TIDM63AS
RNS Number : 6217Q
HSBC Bank plc
20 February 2019
HSBC Bank plc 2018 Annual Report and Accounts
In fulfilment of its obligations under section 4.1.3 and
6.3.5(1) of the Disclosure Guidance and Transparency Rules, HSBC
Bank plc (the "Company") hereby releases the unedited full text of
its 2018 Annual Report and Accounts for the year ended 31 December
2018.
The document is now available on the Company's website at:
http://www.hsbc.com/investor-relations/subsidiary-company-reporting
A copy of the above document has been submitted to the UK
Listing Authority and will shortly be available for inspection at
the UK Listing Authority's Document Viewing Facility via the
National Storage Mechanism which is located at
http://www.morningstar.co.uk/uk/NSM.
HSBC Bank plc
Annual Report &
Accounts 2018
Contents
Page
Strategic Report
Highlights 2
Purpose and strategy 3
Products and services 5
How we do business 6
Key performance indicators 8
Economic background and outlook 9
Financial summary 10
Risk overview 20
Report of the Directors
Risk 22
- Our risk appetite 22
- Top and emerging risks 22
- Areas of special interest 25
- Risk management 25
- Other material risks 38
- Key developments and risk profile 39
Capital 78
- Capital management 78
- Capital overview 78
Corporate Governance Report 81
- Directors 81
- Company Secretary 81
- Board of Directors 81
- Directors' emoluments 82
- Board committees 82
- Dividends 84
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- Internal control 84
- Employees 85
- Auditors 86
- Conflicts of interest and indemnification
of directors 86
- Statement on going concern 86
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- Statement of Directors' Responsibilities 87
Financial Statements
Independent Auditors' Report 88
Financial Statements 86
Notes on the Financial Statements 97
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Presentation of Information
This document comprises the
Annual Report and Accounts 2018
for HSBC Bank plc ('the bank') and its subsidiaries (together
'the group'). 'We', 'us' and 'our' refer to HSBC Bank plc together
with its subsidiaries. It contains the Strategic Report, the Report
of the Directors, the Statement of Directors' Responsibilities and
Financial Statements, together with the Independent Auditors'
Report, as required by the UK Companies Act 2006. References to
'HSBC', 'HSBC Group' or 'Group' within this document mean HSBC
Holdings plc together with its subsidiaries.
HSBC Bank plc is exempt from publishing information required by
The Capital Requirements Country-by-Country Reporting Regulations
2013, as this information is published by its parent, HSBC Holdings
plc. This information will be available in June 2019 on HSBC's
website: www.hsbc.com.
Pillar 3 disclosures for the group are also available on
www.hsbc.com, under Investors.
All narrative disclosures, tables and graphs within the
Strategic Report and Report of the Directors are unaudited unless
otherwise stated.
Our reporting currency is GBP sterling.
Unless otherwise specified, all $ symbols represent US
dollars.
Cautionary Statement Regarding Forward-
Looking Statements
This
Annual Report and Accounts 2018
contains certain forward-looking statements with respect to the
financial condition, results of operations and business of the
group.
Statements that are not historical facts, including statements
about the group's beliefs and expectations, are forward-looking
statements. Words such as 'expects', '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, 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 Bank plc 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
statement.
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.
Highlights
The group transferred its UK retail and qualifying commercial
banking activities to HSBC UK Bank plc ('HSBC UK') on 1 July 2018
to meet the ring-fencing requirements of the Financial Services
(Banking Reform) Act 2013 and related legislation.
The 2018 financial performance and position as disclosed in the
Financial Statements and Notes on the Financial Statements on pages
87 to 165, and sections within the Strategic Report and Report of
the Directors therefore reflect the transfer. The 2018 results
include the income, expenses and cash flows associated with the
transferred activities during the six months to 30 June 2018, which
are disclosed as discontinued operations in Note 35 on the
Financial Statements. Further details are provided in the
Structural Reform section on page 18.
Footnotes 2018 2017
-------- ----------
1,
For the year (GBPm) 2
--------
Profit before tax (reported basis) 1,974 2,370
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Profit before tax (adjusted basis) 3 2,100 3,832
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Net operating income before change in expected credit
losses and other credit impairment charges 4 9,468 13,052
Profit/(loss) attributable to shareholders of the
parent company 1,506 1,809
--------------------------------------------------------- ---------- ------- -------
1,
At year-end (GBPm) 2
Total equity attributable to shareholders of the parent
company 26,878 43,462
Total assets 604,958 818,868
--------------------------------------------------------- ---------- ------- -------
Risk-weighted assets 5 143,875 233,073
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Loans and advances to customers (net of impairment
allowances) 111,964 280,402
Customer accounts 180,836 381,546
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Capital ratios (%) 1,6
----------
Common equity tier 1 13.8 11.8
Tier 1 16.0 13.8
Total capital 26.2 16.9
--------------------------------------------------------- ---------- ------- -------
Performance, efficiency and other ratios (annualised 1,
%) 2
Return on average ordinary shareholders' equity 7 4.2 4.4
----------
Return on average risk-weighted assets 1.1 1.0
--------------------------------------------------------- ---------- ------- -------
Adjusted return on average risk-weighted assets 5 1.1 1.6
--------------------------------------------------------- ---------- ------- -------
Cost efficiency ratio (reported basis) 8 77.6 78.2
--------------------------------------------------------- ---------- ------- -------
Cost efficiency ratio (adjusted basis) 8 76.1 67.5
Jaws (adjusted basis) 9 (9.1) (5.8)
---------- ------- -------
Ratio of customer advances to customer accounts 61.9 73.5
--------------------------------------------------------- ---------- ------- -------
1 The group adopted IFRS 9, as well as the European Union's
regulatory transitional arrangements for IFRS 9, on 1 January 2018.
Comparative information has not been restated. For further details,
refer to 'Changes to accounting from 1 January 2018' on page 10,
'Standards adopted during the year ended 31 December 2018' on page
97 and Note 34 'Effects of reclassifications upon adoption of IFRS
9' on page 158.
2 HSBC completed the ring-fencing of its UK retail banking
activities on 1 July 2018, six months in advance of the legal
requirement coming into force, transferring circa 14.5 million
qualifying RBWM, CMB and GPB customers from the group to HSBC UK,
HSBC's ring-fenced bank. This included the transfer of relevant
retail banking subsidiaries. We have retained the non-qualifying
components, primarily the UK GB&M business and the overseas
branches and subsidiaries. For further details, refer to
'Ring-fenced bank' on page 18 and Note 35 'Discontinued operations'
on page 161.
3 Adjusted performance is computed by adjusting reported results
for the effect of significant items as detailed on pages 12 to
15.
4 Net operating income before change in expected credit losses
and other credit impairment charges is also referred to as
revenue.
5 The group has adopted the European Union's regulatory
transitional arrangements for IFRS 9, on 1 January 2018. These
apply to reported and adjusted RWAs for 2018 (and related ratios)
throughout the Annual Report and Accounts 2018 unless otherwise
stated.
6 Capital ratios are detailed in the Capital section on pages 69 to 71.
7 The return on average ordinary shareholders' equity is defined
as profit attributable to shareholders of the parent company
divided by the average total shareholders' equity. The return on
average ordinary shareholders' equity at 31 December 2017 has been
restated by 20 basis points to incorporate the tax effect for
dividends paid on Additional Tier 1 ('AT1') capital. Dividends paid
on AT1 should be net of tax in the calculation.
8 Reported cost efficiency ratio is defined as total operating
expenses (reported) divided by net operating income before change
in expected credit losses and other credit impairment charges
(reported), while adjusted cost efficiency ratio is defined as
total operating expenses (adjusted) divided by net operating income
before change in expected credit losses and other credit impairment
charges (adjusted).
9 Adjusted jaws measures the difference between adjusted revenue
and adjusted cost growth rates.
Purpose and strategy
Our purpose
Our purpose is to be where the growth is, connecting customers
to opportunities. We enable businesses to thrive and economies to
prosper, helping people to fulfil their hopes, dreams and realise
their ambitions.
We operate in 18 countries. Our operating entities represent the
group to customers, regulators, employees and other
stakeholders.
At 31 December 2018, the bank and its subsidiaries had a
physical presence in Armenia, Belgium, Czech Republic, France,
Germany, Greece, Ireland, Israel, Italy, Luxembourg, Malta, the
Netherlands, Poland, Russia, South Africa, Spain, Switzerland and
the United Kingdom. Two of these subsidiaries are located in
Continental Europe's largest economies (i.e. France and Germany),
with a universal banking presence in France.
Preparing for the UK's withdrawal from the European Union
The UK is due to formally leave the European Union (EU) on 29
March 2019. However, there is no certainty on the future
relationship between the UK and the EU or indeed on an
implementation period. Throughout this period of uncertainty, our
priority is to support our clients and continue to service them,
independent of the outcome of negotiations.
In preparation for potential outcomes including a possible
departure without a Withdrawal Agreement, and to further strengthen
our pan-European proposition, we have made changes to our legal
entity structure and product offerings.
Legal entity structure
The group currently has branches in seven European Economic Area
('EEA') countries (Belgium, the Netherlands, Luxembourg, Spain,
Italy, Ireland and Czech Republic) which rely on passporting out of
the UK. Following regulatory approval in 2018, and on the
assumption that the UK leaves the EU without the existing
passporting or regulatory equivalence framework that supports
cross-border business, the branch network is in the process of
transferring to HSBC France ('HBFR'), as HSBC's primary banking
entity authorised in the EU. We are on track to complete the
business transfer in the first quarter of 2019 and good progress is
being made on the operational integration with HBFR of its branches
in Belgium, Czech Republic, Luxembourg, the Netherlands, Ireland,
Italy and Spain.
Product offerings
To accommodate customer migrations and new business after the
UK's EU departure, we are expanding and enhancing our capabilities
across Europe, where we already have a strong foundation, with a
focus on France, the Netherlands and Ireland. Euro clearing
capabilities in HBFR are now available and further product launches
are planned during the first quarter of 2019.
Potential outcomes arising from the UK's departure from the EU
will impact our clients and our employees. Our focus is on
mitigating this impact and providing support and guidance
throughout the withdrawal process.
Clients
The UK's departure from the EU is likely to have an impact on
our clients' operating models including their working capital
requirements, investment decisions and financial markets
infrastructure access. Our priority is to provide continuity of
service and our intention is to minimise the level of change for
our customers. However, we will be required to migrate some
EEA-incorporated clients from the UK to HSBC France (or another EEA
entity). We are in active dialogue with impacted clients to make
the transition as smooth as possible.
Employees
The migration of EEA-incorporated clients will require us to
strengthen our local teams in Continental Europe and France in
particular. We expect the majority of roles to be filled through
hires and we have started a recruitment process. Given the scale of
our existing business in France, which already has more than 8,000
employees, a strong balance sheet and extensive product
capabilities, we are already well prepared to handle the transfer
of activities. Throughout, our objective is to minimise the level
of change for our people. We are therefore also providing support
on settlement applications to EEA staff resident in the UK and UK
staff resident in EEA countries.
Nevertheless, London will continue to be an important global
financial centre and the best location for our global headquarters.
At 31 December 2018, HSBC employed approximately 39,000 people in
the UK.
We have made good progress in terms of ensuring we are prepared
for potential outcomes from the UK leaving the EU in the first
quarter of 2019 under the terms described above, but there remain
execution risks, many of them linked to the uncertain outcome of
negotiations and potentially tight timelines to implement
significant changes to our UK and European operating models.
HSBC worldwide
The group is part of HSBC, which has approximately 229,000
employees working around the world to provide more than 38 million
customers with a broad range of banking products and services to
meet their financial needs.
HSBC values
HSBC values define who we are as an organisation and what makes
us distinctive.
Dependable
-- We are dependable, standing firm for what is right and delivering on commitments.
Open
-- We are open to different ideas and cultures and value diverse perspectives.
Connected
-- We are connected to our customers, communities, regulators
and each other, caring about individuals and their progress.
Our role in society
How we do business is as important as what we do. Our
responsibilities to our customers, employees and shareholders as
well as to wider society go far beyond simply being profitable.
We seek to build trusting and lasting relationships with our
many stakeholders to generate value in society.
Our strategy
HSBC Bank plc's strategic vision is to be the leading
international bank in Europe.
The Group's strategy and strategic direction is embedded in HSBC
Bank plc's strategy which aims to capture value from its
international network.
This strategy is supported by long-term global trends and the
Group's combination of strategic advantages.
Long-term trends
Increasing global connectivity
The international flow of goods, services and finance continues
to expand, aided by the development of technology and data in
personal and commercial exchanges.
Growing individual wealth
Studies indicate half of the world's population is now
considered middle class or wealthier and this proportion is
expected to grow to approximately two thirds by 2030. The majority
of the middle class consumers are expected to be Asian. (Source:
Brookings, "A Global Tipping Point: Half the world is now middle
class or wealthier" (2018)).
Increasing need for sustainable finance
Climate change is accelerating and global temperatures are
trending significantly higher. Investment in renewable energy
capacity will be increasingly required. (Source: OECD, Investing in
Climate, Investing in Growth (2017); BP, Statistical Review of
World Energy; HSBC analysis)
Strategic advantages
Leading international bank
The group derives value from HSBC's network of businesses and
geographical reach to support future growth and increase global
connectivity. More than 50% of HSBC Group's client revenue is
linked to international clients (revenue from international clients
is derived from an allocation of adjusted revenue based on internal
management information. International clients are businesses and
individuals with an international presence). HSBC Group has been
chosen by large corporates across regions as their lead
international bank (Source: Greenwich Associates - Large Corporate
Banking; percentage of large corporates choosing HSBC as their lead
international bank).
Exceptional access to high-growth markets
HSBC's network provides access to high-growth developing markets
in Asia, the Middle East and Latin America. We use it to enable
clients to participate in global growth opportunities and our
investments are aligned to high-growth markets to deliver
shareholder value. We remain committed to enhanced customer service
and investments in technology
Balance sheet strength
The group's diversified business model enables us to support a
strong capital, funding and liquidity position, adopt a
conservative approach to credit risk and liquidity management and
generate stable returns for shareholders.
Strategic priorities
In June 2018, HSBC Group outlined eight strategic priorities to
return HSBC to growth, improve returns and enhance customer and
employee experience. HSBC Group aim to achieve this through
accelerating growth in areas of strength, embracing new
technologies, simplifying the organisation and investing in
capabilities for the future. As a result of these strategic
priorities, HSBC Group has defined overall financial targets.
We aim to:
-- Accelerate growth from our Asian businesses, including in
Hong Kong, the Pearl River Delta, ASEAN, and Wealth in Asia,
including Insurance and Asset Management; and be the leading bank
to support the transition to a low-carbon economy and the China-led
Belt and Road Initiative
-- Complete the establishment of our UK ring-fenced bank,
increase mortgage market share, grow our commercial customer base,
and improve customer service
-- Gain market share and deliver growth from our international network
-- Turn around our US business
-- Improve capital efficiency and redeploy capital into higher-return businesses
-- Create the capacity for increasing investments in growth and
technology through efficiency gains
-- Improve our customer service by investing further in
technology and our digital capabilities; increasing our reach; and
delivering industry-leading financial crime standards
-- Simplify the organisation and invest in future skills
HSBC Bank plc delivers the relevant elements of HSBC Group
strategy across Europe and overseas branches.
Value of the network
HSBC's network of businesses covers the world's largest and
fastest growing trade corridors and economic zones.
Services around the world
We provide products and services to meet our clients' diverse
financial needs. HSBC's geographic reach and network of clients
allows greater insight into the trade and capital flows across
supply chains.
Business synergies
We share resources and product capabilities across our
businesses and leverage these synergies when serving our customers.
We are able to provide global markets products, for example, to
large multinationals as well as to small businesses. We issue
insurance products to individuals and corporations alike. Many of
our private banking clients are business owners who we also serve
as corporate clients.
Products and services
The group manages its products and services through its four
businesses: RBWM; CMB; GB&M; GPB; and Corporate Centre.
Retail Banking and Wealth Management
('RBWM')
Customers
RBWM helps over 1.2 million customers across Europe to manage
their finances, buy their homes, and save and invest for the
future. Our Insurance and Asset Management businesses support all
HSBC's global businesses in meeting their customers' needs.
Products and services
RBWM offers a range of services, including personal banking,
mortgages, loans, credit cards, savings and investments and
insurance. This includes HSBC Jade, Premier and Advance
propositions, wealth solutions and financial planning, personal
banking and international services. We serve our customers through
four main channels: branches, self-service terminals, telephone
service centres and digital (internet and mobile banking).
Business synergies
RBWM makes a significant contribution to the overall success of
the group. Insurance and Asset Management provide services to
clients across all of the global businesses; and the foreign
exchange and wealth management needs of RBWM clients create
opportunities for GB&M and the Private Bank. There is also
successful collaboration between CMB and RBWM in order to provide
services to a broad range of business customers.
Areas of focus
RBWM's priorities are to deliver growth, improve returns and
enhance customer and employee experience, as it continues to
enhance customer centricity and customer service through
investments in technology.
Commercial Banking ('CMB')
Customers
CMB customers range from small enterprises focused primarily on
their domestic markets through to corporates operating
globally.
Products and services
We support our customers with a range of financial products and
services to enable them to operate efficiently and meet their
business aspirations. We support our customers' operational and
transaction banking needs through working capital facilities,
payment services and trade solutions. We also offer expertise in
capital financing, mergers and acquisitions, and access to
financial markets to our customers.
Business synergies
CMB is at the centre of creating revenue synergies within the
group. For instance, we work closely with our GB&M colleagues
to provide expertise in capital finance solutions to support our
CMB clients. Our trade teams within CMB also provide import and
export finance solutions to GB&M clients.
Areas of focus
HSBC is focused on creating value from its network.
The group is investing heavily in digital and technology aspects
of its core Global Liquidity and Cash Management ('GLCM') and
Global Trade and Receivables Finance ('GTRF') propositions.
Global Banking and Markets ('GB&M')
Customers
HSBC Global Banking and Markets is a client-focused business
that provides tailored financial solutions to major government,
corporate and institutional clients worldwide. We operate in 18
countries across Europe and contribute significant revenues to
other regions through our European client base. Managed as a global
business, we offer clients geographical reach and deep local
knowledge.
Products and services
Our clients are served by teams that bring together relationship
managers and product specialists to develop financial solutions
that meet individual client needs. We deliver a comprehensive range
of services including capital financing, transaction and advisory
banking services, trade services, research, securities services and
global liquidity and cash management.
Areas of focus
Deepening client relationships, maximising our synergies with
the Group and other Businesses, investments in transaction banking
platforms and digital programmes focused on clients remains a
priority.
Ongoing focus on cost discipline should result in further
simplification of the business through streamlining business lines,
operations and technology.
Our growth will be underpinned by a focus on highest standards
of conduct and financial crime risk management.
Global Private Banking ('GPB')
Customers
GPB serves high net worth individuals and families, including
those with international banking needs, through 6 strategic booking
centres located in the EMEA region covering 19 target markets.
Products and services
Our products and services include: Investment Management,
incorporating advisory, discretionary and brokerage services;
Private Wealth Solutions, comprising trusts and estate planning,
designed to protect wealth and preserve it for future generations;
and a full range of Private Banking services.
Business synergies
GPB collaborates closely with GB&M, CMB and RBWM, to offer
propositions to clients that leverage the Group's expertise in
asset management, research, insurance, trade finance and capital
financing.
Areas of focus
GPB aspires to be the Private Bank of choice to the families of
owners and principals of our best corporate clients, and help them
preserve their wealth from generation to generation.
Corporate Centre
Corporate Centre comprises Central Treasury, including Balance
Sheet Management ('BSM'), certain legacy assets, interests in our
associates and joint ventures, and central stewardship costs.
How we do business
We conduct our business intent on supporting the sustained
success of our people, customers and communities. To achieve our
purpose, we need to build strong relationships with all of our
stakeholders - including customers, employees, and the communities
in which we operate. In 2018, we launched our ambition to become
the healthiest human system in the financial services industry as a
way to create stronger connections across these groups. This will
enable us to deliver our strategy with our long-term values, and
operate the business in a way that is sustainable.
Customers
We create value by providing the products and services our
customers need, we aim to do so in a way that makes it easy for
them. This helps us to build healthy and sustainable relationships
with our customers.
Our customers range from individuals to major international
corporate clients.
Taking responsibilities for the service we deliver
We define conduct as delivering fair outcomes for customers and
not disrupting the orderly and transparent operation of financial
markets. This is central to our long-term success and ability to
serve customers. We have clear policies, frameworks and governance
in place to protect them. These cover the way we behave, design
products and services, train and incentivise employees, and
interact with customers and each other. Our Conduct Framework
guides activities to strengthen our business and increases our
understanding of how the decisions we make affect customers and
other stakeholders. Details on our Conduct Framework are available
at www.hsbc.com
Acting on feedback
We listen to our customers and know that asking their opinion on
our service is core to understanding their needs and concerns. For
more details on how we perform with respect to non-financial
metrics related to customer, refer to pages 8 and 9.
Acting on customer feedback has helped make our services more
accessible and transparent.
Investing in digital
As part of our strategy, HSBC Bank plc is committed to using
technology to enhance our customer experience.
Sustainable finance
Supporting sustainable growth
We recognise our wider obligations to the communities where we
operate, and understand economic growth must also be sustainable.
We will continue to engage with our stakeholders, and set policies
that change in line with technology, science and societal
expectations.
Our sustainable growth initiatives are set out in an integrated
strategy aligned to our Group strategy and our global business
operations. These initiatives are managed across three pillars:
sustainable finance; sustainable networks and entrepreneurship; and
future skills. Our progress update on sustainable finance is
included below. The updates on sustainable networks and
entrepreneurship and future skills will be published in our 2019
Environmental, Social and Governance ('ESG') Update.
Each and every one of us has a stake in developing a sustainable
economic system. It is the combined responsibility of all players
in society to respond to climate change, rapid technological change
and continuing globalisation to secure a prosperous future. Since
its foundation in 1865, HSBC Group has adapted to and helped serve
the needs of a changing world. It has financed economic growth,
fostered international trade and overcome events such as economic
crises. We recognise that governments, corporations, the financial
system and civil society are all stakeholders in climate change and
sustainability challenges. Now more than ever, there is a need to
develop the skills, business innovation and low-carbon solutions
needed to secure long-term prosperity for all.
In 2017, HSBC Group launched its sustainability strategy
focusing on three main areas: sustainable finance; sustainable
networks and entrepreneurship; and future skills. This is
underpinned by the Group's sustainability risk policies and
approach to sustainable operations. We recognise our wider
obligations to the communities in which we operate, and understand
economic growth must also be sustainable. We will continue to
engage with our stakeholders, and set policies that change in line
with technology, science and societal expectations.
Our global progress update on our sustainability strategy is
published annually in our HSBC ESG Update.
(www.hsbc.com/our-approach/measuring-our-impact).
We define sustainable finance as any form of financial service
that integrates ESG criteria into business or investment decisions.
Sustainable finance covers the financing and investment activities
needed to support the United Nations Sustainable Development Goals
('SDGs'), and the Paris Agreement.
A key objective for HSBC is to provide financing to enable the
transition to a low-carbon economy and to help clients manage
transition risk. Sustainable financing includes providing credit
and lending facilities, as well as advisory services or access to
capital markets. In 2017 HSBC committed to USD100 billion of
financing and investments by 2025 to develop clean energy,
lower-carbon technologies, and projects that contribute to the
delivery of the Paris Climate agreement and the UN SDGs.
Sustainable finance case study
Société du Grand Paris ('SGP'), a state owned infrastructure
entity established the first ever 100% Green Euro Medium Term Note
('EMTN') Programme and the net proceeds of the inaugural bond will
be exclusively dedicated to finance the Grand Paris Express
automatic metro, which is a key feature of the French Government
Climate Plan. The project is anticipated to help create between
250,000 to 400,000 housing units, reduce 27 million tons of CO2
emissions by 2050 and substantially reduce commuting travel time on
various journeys throughout the Greater Paris area.
In October 2018, HSBC France acted as joint Bookrunner on SGP's
10-year inaugural green benchmark of their Green EMTN Programme, a
EUR 1.75 billion 1.125% green bond.
Sustainable finance training
In order to raise awareness of the transition to a low-carbon
economy, the bank ran Sustainability training programmes in
conjunction with Earthwatch, an environmental charity. In 2018 we
ran 5 off-site training programmes where 87 employees attended the
2-day offsite Sustainability Training Programme whilst 11 senior
leaders attended a 3-day Sustainability Leadership Programme. In
addition, we launched on-line training in collaboration with the
Cambridge Institute of Sustainability Leadership on our HSBC
University platform.
How we do business in the community
Future skills
As part of HSBC's sustainability strategy the bank is focusing
on Future Skills - for our customers, employees and for the people
in our local communities. This is being achieved by concentrating
on two key areas: employability and financial capability.
Employability
In France, HSBC is supporting Fondation Entreprende in order to
increase Senior entrepreneurship. Due to high levels of
unemployment of senior people (50% of 55-64 year olds), an
increasing number of these people are choosing to become
entrepreneurs as a way to maintain a social and economic activity
(90,000 enterprises created by senior people in 2017). HSBC France
supports Fondation Entreprendre to conduct market surveys, create
an incubator to support Senior company creation and allow staff to
volunteer as coaches in order to further develop the incubator.
Financial capability
Providing our customers, our communities and our employees with
the skills and knowledge needed to thrive in the global economy, we
are helping people secure their financial futures through building
financial capability.
Community investment
We have a proud record of supporting the local communities and
environments in which we operate. Thousands of HSBC employees
across Europe are involved every year by volunteering with our
charity partnerships and programmes. All employees can take a
minimum of two days to volunteer for a charity of their choice in
work time. There is also a fund to match fundraising or
volunteering in their own time for up to three charities. Our local
charity funding supports vulnerable people through the generations.
We supported 43 charities across Europe raising a total of USD 7.9
million. Across their own time as well as work time our employees
volunteered a total of 22,227 hours.
Empowering people
Enabling a diverse and inclusive environment for all
Our commitment
We are committed to a thriving environment where people are
valued, respected and supported to fulfil their potential. By
building upon the extraordinary range of ideas, backgrounds, styles
and perspectives of our employees we can drive better outcomes for
our stakeholders including customers, communities, suppliers and
shareholders.
Gender balance at senior levels
We continue to focus on improving gender balance in senior
leadership in line with our 30% Club CEO Campaign commitment to
reach 30% women in senior leadership roles by 2020. In order to
achieve that aspirational target, we set an objective of at least a
21.8% female share of our senior leadership by the end of 2018 in
Europe. We achieved 23.3%, a 2.7 percentage point increase on our
2017 position.
Employee networks
We have seven global employee networks as well as our HSBC
Communities, which include common interest groups. They provide
spaces for colleagues to speak up about internal and commercial
issues and opportunities, make connections, and learn from each
other. The networks focus on gender, age, ethnicity, LGBT+, faith,
working parents and carers, and ability.
More information about our diversity and inclusion activity is
available at www.hsbc.com/our-approach/measuring-our-impact
Whistleblowing
It is important to have a culture where our people feel able to
speak up. Individuals are encouraged to raise concerns about
wrongdoing or unethical conduct through the usual reporting and
escalation channels. However, we understand that there are
circumstances where people need to raise concerns more discreetly.
HSBC Confidential is a global whistleblower platform that enables
all of our people, past and present, to raise issues in confidence
and without fear of retaliation.
Whistleblowing concerns are investigated thoroughly and
independently. Some of the common themes that have been referred to
HSBC Confidential include behaviour and conduct, allegations of
fraud, and weaknesses with information security. Remedial activity
has been undertaken where appropriate, including disciplinary
action and adjustments to variable pay, performance ratings and
behaviour ratings. Processes have also been enhanced where needed.
HSBC does not condone or tolerate any acts of retaliation against
those who raise concerns, and has a strict policy prohibiting any
such acts. Senior management are made aware of the existence and
the outcome of cases where retaliation has been alleged. Making
malicious or false claims is incompatible with our values.
The Group Audit Committee has responsibility for oversight of
HSBC's whistleblowing arrangements and receives regular updates on
the status of whistleblowing arrangements and outcomes.
363 cases were raised during 2018 (2017: 461 cases). All cases
were subject to investigation. In 24% of the closed cases in 2018
(2017: 33%), allegations were substantiated in whole or in part and
appropriate remedial action taken.
From 1 July 2018, cases relating to the ring-fenced activities
of HSBC UK Bank plc have been excluded from the group's totals.
Tax
Our approach to tax
We apply the spirit as well as the letter of the law in all
territories where we operate, and have adopted the UK Code of
Practice for the Taxation of Banks. As a consequence, we pay our
fair share of tax in the countries in which we operate. We continue
to strengthen our processes to help ensure our banking services are
not associated with any arrangements known or suspected to
facilitate tax evasion.
HSBC continues to apply global initiatives to improve tax
transparency such as:
-- the US Foreign Account Tax Compliance Act ('FATCA');
-- the OECD Standard for Automatic Exchange of Financial Account
Information (also known as the Common Reporting Standard);
-- the Capital Requirements Directive IV ('CRD IV') Country by Country Reporting;
-- the OECD Base Erosion and Profit Shifting ('BEPS') initiative; and
-- the UK legislation on the corporate criminal offence ('CCO')
of failing to prevent the facilitation of tax evasion.
We do not expect the BEPS or similar initiatives adopted by
national governments to adversely impact our results.
Key Performance Indicators
The Board of Directors tracks the group's progress in
implementing its strategy with a range of financial and
non-financial measures or key performance indicators ('KPIs').
Progress is assessed by comparison with the group strategic
priorities, operating plan targets and historical performance.
The group reviews its KPIs regularly in light of its strategic
objectives and may adopt new or refined measures to better align
the KPIs to HSBC's strategy and strategic priorities.
Financial KPIs
2018 2017
------ --------
Profit before tax (reported)
(GBPm) 1,974 2,370
Profit before tax (adjusted)
(GBPm) 2,100 3,832
--------------------------------- -----
Jaws (adjusted) (%) (9.1) (5.8)
---------------------------------
Cost efficiency ratio
(reported) (%) 77.6 78.2
--------------------------------- ----- -----
Cost efficiency ratio
(adjusted) (%) 76.1 67.5
---------------------------------
Return on average risk-weighted
assets (%) 1.1 1.0
--------------------------------- ----- -----
Adjusted return on
average risk-weighted
assets (%) 1.1 1.6
--------------------------------- ----- -----
Common equity tier
1 capital ratio (%) 13.8 11.8
--------------------------------- ----- -----
Profit before tax (reported/adjusted): Reported profit before
tax is the profit as reported under IFRS. Adjusted profit before
tax adjusts the reported profit for the effect of significant items
as detailed on pages 12 to 15.
Reported profit before tax was lower year-on-year. This was
primarily in GB&M due to lower revenue, mainly in Global
Markets, and higher operating expenses due to the non-repeat of
2017 provision releases relating to legal and regulatory matters.
This was partly offset by lower Expected Credit Losses/Loan
Impairment Charges (ECL/LICs).
Adjusted profit before tax decreased due to the impact of the
discontinued operations from 1 July 2018. Revenue was also lower in
GB&M, mainly in Global Markets, and in Corporate Centre due to
losses on Legacy Credit portfolio disposals. Lower revenue was
partly offset by lower ECL/LICs in GB&M.
Adjusted jaws measures the difference between adjusted revenue
and adjusted cost growth rates (excluding the effects of
costs-to-achieve and other significant items as detailed on pages
12 to 15). Our target is to grow revenues faster than operating
expenses on an adjusted basis. This is referred to as positive
jaws.
In 2018, revenue reduced by 29% and our operating expenses also
went down, but by 19.9%. Jaws was therefore a negative 9.1%.
Adjusted costs decreased due to the impact of discontinued
operations. Costs were also lower due to the transfer of costs from
the bank to a separate service company in 2018. Since these costs
had been recharged to other entities in the Group in 2017, there
was an offsetting reduction in intercompany revenue. Adjusted
revenue decreased due to the impact of discontinued operations,
lower income in GB&M, mainly in Global Markets, and lower
intercompany revenue in Corporate Centre.
Cost efficiency ratio (reported/adjusted) is measured as total
operating expenses divided by net operating income before expected
credit losses and other credit impairment charges.
In 2018, reported revenue decreased by 27% while reported
operating expenses decreased by 28%. The cost efficiency ratio
therefore improved by 0.6 percentage points.
Reported revenue and operating expenses decreased due to the
impact of the discontinued operations on 1(st) July 2018. Excluding
this, the cost efficiency ratio worsened by 7.1 percentage points
mainly due to lower revenue and higher costs in GB&M.
The cost efficiency ratio (adjusted) worsened by 8.7 percentage
points from 2017 as costs increased by more than revenue.
Return on risk-weighted assets ratio (reported/adjusted) is
measured as pre-tax profit divided by average risk-weighted
assets.
The reported return on average risk-weighted assets has
increased by 0.1%. Of this, an increase of 0.3% was due to the
impact of discontinued operations. Excluding this, the decrease in
return on average risk-weighted assets was driven by lower
profitability in GB&M.
The adjusted return on average risk-weighted assets has
decreased by 0.5%. Of this, a decrease of 0.2% was due to the
impact of discontinued operations. Excluding this, the decrease in
return on average risk-weighted assets was driven by lower
profitability in GB&M and Corporate Centre.
Common equity tier 1 ('CET1') capital ratio represents the ratio
of common equity tier 1 capital to total risk-weighted assets. CET1
capital is the highest quality form of capital comprising
shareholders' equity and related non-controlling interests less
regulatory deductions and adjustments. The group seeks to maintain
a strong capital base to support the development of its business
and meet regulatory capital requirements at all times.
The CET1 capital ratio increased during the year mainly due to
the implementation of the ring-fencing transfer scheme alongside
the capital contribution from HSBC Holdings plc and HSBC UK
Holdings Ltd.
Non-financial KPIs
We also monitor a range of non-financial KPIs focusing on
customers, people, culture and values including customer service
satisfaction, employee involvement and engagement, and diversity
and sustainability.
For details on customer service and satisfaction please refer
below; for the remaining non-financial KPIs refer to the Corporate
Governance section on pages 72 to 78.
Customer service and satisfaction
RBWM
For RBWM in France the core metric used to assess performance is
the Customer Recommendation Index (CRI), which measures customers'
likelihood to recommend the banks' products and services, tracked
relative to the competitor set.
In 2018, the CRI score remains consistent year on year and
similar to the 2017 score. HSBC ranks in the top 3 banks within the
competitive set and as such meets the target. HSBC performs well on
key attributes versus competition, particularly on wealth
solutions, reliability, relationship manager, customer service and
international. However, there has been a slight decline in HSBC's
performance compared with 2017, particularly in areas such as
Customer Service and understanding.
HSBC will build on the positive momentum since 2017 in
perceptions of its digital services, making it essential to
continue supporting investments in Digital banking. This will help
further boost perceptions of accessibility.
CMB
Customer experience, satisfaction and conduct are key priorities
for CMB in Continental Europe. We continue to remain focused on
enhancing our insights through relevant and measurable metrics that
enables us to improve understanding of our customers. This in turn
continues to help us to drive appropriate actions across our
customers' experience with us.
In 2018, our customers have indicated that the key strengths of
our existing franchise are the skills and knowledge of our people
and our global international network. This is further complemented
by our product and service capabilities which support our
customers' business aspirations. We have received a number of
external recognitions including 'Best in service for Trade Finance
in Western Europe' from Euromoney in 2018.
Conversely, we acknowledge that we do not always consistently
meet our customers' expectations. To address this, we are
streamlining the onboarding process and conducting deep dives in
these areas to identify opportunities for improvement. Further work
has been planned for this year across all of these areas, focusing
on utilising customer insights to drive appropriate changes
required to improve overall customer experience and
satisfaction.
GB&M
The core internal metric used to assess the strength of our
client relationships in GB&M is the Client Engagement Score (a
composite measure made up of seven questions, covering
satisfaction, advocacy, loyalty, trust, emotion, value and rapport)
which is tracked over time. The measure provides a score out of 100
and is benchmarked against the competition (competitors are
self-defined by respondents).
In 2018 the Client Engagement Score for HSBC in Continental
Europe was 86, in line with competitor scores, and slightly above
the HSBC global score of 85. Our staff are considered a real asset
by clients, consistently scoring highly on their professional
integrity.
In Greenwich Associates' 2018 Large Corporate Cash Management
report, HSBC continues to be second in Market Penetration among
Top-Tier European companies (companies with at least EUR 2bn
turnover per annum). Account opening is an area that our clients
have highlighted where their experience lags behind their
expectation levels. We will continue to build on the improvements
we have already made, with a focus on simplifying the documentation
process and increasing the responsiveness and resolution of
errors.The bank won a number of awards in Europe in 2018, including
Most Innovative Bank for Western Europe (The Banker Awards
2018).
Economic background and
outlook
UK
UK real GDP rose by 0.2% in the last quarter of 2018, a sharp
slowdown from the Q3 growth rate of 0.6% quarter-on-quarter. The
year-on-year GDP growth rate was 1.3%, the joint slowest pace since
2012. The unemployment rate was broadly steady over the second half
of 2018 - in November it stood at 4.0%, the lowest since February
1975. Employment as a percentage of the population aged 16-64 was
75.8% in November, a series high. The annual rate of wage growth
rose over the course of the year, increasing to a new ten-year high
of 3.4% for the three months to November. The annual Consumer Price
Index (CPI) inflation rate dropped to 1.8% in January, down from
3.0% a year earlier, due to lower energy prices and a waning
inflationary impact of the drop in sterling in 2016. The Bank of
England increased Bank Rate in August, from 0.50% to 0.75%.
HSBC Global Research forecasts assume that the UK avoids a
departure from the EU without a Withdrawal Agreement and begins to
move towards agreement on a multi-year transition period. Under
this assumption, calendar year GDP growth is expected to edge up to
1.6% in 2019 and 2020, from 1.4% in 2018. The unemployment rate is
forecast to remain low, at around the 4% mark. CPI inflation is
expected to fall to around 1.5% by Q4 2019, driven by recent oil
price falls and soft underlying price pressures. Given outstanding
uncertainties, mainly relating to the UK's withdrawal from the EU,
the central forecast is for no Bank Rate rises through 2019 and
2020. But if a Withdrawal Agreement can be approved smoothly and
quickly, the Bank of England might be more minded to raise
rates.
Eurozone
Eurozone economic growth slowed through the course of 2018. GDP
increased by 0.2% in the fourth quarter of 2018, unchanged versus
Q3. The annual growth rate slowed from 1.6% to 1.2%, the weakest
since 2013. In terms of quarterly growth in the fourth quarter,
Germany's economy stagnated following a 0.2% contraction in Q3.
Italy's economy contracted for the second successive quarter (-0.2%
quarter-on-quarter following -0.1% in Q3). France saw an expansion
of 0.3% for the second quarter in a row, while the Spanish economy
continued its robust expansion by growing 0.7%. Relative to strong
growth seen in 2017, the 2018 slowdown was largely driven by a
softening in net exports and investment. The labour market remained
fairly robust, though. The unemployment rate fell to a ten-year low
of 7.9% in November, while annual wage growth climbed to a ten-year
high of 2.5% in the third quarter of 2018. The Harmonised Index of
Consumer Prices (HICP) rate of inflation softened towards the end
of year, dropping to 1.4% in January, reflecting the impact of
lower oil prices.
Following GDP growth of 1.8% in 2018, HSBC Global Research
forecasts GDP to grow by 1.4% in 2019 and 1.3% in 2020. In terms of
the drivers of growth, net exports are expected to remain subdued,
while household spending is expected to make relatively solid
gains, as a result of further rises in household income growth.
But, given this subdued rate of economic growth, inflationary
pressure is unlikely to build very rapidly. As a result of oil
price falls, the HICP inflation rate is expected to fall to just
below 1% in the autumn of 2019, before recovering thereafter,
reaching a (still subdued) rate of 1.6% in 2020. In light of this
soft inflation backdrop, alongside risks to the growth outlook, the
European Central Bank (ECB) is forecast to keep key policy rates on
hold throughout this year and next.
Financial summary
Use of non-GAAP financial measures
Our reported results are prepared in accordance with IFRSs, as
detailed in the Financial Statements starting on page 86. In
measuring our performance, the financial measures that we use
include those derived from our reported results in order to
eliminate factors that distort year-on-year comparisons. These are
considered non-GAAP financial measures.
Non-GAAP financial measures are described and reconciled to the
closest reported financial measure when used.
The global business segmental results on pages 12 to 15 are
presented on an adjusted basis in accordance with IFRS 8 'Operating
Segments' as detailed in 'Basis of preparation'.
Adjusted performance
Adjusted performance is computed by adjusting reported results
for the year-on-year effects of significant items that distort
year-on-year comparisons.
We use 'significant items' to describe collectively the group of
individual adjustments excluded from reported results when arriving
at adjusted performance. These items are ones that management and
investors would ordinarily identify and consider separately when
assessing performance to understand better the underlying trends in
the business.
We consider adjusted performance provides useful information for
investors by aligning internal and external reporting, identifying
and quantifying items management believes to be significant and
providing insight into how management assesses year-on-year
performance.
Basis of preparation
Global businesses are our reportable
segments under IFRS 8.
The global business results are
assessed by the chief operating
decision maker on the basis of adjusted
performance that removes the effects
of significant items from reported
results. We therefore present these
results on an adjusted basis.
Reconciliations of reported and
adjusted performance are presented
on pages 12 to 15. 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
operational business lines. While
such allocations have been made
on a systematic and consistent basis,
they necessarily involve a degree
of subjectivity. Costs which 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
intercompany and inter-business
line transactions. All such transactions
are undertaken on arm's length terms.
The intra-group elimination items
are presented in the Corporate Centre.
==========================================
A description of the Global businesses is provided in the
Strategic Report, page 5
Changes to accounting from 1 January
2018
IFRS 9
The group adopted the requirements of IFRS 9 'Financial
Instruments' on 1 January 2018, with the exception of the
provisions relating to the presentation of gains and losses on
financial liabilities designated at fair value, which were adopted
on 1 January 2017. The impact of transitioning to IFRS 9 at
1 January 2018 on the consolidated financial statements of the
group was a decrease in net assets of GBP532m, arising from:
-- a decrease of GBP764m from additional impairment allowances;
-- an increase of GBP58m from the remeasurement of financial
assets and liabilities as a consequence of classification changes,
mainly from revoking fair value accounting designations for certain
subordinated debt instruments; and
-- an increase in net deferred tax assets of GBP174m.
Refer to 'Standards adopted during the year ended 31 December
2018' on page 97 and Note 34 'Effects of reclassifications upon
adoption of IFRS 9' for further details.
Changes in accounting policy
We have considered market practices for the presentation of
certain financial liabilities which contain both deposit and
derivative components and were previously included in 'Trading
liabilities'. Such liabilities amounted to GBP17,958m at 31
December 2017. We have concluded that a change in accounting policy
and presentation is appropriate, since it would better align with
the presentation of similar financial instruments by peers and
therefore provide more relevant information about the effect of
these financial liabilities on our financial position and
performance.
As a result, rather than being classified as held for trading,
these liabilities are classified as 'Financial liabilities
designated at fair value' from 1 January 2018. Comparative
information has not been restated.
A further consequence of this change in presentation is that
movements in fair value attributable to changes in own credit risk
of these liabilities are presented in other comprehensive income
with the remaining fair value movements presented in profit or loss
in accordance with the accounting policy adopted in 2017.
Previously, all fair value movements related to these liabilities
were included in profit or loss. For 2017, a loss of GBP335m
relating to changes in the credit risk of these liabilities was
included in 'Net income from financial instruments held for trading
or managed on a fair value basis' with a credit of GBP96m
recognised in 'Tax expense'. If the change in accounting policy had
been applied retrospectively, these amounts would have been
recognised in other comprehensive income, thereby resulting in a
net increase in profit after tax for 2017 of GBP239m.
Cash collateral, margin and settlement accounts included in
'Trading assets' (GBP26,447m), 'Loans and advances to banks'
(GBP573m) and 'Loans and advances to customers' (GBP394m) at 31
December 2017 were reclassified to 'Prepayments, accrued income and
other assets' at 1 January 2018 in accordance with IFRS 9. Cash
collateral, margin and settlement accounts included in 'Trading
liabilities' (GBP30,755m), 'Deposits by banks' (GBP570m) and
'Customer accounts' (GBP548m) at 31 December 2017 were reclassified
to 'Accruals, deferred income and other liabilities' at 1 January
2018 as this presentation is considered to provide more relevant
information, given the change in presentation for the financial
assets. Comparative information has not been restated.
Refer to 'Standards adopted during the year ended 31 December
2018' on page 97 and Note 34 'Effects of reclassifications upon
adoption of IFRS 9' for further details.
Income statement presentation
The classification and measurement requirements under IFRS 9,
which was adopted from 1 January 2018, are based on an entity's
assessment of both the business model for managing the assets and
the contractual cash flow characteristics of the assets. The
standard contains a classification for items measured mandatorily
at fair value through profit or loss as a residual category. Given
its residual nature, the presentation of the income statement has
been updated to separately present items in this category which are
of a dissimilar nature or function, in line with IAS 1
'Presentation of Financial Statements' requirements. Comparative
information has been re-presented. There is no net impact on total
operating income.
Prior to 2018, foreign exchange movements on some financial
instruments designated at fair value were presented in the same
line in the income statement as the underlying fair value movement
on these instruments. In 2018, foreign exchange movements on these
instruments and their economic hedges are presented together within
'Net income from financial instruments held for trading or managed
on a fair value basis'. Comparative information has been
re-presented. As a result, the amount reported in 'Changes in fair
value of long-term debt and related derivatives' decreased by
GBP402m for 2017. There is no net impact on total operating
income.
Summary consolidated income statement for the year ended(1)
2018 2017
Footnotes GBPm GBPm
Net interest income 3,660 6,181
Net fee income 2,044 2,989
Net income from financial instruments measured at fair
value 2, 3 2,645 3,505
Gains less losses from financial investments 12 262
Net insurance premium income 2,005 1,809
------
Other operating income 580 796
-------------------------------------------------------------- ---------- ------ -------
Total operating income 4 10,946 15,542
-------------------------------------------------------------- ---------- ------ -------
- of which: Discontinued operations 3,132 5,997
-------------------------------------------------------------- ---------- ------ -------
Net insurance claims, benefits paid and movement in
liabilities to policyholders (1,478) (2,490)
Net operating income before expected credit losses
and other credit impairment charges 9,468 13,052
-------------------------------------------------------------- ---------- ------ -------
Change in expected credit losses and other credit impairment
charges (159) N/A
Loan impairment charges and other credit risk provisions N/A (495)
Net operating income 9,309 12,557
- of which: Discontinued operations 3,037 5,767
--------------------------------------------------------------
Total operating expenses 4 (7,351) (10,208)
- of which: Discontinued operations (1,894) (4,635)
--------------------------------------------------------------
Operating profit 1,958 2,349
-------------------------------------------------------------- ---------- ------ -------
Share of profit/(loss) in associates and joint ventures 16 21
Profit before tax 1,3 1,974 2,370
-------------------------------------------------------------- ---------- ------ -------
- of which: Discontinued operations 1,143 1,132
-------------------------------------------------------------- ---------- ------ -------
Tax expense (442) (528)
-------------------------------------------------------------- ---------- ------ -------
Profit/(loss) for the year 1,532 1,842
-------------------------------------------------------------- ---------- ------ -------
Profit/(loss) attributable to shareholders of the parent
company 1,506 1,809
Profit attributable to non-controlling interests 26 33
-------------------------------------------------------------- ---------- ------ -------
1 The group adopted IFRS 9 on 1 January 2018. Comparative
information has not been restated, apart from the re-presentation
of certain income statement line items. For further details, refer
to 'Changes to accounting' on page 10, 'Standards adopted during
the year ended 31 December 2018' on page 97, and Note 34 'Effects
of reclassifications upon adoption of IFRS 9' on page 158.
2 On 1 July 2018, HSBC completed the ring-fencing of its UK
retail banking activities transferring qualifying RBWM, CMB and GPB
customers from the group to HSBC UK, HSBC's ring-fenced bank. This
included the transfer of relevant retail banking subsidiaries. We
have retained the non-qualifying components, primarily the UK
GB&M business and the overseas branches and subsidiaries. Refer
to 'Ring-fenced bank' on page 18 and Note 35 'Discontinued
operations' on page 161 for further details.
-- We have considered market practices for the presentation of
certain financial liabilities which contain both deposit and
derivative components and were previously included in 'Trading
liabilities'. Such liabilities amounted to GBP17,958m at 31
December 2017. These liabilities are classified as 'Financial
liabilities designated at fair value' from 1 January 2018.
Comparative information has not been restated. For 2017, a loss of
GBP335m relating to changes in the credit risk of these liabilities
was included in 'Net income from financial instruments held for
trading or managed on a fair value basis' with a credit of GBP96m
recognised in 'Tax expense'. If the change in accounting policy had
been applied retrospectively, these amounts would have been
recognised in other comprehensive income, thereby resulting in a
net increase in profit for 2017 of GBP239m. Refer to 'Changes to
accounting from 1 January 2018' on page 10 and Note 34 'Effects of
reclassifications upon adoption of IFRS 9' for further details.
4 Total operating income and expenses include significant items as detailed on pages 12 to 15.
Reported performance
Reported profit before tax was GBP1,974m, GBP396m lower than
2017.
Net interest income ('NII') decreased by GBP2,521m or 41%. Of
this, GBP1,855m was due to the impact of discontinued operations.
Excluding this, NII decreased in Corporate Centre in Balance Sheet
Management ('BSM') due to the effect of de-risking activities
undertaken in 2017 and due to higher funding costs driven by
liquidity requirements resulting from the ring-fencing of the UK
bank. In GB&M, NII decreased due to margin compression and
lower client activity in Global Markets. In RBWM, income decreased
due to the transfer of our operations in Turkey to HSBC Middle East
Holdings B.V and HSBC Bank Middle East Limited in June 2017, and
from adverse market valuation adjustments on insurance
manufacturing in France.
Net fee income decreased by GBP945m or 32%. Of this, GBP798m was
due to the impact of discontinued operations. Excluding this, net
fee income decreased in GB&M due to lower Global Banking
revenue reflecting lower volumes and fee compression, in particular
across Debt Capital Markets, Equity Capital Markets and Advisory
product lines. In RBWM, income decreased due to the transfer of our
operations in Turkey to HSBC Middle East Holdings B.V and HSBC Bank
Middle East Limited in June 2017.
Net income from financial instruments designated at fair value
decreased by GBP860m or 25%. Of this, GBP34m was due to the impact
of discontinued operations. Income also decreased in RBWM in the
Insurance business primarily reflecting deteriorating equity market
conditions in France, which impacted the value of equity and unit
trust assets supporting insurance contracts. Corresponding
movements were recorded in the liabilities to customers, reflecting
the extent to which they participate in the investment performance
of the associated assets. The offsetting movements are recorded in
'Net insurance claims and benefits paid and movement in liabilities
to policyholders'. This was partly offset in GB&M reflecting
net adverse movements in debit valuation adjustments on derivative
contracts.
Gains less losses from financial investments decreased by
GBP250m or 95%. Of this, GBP40m was due to the impact of
discontinued operations. Excluding this, income decreased in
GB&M due to lower disposal gains in Principal Investments. In
Corporate Centre, income decreased, notably in the UK, due to
losses in Legacy Credit following portfolio disposals, undertaken
to run-down the legacy business to release capital for other
purposes.
Net insurance premium income increased by GBP196m or 11%,
primarily due to increased net insurance premium income in France
driven by improved commercial performance.
Net insurance claims, benefits paid and movement in liabilities
to policyholders decreased by GBP1,012m or 41%. This was primarily
in the Insurance business largely reflecting lower returns on
financial assets supporting contracts where the policyholder is
subject to part or all of the investment risk. This reflected
unfavourable equity market performance in France compared with
favourable performance in 2017 as well as higher claims and
benefits paid. These decreases were partly offset by the impact of
higher new business in France. The gains or losses recognised on
the financial assets measured at fair value through profit and loss
that are held to support these insurance contract liabilities are
reported in 'Net income from financial instruments designated at
fair value'.
Other operating income decreased by GBP214m or 27%. Of this,
GBP133m was due to discontinued operations. Excluding this, income
decreased in Corporate Centre due mainly to lower recharges to
other entities in the Group reflecting the transfer of certain
costs to ServCo in 2018. This was partly offset by increases in
RBWM driven in part by favourable movements in the present value of
in-force long-term insurance business ('PVIF') in 2018 compared
with 2017, in GB&M from the recovery of costs relating to the
foreign exchange business from other HSBC Group entities, and in
CMB in part due to the non-repeat of prior year fair value losses
on investment properties in Malta.
Changes in expected credit losses and other impairment charges
('ECL') were GBP159m in 2018. Of this, GBP94m related to
discontinued operations. The remaining charge was mainly in
GB&M in the construction and retail sectors, partly offset by
releases of provisions in the retail and telecoms sectors. In
Corporate Centre, there was a net ECL release following Legacy
Credit portfolio disposals.
Loan impairment charges and other credit risk provisions
('LICs') were GBP495m in 2017. Of this, GBP229m was due to
discontinued operations. The remaining charge was mainly in
GB&M due to two large corporate exposures in the construction
and retail sectors. This was partly offset in Corporate Centre by
net releases in Legacy Credit following portfolio disposals.
Total operating expenses decreased by GBP2,857m or 28%. Of this,
GBP2,742m was due to the impact of discontinued operations. The
decrease also included the impact of a number of significant items
including:
-- a decrease in costs-to-achieve of GBP551m, comprising costs
relating to the achievement of strategic actions following the
completion of this programme at the end of 2017;
-- lower UK customer redress costs of GBP19m; partly offset by
-- net legal and regulatory provision releases of GBP70m in
2018, compared with releases in 2017 of GBP540m;
-- higher costs of structural reform of GBP141m.
Excluding these items, operating expenses decreased in Corporate
Centre, partly offset by higher costs in GB&M. Lower costs in
Corporate Centre were mainly due to the transfer of certain costs
to a service company ServCo in 2018. Since these costs had been
recharged from the bank to other entities in the Group in 2017,
there was an offsetting reduction in intercompany revenue. The
costs moved to ServCo primarily related to premises and equipment,
and electronic data processing. Higher costs in GB&M were
driven by higher temporary staff costs relating to regulatory
projects and higher indirect taxes.
For further details of significant items affecting revenue and
costs, please refer to significant revenue/cost items by business
segment on pages 12 and 13.
Tax expense totalled GBP442m in 2018 compared with GBP528m in
2017. The effective rate of 22.4% in 2018 was broadly in line with
prior year.
Adjusted performance
Significant revenue items by business segment - (gains)/losses
Corporate
Audited RBWM CMB GB&M GPB Centre Total
GBPm GBPm GBPm GBPm GBPm GBPm
----- ------ ------ ---- ----------- ---------
31 Dec 2018
--------------------------------------------
Reported revenue 2,580 2,479 4,249 249 (89) 9,468
----- ----- ----- ---- ------- ------
Significant revenue items - (34) (42) - 2 (74)
----- ----- ----- ---- ------- ------
- UK customer redress programmes - (34) - - - (34)
- debit valuation adjustment on derivative
contracts - - (42) - - (42)
--------------------------------------------
- fair value movement on non-qualifying
hedges - - - - 2 2
--------------------------------------------
Adjusted revenue 2,580 2,445 4,207 249 (87) 9,394
-------------------------------------------- ----- ----- ----- ---- ------- ------
31 Dec 2017
-------------------------------------------- ----- ------ ------ ---- ----------- ---------
Reported revenue 4,097 3,490 4,436 321 708 13,052
Significant revenue items 2 77 166 - (65) 180
----- ----- ----- ---- ------- ------
- UK customer redress programmes - 73 2 - - 75
- debit valuation adjustment on derivative
contracts - - 164 - - 164
--------------------------------------------
- fair value movement on non-qualifying
hedges - - - - (4) (4)
--------------------------------------------
- provisions arising from on-going
review of compliance with the CCA in
the UK 2 4 - - - 6
--------------------------------------------
- gain on disposal of HSBC's interest
in VocaLink Holdings Limited - - - - (61) (61)
-------------------------------------------- ----- ----- ----- ---- ------- ------
Adjusted revenue 4,099 3,567 4,602 321 643 13,232
-------------------------------------------- ----- ----- ----- ---- ------- ------
Significant cost items by business segment - (recoveries)/charges
Corporate
Audited RBWM CMB GB&M GPB Centre Total
GBPm GBPm GBPm GBPm GBPm GBPm
-------------------------------------------- ------- ------- ------- ----- --------- ----------
31 Dec 2018
-------------------------------------------- ------- ------- ------- ----- --------- ----------
Reported operating expenses (2,102) (1,143) (3,335) (188) (583) (7,351)
Significant cost items 68 9 (56) - 179 200
-------------------------------------------- ------ ------ ------ ---- -------- -------
- costs of structural reform(1) - 4 26 - 154 184
--------------------------------------------
- UK customer redress programmes 68 5 (17) - - 56
--------------------------------------------
- restructuring and other related costs - - - - 30 30
--------------------------------------------
- settlements and provisions in connection
with legal and regulatory matters - - (65) - (5) (70)
-------------------------------------------- ------ ------ ------ ---- -------- -------
Adjusted operating expenses (2,034) (1,134) (3,391) (188) (404) (7,151)
-------------------------------------------- ------ ------ ------ ---- -------- -------
31 Dec 2017
Reported operating expenses (3,641) (1,571) (2,885) (251) (1,860) (10,208)
-------------------------------------------- ------ ------ ------ ---- -------- -------
Significant cost items 569 20 (396) (1) 1,090 1,282
-------------------------------------------- ------ ------ ------ ---- -------- -------
- costs to achieve 69 6 147 (1) 817 1,038
--------------------------------------------
- costs to establish UK ring-fenced
bank 5 1 - - 251 257
--------------------------------------------
- UK customer redress programmes 495 12 2 - - 509
--------------------------------------------
- settlements and provisions in connection
with legal and regulatory matters - - (551) - 11 (540)
--------------------------------------------
- costs associated with the UK's exit
from the EU - 1 6 - 11 18
-------------------------------------------- ------ ------ ------ ---- -------- -------
Adjusted operating expenses (3,072) (1,551) (3,281) (252) (770) (8,926)
-------------------------------------------- ------ ------ ------ ---- -------- -------
1 The current year 'cost of structural reform' includes 'costs
associated with the UK's exit from the EU' of GBP97m and 'costs to
establish UK ring-fenced bank' of GBP87m.
Net impact on profit before tax by business segment
Corporate
Audited RBWM CMB GB&M GPB Centre Total
GBPm GBPm GBPm GBPm GBPm GBPm
---- ------ ------ ---- --------- --------
31 Dec 2018
Reported profit/(loss) before tax 375 1,310 804 62 (577) 1,974
---------------------------------------- ---- ----- ----- --- -------- -----
Net impact on reported profit and loss 68 (25) (98) - 181 126
----------------------------------------
- Significant revenue items - (34) (42) - 2 (74)
----------------------------------------
* Significant cost items 68 9 (56) - 179 200
---------------------------------------- ---- ----- ----- --- -------- -----
Adjusted profit/(loss) before tax 443 1,285 706 62 (396) 2,100
---------------------------------------- ---- ----- ----- --- -------- -----
31 Dec 2017
Reported profit/(loss) before tax 329 1,779 1,193 60 (991) 2,370
---------------------------------------- ---- ----- ----- --- -------- -----
Net impact on reported profit and loss 571 97 (230) (1) 1,025 1,462
----------------------------------------
- Significant revenue items 2 77 166 - (65) 180
----------------------------------------
- Significant cost items 569 20 (396) (1) 1,090 1,282
---------------------------------------- ----- ----- --- -------- -----
Adjusted profit/(loss) before tax 900 1,876 963 59 34 3,832
---------------------------------------- ---- ----- ----- --- -------- -----
By operating segment:
Adjusted profit for the year
(Audited) 2018
Corporate
RBWM CMB GB&M GPB Centre Total
GBPm GBPm GBPm GBPm GBPm GBPm
------- ------- ------- ----- ----------- ---------
Net operating income before change in expected
credit losses and other credit
impairment charges(1) 2,580 2,445 4,207 249 (87) 9,394
-------------------------------------------------------- ------ ------ ------ ---- ------ ------
- external 2,530 2,252 4,554 248 (190) 9,394
- inter-segment 50 193 (347) 1 103 -
Change in expected credit losses and other
credit impairment charges (103) (26) (110) 1 79 (159)
-------------------------------------------------------- ------ ------ ------ ---- ------ --- ------
Net operating income 2,477 2,419 4,097 250 (8) 9,235
-------------------------------------------------------- ------ ------ ------ ---- ------ ------
Total operating expenses (2,034) (1,134) (3,391) (188) (404) (7,151)
-------------------------------------------------------- ------ ------ ------ ---- ------ ------
Operating profit 443 1,285 706 62 (412) 2,084
-------------------------------------------------------- ------ ------ ------ ---- ------ ------
Share of profit/(loss) in associates and
joint ventures - - - - 16 16
-------------------------------------------------------- ------ ------ ------ ---- ------ --- ------
Adjusted profit before tax(2) 443 1,285 706 62 (396) 2,100
-------------------------------------------------------- ------ ------ ------ ---- ------ ------
% % % % %
Adjusted cost efficiency ratio 78.8 46.4 80.6 75.5 76.1
-------------------------------------------------------- ------ ------ ------ ---- ----------- ------
2017
Net interest income 3,185 2,323 856 175 (283) 6,256
Net fee income 963 1,138 762 117 9 2,989
Net trading income 13 40 2,368 9 113 2,543
Other income (62) 66 616 20 804 1,444
Net operating income before loan impairment
charges and other credit risk 4,099 3,567 4,602 321 643 13,232
* external 3,840 3,784 5,142 242 224 13,232
* inter-segment 259 (217) (540) 79 419 -
Loan impairment charges and other credit
risk provisions (127) (140) (358) (10) 140 (495)
Net operating income 3,972 3,427 4,244 311 783 12,737
-------------------------------------------------------- ------ ------ ------ ---- ------ --- ------
Total operating expenses (3,072) (1,551) (3,281) (252) (770) (8,926)
* employee compensation and benefits (973) (507) (1,014) (82) (41) (2,617)
* general and administrative expenses (2,084) (1,027) (2,262) (168) (212) (5,753)
* depreciation and impairment of property, plant a
nd
equipment (6) (17) (3) (1) (293) (320)
* amortisation and impairment of intangible assets (9) - (2) (1) (224) (236)
-------------------------------------------------------- ------ ------ ------ ---- ------ ------
Operating profit 900 1,876 963 59 13 3,811
-------------------------------------------------------- ------ ------ ------ ---- ------ --- ------
Share of profit in associates and joint
ventures - - - - 21 21
-------------------------------------------------------- ------ ------ ------ ---- ------ --- ------
Adjusted profit before tax(2) 900 1,876 963 59 34 3,832
------ ------ ------ ---- ------ --- ------
% % % % %
Adjusted cost efficiency ratio 74.9 43.5 71.3 78.5 67.5
-------------------------------------------------------- ------ ------ ------ ---- ----------- ------
1 Net operating income before change in expected credit losses
and other credit impairment charges/Net operating income before
loan impairment charges and other credit provisions also referred
to as revenue.
2 The group adopted IFRS 9 on 1 January 2018. Comparative information has not been restated.
Adjusted performance
Our adjusted profit before tax decreased by GBP1,732m or 45%
compared with 2017. Adjusted profit before tax decreased due to the
impact of discontinued operations and lower revenue, partly offset
by lower ECL and operating expenses.
Adjusted revenue decreased by GBP3,838m or 29%. Of this,
GBP2,912m was due to the impact of discontinued operations. Revenue
was also lower in GB&M due to a decrease in Global Markets
revenue, notably in Rates due to lower volumes and margin
compression as a result of challenging market conditions and
reduced client activity. Revenue was also lower in Global Banking
due to lower volumes and fee compression across a number of product
lines. In Corporate Centre, revenue decreased mainly due to lower
recharges to other entities in the Group, offset by lower operating
expenses. This reflected the transfer of certain costs to ServCo in
2018. This was partly offset by higher revenue in CMB, primarily
driven by higher revenue in the UK achieved through collaboration
between our global businesses.
Adjusted ECL/LICs were GBP336m or 68% lower. Of this, GBP136m
was due to the impact of discontinued operations. In 2018, ECL net
charges (excluding discontinued operations) were primarily in
GB&M due to an increase in charges in Global Banking, notably
in the construction and retail sectors in the UK and Italy. This
was partly offset by provision releases in Corporate Centre in
Legacy Credit following portfolio disposals. In 2017, net LICs
(excluding discontinued operations) were primarily driven by a
number of large exposures in GB&M in Global Banking in the
retail and construction sectors in the UK. This was partly offset
by provision releases in Corporate Centre following disposal of
assets in Legacy Credit.
Adjusted operating expenses decreased by GBP1,775m or 20%. Of
this, GBP1,629m was due to the impact of discontinued operations.
The remaining decrease was in Corporate Centre, primarily driven by
the transfer of costs to ServCo in 2018. Since these costs had
previously been recharged to other entities in the Group in 2017,
there was an offsetting reduction in intercompany revenue. This was
partly offset by an increase in operating expenses in GB&M
reflecting higher costs relating to temporary staff and higher
indirect taxes.
Retail Banking and Wealth Management
Adjusted profit before tax of GBP443m was GBP457m or 51% lower
than 2017. Of this, GBP454m was due to the impact of discontinued
operations.
Revenue decreased by GBP1,519m or 37%. Of this, GBP1,506m was
due to the impact of discontinued operations. Revenue also
decreased due to the transfer of our operations in Turkey to HSBC
Middle East Holdings B.V and HSBC Bank Middle East Limited in June
2017. In France revenue was lower reflecting margin compression on
lending and deposits, partly offset in insurance manufacturing due
to favourable movements in the present value of in-force long-term
insurance business ('PVIF') in 2018 compared with 2017. Our revenue
was higher in the Channel Islands reflecting growth in deposit
balances and higher margins.
ECL/LICs decreased by GBP24m or 19%. In 2018, ECL of GBP103m
included charges relating to discontinued operations of GBP101m as
well as increased provisions in Malta driven by model changes. In
2017, LICs of GBP127m included charges relating to discontinued
operations of GBP103m, charges in our Turkey operations of GBP10m,
as well as individually assessed provisions in France and
Greece.
Operating expenses decreased by GBP1,038m or 34%. Of this,
GBP1,050m was due to the impact of discontinued operations.
Operating expenses also decreased due to the transfer of our
operations in Turkey to HSBC Middle East Holdings B.V and HSBC Bank
Middle East Limited in June 2017. This was partly offset by an
increase in operating expenses, mainly in France due to higher
staff, marketing and training costs.
Commercial Banking
Adjusted profit before tax of GBP1,285m was GBP591m or 31% lower
than 2017. Of this, GBP596m was due to the impact of discontinued
operations.
Revenue decreased by GBP1,122m or 31%. Of this, GBP1,146m was
due to the impact of discontinued operations. Excluding this,
revenue increased, mainly in the UK through collaboration between
our global businesses.
ECL/LICs decreased by GBP114m or 81%. In 2018, ECL of GBP26m
included net releases relating to discontinued operations of GBP8m.
There were also charges in the UK relating to exposures in Turkey.
In 2017, LICs of GBP140m included charges relating to discontinued
operations of GBP116m as well as provisions in Armenia and Germany,
partly offset by releases in Greece and Spain.
Operating expenses decreased by GBP417m or 27%. Of this, GBP426m
was due to the impact of discontinued operations. Excluding this,
expenses increased due to higher IT costs in France.
Global Banking and Markets
Adjusted profit before tax of GBP706m was GBP257m or 27% lower,
primarily reflecting lower revenue and higher operating expenses,
partly offset by lower LICs/ECL.
Revenue decreased by GBP395m or 9%. Of this, GBP76m was due to
the impact of discontinued operations. Revenue decreased mainly in
Global Markets, notably in Rates due to lower volumes and margin
compression as a result of challenging market conditions and
reduced client activity. Revenue was also lower in Global Banking,
particularly across Debt Capital Markets, Equity Capital Markets
and Advisory product lines due to lower volumes and fee
compression.
ECL/LICs decreased by GBP248m or 69%. In 2018, ECL of GBP109m
were in the construction and retail sectors, partly offset by
releases of provisions in the retail and telecommunications
sectors. In 2017, LICs of GBP357m mainly comprised two large
exposures in the construction and retail sectors.
Operating expenses increased by GBP110m or 3%. Operating
expenses related to discontinued operations decreased by GBP79m.
Excluding this, the increase in operating expenses was due to
higher temporary staff costs relating to regulatory projects,
higher indirect taxes, and a legal settlement in relation to a
class action.
Global Private Banking
Adjusted profit before tax of GBP62m was GBP3m or 5% higher than
2017. Excluding discontinued operations, profit before tax
increased by a further GBP7m from 2017.
Revenue decreased by GBP72m or 22%. Of this, GBP90m was due to
the impact of discontinued operations. Excluding this, revenue
increased in the Channel Islands from increased deposits and higher
income on deposits due to the increase in interest rates.
ECL/LICs decreased by GBP11m. Of this, GBP10m was due to the
impact of discontinued operations. ECL in 2018 were therefore
broadly in line with LICs in 2017.
Operating expenses decreased by GBP64m or 25%. Of this, GBP73m
was due to the impact of discontinued operations. Excluding this,
operating expenses were higher, driven by increased costs in
Channel Islands relating to collaboration services from HSBC
UK.
Corporate Centre
Adjusted loss before tax of GBP396m was GBP430m lower than 2017.
Of this, GBP93m was due to the impact of discontinued operations.
Excluding this, profit before tax decreased due to lower revenue
and higher ECL/LICs, partly offset by lower operating expenses.
Revenue decreased by GBP730m. Of this, GBP96m was due to the
impact of discontinued operations. Excluding this, revenue
decreased mainly due to lower recharges to other entities in the
Group, offset by lower operating expenses. This reflected the
transfer of certain costs to ServCo in 2018. Revenue was also lower
due to increased losses on Legacy Credit portfolio disposals as we
accelerated the run-down of this legacy business to release capital
for other purposes.
ECL/LICs decreased by GBP61m or 43%, mainly driven by impairment
provision releases in Legacy Credit in 2018 following asset
portfolio disposals.
Operating expenses decreased by GBP366m or 47%, mainly due to
the transfer of certain costs to ServCo in 2018. Since these costs
had previously been recharged from the bank to other entities in
the Group in 2017, there was an offsetting reduction in
intercompany revenue. The costs moved to ServCo related to premises
and equipment, and electronic data processing.
Dividends
The consolidated reported profit for the year attributable to
the shareholders of the bank was GBP
1,506m
.
Interim dividends of GBP583m, in lieu of a final dividend in
respect of the previous financial year, and GBP234m in respect of
2018 were paid on the ordinary share capital during the year.
A second interim dividend of GBP406m, in lieu of a final
dividend in respect of the current year, was declared after 31
December 2018, payable on 26 February 2019.
In addition, a special dividend of GBP674m on the ordinary share
capital of HSBC Bank plc in respect of the current year was
declared after 31 December 2018, payable on 26 February 2019.
Further information about the results is given in the
consolidated income statement on page 87.
Review of business position
Summary consolidated balance sheet at 31 Dec
2018 2017
GBPm GBPm
Total assets(1,2) 604,958 818,868
------------------------------------------------------- ------- -------
Cash and balances at central banks 52,013 97,601
Trading assets(3) 95,420 145,725
Financial assets designated and otherwise mandatorily
measured at fair value through profit or loss 17,799 N/A
Financial assets designated at fair value N/A 9,266
Derivatives 144,522 143,335
Loans and advances to banks(3) 13,628 14,149
Loans and advances to customers(3) 111,964 280,402
Reverse repurchase agreements - non-trading 80,102 45,808
Financial investments 47,272 58,000
Other assets(3) 42,238 24,582
------------------------------------------------------- ------- -------
Total liabilities(1,2) 577,549 774,819
------------------------------------------------------- ------- -------
Deposits by banks(4) 24,532 29,349
Customer accounts(4) 180,836 381,546
Repurchase agreements - non-trading 46,583 37,775
Trading liabilities(4,5) 49,514 106,496
Financial liabilities designated at fair value(5) 36,922 18,249
Derivatives 139,932 140,070
Debt securities in issue 22,721 13,286
Liabilities under insurance contracts 20,657 21,033
Other liabilities(4) 55,852 27,015
------------------------------------------------------- ------- -------
Total equity(1,2) 27,409 44,049
------------------------------------------------------- ------- -------
Total shareholders' equity 26,878 43,462
Non-controlling interests 531 587
------------------------------------------------------- ------- -------
1 The group adopted IFRS 9 together with voluntary changes to
accounting policy and presentation on 1 January 2018. Comparative
information has not been restated. For further details, refer to
'Changes to accounting from 1 January 2018' on page 10, 'Standards
adopted during the year ended 31 December 2018' on page 97, and
Note 34 'Effects of reclassifications upon adoption of IFRS 9' on
page 158.
2 On 1 July 2018, HSBC completed the ring-fencing of its UK
retail banking activities transferring qualifying RBWM, CMB and GPB
customers from the group to HSBC UK. This included the transfer of
relevant retail banking subsidiaries. We have retained the
non-qualifying components, primarily the UK GB&M business and
the overseas branches and subsidiaries. Refer to 'Ring-fenced bank'
on page 18 and Note 35 'Discontinued operations' on page 161 for
further details.
3 Cash collateral, margin and settlement accounts included in
'Trading assets' (GBP26,447m), 'Loans and advances to banks'
(GBP573m) and 'Loans and advances to customers' (GBP394m) at 31
December 2017 were reclassified to 'Prepayments, accrued income and
other assets' at 1 January 2018 in accordance with IFRS 9.
Comparative information has not been restated. Refer to 'Changes to
accounting from 1 January 2018' on page 10 and Note 34 'Effects of
reclassifications upon adoption of IFRS 9' for further details.
4 Cash collateral, margin and settlement accounts included in
'Trading liabilities' (GBP30,755m), 'Deposits by banks' (GBP570m)
and 'Customer accounts' (GBP548m) at 31 December 2017 were
reclassified to 'Accruals, deferred income and other liabilities'
at 1 January 2018 as this presentation is considered to provide
more relevant information, given the change in presentation for the
financial assets. Comparative information has not been restated.
Refer to 'Changes to accounting from 1 January 2018' on page 10 and
Note 34 'Effects of reclassifications upon adoption of IFRS 9' for
further details.
5 We have considered market practices for the presentation of
certain financial liabilities which contain both deposit and
derivative components and were previously included in 'Trading
liabilities'. Such liabilities amounted to GBP17,958m at 31
December 2017. These liabilities are classified as 'Financial
liabilities designated at fair value' from 1 January 2018.
Comparative information has not been restated. Refer to 'Changes to
accounting from 1 January 2018' on page 10 and Note 34 'Effects of
reclassifications upon adoption of IFRS 9' for further details.
Balance sheet information by global business
(Audited)
RBWM CMB GB&M GPB Corporate Total
Centre
GBPm GBPm GBPm GBPm GBPm GBPm
31 Dec 2018
---------------------------------
Loans and advances to customers 21,924 29,021 56,464 3,541 1,014 111,964
Customer accounts 29,961 34,716 103,387 6,514 6,258 180,836
31 Dec 2017
--------------------------------- ------- ------- ------- ------ --------- ---------
Loans and advances to customers 117,933 84,947 63,379 7,372 6,771 280,402
Customer accounts 151,985 100,831 94,069 12,774 21,887 381,546
--------------------------------- ------- ------- ------- ------ --------- -------
There are no reconciling items between the adjusted and reported
view of the balance sheet for 2018 and 2017.
The group maintained a strong and liquid balance sheet with the
ratio of customer advances to customer accounts of 61.9% compared
with 73.5% at 31 December 2017.
The reduction in the ratio of customer advances to customer
accounts, as well as the reduction in the overall balance sheet
size is a result of ring-fencing. Notably this impacted:
Assets
-- Loans and advances to customers, which decreased by 60%;
-- Cash and balances at central banks, which decreased by 47%;
-- Financial investments, which decreased by 18%;
Liabilities
-- Customer accounts decreased by 53%;
Equity
-- The equity balance decreased by 38% as a result of transfer to HSBC UK.
Trading assets and liabilities decreased by 35% and 54%
respectively as a result of reclassifications upon adoption of IFRS
9 as well as a reduction in equities business.
Debt securities in issue increased by 71% due to funding
initiatives driven by both internal and regulatory
requirements.
Repurchase and reverse repurchase agreements (non-trading)
increased by 23% and 75% respectively as a result of increased
market activity.
Reported performance by country
Profit before tax - by country
Retail
Banking Global
and Banking Global
Wealth Commercial and Private Corporate
Management Banking Markets Banking Centre Total
Footnotes GBPm GBPm GBPm GBPm GBPm GBPm
------------------- ---------- ------------- ---------- -------- ---------- --------- -------
31 Dec 2018
------------------- ----------
United Kingdom 1 402 1,018 582 44 (535) 1,511
--------- ---------- -------- ------ -------- -----
France (42) 128 20 12 (75) 43
--------- ---------- -------- ------ -------- -----
Germany 10 64 74 6 (3) 151
--------- ---------- -------- ------ -------- -----
Other 5 100 128 - 36 269
------------------- ---------- --------- ---------- -------- ------ -------- -----
Profit before tax 375 1,310 804 62 (577) 1,974
------------------- ---------- --------- ---------- -------- ------ -------- -----
31 Dec 2017
United Kingdom 320 1,491 704 50 (950) 1,615
------------------- ----------
France (8) 158 181 4 (121) 214
------------------- ----------
Germany 16 48 111 7 30 212
------------------- ----------
Turkey 2 (9) 8 19 - 2 20
------------------- ----------
Other 10 74 178 (1) 48 309
------------------- ---------- --------- ---------- -------- ------ -------- -----
Profit before tax 329 1,779 1,193 60 (991) 2,370
------------------- ---------- --------- ---------- -------- ------ -------- -----
1 On 1 July 2018, HSBC completed the ring-fencing of its UK
retail banking activities transferring qualifying RBWM, CMB and GPB
customers from the group to HSBC UK. This included the transfer of
relevant retail banking subsidiaries. We have retained the
non-qualifying components, primarily the UK GB&M business and
the overseas branches and subsidiaries. Refer to 'Ring-fenced bank'
on page 18 and Note 35 Discontinued operations on page 161 for
further details.
2 On 29 June 2017, the Turkish operations transferred to HSBC
Middle East Holdings B.V. and HSBC Bank Middle East Limited.
Net interest margin
Net interest margin is calculated by dividing net interest
income as reported in the income statement by the average balance
of interest-earning assets. Average balances are based on daily
averages of the group's activities.
Net interest margin of 0.88% was 48 basis points ('bps') lower
than in 2017, including the effects of significant items, foreign
currency translation and impacted by the transfer of the UK
businesses to HSBC UK.
Net interest income
2018 2017
GBPm GBPm
-------- ----------
Interest income 7,422 9,043
--------------------------------- ------- -------
Interest expense (3,762) (2,862)
--------------------------------- -------
Net interest income 3,660 6,181
--------------------------------- ------- -------
Average interest-earning assets 417,569 453,182
--------------------------------- -------
% %
--------------------------------- -------- ----------
Gross interest yield 1.58 1.84
--------------------------------- -------
Less: cost of funds (0.77) (0.53)
--------------------------------- ------- -------
Net interest spread 0.81 1.31
--------------------------------- ------- -------
Net interest margin(1) 0.88 1.36
--------------------------------- ------- -------
1 Net interest margin is net interest income expressed as an annualised percentage of average interest-earning assets.
Summary of interest income by asset type
2018 2017
Average Interest Average Interest
balance income Yield(1) balance income Yield(1)
GBPm GBPm % GBPm GBPm %
----------
Short term funds and loans and
advances to banks 85,186 146 0.17 78,133 53 0.07
------------------------------------- ------- -------- -------- -------
Loans and advances to customers 188,956 4,865 2.57 266,491 7,136 2.68
------------------------------------- -------- --------
Reverse repurchase agreements -
non trading 64,462 404 0.63 44,739 186 0.42
------------------------------------- -------- --------
Financial investments 52,153 902 1.73 63,462 943 1.49
-------------------------------------
Other interest-earning assets 26,812 268 1.00 357 18 5.04
------------------------------------- ------- -------- -------- ------- -------- --------
Total interest-earning assets 417,569 6,585 1.58 453,182 8,336 1.84
------------------------------------- ------- -------- -------- ------- -------- --------
Trading assets and financial assets
designated or mandatorily measured
at fair value(2) 70,958 1,906 2.69 N/A N/A N/A
------------------------------------- ------- -------- -------- -------- -------- ----------
Trading assets and financial assets
designated at fair value(2) N/A N/A N/A 82,765 1,685 2.04
------------------------------------- -------- -------- -------- ------- -------- --------
Expected credit losses provision (2,051) - - N/A N/A N/A
------------------------------------- ------- -------- -------- -------- -------- ----------
Impairment allowance N/A N/A N/A (2,328) - -
-------- --------
Non-interest-earning assets 263,691 - - 300,521 - -
------- -------- -------- --------
Total assets 750,167 8,491 1.13 834,140 10,021 1.20
------------------------------------- ------- -------- -------- ------- -------- --------
1 Yield calculations include negative interest on assets
recognised as interest expense in the income statement.
2 Interest income arising from trading assets is included within
'Net trading income' in the income statement.
Summary of interest expense by type of liability and equity
2018 2017
Average Interest Average Interest
balance expense(1) Cost balance expense(1) Cost
GBPm GBPm % GBPm GBPm %
------------------------------------------- -----------
Deposits by banks 21,716 109 0.50 17,293 54 0.31
------------------------------------------- -------- ----------- ---- -------- ----------- ----
Financial liabilities designated
at fair value - own debt issued 16,178 187 1.16 17,307 218 1.26
------------------------------------------- -------- ----------- ---- -------- ----------- ----
Customer accounts 222,970 1,343 0.60 308,944 1,279 0.41
------------------------------------------- -------- ----------- ---- -------- ----------- ----
Repurchase agreements - non trading 49,523 389 0.79 39,239 152 0.39
------------------------------------------- -------- ----------- ---- -------- ----------- ----
Debt securities in issue and subordinated
debts 34,969 600 1.72 21,846 377 1.73
------------------------------------------- -------- ----------- ---- -------- ----------- ----
Other interest-bearing liabilities 32,729 297 0.91 1,114 75 6.73
------------------------------------------- -------- ----------- ---- -------- ----------- ----
Total interest-bearing liabilities 378,085 2,925 0.77 405,743 2,155 0.53
------------------------------------------- -------- ----------- ---- -------- ----------- ----
Trading liabilities and financial
liabilities designated at fair
value (excluding own debt issued)(2) 65,768 1,617 2.46 91,830 1,167 1.27
----------- -----------
Non-interest-bearing current accounts 53,741 - - 49,527 - -
Total equity and other non-interest
bearing liabilities 252,573 - - 287,040 - -
------------------------------------------- -------- ----------- ---- -------- ----------- ----
Total equity and liabilities 750,167 4,542 0.61 834,140 3,322 0.40
------------------------------------------- -------- ----------- ---- -------- ----------- ----
1 Cost of funding calculations include negative interest on
liabilities recognised as interest income in the income
statement.
2 Interest expense arising from trading liabilities is included
within 'Net trading income' in the income statement.
Structural reform
UK exit from EU
The structural reform in preparation of the UK's withdrawal from
the EU is described under Areas of special interest within the Risk
section, page 23.
Ring-fenced bank
Policy background
The UK Financial Services (Banking Reform) Act 2013 and
associated secondary legislation and regulatory rules required UK
deposit-taking banks with more than GBP25bn of 'core deposits'
(broadly from individuals and small to medium-sized businesses) to
separate their UK retail banking activities from their other
wholesale and investment banking activities by
1 January 2019. The resulting UK ring-fenced bank ('RFB')
entities need to be legally distinct, operationally separate and
economically independent from the non-ring-fenced bank
entities.
Ring-fencing rules have been published by the Prudential
Regulation Authority ('PRA') determining how ring-fenced banks are
permitted to operate. Further rules published by the FCA set out
the disclosures that non-ring-fenced banks are required to make to
prospective customers who are individuals.
Ring-fencing implementation
HSBC completed the ring-fencing of its UK retail banking
activities on 1 July 2018, six months in advance of the legal
requirement coming into force, transferring circa 14.5 million
qualifying RBWM, CMB and GPB customers from HSBC Bank plc to HSBC
UK Bank plc ('HSBC UK'), HSBC's ring-fenced bank. This included the
transfer of relevant retail banking subsidiaries. HSBC Bank plc,
which is HSBC's non-ring-fenced bank, has retained the
non-qualifying components, primarily the UK GB&M business and
the overseas branches and subsidiaries. The two banking entities
will operate alongside each other, supported by services received
from HSBC Global Services (UK) Limited ('UK ServCo').
The primary means of transferring HSBC Bank plc's qualifying
customers and subsidiaries to HSBC UK was through a court-approved
ring-fencing transfer scheme ('RFTS') as provided for in Part VII,
section 106 of the Financial Services and Markets Act 2000 (as
amended) ('FSMA'). In addition to these transfers, certain items
were transferred through other legal arrangements.
Establishment of HSBC UK Bank plc
The establishment of HSBC UK was accounted for as a group
restructuring. HSBC's accounting policy for such transactions
requires that assets and liabilities were recognised by HSBC UK at
their existing carrying amounts in the financial statements of the
group.
Risk overview
The group continuously identifies and monitors risks. This
process, which is informed by its risk factors and the results of
its stress testing programme, gives rise to the classification of
certain principal risks. Changes in the assessment of principal
risks may result in adjustments to the group's business strategy
and, potentially, its risk appetite.
Our banking risks are credit risk, operational risk, market
risk, liquidity and funding risk, compliance risk and reputational
risk. We also incur insurance risk.
In addition to these banking risks, we have identified top and
emerging risks with the potential to have a material impact on our
financial results or reputation and the sustainability of our
long-term business model.
The exposure to our risks and risk management of these are
explained in more detail in the Risk section of the Report of the
Directors on pages 20 to 35.
During 2018, a number of changes to our top and emerging risks
have been made, to reflect the revised assessment of their effect
on the group. Two risks have been removed, 'Turning of the Credit
cycle'; this risk will be controlled in line with the group's
approach to managing credit through the cycle and "Increasing
Regulatory expectations"; this risk has been removed as specific
high impact regulatory change initiatives have dedicated coverage
(such as the HSBC programme to manage the impact of the UK's exit
from the EU) and the associated implications of such change
initiatives will be covered through Execution Risk.
A new risk 'IBOR (Inter Bank Offered Rate) transition' was added
during 2018 and also includes LIBOR (London Inter Bank Offered
Rate).
Externally driven
UK exit from p The UK is due to leave the EU in March 2019 and negotiations
EU are ongoing. We will continue to work with regulators,
governments and our customers to manage the risks
of the UK's exit from the EU (and the current period
of uncertainty) as they arise, particularly across
those sectors most impacted.
------------------- -------------------------------------------------------------
Geopolitical p We continually assess the impact of geopolitical events
risk on our businesses and exposures across Europe and
take steps to mitigate them, where required, to help
ensure that we remain within risk appetite. We have
also strengthened physical security at our premises
where the risk of terrorism is heightened.
Cyber threat u We continue to strengthen our cyber control framework,
and unauthorised in line with the changing threat environment and improve
access to systems our resilience and cybersecurity capabilities, including
threat detection and analysis, access control, payment
system controls, data protection, network controls
and backup and recovery.
------------------- --- -------------------------------------------------------------
Regulatory u We continue to enhance our management of conduct in
focus on conduct a number of areas, including the treatment of potentially
of business vulnerable customers, market surveillance, employee
training and performance.
------------------- --- -------------------------------------------------------------
Financial Crime u We have integrated the majority of the Global Standards
Compliance programme financial crime risk core capabilities into
our day-to-day operations during 2018, and expect
to complete the transition to business and function
management in the first half of 2019. We continue
to take further steps to refine and strengthen our
defences against financial crime by applying advanced
analytics and artificial intelligence.
------------------- -------------------------------------------------------------
Market illiquidity u We monitor risks closely and report regularly on illiquidity
and volatility and concentration risks to the PRA.
------------------- --- -------------------------------------------------------------
IBOR transition -- We are evaluating the impact on HSBC's products, services
and processes as the industry accord evolves, with
the intention of minimising disruption through appropriate
mitigating actions.
------------------- --- -------------------------------------------------------------
Internally driven
People risk u We continue to increase our focus on resource planning
and employee retention and to equip line managers
with the skills to both manage change and support
their employees.
------------------- -------------------------------------------------------------
IT systems u We continue to monitor and improve service resilience
infrastructure across our technology infrastructure, enhancing our
and resilience problem diagnosis/resolution and change execution
capabilities, reducing service disruption to our customers.
------------------- --- -------------------------------------------------------------
Execution risk u We continue to strengthen our prioritisation and governance
processes for significant strategic, regulatory and
compliance projects.
------------------- --- -------------------------------------------------------------
Model risk p We have enhanced our model risk governance framework
by establishing an independent second line of defence
Model Risk Management sub-function, and enhancing
our existing policy and standards in order to address
evolving regulatory, external and internal requirements.
------------------- --- -------------------------------------------------------------
Data management p We continue to improve our insights, consistency of
data aggregation, reporting and decisions through
ongoing enhancement of our data governance, data quality,
data privacy and architecture framework.
------------------- --- -------------------------------------------------------------
p Risk has heightened during 2018
u Risk remains at the same level
as 2017
-- New risk introduced in 2018
On behalf of the Board
J Fleurant, Director
19 February 2019
Registered number
14259
r
Risk
Page
Our risk appetite 22
------
Top and emerging risks 22
------
Externally driven 22
--------------------------------------- ------
Internally driven 24
--------------------------------------- ------
Areas of special interest 25
------
Risk management 25
------
Our risk management framework 25
--------------------------------------- ------
Our material banking and insurance
risks 28
--------------------------------------- ------
Credit risk management 29
--------------------------------------- ------
Liquidity and funding risk management 32
--------------------------------------- ------
Market risk management 32
--------------------------------------- ------
Operational risk management 35
--------------------------------------- ------
Regulatory compliance risk management 35
--------------------------------------- ------
Financial crime risk management 36
--------------------------------------- ------
Insurance manufacturing operations
risk management 37
--------------------------------------- ------
Other material risks 34
--------------------------------------- ----
Reputational risk management 34
--------------------------------------- ----
Pension risk management 34
--------------------------------------- ----
Key developments and risk profile 39
--------------------------------------- ------
Key developments in 2018 39
--------------------------------------- ------
Credit risk in 2018 39
--------------------------------------- ------
Summary of credit risk 35
--------------------------------------- ----
Management of liquidity and funding
risk profile 68
--------------------------------------- ------
Market risk profile 70
--------------------------------------- ------
Operational risk profile 73
--------------------------------------- ------
Insurance manufacturing operations
risk profile 73
--------------------------------------- ------
Our risk appetite
Throughout its history HSBC has maintained a risk profile that
has developed in line with its strategy and business
objectives.
The following principles guide the group's overarching risk
appetite and determine how its businesses and risks are
managed:
Financial position
-- Strong capital position, defined by regulatory and internal ratios.
-- Liquidity and funding management for each entity on a stand-alone basis.
Operating model
-- Ambition to generate returns in line with our risk appetite
and strong risk management capability.
-- Ambition to deliver sustainable earnings and appropriate returns for shareholders.
Business practice
-- Zero tolerance for knowingly engaging in any business,
activity or association where foreseeable reputational risk or
damage has not been considered and/or mitigated.
-- No appetite for deliberately or knowingly causing detriment
to consumers arising from our products and services or incurring a
breach of the letter or spirit of regulatory requirements.
-- No appetite for inappropriate market conduct by a member of staff or by any group business.
Enterprise-wide application
Our risk appetite encapsulates consideration of financial and
non-financial risks and is expressed in both quantitative and
qualitative terms. It is applied at the global business level, at
the country level and to material European entities.
Top and emerging risks
Top and emerging risks are those that may impact on the
financial results, reputation or business model of the bank. If
these risks were to occur, they could have a material effect on the
group. The exposure to these risks and our risk management approach
are explained in more detail below.
Externally driven
Process of UK withdrawal from the European Union
Uncertainty regarding the terms of the UK's exit agreement and
its future relationship (including trading) with both the EU and
the rest of the world is expected to continue for the next few
years at least. Market volatility will therefore persist as the UK
continues its negotiations with the EU and its potential future
trading partners around the world. Throughout this period, we will
continually update our assessment of potential consequences for our
customers, products and banking model and re-evaluate our
mitigating actions accordingly.
The scale and nature of the impact on HSBC will depend on the
precise terms on which HSBC and its customers will be able to
conduct cross-border business following the UK's departure from the
EU. Changes to the UK's current trade relationships could require
changes to HSBC's banking model to ensure we continue to comply
with law and regulation in meeting the needs of our customers and
conducting our business. Such changes could, among other things,
increase our operating costs and require us to relocate staff and
businesses to other jurisdictions. In addition, any negative impact
on the economy, demand for borrowing and capital flows as a result
of the aforementioned uncertainty, volatility or result of UK
negotiations could have a consequential negative impact on
HSBC.
Mitigating actions
-- We have undertaken a comprehensive impact assessment to
understand the range of potential implications for our customers,
our products and our business. We have identified actions to ensure
we can continue to serve our customers across the UK and Europe,
and have started implementing them.
-- We actively monitor our portfolio to identify areas of
stress, supported by stress testing analyses. Vulnerable sectors
will be subject to management review to determine if any
adjustments to risk policy or appetite are required. As part of our
stress testing programme, in addition to the Bank of England
regulatory stress test which incorporated assumptions of a UK
departure from the EU without a Withdrawal Agreement, we have
conducted additional specific stress tests incorporating a number
of internal macroeconomic and event-driven scenarios to assess a
range of risks and provide management with a wider view of possible
scenarios and outcomes from the UK's EU departure.
-- We will continue to work with regulators, governments and our
clients in an effort to manage risks as they arise, particularly
across the most impacted sectors.
We believe we are well placed to withstand these risks, but
would nevertheless be affected by severe shocks. For further
details, see 'Areas of special interest' section.
Geopolitical risk
Our operations and portfolios are exposed to risks associated
with political instability, civil unrest and military conflict
which could lead to disruption to our operations, physical risk to
our staff and/or physical damage to our assets. In addition rising
protectionism and the increased trend of using trade and investment
policies as diplomatic tools may also adversely affect global trade
flows. Geopolitical risk remained heightened throughout 2018.
The growing presence of populist parties means political systems
across Europe are increasingly fragmented, volatile and less
predictable. Political uncertainty remains high in the UK as its
departure from the EU continues to dominate the political agenda.
The persistent threat of terrorist attacks remains.
Mitigating actions
-- We continually monitor the geopolitical outlook, in
particular in countries where we have material exposures and/or a
physical presence.
-- We use internal stress tests and scenario analysis as well as
regulatory stress test programmes, to adjust limits and exposures
to reflect our risk appetite and mitigate risks as appropriate.
-- We have taken steps to enhance physical security in those
countries deemed to be at high risk from terrorism.
Cyber threat and unauthorised access to systems
HSBC and other public and private organisations continue to be
the targets of increasingly sophisticated cyber attacks. Ransomware
and distributed denial of service attacks appear to be an
increasingly dominant threat to the financial industry, which may
result in disruption to our operations and customer-facing
websites, financial loss or loss of customer data.
Mitigating actions
-- We continue to strengthen our capabilities to protect against
increasingly sophisticated malware, denial of service attacks and
loss of data, as well as enhancing our security event detection and
incident response processes. As well as technological improvement
there is an increasing awareness of the cyber threat within our
business, supported by formal training and the implementation of a
number of specific cyber related working groups leading to an
improving control environment around the end user and third party
environment.
-- Cyber risk is a top priority of the Board and is regularly
reported to ensure appropriate visibility, governance and executive
support for our ongoing cybersecurity programme.
-- We participate in intelligence sharing with both law
enforcement and industry schemes to help improve our understanding
of, and ability to respond to, the evolving threats faced by us and
our peers.
Regulatory focus on conduct of business
Financial institutions remain under considerable scrutiny
regarding conduct of business, particularly in relation to fair
outcomes for customers and orderly and transparent operations in
financial markets. Regulators, prosecutors, the media and the
public all have heightened expectations as to the behaviour and
conduct of financial institutions, and any shortcomings or failure
to demonstrate adequate controls are in place to mitigate such
risks could result in regulatory sanctions, fines or an increase in
civil litigation.
In September 2017, HBSC Holdings and HSBC North America Holdings
Inc. ('HNAH') consented to a civil money penalty order with the US
Federal Reserve Board ('FRB') in connection with its investigation
into HSBC's historical foreign exchange activities. Under the terms
of the order, HSBC Holdings and HNAH agreed to undertake certain
remedial steps and to pay a civil money penalty to the FRB. In
January 2018, HSBC Holdings entered into a three-year deferred
prosecution agreement with the Criminal Division of the US
Department of Justice ('DoJ') relating to HSBC's historical foreign
exchange sales and trading activities. Under the terms of the
deferred prosecution agreement, HSBC agreed to undertake certain
remedial steps; to provide annual reports to the DoJ and to pay a
financial penalty and restitution. For further details, see Note 32
of the Financial Statements.
Mitigating actions
-- We have continued to enhance our management of conduct in
areas including the treatment of potentially vulnerable customers,
market surveillance, employee training and performance management
(see 'Regulatory compliance risk management' on page 31.
Financial crime compliance
Financial institutions remain under considerable regulatory
scrutiny regarding their ability to prevent and detect financial
crime. Financial crime threats continue to evolve, often in tandem
with geopolitical developments. The highly speculative, volatile
and opaque nature of virtual currencies as well as the pace of new
currencies and associated technological developments creates
challenges in effectively managing financial crime risks. The
evolving regulatory environment continues to present execution
challenge. An increasing trend towards greater data privacy
requirements may affect our ability to effectively manage financial
crime risks.
In December 2012, among other agreements, HSBC Holdings plc
('HSBC Holdings') consented to a cease-and-desist order with the US
Federal Reserve Board ('FRB') and agreed to an undertaking with the
UK Financial Conduct Authority ('FCA') to comply with certain
forward-looking AML and sanctions-related obligations. HSBC
Holdings 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 annual assessments of the
Group's AML and sanctions compliance programme. HSBC Holdings
entered into an agreement with the Office of Foreign Assets Control
('OFAC') regarding historical transactions involving parties
subject to OFAC sanctions. The Skilled Person/Independent
Consultant will continue to conduct country reviews and provide
periodic reports for a period of time at the FCA's and FRB's
discretion. The role of the Skilled Person/Independent Consultant
is discussed on page 33.
Mitigating actions
-- HSBC continues to enhance financial crime risk management
capabilities; investing in the next generation of tools to fight
financial crime by applying advanced analytics and artificial
intelligence.
-- HSBC are developing procedures and controls to manage the
risks associated with direct and indirect exposure to virtual
currencies.
-- HSBC continues to work with jurisdictions and relevant bodies
to address data privacy challenges through international standards,
guidance and legislation to enable effective management of
financial crime risk.
-- We continue to ensure that the reforms we have put in place
are both effective and sustainable over the long term.
Market illiquidity and volatility
Market liquidity, as defined by the ability to trade the desired
volume of a financial security in a timely manner, continues to be
sporadic. Liquidity remains challenging due to multiple factors:
regulatory demands such as increased capital requirements
constraining the overall balance sheet size of financial
institutions, the implementation of the Volcker rule, which
prohibits certain trading activities, and the impact of revised
collateral requirements.
This is a market-wide issue, where HSBC may suffer losses or
incur lower revenue.
Mitigating actions
-- We continually monitor our illiquid positions and
concentration risks, adjusting our market risk limits and risk
appetite where appropriate.
IBOR transition
Interbank Offered Rates ('IBORs') including LIBOR (London
Interbank Offered Rate) are used to set interest rates on hundreds
of trillions of US dollars' worth of different types of financial
transactions and are used extensively for valuation purposes, risk
measurement and performance benchmarking.
Following the recommendations of the Financial Stability Board,
a fundamental review and reform of the major interest rates
benchmarks, including IBORs, are underway across the world's
largest financial markets. In some cases, the reform will include
replacing interest rate benchmarks with alternative Risk Free Rates
('RFRs'). This replacement process is at different stages, and is
progressing at different speeds, across several major
currencies.
There is therefore uncertainty as to the basis, method and
timing of transition and their implications on the participants in
the financial markets.
HSBC has identified a number of potential prudential, conduct
and systemic risks associated with the transition.
Mitigating actions
-- The Group has established a Global Programme across all of
our Global Businesses to coordinate HSBC's transition activities
and to assess the potential risks and impacts of any
transition.
-- The Group will continue to engage with industry participants
and the official sector to support an orderly transition.
-- We will continue to contribute to the ongoing Global
Programme work to determine the volume and value of customer
exposures potentially impacted by the transition from IBORs.
Internally driven
People risk
Our people are critical to our success and it is important that
we identify, manage and mitigate any risks that might have an
impact on our people feeling empowered and able to thrive in their
careers, as well as being able to support our customers and the
communities they serve. We aim to foster a culture that proactively
promotes the right colleague behaviours and conduct, and that we
have the right number of people with the right skills, knowledge
and capabilities to be able to do the right thing for our
customers. We have processes in place to identify where this might
not be the case and to mitigate the risk accordingly.
We continually assess the impact of geopolitical events on our
businesses and exposures. Some events, such as the UK's exit from
the EU, result in increased people risks to be assessed in the UK
and across a number of European sites, and for steps to be taken to
mitigate such risks, where required.
Our success in delivering the Group's strategic priorities, as
well as proactively managing the regulatory environment, depends on
the continuous development and retention of our leadership and high
performing employees. The ability to continue to attract, train,
motivate and retain highly qualified professionals in an employment
market where expertise is often mobile and in short supply is
critical, particularly as our business lines execute their
strategic business outlooks.
Mitigating actions
-- We have plans in place to manage the potential impacts
resulting from the UK exit from the EU.
-- HSBC University is focused on developing opportunities and
tools for now, next and future skills, personal skills to 'learn,
adapt and evolve' and leaders to create an environment for
success.
-- HSBC is building the healthiest human system where colleagues
can thrive. A number of initiatives to improve our 'Ways of
Working' (e.g. simplifying processes and governance, adopting new
behaviours) and encourage an open and positive culture have been
launched. We also promote a diverse and inclusive workforce and
provide active support across a wide range of health and wellbeing
activities.
IT systems infrastructure and resilience
HSBC continues to invest in the reliability and resilience of
the group's IT systems and crucial services, which could result in
reputational and regulatory damage.
Mitigating actions
-- Strategic initiatives are transforming how technology is
developed, delivered and maintained, with a particular focus on
providing high quality, stable and secure services. As part of
this, we are concentrating on materially improving system
resilience and service continuity testing. In addition we have
enhanced the security of our development lifecycle and improved our
testing processes and tools.
-- During 2018, we continued to monitor and upgrade our IT
systems, simplifying our service provision and replacing older IT
infrastructure and applications.
Execution risk
In order to deliver our strategic objectives and meet mandatory
regulatory requirements, it is important for HSBC to maintain a
strong focus on execution risk. This requires robust management of
significant resource--intensive and time--sensitive programmes.
Risks arising from the magnitude and complexity of change may
include regulatory censure, reputational damage or financial
losses. Current major initiatives include managing the operational
implications of updating our business model following the UK's vote
to leave the EU.
Mitigating actions
-- Our prioritisation and governance processes for significant
projects are monitored by the group's Executive Committee.
-- In 2018, we continued to manage execution risks through
closely monitoring the punctual delivery of critical initiatives,
internal and external dependencies, and key risks, to allow better
portfolio management across the group.
Model risk
We use models for a range of purposes in managing our business,
including regulatory capital calculations, stress testing, credit
approvals, financial crime risk management and financial reporting.
Evolving regulatory requirements have had a significant impact on
our approach to model risk management, which poses execution
challenges. The adoption of more sophisticated modelling approaches
and technology across the industry could also lead to increased
model risk.
Mitigating actions
-- We established a model risk management sub-function in the
second line of defence to strengthen governance and oversight of
this risk type.
-- We enhanced our model risk governance framework while
partnering with the business in order to enable more effective
management of model risk in a commercial context. As we adopt new
modelling technologies, we are updating our model risk management
framework and governance standards to help drive the evolution of
the overall governance framework to ensure best practice.
Data management
The group currently uses a large number of systems and
applications to support key business processes and operations. As a
result, we often need to reconcile multiple data sources to reduce
the risk of error. HSBC, along with other organisations, also needs
to respond to the increasing external and regulatory expectations
regarding data privacy and protection capabilities across our
customer data systems.
Mitigating actions
-- We continue to improve data quality across a large number of
systems globally. Our data management, aggregation and oversight
continues to strengthen and enhance the effectiveness of internal
systems and processes. We are implementing data controls for
critical processes in the 'front-office' systems to improve our
data capture at the point of entry. HSBC has achieved its objective
of meeting a "largely compliant" rating in support of the Basel
Committee for Banking Supervision (BCBS 239) principles.
-- Through the Group's Global Data Management Framework, we have
embedded governance processes to proactively monitor the quality of
critical customer, product and transaction data and resolving
associated data issues in a timely manner. We have also implemented
data controls in order to improve the reliability of data used by
our customers and staff.
-- To address global data privacy and protection regulations,
HSBC is leveraging outcomes from the Global Data Protection
Regulations (GDPR) initiative to roll-out and implement a global
and consistent data privacy framework, while tailoring it to
address any country specific regulations where required.
-- We have also initiated efforts to modernize our data
architecture and infrastructure through adoption of big data,
cloud, machine learning, advanced analytics and visualization
technologies.
Areas of special interest
Process of UK withdrawal from the European Union
The UK is due to formally leave the EU on 29 March 2019. The
UK's withdrawal from the EU may adversely affect our operating
model and financial results. Before 29 March, the UK and the EU are
seeking to finalise the Article 50 Withdrawal Agreement, which will
need to be approved by their respective parliaments. A
comprehensive trade deal will not be concluded within this time
frame. A period of transition until 31 December 2020 has been
agreed between the UK and the EU. However, there will be no legal
certainty until this is enshrined in the Withdrawal Agreement.
The modalities of the UK's exit from the European Union will
likely to have a significant impact on general economic conditions
in the UK and the European Union. The UK's future relationship with
the EU and its trading relationships with the rest of the world
will likely take a number of years to resolve. This may result in a
prolonged period of uncertainty, unstable economic conditions and
market volatility, including currency fluctuations. Throughout this
period of uncertainty, our priority is to support our clients and
continue to service them, independent of the outcome of
negotiations.
To ensure continuity of service, independent of the outcome of
negotiations, our robust contingency plan is based on a scenario
whereby the UK leaves the EU without the existing passporting or
regulatory equivalence framework that supports cross-border
business. HSBC's programme to manage the impact of the UK leaving
the EU was set up in 2017 and now has in excess of 1,000 employees
covering all businesses and functions. It focuses on four main
components: legal entity restructuring, platform build, clients and
employees.
Legal entity restructuring
On 1 January 2018, the activities of HSBC Bank plc's branch in
Greece were transferred to a new branch of HSBC France ('HBFR') in
Greece.
On 1 August 2018, the group transferred two wholly owned
subsidiaries, HSBC Bank Polska S.A. and HSBC Institutional Trust
Services (Ireland) DAC to its subsidiary, HBFR.
The group currently has branches in seven European Economic Area
('EEA') countries (Belgium, the Netherlands, Luxembourg, Spain,
Italy, Ireland and Czech Republic) which rely on passporting out of
the UK. Following regulatory approval in 2018, and on the
assumption that the UK leaves the EU without the existing
passporting or regulatory equivalence framework that supports
cross-border business, the branch network is in the process of
transferring to HBFR, as HSBC's primary banking entity authorised
in the EU.
The transfer of branches is happening in several steps:
-- establishment of new branches of HBFR
-- business transfer to the newly established branches
-- de-registration of the group's branches.
We are on track to complete the business transfer in the first
quarter of 2019 and good progress is being made on the operational
integration with HBFR of its branches in Belgium, Czech Republic,
Luxembourg, the Netherlands, Ireland, Italy and Spain.
Platform build
To accommodate customer migrations and new business after the
UK's EU departure, we are expanding and enhancing our product
offering and building new capabilities across Europe, where we
already have a strong foundation, with a focus on France, the
Netherlands and Ireland. Euro clearing capabilities are now
available in HBFR and further product launches are planned during
the first quarter of 2019.
Potential outcomes arising from the UK's departure from the EU
will impact our clients and our employees. Our focus is on
mitigating this impact and providing support and guidance
throughout the withdrawal process.
Clients
The UK's departure from the EU is likely to have an impact on
our clients' operating models including their working capital
requirements, investment decisions and financial markets
infrastructure access. Our priority is to provide our clients
continuity of service and our intention is to minimise the level of
change for our customers. However, some of our EEA-incorporated
customers will no longer be able to be serviced out of the UK under
the scenario planned for and will need to be migrated from the UK
to HBFR (or another EEA entity). Relationship Managers are in
active dialogue with affected clients and are working with them on
an appropriate migration plan, including the timely execution of
legal documentation. To provide clients with a better understanding
of these implications, we are organising client events and
communications.
Employees
The migration of EEA-incorporated clients will require us to
strengthen our local teams in Continental Europe, and France in
particular. We expect the majority of roles to be filled through
hires and we have started a recruitment process. Throughout, our
objective is to minimise the level of change for our people and to
ensure any transition is as smooth as possible.
Given the scale and capabilities of our existing business in
France, which already has more than 8,000 employees, a strong
balance sheet and extensive product capabilities, we are well
prepared to handle the transfer of activities.
Beyond the transfer of roles to Continental Europe, we are also
providing support to our UK employees resident in EEA countries and
EEA employees resident in the UK, for example on settlement
applications.
Nevertheless, London will continue to be an important global
financial centre and the best location for our global headquarters.
At 31 December 2018, HSBC employed approximately 39,000 people in
the UK.
Across the programme, we have made good progress in terms of
ensuring we are prepared for the UK leaving the EU in the first
quarter of 2019 under the terms described above, but there remain
execution risks, many of them linked to the uncertain outcome of
negotiations and potentially tight timelines to implement
significant changes to our UK and European operating models.
If these risks materialise, HSBC's clients and employees are
likely to be affected. The exact impact on our clients will depend
on their individual circumstances and, in a worst case scenario,
could include disruption to the provision of products and
services.
We have carried out detailed reviews of our credit portfolios to
determine those sectors and customers most vulnerable to the UK's
exit from the EU. For further details please see 'Impact of UK
economic uncertainty on ECL' on page 44.
Risk management
As a provider of banking and financial services, the group
actively manages risk as a core part of its day-to-day activities.
It continues to maintain a strong liquidity position and is well
positioned for the evolving regulatory landscape.
Our risk management framework
An established risk governance framework and ownership structure
ensures oversight of, and accountability for, the effective
management of risk. The group's risk management framework fosters
the continuous monitoring of the risk environment and an integrated
evaluation of risks and their interactions. Integral to the group's
risk management framework are risk appetite, stress testing and the
identification of emerging risks.
The bank's Risk Committee focuses on risk governance and
provides a forward-looking view of risks and their mitigation. The
Risk Committee is a committee of the Board and has responsibility
for oversight and advice to the Board on, inter alia, the bank's
risk appetite, tolerance and strategy, systems of risk management,
internal control and compliance. Additionally, members of the Risk
Committee attend meetings of the Chairman's Nominations and
Remuneration Committee at which the alignment of the reward
structures to risk appetite is considered.
In carrying out its responsibilities, the Risk Committee is
closely supported by the Chief Risk Officer, the Chief Financial
Officer, the Head of Internal Audit and the Heads of Compliance,
together with other business functions on risks within their
respective areas of responsibility.
Three lines of defence
To create a robust control environment to manage risks, we use
an activity-based three lines of defence model, whereby the
activity a member of staff undertakes drives which line they reside
within. This model delineates management accountabilities and
responsibilities for risk management and the control
environment.
The model underpins our approach to risk management by
clarifying responsibility, encouraging collaboration and enabling
efficient coordination of risk and control activities. The three
lines are summarised below:
-- The first line of defence owns the risks and is responsible
for identifying, recording, reporting and managing them, and
ensuring that the right controls and assessments are in place to
mitigate them.
-- The second line of defence sets the policy and guidelines for
managing specific risk areas, provides advice and guidance in
relation to the risk, and challenges the first line of defence on
effective risk management.
-- The third line of defence is our Internal Audit function,
which provides independent and objective assurance of the adequacy
of the design and operational effectiveness of the group's risk
management framework and control governance process.
Our risk culture
Risk culture refers to HSBC's norms, attitudes and behaviours
related to risk awareness, risk taking and risk management.
HSBC has long recognised the importance of a strong risk
culture, the fostering of which is a key responsibility of senior
executives. Our risk culture is reinforced by the HSBC Values and
our Global Standards programme. It is instrumental in aligning the
behaviours of individuals with our attitude to assuming and
managing risk, which helps to ensure that our risk profile remains
in line with our risk appetite.
We use clear and consistent employee communication on risk to
convey strategic messages and set the tone from senior management
and the Board. We also deploy mandatory training on risk and
compliance topics to embed skills and understanding in order to
strengthen our risk culture and reinforce the attitude to risk in
the behaviour expected of employees, as described in our risk
policies.
The risk culture is reinforced by HSBC Group's approach to
remuneration. Individual awards, including those for senior
executives, are based on compliance with the HSBC Values and the
achievement of both financial and non-financial objectives, that
are aligned to our risk appetite and global strategy.
Whistleblowing
We operate a global whistleblowing standard, HSBC Confidential,
allowing staff to report matters of concern confidentially. We also
maintain an external email address for concerns about accounting
and internal financial controls or auditing matters
(accountingdisclosures@hsbc.com).
For further details, see page 6 of the How we do Business
section.
Risk appetite
The group's Risk Appetite Statement describes the types and
levels of risk that the group is prepared to accept in executing
its strategy. Quantitative and qualitative metrics are assigned to
14 key categories, including: earnings, capital (including leverage
measures), liquidity and funding, interest rate risk in the banking
book, credit risk, traded risk, operational risk, model risk and
regulatory compliance.
Measurement against the metrics:
-- guides underlying business activity;
-- informs risk-adjusted remuneration;
-- enables the key underlying assumptions to be monitored and,
where necessary, adjusted through subsequent business planning
cycles; and
-- promptly identifies business decisions needed to mitigate risk.
The Risk Appetite Statement is approved by the Board following
advice from the Risk Committee. It is part of the annual planning
process, in which global businesses, geographical regions and
functions are required to articulate their individual risk appetite
statements. These are aligned with the group strategy, and provide
a risk profile of each global business, region or function in the
context of the individual risk categories.
Stress testing
Stress testing is an important tool for banks and regulators to
assess vulnerabilities in individual banks and/or the financial
banking sector under hypothetical adverse scenarios. The results of
stress testing are used to assess banks' resilience to a range of
adverse shocks and to assess their capital adequacy.
HSBC Bank plc is subject to regulatory stress testing in several
jurisdictions. These requirements are increasing in frequency and
granularity. They include the programmes of the Bank of England
('BoE'), Prudential Regulation Authority ('PRA') and the European
Banking Authority ('EBA'). Assessment by regulators is on both a
quantitative and qualitative basis, the latter focusing on our
portfolio quality, data provision, stress testing capability and
capital planning processes.
A number of internal macroeconomic and event-driven scenarios
specific to the European region were considered and reported to
senior management during the course of the year, focusing in
particular on the ramifications of various potential scenarios
relating to the UK exit from the EU, before and after the
successful completion of the ring-fencing of HSBC UK at 1 July
2018. We have worked closely with Group Stress Testing and France
to ensure that the impact of the various planned transfers of
branches and customers to France, as part of our preparation for
the UK's exit from the EU, can be appropriately reflected and
modelled in our internal and regulatory stress testing exercises.
The group also conducts Reverse Stress Testing. This exercise
requires a firm to assess scenarios and circumstances that would
render its business model unviable, thereby identifying potential
business vulnerabilities.
In 2018, the Group participated in the successful completion of
the annual BoE concurrent stress testing exercise. The Annual
Cyclical Scenario was materially unchanged from 2017, incorporating
a synchronised global downturn affecting Asia and the UK in
particular. Financial markets come under severe stress with a
reduction in global risk appetite and reductions in market
liquidity. The UK experiences a slowdown driven by the downturn in
its trading partners, fall in confidence, and a sharp sterling
depreciation leading to inflationary pressure on imports. In
response monetary policy tightening leads to a steep rise in market
and lending interest rates in the UK while global yield curves
remain flat.
The BoE published the results of the 2018 Concurrent Stress Test
in December 2018, confirming that these tests did not reveal any
capital inadequacies for the HSBC Group. At the European level, the
results of the EBA 2018 exercise were published in November 2018
and likewise demonstrated HSBC's continuing capital strength.
Our material banking and insurance risks
The material risk types associated with our banking and
insurance manufacturing operations are described in the following
tables.
Description of risks - banking operations
Credit risk (see page 26)
The risk of Credit risk Credit risk is:
financial loss arises principally * measured as the amount that could be lost if a
if a customer from direct customer or counterparty fails to make repayments;
or counterparty lending, trade
fails to meet finance and
an obligation leasing business, * monitored using various internal risk management
under a contract. but also from measures and within limits approved by individuals
certain other within a framework of delegated authorities; and
products such
as guarantees
and derivatives. * managed through a robust risk control framework that
outlines clear and consistent policies, principles
and guidance for risk managers.
------------------------ ------------------------------ ------------------------------------------------------------
Liquidity and funding risk
(see page 28)
The risk that Liquidity risk Liquidity and funding risk is:
we do not have arises from * measured using a range of different metrics including
sufficient financial mismatches in the liquidity coverage ratio and net stable funding
resources to the timing of ratio;
meet our obligations cash flows.
as they fall Funding risk
due or that arises when * assessed through the internal liquidity adequacy
we can only illiquid asset assessment process ('ILAAP');
do so at an positions cannot
excessive cost. be funded at
Funding Risk the expected * monitored against the group's liquidity and funding
is the risk terms and when risk framework; and
that funding required.
considered to
be sustainable, * managed on a stand-alone basis with no reliance on
and therefore any group entity (unless pre-committed) or central
used to fund bank unless this represents routine established
assets, is not business-as-usual market practice.
sustainable
over time.
------------------------ ------------------------------ ------------------------------------------------------------
Market risk (see page 28)
The risk that Exposure to Market risk is:
movements in market risk * measured using sensitivities, value at risk ('VaR')
market factors is separated and stress testing, giving a detailed picture of
such as foreign into two portfolios: potential gains and losses for a range of market
exchange rates, * trading portfolios; and movements and scenarios, as well as tail risks over
interest rates, specified time horizons;
credit spreads,
equity prices * non-trading portfolios.
and commodity * monitored using VaR, stress testing and other
prices will measures, including the sensitivity of net interest
reduce our income Market risk income and the sensitivity of structural foreign
or the value exposures arising exchange; and
of our portfolios. from our insurance
operations are
discussed on * managed using risk limits approved by the risk
page 65. management meeting ('RMM') and the RMM in various
global businesses.
------------------------ ------------------------------ ------------------------------------------------------------
Operational risk (see page
31)
The risk to Operational Operational risk is:
achieving our risk arises * measured using the risk and control assessment
strategy or from day-to-day process, which assesses the level of risk and
objectives as operations or effectiveness of controls, and is also measured for
a result of external events, economic capital management using risk event losses
inadequate or and is relevant and scenario analysis;
failed internal to every aspect
processes, people of our business.
and systems Regulatory compliance * monitored using key indicators and other internal
or from external risk and financial control activities; and
events. crime compliance
risk are discussed
below. * managed primarily by global business and functional
managers that identify and assess risks, implement
controls to manage them and monitor the effectiveness
of these controls utilising the operational risk
management framework.
------------------------ ------------------------------ ------------------------------------------------------------
Regulatory compliance risk
(see page 31)
The risk that Regulatory compliance Regulatory compliance risk is:
we fail to observe risk is part * measured by reference to identified metrics, incident
the letter and of operational assessments, regulatory feedback and the judgement
spirit of all risk, and arises and assessment of our Regulatory Compliance teams;
relevant laws, from the risks
codes, rules, associated with
regulations breaching our * monitored against the first line of defence risk and
and standards duty to customers control assessments, the results of the monitoring
of good market and other counterparties, and control activities of the second line of defence
practice, and inappropriate functions, and the results of internal and external
incur fines market conduct audits and regulatory inspections; and
and penalties and breaching
and suffer damage other regulatory
to our business standards. * managed by establishing and communicating appropriate
as a consequence. policies and procedures, training employees in them,
and monitoring activity to assure their observance.
Proactive risk control and/or remediation work is
undertaken where required.
------------------------ ------------------------------ ------------------------------------------------------------
Financial crime compliance risk (see page 32)
The risk that Financial crime Financial crime compliance risk is:
we knowingly compliance risk * measured by reference to identified metrics, incident
or unknowingly is part of operational assessments, regulatory feedback and the judgement
help parties risk and arises and assessment of our Financial Crime Compliance
to commit or from day-to-day teams;
to further potentially banking operations.
illegal activity
through the * monitored against our financial crime compliance risk
group. appetite statement and metrics, the results of the
monitoring and control activities of the second line
of defence functions, and the results of internal and
external audits and regulatory inspections; and
* managed by establishing and communicating appropriate
policies and procedures, training employees in them,
and monitoring activity to ensure their observance.
Proactive risk control and/or remediation work is
undertaken where required.
------------------------ ------------------------------ ------------------------------------------------------------
Other material risk
Reputational risk (see page 34)
The risk of Primary reputational Reputational risk is:
failure to meet risks arise * measured by reference to our reputation as indicated
stakeholder directly from by our dealings with all relevant stakeholders,
expectations an action or including media, regulators, customers and employees;
as a result inaction by
of any event, HSBC, its employees
behaviour, action or associated * monitored through a reputational risk management
or inaction, parties that framework that is integrated into the group's broader
either by the are not the risk management framework; and
group itself, consequence
our employees of another type
or those with of risk. Secondary * managed by every member of staff, and covered by a
whom we are reputational number of policies and guidelines. There is a clear
associated. risks are those structure of committees and individuals charged with
arising indirectly mitigating reputational risk.
and are a result
of a failure
to control any
other risks.
------------------- --------------------- -------------------------------------------------------------
Pension risk (see page 34)
The risk of Pension risk Pension risk is:
increased costs arises from * measured in terms of the schemes' ability to generate
to the group investments sufficient funds to meet the cost of their accrued
from offering delivering an benefits;
post-employment inadequate return,
benefit plans adverse changes
to its employees. in interest * monitored through the specific risk appetite that has
rates or inflation, been developed at HSBC Group and Regional levels; and
or members living
longer than
expected. Pension * managed locally through the Pensions Oversight Forum
risk also includes and ultimately through the RMM.
the operational
and reputational
risk of sponsoring
pension plans.
------------------- --------------------- -------------------------------------------------------------
Our insurance manufacturing subsidiaries are regulated
separately from our banking operations. Risks in our insurance
entities are managed using methodologies and processes that are
subject to Group oversight. Our insurance operations are also
subject to some of the same risks as our banking operations, which
are covered by the group's risk management processes.
Description of risks - insurance manufacturing operations
Financial risk (see page
65)
Our ability Exposure to Financial risk is:
to effectively financial risks * measured (i) for credit risk, in terms of economic
match arises from: capital and the amount that could be lost if a
liabilities * market risk affecting the fair values of financial counterparty fails to make repayments; (ii) for
arising under assets or their future cash flows; market risk, in terms of economic capital, internal
insurance metrics and fluctuations in key financial variables;
contracts and (iii) for liquidity risk, in terms of internal
with the asset * credit risk; and metrics, including stressed operational cash flow
portfolios projections;
that
back them is * liquidity risk of entities not being able to make
contingent on payments to policyholders as they fall due. * monitored through a framework of approved limits and
the management delegated authorities; and
of financial
risks and the
extent to * managed through a robust risk control framework that
which outlines clear and consistent policies, principles
these are and guidance. This includes using product design and
borne asset liability matching and bonus rates.
by
policyholders.
--------------- --------------------------------------------------------- -----------------------------------------------------------
Insurance risk (see page
68)
The risk that, The cost of Insurance risk is:
over time, the claims and benefits * measured in terms of life insurance liabilities and
cost of the can be influenced economic capital allocated to insurance underwriting
contract, by many factors, risk;
including including mortality
claims and and morbidity
benefits experience, * monitored though a framework of approved limits and
may exceed the as well as lapse delegated authorities; and
total amount and surrender
of premiums rates.
and investment * managed through a robust risk control framework that
income outlines clear and consistent policies, principles
received. and guidance. This includes using product design,
underwriting, reinsurance and claims-handling
procedures.
--------------- --------------------------------------------------------- -----------------------------------------------------------
Credit risk management
(Audited)
Of the risks in which we engage, credit risk generates the
largest regulatory capital requirements.
The principal objectives of our credit risk management are:
-- to maintain across the group a strong culture of responsible
lending and a robust risk policy and control framework;
-- to both partner and challenge Global Businesses in defining,
implementing and continually re-evaluating our risk appetite under
actual and scenario conditions; and
-- to ensure there is independent, expert scrutiny of credit risks, their costs and mitigation.
Within the bank, the Credit Risk function is headed by the
European Chief Risk Officer who reports to the Chief Executive
Officer, with a functional reporting line to HSBC Group Chief Risk
Officer. Its responsibilities are:
-- to formulate credit policy. Compliance, subject to approved
dispensations, is mandatory for all operating companies which must
develop local credit policies consistent with group policies that
very closely reflect Group policy;
-- to guide operating companies on the group's appetite for
credit risk exposure to specified market sectors, activities and
banking products and controlling exposures to certain higher-risk
sectors;
-- to undertake an independent review and objective assessment
of risk. Credit risk assesses all credit facilities and exposures
over designated limits, prior to the facilities being committed to
customers or transactions being undertaken;
-- to monitor the performance and management of portfolios across the group;
-- to control exposure to sovereign entities, banks and other
financial institutions, as well as debt securities which are not
held solely for the purpose of trading;
-- to set policy on large credit exposures, ensuring that
concentrations of exposure by counterparty, sector or geography do
not become excessive in relation to the group's capital base, and
remain within internal and regulatory limits;
-- to maintain and develop the risk rating framework and systems
through Model Oversight Committees (MOCs). MOCs are in place to
oversee risk rating governance for the wholesale and retail models
that are used within the group;
-- to report on retail portfolio performance, high risk
portfolios, risk concentrations, large impaired accounts,
impairment allowances and stress testing results and
recommendations to the group's Risk Management Meeting, the group's
Risk Committee and the Board; and
-- to act on behalf of the group as the primary interface for
credit-related issues, with the BoE, the PRA, local regulators,
rating agencies, analysts and counterparts in major banks and
non-bank financial institutions.
Concentration of credit risk exposure
(Audited)
Concentrations of credit risk arise when a number of
counterparties or exposures have comparable economic
characteristics, or are engaged in similar activities, or operate
in the same geographical areas/industry sectors, so that their
collective ability to meet contractual obligations is uniformly
affected by changes in economic, political or other conditions. The
group uses a number of controls and measures to minimise undue
concentration of exposure in the group's portfolios across
industry, country and customer groups. These include portfolio and
counterparty limits, approval and review controls, and stress
testing.
Wrong-way risk occurs when a counterparty's exposures are
adversely correlated with its credit quality. There are two types
of wrong-way risk:
-- general wrong-way risk occurs when the probability of
counterparty default is positively correlated with general risk
factors such as where the counterparty is resident and/or
incorporated in a higher-risk country and seeks to sell a
non-domestic currency in exchange for its home currency; and
-- specific wrong-way risk occurs in self-referencing
transactions. These are transactions in which exposure is driven by
capital or financing instruments issued by the counterparty and
occurs where exposure from HSBC's perspective materially increases
as the value of the counterparty's capital or financing instruments
referenced in the contract decreases. It is HSBC policy that
specific wrong-way risk transactions are approved on a case-by-case
basis.
We use a range of procedures to monitor and control wrong-way
risk, including requiring entities to obtain prior approval before
undertaking wrong-way risk transactions outside pre-agreed
guidelines.
Credit quality of financial instruments
(Audited)
Our credit risk rating systems and processes differentiate
exposures in order to highlight those with greater risk factors and
higher potential severity of loss. In the case of individually
significant accounts, risk ratings are reviewed regularly and any
amendments are implemented promptly. Within the group's retail
business, risk is assessed and managed using a wide range of risk
and pricing models to generate portfolio data.
Our risk rating system facilitates the internal ratings-based
approach under the Basel framework adopted by HSBC Group to support
calculation of the minimum credit regulatory capital
requirement.
Special attention is paid to problem exposures in order to
accelerate remedial action. Where appropriate, operating companies
use specialist units to provide customers with support to help them
avoid default returning to sound trading wherever possible.
The Credit Review and Risk Identification team reviews the
robustness and effectiveness of key management, monitoring and
control activities.
Risk rating scales
The Customer Risk Rating ('CRR') 10-grade scale summarises a
more granular underlying 23-grade scale of obligor probability of
default ('PD'). All distinct HSBC customers are rated using one of
these two PD scales, depending on the degree of sophistication of
the Basel II approach adopted for the exposure.
Each CRR band is associated with an external rating grade by
reference to long-run default rates for that grade, represented by
the average of issuer-weighted historical default rates. This
mapping between internal and external ratings is an indication only
and may vary over time.
The Expected Loss ('EL') 10-grade scale for retail business
summarises a more granular underlying EL scale for these customer
segments; this combines obligor and facility/product risk factors
in a composite measure. For debt securities and certain other
financial instruments, external ratings have been aligned to the
five quality classifications based upon the mapping of related CRR
to external credit grades.
For the purpose of the following disclosure, retail loans which
are past due up to 89 days and are not otherwise classified as EL 9
or EL 10, are not disclosed within the EL grade to which they
relate, but are separately classified as past due but not impaired.
The following tables set out the group's distribution of financial
instruments by measures of credit quality.
The five credit quality classifications defined each encompasses
a range of granular internal credit rating grades assigned to
wholesale and retail lending businesses and the external ratings
attributed by external agencies to debt securities.
For debt securities and certain other financial instruments,
external ratings have been aligned to the five quality
classifications based upon the mapping of related CRR to external
credit ratings. The mapping is reviewed on a regular basis and the
most recent review resulted in sovereign BBB+ and BBB exposures
previously mapped to Credit Quality band 'Good' being mapped to
Credit Quality band 'Strong'. Sovereign BB+ and BB exposures
previously mapped to Credit Quality band 'Satisfactory' were mapped
to Credit Quality band 'Good'. This represents a change in
disclosure mapping unrelated to changes in counterparty
creditworthiness.
Credit quality classification
Sovereign Other debt
debt securities securities Wholesale lending
and bills and bills and derivatives Retail lending
12-month
probability
of Internal
External External Internal default credit Expected
credit rating credit rating credit rating % rating loss %
------------------ --------------- ---------------
Quality classification
------------------------
CRR1 to EL1 to
Strong BBB and above A- and above CRR2(1) 0 - 0.169 EL2(2) 0 - 0.999
CRR3 0.170 - EL3 1.000 - 4.999
Good BB to BBB- BBB+ to BBB- 0.740
BB- to B and BB+ to B and CRR4 to 0.741 - EL4 to 5.000 - 19.999
Satisfactory unrated unrated CRR5 4.914 EL5
CRR6 to 4.915 - EL6 to 20.000 -
Sub-standard B- to C B- to C CRR8 99.999 EL8 99.999
CRR9 to 100 EL9 to 100+ or
Credit impaired Default Default CRR10 EL10 defaulted(3)
------------------------ ------------------ --------------- --------------- ------------ -------- --------------
1 Customer risk rating ('CRR').
2 Expected loss ('EL').
3 The EL percentage is derived through a combination of
Probability of Default ('PD') and Loss Given Default ('LGD') and
may exceed 100% in circumstances where the LGD is above 100%
reflecting the cost of recoveries.
Quality classification definitions
* 'Strong': Exposures demonstrate a strong capacity to
meet financial commitments, with negligible or low
probability of default and/or low levels of expected
loss.
* 'Good': Exposures require closer monitoring and
demonstrate a good capacity to meet financial
commitments, with low default risk.
* 'Satisfactory': Exposures require closer monitoring
and demonstrate an average to fair capacity to meet
financial commitments, with moderate default risk.
* 'Sub-standard': Exposures require varying degrees of
special attention and default risk is of greater
concern.
* 'Credit-impaired': Exposures have been assessed as
described in Note 1.2(i) in the Financial Statements.
=============================================================
Renegotiated loans and forbearance
A range of forbearance strategies are employed to improve the
management of customer relationships, maximise collection
opportunities and, if possible, avoid default, foreclosure or
repossession. They include extended payment terms, a reduction in
interest or principal repayments, approved external debt management
plans, debt consolidations, the deferral of foreclosures and other
forms of loan modifications and
re-ageing.
The group's policies and practices are based on criteria which
enable local management to judge whether repayment is likely to
continue. These typically provide a customer with terms and
conditions that are more favourable than those provided initially.
Loan forbearance is only granted in situations where the customer
has showed a willingness to repay their loan and is expected to be
able to meet the revised obligations.
Refinance risk
Personal lending
Interest--only mortgages lending incorporate bullet payments at
the point of final maturity. To reduce refinance risk, an initial
on-boarding assessment of customers' affordability is made on a
capital repayment basis and every customer has a credible defined
repayment strategy. Additionally the customer is contacted at least
once during the mortgage term to check the status of the repayment
strategy. In situations where it is identified that a borrower is
expected not to be able either to repay a bullet/balloon payment
then the customer will either default on the repayment or it is
likely that the bank may need to apply forbearance to the loan. In
either circumstance this gives rise to a loss event and an
impairment allowance will be considered where appropriate.
Wholesale lending
Many types of wholesale lending incorporate bullet/balloon
payments at the point of final maturity; often, the intention or
assumption is that the borrower will take out a new loan to settle
the existing debt. Where this is true the term refinance risk
refers generally to the possibility that, at the point that such a
repayment is due, a borrower cannot refinance by borrowing to repay
existing debt. In situations where it is identified that a borrower
is expected not to be able either to repay a bullet/balloon payment
or to be capable of refinancing their existing debt on commercial
terms then the customer will either default on the repayment or it
is likely that the bank may need to refinance the loan on terms it
would not normally offer in the ordinary course of business. In
either circumstance this gives rise to a loss event and an
impairment allowance will be considered.
Impairment assessment
(Audited)
For details of our impairment policies on loans and advances and
financial investments see Note 1.2(i) on the Financial
Statements.
Write-off of loans and advances
(Audited)
For details of our accounting policy on the write-off of loans
and advances, see Note 1.2(i) on the Financial Statements.
Personal lending
Property collateral for residential mortgages is repossessed and
sold on behalf of the borrower only when all normal debt recovery
procedures have been unsuccessful. Any portion of the balance not
covered following the realisation of security is written-off.
Unsecured personal lending products are normally written off, when
there is no realistic prospect of recovery, usually when they
reached 180 days past due.
In case of some products, e.g. credit cards, it is common for
accounts to be written off at the end of the month in which they
fall six months past due. Examples of events which may result in
early write-off include bankruptcy, deceased customers, fraud and
facilities with small balances.
Wholesale lending
Wholesale loans and advances are written off where normal
collection procedures have been unsuccessful to the extent that
there appears no realistic prospect of repayment. These procedures
may include a referral of the business relationship to a debt
recovery company. Debt reorganisation will be considered at all
times and may involve, in exceptional circumstances and in the
absence of any viable alternative, a partial write-off in exchange
for a commitment to repay the remaining balance.
In the event of bankruptcy or analogous proceedings, write-off
for both personal and wholesale lending may occur earlier than at
the
periods stated above. Collections procedures may continue after
write-off.
Liquidity and funding risk management
Details of HSBC's Liquidity and Funding Risk Management
Framework ('LFRF') can be found in the group's Pillar 3
document.
HSBC requires all operating entities to comply with HSBC Group's
LFRF on a stand-alone basis and to meet regulatory and internal
minimum requirements at all times. The liquidity coverage ratio
('LCR') and net stable funding ratio ('NSFR') are key components of
the LFRF.
The elements of the LFRF are underpinned by a robust governance
framework, the two major elements of which are:
-- Group, regional and entity level asset and liability management committees ('ALCOs'); and
-- Annual individual liquidity adequacy assessment process
('ILAAP') used to validate risk tolerance and set risk
appetite.
The Group's operating entities are predominantly defined on a
country basis to reflect the local management of liquidity and
funding. However, where appropriate, this definition may be
expanded to cover a consolidated group of legal entities or
narrowed to a principal office (branch) of a wider legal entity to
reflect the management under internal or regulatory
definitions.
The RMM reviews and agrees annually the list of entities it
directly oversees and the composition of these entities.
Market risk management
Where appropriate, we apply similar risk management policies and
measurement techniques to both trading and non-trading portfolios.
Our objective is to manage and control market risk exposures to
optimise return on risk while maintaining a market profile
consistent with our status as one of the world's largest banking
and financial services organisations.
The nature of the hedging and risk mitigation strategies
performed across the group corresponds to the market risk
management instruments available within each operating
jurisdiction. These strategies range from the use of traditional
market instruments, such as interest rate swaps, to more
sophisticated hedging strategies to address a combination of risk
factors arising at portfolio level.
Market risk governance
(Audited)
Market risk is managed and controlled through limits approved by
the RMM of HSBC Group Management Board ('GMB') for HSBC Holdings
and the global businesses. These limits are allocated across
business lines and agreed with HSBC Group's legal entities,
including HSBC Bank plc.
The management of market risk is principally undertaken in
Markets using risk limits allocated from the risk appetite, which
is subject to HSBC Bank plc RMM ratification. Limits are set for
portfolios, products and risk types, with market liquidity being a
primary factor in determining the level of limits set.
Global Risk is responsible for setting market risk management
policies and measurement techniques. Each major operating entity
has an independent market risk management and control function
which is responsible for measuring market risk exposures in
accordance with the policies defined by Global Risk, and monitoring
and reporting these exposures against the prescribed limits on a
daily basis.
Each operating entity is required to assess the market risks
arising on each product in its business and to transfer them to
either its local Markets unit for management, to Balance Sheet
management books or to separate books managed under the supervision
of the local ALCO.
The aim is to ensure that all market risks are consolidated
within operations which have the necessary skills, tools,
management and governance to manage them professionally. In certain
cases where the market risks cannot be fully transferred, the group
identifies the impact of varying scenarios on valuations or on net
interest income resulting from any residual risk positions.
Model risk is governed through Model Oversight Committees
('MOCs') at the regional and global Wholesale Credit and Market
Risk levels. They have direct oversight and approval responsibility
for all traded risk models utilised for risk measurement and
management and stress testing. The MOCs prioritise the development
of models, methodologies and practices used for traded risk
management within HSBC Group and ensure that they remain within our
risk appetite and business plans. The Markets MOC reports into HSBC
Group MOC, which oversees all model risk types at Group level.
Group MOC informs HSBC Group RMM about material issues at least on
a bi-annual basis. The RMM is HSBC Group's 'Designated Committee'
according to regulatory rules and has delegated day-to-day
governance of all traded risk models to the Markets MOC.
The control of market risk in the trading and non-trading
portfolios is based on a policy restricting individual operations
to trading within a list of permissible instruments authorised for
each site by Global Risk, enforcing new product approval
procedures, and restricting trading in the more complex derivative
products only to offices with appropriate levels of product
expertise and robust control systems.
Market risk measures
Monitoring and limiting market risk exposures
Our objective is to manage and control market risk exposures
while maintaining a market profile consistent with the group's risk
appetite.
We use a range of tools to monitor and limit market risk
exposures including sensitivity analysis, value at risk ('VaR'),
and stress testing.
Sensitivity analysis
Sensitivity analysis measures the impact of individual market
factor movements on specific instruments or portfolios, including
interest rates, foreign exchange rates, credit spreads and equity
prices, such as the effect of a one basis point change in yield. We
use sensitivity measures to monitor the market risk positions
within each risk type. Sensitivity limits are set for portfolios,
products and risk types, with the depth of the market being one of
the principal factors in determining the level of limits set.
Value at risk
VaR is a technique that estimates the potential losses on risk
positions as a result of movements in market rates and prices over
a specified time horizon and to a given level of confidence. The
use of VaR is integrated into market risk management and is
calculated for all trading positions regardless of how the group
capitalises those exposures. Where there is not an approved
internal model, the group uses the appropriate local rules to
capitalise exposures.
In addition, the group calculates VaR for non-trading portfolios
in order to have a complete picture of risk. The models are
predominantly based on historical simulation. VaR is calculated at
a 99% confidence level for a one-day holding period. Where we do
not calculate VaR explicitly, we use alternative tools as
summarised in the Market Risk Stress testing section.
The VaR models used by us are based predominantly on historical
simulation. These models derive plausible future scenarios from
past series of recorded market rates and prices, taking into
account inter-relationships between different markets and rates
such as interest rates and foreign exchange rates. The models also
incorporate the effect of option features on the underlying
exposures.
The historical simulation models used incorporate the following
features:
-- historical market rates and prices are calculated with
reference to foreign exchange rates and commodity prices, interest
rates, equity prices and the associated volatilities;
-- potential market movements utilised for VaR are calculated
with reference to data from the past two years; and
-- VaR measures are calculated to a 99% confidence level and use a one-day holding period.
The nature of the VaR models means that an increase in observed
market volatility will most likely lead to an increase in VaR
without any changes in the underlying positions.
VaR model limitations
Although a valuable guide to risk, VaR should always be viewed
in the context of its limitations. For example:
-- the use of historical data as a proxy for estimating future
events may not encompass all potential events, particularly those
which are extreme in nature;
-- the use of a holding period assumes that all positions can be
liquidated or the risks offset during that period. This may not
fully reflect the market risk arising at times of severe
illiquidity, when the holding period may be insufficient to
liquidate or hedge all positions fully;
-- the use of a 99% confidence level by definition does not take
into account losses that might occur beyond this level of
confidence; and
-- VaR is calculated on the basis of exposures outstanding at
the close of business and therefore does not necessarily reflect
intra-day exposures.
Risk not in VaR framework
Other basis risks which are not completely covered in VaR, such
as the Libor tenor basis, are complemented by our risk not in VaR
('RNIV') calculations, and are integrated into our capital
framework.
Risk factors are reviewed on a regular basis and either
incorporated directly in the VaR models, where possible, or
quantified through the VaR-based RNIV approach or a stress test
approach within the RNIV framework. The outcome of the VaR-based
RNIV is included in the VaR calculation and back-testing; a
stressed VaR RNIV is also computed for the risk factors considered
in the VaR-based RNIV approach.
Stress-type RNIVs include a gap risk exposure measure to capture
risk on non-recourse margin loans and a de-peg risk measure to
capture risk to pegged and heavily managed currencies.
Stress testing
Stress testing is an important procedure that is integrated into
our market risk management tool to evaluate the potential impact on
portfolio values of more extreme, although plausible, events or
movements in a set of financial variables. In such scenarios,
losses can be much greater than those predicted by VaR
modelling.
Stress testing is implemented at legal entity, regional and
overall Group levels. A standard set of scenarios is utilised
consistently across all regions within HSBC Group. Scenarios are
tailored to capture the relevant events or market movements at each
level. The risk appetite around potential stress losses for the
group is set and monitored against referral limits.
Market risk reverse stress tests are undertaken on the premise
that there is a fixed loss. The stress testing process identifies
which scenarios lead to this loss. The rationale behind the reverse
stress test is to understand scenarios which are beyond normal
business settings that could have contagion and systemic
implications.
Stressed VaR and stress testing, together with reverse stress
testing and the management of gap risk, provide management with
insights regarding the 'tail risk' beyond VaR for which the group's
appetite is limited.
Trading portfolios
Back-testing
We routinely validate the accuracy of our VaR models by
back-testing them against both actual and hypothetical profit and
loss against the corresponding VaR numbers. Hypothetical profit and
loss excludes non-modelled items such as fees, commissions and
revenues of intra-day transactions.
We would expect on average to see two or three profits in excess
of the VaR at 1% confidence level and two or three losses in excess
of VaR at the 99% confidence level over a one-year period. The
actual number of profits or losses in excess of VaR over this
period can therefore be used to gauge how well the models are
performing.
We back-test our VaR at various levels which reflect a full
legal entity scope of HSBC, including entities that do not have
local permission to use VaR for regulatory purposes.
Non-trading portfolios
Non-trading VaR of HSBC Bank plc includes the interest rate risk
of non-trading financial instruments held by the global businesses
and transferred into portfolios managed by BSM or ALCM functions.
In measuring, monitoring and managing risk in our non-trading
portfolios, VaR is just one of the tools used. The management of
interest rate risk in the banking book is described further in
'Non-trading interest rate risk' below, including the role of BSM.
The group's and HSBC Bank plc's control of market risk in the
non-trading portfolios is based on transferring the assessed market
risk of non-trading assets and liabilities created outside BSM or
Markets, to the books managed by BSM, provided the market risk can
be neutralised. The net exposure is typically managed by BSM
through the use of fixed rate government bonds (liquid asset held
in held-to-collect-and-sale (HTCS books)) and interest rate swaps.
The interest rate risk arising from fixed rate government bonds
held within HTCS portfolios is reflected within the group's
non-traded VaR. Interest rate swaps used by BSM are typically
classified as either a fair value hedge or a cash flow hedge and
included within the group's non-traded VaR. Any market risk that
cannot be neutralised in the market is managed by HSBC Bank plc
ALCM in segregated ALCO books.
Structural foreign exchange exposure
Structural foreign exchange exposures represent the group's net
investments in subsidiaries, branches and associates, the
functional currencies of which are currencies other than sterling.
An entity's functional currency is that of the primary economic
environment in which the entity operates.
Unrealised gains or losses due to revaluations of structured
foreign exchange exposures are recognised in other comprehensive
income, whereas other unrealised gains or losses arising from
revaluations of foreign exchange positions are reflected in the
income statement.
The group's structural foreign exchange exposures are managed
with the primary objective of ensuring, where practical, that the
group's consolidated capital ratios and the capital ratios of
individual banking subsidiaries are largely protected from the
effect of changes in exchange rates. We hedge structural foreign
exchange exposures only in limited circumstances.
Interest rate risk in the banking book
Overview
Interest Rate Risk in the Banking Book ('IRRBB') is the risk of
an adverse impact to earnings or capital due to changes in market
interest rates. IRRBB is generated by our non-traded assets and
liabilities. The Asset, Liability and Capital Management ('ALCM')
function is responsible for measuring and controlling IRRBB under
the supervision of the RMM who approve risk limits used in the
management of interest rate risk. IRRBB is transferred to and
managed by BSM, who are overseen by Wholesale Market Risk and
Product Control functions.
Key risk drivers
The bank's IRRBB can be segregated into the following
drivers:
-- Managed rate risk - the risk that the pricing of products,
which are dependent upon business line decisions, do not correlate
to movements in market interest rates.
-- Re-investment risk - risk arising due to change in rates when
behaviouralised balances are reinvested as per the transfer pricing
policy.
-- Basis risk - the risk arising from assets and liabilities
that are priced referencing different market indices creating a
repricing mismatch.
-- Prepayment risk - the risk that the actual customer
prepayment in different interest rate scenarios does not match the
profile used to hedge the interest rate risk.
-- Duration risk - the risk that there are changes in the
maturities of assets and liabilities due to changes in interest
rate, which create or exacerbate a mismatch.
Governance and structure
ALCM monitors and control non-traded interest rate risk as well
as reviewing and challenging the business prior to the release of
new products and proposed behavioural assumptions used for hedging
activities. ALCM is also responsible for maintaining and updating
the transfer pricing framework, informing ALCO of the group's
overall banking book interest rate risk exposure and managing the
balance sheet in conjunction with BSM.
The internal transfer pricing framework is constructed to ensure
that structural interest rate risk, arising due to differences in
the repricing timing of assets and liabilities, is transferred to
BSM and business lines are correctly allocated income and expense
based on the products they write, inclusive of activities to
mitigate this risk. Contractual principal repayments, payment
schedules, expected prepayments, contractual rate indices used for
repricing and interest rate reset dates are examples of elements
transferred for risk management by BSM.
The internal transfer pricing framework is governed by ALCO
whose responsibility it is to define each operating entity's
transfer pricing curve as well as to review and approve the
transfer pricing policy, including behaviouralisation assumptions
used for products where there is either no defined maturity or
where customer optionality exists. ALCO is also responsible for
monitoring and reviewing the overall structural interest rate risk
position. Interest rate behaviouralisation policies have to be
formulated in line with HSBC Group's behaviouralisation policies
and approved at least annually by local ALCOs.
Non-traded assets and liabilities are transferred to BSM based
on their repricing and maturity characteristics. For assets and
liabilities with no defined maturity or repricing characteristics
behaviouralisation is used to assess the interest rate risk
profile.
BSM manages the banking book interest rate positions transferred
to it within the Markets Risk limits approved by RMM. Effective
governance across BSM is supported by the dual reporting lines it
has to the Chief Executive Officer of GB&M and to the HSBC
Group Treasurer. BSM will only receive non-trading assets and
liabilities as long as they can economically hedge the risk they
receive. Hedging is generally managed through vanilla interest rate
derivatives or fixed rate government bonds. Any interest rate risk
which BSM cannot economically hedge is not transferred and will
remain within the business line where the risk is originated.
Measurement of interest rate risk in the banking book
The following measures are used by ALCM to monitor and control
interest rate risk in the banking book including:
-- non-traded VaR;
-- net Interest Income ('NII') sensitivity; and
-- economic value of equity ('EVE').
Non-traded VaR uses the same models as those used in the trading
book but for banking book balances.
NII sensitivity reflects the group's sensitivity of earnings to
changes in market interest rates. Entities forecast both one year
and five year NII sensitivities across a range of interest rate
scenarios based on a static balance sheet assumption. Sites include
business line rate pass-on assumptions, re-investment of maturing
assets and liabilities at market rates per shock scenario and
prepayment risk. BSM is modelled based on no management actions
i.e. the risk profile at the month end is assumed to remain
constant throughout the forecast horizon.
Net interest income sensitivity
A principal part of our management of non-traded interest rate
risk is to monitor the sensitivity of expected NII under varying
interest rate scenarios (simulation modelling), where all other
economic variables are held constant. This monitoring is undertaken
by ALCO.
The group applies a combination of scenarios and assumptions
relevant to the businesses as well as applying standard scenarios
that are required throughout HSBC Group.
Economic value of equity
EVE represents the present value of the future banking book cash
flows that could be distributed to equity providers under a managed
run-off scenario, i.e. the current book value of equity plus the
present value of future net interest income in this scenario. EVE
sensitivity is the extent to which the EVE value will change due to
a pre-specified movement in interest rates, where all other
economic variables are held constant.
Defined benefit pension scheme
Market risk also arises within the group's defined benefit
pension schemes to the extent that the obligations of the schemes
are not fully matched by assets with determinable cash flows. Refer
to Pension risk section on page 34 for additional information.
Operational risk management
Details of our operational risk profile in 2018 can be found on
page 65, in 'Operational risk in 2018'.
Overview
The objective of our operational risk management is to manage
and control operational risk in a cost-effective manner within
targeted levels of operational risk consistent with our risk
appetite.
Key developments in 2018
During 2018 we continued to strengthen our approach to managing
operational risk as set out in the operational risk management
framework ('ORMF'). The approach sets out governance, appetite and
provides an end-to-end view of non-financial risks, enhancing focus
on the risks that matter most and associated controls. It
incorporates a risk management system to enable active risk
management.
Activity to strengthen our risk culture and better embed the
approach, particularly the three lines of defence model, continued
to be a key focus in 2018. The framework sets out our roles and
responsibilities for managing operational risk on a daily
basis.
Data relating to HSBC UK Bank plc in the risk management system
was separated from HSBC Bank plc in advance of the UK ring-fenced
bank going live on 1 July 2018.
In accordance with preparations for the UK's withdrawal from the
EU, a number of branches within the European Economic Area have
been moved under HSBC France in the risk management system,
replicating the proposed legal structure of the bank.
Further information on the three lines of defence model can be
found in the 'Our risk management framework' section on
page 23.
Governance and structure
The ORMF defines minimum standards and processes, and the
governance structure for the management of operational risk and
internal control. The ORMF has been codified in a high-level
standards manual, supplemented with detailed policies, which
describes our approach to identifying, assessing, monitoring and
controlling operational risk and gives guidance on mitigating
action to be taken when weaknesses are identified.
We have a dedicated Operational Risk sub-function within our
Risk function. It is responsible for leading the embedding of the
ORMF, and assuring adherence to associated policies and processes
across the first and second lines of defence.
Operational Risk reviews the level of implementation of the ORMF
and provides updates on progress to the RMM.
Key risk management processes
Business managers throughout HSBC Group are responsible for
maintaining an acceptable level of internal control commensurate
with the scale and nature of operations, and for identifying and
assessing risks, designing controls and monitoring the
effectiveness of these controls. The ORMF helps managers to fulfil
these responsibilities by defining a standard risk assessment
methodology and providing a tool for the systematic reporting of
operational loss data.
A Group-wide risk management system is used to record the
results of the operational risk management process. Operational
risk and control self-assessments, along with issues and action
plans, are entered and maintained by business units. Business and
functional management monitor the progress of documented action
plans to address shortcomings. To help ensure that operational risk
losses are consistently reported and monitored at Group level, all
Group companies are required to report individual losses when the
net loss is expected to exceed $10,000, and to aggregate all other
operational risk losses under $10,000. Losses are entered into the
Group-wide risk management system and reported to governance on a
monthly basis.
Continuity of business operations
The Operational Risk function undertakes business continuity
management, which incorporates the development of a plan including
a business impact analysis assessing risk when business disruption
occurs.
The group maintains a number of dedicated work area recovery
sites globally. Regular testing of these facilities is carried out
with representation from each business and support function, to
ensure business continuity plans remain accurate, relevant and fit
for purpose. Where possible, the group has ensured that its
critical business systems are not co-located with business system
users, thereby reducing concentration risk.
Regulatory compliance risk management
Overview
The Regulatory Compliance sub-function ('RC') provides
independent, objective oversight and challenge, and promotes a
compliance-orientated culture that supports the business in
delivering fair outcomes for customers, maintaining the integrity
of financial markets and achieving HSBC's strategic objectives.
Key developments in 2018
There were no material changes to the policies and practices for
the management of RC risk in 2018, except for the following:
-- The HBEU Board maintains oversight of conduct matters
following the demise of the Conduct & Values Committee in
2018.
-- We implemented a number of initiatives to raise our standards
in relation to the conduct of our business, as described below
under 'Conduct of business'.
-- The reporting line of the Global Head of Regulatory
Compliance was changed from reporting to the Group Chief Risk
Officer to reporting to the Group Chief Compliance Officer from
1 November 2018.
Governance and structure
The Europe Head of RC reports into the Global head of RC.
Regulatory Compliance and Financial Crime Risk were integrated into
a new Compliance function from 1 November, which is headed by the
Group Chief Compliance Officer. RC continues to be structured as a
global sub function with regional and country RC teams, which
support and advise each global business and global function.
Key risk management processes
We regularly review our policies and procedures. Global policies
and procedures require the prompt identification and escalation of
any actual or potential regulatory breach to RC. Reportable events
are escalated to the bank's RMM and Risk Committee, as appropriate.
Matters relating to the Group's regulatory conduct of business are
reported to the Group Risk Committee.
Conduct of business
In 2018, we have continued to highlight conduct requirements, as
a global principle and elsewhere within the risk management
framework, reflecting the individual responsibility and
accountability we have for delivery of good conduct outcomes for
customers and market integrity. Other key activities in 2018
included:
-- the inclusion of an annual conduct objective in performance
management scorecards for executive Directors, Group Managing
Directors, Group General Managers and Country CEOs across all
regions, business lines, global functions and HSBC Operations
Services and Technology. Executive Directors are also now subject
to a new separate conduct-focused 'long term incentive'
measure;
-- further development of digital products and supporting
processes to ensure our digital offerings deliver fair outcomes for
customers. Governance and controls continue to be strengthened to
ensure they remain fit for purpose as new technology is
introduced;
-- enhanced global policy requirements helping customers who
are, or may become, vulnerable. Business line-led initiatives in
specific markets have addressed support for appointed
representatives of vulnerable customers, customers in financial
distress, financial inclusion, and a pilot programme of training to
help customers with or affected by cancer or dementia; and
-- the delivery of our fourth annual global mandatory training
course on conduct for all employees. This is complemented by an
ongoing programme of newsletter, intranet and live-streamed
communications, internal surveys of staff sentiment regarding
progress in delivering good conduct, and conduct awareness
campaigns.
Further information on our conduct is provided in the Strategic
Report on page 6 and www.hsbc.com/conduct, and for conduct-related
costs relating to significant items, see page 13.
Financial crime risk management
Overview
HSBC continues to embed a sustainable financial crime risk
management capability. We are making good progress with our
financial crime control framework enhancements including the
three-year programme to further strengthen the bank's anti-bribery
and corruption risk management capability. We have made good
progress on completing the actions arising from the 2017
country-by-country assessment of our framework. We also continue to
take further steps to refine and strengthen our defences against
financial crime by applying advanced analytics and artificial
intelligence to improve our ability to identify financial crime
risk in our customer population.
Key developments in 2018
During 2018, the group continued to increase its efforts to keep
financial crime out of the financial system. We have integrated the
majority of the Global Standards programme financial crime risk
core capabilities into our day-to-day operations during 2018, and
expect to complete the closure of the programme infrastructure in
2019.
We have commenced several initiatives to define the next phase
of financial crime risk management and to improve effectiveness
through the use of artificial intelligence and applying advanced
analytics techniques to achieve an intelligence-led financial crime
risk management framework for the future.
Working in partnership is vital to managing financial crime
risk. HSBC is a strong proponent of public-private partnerships and
information-sharing initiatives. During 2018, FCR created new
partnerships in HK and Singapore and continues to mature existing
partnerships which include UK Joint Money Laundering Intelligence
Task Force, US AML Consortium, Australia and Canada in order to
bring further benefit to the bank by enhancing the understanding of
financial crime risks.
We have delivered a number of enhancements to our control
framework around correspondent banking; developed our operating
model to address the move of EEA branches to HSBC France; and
strengthened the dedicated Financial Crime Risk sub-function.
Key Risk management processes
During 2018 we embedded a robust financial crime risk management
governance framework, mandating Financial Crime Risk Management
Committees with a standardised agenda and management information at
country, region and global business line levels.
During 2018, we also deployed anti-tax evasion controls and
established an AB&C Transformation programme to further enhance
the policies and controls around identifying and managing the risks
of bribery and corruption across our business. We have delivered
improvements to our capabilities to manage AB&C risk in our
portfolio of third party service providers by undertaking a data
quality remediation of existing relationships and providing
targeted training to those managing higher risk relationships. For
the longer term we established improved AB&C requirements for
the strategic third party relationship management system. We have
introduced a Fraud transformation programme to strengthen the
anti-fraud capabilities. As of January 2019, the Fraud Risk
stewards will become a part of FCC and a Risk and Control Framework
review is planned.
We are ensuring we retain a strong link between the bank and
HSBC UK Bank plc wherever there is commonality of risk or cross
reliance for controls between the entities. We have maintained a
single investigation function and continue to share issues of
relevance between both the First and Second Line including reviews
of the respective entities' governance papers and changes to
relevant financial crime policies and procedures.
We are investing in the next generation of capabilities to fight
financial crime by applying advanced analytics and artificial
intelligence. Our commitment to enhance our risk assessment
capabilities remains, aiming to deliver more proactive risk
management and improve the customer experience.
The Skilled Person
Following expiration in December 2017 of the AML Deferred
Prosecution Agreement entered into with the US Department of
Justice ('DoJ'), the then Monitor has continued to work under the
Direction issued by the UK Financial Conduct Authority ('FCA') in
2012 in his capacity as a Skilled Person under section 166 of the
Financial Services and Markets Act. He has also continued to work
in his capacity as an Independent Consultant under the 2012 Cease
and Desist Order issued by the US Federal Reserve Board ('FRB').
The Skilled Person and the Independent Consultant will continue
working for a period of time at the FCA's and FRB's discretion.
The Skilled Person has assessed HSBC's progress towards being
able to effectively manage its financial risk on a business as
usual basis. The Skilled Person has issued five country reports and
two quarterly reports in 2018. The Skilled Person has noted that
HSBC continues to make material progress towards its financial
crime risk target end state in terms of key systems, processes and
people. Nonetheless, the Skilled Person has identified some areas
that require further work before HSBC reaches a business as usual
state. The Skilled Person has not highlighted potential instances
of financial crime.
The Independent Consultant completed his fifth annual
assessment. The Independent Consultant concluded that HSBC
continues to make significant strides toward establishing an
effective sanctions compliance programme, commending HSBC on a
largely successful affiliates remediation exercise. He has,
however, determined that that certain areas within HSBC's sanctions
compliance programme require further work and, as such, HSBC's
sanctions programme does not yet operate in a business-as-usual
state. The Independent Consultant has commenced his sixth annual
assessment which is due to conclude in March 2019.
Throughout 2018, the Financial System Vulnerabilities Committee
('FSVC') received regular reports on HSBC's relationship with the
Skilled Person and Independent Consultant. The FSVC received
regular updates on the Skilled Person's and Independent
Consultant's reviews and has received the Skilled Person's country
and quarterly reports and the Independent Consultant's fifth annual
assessment report.
Insurance manufacturing operations risk management
Details of changes in our insurance manufacturing operations
risk profile in 2018 can be found on page 65 in 'Insurance
manufacturing operations risk in 2018'.
There were no material changes to our policies and practices for
the management of risks arising in our insurance manufacturing
operations in 2018.
Governance
(Audited)
Insurance risks are managed to a defined risk appetite, which is
aligned to the bank's risk appetite and risk management framework,
including the three lines of defence model. For details on the
governance framework, see page 23. The Group Insurance Risk
Management Meeting oversees the control framework globally and is
accountable to the RBWM Risk Management Meeting on risk matters
relating to the insurance business.
The monitoring of the risks within the insurance operations is
carried out by insurance risk teams. Specific risk functions,
including Wholesale Credit & Market Risk, Operational Risk,
Information Security Risk and Financial Crime Risk, support
Insurance Risk teams in their respective areas of expertise.
Stress and scenario testing
(Audited)
Stress testing forms a key part of the risk management framework
for the insurance business. We participate in local and group-wide
regulatory stress tests, including the Bank of England stress test
of the banking system, the European Insurance and Occupational
Pensions Authority stress test, and individual country insurance
regulatory stress tests.
These have highlighted that a key risk scenario for the
insurance business is a prolonged low interest rate environment. In
order to mitigate the impact of this scenario, the insurance
operations are taking a number of actions including repricing some
products to reflect lower interest rates, launching less capital
intensive products, investing in more capital efficient assets and
developing investment strategies to optimise the expected returns
against the cost of economic capital.
Management and mitigation of key risk types
Market risk
All our insurance manufacturing subsidiaries have market risk
mandates which specify the investment instruments in which they are
permitted to invest and the maximum quantum of market risk which
they may retain. They manage market risk by using, among others,
some or all of the techniques listed below, depending on the nature
of the contracts written:
-- For products with discretionary participating features
('DPF'), adjusting bonus rates to manage the liabilities to
policyholders. The effect is that a significant portion of the
market risk is borne by the policyholder.
-- Asset and liability matching where asset portfolios are
structured to meet projected liability cash flows. The group
manages its assets using an approach that considers asset quality,
diversification, cash flows matching, liquidity, volatility and
target investment return. It is not always possible to match asset
and liability durations due to uncertainty over the receipt of all
future premiums and the timing of claims, and also because the
forecast payment dates of liabilities may exceed the duration of
the longest-dated investments available. We use models to assess
the effect of a range of future scenarios on the values of assets
and associated liabilities, and local ALCOs employ the outcomes in
determining how to best structure asset holdings to support
liabilities.
-- Using derivatives to protect against adverse market movements
or better match liability cash flows.
-- For new products with investment guarantees, considering the
cost when determining the level of premiums or the price
structure.
-- Periodically reviewing products identified as higher risk,
which contain investment guarantees and embedded optionality
features linked to savings and investment products, for active
management.
-- Designing new products to mitigate market risk, such as
changing the investment return sharing between policyholders and
the shareholder.
-- Exiting, to the extent possible, investment portfolios whose risk is considered unacceptable.
-- Repricing premiums charged to policyholders.
Credit risk
Our insurance manufacturing subsidiaries are responsible for the
credit risk, quality and performance of their investment
portfolios. Our assessment of the creditworthiness of issuers and
counterparties is based primarily upon internationally recognised
credit ratings and other publicly available information.
Investment credit exposures are monitored against limits by our
insurance manufacturing subsidiaries, and are aggregated and
reported to HSBC Group Insurance Credit Risk and Group Credit Risk
functions. Stress testing is performed on the investment
credit exposures using credit spread sensitivities and default
probabilities.
We use a number of tools to manage and monitor credit risk.
These include a credit report which contains a watch-list of
investments with current credit concerns, primarily investments
that may be at risk of future impairment or where high
concentrations to counterparties are present in the investment
portfolio. The report is circulated monthly to senior management in
Group Insurance and the individual country chief risk officers to
identify investments which may be at risk of future impairment.
Liquidity risk
Risk is managed by cash flow matching and maintaining sufficient
cash resources, investing in high credit-quality investments with
deep and liquid markets, monitoring investment concentrations and
restricting them where appropriate, and establishing committed
contingency borrowing facilities.
Insurance manufacturing subsidiaries are required to complete
quarterly liquidity risk reports for HSBC Group Insurance Risk
function and an annual review of the liquidity risks to which it is
exposed.
Insurance risk
The bank primarily uses the following techniques to manage and
mitigate insurance risk:
-- product design, pricing and overall proposition management
(for example, management of lapses by introducing surrender
charges);
-- underwriting policy;
-- claims management processes; and
-- reinsurance which cedes risks above our acceptable thresholds
to an external reinsurer thereby limiting our exposure.
Other material risks
Reputational risk management
Overview
Reputational risk is the risk of failing to meet stakeholder
expectations as a result of any event, behaviour, action or
inaction, either by HSBC, our employees or those with whom we are
associated. Any material lapse in standards of integrity,
compliance, customer service or operating efficiency may represent
a potential reputational risk. Stakeholder expectations constantly
evolve, and so reputational risk is dynamic and varies between
geographical regions, groups and individuals. We have an unwavering
commitment to operate at the high standards we set for ourselves in
every jurisdiction.
Key developments in 2018
In the second half of 2018, as part of a revised enterprise risk
management framework, it was agreed that reputational risk would be
classified as a 'transverse' risk, which spans both financial and
non-financial risk categories. It was also agreed that the overall
risk stewardship for reputational risk would be transferred to a
single risk steward, the Group Chief Risk Officer. As a result, the
reputational risk policy will be revised and updated in 2019. The
governance structure, however, remains unchanged.
Governance and structure
The development of policies and an effective control environment
for the identification, assessment, management and mitigation of
reputational risk, are considered by the Group Reputational Risk
Committee which is chaired by the Group Chief Risk Officer. The
focus of the Group Reputational Risk Committee is to consider
matters arising from clients or transactions that either present a
serious potential reputational risk to the Group or merit a
Group-led decision to ensure a consistent risk management approach
across the regions, global businesses and global functions. Within
HBEU, matters arising from clients, transactions and third parties
that present a material reputational risk are considered by the
Line Of Business Reputational Risk Client Selection Committees.
These committees are responsible for keeping the RMMs apprised of
areas and activities presenting significant reputational risk and,
where appropriate, for making recommendations to the RMM to
mitigate such risk.
Key risk management processes
Our Reputational Risk and Client Selection team oversees the
identification, management and control of significant reputational
risks across the Region. It is responsible for informing on
policies to guide HBEU reputational risk management, devising
strategies to protect against reputational risk, and advising the
regional businesses and regional functions to help them identify,
assess and mitigate such risks, where possible. It is supported by
Reputational Risk and CSEM teams in each of the businesses. Each
global business has an established reputational risk management
governance process. The global functions manage and escalate
reputational risks within established operational risk
frameworks.
Our policies set out our risk appetite and operational
procedures for all areas of reputational risk, including financial
crime prevention, regulatory compliance, conduct-related concerns,
environmental impacts, human rights matters and employee
relations.
For further details of our financial crime risk management and
regulatory compliance risk management, see 'Financial crime risk
management' on page 32 and 'Regulatory compliance risk management'
on page 31 respectively.
Further details can be found on www.hsbc.com.
Pension risk management
There were no material changes to our policies and practices for
the management of pension risk in 2018.
Governance and structure
A global pension risk framework and accompanying global policies
on the management of risks related to defined benefit and defined
contribution plans are in place. Pension risk is managed by a
network of local and regional pension risk forums. The group's
Europe Pension Oversight Forum is responsible for the governance
and oversight of pension plans sponsored by HSBC within its
European operations.
Key risk management processes
HSBC provides future pension benefits on a defined contribution
basis from many of its European operations. However there remain
future defined benefit pensions provided in the region.
In defined contribution pension plans, the contributions that
HSBC is required to make are known, while the ultimate pension
benefit will vary, typically with investment returns achieved by
investment choices made by the employee. While the market risk to
HSBC of defined contribution plans is low, the bank is still
exposed to operational and reputational risk.
In defined benefit pension plans, the level of pension benefit
is known. Therefore, the level of contributions required by HSBC
will vary due to a number of risks, including:
-- investments delivering a return below that required to provide the projected plan benefits;
-- the prevailing economic environment leading to corporate
failures, thus triggering write-downs in asset values (both equity
and debt);
-- a change in either interest rates or inflation, causing an
increase in the value of the plan liabilities; and
-- plan members living longer than expected (known as
longevity risk).
Pension risk is assessed using an economic capital model that
takes into account potential variations in these factors. The
impact of these variations on both pension assets and pension
liabilities is assessed using a one-in-200 year stress test.
Scenario analysis and other stress tests are also used to support
pension risk management.
To fund the benefits associated with defined benefit plans,
sponsoring Group companies, and in some instances employees, make
regular contributions in accordance with advice from actuaries and
in consultation with the plan's trustees where relevant. These
contributions are normally set to ensure that there are sufficient
funds to meet the cost of the accruing benefits for the future
service of active members. However, higher contributions are
required when plan assets are considered insufficient to cover the
existing pension liabilities. Contribution rates are typically
revised annually or once every three years, depending on the
plan.
The defined benefit plans invest contributions in a range of
investments designed to limit the risk of assets failing to meet a
plan's liabilities. Any changes in expected returns from the
investments may also change future contribution requirements. In
pursuit of these long-term objectives, an overall target allocation
of the defined benefit plan assets between asset classes is
established. In addition, each permitted asset class has its own
benchmarks, such as stock market or property valuation indices. The
benchmarks are reviewed at least once every three to five years and
more frequently if required by local legislation or circumstances.
The process generally involves an extensive asset and liability
review.
Key developments and risk profile
Key developments in 2018
-- We continued to strengthen our operational risks controls, as
described on page 65 under 'Operational risk in 2018'.
-- We have integrated the majority of the Global Standards
programme financial crime risk core capabilities into our
day-to-day operations during 2018, and expect to complete the
transition to business and function management in the first half of
2019. We continue to take further steps to refine and strengthen
our defences against financial crime by applying advanced analytics
and artificial intelligence.
-- IFRS 9 introduced new concepts and measures such as
significant increase in credit risk and lifetime expected credit
losses ('ECL'). Existing stress testing and regulatory models,
skills and expertise were adapted in order to meet IFRS 9
requirements. Data from various client, finance and risk systems
has been integrated and validated. As a result of IFRS 9 adoption,
management has additional insight and measures not previously
utilised which, over time, may influence our risk appetite and risk
management processes.
Credit risk in 2018
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.
1 January 2018 comparative credit disclosures reflecting the
adoption of IFRS 9 have been included where available. 31 December
2017 comparative credit tables, which do not reflect the adoption
of IFRS 9, have been disclosed separately on pages 55 to 61, as
they are not directly comparable.
Refer to 'Standards applied during the year ended 31 December
2018 on page 97 and Note 34 'Effects of reclassifications upon
adoption' of IFRS 9 for further details.
There were no material changes to the policies and practices for
the management of credit risk in 2018. A summary of our current
policies and practices for the management of credit risk is set out
in 'Credit risk management' on page 26.
Gross loans and advances to customers of GBP113bn, as defined by
IFRS9, have decreased from GBP277bn at 1 January 2018,
predominantly due to the separation of the ring--fenced bank. Loans
and advances to banks of GBP14bn have increased from GBP13bn at 1
January 2018; Wholesale and personal lending movements are
disclosed on pages 49 to 56.
The change in ECL, as it appears in the income statement, for
the period was GBP159m.
Our maximum exposure to credit risk is presented on page 41 and
credit quality on page 46. While credit risk arises across most of
our balance sheet, losses have typically been incurred on loans and
advances and securitisation exposures and other structured
products. As a result, our disclosures focus primarily on these two
areas.
Summary of credit risk
The disclosure below 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. Due to the
forward-looking nature of IFRS 9, the scope of financial
instruments on which ECL is recognised is greater than the scope of
IAS 39.
The following tables analyse loans by industry sector and the
extent in which they are exposed to credit risks.
The allowance for ECL at 31 December 2018 comprised of GBP1,347m
in respect of assets held at amortised cost, GBP83m in respect of
loan commitments and financial guarantees, and GBP45m 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
(Audited)
---------------------- ----------- ---------------------- -------------
31 Dec 2018 At 1 Jan 2018
Allowance
Gross carrying/nominal for Gross carrying/nominal Allowance
amount ECL(1) amount for ECL(1)
------------------------------------
The group GBPm GBPm GBPm GBPm
---------------------- ----------- ---------------------- -------------
Loans and advances to customers
at amortised cost 113,306 (1,342) 276,852 (2,893)
- personal 23,903 (206) 120,277 (685)
- corporate and commercial 74,058 (1,106) 133,742 (2,093)
- non-bank financial institutions 15,345 (30) 22,833 (115)
---------------------- ---------- ---------------------- ----------
Loans and advances to banks at
amortised
cost 13,631 (3) 13,227 (8)
---------------------- ---------- ---------------------- ----------
Other financial assets measured
at amortised cost 165,525 (2) 179,750 (2)
- cash and balances at central
banks 52,014 (1) 97,601 (1)
- items in the course of collection
from other banks 839 - 2,023 -
- reverse repurchase agreements
- non trading 80,102 - 45,808 -
- financial investments 13 - 6 -
------------------------------------
- prepayments, accrued income and
other assets(2) 32,557 (1) 34,312 (1)
---------------------- ----------
Total gross carrying amount on
balance
sheet 292,462 (1,347) 469,829 (2,903)
------------------------------------ ---------------------- ---------- ---------------------- ----------
Loans and other credit related
commitments 141,620 (66) 167,349 (108)
------------------------------------ ---------------------- ---------- ---------------------- ----------
- personal 2,062 - 39,462 -
------------------------------------
- corporate and commercial 69,119 (65) 81,323 (105)
------------------------------------
- financial(3) 70,439 (1) 46,564 (3)
------------------------------------ ---------------------- ---------- ---------------------- ----------
Financial guarantees (4) 6,054 (17) 8,301 (32)
------------------------------------ ---------------------- ---------- ---------------------- ----------
- personal 43 - 70 -
- corporate and commercial 4,429 (16) 5,972 (32)
- financial 1,582 (1) 2,259 -
------------------------------------ ---------------------- ---------- ---------------------- ----------
Total nominal amount off balance
sheet(5) 147,674 (83) 175,650 (140)
------------------------------------ ---------------------- ---------- ---------------------- ----------
440,136 (1,430) 645,479 (3,043)
------------------------------------ ---------------------- ---------- ---------------------- ----------
Memorandum
Memorandum allowance
allowance for
Fair value for ECL(6) Fair value ECL(6)
GBPm GBPm GBPm GBPm
---------------------- -------------
Debt instruments measured at fair
value through other comprehensive
income ('FVOCI') 47,172 (45) 55,045 (166)
------------------------------------ ---------------------- ---------- ---------------------- ----------
1 The total ECL is recognised in the loss allowance for the
financial asset unless the total ECL exceeds the gross carrying
amount of the financial asset, in which case the ECL is recognised
as a provision.
2 Includes only those financial instruments which are subject to
the impairment requirements of IFRS 9. 'Prepayments, accrued income
and other assets' as presented within the consolidated balance
sheet on page 89 includes both financial and non-financial
assets.
3 31 December 2017 balances have been restated to include
GBP32.5bn of loan commitments (unsettled reverse repurchase
agreements) not previously identified for disclosure.
4 Excludes performance guarantee contracts to which the
impairment requirements in IFRS 9 are not applied.
5 Represents the maximum amount at risk should the contracts be
fully drawn upon and clients default.
6 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 in expected credit losses and other
credit impairment charges' in the income statement.
Summary of financial instruments to which the impairment requirements
in IFRS 9 are applied
(Audited)
---------------------- -------------
31 Dec 2018
Allowance
Gross carrying/nominal for
amount ECL(1)
The bank GBPm GBPm
---------------------- -------------
Loans and advances to customers at amortised cost 59,527 (744)
- personal 3,249 (9)
- corporate and commercial 39,256 (685)
- non-bank financial institutions 17,022 (50)
---------------------- ---------
Loans and advances to banks at amortised cost 12,689 (3)
---------------------- ---------
Other financial assets measured at amortised cost 124,544 (1)
- cash and balances at central banks 40,657 -
- items in the course of collection from other banks 442 -
- reverse repurchase agreements - non trading 56,495 -
- financial investments - -
-----------------------------------------------------------
- prepayments, accrued income and other assets(2) 26,950 (1)
---------------------- ---------
Total gross carrying amount on balance sheet 196,760 (748)
----------------------------------------------------------- ---------------------- ---------
Loans and other credit related commitments 61,196 (50)
----------------------------------------------------------- ---------------------- ---------
- personal 305 -
-----------------------------------------------------------
- corporate and commercial 33,291 (49)
-----------------------------------------------------------
- financial 27,600 (1)
----------------------------------------------------------- ---------------------- ---------
Financial guarantees(3) 5,578 (14)
----------------------------------------------------------- ---------------------- ---------
- personal 3 -
- corporate and commercial 1,846 (13)
- financial 3,729 (1)
----------------------------------------------------------- ---------------------- ---------
Total nominal amount off balance sheet(4) 66,774 (64)
----------------------------------------------------------- ---------------------- ---------
263,534 (812)
----------------------------------------------------------- ---------------------- ---------
Memorandum
allowance
Fair value for ECL(5)
GBPm GBPm
Debt instruments measured at fair value through
other comprehensive income ('FVOCI') 26,646 (6)
----------------------------------------------------------- ---------------------- ---------
1 The total ECL is recognised in the loss allowance for the
financial asset unless the total ECL exceeds the gross carrying
amount of the financial asset, in which case the ECL is recognised
as a provision.
2 Includes only those financial instruments which are subject to
the impairment requirements of IFRS 9. 'Prepayments, accrued income
and other assets' as presented within the consolidated balance
sheet on page 89 includes both financial and non-financial
assets.
3 Excludes performance guarantee contracts to which the
impairment requirements in IFRS 9 are not applied.
4 Represents the maximum amount at risk should the contracts be
fully drawn upon and clients default.
5 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 in expected credit losses and other
credit impairment charges' in the income statement.
The following table provides an overview of the banks and
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: unimpaired and without significant increase in
credit risk on which a 12-month allowance for ECL is
recognised.
-- stage 2: a significant increase in credit risk has been
experienced since initial recognition on which a lifetime ECL is
recognised.
-- stage 3: objective evidence of impairment, and are therefore
considered to be in default or otherwise credit-impaired on which a
lifetime ECL is recognised.
-- purchased or originated credit-impaired ('POCI'): Purchased
or originated at a deep discount that reflects 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
31 December 2018
(Audited)
Gross carrying/nominal Allowance for
amount(2) ECL ECL coverage %
------- ------- -------
Stage Stage Stage Stage Stage Stage Stage Stage Stage
1 2 3 POCI(3) Total 1 2 3 POCI(3) Total 1 2 3 POCI(3) Total
The group GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm % % % % %
-------
Loans and
advances
to customers
at amortised
cost 102,129 8,816 2,244 117 113,306 (121) (171) (972) (78) (1,342) 0.1 1.9 43.3 66.7 1.2
-----
- personal 22,170 1,206 527 - 23,903 (9) (27) (170) - (206) - 2.2 32.3 - 0.9
* corporate and commercial 64,822 7,476 1,643 117 74,058 (99) (132) (797) (78) (1,106) 0.2 1.8 48.5 66.7 1.5
* non-bank financial institutions 15,137 134 74 - 15,345 (13) (12) (5) - (30) 0.1 9.0 6.8 - 0.2
---------------------------------------
Loans and
advances
to banks
at amortised
cost 13,565 66 - - 13,631 (2) (1) - - (3) - 1.5 - - -
---------------------------------------
Other financial
assets
measured
at amortised
cost 165,496 24 5 - 165,525 (1) - (1) - (2) - - 20.0 - -
---------------------------------------
Loan and
other credit-related
commitments 136,539 4,827 249 5 141,620 (27) (26) (13) - (66) - 0.5 5.2 - -
---------------------------------------
- personal 2,005 54 3 - 2,062 - - - - - - - - - -
* corporate and commercial 64,428 4,441 245 5 69,119 (26) (26) (13) - (65) - 0.6 5.3 - 0.1
- financial 70,106 332 1 - 70,439 (1) - - - (1) - - - - -
---------------------------------------
Financial
guarantees(1) 5,423 565 64 2 6,054 (4) (9) (4) - (17) 0.1 1.6 6.3 - 0.3
- personal 42 - 1 - 43 - - - - - - - - - -
* corporate and commercial 3,866 499 62 2 4,429 (4) (8) (4) - (16) 0.1 1.6 6.5 - 0.4
- financial 1,515 66 1 - 1,582 - (1) - - (1) - 1.5 - - 0.1
---------------------------------------
At 31 Dec
2018 423,152 14,298 2,562 124 440,136 (155) (207) (990) (78) (1,430) - 1.4 38.6 62.9 0.3
--------------------------------------- ------- ------ ----- ------- ------- ---- ---- ---- ---- ------ ----- ----- ----- ------- -----
1 Excludes performance guarantee contracts to which the
impairment requirements in IFRS 9 are not applied.
2 Represents the maximum amount at risk should the contracts be
fully drawn upon and clients default.
3 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 and are transferred from stage 1 to stage
2. The following disclosure presents the ageing of stage 2
financial assets. It distinguishes those assets that are classified
as stage 2 when they are less than 30 days past due (1-29 DPD) from
those that are more than 30 DPD (30 and > DPD). Past due
financial instruments are those loans where customers have failed
to make payments in accordance with the contractual terms of their
facilities.
Stage 2 days past due analysis at 31 December 2018
(Audited) Gross carrying amount Allowance for ECL ECL coverage %
------------------------ ------------------------------------- ---------------------------
Of which: Of which: Of which:
1 to 30 and 1 to
Stage 29 > Stage 1 to 30 and Stage 29 30 and
2 DPD(1) DPD(1) 2 29 DPD(1) > DPD(1) 2 DPD(1) > DPD(1)
The group GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------ ------- ------- ----------- ----------- ----------- ------- ------- ---------
Loans and
advances
to customers
at amortised
cost: 8,816 117 178 (171) (3) (6) 1.9 2.6 3.4
- Personal 1,206 80 83 (27) (2) (4) 2.2 2.5 4.8
- Corporate
and
commercial 7,476 37 95 (132) (1) (2) 1.8 2.7 2.1
- Non-bank
financial
institutions 134 - - (12) - - 9.0 - -
------- -------
Loans and
advances
to banks at
amortised
cost 66 5 - (1) - - 1.5 - -
------- -------
Other
financial
assets
measured at
amortised
cost 24 - - - - - - - -
-------------- ------ ------- ------- ------- ------- ------- ------- ------- -------
1 Days past due ('DPD') Up-to-date accounts in stage 2 are not
shown in amounts presented above.
Summary of credit risk (excluding debt instruments measured at FVOCI)
by stage distribution and ECL coverage by industry sector at
1 January 2018
Gross carrying/nominal
amount(3) Allowance for ECL ECL coverage %
Stage Stage Stage Stage Stage Stage Stage Stage Stage
1 2 3 POCI(4) Total 1 2 3 POCI(4) Total 1 2 3 POCI(4) Total
The group GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm % % % % %
Loans and
advances
to customers
at amortised
cost 256,850 14,526 5,063 413 276,852 (401) (566) (1,852) (74) (2,893) 0.2 3.9 36.6 17.9 1.0
--------------------------------------- ------- ------ ----- ------- ------- ---- ---- ------ ---- ------ ----- ----- ----- ------- -----
- personal 115,877 3,153 1,247 - 120,277 (129) (195) (361) - (685) 0.1 6.2 28.9 - 0.6
---------------------------------------
* corporate and commercial 118,985 10,699 3,645 413 133,742 (267) (368) (1,384) (74) (2,093) 0.2 3.4 38.0 17.9 1.6
---------------------------------------
* non-bank financial institutions 21,988 674 171 - 22,833 (5) (3) (107) - (115) - 0.4 62.6 - 0.5
--------------------------------------- ------- ------ ----- ------- ------- ---- ---- ------ ---- --- ------ ----- ----- ----- ------- -----
Loans and
advances
to banks
at amortised
cost 12,966 250 11 - 13,227 (5) (2) (1) - (8) - 0.8 9.1 - 0.1
--------------------------------------- ------- ------ ----- ------- ------- ---- ---- ------ ---- --- ------ ----- ----- ----- ------- -----
Other financial
assets measured
at amortised
cost 179,519 225 4 2 179,750 (2) - - - (2) - - - - -
Loan and
other credit
related commitments 163,726 3,364 225 34 167,349 (42) (49) (17) - (108) - 1.5 7.6 - 0.1
--------------------------------------- ------- ------ ----- ------- ------- ---- ---- ------ ---- --- ------ ----- ----- ----- ------- -----
- personal 39,300 112 50 - 39,462 - - - - - - - - - -
---------------------------------------
* corporate and commercial 77,932 3,182 175 34 81,323 (40) (48) (17) - (105) 0.1 1.5 9.7 - 0.1
---------------------------------------
- financial(1) 46,494 70 - - 46,564 (2) (1) - - (3) - 1.4 - - -
--------------------------------------- ------- ------ ----- ------- ------- ---- ---- ------ ---- --- ------ ----- ----- ----- ------- -----
Financial
guarantees(2) 7,595 647 43 16 8,301 (4) (1) (27) - (32) 0.1 0.2 62.8 - 0.4
--------------------------------------- ------- ------ ----- ------- ------- ---- ---- ------ ---- --- ------ ----- ----- ----- ------- -----
- personal 69 - 1 - 70 - - - - - - - - - -
---------------------------------------
* corporate and commercial 5,353 561 42 16 5,972 (4) (1) (27) - (32) 0.1 0.2 64.3 - 0.5
---------------------------------------
- financial 2,173 86 - - 2,259 - - - - - - - - - -
--------------------------------------- ------- ------ ----- ------- ------- ---- ---- ------ ---- --- ------ ----- ----- ----- ------- -----
At 1 Jan
2018 620,656 19,012 5,346 465 645,479 (454) (618) (1,897) (74) (3,043) 0.1 3.3 35.5 15.9 0.5
--------------------------------------- ------- ------ ----- ------- ------- ---- ---- ------ ---- ------ ----- ----- ----- ------- -----
1 31 December 2017 balances have been restated to include
GBP32.5bn of loan commitments (unsettled reverse repurchase
agreements) not previously identified for disclosure.
2 Excludes performance guarantee contracts to which the
impairment requirements in IFRS 9 are not applied.
3 Represents the maximum amount at risk should the contracts be
fully drawn upon and clients default.
4 Purchased or originated credit-impaired ('POCI').
Stage 2 days past due analysis at 1 January 2018
Gross carrying
amount Allowance for ECL ECL coverage %
Of which: Of which: Of which:
1 to 30 and 1 to 30 and 1 to
Stage 29 > Stage 29 > Stage 29 30 and
2 DPD(1) DPD(1) 2 DPD(1) DPD(1) 2 DPD(1) > DPD(1)
The group GBPm GBPm GBPm GBPm GBPm GBPm % % %
------ ------ ------ -------- -------- ------ ----- ------ --------
Loans and advances
to customers at amortised
cost 14,526 477 590 (566) (49) (50) 3.9 10.3 8.5
------ ------ ------ ---- ---- ----- ----- ------ ------
- personal 3,153 411 183 (195) (36) (36) 6.2 8.8 19.7
* corporate and commercial 10,699 66 405 (368) (13) (14) 3.4 19.7 3.5
* non-bank financial institutions 674 - 2 (3) - - 0.4 - -
------ ------ ------ ---- ---- ----- ----- ------ ------
Loans and advances
to banks at amortised
cost 250 1 2 (2) (2) - 0.8 200.0 -
------ ------ ------ ---- ---- ----- ----- ------ ------
Other financial assets
measured at amortised
cost 225 1 16 - - - - - -
--------------------------------------- ------ ------ ------ ---- ---- ----- ----- ------ ------
1 Days past due ('DPD') Up-to-date accounts in stage 2 are not
shown in amounts presented above.
Summary of credit risk (excluding debt instruments measured at FVOCI)
by stage distribution and ECL coverage by industry sector at
31 December 2018
(Audited)
Gross carrying/nominal Allowance for
amount(2) ECL ECL coverage %
------- ----- -------
Stage Stage Stage Stage Stage Stage Stage Stage Stage
1 2 3 POCI(3) Total 1 2 3 POCI(3) Total 1 2 3 POCI(3) Total
The bank GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm % % % % %
-------
Loans and
advances
to customers
at amortised
cost 52,962 5,477 985 103 59,527 (86) (122) (461) (75) (744) 0.2 2.2 46.8 72.8 1.2
-----
- personal 3,134 91 24 - 3,249 (1) (3) (5) - (9) - 3.3 20.8 - 0.3
* corporate and commercial 32,966 5,292 895 103 39,256 (72) (108) (430) (75) (685) 0.2 2.0 48.0 72.8 1.7
* non-bank financial institutions 16,862 94 66 - 17,022 (13) (11) (26) - (50) 0.1 11.7 39.4 - 0.3
---------------------------------------
Loans and
advances
to banks
at amortised
cost 12,629 60 - - 12,689 (2) (1) - - (3) - 1.7 - - -
---------------------------------------
Other financial
assets
measured
at amortised
cost 124,521 19 4 - 124,544 - - (1) - (1) - - 25.0 - -
---------------------------------------
Loan and
other credit-related
commitments 58,162 2,889 141 5 61,197 (24) (24) (2) - (50) - 0.8 1.4 - 0.1
---------------------------------------
- personal 302 3 - - 305 - - - - - - - - - -
* corporate and commercial 30,549 2,597 141 5 33,292 (23) (24) (2) - (49) 0.1 0.9 1.4 - 0.1
- financial 27,311 289 - - 27,600 (1) - - - (1) - - - - -
---------------------------------------
Financial
guarantees(1) 5,248 277 53 - 5,578 (3) (7) (4) - (14) 0.1 2.5 7.5 - 0.3
- personal 3 - - - 3 - - - - - - - - - -
* corporate and commercial 1,567 227 52 - 1,846 (3) (6) (4) - (13) 0.2 2.6 7.7 - 0.7
- financial 3,678 50 1 - 3,729 - (1) - - (1) - 2.0 - - -
---------------------------------------
At 31 Dec
2018 253,522 8,722 1,183 108 263,535 (115) (154) (468) (75) (812) - 1.8 39.6 69.4 0.3
--------------------------------------- ------- ----- ----- ------- ------- ---- ---- ---- ---- ---- ----- ----- ----- ------- -----
1 Excludes performance guarantee contracts to which the
impairment requirements in IFRS 9 are not applied.
2 Represents the maximum amount at risk should the contracts be
fully drawn upon and clients default.
3 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 and are transferred from stage 1 to stage
2. The following disclosure presents the ageing of stage 2
financial assets. It distinguishes those assets that are classified
as stage 2 when they are less than 30 days past due (1-29 DPD) from
those that are more than 30 DPD (30 and > DPD). Past due
financial instruments are those loans where customers have failed
to make payments in accordance with the contractual terms of their
facilities.
Stage 2 days past due analysis at 31 December 2018
(Audited) Gross carrying amount Allowance for ECL ECL coverage %
Of which: Of which: Of which:
1 to 30 and 1 to 1 to
Stage 29 > Stage 29 30 and Stage 29 30 and
2 DPD(1) DPD(1) 2 DPD(1) > DPD(1) 2 DPD(1) > DPD(1)
The bank GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------- ------- ------- ------------ ------- -------- ------- ------- ----------
Loans and
advances
to customers
at amortised
cost: 5,477 20 5 (122) - - 2.2 - -
- Personal 91 20 5 (3) - - 3.3 - -
- Corporate
and
commercial 5,292 - - (108) - - 2.0 - -
- Non-bank
financial
institutions 94 - - (11) - - 11.7 - -
------- --------
Loans and
advances
to banks at
amortised
cost 60 - - (1) - - 1.7 - -
------- --------
Other
financial
assets
measured at
amortised
cost 19 - - - - - - - -
-------------- ------- ------- ------- ------- --- ------- -------- ------- ------- --------
1 Days past due ('DPD') Up-to-date accounts in stage 2 are not
shown in amounts presented above.
Credit exposure
Maximum exposure to credit risk
(Audited)
The following table provides information on balance sheet items,
offsets, and loan and other credit-related commitments.
The offset on derivatives remains in line with the movements in
maximum exposure amounts.
'Maximum exposure to credit risk'
table
The following table presents our
maximum exposure before taking account
of any collateral held or other
credit enhancements (unless such
enhancements meet accounting offsetting
requirements). The table excludes
financial instruments whose carrying
amount best represents the net exposure
to credit risk and it excludes equity
securities as they are not subject
to credit risk. For the financial
assets recognised on the balance
sheet, the maximum exposure to credit
risk equals their carrying amount;
for financial guarantees and other
guarantees granted, it is the maximum
amount that we would have to pay
if the guarantees were called upon.
For loan commitments and other credit-related
commitments, it is generally the
full amount of the committed facilities.
The offset in the table relates
to amounts where there is a legally
enforceable right of offset in the
event of counterparty default and
where, as a result, there is a net
exposure for credit risk purposes.
However, as there is no intention
to settle these balances on a net
basis under normal circumstances,
they do not qualify for net presentation
for accounting purposes. No offset
has been applied to off-balance
sheet collateral. In the case of
derivatives the offset column also
includes collateral received in
cash and other financial assets.
===============================================
Other credit risk mitigants
While not disclosed as an offset in the following 'Maximum
exposure to credit risk' table, other arrangements are in place
which reduce our maximum exposure to credit risk. These include a
charge over collateral on borrowers' specific assets such as
residential properties, collateral held in the form of financial
instruments that are not held on balance sheet and short positions
in securities. In addition, for financial assets held as part of
linked insurance/investment contracts the risk is predominantly
borne by the policyholder. See Note 28 on the Financial Statements
for further details of collateral in respect of certain loans and
advances and derivatives.
Maximum exposure to credit risk
(Audited)
Maximum
exposure Offset Net
The group GBPm GBPm GBPm
Loans and advances to customers held at amortised
cost 111,964 (12,579) 99,385
--------- -------- -------
- personal 23,697 - 23,697
- corporate and commercial 72,952 (10,610) 62,342
- non-bank financial institutions 15,315 (1,969) 13,346
--------- -------- -------
Loans and advances to banks at amortised cost 13,628 (12) 13,616
--------- -------- -------
Other financial assets held at amortised cost 165,793 (17,065) 148,728
--------------------------------------------------- --------- -------- -------
- cash and balances at central banks 52,013 - 52,013
---------------------------------------------------
- items in the course of collection from other
banks 839 - 839
---------------------------------------------------
- reverse repurchase agreements - non trading 80,102 (17,065) 63,037
---------------------------------------------------
- financial investments 13 - 13
---------------------------------------------------
- prepayments, accrued income and other assets 32,826 - 32,826
--------------------------------------------------- --------- -------- -------
Derivatives 144,522 (140,644) 3,878
--------------------------------------------------- --------- -------- -------
Total on balance sheet exposure to credit risk 435,907 (170,300) 265,607
--------------------------------------------------- --------- -------- -------
Total off-balance sheet 172,073 - 172,073
--------------------------------------------------- --------- -------- -------
- financial and other guarantees(1) 23,244 - 23,244
---------------------------------------------------
- loan and other credit-related commitments 148,829 - 148,829
--------------------------------------------------- --------- -------- -------
31 Dec 2018 607,980 (170,300) 437,680
--------------------------------------------------- --------- -------- -------
The bank GBPm GBPm GBPm
Loans and advances to customers held at amortised
cost 58,783 (20,045) 38,738
------- -------- -------
- personal 3,240 - 3,240
- corporate and commercial 38,571 (10,610) 27,961
- non-bank financial institutions 16,972 (9,435) 7,537
------- -------- -------
Loans and advances to banks at amortised cost 12,686 (22) 12,664
------- -------- -------
Other financial assets held at amortised cost 124,815 (13,401) 111,414
------- -------- -------
- cash and balances at central banks 40,657 - 40,657
- items in the course of collection from other
banks 442 - 442
- reverse repurchase agreements - non trading 56,495 (13,401) 43,094
- financial investments - - -
- prepayments, accrued income and other assets 27,221 - 27,221
------- -------- -------
Derivatives 139,229 (137,504) 1,725
------- -------- -------
Total on balance sheet exposure to credit risk 335,513 (170,972) 164,541
--------------------------------------------------- ------- -------- -------
Total off-balance sheet 81,748 - 81,748
------- -------- -------
- financial and other guarantees(1) 15,860 - 15,860
---------------------------------------------------
- loan and other credit-related commitments 65,888 - 65,888
--------------------------------------------------- ------- -------- -------
31 Dec 2018 417,261 (170,972) 246,289
--------------------------------------------------- ------- -------- -------
1 'Financial and other guarantees' represents 'Financial
guarantees' and 'Performance and other guarantees' as disclosed in
Note 30.
Concentration of exposure
The geographical diversification of our lending portfolio, and
our broad range of global businesses and products, ensured that we
did not overly depend on a few markets or businesses to generate
growth in 2018.
For an analysis of:
-- financial investments, see Note 15 on the Financial Statements;
-- trading assets, see Note 10 on the Financial Statements;
-- derivatives, see page 52 and Note 14 on the Financial Statements; and
-- loans and advances by industry sector and by the location of
the principal operations of the lending subsidiary or by the
location of the lending branch, see page 50 for wholesale lending
and page 52 for personal lending.
Credit deterioration of financial instruments
(Audited)
A summary of our current policies and practices regarding the
identification, treatment and measurement of stage 1, stage 2 and
stage 3 (credit impaired) and POCI financial instruments can be
found in note 1.2 of the financial statements.
Measurement uncertainty and sensitivity
analysis of ECL estimates
Expected credit loss impairment allowances recognised in the
financial statements reflect the effect of a range of possible
economic outcomes, calculated on a probability-weighted basis,
based on the economic scenarios described below. The recognition
and measurement of expected credit losses ('ECL') involves the use
of significant judgement and estimation. It is necessary to
formulate multiple forward-looking economic forecasts and
incorporate them into the ECL estimates. HSBC uses a standard
framework to form economic scenarios to reflect assumptions about
future economic conditions, supplemented with the use of management
judgement, which may result in using alternative or additional
economic scenarios and/or management adjustments.
Methodology
HSBC has adopted the use of three scenarios, representative of
our view of forecast economic conditions, sufficient to calculate
unbiased expected loss in most economic environments. They
represent a 'most likely outcome' (the Central scenario), and two,
less likely 'outer' scenarios, referred to as the Upside and
Downside scenarios. Each outer scenario is consistent with a
probability of 10%, while the Central scenario is assigned the
remaining 80%, according to the decision of HSBC's senior
management. This weighting scheme is deemed appropriate for the
unbiased estimation of ECL in most circumstances. Key scenario
assumptions are set using the average of forecasts of external
economists, helping to ensure that the IFRS 9 scenarios are
unbiased and maximise the use of independent information. The
Central, Upside and Downside scenarios selected with reference to
external forecast distributions using the above approach are termed
the 'consensus economic scenarios'.
For the Central scenario, HSBC sets key assumptions such as GDP
growth, inflation, unemployment and policy interest rates, using
either the average of external forecasts (commonly referred to as
consensus forecasts) for most economies, or market prices. An
external provider's global macro model, conditioned to follow the
consensus forecasts, projects the other paths required as inputs to
credit models. This external provider is subject to HSBC's risk
governance framework, with oversight by a specialist internal
unit.
The Upside and Downside scenarios are designed to be cyclical,
in that GDP growth, inflation and unemployment usually revert back
to the Central scenario after the first three years for major
economies. We determine the maximum divergence of GDP growth from
the Central scenario using the 10th and the 90th percentile of the
entire distribution of forecast outcomes for major economies. While
key economic variables are set with reference to external
distributional forecasts, we also align the overall narrative of
the scenarios to the macroeconomic risks described in HSBC's 'Top
and emerging risks' on 20. This ensures that scenarios remain
consistent with the more qualitative assessment of these risks. We
project additional variable paths using the external provider's
global macro model.
We apply the following steps to generate the three economic
scenarios:
-- Economic risk assessment: We develop a shortlist of the
upside and downside economic and political risks most relevant to
HSBC and the IFRS 9 measurement objective.
-- Scenario generation: For the Central scenario, we obtain a
pre-defined set of economic paths from the average taken from the
consensus survey of professional forecasters. Paths for the two
outer scenarios are benchmarked to the Central scenario and reflect
the economic risk assessment. We select scenarios that in
management's judgement are representative of the probability
weighting scheme, informed by the current economic outlook, data
analysis of past recessions, and transitions in and out of
recession. The key assumptions made, and the accompanying paths,
represent our "best estimate" of a scenario at a specified
probability. Suitable narratives are developed for the Central
scenario and the paths of the two outer scenarios.
-- Variable enrichment: We expand each scenario through
enrichment of variables. This includes the production of more than
400 variables that are required to calculate ECL. The external
provider expands these scenarios by using as inputs the agreed
scenario narratives and the variables aligned to these narratives.
Scenarios, once expanded, continue to be benchmarked to latest
events and information. Late breaking events could lead to revision
of scenarios to reflect management judgement.
The Upside and Downside scenarios are generated at year-end and
are only updated during the year if economic conditions change
significantly. The Central scenario is generated every quarter. In
quarters where only the Central scenario is updated, outer
scenarios for use in Wholesale are adjusted such that the
relationship between the Central scenario and outer scenarios in
the quarter is consistent with that observed at the last full
scenario generation. In Retail, three scenarios are run annually to
establish the effect of multiple scenarios for each portfolio. This
effect is then applied in each quarter with the understanding that
the non-linearity of response to economic conditions should not
change, unless a significant change in economic conditions
occurs.
HSBC recognises that the consensus economic scenario approach,
using three scenarios, will be insufficient in certain economic
environments. Additional analysis may be requested at management's
discretion. This may result in a change in the weighting scheme
assigned to the three scenarios or the inclusion of extra
scenarios. We anticipate that there will be only limited instances
when the standard approach will not apply. We invoked this
additional step on 1 January 2018, due to the specific
uncertainties facing the UK economy at that time, resulting in the
recognition of additional ECL through a management adjustment for
economic uncertainty. During 2018 we maintained additional ECL
impairment allowances for the UK.
Description of Consensus Central Scenarios
The Consensus Central Scenario
HSBC's central scenario is one of moderate growth over the
forecast period 2019-2023. Global GDP growth is expected to be 2.9%
on average over the period, which is marginally higher than the
average growth rate over the period 2013-2017. Across the key
markets, we note that:
-- Expected average rates of GDP growth over the 2019-2023
period are lower than average growth rates achieved over the
2013-2017 period for the UK which reflects expectations that the
long-term impact of current economic uncertainty will be moderately
adverse.
-- The average unemployment rate over the projection horizon is
expected to remain at or below the averages observed in the 2013
-2017 period across all of our major markets.
-- Inflation is expected to be stable despite steady GDP growth
and strong labour markets and will remain close to central bank
targets in our core markets over the forecast period.
-- Major central banks are expected to gradually raise their main policy interest rate.
-- The West Texas Intermediate oil price is forecast to average
$63 per barrel over the projection period.
The following table describes key macroeconomic variables and
the probabilities assigned in the Consensus Central scenario.
Consensus Central scenario (average
2019-2023)
UK France
---- --------
GDP growth rate (%) 1.7 1.5
Inflation (%) 2.1 1.7
Unemployment (%) 4.5 7.8
Short Term Interest rate
(%) 1.2 0.2
------------------------------
10 year Treasury bond yields
(%) 2.6 2.0
------------------------------
House price growth (%) 2.9 1.7
------------------------------
Equity price growth (%) 3.2 3.1
------------------------------
Probability (%) 50.0 80.0
------------------------------ ---- ------
The Consensus Upside scenario
The economic forecast distribution of risks (as captured by
consensus probability distributions of GDP growth) has shown a
marginal increase in upside risks for the eurozone, but a decrease
of the same for the UK over the course of 2018. Globally, real GDP
growth rises in the first two years of the Upside scenario before
converging to the Central scenario. Increased confidence,
de-escalation of trade tensions and removal of trade barriers,
expansionary fiscal policy, positive resolution of economic
uncertainty in the UK, stronger oil prices as well as calming of
geopolitical tensions are the risk themes that support the 2018
year-end upside scenario.
The following table describes key macroeconomic variables and
the probabilities assigned in the Consensus Upside scenario.
Consensus Upside scenario (average
2019-2023)
UK France
---- --------
GDP growth rate (%) 2.2 1.9
Inflation (%) 2.3 2.0
Unemployment (%) 4.2 7.4
Short term interest rate
(%) 1.3 0.2
------------------------------
10-year treasury bond yields
(%) 2.7 2.0
------------------------------
House price growth (%) 4.1 2.3
------------------------------
Equity price growth (%) 6.0 7.3
------------------------------
Probability (%) 10.0 10.0
------------------------------ ---- ------
The Consensus Downside scenario
The distribution of risks (as captured by consensus probability
distributions of GDP growth) were broadly stable for the eurozone
and the UK (but see discussion on UK economic uncertainty below).
Globally, real GDP growth declines for two years in the Downside
scenario before recovering to the Central scenario. House price
growth either stalls or contracts and equity markets correct
abruptly in our major markets. The global slowdown in demand drives
commodity prices lower and results in an accompanying fall in
inflation. Central Banks remain accommodative. This is consistent
with the key risk themes of the downside, such as an
intensification of global protectionism and trade barriers, faster
than expected tightening of the Fed policy rate, a worsening of
economic uncertainty in the UK, China choosing to rebalance with
stringent measures, and weaker commodity prices.
The following table describes key macroeconomic variables and
the probabilities assigned in the Consensus Downside scenario.
Consensus Downside scenario (average
2019-2023)
UK France
----- --------
GDP growth rate (%) 1.1 1.1
Inflation (%) 1.7 1.3
Unemployment (%) 4.8 8.2
Short Term Interest rate
(%) 0.3 (0.3)
------------------------------
10 year Treasury bond yields
(%) 1.6 0.9
------------------------------
House price growth (%) 1.0 (1.3)
------------------------------
Equity price growth (%) (0.2) (2.4)
------------------------------
Probability (%) - 10.0
------------------------------ ---- -----
Alternative Downside scenarios
UK economic uncertainty
A number of events occurred over the course of 2018 that led
management to re-evaluate the shape of the consensus distribution
for the UK. Given the challenges facing economic forecasters in
this environment, management was concerned that this distribution
did not adequately represent downside risks for the UK. The high
level of economic uncertainty that prevailed at the end of 2018,
including the lack of progress in agreeing a clear plan for an exit
from the EU and the uncertain performance of the UK economy after
an exit, was a key factor in this consideration. In management's
view, the extent of this uncertainty justifies the use of the
following Alternative Downside scenarios, used in place of the
consensus downside, with the assigned probabilities:
Alternative Downside scenario 1 (AD1): Economic uncertainty
could have a large impact on the UK economy resulting in a long
lasting recession with a weak recovery. This scenario reflects the
consequences of such a recession with an initial risk-premium shock
and weaker long-run productivity growth. This scenario has been
used with a 30% weighting.
Alternative Downside scenario 2 (AD2): This scenario reflects
the possibility that economic uncertainty could result in a deep
cyclical shock triggering a steep depreciation in sterling, a sharp
increase in inflation and an associated monetary policy response.
This represents a tail risk and has been assigned a 5%
weighting.
Alternative Downside scenario 3 (AD3): This scenario reflects
the possibility that the adverse impact associated with economic
uncertainty currently in the UK could manifest over a far longer
period of time with the worst effects occurring later than in the
above two scenarios. This scenario is also considered a tail risk
and has been assigned a 5% weighting.
The table below describes key macroeconomic variables and the
probabilities for each of the Alternative Downside scenarios:
Average 2019-2023
Alternative Alternative Alternative
Downside Downside Downside
scenario scenario scenario
1 2 3
GDP growth rate
(%) 0.5 (0.1) (0.7)
Inflation (%) 2.2 2.4 2.7
Unemployment
(%) 6.5 8.0 7.7
Short term interest
rate (%) 0.4 2.5 2.5
---------------------
10-year treasury
bond yields (%) 1.8 4.0 4.0
House price growth
(%) (1.5) (3.3) (4.8)
Equity price
growth (%) (0.9) (2.3) (7.5)
Probability (%) 30.0 5.0 5.0
--------------------- --------- --------- ---------
The conditions which resulted in departure from the consensus
economic forecasts will be reviewed regularly as economic
conditions change in future to determine whether this adjustment
continues to be necessary.
How economic scenarios are reflected in the wholesale
calculation of ECL
HSBC has developed a globally consistent methodology for the
application of economic scenarios into the calculation of ECL by
incorporating those scenarios into the estimation of the term
structure of probability of default ('PD') and loss given default
('LGD'). For PDs, we consider the correlation of economic guidance
to default rates for a particular industry in a country. For LGD
calculations we consider the correlation of economic guidance to
collateral values and realisation rates for a particular country
and industry. PDs and LGDs are estimated for the entire term
structure of each instrument.
For impaired loans, LGD estimates take into account independent
recovery valuations provided by external consultants where
available, or internal forecasts corresponding to anticipated
economic conditions and individual company conditions. In
estimating the ECL on impaired loans that are individually
considered not to be significant, HSBC incorporates economic
scenarios proportionate to the probability-weighted outcome and the
central scenario outcome for non-stage 3 populations.
How economic scenarios are reflected in the retail calculation
of ECL
HSBC has developed and implemented a globally consistent
methodology for incorporating forecasts of economic conditions into
ECL estimates. The impact of economic scenarios on PD is modelled
at a portfolio level. Historical relationships between observed
default rates and macroeconomic variables are integrated into IFRS
9 ECL estimates by leveraging economic response models. The impact
of these scenarios on PD is modelled over a period equal to the
remaining maturity of underlying asset or assets. The impact on LGD
is modelled for mortgage portfolios by forecasting future
loan-to-value ('LTV') profiles for the remaining maturity of the
asset by leveraging national level forecasts of the house price
index ('HPI') and applying the corresponding LGD expectation.
Impact of UK economic uncertainty on ECL
In light of UK economic uncertainty at 31 December 2018,
management made an adjustment that increased ECL allowances in the
UK by GBP64m, of which GBP62m was attributed to GB&M and GBP2m
to CMB. The adjustment represents incremental ECL based on a
probability-weighted distribution of the upside (10%), consensus
(50%) and alternative downside scenarios (40% combined).
In its assessment of events after the balance sheet date, HSBC
considered, among others, the events related to the process of the
UK's withdrawal from the European Union that occurred between 31
December 2018 and the date when the financial statements were
authorised for issue, and concluded that no adjustments to the
financial statements were required.
Economic scenarios sensitivity analysis of ECL estimates
The ECL outcome is sensitive to judgement and estimations made
with regards to the formulation and incorporation of multiple
forward-looking economic forecasts described above. As a result,
management assessed and considered the sensitivity of the ECL
outcome against the forward-looking economic conditions 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 significant increase in credit risk as
well as the measurement of the resulting ECL. The ECL relating to
Wholesale defaulted obligors reflects a combination of anticipated
economic conditions, independent recovery valuations and factors
specific to the defaulted corporate. 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.
The economic scenarios are generated to capture HSBC's view of a
range of possible forecast economic conditions that is sufficient
for the calculation of unbiased and probability-weighted ECL.
Therefore, the ECL calculated for each of the scenarios represent a
range of possible outcomes that have been evaluated to estimate
ECL. As a result, the ECL calculated for the Upside and Downside
scenarios should not be taken to represent the upper and lower
limits of possible actual ECL outcomes. There is a high degree of
estimation uncertainty in numbers representing tail risk scenarios
when assigned a 100% weighting, and an indicative range is provided
for the UK tail risk sensitivity analysis. A wider range of
possible ECL outcomes reflects uncertainty about the distribution
of economic conditions and does not necessarily mean that credit
risk on the associated loans is higher than for loans where the
distribution of possible future economic conditions is narrower.
The recalculated ECL for each of the scenarios should be read in
the context of the sensitivity analysis as a whole and in
conjunction with the narrative disclosures provided below.
ECL under each scenario is given in dollar terms and as a
percentage of the gross carrying amount (and, for wholesale
lending, the nominal amount for related loan commitments and
financial guarantees).
Wholesale analysis
IFRS 9 ECL sensitivity to future
economic conditions(1)
UK France
ECL Coverage of Loans
and Advances to Customers
at 31 December 2018
---------------------------------
Reported ECL (GBPm) 218 36
--------
Gross carrying/nominal
amount (GBPm) 98,450 49,725
------ --------
Reported ECL Coverage
(%) 0.22 0.07
------ ------
Coverage Ratios by Scenario
(%):
------
Consensus central scenario 0.16 0.07
------ ------
Consensus upside scenario 0.14 0.07
------ ------
Consensus downside scenario 0.18 0.1
------ ------
Coverage ratios for alternative
scenarios
UK AD 1 0.22
--------------------------------- ------ --------
UK AD 2 0.39
--------------------------------- ------ --------
UK AD 3 0.35
--------------------------------- ------ --------
Alternative scenarios
ECL
--------------------------------- ------ --------
AD1 213
--------------------------------- ------ --------
Tail risk scenarios (UK 384
AD 2-3) - 341
--------------------------------- ------ --------
1 Excludes ECL and Drawn Amounts related to defaulted
obligors
ECL coverage rates reflect the underlying observed credit
defaults, the sensitivity to economic environment, extent of
security and the effective maturity of the book. The additional
scenarios for UK economic uncertainty could, if they occurred,
increase ECL coverage by between 13 to 17 basis points compared
with reported ECL for loans and advances to customers including
loan commitments and financial guarantees, and represents the
elasticity between macro economic factors such as gross domestic
product and the risk of default.
Retail analysis
IFRS 9 ECL sensitivity to future
economic conditions(1)
UK France
ECL Coverage of Loans
and Advances to Customers
at 31 December 2018
Reported ECL (GBPm) 6 116
Drawn Amount (GBPm) 1,899 16,760
Reported ECL Coverage
(%) 0.33 0.69
----- ------
Coverage Ratios by scenario
(%):
Consensus central scenario 0.33 0.69
----- ------
Consensus upside scenario 0.29 0.69
----- ------
Consensus downside scenario 0.37 0.7
----------------------------- ----- ------
1 ECL sensitivities exclude portfolios utilising less complex modelling approaches
Under certain economic conditions, economic factors can
influence ECL in counter-intuitive ways (for example an increase in
GDP growth accompanied by rising interest rates resulting in an
increase in PDs) and it may be necessary to apply management
judgement to the output which, following management review of the
calculated ECL sensitivities, may require modelled output
adjustments. An example of this is in France, where the ECL
sensitivity results have been adjusted to more accurately reflect
management's views of ECL sensitivity under an upside and downside
scenario by inverting the Upside and Downside ECL sensitivity.
For all the above sensitivity analyses, as the level of
uncertainty, economic forecasts, historical economic variable
correlations or credit quality changes, corresponding changes in
the ECL sensitivity would occur.
Reconciliation of changes in gross carrying/nominal amount and
allowances for loans and advances to banks and customers including
loan commitments and financial guarantees
The following disclosure provides a reconciliation of the
Group's gross carrying/nominal amount and allowances for loans and
advances to banks and customers including loan commitments and
financial guarantees.
The transfers of financial instruments represents 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 CRR/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.
The 'Net new and further lending/repayments' represent the gross
carrying/nominal amount and associated allowance ECL 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(1)
(Audited)
Non credit - impaired Credit - impaired
Stage 1 Stage 2 Stage 3 POCI Total
Gross Gross Gross
Gross carrying/ Allowance carrying/ Allowance carrying/ Gross
carrying/nominal Allowancefor nominal for nominal for nominal Allowancefor carrying/nominal Allowancefor
amount ECL amount ECL amount ECL amount ECL amount ECL
------------------ -------------- ----------- ----------- ----------- ----------- ----------- -------------- ------------------ --------------
The group GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------ ------------------ -------------- ----------- ----------- ----------- ----------- ----------- -------------- ------------------ --------------
At 1 Jan 2018 408,167 (452) 18,702 (618) 5,342 (1,897) 463 (74) 432,674 (3,041)
------------------ ----------- ----- ------- ---- ------- ------ ------- ------- ----- ---- ------ ----- ----------- ----- -------- ---
Transfers to HSBC
UK and its
subsidiaries (216,026) 288 (9,502) 453 (2,711) 663 - - (228,239) 1,404
------------------ ----------- ---- ------- ----- ------- ------ --- ------- ------- ----- ---- ------ ------ ----------- ---- -------- ----
Transfers of
financial
instruments: (5,852) (120) 4,637 176 1,215 (56) - - - -
------------------ ------- ---- ------- ------ --- ------- ------- ----- ---- ------ ------ ----------- ----- -------- ----
- Transfers from
Stage 1 to Stage
2 (15,141) 38 15,141 (38) - - - - - -
- Transfers from
Stage 2 to Stage
1 9,955 (154) (9,955) 154 - - - - - -
- Transfers to
Stage
3 (754) 11 (941) 79 1,695 (90) - - - -
- Transfers from
Stage 3 88 (15) 392 (19) (480) 34 - - - -
----------- ----- ------- ---- ------- ------ ------- ------- ----- ---- ------ ------ ----------- ----- -------- ----
Net remeasurement
of ECL arising
from
transfer of
stage - 99 - (114) - (7) - - - (22)
------------------
Net new and
further
lending /
(repayments) 19,080 (143) (421) 239 (769) 76 (330) 11 17,560 183
------------------
Changes to risk
parameters
-credit
quality 138 (324) (240) (22) (448)
------------------ ------- ----- ----------- ------ ----------- ------- ----------- ------ ----- ------------------ -------- ---
Assets written
off - - - - (456) 456 - - (456) 456
Foreign exchange 779 (2) 86 - 14 (8) (1) - 878 (10)
Others 1,597 38 772 (19) (78) 24 (8) 7 2,283 50
------------------
At 31 Dec 2018 207,745 (154) 14,274 (207) 2,557 (989) 124 (78) 224,700 (1,428)
------------------ ----------- ----- ------- ---- ------- ------ ------- ------- ----- ---- ------ ----- ----------- ----- -------- ---
ECL
release/(charge)
for the period 94 (199) (171) (11) (287)
Recoveries 71
Others (10)
Total change in
ECL for the
period (226)
------------------ ------------------ -------------- ----------- ----------- ----------- ----------- ----------- -------------- ------------------ -------- ---
12 months
ended 31
At 31 Dec 2018 Dec 2018
Gross carrying/nominal Allowance
amount for ECL ECL charge
GBPm GBPm GBPm
---------------------- ---------
As above 224,700 (1,428) (226)
------------------------------------------ ---------------------- -------- --------
Other financial assets measured at
amortised cost 165,525 (2) -
---------------------- -------- --------
Non-trading reverse purchase agreement
commitments 49,911 - -
------------------------------------------ ---------------------- -------- --------
Summary of financial instruments to
which the impairment requirements in
IFRS 9 are applied/Summary consolidated
income statement 440,136 (1,430) (226)
------------------------------------------ ---------------------- -------- --------
Debt instruments measured at FVOCI 47,172 (45) 79
------------------------------------------ ---------------------- -------- --------
Total allowance for ECL/total income
statement ECL charge for the period 487,308 (1,475) (147)
------------------------------------------ ---------------------- -------- --------
1 Excludes performance guarantee contracts to which the
impairment requirements in IFRS 9 are not applied.
Credit quality
Credit quality of financial instruments
(Audited)
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 the probability of
default of financial instruments, whereas IFRS 9 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 IFRS 9 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 table on page
27. Under IAS 39, personal lending credit quality was disclosed
based on expected-loss percentages. Under IFRS 9, personal lending
credit quality is now 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.
Distribution of financial instruments by credit quality
(Audited)
Gross carrying/notional amount
Sub- Credit Allowance
Strong Good Satisfactory standard impaired Total for ECL Net
The group GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------- ------ ------------ --------- --------- ------- --------- ---------
In-scope for IFRS 9
Loans and advances
to customers held
at
amortised cost 45,870 31,451 30,141 3,483 2,361 113,306 (1,342) 111,964
-------
- personal 15,579 5,266 2,346 185 527 23,903 (206) 23,697
- corporate and
commercial 20,868 23,016 25,342 3,072 1,760 74,058 (1,106) 72,952
- non-bank
financial
institutions 9,423 3,169 2,453 226 74 15,345 (30) 15,315
------- ------ ------------ --------- --------- ------- -------- -------
Loans and advances
to banks held at
amortised
cost 11,735 1,536 355 5 - 13,631 (3) 13,628
-------------------- ------- ------ ------------ --------- --------- ------- -------- -------
Cash and balances
at
central banks 51,965 - 35 14 - 52,014 (1) 52,013
------- ------ ------------ --------- --------- ------- -------- -------
Items in the course
of collection from
other banks 839 - - - - 839 - 839
-------------------- ------- ------ ------------ --------- --------- ------- -------- -------
Reverse repurchase
agreements -
non-trading 67,748 8,017 4,337 - - 80,102 - 80,102
-------------------- ------- ------ ------------ --------- --------- ------- -------- -------
Financial
investments 5 - 8 - - 13 - 13
-------------------- ------- ------ ------------ --------- --------- ------- -------- -------
Prepayments,
accrued
income and other
assets 31,885 486 444 7 5 32,827 (1) 32,826
- endorsements and
acceptances 93 14 7 - 1 115 (1) 114
- accrued income
and
other 31,792 472 437 7 4 32,712 - 32,712
------- ------ ------------ --------- --------- ------- -------- -------
Debt instruments
measured
at fair value
through
other
comprehensive
income(1) 42,363 2,084 606 597 9 45,659 (45) 45,614
------- ------ ------------ --------- --------- ------- -------- -------
Out-of-scope for
IFRS
9
Trading assets 42,274 9,924 7,088 876 - 60,162 - 60,162
-------------------- ------- ------ ------------ --------- --------- ------- -------- -------
Other financial
assets
designated and
otherwise
mandatorily
measured
at fair value
through
profit or loss 2,633 1,362 4,136 2 - 8,133 - 8,133
------- ------ ------------ --------- --------- ------- -------- -------
Derivatives 122,695 17,115 4,229 451 32 144,522 - 144,522
-------------------- ------- ------ ------------ --------- --------- ------- -------- -------
Total gross
carrying
amount on balance
sheet 420,012 71,975 51,379 5,435 2,407 551,208 (1,392) 549,816
-------------------- ------- ------ ------------ --------- --------- ------- -------- -------
Percentage of total
credit quality 78% 15% 6% 1% - 100%
-------------------- -------
Loan and other
credit-related
commitments 96,522 31,393 12,821 630 254 141,620 (66) 141,554
-------------------- ------- ------ ------------ --------- --------- ------- -------- -------
Financial
guarantees 3,390 1,456 948 194 66 6,054 (17) 6,037
-------------------- ------- ------ ------------ --------- --------- ------- -------- -------
In-scope:
Irrevocable
loan commitments
and
financial
guarantees 99,912 32,849 13,769 824 320 147,674 (83) 147,591
-------------------- ------- ------ ------------ --------- --------- ------- -------- -------
Loan and other
credit-related
commitments(2) 7,275 - - - - 7,275 - 7,275
Performance and
other
guarantees 8,631 5,236 2,682 592 103 17,244 (37) 17,207
Out-of-scope:
Revocable
loan commitments
and
non-financial
guarantees 15,906 5,236 2,682 592 103 24,519 (37) 24,482
-------------------- ------- ------ ------------ --------- --------- ------- -------- -------
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 as presented above will not reconcile
to the balance sheet as it excludes fair value gains and
losses.
2 Revocable loan and other commitments of GBP7.3bn which are
out-of-scope of IFRS 9 are presented within the strong credit
quality classification.
Distribution of financial instruments by credit quality
(Audited)
Gross carrying/notional amount
Sub- Credit Allowance
Strong Good Satisfactory standard impaired Total for ECL Net
The bank GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------- ------ ------------ --------- --------- ------- --------- ---------
In-scope for IFRS 9
Loans and advances
to customers held
at
amortised cost 23,923 17,828 15,123 1,586 1,067 59,527 (744) 58,783
-------
- personal 1,782 695 734 14 24 3,249 (9) 3,240
- corporate and
commercial 9,441 14,695 12,764 1,358 998 39,256 (685) 38,571
- non-bank
financial
institutions 12,700 2,438 1,625 214 45 17,022 (50) 16,972
------- ------ ------------ --------- --------- ------- -------- -------
Loans and advances
to banks held at
amortised
cost 11,225 1,356 107 1 - 12,689 (3) 12,686
------- ------ ------------ --------- --------- ------- -------- -------
Cash and balances at
central banks 40,657 - - - - 40,657 - 40,657
------- ------ ------------ --------- --------- ------- --------- -------
Items in the course
of collection from
other banks 442 - - - - 442 - 442
------- ------ ------------ --------- --------- ------- -------
Reverse repurchase
agreements -
non-trading 48,220 6,668 1,607 - - 56,495 - 56,495
------- ------ ------------ --------- --------- ------- --------- -------
Financial - - - - - - - -
investments
------- ------ ------------ --------- --------- ------- --------- -------
Prepayments, accrued
income and other
assets 26,653 170 122 1 4 26,950 (1) 26,949
- endorsements and
acceptances 67 14 - - 1 82 (1) 81
- accrued income and
other 26,586 156 122 1 3 26,868 - 26,868
------- ------ ------------ --------- --------- ------- -------
Debt instruments
measured
at fair value
through
other comprehensive
income(1) 26,272 40 12 2 3 26,329 (6) 26,323
------- ------ ------------ --------- --------- ------- -------- -------
Out-of-scope for
IFRS
9
Trading assets 28,973 7,379 6,873 845 - 44,070 - 44,070
------- ------ ------------ --------- --------- ------- -------
Other financial
assets
designated and
otherwise
mandatorily
measured
at fair value
through
profit or loss 303 939 3,800 2 - 5,044 - 5,044
------- ------ ------------ --------- --------- ------- -------
Derivatives 120,848 14,240 3,684 427 30 139,229 - 139,229
------- ------ ------------ --------- --------- ------- --------- -------
Total gross carrying
amount on balance
sheet 327,516 48,620 31,328 2,864 1,104 411,432 (754) 410,678
------- ------ ------------ --------- --------- ------- -------- -------
Percentage of total
credit quality 79% 12% 8% 1% - 100%
-------
Loan and other
credit-related
commitments 37,245 14,927 8,499 379 146 61,196 (50) 61,146
------- ------ ------------ --------- --------- ------- -------- -------
Financial guarantees 4,448 598 383 96 53 5,578 (14) 5,564
------- ------ ------------ --------- --------- ------- -------- -------
In-scope:
Irrevocable
loan commitments
and
financial
guarantees 41,693 15,525 8,882 475 199 66,774 (64) 66,710
------- ------ ------------ --------- --------- ------- -------- -------
Loan and other
credit-related
commitments(2) 4,742 - - - - 4,742 - 4,742
Performance and
other
guarantees 5,231 2,458 2,193 374 67 10,323 (27) 10,296
Out-of-scope:
Revocable
loan commitments
and
non-financial
guarantees 9,973 2,458 2,193 374 67 15,065 (27) 15,038
------- ------ ------------ --------- --------- ------- -------- -------
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 as presented above will not reconcile
to the balance sheet as it excludes fair value gains and
losses.
2 Revocable loan and other commitments of GBP4.7bn which are
out-of-scope of IFRS 9 are presented within the strong credit
quality classification.
Distribution of financial instruments to which the impairment requirements
in IFRS 9 are applied, by credit quality and stage distribution
(Audited)
Gross carrying/notional amount
Sub- Credit Allowance
Strong Good Satisfactory standard impaired Total for ECL Net
The group GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Loans and advances
to
customers at
amortised
cost 45,870 31,451 30,141 3,483 2,361 113,306 (1,342) 111,964
- stage 1 45,858 29,662 24,835 1,774 - 102,129 (121) 102,008
- stage 2 12 1,789 5,306 1,709 - 8,816 (171) 8,645
- stage 3 - - - - 2,244 2,244 (972) 1,272
- POCI - - - - 117 117 (78) 39
-------
Loans and advances
to
banks at amortised
cost 11,735 1,536 355 5 - 13,631 (3) 13,628
- stage 1 11,727 1,483 350 5 - 13,565 (2) 13,563
- stage 2 8 53 5 - - 66 (1) 65
- stage 3 - - - - - - - -
- POCI - - - - - - - -
-------
Other financial
assets
measured at
amortised
cost 152,293 8,491 4,717 19 5 165,525 (2) 165,523
------- -------
- stage 1 152,293 8,477 4,710 16 - 165,496 (1) 165,495
- stage 2 - 14 7 3 - 24 - 24
- stage 3 - - - - 5 5 (1) 4
- POCI - - - - - - - -
-------
Loan and other
credit-related
commitments 96,522 31,393 12,821 630 254 141,620 (66) 141,554
- stage 1 96,507 30,452 9,515 65 - 136,539 (27) 136,512
- stage 2 15 941 3,306 565 - 4,827 (26) 4,801
- stage 3 - - - - 249 249 (13) 236
- POCI - - - - 5 5 - 5
-------
Financial
guarantees(1) 3,390 1,456 948 194 66 6,054 (17) 6,037
- stage 1 3,354 1,431 604 34 - 5,423 (4) 5,419
- stage 2 36 25 344 160 - 565 (9) 556
- stage 3 - - - - 64 64 (4) 60
- POCI - - - - 2 2 - 2
At 31 Dec 2018 309,810 74,327 48,982 4,331 2,686 440,136 (1,430) 438,706
------- -------
Debt instruments at
FVOCI(2)
- stage 1 42,356 2,008 329 331 - 45,024 (8) 45,016
- stage 2 7 76 277 266 - 626 (36) 590
- stage 3 - - - - 6 6 (1) 5
- POCI - - - - 3 3 - 3
At 31 Dec 2018 42,363 2,084 606 597 9 45,659 (45) 45,614
------- -------
1 Excludes performance guarantee contracts to which the
impairment requirements in IFRS 9 are not applied.
2 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 as presented above will not reconcile
to the balance sheet as it excludes fair value gains and
losses.
Credit--impaired loans
(Audited)
The Group determines that a financial instrument is credit
impaired and in stage 3 by considering relevant objective evidence,
primarily whether:
-- contractual payments of either principal or interest are past due for more than 90 days;
-- there are other indications that the borrower is unlikely to
pay such as that a concession has been granted to the borrower for
economic or legal reasons relating to the borrower's financial
condition; and
-- the loan is otherwise considered to be in default. If such
unlikeliness to pay is not identified at an earlier stage, it is
deemed to occur when an exposure is 90 days past due, even where
regulatory rules permit default to be defined based on 180 days
past due. Therefore the definitions of credit-impaired and default
are aligned as far as possible so that stage 3 represents all loans
which are considered defaulted or otherwise credit-impaired.
Renegotiated loans and forbearance
The following table shows the gross carrying amounts of the
group's holdings of renegotiated loans and advances to customers by
industry sector and by stages. Wholesale renegotiated loans are
classified as stage 3 until there is sufficient evidence to
demonstrate a significant reduction in the risk of non-payment of
future cash flows, observed over a minimum one-year period, and
there are no other indicators of impairment. Personal renegotiated
loans are deemed to remain credit-impaired until repayment or
derecognition.
Renegotiated loans and advances to customers at amortised costs by
stage allocation
Stage Stage Stage
1 2 3 POCI Total
The group GBPm GBPm GBPm GBPm GBPm
Gross carrying amount
Personal - - 75 - 75
- first lien residential mortgages - - 56 - 56
- other personal lending - - 19 - 19
Wholesale 394 429 568 117 1,508
- corporate and commercial 394 429 567 117 1,507
- non-bank financial institutions - - 1 - 1
At 31 Dec 2018 394 429 643 117 1,583
Allowance for ECL
Personal - - (14) - (14)
- first lien residential mortgages - - (9) - (9)
- other personal lending - - (5) - (5)
Wholesale (4) (10) (169) (78) (261)
- corporate and commercial (4) (10) (169) (78) (261)
- non-bank financial institutions - - - - -
At 31 Dec 2018 (4) (10) (183) (78) (275)
Wholesale lending
This section provides further details on the countries and
industries comprising wholesale loans and advances to customers and
banks. Industry granularity is also provided by stage with
geographical data presented for loans and advances to customers and
banks, loan and other credit-related commitments and financial
guarantees.
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
The group GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Corporate and commercial 64,822 7,476 1,643 117 74,058 (99) (132) (797) (78) (1,106)
------ ----- ----- ---- ------- ---- ---- ---- --- ------
* agriculture, forestry and fishing 187 5 10 - 202 - - (4) - (4)
* mining and quarrying 1,368 107 19 - 1,494 (4) (3) (2) - (9)
* manufacture 12,364 1,379 245 53 14,041 (23) (19) (100) (33) (175)
* electricity, gas, steam and air-conditioning supply 2,232 332 6 47 2,617 (3) (19) (2) (43) (67)
* water supply, sewerage, waste management and
remediation 465 2 - - 467 - - - - -
- construction 1,267 179 305 - 1,751 (2) (18) (141) - (161)
* wholesale and retail trade, repair of motor vehicles
and motorcycles 9,331 2,654 291 11 12,287 (8) (11) (156) - (175)
* transportation and storage 5,232 563 148 - 5,943 (14) (19) (23) - (56)
* accommodation and food 1,170 28 23 2 1,223 (1) (1) (12) (1) (15)
* publishing, audiovisual and broadcasting 3,849 310 30 - 4,189 (8) (4) (8) - (20)
- real estate 7,274 410 398 1 8,083 (8) (7) (252) - (267)
* professional, scientific and technical activities 5,570 175 38 - 5,783 (3) - (8) - (11)
* administrative and support services 7,757 703 86 3 8,549 (8) (16) (64) (1) (89)
* public administration and defence, compulsory social
security 562 21 - - 583 - (2) - - (2)
- education 109 3 1 - 113 (2) - (1) - (3)
- health and care 425 29 10 - 464 (1) (1) (7) - (9)
* arts, entertainment and recreation 1,367 446 12 - 1,825 (2) (1) (8) - (11)
- other services 3,114 55 16 - 3,185 (12) (1) (8) - (21)
- activities of households 6 - - - 6 - - - - -
* extra-territorial organisations and bodies activities 15 - 5 - 20 - - (1) - (1)
- government 1,157 63 - - 1,220 - - - - -
- asset-backed securities 1 12 - - 13 - (10) - - (10)
------
Non-bank financial
institutions 15,137 134 74 - 15,345 (13) (12) (5) - (30)
------
Loans and advances
to banks 13,565 66 - - 13,631 (2) (1) - - (3)
------ ----- ----- ------
At 31 Dec 2018 93,524 7,676 1,717 117 103,034 (114) (145) (802) (78) (1,139)
------ ----- ----- ------
By country
UK 54,481 4,776 716 6 59,979 (69) (100) (354) - (523)
------ ----- ----- ---- ------- ---- ---- ---- --- ------
France 26,555 1,549 408 10 28,522 (18) (16) (298) (3) (335)
------ ----- ----- ---- ------- ---- ---- ---- --- ------
Germany 9,071 472 220 - 9,763 (1) (2) (25) - (28)
------ ----- ----- ---- ------- ---- ---- ---- --- ------
Other countries 3,417 879 373 101 4,770 (26) (27) (125) (75) (253)
------ ----- ----- ---- ------- ---- ---- ---- --- ------
At 31 Dec 2018 93,524 7,676 1,717 117 103,034 (114) (145) (802) (78) (1,139)
------ ----- ----- ---- ------- ---- ---- ---- --- ------
Total wholesale lending for loans and other credit-related commitments
and financial guarantees(1) by stage distribution
Nominal amount Allowance for ECL
Stage Stage Stage Stage Stage Stage
1 2 3 POCI Total 1 2 3 POCI Total
The group GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Corporate and commercial 68,294 4,940 307 7 73,548 (30) (34) (17) - (81)
Financial 71,621 398 2 - 72,021 (1) (1) - - (2)
At 31 Dec 2018 139,915 5,338 309 7 145,569 (31) (35) (17) - (83)
By geography
Europe 139,915 5,338 309 7 145,569 (31) (35) (17) - (83)
of which: UK 46,682 2,715 175 - 49,572 (23) (29) (5) - (57)
of which: France 76,550 1,018 33 - 77,601 (1) (2) (7) - (10)
of which: Germany 14,772 1,019 78 - 15,869 - (1) (4) - (5)
1 Excludes performance guarantee contracts to which the
impairment requirements in IFRS 9 are not applied.
Collateral and other credit enhancement held
(Audited)
It is the group's practice to lend on the basis of the
customer's ability to meet their obligations out of their cash flow
resources rather than rely on the value of security offered.
Depending on the customer's standing and the type of product,
facilities may be provided unsecured.For other lending a charge
over collateral is obtained and considered in determining the
credit decision and pricing. In the event of a default, the group
may utilise the collateral as a source of repayment. Depending on
its form, collateral can have a significant financial effect in
mitigating exposure to credit risk.
Other corporate, commercial and financial (non-bank) loans and
advances
Other corporate, commercial and financial (non-bank) loans are
analysed separately in the following table, which focuses on the
countries containing the majority of our loans and advances
balances. For financing activities in other corporate and
commercial lending, collateral value is not strongly correlated to
principal repayment performance.
Collateral values are generally refreshed when an obligor's
general credit performance deteriorates and we have to assess the
likely performance of secondary sources of repayment should it
prove necessary to rely on them.
Wholesale lending - corporate, commercial and financial (non-bank)
loans and advances including loan commitments by level of
collateral for key countries by stage (excluding commercial real estate)
(Audited)
Of which:
Total UK France Germany
Gross Gross Gross Gross
carrying/nominal ECL carrying/nominal ECL carrying/nominal ECL carrying/nominal ECL
amount coverage amount coverage amount coverage amount coverage
The group GBPm % GBPm % GBPm % GBPm %
------------------ ----------- ------------------ ----------- ------------------ ----------- ------------------ -----------
Stage 1
Not
collateralised 116,011 0.1 71,762 0.1 14,057 0.1 20,857 -
Fully
collateralised 48,699 - 9,890 - 38,582 -
-----------
LTV ratio:
----------- -----------
- less than
50% 2,184 0.1 1,236 0.1 868 0.1 - -
- 51% to 75% 38,068 - 2,066 - 36,001 - - -
- 76% to 90% 1,013 0.1 387 - 626 - - -
- 91% to 100% 7,434 - 6,201 - 1,087 0.1 - -
Partially
collateralised
(A): 1,834 0.1 625 - 1,161 0.1 - -
- collateral
value
on A 343 295 33 -
----------- ----------- -----------
Total Stage 1 166,544 0.1 82,277 0.1 53,800 - 20,857 -
Stage 2
Not
collateralised 9,327 1.4 5,852 1.7 1,184 0.3 1,261 0.2
Fully
collateralised 2,429 0.9 1,280 0.9 1,082 0.6 - -
LTV ratio:
----------- -----------
- less than
50% 294 0.7 240 - 39 2.6 - -
- 51% to 75% 1,378 0.9 426 2.8 948 0.2 - -
- 76% to 90% 19 - 14 - 5 - - -
- 91% to 100% 738 0.7 600 - 90 2.2 - -
Partially
collateralised
(B): 163 0.6 8 - 148 0.7 - -
- collateral
value
on B 11 1 7 -
----------- ----------- -----------
Total Stage 2 11,919 1.3 7,140 1.5 2,414 0.5 1,261 0.2
Stage 3
Not
collateralised 1,450 44.3 664 48.6 286 66.4 252 11.5
Fully
collateralised 226 21.2 124 6.5 67 44.8 - -
LTV ratio:
----------- -----------
- less than
50% 54 42.6 15 20.0 10 100.0 - -
- 51% to 75% 75 12.0 25 - 51 29.4 - -
- 76% to 90% 37 16.2 34 8.8 3 100.0 - -
- 91% to 100% 60 16.7 50 6.0 3 100.0 - -
Partially
collateralised
(C): 83 42.2 33 6.1 33 72.7 - -
- collateral
value
on C 26 21 1 -
----------- ----------- -----------
Total Stage 3 1,759 41.3 821 40.6 386 63.2 252 11.5
POCI
Not
collateralised 102 72.5 - - - - - -
Fully
collateralised 13 23.1 - - 9 33.3 - -
LTV ratio:
----------- -----------
- less than 50% - - - - - - - -
- 51% to 75% 13 - - - 9 33.3 - -
- 76% to 90% - - - - - - - -
- 91% to 100% - - - - - - - -
Partially
collateralised
(D): 6 - 6 - - - - -
- collateral
value
on D 3 3 - -
----------- ----------- -----------
Total POCI 121 63.6 6 - 9 33.3 - -
At 31 Dec 2018 180,343 0.6 90,244 0.6 56,608 0.5 22,370 0.1
Other credit risk exposures
In addition to collateralised lending, other credit enhancements
are employed and methods used to mitigate credit risk arising from
financial assets. These are described in more detail below:
-- Some securities issued by governments, banks and other
financial institutions benefit from additional credit enhancement
provided by government guarantees that cover the assets;
-- Debt securities issued by corporates are primarily unsecured;
-- Debt securities issued by banks and financial institutions
include ABSs and similar instruments which are supported by
underlying pools of financial assets. Credit risk associated with
ABSs is reduced through the purchase of credit default swap ('CDS')
protection;
-- Trading assets include loans and advances held with trading
intent. These mainly consist of cash collateral posted to satisfy
margin requirements on derivatives, settlement accounts, reverse
repos and stock borrowing. There is limited credit risk on cash
collateral posted since in the event of default of the counterparty
these would be set off against the related liability. Reverse repos
and stock borrowing are by their nature collateralised; and
-- The group's maximum exposure to credit risk includes
financial guarantees and similar contracts granted as well as loan
commitments that we are irrevocably committed to. Depending on the
terms of the arrangement, we may have recourse to additional credit
mitigation in the event that a guarantee is called upon or a loan
commitment is drawn and subsequently defaults.
Derivatives
The group participates in transactions exposing it to
counterparty credit risk. Counterparty credit risk is the risk of
financial loss if the counterparty to a transaction defaults before
completing the satisfactory settlement of the transaction, which
varies in value by reference to a market factor such as interest
rate, exchange rate or asset price. It arises principally from OTC
derivatives and securities financing transactions ('SFTs') and is
calculated in both the trading and non-trading books.
Transactions vary in value by reference to a market factor such
as interest rate, exchange rate or asset price. The counterparty
risk from derivative transactions is taken into account when
reporting the fair value of derivative positions. The adjustment to
the fair value is known as the credit value adjustment ('CVA').
The International Swaps and Derivatives Association ('ISDA')
Master Agreement is the group's preferred agreement for documenting
derivatives activity. It provides the contractual framework within
which dealing activity across a full range of OTC products is
conducted, and contractually binds both parties to apply close-out
netting across all outstanding transactions covered by an agreement
if either party defaults or other pre-agreed termination events
occur. It is common, and the group's preferred practice, for the
parties to execute a Credit Support Annex ('CSA') in conjunction
with the ISDA Master Agreement. Under a CSA, collateral is passed
between the parties to mitigate the market-contingent counterparty
risk inherent in the outstanding positions.
We manage the counterparty exposure arising from market risk on
our OTC derivative contracts by using collateral agreements with
counterparties and netting agreements. Currently, we do not
actively manage our general OTC derivative counterparty exposure in
the credit markets, although we may manage individual exposures in
certain circumstances.
HSBC has historically placed strict policy restrictions on
collateral types and as a consequence the types of collateral
received and pledged are, by value, highly liquid and of a strong
quality, being predominantly cash.
Where a collateral type is required to be approved outside the
collateral policy (which includes collateral that includes
wrong-way risks), a submission to the Documentation Approval
Committee ('DAC') for approval is required. The DAC requires the
participation and sign-off of senior representatives from the
Global Markets Chief Operating Officer, Legal and Risk.
The majority of the counterparties with whom we have a
collateral agreement are European. The majority of the group's CSAs
are with financial institutional clients.
Personal lending
This section provides further details on the countries and
products comprising personal loans and advances to customers.
Further product granularity is also provided by stage, with
geographical data presented for loans and advances to customers,
loan and other credit-related commitments, and financial
guarantees.
Total personal lending for loans and advances to customers at amortised
costs by stage distribution
Gross carrying
amount Allowance for ECL
Stage Stage Stage Stage Stage Stage
1 2 3 Total 1 2 3 Total
The group GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
By portfolio
First lien residential mortgages 6,832 349 276 7,457 (4) (8) (81) (93)
* of which: interest only (including offset) 3,323 244 126 3,693 - (3) (32) (35)
- affordability including
ARMs 290 - - 290 - - - -
Other personal lending 15,338 857 251 16,446 (5) (19) (89) (113)
- other 14,888 818 235 15,941 (4) (15) (88) (107)
- credit cards 334 39 16 389 (1) (4) (1) (6)
* second lien residential mortgages 116 - - 116 - - - -
At 31 Dec 2018 22,170 1,206 527 23,903 (9) (27) (170) (206)
By geography
UK(2) 3,133 92 24 3,249 (1) (3) (4) (8)
France 16,756 984 328 18,068 (3) (17) (102) (122)
Germany 186 40 - 226 - - - -
Other countries 2,095 90 175 2,360 (5) (7) (64) (76)
At 31 Dec 2018 22,170 1,206 527 23,903 (9) (27) (170) (206)
Total personal lending for loans and other credit-related commitments
and financial guarantees(1) by stage distribution
Nominal amount Allowance for ECL
Stage Stage Stage Stage Stage Stage
1 2 3 Total 1 2 3 Total
The group GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------- ----- ----- ---------- -------- ----- ----- -------
UK 305 3 - 308 - - - -
----------- ----- ----- -------- ----- ----- -----
France 1,022 31 3 1,056 - - - -
----------- ----- ----- ---------- -------- ----- ----- -----
Germany 181 5 - 186 - - - -
----------- ----- ----- ---------- -------- ----- ----- -----
Other countries 539 15 1 555 - - - -
----------- ----- ----- ---------- -------- ----- ----- -----
At 31 Dec 2018 2,047 54 4 2,105 - - - -
1 Excludes performance guarantee contracts to which the
impairment requirements in IFRS 9 are not applied.
2 Includes primarily first lien residential mortgages in Channel
Islands, Isle of Man, Jersey and Guernsey
Collateral on loans and advances
The following table provides a quantification of the value of
fixed charges we hold over specific assets where we have a history
of enforcing, and are able to enforce, collateral in satisfying a
debt in the event of the borrower failing to meet its contractual
obligations, and where the collateral is cash or can be realised by
sale in an established market.
The collateral valuation excludes any adjustment for obtaining
and selling the collateral and in particular loans shown as
collateralised or partially collateralised may also benefit from
other forms of credit mitigants.
Personal lending: residential mortgage loans including loan commitments
by level of collateral for key countries
(Audited)
Of which:
Total UK France
Gross ECL Gross ECL Gross ECL
exposure coverage exposure coverage exposure coverage
The group GBPm % GBPm % GBPm %
Stage 1
Fully collateralised 6,875 0.1 2,473 - 2,278 -
LTV ratio:
- less than 50% 3,029 0.1 1,004 - 884 -
- 51% to 60% 963 - 271 - 452 -
- 61% to 70% 896 - 227 - 436 -
- 71% to 80% 823 0.1 208 - 317 -
- 81% to 90% 422 0.2 92 - 128 -
-------------------------------------
- 91% to 100% 742 - 671 - 61 -
--------- --------- ---------
Partially collateralised (A): 323 - 179 - 100 -
LTV ratio:
- 101% to 110% 222 - 176 - 23 -
- 111% to 120% 26 - 1 - 16 -
- greater than 120% 75 - 2 - 61 -
--------- --------- ---------
- collateral value on A 305 177 99
--------- --------- ---------
Total 7,198 0.1 2,652 - 2,378 -
------------------------------------- --------- --------- ---------
Stage 2
Fully collateralised 297 2.4 38 - 199 0.5
LTV ratio:
- less than 50% 130 1.5 16 - 84 1.2
- 51% to 60% 46 2.2 4 - 33 -
- 61% to 70% 41 2.4 - - 32 -
- 71% to 80% 40 5.0 - - 30 -
- 81% to 90% 18 5.6 - - 16 -
- 91% to 100% 22 - 18 - 4 -
--------- --------- ---------
Partially collateralised (B): 52 3.8 34 - 10 -
LTV ratio:
- 101% to 110% 39 2.6 34 - 2 -
- 111% to 120% 4 - - - 2 -
- greater than 120% 9 11.1 - - 6 -
- collateral value on B 52 34 10
--------- --------- ---------
Total 349 - 72 - 209 -
------------------------------------- --------- --------- ---------
Stage 3
Fully collateralised 222 22.1 17 11.8 98 16.3
LTV ratio:
- less than 50% 113 11.5 13 7.7 46 15.2
- 51% to 60% 27 18.5 - - 15 13.3
- 61% to 70% 32 28.1 2 - 13 15.4
- 71% to 80% 20 35.0 1 - 8 25.0
- 81% to 90% 8 25.0 - - 5 20.0
- 91% to 100% 22 59.1 1 100.0 11 18.2
Partially collateralised (C): 57 71.9 1 - 20 70.0
LTV ratio:
- 101% to 110% 11 36.4 1 - 4 25.0
- 111% to 120% 12 50.0 - - 4 25.0
- greater than 120% 34 91.2 - - 12 100.0
- collateral value on C 47 1 20
--------- --------- ---------
Total 279 32.3 18 11.1 118 25.4
------------------------------------- --------- --------- ---------
At 31 Dec 2018 7,826 - 2,742 - 2,705 -
------------------------------------- --------- --------- ---------
Supplementary information
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
The group GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------ ---------
Loans and advances to
customers at
amortised
cost 102,129 8,816 2,244 117 113,306 (121) (171) (972) (78) (1,342)
- RBWM 20,331 1,263 532 - 22,126 (10) (18) (174) - (202)
- CMB 26,307 2,377 867 114 29,665 (46) (81) (439) (78) (644)
- GB&M 51,279 4,870 785 2 56,936 (64) (60) (348) - (472)
- GPB 3,296 209 48 1 3,554 (1) (1) (11) - (13)
- Corporate Centre 916 97 12 - 1,025 - (11) - - (11)
------
Loans and advances to
banks at amortised
cost 13,565 66 - - 13,631 (2) (1) - - (3)
-------- ------ ------
- RBWM 2,418 4 - - 2,422 - - - - -
- CMB 348 3 - - 351 - - - - -
- GB&M 6,100 38 - - 6,138 (2) (1) - - (3)
- GPB 5 - - - 5 - - - - -
- Corporate Centre 4,694 21 - - 4,715 - - - - -
------
Other financial assets
measured at amortised
cost 165,496 24 5 - 165,525 (1) - (1) - (2)
-------- ------ ------
- RBWM 681 2 - - 683 - - - - -
- CMB 421 1 1 - 423 - - - - -
- GB&M 116,790 18 4 - 116,812 - - (1) - (1)
- GPB 72 - - - 72 - - - - -
- Corporate Centre 47,532 3 - - 47,535 (1) - - - (1)
Total gross carrying
amount
on balance sheet at
31
Dec 2018 281,190 8,906 2,249 117 292,462 (124) (172) (973) (78) (1,347)
--------
Loans and other
credit-related
commitments 136,539 4,827 249 5 141,620 (27) (26) (13) - (66)
-------- ------ ------
- RBWM 1,725 50 3 - 1,778 - - - - -
- CMB 18,832 1,584 111 4 20,531 (4) (4) (11) - (19)
- GB&M 107,965 2,600 135 1 110,701 (23) (22) (2) - (47)
- GPB 475 593 - - 1,068 - - - - -
- Corporate Centre(1) 7,542 - - - 7,542 - - - - -
Financial guarantees 5,423 565 64 2 6,054 (4) (9) (4) - (17)
-------- ------ ---- ---- ---- --- ------
- RBWM 13 - - - 13 - - - - -
- CMB 1,472 319 17 2 1,810 (1) (3) (1) - (5)
- GB&M 3,288 245 46 - 3,579 (3) (6) (3) - (12)
- GPB 43 1 - - 44 - - - - -
- Corporate Centre(1) 607 - 1 - 608 - - - - -
Total nominal amount
off
balance sheet at 31
Dec
2018 141,962 5,392 313 7 147,674 (31) (35) (17) - (83)
--------
RBWM 10,005 120 - - 10,125 (5) - - - (5)
CMB - - - 1 1 - - - - -
GB&M 548 - - - 548 - - - - -
GPB - - - - - - - - - -
Corporate Centre 35,998 491 6 3 36,498 (3) (36) (1) - (40)
Debt instruments
measured
at FVOCI at
31 Dec 2018 46,551 611 6 4 47,172 (8) (36) (1) - (45)
--------
1 Corporate Centre includes GBP4,358m and GBP597m of
inter-company balances for 'Loans and other-credit related
commitments' and 'Financial guarantees' respectively.
Securitisation exposures and other structured products
This section contains information about our exposure to ABSs,
some of which are held through consolidated structured entities
('SEs') and summarised in the table below.
Also included within this section is information on the GB&M
legacy credit activities in respect of Solitaire and the securities
investment conduits ('SICs'). For further information on structured
entities please refer to Note 19.
Carrying amount of the group's consolidated holdings of ABSs
Financial
assets designated
and otherwise
mandatorily
measured at Of which
Financial Held at fair value held through
investments amortised through profit consolidated
Trading at FVOCI cost and loss Total SEs
The group GBPm GBPm GBPm GBPm GBPm GBPm
Mortgage-related
assets: 1,182 360 14 99 1,655 163
- sub-prime residential - 233 - - 233 39
- US Alt-A residential - 36 - 73 109 33
- other residential 723 8 3 - 734 8
- commercial property 459 83 11 26 579 83
Leveraged finance-related
assets 162 31 - 16 209 156
Student loan-related
assets 28 1,421 - 1 1,450 1,410
Other assets 596 287 - 5 888 160
At 31 Dec 2018 1,968 2,099 14 121 4,202 1,889
Included in the above table are securities with a carrying
amount of GBP78m (2017: GBP884m) held through the SICs, excluding
Solitaire, that are consolidated by the group. Although the group
includes these assets in full on its balance sheet, significant
first loss risks are borne by the third-party capital notes
investors. The carrying amount of the capital notes liability at
the year ended 31 December 2018 was GBP84m (2017: GBP182m).
The financial assets at FVOCI reserve movement in relation to
these ABSs for the year was a decrease of GBP27m (2017: increase of
GBP25m). The impairment write-back attributed to the group for the
year was GBP37m (2017: write-back of GBP40m).
2017 credit disclosures
The below disclosures were included in the Interim Report 2017
and the Annual Report and Accounts 2017 and do not reflect the
adoption of IFRS 9. As these tables are not directly comparable to
the current 2018 credit risk tables which are disclosed on an IFRS
9 basis, the 2017 disclosures have been shown below and not
adjacent to the 2018 tables.
Total personal lending
Continental
UK Europe Total
As a %
of total
GBPm GBPm GBPm gross loans
First lien residential mortgages 88,653 4,171 92,824 31.28
- of which:
interest-only (including endowment)
mortgages 24,773 14 24,787 8.35
affordability mortgages, including
adjustable rate mortgages - 303 303 0.10
Other personal lending 14,648 12,817 27,465 9.25
- personal loans and overdrafts 7,430 12,386 19,816 6.68
- credit cards 7,218 358 7,576 2.55
- second lien residential mortgages - 73 73 0.02
- motor vehicle finance - - - -
Total gross loans at 31 Dec 2017 103,301 16,988 120,289 40.53
Impairment allowances on personal lending
First lien residential mortgages (108) (86) (194)
Other personal lending (192) (51) (243)
- personal loans and overdrafts (110) (51) (161)
- credit cards (82) - (82)
- second lien residential mortgages - - -
- motor vehicle finance - - -
Total impairment allowances at 31 Dec
2017 (300) (137) (437)
Residential mortgage loans including loan commitments by level of collateral
(Audited) The group The bank
2017 2017
GBPm GBPm
Non-impaired loans and advances
Fully collateralised 96,173 90,421
LTV ratio:
- Less than 50% 52,940 51,015
- 51% to 60% 15,989 14,954
- 61% to 70% 12,083 10,818
- 71% to 80% 9,517 8,585
- 81% to 90% 4,698 4,218
- 91% to 100% 946 831
Partially collateralised:
greater than 100% LTV (A) 228 91
- 101% to 110% 92 27
- 111% to 120% 34 15
- greater than 120% 102 49
Collateral value on A 190 59
Impaired loans and advances
Fully collateralised 917 725
LTV ratio:
- Less than 50% 470 396
- 51% to 60% 175 136
- 61% to 70% 115 91
- 71% to 80% 86 56
- 81% to 90% 40 28
- 91% to 100% 31 18
Partially collateralised:
greater than 100% LTV (B) 64 19
- 101% to 110% 28 8
- 111% to 120% 10 6
- greater than 120% 26 5
Collateral value on B 49 18
At 31 Dec 97,382 91,256
Total wholesale lending
2017
As a %
of
total
GBPm gross loans
Corporate and commercial 134,513 45.32
- manufacturing 21,494 7.24
- international trade and services 47,837 16.12
- commercial real estate 18,849 6.35
- other property-related 5,908 1.99
- government 2,583 0.87
- other commercial 37,842 12.75
Financial 41,991 14.15
- non-bank financial institutions 27,842 9.38
- banks 14,149 4.77
Gross loans at 31 Dec 176,504 59.47
Impairment allowances on wholesale lending
Corporate and commercial (1,671)
- manufacturing (226)
- international trade and services (497)
- commercial real estate (268)
- other property-related (256)
- government (2)
- other commercial (422)
Financial (134)
- non-bank financial institutions (134)
- banks -
Impairment allowances at 31 Dec (1,805)
Impairment allowances % of impaired loans 41.41%
Maximum exposure to credit risk
(Audited) 2017
Exposure
Maximum to credit
exposure Offset risk (net)
The group GBPm GBPm GBPm
Trading assets: loans and advances to banks 20,590 (97) 20,493
Trading assets: loans and advances to customers 22,520 (222) 22,298
Derivatives 143,335 (139,174) 4,161
Loans and advances to banks 14,149 (202) 13,947
Loans and advances to customers 280,402 (19,074) 261,328
Reverse repurchase agreements - non-trading 45,808 (2,748) 43,060
Total balance sheet exposure to credit risk 728,568 (161,517) 567,051
Total off-balance sheet 190,413 - 190,413
- financial guarantees(1) 15,642 - 15,642
* loan commitments and other credit-related
commitments(1) 174,771 - 174,771
At 31 Dec 918,981 (161,517) 757,464
The bank GBPm GBPm GBPm
Trading assets: loans and advances to banks 17,744 (97) 17,647
Trading assets: loans and advances to customers 22,254 (222) 22,032
Derivatives 135,236 (121,736) 13,500
Loans and advances to banks 15,160 - 15,160
Loans and advances to customers 220,450 (19,024) 201,426
Reverse repurchase agreements - non-trading 36,627 (342) 36,285
Total balance sheet exposure to credit risk 588,080 (141,421) 446,659
Total off-balance sheet 109,033 - 109,033
- financial guarantees 9,219 - 9,219
- loan commitments and other credit-related
commitments 99,814 - 99,814
At 31 Dec 697,113 (141,421) 555,692
1 31 December 2017 balances have been restated to include
GBP32.5bn of loan commitments (unsettled reverse repurchase
agreements) and GBP2.3bn of performance and other guarantees not
previously identified for disclosure.
Gross loans and advances to customers by industry sector
2017
Gross loans
by
industry
sector
as
Gross loans a % of
and total
advances gross
to loans to
customers customers
The group GBPm %
Personal 120,289 42.56
Corporate and commercial 134,513 47.59
Financial 27,842 9.85
Total gross loans and advances to customers at 31 Dec 282,644 100.00
The bank
Personal 97,248 43.80
Corporate and commercial 89,549 40.34
Financial 35,214 15.86
Total gross loans and advances to customers at 31 Dec 222,011 100.00
Distribution of financial instruments by credit quality
(Audited) 2017
Neither past due nor
impaired
Past
due Total
not gross Impairment
Strong Good Satisfactory Sub-standard impaired Impaired amount allowances Total
The group GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Cash and
balances at
central
banks 97,601 - - - - - 97,601 - 97,601
Items in the
course
of
collection
from other
banks 2,023 - - - - - 2,023 - 2,023
Trading
assets 57,965 11,279 12,132 1,218 - - 82,594 - 82,594
- treasury
and other
eligible
bills 775 252 139 782 - - 1,948 - 1,948
- debt
securities 29,038 3,577 4,744 177 - - 37,536 - 37,536
- loans and
advances
to banks 12,980 4,207 3,385 18 - - 20,590 - 20,590
- loans and
advances
to customers 15,172 3,243 3,864 241 - - 22,520 - 22,520
Financial
assets
designated
at fair
value 898 118 24 - - - 1,040 - 1,040
Derivatives 122,547 17,143 3,113 532 - - 143,335 - 143,335
Loans and
advances to
customers
held at
amortised
cost 157,147 56,744 57,092 4,871 973 5,817 282,644 (2,242) 280,402
- personal 109,224 5,687 2,860 453 607 1,458 120,289 (437) 119,852
- corporate
and
commercial 30,262 45,954 49,458 4,266 355 4,218 134,513 (1,671) 132,842
- non-bank
financial
institutions 17,661 5,103 4,774 152 11 141 27,842 (134) 27,708
Loans and
advances to
banks held
at amortised
cost 11,509 1,651 982 7 - - 14,149 - 14,149
Reverse
repurchase
agreements
-
non-trading 36,667 4,563 4,274 304 - - 45,808 - 45,808
Financial
investments 51,478 3,271 1,132 920 - 537 57,338 - 57,338
Other assets 2,118 609 1,358 185 4 4 4,278 - 4,278
At 31 Dec 539,953 95,378 80,107 8,037 977 6,358 730,810 (2,242) 728,568
Percentage of
total
gross amount 73.8% 13.1% 11.0% 1.1% 0.1% 0.9% 100.0%
2017
Neither past due nor
impaired
Past
due Total
not gross Impairment
Strong Good Satisfactory Sub-standard impaired Impaired amount allowances Total
The bank GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Cash and
balances at
central
banks 81,358 - - - - - 81,358 - 81,358
Items in the
course
of
collection
from other
banks 1,407 - - - - - 1,407 - 1,407
Trading
assets 43,271 9,643 9,578 1,218 - - 63,710 - 63,710
- treasury
and other
eligible
bills 458 - 139 782 - - 1,379 - 1,379
- debt
securities 15,251 3,313 3,592 177 - - 22,333 - 22,333
- loans and
advances
to banks 12,493 3,208 2,025 18 - - 17,744 - 17,744
- loans and
advances
to customers 15,069 3,122 3,822 241 - - 22,254 - 22,254
Derivatives 116,791 15,017 2,915 513 - - 135,236 - 135,236
Loans and
advances to
customers
held at
amortised
cost 133,341 38,408 41,835 3,735 488 4,204 222,011 (1,561) 220,450
- personal 91,589 2,688 1,175 390 451 955 97,248 (307) 96,941
- corporate
and
commercial 15,126 31,551 36,528 3,199 37 3,108 89,549 (1,100) 88,449
- non-bank
financial
institutions 26,626 4,169 4,132 146 - 141 35,214 (154) 35,060
Loans and
advances to
banks held
at amortised
cost 13,273 1,204 682 1 - - 15,160 - 15,160
Reverse
repurchase
agreements
-
non-trading 30,807 2,914 2,605 301 - - 36,627 - 36,627
Financial
investments 29,607 1,034 42 291 - 1 30,975 - 30,975
Other assets 2,146 581 426 4 - - 3,157 - 3,157
At 31 Dec 452,001 68,801 58,083 6,063 488 4,205 589,641 (1,561) 588,080
% % % % % % %
Percentage of
total
gross amount 76.6 11.7 9.9 1.0 0.1 0.7 100.0
Ageing analysis of days past due but not impaired gross financial instruments
(Audited)
Over
Up to 30-59 60-89 90-179 180
29 days days days days days Total
The group GBPm GBPm GBPm GBPm GBPm GBPm
-------- ----- ----- ------ ----- -------
Loans and advances held at amortised
cost 726 161 86 - - 973
* personal 426 116 65 - - 607
* corporate and commercial 291 43 21 - - 355
* financial 9 2 - - - 11
Other assets 4 - - - - 4
At 31 Dec 2017 730 161 86 - - 977
The bank
Loans and advances held at amortised
cost 340 93 55 --488
* personal 312 87 52 --451
* corporate and commercial 28 6 3 -- 37
* financial - - - -- -
Other assets - - - -- -
At 31 Dec 2017 340 93 55 --488
Loan impairment charges and other credit risk provisions
2017
GBPm
Net impairment charge on loans and advances (624)
Release of impairment on available-for-sale debt securities 145
Other credit risk provisions (16)
Total (495)
Impaired loans and advances to customers and banks by industry sector
(Audited)
2017
Individually Collectively
assessed assessed Total
GBPm GBPm GBPm
Banks - - -
Customers 5,365 452 5,817
- personal 1,061 397 1,458
- corporate and commercial 4,163 55 4,218
- financial 141 - 141
At 31 Dec 5,365 452 5,817
Renegotiated loans and advances to customers by industry sector
2017
Other Non-bank
Residential personal Corporate financial
mortgages lending and commercial institutions Total
GBPm GBPm GBPm GBPm GBPm
Neither past due nor impaired 252 57 1,203 6 1,518
Past due not impaired 33 6 42 - 81
Impaired 211 71 2,165 136 2,583
Renegotiated loans at 31 Dec 496 134 3,410 142 4,182
Impairment allowance on renegotiated
loans (684)
----------- --------- --------------- -------------
Loan impairment charge to the income statement by industry sector
2017
GBPm
-------
Personal 120
- residential mortgages 7
- other personal 113
Corporate and commercial 454
* manufacturing and international trade and services 227
* commercial real estate and other property-related 149
* other commercial 78
Financial 50
Total loan impairment charge for the year ended 31 Dec 624
Individually assessed impairment allowances 529
* new allowances 919
* release of allowances no longer required (366)
* recoveries of amounts previously written off (24)
Collectively assessed impairment allowances 95
* new allowances net of allowance releases 327
* recoveries of amounts previously written off (232)
Total loan impairment charge for the year ended 31 Dec 624
Movement in impairment allowances on loans and advances to customers
and banks
(Audited) Banks Customers
Individually Individually Collectively
assessed assessed assessed Total
The group GBPm GBPm GBPm GBPm
At 1 Jan 2017 - 1,729 828 2,557
Amounts written off - (310) (173) (483)
Recoveries of loans and advances written
off in previous years - 14 96 110
Loan impairment charge - 10 31 41
Exchange and other movements - (53) (236) (289)
-------------------------------------------------
At 30 June 2017 - 1,390 546 1,936
------------------------------------------------- ---
As a percentage of gross loans and
advances(1) - 0.50% 0.20% 0.65%
-------------------------------------------------
At 1 July 2017 - 1,390 546 1,936
Amounts written off - (243) (185) (428)
Recoveries of loans and advances written
off in previous years - 10 136 146
Loan impairment charge - 519 64 583
Exchange and other movements - 1 4 5
-------------------------------------------------
At 31 Dec 2017 - 1,677 565 2,242
------------------------------------------------- ---
As a percentage of gross loans and
advances(1) 0.59% 0.20% 0.76%
-------------------------------------------------
1 Net of reverse repo transactions, settlement accounts and stock borrowings.
2017
Banks Customers
Individually Individually Collectively
assessed assessed assessed Total
The bank GBPm GBPm GBPm GBPm
At 1 Jan - 1,074 475 1,549
Amounts written off - (345) (308) (653)
Recoveries of loans and advances written
off in previous years - 20 201 221
Loan impairment charge - 347 84 431
Exchange and other movements - 1 12 13
At 31 Dec - 1,097 464 1,561
as a percentage of gross loans and
advances(1) - 0.49% 0.21% 0.66%
1 Net of reverse repo transactions, settlement accounts and stock borrowings.
Carrying amount of consolidated holdings of ABS
Of which
held through
Available- Loans and consolidated
Trading for-sale receivables Total(1) SEs
GBPm GBPm GBPm GBPm GBPm
Mortgage-related assets:
- sub-prime residential 4 679 24 707 358
- US Alt-A residential - 778 - 778 771
- other residential 603 134 816 1,553 56
- commercial property 444 198 41 683 167
Leveraged finance-related
assets 38 276 - 314 209
Student loan-related
assets 29 1,627 - 1,656 1,597
Other assets 573 455 1 1,029 317
At 31 Dec 2017 1,691 4,147 882 6,720 3,475
1 The asset-backed securities are primarily US Dollar ('USD')
denominated. Principal carrying amounts are converted into sterling
('GBP') at the prevailing exchange rates at 31 December 2017: 1GBP
: USD 1.351.
Liquidity and funding risk in 2018
Liquidity coverage ratio
The Liquidity Coverage Ratio ('LCR') aims to ensure that a bank
has sufficient unencumbered high-quality liquid assets ('HQLA') to
meet its liquidity needs in a 30-calendar-day liquidity stress
scenario. HQLA consist of cash or assets that can be converted into
cash at little or no loss of value in markets.
At 31 December 2018, all the group's principal operating
entities were within the LCR risk tolerance level established by
the Board and applicable under the LFRF.
The following table displays the individual LCR levels for HSBC
Bank Plc's principal operating entities on an EC LCR Delegated
Regulation basis.
Operating entities' LCRs
At
31 Dec 31 Dec
2018 2017
Footnotes % %
HSBC Bank Plc 1,2 147 139
HSBC France 128 149
------ ------
HSBC Trinkaus &
Burkhardt AG 111 114
------ ------
1 2017 figures are for HSBC UK Liquidity Group which comprises:
HSBC Bank plc (pre ring-fencing), Marks and Spencer Financial
Services plc, HSBC Trust Company (UK) Limited and Private Bank (UK)
Limited.
2 2018 LCR is higher than 2017, as we carry surplus liquidity in
preparation for the UK's withdrawal from the EU.
Net stable funding ratio
The Net Stable Funding Ratio ('NSFR') requires institutions to
maintain sufficient stable funding relative to required stable
funding, and reflects a bank's long-term funding profile (funding
with a term of more than a year). It is designed to complement the
LCR.
At 31 December 2018, all the group's principal operating
entities were within the NSFR risk tolerance level established by
the Board and applicable under the LFRF.
The table below displays the NSFR levels for the principal
operating entities on a BCBS 295 basis.
Operating entities' NSFRs
At
31 Dec 31 Dec
2018 2017
Footnotes % %
HSBC Bank Plc 1 113 108
------ ------
HSBC France 113 116
HSBC Trinkaus
& Burkhardt AG 116 117
------ ------
1 In adopting the NSFR (BCBS 295) as a key internal risk
management metric, the HSBC Group has, until such time that the
NSFR becomes a binding regulatory requirement on HSBC Group or the
operating entity locally, permitted entities to reduce the amount
of Required Stable Funding Requirement (RSF) for listed equities
where the valuation risk has been hedged through an exchange traded
daily cash margined derivative, due to management's view as to the
speed at which these assets could be monetised under stress and the
mitigation of the valuation risk. HSBC Bank Plc is applying a lower
RSF to such equities.
Depositor concentration and term funding maturity
concentration
The LCR and NSFR metrics assume a stressed outflow based on a
portfolio of depositors within each deposit segment. The validity
of these assumptions is undermined if the underlying depositors do
not represent a large enough portfolio so that a depositor
concentration exists.
In addition to this, operating entities are exposed to term
re-financing concentration risk if the current maturity profile
results in future maturities being overly concentrated in any
defined period.
Liquid assets of the group's principal operating entities
The table below shows the unweighted liquidity value of assets
categorised as liquid, which is used for the purposes of
calculating the LCR metric. This reflects the stock of unencumbered
liquid assets at the reporting date, using the regulatory
definition of liquid assets.
Operating entities' liquid
assets
Estimated At Estimated
liquidity liquidity
value value
At 31 Dec 31 Dec
2018 2017
GBPm GBPm
HSBC Bank Plc
Level 1 84,185 119,198
Level 2a 4,243 2,157
Level 2b 7,764 13,899
HSBC France
Level 1 15,545 16,441
Level 2a 435 741
Level 2b 24 2
HSBC Trinkaus & Burkhardt
AG
Level 1 5,605 6,237
Level 2a 60 50
Level 2b 520 590
Sources of funding
Our primary sources of funding are customer current accounts,
repo and wholesale securities.
The following 'Funding sources and uses' table provides a
consolidated view of how our balance sheet is funded, and should be
read in light of the LFRF, which requires operating entities to
manage liquidity and funding risk on a stand-alone basis.
The table analyses 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 2018, 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, cash and balances with
central banks and financial investments, as required by the
LFRF.
Funding sources and uses for the group
2018 2017 2018 2017
GBPm GBPm GBPm GBPm
------- -------
Sources Uses
-------
Loans and advances to
Customer accounts 180,836 381,546 customers 111,964 280,402
Loans and advances to
Deposits by banks 24,532 29,349 banks 13,628 14,149
Repurchase agreements Reverse repurchase agreements
- non-trading 46,583 37,775 - non-trading 80,102 45,808
------- ------
Cash collateral, margin
Debt securities in issue 22,721 13,286 and settlement accounts 28,870 N/A
------
Cash collateral, margin
and settlement accounts 35,561 N/A Assets held for sale 37 461
------- ------
Liabilities of disposal
groups held for sale - 454 Trading assets 95,420 145,725
------
Subordinated liabilities 13,770 16,494 - reverse repos 6,141 5,987
Financial liabilities
designated at fair value - stock borrowing 6,498 5,189
36,922 18,249 - settlement accounts N/A 4,947
Liabilities under insurance
contracts 20,657 21,033 - other trading assets 82,781 129,602
------
Trading liabilities 49,514 106,496 Financial investments 47,272 58,000
------
* repos 1,027 1,182
Cash and balances with
- stock lending 9,161 21,156 central banks 52,013 97,601
- settlement accounts N/A 2,959
- other trading liabilities 39,326 81,199
Net deployment in other
balance sheet assets
Total equity 27,409 44,049 and liabilities 29,199 26,585
At 31 Dec 458,505 668,731 At 31 Dec 458,505 668,731
------- ------
Contingent liquidity risk arising from committed lending
facilities
The group provides customers with committed facilities such as
standby facilities to corporate customers and committed backstop
lines to conduits sponsored by the group. All of the undrawn
commitments provided to conduits or external customers are
accounted for in the LCR and NSFR in line with the applicable
regulations. This ensures that under a stress scenario any
additional outflow generated by increased utilisation of these
committed facilities by either customers or the group's sponsored
conduits will not give rise to liquidity risk for the group.
Since the group controls the size of the portfolio of securities
held by these conduits, no contingent liquidity risk exposure
arises as a result of these undrawn committed lending facilities.
In relation to commitments to customers, the table below shows the
level of undrawn commitments outstanding in terms of the five
largest single facilities and the largest market sector.
The group's contractual exposures at 31 December monitored under the
contingent liquidity risk limit structure
2018 2017
Footnotes GBPbn GBPbn
Commitments to conduits
Consolidated multi-seller conduits 1
- total lines 5.6 6.8
- largest individual lines 0.3 0.6
Consolidated securities investment conduits - total
lines 3.4 3.4
Commitments to customers
- five largest 2 3.0 2.5
- largest market sector 3 9.1 19.0
1 Exposures relate to the Regency multi-seller conduit. This
vehicle provides funding to group customers by issuing debt secured
by a diversified pool of customer-originated assets.
2 Represents the undrawn balance for the five largest committed
liquidity facilities provided to customers, other than those
facilities to conduits.
3 Represents the undrawn balance for the total of all committed
liquidity facilities provided to the largest market sector, other
than those facilities to conduits.
Asset encumbrance and collateral management
An asset is defined as encumbered if it has been pledged as
collateral against an existing liability and, as a result, is no
longer available to the group to secure funding, satisfy collateral
needs or be sold to reduce the funding requirement. Collateral is
managed on an operating entity basis consistent with the approach
to managing liquidity and funding. Available collateral held in an
operating entity is managed as a single consistent collateral
pool
from which each operating entity will seek to optimise the use
of the available collateral. The objective of this disclosure is to
facilitate an understanding of available and unrestricted assets
that could be used to support potential future funding and
collateral needs. The disclosure is not designed to identify assets
which would be available to meet the claims of creditors or to
predict assets that would be available to creditors in the event of
a resolution or bankruptcy.
Summary of assets available to support potential future funding and
collateral needs (on- and off-balance sheet)
2018 2017
GBPm GBPm
Total on-balance sheet assets at 31 Dec 604,958 818,868
-------------------------------------------------------------
Less:
- reverse repo/stock borrowing receivables and derivative
assets (237,020) (200,319)
- other assets that cannot be pledged as collateral (56,982) (79,306)
Total on-balance sheet assets that can support funding
and collateral needs at 31 Dec 310,956 539,243
-------------------------------------------------------------
Add: off-balance sheet assets
- fair value of collateral received in relation to
reverse repo/stock borrowing/derivatives that is available
to sell or repledge 250,277 173,386
Total assets that can support future funding and collateral
needs 561,233 712,629
-------------------------------------------------------------
Less:
- on-balance sheet assets pledged (89,123) (88,768)
- re-pledging of off-balance sheet collateral received
in relation to reverse repo/stock borrowing/derivatives (202,782) (130,430)
-------------------------------------------------------------
Assets available to support funding and collateral
needs at 31 Dec 269,328 493,431
-------------------------------------------------------------
Market risk in 2018
Market risk is the risk that movements in market factors,
including foreign exchange rates and commodity prices, interest
rates, credit spreads and equity prices will reduce the group's
income or the value of its portfolios.
There were no material changes to our policies and practices for
the management of market risk in 2018.
Exposure to market risk is separated into two portfolios.
Trading portfolios comprise positions arising from market-making
and warehousing of customer-derived positions.
Non-trading portfolios including BSM comprise positions that
primarily arise from the interest rate management of the group's
retail and commercial banking assets and liabilities, financial
investments designated as as held-to-collect-and-sale ('HTCS'), and
exposures arising from the group's insurance operations.
Trading portfolios
Value at risk of the trading portfolios
(Audited)
Trading VaR predominantly resides within Global Markets where it
was GBP39.5m at 31 December 2018 compared with GBP36.3m at 31
December 2017. The Total Trading VaR moderately increased during
the first half of 2018 and suddenly decreased in May 2018 following
a change of methodology in HBFR to assess the shocks to apply on
credit spreads. Both the Total Trading VaR and Credit VaR remained
relatively stable until the last quarter of 2018. In December 2018,
the IR Trading VaR increased from GBP17m to GBP22m following a
change of positions, which resulted in an increase of the total
trading VaR. The change in Equity Trading VaR was from fluctuations
in dividend and correlation exposures.
The ALCO-trading book has been included in this exercise, which
was not the case last year.
The long protection position held in the book against a Sterling
devaluation for a future capital injection into HBFR results in a
decrease of the FX Trading VaR since November 2018. The daily
levels of Total Trading VaR over the past year are set out in the
graph below.
Daily VaR (trading portfolios), 99% 1 day (GBPm)
Trading
VaR
inc RNIV
IR trading
inc RNIV
Equity
Trading
inc RNIV
CR Trading
FX Trading
Diversification
The group's trading VaR for the year is shown in the table
below.
Trading VaR, 99% 1 day
(Audited)
Foreign
exchange Credit
(FX) and Interest Equity Spread Portfolio
commodity rate (IR) (EQ) (CS) Diversification(1) Total(2)
GBPm GBPm GBPm GBPm GBPm GBPm
Balance at 31 Dec
2018 7.9 21.7 15.4 16.6 (22.0) 39.6
Average 5.2 18.4 14.1 13.9 (19.0) 32.6
Maximum 11.7 25.1 22.1 24.3 44.0
Minimum 2.1 14.5 9.6 8.1 24.1
Balance at 31 Dec 2017 2.1 17.1 21.4 16.2 (20.5) 36.3
Average 5.2 25.3 12.0 9.2 (19.1) 32.6
Maximum 15.3 52.3 21.4 17.4 53.4
Minimum 0.9 17.1 7.5 3.4 26.2
1 Portfolio diversification is the market risk dispersion effect
of holding a portfolio containing different risk types. It
represents the reduction in unsystematic market risk that occurs
when combining a number of different risk types, for example,
interest rate, equity and foreign exchange, together in one
portfolio. It is measured as the difference between the sum of the
VaR by individual risk type and the combined total VaR. A negative
number represents the benefit of portfolio diversification. As the
maximum occurs on different days for different risk types, it is
not meaningful to calculate a portfolio diversification benefit for
this measure.
2 The total VaR is non-additive across risk types due to
diversification effect and it includes VaR RNIV.
Back-testing
In 2018, the group experienced two back-testing exceptions, one
against hypothetical loss and one against actual loss. There was no
evidence of model failure or control error.
Non-trading portfolios
Value at risk of the non-trading portfolios
(Audited)
Following the go live of the ring-fenced bank HSBC UK on 1 July,
the non-trading VaR of our London Balance Sheet Management (BSM)
desk dropped by GBP19m. This is to reflect the legal transfer of
certain positions into HSBC UK. These positions were made up of
ALCM buy in for the management of the structural interest rate risk
(50% of the risk transferred to the combined to the bank), the
existing cash flow hedge (CFH) positions referencing transferred
asset pools and the high quality liquid asset (HQLA) (and
corresponding hedges) purchased to form part of the newly formed
HSBC UK Liquid Asset Buffer (LAB).
Our non trading ALCO books have been included in the non trading
VaR. They contain capital issuances for the group (including TLAC)
and any corresponding hedges. This resulted in an average decrease
of the non trading VaR by GBP6m.
The daily levels of total non-trading VaR over the last year are
set out in the graph below.
Daily VaR (non-trading portfolios), 99% 1 day (GBPm)
Non-trading
VaR
IR non-trading
CS non-trading
Diversification
The group's non-trading VaR for the year is shown in the table
below.
Non-trading VaR, 99% 1 day
(Audited)
Credit
Interest spread Portfolio
rate (IR) (CS) diversification Total
GBPm GBPm GBPm GBPm
Balance at 31 Dec 2018 19.4 5.7 (4.6) 20.5
------------------------
Average 32.8 16.4 (13.7) 35.5
Maximum 59.3 41.3 64.6
Minimum 17.4 4.9 17.7
------------------------
Balance at 31 Dec 2017 45.8 22.1 (17.8) 50.1
------------------------
Average 64.1 29.3 (23.6) 69.8
Maximum 92.0 53.4 91.2
------------------------
Minimum 44.8 9.3 47.7
------------------------
Structural foreign exchange exposures
The group's structural foreign currency exposure is represented
by the net asset value of its foreign currency equity and
subordinated debt investments in subsidiary undertakings, branches,
joint ventures and associates.
For our policies and procedures for managing structural foreign
exchange exposures, see page 30 of the 'Risk management'
section.
Net structural foreign exchange
exposures
2018 2017
GBPm GBPm
Currency of structural
exposure
Euro(1) 12,866 11,896
US Dollars(1) 805 648
------
South African rand(1) 357 349
Russian rouble 197 225
Others, each less than
GBP150m(1) 433 404
------
At 31 Dec 14,658 13,522
------
1 The net structural exposure at 31 December 2017 has been
restated by GBP946m to increase the Euro (GBP764m), US dollar
(GBP133m), Armenian dram (GBP25m), South African rand (GBP23m), and
Swiss franc (GBP1m) exposures. This is due to incorrect currency
classification of dotation capital to branches, elimination of
subsidiaries' shareholders' equity on date of acquisition, and
Additional Tier 1 instruments held in the UK.
Operational risk in 2018
Operational risk is the risk to achieving our strategy or
objectives as a result of inadequate or failed internal processes,
people and systems or from external events.
Responsibility for minimising operational risk lies with HSBC's
employees. They are required to manage the operational risks of the
business and operational activities for which they are
responsible.
A summary of our current policies and practices regarding the
management of operational risk is set out on page 31.
Operational risk exposures
In 2018 we continued our ongoing work to strengthen those
controls that manage our most material risks. Among other measures,
we:
-- further enhanced our controls to help ensure that we know our
customers, ask the right questions, monitor transactions and
escalate concerns to detect, prevent and deter financial crime
risk;
-- implemented a number of initiatives to raise our standards in
relation to the conduct of our business as described on page 31 of
the 'Regulatory compliance risk management' section;
-- increased monitoring and enhanced detective controls to
manage fraud risks which arise from new technologies and new ways
of banking;
-- strengthened internal security controls to help prevent
cyber-attacks;
-- improved controls and security to protect customers when using digital channels; and
-- enhanced our third-party risk management capability to help
enable the consistent risk assessment of any third-party
service.
Further information on the nature of these risks is provided in
'Top and emerging risks' on page 20 and in 'Risk management' from
pages 23 to 24.
Operational risk losses
Operational risk losses in 2018 are higher than in 2017. Total
losses in both years were reduced by the write-back of provisions
for a large conduct-related event. For further details, see Note 32
on the Financial Statements and on conduct-related costs included
in significant items on page 12.
Insurance manufacturing operations risk in 2018
Our insurance manufacturing operations are subject to insurance
risk and financial risk, including market risk, credit risk and
liquidity risk.
A summary of our current policies and practices regarding the
management of insurance risk is set out on page 33.
The group's bancassurance model
We operate an integrated bancassurance model that provides
insurance products principally for customers with whom we have a
banking relationship.
The insurance contracts we sell relate to the underlying needs
of our banking customers, which we can identify from our
point-of-sale contacts and customer knowledge. The majority of
sales are of savings and investment products and term and credit
life contracts.
By focusing largely on personal and SME lines of business, we
are able to optimise volumes and diversify individual insurance
risks.
We choose to manufacture these insurance products in HSBC
subsidiaries based on an assessment of operational scale and risk
appetite. Manufacturing insurance allows us to retain the risks and
rewards associated with writing insurance contracts by keeping part
of the underwriting profit and investment income within the
bank.
We have life insurance manufacturing subsidiaries in France,
Malta and the UK. Where we do not have the risk appetite or
operational scale to be an effective insurance manufacturer, we
engage with a handful of leading external insurance companies in
order to provide insurance products to our customers through our
banking network and direct channels. These arrangements are
generally structured with our exclusive strategic partners and earn
the bank a combination of commissions, fees and a share of
profits.
Insurance products are sold through all global businesses, but
predominantly by RBWM, GPB and CMB through our branches and direct
channels.
Measurement
(Audited)
The risk profile of our insurance manufacturing businesses is
measured using an economic capital approach. Assets and liabilities
are measured on a market value basis, and a capital requirement is
defined to ensure that there is a less than one-in-200 chance of
insolvency over a one-year time horizon, given the risks to which
the businesses are exposed. The methodology for the economic
capital calculation is largely aligned to the pan-European Solvency
II insurance capital regulations. The economic capital coverage
ratio (economic net asset value divided by the economic capital
requirement) is a key risk appetite measure. The business has a
current appetite to remain above 140% with a tolerance of 110%. In
addition to economic capital, the regulatory solvency ratio is also
a metric used to manage risk appetite on an entity basis.
The following table shows the composition of assets and
liabilities by contract type.
Balance sheet of insurance manufacturing subsidiaries by type of contract
(Audited)
Shareholder
With Unit- Other assets
DPF linked contracts(1) and liabilities Total
Footnotes GBPm GBPm GBPm GBPm GBPm
Financial assets 18,619 1,602 253 1,872 22,346
- financial assets designated and
otherwise mandatorily measured at
fair value through profit or loss 7,850 1,548 87 809 10,294
- derivatives 92 - - 3 95
- financial investments - at amortised
cost 182 - - 6 188
- financial investments - at fair
value through other comprehensive
income 8,698 - 108 947 9,753
- other financial assets 2 1,797 54 58 107 2,016
Reinsurance assets - 50 145 - 195
PVIF 3 - - - 652 652
Other assets and investment properties 774 1 - 48 823
Total assets at 31 Dec 2018 19,393 1,653 398 2,572 24,016
---------- ------ ------- ------------- ---------------- ------
Liabilities under investment contracts
designated at fair value - 611 - - 611
Liabilities under insurance contracts 19,262 1,041 354 - 20,657
Deferred tax 4 - 1 - 162 163
---------- ------ ------------- ------
Other liabilities - - - 1,294 1,294
Total liabilities at 31 Dec 2018 19,262 1,653 354 1,456 22,725
Total equity at 31 Dec 2018 - - - 1,291 1,291
----------
Total liabilities and equity at 31
Dec 2018 19,262 1,653 354 2,747 24,016
----------
Financial assets 18,749 1,530 190 1,906 22,375
- financial assets designated at
fair value 7,020 1,466 85 630 9,201
- derivatives 95 - - 30 125
- financial investments - HTM - - - - -
- financial investments - AFS 9,918 - 104 1,188 11,210
- other financial assets 2 1,716 64 1 58 1,839
Reinsurance assets - 188 159 - 347
PVIF 3 - - - 572 572
Other assets and investment properties 784 1 1 449 1,235
Total assets at 31 Dec 2017 19,533 1,719 350 2,927 24,529
Liabilities under investment contracts
designated at fair value - 548 - - 548
Liabilities under insurance contracts 19,533 1,166 334 - 21,033
Deferred tax 4 - 5 - 156 161
Other liabilities - - - 1,561 1,561
Total liabilities at 31 Dec 2017 19,533 1,719 334 1,717 23,303
Total equity at 31 Dec 2017 - - - 1,226 1,226
Total liabilities and equity at 31
Dec 31 Dec 2017 19,533 1,719 334 2,943 24,529
1 'Other contracts' includes term assurance and credit life insurance.
2 Comprise mainly loans and advances to banks, cash and
intercompany 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.
Key risk types
The key risks for the insurance operations are market risks (in
particular interest rate and equity) and credit risks, followed by
insurance underwriting risks and operational risks. Liquidity risk,
whilst significant for the bank, is minor for our insurance
operations.
Market risk
(Audited)
Description and exposure
Market risk is the risk of changes in market factors affecting
the bank'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 investment
contracts with discretionary participating features ('DPF') issued
in France. 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 the bank 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 the bank.
Reserves 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 contracts. The table below shows the total
reserve held for the cost of guarantees, the range of investment
returns on assets supporting these products and the implied
investment return that would enable the business to meet the
guarantees.
The financial guarantees offered on some portfolios exceeded the
current yield on the assets that back them.
For unit-linked contracts, market risk is substantially borne by
the policyholder, but some market risk exposure typically remains
as fees earned are related to the market value of the linked
assets.
Financial return guarantees
(Audited)
2018 2017
Long-term Long-term
Investment investment Investment investment
returns returns Cost returns returns
implied on relevant of implied on relevant Cost
by guarantee portfolios guarantees by guarantee portfolios of guarantees
Footnotes % % GBPm % % GBPm
-------------
1.5 -
Capital - 2.7 73 0.0 3.2 67
Nominal
annual
return 1 2.6 2.7 73 2.6 3.2 80
Nominal
annual
return 4.5 2.7 45 4.5 3.2 44
At 31 Dec 191 191
--------- ------------
1 A block of contracts in France with guaranteed nominal annual
returns in the range 1.25%-3.72% are reported in line with the
average guaranteed return of 2.6% (2017: 2.6%) offered to
policyholders on these contracts.
Sensitivities
The following table illustrates the effects of selected interest
rate and equity price scenarios on our profit for the year and the
total equity of our insurance manufacturing subsidiaries.
Where appropriate, the effects of the sensitivity tests on
profit after tax and equity incorporate the impact of the stress on
the PVIF. Due in part to the impact of the cost of guarantees and
hedging strategies which may be in place, the relationship between
the profit and total equity and the risk factors is non-linear.
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.
Changes in sensitivity compared to 2017 were primarily driven by
the impact of increasing yields in France on the projected cost of
options and guarantees.
Sensitivity of the group's insurance manufacturing subsidiaries to
market risk factors
(Audited)
2018 2017
Effect Effect Effect
on on Effect on
profit total on profit total
after tax equity after tax equity
GBPm GBPm GBPm GBPm
+100 basis point parallel shift
in yield curves 32 18 24 9
-100 basis point parallel shift
in yield curves (35) (19) (44) (28)
10% increase in equity prices 23 23 20 20
10% decrease in equity prices (21) (21) (19) (19)
Credit risk
(Audited)
Description and exposure
Credit risk arises in two main areas for our insurance
manufacturers:
-- risk associated with credit spread volatility and default by
debt security counterparties after investing premiums to generate a
return for policyholders and shareholders; and
-- risk of default by reinsurance counterparties and
non-reimbursement for claims made after ceding insurance risk.
The amounts outstanding at the balance sheet date in respect of
these items are shown in the table on page 66.
The credit quality of the reinsurers' share of liabilities under
insurance contracts is assessed as 'satisfactory' or higher as
defined on page 27, with 100% of the exposure being neither past
due nor impaired.
Credit risk on assets supporting unit-linked liabilities is
predominantly borne by the policyholder; therefore our exposure is
primarily related to liabilities under non-linked insurance and
investment contracts and shareholders' funds. The credit quality of
these financial assets is included in the table on page 46.
Liquidity risk
(Audited)
Description and exposure
Liquidity risk is the risk that an insurance operation, though
solvent, either does not have sufficient financial resources
available to meet its obligations when they fall due, or can secure
them only at excessive cost.
The following table shows the expected undiscounted cash flows
for insurance contract liabilities at 31 December 2018. The
liquidity risk exposure is wholly borne by the policyholder in the
case of unit-linked business and is shared with the policyholder
for non-linked insurance.
The profile of the expected maturity of insurance contracts
at
31 December 2018 remained comparable with 2017.
The remaining contractual maturity of investment contract
liabilities is included in Note 27.
Expected maturity of insurance contract liabilities
(Audited)
Expected cash flows (undiscounted)
Within Over 15
1 year 1-5 years 5-15 years years Total
GBPm GBPm GBPm GBPm GBPm
Unit-linked 177 362 472 433 1,444
With DPF and Other contracts 1,445 6,735 6,606 4,787 19,573
At 31 Dec 2018 1,622 7,097 7,078 5,220 21,017
Unit-linked 289 323 436 440 1,488
With DPF and Other contracts 1,460 6,665 6,625 5,212 19,962
At 31 Dec 2017 1,749 6,988 7,061 5,652 21,450
Insurance risk
Description and exposure
Insurance risk is the risk of loss through adverse experience,
in either timing or amount, of insurance underwriting parameters
(non-economic assumptions). These parameters include mortality,
morbidity, longevity, lapses and unit costs.
The principal risk we face is that, over time, the cost of the
contract, including claims and benefits, may exceed the total
amount of premiums and investment income received.
The table on page 66 analyses our insurance manufacturing
exposures by type of contract.
The insurance risk profile and related exposures remain largely
consistent with those observed at 31 December 2017.
Sensitivities
The table below shows the sensitivity of profit and total equity
to reasonably possible changes in non-economic assumptions across
all our insurance manufacturing subsidiaries.
Mortality and morbidity risk is typically associated with life
insurance contracts. The effect on profit of an increase in
mortality or morbidity depends on the type of business being
written. Our largest exposure to mortality and morbidity risk
exists in the UK.
Sensitivity to lapse rates depends on the type of contracts
being written. For a portfolio of term assurance, an increase in
lapse rates typically has a negative effect on profit due to the
loss of future income on the lapsed policies. However, some
contract lapses have a positive effect on profit due to the
existence of policy surrender charges. We are most sensitive to a
change in lapse rates in France.
Expense rate risk is the exposure to a change in the cost of
administering insurance contracts. To the extent that increased
expenses cannot be passed on to policyholders, an increase in
expense rates will have a negative effect on our profits.
Sensitivity analysis
(Audited)
2018 2017
GBPm GBPm
Effect on profit after
tax and total equity
at 31 Dec
10% increase in mortality
and/or morbidity rates (19) (18)
10% decrease in mortality
and/or morbidity rates 19 18
10% increase in lapse
rates (27) (22)
10% decrease in lapse
rates 30 25
10% increase in expense
rates (33) (31)
10% decrease in expense
rates 34 31
Capital
Capital management
Approach and policy
(Audited)
Our objective in managing the group's capital is to maintain
appropriate levels of capital to support our business strategy and
meet regulatory and stress testing related requirements.
We manage group capital to ensure that we exceed current and
expected future requirements, and that we respect the payment
priority of our capital providers. Throughout 2018, we complied
with the Prudential Regulation Authority's ('PRA') regulatory
capital adequacy requirements, including those relating to
stress testing.
Capital measurement
The PRA is the supervisor of the bank and lead supervisor of the
group. The PRA sets capital requirements and receives information
on the capital adequacy of the bank and the group.
Individual banking subsidiaries are directly regulated by their
local banking supervisors, who set and monitor their capital
adequacy requirements. Since 1 January 2014, our capital at group
level is calculated under CRD IV and the PRA Rulebook.
Our policy and practice in capital measurement and allocation at
the group level is underpinned by the CRD IV rules. In most
jurisdictions, non-bank financial subsidiaries are also subject to
the supervision and capital requirements of local regulatory
authorities.
The Basel III framework, like Basel II, is structured around
three 'pillars': minimum capital requirements, supervisory review
process and market discipline. Basel III also introduces a number
of capital buffers, including the Capital Conservation Buffer
('CCB'), Countercyclical Capital Buffer ('CCyB'), and other
systemic buffers such as the Globally/Other Systemically Important
Institutions ('G-SII'/'O-SII') buffer. CRD IV legislation
implemented Basel III in the EU and the 'PRA Rulebook' for CRR
Firms transposed the various national discretions under the CRD IV
legislation into UK requirements.
Regulatory capital
Our capital base is divided into three main categories, namely
common equity tier 1, additional tier 1 and tier 2, depending on
their characteristics.
-- Common equity tier 1 ('CET 1') capital is the highest quality
form of capital, comprising shareholders' equity and related
non-controlling interests (subject to limits). Under CRD IV various
capital deductions and regulatory adjustments are made against
these items; these include deductions for goodwill and intangible
assets, deferred tax assets that rely on future profitability,
negative amounts resulting from the calculation of expected loss
amounts under internal ratings based ('IRB') approach and surplus
defined benefit pension fund assets.
-- Additional tier 1 capital comprises eligible non-common
equity capital instruments and any related share premium; it also
includes other qualifying instruments issued by subsidiaries
subject to certain limits. Holdings of additional tier 1
instruments of financial sector entities are deducted from our
additional tier 1 capital.
-- Tier 2 capital comprises eligible capital instruments and any
related share premium and other qualifying tier 2 capital
instruments issued by subsidiaries, subject to limits. Holdings of
tier 2 capital instruments of financial sector entities are
deducted from our tier 2 capital.
Pillar 3 disclosure requirements
Pillar 3 of the Basel regulatory framework is related to market
discipline and aims to increase market transparency by requiring
firms to publish, at least annually, wide-ranging information on
their risks and capital, and how these are managed. Our Pillar 3
Disclosures 2018 are published on HSBC's website, www.hsbc.com,
under 'Investors'.
Capital overview
Key capital numbers
At 31 Dec
Footnotes 2018 2017(1)
Available capital
(GBPm)
Common equity tier
1 capital 19,831 27,409
Tier 1 capital 23,079 32,243
Total regulatory capital 37,671 39,288
Risk-weighted assets
(GBPm)
Credit risk 2 88,822 164,767
Counterparty credit
risk 24,669 24,018
Market risk 17,534 20,978
Operational risk 12,850 23,310
Total risk-weighted
assets 143,875 233,073
Capital ratios (%)
Common equity tier
1 13.8 11.8
Total tier 1 16.0 13.8
Total capital 26.2 16.9
Leverage ratio
Tier 1 capital (GBPm) 22,213 31,165
Total leverage ratio
exposure measure (GBPm) 570,001 787,220
Leverage ratio (%) 3 3.9 4.0
1 All figures presented as reported under IAS 39 at 31 December 2017.
2 'Credit risk' here, and in all tables where the term is used,
excludes counterparty credit risk.
3 Leverage ratio is calculated on a fully phased-in basis.
Capital structure at 31 December
(Audited)
Own funds disclosure
At
31 Dec 31 Dec
Ref(1) 2018 2017
GBPm GBPm
Common equity tier 1 ('CET1') capital: instruments
and reserves
Capital instruments and the related share premium
1 accounts 797 797
- ordinary shares 797 797
2 Retained earnings 30,668 32,601
3 Accumulated other comprehensive income (and other
reserves) 2,953 4,341
5 Minority interests (amount allowed in consolidated
CET1) 372 337
5a Independently reviewed interim net profits net of
any foreseeable charge or dividend (12,049) 217
6 Common equity tier 1 capital before regulatory adjustments 22,741 38,293
Common equity tier 1 capital: regulatory adjustments
7 Additional value adjustments (623) (587)
8 Intangible assets (net of related deferred tax liability) (1,970) (5,337)
10 Deferred tax assets that rely on future profitability
excluding those arising from temporary differences
(net of related tax liability) (40) (39)
11 Fair value reserves related to gains or losses on
cash flow hedges 7 41
12 Negative amounts resulting from the calculation of
expected loss amounts (183) (864)
14 Gains or losses on liabilities at fair value resulting
from changes in own credit standing (79) 452
15 Defined-benefit pension fund assets (22) (4,550)
Total regulatory adjustments to common equity tier
28 1 (2,910) (10,884)
29 Common equity tier 1 capital 19,831 27,409
Additional tier 1 ('AT1') capital: instruments
30 Capital instruments and the related share premium
accounts 2,403 3,781
31 - classified as equity under IFRSs 2,403 3,781
33 Amount of qualifying items and the related share
premium accounts subject to phase out from AT1 866 1,083
34 Qualifying tier 1 capital included in consolidated
AT1 capital (including minority interests not included
in CET1) issued by subsidiaries and held by third
parties 26 44
36 Additional tier 1 capital before regulatory adjustments 3,295 4,908
Additional tier 1 capital: regulatory adjustments
37 Direct and indirect holdings of own AT1 instruments (47) (45)
41b Residual amounts deducted from AT1 capital with regard (29)
to deduction from tier 2 ('T2') capital during the
transitional period -
* direct and indirect holdings by the institution of
the T2 instruments and subordinated loans of
financial sector entities where the institution has a
significant investment in those entities - (29)
Total regulatory adjustments to additional tier 1
43 capital (47) (74)
44 Additional tier 1 capital 3,248 4,834
45 Tier 1 capital (T1 = CET1 + AT1) 23,079 32,243
Tier 2 capital: instruments and provisions
46 Capital instruments and the related share premium
accounts 13,962 5,977
47 Amount of qualifying items and the related share
premium accounts subject to phase out from T2 881 1,194
48 Qualifying own funds instruments included in consolidated
T2 capital (including minority interests and AT1
instruments not included in CET1 or AT1) issued by
subsidiaries and held by third parties 152 169
49 - of which: instruments issued by subsidiaries subject
to phase out 107 146
51 Tier 2 capital before regulatory adjustments 14,995 7,340
Tier 2 capital: regulatory adjustments
52 Direct and indirect holdings of own T2 instruments (31) (30)
55 Direct and indirect holdings by the institution of
the T2 instruments and subordinated loans of financial
sector entities where the institution has a significant
investment in those entities (net of eligible short
positions) (372) (265)
57 Total regulatory adjustments to tier 2 capital (403) (295)
58 Tier 2 capital 14,592 7,045
59 Total capital (TC = T1 + T2) 37,671 39,288
1 The references identify the lines prescribed in the EBA
template, which are applicable and where there is a value.
CET1 capital decreased during the year by GBP7.6bn, mainly due
to:
-- GBP11.2bn reduction from implementing the ring-fencing transfer scheme; and
-- GBP0.1bn of capital reduction through profits, net of dividends;
These decreases were partly offset by:
-- GBP3.5bn capital contribution from HSBC Holdings plc and HSBC UK Holdings Ltd; and
-- GBP0.1bn of IFRS 9 day one transition impact.
Risk-Weighted Assets ('RWAs')
RWA movement by business by key driver
Credit risk, counterparty credit
risk and operational risk
Corporate Market Total
RBWM CMB GB&M GPB Centre risk RWAs
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------- -------- ------- ------- ----------- ------- ----------
RWAs at 31 Dec 2017 26,676 85,448 76,790 3,540 19,641 20,978 233,073
Asset size 248 6,177 (3,622) (7) (7,143) (4,309) (8,656)
------- ------- ------ ------ ------- ------
Asset quality (32) 1,206 370 116 (49) - 1,611
Model updates 332 1,300 328 - - - 1,960
* portfolios moving onto IRB approach - - - - - - -
* new/updated models 332 1,300 328 - - - 1,960
Methodology and policy 726 3,792 (4,185) 196 (324) (219) (14)
* internal updates 726 3,792 (4,185) 196 (635) (219) (325)
* external updates - regulatory - - - - 311 - 311
Acquisitions, disposals and
transfers (20,982) (66,241) 2,264 (1,848) (811) (38) (87,656)
Foreign exchange movement 64 228 1,929 15 199 1,122 3,557
Write-offs - - - - - - -
Total RWA movement (19,644) (53,538) (2,916) (1,528) (8,128) (3,444) (89,198)
RWAs at 31 Dec 2018 7,032 31,910 73,874 2,012 11,513 17,534 143,875
RWAs fell by GBP89.2bn in the year, principally as a result of
an GBP87.7bn reduction due to acquisitions, disposals and
transfers. On 1 July the bank transferred business and assets worth
GBP89.7bn to HSBC UK bank plc to complete the ring-fencing of its
qualifying retail business. This transfer was partly offset by
other movements, primarily the acquisition of HSBC Investment Bank
Holdings and HSBC Specialist Investment Limited which added GBP2.6
bn RWAs.
Excluding these movements, and an increase of GBP3.6bn due to
foreign currency translation differences, the bank's RWAs reduced
by GBP5.1bn mainly as a result of an GBP8.7bn fall in asset size,
less a GBP2.0bn increase due to model updates and a GBP1.6bn
increase due to movements in asset quality.
The following comments describe RWA movements in 2018 excluding
foreign currency translation differences and acquisitions and
disposals.
Asset size
Asset size movements were mainly driven by management
initiatives which reduced legacy securitisation assets in Corporate
Centre and GB&M RWAs by GBP10.7bn. This was partly offset by
GBP6.4bn of lending growth in CMB corporate book and in RBWM
mortgages and credit card exposure. Market risk RWAs fell by
GBP4.3bn due to management initiatives to lower exposures.
Asset quality
RWAs increased by GBP1.6bn mainly as a result of changes in
portfolio mix across CMB and GB&M.
Methodology and policy
The GBP0.3bn decrease in RWAs from internal updates is
principally the result of a fall of GBP4.2bn in GB&M RWAs and a
GBP3.8bn increase in CMB. These movements include the transfer of
GBP1.6bn of RWAs from GB&M to CMB as part of resegmentation
activity prior to ring-fencing. Excluding this transfer:
-- GB&M RWAs fell by GBP2.6bn as a result of management
initiatives and calculation refinements; and
-- CMB RWAs rose by GBP2.1bn primarily as a result of calculation refinements following IFRS 9 implementation.
This is offset by a GBP0.3bn increase in external updates as a
result of IFRS 9 implementation.
Model updates
The GBP2.0bn increase in RWAs was largely due to updates to UK
retail and corporate PD models and to the implementation of a
German receivable finance model.
Leverage ratio
Our fully phased-in CRD IV leverage ratio was 3.9% at 31
December 2018, down from 4.0% at 31 December 2017. Fall in tier 1
capital was largely offset by a decrease in the leverage exposure
measure, primarily due to a transfer of qualifying exposures to
HSBC UK bank plc.
Corporate Governance Report
The statement of corporate governance practices set out on
pages
72
to
77
and information incorporated by reference constitute the
Corporate Governance Report of HSBC Bank plc.
The Directors serving at 31 December 2018 are set out below.
Directors
Stephen O'Connor
Chairman
Chairman of the Chairman's Nominations and Remuneration
Committee
Appointed to the Board: May 2018. Chairman since August 2018
Stephen is Founder and Chairman of Quantile Technologies
Limited, and a non-executive Director, Chairman of the Risk
Committee and member of both the Audit and Nomination Committees of
The London Stock Exchange Group plc. He has more than 25 years'
investment banking experience in London and New York. Former
appointments include: Chairman of the International Swaps and
Derivatives Association and prior to that he was Managing Director
and a member of the Fixed Income Management Committee at Morgan
Stanley.
James Emmett
Executive Director and Chief Executive Officer
Chairman of the Executive Committee
Appointed to the Board and as Chief Executive Officer: September
2018
James joined HSBC in 1994 and has performed a variety of senior
management roles. He is a Director of HSBC France and a member of
the Supervisory Board of HSBC Trinkaus & Burkhardt AG. Former
appointments include: Group General Manager and Chief Operating
Officer of HSBC Bank plc, and Group General Manager and CEO of HSBC
Bank A.S. (Turkey).
Jacques Fleurant
Executive Director and Chief Financial Officer
Member of the Executive Committee
Appointed to the Board and as Chief Financial Officer: August
2018
Jacques joined HSBC in 2000 in Toronto, and has held a variety
of senior roles in finance and operations. Prior to joining HSBC he
performed senior roles at Merrill Lynch and for the Canadian
Revenue Agency.
Dame Mary Marsh
Independent non-executive Director
Member of the Risk Committee
Appointed to the Board: January 2009
Mary is the non-executive Chair of Trustees of the Royal College
of Paediatrics and Child Health, a director of the London Symphony
Orchestra, a member of the Governing Body of the London Business
School and a Trustee of Teach First. Former appointments include:
founding Director of the Clore Social Leadership Programme and
Chief Executive of the National Society for the Prevention of
Cruelty to Children.
Yukiko Omura
Independent non-executive Director
Member of the Risk Committee
Appointed to the Board: May 2018
Yukiko is a non-executive Director of The Private Infrastructure
Development Group Limited ("PIDG"), as well as Chair of GuarantCo
Limited, a subsidiary of PIDG. She also serves as a non-executive
Director of Assured Guaranty Ltd, and on the Supervisory Board
member of Nishimoto HD Co. Ltd. She has more than 35 years'
international professional experience in both the public and
private financial sector, performing senior roles for JP Morgan,
Lehman Brothers, UBS and Dresdner Bank. Former appointments
include: Under-Secretary General and COO/Vice President of the
International Fund for Agricultural Development and, Executive Vice
President and CEO of the Multilateral Investment Guarantee Agency
of the World Bank Group.
Dr Eric Strutz
Independent non-executive Director
Chairman of the Risk Committee, Member of the Audit Committee
and the Chairman's Nominations and Remuneration Committee
Appointed to the Board: October 2016
Eric is a member of the Supervisory Board and Chairman of the
Risk and Audit Committees of HSBC Trinkaus & Burkhardt AG,
Germany, member of the Board of Directors and Chairman of the Risk
and Audit Committee of Partners Group Holding AG, Switzerland, a
member of the Board of Directors and Chairman of the Audit
Committee of Global Blue SA, and a member of the Advisory Board and
Chairman of the Audit & Risk Committee of Luxembourg Investment
Company 261 Sarl. Former appointments include: Chief Financial
Officer of Commerzbank Group, Partner and Director of the Boston
Consulting Group, as well as non-executive Director of Mediobanca
Banca di Credito Finanziario SpA.
John Trueman
Deputy Chairman and independent non-executive Director
Member of the Audit Committee, the Risk Committee and the
Chairman's Nominations and Remuneration Committee
Appointed to the Board: 2004. Deputy Chairman since December
2013
John is Chairman of HSBC Global Asset Management Limited and
non-executive director of HSBC Private Bank (UK) Limited. Former
appointments include: Deputy Chairman of S.G. Warburg & Co
Ltd.
Andrew Wright
Independent non-executive Director
Chairman of the Audit Committee, Member of the Risk Committee
and the Chairman's Nominations and Remuneration Committee
Appointed to the Board: May 2018
Andrew has been the Treasurer to the Prince of Wales and the
Duchess of Cornwall since 2012. Former appointments include: Global
Chief Financial Officer for the Investment Bank at UBS AG, Chief
Financial Officer, Europe and the Middle East at Lehman Brothers
and Chief Financial Officer for the Private Client and Asset
Management Division at Deutsche Bank.
Company Secretary
Loren Wulfsohn was appointed Company Secretary of HSBC Bank plc
with effect from 1 January 2018.
Board of Directors
The objective of the Board of Directors, led by the Chairman, is
to deliver sustainable value to shareholders and internal and
external stakeholders. Implementation of the strategy is delegated
to the Bank's Executive Committee.
The Board meets regularly and Directors receive information
between meetings about the activities of committees and
developments in the bank's business. All Directors have full and
timely access to all relevant information and may take independent
professional advice if necessary.
All Directors are subject to annual re-election at the HSBC Bank
plc Annual General Meeting.
Board Changes during 2018
The Board regularly reviews its composition and in 2018 a number
of changes were made to the Board to ensure that the Board has the
right mix of skills and experience.
In May 2018 Stephen O'Connor, Yukiko Omura and Andrew Wright
were appointed to the Board as independent non-executive
Directors.
The following Board changes took place:
In August 2018;
-- Jonathan Symonds stepped down as Chairman of the Board;
-- Stephen O'Connor was appointed as Chairman of the Board;
-- Jim Coyle, Dame Denise Holt and David Lister resigned, having
each been appointed to the Board of HSBC UK Bank plc;
-- Eric Strutz and Andrew Wright were appointed as Chairman of
the Risk and Audit Committees respectively; and
-- Jacques Fleurant was appointed as Chief Financial Officer and Executive Director.
In September 2018;
-- Thierry Moulonguet resigned as a non-executive Director having served since July 2012;
-- Antonio Simoes who served on the Board and as Chief Executive
Officer since 2012 resigned; and
-- James Emmett, who had been appointed as acting Chief
Executive Officer in March 2018, was appointed as Chief Executive
Officer and to the Board.
Directors' emoluments
Details of the emoluments of the Directors of the bank for 2018,
disclosed in accordance with the Companies Act, are shown in Note 6
'Employee compensation and benefits'.
Non-executive Directors do not have service contracts, but are
bound by letters of appointment.
Board committees
The Board has established a number of committees to assist it in
discharging its responsibilities. The Chairman of each
non-executive Board committee reports to the Board on the
activities of the committee since the previous Board meeting. All
of the members of the Audit, Risk and Chairman's Nomination and
Remuneration Committees are independent non-executive
directors.
At the date of this report, the following are the principal
committees of the Board:
Audit Committee
The Audit Committee is accountable to the Board and has
non-executive responsibility for oversight of and advice to the
Board on financial reporting related matters and internal controls
over financial reporting.
The Committee meets regularly with the bank's senior financial
and internal audit management and the external Auditors to
consider, among other matters, the bank's financial reporting, the
nature and scope of audit reviews, the effectiveness of the systems
of internal control relating to financial reporting, the review of
the financial underpinnings of structural reform projects and the
monitoring of the finance function transformation program. The
current members are Andrew Wright (Chairman), Eric Strutz and John
Trueman.
Significant accounting judgements and related matters considered by
the Audit Committee during 2018 included:
Appropriateness The HSBC Bank plc Audit Committee ('AC') received reports
of provisioning from management on the recognition and measurement of
for legal proceedings provisions and contingent liabilities for legal proceedings
and regulatory and regulatory matters. Specific matters included accounting
matters judgements in relation to provisions and contingent
liabilities arising from investigations by regulators
and competition and law enforcement authorities around
the world into trading on the foreign exchange market.
IBOR transition The AC considered the accounting implications of benchmark
interest rate replacement for hedge accounting relationships
at 31 December 2018, the longer term broader implications
for financial instruments and other areas of accounting,
and the related disclosures. The AC considered management's
judgement that no change to hedge accounting is appropriate
as at 31 December 2018 and that this position will be
kept under review in the context of future market developments
in the transition of interest rate benchmarks to new
risk free rates.
Interim and annual The AC considered key judgements in relation to interim
reporting and annual reporting.
Expected credit The AC considered the key judgements related to IFRS
loss ('ECL') allowances 9 and the related disclosures, The AC considered ECL
and charges allowances and charges for personal and wholesale lending.
Specific attention was paid to credit risk in the UK
and adjustment to ECL for UK economic uncertainty.
Valuation of financial The AC considered the key valuation metrics and judgements
instruments involved in the determination of the fair value of financial
instruments.
Going concern The AC considered a wide range of information relating
to present and potential conditions, including projections
for profitability, cash flows, liquidity and capital.
Specific attention was paid to the effects of ring-fencing
and the potential impact of the UK's withdrawal from
the European Union.
UK customer remediation The AC considered the provisions for redress for mis-selling
of payment protection insurance ('PPI') policies in
the UK and the associated redress on PPI commissions
earned under certain criteria, including management's
judgements regarding the effect of the time-bar for
claims ending August 2019. In addition, the AC monitored
progress on the remediation of operational processes
and associated customer redress.
Goodwill impairment The AC considered the results of the annual goodwill
testing impairment test and subsequent review for any impairment
indicators. Whilst there were no indicators of impairment
at 31 December 2018, the AC noted the sensitivity of
Commercial Banking goodwill to reasonably possible changes
in assumptions and the risk of impairment in the future
should business performance or economic factors diverge
from forecasts
Controls The AC considered the financial control environment
and reviewed action taken to enhance controls over IT
access management, balance sheet substantiation, disclosure
preparation and other areas. The AC reviewed the progress
of ongoing action to enhance controls over general ledger
reconciliation and substantiation, model governance,
IFRS 9 data quality and control monitoring.
Tax The AC considered key judgements in relation to tax,
notably the contingent liability for retrospective VAT
assessments issued by HMRC.
Estimated impact The AC considered the estimated impact of implementation
of IFRS 16, Leases of IFRS 16 Leases on 1 January 2019 and the related
disclosures.
Ring-fenced bank The AC considered the accounting in relation to the
('RFB') creation of the RFB and the associated judgements, including
those related to the disclosure of discontinued operations.
Risk Committee
The Risk Committee is accountable to the Board and has
non-executive responsibility for oversight of and advice to the
Board on high-level risk related matters and risk governance.
The Committee meets regularly with the bank's senior financial,
risk, internal audit and compliance management and the external
Auditors to consider, among other matters, risk reports and
internal audit reports and the effectiveness of compliance.
The current members are: Dr Eric Strutz (Chairman); Dame Mary
Marsh; Yukiko Omura; John Trueman and Andrew Wright.
Post ring-fencing, the sub Committee of the Risk Committee for
Global Banking and Markets ("GB&M") Risk Oversight was demised
and its role assumed by the Risk Committee.
Operations and Technology Committee
Following implementation of ring-fencing in the UK, the
Operations and Technology Committee was demised in July 2018. The
Committee's responsibilities, which included the oversight of
systems, operational resilience and the bank's IT infrastructure,
were assigned to the Risk Committee which will be assisted in the
discharge of its duties by the newly formed Operations and
Technology Forum.
Before its demise, the Committee met regularly in 2018 with the
bank's senior risk, operations, security and fraud risk and
technology audit management to consider, among other matters,
internal audit reports and reports on the risks associated with the
bank's IT infrastructure and transformation projects, cybersecurity
and data management.
The current members are Stephen O'Connor and Eric Strutz.
Chairman's Nominations and Remuneration Committee
The Chairman's Nominations and Remuneration Committee has
responsibility for: (i) leading the process for Board appointments
and for identifying and nominating, for the approval of the Board,
candidates for appointment to the Board; (ii) the endorsement of
the appointment of the chairman and any director to the Board of
certain subsidiaries of the bank; and (iii) reviewing the
implementation and appropriateness of HSBC Group's remuneration
policy and the remuneration of the bank's senior executives.
The current members are: Stephen O'Connor (Chairman); Eric
Strutz; John Trueman and Andrew Wright.
Executive Committee
The Executive Committee meets regularly and operates as a
general management committee under the direct authority of the
Board, exercising all of the powers, authorities and discretions of
the Board in so far as they concern the management and day-to-day
running of the bank, in accordance with such policies and
directions as the Board may from time to time determine. The bank's
Chief Executive Officer, James Emmett, chairs the Committee.
Regular Risk Management Meetings of the Executive Committee,
chaired by the Chief Risk Officer, Europe, are held to establish,
maintain and periodically review the policy and guidelines for the
management of risk within the bank.
The following committees are sub-committees of the Executive
Committee:
-- International Executive Committee; and
-- International Risk Management Meeting.
The International Executive Committee is responsible for
monitoring and, where appropriate, implementing and driving
execution of the group's strategy as it pertains to the portion of
the group's operations designated as International.
The International Risk Management Committee is responsible for
the oversight and management of all risks impacting the group's
operations designated as International.
Dividends
Information about dividends is provided on page 15 of the
Strategic Report.
Internal control
The Board is responsible for maintaining and reviewing the
effectiveness of risk management and internal control systems and
for determining the aggregate level and types of risks the bank is
willing to take in achieving its strategic objectives.
The bank has procedures in place designed to safeguard assets
against unauthorised use or disposal, maintain proper accounting
records and ensure the reliability and usefulness of financial
information whether used within the business or for
publication.
These procedures can only provide reasonable assurance against
material mis-statement, errors, losses or fraud. They are designed
to provide effective internal control within the bank. The
procedures have been in place throughout the year and up to the
date of approval of the Annual Report and Accounts 2018.
In the case of companies acquired during the year, the risk
management and internal controls in place are being reviewed
against HSBC's benchmarks and integrated into HSBC's processes.
Key risk management and internal control procedures include the
following:
-- Adherence to the Group's Global Standards Manual ('GSM'). The
GSM outlines the core principles within which all members of the
HSBC Group must operate wherever business is conducted. The GSM
overlays all other policies and procedures throughout the HSBC
Group. The requirements of the GSM are mandatory, apply to and must
be observed by all businesses within the HSBC Group, regardless of
the nature or location of their activities. In 2019, the GSM
process will be replaced by a set of Global Principles.
-- Delegation of authority within limits set by the Board.
Authority to manage the day-to-day running of the bank is delegated
within limits set by the Board to the Chief Executive who has
responsibility for overseeing the establishment and maintenance of
systems of control appropriate to the business and who has the
authority to delegate such duties and responsibilities as he sees
fit. Appointments to the most senior positions require Board
approval.
-- Risk identification and monitoring. Systems and procedures
are in place to identify, control and report on the material risk
types facing the group.
-- Changes in market conditions/practices. Processes are in
place to identify new risks arising from changes in market
conditions/practices or customer behaviours, which could expose the
group to heightened risk of loss or reputational damage. The group
employs a top and emerging risks framework at all levels of the
organisation, which enables it to identify current and
forward-looking risks and to take action which either prevents them
materialising or limits their impact.
-- Responsibility for risk management. All employees are
responsible for identifying and managing risk within the scope of
their role as part of the three lines of defence model, which is an
activity-based model to delineate management accountabilities and
responsibilities for risk management and the control environment.
The second line of defence sets the policy and guidelines for
managing specific areas, provides advice and guidance in relation
to the risk, and challenges the first line of defence (the risk
owners) on effective risk management.
-- Strategic plans. Strategic plans are prepared for global
businesses, global functions and geographical regions within the
framework of the HSBC Group's overall strategy. The bank also
prepares and adopts an Annual Operating Plan, which is informed by
detailed analysis of risk appetite, describing the types and
quantum of risk that the bank is prepared to take in executing its
strategy and sets out the key business initiatives and the likely
financial effects of those initiatives.
The key risk management and internal control procedures over
financial reporting include the following:
-- Entity level controls: The primary mechanism through which
comfort over risk management and internal control systems is
achieved, is through assessments of the effectiveness of entity
level controls ('ELC'), and the reporting of risk and control
issues on a regular basis through the various risk management and
risk governance forums. ELCs are internal controls that have a
pervasive influence over the entity as a whole. They include
controls related to the control environment, for example the
Company's values and ethics, the promotion of effective risk
management and the overarching governance exercised by the Board
and its non-executive committees. The design and operational
effectiveness of ELCs are assessed annually as part of the
assessment of the effectiveness of internal controls over financial
reporting.
-- Key process level controls that mitigate risk of financial
misstatement are recorded in the Operation Risk system and
monitored in accordance with the ORMF. Further details on the
framework can be found on page 31.
-- Disclosure Forum. The Disclosure Forum reviews financial
reporting disclosures made by the bank for any material errors,
misstatements or omissions. The integrity of disclosures is
underpinned by structures and processes within the group's Finance
and Risk functions that support rigorous analytical review of
financial reporting and the maintenance of proper accounting
records.
-- Financial reporting. The bank's financial reporting process
for preparing the consolidated Annual Report and Accounts 2018 is
controlled using documented accounting policies and reporting
formats, supported by detailed instructions and guidance on
reporting requirements, issued to all reporting entities within the
Group in advance of each reporting period end.
-- Subsidiary certifications. Full and half-yearly
certifications are provided to the Audit Committee and the Risk
Committee from audit and risk committees of principal subsidiary
companies, confirming that their financial statements have been
prepared in accordance with Group policies, present fairly the
state of affairs of the relevant principal subsidiary and are
prepared on a going concern basis.
In 2018, the acceleration of operational resilience and
investment in technology controls were particular areas of focus
for HSBC. The Group continued to embed the operational risk
management framework and invest in the non-financial risk
infrastructure. Work also continued to enhance the risk appetite
framework for non-financial risks and improve the consistency of
adoption of the end-to-end risk and control assessment process.
Whilst there remains more to do, considerable progress has been
made to strengthen HSBC's control environment and it will continue
to be a priority for 2019.
During the year, the Audit and Risk Committees keep under review
the effectiveness of this system of internal control and report
regularly to the Board. In carrying out their reviews, the Audit
and Risk Committees receive regular business and operational risk
assessments; regular reports from the heads of key risk functions,
which cover all internal controls, both financial and
non-financial; internal audit reports; external audit reports;
prudential reviews; and regulatory reports.
The Risk Committee monitors the status of principal risks and
considers whether the mitigating actions put in place are
appropriate. In addition, when unexpected losses have arisen or
when incidents have occurred which indicate gaps in the control
framework or in adherence to Group policies, the Risk and Audit
Committees review special reports, prepared at the instigation of
management, which analyse the cause of the issue, the lessons
learned and the actions proposed by management to address
the issue.
Employees
Health and safety
The group is committed to providing a healthy and safe working
environment for our employees, contractors, customers and visitors
on HSBC premises and where impacted by our operations. We aim to be
compliant with all applicable health and safety legal requirements,
and that best practice health and safety management standards are
implemented and maintained across the HSBC Group.
Everyone at HSBC has a responsibility for helping to create a
healthy and safe working environment. Employees are expected to
take ownership of their safety and are encouraged and empowered to
report any concerns.
Chief Operating Officers have overall responsibility for
ensuring that the correct policies, procedures and safeguards are
put into practice. This includes making sure that everyone in HSBC
has access to appropriate information, instruction, training and
supervision.
Putting our commitment into practice, in 2018 the group
delivered a health and safety education and information training
programme to every one of our employees, and a range of programmes
to help us understand and effectively manage the risks we face and
improve the buildings in which we operate:
-- We developed and implemented a health and safety continuous
improvement programme, focusing on education, engineering and
enforcement/reward, to improve our health and safety culture and to
implement the highest standards of control for managing health and
safety.
-- We developed and implemented an improved health and safety
training and awareness programme for all employees globally,
ensuring roles and responsibilities were clear and understood; and
processes for identifying and reporting hazards and incidents were
clearly defined and communicated.
-- We implemented, through our global facilities management
service provider, an electronic permit to work system to provide
effective controls for all high risk work undertaken.
-- We developed and implemented a global earthquake risk
management programme, to ensure all HSBC properties in earthquake
zones were risk assessed and controls implemented to manage the
risk.
-- We ensured all our properties had been assessed for fire and
asbestos risk, with over 40,000 individual actions taken to improve
standards.
Employee health and safety
Footnotes 2018 2017 2016
Number of workplace
fatalities 1,2 - - -
Number of major
injuries to employees 1,2 9 19 21
All injury rate
per 100,000 employees 2 343 448 470
1 Fractures, dislocation, concussion.
2 Comparative data has been restated to show Europe figures.
Diversity and inclusion
We are committed to enabling a thriving environment where people
are valued, respected and supported to fulfil their potential; and
where leveraging the extraordinary range of ideas, backgrounds,
styles and perspectives of our employees means we can effectively
meet the needs of our different stakeholder groups and drive better
business outcomes for all. Our employees are expected to build
positive and lasting relationships among the variety of people they
interact with.
We focus on enhancing the diversity profile of our workforce so
that it is more reflective of the communities we operate in and the
customers we serve.
To support an inclusive environment, our policy is that each of
us must treat colleagues with dignity and respect. We have zero
tolerance for discrimination, bullying, harassment and
victimisation on any ground, including age, race, ethnic or
national origin, colour, mental or physical health conditions,
disability, pregnancy, gender, gender expression, gender identity,
sexual orientation, marital status or other domestic circumstances,
employment status, working hours or other flexible working
arrangements, or religion or belief. Such behaviour is considered a
personal conduct matter and managed in accordance with applicable
local policies and procedures and our consequence management
framework.
Diversity and inclusion carries the highest level of executive
support and is governed by the Group People Committee.
More information about our diversity and inclusion activity is
available at https://www.hsbc.com/our-approach.
Key achievements
In 2018, the UK created and launched the 'Inclusion Hub', which
holds an abundance of information and resources relating to
Diversity & Inclusion ('D&I'). This effectively provides UK
employees with a 'one stop shop' for all of their D&I questions
and requirements. The Driving Inclusion Workshops were delivered to
UK leaders, with the HR Leadership Team, UK Inclusion Board and the
UK Executive Committee already having participated during 2018. The
workshop has been designed to support our inclusion strategy
underpinned by inclusive behaviours. To focus the agenda around the
five areas of priority for the UK business; gender, LGBT+,
ethnicity, flexible working, and disability, a framework has been
designed to progress the agenda at pace. The framework provides for
business led actions with clear UK Executive Committee
accountability and ownership.
HSBC France launched its first Diversity & Inclusion week to
raise awareness in partnership with its two Employee Resource
Groups: 50 50 Partner of Balance and HSBC Pride Network France.
HSBC France also continued to raise managers' awareness of
diversity and unconscious bias via dedicated workshops.
HSBC Malta was accredited as an Equal Employer by the National
Commission Promoting Equality. The company demonstrated commitment
towards its equality and sexual harassment policy; taking measures
to ensure equal opportunities in recruitment and employment
practices, and in career and personal development opportunities;
promoting family-friendly measures and work-life balance options
for men and women with caring responsibilities. It is an
affirmation that the company truly demonstrates its commitment
towards gender equality and provides true equal opportunities
without judgements based on stereotypes. Ultimately, this showcases
a quality standard for job seekers to look out for and makes the
company an employer of choice.
HSBC Germany continued to establish an integrated talent
development and D&I approach by increasing talent development
activities. These include initiatives such as progression and
targeted development of female talents by implementing the Female
Leadership Accelerator Programme and implementing individual
development plans for female key talent. HSBC Germany also
continued to focus on unconscious bias awareness by deploying
Unconscious Bias workshops for leaders. The local Balance network
continues to provide its members opportunities to have an open
dialogue and share insights around career development within the
firm. Typical activities include speeches by senior women, blind
date lunches and quarterly newsletters. Additionally events are
supported by external speakers who share best practices around
gender balance. The local mentoring programme continues
successfully. To date, 148 senior leaders offered their guidance
for junior colleagues.
Diverse representation in Europe
Our focus on improving gender balance in senior leadership
across Europe is on going.
Female representation by management level:
-- All grades: 48%
-- Clerical grades: 68%
-- Junior management: 56%
-- Management: 39%
-- Senior management: 24%
-- Executive management: 12%
Employment of people with a disability
We believe in providing equal opportunities for all employees.
The employment of people with a disability is included in this
commitment. The recruitment, training, career development and
promotion of people with a disability are based on the aptitudes
and abilities of the individual. Should employees become disabled
during their employment with us, efforts are made to continue their
employment and, if necessary, appropriate training and reasonable
equipment and facilities are provided.
A number of countries have dedicated teams to ensure that
barriers to work are removed for colleagues. HSBC France has taken
actions to create a more inclusive environment for disabled people,
for example HOST and Finance are ensuring disabilities are
accommodated through assisted technologies. A deaf employee who
benefits from interpreters and technological support was
interviewed on French television (France 24) to explain how the
support put in place and the commitment of his colleagues make his
integration successful. HSBC France has worked with a non profit
organisation to coach young disabled people on their CV and prepare
them for interviews.
Learning and talent development
The development of our people is fundamental to the ongoing
success of our organisation. We continue to develop and implement
practices that build employee capability and identify, develop and
deploy talented employees to ensure an appropriate supply of high
calibre individuals with the right values, skills and experience
for current and future senior management positions.
Since the launch of HSBC University in 2017 we have continued to
add to the portfolio of world class leadership and professional
programmes that provide opportunity for leaders and people managers
to both develop and connect with each other across the group. In
2018 as part of our drive to use our own leaders to share
experiences and the skill sets that they possess, we successfully
launched a programme of development that enables our leaders to do
just this. As a result we now have a growing number of HSBC leaders
who actively help facilitate and bring our HSBC leadership
development programmes to life.
As well as growing our learning and talent offering in
traditional format, we also spent the year testing new technology
platforms that make personal development accessible to all in HSBC.
In addition we closed the year with the launch of our first digital
learning curriculum covering the topic of personal leadership in
HSBC. The target audience for this development is wide and includes
HSBC front-line staff, meaning format and accessibility will be
crucial to the overall success of the programme.
During 2018 a total of 75,000 formal days of training were
received by 170,000 participants across Europe. Over 4,800
participants across Europe attended a flagship leadership programme
in 2018 and all courses continue to receive positive feedback.
Employee relations
We consult with and, where appropriate, negotiate with employee
representative bodies. It is our policy to maintain well-developed
communications and consultation programmes with all employee
representative bodies and there have been no material disruptions
to our operations from labour disputes during the past five
years.
Auditor
PricewaterhouseCoopers LLP ('PwC') is external Auditors to the
bank. PwC has expressed its willingness to continue in office and
the Board recommends that PwC be re-appointed as the bank's
Auditors. A resolution proposing the re-appointment of PwC as the
bank's Auditors and giving authority to the Audit Committee to
determine its remuneration will be submitted to the forthcoming
AGM.
Articles of Association, Conflicts
of interest and indemnification
of Directors
On 23 November 2018 the Articles of Association of HSBC Bank plc
were amended to reflect the redesignation of the preferred ordinary
share to an ordinary share as set out in Note 29 of the financial
statements.
The Articles of Association of HSBC Bank plc gives the Board
authority to approve Directors' conflicts and potential conflicts
of interest. The Board has adopted a policy and procedures for the
approval of Directors' conflicts or potential conflicts of
interest. A review of situational conflicts which have been
authorised, including the terms of authorisation, is undertaken by
the Board annually.
The Articles of Association provide that Directors and directors
of associated companies are entitled to be indemnified out of the
assets of the company against claims from third parties in respect
of certain liabilities arising in connection with the performance
of their functions, in accordance with the provisions of the UK
Companies Act 2006. Such indemnity provisions have been in place
during the financial year but have not been utilised by the
Directors. All Directors have the benefit of directors' and
officers' liability insurance.
Statement on going concern
The Directors consider it appropriate to prepare the financial
statements on the going concern basis. In making their going
concern assessment, the Directors have considered a wide range of
detailed information relating to present and potential conditions,
including profitability, cash flows, capital requirements and
capital resources.
Further information relevant to the assessment is provided in
the Strategic Report and the Report of the Directors, in
particular:
-- a description of the group's strategic direction;
-- a summary of the group's financial performance and a review of performance by business;
-- the group's approach to capital management and its capital position; and
-- the top and emerging risks facing the group, as appraised by
the Directors, along with details of the group's approach to
mitigating those risks and its approach to risk management in
general.
In addition, the objectives, policies and processes for managing
credit, liquidity and market risk are set out in the 'Report of the
Directors: Risk'.
Statement of directors' responsibilities in respect of the financial
statements
The directors are responsible for preparing the Annual Report
and the financial statements in accordance with applicable law and
regulation.
Company law requires the directors to prepare financial
statements for each financial year. Under that law the directors
have prepared the group financial statements in accordance with
International Financial Reporting Standards (IFRSs) as adopted by
the European Union and company financial statements in accordance
with International Financial Reporting Standards (IFRSs) as adopted
by the European Union. Under company law the directors must not
approve the financial statements unless they are satisfied that
they give a true and fair view of the state of affairs of the group
and company and of the profit or loss of the group and company for
that period. In preparing the financial statements, the directors
are required to:
-- select suitable accounting policies and then apply them consistently;
-- state whether applicable IFRSs as adopted by the European
Union have been followed for the group financial statements and
IFRSs as adopted by the European Union have been followed for the
company financial statements, subject to any material departures
disclosed and explained in the financial statements;
-- make judgements and accounting estimates that are reasonable and prudent; and
-- prepare the financial statements on the going concern basis
unless it is inappropriate to presume that the group and company
will continue in business.
The directors are also responsible for safeguarding the assets
of the group and company and hence for taking reasonable steps for
the prevention and detection of fraud and other irregularities.
The directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the group and
company's transactions and disclose with reasonable accuracy at any
time the financial position of the group and company and enable
them to ensure that the financial statements comply with the
Companies Act 2006 and, as regards the group financial statements,
Article 4 of the IAS Regulation.
The directors of HSBC Holdings plc are responsible for the
maintenance and integrity of the website on which the bank's
financial results are located. Legislation in the United Kingdom
governing the preparation and dissemination of financial statements
may differ from legislation in other jurisdictions.
By order of the Board
Loren Wulfsohn
Company Secretary
HSBC Bank plc
19 February 2019
Registered number 14259
Independent auditors' report to the member of HSBC Bank plc
Report on the audit of the financial statements
Opinion
In our opinion, HSBC Bank plc's group financial statements and
parent company financial statements (the "financial
statements"):
-- give a true and fair view of the state of the group's and of
the parent company's affairs as at 31 December 2018 and of the
group's profit and the group's and the parent company's cash flows
for the year then ended;
-- have been properly prepared in accordance with International
Financial Reporting Standards (IFRSs) as adopted by the European
Union and, as regards the parent company's financial statements, as
applied in accordance with the provisions of the Companies Act
2006; and
-- have been prepared in accordance with the requirements of the
Companies Act 2006 and, as regards the group financial statements,
Article 4 of the IAS Regulation.
We have audited the financial statements, included within the
Annual Report and Accounts 2018, which comprise:
-- the consolidated and HSBC Bank plc balance sheets as at 31 December 2018;
-- the consolidated income statement and consolidated statement
of comprehensive income for the year then ended;
-- the consolidated and HSBC Bank plc statements of cash flows for the year then ended;
-- the consolidated and HSBC Bank plc statements of changes in
equity for the year then ended; and
-- the notes to the financial statements, which include a
description of the significant accounting policies.
Our opinion is consistent with our reporting to the Audit
Committee.
Basis for opinion
We conducted our audit in accordance with International
Standards on Auditing (UK) ("ISAs (UK)") and applicable law. Our
responsibilities under ISAs (UK) are further described in the
Auditors' responsibilities for the audit of the financial
statements section of our report. We believe that the audit
evidence we have obtained is sufficient and appropriate to provide
a basis for our opinion.
Independence
We remained independent of the group in accordance with the
ethical requirements that are relevant to our audit of the
financial statements in the UK, which includes the FRC's Ethical
Standard, as applicable to listed public interest entities, and we
have fulfilled our other ethical responsibilities in accordance
with these requirements.
To the best of our knowledge and belief, we declare that
non-audit services prohibited by the FRC's Ethical Standard were
not provided to the group or the parent company.
Other than those disclosed in Note 7 to the financial
statements, we have provided no non-audit services to the group or
the parent company in the period from 1 January 2018 to 31 December
2018.
Our audit approach
Overview
-- Overall group materiality: GBP282 million (2017: GBP183
million), based on 0.75% of Total Regulatory Capital.
-- Overall parent company materiality: GBP235 million (2017:
GBP183 million), based on the lower of the group materiality or
0.75% of the parent's regulatory capital. 0.75% of the parent
company's regulatory capital was lower and therefore was the
benchmark used.
-- HSBC Bank plc (the 'Bank') is a member of the HSBC Holdings
plc Group, the ultimate parent company of which is HSBC Holdings
plc. HSBC Bank plc operates in 18 countries.
-- We performed audits of the complete financial information of
two components, namely the UK business of the Bank (referred to as
UK Operations) and HSBC France.
-- For five further reporting units, specific audit procedures
were performed over selected significant account balances.
The following areas were identified as key audit matters. These
are discussed in further detail in the Appendix:
-- Application of IFRS 9 in the calculation of impairment of loans and advances;
-- Execution of structural reform required by the UK Financial
Services (Banking Reform) Act 2013;
-- IT access management; and
-- Valuation of financial instruments.
The scope of our audit
As part of designing our audit, we determined materiality and
assessed the risks of material misstatement in the financial
statements. In particular, we looked at where the directors made
subjective judgements, for example in respect of significant
accounting estimates that involved making assumptions and
considering future events that are inherently uncertain.
Capability of the audit in detecting irregularities, including
fraud
We focused on laws and regulations that could give rise to a
material misstatement in the financial statements, including, but
not limited to, the Companies Act 2006, the Financial Conduct
Authority's regulations, the Prudential Regulation Authority's
regulations, UK Listing Rules, the UK tax legislation and
equivalent local laws and regulations applicable to significant
component teams. One identified risk related to the execution of
structural reform required by the UK Financial Services (Banking
Reform) Act 2013; our audit procedures are explained in the key
audit matter in the Appendix. Further to this, our tests in
relation to laws and regulations included, but were not limited to,
review of the financial statement disclosures to underlying
supporting documentation, review of correspondence with and reports
to the regulators, review of correspondence with legal advisors,
enquiries of management, enquiries of legal counsel, review of
significant component auditors' work and review of internal audit
reports in so far as they related to the financial statements. We
also designed audit procedures at a group and significant component
level to respond to the risk of fraud. This included identifying
specific fraud criteria as part of our journals testing which were
relevant to HSBC Bank plc and its business, for example unusual
account combinations.
There are inherent limitations in the audit procedures described
above and the further removed non-compliance with laws and
regulations is from the events and transactions reflected in the
financial statements, the less likely we would become aware of it.
Also, the risk of not detecting a material misstatement due to
fraud is higher than the risk of not detecting one resulting from
error, as fraud may involve deliberate concealment by, for example,
forgery or intentional misrepresentations, or through
collusion.
Key audit matters
Key audit matters are those matters that, in the auditors'
professional judgement, were of most significance in the audit of
the financial statements of the current period and include the most
significant assessed risks of material misstatement (whether or not
due to fraud) identified by the auditors, including those which had
the greatest effect on: the overall audit strategy; the allocation
of resources in the audit; and directing the efforts of the
engagement team. These matters, and any comments we make on the
results of our procedures thereon, were addressed in the context of
our audit of the financial statements as a whole, and in forming
our opinion thereon, and we do not provide a separate opinion on
these matters. This is not a complete list of all risks identified
by our audit. The key audit matters are discussed further in the
Appendix.
How we tailored the audit scope
We tailored the scope of our audit to ensure that we performed
enough work to be able to give an opinion on the financial
statements as a whole, taking into account the structure of the
group and the parent company, the accounting processes and
controls, and the industry in which they operate.
HSBC Bank plc is structured into four divisions being Retail
Banking and Wealth Management, Commercial Banking, Global Banking
& Markets and Global Private Banking. The divisions operate
across a number of operations, subsidiary entities and branches
throughout Europe. Within the group's main consolidation and
financial reporting system, the consolidated financial statements
are an aggregation of the operations, subsidiary entities and
branches ('reporting units'). Each reporting unit submits their
financial information to the group in the form of a consolidation
pack.
The ring-fencing requirements of the UK Financial Services
(Banking Reform) Act 2013 and associated secondary legislation and
regulatory rules, required UK deposit-taking banks with more than
GBP25bn of 'core deposits' (broadly from individuals and small to
medium-sized businesses) to separate their UK retail banking
activities from their other wholesale and investment banking
activities by 1 January 2019. As a result, on 1 July 2018, the UK
Retail Banking and Wealth Management and the majority of the
Commercial Banking divisions were transferred from HSBC Bank plc
into a separately regulated legal entity, HSBC UK Bank plc (the
'ring-fenced bank'). This transaction had a significant impact on
the audit of HSBC Bank plc and was considered as part of the
scoping and execution of our testing.
In establishing the overall approach to the group and parent
company audit, we scoped using the balances included in the
consolidation pack. We determined the type of work that needed to
be performed over the reporting units by us, as the group
engagement team, or auditors within PwC UK and from other PwC
network firms operating under our instruction ('component
auditors').
As a result of our scoping, for the parent company we determined
that an audit of the complete financial information of the UK
Operations of the Bank was necessary, owing to its financial
significance. For group purposes, we additionally performed an
audit of the complete financial information of HSBC France. We
instructed component auditors, PwC UK and PwC France, to perform
the audits of these components. Our interactions with component
auditors included regular communication throughout the audit,
including visits to France, the issuance of instructions, a review
of working papers relating to the key audit matters and formal
clearance meetings. The group audit engagement partner was also the
partner on the audit of the UK Operations significant
component.
We then considered the significance of other reporting units in
relation to primary statement account balances. In doing this we
also considered the presence of any significant audit risks and
other qualitative factors (including history of misstatements
through fraud or error). For five reporting units, specific audit
procedures were performed over selected significant account
balances. For the remainder, the risk of material misstatement was
mitigated through group audit procedures including testing of
entity level controls and group and parent company level analytical
review procedures.
Certain group-level account balances (including goodwill) were
audited by the group engagement team.
Materiality
The scope of our audit was influenced by our application of
materiality. We set certain quantitative thresholds for
materiality. These, together with qualitative considerations,
helped us to determine the scope of our audit and the nature,
timing and extent of our audit procedures on the individual
financial statement line items and disclosures and in evaluating
the effect of misstatements, both individually and in aggregate on
the financial statements as a whole.
Based on our professional judgement, we determined materiality
for the financial statements as a whole as follows:
Group financial statements Parent company financial
statements
Overall materiality GBP282 million (2017: GBP183 GBP235 million (2017: GBP183
million). million).
How we determined 0.75% of Total Regulatory 0.75% of Total Regulatory
it Capital. Capital.
Rationale for benchmark Regulatory capital is used Materiality is determined
applied as a benchmark as it is considered as the lower of the group
to be a key driver of HSBC's materiality or 0.75% of the
decision making process and parent company's regulatory
is a primary focus for regulators. capital. 0.75% of the parent
company's regulatory capital
was lower.
In the prior year an adjusted profit before tax benchmark was
used to determine materiality. However, due to the change in the
nature of the group's business activities following the separation
of the ring-fenced bank, the basis for determining materiality was
re-evaluated and a regulatory capital based benchmark for
materiality was chosen instead.
For each component in the scope of our group audit, we allocated
a materiality that is less than our overall group materiality. The
range of materiality allocated across components was GBP10m to
GBP168m. Certain components were audited to a local statutory audit
materiality that was also less than our overall group
materiality.
We agreed with the Audit Committee that we would report to them
misstatements identified during our audit above GBP10 million
(group audit and parent company audit) (2017: GBP9 million) as well
as misstatements below those amounts that, in our view, warranted
reporting for qualitative reasons.
Conclusions relating to going concern
ISAs (UK) require us to report to you when:
-- the directors' use of the going concern basis of accounting
in the preparation of the financial statements is not appropriate;
or
-- the directors have not disclosed in the financial statements
any identified material uncertainties that may cast significant
doubt about the group's and parent company's ability to continue to
adopt the going concern basis of accounting for a period of at
least twelve months from the date when the financial statements are
authorised for issue.
We have nothing to report in respect of the above matters.
However, because not all future events or conditions can be
predicted, this statement is not a guarantee as to the group's and
parent company's ability to continue as a going concern.
Reporting on other information
The other information comprises all of the information in the
Annual Report and Accounts 2018 other than the financial statements
and our auditors' report thereon. The directors are responsible for
the other information. Our opinion on the financial statements does
not cover the other information and, accordingly, we do not express
an audit opinion or, except to the extent otherwise explicitly
stated in this report, any form of assurance thereon.
In connection with our audit of the financial statements, our
responsibility is to read the other information and, in doing so,
consider whether the other information is materially inconsistent
with the financial statements or our knowledge obtained in the
audit, or otherwise appears to be materially misstated. If we
identify an apparent material inconsistency or material
misstatement, we are required to perform procedures to conclude
whether there is a material misstatement of the financial
statements or a material misstatement of the other information. If,
based on the work we have performed, we conclude that there is a
material misstatement of this other information, we are required to
report that fact. We have nothing to report based on these
responsibilities.
With respect to the Strategic Report and Report of the
Directors, we also considered whether the disclosures required by
the UK Companies Act 2006 have been included.
Based on the responsibilities described above and our work
undertaken in the course of the audit, ISAs (UK) require us also to
report certain opinions and matters as described below.
Strategic Report and Report of the Directors
In our opinion, based on the work undertaken in the course of
the audit, the information given in the Strategic Report and Report
of the Directors for the year ended 31 December 2018 is consistent
with the financial statements and has been prepared in accordance
with applicable legal requirements.
In light of the knowledge and understanding of the group and
parent company and their environment obtained in the course of the
audit, we did not identify any material misstatements in the
Strategic Report and Report of the Directors.
Responsibilities for the financial statements and the audit
Responsibilities of the directors for the financial
statements
As explained more fully in the Statement of Directors'
Responsibilities set out on page 78, the directors are responsible
for the preparation of the financial statements in accordance with
the applicable framework and for being satisfied that they give a
true and fair view. The directors are also responsible for such
internal control as they determine is necessary to enable the
preparation of financial statements that are free from material
misstatement, whether due to fraud or error.
In preparing the financial statements, the directors are
responsible for assessing the group's and the parent company's
ability to continue as a going concern, disclosing as applicable,
matters related to going concern and using the going concern basis
of accounting unless the directors either intend to liquidate the
group or the parent company or to cease operations, or have no
realistic alternative but to do so.
Auditors' responsibilities for the audit of the financial
statements
Our objectives are to obtain reasonable assurance about whether
the financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an
auditors' report that includes our opinion. Reasonable assurance is
a high level of assurance, but is not a guarantee that an audit
conducted in accordance with ISAs (UK) will always detect a
material misstatement when it exists. Misstatements can arise from
fraud or error and are considered material if, individually or in
the aggregate, they could reasonably be expected to influence the
economic decisions of users taken on the basis of these financial
statements.
A further description of our responsibilities for the audit of
the financial statements is located on the FRC's website at:
www.frc.org.uk/auditorsresponsibilities. This description forms
part of our auditors' report.
Use of this report
This report, including the opinions, has been prepared for and
only for the parent company's member as a body in accordance with
Chapter 3 of Part 16 of the Companies Act 2006 and for no other
purpose. We do not, in giving these opinions, accept or assume
responsibility for any other purpose or to any other person to whom
this report is shown or into whose hands it may come save where
expressly agreed by our prior consent in writing.
Other required reporting
Companies Act 2006 exception reporting
Under the Companies Act 2006 we are required to report to you
if, in our opinion:
-- we have not received all the information and explanations we require for our audit; or
-- adequate accounting records have not been kept by the parent
company, or returns adequate for our audit have not been received
from branches not visited by us; or
-- certain disclosures of directors' remuneration specified by law are not made; or
-- the parent company financial statements are not in agreement
with the accounting records and returns.
We have no exceptions to report arising from this
responsibility.
Appointment
Following the recommendation of the HSBC Bank plc Audit
Committee, we were appointed by the directors on 31 March 2015 to
audit the financial statements for the year ended 31 December 2015
and subsequent financial periods. The period of total uninterrupted
engagement is 4 years, covering the years ended 31 December 2015 to
31 December 2018.
Simon Hunt
(Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
London
19 February 2019
Appendix: Key audit matters discussed with the Audit Committee ('AC')
The key audit matters are discussed below together with an
explanation of how the audit was tailored to address these specific
areas.
All key audit matters are applicable to both the group and
parent company.
Application of IFRS 9 in the calculation of impairment of loans and
advances
As this is the first year of adoption At each Audit Committee and Risk
of IFRS 9, there is limited experience Committee meeting there was a discussion
available to back-test the charge on changes to risk factors and other
for expected credit losses ('ECL') inputs within the models, geopolitical
with actual results. There is also risks, such as Brexit, as well as
a significant increase in the number discussions on individually significant
of data inputs required for the impairment loan impairments.
calculation. The data is sourced
from a number of systems that have The more judgemental interpretations
not been used previously for the of IFRS 9 made by management continued
preparation of the accounting records. to be discussed, in particular the
This increases risk around completeness application of forward economic
and accuracy of certain data used guidance, including the severity
to create assumptions and operate and magnitude of modelled downside
the models. scenarios; and associated considerations
of post model adjustments.
The credit environment has remained
benign for an extended period of As the control environment for the
time, in part due to low interest calculation of ECL under IFRS 9
rates and relative strength of the continued to be strengthened following
European economy. However, there initial adoption, we provided updates
are a number of headwinds to the on the changes being made and the
regional economy as well as certain results of our testing procedures.
country specific risks. As a result,
whilst the current levels of delinquencies
and defaults remains low, the risk
of impairment remains significant.
Controls were tested over:
* Model performance monitoring, including periodic
policy and independent model reviews, back testing of
performance and approval of model changes.
* Review and challenge of multiple economic scenarios
by an expert panel and internal governance committee.
* Inputs of critical data into source systems, and the
flow and transformation of data between source
systems to the impairment calculation engine.
* User acceptance testing over the automated
calculation of ECL to ensure it is performed in line
with business requirements.
* Review and challenge forums to assess the ECL output
and approval of post model adjustments.
* Approval of the key inputs, assumptions and
discounted cash-flows that support the significant
individual impairments.
Further substantive procedures included:
* Risk based testing of models, including independent
rebuild of certain assumptions.
* Testing the multiple economic scenarios and variables
using our economic experts to assess their
reasonableness.
* Testing of the critical data used in the year end ECL
calculation.
* Review of the SAS script codes for the impairment
engine against business requirements and our
expectations of how the calculation should operate.
* Testing discounted cash flows for a sample of
individually assessed loans including, in specific
instances, using experts to assess the valuation of
collateral.
Credit Risk Disclosures, page 35.
AC Report, page 74.
Note 34: Effects of reclassifications upon adoption of IFRS9, page
158.
Execution of structural reform required by the UK Financial Services
(Banking Reform) Act 2013
On 1 July 2018, the Retail Banking The application of predecessor accounting
and Wealth Management, Global Private and the method of allocation of
Banking, the majority of the Commercial goodwill to the ring-fenced bank
Banking and specific elements of was reviewed and discussed with
Global Banking and Markets divisions the Audit Committee.
of HSBC Bank plc were transferred
to HSBC UK Bank plc. The transfer In addition, we discussed the approach
was accounted for as a group reorganisation taken by management to identify
and predecessor accounting values and allocate customer accounts defined
applied to the balances transferred. by regulation as core deposits,
Relevant Financial Institutions
The separation of most financial and complex products. We also discussed
statement line items was straightforward, the results of quality assurance
however, the allocation of certain procedures undertaken by management
intangible assets, certain provisions to test the appropriateness of the
and specific balances in other assets allocation process.
and other liabilities involved a
higher degree of management judgement, We discussed with the Audit Committee
specifically: the appropriateness of allocations
involving a higher degree of judgement.
* the allocation of intangible assets based on an We also discussed the appropriateness
historic apportionment of central costs; of customer account allocations
to either HSBC Bank plc or HSBC
UK Bank plc.
* the nature of underlying transactions relating to
specific balances in other assets and other We discussed the results of our
liabilities; controls and substantive testing,
which found no material errors.
* the allocation of goodwill between the banks; and
* whether the separation of certain provisions was
appropriate and reasonable.
While not requiring substantial management
judgement, the allocation of customer
accounts was also a key driver for
assignment of multiple balances to
each bank and therefore also a key
area of audit focus.
Controls were tested over:
* The quality assurance measures performed by
management over customer allocations. Evidence
corroborating the conclusions drawn by management was
also obtained and reviewed.
* Internal governance over the separation of HSBC UK
Bank plc from HSBC Bank plc.
Further substantive procedures included:
* We assessed the appropriateness of the accounting
treatment applied by management.
* We tested the customers allocated to each entity and
assessed the nature of the customers and the
appropriateness of the sort-code applied.
* We recalculated the allocation of goodwill between
the entities.
* We obtained an understanding of management's approach
to judgemental allocations in relation to vacant
space provisions. We agreed the properties to the
entity fixed asset register together with the
associated vacant space provision. The allocation of
property to the entity fixed asset register was
tested.
* For other assets and other liabilities not aligned to
a specific customer, samples were selected and
evidence obtained to validate the nature of the
underlying transactions and corroborate the
allocation.
* In relation to intangible assets aligned to more than
one business line, the allocation percentage, based
on predefined rates upon which all central costs are
allocated, was recalculated.
AC Report, page 74.
Economic background and outlook - Structural reform, page 18
IT Access Management
The audit approach relies extensively Over the past 4 years, management
on automated controls and therefore implemented remediation activities
on the effectiveness of controls that have contributed to reducing
over IT systems. the risk over access management
in the financial reporting process.
In previous years, we identified The status of the remediation was
and reported that controls over access discussed at several Audit Committee
to applications, operating systems meetings.
and data in the financial reporting
process required improvements. Access
management controls are critical
to ensure that changes to applications
and underlying data are made in an
appropriate manner. Appropriate access
controls contribute to mitigating
the risk of potential fraud or errors
as a result of changes to application
and data.
However, issues related to privileged
access and business user access remained
unresolved on parts of the technology
infrastructure, requiring our audit
approach to respond to the risks
presented.
Access rights were tested over applications, operating systems and
databases relied upon for financial reporting. Specifically the audit
tested that:
* New access requests for joiners were properly
reviewed and authorised.
* User access rights were removed on a timely basis
when an individual left or moved role.
* Access rights to applications, operating systems and
databases were periodically monitored for
appropriateness.
* Highly privileged access was restricted to
appropriate personnel.
Other areas that were independently assessed included password policies,
security configurations, controls over changes to applications and
databases and that business users, developers and production support
did not have access to change applications, the operating system or
databases in the production environment.
As a consequence of the deficiencies identified, a range of other procedures
were performed:
* Where inappropriate access was identified, we
understood the nature of the access, and, where
possible, obtained additional evidence on the
appropriateness of the activities performed.
* Additional substantive testing was performed on
specific year-end reconciliations (i.e. custodian,
bank account and suspense account reconciliations)
and confirmations with external counterparties.
* Testing was performed on other compensating controls
such as review controls undertaken by management.
* Testing was performed over toxic combination
controls.
* A list of users' access permissions was obtained and
manually compared to other access lists where
segregation of duties was deemed to be of higher risk,
for example users having access to both core banking
and payments systems.
AC Report, page 74.
Effectiveness of internal controls, page 75.
Valuation of financial instruments
The financial instruments held by We discussed with the Audit Committee
HSBC range from those that are traded our risk assessment with respect
daily on active markets with quoted to valuation and the results of
prices, to more complex and bespoke our controls testing. This included
positions. The valuation of these a number of observations on how
complex financial instruments can controls may be improved including
require the use of prices or inputs controls over valuation models.
which are not readily observable
in the market. We also discussed the results of
Financial instruments classified our substantive testing which included
as Level 3 (L3), per the IFRS 13 independent revaluation of a range
fair value hierarchy, are valued of financial instruments, including
using some unobservable inputs. There a sample of Level 3 positions.
is a risk that certain L3 portfolios
are not valued appropriately due
to the complexity of the trades and/or
unobservability of some inputs.
Valuation of the following L3 portfolios
was therefore classified as a significant
risk for the audit: asset-backed
securities and certain long-dated
interest rate derivatives.
* We evaluated the design and tested the operating
effectiveness of the key controls supporting the
identification, measurement and oversight of the
valuation of financial instruments, including the
independent price verification process and governance
and reporting controls. This included review of the
year end independent price verification results by
the HSBC Bank plc Valuation Committee.
* Methodology and underlying assumptions of key
valuation adjustments, including the Credit Valuation
Adjustment, Debt Valuation Adjustment and Funding
Fair Value Adjustment, were assessed, and compared
with our knowledge of current industry practice.
Controls over the calculation of these adjustments
were also tested.
* We utilised our valuation specialists to perform
independent valuations to determine if management's
valuations fell within a reasonable range. The
revaluation covered a range of product classes and
was performed across Level 1, 2 and 3 of the group's
IFRS 13 fair value hierarchy. This testing
specifically included a sample of Level 3 positions
as at the balance sheet date. Where revaluation was
not possible, alternative testing procedures were
performed.
* As a response to the control findings noted, we
increased the sample of independent revaluations
performed.
AC Report, page 74.
Note 11: Fair values of financial instruments carried at fair value,
page 120.
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END
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