----
HSBC Bank plc (non-ring-fenced bank) 2 141 123 87 118
---------- ----- ---- ----
The Hongkong and Shanghai Banking Corporation
- Hong Kong branch 3 192 128 67 138
---------- ----- ---- ----
The Hongkong and Shanghai Banking Corporation
- Singapore branch 3 210 12 6 136
---------- ----- ---- ----
Hang Seng Bank 181 46 26 151
---------- ----- ---- ----
HSBC Bank China 169 22 13 149
---------- ----- ---- ----
HSBC Bank USA 145 105 72 127
---------- ----- ---- ----
HSBC France 4 167 56 33 122
---------- ----- ---- ----
HSBC Middle East - UAE branch 177 12 7 148
---------- ----- ---- ----
HSBC Canada 4 173 29 17 135
---------- ----- ---- ----
HSBC Mexico 206 9 4 134
---------- ----- ---- ----
At 31 December 2019
HSBC UK Bank plc (ring-fenced bank) 1 165 75 45 150
HSBC Bank plc (non-ring-fenced bank) 2 142 103 72 106
The Hongkong and Shanghai Banking Corporation
- Hong Kong branch 3 163 109 67 128
The Hongkong and Shanghai Banking Corporation
- Singapore branch 3 147 14 10 120
Hang Seng Bank 185 42 23 148
HSBC Bank China 180 21 11 151
HSBC Bank USA 125 73 59 122
HSBC France 4 152 44 29 117
HSBC Middle East - UAE branch 202 11 5 159
HSBC Canada 4 124 18 14 124
HSBC Mexico 208 9 4 136
------ ----- -----
1 HSBC UK Bank plc refers to the HSBC UK liquidity group, which
comprises four legal entities: HSBC UK Bank plc (including the
Dublin branch), Marks and Spencer Financial Services plc, HSBC
Private Bank (UK) Ltd and HSBC Trust Company (UK) Limited, managed
as a single operating entity, in line with the application of UK
liquidity regulation as agreed with the PRA.
2 HSBC Bank plc includes overseas branches and SPEs consolidated
by HSBC for financial statements purposes.
3 The Hongkong and Shanghai Banking Corporation - Hong Kong
branch and The Hongkong and Shanghai Banking Corporation -
Singapore branch represent the material activities of The Hongkong
and Shanghai Banking Corporation. Each branch is monitored and
controlled for liquidity and funding risk purposes as a stand-alone
operating entity.
4 HSBC France and HSBC Canada represent the consolidated banking
operations of the Group in France and Canada, respectively. HSBC
France and HSBC Canada are each managed as single distinct
operating entities for liquidity purposes.
At 30 June 2020, all of the Group's principal operating entities
were well above regulatory minimum levels.
The most significant movements in 2020 are explained below:
-- HSBC UK Bank plc improved its liquidity ratio to 187%, mainly
driven by increased commercial and retail current and savings
accounts.
-- HSBC Bank plc's liquidity ratio remained largely unchanged.
-- The Hongkong and Shanghai Banking Corporation - Hong Kong
branch liquidity position remained strong, mainly reflecting strong
retail and corporate deposits.
-- Hang Seng Bank's liquidity position remained largely
unchanged, mainly supported by its strong customer deposit
base.
-- The Hongkong and Shanghai Banking Corporation - Singapore
branch improved its liquidity ratio to 210%, mainly due to a higher
commercial surplus following increased deposits across all lines of
businesses.
-- HSBC Bank China's liquidity ratio dropped by 11%, mainly due
to growth in loans to corporate customers, partly offset by
long-term debt issuances.
-- HSBC Bank USA improved its liquidity ratio to 145%, mainly
driven by increased customer deposits.
-- HSBC France increased its liquidity position, reflecting
successful subscription to the ECB targeted longer-term refinancing
operations programme.
-- HSBC Bank Middle East - UAE Branch retained a strong
liquidity position, with a liquidity ratio of 177%.
-- HSBC Canada improved its liquidity ratio to 173%, mainly
driven by increased customer deposits, covered bond issuance and
secured funding.
Consolidated liquidity metrics
Liquidity coverage ratio
At 30 June 2020, HQLA at entity level amounted to $784bn
(31 December 2019: $646bn), an increase of $138bn, reflecting
the increases in entity liquidity positions described above.
Consistent with prior periods, the application of requirements
under the EC Delegated Act results in an adjustment of $130bn (31
December 2019: $45bn) to reflect the limitations in the fungibility
of entity liquidity around the Group. As a consequence, the Group
consolidated LCR was 148% at 30 June 2020 (31 December 2019: 150%).
The $130bn of HQLA remains available to cover liquidity risk in the
relevant entities.
The methodology used in the Group consolidated LCR in relation
to the treatment of part of our HQLA is currently under review with
our regulators.
At
30 Jun 30 Jun 31 Dec
2020 2019 2019
--------
$bn $bn $bn
--------
High-quality liquid
assets (in entities) 784 606 646
--------
EC Delegated Act adjustment (130) (73) (45)
--------
Group LCR HQLA 654 533 601
--------
Net outflows 443 391 400
--------
Liquidity coverage
ratio 148% 136% 150%
Liquid assets
After the $130bn adjustment, the Group LCR HQLA of $654bn
(31 December 2019: $601bn) was held in a range of asset classes
and currencies. Of these, 88% were eligible as level 1 (31 December
2019: 90%).
The following tables reflect the composition of the liquidity
pool by asset type and currency at 30 June 2020:
Liquidity pool by asset type
Liquidity Level Level
pool Cash 1(1) 2(1)
$bn $bn $bn $bn
---------------------
Cash and balance
at central bank 251 251 - -
---------------------
Central and local
government bonds 339 - 282 57
---------------------
Regional government
PSE 14 - 13 1
--------------------- ----
International
organisation
and MDBs 16 - 16 -
---------------------
Covered bonds 12 - 3 9
--------------------- ----
Other 22 - 13 9
--------------------- ----
Total at 30 June
2020 654 251 327 76
--------------------- ----
Total at 31 Dec
2019 601 158 383 60
--------------------- ---------
1 As defined in EU regulation, level 1 assets means 'assets of
extremely high liquidity and credit quality', and level 2 assets
means 'assets of high liquidity and credit quality'.
Liquidity pool by currency
$ GBP EUR HK$ Other Total
$bn $bn $bn $bn $bn $bn
Liquidity pool
at 30 June
2020 215 151 118 56 114 654
Liquidity pool
at 31 Dec 2019 179 117 93 47 165 601
Sources of funding
Our primary sources of funding are customer current accounts and
savings deposits payable on demand or at short notice. We issue
secured and unsecured wholesale securities to supplement customer
deposits, meet regulatory obligations and to change the currency
mix, maturity profile or location of our liabilities.
The following 'Funding sources' and 'Funding uses' tables
provide a view of how our consolidated balance sheet is funded. In
practice, all the principal operating entities are required to
manage liquidity and funding risk on a stand-alone basis.
The tables analyse our consolidated balance sheet according to
the assets that primarily arise from operating activities and the
sources of funding primarily supporting these activities. Assets
and liabilities that do not arise from operating activities are
presented as a net balancing source or deployment of funds.
In 1H20, the level of customer accounts continued to exceed the
level of loans and advances to customers. The positive funding gap
was predominantly deployed in liquid assets.
Funding sources
At
30 Jun 31 Dec
2020 2019
$m $m
Customer accounts 1,532,380 1,439,115
Deposits by banks 82,715 59,022
Repurchase agreements
- non-trading 112,799 140,344
Debt securities in issue 110,114 104,555
Cash collateral, margin
and settlement accounts 127,342 71,002
--------- ---------
Subordinated liabilities 23,621 24,600
Financial liabilities
designated at fair value 156,608 164,466
Liabilities under insurance
contracts 98,832 97,439
---------
Trading liabilities 79,612 83,170
---------
* repos 8,325 558
* stock lending 2,795 9,702
* other trading liabilities 68,492 72,910
---------
Total equity 195,221 192,668
---------
Other balance sheet liabilities 403,554 338,771
--------- ---------
2,922,798 2,715,152
--------- ---------
Funding uses
At
30 Jun 31 Dec
2020 2019
Footnotes $m $m
---------- --------- -----------
Loans and advances
to customers 1,018,681 1,036,743
----------
Loans and advances
to banks 77,015 69,203
----------
Reverse repurchase
agreements
- non-trading 226,345 240,862
Prepayments, accrued
income and other
assets 1 113,867 63,891
- cash collateral,
margin and settlement
accounts 113,867 63,891
Assets held for sale 139 123
---------
Trading assets 208,964 254,271
----------
- reverse repos 16,116 13,659
- stock borrowing 8,161 7,691
- other trading assets 184,687 232,921
---------- --------- ---------
Financial investments 494,109 443,312
Cash and balances
with central banks 249,673 154,099
Other balance sheet
assets 534,005 452,648
---------- ---------
2,922,798 2,715,152
---------- --------- ---------
1 Includes only those financial instruments that are subject to
the impairment requirements of IFRS 9. 'Prepayments, accrued income
and other assets' as presented within the consolidated balance
sheet on page 94 includes both financial and non-financial
assets.
Market risk
Overview
Market risk is the risk that movements in market factors, such
as foreign exchange rates, interest rates, credit spreads, equity
prices and commodity prices, will reduce our income or the value of
our portfolios.
A summary of our current policies and practices for the
management of market risk is set out in 'Market risk management' on
page 135 of the Annual Report and Accounts 2019.
Market risk in the first half of 2020
There were no material changes to the policies and practices for
the management of market risk in the first half of 2020.
Global financial conditions worsened rapidly with the onset of
the Covid-19 outbreak from mid-February. Market volatility reached
extreme levels across most asset classes and equity prices fell
sharply from the previous historical peak levels. In credit
markets, spreads and yields reached multi-year highs. The gold
market experienced Covid-19-related disruption in refining and
transportation, affecting the relative pricing of gold futures
contracts. Oil prices collapsed due to rising oversupply as demand
reduced materially from the economic slowdown. Financial markets
tended to stabilise from April onwards, as governments in mainly
developed countries announced economic recovery programmes and key
central banks intervened to provide liquidity and support asset
prices.
We managed market risk prudently in the first half of 2020.
Sensitivity exposures remained within appetite as the business
pursued its core market-making activity in support of our customers
during the outbreak. We also undertook hedging activities to
protect the business from potential future deterioration in credit
conditions. Market risk continued to be managed using a
complementary set of exposure measures and limits, including stress
and scenario analysis.
The overall risk profile remained relatively stable in the first
half of 2020 as the Fixed Income business continued to be the main
driver of trading VaR. Interest rate risks from market-making
activities were the key contributors to trading VaR, with partially
offsetting gains from credit spread risks. The Equity and Foreign
Exchange businesses provided a further offset to overall market
risks in the trading book.
Trading portfolios
Value at risk of the trading portfolios
Trading VaR was predominantly generated by Global Markets. The
VaR for trading activity at 30 June 2020 was higher than at 31
December 2019. The moderate increase in trading VaR was due mainly
to higher levels of market volatility reached in March and April
2020 as a result of the economic impact of the Covid-19 outbreak.
The increase was spread across all asset classes, while interest
rate risk was the main contributor to this uplift in VaR. An
additional driver was the increase of risks captured in the risks
not in VaR ('RNIV') framework, including mainly equity correlation
and dividend risks. The risk was actively managed during 1H20 and
it was in line with the normal range observed in 2019, except for a
spike observed in 2Q20, which was driven by higher levels of market
volatility in the first half of the year. The Group trading VaR for
the half-year is shown in the table below.
Trading VaR, 99% 1 day
Foreign
exchange Interest Credit Portfolio
and commodity rate Equity spread diversification(1) Total
$m $m $m $m $m $m
Half-year to 30
Jun 2020 10.4 36.8 26.3 18.7 (47.8) 44.4
Average 10.6 27.6 25.0 23.1 (36.2) 50.1
Maximum 19.9 43.5 41.3 44.1 69.3
Minimum 5.6 19.1 13.6 13.7 33.6
Half-year to 30
Jun 2019 6.6 29.9 17.4 31.2 (34.8) 50.3
Average 7.1 30.9 16.6 24.8 (29.3) 50.1
Maximum 13.5 36.5 22.2 33.2 59.3
Minimum 4.1 26.1 12.4 18.4 42.8
Half-year to 31
Dec 2019 7.7 28.2 15.7 15.2 (26.4) 40.3
Average 6.9 29.9 16.2 23.7 (29.0) 47.8
Maximum 13.5 36.5 24.9 33.2 59.3
Minimum 4.1 22.9 12.4 11.7 33.3
1 When VaR is calculated at a portfolio level, natural offsets
in risk can occur when compared with aggregating VaR at the asset
class level. This difference is called portfolio diversification.
The asset class VaR maxima and minima reported in the table
occurred on different dates within the reporting period. For this
reason, we do not report an implied portfolio diversification
measure between the maximum (minimum) asset class VaR measures and
the maximum (minimum) total VaR measures in this table.
The RNIV framework covers risks from exposures in our trading
book that are not fully captured by the VaR model. The VaR-based
RNIVs are included within the metrics for each asset class.
Back-testing
In 1H20, the Group experienced three loss back-testing
exceptions against actual profit and losses. The Group also
experienced eight loss back-testing exceptions against hypothetical
profit and losses. The high number of hypothetical back-testing
exceptions that occurred in March 2020 was primarily due to the
extreme market volatility resulting from the economic impact of the
Covid-19 outbreak, which was significantly greater than the
volatility used in the model calibration.
In recognition of the exceptional market environment, the PRA
has granted temporary relief, valid for six months, that permits UK
firms, including HSBC, to offset the impact of the higher VaR
multiplier resulting from exceptions that occurred after the onset
of the Covid-19 outbreak. This offset is against incremental RNIV
market risk capital requirements.
The hypothetical profit and loss reflects the profit and loss
that would be realised if positions were held constant from the end
of one trading day to the end of the next. This measure of profit
and loss does not align with how risk is dynamically hedged, and is
not therefore necessarily indicative of the actual performance of
the business. Accordingly, of the eight loss back-testing
exceptions against hypothetical profit and losses, only the largest
exception in March and one exception in April corresponded to a
loss exception against actual profit and loss. The two loss
exceptions against actual profit and loss that occurred in the
second half of March and the loss exception against actual profit
and loss that occurred in April comprised:
-- a loss exception in March, which was partly due to unprecedented widening of the gold exchange-for-physical basis, reflecting Covid-19-related challenges in gold refining and transportation, which affected HSBC's gold leasing and financing business and other gold hedging activity leading to mark-to-market losses. Additional loss drivers on this trading day included a significant reduction in foreign exchange and equity volatilities, and a material tightening of credit spreads;
-- a loss exception at the end of March, mainly driven by
increases to month-end valuation adjustments, which were
recalibrated to reflect changes in liquidity and bid-offer market
conditions over the course of the month relative to February
month-end; and
-- a loss exception in April, which was partly due to the
renewed widening of the gold exchange-for-physical basis.
Additional loss drivers included lower equity implied volatilities
and a reduction in dividend projections.
Despite the high number of loss exceptions, performance of the
VaR model was in line with expectations when considered in the
context of the extraordinary market movements observed in March and
April 2020. During this period, market risk continued to be managed
using a complementary set of exposure measures and limits,
including stress and scenario analysis. This ensured that the
business was prudently managed and performed well across the
period.
Non-trading portfolios
Value at risk of the non-trading portfolios
Non-trading VaR of the Group includes contributions from all
global businesses. There is no commodity risk in the non-trading
portfolios. The VaR for non-trading activity at 30 June 2020 was
higher than at 31 December 2019. The increase arose primarily from
the effect of higher levels of market volatility reached in March
and April 2020 due to the economic impact of the Covid-19 outbreak.
Although interest rate gap risk fell during the period and credit
sensitivity was relatively stable, extreme volatility in the yields
of sovereign debt and interest rate swaps, coupled with volatility
in the spreads of agency and mortgage-backed securities, led to an
uplift in contributions to total non-trading VaR from both interest
rate and credit spread risks.
Non-trading VaR includes non-trading financial instruments held
in portfolios managed by Balance Sheet Management ('BSM'). The
management of interest rate risk in the banking book is described
further in 'Net interest income sensitivity' on page 140 of the
Annual Report and Accounts 2019.
The Group non-trading VaR for the half-year is shown in the
following table.
Non-trading VaR, 99% 1 day
Interest Credit Portfolio
rate spread diversification(1) Total
$m $m $m $m
Half-year to 30 Jun 2020 184.3 83.2 (61.6) 205.9
Average 122.8 80.9 (60.7) 143.0
Maximum 190.1 133.4 219.7
Minimum 59.0 44.2 79.7
Half-year to 30 Jun 2019 68.5 36.6 (22.0) 83.1
Average 57.1 30.5 (16.6) 71.0
Maximum 74.3 36.6 85.2
Minimum 49.2 26.6 60.9
Half-year to 31 Dec 2019 96.2 62.5 (28.2) 130.5
Average 65.9 44.2 (25.6) 84.5
Maximum 100.1 81.2 132.8
Minimum 49.2 26.6 60.9
1 When VaR is calculated at a portfolio level, natural offsets
in risk can occur when compared with aggregating VaR at the asset
class level. This difference is called portfolio diversification.
The asset class VaR maxima and minima reported in the table
occurred on different dates within the reporting period. For this
reason, we do not report an implied portfolio diversification
measure between the maximum (minimum) asset class VaR measures and
the maximum (minimum) total VaR measures in this table.
Non-trading VaR excludes equity risk on securities held at fair
value, structural foreign exchange risk and interest rate risk on
fixed-rate securities issued by HSBC Holdings. The following
sections describe the scope of HSBC's management of market risks in
non-trading books.
Third-party assets in Balance Sheet Management
Third-party assets in BSM increased by 30% during the first half
of 2020.
Commercial surplus increased in this period due to an increase
in client deposits and lower credit growth. This was partly
reflected in the increase of $94bn in 'Cash and balances at central
banks'.
The increase of $23bn across 'Loans and advances to banks' and
'Reverse repurchase agreements' was driven by the short-term
investment of part of this surplus with the remainder invested in
high-quality liquid assets contributing to the increase of $45bn in
'Financial investments'.
Third-party assets in Balance Sheet Management
At
30 Jun 31 Dec
2020 2019
$m $m
Cash and balances at central banks 222,991 129,114
Trading assets 200 268
Loans and advances:
* to banks 29,143 24,466
-------
* to customers 579 310
-------
Reverse repurchase agreements 48,309 29,868
Financial investments 396,918 351,842
Other 9,273 7,655
------- -------
707,413 543,523
------- -------
Interest rate risk in the banking book
Interest rate risk in the banking book is the risk of capital or
earnings volatility due to changes in market interest rates.
Our policies regarding the funds transfer pricing process and
the management of interest rate risk in the banking book are
described on pages 136 and 137, respectively, of the Annual Report
and Accounts 2019.
The Group utilises sensitivity of net interest income to assess
the overall level of interest rate risk in the banking book. This
measure reflects all interest rate risk in the banking book,
including that transferred to BSM.
Sensitivity of net interest income
The following tables set out the assessed impact to a
hypothetical base case projection of our net interest income
('NII'), excluding insurance, under the following scenarios:
-- an immediate shock of 25 basis points ('bps') to the current
market-implied path of interest rates across all currencies on 1
July 2020 (effects over one year and five years); and
-- an immediate shock of 100bps to the current market-implied
path of interest rates across all currencies on 1 July 2020
(effects over one year and five years).
The sensitivities shown represent our assessment of the change
to a hypothetical base case NII, assuming a static balance sheet
and no management actions from BSM. They incorporate the effect of
interest rate behaviouralisation, managed rate product pricing
assumptions and customer behaviour, including the prepayment of
mortgages or customer migration from non-interest-bearing to
interest-bearing deposit accounts. The scenarios represent interest
rate shocks to the current market implied path of rates.
The NII sensitivity results in the down-shock scenarios reflect
no floors to the shocked market rates. This is a change from the
NII sensitivity approach published in the Annual Report and
Accounts 2019, where market rates were floored to zero, unless the
central bank rate was already negative, as in the case of the euro,
Swiss franc and Japanese yen. This reflects the increased risk of
negative market interest rates going forward. Customer product
specific interest rate floors remain to be recognised where
applicable.
As such, the one-year and five-year NII sensitivities in the
down-shock scenarios have increased in June 2020 at Group level
when compared with December 2019. This was driven by the change in
approach, changes in the forecasted yield curves and changes in
balance sheet composition. The NII sensitivities are forecasted for
the whole period of one and five years each quarter.
The NII sensitivities shown are indicative and based on
simplified scenarios. Immediate interest rate rises of 25bps and
100bps would increase projected NII for the 12 months to 30 June
2021 by $1,409m and $4,736m, respectively. Conversely, falls of
25bps and 100bps would decrease projected NII for the 12 months to
30 June 2021 by $1,552m and $4,515m, respectively.
The sensitivity of NII for 12 months has increased by $1,938m in
the plus 100bps parallel shock comparing June 2020 with December
2019.
The increase in the sensitivity of NII for 12 months in the plus
100bps parallel shock was mainly driven by the general build-up of
liquidity throughout the Group, which has been deployed in
short-term investments (predominantly cash, held to collect and
sell, and reverse repos), shortening of BSM positioning and
reduction in the average cost of funds in view of the significant
drop in interest rates, as well as changes in portfolio
composition.
The change in NII sensitivity for five years is also driven by
the factors above.
The structural sensitivity of NII arising within the three
global businesses, excluding Global Markets, is positive in a
rising rate environment and negative in a falling rate environment.
Both BSM and Global Markets have NII sensitivity profiles that
offset this to some degree. The tables do not include potential BSM
management actions or changes in Global Markets's net trading
income that may further limit the offset.
NII sensitivity to an instantaneous change in yield curves (12 months)
US dollar HK dollar Sterling Euro Other Total
$m $m $m $m $m $m
Change in Jul 2020 to Jun 2021 (based
on balance sheet at
30 Jun 2020)
+25bps 229 375 394 138 273 1,409
* 25bps (233) (464) (506) (94) (255) (1,552)
+100bps 560 1,140 1,475 565 996 4,736
* 100bps (276) (955) (1,908) (337) (1,039) (4,515)
Change in Jan 2020 to Dec 2020 (based
on balance sheet at 31 Dec 2019)
+25bps 59 198 278 116 202 853
* 25bps (91) (255) (332) 11 (182) (849)
+100bps (16) 504 1,123 441 746 2,798
* 100bps (490) (1,023) (1,049) (23) (726) (3,311)
NII sensitivity to an instantaneous change in yield curves (5 years)
Year Year Year Year Year
1 2 3 4 5 Total
$m $m $m $m $m $m
------- ------- ------- ------- -------
Change in Jul 2020 to Jun 2025 (based
on balance sheet at
30 Jun 2020)
+25bps 1,409 1,772 1,967 1,857 1,921 8,926
* 25bps (1,552) (1,865) (2,104) (2,279) (2,219) (10,019)
+100bps 4,736 5,965 6,655 6,819 7,014 31,189
* 100bps (4,515) (5,627) (6,487) (7,290) (7,984) (31,903)
Change in Jan 2020 to Dec 2024 (based
on balance sheet at 31 Dec 2019)
+25bps 853 1,158 1,348 1,449 1,523 6,331
* 25bps (849) (1,205) (1,402) (1,562) (1,649) (6,667)
+100bps 2,798 4,255 4,915 5,155 5,454 22,577
* 100bps (3,311) (4,621) (5,289) (5,766) (6,164) (25,151)
Insurance manufacturing operations
risk
Overview
The majority of the risk in our insurance business derives from
manufacturing activities and can be categorised as financial risk
and insurance risk. Financial risks include market risk, credit
risk and liquidity risk. Insurance risk is the risk, other than
financial risk, of loss transferred from the holder of the
insurance contract to HSBC, the issuer. The cost of claims and
benefits can be influenced by many factors, including mortality and
morbidity experience, as well as lapse and surrender rates.
A summary of our policies and practices regarding the risk
management of insurance operations, our insurance model and the
main contracts we manufacture is provided on page 146 of the Annual
Report and Accounts 2019.
There have been no material changes to the policies and
practices for the management of risks arising in our insurance
operations described in the Annual Report and Accounts 2019.
Insurance manufacturing operations risk in the first half of
2020
The risk profile of our insurance manufacturing businesses is
measured using an economic capital approach. Assets and liabilities
are measured on a market value basis, and a capital requirement is
defined to ensure that there is a less than one in 200 chance of
insolvency over a one-year time horizon, given the risks to which
the businesses are exposed. The methodology for the economic
capital calculation is largely aligned to the pan-European Solvency
II insurance capital regulations. A key risk appetite metric is the
economic coverage ratio, which is calculated by dividing the
economic net asset value by the economic capital requirement. The
business has a current appetite to remain globally above 140% with
a tolerance to 110%. In addition to economic capital, the
regulatory solvency ratio is also a metric used to manage risk
appetite on an entity basis.
The impact from the Covid-19 outbreak on financial markets has
affected the profitability of manufactured insurance products and
caused overall capital levels to fall in several of the insurance
entities. At 30 June 2020, regulatory capital levels were above
risk appetite and the global economic capital level was above risk
tolerance. A variety of management actions were taken during the
period to actively manage the risk profile of the insurance
entities. Enhanced monitoring of risks and pricing conditions will
continue, as the low level of interest rates results in a higher
cost of guarantees to be paid to policyholders, increasing the
reinvestment risk for interest rate sensitive products. This will
have an impact on their profitability and increase the solvency
requirements for the entities that are most exposed to these
products. The following table shows the composition of assets and
liabilities by contract type.
Balance sheet of insurance manufacturing subsidiaries by type of contract
Shareholder
assets
With Unit- Other and
DPF linked contracts(1) liabilities Total
Footnotes $m $m $m $m $m
------ ------ ------------ ----------- ---------
Financial assets 76,665 7,680 18,055 8,142 110,542
- trading assets - - - - -
* financial assets designated and otherwise mandatorily
measured at fair value through profit or loss 19,872 7,429 3,288 1,306 31,895
- derivatives 400 5 15 5 425
- financial investments - at amortised
cost 39,684 27 13,428 4,035 57,174
* financial investments - at fair value through other
comprehensive income 11,818 - 425 1,640 13,883
- other financial assets 2 4,891 219 899 1,156 7,165
Reinsurance assets 2,257 67 1,617 2 3,943
PVIF 3 - - - 9,379 9,379
Other assets and investment properties 2,448 3 221 711 3,383
Total assets at June 2020 81,370 7,750 19,893 18,234 127,247
----------
Liabilities under investment contracts
designated at fair value - 1,954 4,024 - 5,978
Liabilities under insurance contracts 78,296 5,719 14,865 - 98,880
Deferred tax 4 152 17 56 1,406 1,631
Other liabilities - - - 6,665 6,665
Total liabilities 78,448 7,690 18,945 8,071 113,154
Total equity - - - 14,093 14,093
Total equity and liabilities at
June 2020 78,448 7,690 18,945 22,164 127,247
----------
Financial assets 73,929 7,333 17,514 8,269 107,045
- trading assets - - - - -
- financial assets designated
at fair value 21,652 7,119 3,081 2,426 34,278
- derivatives 202 (6) 9 3 208
- financial investments at amortised
cost 35,299 18 13,436 4,076 52,829
- financial investments at fair
value through other comprehensive
income 12,447 - 445 1,136 14,028
- other financial assets 2 4,329 202 543 628 5,702
Reinsurance assets 2,208 72 1,563 1 3,844
PVIF 3 - - - 8,945 8,945
----------
Other assets and investment properties 2,495 2 211 602 3,310
Total assets at December 2019 78,632 7,407 19,288 17,817 123,144
----------
Liabilities under investment contracts
designated at fair value - 2,011 3,881 - 5,892
----------
Liabilities under insurance contracts 77,147 6,151 14,141 - 97,439
Deferred tax 4 197 23 6 1,297 1,523
----------
Other liabilities - - - 4,410 4,410
Total liabilities 77,344 8,185 18,028 5,707 109,264
Total equity - - - 13,879 13,879
Total equity and liabilities at
December 2019 77,344 8,185 18,028 19,586 123,143
----------
1 Other contracts includes term assurance, credit life
insurance, universal life insurance and certain investment
contracts not included in the 'Unit-linked' or 'With DPF'
columns.
2 Comprise mainly loans and advances to banks, cash and
inter-company balances with other non-insurance legal entities.
3 Present value of in-force long-term insurance business.
4 Deferred tax includes the deferred tax liabilities arising on recognition of PVIF.
Market risk
Description and exposure
Market risk is the risk of changes in market factors affecting
HSBC's capital or profit. Market factors include interest rates,
equity and growth assets and foreign exchange rates.
Our exposure varies depending on the type of contract issued.
Our most significant life insurance products are contracts with
discretionary participating features ('DPF') issued in France and
Hong Kong. These products typically include some form of capital
guarantee or guaranteed return on the sums invested by the
policyholders, to which discretionary bonuses are added if allowed
by the overall performance of the funds. These funds are primarily
invested in bonds, with a proportion allocated to other asset
classes to provide customers with the potential for enhanced
returns.
DPF products expose HSBC to the risk of variation in asset
returns, which will impact our participation in the investment
performance.
In addition, in some scenarios the asset returns can become
insufficient to cover the policyholders' financial guarantees, in
which case the shortfall has to be met by HSBC. Amounts are held
against the cost of such guarantees, calculated by stochastic
modelling.
Where local rules require, these reserves are held as part of
liabilities under insurance contracts. Any remainder is accounted
for as a deduction from the present value of in-force ('PVIF')
long-term insurance business on the relevant product.
For unit-linked contracts, market risk is substantially borne by
the policyholder, but some market risk exposure typically remains,
as fees earned are related to the market value of the linked
assets.
Sensitivities
Changes in financial market factors, from the economic
assumptions in place at the start of the year, had a negative
impact on reported profit before tax of $320m (1H19: $163m
positive). The following table illustrates the effects of selected
interest rate, equity price and foreign exchange rate scenarios on
our profit for the period and the total equity of our insurance
manufacturing subsidiaries.
Where appropriate, the effects of the sensitivity tests on
profit after tax and equity incorporate the impact of the stress on
the PVIF. In Europe, where observable long-tenor interest rates are
at or close to zero, the -100bps stress sensitivity allows for the
impact of negative rates. In other regions, the downside interest
rate sensitivity does not take into account negative interest rates
as the calculation rates are floored at zero. Due in part to the
impact of the cost of guarantees and hedging strategies, which may
be in place, the relationship between the profit and total equity
and the risk factors is non-linear, particularly in a low interest
rate environment. Therefore, the results disclosed should not be
extrapolated to measure sensitivities to different levels of
stress. For the same reason, the impact of the stress is not
necessarily symmetrical on the upside and downside. The
sensitivities are stated before allowance for management actions,
which may mitigate the effect of changes in the market environment.
The sensitivities presented allow for adverse changes in
policyholder behaviour that may arise in response to changes in
market rates. The differences between the impacts on profit after
tax and equity are driven by the changes in value of the bonds
measured at fair value through other comprehensive income, which
are only accounted for in equity.
Sensitivity of HSBC's insurance manufacturing subsidiaries to market
risk factors
At 30 Jun 2020 At 31 Dec 2019
Effect Effect
on Effect on Effect
profit on profit on
after total after total
tax equity tax equity
$m $m $m $m
+100 basis point parallel shift in yield
curves (97) (196) 43 (37)
* 100 basis point parallel shift in yield curves (126) (23) (221) (138)
10% increase in equity prices 242 242 270 270
10% decrease in equity prices (243) (243) (276) (276)
10% increase in US dollar exchange rate
compared with all currencies 3 3 41 41
10% decrease in US dollar exchange rate
compared with all currencies (3) (3) (41) (41)
Directors' responsibility statement
The Directors(1) are required to prepare the financial
statements on a going concern basis unless it is not appropriate.
They are satisfied that the Group has the resources to continue in
business for the foreseeable future and that the financial
statements continue to be prepared on a going concern basis.
The Directors confirm that to the best of their knowledge:
-- the financial statements have been prepared in accordance
with IAS 34 'Interim Financial Reporting' as adopted by the EU;
-- this Interim Report 2020 gives a true and fair view of the
assets, liabilities, financial position and profit or loss of the
Company; and
-- this Interim Report 2020 includes a fair review of the information required by:
- DTR 4.2.7R of the Disclosure Guidance and Transparency Rules,
being an indication of: important events that have occurred during
the first six months of the financial year ending 31 December 2020
and their impact on the condensed set of financial statements; and
a description of the principal risks and uncertainties for the
remaining six months of the financial year; and
- DTR 4.2.8R of the Disclosure Guidance and Transparency Rules,
being: related party transactions that have taken place in the
first six months of the financial year ending 31 December 2020,
which have materially affected the financial position or
performance of HSBC during that period; and any changes in the
related parties transactions described in the Annual Report and
Accounts 2019 that could materially affect the financial position
or performance of HSBC during the first six months of the financial
year ending 31 December 2020.
On behalf of the Board
Mark E Tucker
Group Chairman
3 August 2020
1 Mark Tucker*, Laura Cha , Henri de Castries , James Anthony
Forese , Steven Guggenheimer , Irene Lee , José Antonio Meade
Kuribreña , Heidi Miller , Eileen K Murray , David Nish , Noel
Quinn, Ewen Stevenson, Jackson Tai and Pauline van der Meer Mohr
.
*Non-executive Group Chairman Independent non-executive
Director
Independent review report to HSBC Holdings plc
Report on the interim condensed consolidated financial statements
Our conclusion
We have reviewed HSBC Holdings plc's interim condensed
consolidated financial statements (the 'interim financial
statements') in the interim report of HSBC Holdings plc and its
subsidiaries (the 'Group') for the six month period ended 30 June
2020. Based on our review, nothing has come to our attention that
causes us to believe that the interim financial statements are not
prepared, in all material respects, in accordance with
International Accounting Standard 34, 'Interim Financial
Reporting', as adopted by the European Union and the Disclosure
Guidance and Transparency Rules sourcebook of the United Kingdom's
Financial Conduct Authority.
What we have reviewed
The interim financial statements comprise:
-- the consolidated balance sheet as at 30 June 2020;
-- the consolidated income statement and consolidated statement
of comprehensive income for the six month period then ended;
-- the consolidated statement of cash flows for the period then ended;
-- the consolidated statement of changes in equity for the period then ended; and
-- the notes to the financial statements and certain other information(1) .
The interim financial statements included in the interim report
have been prepared in accordance with International Accounting
Standard 34, 'Interim Financial Reporting', as adopted by the
European Union and the Disclosure Guidance and Transparency Rules
sourcebook of the United Kingdom's Financial Conduct Authority.
As disclosed in note 1 to the interim financial statements, the
financial reporting framework that has been applied in the
preparation of the full annual financial statements of the Group is
applicable law and International Financial Reporting Standards
(IFRSs) as adopted by the European Union.
Responsibilities for the interim financial statements and the review
Our responsibilities and those of the directors
The interim report, including the interim financial statements,
is the responsibility of, and has been approved by, the directors.
The directors are responsible for preparing the interim report in
accordance with the Disclosure Guidance and Transparency Rules
sourcebook of the United Kingdom's Financial Conduct Authority.
Our responsibility is to express a conclusion on the interim
financial statements in the interim report based on our review.
This report, including the conclusion, has been prepared for and
only for the company for the purpose of complying with the
Disclosure Guidance and Transparency Rules sourcebook of the United
Kingdom's Financial Conduct Authority and for no other purpose. We
do not, in giving this conclusion, 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.
What a review of financial statements involves
We conducted our review in accordance with International
Standard on Review Engagements (UK and Ireland) 2410, 'Review of
Interim Financial Information Performed by the Independent Auditor
of the Entity' issued by the Auditing Practices Board for use in
the United Kingdom. A review of interim financial information
consists of making enquiries, primarily of persons responsible for
financial and accounting matters, and applying analytical and other
review procedures.
A review is substantially less in scope than an audit conducted
in accordance with International Standards on Auditing (UK) and,
consequently, does not enable us to obtain assurance that we would
become aware of all significant matters that might be identified in
an audit. Accordingly, we do not express an audit opinion.
We have read the other information contained in the interim
report and considered whether it contains any apparent
misstatements or material inconsistencies with the information in
the interim financial statements.
PricewaterhouseCoopers LLP
Chartered Accountants
London, United Kingdom
3 August 2020
1 Certain other information comprises the following tables: "Reconciliation of changes in gross carrying/nominal amount and allowances for loans and advances to banks and customers including loan commitments and financial guarantees" and "Distribution of financial instruments to which the impairment requirements of IFRS 9 are applied, by credit quality and stage allocation".
Interim condensed financial
statements
Page
Consolidated income statement 92
-----------------------------------------
Consolidated statement of comprehensive
income 93
-----------------------------------------
Consolidated balance sheet 94
-----------------------------------------
Consolidated statement of cash
flows 95
-----------------------------------------
Consolidated statement of changes
in equity 96
----------------------------------------- ----
Consolidated income statement
Half-year to
30 Jun 30 Jun 31 Dec
2020 2019 2019
Notes* $m $m $m
Net interest income 14,509 15,240 15,222
- interest income 23,000 27,750 26,945
- interest expense (8,491) (12,510) (11,723)
Net fee income 2 5,926 6,124 5,899
-------
- fee income 7,480 7,804 7,635
- fee expense (1,554) (1,680) (1,736)
-------
Net income from financial instruments held
for trading or managed on a fair value basis 5,768 5,331 4,900
Net income/(expense) from assets and liabilities
of insurance businesses, including related
derivatives, measured at fair value through
profit or loss (1,290) 2,196 1,282
Change in fair value of designated debt and
related derivatives 197 88 2
Changes in fair value of other financial instruments
mandatorily measured at fair value through
profit or loss 80 457 355
Gains less losses from financial investments 466 201 134
Net insurance premium income 5,020 6,323 4,313
Other operating income 471 2,072 885
Total operating income 31,147 38,032 32,992
-------
Net insurance claims and benefits paid and
movement in liabilities to policyholders (4,402) (8,660) (6,266)
Net operating income before change in expected
credit losses and other credit impairment charges 26,745 29,372 26,726
Change in expected credit losses and other
credit impairment charges (6,858) (1,140) (1,616)
-------
Net operating income 19,887 28,232 25,110
-------
Employee compensation and benefits (8,514) (9,255) (8,747)
General and administrative expenses (4,918) (6,372) (7,456)
-------
Depreciation and impairment of property, plant
and equipment and right-of-use assets (1,209) (1,010) (1,090)
-------
Amortisation and impairment of intangible assets (1,845) (512) (558)
Goodwill impairment (41) - (7,349)
Total operating expenses (16,527) (17,149) (25,200)
-------
Operating profit/(loss) 3,360 11,083 (90)
-------
Share of profit in associates and joint ventures 958 1,324 1,030
Profit before tax 4,318 12,407 940
-------
Tax expense (1,193) (2,470) (2,169)
Profit/(loss) for the period 3,125 9,937 (1,229)
-------
Attributable to:
- ordinary shareholders of the parent company 1,977 8,507 (2,538)
-------
- preference shareholders of the parent company 45 45 45
- other equity holders 617 664 660
- non-controlling interests 486 721 604
Profit/(loss) for the period 3,125 9,937 (1,229)
-------
$ $ $
Basic earnings per ordinary share 4 0.10 0.42 (0.13)
Diluted earnings per ordinary share 4 0.10 0.42 (0.13)
-------
* For Notes on the interim condensed financial statements, see page 98.
Consolidated statement of comprehensive income
Half-year to
30 Jun 30 Jun 31 Dec
2020 2019 2019
$m $m $m
------- ------- ---------
Profit/(loss) for the period 3,125 9,937 (1,229)
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 1,747 1,015 137
- fair value gains/(losses) 2,654 2,141 (348)
- fair value (gains)/losses transferred to the
income statement on disposal (454) (794) 429
- expected credit recoveries/(losses) recognised
in the income statement 109 (5) 114
- income taxes (562) (327) (58)
Cash flow hedges 476 239 (33)
* fair value gains 255 241 310
- fair value losses/(gains) reclassified to the
income statement 364 68 (354)
* income taxes and other movements (143) (70) 11
Share of other comprehensive income/(expense) of
associates and joint ventures (115) 73 (52)
* share for the period (115) 85 (64)
* fair value (gains)/losses transferred to the income
statement on disposal - (12) 12
Exchange differences (4,552) 109 935
Items that will not be reclassified subsequently
to profit or loss:
------- ------- ---------
Remeasurement of defined benefit asset/liability 1,182 (45) 58
* before income taxes 1,703 (50) 33
- income taxes (521) 5 25
Changes in fair value of financial liabilities
designated at fair value upon initial recognition
arising from changes in own credit risk 2,354 (1,445) (557)
- before income taxes 2,936 (1,816) (823)
- income taxes (582) 371 266
Equity instruments designated at fair value through
other comprehensive income (123) 268 98
- fair value gains/(losses) (122) 265 99
- income taxes (1) 3 (1)
Effects of hyperinflation 72 113 104
Other comprehensive expense for the period, net
of tax 1,041 327 690
Total comprehensive income/(expense)
for the period 4,166 10,264 (539)
Attributable to:
- ordinary shareholders of the parent company 3,043 8,741 (1,903)
- preference shareholders of the parent company 45 45 45
- other equity holders 617 664 660
- non-controlling interests 461 814 659
Total comprehensive income/(expense)
for the period 4,166 10,264 (539)
Consolidated balance sheet
At
30 Jun 31 Dec
2020 2019
Notes* $m $m
Assets
Cash and balances at central banks 249,673 154,099
Items in the course of collection from other banks 6,289 4,956
Hong Kong Government certificates of indebtedness 39,519 38,380
Trading assets 208,964 254,271
Financial assets designated and otherwise mandatorily
measured at fair value through profit and loss 41,785 43,627
Derivatives 8 313,781 242,995
Loans and advances to banks 77,015 69,203
Loans and advances to customers 1,018,681 1,036,743
Reverse repurchase agreements - non-trading 226,345 240,862
Financial investments 9 494,109 443,312
-------
Prepayments, accrued income and other assets 197,425 136,680
Current tax assets 821 755
Interests in associates and joint ventures 10 24,800 24,474
-------
Goodwill and intangible assets 19,438 20,163
Deferred tax assets 4,153 4,632
------- --------- ---------
Total assets 2,922,798 2,715,152
---------
Liabilities and equity
Liabilities
Hong Kong currency notes in circulation 39,519 38,380
Deposits by banks 82,715 59,022
Customer accounts 1,532,380 1,439,115
Repurchase agreements - non-trading 112,799 140,344
Items in the course of transmission to other banks 6,296 4,817
Trading liabilities 79,612 83,170
-------
Financial liabilities designated at fair value 156,608 164,466
Derivatives 8 303,059 239,497
Debt securities in issue 110,114 104,555
Accruals, deferred income and other liabilities 173,181 118,156
Current tax liabilities 1,141 2,150
Liabilities under insurance contracts 98,832 97,439
Provisions 12 3,209 3,398
Deferred tax liabilities 4,491 3,375
Subordinated liabilities 23,621 24,600
------- --------- ---------
Total liabilities 2,727,577 2,522,484
---------
Equity
Called up share capital 10,346 10,319
Share premium account 14,268 13,959
Other equity instruments 20,914 20,871
Other reserves (301) 2,127
Retained earnings 141,809 136,679
Total shareholders' equity 187,036 183,955
------- --------- ---------
Non-controlling interests 8,185 8,713
Total equity 195,221 192,668
------- --------- ---------
Total liabilities and equity 2,922,798 2,715,152
---------
* For Notes on the interim condensed financial statements, see page 98.
Consolidated statement of cash flows
Half-year to
30 Jun 30 Jun 31 Dec
2020 2019 2019
$m $m $m
Profit before tax 4,318 12,407 940
-------- -------- --------
Adjustments for non-cash items:
--------- --------- -----------
Depreciation, amortisation and impairment 3,095 1,522 8,997
--------
Net gain from investing activities (405) (352) (47)
--------
Share of profits in associates and joint ventures (958) (1,324) (1,030)
-------- -------- --------
Gain on disposal of subsidiaries, businesses, associates
and joint ventures - (828) (101)
--------
Change in expected credit losses gross of recoveries
and other credit impairment charges 6,875 1,347 1,665
--------
Provisions including pensions 277 1,012 1,411
--------
Share-based payment expense 195 288 190
--------
Other non-cash items included in profit before
tax (718) (1,401) (896)
--------
Change in operating assets 11,185 (114,049) 9,818
--------
Change in operating liabilities 134,734 136,627 (20,544)
--------
Elimination of exchange differences(1) 3,775 (10,266) 6,524
--------
Dividends received from associates 120 170 463
--------
Contributions paid to defined benefit plans (335) (153) (380)
-------- -------- --------
Tax paid (2,373) (1,347) (920)
--------
Net cash from operating activities 159,785 23,653 6,090
--------
Purchase of financial investments (271,830) (234,762) (211,145)
Proceeds from the sale and maturity of financial
investments 225,733 204,600 208,586
Net cash flows from the purchase and sale of property,
plant and equipment (447) (532) (811)
Net cash flows from purchase of customer and loan
portfolios 244 435 683
Net investment in intangible assets (957) (951) (1,338)
Net cash flow on (purchase)/disposal of subsidiaries,
businesses, associates and joint ventures (409) (75) (8)
Net cash from investing activities (47,666) (31,285) (4,033)
-------- -------- --------
Cancellation of shares - - (1,000)
--------
Net sales/(purchases) of own shares for market-making
and investment purposes (48) 27 114
Redemption of preference shares and other equity
instruments (398) - -
Subordinated loan capital repaid (1,538) (4,138) (72)
Dividends paid to shareholders of the parent company
and non-controlling interests (1,204) (4,271) (5,502)
Net cash from financing activities (3,188) (8,382) (6,460)
-------- -------- --------
Net increase/(decrease) in cash and cash equivalents 108,931 (16,014) (4,403)
--------
Cash and cash equivalents at the beginning of the
period(2) 293,742 312,911 296,723
Exchange differences in respect of cash and cash
equivalents (7,455) (174) 1,422
-------- -------- --------
Cash and cash equivalents at the end of the period(2) 395,218 296,723 293,742
--------
1 Adjustments 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 At 31 December 2019, HSBC re-presented cash and cash
equivalents to reflect a consistent global approach to these
amounts. The net effect of these changes decreased cash and cash
equivalents by $15.3bn at 30 June 2019.
Consolidated statement of changes in equity
Other reserves
Called
up
share
capital Financial Cash Merger
and Other assets flow Foreign and Total Non-
share equity Retained at FVOCI hedging exchange other share-holders' controlling Total
premium instru-ments earnings reserve reserve reserve reserves 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 period - - 2,639 - - - - 2,639 486 3,125
------------------------------------------------------------ ------- ------- ------- --- ---
Other comprehensive
income (net of tax) - - 3,506 1,654 465 (4,559) - 1,066 (25) 1,041
------------------------------------------------------------
* debt instruments at fair value through other
comprehensive income - - - 1,735 - - - 1,735 12 1,747
* equity instruments designated at fair value through
other comprehensive income - - - (81) - - - (81) (42) (123)
* cash flow hedges - - - - 465 - - 465 11 476
* changes in fair value of financial liabilities
designated at fair value upon initial recognition
arising from changes in own credit risk - - 2,354 - - - - 2,354 - 2,354
* remeasurement of defined benefit asset/liability - - 1,195 - - - - 1,195 (13) 1,182
* share of other comprehensive income of associates and
joint ventures - - (115) - - - - (115) - (115)
* effects of hyperinflation - - 72 - - - - 72 - 72
* exchange differences - - - - - (4,559) - (4,559) 7 (4,552)
Total comprehensive
income for the period - - 6,145 1,654 465 (4,559) - 3,705 461 4,166
------------ ------- ----- -------- --- ---
Shares issued under
employee remuneration
and share plans 336 - (329) - - - - 7 - 7
------- --- ---
Dividends to shareholders - - (662) - - - - (662) (542) (1,204)
------------------------------------------------------------ ------- ------- -------
Cost of share-based
payment arrangements - - 195 - - - - 195 - 195
------------------------------------------------------------ ------- ------- ------- --- ---
Other movements - 43 (219) 12 - - - (164) (447) (611)
------------------------------------------------------------ ------- ------- -------
At 30 Jun 2020 24,614 20,914 141,809 1,558 463 (29,692) 27,370 187,036 8,185 195,221
------- ------- ------- --- ---
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 period - - 9,216 - - - - 9,216 721 9,937
------------------------------------------------------------ --- ---
Other comprehensive
income (net of tax) - - (1,297) 1,202 237 92 - 234 93 327
------------------------------------------------------------
* debt instruments at fair value through other
comprehensive income - - - 1,001 - - - 1,001 14 1,015
* equity instruments designated at fair value through
other comprehensive income - - - 201 - - - 201 67 268
* cash flow hedges - - - - 237 - - 237 2 239
* changes in fair value of financial liabilities
designated at fair value upon initial recognition
arising from changes in own credit risk - - (1,445) - - - - (1,445) - (1,445)
* remeasurement of defined benefit asset/liability - - (38) - - - - (38) (7) (45)
* share of other comprehensive income of associates and
joint ventures - - 73 - - - - 73 - 73
- effects of hyperinflation - - 113 - - - - 113 - 113
* exchange differences - - - - - 92 - 92 17 109
Total comprehensive
income for the period - - 7,919 1,202 237 92 - 9,450 814 10,264
------------------------------------------------------------ --- ---
Shares issued under
employee remuneration
and share plans 490 - (475) - - - - 15 - 15
Shares issued in
lieu of dividends
and amounts arising
thereon - - 1,160 - - - - 1,160 - 1,160
--- ---
Dividends to shareholders - - (4,915) - - - - (4,915) (516) (5,431)
------------------------------------------------------------
Cost of share-based
payment arrangements - - 255 - - - - 255 - 255
------------------------------------------------------------ --- ---
Other movements - - 458 - - - - 458 (96) 362
------------------------------------------------------------
At 30 Jun 2019 24,279 22,367 142,593 (330) 31 (26,041) 29,777 192,676 8,198 200,874
--- ---
Consolidated statement of changes in equity (continued)
Other reserves
Called
up
share
capital Other Financial Cash Merger Total
and equity assets flow Foreign and share- Non-
share instru- Retained at FVOCI hedging exchange other holders' controlling Total
premium ments earnings reserve reserve reserve reserves equity interests equity
$m $m $m $m $m $m $m $m $m $m
At 1 Jul 2019 24,279 22,367 142,593 (330) 31 (26,041) 29,777 192,676 8,198 200,874
------ ------ --- ------- ---
Profit for the period - - (1,833) - - - - (1,833) 604 (1,229)
Other comprehensive
income
(net of tax) - - (462) 222 (33) 908 - 635 55 690
------ ------ --- ------- ---
* debt instruments at fair value through other
comprehensive income - - - 145 - - - 145 (8) 137
* equity instruments designated at fair value through
other comprehensive income - - - 77 - - - 77 21 98
* cash flow hedges - - - - (33) - - (33) - (33)
* changes in fair value of financial liabilities
designated at fair value upon initial recognition
arising from changes in own credit risk - - (557) - - - - (557) - (557)
* remeasurement of defined benefit asset/liability - - 43 - - - - 43 15 58
* share of other comprehensive income of associates and
joint ventures - - (52) - - - - (52) - (52)
* effects of hyperinflation - - 104 - - - - 104 - 104
* exchange differences - - - - - 908 - 908 27 935
Total comprehensive
income for the period - - (2,295) 222 (33) 908 - (1,198) 659 (539)
Shares issued under
employee remuneration
and share plans 67 - (20) - - - - 47 - 47
Shares issued in
lieu of dividends
and amounts arising
thereon - - 1,527 - - - - 1,527 - 1,527
------ ------ --- --- ------- ---
Dividends to shareholders - - (6,768) - - - - (6,768) (261) (7,029)
Redemption of securities(1) - (1,496) (12) - - - - (1,508) - (1,508)
Transfers(2) - - 2,475 - - - (2,475) - - -
Cost of share-based
payment arrangements - - 223 - - - - 223 - 223
------ ------ --- --- ------- ---
Cancellation of shares(3) (68) - (1,000) - - - 68 (1,000) - (1,000)
------ ------- ------ --- --- ------- --- -------
Other movements - - (44) - - - - (44) 117 73
At 31 Dec 2019 24,278 20,871 136,679 (108) (2) (25,133) 27,370 183,955 8,713 192,668
------ ------ ------- ---
1 In 2019, HSBC Holdings called and later redeemed $1,500m
5.625% perpetual subordinated capital securities on which there
were $12m of external issuance costs.
2 Permitted transfers from the merger reserve to retained
earnings were made when the investment in HSBC Overseas Holdings
(UK) Limited was previously impaired. 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.
3 In August 2019, HSBC announced a share buy-back of up to
$1.0bn, which was completed in September 2019.
Notes on the interim condensed financial statements
Page Page
Basis of preparation and significant Interests in associates and
1 accounting policies 98 10 joint ventures 111
2 Net fee income 99 11 Goodwill and intangible assets 114
3 Dividends 99 12 Provisions 115
----
Contingent liabilities, contractual
4 Earnings per share 100 13 commitments and guarantees 116
Legal proceedings and regulatory
5 Segmental analysis 100 14 matters 116
Fair values of financial instruments
6 carried at fair value 104 15 Transactions with related parties 120
----
Fair values of financial instruments Events after the balance sheet
7 not carried at fair value 109 16 date 120
----
Interim Report 2020 and statutory
8 Derivatives 110 17 accounts 120
---- ----
9 Financial investments 111
----
1 Basis of preparation and significant accounting policies
(a) Compliance with International Financial Reporting Standards
Our interim condensed consolidated financial statements have
been prepared in accordance with the Disclosure Guidance and
Transparency Rules of the Financial Conduct Authority and IAS 34
'Interim Financial Reporting', as issued by the International
Accounting Standards Board ('IASB') and as endorsed by the EU.
Therefore, they include an explanation of events and transactions
that are significant to an understanding of the changes in HSBC's
financial position and performance since the end of 2019. These
financial statements should be read in conjunction with the Annual
Report and Accounts 2019.
At 30 June 2020, there were no unendorsed standards effective
for the half-year to 30 June 2020 affecting these financial
statements, and there was no difference between IFRSs endorsed by
the EU and IFRSs issued by the IASB in terms of their application
to HSBC.
Standards applied during the half-year to 30 June 2020
There were no new standards or amendments to standards that had
an effect on these interim condensed consolidated financial
statements.
(b) Use of estimates and judgements
Management believes that our critical accounting estimates and
judgements are those that relate to impairment of amortised cost
and FVOCI debt financial assets, goodwill impairment, the valuation
of financial instruments, deferred tax assets, provisions for
liabilities, defined benefit obligations and interests in
associates. There were no changes in the current period to the
critical accounting estimates and judgements applied in 2019, which
are stated on pages 47 and 242 of the Annual Report and Accounts
2019. However, the level of estimation uncertainty and judgement
for the calculation of expected credit losses ('ECL') has increased
since 31 December 2019 as a result of the economic effects of the
Covid-19 outbreak as set out in 'Measurement uncertainty and
sensitivity analysis' on page 56. In addition, as a result of the
heightened economic uncertainty together with the plans announced
in the 2020 business update and historical underperformance of
certain businesses, the estimates and judgements with regard to the
expected cash flows of cash generating units, which are applied to
the impairment of non-financial assets other than goodwill,
particularly intangible assets, have become more sensitive and
resulted in significant impairment charges in the interim reporting
period. See Note 11 'Goodwill and intangible assets'.
(c) Composition of Group
There were no material changes in the composition of the Group
in the half-year to 30 June 2020.
(d) Future accounting developments
IFRS 17 'Insurance Contracts' was issued in May 2017, with
amendments to the standard issued in June 2020. It has not been
endorsed for use in the EU. 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 impact of its implementation remains uncertain.
(e) 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 pandemic 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.
(f) Accounting policies
Except as described above, the accounting policies that we
applied for these interim condensed consolidated financial
statements are consistent with those described on pages 240 to 251
of the Annual Report and Accounts 2019, as are the methods of
computation.
2 Net fee income
Half-year to
30 Jun 30 Jun 31 Dec
2020 2019 2019
Total Total Total
Footnotes $m $m $m
Net fee income by product
Funds under management 1,113 1,067 1,110
Cards 954 968 1,007
----------
Broking income 743 544 513
---------- ------ ------ ------
Credit facilities 726 805 813
---------- ------ ------ ------
Account services 649 1,034 969
---------- ------ ------ ------
Underwriting 552 446 383
---------- ------ ------ ------
Unit trusts 455 546 489
---------- ------ ------ ------
Global custody 446 342 375
---------- ------ ------ ------
Remittances 325 373 374
---------- ------ ------ ------
Imports/exports 288 338 324
---------- ------ ------ ------
Insurance agency commission 171 200 177
---------- ------ ------ ------
Other 1,058 1,141 1,101
Fee income 7,480 7,804 7,635
----------
Less: fee expense (1,554) (1,680) (1,736)
---------- ------ ------ ------
Net fee income 5,926 6,124 5,899
------ ------ ------
Net fee income by global business 1
Wealth and Personal Banking 2,691 2,870 2,765
Commercial Banking 1,630 1,773 1,617
Global Banking and Markets 1,608 1,489 1,550
Corporate Centre (3) (8) (33)
1 A change in reportable segments was made in 2Q20. Comparative
data have been re-presented accordingly. For further guidance,
refer to Note 5 on page 100.
3 Dividends
On 31 March 2020, HSBC announced that, in response to a request
from the Bank of England through the UK's Prudential Regulation
Authority, the Board had cancelled the fourth interim dividend for
2019 of $0.21 per ordinary share, which was scheduled to be paid on
14 April 2020. The Board also announced that until the end of 2020,
HSBC will make no quarterly or interim dividend payments or
accruals in respect of ordinary shares.
The Board intends to provide an update on the dividend policy at
the year-end results for 2020, when the economic impact of the
Covid-19 outbreak is better understood. We will also take into
account the views of our shareholders, the interests of our other
stakeholders and other factors, including our financial performance
and capital position.
Dividends paid to shareholders of HSBC Holdings plc
Half-year to
30 Jun 2020 30 Jun 2019 31 Dec 2019
Settled Settled
Per in Per in Per Settled
share Total scrip share Total scrip share Total in 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 - - -
In respect of current
year:
------- ---------
* first interim dividend(1) - - - - - - 0.10 2,013 375
* second interim dividend - - - - - - 0.10 2,021 795
* third interim dividend - - - - - - 0.10 2,029 357
Total - - - 0.21 4,206 1,160 0.30 6,063 1,527
------- -------
Total dividends on
preference shares
classified as equity
(paid quarterly) 31.00 45 31.00 45 31.00 45
--------------------------------
Total coupons on capital
securities classified
as equity 617 664 660
--------------------------------
Dividends to shareholders 662 4,915 6,768
------- ---------
1 At 30 June 2019, HSBC changed its accounting practice on the
recognition of interim dividends to recognise them on the date of
payment rather than the date of declaration, in line with generally
accepted accounting practice.
Total coupons on capital securities classified as equity
Half-year to
30 Jun 30 Jun 31 Dec
2020 2019 2019
Total Total Total
First
Footnotes call date Per security $m $m $m
----------
Perpetual subordinated contingent
convertible securities 1
----------
* $1,500m issued at 5.625% 2 Nov 2019 $56.250 - 42 42
* $2,000m issued at 6.875% Jun 2021 $68.750 69 69 69
----------
* $2,250m issued at 6.375% Sep 2024 $63.750 72 72 71
----------
* $2,450m issued at 6.375% Mar 2025 $63.750 78 78 78
* $3,000m issued at 6.000% May 2027 $60.000 90 90 90
----------
* $2,350m issued at 6.250% Mar 2023 $62.500 73 73 74
- $1,800m issued at 6.500% Mar 2028 $65.000 59 58 59
* EUR1,500m issued at 5.250% Sep 2022 EUR52.500 44 45 43
* EUR1,000m issued at 6.000% Sep 2023 EUR60.000 33 34 32
- EUR1,250m issued at 4.750% July 2029 EUR47.500 33 34 34
* SGD1,000m issued at 4.700% Jun 2022 SGD47.000 17 17 17
* SGD750m issued at 5.000% Sep 2023 SGD50.000 13 14 14
- GBP1,000m issued at 5.875% Sep 2026 GBP58.750 36 38 37
Total 617 664 660
1 Discretionary coupons are paid twice a year on the perpetual
subordinated contingent convertible securities, in denominations of
1,000 per security in each security's issuance currency.
2 This security was called by HSBC Holdings on 22 November 2019
and was redeemed and cancelled on 17 January 2020.
4 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/(loss) attributable to ordinary shareholders of the parent company
Half-year to
30 Jun 30 Jun 31 Dec
2020 2019 2019
$m $m $m
Profit attributable to shareholders of the parent company 2,639 9,216 (1,833)
Dividend payable on preference shares classified as
equity (45) (45) (45)
-----
Coupon payable on capital securities classified as
equity (617) (664) (660)
-----
Profit/(loss) attributable to ordinary shareholders
of the parent company 1,977 8,507 (2,538)
-----
Basic and diluted earnings per share
Half-year to
30 Jun 2020 30 Jun 2019 31 Dec 2019
Number Amount Number Amount Number Amount
of per of per of per
Profit shares share Profit shares share Profit/(loss) shares share
Footnotes $m (millions) $ $m (millions) $ $m (millions) $
---------- ------ ---------- ------ ------ ---------- ------ --------------- ---------- --------
Basic 1 1,977 20,162 0.10 8,507 20,124 0.42 (2,538) 20,191 (0.13)
Effect of
dilutive
potential
ordinary
shares 58 65 -
Diluted 1 1,977 20,220 0.10 8,507 20,189 0.42 (2,538) 20,191 (0.13)
----------- ---------- ------ ---------- ------ ------ ---------- ------ --------- --- ---------- -----
1 Weighted average number of ordinary shares outstanding (basic)
or assuming dilution (diluted).
5 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 adjusted performance information is
presented on a constant currency basis. The income statements for
the half-years to 30 June 2019 and 31 December 2019 are converted
at the average rates of exchange for 2020, and the balance sheets
at 30 June 2019 and 31 December 2019 at the prevailing rates of
exchange on 30 June 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 2Q20, 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 Balance Sheet Management,
hyperinflation accounting in Argentina and 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
Half-year to 30 Jun 2020
Global
Wealth Banking
and Personal Commercial and Corporate
Banking Banking Markets Centre Total
Footnotes $m $m $m $m $m
Net operating income before change
in expected credit losses and
other credit impairment charges 1 11,251 7,000 8,178 48 26,477
- external 9,684 7,431 10,105 (743) 26,477
- inter-segment 1,567 (431) (1,927) 791 -
of which: net interest
income/(expense) 8,032 4,883 2,372 (804) 14,483
Change in expected credit losses
and other credit impairment
charges (2,202) (3,526) (1,118) (12) (6,858)
Net operating income 9,049 3,474 7,060 36 19,619
Total operating expenses (7,346) (3,290) (4,512) 206 (14,942)
----------
Operating profit 1,703 184 2,548 242 4,677
Share of profit in associates
and joint ventures (8) - - 966 958
Adjusted profit before tax 1,695 184 2,548 1,208 5,635
----------
% % % % %
------------- ---------- ---------- --------- ------------
Share of HSBC's adjusted profit
before tax 30.1 3.3 45.2 21.4 100.0
Adjusted cost efficiency ratio 65.3 47.0 55.2 (429.2) 56.4
Adjusted balance sheet data $m $m $m $m $m
------------- ---------- ---------- --------- ------------
Loans and advances to customers
(net) 429,487 344,567 243,355 1,272 1,018,681
Interests in associates and joint
ventures 425 13 136 24,226 24,800
----------
Total external assets 814,719 549,530 1,390,006 168,543 2,922,798
Customer accounts 775,870 418,263 337,573 674 1,532,380
HSBC adjusted profit before tax and balance sheet data (continued)
Half-year to 30 Jun 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 12,861 7,647 7,590 (283) 27,815
- external 10,747 8,087 10,258 (1,277) 27,815
----------
- inter-segment 2,114 (440) (2,668) 994 -
----------
of which: net interest
income/(expense) 8,525 5,466 2,667 (1,761) 14,897
----------
Change in expected credit losses
and other credit impairment
(charges)/recoveries (527) (478) (97) 14 (1,088)
Net operating income/(expense) 12,334 7,169 7,493 (269) 26,727
----------
Total operating expenses (7,551) (3,258) (4,758) (172) (15,739)
Operating profit/(loss) 4,783 3,911 2,735 (441) 10,988
----------
Share of profit in associates
and joint ventures 41 - - 1,244 1,285
----------
Adjusted profit before tax 4,824 3,911 2,735 803 12,273
----------
% % % % %
Share of HSBC's adjusted profit
before tax 39.3 31.9 22.3 6.5 100.0
Adjusted cost efficiency ratio 58.7 42.6 62.7 (60.8) 56.6
Adjusted balance sheet data $m $m $m $m $m
------------- ---------- ---------- --------- ------------
Loans and advances to customers
(net) 414,611 340,976 246,209 1,184 1,002,980
Interests in associates and joint
ventures 451 12 14 23,046 23,523
Total external assets 729,032 506,223 1,319,642 148,668 2,703,565
Customer accounts 714,969 354,806 286,867 505 1,357,147
----------
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 2Q20. Comparative
data have been re-presented accordingly.
Half-year to 31 Dec 2019(2)
Net operating income/(expense)
before change in expected credit
losses and other credit impairment
charges 1 12,492 7,379 7,113 (352) 26,632
- external 10,320 7,871 9,886 (1,445) 26,632
- inter-segment 2,172 (492) (2,773) 1,093 -
of which: net interest income/(expense) 8,769 5,409 2,533 (1,495) 15,216
Change in expected credit losses
and other credit impairment charges (829) (684) (61) 20 (1,554)
Net operating income/(expense) 11,663 6,695 7,052 (332) 25,078
Total operating expenses (7,685) (3,498) (4,656) (609) (16,448)
Operating profit/(loss) 3,978 3,197 2,396 (941) 8,630
Share of profit in associates
and joint ventures 11 - - 1,019 1,030
Adjusted profit before tax 3,989 3,197 2,396 78 9,660
% % % % %
-------- -------- ---------- -------- ------------
Share of HSBC's adjusted profit
before tax 41.3 33.1 24.8 0.8 100.0
Adjusted cost efficiency ratio 61.5 47.4 65.5 (173.0) 61.8
Adjusted balance sheet data $m $m $m $m $m
Loans and advances to customers
(net) 428,834 336,345 240,411 1,071 1,006,661
Interests in associates and joint
ventures 445 13 13 23,760 24,231
Total external assets 754,369 496,757 1,233,829 153,539 2,638,494
Customer accounts 735,301 377,691 285,954 710 1,399,656
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 2Q20. Comparative
data have been 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:
Half-year to
30 Jun 30 Jun 31 Dec
2020 2019 2019
Footnotes $m $m $m
------ ------ --------
Reported external net operating income by country/territory 1 26,745 29,372 26,726
---------
* UK 4,166 4,577 4,434
* Hong Kong 8,703 9,461 8,988
* US 2,435 2,293 2,178
* France 697 979 963
* other countries 10,744 12,062 10,163
1 Net operating income before change in expected credit losses
and other credit impairment charges, also referred to as
revenue.
Adjusted results reconciliation
Half-year to
30 Jun 2020 30 Jun 2019 31 Dec 2019
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 26,477 268 26,745 27,815 681 876 29,372 26,632 281 (187) 26,726
---------- ----- --------
ECL (6,858) - (6,858) (1,088) (52) - (1,140) (1,554) (62) - (1,616)
---- ---
Operating
expenses (14,942) (1,585) (16,527) (15,739) (453) (957) (17,149) (16,448) (228) (8,524) (25,200)
----
Share of
profit
in
associates
and joint
ventures 958 - 958 1,285 39 - 1,324 1,030 - - 1,030
----- ---
Profit
before
tax 5,635 (1,317) 4,318 12,273 215 (81) 12,407 9,660 (9) (8,711) 940
---------- ------- -------- ----- ---- ---- -------
1 Net operating income before change in expected credit losses
and other credit impairment charges, also referred to as
revenue.
Adjusted balance sheet reconciliation
At
30 Jun
2020 31 Dec 2019
Reported Currency
and adjusted Adjusted translation Reported
$m $m $m $m
Loans and advances to customers (net) 1,018,681 1,006,661 30,082 1,036,743
--------- ------------ ---------
Interests in associates and joint ventures 24,800 24,231 243 24,474
Total external assets 2,922,798 2,638,494 76,658 2,715,152
---------
Customer accounts 1,532,380 1,399,656 39,459 1,439,115
-------------
Adjusted profit reconciliation
Half-year to
30 Jun 30 Jun 31 Dec
2020 2019 2019
Footnotes $m $m $m
Adjusted profit before tax 5,635 12,273 9,660
Significant items (1,317) (81) (8,711)
- customer redress programmes (revenue) 26 - (163)
- disposals, acquisitions and investment in
new businesses (revenue) (8) 827 (59)
----------
- fair value movements on financial instruments 1 299 50 34
- restructuring and other related costs (revenue) (49) - -
- costs of structural reform 2 - (91) (67)
- customer redress programmes (operating expenses) (50) (610) (671)
----------
- impairment of goodwill and other intangible
assets (1,025) - (7,349)
----------
- restructuring and other related costs (operating
expenses) 3 (505) (287) (540)
- settlements and provisions in connection
with legal and other regulatory matters (5) 2 59
----------
- currency translation on significant items 28 45
----------
Currency translation 215 (9)
---------- -------
Reported profit before tax 4,318 12,407 940
----------
1 Includes fair value movements on non-qualifying hedges and
debt valuation adjustments on derivatives.
2 Comprises costs associated with preparations for the UK's exit from the European Union.
3 Includes impairment of software intangible assets of $173m.
6 Fair values of financial instruments carried at fair value
The accounting policies, control framework and hierarchy used to
determine fair values at 30 June 2020 are consistent with those
applied for the Annual Report and Accounts 2019.
Financial instruments carried at fair value and bases of valuation
Valuation techniques
Quoted Using
market observable With significant
price inputs unobservable
Level Level inputs
1 2 Level 3 Total
$m $m $m $m
Recurring fair value measurements
At 30 Jun 2020
Assets
Trading assets 141,930 63,169 3,865 208,964
Financial assets designated and otherwise mandatorily
measured at fair value through profit or loss 16,054 15,327 10,404 41,785
Derivatives 2,126 307,800 3,855 313,781
Financial investments 311,685 89,304 3,339 404,328
Liabilities
Trading liabilities 63,204 16,303 105 79,612
Financial liabilities designated at fair value 1,059 150,541 5,008 156,608
Derivatives 2,002 297,332 3,725 303,059
------- ---------------- -------
At 31 Dec 2019
Assets
Trading assets 186,653 62,639 4,979 254,271
Financial assets designated and otherwise mandatorily
measured at fair value through profit or loss 18,626 15,525 9,476 43,627
Derivatives 1,728 239,131 2,136 242,995
Financial investments 261,341 93,018 3,218 357,577
Liabilities
Trading liabilities 66,925 16,192 53 83,170
Financial liabilities designated at fair value 9,549 149,901 5,016 164,466
Derivatives 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 30 Jun 2020
Transfers from
Level
1 to Level 2 1,342 2,132 217 - 98 7,414 -
------------
Transfers from
Level
2 to Level 1 4,353 3,025 154 1 355 - -
------------ ----------
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
At
30 Jun 2020 31 Dec 2019
Corporate Corporate
GBM Centre GBM Centre
Footnotes $m $m $m $m
Type of adjustment
Risk-related 1,230 149 1,040 125
--------- ------- ---------
* bid-offer 486 92 428 79
* uncertainty 101 1 115 1
* credit valuation adjustment 558 48 355 38
* debt valuation adjustment (184) - (126) -
* funding fair value adjustment 239 8 241 7
* other 30 - 27 -
------- --------- ------- ---------
Model-related 99 5 71 3
* model limitation 96 5 68 3
* other 3 - 3 -
------- --------- ------- ---------
Inception profit (Day 1 P&L reserves) 1 89 - 72 -
--------- ------- --------- ------- ---------
1,418 154 1,183 128
--------- ------- --------- ------- ---------
1 See Note 8 on the interim condensed financial statements on page 110.
Fair value adjustment changes were driven mainly by an increase
in credit valuation adjustment ('CVA') due to widening credit
spreads and changes to derivative exposures caused by interest
rates moves.
For further details of our risk-related and model-related
adjustments, see pages 267 and 268 of the Annual Report and
Accounts 2019.
Fair value valuation bases
Financial instruments measured at fair value using a valuation technique
with significant unobservable inputs - Level 3
Assets Liabilities
Designated
and
otherwise
mandatorily
measured at
fair value
through Designated
Financial Trading profit Trading at fair
investments assets or loss Derivatives Total liabilities value Derivatives Total
$m $m $m $m $m $m $m $m $m
Private equity
including
strategic
investments 689 3 9,756 - 10,448 3 - - 3
Asset-backed
securities 1,095 674 98 - 1,867 - - - -
Loans held
for
securitisation - 1 - - 1 - - - -
Structured
notes - 3 - - 3 36 5,003 - 5,039
Derivatives
with monolines - - - 75 75 - - - -
Other
derivatives - - - 3,771 3,771 - - 3,717 3,717
Other
portfolios 1,555 3,184 550 9 5,298 66 5 8 79
At 30 Jun 2020 3,339 3,865 10,404 3,855 21,463 105 5,008 3,725 8,838
----------- ------- ------- ----------- ---------- -----
Private equity
including
strategic
investments 716 4 8,831 - 9,551 4 - - 4
Asset-backed
securities 874 934 28 - 1,836 - - - -
Loans held
for
securitisation - 1 39 - 40 - - - -
Structured
notes - 3 - - 3 47 5,016 - 5,063
Derivatives
with monolines - - - 66 66 - - - -
Other
derivatives - - - 2,070 2,070 - - 2,302 2,302
Other
portfolios 1,628 4,037 578 - 6,243 2 - - 2
At 31 Dec 2019 3,218 4,979 9,476 2,136 19,809 53 5,016 2,302 7,371
Balances from 2019 have been re-presented to disclose a
consistent application of the levelling methodology. This resulted
in an increase of $2.9bn of assets in Level 3. 'Other portfolios'
increased by $1.4bn and 'Private equity including strategic
investments' increased by $1.5bn.
The basis for determining the fair value of the financial
instruments in the table above is explained on pages 268 and 269 of
the Annual Report and Accounts 2019.
Reconciliation of fair value measurements in Level 3 of the fair
value hierarchy
Movement in Level 3 financial instruments
Assets Liabilities
Designated
and otherwise
mandatorily
measured
at fair
value through Designated
Financial Trading profit Trading at fair
investments assets or loss Derivatives liabilities value Derivatives
Footnotes $m $m $m $m $m $m $m
At 1 Jan 2020 3,218 4,979 9,476 2,136 53 5,016 2,302
Total gains/(losses)
recognised in profit
or loss (13) (541) (106) 2,237 - (117) 2,105
* net income from financial instruments held for
trading or managed on a fair value basis - (541) - 2,237 - - 2,105
* changes in fair value of other financial instruments
mandatorily measured at fair value through profit or
loss - - (106) - - (117) -
* gains less losses from financial investments at fair
value through other comprehensive income (13) - - - - - -
Total gains/(losses)
recognised in other
comprehensive income 1 (29) (171) (4) (147) (2) (78) (162)
* financial investments: fair value gains/(losses) (19) - - - - - -
* exchange differences (10) (171) (4) (147) (2) (78) (162)
Purchases 610 199 1,594 - 63 - -
New issuances - - - - 2 1,091 -
Sales (271) (577) (424) - (1) - -
Settlements (401) (22) (170) (262) (12) (853) (307)
Transfers out (22) (797) (63) (139) (5) (275) (270)
Transfers in 247 795 101 30 7 224 57
----------------------------------------------------------- ---------- ------- ---- ------ ---- ------- ---- ----- ------ --- ------- ----
At 30 Jun 2020 3,339 3,865 10,404 3,855 105 5,008 3,725
---------- ------- ---- ------ ---- ------- ---- ----- ------ --- ------- ----
Unrealised gains/(losses)
recognised in profit
or loss relating to
assets and liabilities
held at
30 Jun 2020 - (7) (140) 529 (3) 100 1,104
* net income from financial instruments held for
trading or managed on a fair value basis - (7) - 529 (3) - 1,104
* changes in fair value of other financial instruments
mandatorily measured at fair value through profit or
loss - - (140) - - 100 -
At 1 Jan 2019 2,796 6,759 7,080 2,423 58 5,328 1,756
-----
Total gains/(losses)
recognised in profit
or loss - (2) 196 (9) (4) 246 591
* net income from financial instruments held for
trading or managed on a fair value basis - (2) - (9) (4) - 591
* changes in fair value of other financial instruments
mandatorily measured at fair value through profit or
loss - - 196 - - 246 -
Total gains/(losses)
recognised in other
comprehensive income
('OCI') 1 236 (18) 6 (6) (1) (6) (10)
----- ------ ----- --- -----
* financial investments: fair value gains/(losses) 238 - - - - - -
* exchange differences (2) (18) 6 (6) (1) (6) (10)
----- ------ ----- --- -----
Purchases 336 1,145 1,214 - 5 118 -
New issuances - 154 - - - 818 -
Sales (7) (487) (87) - (9) (180) -
Settlements (240) (1,691) (184) 94 - (396) (136)
Transfers out (4) (409) (20) (622) (9) (550) (189)
Transfers in 179 222 40 50 9 18 21
-----
At 30 Jun 2019 3,296 5,673 8,245 1,930 49 5,396 2,033
-----
Unrealised gains/(losses)
recognised in profit
or loss relating to
assets and liabilities
held at
30 Jun 2019 - 2 67 257 (23) (7) (320)
* net income from financial instruments held for
trading or managed on a fair value basis - 2 - 257 (23) - (320)
-----------------------------------------------------------
* changes in fair value of other financial instruments
mandatorily measured at fair value through profit or
loss - - 67 - - (7) -
Movement in Level 3 financial instruments (continued)
Assets Liabilities
Designated
at fair
value
through Designated
Financial Trading profit Trading at fair
investments assets or loss Derivatives liabilities value Derivatives
Footnotes $m $m $m $m $m $m $m
---------- ------------- ------------- ------------ -------------
At 1 Jul 2019 3,296 5,673 8,245 1,930 49 5,396 2,033
---- ---- ------- ---- ------- --- ------- ----
Total gains/(losses)
recognised in profit
or loss 6 (110) 391 287 - (51) 339
* net income from financial instruments held for
trading or managed on a fair value basis - (110) - 287 - - 339
* changes in fair value of other financial instruments
mandatorily measured at fair value through profit or
loss - - 391 - - (51) -
* gains less losses from financial investments at fair
value through other comprehensive income 10 - - - - - -
* expected credit loss charges and other credit risk
charges (4) - - - - - -
Total gains/(losses)
recognised in other comprehensive
income ('OCI') 1 73 94 (10) 55 2 24 62
------- ---- --- ------- ---- ------- --- ------- ----
* financial investments: fair value gains/(losses) 63 - - - - - -
* exchange differences 10 94 (10) 55 2 24 62
------- ---- --- ------- ---- ------- --- ------- ----
Purchases 357 1,061 1,292 - 3 39 -
New issuances - - - - 6 783 -
Sales (49) (408) (189) - - (13) -
Settlements (89) (416) (250) (194) (7) (652) (26)
Transfers out (484) (1,149) (3) (88) - (529) (284)
Transfers in 108 234 - 146 - 19 178
---- ---- ---- ------- --- ------- ----
At 31 Dec 2019 3,218 4,979 9,476 2,136 53 5,016 2,302
---------- ---- ---- ------- ---- ------- --- ------- ----
Unrealised gains/(losses)
recognised in profit
or loss relating to assets
and liabilities held
at 31 Dec 2019 (4) (22) 465 279 - 57 (407)
* net income from financial instruments held for
trading or managed on a fair value basis - (22) - 279 - - (407)
* changes in fair value of other financial instruments
mandatorily measured at fair value through profit or
loss - - 465 - - 57 -
* loan impairment recoveries and other credit risk
provisions (4) - - - - - -
--- ---- ---- ------- --- ----
1 Included in 'Financial investments: fair value gains/(losses)'
in the current year and 'Exchange differences' in the consolidated
statement of comprehensive income.
Balances from 2019 have been re-presented to disclose a
consistent application of the levelling methodology. The result of
this is an increase of $2.9bn of assets in Level 3. 'Financial
investments' increased by $1.2bn and 'Private equity including
strategic investments financial assets designated and otherwise
mandatorily measured at fair value' increased by $1.7bn.
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.
Effect of changes in significant unobservable assumptions to
reasonably possible alternatives
The following table shows the sensitivity of Level 3 fair values
to reasonably possible alternative assumptions:
Sensitivity of fair values to reasonably possible alternative assumptions
Reflected in
other
Reflected in comprehensive
profit or loss income
Favourable Unfavourable Favourable Unfavourable
changes changes changes changes
Footnotes $m $m $m $m
Derivatives, trading assets and trading
liabilities 1 271 (268) - -
Financial assets and liabilities designated
and otherwise mandatorily measured
at fair value 625 (625) - -
Financial investments 28 (28) 101 (104)
At 30 Jun 2020 924 (921) 101 (104)
-----------
Derivatives, trading assets and trading
liabilities 1 298 (303) - -
Financial assets and liabilities designated
and otherwise mandatorily measured
at fair value 545 (439) - -
Financial investments 43 (46) 74 (74)
At 30 Jun 2019 886 (788) 74 (74)
-----------
Derivatives, trading assets and trading
liabilities 1 255 (230) - -
Financial assets and liabilities designated
and otherwise mandatorily measured
at fair value through profit or loss 618 (503) - -
Financial investments 48 (53) 81 (81)
At 31 Dec 2019 921 (786) 81 (81)
-----------
1 'Derivatives, trading assets and trading liabilities' is
presented as one category to reflect the manner in which these
financial instruments are risk-managed.
Balances from 2019 have been re-presented to disclose a
consistent application of the levelling methodology. The result of
this is an increase in 'Financial investments reflected through
OCI' and 'Financial asset designated and mandatorily measured at
fair value reflected in profit or loss' of $59m and $86m
respectively.
The sensitivity analysis aims to measure a range of fair values
consistent with the application of a 95% confidence interval.
Methodologies take account of the nature of the valuation technique
employed, as well as the availability and reliability of observable
proxy and historical data.
When the fair value of a financial instrument is affected by
more than one unobservable assumption, the table above reflects the
most favourable or the most unfavourable change from varying the
assumptions individually.
Key unobservable inputs to Level 3 financial instruments
The following table lists key unobservable inputs to Level 3
financial instruments and provides the range of those inputs at 30
June 2020. There has been no change to the key unobservable inputs
to Level 3 financial instruments and inter-relationships therein,
which are detailed on pages 271 and 272 of the Annual Report and
Accounts 2019.
Quantitative information about significant unobservable inputs in Level
3 valuations
Fair value
Full range
Assets Liabilities of inputs
Key
Valuation unobservable
Footnotes $m $m technique inputs Lower Higher
Private equity including See footnote See footnote
strategic investments 10,448 3 1 1
------- --------
Asset-backed securities 1,867 -
Prepayment
2 113 - Market proxy rate 0% 9%
* CLO/CDO - Market proxy Bid quotes 0 99
* other ABSs 1,754 - Market proxy Bid quotes 0 100
-------
Loans held for securitisation 1 -
Structured notes 3 5,039
Model - option Equity
- 3,988 model volatility 6% 161%
Model - option Equity
* equity-linked notes model correlation 22% 92%
Model - option
* FX-linked notes - 579 model FX volatility 1% 34%
------- --------
* other 3 472
Model -
discounted
Derivatives with monolines 75 - cash flow Credit spread 1.6% 2.1%
Other derivatives 3,771 3,717
- interest rate derivatives
------- --------
Model -
discounted Prepayment
securitisation swaps 283 869 cash flow rate 6% 7%
Model - option
long-dated swaptions 1,778 735 model IR volatility 7% 33%
------- --------
other 412 335
--------
- FX derivatives
Model - option
FX options 109 191 model FX volatility 1% 49%
------- --------
other 142 139
--------
- equity derivatives
long-dated single stock Model - option Equity
options 750 821 model volatility 0% 131%
------- --------
other 192 551
----------
- credit derivatives
other 105 76
Other portfolios 5,298 79
Model -
discounted Credit
* structured certificates 1,488 - cash flow volatility 11% 11%
* repurchase agreements 778 63
--------
* other 3 3,032 16
---------- --------
At 30 Jun 2020 21,463 8,838
--------
Quantitative information about significant unobservable inputs in Level
3 valuations (continued)
Fair value
Full range
Assets Liabilities of inputs
Valuation Key unobservable
Footnotes $m $m technique inputs Lower Higher
------ -----------
Private equity including See footnote See footnote
strategic investments 9,551 4 1 1 n/a n/a
Asset-backed securities 1,836 -
Prepayment
2 373 - Market proxy rate 0% 9%
* CLO/CDO Market proxy Bid quotes 0 100
* other ABSs 1,463 - Market proxy Bid quotes 0 101
Loans held for securitisation 40 -
Structured notes 3 5,063
Model - option Equity
- 3,768 model volatility 5% 90%
Model - option Equity
* equity-linked notes model correlation 9% 93%
Model - option
* FX-linked notes - 1,046 model FX volatility 1% 23%
* other 3 249
Model -
discounted
Derivatives with monolines 66 - cash flow Credit spread 0.4% 2%
Other derivatives 2,070 2,302
- interest rate derivatives
Model -
discounted Prepayment
securitisation swaps 314 640 cash flow rate 6% 7%
Model - option
long-dated swaptions 838 51 model IR volatility 8% 22%
other 255 155
- FX derivatives
Model - option
FX options 93 218 model FX volatility 1% 25%
other 119 104
- equity derivatives
long-dated single stock Model - option Equity
options 230 293 model volatility 0% 89%
other 78 712
- Credit derivatives
Other 143 129
----------
Other portfolios 6,243 2
Model -
discounted Credit
* structured certificates 1,515 - cash flow volatility 4% 4%
* repurchase agreements 1,604 -
- other 3 3,124 2
At 31 Dec 2019 19,809 7,371
----------
1 See notes on page 271 of the Annual Report and Accounts 2019.
2 Collateralised loan obligation/collateralised debt obligation.
3 'Other' includes a range of smaller asset holdings.
Balances from 2019 have been re-presented to disclose a
consistent application of the levelling methodology. The result of
this is an increase of $2.9bn of assets in Level 3. 'Other
portfolios' increased by $1.4bn and 'Private equity including
strategic investments' increased by $1.5bn.
7 Fair values of financial instruments not carried at fair value
The bases for measuring the fair values of loans and advances to
banks and customers, financial investments, deposits by banks,
customer accounts, debt securities in issue, subordinated
liabilities and non-trading repurchase and reverse repurchase
agreements are explained on pages 273 and 274 of the Annual Report
and Accounts 2019.
Fair values of financial instruments not carried at fair value on the
balance sheet
At 30 Jun 2020 At 31 Dec 2019
Carrying Fair Carrying Fair
amount value amount value
$m $m $m $m
--------- -----------
Assets
Loans and advances to banks 77,015 77,122 69,203 69,247
---------
Loans and advances to customers 1,018,681 1,018,036 1,036,743 1,037,543
---------
Reverse repurchase agreements - non-trading 226,345 226,402 240,862 240,906
---------
Financial investments - at amortised cost 89,781 96,434 85,735 89,061
Liabilities
Deposits by banks 82,715 82,718 59,022 58,951
---------
Customer accounts 1,532,380 1,533,284 1,439,115 1,439,512
---------
Repurchase agreements - non-trading 112,799 112,803 140,344 140,344
Debt securities in issue 110,114 110,474 104,555 104,936
---------
Subordinated liabilities 23,621 26,599 24,600 29,246
--------- --------- --------- ---------
Other financial instruments not carried at fair value are
typically short term in nature and reprice to current market rates
frequently. Accordingly, their carrying amount is a reasonable
approximation of fair value.
8 Derivatives
Notional contract amounts and fair values of derivatives by product
contract type held by HSBC
Notional contract
amount Fair value amount
Assets and liabilities Assets Liabilities
Trading Hedging Trading Hedging Total Trading Hedging Total
$m $m $m $m $m $m $m $m
Foreign exchange 7,383,599 36,888 83,704 366 84,070 84,600 729 85,329
------------------ ------- ------- ------- ------- ------- -------
Interest rate 17,590,866 165,107 291,177 2,522 293,699 274,938 3,550 278,488
------- ------- ------- ------- ------- -------
Equities 648,250 - 10,697 - 10,697 11,836 - 11,836
------- ------- ------- ------- ------- -------
Credit 329,551 - 3,661 - 3,661 5,000 - 5,000
------- ------- ------- ------- ------- -------
Commodity and
other 134,410 - 2,764 - 2,764 3,516 - 3,516
------------------ ------------- --------- ------- ------- ------- ------- ------- -------
Gross total fair
values 26,086,676 201,995 392,003 2,888 394,891 379,890 4,279 384,169
------------------ --------- ------- ------- ------- ------- ------- -------
Offset (81,110) (81,110)
------------------ --------- ------- ------- ------- ------- ------- -------
At 30 Jun 2020 26,086,676 201,995 392,003 2,888 313,781 379,890 4,279 303,059
------------- --------- ------- ------- ------- ------- ------- -------
Foreign exchange 8,207,629 31,899 84,083 455 84,538 84,498 740 85,238
Interest rate 17,895,349 177,006 183,668 1,208 184,876 175,095 2,031 177,126
Equities 1,077,347 - 9,053 - 9,053 11,237 - 11,237
Credit 345,644 - 4,744 - 4,744 5,597 - 5,597
Commodity and
other 93,245 - 1,523 - 1,523 2,038 - 2,038
Gross total fair
values 27,619,214 208,905 283,071 1,663 284,734 278,465 2,771 281,236
Offset (41,739) (41,739)
------------------
At 31 Dec 2019 27,619,214 208,905 283,071 1,663 242,995 278,465 2,771 239,497
The notional contract amounts of derivatives held for trading
purposes and derivatives designated in qualifying hedge accounting
relationships indicate the nominal value of transactions
outstanding at the balance sheet date, not amounts at risk.
Derivative assets and liabilities increased during 1H20, reflecting
changes in yield curves and the market environment.
Derivatives valued using models with unobservable inputs
The following table shows the difference between the fair value
at initial recognition, which is the transaction price, and the
value that would have been derived had valuation techniques used
for subsequent measurement been applied at initial recognition,
less subsequent releases.
Unamortised balance of derivatives valued using models with significant
unobservable inputs
Half-year to
30 Jun 30 Jun 31 Dec
2020 2019 2019
Footnotes $m $m $m
----------
Unamortised balance at beginning of period 73 86 99
Deferral on new transactions 106 90 55
Recognised in the income statement during the
period (87) (78) (76)
* amortisation (51) (36) (44)
* subsequent to unobservable inputs becoming observable (1) (6) 3
* maturity, termination or offsetting derivative (35) (36) (35)
Exchange differences (3) - 1
Other - 1 (6)
----------
Unamortised balance at end of period 1 89 99 73
----------
1 This amount is yet to be recognised in the consolidated income statement.
Hedge accounting derivatives
The notional contract amounts of derivatives held for hedge
accounting purposes indicate the nominal value of transactions
outstanding at the balance sheet date, not amounts at risk.
Notional contract amounts of derivatives held for hedging purposes
by product type
At 30 Jun 2020 At 31 Dec 2019
Cash flow Fair value Cash flow Fair value
hedges hedges hedges hedges
$m $m $m $m
Foreign exchange 26,374 14 21,385 14
-----------
Interest rate 39,590 125,517 54,253 122,753
---------- --------- -----------
Total 65,964 125,531 75,638 122,767
---------- -----------
The Group applies hedge accounting in respect of certain
consolidated net investments. Hedging is undertaken using forward
foreign exchange contracts or by financing with foreign currency
borrowings. At 30 June 2020, the notional contract values of
outstanding financial instruments designated as hedges of net
investments in foreign operations were $10,500m (31 December 2019:
$10,500m).
9 Financial investments
Carrying amounts of financial investments
30 Jun 31 Dec
2020 2019
Footnotes $m $m
Financial investments measured at fair value through
other comprehensive income 404,328 357,577
---------
- treasury and other eligible bills 130,389 95,043
- debt securities 271,859 260,536
---------
- equity securities 1,997 1,913
- other instruments 1 83 85
---------
Debt instruments measured at amortised cost 89,781 85,735
---------
- treasury and other eligible bills 12,192 10,476
- debt securities 77,589 75,259
At the end of the period 494,109 443,312
---------
1 'Other instruments' are comprised of loans and advances.
10 Interests in associates and joint ventures
At 30 June 2020, the carrying amount of HSBC's interests in
associates and joint ventures was $24,800m (31 December 2019:
$24,474m).
Principal associates of HSBC
At
30 Jun 2020 31 Dec 2019
Carrying Fair Carrying Fair
amount value(1) amount value(1)
$m $m $m $m
Bank of Communications Co., Limited 19,630 8,718 18,982 10,054
The Saudi British Bank 4,139 3,644 4,370 5,550
-------- --------- -------- ---------
1 Principal associates are listed on recognised stock exchanges.
The fair values are based on the quoted market prices of the shares
held (Level 1 in the fair value hierarchy).
Bank of Communications Co., Limited
The Group's investment in Bank of Communications Co. Limited
('BoCom') is classified as an associate. Significant influence in
BoCom was established via representation on BoCom's Board of
Directors and participation in a Resource and Experience Sharing
agreement ('RES'). Under the RES, HSBC staff have been seconded to
assist in the maintenance of BoCom's financial and operating
policies. Investments in associates are recognised using the equity
method of accounting in accordance with IAS 28 whereby the
investment is initially recognised at cost and adjusted thereafter
for the post-acquisition change in the Group's share of BoCom's net
assets. An impairment test is required if there is any indication
of impairment.
Impairment testing
At 30 June 2020, the fair value of the Group's investment in
BoCom had been below the carrying amount for approximately eight
years. As a result, the Group performed an impairment test on the
carrying amount, which confirmed that there was no impairment at 30
June 2020 as the recoverable amount, as determined by a
value-in-use ('VIU') calculation, was higher than the carrying
value.
At
30 Jun 2020 31 Dec 2019
Carrying Fair Carrying Fair
VIU value value VIU value value
$bn $bn $bn $bn $bn $bn
BoCom 20.5 19.6 8.7 21.5 19.0 10.1
---- -------- ------ ---- -------- ------
The decrease in VIU for the first half of 2020 was principally
driven by BoCom's actual performance, which was lower than earlier
forecasts due to the impact of the Covid-19 outbreak and the
disruption to global economic activity, and downward revisions to
management's best estimates of BoCom's future earnings.
In future periods, the VIU may increase or decrease depending on
the effect of changes to model inputs. The main model inputs are
described below and are based on factors observed at the
period-end. The factors that could result in a change in the VIU
and an impairment include a short-term underperformance by BoCom, a
change in regulatory capital requirements, or an increase in
uncertainty regarding the future performance of BoCom resulting in
a downgrade of the future asset growth or profitability. An
increase in the discount rate as a result of an increase in the
risk premium or risk-free rates could also result in a reduction of
VIU and an impairment. At the point where the carrying value
exceeds the VIU, impairment would be recognised.
If the Group did not have significant influence in BoCom, the
investment would be carried at fair value rather than the current
carrying value.
Basis of recoverable amount
The impairment test was performed by comparing the recoverable
amount of BoCom, determined by a VIU calculation, with its carrying
amount. The VIU calculation uses discounted cash flow projections
based on management's best estimates of future earnings available
to ordinary shareholders prepared in accordance with IAS 36.
Significant management judgement is required in arriving at the
best estimate. There are two main components to the VIU
calculation. The first component is management's best estimate of
BoCom's earnings, which is based on explicit forecasts over the
short to medium term. This results in forecast earnings growth that
is lower than recent historical actual growth and also reflects the
uncertainty arising from the current economic outlook. Earnings
beyond the short to medium term are then extrapolated in perpetuity
using a long-term growth rate to derive a terminal value, which
comprises the majority of the VIU. The second component is the
capital maintenance charge ('CMC'), which is management's forecast
of the earnings that need to be withheld in order for BoCom to meet
regulatory capital requirements over the forecast period (i.e. CMC
is deducted when arriving at management's estimate of future
earnings available to ordinary shareholders). The principal inputs
to the CMC calculation include estimates of asset growth, the ratio
of risk-weighted assets to total assets and the expected minimum
regulatory capital requirements. An increase in the CMC as a result
of a change to these principal inputs would reduce VIU.
Additionally, management considers other factors (including
qualitative factors) to ensure that the inputs to the VIU
calculation remain appropriate.
Key assumptions in value-in-use calculation
We used a number of assumptions in our VIU calculation, in
accordance with the requirements of IAS 36:
-- Long-term profit growth rate: 3% (31 December 2019: 3%) for
periods after 2023, which does not exceed forecast GDP growth in
mainland China and is consistent with forecasts by external
analysts.
-- Long-term asset growth rate: 3% (31 December 2019: 3%) for
periods after 2023, which is the rate that assets are expected to
grow to achieve long-term profit growth of 3%.
-- Discount rate: 11.24% (31 December 2019: 11.24%), which is
based on a capital asset pricing model ('CAPM') calculation for
BoCom, using market data. Management also compares the rate derived
from the CAPM with discount rates from external sources. The
discount rate used is within the range of 10.3% to 15.0% (31
December 2019: 10.0% to 15.0%) indicated by external sources.
-- Expected credit losses as a percentage of customer advances:
ranges from 0.95% to 1.10% (31 December 2019: 0.95%) in the short
to medium term, reflecting increases due to the Covid-19 outbreak
and BoCom's actual results. For periods after 2023, the ratio is
0.76% (31 December 2019: 0.76%), which is slightly higher than the
historical average.
-- Risk-weighted assets as a percentage of total assets: ranges
from 61% to 62% (31 December 2019: 61%) in the short to medium
term, reflecting increases that may arise from higher expected
credit losses as a percentage of customer advances. For periods
after 2023, the ratio is 61% (31 December 2019: 61%). These rates
are similar to BoCom's actual results in recent years and forecasts
disclosed by external analysts.
-- Operating income: ranges from 1.3% to 6.2% (31 December 2019:
4.9% to 9.4%) in the short to medium term, and are lower than
BoCom's actual results in recent years and the forecasts disclosed
by external analysts, reflecting pressures from the Covid-19
outbreak and industry developments in mainland China.
-- Cost-income ratio: ranges from 36.2% to 36.6% (31 December
2019: 37.1% to 38.8%) in the short to medium term. These rates are
similar to BoCom's actual results and slightly higher than the
forecasts disclosed by external analysts.
-- Effective tax rate: ranges from 11.0% to 17.9% (31 December
2019:12.0% to 17.0%) in the short to medium term, reflecting
BoCom's actual results and an expected increase towards the
long-term assumption. For periods after 2023, the rate is 22.5% (31
December 2019: 22.5%), which is slightly higher than the historical
average.
-- Capital requirements: Capital adequacy ratio: 11.5% (31
December 2019: 11.5%) and tier 1 capital adequacy ratio: 9.5% (31
December 2019: 9.5%), based on the minimum regulatory
requirements.
The following table shows the change to each key assumption in
the VIU calculation that on its own would reduce the headroom to
nil:
Changes to key assumption to reduce
Key assumption headroom to nil
Decrease by 36 basis points
* Long-term profit growth rate
Increase by 32 basis points
* Long-term asset growth rate
Increase by 41 basis points
* Discount rate
Increase by 6 basis points
* Expected credit losses as a percentage of customer
advances
Increase by 234 basis points
* Risk-weighted assets as a percentage of total assets
Decrease by 62 basis points
* Operating income
Increase by 139 basis points
* Cost-income ratio
Increase by 320 basis points
* Long-term effective tax rate
Increase by 44 basis points
* Capital requirements - capital adequacy ratio
Increase by 137 basis points
* Capital requirements - tier 1 capital adequacy ratio
The following table further illustrates the impact on VIU of
reasonably possible changes to key assumptions. This reflects the
sensitivity of the VIU to each key assumption on its own and it is
possible that more than one favourable and/or unfavourable change
may occur at the same time. The selected rates of reasonably
possible changes to key assumptions are largely based on external
analysts' forecasts, which can change period to period.
Sensitivity of VIU to reasonably possible changes in key assumptions
Favourable change Unfavourable change
Increase Decrease
in in
VIU VIU VIU VIU
bps $bn $bn bps $bn $bn
----
At 30 Jun 2020
---------- -------- -------- --------
Long-term profit growth rate - - 20.5 (50) (1.2) 19.3
----- --- ----
Long-term asset growth rate (50) 1.3 21.8 - - 20.5
----- --- ---- ----
Discount rate (24) 0.6 21.1 86 (1.8) 18.7
----- --- ---- ----
2020 to 2020 to
2023: 93 2023: 108
Expected credit losses as 2024 onwards: 2024 onwards:
a percentage of customer advances 75 0.5 21.0 92 (2.2) 18.3
Risk-weighted assets as a
percentage of total assets (190) 0.5 21.0 93 (0.5) 20.0
----- --- ----
Operating income 64 1.0 21.5 (69) (0.9) 19.6
---- ----- --- ---- ---
Cost-income ratio (205) 1.5 22.0 179 (1.3) 19.2
--- ----- --- ---- ---- ------- ----
Long-term effective tax rate (433) 1.2 21.7 250 (0.7) 19.8
--- ----- --- ---- ---- ------- ----
Capital requirements - capital
adequacy ratio - - 20.5 266 (6.0) 14.5
---- ----- --- ---- ---- ------- ----
Capital requirements - tier
1 capital adequacy ratio - - 20.5 289 (4.5) 16.0
---- ----- --- ---- ---- ------- ----
At 31 Dec 2019
Long-term profit growth rate - - 21.5 (50) (1.3) 20.2
Long-term asset growth rate (50) 1.4 22.9 - - 21.5
Discount rate (54) 1.4 22.9 56 (1.2) 20.3
2019 to 2019 to
2023: 90 2023: 108
Expected credit losses as 2024 onwards: 2024 onwards:
a percentage of customer advances 70 1.0 22.5 81 (1.2) 20.3
Risk-weighted assets as a
percentage of total assets (96) 0.4 21.9 12 - 21.5
Operating income 14 0.3 21.8 (102) (1.8) 19.7
---- --- ---
Cost-income ratio (175) 1.0 22.5 95 (1.2) 20.3
--- --- ----
Long-term effective tax rate (352) 1.0 22.5 250 (0.7) 20.8
--- --- ----
Capital requirements - capital
adequacy ratio - - 21.5 337 (8.2) 13.3
---- --- ----
Capital requirements - tier
1 capital adequacy ratio - - 21.5 322 (6.0) 15.5
---- --- ----
Considering the interrelationship of the changes set out in the
table above, management estimates that the reasonably possible
range of VIU is $17.3bn to $21.9bn (31 December 2019: $18.5bn to
$22.8bn). The range is based on the favourable/unfavourable change
in the earnings in the short to medium term and long-term expected
credit losses as a percentage of customer advances, as set out in
the table above. All other long-term assumptions, the discount rate
and the basis of the CMC have been kept unchanged when determining
the reasonably possible range of the VIU.
The Saudi British Bank
The Group's investment in The Saudi British Bank ('SABB') is
classified as an associate. In June 2019, the merger between SABB
and Alawwal bank ('Alawwal') became effective, which reduced HSBC's
40% interest in SABB to 29.2%. HSBC remained the largest
shareholder in SABB. Significant influence in SABB is established
via representation on the Board of Directors. Investments in
associates are recognised using the equity method of accounting in
accordance with IAS 28, as described previously for BoCom.
Impairment testing
SABB's share price has declined during the period due to oil
price volatility and global economic uncertainty arising from the
Covid-19 outbreak. At 30 June 2020, the fair value of the Group's
investment in SABB ($3.6bn) was below the carrying amount ($4.1bn).
As a result, the Group performed an impairment test on the carrying
amount, which confirmed no impairment. However, the recoverable
amount as determined by a VIU calculation indicated no remaining
headroom.
If SABB generates lower profitability (relative to historical
trends) over the medium term, there is a risk that our investment
in SABB could become impaired.
The basis of recoverable amount
The impairment test was performed by comparing the recoverable
amount of SABB, determined by a VIU calculation, with its carrying
amount. The VIU calculation uses discounted cash flow projections
based on management's best estimates of future earnings available
to ordinary shareholders prepared in accordance with IAS 36, which
requires significant management judgement. A key component to the
VIU calculation is management's best estimate of SABB's earnings,
which is based on explicit forecasts over the short to medium term.
This reflects the uncertainty arising from the current economic
outlook. Earnings beyond the short to medium term are then
extrapolated in perpetuity using a long-term growth rate to derive
a terminal value, which comprises the majority of the VIU.
Additionally, management considers other factors (including
qualitative factors) to ensure that the inputs to the VIU
calculation remain appropriate.
Key assumptions in value-in-use calculation
We used a number of assumptions in our VIU calculation, in
accordance with the requirements of IAS 36:
-- Long-term profit growth rate: 2.55% for periods after 2023.
This does not exceed forecast GDP growth in Saudi Arabia.
-- Long-term asset growth rate: 2.55% for periods after 2023.
This is the rate that assets are expected to grow to achieve
long-term profit growth of 2.55%.
-- Discount rate: 10.2%. This is based on a CAPM calculation for
Saudi Arabia using market data. Management also compares the rate
derived from the CAPM with cost of capital rates from external
sources.
-- Management's judgement in estimating the cash flows of SABB:
Cash flow projections have considered the scale of the entity
following the merger with Alawwal, current market conditions and
our macroeconomic outlook.
Sensitivity of VIU to reasonably possible changes in key
assumptions
At 30 June 2020, the Group's investment in SABB was sensitive to
reasonably possible adverse changes in key assumptions supporting
the recoverable amount. The most sensitive inputs to the impairment
test are set out in the following table.
Input Reasonably possible change
Cash flow projections decrease by
* Cash flow projections 5%. This could result in an impairment
of $0.1bn.
Discount rate increases by 50bps.
* Discount rate This could result in an impairment
of $0.1bn.
11 Goodwill and intangible assets
30 Jun 31 Dec
2020 2019
Footnotes $m $m
Goodwill 5,482 5,590
Present value of in-force long-term insurance business 9,379 8,945
Other intangible assets 1 4,577 5,628
----------
At the end of the period 19,438 20,163
----------
1 Included within other intangible assets is capitalised
software with a net carrying amount of $3,861m (31 December 2019:
$4,829m).
We considered the pervasive macroeconomic deterioration caused
by the outbreak of Covid-19, along with the impact on forecast
profitability in some businesses, to be an indicator of goodwill
and capitalised software impairment. As a result, interim
impairment tests were performed at 30 June 2020.
Goodwill
Impairment test at 30 June 2020
An interim impairment test was performed by comparing the
estimated recoverable amount of a cash generating unit ('CGU')
carrying goodwill, determined by a VIU calculation, with its
carrying amount. At 30 June 2020, the goodwill allocated to Middle
East and North Africa - WPB ($41m) was fully impaired.
As disclosed on page 290 of our Annual Report and Accounts 2019,
a reasonable change in a single key assumption would not result in
impairment of goodwill in our former Europe - RBWM CGU. Though
taken together, a combination of reasonable changes in forecast
cash flows (30% decrease) and an increase in the discount rate (by
100bps) could result in a recoverable amount that is lower than the
CGU's carrying amount. The sensitivity profile of our new Europe -
WPB CGU at 30 June 2020 is the same. Details regarding our change
in global businesses are set out in Note 5.
No other CGUs are sensitive to changes in key assumptions that
would result in impairment.
Other intangible assets
Impairment test at 30 June 2020
An impairment test was performed at 30 June 2020 by comparing
the net carrying amount of capitalised software assets with their
recoverable amounts. Recoverable amounts were determined by
calculating an estimated VIU or fair value, as appropriate, for
each underlying business that carries software assets. Our cash
flow forecasts have been updated for changes in the external
outlook, although current economic and geopolitical risks increase
the inherent estimation uncertainty.
We recognised $1.2bn of capitalised software impairment related
principally to businesses within HSBC Bank plc, our non-ring-fenced
bank in Europe. This impairment reflected underperformance and
deterioration in the future forecasts of these businesses,
substantially relating to prior periods.
Key assumptions in VIU calculation
We used a number of assumptions in our VIU calculation, in
accordance with the requirements of IAS 36:
-- Management's judgement in estimating future cash flows: We
considered past business performance, the scale of the current
impact from the Covid-19 outbreak on our operations, current market
conditions and our macroeconomic outlook to estimate future
earnings. As required by IFRSs, estimates of future cash flows
exclude estimated cash inflows or outflows that are expected to
arise from restructuring initiatives before an entity has a
constructive obligation to carry out the plan, and would therefore
have recognised a provision for restructuring costs. For some
businesses, this means that the benefit of certain strategic
actions are not included in this impairment assessment, including
capital releases.
-- Long-term growth rates: The long-term growth rate is used to
extrapolate the cash flows in perpetuity because of the long-term
perspective of the businesses within the Group. Rates do not exceed
forecast inflation for the countries and territories within which
the Group operates.
-- Discount rates: Rates are based on a CAPM calculation
considering market data for the businesses and geographies in which
the Group operates. Discount rates ranged from 8.5% to 9.7% for
HSBC Bank plc's businesses.
Future software capitalisation
We will continue to invest in digital capabilities to meet our
strategic objectives. However, software capitalisation within
businesses where impairment was identified will not resume until
the performance outlook for each business indicates future profits
are sufficient to support capitalisation. The cost of additional
software investment in these businesses will be recognised as an
operating expense until such time.
12 Provisions
Legal
proceedings
Restructuring and regulatory Customer Other
costs matters remediation provisions Total
Footnotes $m $m $m $m $m
Provisions (excluding
contractual
commitments)
----------
At 31 Dec 2019 356 605 1,646 280 2,887
---------- ---
Additions 103 20 75 109 307
Amounts utilised (128) (70) (436) (91) (725)
Unused amounts reversed (38) (29) (38) (44) (149)
Exchange and other movements (58) (8) (99) 25 (140)
At 30 Jun 2020 235 518 1,148 279 2,180
---------- ---
Contractual commitments 1
----------
At 31 Dec 2019 511
----------
Net change in expected credit
loss provision and other
movements 518
At 30 Jun 2020 1,029
----------
Total provisions
At 31 Dec 2019 3,398
----------
At 30 Jun 2020 3,209
----------
1 The contractual commitments provision includes off-balance
sheet loan commitments and guarantees, for which expected credit
losses are provided under IFRS 9.
Further details of 'Legal proceedings and regulatory matters'
are set out in Note 14. Legal proceedings include civil court,
arbitration or tribunal proceedings brought against HSBC companies
(whether by way of claim or counterclaim); or civil disputes that
may, if not settled, result in court, arbitration or tribunal
proceedings. 'Regulatory matters' refers to investigations, reviews
and other actions carried out by, or in response to, the actions of
regulators or law enforcement agencies in connection with alleged
wrongdoing by HSBC.
Customer remediation refers to HSBC's activities to compensate
customers for losses or damages associated with a failure to comply
with regulations or to treat customers fairly. Customer remediation
is often initiated by HSBC in response to customer complaints
and/or industry developments in sales practices, and is not
necessarily initiated by regulatory action. Further details of
customer remediation are set out in this note.
Further disclosure on 'ECL on undrawn loan commitments and
financial guarantees' can be found in the 'Credit risk' section of
the 'Interim management report' on page 54.
Payment protection insurance
At 30 June 2020, $613m (31 December 2019: $1.1bn) of the
customer remediation provision relates to the estimated liability
for redress in respect of the possible mis-selling of PPI policies
in previous years. Payments totalling $376m were made during the
first six months of 2020.
At 30 June 2020, contact was made with customers who
collectively held 3.0 million policies, representing 56% of total
policies sold. A total of 5.4 million PPI policies have been sold
since 2000, generating estimated revenue of $3.2bn at 30 June 2020.
The gross written premiums on these policies were approximately
$4.2bn.
As at 30 June 2020, there were an estimated 42,700 complaints
still requiring assessment. Historical claim handling processes are
monitored on a regular basis, and there remains potential for this
review process to lead to additional rework costs in the future.
Although the deadline for bringing complaints has passed, customers
can still commence litigation for PPI mis-selling. Provision has
been made for the best estimate of any obligation to pay
compensation in respect of an estimated 43,000 future claims.
However, the volume and quality of future claims through legal
channels, and the amount of any compensation to be paid, remain
uncertain. The provision also includes claims made by the Official
Receiver to pursue redress amounts in respect of bankrupt and
insolvent customers.
The estimated liability for redress for both single and regular
premium policies is calculated on the basis of a refund of the
total premiums paid by the customer plus simple interest of 8% per
annum (or the rate inherent to the related loan product where
higher). Further estimated redress levels are based on historical
redress paid to customers per policy.
The PPI provision is based upon assumptions and estimates taken
from historical experience. The profile of cases yet to be
assessed, whether those submitted prior to the complaints deadline
or subsequently via the legal channels, could therefore vary,
leading to different uphold rates or average redress levels being
used to arrive at the provision.
We continued to monitor available information up until the date
of the approval of the financial statements to ensure that the
provision estimate was appropriate.
Sensitivity to key assumptions
An increase/decrease in customer redress volumes of 10,000
received through legal channels would increase/decrease the redress
provision by approximately $16m, based on observed settlement rates
and average redress during the first half of 2020.
13 Contingent liabilities, contractual commitments and guarantees
At
30 Jun 31 Dec
2020 2019
Footnotes $m $m
Guarantees and contingent liabilities:
* financial guarantees 18,328 20,214
---------- ------- -------
* performance and other guarantees 73,078 75,933
---------- ------- -------
* other contingent liabilities 1,094 1,576
----------
At the end of the period 92,500 97,723
---------- ------- -------
Commitments: 1
* documentary credits and short-term trade-related
transactions 6,201 6,316
----------
* forward asset purchases and forward deposits placed 91,849 56,326
----------
* standby facilities, credit lines and other
commitments to lend 740,023 734,966
---------- -------
At the end of the period 838,073 797,608
---------- ------- -------
1 Includes $648,156m of commitments at 30 June 2020 (31 December
2019: $600,029m), to which the impairment requirements in IFRS 9
are applied where HSBC has become party to an irrevocable
commitment.
The preceding table discloses the nominal principal amounts of
off-balance sheet liabilities and commitments for the Group, which
represent the maximum amounts at risk should the contracts be fully
drawn upon and the clients default. As a significant portion of
guarantees and commitments are expected to expire without being
drawn upon, the total of the nominal principal amounts is not
indicative of future liquidity requirements. The expected credit
loss provision relating to guarantees and commitments under IFRS 9
is disclosed in Note 12.
The majority of the guarantees have a term of less than one
year, while guarantees with terms of more than one year are subject
to HSBC's annual credit review process.
Contingent liabilities arising from legal proceedings,
regulatory and other matters against Group companies are disclosed
in Notes 12
and 14.
14 Legal proceedings and regulatory matters
HSBC is party to legal proceedings and regulatory matters in a
number of jurisdictions arising out of its normal business
operations. Apart from the matters described below, HSBC considers
that none of these matters are material. The recognition of
provisions is determined in accordance with the accounting policies
set out in Note 1 of the Annual Report and Accounts 2019. While the
outcomes of legal proceedings and regulatory matters are inherently
uncertain, management believes that, based on the information
available to it, appropriate provisions have been made in respect
of these matters as at 30 June 2020 (see Note 12). Where an
individual provision is material, the fact that a provision has
been made is stated and quantified, except to the extent that doing
so would be seriously prejudicial. Any provision recognised does
not constitute an admission of wrongdoing or legal liability. It is
not practicable to provide an aggregate estimate of potential
liability for our legal proceedings and regulatory matters as a
class of contingent liabilities.
Bernard L. Madoff Investment Securities LLC
Bernard L. Madoff ('Madoff') was arrested in December 2008 and
later pleaded guilty to running a Ponzi scheme. His firm, Bernard
L. Madoff Investment Securities LLC ('Madoff Securities'), is being
liquidated in the US by a trustee (the 'Trustee').
Various non-US HSBC companies provided custodial, administration
and similar services to a number of funds incorporated outside the
US whose assets were invested with Madoff Securities. Based on
information provided by Madoff Securities as at 30 November 2008,
the purported aggregate value of these funds was $8.4bn, including
fictitious profits reported by Madoff.
Based on information available to HSBC, the funds' actual
transfers to Madoff Securities minus their actual withdrawals from
Madoff Securities during the time HSBC serviced the funds are
estimated to have totalled approximately $4bn. Various HSBC
companies have been named as defendants in lawsuits arising out of
Madoff Securities' fraud.
US litigation: The Trustee has brought lawsuits against various
HSBC companies and others in the US Bankruptcy Court for the
Southern District of New York (the 'US Bankruptcy Court'), seeking
recovery of transfers from Madoff Securities to HSBC in an amount
not yet pleaded or determined. HSBC and other parties to the
actions have moved to dismiss the Trustee's claims. The US
Bankruptcy Court granted HSBC's motion to dismiss with respect to
certain of the Trustee's claims in November 2016. In February 2019,
the US Court of Appeals for the Second Circuit (the 'Second Circuit
Court of Appeals') reversed that dismissal. Following the US
Supreme Court's denial of certiorari in June 2020, the cases were
remanded to the US Bankruptcy Court, where they are now
pending.
Fairfield Sentry Limited, Fairfield Sigma Limited and Fairfield
Lambda Limited (together, 'Fairfield') (in liquidation since July
2009) have brought a lawsuit in the US against fund shareholders,
including HSBC companies that acted as nominees for clients,
seeking restitution of redemption payments. In December 2018, the
US Bankruptcy Court issued an opinion, which ruled in favour of the
defendants' motion to dismiss in respect of certain claims by the
liquidators for Fairfield and granted a motion by the liquidators
to file amended complaints. As a result of that opinion, all claims
against one of the HSBC companies were dismissed, and certain
claims against the remaining HSBC defendants were also dismissed.
In May 2019, the liquidators appealed certain issues from the US
Bankruptcy Court to the US District Court for the Southern District
of New York (the 'New York District Court') and, in January 2020,
the liquidators filed amended complaints on the claims remaining in
the US Bankruptcy Court. In March 2020, HSBC and other parties to
the action moved to dismiss the amended complaints in the US
Bankruptcy Court.
UK litigation: The Trustee has filed a claim against various
HSBC companies in the High Court of England and Wales, seeking
recovery of transfers from Madoff Securities to HSBC in an amount
not yet pleaded or determined. The deadline for service of the
claim has been extended to September 2020 for UK-based defendants
and November 2020 for all other defendants.
Cayman Islands litigation: In February 2013, Primeo Fund
('Primeo') (in liquidation since April 2009) brought an action
against HSBC Securities Services Luxembourg ('HSSL') and Bank of
Bermuda (Cayman) Limited (now known as HSBC Cayman Limited),
alleging breach of contract and breach of fiduciary duty and
claiming damages and equitable compensation. The trial concluded in
February 2017 and, in August 2017, the court dismissed all claims
against the defendants. In September 2017, Primeo appealed to the
Court of Appeal of the Cayman Islands and, in June 2019, the Court
of Appeal of the Cayman Islands dismissed Primeo's appeal. In
August 2019, Primeo filed a notice of appeal to the UK Privy
Council, which has listed the hearing for April 2021.
Luxembourg litigation: In April 2009, Herald Fund SPC ('Herald')
(in liquidation since July 2013) brought an action against HSSL
before the Luxembourg District Court, seeking restitution of cash
and securities that Herald purportedly lost because of Madoff
Securities' fraud, or money damages. The Luxembourg District Court
dismissed Herald's securities restitution claim, but reserved
Herald's cash restitution claim and its claim for money damages.
Herald has appealed this judgment to the Luxembourg Court of
Appeal, where the matter is pending. In late 2018, Herald brought
additional claims against HSSL and HSBC Bank plc before the
Luxembourg District Court, seeking further restitution and
damages.
In October 2009, Alpha Prime Fund Limited ('Alpha Prime')
brought an action against HSSL before the Luxembourg District
Court, seeking the restitution of securities, or the cash
equivalent, or money damages. In December 2018, Alpha Prime brought
additional claims before the Luxembourg District Court seeking
damages against various HSBC companies. These matters are currently
pending before the Luxembourg District Court.
In December 2014, Senator Fund SPC ('Senator') brought an action
against HSSL before the Luxembourg District Court, seeking
restitution of securities, or the cash equivalent, or money
damages. In April 2015, Senator commenced a separate action against
the Luxembourg branch of HSBC Bank plc asserting identical claims
before the Luxembourg District Court. In December 2018, Senator
brought additional claims against HSSL and HSBC Bank plc Luxembourg
branch before the Luxembourg District Court, seeking restitution of
Senator's securities or money damages. These matters are currently
pending before the Luxembourg District Court.
Ireland litigation: In November 2013, Defender Limited brought
an action against HSBC Institutional Trust Services (Ireland)
Limited ('HTIE') and others, based on allegations of breach of
contract and claiming damages and indemnification for fund losses.
The trial commenced in October 2018. In December 2018, the Irish
High Court issued a judgment in HTIE's favour on a preliminary
issue, holding that Defender Limited had no effective claim against
HTIE. This judgment concluded the trial without further issues in
dispute being heard. In February 2019, Defender Limited appealed
the decision. In July 2020, the Irish Supreme Court ruled in part
in favour of Defender Limited and returned the case to the High
Court for further proceedings.
There are many factors that may affect the range of possible
outcomes, and any resulting financial impact, of the various
Madoff-related proceedings described above, including but not
limited to the multiple jurisdictions in which the proceedings have
been brought. Based upon the information currently available,
management's estimate of the possible aggregate damages that might
arise as a result of all claims in the various Madoff-related
proceedings is up to or exceeding $500m, excluding costs and
interest. Due to uncertainties and limitations of this estimate,
any possible damages that might ultimately arise could differ
significantly from this amount.
Anti-money laundering and sanctions-related matters
In December 2012, among other agreements, HSBC Holdings agreed
to an undertaking with the UK Financial Services Authority, which
was replaced by a Direction issued by the UK Financial Conduct
Authority ('FCA') in 2013, and again in July 2020, and consented to
a cease-and-desist order with the US Federal Reserve Board ('FRB'),
both of which contained certain forward-looking anti-money
laundering ('AML') and sanctions-related obligations. HSBC also
agreed to retain an independent compliance monitor (who is, for FCA
purposes, a 'Skilled Person' under section 166 of the Financial
Services and Markets Act and, for FRB purposes, an 'Independent
Consultant') to produce periodic assessments of the Group's AML and
sanctions compliance programme (the 'Skilled Person/Independent
Consultant'). In December 2012, HSBC Holdings also entered into an
agreement with the Office of Foreign Assets Control ('OFAC')
regarding historical transactions involving parties subject to OFAC
sanctions. HSBC's engagement with the Skilled Person appointed
pursuant to the 2013 Direction was terminated in February 2020 and
a new Skilled Person with a narrower mandate has been appointed to
assess the remaining areas that require further work in order for
HSBC to transition fully to business-as-usual financial crime risk
management. The Independent Consultant will continue to carry out
an annual OFAC compliance review at the FRB's discretion. The role
of the Skilled Person/Independent Consultant is discussed on page
145 of the Annual Report and Accounts 2019.
Through the Skilled Person/Independent Consultant's prior
reviews, as well as internal reviews conducted by HSBC, certain
potential AML and sanctions compliance issues have been identified
that HSBC is reviewing further with the FRB, FCA and/or OFAC. The
Financial Crimes Enforcement Network of the US Treasury Department,
as well as the Civil Division of the US Attorney's Office for the
Southern District of New York, are investigating the collection and
transmittal of third-party originator information in certain
payments instructed over HSBC's proprietary payment systems. The
FCA is also conducting an investigation into HSBC Bank plc's and
HSBC UK Bank plc's compliance with UK money laundering regulations
and financial crime systems and controls requirements. HSBC is
cooperating with all of these investigations.
In May 2014, a shareholder derivative action was filed by a
shareholder of HSBC Holdings purportedly on behalf of HSBC
Holdings, HSBC Bank USA N.A. ('HSBC Bank USA'), HSBC North America
Holdings Inc. and HSBC USA Inc. (the 'Nominal Corporate
Defendants') in New York state court against certain current and
former directors and officers of the Nominal Corporate Defendants
(the 'Individual Defendants'). The complaint alleges that the
Individual Defendants breached their fiduciary duties to the
Nominal Corporate Defendants and caused a waste of corporate assets
by allegedly permitting and/or causing the conduct underlying the
five-year deferred prosecution agreement with the US Department of
Justice ('DoJ'), entered into in December 2012. In November 2015,
the New York state court granted the Nominal Corporate Defendants'
motion to dismiss, but the appellate court reversed the decision in
November 2018 and reinstated the action. In June 2020, the parties
reached an agreement to resolve this derivative action. In July
2020, the court granted preliminary approval of the settlement,
under which HSBC will receive a payment from directors and officers
liability insurance carriers and will continue for a period of time
certain corporate governance practices. The final settlement
approval hearing has been scheduled for October 2020.
Since November 2014, a number of lawsuits have been filed in
federal courts in the US against various HSBC companies and others
on behalf of plaintiffs who are, or are related to, victims of
terrorist attacks in the Middle East or of cartel violence in
Mexico. In each case, it is alleged that the defendants aided and
abetted the unlawful conduct of various sanctioned parties in
violation of the US Anti-Terrorism Act. Currently, 10 actions
remain pending in federal courts in New York or the District of
Columbia. In March, September and October 2019, the courts granted
HSBC's motions to dismiss in three of these cases. The plaintiffs
have appealed the decisions in two of these cases and are seeking
certification to appeal in the third case. HSBC has filed motions
to dismiss in three further cases, two of which were granted in
June 2020, while the third remains pending. The four remaining
actions are at a very early stage.
Based on the facts currently known, it is not practicable at
this time for HSBC to predict the resolution of these matters,
including the timing or any possible impact on HSBC, which could be
significant.
London interbank offered rates, European interbank offered rates
and other benchmark interest rate investigations and litigation
Euro interest rate derivatives: In December 2016, the European
Commission (the 'EC') issued a decision finding that HSBC, among
other banks, engaged in anti-competitive practices in connection
with the pricing of euro interest rate derivatives in early 2007.
The EC imposed a fine on HSBC based on a one-month infringement.
HSBC appealed the decision and, in September 2019, the General
Court of the European Union (the 'General Court') issued a decision
largely upholding the EC's findings on liability but annulling the
fine. HSBC and the EC have both appealed the General Court's
decision to the European Court of Justice.
US dollar Libor: Beginning in 2011, HSBC and other panel banks
have been named as defendants in a number of private lawsuits filed
in the US with respect to the setting of US dollar Libor. The
complaints assert claims under various US laws, including US
antitrust and racketeering laws, the US Commodity Exchange Act ('US
CEA') and state law. The lawsuits include individual and putative
class actions, most of which have been transferred and/or
consolidated for pre-trial purposes before the New York District
Court.
In 2017 and 2018, HSBC reached agreements with plaintiffs to
resolve putative class actions brought on behalf of the following
five groups of plaintiffs: persons who purchased US dollar
Libor-indexed bonds; persons who purchased US dollar Libor-indexed
exchange-traded instruments; US-based lending institutions that
made or purchased US dollar Libor-indexed loans (the 'Lender
class'); persons who purchased US dollar Libor-indexed interest
rate swaps and other instruments directly from the defendant banks
and their affiliates (the 'OTC class'); and persons who purchased
US dollar Libor-indexed interest rate swaps and other instruments
from certain financial institutions that are not the defendant
banks or their affiliates. During 2018, the New York District Court
granted final approval of the settlements with the OTC and Lender
classes. The remaining settlements are subject to final court
approval. Additionally, a number of other US dollar Libor-related
actions remain pending against HSBC in the New York District Court
and the Second Circuit Court of Appeals.
Intercontinental Exchange ('ICE') Libor: Between January and
March 2019, HSBC and other panel banks were named as defendants in
three putative class actions filed in the New York District Court
on behalf of persons and entities who purchased instruments paying
interest indexed to US dollar ICE Libor from a panel bank. The
complaints allege, among other things, misconduct related to the
suppression of this benchmark rate in violation of US antitrust and
state law. In July 2019, the three putative class actions were
consolidated, and the plaintiffs filed a consolidated amended
complaint. In March 2020, the court granted the defendants' joint
motion to dismiss in its entirety. The plaintiffs have
appealed.
Singapore interbank offered rate ('Sibor'), Singapore swap offer
rate ('SOR') and Australia bank bill swap rate ('BBSW'):
In July and August 2016, HSBC and other panel banks were named
as defendants in two putative class actions filed in the New York
District Court on behalf of persons who transacted in products
related to the Sibor, SOR and BBSW benchmark rates. The complaints
allege, among other things, misconduct related to these benchmark
rates in violation of US antitrust, commodities and racketeering
laws, and state law.
In the Sibor/SOR litigation, following a decision on the
defendants' motion to dismiss in October 2018, the claims against a
number of HSBC entities were dismissed, and The Hongkong and
Shanghai Banking Corporation Limited ('HBAP') remained as the only
HSBC defendant in this action. In October 2018, HBAP filed a motion
for reconsideration of the decision based on the issue of personal
jurisdiction. This motion was denied in April 2019. Also in October
2018, the plaintiffs filed a third amended complaint naming only
the Sibor panel members, including HBAP, as defendants. The court
dismissed the third amended complaint in its entirety in July 2019
against all defendants. In August 2019, the plaintiffs filed an
appeal to the Second Circuit Court of Appeals, which remains
pending.
In the BBSW litigation, in November 2018, the court dismissed
all foreign defendants, including all the HSBC entities, on
personal jurisdiction grounds. In April 2019, the plaintiffs filed
an amended complaint, which the defendants moved to dismiss. In
February 2020, the court again dismissed the plaintiffs' amended
complaint against all the HSBC entities.
There are many factors that may affect the range of outcomes,
and the resulting financial impact, of these matters, which could
be significant.
Foreign exchange-related investigations and litigation
Various regulators and competition authorities around the world,
including in the EU, Brazil and South Africa, are conducting
investigations and reviews into trading by HSBC and others on the
foreign exchange markets. HSBC is cooperating with these
investigations and reviews.
In January 2018, HSBC Holdings entered into a three-year
deferred prosecution agreement with the Criminal Division of the
DoJ (the 'FX DPA'), regarding fraudulent conduct in connection with
two particular transactions in 2010 and 2011. This concluded the
DoJ's investigation into HSBC's historical foreign exchange
activities. Under the terms of the FX DPA, HSBC has a number of
ongoing obligations, including implementing enhancements to its
internal controls and procedures in its Global Markets business,
which will be the subject of annual reports to the DoJ. In
addition, HSBC agreed to pay a financial penalty and
restitution.
In December 2016, Brazil's Administrative Council of Economic
Defense initiated an investigation into the onshore foreign
exchange market and identified a number of banks, including HSBC,
as subjects of its investigation.
In June 2020, the Competition Commission of South Africa, having
initially referred a complaint for proceedings before the South
African Competition Tribunal in February 2017, filed a revised
complaint against 28 financial institutions, including HSBC Bank
plc and HSBC Bank USA, for alleged anti-competitive behaviour in
the South African foreign exchange market.
In October 2018, HSBC Holdings and HSBC Bank plc received an
information request from the EC concerning potential coordination
in foreign exchange options trading. In May 2020, HSBC was informed
that the EC had discontinued its investigation and does not intend
to take further action.
In late 2013 and early 2014, various HSBC companies and other
banks were named as defendants in various putative class actions
consolidated in the New York District Court. The consolidated
complaint alleged, among other things, that the defendants
conspired to manipulate the WM/Reuters foreign exchange benchmark
rates. In September 2015, HSBC reached an agreement with the
plaintiffs to resolve the consolidated action, and the court
granted final approval of the settlement in August 2018.
A putative class action complaint making similar allegations on
behalf of retail customers of foreign exchange products was filed
in the US District Court for the Northern District of California in
2015, and was subsequently transferred to the New York District
Court where it remains pending. In 2017, putative class action
complaints making similar allegations on behalf of purported
indirect purchasers of foreign exchange products were filed in New
York and were subsequently consolidated in the New York District
Court. In April 2020, HSBC reached an agreement with the plaintiffs
to resolve the indirect purchaser action. The settlement remains
subject to final court approval.
In September 2018, various HSBC companies and other banks were
named as defendants in two motions for certification of class
actions filed in Israel alleging foreign exchange-related
misconduct. In July 2019, the Tel Aviv Court allowed the plaintiffs
to consolidate their claims and, in September 2019, the plaintiffs
filed a motion for certification of the consolidated class
action.
In November and December 2018, complaints alleging foreign
exchange-related misconduct were filed in the New York District
Court and the High Court of England and Wales against HSBC and
other defendants by certain plaintiffs that opted out of the US
class action settlement. In May 2020, the court granted in part and
denied in part the defendants' motion to dismiss the US opt-out
actions. These matters remain at an early stage. It is possible
that additional civil actions will be initiated against HSBC in
relation to its historical foreign exchange activities.
There are many factors that may affect the range of outcomes,
and the resulting financial impact, of these matters, which could
be significant.
Precious metals fix-related litigation
Gold: Beginning in March 2014, numerous putative class actions
were filed in the New York District Court and the US District
Courts for the District of New Jersey and the Northern District of
California, naming HSBC and other members of The London Gold Market
Fixing Limited as defendants. The complaints allege that, from
January 2004 to June 2013, the defendants conspired to manipulate
the price of gold and gold derivatives for their collective benefit
in violation of US antitrust laws, the US CEA and New York state
law. The actions were consolidated in the New York District Court.
The defendants' motion to dismiss the consolidated action was
granted in part and denied in part in October 2016. In June 2017,
the court granted the plaintiffs leave to file a third amended
complaint, naming a new defendant. The court has denied the
pre-existing defendants' request for leave to file a joint motion
to dismiss, and discovery is proceeding.
Beginning in December 2015, numerous putative class actions
under Canadian law were filed in the Ontario and Quebec Superior
Courts of Justice against various HSBC companies and other
financial institutions. The plaintiffs allege that, among other
things, from January 2004 to March 2014, the defendants conspired
to manipulate the price of gold and gold derivatives in violation
of the Canadian Competition Act and common law. These actions are
at an early stage.
Silver: Beginning in July 2014, numerous putative class actions
were filed in federal district courts in New York, naming HSBC and
other members of The London Silver Market Fixing Limited as
defendants. The complaints allege that, from January 2007 to
December 2013, the defendants conspired to manipulate the price of
silver and silver derivatives for their collective benefit in
violation of US antitrust laws, the US CEA and New York state law.
The actions were consolidated in the New York District Court. The
defendants' motion to dismiss the consolidated action was granted
in part and denied in part in October 2016. In June 2017, the court
granted the plaintiffs leave to file a third amended complaint,
which names several new defendants. The court has denied the
pre-existing defendants' request for leave to file a joint motion
to dismiss, and discovery is proceeding.
In April 2016, two putative class actions under Canadian law
were filed in the Ontario and Quebec Superior Courts of Justice
against various HSBC companies and other financial institutions.
The plaintiffs in both actions allege that, from January 1999 to
August 2014, the defendants conspired to manipulate the price of
silver and silver derivatives in violation of the Canadian
Competition Act and common law. The Ontario action is at an early
stage. The Quebec action has been temporarily stayed.
Platinum and palladium: Between late 2014 and early 2015,
numerous putative class actions were filed in the New York District
Court, naming HSBC and other members of The London Platinum and
Palladium Fixing Company Limited as defendants. The complaints
allege that, from January 2008 to November 2014, the defendants
conspired to manipulate the price of platinum group metals ('PGM')
and PGM-based financial products for their collective benefit in
violation of US antitrust laws and the US CEA. In March 2017, the
defendants' motion to dismiss the second amended consolidated
complaint was granted in part and denied in part. In June 2017, the
plaintiffs filed a third amended complaint. In March 2020, the
court granted the defendants' motion to dismiss the third amended
complaint but granted the plaintiffs leave to re-plead certain
claims. The plaintiffs have filed an appeal.
Based on the facts currently known, it is not practicable at
this time for HSBC to predict the resolution of these matters,
including the timing or any possible impact on HSBC, which could be
significant.
Film finance litigation
In July and November 2015, two actions were brought by
individuals against HSBC Private Bank (UK) Limited ('PBGB') in the
High Court of England and Wales seeking damages on various alleged
grounds, including breach of duty to the claimants, in connection
with their participation in certain Ingenious film finance schemes.
These actions are ongoing.
In December 2018, a separate action was brought against PBGB in
the High Court of England and Wales by multiple claimants seeking
damages for alleged unlawful means conspiracy and dishonest
assistance in connection with lending provided by PBGB to third
parties in respect of certain Ingenious film finance schemes in
which the claimants participated. In June 2019, a similar claim was
issued against PBGB in the High Court of England and Wales by
additional claimants. These actions are ongoing.
In June 2020, two separate claims were issued against HSBC UK
Bank plc (as successor to PBGB's business) by two separate groups
of investors in Eclipse film finance schemes in connection with
PBGB's role in facilitating the design, promotion and operation of
such schemes. Only one of these claims has been served to date.
These matters are at an early stage.
In February 2020, a claim was issued against HSBC UK Bank plc
(as successor to PBGB's business) by two individuals in relation to
the Zeus film finance schemes. Separately, in June 2020, HSBC UK
Bank plc received an application for disclosure of documents by a
law firm acting on behalf of a number of investors in the Zeus
schemes. These matters are at an early stage.
It is possible that additional actions or investigations will be
initiated against HSBC UK Bank plc as a result of PBGB's historical
involvement in the provision of certain film finance-related
services.
Based on the facts currently known, it is not practicable to
predict the resolution of these matters, including the timing or
any possible impact on HSBC, which could be significant.
Other regulatory investigations, reviews and litigation
HSBC Holdings and/or certain of its affiliates are subject to a
number of other investigations and reviews by various regulators
and competition and law enforcement authorities, as well as
litigation, in connection with various matters relating to the
firm's businesses and operations, including:
-- investigations by tax administration, regulatory and law
enforcement authorities in Argentina, India and elsewhere in
connection with allegations of tax evasion or tax fraud, money
laundering and unlawful cross-border banking solicitation;
-- an investigation by the US Commodity Futures Trading
Commission regarding interest rate swap transactions related to
bond issuances;
-- an investigation by the Swiss Competition Commission in
connection with the setting of Euribor and Japanese yen Libor;
-- an investigation by the FCA in connection with collections
and recoveries operations in the UK;
-- an information request from the UK Competition and Markets
Authority concerning the financial services sector;
-- putative class actions brought in the New York District Court
relating to the Mexican government bond market, the US
government-sponsored enterprise bond market, and the market for US
dollar-denominated supranational sovereign and agency bonds;
-- two group actions pending in the US courts and a claim issued
in the High Court of England and Wales in connection with HSBC Bank
plc's role as a correspondent bank to Stanford International Bank
Ltd from 2003 to 2009; and
-- litigation brought against various HSBC companies in the US
courts relating to residential mortgage-backed securities, based
primarily on (a) claims brought against HSBC Bank USA in connection
with its role as trustee on behalf of various securitisation
trusts; and (b) claims against several HSBC companies seeking that
the defendants repurchase various mortgage loans.
There are many factors that may affect the range of outcomes,
and the resulting financial impact, of these matters, which could
be significant.
15 Transactions with related parties
There were no changes in the related party transactions
described in the Annual Report and Accounts 2019 that have had a
material effect on the financial position or performance of HSBC in
the half-year to 30 June 2020. All related party transactions that
took place in the half-year to 30 June 2020 were similar in nature
to those disclosed in the Annual Report and Accounts 2019.
16 Events after the balance sheet date
In its assessment of events after the balance sheet date, HSBC
has considered and concluded that no material events have occurred
resulting in adjustments to the financial statements.
17 Interim Report 2020 and statutory accounts
The information in this Interim Report 2020 is unaudited and
does not constitute statutory accounts within the meaning of
section 434 of the Companies Act 2006. This Interim Report 2020 was
approved by the Board of Directors on 3 August 2020. The statutory
accounts of HSBC Holdings plc for the year ended 31 December 2019
have been delivered to the Registrar of Companies in England and
Wales in accordance with section 447 of the Companies Act 2006. The
Group's auditor PricewaterhouseCoopers LLP ('PwC') has reported on
those accounts. Its report was unqualified, did not include a
reference to any matters to which PwC drew attention by way of
emphasis without qualifying its report and did not contain a
statement under section 498(2) or (3) of the Companies Act
2006.
Shareholder information
Page Page
1 Directors' interests 121 9 Corporate governance 124
---- ----
2 Employee share plans 123 10 Changes in Directors' details 125
---- ----
3 Other equity instruments 123 11 Going concern basis 125
---- ----
Notifiable interests in share Telephone and online share dealing
4 capital 124 12 service 125
---- ----
Dealings in HSBC Holdings
5 listed securities 124 13 Stock symbols 125
---- ----
Copies of the Interim Report
2020 and shareholder enquiries
6 Dividend on preference shares 124 14 and communications
----
7 Earnings release 124 126
----
8 Final results 124
----
1 Directors' interests
According to the register of Directors' interests maintained by
HSBC Holdings pursuant to section 352 of the Securities and Futures
Ordinance of Hong Kong, at 30 June 2020 (or date of retirement from
the Board, if earlier) the Directors of HSBC Holdings had the
following interests, all beneficial unless otherwise stated, in the
shares or debentures of HSBC and its associates:
Directors' interests - shares and debentures
At 30 Jun 2020
Child
At under Jointly
1 Jan Beneficial 18 with another Total
Footnotes 2020 owner or spouse person Trustee interests
----------
HSBC Holdings ordinary
shares
----------
Kathleen Casey 1,2 15,125 15,125 - - - 15,125
---------- ----------
Laura Cha 16,200 16,200 - - - 16,200
---------- ---------- ------------- ------- ----------
Henri de Castries 19,251 19,251 - - - 19,251
James Forese 3 - - - - - -
---------- ---------- ------------- ------- ----------
1,3,
Steven Guggenheimer 4 - - - 10,000 - 10,000
---------- ------- ---------- ---------- ------------- ------- ----------
Irene Lee 11,904 11,904 - - - 11,904
---------- ---------- ------------- ------- ----------
José Antonio Meade
Kuribreña - - - - - -
---------- ---------- ------------- ------- ------------
Heidi Miller 1 15,700 15,700 - - - 15,700
------- ---------- ---------- ------------- ------- ----------
David Nish 50,000 - 50,000 - - 50,000
---------- ---------- ------------- ------- ----------
Noel Quinn 5 441,925 598,527 - - - 598,527
------- ---------- ---------- ------------- ------- ----------
Ewen Stevenson 5 233,972 407,903 - - - 407,903
------- ---------- ---------- ------------- ------- ----------
Sir Jonathan Symonds 6 43,821 38,823 4,998 - - 43,821
---------- ---------- ------------- ------- ----------
Jackson Tai 1,7 66,515 32,800 11,965 21,750 - 66,515
---------- ------- ---------- ---------- ------------- ------- ----------
Mark Tucker 307,352 307,352 - - - 307,352
---------- ------- ---------- ---------- ------------- ------- ----------
Pauline van der Meer Mohr 15,000 15,000 - - - 15,000
---------- ------- ---------- ---------- ------------- ------- ----------
1 Kathleen Casey has an interest in 3,025, Steven Guggenheimer
has an interest in 2,000, Heidi Miller has an interest in 3,140 and
Jackson Tai has an interest in 13,303 listed American Depositary
Shares ('ADSs'), which are categorised as equity derivatives under
Part XV of the Securities and Futures Ordinance of Hong Kong. Each
ADS represents five HSBC Holdings ordinary shares.
2 Kathleen Casey retired from the Board on 24 April 2020.
3 James Forese and Steven Guggenheimer joined the Board on 1 May 2020.
4 On 19 May 2020, Steven Guggenheimer reported to HSBC Holdings
that he had acquired 1,000 ADSs, representing 5,000 HSBC Holdings
ordinary shares, on 1 May 2020. The ADSs were acquired jointly with
his spouse, Nichola Guggenheimer. Prior clearance was not obtained
as required pursuant to the standards set out in the Hong Kong
Model Code for Securities Transactions by Directors of Listed
Issuers. The Directors' onboarding process has been reviewed and
certain improvements have been made. Prior clearance was obtained
for Steven Guggenheimer's sole subsequent transaction.
5 Executive Directors' other interests in HSBC Holdings ordinary
shares arising from the HSBC Holdings Savings-Related Share Option
Plan and the HSBC Share Plan 2011 are set out on the following
pages. At 30 June 2020, the aggregate interests under the
Securities and Futures Ordinance of Hong Kong in HSBC Holdings
ordinary shares, including interests arising through employee share
plans, were: Noel Quinn - 1,153,083; and Ewen Stevenson -
1,613,450. Each Director's total interests represents less than
0.01% of the shares in issue and 0.01% of the shares in issue
excluding treasury shares.
6 Sir Jonathan Symonds retired from the Board on 18 February 2020.
7 Jackson Tai's holding includes a non-beneficial interest in
11,965 shares of which he is custodian.
Savings-Related Share Option Plan
Currently no executive Directors participate in a
Savings-Related Share Option Plan. For further details on the
Savings-Related Share Option Plan, see page 123.
HSBC Share Plan 2011
Conditional awards of deferred shares
Vesting of deferred share awards is normally subject to the
Director remaining an employee on the vesting date. The awards may
vest at an earlier date in certain circumstances. Under the
Securities and Futures Ordinance of Hong Kong, interests in
conditional share awards are categorised as the interests of the
beneficial owner.
Deferred share awards
HSBC Holdings ordinary shares
Awards made Awards vested
during during
Awards the period to the period to Awards
held at 30 Jun 2020 30 Jun 2020(1) held at
Year in
which
Date of awards 1 Jan Monetary Monetary 30 Jun
award Footnotes may vest 2020 Number value Number value 2020
GBP000 GBP000
-------- --------
2 Mar
2015 2 2020 20,199 - - 20,838 100 -
-------- --------- -------- --------- -------- -------------
29 Feb
2016 3 2021 39,549 - - - - 38,910(4)
-------- --------- -------- --------- -------- -------------
27 Feb
2017 5 2020-2024 82,950 - - 17,114 77 65,836
-------- --------- -------- --------- -------- -----------
26 Feb
2018 6 2021-2025 107,523 - - - - 107,523
-------- --------- -------- --------- -------- -----------
25 Feb
2019 7 2022-2026 140,585 - - - - 140,585
-------- --------- -------- --------- -------- -----------
24 Feb
2020 8 2020 - 105,072 591 105,072 591 -
-------- --------- -------- --------- -------- -------------
24 Feb
Noel Quinn 2020 9 2023-2027 - 201,702 1,134 - - 201,702
-------- --------- -------- --------- -------- -----------
28 May
2019 10 2020-2025 703,933 - - 148,419 672 486,802(11)
-------- --------- -------- --------- -------- -------------
28 May
2019 12 2022-2026 241,988 - - 241,988
-------- --------- -------- --------- -------- -----------
Ewen 24 Feb
Stevenson 2020 8 2020 - 96,202 541 96,202 541 -
-------- --------- -------- --------- -------- -------------
Noel Quinn became a Director of HSBC Holdings on 5 August 2019.
He served as Interim Group Chief Executive of HSBC Holdings between
5 August 2019 and 16 March 2020. On 17 March 2020, he was appointed
as Group Chief Executive of HSBC Holdings.
1 Includes any additional shares arising from dividend
equivalents (see Notes 2 and 4 for further information).
2 At the date of the award (2 March 2015), the market value per
share was GBP5.8300. The award vested in full on 10 March 2020 at a
market value of GBP4.8187. The vesting included dividend
equivalents applied in
anticipation of the fourth interim dividend for 2019 that were later recovered (see Note 4).
3 At the date of the award (29 February 2016), the market value
per share was GBP4.6735. The award will vest in full in March
2021.
4 Following cancellation of the fourth interim dividend for
2019, shares were deducted from this award to reflect the dividend
equivalents that vested on 10 March 2020 in respect of the 2015
award.
5 At the date of the award (27 February 2017), the market value
per share was GBP6.5030. The award will vest in five equal annual
tranches. The first tranche vested on 12 March 2020 and was based
on a market value of GBP4.5246. Shares equivalent in number to
those that vest under the award (net of tax liabilities) must be
retained for six months from the vesting date.
6 At the date of the award (26 February 2018), the market value
per share was GBP7.2340. Shares equivalent in number to those that
vest under the award (net of tax liabilities) must be retained for
one year from the vesting date. The award will vest in five equal
annual tranches commencing in March 2021.
7 At the date of the award (25 February 2019), the market value
per share was GBP6.2350. Shares equivalent in number to those that
vest under the award (net of tax liabilities) must be retained for
one year from the vesting date. The award will vest in five equal
annual tranches commencing in March 2022.
8 The non-deferred award vested immediately on 24 February 2020
and was based on the market value of GBP5.6220. Shares equivalent
in number to those that vest under the award (net of tax
liabilities) must be retained for one year from the vesting
date.
9 At the date of the award (24 February 2020), the market value
per share was GBP5.6220. Shares equivalent in number to those that
vest under the award (net of tax liabilities) must be retained for
one year from the vesting date. The award will vest in five equal
annual tranches commencing in March 2023.
10 The award was granted on 28 May 2019 using a market value per
share of GBP6.6430 as at 30 November 2018. Shares equivalent in
number to those that vest under the award (net of tax liabilities)
must be retained for up to one year from the vesting date. The
first tranche vested on 12 March 2020 and was based on a market
value of GBP4.5246. The award replaces the 2015 to 2018 long-term
incentive ('LTI') plans forfeited by the Royal Bank of Scotland
Group plc ('RBS') and is subject to any performance adjustments
assessed and disclosed in the relevant annual report and accounts
of RBS.
11 The award has been adjusted following the performance outcome
applied and disclosed in RBS's Annual Report and Accounts 2019. The
RBS performance outcome was 78.09%, which resulted in a reduction
of 68,712 shares in respect of the 2016 LTI plan.
12 The award was granted on 28 May 2019 using a market value per
share of GBP6.2350 as at 22 February 2019. Shares equivalent in
number to those that vest under the award (net of tax liabilities)
must be retained for up to one year from the vesting date. The
award will vest in five annual tranches commencing in March 2022.
The award is in respect of the 2018 performance year granted based
on Ewen Stevenson's maximum opportunity under RBS's policy and the
outcome of the 2018 scorecard as disclosed in RBS's Annual Report
and Accounts 2018. The number of shares that vest may be adjusted
based on any 'pre-vest performance test' assessed and disclosed in
RBS's Annual Report and Accounts.
Long-term incentive awards
The long-term incentive award is an award of shares with a
three-year performance period. At the end of this performance
period and subject to the award terms, the number of shares that
vest will be determined based on an assessment against financial
and non-financial measures. Subject to that assessment, the shares
will vest in five equal annual instalments. On vesting, awards are
subject to a retention period of up to one year. Under the
Securities and Futures Ordinance of Hong Kong, interests in awards
are categorised as beneficial.
Long-term incentive awards
HSBC Holdings ordinary shares
Awards made Awards vested
Awards during during Awards
held the period the period held
at to 30 Jun 2020 to 30 Jun 2020 at
Year
in which
Date awards 1 Jan Monetary Monetary 30 Jun
of award Footnotes may vest 2020 Number value Number value 2020
GBP000 GBP000
Ewen 24 Feb 2023
Stevenson 2020 1 - 2027 - 476,757 2,680 - - 476,757
----------
1 Awards were made on 24 February 2020 and were based on the market value of GBP5.6220.
No Directors held any short position (as defined in the
Securities and Futures Ordinance of Hong Kong) in the shares or
debentures of HSBC Holdings and its associated corporations. Save
as stated in the tables above, none of the Directors had an
interest in any shares or debentures of HSBC Holdings or any
associates at the beginning or at the end of the period, and none
of the Directors or members of their immediate families were
awarded or exercised any right to subscribe for any shares or
debentures in any HSBC corporation during the period.
There have been no changes in the shares or debentures of the
Directors from 30 June 2020 to the date of this report.
2 Employee share plans
Share options and discretionary awards of shares are granted
under HSBC share plans to help align the interests of employees
with those of shareholders. The following are particulars of
outstanding share options, including those held by employees
working under employment contracts that are regarded as 'continuous
contracts' for the purposes of the Hong Kong Employment Ordinance.
The options were granted at nil consideration. No options have been
granted to substantial shareholders, suppliers of goods or
services, or in excess of the individual limit for each share plan.
No options were cancelled by HSBC during the period to 30 June
2020.
A summary of the total number of options granted, exercised or
lapsed during the period is shown in the following table.
Particulars of options held by Directors of HSBC Holdings are set
out on page 121. Further details required to be disclosed pursuant
to Chapter 17 of the Rules Governing the Listing of Securities on
The Stock Exchange of Hong Kong Limited are available on our
website at www.hsbc.com, and on the website of The Stock Exchange
of Hong Kong Limited at www.hkex.com.hk. Copies may be obtained
upon request from the Group Company Secretary and Chief Governance
Officer, 8 Canada Square, London E14 5HQ.
All-employee share plans
The HSBC Holdings Savings-Related Share Option Plan is an
all-employee share plan under which eligible employees have been
granted options to acquire HSBC Holdings ordinary shares. The HSBC
International Employee Share Purchase Plan was introduced in 2013
and now includes employees based in 27 jurisdictions, although no
options are granted under this plan. During 2019, approximately
178,000 employees were offered participation in these plans.
For options granted under the HSBC Holdings Savings-Related
Share Option Plan, employees may make contributions of up to GBP500
each month over a period of three or five years. The contributions
may be used within six months following the third or fifth
anniversary of the commencement of the relevant savings contract,
at the employee's election, to exercise the options. Alternatively,
the employee may elect to have the savings, plus (where applicable)
any interest or bonus, repaid in cash. In the case of redundancy,
ceasing employment on grounds of injury or disability, retirement,
death, the transfer of the employing business to another party, or
a change of control of the employing company, options may be
exercised before completion of the relevant savings contract. In
certain limited circumstances, the exercise period of options
granted under the all-employee share option plans may be
extended.
Under the HSBC Holdings Savings-Related Share Option Plan, the
option exercise price is determined by reference to the average
market value of the HSBC Holdings ordinary shares on the five
business days immediately preceding the invitation date, then
applying a discount of 20%. The HSBC Holdings Savings-Related Share
Option Plan has an expiry date of 24 April 2030 (by which time the
plan may be extended with approval from shareholders) unless the
Directors resolve to terminate the plan at an earlier date.
HSBC Holdings all-employee share option plan
HSBC Holdings ordinary shares
Dates of Exercise Usually
award price exercisable
Granted
1 Jan in Exercised Lapsed 30 Jun
from to from to from to Footnotes 2020 period in period in period 2020
------- -------- ----------
Savings-Related Share Option Plan 1
20 Sep (GBP) (GBP)
20 Sep 1 Nov 30 April
2013 2019 4.0472 5.9640 2018 2025 65,060,681 - 1,256,031 8,154,549 55,650,101
1 The weighted average closing price of the shares immediately
before the dates on which options were exercised was GBP5.3412.
3 Other equity instruments
Additional tier 1 capital - contingent convertible
securities
Our intention is to continue to issue contingent convertible
securities in accordance with our issuance plans. These securities
are included in our capital base as fully CRR II-compliant
additional tier 1 capital securities. These securities are marketed
principally and subsequently allotted to institutional investors.
The net proceeds of the issuances are typically used for our
general corporate purposes and to further strengthen our capital
base to meet requirements under CRR II. These securities typically
bear a fixed rate of interest until their initial call dates. After
the initial call dates, if they are not redeemed, the securities
typically bear interest at a rate which is reset every five years
based on credit spreads, fixed at issuance, above prevailing market
benchmark/reference security rates. Interest on the contingent
convertible securities will be due and payable only at our sole
discretion, and we have sole and absolute discretion at all times
to cancel for any reason (in whole or part) any interest payment
that would otherwise be payable on any payment date. Interest
payments will not be made if they are prohibited under UK banking
regulations or if we have insufficient reserves or fail to meet the
solvency conditions defined in the securities' terms.
The contingent convertible securities are undated and are
repayable at our option in whole at the initial call date or
typically on any fifth anniversary after this date. In addition,
the securities are repayable at our option in whole for certain
regulatory or tax reasons. Any repayments require the prior consent
of the PRA. These securities rank pari passu with our dollar and
sterling preference shares and therefore rank ahead of ordinary
shares. The contingent convertible securities will be converted
into fully paid ordinary shares at a predetermined price, should
our consolidated CET1 ratio on a non-transitional basis (i.e. on a
consolidated basis and without applying the transitional provisions
set out in Part Ten under CRR II) fall below 7.0%. Therefore, in
accordance with the terms of the securities, if the
non-transitional CET1 ratio falls below the 7.0% trigger, the
securities will convert into ordinary shares at the fixed
contractual conversion price specified in the securities' terms,
subject to anti-dilution adjustments. During the first half of
2020, HSBC did not issue any contingent convertible securities.
4 Notifiable interests in share capital
At 30 June 2020, HSBC Holdings had received the following
notification of major holdings of voting rights pursuant to the
requirements of Rule 5 of the UK Disclosure Guidance and
Transparency Rules:
-- BlackRock, Inc. gave notice on 3 March 2020 that on 2 March
2020 it had an indirect interest in HSBC Holdings of 1,235,558,490
ordinary shares, qualifying financial instruments with 7,294,459
voting rights that may be acquired if the instruments are exercised
or converted, and financial instruments with similar economic
effect to qualifying financial instruments that refer to 2,441,397
voting rights. These represented 6.07%, 0.03% and 0.01%,
respectively, of the total voting rights at 2 March 2020.
At 30 June 2020, as recorded in the register maintained by HSBC
Holdings pursuant to section 336 of the Securities and Futures
Ordinance of Hong Kong:
-- BlackRock, Inc. gave notice on 12 May 2020 that on 7 May 2020
it had the following interests in HSBC Holdings ordinary shares: a
long position of 1,480,094,020 shares and a short position of
38,033,956, representing 7.15% and 0.18%, respectively, of the
ordinary shares in issue at 7 May 2020.
-- Ping An Asset Management Co., Ltd. gave notice on 2 November
2018 that on 1 November 2018 it had a long position of
1,418,925,452 in HSBC Holdings ordinary shares, representing 7.01%
of the ordinary shares in issue at that date.
5 Dealings in HSBC Holdings listed securities
HSBC has policies and procedures that, except where permitted by
statute and regulation, prohibit it undertaking specified
transactions in respect of its securities listed on The Stock
Exchange of Hong Kong Limited ('HKEx'). Except for dealings as
intermediaries or as trustees by subsidiaries of HSBC Holdings,
neither HSBC Holdings nor any of its subsidiaries has purchased,
sold or redeemed any of its securities listed on HKEx during the
half-year ended 30 June 2020.
6 Dividend on preference shares
A quarterly dividend of $15.50 per 6.20% non-cumulative US
dollar preference share, Series A ('Series A dollar preference
share') (equivalent to a dividend of $0.3875 per Series A American
Depositary Share ('ADS'), each of which represents one-fortieth of
a Series A dollar preference share), and GBP0.01 per Series A
sterling preference share is payable on 15 March, 15 June, 15
September and 15 December 2020 for the quarter then ended at the
sole and absolute discretion of the Board of HSBC Holdings plc.
Accordingly, the Board of HSBC Holdings plc has approved a
quarterly dividend to be payable on 15 September 2020 to holders of
record on 31 August 2020.
The Series A dollar preference share quarterly dividend,
announced on 28 April 2020 to be payable on 15 June 2020, was paid
on 16 June 2020 due to an administrative error and may not have
been received by a limited number of ADS holders who were on the
record on 29 May 2020. ADS holders who have not received their
expected dividend should contact HSBC Investor Relations at
investorrelations@hsbc.com to discuss this further.
7 Earnings release
An earnings release for the three-month period ending 30
September 2020 is expected to be issued on 27 October 2020.
8 Final results
The results for the year to 31 December 2020 are expected to be
announced on 23 February 2021.
9 Corporate governance
We are subject to corporate governance requirements in both the
UK and Hong Kong. Throughout the six months ended 30 June 2020, we
complied with the applicable provisions of the UK Corporate
Governance Code and also the requirements of the Hong Kong
Corporate Governance Code, save to the extent referred to in the
next paragraph. The UK Corporate Governance Code is available at
www.frc.org.uk and the Hong Kong Corporate Governance Code is
available at www.hkex.com.hk
Following the UK Government's introduction of social distancing
measures and prohibition on non-essential travel and public
gatherings, it was not possible for shareholders to attend this
year's Annual General Meeting ('AGM') in person. The Board was
fully informed of all relevant AGM and shareholder matters but only
a limited number of Directors and essential personnel attended the
AGM to ensure the meeting was quorate and to enable the business of
the meeting to be conducted. Shareholders were advised to vote by
submitting a proxy in advance of the AGM and that they should only
appoint the Chairman of the AGM to act as their proxy. To ensure
that shareholders did not lose the opportunity to raise questions,
shareholders were encouraged to submit questions for the Board via
email in advance of the AGM. Responses to the most frequent
questions across key themes were published on the HSBC website
after due consideration by the Board. None of the questions
submitted covered a topic that required consideration by the
auditor. Given these measures, not all of the persons set out in
paragraphs A.6.7 and E.1.2 of the Hong Kong Corporate Governance
Code were able to attend the AGM.
Under the Hong Kong Code, the Group Audit Committee should be
responsible for the oversight of all risk management and internal
control systems, unless expressly addressed by a separate risk
committee. Our Group Risk Committee is responsible for oversight of
internal control, other than internal financial controls, and risk
management systems.
The Board has codified obligations for transactions in Group
securities in accordance with the requirements of the Market Abuse
Regulation and the rules governing the listing of securities on the
HKEx, save that the HKEx has granted waivers from strict compliance
with the rules that take into account accepted practices in the UK,
particularly in respect of employee share plans.
Following specific enquiries and except as disclosed on page 121
of the Interim Report 2020, all Directors have confirmed that they
have complied with their obligations in respect of transacting in
Group securities throughout the period.
There have been no material changes to the information disclosed
in the Annual Report and Accounts 2019 in respect of the
remuneration of employees, remuneration policies, bonus and share
option plans and training schemes. Details of the number of
employees are provided on page 29.
10 Changes in Directors' details
Changes in current Directors' details since the date of the
Annual Report and Accounts 2019, which are required to be disclosed
pursuant to Rule 13.51(2) and Rule 13.51B(1) of the Hong Kong
Listing Rules, are set out below.
Kathleen Casey
Retired from the Board and Group Audit Committee, Group Risk
Committee and Nomination & Corporate Governance Committee
on
24 April 2020.
James Forese
Appointed to the Board and as a member of the Group Audit
Committee, Group Remuneration Committee and Nomination &
Corporate Governance Committee on 1 May 2020.
Steven Guggenheimer
Appointed to the Board and as a member of the Group Risk
Committee and Nomination & Corporate Governance Committee on 1
May 2020.
Heidi Miller
Appointed Chair of the Audit Committee of Fiserv, Inc. on 15 May
2020.
Eileen Murray
Appointed to the Board and as a member of the Group Audit
Committee, Group Risk Committee and Nomination & Corporate
Governance Committee on 1 July 2020.
David Nish
Appointed as Senior Independent Director, Chair of the Group
Audit Committee and as a member of the Group Risk Committee on
18 February 2020.
Sir Jonathan Symonds
Retired from the Board, Group Audit Committee, Group Risk
Committee and Nomination & Corporate Governance Committee
on
18 February 2020.
Pauline van der Meer Mohr
Appointed as a member of the Group Audit Committee on 19
February 2020.
11 Going concern basis
As mentioned in Note 1 'Basis of preparation and significant
accounting policies' on page 98, 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 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
pandemic 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.
In particular, HSBC's principal activities, business and
operating models, strategic direction and top and emerging risks
are addressed in the Overview section. A financial summary,
including a review of the consolidated income statement and
consolidated balance sheet, is provided in the 'Interim management
report' section. HSBC's objectives, policies and processes for
managing credit, liquidity and market risk are described in the
Risk section of the Annual Report and Accounts 2019. HSBC's
approach to capital management and allocation is described in the
Capital section of the Annual Report and Accounts 2019.
12 Telephone and online share dealing service
For shareholders on the Principal Register who are resident in
the UK, with a UK postal address, and who hold an HSBC Bank plc
personal current account, the HSBC InvestDirect share dealing
service is available for buying and selling HSBC Holdings plc
ordinary shares. Details are available from: HSBC InvestDirect,
Forum 1, Parkway, Whiteley PO15 7PA; or UK telephone: +44 (0) 3456
080848, or from an overseas telephone: +44 (0) 1226 261090; or
website:
www.hsbc.co.uk/investments/products-and-services/invest-direct.
13 Stock symbols
HSBC Holdings plc ordinary shares trade under the following
stock symbols:
London Stock Exchange HSBA*
Hong Kong Stock Exchange 5
New York Stock Exchange (ADS) HSBC
Euronext Paris HSB
Bermuda Stock Exchange HSBC.BH
*HSBC's primary market
14 Copies of the Interim Report 2020 and shareholder enquiries and
communications
Further copies of the Interim Report 2020 may be obtained from
Global Communications, HSBC Holdings plc, 8 Canada Square, London
E14 5HQ, United Kingdom; from Communications (Asia), The Hongkong
and Shanghai Banking Corporation Limited, 1 Queen's Road Central,
Hong Kong; or from US Communications, HSBC Bank USA, N.A., 1 West
39th Street, 9th Floor, New York, NY 10018, USA. The Interim Report
2020 may also be downloaded from the HSBC website,
www.hsbc.com.
Shareholders may at any time choose to receive corporate
communications in printed form or to receive notifications of their
availability on HSBC's website. To receive notifications of the
availability of a corporate communication on HSBC's website by
email, or to revoke or amend an instruction to receive such
notifications by email, go to www.hsbc.com/ecomms. If you provide
an email address to receive electronic communications from HSBC, we
will also send notifications of any future dividend entitlements by
email. If you received a notification of the availability of this
document on HSBC's website and would like to receive a printed copy
or, if you would like to receive future corporate communications in
printed form, please write or send an email (quoting your
shareholder reference number) to the appropriate Registrar at the
address given below. Printed copies will be provided without
charge.
Any enquiries relating to your shareholdings on the share
register (for example transfers of shares, change of name or
address, lost share certificates or dividend cheques) should be
sent to the Registrar at the address given below. The Registrars
offer an online facility, Investor Centre, which enables
shareholders to manage their shareholding electronically.
Hong Kong Overseas Branch Bermuda Overseas Branch
Principal Register Register Register
Computershare Investor Computershare Hong Kong Investor Relations Team
Services PLC Investor HSBC Bank Bermuda Limited
The Pavilions Services Limited 37 Front Street
Bridgwater Road Rooms 1712-1716, 17th Hamilton HM 11
Bristol BS99 6ZZ Floor Bermuda
United Kingdom Hopewell Centre
183 Queen's Road East
Hong Kong
Telephone: +44 (0) 370 Telephone: +852 2862 8555 Telephone: +1 441 299
702 0137 Email: hsbc.ecom@computershare.com.hk 6737
Email: via website Web: www.investorcentre.com/hk Email:
Web: hbbm.shareholder.services@hsbc.bm
www.investorcentre.co.uk/contactus Web: www.investorcentre.com/bm
Any enquiries relating to ADSs should be sent to the depositary
at:
The Bank of New York Mellon Telephone (US): +1 877 283 5786
Shareowner Services Telephone (international): +1 201 680 6825
PO Box 505000 Email: shrrelations@cpushareownerservices.com
Louisville, KY 40233-5000 Web: www.mybnymdr.com
USA
Any enquiries relating to shares held through Euroclear France,
the settlement and central depositary system for NYSE Euronext
Paris, should be sent to the paying agent:
CACEIS Corporate Trust Telephone: +33 1 57 78 34 28
14, rue Rouget de Lisle Email: ct-service-ost@caceis.com
92130 Issy-les-Moulineaux Website: www.caceis.com
France
A Chinese translation of this and future documents may be
obtained on request from the Registrar. Please also contact the
Registrar if you have received a Chinese translation of this
document and do not wish to receive such translations in
future.
Persons whose shares are held on their behalf by another person
may have been nominated to receive communications from HSBC
pursuant to section 146 of the UK Companies Act 2006 ('nominated
person'). The main point of contact for a nominated person remains
the registered shareholder (for example your stockbroker,
investment manager, custodian or other person who manages the
investment on your behalf). Any changes or queries relating to a
nominated person's personal details and holding (including any
administration thereof) must continue to be directed to the
registered shareholder and not HSBC's Registrar. The only exception
is where HSBC, in exercising one of its powers under the UK
Companies Act 2006, writes to nominated persons directly for a
response.
Cautionary statement regarding forward-
looking statements
This Interim Report 2020 contains certain forward-looking
statements with respect to HSBC's: financial condition; results of
operations and business, including the strategic priorities; 2020
financial, investment and capital targets; and ESG
targets/commitments described herein.
Statements that are not historical facts, including statements
about HSBC's beliefs and expectations, are forward-looking
statements. Words such as 'expects', 'targets', 'anticipates',
'intends', 'plans', 'believes', 'seeks', 'estimates', 'potential'
and 'reasonably possible', variations of these words and similar
expressions are intended to identify forward-looking statements.
These statements are based on current plans, information, data,
estimates and projections, and therefore undue reliance should not
be placed on them. Forward-looking statements speak only as of the
date they are made. HSBC makes no commitment to revise or update
any forward-looking statements to reflect events or circumstances
occurring or existing after the date of any forward-looking
statements.
Written and/or oral forward-looking statements may also be made
in the periodic reports to the US Securities and Exchange
Commission, summary financial statements to shareholders, proxy
statements, offering circulars and prospectuses, press releases and
other written materials, and in oral statements made by HSBC's
Directors, officers or employees to third parties, including
financial analysts.
Forward-looking statements involve inherent risks and
uncertainties. Readers are cautioned that a number of factors could
cause actual results to differ, in some instances materially, from
those anticipated or implied in any forward-looking statement.
These include, but are not limited to:
-- changes in general economic conditions in the markets in
which we operate, such as continuing or deepening recessions and
fluctuations in employment and creditworthy customers beyond those
factored into consensus forecasts (including, without limitation,
as a result of the Covid-19 outbreak); the Covid-19 outbreak, which
will have adverse impacts on our income due to lower lending and
transaction volumes, lower wealth and insurance manufacturing
revenue, and lower or negative interest rates in markets where we
operate, as well as, more generally, the potential for material
adverse impacts on our financial condition, results of operations,
prospects, liquidity, capital position and credit ratings;
deviations from the market and economic assumptions that form the
basis for our ECL measurements (including, without limitation, as a
result of the Covid-19 outbreak); potential changes in future
dividend policy; changes in foreign exchange rates and interest
rates, including the accounting impact resulting from financial
reporting in respect of hyperinflationary economies; volatility in
equity markets; lack of liquidity in wholesale funding or capital
markets, which may affect our ability to meet our obligations under
financing facilities or to fund new loans, investments and
businesses; geopolitical tensions or diplomatic developments
producing social instability or legal uncertainty, such as the
unrest in Hong Kong, the existing US-China tensions and the
emerging challenges in UK-China relations, which in turn may affect
demand for our products and services and could result in (among
other things) regulatory, reputational and market risks for HSBC;
climate change, which may cause both idiosyncratic and systemic
risks resulting in potential financial impacts; illiquidity and
downward price pressure in national real estate markets; adverse
changes in central banks' policies with respect to the provision of
liquidity support to financial markets; heightened market concerns
over sovereign creditworthiness in over-indebted countries; adverse
changes in the funding status of public or private defined benefit
pensions; consumer perception as to the continuing availability of
credit; exposure to counterparty risk, including third parties
using us as a conduit for illegal activities without our knowledge;
the expected discontinuation of certain key Ibors and the
development of alternative risk-free benchmark rates, which may
require us to enhance our capital position and/or position
additional capital in specific subsidiaries; and price competition
in the market segments we serve;
-- changes in government policy and regulation, including the
monetary, interest rate and other policies of central banks and
other regulatory authorities in the principal markets in which we
operate and the consequences thereof (including, without
limitation, actions taken as a result of the Covid-19 outbreak);
initiatives to change the size, scope of activities and
interconnectedness of financial institutions in connection with the
implementation of stricter regulation of financial institutions in
key markets worldwide; revised capital and liquidity benchmarks,
which could serve to deleverage bank balance sheets and lower
returns available from the current business model and portfolio
mix; imposition of levies or taxes designed to change business mix
and risk appetite; the practices, pricing or responsibilities of
financial institutions serving their consumer markets;
expropriation, nationalisation, confiscation of assets and changes
in legislation relating to foreign ownership; the UK's exit from
the EU, which may result in a prolonged period of uncertainty,
unstable economic conditions and market volatility, including
currency fluctuations; passage of the Hong Kong national security
law and restrictions on telecommunications, as well as the US Hong
Kong Autonomy Act, which have caused tensions between China, the US
and the UK; general changes in government policy that may
significantly influence investor decisions; the costs, effects and
outcomes of regulatory reviews, actions or litigation, including
any additional compliance requirements; and the effects of
competition in the markets where we operate including increased
competition from non-bank financial services companies; and
-- factors specific to HSBC, including our success in adequately
identifying the risks we face, such as the incidence of loan losses
or delinquency, and managing those risks (through account
management, hedging and other techniques); our ability to achieve
our targets, which may result in our failure to achieve any of the
expected benefits of our strategic initiatives; model limitations
or failure, including, without limitation, the impact that the
consequences of the Covid-19 outbreak have had on the performance
and usage of financial models, which may require us to hold
additional capital, incur losses and/or use compensating controls,
such as overlays and overrides, to address model limitations;
changes to the judgements, estimates and assumptions we base our
financial statements on; changes in our ability to meet the
requirements of regulatory stress tests; a reduction in the credit
rating assigned to us or any of our subsidiaries, which could
increase the cost or decrease the availability of our funding and
affect our liquidity position and net interest margin; changes to
the reliability and security of our data management, data privacy,
information and technology infrastructure, including threats from
cyber-attacks, which may impact our ability to service clients and
may result in financial loss, business disruption and/ or loss of
customer services and data; changes in insurance customer behaviour
and insurance claim rates; our dependence on loan payments and
dividends from subsidiaries to meet our obligations; changes in
accounting standards, which may have a material impact on the way
we prepare our financial statements; changes in our ability to
manage third-party, fraud and reputational risks inherent in our
operations; employee misconduct, which may result in regulatory
sanctions and/or reputational or financial harm; and changes in
skill requirements, ways of working and talent shortages, which may
affect our ability to recruit and retain senior management and
diverse and skilled personnel. Effective risk management depends
on, among other things, our ability through stress testing and
other techniques to prepare for events that cannot be captured by
the statistical models it uses; and our success in addressing
operational, legal and regulatory, and litigation challenges; and
other risks and uncertainties we identify in 'Top and emerging
risks' on pages 76 to 81 of the Annual Report and Accounts
2019.
Certain defined terms
Unless the context requires otherwise, 'HSBC Holdings' means
HSBC Holdings plc and 'HSBC', the 'Group', 'we', 'us' and 'our'
refer to HSBC Holdings together with its subsidiaries. Within this
document the Hong Kong Special Administrative Region of the
People's Republic of China is referred to as 'Hong Kong'. When used
in the terms 'shareholders' equity' and 'total shareholders'
equity', 'shareholders' means holders of HSBC Holdings ordinary
shares and those preference shares and capital securities issued by
HSBC Holdings classified as equity. The abbreviations '$m', '$bn'
and '$tn' represent millions, billions (thousands of millions) and
trillions of US dollars, respectively.
Abbreviations
Currencies
GBP British pound sterling
CA$ Canadian dollar
EUR Euro
HK$ Hong Kong dollar
RMB Chinese renminbi
SGD Singapore dollar
$ United States dollar
Abbreviation
1H19 First half of 2019
1H20 First half of 2020
1Q19 First quarter of 2019
1Q20 First quarter of 2020
2H19 Second half of 2019
2Q19 Second quarter of 2019
2Q20 Second quarter of 2020
4Q19 Fourth quarter of 2019
A
ABS Asset-backed security
ADS American Depositary Share
Average interest-earning
AIEA assets
AML Anti-money laundering
Annualised new business
ANP premiums
Association of Southeast
ASEAN Asian Nations
B
Basel Basel Committee on Banking
Supervision
Basel III Basel Committee's reforms
to strengthen global capital
and liquidity rules
BoCom Bank of Communications Co.,
Limited, one of China's
largest banks
BoE Bank of England
Bps Basis points. One basis
point is equal to one hundredth
of a percentage point
BSM Balance Sheet Management
C
C&L Credit and Lending
CAPM Capital asset pricing model
CDO Collateralised debt obligation
CEA Commodity Exchange Act (US)
CET1 Common equity tier 1
CGU Cash generating unit
CLO Collateralised loan obligation
CMB Commercial Banking, a global
business
CMC Capital maintenance charge
CODM Chief Operating Decision
Maker
CRR Customer risk rating
CRR II Revised Capital Requirements
Regulation and Directive,
as implemented
CRD IV Capital Requirements Regulation
and Directive
CVA Credit valuation adjustment
D
DoJ Department of Justice (US)
DPA Deferred prosecution agreement
(US)
DPD Days past due
DPF Discretionary participation
feature of insurance and
investment contracts
E
EBA European Banking Authority
EC European Commission
ECL Expected credit losses.
In the income statement,
ECL is recorded as a change
in expected credit losses
and other credit impairment
charges. In the balance
sheet, ECL is recorded as
an allowance for financial
instruments to which only
the impairment requirements
in IFRS 9 are applied.
Eonia Euro Overnight Index Average
ESG Environmental, social and
governance
EURSTER Euro short-term rate
EU European Union
Euribor Euro interbank offered rate
F
FCA Financial Conduct Authority
(UK)
FICC Fixed Income, Currencies
and Commodities
FRB Federal Reserve Board (US)
FTE Full-time equivalent staff
FVOCI Fair value through other
comprehensive income
FX Foreign exchange
FX DPA Three-year deferred prosecution
agreement with the US Department
of Justice, entered into
in January 2018
G
GAAP Generally accepted accounting
principles
GBM Global Banking and Markets,
a global business
GDP Gross domestic product
GEC Group Executive Committee
GLCM Global Liquidity and Cash
Management
Global HSBC's capital markets services
Markets in Global Banking and Markets
GPB Global Private Banking,
a former global business
now part of Wealth and Personal
Banking
Group HSBC Holdings together with
its subsidiary undertakings
GTRF Global Trade and Receivables
Finance
H
HKEx The Stock Exchange of Hong
Kong Limited
HNAH HSBC North America Holdings
Inc.
Hong Kong Hong Kong Special Administrative
Region of the People's Republic
of China
HSBC HSBC Holdings together with
its subsidiary undertakings
HSBC Bank HSBC Bank plc, also known
as the non-ring-fenced bank
HSBC Bank HSBC Bank Middle East Limited
Middle
East
HSBC Bank HSBC Bank USA, N.A., HSBC's
USA retail bank in the US
HSBC Canada The sub-group, HSBC Bank
Canada, HSBC Trust Company
Canada, HSBC Mortgage Corporation
Canada and HSBC Securities
Canada, consolidated for
liquidity purposes
HSBC Finance HSBC Finance Corporation,
the US consumer finance
company (formerly Household
International, Inc.)
HSBC France HSBC's French banking subsidiary,
formerly CCF S.A.
HSBC Holdings HSBC Holdings plc, the parent
company of HSBC
HSBC Private HSBC Private Bank (Suisse)
Bank Suisse SA, HSBC's private bank
in Switzerland
HSBC UK HSBC UK Bank plc, also known
as the ring-fenced bank
HSBC USA The sub-group, HSBC USA
Inc and HSBC Bank USA, consolidated
for liquidity purposes
HSI HSBC Securities (USA) Inc.
HSSL HSBC Securities Services
(Luxembourg)
HTIE HSBC Institutional Trust
Services (Ireland) Limited
I
IAS International Accounting
Standards
IASB International Accounting
Standards Board
Ibor Interbank offered rate
ICAAP Internal capital adequacy
assessment process
IFRSs International Financial
Reporting Standards
IRB Internal ratings-based
L
LCR Liquidity coverage ratio
LGD Loss given default
Libor London interbank offered
rate
LTV Loan to value
M
Madoff Bernard L Madoff Investment
Securities Securities LLC
Mainland People's Republic of China
China excluding Hong Kong
and Macau
MENA Middle East and North Africa
MREL EU minimum requirements
for own funds and eligible
liabilities
N
NII Net interest income
NIM Net interest margin
NSFR Net stable funding ratio
O
OCI Other comprehensive income
OFAC Office of Foreign Assets
Control
ORMF Operational risk management
framework
P
PBT Profit before tax
PD Probability of default
POCI Purchased or originated
credit impaired
PPI Payment protection insurance
PRA Prudential Regulation Authority
(UK)
Premier HSBC Premier, HSBC's premium
personal global banking
service
PVIF Present value of in-force
long-term insurance business
PwC PricewaterhouseCoopers LLP
and its network of firms
R
RBWM Retail Banking and Wealth
Management, a former global
business now part of Wealth
and Personal Banking
RFR Risk-free rate
RNIV Risk not in VaR
RoE Return on equity
RoTE Return on average tangible
equity
RWA Risk-weighted asset
S
SABB The Saudi British Bank
SEC Securities and Exchange
Commission (US)
ServCo Separately incorporated
group group of service companies
planned in response to UK
ringfencing proposals
Sibor Singapore interbank offered
rate
T
The Hongkong The Hongkong and Shanghai
and Shanghai Banking Corporation Limited,
Banking the founding member of HSBC
Corporation
U
UAE United Arab Emirates
UK United Kingdom
US United States of America
V
VaR Value at risk
VIU Value in use
W
WPB Wealth and Personal Banking,
a global business
This document comprises the Interim Report 2020 and information
herein has been filed on Form 6-K with the US Securities and
Exchange Commission for HSBC Holdings plc and its subsidiary and
associated undertakings.
HSBC Holdings plc
Incorporated in England with limited liability. Registered in
England: number 617987
Registered Office and Group Head Office
8 Canada Square, London E14 5HQ, United Kingdom
Web: www.hsbc.com
(c) Copyright HSBC Holdings plc 2020
All rights reserved
No part of this publication may be reproduced, stored in a
retrieval system, or transmitted, in any form or by any means,
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without the prior written permission of HSBC Holdings plc.
Published by Global Finance, HSBC Holdings plc, London
Designed by Superunion, London (cover and 'Overview' section)
and by Global Finance, HSBC Holdings plc, London (rest of the
Interim Report 2020
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