Connecting customers
to opportunities
HSBC Holdings plc
Annual Report and Accounts 2012
H S B C H O L D I N G S P L C
Annual Report and Accounts 2012
Contents / Highlights
This document comprises the Annual Report and Accounts
2012 for HSBC Holdings plc and its subsidiaries. It
contains the Report of the Directors and Financial
Statements, together with the Independent Auditor’s
Report thereon, as required by the UK Companies Act
2006. The Annual Review 2012 of HSBC Holdings plc is
published as a separate document. The Report of the
Directors on pages 2 to 346 and the Directors’
Remuneration Report on pages 347 to 367 have each been
drawn up in accordance with the requirements of English
law, and liability in respect thereof is also governed by
English law. In particular, the liability of the Directors for
these reports is solely to HSBC Holdings plc.
Additional information, including commentary
on 2011 compared with 2010, may be found in the
Form 20-F filed with the US Securities and Exchange
Commission and available on www.hsbc.com and
www.sec.gov.
Certain defined terms
Unless the context requires otherwise, ‘HSBC Holdings’
means HSBC Holdings plc and ‘HSBC’, the ‘Group’, ‘we’,
‘us’ and ‘our’ refers to HSBC Holdings together with its
subsidiaries. Within this document the Hong Kong Special
Administrative Region of the People’s Republic of China
is referred to as ‘Hong Kong’. When used in the terms
‘shareholders’ equity’ and ‘total shareholders’ equity’,
‘shareholders’ means holders of HSBC Holdings ordinary
shares and those preference shares classified as equity.
The abbreviations ‘US$m’ and ‘US$bn’ represent millions
and billions (thousands of millions) of US dollars,
respectively.
Financial statements
The consolidated financial statements of HSBC and the
separate financial statements of HSBC Holdings have
been prepared in accordance with International Financial
Reporting Standards (‘IFRSs’) as issued by the
International Accounting Standards Board (‘IASB’) and
as endorsed by the European Union (‘EU’). EU-endorsed
IFRSs may differ from IFRSs as issued by the IASB if, at
any point in time, new or amended IFRSs have not been
endorsed by the EU. At 31 December 2012, there were
no unendorsed standards effective for the year ended
31 December 2012 affecting these consolidated and
separate financial statements, and there was no difference
between IFRSs endorsed by the EU and IFRSs issued by
the IASB in terms of their application to HSBC.
Accordingly, HSBC’s financial statements for the year
ended 31 December 2012 are prepared in accordance
with IFRSs as issued by the IASB.
We use the US dollar as our presentation currency
because the US dollar and currencies linked to it form
the major currency bloc in which we transact and fund our
business. Unless otherwise stated, the information
presented in this document has been prepared in
accordance with IFRSs.
When reference to ‘underlying’ is made in tables or
commentaries, comparative information has been
expressed at constant currency (see page 25), eliminating
the impact of fair value movements in respect of credit
spread changes on HSBC’s own debt and adjusting for the
effects of acquisitions and disposals as reconciled on
page 28. Underlying RoRWA is defined and reconciled on
page 52.
Contents
Report of the Directors
Overview
Financial highlights ...............................................................
Group Chairman’s Statement ................................................
Group Chief Executive’s Business Review ..........................
Our disclosure philosophy .....................................................
Principal activities .................................................................
HSBC Values .........................................................................
Business and operating models .............................................
Strategic direction ..................................................................
Risk ........................................................................................
Key performance indicators ..................................................
2
4
8
12
13
13
14
17
19
22
Operating and Financial Review
Financial summary1 ...............................................................
Global businesses1 .................................................................
Products and services ............................................................
Geographical regions1 ...........................................................
79
Other information .................................................................. 118
Risk1 ....................................................................................... 123
Capital1 .................................................................................. 281
60
58
25
Corporate Governance1
Corporate Governance Report ............................................... 301
Biographies of Directors and senior management ................ 302
Board of Directors ................................................................. 309
Board committees .................................................................. 318
Internal control ...................................................................... 332
Going concern basis .............................................................. 334
Employees ............................................................................. 335
Directors’ Remuneration Report1 ........................ 347
Financial Statements and Other Information
Statement of Directors’ Responsibilities ............................... 368
Independent Auditor’s Report ............................................... 369
Financial Statements1
Financial statements .............................................................. 371
Notes on the financial statements .......................................... 383
Shareholder Information1
Shareholder information ........................................................ 516
Cautionary statement regarding forward-looking statements ..... 525
Abbreviations ........................................................................ 526
Glossary ................................................................................. 529
Index ...................................................................................... 537
1 Detailed contents are provided on the referenced pages.
Who we are and what we do
HSBC is one of the world’s largest banking and financial services organisations, with
around 6,600 offices in both established and faster-growing markets. We aim to be
where the economic growth is, connecting customers to opportunities, enabling
businesses to thrive and economies to prosper, and ultimately helping people to fulfil
their hopes and realise their ambitions.
We serve around 58 million customers through our four global businesses: Retail
Banking and Wealth Management, Commercial Banking, Global Banking and Markets,
and Global Private Banking. Our network covers 81 countries and territories in six
geographical regions: Europe, Hong Kong, Rest of Asia-Pacific, Middle East and North
Africa, North America and Latin America. Our aim is to be acknowledged as the
world’s leading international bank.
Listed on the London, Hong Kong, New York, Paris and Bermuda stock exchanges,
shares in HSBC Holdings plc are held by about 220,000 shareholders in 129 countries
and territories.
Highlights
• Profit before tax down 6% to US$20.6bn and revenue down 5% to US$68.3bn on a reported
basis.
• Underlying profit before tax up 18% to US$16.4bn.
• Continued to execute our strategy to grow, simplify and restructure the Group.
• Underlying revenue up 7% reflecting revenue growth, notably in Global Banking and Markets
and Commercial Banking.
• Achieved sustainable savings of US$2.0bn, taking our total annualised savings to US$3.6bn,
exceeding our cumulative target of US$2.5bn to US$3.5bn since 2011.
• Announced 26 disposals and closures of non-strategic businesses and non-core investments in
2012.
• Return on equity was 8.4%, down from 10.9% in 2011.
• Dividends declared in respect of 2012 US$8.3bn or US$0.45 per ordinary share, up 10% on
2011.
• Core tier 1 capital ratio increased during the year from 10.1% to 12.3%.
Cover image
Financing trade has always been at the heart of HSBC's business, especially in our home market of Hong Kong. Today,
Hong Kong International Airport is the world's busiest air cargo hub, with its freight volume accounting for over one-
third of the total value of Hong Kong's external trade.
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H S B C H O L D I N G S P L C
Report of the Directors: Overview
Financial highlights
Financial highlights
Earnings per share
Dividends per ordinary share1
Net assets per share
US$0.74 – down 20%
2011: US$0.92
2010: US$0.73
US$0.41
2011: US$0.39
2010: US$0.34
US$9.09 – up 7%
2011: US$8.48
2010: US$7.94
For the year
Profit before taxation
Underlying profit before taxation
Total operating income
US$20,649m – down 6%
US$16,385m – up 18%
US$82,545m – down 1%
2011: US$21,872m
2010: US$19,037m
2011: US$13,861m
2011: US$83,461m
2010: US$80,014m
Net operating income before
loan impairment charges and
other credit risk provisions
Profit attributable to the ordinary
shareholders of the parent company
US$68,330m – down 5%
US$13,454m – down 17%
2011: US$72,280m
2010: US$68,247m
2011: US$16,224m
2010: US$12,746m
At the year-end
Loans and advances
to customers
Customer accounts
Ratio of customer advances
to customer accounts
US$998bn – up 6%
US$1,340bn – up 7%
2011: US$940bn
2010: US$958bn
Total equity
2011: US$1,254bn
2010: US$1,228bn
Average total shareholders’
equity to average total assets
US$183bn – up 10%
2011: US$166bn
2010: US$155bn
6.2%
2011: 5.6%
2010: 5.5%
74.4%
2011: 75.0%
2010: 78.1%
Risk-weighted assets
US$1,124bn – down 7%
2011: US$1,210bn
2010: US$1,103bn
Capital ratios
Core tier 1 ratio
12.3%
2011: 10.1%
2010: 10.5%
Tier 1 ratio
13.4%
2011: 11.5%
2010: 12.1%
Total capital ratio
16.1%
2011: 14.1%
2010: 15.2%
2
Performance ratios
Credit coverage ratios
Loan impairment charges to
total operating income
Loan impairment charges to
average gross customer advances
Total impairment allowances to
impaired loans at year-end
9.9%
2011: 13.8%
2010: 16.9%
Return ratios
0.9%
2011: 1.2%
2010: 1.5%
41.7%
2011: 42.3%
2010: 43.0%
Return on average ordinary
shareholders’ equity2
Return on average
invested capital3
Post-tax return on
average total assets
Pre-tax return on average
risk-weighted assets
8.4%
2011: 10.9%
2010: 9.5%
8.0%
2011: 10.2%
2010: 8.7%
0.6%
2011: 0.6%
2010: 0.6%
1.8%
2011: 1.9%
2010: 1.7%
Efficiency and revenue mix ratios
Cost efficiency ratio4
Net interest income to
total operating income
Net fee income to
total operating income
Net trading income to
total operating income
62.8%
2011: 57.5%
2010: 55.2%
45.6%
2011: 48.7%
2010: 49.3%
19.9%
2011: 20.6%
2010: 21.7%
8.6%
2011: 7.8%
2010: 9.0%
Share information at the year-end
US$0.50 ordinary
shares in issue
Market
capitalisation
18,476m
US$194bn
2011: 17,868m
2010: 17,686m
2011: US$136bn
2010: US$180bn
London
£6.47
2011: £4.91
2010: £6.51
Closing market price
Hong Kong
HK$81.3
2011: HK$59.00
2010: HK$79.70
American
Depositary Share5
US$53.07
2011: US$38.10
2010: US$51.04
Over 1 year
Total shareholder return6
Over 3 years
Over 5 years
To 31 December 2012 .............................................. 139
Benchmarks:
– FTSE 1007 ............................................................... 110
– MSCI World8 .......................................................... 117
– MSCI Banks9 .......................................................... 128
104
121
124
106
113
111
97
68
For footnotes, see page 120.
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H S B C H O L D I N G S P L C
Report of the Directors: Overview (continued)
Group Chairman’s Statement
Group Chairman’s Statement
2012 was a year of considerable progress in
delivering on the strategic priorities which the Board
has tasked management to address. Our decision to
focus on reshaping the Group through targeted
disposals and closures and internal reorganisation is
paying dividends. It is bringing greater clarity and
focus and is delivering sustainable cost savings
while allowing incremental investment to be
available and directed towards the areas of greatest
opportunity.
This progress is all the more notable given that
during 2012, the banking sector, including HSBC,
faced continuing and in many ways unprecedented
challenges. Banking has been given a huge wake-up
call and we are determined to play our part in
restoring its reputation and thereby regaining
society’s trust. Thus our restructuring agenda is not
only justified economically but is helping the Group
shape its response to the media, the regulatory and
political challenges, and societal expectations which,
simply put, all revolve around restoring the trust of
all stakeholders. From depositors to investors,
regulators to employees, public policy makers to
consumer lobbyists we need to ensure the business
model of banking is fair, transparent, sustainable
and meeting its core objective of serving society.
Never has it been more important to put the
customer first and provide the means and support
to help them fulfil their financial aspirations and
ambitions. That is our prime purpose and one of
which we should never lose sight.
Over the last two years the Board was exercised
greatly by the major US regulatory and law
enforcement investigations we faced. I covered the
background to these investigations, settlement of
4
which we reached in December, in our Interim
Report.
Management is now delivering the required
enhancements to our control framework and on top
of this we have significantly augmented the Board’s
oversight and governance capabilities. This is dealt
with in more detail below.
Encouragingly, there is now growing external
recognition of the progress being made in delivering
against our stated strategic priorities. This, together
with our overweight exposure to the world’s more
attractive economies, contributed to a total
shareholder return of 39% over the year – 7%
from dividends paid and 32% from share price
appreciation. Over the course of the year the market
capitalisation of HSBC grew by US$58bn from
US$136bn to US$194bn, returning shareholders
once again to the position where their company is
worth more than its contributed capital. We
remained among the highest dividend payers in the
FTSE 100, a performance which we know is of great
importance to our shareholders.
The cover to this year’s Annual Report again
illustrates our strategy of connecting customers and
markets. The scene depicted is the cargo terminal at
Hong Kong International Airport, which has been
ranked as the busiest airport for international air
cargo since 1996. Today the airport’s trade
throughput represents over one third of Hong Kong's
external trade. HSBC’s connection with trade
financing and trade services through Hong Kong
goes back to our earliest days and remains one of our
core strengths. Projections of trade growth in Asia
and Hong Kong’s role therein reinforce our
investment focus in this area.
Performance in 2012
There was much to be positive about in HSBC’s
performance in 2012. The majority of our core
businesses in Asia, particularly in Hong Kong,
continued to perform well, achieving good
underlying revenue growth in the year. Increased
market confidence around eurozone recovery
contributed to a significant turnaround in Global
Banking and Markets results in Europe. Targeted
disposals and the continuing run-off from our exit
portfolios in the United States, together with
evidence of recovery in many housing areas were
reflected in significantly lower US loan impairment
charges.
Progress in managing costs to reflect a lower
economic growth environment in developed markets
was encouraging. Offsetting these positive factors,
credit demand remained muted throughout Europe,
low interest rates continued to constrain the value of
our liquid balance sheet and customer redress costs
continued to weigh heavily in the UK.
The Group Chief Executive’s Business Review
covers financial performance and progress on
strategy delivery in more detail.
Reported results include the benefit of profits
arising from the significant disposals made in the
year as well as bearing the burden of the fines and
penalties levied as part of the settlement with US
regulatory and law enforcement agencies and
increased customer redress provisions in the UK.
When the Board assesses management performance
as part of reward measurement, these disposal gains
are eliminated but the legal settlement and customer
redress costs are not.
Looking through the reported results to
underlying financial performance, the Board viewed
positively the 2012 outcome.
Although earnings per share of US$0.74 were
20% lower than 2011, this largely reflected a
US$9.1bn negative swing in the fair value of our
own debt as credit spreads tightened, together with
a higher tax rate.
With the Group’s capital position strengthened
from retained profits and from capital released from
the divestments made in the year, the Board has
approved a 29% increase in the final dividend in
respect of the year to US$0.18 per share, US$0.04
higher than the final dividend in respect of 2011.
Total dividends in respect of 2012 of US$8.3bn,
amounted to US$0.45 per share, US$0.9bn higher
than in 2011. The Board also intends to increase
the quarterly dividends in respect of the first three
quarters of 2013 by US$0.01 per share to US$0.10
per share.
Shareholders’ equity at the end of 2012 stood at
US$175bn, US$17bn or some 10 % higher than at
the beginning of the year. The core tier 1 capital
ratio strengthened from 10.1% to 12.3% and the
Group remains on track to deliver compliance with
the more onerous Basel III requirements in the
accelerated timetable being sought by UK regulators.
During 2012, the UK government increased the
rate of levy applied on the global balance sheets of
UK domiciled banks. The cost to HSBC of the
revised levy for the current year was US$571m of
which US$295m related to non-UK banking activity.
The 2012 levy, which is not tax deductible, is the
equivalent of US$0.03 per ordinary share and, as
indicated last year, would otherwise have been
available for distribution to shareholders or used to
strengthen the capital base further.
5
Progress on regulatory reform
2012 was a further year of progress in delivering key
elements of the regulatory reform agenda mandated
by the G20 in response to the financial crisis. After
a long consultation period, the proposed Liquidity
Coverage Ratio within the Basel III framework was
recalibrated to better match industry experience, and
so strengthen bank liquidity without unnecessarily
constraining credit formation.
The list of banks to be designated as globally
significant was announced and, as expected, HSBC
was one of four placed in the highest category.
Good progress was made on clarifying the possible
approaches to resolving the failure of a bank with
operations in multiple jurisdictions. One approach
was directly applicable to the subsidiarised model
favoured by HSBC.
On structural reform of banking entities, the
Liikanen Group in Europe produced its report for
consideration while draft alternatives have been
proposed in France and Germany. In the UK,
the Government substantially accepted the
recommendations of the Independent Commission
on Banking in a policy paper and a draft Financial
Services (Banking Reform) Bill is expected to be
approved in the first half of 2013. Thereafter, the
government has signalled its intention to pass
secondary legislation by the end of this parliament
in 2015, with final implementation of the new
regime by 2019.
The key structural change being legislated
remains the separation of certain banking activities
for personal and small business customers into a
ring-fenced bank with its own financial and
governance arrangements. The recently appointed
Parliamentary Commission on Banking Standards in
the UK has reviewed the proposed legislation and
inter alia recommended strengthening the ring fence
by empowering regulators to force full separation in
the event of attempts to frustrate the objectives of the
ring fence.
Ongoing work remains extensive. Major areas
of policy development covering augmenting loss
absorbency through bailing-in certain categories of
creditor, addressing the systemic impact of central
clearing counterparties, establishing a banking union
within the eurozone and revisiting the risk weighting
of assets to enhance transparency and consistency,
are among the most important.
On top of this, the UK Parliamentary
Commission on Banking Standards is currently
examining all aspects of conduct, behaviour and
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H S B C H O L D I N G S P L C
Report of the Directors: Overview (continued)
Group Chairman’s Statement
culture with a view to making recommendations
designed to restore trust and confidence in banks.
We are committed to working constructively
with public policy makers and our regulators to give
effect to these proposals. We note, however, two
areas of concern.
First, it is perplexing that, after the great
international effort invested in the G20 programme
of sound and consistent global financial regulation,
and the extent of reform currently underway, an
increasing number of countries now appear to
be acting unilaterally, thereby putting globally
consistent regulation at risk of fragmentation and
‘balkanising’ the capital and liquidity resources of
firms.
Second, we believe the sheer scale and timescale
of the reform programme is hampering investors’
line of sight to the long-term returns available.
Resolving these two issues, which will require
inter-governmental direction and co-operation,
would contribute to enhancing the ability of the
industry to support the economic growth agenda
now being prioritised in most parts of the world.
Enforcing global standards
The Board is determined to adopt and enforce the
highest behavioural and compliance standards in
HSBC. For well documented reasons, the last two
years have been extremely damaging to HSBC’s
reputation and to our perception of ourselves. We
faced serious failings both in the application of our
standards and in our ability to identify, and so
prevent, misuse and abuse of the financial system
through our networks. Our strategy is entirely
configured to eliminate the possibility of this
happening again.
We have apologised unreservedly to all our
stakeholders and have paid huge penalties both in
monetary cost and reputational damage. More
important than apologies, however, are the steps
being taken to prevent recurrence. Management
under Stuart Gulliver, the Group Chief Executive,
is leading the work to simplify business and so
reinforce risk management and control.
Our success in meeting our objectives will be
subject to independent validation not simply through
ongoing regulatory review but additionally through
the appointment of an independent Monitor who will
report to both UK and US authorities. We welcome
the additional rigour this will bring to the process of
upgrading and enforcing our global standards.
6
To reinforce the Board’s ability to exercise
rigorous governance over these endeavours, we
announced the creation of a new Board committee,
the Financial System Vulnerabilities Committee
on 30 January 2013. This committee will provide
governance, oversight and policy guidance over the
framework of controls and procedures designed to
identify areas where HSBC may become exposed
and, through that exposure, expose the financial
system more broadly to financial crime or system
abuse.
Five subject matter experts drawn from the
highest levels of public service will support the
committee. Their expertise includes the combating
of organised crime, terrorist financing, narcotics
trafficking, tax evasion and money laundering as
well as expertise in intelligence gathering and
international payments systems. They will provide
invaluable guidance and advice, and most
importantly challenge, as we strengthen our
capabilities and enforce the highest standards.
Further details of the background and experience
of these individuals are contained in the Directors’
Report.
Recognising the need to augment the Board’s
own experience and expertise we have also added
specialist expertise at Board level.
Board changes
At the end of 2012 we said farewell to Narayana
Murthy, who stepped down from the Board after
serving with distinction for five years. Narayana, as
co-founder and long-term CEO of Infosys, brought
to the Board exceptional expertise in technology,
operational efficiency and outsourcing matters as
well as an in-depth knowledge of India and of
international business through his experience on
many multinational and educational boards. On
behalf of the Board and shareholders I want to
record our appreciation and gratitude for his
contribution to HSBC.
We welcome two new directors to the Board.
Renato Fassbind joined the Board on 1 January
and will serve on the Audit and Remuneration
Committees. Renato brings to the Board
considerable international business and financial
expertise from a distinguished career in industrial,
service and financial companies. He is currently
Vice Chairman of the Supervisory Board and a
member of the audit and the compensation
committees of Swiss Reinsurance Company,
a member of the Supervisory Board and audit
committee of Kühne + Nagel International AG
and a member of the Supervisory Board of the
Swiss Federal Audit Oversight Authority.
around the world and, in 2012, 2,717 members of
staff volunteered to support the programme.
Renato stepped down as Chief Financial Officer
and a member of the executive board of Credit
Suisse Group in September 2010, having served in
that role since 2004.
Jim Comey joins the Board today and will
serve on the newly created Financial System
Vulnerabilities Committee. Jim brings to the Board
outstanding governance experience from both the
private and public sectors. In his private sector roles
he acted as General Counsel to leading international
businesses and in public life served at the apex of
law enforcement in the United States. Most recently,
within the private sector, Jim Comey served as
General Counsel of Bridgewater Associates, LP and
prior to that as Senior Vice President and General
Counsel of the Lockheed Martin Corporation. In
public life, from 2003 to 2005, he served as US
Deputy Attorney General, where he was responsible
for supervising the operations of the Department of
Justice, and chaired the President’s Corporate Fraud
Task Force. From 2002 to 2003, he served as US
Attorney for the Southern District of New York.
Fuller details of their background and
experience are set out in the Directors’ Report.
Social contribution
Much is currently being written and debated about
the role banks should play in society. In large part,
this reflects the fact that the economic success that
underpins a harmonious society depends upon
sustainable financing, confidence and trust in the
financial system. That trust is founded upon the
broader role that banks play in their local
communities.
Within HSBC, many of my colleagues
make tremendous personal contributions to their
communities and I want to take this opportunity to
pay tribute to them. HSBC’s outreach in terms of
community investment is primarily in the areas
of education and the environment and, in 2012, in
financial terms it amounted to some US$120m.
In 2012, we extended our commitment to
support disadvantaged and vulnerable young people
who are neither in education, employment nor
training. We support local and international charities
working in this area, and also run our own staff-
driven ‘Future First’ programme, which helps street
children, children in care and orphans to access
education. Initiatives under this programme are
developed and supported by HSBC colleagues
Importantly in all our community work we
increasingly look to involve our staff to reinforce our
links with the communities we serve. In 2012, for
example, 114,982 HSBC colleagues spent 724,650
hours in volunteer activity.
We also launched the HSBC Water Programme
last year. This is a five-year, US$100m commitment
to support Water Aid, WWF and Earthwatch to
deliver freshwater and sanitation to poor rural
communities in Asia and Africa, educate local
communities on sustainable water management in
five major river basins around the world, and involve
more than 7,500 HSBC staff with local conservation
partners to address urban water management issues
and learn to carry out scientific water research tasks.
Looking ahead
It is often said that people come together in
adversity, learning lessons from the past and each
other to create the bonds that ensure a better future.
I believe that this has happened within HSBC. The
last year has been a difficult one for all at HSBC as
we addressed the restructuring of the firm against a
lower-growth economic backdrop and with legacy
issues and regulatory challenges imposing a further
set of imperatives. Our 270,000 staff have had to
face up to bewildering descriptions of HSBC that
contrasted with the way they conduct their
relationships with the firm’s customers and clients.
What has been inspirational is how everyone has
pulled together, focused on the future and committed
to do all and everything necessary to restore a
reputation that we all believe can be positively
distinctive. On behalf of the Board, I want to thank
all our employees for that commitment and their
loyal support.
I also want to thank our clients and customers,
our shareholders, our regulators and those in
government who believe, as we do, that we will meet
the commitments we have made to allow us better to
serve the communities who entrust their financial
needs to HSBC.
D J Flint, Group Chairman
4 March 2013
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H S B C H O L D I N G S P L C
Report of the Directors: Overview (continued)
Group Chief Executive’s Business Review
Group Chief Executive’s
Business Review
HSBC made significant progress in 2012 despite a
challenging operating environment characterised by
low economic growth and a changing regulatory
landscape. We continued to pursue the strategy
outlined in May 2011, announcing the sale or closure
of 26 businesses or non-core investments, surpassing
our sustainable savings target and recording
underlying revenue growth in the majority of our
faster-growing regions. We also reached agreement
with the US authorities and the FSA in relation to
past inadequate compliance with anti-money
laundering and sanction laws. Although reported
pre-tax profit fell by 6% to US$20.6bn in 2012,
underlying profit, which includes the impact of fines
and penalties and UK customer redress provisions
totalling US$4.3bn, grew by 18%. This was
primarily due to revenue growth, notably in Global
Banking and Markets and Commercial Banking, and
lower loan impairment charges in North America.
We regard this as a good performance.
Our strategy is founded on a clear sense of
purpose – to be where the growth is, connecting
customers to opportunities and enabling businesses
to thrive, economies to prosper and individuals to
realise their ambitions. This has given us clear
parameters around the way that we behave and
conduct business and where and how we compete.
Since 2011, we have created a consistent global
structure with strong governance, consisting of four
global businesses and 11 global functions. In 2012,
we continued to execute our strategic priorities to
grow, restructure and simplify HSBC.
We grew our business in 2012, achieving
underlying revenue growth in most of our priority
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markets. The growth in these markets was a factor
in generating a record reported profit before tax in
Commercial Banking as we maintained our position
as the world’s largest global trade finance bank, as
reported in the Oliver Wyman Global Transaction
Banking Survey 2012. The collaboration between
Commercial Banking and Global Banking and
Markets delivered incremental gross revenues of
over US$0.1bn in 2012. Wealth Management
achieved more than US$0.5bn of additional
revenues, although further progress is required to
achieve our strategic goals.
The restructuring of the US business progressed
in 2012 as we continued to run off the Consumer and
Mortgage Lending portfolio, resulting in a US$14bn
reduction in the value of average risk-weighted
assets and a reduced loss before tax of US$3.1bn,
reflecting improved loan impairment charges.
Following our agreement with the US authorities and
the FSA in December 2012, we are adopting global
standards as part of our effort to raise our practices
to an industry-leading level. This is part of our
wholehearted commitment to protect the integrity of
the organisation and the financial system, and to do
our part to fight financial crime.
We further simplified the Group structure in
2012, bringing the total number of announced
disposals and closures of non-strategic businesses
or non-core investments to 47 since the beginning
of 2011, including 4 in 2013.
During 2012, we completed the disposal of the
Card and Retail Services business and the upstate
New York branches in the United States, and the
sale or closure of our retail businesses in Thailand,
Honduras, El Salvador and Costa Rica, as well as
the full service retail brokerage businesses in
Canada. Additionally we announced the sale of
our operations in Colombia, Peru, Uruguay and
Paraguay.
Following completion of all the announced
transactions we will have completed the refocus
of Retail Banking and Wealth Management
(‘RBWM’) to 20 of our 22 home and priority
markets, which represented 98% of the RBWM,
excluding US CRS and the US run-off portfolio,
profit before tax in 2012, plus a limited number
of important network and smaller markets.
Notably, on top of the above, we reached
agreement in December 2012 to sell our stake in
Ping An for an aggregate cash consideration, the
equivalent of US$9.4bn. This transaction completed
in two tranches, in December 2012 and February
2013, generating a profit of US$3.0bn. In 2012
our share of Ping An’s earnings was US$0.8bn.
We also made progress in eliminating
unnecessary organisational layers and streamlining
various processes, achieving an additional US$2.0bn
in sustainable cost savings. This takes our total
annualised savings to US$3.6bn, surpassing our
cumulative target of US$2.5bn to US$3.5bn of
sustainable savings since 2011. Taken together, these
changes have made HSBC much easier to manage
and control.
Although we made some good progress in 2012,
the cost efficiency ratio at 62.8% and ROE at 8.4%
were outside our target ranges. These were both
affected by UK customer redress provisions, as well
as payments we were required to make as part of the
settlement of the investigations noted above.
Implementing our strategy can add significant
value to HSBC. We are on the right track and remain
fully committed to achieving our ambition of being
the world’s leading international bank.
We are investing to build this distinctive
international competitive position.
In Retail Banking and Wealth Management,
we accelerated the transformation of the Wealth
Management business in HSBC with infrastructure
investment to improve customer experience and so
drive growth. Technology solutions improved the
customer offering in foreign exchange services and
we introduced enhanced risk profiling and strategic
financial planning tools.
In Commercial Banking we maintained our
investment in the faster-growing regions in support
of the strong network that helps connect customers
with both developed and developing markets as they
expand internationally. A great deal of attention is
being devoted to the increasing internationalisation
of the renminbi. During 2012, we were the first bank
to settle cross-border renminbi trade across six
continents with capabilities in over 50 countries,
offering a competitive advantage to our customers as
the renminbi positions to be a major global trade and
investment currency. We have expanded our global
network of dedicated China desks to cover our top
markets, representing about half of the world’s GDP.
These are staffed by Mandarin-speaking experts who
support mainland Chinese businesses to identify new
opportunities to expand overseas.
In Global Banking and Markets, we invested
in selective recruitment to support key strategic
markets. We continued the successful build-out of
our equities and e-FX platforms to broaden our
product offerings. In Hong Kong we led the market
in Hong Kong dollar bond issuance and were the
leading bookrunner for high yield bonds in Asia,
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excluding Japan. We now also rank in the top five of
equities brokers in Hong Kong. We reinforced our
leading position in the renminbi market in 2012,
supporting a number of significant client transactions
and, as an entity, issuing the first international
renminbi bond outside Chinese sovereign territory.
Reflecting our capabilities in Latin America, the
Middle East and Asia-Pacific, HSBC was recognised
as the ‘Best Global Emerging Markets Debt House’
at the 2012 Euromoney Awards for Excellence and
was also recognised as ‘RMB House of the Year’ at
the 2012 Asia Risk Awards.
I would like to thank all of our employees for
their dedication and endurance throughout a difficult
year for the bank. They have shown a real sense of
passion, pride and duty in the face of critical and
often deeply embarrassing media headlines and I
too am very grateful for their efforts.
Group performance headlines
• Reported profit before tax was US$20.6bn,
US$1.2bn lower than in 2011, including
US$5.2bn of adverse movements in the fair
value of our own debt attributable to credit
spreads compared with favourable movements
of US$3.9bn in 2011. This variance of
US$9.1bn was partially offset by an increase of
US$7.5bn in respect of gains from the disposal
of businesses, notably from the sale of the US
Card and Retail Services business and the
agreement to sell our stake in Ping An.
• Underlying profit before tax was US$16.4bn, up
US$2.5bn, mainly due to higher revenues and
lower loan impairment charges and other credit
risk provisions. These factors were partially
offset by an increase in operating expenses,
primarily reflecting the settlement of the
investigations into past inadequate compliance
with anti-money laundering and sanction laws
and increased provisions for UK customer
redress programmes.
• Underlying revenues rose by 7%, led by Global
Banking and Markets where the majority of our
businesses grew, notably Credit and Rates in
Europe, as spreads tightened and investor
sentiment improved following stimuli by central
banks globally. Commercial Banking also
recorded revenue growth as customer loans and
advances increased in all regions, with over half
of this growth coming from our faster-growing
regions of Hong Kong, Rest of Asia-Pacific and
Latin America, driven by higher trade-related
lending. Customer deposits also rose as we
continued to attract deposits through Payments
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Report of the Directors: Overview (continued)
Group Chief Executive’s Business Review
and Cash Management products. In addition,
Retail Banking and Wealth Management
experienced revenue growth across all faster-
growing regions, in particular Hong Kong and
Latin America. These factors were partially
offset by lower revenue in Global Private
Banking, as we focused on repositioning our
business model and target client base.
• We achieved growth in reported loans and
advances to customers of more than US$57bn
during the year, notably in residential mortgages
and term and trade-related lending. Customer
deposits increased by over US$86bn, allowing
us to maintain a strong ratio of customer
advances to customer accounts of 74.4%.
• Underlying costs were US$4.3bn higher than in
2011 including payments of US$1.9bn made as
part of the settlement of the investigations into
past inadequate compliance with anti-money
laundering and sanctions laws, additional
provisions in respect of UK customer redress
programmes of US$1.4bn, and a credit in 2011
of US$0.6bn relating to defined benefit pension
obligations in the UK which did not recur.
Operating expenses also increased due to
inflationary pressures, for example, on wages
and salaries, in certain of our Latin American
and Asian markets. Other increases arose from
investment in strategic initiatives including
certain business expansion projects, enhanced
processes and technology capabilities, and
increased investment in regulatory and
compliance infrastructure primarily in the US.
• The reported cost efficiency ratio deteriorated
from 57.5% to 62.8% and from 63.4% to 66.0%
on an underlying basis, as a result of higher
notable cost items, as described above.
• Return on equity was 8.4%, down from
10.9% in 2011, primarily reflecting the adverse
movement in fair value of own debt attributable
to movements in credit spreads, a higher tax
charge and higher average shareholders’ equity.
Similarly, the Group’s pre-tax return on average
risk-weighted assets (‘RoRWA’) for 2012 was
1.8% or 1.5% on an underlying basis. Adjusting
for the negative returns on US consumer finance
business and legacy credit in Global Banking
and Markets, the remainder of the Group
achieved a RoRWA of 1.9% in 2012 and 2.1%
in 2011.
• The core tier 1 ratio increased during the year
from 10.1% at the end of 2011 to 12.3%. This
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increase was driven by capital generation and a
reduction in risk-weighted assets following
business disposals.
• The Basel III capital rules began their staged
6-10 year implementation in some parts of the
world in January 2013. Nevertheless, the FSA
has set our 2013 capital target calculation on
a Basel III end point basis. This effectively
accelerates our implementation of Basel III
by several years relative to European regulations
and other global banks. Consistent with this, we
now operate to an internal capital target set on a
Basel III end point basis of 9.5%-10.5%.
• Profit attributable to ordinary shareholders was
US$13.5bn, of which US$8.3bn was declared in
dividends in respect of the year. This compared
with US$2.9bn of variable pay awarded (net of
tax) to our employees for 2012.
• Dividends per ordinary share declared in respect
of 2012 were US$0.45, an increase of 10%
compared with 2011, with a fourth interim
dividend for 2012 of US$0.18 per ordinary share.
Global standards
As a global organisation which trades on its
international connectivity, we recognise that we
have a responsibility to play a part in protecting
the integrity of the financial system. In order to
do this effectively, in April 2012 we committed to
implementing industry-leading controls to increase
our ability to combat financial crime.
The highest compliance standards are being
adopted and enforced across HSBC and our
Compliance function has already been strengthened
considerably. More than 3,500 people are now
employed globally to work on compliance and the
cost of the Compliance function has approximately
doubled since 2010 to more than US$500m. We
have created and recruited externally for two new
Compliance leadership roles – Global Head of
Regulatory Compliance and Head of
Group Financial Crime Compliance – and appointed
a number of senior staff with extensive experience of
handling relevant international legal and financial
issues. A review of ‘Know Your Customer’ files is
under way across the entire Group and an enhanced
global sanctions policy has been devised to ensure
that we do not do business with key illicit actors
anywhere, in any currency. In addition, we have
moved to protect HSBC from the risks inherent in
bearer shares by curtailing the ability of clients using
bearer share companies to open accounts or transact
with HSBC.
We have also introduced a new filter, against
which all existing and prospective clients and
businesses are screened. This sixth filter focuses
on financial crime risk. It means that where we
cannot practically or economically apply the global
standards to which we are committed we will stop
writing business altogether or significantly restrict
our activities. This policy is consistent with our
commitments to adopt global standards, to simplify
our business and operations, and to de-risk our
business activities.
Implementing these standards will be a critical
component of our work in 2013.
Outlook
Whilst the operating environment for financial
institutions remains difficult, our core business will
continue to reap the benefit of recovering economic
growth in mainland China and its positive impact
on other faster-growing regions. We expect the
developing economies, led by mainland China, to
continue to grow briskly at 5.4%, while developed
economies should see more gradual growth of 1.0%.
We forecast growth of 8.6% in mainland China
in 2013.
The US economy should continue its gradual
recovery, with continuing quantitative easing
measures supporting a recovery in the housing
market, although the recovery is still not strong
enough to support a sustained reduction in
unemployment. We expect higher growth in Latin
America in 2013, due in part to a modest recovery
in Brazil. The biggest risk to the world economy
remains an uncharted shock from Europe and an
exacerbation of the sovereign debt crisis. We remain
cautious on the outlook for Europe due to weak
demand, slow growth, and political and regulatory
uncertainty.
Finally, I am pleased to report that the business
had a good start to the year. Our results in 2013
will include a dilution gain of US$1.2bn on our
investment in Industrial Bank, following its issue of
additional share capital to third parties on 7 January.
There was also a US$0.6bn net gain on the
completion of the sale of our shares in Ping An,
which offsets the adverse fair value movement on
the forward contract included within our 2012
results. On 19 February 2013 we announced the
sale of our operations in Panama for US$2.1bn.
S T Gulliver, Group Chief Executive
4 March 2013
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Report of the Directors: Overview (continued)
Disclosure philosophy // HSBC’s vision > Principal activities / HSBC Values
Our disclosure philosophy
HSBC strives to maintain the highest
standards of disclosure in our reporting
It has long been our policy to provide disclosures
that help investors and other stakeholders understand
the Group’s performance, financial position and
changes thereto. In accordance with this policy, the
information provided in the ‘Notes on the Financial
Statements’ and the ‘Report of the Directors’ goes
beyond the minimum levels required by accounting
standards, statutory and regulatory requirements and
listing rules. For this reason, we wholeheartedly
supported the work of the Enhanced Disclosure Task
Force (‘EDTF’) in 2012.
Enhanced Disclosure Task Force
Following increased demands for enhanced risk
disclosures, the Financial Stability Board established
the EDTF in May 2012 with the goal of developing
principles for enhancing risk disclosures by major
banks, recommending disclosure improvements and
identifying existing leading practice disclosures by
global financial institutions, starting with December
2012 risk disclosures and continuing into 2013 and
beyond.
The task force brought together senior officials
and experts from financial institutions, investors
and audit firms from around the world and, on
29 October 2012, the EDTF issued its report,
‘Enhancing the Risk Disclosures of Banks’.
Our approach
HSBC’s Annual Report and Accounts 2011
contained disclosures consistent with a majority of
the report’s recommendations, including some
disclosures referenced in the report as ‘leading
practice’. We have implemented the
recommendations of the report in 2012 and will
further enhance our risk disclosures in 2013.
Guide to the implementation of EDTF
recommendations in this Report
Our response to selected EDTF disclosure
recommendations of particular significance may be
found on the following pages, and in HSBC’s
Pillar 3 Disclosures 2012 report:
Type of risk
Disclosure
General
Risk Governance and risk
management strategies/
business models
Capital adequacy and risk-
weighted assets
• Risks to which the business is exposed, risk appetite and stress testing.
• Top and emerging risks.
• Group Risk Committee.
• Diagram of risk exposures by global business.
• Reconciliation of the accounting balance sheet to the regulatory balance sheet.
• Regulatory capital flow statement.
• Analysis of credit risk by Basel asset class.
Liquidity
Funding
Market risk
• Risk-weighted assets flow statements for each risk-weighted asset type.
• Liquid asset buffer.
• Encumbrance.
• Maturity analysis by balance sheet line.
• Sources of funding and funding strategy.
• Relationship between the market risk measures for trading and non-trading portfolios
and balance sheet classification.
Credit risk
• Policies for impaired loans and reconciliation of movement in impaired loans.
Other risks
• Loan forbearance policies.
• Credit risk mitigation and collateral.
• Quantified measures on the management of operational risk.
Page
124 to 128
130 to 136
323 to 328
20
287
285
Pillar 3
Disclosures 2012
23 to 28 and
32 to 38
282 and 284
206 to 207
211 to 214
485 to 492
209 to 211
218 to 219
162 and
254 to 259
257
163 to 168
227 to 230
For a detailed list of all disclosure enhancements prepared in response to the recommendations of the EDTF, along with their locations,
see page 119.
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HSBC’s vision
Purpose
Values
Strategy
Outcome
Reason
why we
exist
How we
behave and
conduct
business
Where and
how we
compete
We aim to be where the economic growth is, connecting customers to
opportunities, enabling businesses to thrive and economies to prosper, and
ultimately helping people to fulfil their hopes and realise their ambitions.
Act with courageous integrity by being:
• dependable and doing the right thing;
• open to different ideas and cultures; and
• connected to customers, regulators and each other.
• International network connecting faster-growing and developed markets
• Develop Wealth Management services and invest in retail banking only in
markets where we can achieve profitable scale
Being the
world’s leading
international
bank
Our pro forma post-tax profit allocation in 201211:
• 60% of earnings retained
• 29% to shareholders as dividends
• 11% variable pay
For footnote, see page 120.
Principal activities
Our purpose is to enable businesses to
thrive and economies to prosper, helping
people fulfil their hopes and realise their
ambitions.
HSBC is one of the largest banking and financial
services organisations in the world, with a market
capitalisation of US$194bn at 31 December 2012.
We are headquartered in London.
Our products and services are delivered to
clients through four global businesses, Retail Banking
and Wealth Management (‘RBWM’), Commercial
Banking (‘CMB’), Global Banking and Markets
(‘GB&M’) and Global Private Banking (‘GPB’).
We operate through long-established businesses
and have an international network of some 6,600
offices in 81 countries and territories in six
geographical regions; Europe, Hong Kong, Rest
of Asia-Pacific, Middle East and North Africa
(‘MENA’), North America and Latin America.
Taken together, our five largest customers do
not account for more than 1% of our income. We
have contractual and other arrangements with
numerous third parties in support of our business
activities. None of the arrangements is individually
considered to be essential to the business of the
Group.
Continuing the Group-wide review of our
businesses, 26 disposals or closures of non-strategic
and non core investments were announced in 2012
and a further four in 2013, taking the total to 47
since 2011. The most significant of these
transactions which were completed in 2012 were the
sale of the US Card and Retail Services business and
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the upstate New York branches for a total gain of
US$4.0bn. In December 2012, we announced an
agreement to sell our entire shareholding in Ping An
Insurance (Group) Company of China, Limited
(‘Ping An’), the sale of which was completed on
6 February 2013, generating a gain of US$3.0bn. For
further information on all disposals, see page 27.
In 2012, we merged our operations in Oman
with those of the Oman International Bank S.A.O.G.
(‘OIB’) and acquired the onshore retail and
commercial banking businesses of Lloyds Banking
Group in the United Arab Emirates (see page 470).
HSBC Values
Embedding global standards across HSBC in
a consistent manner is a top priority and will
shape the way we do business.
The role of HSBC Values in daily operating practice
is fundamental to our culture in the context of the
financial services sector and the wider economy.
This is particularly so in the light of
developments and changes in regulatory policy,
investor confidence and society’s view of the role of
banks. We expect our executives and employees to
act with courageous integrity in the execution of
their duties by being:
•
•
•
dependable and doing the right thing;
open to different ideas and cultures; and
connected with our customers, communities,
regulators and each other.
We continue to enhance our values-led culture
by embedding HSBC Values into how we conduct
our business and in the selection, assessment,
recognition and training provided to staff.
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Report of the Directors: Overview (continued)
HSBC Values / Business and operating models
Ensuring our conduct matches our values
In line with our ambition to be recognised as the
world’s leading international bank, we aspire to
lead the industry in our standards of conduct. As
international markets become more interconnected
and complex and, as threats to the global financial
system grow, we are strengthening further the
policies and practices which govern how we do
business and with whom.
Like any business, we greatly value our
reputation. HSBC’s success over the years is due in
no small part to our reputation for trustworthiness
and integrity. In April 2012, as part of this effort, we
committed to adopting and enforcing the highest
compliance standards across HSBC. Doing so will
help us to achieve three key objectives:
•
strengthen our capabilities to combat the
ongoing threat of financial crime;
• make consistent – and therefore simplify –
how we monitor and enforce high standards
at HSBC; and
•
ensure that we consistently apply our values so as
to serve positively the customers and societies
who entrust their financial needs to HSBC.
Under the supervision of HSBC’s Global
Standards Steering Meetings of the Group
Management Board (‘GMB’), we are already
strengthening policies and processes in a number of
important areas, described on the right.
We are also reinforcing the status of compliance
and standards as an important element of how we
assess and reward senior executives, and rolling out
communication, training and assurance programmes
to ensure that our staff understand and meet their
responsibilities.
We have adopted the UK Code of Practice for
the Taxation of Banks and seeks to apply the spirit
as well as the letter of the law in all the territories in
which it operates. We deal with tax authorities in an
open and honest manner. We are strengthening our
policies and controls with the objective of ensuring
our services are not used by clients seeking to evade
their tax obligations.
A new committee of the HSBC Holdings Board,
the Financial System Vulnerabilities Committee, will
provide governance, oversight and policy guidance
over the framework of controls and procedures
designed to identify areas where HSBC may become
exposed and through that exposure, expose the
financial system more broadly to financial crime or
system abuse.
14
Global standards execution framework – priority
areas
Financial crime filter
Under the Group’s strategy described on page 17, we analyse
different markets against five financial filters to help
us determine where to do business and the type of business we
can do in line with our values and financial return objectives.
In 2012, we added a sixth filter under which we also analyse
all new and existing business to limit activity and client
acquisition in jurisdictions with a high risk of financial crime.
Tax transparency
We are strengthening our policies and controls with the
objective of ensuring that HSBC’s services are not used by
clients seeking to evade their tax obligations.
Sanctions
We have expanded our application of financial sanctions to
ensure that the most demanding standards are enforced for all
currencies and in all jurisdictions. Through application of these
standards, we screen clients and all cross-border payments to
prevent the use of HSBC’s banking services for the benefit of
blacklisted countries, companies and individuals.
Information sharing
We are extending the sharing of key compliance information
between different parts of HSBC, to the extent permitted by
law, for the purpose of managing our exposure to financial
crime.
Customer due diligence
We are applying a globally consistent approach to the
knowledge needed to accept or retain a customer relationship.
When any customer or potential customer is considered an
unacceptable reputational risk – or otherwise does not meet
our standards – that determination will be applied globally.
Affiliates’ due diligence
We are building a single central repository holding all required
due diligence information on each of our affiliates in order to
facilitate seamlessly cross-border transactions on behalf of our
clients.
Bearer shares
Shares not registered to any owner, but beneficially owned
by the person who has physical possession of the share
certificates, carry inherent risks relating to money laundering
and tax evasion. We have set out minimum, highly restrictive
standards, applicable in all markets, for dealing with customers
who utilise bearer shares.
Business and operating models
Our business model is based on an
international network connecting faster-
growing and developed markets.
Our businesses are organised to serve a cohesive
portfolio of markets, as tabulated below.
Business model
We take deposits from our customers and use these
funds to make loans, either directly or through the
capital markets. Our direct lending includes
residential and commercial mortgages and overdrafts,
and term loan facilities. We finance importers and
exporters engaged in international trade and provide
advances to companies secured on amounts owed to
them by their customers. In addition, we offer a wide
variety of products and financial services including
broking, asset management, financial advisory, life
insurance manufacturing, corporate finance, markets,
securities services and alternative investments. We
provide these products for clients ranging from
governments to large and mid-market corporates,
small and medium-sized enterprises (‘SME’s), high
net worth individuals and retail customers.
Our operating income is primarily derived from:
•
•
net interest income – interest income we earn
on customer loans and advances and on our
surplus funds, less interest expense we pay on
interest-bearing customer accounts and debt
securities in issue;
net fee income – fee income we earn from the
provision of financial services and products to
customers; and
HSBC’s market structure
•
net trading income – income from trading
activities primarily conducted in Global
Markets, including Foreign Exchange, Credit,
Rates and Equities trading.
At our Investor Day in May 2012, we outlined
our geographical priorities where we expect future
growth opportunities to be concentrated. We have
defined the UK and Hong Kong as our home
markets, and a further 20 countries as priority
growth markets. These 22 markets accounted for
over 90% of our profit before tax in 2012, and will
be the primary focus of capital deployment. Network
markets are markets with strong international
relevance which serve to complement our
international network, operating mainly through
CMB and GB&M. Our combination of home,
priority growth and network markets covers around
85-90% of all international trade and financial flows.
The final category, small markets, includes
those where our operations are of sufficient scale to
operate profitably, or markets where we maintain
representative offices. This structure is illustrated
below.
Hong Kong
and Rest of
Asia-Pacific
• Hong Kong
• UK
Europe
Middle East and
North Africa
North
America
Latin
America
• France
• Germany
• Switzerland
• Turkey
• Egypt
• Saudi Arabia
• UAE
• Canada
• USA
• Argentina
• Brazil
• Mexico
• Australia
• Mainland China
• India
• Indonesia
• Malaysia
• Singapore
• Taiwan
• Vietnam
• Operations primarily focused on international clients and businesses of CMB and GB&M
• Together with home and priority markets these cover 85-90% of international trade and capital flows
• Markets where HSBC has profitable scale and focused operations
• Representative Offices
Home
markets
Priority
growth
markets
Network
markets
Small
markets
Operating model
Holding company
HSBC has a matrix management structure which
includes global businesses, geographical regions and
global functions. Global businesses are responsible
for setting globally consistent business strategies
and operating models. Geographical regions execute
business strategies set by the global businesses.
Global functions, including HSBC Technology and
Services, support and facilitate the execution of the
strategy.
HSBC Holdings plc, the holding company of the
Group, is listed in London, Hong Kong, New York,
Paris and Bermuda. HSBC Holdings is the primary
provider of equity capital to its subsidiaries and
provides non-equity capital to them when necessary.
Under authority delegated by the Board of
HSBC Holdings, the GMB is responsible for
management and day-to-day running of the Group,
15
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H S B C H O L D I N G S P L C
Report of the Directors: Overview (continued)
Business and operating models / Strategic direction
within the risk appetite set by the Board. The Board,
through the GMB, works to ensure that there are
sufficient cash resources to pay dividends to
shareholders, interest to bondholders, expenses and
taxes.
HSBC Holdings does not provide core funding
to any subsidiary, nor is a lender of last resort and
does not carry out any banking business in its
own right. HSBC has a legal entity-based Group
structure, with subsidiaries operating under their
own boards of directors as separately capitalised,
ring-fenced entities, implementing Group strategy
and delivering Group products and services, in most
cases in the country or territory in which they are
domiciled.
Main business activities by global business
Global businesses
Our four global businesses are responsible for
developing, implementing and managing their
business propositions consistently across the Group,
focusing on profitability and efficiency. They set
their strategies within the confines of the Group
strategy in liaison with the geographical regions,
are responsible for issuing planning guidance
regarding their businesses, are accountable for
their profit and loss performance, and manage their
headcount.
The main business activities of our global
businesses are summarised below. Further details
are provided on page 60.
Global
businesses
Liability
driven
Asset
driven
RBWM
CMB
GB&M
GPB
• Deposits
• Account services
• Deposits
• Payments and cash
management
• Deposits
• Payments and cash
• Deposits
• Account services
management
• Balance sheet
management
• Credit and lending
• Credit and lending
• Trade and receivables
• Credit and lending
• Asset and trade finance
• Credit and lending
finance
Fee driven
and other
• Asset management
• Wealth solutions and
financial planning
• Broking12
• Life insurance
manufacturing
For footnotes, see page 120.
• Commercial insurance
and investments
• Corporate finance13
• Markets14
• Securities services
• Asset management15
• Financial advisory16
• Broking12
• Corporate finance (via
GB&M)13
• Alternative investments17
Geographical regions
Global functions
Our global functions are Communications, Company
Secretaries, Corporate Sustainability, Finance,
Human Resources, Internal Audit, Legal, Risk
(including Compliance), Strategy and Planning,
Marketing, and HSBC Technology and Services,
our global service delivery organisation. The
global functions establish and manage all policies,
processes and delivery platforms relevant to their
activities, are fully accountable for their costs
globally and are responsible for managing their
headcount.
The geographical regions share responsibility for
executing the strategies set by the global businesses.
They represent the Group to clients, regulators,
employee groups and other stakeholders; allocate
capital; manage risk appetite, liquidity and funding
by legal entity; and are accountable for profit and
loss performance in line with global business plans.
Within the geographical regions, the Group is
structured as a network of regional banks and locally
incorporated regulated banking entities. Each bank is
separately capitalised in accordance with applicable
prudential requirements and is required to consider
its risk and maintain a capital buffer consistent with
the Group’s risk appetite for the relevant country
or region. The banking entities manage their own
funding and liquidity within parameters set centrally.
16
Strategic direction
Our strategic objective is to become the
world’s leading international bank.
Our strategic direction is aligned to two long-term
trends:
•
International trade and capital flows – the
world economy is becoming ever more
connected. Growth in world trade and cross-
border capital flows continues to outstrip growth
in average gross domestic product. Financial
flows between countries and regions are highly
concentrated, and over the next decade we
expect 35 markets to generate 90% of world
trade growth with a similar degree of
concentration in cross-border capital flows.
• Economic development and wealth creation –
we expect economies currently deemed
‘emerging’ to have increased five-fold in size by
2050, benefiting from demographics and
urbanisation, by which time they will be larger
than the developed world. By then, we expect
19 of the 30 largest economies will be markets
that are currently described as emerging.
HSBC is one of the few truly international
banks and our advantages lie in the extent to which
our network corresponds with markets relevant
to international financial flows, our access and
exposure to high growth markets and businesses,
and our strong balance sheet, which helps to
generate a resilient stream of earnings.
Based on these long-term trends and our
competitive position, our strategy has two parts:
• Network of businesses connecting the world –
HSBC is well positioned to capture the growing
international financial flows. Our global reach
and range of services put us in a strong position
to serve corporate clients as they grow from
small enterprises into large and international
corporates. Our access to local retail funding
and our suite of international products allows
us to offer distinctive solutions for these clients
profitably. We will focus on ‘South-South’ trade,
connecting faster-growing economies with each
other.
• Wealth management and retail with local scale –
social mobility and wealth creation in the faster-
growing markets in which we are positioned
will generate demand for financial services
which we will meet through our Wealth
Management and GPB businesses. We will
only invest in retail businesses in markets
where we can achieve critical mass.
17
To implement this strategy we have set priorities
across three areas to simplify, restructure and grow
the Group, as described below.
Simplifying HSBC
We will continue to make HSBC easier to manage
and control. This includes (i) running off legacy
assets in the US and in GB&M, (ii) addressing
fragmentation in our business portfolio through
our six filters disposing of non-strategic businesses,
and (iii) improving organisational efficiency.
In 2012, we added a sixth filter to the existing
five strategic evaluation criteria used to assess our
business (international connectivity, economic
development, profitability, cost efficiency and
liquidity). The sixth filter requires compliance
with our global standards on financial crime and
involves the assessment of existing and new client
relationships and activities against those standards.
Run-off portfolios
Run-off portfolios comprise Consumer and
Mortgage Lending portfolios and certain related
treasury services in the US and, in GB&M, a legacy
credit business. The latter comprises a separately
identifiable, discretely managed business comprising
Solitaire Funding Limited (‘Solitaire’), securities
investment conduits, asset-backed securities, trading
portfolios and credit correlation portfolios, derivative
transactions entered into with monoline insurers
and certain structured credit transactions.
We continue to run off US legacy consumer
assets and are actively analysing opportunities to
reduce risk and improve returns.
Run-off of portfolio receivables in the US
101
11
16
74
US$bn
120
100
80
60
40
20
0
Compound annual
growth rate 19%
79
7
11
61
58
7
51
49
5
44
43
4
39
2008
2009
2010
2011
2012
Real estate
Non-real estate (unsecured)
Vehicle finance
18
For footnote, see page 120.
We have identified segments of the real estate
portfolio in the US that represent a high risk and/or a
high operational burden or may be sold on a capital
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H S B C H O L D I N G S P L C
Report of the Directors: Overview (continued)
Strategic direction / Risk
accretive basis. We have also identified the non-real
estate portfolio for sale to reduce operational risk.
In GB&M, decisions to hold or sell legacy
assets depend on whether the net present value of
future cash flows from the assets (e.g. the terminal
value net of funding and operational costs and the
cost of capital) exceed the total of the expected loss
on sale and the costs of the transaction.
Addressing fragmentation
Fragmentation of the business is being addressed
using the six filters to guide strategic actions.
Using the six filters in decision-making
(i) implementing consistent business models;
(ii) re-engineering global functions;
(iii) re-engineering operational processes; and
(iv) streamlining IT.
Our approach to organisation, talent and values
8 by 8
structure
• Maximum of 8 layers between Group CEO and frontline
Increased spans of control (8 reports per manager)
•
4 global
businesses
• With target business and operating models
• As non-strategic businesses are exited, we can organise
resources at the centre
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• To manage resources globally
• Easier to enforce global controls
Talent
• More visibility for our global talent pool
• Creating opportunities for talented individuals
What is the
strategic
relevance?
Are the current
returns
attractive?
Do we adhere to
global risk standards?
Values
(Guiding principle –
courageous integrity)
• Led from the top and cascaded through the organisation
– ensuring global adherence to high standards
• Fully integrated into performance management
1. Connectivity
3. Profitability
6. Financial crime risk
2. Economic
development
4. Efficiency
5. Liquidity
Low
High
High
Medium/low
Yes
No
Yes
No
Invest
Turnaround/
improve
Continue
as is
Discontinue/dispose
Since 2011 we have announced and completed a
significant number of disposals:
Announced transactions19
Completed
Still to complete
25
Number
8
14
2011
2012/2013
Key
• Afore
• HSBC
Insurance
(UK) Ltd
• US Card and
Retail
Services
• US branches
• Ping An
• Bao Viet
Holdings
• HSBC Bank
(Panama)
S.A.
For footnote, see page 120.
Improving organisational efficiency
We continued to make headway with the Four
Programmes that we launched in May 2011 designed
to simplify HSBC and make the Group easier to
manage and control. The Four Programmes are
18
Restructuring HSBC
We will restructure certain businesses to adapt to
the new environment, including GB&M, our US
franchise and GPB.
Global Banking and Markets
Product profitability for the industry as a whole is
declining with client activity relatively subdued and
regulatory changes reducing available capital and
liquidity while, at the same time, posing significant
challenges to some traditional business models.
Overall, there is downward pressure on returns on
capital.
GB&M is well positioned for the new business
environment, with its deep and diversified client
base, network of markets covering the majority of
global financial flows, global product capabilities
and diversified funding base.
GB&M is actively managing its legacy credit
exposures. In 2012, risk-weighted assets (‘RWA’s)
decreased mainly because of downgrades to
positions which resulted in a change from being
risk-weighted to being deducted from capital. A
clear economic framework has been put in place for
decision-making over when and how to dispose of
legacy investments.
With regard to its ongoing business activities,
GB&M manages its RWAs comprehensively and
pro-actively, which helps mitigate RWA growth
arising from regulatory and model changes.
Our US businesses
Our US operations are being reshaped to focus on
core activities, with the sale of the US Card and
Retail Services business and the upstate New York
branches and the repositioning of our activities
towards international businesses.
• CMB is now focused on five hubs contributing
over 50% of US corporate imports and exports,
including the West Coast Southeast and
Midwest.
• Global Banking serves top-tier multinationals
and Global Markets (New York) provides a hub
for international clients across America and
globally, providing US dollar funding.
• RBWM and GPB target internationally mobile
clients in large metropolitan centres on the West
and East coasts.
Global Private Banking
The private banking industry faces challenges
from stricter regulatory requirements, particularly
to its international banking model, and increasing
competition to capture new wealth inflows. To meet
these challenges and better serve the needs of our
clients, GPB is repositioning its business to focus
on priority markets and improve its operational
standards in the following ways:
•
•
•
•
operational risk and compliance – GPB will
adhere to the highest standards in the industry,
and will continue to strengthen its compliance
and risk framework, focusing on global
standards and tax transparency;
integrated operating model – GPB has
implemented a new global operating model
that will provide better integration and
coordination between geographical regions,
and it will complete the roll-out of improved
data security and compliance governance,
systems and processes;
integration with the Group – GPB will intensify
collaboration with CMB to access wealth
created by entrepreneurs who already bank
with HSBC on the business side. GPB will
also contribute to a seamless Group wealth
proposition for personal customers; and
capturing growth – GPB will focus investment
on the most attractive developed and faster-
growing wealth markets where it can build
access to well established client franchises
and strong local and international product
capabilities.
Growing HSBC
We continue to position HSBC for growth. We also
continue to benefit from the closer coordination and
collaboration among our four global businesses to
19
capture significant revenue opportunities utilising,
in particular, CMB’s potential for increasing referrals
and cross-selling with GB&M and GPB.
Faster-growing regions20 as a share of Group data
2007
2012
PBT
64%
Revenue21
39%
55%
Gross loans
and advances
to customers
24%
Deposits from
customers
41%
39%
47%
2007 – 2012
difference
percentage
points (pp)
105%
US$6bn
41pp
US$9bn
16pp
US$151bn
15pp
US$190bn
6pp
Headcount
57%
65%
c.(12,545) FTE
(8pp)
100%
100%
Faster growing
Developed
For footnotes, see page 120.
We will actively deploy capital in our home
and priority growth markets (see ‘HSBC’s market
structure’ on page 15), access faster-growing markets
and all major trade corridors and capture growth
opportunities in trade finance as competitors
deleverage.
Our aim in executing our strategy is to be
regarded as the world’s leading international bank.
We have defined financial targets to achieve a return
on equity of between 12% and 15% with a core tier 1
ratio of between 9.5% and 10.5%, and achieve a cost
efficiency ratio of between 48% and 52%. We have
also defined Key Performance Indicators to monitor
the outcomes of actions across the three areas of
capital deployment, cost efficiency and growth
(see page 22).
Risk
As a provider of banking and financial
services, risk is at the core of our day-to-day
activities.
The chart below is designed to provide a high level
guide to how HSBC’s business activities are reflected
in our risk measures and in our balance sheet.
The third party assets and liabilities shown
provide a guide to the proportion of the Group’s
balance sheet which is contributed by each of them.
In addition, we have used the regulatory RWAs to
illustrate the relative size of the risks each of them
incur.
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H S B C H O L D I N G S P L C
Report of the Directors: Overview (continued)
Risk
Exposure to risks arising from the business activities of global businesses
HSBC
Global
business
Business
activities
RBWM
CMB
GB&M
GPB
• Deposits
• Accounts services
• Credit and lending
• Asset management
• Wealth solutions and
financial planning
• Broking
• Life insurance
manufacturing
• Deposits
• Payments and cash
management
• Credit and lending
• International trade
and receivables
finance
• Commercial
insurance and
investments
• Deposits
• Payments and cash
management
• Balance sheet
management
• Credit and lending
• Asset and trade
finance
• Corporate finance
• Markets
• Securities services
• Deposits
• Account services
• Credit and lending
• Asset management
• Financial advisory
• Broking
• Corporate finance
(via GB&M)
• Alternative
investments
Other
(including Holding
Company)
• HSBC holding
company and
central operations
Balance
sheet22
• Assets
• Customer
accounts
US$bn
535
562
• Assets
• Customer
accounts
US$bn
363
338
• Assets
• Customer
accounts
US$bn
1,859
332
• Assets
• Customer
accounts
US$bn
118
106
• Assets
• Customer
accounts
US$bn
187
2
• Credit risk
• Operational risk
US$bn
232
45
• Credit risk
• Operational risk
US$bn
366
31
• Credit risk
• Counterparty
credit risk
• Operational risk
• Market risk
US$bn
259
48
41
55
• Credit risk
• Operational risk
US$bn
18
4
• Credit risk
• Operational risk
US$bn
25
–
Liquidity and funding risk, Pension risk, Fiduciary risk, Reputational risk, Compliance risk,
Sustainability risk and Insurance risk, which is predominantly in RBWM and CMB.
RWAs
Risk
profile
For footnote, see page 120.
In carrying out its business activities, HSBC
incurs a range of risks, some of which are measured
and managed via capital, some by other mechanisms.
For the former, we use both regulatory and economic
capital. Currently, the Group’s risk appetite is most
affected by the regulatory capital dimension as it
exceeds economic capital. The table above shows the
Pillar 1 regulatory capital demand for those risks and
is represented by RWAs. Under this regulatory
capital framework, the capital invested in our
Insurance business is deducted from regulatory
capital; as at 31 December 2012, the capital invested
in our Insurance business was US$10.1bn. HSBC is
also exposed to other risks as shown in the table
above. The regulatory capital required against these
other risks is covered within the total capital that
HSBC holds.
We have identified a comprehensive suite of
risk factors which encompasses the broad range of
risks we are exposed to, but may not necessarily be
deemed as top or emerging risks. The risk factors
inform our ongoing assessment of our top and
emerging risks. This assessment may result in our
risk appetite being revised.
20
Risk factors
Our businesses are exposed to a variety of risk
factors that could potentially affect the results of
our operations or financial condition. These are:
Macroeconomic and geopolitical risk
• Current economic and market conditions may
adversely affect our results.
• We have exposure to the ongoing economic crisis
in the eurozone.
• We are subject to political and economic risks in
the countries in which we operate, including the
risk of government intervention.
• Changes in foreign currency exchange rates may
affect our results.
Macro-prudential, regulatory and legal risks
to our business model
• Failure to comply with certain regulatory
requirements would have an adverse material
effect on our results and operations.
• We are subject to a number of legal and
regulatory actions and investigations, the
outcomes of which are inherently difficult to
predict, but unfavourable outcomes could have a
material adverse effect on our operating results
and brand.
• Unfavourable legislative or regulatory
developments, or changes in the policy of
regulators or governments, could generate model
risk and could have a significant adverse effect on
our operations, financial condition and prospects.
• The UK Government has proposed draft
legislation for banking reforms based on the
recommendations of the Independent
Commission on Banking. Additional proposals
are being considered in France, Germany and
the EU and any resulting structural changes
could have a material adverse effect on us.
• We are subject to tax-related risks in the countries
in which we operate which could have a material
adverse effect on our operating results.
Risks related to our business operations,
governance and internal control systems
including compliance
• Our risk management measures may not be
successful.
• Operational risks are inherent in our business.
• Our operations are subject to the threat of
fraudulent activity.
• Our operations are subject to disruption from the
external environment.
• Our operations utilise third party suppliers.
• Our operations are highly dependent on our
information technology systems.
• Our operations have inherent reputational risk.
• We may suffer losses due to employee
misconduct.
• We rely on recruiting, retaining and developing
appropriate senior management and skilled
personnel.
• Our financial statements are based in part on
assumptions and estimates which, if inaccurate,
could cause material misstatement of the results
and financial position of the Group.
• Third parties may use us as a conduit for illegal
activities without our knowledge, which could
have a material adverse effect on us.
• We may not achieve all the expected benefits of
our strategic initiatives.
Risks related to our business
• We have significant exposure to counterparty risk
within the financial sector and to other risk
concentrations.
• Market fluctuations may reduce our income or
the value of our portfolios.
• Liquidity, or ready access to funds, is essential to
our businesses.
• Any reduction in the credit rating assigned to
HSBC Holdings, any subsidiaries of HSBC
Holdings or any of their respective debt securities
could increase the cost or decrease the availability
of our funding and adversely affect our liquidity
position and interest margins.
• Risks concerning borrower credit quality are
inherent in our businesses.
• Our Insurance business is subject to risks relating
to insurance claim rates and changes in insurance
customer behaviour.
• HSBC Holdings is a holding company and,
as a result, is dependent on dividends from its
subsidiaries to meet its obligations, including
obligations with respect to its debt securities, and
to provide profits for payment of future dividends
to shareholders.
• We may be required to make substantial
contributions to our pension plans.
21
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Report of the Directors: Overview (continued)
Risk / KPIs
Top and emerging risks
We classify certain risks as ‘top’ or ‘emerging’. We
define a ‘top risk’ as being a current, emerged risk
which has arisen across any of our risk categories,
regions or global businesses and has the potential to
have a material impact on our financial results or our
reputation and the sustainability of our long-term
business model, and which may form and crystallise
within a one-year horizon. We consider an ‘emerging
risk’ to be one which has large uncertain outcomes
which may form and crystallise beyond a one-year
horizon and, if it were to crystallise, could have a
material effect on our long-term strategy.
Our approach to identifying and monitoring top
and emerging risks is informed by the risk factors.
All of our activities involve, to varying degrees,
the measurement, evaluation, acceptance and
management of risk or combinations of risks which
we assess on a Group-wide basis. Top and emerging
risks fall under the following three broad categories:
• macroeconomic and geopolitical risk;
• macro-prudential, regulatory and legal risks to
•
our business model; and
risks related to our business operations,
governance and internal control systems.
During 2012, our senior management paid
particular attention to a number of top and emerging
risks. The current list is summarised below:
Macroeconomic and geopolitical risk
• Emerging markets slow down.
• Macroeconomic risks within developed economies.
• Increased geopolitical risk in certain regions.
Macro-prudential, regulatory and legal risks to our
business model
• Regulatory developments affecting our business model and
Group profitability.
• Regulatory investigations, fines, sanctions and requirements
relating to conduct of business and financial crime
negatively affecting our results and brand.
• Dispute risk.
Risks related to our business operations, governance and
internal control systems
• Regulatory commitments and consent orders including
under the Deferred Prosecution Agreements.
• Challenges to achieving our strategy in a downturn.
• Internet crime and fraud.
• Level of change creating operational complexity and
heightened operational risk.
• Information security risk.
• Model risk.
A detailed account of these risks is provided on
page 131. All of them are regarded as top risks.
Further comments on expected risks and
uncertainties are made throughout the Annual Report
and Accounts 2012, particularly in the section on
Risk, pages 123 to 249.
Risk appetite
Risk appetite is a key component of our management
of risk and describes the types and level of risk we
are prepared to accept in delivering our strategy. Our
risk appetite is set out in the Group’s Risk Appetite
Statement and is central to the annual planning
process. Global businesses, geographical regions and
global functions are required to articulate their risk
appetite statements. They are discussed further on
page 126.
Our risk appetite may be revised in response to
the top and emerging risks we have identified.
Key performance indicators
The Board of Directors and the GMB monitor
HSBC’s progress against its strategic
objectives. Progress is assessed by
comparison with our strategy, our operating
plan and our historical performance using
both financial and non-financial measures.
From time to time the Group reviews its key
performance indicators (‘KPIs’) in light of its
strategic objectives and may in the future adopt new
or refined measures, or modify or adjust existing
targets, to better align the KPIs to our strategic
objectives.
The GMB remains focused on improving our
capital deployment to support the achievement of
our medium-term target for return on equity of
between 12% and 15%, utilising the six filter
analysis across our portfolio of businesses. We will
continue to evaluate our businesses in 2013 using
this methodology.
Employee engagement has been monitored
through annual Global People Surveys. In 2012,
quarterly Pulse Surveys were introduced, and the
Global People Surveys scheduled biennially. The
next Global People Survey will be in 2013. As the
Pulse Surveys were not designed to report employee
engagement information comparable with that
derived from the Global People Surveys, we have
not disclosed this KPI in 2012.
22
Strategy
Restructuring HSBC – improving the way we deploy capital
Return on average ordinary
shareholders’ equity2
Core tier 1 capital ratio10
Advances to core funding
ratio23
10.9
9.5
10.5
10.1
9.4
3
0
1
6
0
0 1
0
1
8.4
7.0
8
9
6
8
8
7
1
9
9
68
8
5
7
3
7
0
7
12.3
2010
2011
2012
4.7
5.1
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'09
'10
'11
'12
'08
'09
'10
'11
'12
HSBC
UK
HBAP
HSBC
US
Other
entities
Measure: (percentage) profit attributable
to ordinary shareholders divided by
average ordinary shareholders’ equity.
Target: to maintain a return in the medium
term of between 12% and 15%.
Outcome: return on average ordinary
shareholders’ equity remained outside
our target range and was 2.5 percentage
points below 2011. The latter primarily
reflected adverse fair value movements on
own debt attributable to credit spreads,
compared with favourable movements in
2011, a higher tax charge and higher
average shareholders’ equity.
Measure: (percentage) ratio of core tier 1
capital comprising shareholders’ equity
and related non-controlling interests less
regulatory deductions and adjustments to
total risk-weighted assets.
Measure: loans and advances to customers
as a percentage of the total of core
customer deposits and term funding with
a remaining term to maturity in excess of
one year.
Target: to maintain a strong capital base
to support the development of the business
and meet regulatory capital requirements at
all times.
Outcome: the increase in core tier 1
capital ratio to 12.3% was driven by capital
generation and a reduction in RWAs
following business disposals, notably the
disposal of the US Card and Retail
Services business and derecognition of
Ping An as an associate.
Target: to maintain an advances to core
funding ratio below limits set for each
entity.
Outcome: the operating entities reported
remained inside their advances to core
funding limits of between 70% and 115%
during 2012, except for one operating
entity reported within the total of HSBC’s
other principal entities which operated with
a limit of 125% during the year. This limit
has been reduced to 115% for 2013.
Strategy
Simplifying HSBC – a lean and values-driven organisation
Cost efficiency
(2012: underlying cost efficiency 66.0%)
Basic earnings
per ordinary share
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60.1
57.5
55.2
52.0
0.41
0.34
0.92
0.73
0.74
'08
'09
'10
'11
'12
'08
'09
'10
'11
'12
Measure: (percentage) total operating expenses divided by net
operating income before loan impairment and other credit risk
provisions.
Measure: (US$) level of basic earnings generated per ordinary
share.
Target: to be between 48% and 52%, a range within which
Target: to deliver consistent growth in basic earnings per share.
Outcome: earnings per share decreased in 2012 reflecting adverse
fair value movements on own debt attributable to credit spreads,
compared with favourable movements in 2011, and a higher tax
charge which resulted in a decrease in reported profits.
business is expected to remain to accommodate both returns to
shareholders and the need for continued investment in support of
future business growth.
Outcome: the ratio remained outside the target range. On a
reported basis, revenues decreased primarily due to adverse fair
value movements on own debt attributable to credit spreads,
coupled with higher costs in part reflecting a charge in respect of
fines and penalties as part of the settlement of investigations into
HSBC’s past inadequate compliance with anti-money laundering
and sanctions laws as well as an increase in provisions relating
to UK customer redress programmes. On an underlying basis,
revenue growth was more than offset by the increase in costs.
23
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H S B C H O L D I N G S P L C
Report of the Directors: Overview (continued)
KPIs // Financial summary > Use of non-GAAP financial measures
Growing HSBC – continuing to position ourselves for growth
Strategy
Risk-adjusted revenue growth
(2012: underlying growth 13%)
Dividends per ordinary
share growth
37
11
14
10
6
(8)
'08
(0.2)
(30)
'09
'10
'11
'12
(29)
'08
(47)
'09
'10
'11
'12
Measure: (percentage) increase in reported net operating income
after loan impairment and other credit risk charges since last year.
Measure: (percentage) increase in dividends per share since last
year, based on dividends paid in respect of the year to which the
dividend relates.
Target: to deliver consistent growth in risk adjusted revenues.
Target: to deliver sustained dividend per share growth.
Outcome: reported risk-adjusted revenue was broadly in line with
2011. On an underlying basis, there was an increase due to
revenue growth, notably in GB&M and CMB, and lower loan
impairment charges, notably in North America.
Outcome: dividends per share increased by 10%.
Customer recommendation
Brand value
Measure: we measure our customer satisfaction through an
independent market research survey of retail banking customers
in selected countries, using a specific customer recommendation
index (‘CRI’) to score performance. We benchmark our
performance against key competitors in each market and set
targets relative to our peer group of banks.
Target: the Group target is for 75% of all the markets (based on
their weighted revenue) to meet their CRI targets.
Outcome: RBWM failed to make its target of 75% as a
consequence of reputational issues in certain of our major
developed markets that adversely affected customers’ perception
of the bank in the third quarter of 2012. We saw a good recovery
in the fourth quarter but, taking the overall averaged annual
position into account, we only met our target in 38% of our
weighted revenue. 55% of the weighted revenue target was
within two points (from a 100-point scale).
For CMB, we changed our measures in 2012 for customer
satisfaction to reflect the strategic focus of the business.
Previously, we only surveyed small business customers in a
limited number of markets and measured customer
recommendation. For 2012, we introduced a new measure of our
performance through a ‘client engagement’ survey conducted for
us by a third party. This provides a more complete perspective
for our performance across all our CMB segments and will give
us a competitive benchmark in 13 of our top markets. In 2012,
therefore, we set benchmarks but not targets. We will set targets
for 2013 and report results in the future.
For footnotes, see page 120.
1st place
1st place
US$28.5bn
US$28.5bn
3rd place
3rd place
US$27.4bn
US$27.4bn
1st place
1st place
US$27.6bn
US$27.6bn
3rd place
3rd place
US$22.9bn
US$22.9bn
2010
2010
2011
2011
2012
2012
2013
2013
Measure: in 2011, we moved our brand measure to the Brand
Finance valuation method as reported in The Banker Magazine.
This is our second year of using this benchmark. The Brand
Finance methodology gives us a more complete measure of the
strength of the brand and its impact across all business lines and
customer groups. It is a wholly independent measure and is
publicly reported.
Target: a top three position in the banking peer group.
Outcome: The HSBC brand moved from first to third in the
Brand Finance ranking and suffered a substantial reduction in
value. We achieved our target of a top three position but, in
consultation with the Brand Finance organisation, we have
seen reputational issues cited as a major factor in our reduced
performance in 2012.
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review
Financial summary > Consolidated income statement
Financial summary
Use of non-GAAP financial measures ......................
Constant currency .........................................................
Underlying performance ...............................................
Consolidated income statement .................................
Group performance by income and expense item ...
Net interest income .......................................................
Net fee income ..............................................................
Net trading income .......................................................
Net income/(expense) from financial instruments
designated at fair value .............................................
Gains less losses from financial investments ...............
Net earned insurance premiums ...................................
Gains on disposal of US branch network, US
cards business and Ping An ......................................
Other operating income ................................................
Net insurance claims incurred and movement in
liabilities to policyholders ........................................
Loan impairment charges and other credit risk
provisions .................................................................
Operating expenses .......................................................
Share of profit in associates and joint ventures ............
Tax expense ..................................................................
Consolidated balance sheet ........................................
Movement in 2012 ........................................................
Economic loss ..............................................................
Reconciliation of RoRWA measures .........................
Disposals, held for sale and run-off portfolios .........
Critical accounting policies ........................................
25
25
26
29
33
33
35
36
37
38
38
39
39
40
41
42
43
44
45
46
51
52
52
54
The management commentary included in the Report of the
Directors: ‘Overview’ and ‘Operating and Financial Review’,
together with the ‘Employees’ and ‘Corporate sustainability’
sections of ‘Corporate Governance’ and the ‘Directors’
Remuneration Report’ is presented in compliance with the
IFRS Practice Statement ‘Management Commentary’ issued
by the IASB.
Use of non-GAAP financial measures
Our reported results are prepared in accordance
with IFRSs as detailed in the Financial Statements
starting on page 372. There are times when we
measure our performance internally, using financial
measures which have been derived from our reported
results, in order to eliminate factors which distort
year-on-year comparisons so we can view our results
on a more like-for-like basis; these are considered
non-GAAP measures. ‘Constant currency’ and
‘underlying’ performance are non-GAAP measures
that we use throughout our Operating and Financial
Review and are described below. Other non-GAAP
financial measures are described and reconciled to
the closest reported financial measure when used.
Constant currency
The constant currency measure adjusts for the year-
on-year effects of foreign currency translation
differences by comparing reported results for 2012
with reported results for 2011 retranslated at 2012
exchange rates. Except where stated otherwise,
commentaries are on a constant currency basis, as
reconciled in the table overleaf.
The foreign currency translation differences
reflect the movements of the US dollar against most
major currencies during 2012.
We exclude the translation differences when
monitoring progress against operating plans and past
results because management believes the like-for-
like basis of constant currency financial measures
more appropriately reflects changes due to operating
performance.
Constant currency
Constant currency comparatives for 2011 referred to in the
commentaries are computed by retranslating into US dollars
for non-US dollar branches, subsidiaries, joint ventures and
associates:
• the income statements for 2011 at the average rates of
exchange for 2012; and
• the balance sheet at 31 December 2011 at the prevailing
rates of exchange on 31 December 2012.
No adjustment has been made to the exchange rates used to
translate foreign currency denominated assets and liabilities
into the functional currencies of any HSBC branches,
subsidiaries, joint ventures or associates. When reference is
made to ‘constant currency’ in tables or commentaries,
comparative data reported in the functional currencies of
HSBC’s operations have been translated at the appropriate
exchange rates applied in the current period on the basis
described above.
25
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Report of the Directors: Operating and Financial Review (continued)
Financial summary > Use of non-GAAP financial measures
Reconciliation of reported and constant currency profit before tax
HSBC
Net interest income ............................
Net fee income ...................................
Own credit spread26 ...........................
Gains on disposal of US branch
network, US cards business and
Ping An ..........................................
Other income27 ...................................
Net operating income21 ....................
Loan impairment charges and
2011 as
reported
US$m
40,662
17,160
3,933
–
10,525
72,280
Currency
translation
adjustment24
US$m
(1,151)
(436)
(35)
–
(446)
(2,068)
other credit risk provisions ............
(12,127)
277
Net operating income ......................
60,153
(1,791)
Operating expenses ............................
(41,545)
Operating profit ...............................
18,608
Share of profit in associates
and joint ventures ..........................
Profit before tax ...............................
By global business28
Retail Banking and Wealth
Management ..................................
Commercial Banking .........................
Global Banking and Markets .............
Global Private Banking .....................
Other ..................................................
3,264
21,872
4,270
7,947
7,049
944
1,662
Profit before tax .................................
21,872
By geographical region28
Europe ................................................
Hong Kong ........................................
Rest of Asia-Pacific ...........................
Middle East and North Africa ...........
North America ...................................
Latin America ....................................
4,671
5,823
7,471
1,492
100
2,315
Profit before tax .................................
21,872
For footnotes, see page 120.
Underlying performance
Underlying performance:
•
•
•
adjusts for the year-on-year effects of foreign
currency translation;
eliminates the fair value movements on our long-
term debt attributable to credit spread (‘own
credit spread’) where the net result of such
movements will be zero upon maturity of the
debt (see footnote 26 on page 120); and
adjusts for acquisitions, disposals and changes of
ownership levels of subsidiaries, associates and
businesses (see footnote 29 on page 120).
1,273
(518)
55
(463)
(71)
(180)
(200)
(8)
(4)
(463)
(130)
20
(79)
(7)
(14)
(253)
(463)
26
2012 compared with 2011
2011
at 2012
exchange
rates
US$m
39,511
16,724
3,898
–
10,079
70,212
(11,850)
58,362
2012 as
reported
US$m
37,672
16,430
(5,215)
7,024
12,419
68,330
(8,311)
60,019
(40,272)
(42,927)
18,090
17,092
3,319
21,409
3,557
20,649
4,199
7,767
6,849
936
1,658
9,575
8,535
8,520
1,009
(6,990)
Reported
change25
%
(7)
(4)
18
(5)
31
−
(3)
(8)
9
(6)
124
7
21
7
Constant
currency
change25
%
(5)
(2)
23
(3)
30
3
(7)
(6)
7
(4)
128
10
24
8
21,409
20,649
(6)
(4)
4,541
5,843
7,392
1,485
86
2,062
21,409
(3,414)
7,582
10,448
1,350
2,299
2,384
20,649
30
40
(10)
2,199
3
(6)
30
41
(9)
2,573
16
(4)
For disposals, acquisitions and changes of
ownership levels of subsidiaries, associates and
businesses, we eliminate the gain or loss on disposal
in the period incurred and remove the operating
profit or loss of the acquired and disposed of
businesses from all periods presented. Previously,
this adjustment for the results of operations was
effected by removing the time-equivalent component
of operating profit or loss from the comparative
period. During 2012 we changed this adjustment to
better reflect the results of the ongoing business. Had
we maintained our previous approach, underlying
profit before tax would have been US$1.7bn higher
in 2012. This was mainly due to the elimination of
the US Card and Retail Services business.
We use underlying performance when
monitoring progress against operating plans and
past results because we believe that this basis more
appropriately reflects operating performance. We
use underlying performance in our commentaries to
explain year-on-year changes when the effect of fair
value movements on own debt, acquisitions,
disposals or dilution is significant.
The following acquisitions, disposals and
changes to ownership levels affected the underlying
performance:
Disposal gains/(losses) affecting underlying performance
Date
Disposal
gain/(loss)
US$m
HSBC Financial Services (Middle East) Limited’s disposal of majority stake in HSBC Private Equity
Jun 2011
Middle East Limited.....................................................................................................................................
Dilution gain on our holding in Ping An following the issue of share capital to a third party ......................
Jun 2011
Grupo Financiero HSBC, S.A. de C.V.’s disposal of HSBC Afore S.A. de C.V.30 ....................................... Aug 2011
Dilution gain as a result of the merger between HSBC Saudi Arabia Limited and SABB Securities Limited Dec 2011
HSBC Bank Canada’s disposal of HSBC Securities (Canada) Inc’s full service retail brokerage business30
Jan 2012
The Hongkong and Shanghai Banking Corporation Limited’s disposal of RBWM operations in Thailand30 Mar 2012
HSBC Finance Corporation, HSBC USA Inc. and HSBC Technology and Services (USA) Inc.’s
disposal of US Card and Retail Services business30 ................................................................................... May 2012
HSBC Bank USA, N.A.’s disposal of 138 non-strategic branches30 .............................................................. May 2012
HSBC Argentina Holdings S.A.’s disposal of its general insurance manufacturing subsidiary30 ................. May 2012
The Hongkong and Shanghai Banking Corporation Limited’s disposal of its private banking business
in Japan30 .....................................................................................................................................................
Jun 2012
The Hongkong and Shanghai Banking Corporation Limited’s disposal of its shareholding in a property
company in the Philippines .........................................................................................................................
Jun 2012
HSBC Bank USA, N.A.’s disposal of 57 non-strategic branches30 ................................................................ Aug 2012
Hang Seng Bank Limited’s disposal of its general insurance manufacturing subsidiary30 ............................
Jul 2012
HSBC Asia Holdings B.V.’s investment loss on a subsidiary30 ..................................................................... Aug 2012
HSBC Bank plc’s disposal of HSBC Securities SA ....................................................................................... Aug 2012
HSBC Europe ( Netherlands) B.V.’s disposal of HSBC Credit Zrt ............................................................... Aug 2012
HSBC Europe ( Netherlands) B.V.’s disposal of HSBC Insurance (Ireland) Limited ................................... Oct 2012
HSBC Europe ( Netherlands) B.V.’s disposal of HSBC Reinsurance Limited ............................................ Oct 2012
HSBC Private Bank (UK) Limited’s disposal of Property Vision Holdings Limited .................................... Oct 2012
HSBC Investment Bank Holdings Limited’s disposal of its stake in Havas Havalimanlari Yer Hizmetleri
Yatirim Holding Anonim Sirketi ................................................................................................................ Oct 2012
HSBC Insurance (Asia) Limited’s disposal of its general insurance portfolios30 .......................................... Nov 2012
HSBC Bank plc’s disposal of HSBC Shipping Services Limited .................................................................. Nov 2012
HSBC Bank (Panama) S.A.’s disposal of its operations in Costa Rica, El Salvador and Honduras30 ........... Dec 2012
HSBC Insurance Holdings Limited and The Hongkong and Shanghai Banking Corporation Limited’s
disposal of their shares in Ping An30 ........................................................................................................... Dec 2012
The Hongkong and Shanghai Banking Corporation Limited’s disposal of its shareholding in Global
Payments Asia-Pacific Limited30 ................................................................................................................ Dec 2012
For footnote, see page 120.
Acquisition gains/(losses) affecting the underlying performance
(7)
181
83
27
83
108
3,148
661
102
67
130
203
46
(85)
(11)
(2)
(12)
7
(1)
18
117
(2)
(62)
3,012
212
Our share of the loss recorded by Ping An on re-measurement of its previously held equity interest in Ping
An bank (formerly known as Shenzhen Development Bank) when Ping An took control and fully
consolidated Ping An Bank .........................................................................................................................
Gain on the merger of Oman International Bank S.A.O.G. and the Omani operations of
HSBC Bank Middle East Limited ...............................................................................................................
Gain on the acquisition of the onshore retail and commercial banking business of Lloyds Banking Group in
Jul 2011
Jun 2012
the UAE by HSBC Bank Middle East Limited .......................................................................................... Oct 2012
(48)
3
18
Date
Fair value gain
on acquisition
US$m
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Report of the Directors: Operating and Financial Review (continued)
Financial summary > Use of non-GAAP financial measures / Consolidated income statement
The following table reconciles our reported
revenue, loan impairment charges, operating
expenses and profit before tax for 2012 and 2011
to an underlying basis. Throughout this Annual
Report and Accounts, we reconcile other reported
results to underlying results when doing so results in
Reconciliation of reported and underlying items
a more useful discussion of operating performance.
Equivalent tables are provided for each of our global
businesses and geographical segments in the
Form 20-F filed with the Securities and Exchange
Commission (‘SEC’), which is available on
www.hsbc.com.
2012
US$m
2011 Change25
%
US$m
Revenue21
Reported revenue ...............................................................................................................
Currency translation adjustment24 .....................................................................................
Own credit spread26 ...........................................................................................................
Acquisitions, disposals and dilutions ........................................................................................
Underlying revenue ...........................................................................................................
Loan impairment charges and other credit risk provisions (‘LIC’s)
Reported LICs ....................................................................................................................
Currency translation adjustment24 .....................................................................................
Acquisitions, disposals and dilutions ........................................................................................
Underlying LICs ................................................................................................................
Operating expenses
Reported operating expenses .............................................................................................
Currency translation adjustment24 .....................................................................................
Acquisitions, disposals and dilutions ........................................................................................
68,330
5,215
(10,048)
63,497
(8,311)
338
(7,973)
(42,927)
1,004
Underlying operating expenses .................................................................................................
(41,923)
72,280
(2,033)
(3,933)
(6,976)
59,338
(12,127)
277
1,619
(10,231)
(41,545)
1,273
2,666
(37,606)
Underlying cost efficiency ratio ........................................................................................
66.0%
63.4%
Profit before tax
Reported profit before tax .................................................................................................
Currency translation adjustment24 .....................................................................................
Own credit spread26 ...........................................................................................................
Acquisitions, disposals and dilutions ........................................................................................
Underlying profit before tax ..............................................................................................
By global business28
Retail Banking and Wealth Management .......................................................................
Commercial Banking ......................................................................................................
Global Banking and Markets ..........................................................................................
Global Private Banking ..................................................................................................
Other ...............................................................................................................................
20,649
5,215
(9,479)
16,385
4,001
7,941
8,371
954
(4,882)
Underlying profit before tax ..............................................................................................
16,385
By geographical region28
Europe .............................................................................................................................
Hong Kong ......................................................................................................................
Rest of Asia-Pacific ........................................................................................................
Middle East and North Africa ........................................................................................
North America ................................................................................................................
Latin America .................................................................................................................
699
7,162
6,403
1,380
(1,499)
2,240
21,872
(428)
(3,933)
(3,650)
13,861
871
7,691
6,735
945
(2,381)
13,861
1,629
5,761
6,249
1,417
(3,076)
1,881
Underlying profit before tax ..............................................................................................
16,385
13,861
For footnotes, see page 120.
(5)
7
31
22
(3)
(11)
(6)
18
359
3
24
1
(105)
18
(57)
24
2
(3)
51
19
18
28
Consolidated income statement
Five-year summary consolidated income statement
Net interest income ......................................................................
Net fee income .............................................................................
Net trading income ......................................................................
Net income/(expense) from financial instruments
designated at fair value ...........................................................
Gains less losses from financial investments ..............................
Dividend income ..........................................................................
Net earned insurance premiums ..................................................
Gains on disposal of French regional banks ...............................
Gains on disposal of US branch network,
US cards business and Ping An ..............................................
Other operating income ...............................................................
Gains arising from dilution of interests in associates
and joint ventures ...............................................................
Other ........................................................................................
2012
US$m
37,672
16,430
7,091
(2,226)
1,189
221
13,044
–
7,024
2,100
–
2,100
2011
US$m
40,662
17,160
6,506
3,439
907
149
12,872
–
–
1,766
208
1,558
2010
US$m
39,441
17,355
7,210
1,220
968
112
11,146
–
–
2,562
188
2,374
2009
US$m
40,730
17,664
9,863
(3,531)
520
126
10,471
–
–
2,788
–
2,788
2008
US$m
42,563
20,024
6,560
3,852
197
272
10,850
2,445
–
1,808
–
1,808
Total operating income .............................................................
82,545
83,461
80,014
78,631
88,571
Net insurance claims incurred and movement in liabilities to
policyholders ................................................................................
(14,215)
(11,181)
(11,767)
(12,450)
(6,889)
Net operating income before loan impairment charges
and other credit risk provisions ..........................................
68,330
72,280
68,247
66,181
81,682
Loan impairment charges and other credit risk provisions .........
(8,311)
(12,127)
(14,039)
(26,488)
(24,937)
Net operating income ................................................................
60,019
60,153
54,208
39,693
56,745
Total operating expenses34 ...........................................................
(42,927)
(41,545)
(37,688)
(34,395)
(49,099)
Operating profit .........................................................................
17,092
18,608
16,520
Share of profit in associates and joint ventures ...........................
3,557
Profit before tax .........................................................................
20,649
Tax expense .................................................................................
(5,315)
Profit for the year ......................................................................
Profit attributable to shareholders of the parent company ..........
Profit attributable to non-controlling interests ............................
15,334
14,027
1,307
Five-year financial information
Basic earnings per share35 ............................................................
Diluted earnings per share35 .........................................................
Basic earnings excluding goodwill impairment per share34,35 .....
Dividends per ordinary share1 .....................................................
Dividend payout ratio36 ...............................................................
– reported .....................................................................................
– excluding goodwill impairment34 .............................................
Post-tax return on average total assets ........................................
Return on average ordinary shareholders’ equity .......................
Average foreign exchange translation rates to US$:
US$1: £ ........................................................................................
US$1: € ........................................................................................
For footnotes, see page 120.
3,264
21,872
(3,928)
17,944
16,797
1,147
US$
0.92
0.91
0.92
0.39
%
42.4
42.4
0.65
10.9
US$
0.74
0.74
0.74
0.41
%
55.4
55.4
0.6
8.4
2,517
19,037
5,298
1,781
7,079
7,646
1,661
9,307
(4,846)
(385)
(2,809)
14,191
13,159
1,032
6,694
5,834
860
US$
0.73
0.72
0.73
0.34
US$
0.34
0.34
0.34
0.34
%
%
46.6
46.6
0.57
9.5
100.0
100.0
0.27
5.1
0.641
0.719
6,498
5,728
770
US$
0.41
0.41
1.19
0.93
%
226.8
78.2
0.26
4.7
0.545
0.684
0.631
0.778
0.624
0.719
0.648
0.755
29
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Report of the Directors: Operating and Financial Review (continued)
Financial summary > Consolidated income statement
Reported profit before tax of US$20.6bn in 2012
was US$1.2bn, or 6%, lower than in 2011. This was
primarily due to adverse fair value movements on
own debt attributable to credit spreads of US$5.2bn,
compared with favourable movements of US$3.9bn
in 2011. The variance was partially offset by
US$7.5bn of gains (net of losses) on disposals,
in particular in respect of the US Card and Retail
Services business and our associate, Ping An. Our
remaining shareholding in Ping An has been
reclassified as a financial investment (see Note 26 on
the Financial Statements), the sale of which was
completed on 6 February 2013.
We expect disposal of the Card and Retail
Services business in North America and of our
associate shares in Ping An in Rest of Asia-Pacific to
have a significant impact on our profits in each of
these regions for the foreseeable future. In addition,
future profits in Rest of Asia-Pacific are expected to
be affected by the dilution of our shareholding in
Industrial Bank Co. Limited (‘Industrial Bank’),
following its issue of additional share capital to third
parties on 7 January 2013. Our shareholding in
Industrial Bank has now been classified as a financial
investment.
On an underlying basis, profit before tax rose by
18%, primarily due to higher net operating income
before loan impairment charges and other credit risk
provisions (‘revenue’) and lower loan impairment
charges and other credit risk provisions, which were
partially offset by an increase in operating expenses.
The latter was primarily driven by fines and penalties
paid as part of the settlement of investigations into
past inadequate compliance with anti-money
laundering and sanctions laws of US$1.9bn, and a
higher provision for UK customer redress
programmes of US$1.4bn.
The following commentary is on an underlying
basis, except where otherwise stated. The difference
between reported and underlying results is explained
and reconciled on page 26.
Revenue of US$63.5bn was US$4.2bn, or 7%,
higher than in 2011, primarily due to lower adverse
movements on non-qualifying hedges which
accounted for US$1.1bn of the increase, and
revenue growth in GB&M and CMB.
Revenue growth in GB&M mainly reflected
higher Rates and Credit income, notably in Europe,
as spreads tightened and investor sentiment improved
following stimuli by central banks globally.
In CMB, revenue growth primarily reflected
increased net interest income as a result of average
balance sheet growth. Customer loans and advances
30
grew in all regions, with over half this growth
coming from our faster-growing regions of Hong
Kong, Rest of Asia-Pacific and Latin America,
driven by trade-related lending. In Europe, lending
balances increased, notably in the UK, despite muted
demand for credit. Customer deposits also rose as we
continued to attract deposits through our Payments
and Cash Management products.
Revenue growth in RBWM reflected increased
insurance income, mainly in Hong Kong and Latin
America, which benefited from higher investment
returns and increased sales of life insurance products.
In addition, net interest income grew, mainly in
Hong Kong and Latin America, reflecting higher
average lending and deposit balances. These factors
were partially offset by the continued run-off of our
Consumer and Mortgage Lending (‘CML’) portfolio
in the US.
Loan impairment charges and other credit risk
provisions were US$2.3bn lower than in 2011.
This primarily reflected a decrease in North America,
mainly due to the continued decline in lending
balances and lower delinquency rates in the CML
portfolio. In addition, in Europe there were lower
credit risk provisions on available-for-sale asset-
backed securities (‘ABS’s) driven by an
improvement in underlying asset prices, and lower
loan impairment charges in RBWM, most notably in
the UK, as delinquency rates improved across both
unsecured and secured lending portfolios. These
factors were partially offset by increased loan
impairment charges and other credit risk provisions
in Latin America, particularly in Brazil, which were
primarily due to higher delinquency rates in RBWM
and in Business Banking in CMB. In Rest of Asia-
Pacific, there were also higher individually assessed
loan impairments on a small number of customers in
CMB.
Operating expenses were higher than in 2011,
primarily from fines and penalties paid as part of
the settlement of investigations into past inadequate
compliance with anti-money laundering and
sanctions laws of US$1.9bn, as well as an increase
in provisions relating to UK customer redress
programmes of US$1.4bn. In addition, in 2011
operating expenses included a credit of US$570m
relating to defined benefit pension obligations in the
UK, which did not recur.
The charges for UK customer redress
programmes include estimates in respect of possible
mis-selling in previous years of payment protection
insurance (‘PPI’) policies of US$1.7bn and interest
rate protection products of US$598m. The additional
provision relating to PPI reflects our recent claims
experience. The provision in relation to interest rate
protection products reflects an estimate of possible
customer redress requirements following an
independent review carried out at the request of the
Financial Services Authority (‘FSA’). There are many
factors which affect these estimated liabilities and there
remains a high degree of uncertainty as to the eventual
cost of redress for these matters.
Operating expenses also increased due to
inflationary pressures, for example, on wages and
salaries, in certain of our Latin American and Asian
markets. Other increases arose from investment in
strategic initiatives including certain business expansion
projects, enhanced processes and technology
capabilities, and increased investment in regulatory and
compliance infrastructure, primarily in the US. These
factors were partly offset by US$2.0bn of sustainable
cost savings achieved across all regions, as we
continued with our organisational effectiveness
programmes during 2012. The number of full time
equivalent staff numbers (‘FTEs’) fell by more than
27,700, reflecting the planned net reduction of staff
numbers across the Group from organisational
effectiveness initiatives and business disposals.
Notable revenue items by geographical region
On a constant currency basis, income from
associates increased, mainly driven by strong results in
our mainland China associates. The contribution from
Bank of Communications Co., Limited (‘BoCom’) and
Industrial Bank rose due to loan growth and higher fee
income. These factors were partially offset by a decline
in income from Ping An due to market valuation losses
on equity securities held by their insurance business,
reflecting volatile domestic equity markets.
The reported profit after tax was US$2.6bn or 15%
lower than in 2011, reflecting a decrease in taxable
profits, and a higher tax charge in 2012. The increased
tax charge included the effect of the non-tax deductible
charge for fines and penalties paid as part of the
settlement of investigations into past inadequate
compliance with anti-money laundering and sanctions
laws, together with the non-recognition of the tax
benefit in respect of the accounting charge associated
with negative fair value movements on own debt. The
lower tax charge in 2011 included the benefit of US
foreign tax credits. The effective tax rate in 2012
was 26% compared with 18% in 2011.
Europe
US$m
Rest of
Asia-
Pacific
US$m
Hong
Kong
US$m
North
Latin
MENA
US$m
America
US$m
America
US$m
Total
US$m
2012
Non-qualifying hedges ...................................
Ping An contingent forward sale contract37 ...
Gain on sale of non-core investments in India
Loss recognised following the classification of
businesses to held for sale ..........................
2011
Non-qualifying hedges ...................................
Refinement of PVIF calculation .....................
2010
Non-qualifying hedges ...................................
(51)
–
–
–
(291)
95
(31)
–
314
–
(14)
135
(691)
(17)
(20)
(553)
–
–
(20)
11
4
Notable revenue items by global business
–
–
–
–
–
–
–
(194)
–
–
–
–
–
(296)
(553)
314
–
(96)
(96)
(1,067)
–
(353)
–
2
–
(1,392)
243
(1,057)
Retail
Banking
and Wealth
Management
US$m
Commercial
Banking
US$m
Global
Banking
and
Markets
US$m
Global
Private
Banking
US$m
Other
US$m
Total
US$m
(193)
–
–
(26)
(1,038)
181
(310)
–
–
–
(35)
–
62
–
(42)
–
–
(27)
90
–
(309)
4
–
–
–
(5)
–
1
(65)
(553)
314
(8)
(439)
–
(296)
(553)
314
(96)
(1,392)
243
(439)
(1,057)
2012
Non-qualifying hedges .......................................
Ping An contingent forward sale contract37 .......
Gain on sale of non-core investments in India ...
Loss recognised following the classification
of businesses to held for sale ..........................
2011
Non-qualifying hedges .......................................
Refinement of PVIF calculation .........................
2010
Non-qualifying hedges .......................................
For footnote, see page 120.
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Report of the Directors: Operating and Financial Review (continued)
Financial summary > Consolidated income statement / Group performance by income and expense item
Notable cost items by geographical region38
2012
Restructuring and other related costs .............
UK customer redress programmes .................
UK bank levy ..................................................
Fines and penalties for inadequate compliance
with anti-money laundering and sanction
laws .............................................................
US mortgage foreclosure and servicing costs .
2011
Restructuring and other related costs .............
UK customer redress programmes .................
UK bank levy ..................................................
UK pension credit ...........................................
Payroll tax .......................................................
US mortgage foreclosure and servicing costs .
2010
Restructuring and other related costs .............
UK customer redress programmes .................
US accounting gain on change in staff
benefits .......................................................
Payroll tax .......................................................
Notable cost items by global business38
Europe
US$m
299
2,338
472
375
–
404
898
570
(587)
(13)
–
87
78
–
324
Rest of
Asia-
Pacific
US$m
Hong
Kong
US$m
North
Latin
MENA
US$m
America
US$m
America
US$m
Total
US$m
31
–
–
–
–
68
–
–
–
–
–
15
–
–
–
131
–
–
–
–
45
–
–
–
–
–
36
–
–
–
27
–
–
–
–
31
–
–
–
–
–
–
–
–
–
221
–
–
1,546
104
236
–
–
–
–
257
13
–
(148)
–
167
–
–
876
2,338
472
–
–
1,921
104
338
–
–
–
–
–
3
–
–
–
Retail
Banking
and Wealth
Management
US$m
Commercial
Banking
US$m
Global
Banking
and
Markets
US$m
Global
Private
Banking
US$m
Other
US$m
266
1,751
–
–
104
405
875
–
(264)
–
257
22
78
(99)
5
62
258
–
–
–
122
23
–
(212)
–
–
1
–
(16)
3
63
331
–
–
–
158
–
–
(111)
(13)
–
4
–
(19)
307
58
(2)
–
–
–
38
–
–
–
–
–
–
–
(5)
9
427
–
472
1,921
–
399
–
570
–
–
–
127
–
(9)
–
2012
Restructuring and other related costs .................
UK customer redress programmes .....................
UK bank levy ......................................................
Fines and penalties for inadequate compliance
with anti-money laundering and sanction
laws .................................................................
US mortgage foreclosure and servicing costs ....
2011
Restructuring and other related costs .................
UK customer redress programmes .....................
UK bank levy ......................................................
UK pension credit ...............................................
Payroll tax ...........................................................
US mortgage foreclosure and servicing costs ....
2010
Restructuring and other related costs .................
UK customer redress programmes .....................
US accounting gain on change in staff
benefits ...........................................................
Payroll tax ...........................................................
For footnote, see page 120.
32
1,122
898
570
(587)
(13)
257
154
78
(148)
324
Total
US$m
876
2,338
472
1,921
104
1,122
898
570
(587)
(13)
257
154
78
(148)
324
Group performance by income and expense item
Net interest income
Interest income ...........................................................................................................
Interest expense ..........................................................................................................
Net interest income39 ..................................................................................................
2012
US$m
56,702
(19,030)
37,672
2011
US$m
63,005
(22,343)
40,662
2010
US$m
58,345
(18,904)
39,441
Average interest-earning assets ..................................................................................
1,625,068
1,622,658
1,472,294
Gross interest yield40 ...................................................................................................
Less: cost of funds ......................................................................................................
Net interest spread41 ....................................................................................................
Net interest margin42 ...................................................................................................
3.49%
(1.36%)
2.13%
2.32%
3.88%
(1.56%)
2.32%
2.51%
3.96%
(1.41%)
2.55%
2.68%
Summary of interest income by type of asset
Average
balance
2012
Interest
income Yield
US$m US$m %
Average
balance
US$m
2011
Interest
income Yield
US$m
%
Average
balance
US$m
2010
Interest
income Yield
%
US$m
Short-term funds and loans and advances
to banks ...................................................
Loans and advances to customers ..............
Financial investments .................................
Other interest-earning assets43 ....................
275,979
934,656
387,329
27,104
4,307 1.56
41,043 4.39
9,078 2.34
2,274 8.39
261,749
945,288
384,059
31,562
5,860 2.24
45,250 4.79
10,229 2.66
1,666 5.28
236,742
858,499
378,971
(1,918)
4,555 1.92
44,186 5.15
9,375 2.47
229 (11.94)
Total interest-earning assets ....................... 1,625,068
Trading assets and financial assets
designated at fair value44,45 .....................
Impairment provisions ................................
Non-interest-earning assets ........................
368,406
(17,421)
730,901
56,702 3.49 1,622,658
63,005 3.88 1,472,294
58,345 3.96
6,931 1.88
410,038
(18,738)
752,965
8,671 2.11
385,203
(22,905)
664,308
7,060 1.83
Total assets and interest income ................. 2,706,954
63,633 2.35 2,766,923
71,676 2.59
2,498,900
65,405 2.62
Summary of interest expense by type of liability and equity
Average
balance
2012
Interest
expense Cost
US$m US$m %
Average
balance
US$m
2011
Interest
expense Cost
US$m
%
Average
balance
US$m
2010
Interest
expense Cost
%
US$m
Deposits by banks46 ....................................
Financial liabilities designated at fair
92,803
1,160 1.25
106,099
1,591 1.50
111,443
1,136 1.02
value – own debt issued47 .......................
75,016
Customer accounts48 ................................... 1,052,812
Debt securities in issue ...............................
161,348
Other interest-bearing liabilities .................
19,275
Total interest-bearing liabilities .................. 1,401,254
Trading liabilities and financial liabilities
designated at fair value (excluding
own debt issued) .....................................
Non-interest bearing current accounts ........
Total equity and other non-interest
318,883
177,085
bearing liabilities ....................................
809,732
1,325 1.77
73,635
10,878 1.03 1,058,326
181,482
14,024
4,755 2.95
912 4.73
1,313 1.78
13,456 1.27
5,260 2.90
723 5.16
66,706
962,613
189,898
8,730
1,271 1.91
10,778 1.12
4,931 2.60
788 9.03
19,030 1.36 1,433,566
22,343 1.56 1,339,390
18,904 1.41
3,445 1.08
355,345
162,369
815,643
4,564 1.28
275,804
142,579
741,127
3,780 1.37
Total equity and liabilities .......................... 2,706,954
22,475 0.83 2,766,923
26,907 0.97 2,498,900
22,684 0.91
For footnotes, see page 120.
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Financial summary > Group performance by income and expense item
The commentary in the following sections is on a
constant currency basis unless otherwise stated.
Reported net interest income decreased by 7%.
On a constant currency basis, it declined by 5%.
On an underlying basis, excluding net interest
income earned by the businesses sold during 2012
(see page 29) from all periods presented (2012:
US$1.6bn; 2011: US$4.8bn) and currency translation
movements of US$1.2bn, net interest income rose by
4%. This reflected strong balance sheet growth in
Hong Kong and Rest of Asia-Pacific, together with a
lower cost of funds in Latin America driven by a
decline in interest rates in Brazil.
The decrease in both net interest spread and net
interest margin compared with 2011 was attributable
to significantly lower yields on customer lending and
on our surplus liquidity, partly offset by a reduction
in our cost of funds, notably on customer accounts.
Interest income was lower than in 2011. This
was driven by lower interest income on customer
lending, including loans classified within ‘Assets
held for sale’, due in part to the loss of interest
income from disposals during 2012, principally in
the US. These disposals also led to a change in the
composition of our lending book as the decline in
higher yielding card balances was replaced by
volume growth in relatively lower yielding products,
mainly residential mortgages and term lending, in
Hong Kong, Rest of Asia-Pacific and Europe.
Growth in average residential mortgage balances
reflected the success of marketing campaigns and
competitive pricing in the UK, the continued strength
in the property market in Hong Kong and the
expansion of our distribution network in Rest of
Asia-Pacific. Average term lending balances
increased in Hong Kong and Rest of Asia-Pacific as
we capitalised on trade and capital flows, while the
rise in Europe was in spite of muted demand for
credit. As a result of the change in composition of the
lending book, the gross yield on customer lending
fell.
Revenue in Balance Sheet Management also
decreased, principally in Europe as yield curves
continued to flatten and liquidity arising from
maturities and sales of available-for-sale debt
securities was re-invested at lower prevailing rates.
In addition, we placed a greater portion of our
liquidity with central banks. This was partly offset by
higher revenue in Rest of Asia-Pacific, notably
mainland China, as strong customer deposit growth
led to a rise in the size of the available-for-sale debt
securities portfolio.
34
The decline in interest income was partly offset
by lower interest expense, notably on customer
accounts. This was driven by a reduction in the cost
of funds on customer accounts in Latin America,
notably in Brazil, and in Europe due to the downward
movement in interest rates during the year, together
with deposit repricing initiatives in the US and
Europe. The reduction in average customer account
balances due to the disposal of non-strategic branches
in the US was largely offset by significant volume
growth in other parts of the business, notably in Hong
Kong, reflecting more conservative customer
behaviour during the year in RBWM, and in Rest of
Asia-Pacific, as a result of new mandates and deposit
acquisition in Payments and Cash Management in
CMB and GB&M.
Interest expense on deposits by banks decreased,
mainly in Europe. This was due to lower placements
by other financial institutions with HSBC, in part due
to lower interest rates offered, together with a
reduction in the cost of sale and repurchase (‘repo’)
funding as market rates fell. Lower average balances
and interest rates in Brazil also contributed to the
decline.
There was also a decrease in interest expense on
debt securities issued by the Group, driven by a net
reduction in average balances outstanding, mainly in
North America and, to a lesser extent, in Europe.
Funding requirements in the US fell as a result of the
business disposals and continued reduction of the
CML portfolio in run-off and, as a consequence,
maturing debt was not replaced and some of the
outstanding debt was repaid with the proceeds from
the sales. In addition, maturing debt was not replaced
in Europe. These decreases were partly offset by
higher interest expense in Latin America, as a result
of new debt issued, principally in 2011. The Group’s
cost of funds on debt securities rose as the new
issuances in Latin America were at a higher effective
interest rate than that paid in other parts of the
Group. The replacement of short-term debt by the
issuance of medium-term notes in Europe also
contributed to the rise in the cost of funds of debt
securities in issue.
‘Net interest income’ includes the expense
of internally funding trading assets, while related
revenue is reported in ‘Net trading income’. The
internal cost of funding of these assets declined,
reflecting the reduction in average trading assets
during the year. In reporting our global business
results, this cost is included within ‘Net trading
income’.
Net fee income
Account services .........................................................................................................
Cards ...........................................................................................................................
Funds under management ...........................................................................................
Credit facilities ...........................................................................................................
Broking income ..........................................................................................................
Imports/exports ...........................................................................................................
Remittances ................................................................................................................
Unit trusts ...................................................................................................................
Underwriting ...............................................................................................................
Global custody ............................................................................................................
Insurance .....................................................................................................................
Corporate finance .......................................................................................................
Trust income ...............................................................................................................
Investment contracts....................................................................................................
Mortgage servicing .....................................................................................................
Taxpayer financial services ........................................................................................
Maintenance income on operating leases ...................................................................
Other ...........................................................................................................................
Fee income ..................................................................................................................
Less: fee expense ........................................................................................................
Net fee income ............................................................................................................
2012
US$m
3,563
3,030
2,561
1,761
1,350
1,196
819
739
739
737
696
370
283
141
86
–
–
2,078
20,149
(3,719)
16,430
2011
US$m
3,670
3,955
2,753
1,749
1,711
1,103
770
657
578
751
1,052
441
294
136
109
2
–
1,766
21,497
(4,337)
17,160
2010
US$m
3,632
3,801
2,511
1,635
1,789
991
680
560
623
700
1,147
440
291
109
118
73
99
1,918
21,117
(3,762)
17,355
Net fee income decreased by US$730m on a reported
basis, and by US$294m on a constant currency basis.
On an underlying basis, which excludes the net
fee income relating to the business disposals listed on
page 29 (2012: US$401m and 2011:US$1.41bn) and
currency translation movements of US$436m, net fee
income rose by US$726m, or 5%.
The reduction on a constant currency basis was
primarily due to the sale of the Card and Retail
Services business, which led to a reduction in cards
and insurance fee income and fee expenses. As
part of that transaction, we entered into a transition
service agreement with the purchaser to support
certain account servicing operations until they are
integrated into the purchaser’s infrastructure. We
receive fees for providing these services, which are
reported in ‘Other fee income’. The associated costs
are reported in ‘Operating expenses’.
Broking income fell, most notably in Hong
Kong and Europe, due to reduced transaction
volumes reflecting investor sentiment. Income from
funds under management (‘FuM’) fell, mainly in
Rest of Asia-Pacific, as customers invested in lower
yielding products reflecting their lower risk appetite.
Income from FuM was also lower in North America,
due to the sale of the full service retail brokerage
business in Canada. In Europe, the decline was
mainly due to challenging market conditions in the
latter half of 2011 which led to a fall in average
client assets in 2012 as well as net new money
outflows and a fall in client numbers within GPB.
Partly offsetting these reductions was growth in
underwriting fees as we actively captured increased
client demand for debt capital financing in North
America, Hong Kong and Europe in 2012, in part,
reflecting the enhanced collaboration between CMB
and GB&M. Trade-related income also increased,
most notably in Europe and Hong Kong, reflecting
increased transaction volumes as we capitalised on
our global network to capture cross-border trade
flows.
Fees from unit trusts also rose in Hong Kong,
reflecting higher sales volumes.
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Financial summary > Group performance by income and expense item
Net trading income
Trading activities ........................................................................................................
Ping An contingent forward sale contract37 ...............................................................
Net interest income on trading activities ....................................................................
Other trading income – hedge ineffectiveness:
– on cash flow hedges ............................................................................................
– on fair value hedges ............................................................................................
Non-qualifying hedges ...............................................................................................
Net trading income49,50 ................................................................................................
2012
US$m
5,249
(553)
2,683
35
(27)
(296)
7,091
2011
US$m
4,873
–
3,223
26
(224)
(1,392)
6,506
2010
US$m
5,708
–
2,530
(9)
38
(1,057)
7,210
For footnotes, see page 120.
Reported net trading income of US$7.1bn was
US$585m higher than in 2011. On a constant
currency basis, net trading income rose by
US$849m, driven by lower adverse fair value
movements on non-qualifying hedges. Net income
from trading activities rose in GB&M, but this was
more than offset by lower net interest income on
trading activities and adverse fair value movements
on the contingent forward sale contract relating to
Ping An.
There were lower adverse fair value
movements on non-qualifying hedges. These hedges
are derivatives entered into as part of a documented
interest rate management strategy for which hedge
accounting was not, nor could be, applied. They are
principally cross-currency and interest rate swaps
used to economically hedge fixed rate debt issued
by HSBC Holdings and floating rate debt issued by
HSBC Finance Corporation (‘HSBC Finance’). The
size and direction of the changes in the fair value of
non-qualifying hedges that are recognised in the
income statement can be volatile from year-to-year,
but do not alter the cash flows expected as part of the
documented interest rate management strategy for
both the instruments and the underlying
economically hedged assets and liabilities if the
derivative is held to maturity. In North America,
there were lower adverse fair value movements on
non-qualifying hedges as US long-term interest rates
declined to a lesser extent than in 2011. There were
also lower adverse fair value movements on non-
qualifying hedges in Europe. This was driven by
favourable fair value movements in HSBC Holdings,
compared with adverse fair value movements in
2011, reflecting the less pronounced decline in long-
term US interest rates relative to sterling and euro
interest rates compared with 2011. This was partly
offset by adverse movements in European operating
entities as interest rates fell.
During 2012, HSBC Finance terminated
approximately US$3.0bn of non-qualifying hedges.
A further US$2.4bn of non-qualifying hedges were
36
terminated in January 2013 to better align our hedges
with the overall interest rate position in HSBC
Finance. The losses on these economic hedges
reported in previous years were therefore crystallised.
Net income from trading activities increased
compared with 2011, driven by a strong performance
in GB&M. This was after taking into account a net
charge of US$385m in the fourth quarter of 2012 as
a result of a change in estimation methodology in
respect of credit valuation adjustments on derivative
assets and debit valuation adjustments on derivative
liabilities to reflect evolving market practices (see
page 441).
Rates revenue was significantly higher, notably
in Europe, as spreads on government debt securities
tightened and investor sentiment improved following
stimuli by central banks. This was despite significant
adverse fair value movements due to own credit
spreads on structured liabilities as spreads tightened,
compared with a gain reported in 2011, together with
a credit valuation adjustment charge of US$837m.
The improvement in market sentiment also led to
tighter spreads on corporate debt securities, resulting
in strong growth in Credit revenue. Foreign
Exchange revenue was broadly in line with 2011, as
higher income resulting from enhanced collaboration
between GB&M and CMB, and increased volumes
from improvements in our electronic pricing and
distribution capabilities, offset the effect of less
volatile markets in 2012. These favourable
movements were partly offset by a reduction in
Equities trading revenue, reflecting a decline in
market volumes together with adverse fair value
movements on structured liabilities as own credit
spreads tightened in 2012, compared with favourable
movements in 2011.
These factors were partly offset by
unfavourable fair value movements on assets held as
economic hedges of foreign currency debt at fair
value compared with favourable movements in 2011,
due to movements in the underlying currencies.
These offset favourable foreign exchange
movements on foreign currency debt which are
reported in ‘Net expense from financial instruments
designated at fair value’.
Net interest income on trading activities also
declined. This was driven by a significant reduction
in average trading assets, notably holdings of debt
securities in Europe, in the latter part of 2011 and the
first quarter of 2012 as eurozone sovereign debt
concerns dominated the market. In addition, yields
fell as a result of both price appreciation in a low
interest rate environment and an increase in the
proportion of the portfolio invested in relatively
lower-yielding treasury bills and government debt
securities. This was partly offset by a reduction in
funding costs, reflecting both the decline in the size
of the portfolio and the low rate environment.
There were also adverse fair value movements
of US$553m on the contingent forward sale contract
relating to Ping An (see page 472).
Net income/(expense) from financial instruments designated at fair value
Net income/(expense) arising from:
– financial assets held to meet liabilities under insurance and
investment contracts ...........................................................................................
– liabilities to customers under investment contracts ...........................................
– HSBC’s long-term debt issued and related derivatives .....................................
Change in own credit spread on long-term debt ...........................................
Other changes in fair value51 .........................................................................
– other instruments designated at fair value and related derivatives ....................
Net income/(expense) from financial instruments designated at fair value ..............
2012
US$m
2,980
(996)
(4,327)
(5,215)
888
117
(2,226)
2011
US$m
2010
US$m
(933)
231
4,161
3,933
228
(20)
3,439
2,349
(946)
(258)
(63)
(195)
75
1,220
Assets and liabilities from which net income/(expense) from financial instruments designated at fair value arose
Financial assets designated at fair value at 31 December ..........................................
Financial liabilities designated at fair value at 31 December ....................................
Including:
Financial assets held to meet liabilities under:
– insurance contracts and investment contracts with DPF52 ..................................
– unit-linked insurance and other insurance and investment contracts .................
Long-term debt issues designated at fair value ..........................................................
2012
US$m
33,582
87,720
8,376
23,655
74,768
2011
US$m
30,856
85,724
7,221
20,033
73,808
2010
US$m
37,011
88,133
7,167
19,725
69,906
For footnotes, see page 120.
The accounting policies for the designation of
financial instruments at fair value and the treatment
of the associated income and expenses are described
in Notes 2i and 2b on the Financial Statements,
respectively.
The majority of the financial liabilities designated
at fair value are fixed-rate long-term debt issues, the
rate profile of which has been changed to floating
through interest rate swaps as part of a documented
interest rate management strategy. The movement
in fair value of these long-term debt issues and the
related hedges includes the effect of our credit spread
changes and any ineffectiveness in the economic
relationship between the related swaps and own
debt. As credit spreads widen or narrow, accounting
profits or losses, respectively, are booked. The size
and direction of the changes in the credit spread on
our debt and ineffectiveness, which are recognised
in the income statement, can be volatile from year to
year, but do not alter the cash flows expected as part
of the documented interest rate management strategy.
As a consequence, fair value movements arising
from changes in our own credit spread on long-term
debt and other fair value movements on the debt
and related derivatives are not regarded internally as
part of managed performance and are therefore not
allocated to global businesses, but are reported in
‘Other’. Credit spread movements on own debt
designated at fair value are excluded from underlying
results, and related fair value movements are not
included in the calculation of regulatory capital.
We reported net expense from financial
instruments designated at fair value of US$2.2bn
in 2012 compared with net income of US$3.4bn
in 2011. This included the credit spread-related
movements in the fair value of our own long-term
debt, on which we reported adverse fair value
movements of US$5.2bn in 2012 and favourable
37
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Report of the Directors: Operating and Financial Review (continued)
Financial summary > Group performance by income and expense item
movements of US$3.9bn in 2011. The adverse fair
value movements arose in 2012 as credit spreads
tightened in Europe and North America, having
widened during 2011.
Net income arising from financial assets held to
meet liabilities under insurance and investment
contracts reflected net investment gains in 2012 as
global equity market conditions improved, compared
with net investment losses in 2011. This
predominantly affected the value of assets held to
support unit-linked contracts in the UK and Hong
Kong, insurance contracts with discretionary
participation features (‘DPF’) in Hong Kong,
and investment contracts with DPF in France.
The investment gains or losses arising from
equity markets result in a corresponding movement
in liabilities to customers, reflecting the extent to
which unit-linked policyholders, in particular,
participate in the investment performance of the
Gains less losses from financial investments
associated asset portfolio. Where these relate to
assets held to back investment contracts, the
corresponding movement in liabilities to customers
is also recorded under ‘Net income/(expense) from
financial instruments designated at fair value’. This
is in contrast to gains or losses related to assets held
to back insurance contracts or investment contracts
with DPF, where the corresponding movement in
liabilities to customers is recorded under ‘Net
insurance claims incurred and movement in liabilities
to policyholders’.
Within net income from financial instruments
designated at fair value were favourable foreign
exchange movements in 2012, compared with
adverse movements in 2011, on foreign currency
debt designated at fair value issued as part of our
overall funding strategy. An offset from assets held
as economic hedges was reported in ‘Net trading
income’.
Net gains/(losses) from disposal of:
– debt securities ......................................................................................................
– equity securities ...................................................................................................
– other financial investments .................................................................................
Impairment of available-for-sale equity securities .....................................................
Gains less losses from financial investments .............................................................
2012
US$m
781
823
5
1,609
(420)
1,189
2011
US$m
712
360
12
1,084
(177)
907
2010
US$m
564
516
(7)
1,073
(105)
968
Gains less losses from financial investments
increased by US$282m on a reported basis
and US$310m on a constant currency basis.
The increase was driven by higher net gains
from the disposal of available-for-sale equity
securities, notably in Hong Kong as a result of the
sale of our shares in four Indian banks. In addition,
we reported a rise in disposal gains in Principal
Investments in GB&M.
Higher gains were also reported on the disposal
of available-for-sale government debt securities,
principally in the UK as part of Balance Sheet
Net earned insurance premiums
Management’s structural interest rate risk
management activities. This was partly offset by
losses on the disposal of legacy assets in GB&M in
the UK (see page 18), together with the non-
recurrence of gains in 2011 on the disposal of
available-for-sale debt securities in our Insurance
business in RBWM, also in Europe.
There were higher impairments of available-for-
sale equity securities due to significant write-downs
in 2012 on three holdings, two of which were in our
direct investment business, which is in run-off.
Gross insurance premium income ..............................................................................
Reinsurance premiums ...............................................................................................
Net earned insurance premiums .................................................................................
2012
US$m
13,602
(558)
13,044
2011
US$m
13,338
(466)
12,872
2010
US$m
11,609
(463)
11,146
38
Net earned insurance premiums were broadly
in line with 2011 on a reported basis. On a
constant currency basis net earned premiums
increased by 6%.
The rise in net earned premium income was
driven by Hong Kong and Latin America. In Hong
Kong, sales of insurance contracts increased, in
particular deferred annuity products, as we widened
our product offerings to fulfil customers’ long-term
savings and retirement needs, supported by
successful marketing campaigns. Renewal premiums
from both unit-linked and insurance contracts with
DPF also increased reflecting strong sales in previous
years. The increase in net earned premiums in Latin
America was due to higher sales of unit-linked and
term life products in Brazil, reflecting customer
appetite for life insurance products. It was partly
offset by a decrease in net earned premiums
following the sale of the general insurance business
in Argentina in May 2012. In Europe, net earned
premiums decreased, mainly on investment contracts
with DPF in France, as a result of the uncertain
economic and political environment in the election
year and increased product competition. The non-
renewal and transfer to third parties of certain
contracts in our Irish business during 2011 also
contributed to the decline. This was partly offset by a
rise in net earned premiums in the UK due, in part, to
the sale of a unit-linked insurance product through
two new third party platforms.
Gains on disposal of US branch network, US cards business and Ping An
Gains on disposal of US branch network ...................................................................
Gains on disposal of US cards business .....................................................................
Gains on disposal of Ping An .....................................................................................
Total ............................................................................................................................
2012
US$m
864
3,148
3,012
7,024
2011
US$m
2010
US$m
–
–
–
–
–
–
–
–
Significant progress was made in 2012 in exiting
non-strategic markets and disposing of businesses
and investments not aligned with the Group’s long-
term strategy. These included three major disposals:
•
•
In May 2012, HSBC USA Inc., HSBC Finance
and HSBC Technology and Services (USA) Inc.
sold their US Card and Retail Services business
to Capital One Financial Corporation, realising a
gain on sale of US$3.1bn.
In May 2012, HSBC Bank USA, N.A. (‘HSBC
Bank USA’) sold 138 out of 195 branches
primarily in upstate New York to First Niagara
Bank, realising a gain of US$661m. In August
2012, it sold the remaining 57 branches to the
same purchaser, realising a gain of US$203m.
Other operating income
•
In December 2012, HSBC Insurance Holdings
Limited and The Hongkong and Shanghai
Banking Corporation agreed to sell to indirect
wholly-owned subsidiaries of Charoen
Pokphand Group Company Limited their entire
shareholdings in Ping An, representing 15.57%
of the issued share capital of Ping An, in two
tranches. The first tranche was completed
on 7 December 2012. The completion of the
second tranche took place on 6 February 2013.
The disposal of this associate resulted in a gain
of US$3.0bn in 2012 (see page 472). Our
remaining shareholding has been classified as a
financial investment.
2012
US$m
2011
US$m
Rent received ..............................................................................................................
Gains/(losses) recognised on assets held for sale .......................................................
Valuation gains on investment properties ..................................................................
Gain on disposal of property, plant and equipment, intangible assets and
non-financial investments ......................................................................................
Gains arising from dilution of interests in associates and joint ventures ..................
Change in present value of in-force long-term insurance business ...........................
Other ...........................................................................................................................
210
485
72
187
–
737
409
217
55
118
57
208
726
385
2010
US$m
535
(263)
93
701
188
705
603
Other operating income ..............................................................................................
2,100
1,766
2,562
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Report of the Directors: Operating and Financial Review (continued)
Financial summary > Group performance by income and expense item
Change in present value of in-force long-term insurance business
Value of new business ................................................................................................
Expected return ...........................................................................................................
Assumption changes and experience variances .........................................................
Other adjustments .......................................................................................................
Change in present value of in-force long-term insurance business ...........................
2012
US$m
1,027
(420)
69
61
737
2011
US$m
943
(428)
(30)
241
726
2010
US$m
737
(85)
59
(6)
705
Reported other operating income of US$2.1bn
increased by 19% in 2012. On a constant currency
basis, it rose by 25% as a result of business disposals
during the year.
We continued to rationalise our portfolio in non-
strategic markets, resulting in a number of gains and
losses on disposal which are excluded from our
underlying results (see page 28). These included
gains of US$108m on the sale of our RBWM
operations in Thailand, US$130m on the sale of
our shareholding in a property company in the
Philippines, US$163m on the sales of the HSBC and
Hang Seng general insurance businesses in Hong
Kong, US$102m following the completion of the
sale of our general insurance manufacturing business
in Argentina, and US$212m following the sale of our
shares in Global Payments Asia-Pacific Ltd. The
gains on disposal were partly offset by an investment
loss on a subsidiary of US$85m in the Middle East
and North Africa and a loss of US$62m on the
sale of our operations in Costa Rica, Honduras and
El Salvador.
Reported other operating income in 2011
included a gain of US$181m arising from a dilution
of our holding in Ping An following its issue of share
capital to a third party and a gain of US$83m from
the sale of HSBC Afore S.A. de C.V. (‘HSBC
Afore’), our Mexican pension business.
On an underlying basis, excluding the gains
and losses on disposal totalling US$747m in 2012
and US$354m in 2011, other operating income rose.
This was due to lower losses on foreclosed properties
due to the reduction in foreclosure activity in the US,
less deterioration in housing prices during 2012 and,
in some markets, improvements in pricing compared
with 2011 in the US.
The present value of in-force (‘PVIF’) long-term
insurance business asset was broadly in line with
2011. The value of new business from the sale of life
insurance products, favourable investment returns,
together with the recognition of a PVIF asset relating
to the unit-linked pension products in Brazil
contributed to a rise. In addition, there were lower
adverse changes to non-economic assumptions,
including mortality and lapse rates in Hong Kong
and North America in 2012. These factors were
substantially offset by adverse assumption changes in
2012, principally relating to the valuation of
policyholder options and guarantees in Hong Kong,
along with the non-recurrence of a gain of US$237m
(US$243m as reported) recognised upon refinement
of the PVIF asset in 2011.
The increase in other operating income was
partly offset by losses recognised on the sale of
syndicated loans in Europe and on the
reclassification of certain businesses to held for sale
in South America. In addition, a gain on sale and
leaseback of branches in Mexico recognised in 2011
did not recur.
Net insurance claims incurred and movement in liabilities to policyholders
Insurance claims incurred and movement in liabilities to policyholders:
– gross ....................................................................................................................
– reinsurers’ share .................................................................................................
– net53 .....................................................................................................................
For footnote, see page 120.
2012
US$m
14,529
(314)
14,215
2011
US$m
11,631
(450)
11,181
2010
US$m
11,969
(202)
11,767
Net insurance claims incurred and movement in
liabilities to policyholders increased by 27% on a
reported basis, and by 33% on a constant currency
basis.
The increase in liabilities to policyholders largely
resulted from gains in the fair value of the assets
where the policyholders bear the investment risk,
particularly in relation to unit-linked insurance
40
contracts and investment and insurance contracts
with DPF.
The higher investment returns were largely the
result of positive equity market movements in 2012
compared with losses experienced during 2011
notably in Hong Kong, France and the UK. The gains
or losses on the financial assets designated at fair
value held to support these insurance and investment
contract liabilities are reported in ‘Net income from
financial instruments designated at fair value’.
The increase in liabilities to policyholders also
reflected the increase in new business written,
notably in Hong Kong and Brazil as explained under
‘Net earned insurance premiums’. This was partly
offset by a lower increase in reserves in France
attributable to the decline in net earned premiums,
and a decrease in Argentina due to the sale of the
general insurance business in May 2012.
Loan impairment charges and other credit risk provisions
Loan impairment charges
New allowances net of allowance releases ............................................................
Recoveries of amounts previously written off .......................................................
Individually assessed allowances ...............................................................................
Collectively assessed allowances ...............................................................................
Impairment of available-for-sale debt securities ........................................................
Other credit risk provisions/(recoveries) ....................................................................
2012
US$m
9,306
(1,146)
8,160
2,139
6,021
99
52
2011
US$m
12,931
(1,426)
11,505
1,915
9,590
631
(9)
2010
US$m
14,568
(1,020)
13,548
2,625
10,923
472
19
Loan impairment charges and other credit risk provisions ........................................
8,311
12,127
14,039
Reported loan impairment charges and other credit
risk provisions (‘LIC’s) fell from US$12bn to
US$8.3bn, a decrease of 31% compared with
2011. On an underlying basis they reduced from
US$10bn to US$8.0bn.
On a constant currency basis, they declined by
US$3.5bn or 30% compared with 2011. Collectively
assessed allowances were down by US$3.3bn and
credit risk provisions fell by US$456m, partly offset
by higher individually assessed impairment charges
of US$258m.
At 31 December 2012, the aggregate balance
of customer loan impairment allowances was
US$16bn. This represented 2% of gross loans
and advances to customers (net of reverse repos and
settlement accounts) in line with 31 December 2011.
The fall in collectively assessed impairment
allowances was most significant in RBWM in North
America due to the continued reduction in the CML
portfolios in run-off, and the sale of the Card and
Retail Services business. In addition, lower loan
impairment charges in Europe in RBWM were due
to improved credit quality as we continued to pro-
actively identify and monitor customers facing
financial hardship and focused our lending growth
on higher quality assets, notably in the UK. These
factors were partly offset by higher loan impairment
charges and other credit risk provisions in Latin
America which were driven by increased delinquency
rates in RBWM and CMB, mainly in Brazil.
Impairment of available-for-sale debt securities
reduced, mainly in Europe, due to lower charges on
available-for-sale ABSs and on Greek sovereign
debt, partly offset by an increase in Rest of Asia-
Pacific due to a charge on an available-for-sale debt
security in GB&M.
Individually assessed impairment allowances
increased by 14%, primarily in Europe in CMB,
reflecting challenging economic conditions in the
UK, Greece, Spain and Turkey. In addition, higher
individually assessed impairments in Latin America
mainly related to a single exposure in Brazil.
LICs declined in North America, primarily in
the CML portfolio, as well as in Europe, Hong Kong
and the Middle East and North Africa. The decrease
was partly offset by an increase in Latin America
and Rest of Asia-Pacific.
In North America, LICs fell by 51% to
US$3.5bn. Within this, loan impairment charges
fell by US$1.3bn following the sale of the Card
and Retail Services business. Loan impairment
charges in our CML business in the US fell by 48%
to US$2.6bn, driven by lower lending balances, as
we continued to run off the portfolio, and lower
delinquency levels. Loan impairment charges
continued to be adversely affected by delays in
expected cash flows from mortgage loans due, in
part, to delays in foreclosure processing, although
the effects were less pronounced than in 2011. These
decreases were partly offset by an adjustment made
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Financial summary > Group performance by income and expense item
following a review completed in the fourth quarter of
2012 which concluded that the estimated average
period of time from current status to write-off was
ten months for real estate loans. In CMB and
GB&M, loan impairment charges increased, mainly
in Bermuda, due to individually assessed
impairments on a small number of exposures.
In Europe, LICs decreased by 22% to
US$1.9bn. This was mainly in GB&M due to lower
credit risk provisions on available-for-sale ABSs as a
result of an improvement in underlying asset prices,
as well as lower charges on Greek sovereign debt.
Further information on our exposures to countries in
the eurozone is provided on page 192. This was
partly offset by increased impairment charges on the
legacy credit loans and receivables portfolio. In
RBWM, loan impairment charges continued to
decline, primarily in the UK, as we focused our
lending growth on higher quality assets and
continued to pro-actively identify and monitor
customers facing financial hardship. As a result,
delinquency rates improved across both the secured
and unsecured lending portfolios. This was partly
offset by an increase in impairments in Turkey due
to strong growth in previous years in our RBWM
customer loans and advances. In addition, there were
higher individually assessed provisions in CMB
across a range of sectors, reflecting increased stress
on the financial status of certain customers in the
challenging economic conditions in certain eurozone
countries.
Operating expenses
In Hong Kong, LICs fell by 53% to US$74m,
largely due to lower specific impairment charges in
CMB and the non-recurrence of charges relating to
available-for-sale Greek sovereign debt securities.
In the Middle East and North Africa, LICs
decreased by US$6m to US$286m. Lower loan
impairment charges in RBWM reflected
repositioning of the book towards higher quality
secured lending in previous years. This was largely
offset by higher LICs recorded for a small number of
large exposures in GB&M.
LICs in Latin America and Rest of Asia-Pacific
increased compared with 2011. In Latin America,
they increased by 29% to US$2.1bn. This was
mainly in Brazil, driven by increased delinquency
rates in RBWM and CMB, particularly in the
Business Banking portfolio reflecting lower
economic growth in 2012. We took a number of
steps to reposition the portfolios in RBWM and
CMB including improving our collections
capabilities, reducing third-party originations and
lowering credit limits where appropriate. Loan
impairment charges fell in Brazil during the second
half of 2012, mainly due to lower collective portfolio
provisions.
In Rest of Asia-Pacific, LICs increased by 64%
to US$436m, notably in CMB as a result of the
impairment of a corporate exposure in Australia and
a small number of corporate exposures in India, as
well as a credit risk provision on an available-for-
sale debt security in GB&M.
By expense category
Employee compensation and benefits ........................................................................
Premises and equipment (excluding depreciation and impairment) ..........................
General and administrative expenses .........................................................................
Administrative expenses .............................................................................................
Depreciation and impairment of property, plant and equipment ...............................
Amortisation and impairment of intangible assets .....................................................
Operating expenses .....................................................................................................
Staff numbers (full-time equivalents)
Europe .........................................................................................................................
Hong Kong .................................................................................................................
Rest of Asia-Pacific ....................................................................................................
Middle East and North Africa ....................................................................................
North America ............................................................................................................
Latin America .............................................................................................................
2012
US$m
20,491
4,326
15,657
40,474
1,484
969
42,927
2012
70,061
27,742
85,024
8,765
22,443
46,556
2011
US$m
21,166
4,503
12,956
38,625
1,570
1,350
41,545
At 31 December
2011
74,892
28,984
91,051
8,373
30,981
54,035
2010
US$m
19,836
4,348
10,808
34,992
1,713
983
37,688
2010
75,698
29,171
91,607
8,676
33,865
56,044
Staff numbers ..............................................................................................................
260,591
288,316
295,061
42
Reported operating expenses of US$42.9bn were
US$1.4bn or 3% higher than in 2011. On an
underlying basis, costs increased by 11%.
On a constant currency basis, operating
expenses in 2012 were US$2.7bn or 7% higher than
in 2011, primarily driven by fines and penalties paid
as part of the settlement of investigations into past
inadequate compliance with anti-money laundering
and sanction laws of US$1.9bn, of which US$1.5bn
was attributed to, and paid by, HSBC North America
Holdings Inc. (‘HNAH’) and its subsidiaries and
US$375m was paid by HSBC Holdings. Further
provisions for the UK customer redress programmes
of US$2.3bn were raised during 2012 compared
with a charge of US$890m in 2011 (US$898m as
reported). This included a charge for additional
estimated redress for possible mis-selling in previous
years of PPI policies US$1.7bn (2011: US$713m)
and interest rate protection products (US$598m),
which took the balance sheet provision for the UK
customer redress programmes at 31 December 2012
to US$2.2bn.
In 2011 we recorded a credit of US$570m
(US$587m as reported) following a change in the
inflation measure used to calculate the defined
benefit obligation in the UK for deferred pensions
which did not recur in 2012.
Cost efficiency ratios4
Costs also rose due to inflationary pressures in
certain of our Latin American and Asian markets and
increased investment costs in strategic initiatives,
including certain business expansion projects, and in
enhanced processes and technology capabilities. We
also increased investment in our regulatory and
compliance infrastructure primarily in the US.
The above increases in costs were mitigated by
strict cost control and the continued delivery of our
organisational effectiveness programmes, which
resulted in sustainable cost savings of US$2.0bn.
The number of employees (expressed in FTEs) at the
end of the 2012 was 10% lower than at the end of
2011. This reflected the planned net reduction of
staff numbers across the Group from organisational
effectiveness initiatives and business disposals. In
2012, average FTEs fell by 7%.
Business disposals in 2011 and 2012 resulted in
a lower cost base, most significantly from the sale of
the Card and Retail Services business and the 195
branches in the US.
Restructuring and other related costs were
US$876m in 2012 compared with US$1.1bn in 2011
(US$1.1bn as reported).
HSBC .........................................................................................................................
Geographical regions
Europe ........................................................................................................................
Hong Kong .................................................................................................................
Rest of Asia-Pacific ....................................................................................................
Middle East and North Africa ....................................................................................
North America ............................................................................................................
Latin America .............................................................................................................
Global businesses
Retail Banking and Wealth Management ..................................................................
Commercial Banking .................................................................................................
Global Banking and Markets .....................................................................................
Global Private Banking ..............................................................................................
For footnote, see page 120.
Share of profit in associates and joint ventures
Associates
Bank of Communications Co., Limited .................................................................
Ping An Insurance (Group) Company of China, Ltd .............................................
Industrial Bank Co., Limited ..................................................................................
The Saudi British Bank ..........................................................................................
Other .......................................................................................................................
Share of profit in associates ........................................................................................
Share of profit in joint ventures ..................................................................................
Share of profit in associates and joint ventures ..........................................................
43
2012
%
62.8
108.4
39.0
42.7
48.0
60.8
58.7
58.4
45.9
54.2
67.6
2012
US$m
1,670
763
670
346
72
3,521
36
3,557
2011
%
57.5
70.4
44.5
54.2
44.5
55.7
63.3
63.2
46.3
57.0
68.8
2011
US$m
1,370
946
471
308
126
3,221
43
3,264
2010
%
55.2
67.9
43.4
55.7
44.7
48.8
65.7
58.1
49.4
48.8
65.8
2010
US$m
987
848
327
161
156
2,479
38
2,517
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Report of the Directors: Operating and Financial Review (continued)
Financial summary > Group performance by income and expense item / Consolidated balance sheet
The reported share of profit in associates and joint
ventures was US$3.6bn, an increase of 9% compared
with 2011. On a constant currency basis, it increased
by 7%, driven by higher contributions from our
associates in mainland China.
Our share of profits from BoCom rose, as a
result of loan growth and higher fee income from
cards, management service and guarantees and
commitments. This was partly offset by increased
operating expenses reflecting investment in staff
and technology, and higher loan impairment charges.
Profits from Industrial Bank also increased,
reflecting continued growth in lending balances
and a rise in associated fee income, partly offset
by higher operating expenses in line with business
expansion, as well as increased loan impairment
charges. On 7 January 2013, our holding in
Industrial Bank was diluted following its issue of
additional share capital to third parties. Our
Tax expense
shareholding has now been classified as a financial
investment.
Profits from The Saudi British Bank rose, driven
by higher revenues reflecting strong balance sheet
growth and lower costs resulting from effective
control and monitoring.
Profits from Ping An were lower due to market
valuation losses on equity securities held by their
insurance business, reflecting volatile domestic
equity markets, partly offset by increased income
from the banking business reflecting the contribution
of Ping An Bank (formerly Shenzhen Development
Bank). On 5 December 2012, we agreed to sell our
entire shareholding in Ping An and recognised a gain
on the disposal of the associate. Our remaining
shareholding has been classified as a financial
investment (see page 39 for details of this
transaction).
Profit before tax ..........................................................................................................
Tax expense ................................................................................................................
Profit after tax .............................................................................................................
Effective tax rate .........................................................................................................
2012
US$m
20,649
(5,315)
15,334
25.7%
2011
US$m
21,872
(3,928)
17,944
18.0%
2010
US$m
19,037
(4,846)
14,191
25.5%
The tax charge in 2012 was US$1.4bn or 35% higher
than in 2011 on a reported basis.
The higher tax charge in 2012 reflected the non-
tax deductible effect of fines and penalties paid as
part of the settlement of investigations into past
inadequate compliance with anti-money laundering
and sanctions laws, together with the non-recognition
of the tax benefit in respect of the accounting charge
associated with negative fair value movements on
own debt. The lower tax charge in 2011 included the
benefit of US deferred tax recognised in 2011 in
respect of foreign tax credits.
As a result of these factors, the reported effective
tax rate for 2012 was 25.7 % compared with 18.0%
for 2011.
In 2012, the tax paid by the Group was
US$9.3bn (2011: US$8.0bn). The amount differs
from the tax charge reported in the income statement
due to indirect taxes such as VAT and the bank levy
included in the pre-tax profit and the timing of
payments.
The Group also plays a major role as tax
collector for governments in the jurisdictions in
which we operate. In 2012, the Group collected
US$8.5bn (2011: US$8.7bn).
44
Consolidated balance sheet
Five-year summary consolidated balance sheet and selected financial information
ASSETS
Cash and balances at central banks .............................................
Trading assets ..............................................................................
Financial assets designated at fair value .....................................
Derivatives ...................................................................................
Loans and advances to banks ......................................................
Loans and advances to customers54 .............................................
Financial investments ..................................................................
Assets held for sale ......................................................................
Other assets ..................................................................................
At 31 December
2012
US$m
141,532
408,811
33,582
357,450
152,546
997,623
421,101
19,269
160,624
2011
US$m
129,902
330,451
30,856
346,379
180,987
940,429
400,044
39,558
156,973
2010
US$m
57,383
385,052
37,011
260,757
208,271
958,366
400,755
1,991
145,103
2009
US$m
60,655
421,381
37,181
250,886
179,781
896,231
369,158
3,118
146,061
2008
US$m
52,396
427,329
28,533
494,876
153,766
932,868
300,235
2,075
135,387
Total assets ..................................................................................
2,692,538
2,555,579
2,454,689
2,364,452
2,527,465
LIABILITIES AND EQUITY
Liabilities
Deposits by banks ........................................................................
Customer accounts .......................................................................
Trading liabilities .........................................................................
Financial liabilities designated at fair value ................................
Derivatives ...................................................................................
Debt securities in issue ................................................................
Liabilities under insurance contracts ...........................................
Liabilities of disposal groups held for sale .................................
Other liabilities ............................................................................
107,429
1,340,014
304,563
87,720
358,886
119,461
68,195
5,018
118,123
112,822
1,253,925
265,192
85,724
345,380
131,013
61,259
22,200
111,971
110,584
1,227,725
300,703
88,133
258,665
145,401
58,609
86
109,868
124,872
1,159,034
268,130
80,092
247,646
146,896
53,707
3
148,411
130,084
1,115,327
247,652
74,587
487,060
179,693
43,683
–
149,150
Total liabilities .............................................................................
2,509,409
2,389,486
2,299,774
2,228,791
2,427,236
Equity
Total shareholders’ equity ...........................................................
Non-controlling interests .............................................................
175,242
7,887
158,725
7,368
147,667
7,248
128,299
7,362
93,591
6,638
Total equity ..................................................................................
183,129
166,093
154,915
135,661
100,229
Total equity and liabilities ...........................................................
2,692,538
2,555,579
2,454,689
2,364,452
2,527,465
Five-year selected financial information
Called up share capital .................................................................
Capital resources55,56 ....................................................................
Undated subordinated loan capital ..............................................
Preferred securities and dated subordinated loan capital57 .........
9,238
180,806
2,778
48,260
8,934
170,334
2,779
49,438
8,843
167,555
2,781
54,421
8,705
155,729
2,785
52,126
6,053
131,460
2,843
50,307
Risk-weighted assets and capital ratios55
Risk-weighted assets ...................................................................
1,123,943
1,209,514
1,103,113
1,133,168
1,147,974
Core tier 1 ratio ............................................................................
Total capital ratio .........................................................................
Financial statistics
Loans and advances to customers as a percentage of
customer accounts ...................................................................
Average total shareholders’ equity to average total assets .........
Net asset value per ordinary share at year-end58 (US$) ..............
Number of US$0.50 ordinary shares in issue (millions) .............
Closing foreign exchange translation rates to US$:
US$1: £ ........................................................................................
US$1: € ........................................................................................
%
12.3
16.1
74.4
6.16
9.09
18,476
%
10.1
14.1
75.0
5.64
8.48
17,868
%
10.5
15.2
%
9.4
13.7
%
7.0
11.4
78.1
5.53
77.3
4.72
83.6
4.87
7.94
17,686
7.17
17,408
7.44
12,105
0.619
0.758
0.646
0.773
0.644
0.748
0.616
0.694
0.686
0.717
For footnotes, see page 120.
A more detailed consolidated balance sheet is contained in the Financial Statements on page 374.
45
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Report of the Directors: Operating and Financial Review (continued)
Financial summary > Consolidated balance sheet
Movement in 2012
Total reported assets were US$2.7 trillion, 5%
higher than at 31 December 2011. Excluding the
effect of currency movements, total assets increased
by 4%, as shown on page 48.
Our business model (see page 14) and our
approach to managing the Group balance sheet
contributed to our strong liquidity position.
Customer deposits increased by over US$65bn in
2012, which enabled us to continue to support our
customers’ borrowing requirements. Loans and
advances to customers grew by more than US$39bn
during the year, notably in residential mortgages and
term and trade-related lending to corporate and
commercial customers. Higher customer activity
also led to a rise in trading assets.
We have made significant progress in
simplifying and re-shaping our balance sheet to
improve our capital deployment. We completed a
significant number of business disposals during the
year, most notably the Card and Retail Services
business and non-strategic branches in the US. This
led to a significant reduction in ‘Assets held for sale’
with further transactions due to complete in 2013.
Assets
Cash and balances at central banks rose by 7% as
we placed a greater portion of our surplus liquidity
in Hong Kong, Europe and Rest of Asia-Pacific with
central banks, reflecting both our risk profile and
growth in customer deposits. This was partly offset
by a reduction in North America as liquidity was
redeployed into highly-rated financial investments.
Trading assets increased by 21%. At the end of
2011, client activity fell as eurozone debt concerns
dominated the global economy and, as a result, we
reduced our holdings of debt and equity securities
and did not replace maturities in our reverse repo
book. In 2012, client activity increased from these
subdued levels which resulted in a rise in reverse
repo and securities borrowing balances, together
with higher holdings of equity securities.
Notwithstanding the rise in year-end balances, we
actively managed the trading inventory in GB&M
and the average balance for the year declined by 9%.
Financial assets designated at fair value rose by
8%. Holdings of equity securities in our insurance
businesses in Hong Kong and Europe increased,
reflecting favourable market movements. Portfolio
growth was also partly attributable to net premiums
received in the year.
Derivative assets remained broadly in line with
December 2011 levels. Downward movements in
46
yield curves in major currencies led to a rise in the
fair value of interest rate contracts, largely in Europe
and, to a lesser extent, the US. This was partly offset
by a decline in the fair value of credit derivative
contracts in Europe and the US, as spreads tightened,
and foreign exchange contracts in Europe reflecting
lower volumes of open trades. In addition, netting
increased from an increase in trading through
clearing houses and a rise in the fair value of interest
rate contracts.
Loans and advances to banks declined by 16%,
driven by a reduction in reverse repo balances in
Europe, in part reflecting the redeployment of
liquidity to central banks, together with maturities
and repayments in Hong Kong and Rest of Asia-
Pacific.
Loans and advances to customers increased by
4%. Residential mortgage balances continued to
grow strongly, following the success of marketing
campaigns and competitive pricing in the UK, the
continued strength in the property market in Hong
Kong and expansion of the distribution network
in Rest of Asia-Pacific. Our focus on corporate and
commercial customers that trade internationally led
to a rise in term and trade-related lending in Hong
Kong and Rest of Asia-Pacific. Lending to CMB
customers also increased in Europe, notably in the
UK despite muted demand for credit, and in North
America, reflecting our focus on target segments in
the US. In the Middle East and North Africa, the rise
in term lending balances followed the completion of
the merger of our operations in Oman with OIB and
the acquisition of the onshore retail and commercial
banking business of Lloyds Banking Group in the
UAE. Corporate overdraft balances which did not
meet netting criteria also increased in the UK, with a
corresponding rise in related customer accounts. The
above movements were partly offset by a reduction
in residential mortgage balances in North America as
a result of repayments and write-offs on the run-off
portfolio. Lending to GB&M customers in Europe
also declined as we reduced our exposure to certain
sectors and disposed of selected positions, and
clients chose to re-finance through the capital
markets. Reverse repo balances also declined,
mainly in Europe.
During 2012 we reclassified to ‘Assets held for
sale’ loans and advances to customers relating to the
planned disposals of non-strategic RBWM banking
operations in Rest of Asia-Pacific and businesses in
Latin America and Middle East and North Africa. In
addition, loans and advances to customers, net of
customer allowances, relating to the planned
disposal of non-real estate personal loan balances
in the CML run-off portfolio in North America were
reclassified as ‘Assets held for sale’.
Financial investments rose by 4% as excess
liquidity was deployed into available-for-sale
investments, notably treasury bills in Hong Kong
and highly-rated debt securities in North America.
Assets held for sale declined by 51% following
the completion of the US disposals. This was partly
offset by the reclassification to ‘Assets held for sale’
during the year of the non-real estate personal loan
balances in North America, our shareholdings in
Ping An and Bao Viet Holdings and other non-
strategic businesses.
Liabilities
Deposits by banks declined by 6% due to lower
placements by, and repo activity with, other financial
institutions in Europe. This was partly offset by
higher short-term placements in North America
and Hong Kong.
Customer accounts rose by 5%. This was driven
in part by a significant rise in Hong Kong, where
RBWM customers adopted a more conservative
approach to managing their assets. CMB benefited
from increased liquidity in the market, higher
Payments and Cash Management balances and a rise
in deposits from Business Banking customers. There
was also strong deposit growth in CMB and GB&M
in Europe, which benefited from higher balances in
Payments and Cash Management, while growth in
RBWM in Europe reflected the success of deposit
gathering campaigns. The increase in current
accounts in GB&M in the UK was also related to the
rise in overdrafts which did not meet netting criteria.
These movements were partly offset by a decrease
in Brazil due to both a managed reduction in
term deposits and the continued transformation of
our funding base, substituting wholesale customer
deposits for medium-term notes. Customer account
balances in North America also fell as short-term
deposits in the US placed at the end of 2011 were
withdrawn. In addition, we reduced rates offered to
customers as our funding requirements diminished
following the business disposals and the continued
decline of the consumer finance portfolios in run-off.
Trading liabilities increased by 12%, due to
higher repo activity, notably in the US and in
Europe, which we used to fund the rise in trading
assets resulting from higher client activity.
Financial liabilities designated at fair value
remained broadly in line with December 2011 levels.
A net increase in Europe due to new issuances was
largely offset by a net reduction in North America as
maturities were not replaced, reflecting the decrease
in funding requirements in the US.
The increase in the value of derivative liabilities
was in line with that of ‘Derivative assets’ as the
underlying risk is broadly matched.
Debt securities in issue declined by 10% as
maturing debt was not replaced in North America
due to the decline in funding requirements there.
Liabilities under insurance contracts rose by
11%, largely due to higher investment returns which
resulted in a rise in the fair value of assets held to
support unit-linked insurance contracts and
investment and insurance contracts with DPF,
together with the related liabilities to policyholders.
In addition, liabilities to policyholders were
established for new business written in Hong Kong,
Europe and Latin America. This was offset in part by
a reduction in liabilities under insurance contracts
reflecting disposals of general insurance businesses
in Hong Kong, Rest of Asia-Pacific, Latin America
and Europe, together with the reclassification to
‘Liabilities of disposal groups held for sale’ of
general insurance liabilities in North America and
life insurance liabilities in Rest of Asia-Pacific.
Liabilities of disposal groups held for sale
declined by 77% following the completion of the US
disposals. This was partly offset by the transfer to
this classification of other non-strategic businesses.
Other liabilities rose by 5%, reflecting higher
provisions for customer redress programmes in the
UK together with a rise in amounts owed to clearing
houses as trading activity conducted through them
increased.
Equity
Total shareholders’ equity rose by 9%, driven in part
by profits generated in the year. In addition, there
was a favourable movement on the available-for-sale
reserve from a negative balance of US$3.3bn at
31 December 2011 to a positive balance of
US$1.6bn at 31 December 2012, reflecting an
improvement in the fair value of these assets.
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Financial summary > Consolidated balance sheet
Reconciliation of reported and constant currency assets and liabilities
31 December 2012 compared with 31 December 2011
HSBC
Cash and balances at central banks ..
Trading assets ...................................
Financial assets designated at fair
value .............................................
Derivative assets ...............................
Loans and advances to banks ...........
Loans and advances to customers ....
Financial investments .......................
Assets held for sale ...........................
Other assets .......................................
31 Dec 11
as
reported
US$m
Currency
translation
adjustment59
US$m
31 Dec 11
at 31 Dec 12
exchange
rates
US$m
129,902
330,451
30,856
346,379
180,987
940,429
400,044
39,558
156,973
2,011
7,317
147
9,519
1,436
18,175
4,772
(175)
719
131,913
337,768
31,003
355,898
182,423
958,604
404,816
39,383
157,692
31 Dec 12
as
reported
US$m
141,532
408,811
33,582
357,450
152,546
997,623
421,101
19,269
160,624
Total assets .......................................
2,555,579
43,921
2,599,500
2,692,538
Deposits by banks .............................
Customer accounts ............................
Trading liabilities ..............................
Financial liabilities designated at
fair value .......................................
Derivative liabilities .........................
Debt securities in issue .....................
Liabilities under insurance contracts
Liabilities of disposal groups held
for sale ..........................................
Other liabilities .................................
112,822
1,253,925
265,192
85,724
345,380
131,013
61,259
22,200
111,971
1,809
20,233
6,262
114,631
1,274,158
271,454
107,429
1,340,014
304,563
1,782
9,566
2,053
145
(486)
693
87,506
354,946
133,066
61,404
21,714
112,664
87,720
358,886
119,461
68,195
5,018
118,123
Total liabilities ..................................
2,389,486
42,057
2,431,543
2,509,409
Total shareholders’ equity ................
Non-controlling interests ..................
158,725
7,368
Total equity .......................................
166,093
1,821
43
1,864
160,546
7,411
167,957
175,242
7,887
183,129
Total equity and liabilities ................
2,555,579
43,921
2,599,500
2,692,538
For footnote, see page 120.
Reported
change
%
Constant
currency
change
%
9
24
9
3
(16)
6
5
(51)
2
5
(5)
7
15
2
4
(9)
11
(77)
5
5
10
7
10
5
7
21
8
–
(16)
4
4
(51)
2
4
(6)
5
12
–
1
(10)
11
(77)
5
3
9
6
9
4
48
6
(83)
(100)
(100)
74
3
7
(85)
(100)
(40)
5
In implementing our strategy, we have agreed
to sell a number of businesses across the Group.
Assets and liabilities of businesses which, it is highly
probable, will be sold are reported as held for sale on
the balance sheet until the sale is closed. We include
loans and advances to customers and customer
Combined view of customer lending and customer deposits
account balances reported as held for sale in our
combined view of customer lending and customer
accounts. We consider the combined view more
accurately reflects the size of our lending and deposit
books and growth thereof.
Loans and advances to customers ..............................................................................
Loans and advances to customers reported in assets held for sale60 ..........................
Card and Retail Services ........................................................................................
US branches ............................................................................................................
Other .......................................................................................................................
2012
US$m
997,623
6,124
–
–
6,124
940,429
35,105
29,137
2,441
3,527
2011
US$m
Change
%
Combined customer lending .......................................................................................
1,003,747
975,534
Customer accounts ......................................................................................................
Customer accounts reported in assets held for sale62 .................................................
US branches ............................................................................................................
Other .......................................................................................................................
1,340,014
2,990
–
2,990
1,253,925
20,138
15,144
4,994
Combined customer deposits ......................................................................................
1,343,004
1,274,063
For footnote, see page 120.
Financial investments
Balance Sheet Management .......................................................................................
Insurance entities ........................................................................................................
Special purpose entities ..............................................................................................
Principal investments ..................................................................................................
Other ...........................................................................................................................
At 31 December 2012
Equity
securities
US$bn
Debt
securities
US$bn
–
–
–
2.9
2.9
5.8
293.4
43.4
24.7
−
53.8
415.3
Total
US$bn
293.4
43.4
24.7
2.9
56.7
421.1
The table above analyses the Group’s holdings
of financial investments by business activity. Further
information can be found in the following sections:
•
•
‘Balance Sheet Management’ (page 223) for a
description of the activities and an analysis of
third party assets in balance sheet management.
‘Risk management of insurance operations’
(page 232) includes a discussion and further
analysis of the use of financial investments
within our insurance operations.
•
•
•
‘Special purpose entities’ (page 502) for further
information about the nature of securities
investment conduits in which the above
financial investments are held.
‘Equity securities classified as available for
sale’ (page 222) includes private equity holdings
and other strategic investments.
‘Other’ represents financial investments held in
certain locally managed treasury portfolios and
other GB&M portfolios held for specific
business activities.
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Report of the Directors: Operating and Financial Review (continued)
Financial summary > Consolidated balance sheet / Economic profit/loss
Customer accounts by country
Europe ......................................................................................................................................................
UK .............................................................................................................................................................
France61 .....................................................................................................................................................
Germany ...................................................................................................................................................
Malta .........................................................................................................................................................
Switzerland62 .............................................................................................................................................
Turkey .......................................................................................................................................................
Other .........................................................................................................................................................
At 31 December
2012
US$m
555,009
426,144
55,578
15,611
5,957
20,211
7,629
23,879
2011
US$m
493,404
373,737
55,278
8,738
5,695
19,888
6,809
23,259
Hong Kong ...............................................................................................................................................
346,208
315,345
Rest of Asia-Pacific .................................................................................................................................
Australia ....................................................................................................................................................
India ..........................................................................................................................................................
Indonesia ...................................................................................................................................................
Mainland China ........................................................................................................................................
Malaysia ....................................................................................................................................................
Singapore ..................................................................................................................................................
Taiwan ......................................................................................................................................................
Vietnam .....................................................................................................................................................
Other .........................................................................................................................................................
Middle East and North Africa
(excluding Saudi Arabia) ..........................................................................................................................
Egypt .........................................................................................................................................................
Qatar .........................................................................................................................................................
UAE ..........................................................................................................................................................
Other .........................................................................................................................................................
North America ........................................................................................................................................
US .............................................................................................................................................................
Canada ......................................................................................................................................................
Bermuda ....................................................................................................................................................
Latin America .........................................................................................................................................
Argentina ..................................................................................................................................................
Brazil .........................................................................................................................................................
Mexico ......................................................................................................................................................
Panama ......................................................................................................................................................
Other .........................................................................................................................................................
183,621
20,430
10,415
6,512
35,572
17,641
47,862
12,497
2,147
30,545
39,583
7,548
2,704
18,448
10,883
149,037
90,627
47,049
11,361
66,556
5,351
30,144
22,724
5,940
2,397
174,012
18,802
10,227
6,490
31,570
16,970
44,447
11,659
1,834
32,013
36,422
7,047
2,796
18,172
8,407
155,982
97,542
45,510
12,930
78,760
4,878
42,410
21,772
5,463
4,237
Total ..........................................................................................................................................................
1,340,014
1,253,925
For footnotes, see page 120.
50
Economic loss
Our internal performance measures include
economic profit/(loss), a calculation which compares
the return on financial capital invested in HSBC by
our shareholders with the cost of that capital. We
price our cost of capital internally and the difference
between that cost and the post-tax profit attributable
to ordinary shareholders represents the amount of
economic profit/(loss) generated.
Our long-term cost of capital is reviewed
annually and is 11% for 2012; this remains
unchanged from 2011. However, it has been revised
to 10% for 2013, primarily due to a reduction in the
risk-free rate, reflecting the continued intervention of
central banks, quantitative easing and the flight to
quality, and greater banking sector stability through
higher levels of capital and liquidity.
The following commentary is on a reported
basis.
The return on invested capital fell by
2.2 percentage points to 8.0%, which was
3.0 percentage points lower than our benchmark cost
of capital. Our economic loss was US$5.1bn,
a deterioration of US$3.7bn compared with the
loss in 2011. This reflected higher average invested
capital and a decrease in profits attributable to
ordinary shareholders, primarily due to adverse fair
value movements on own debt attributable to credit
spreads of US$5.2bn, compared with favourable
movements of US$3.9bn in 2011, an increase in
notable cost items and a higher tax charge in 2012.
2012
US$m
%63
2011
US$m
%63
Average total shareholders’ equity .........................................................................
Adjusted by:
Goodwill previously amortised or written off ...................................................
Property revaluation reserves .............................................................................
Reserves representing unrealised losses on effective cash flow hedges ...........
Reserves representing unrealised losses on available-for-sale securities ..........
Preference shares and other equity instruments .................................................
166,820
8,399
(896)
55
1,185
(7,256)
Average invested capital64 ......................................................................................
168,307
156,129
8,123
(914)
287
3,379
(7,256)
159,748
Return on invested capital65 ....................................................................................
13,454
8.0
16,224
10.2
Benchmark cost of capital ......................................................................................
(18,514)
(11.0)
(17,572)
(11.0)
Economic loss and spread ......................................................................................
(5,060)
(3.0)
(1,348)
(0.8)
For footnotes, see page 120.
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Report of the Directors: Operating and Financial Review (continued)
Financial summary > Reconciliation of RoRWA measures / Disposals, held for sale and run-off portfolios
Reconciliation of RoRWA measures
Performance Management
We target a return on average ordinary shareholders’ equity of
12%–15%. For internal management purposes we monitor
global businesses and geographical regions by pre-tax return
on RWAs, a metric which combines return on equity and
regulatory capital efficiency objectives.
In addition to measuring return on average risk-
weighted assets (‘RoRWA’) we measure our
performance internally using the non-GAAP
measure of underlying RoRWA, which is underlying
profit before tax as a percentage of average risk-
weighted assets adjusted for the effects of foreign
currency translation differences and business
disposals. Underlying RoRWA adjusts performance
for certain items which distort year-on-year
performance as explained on page 26.
We also present the non-GAAP measure of
underlying RoRWA adjusted for the effect of
operations which are not regarded as contributing to
the longer-term performance of the Group. These
include the run-off portfolios and the Card and Retail
Services business which was sold in 2012.
The Card and Retail Services average RWAs in
the table below represent the average of the
associated operational risk RWAs that were not
immediately released on disposal and have not
already been adjusted as part of the underlying
RoRWA calculation. The pre-tax loss for Card and
Retail Services in the table below primarily relates to
litigation expenses incurred after the sale of the
business that have not been adjusted as part of the
underlying RoRWA calculation.
Reconciliation of underlying RoRWA (excluding run-off portfolios and Card and Retail Services)
Pre-tax
return
US$m
2012
Average
RWAs66
US$bn
RoRWA
66,67
%
2011
Average
Pre-tax
return
US$m
Reported ...........................................................
20,649
Underlying67 .....................................................
Run-off portfolios ............................................
Legacy credit in GB&M ..............................
US CML and other68 ....................................
Card and Retail Services .................................
Underlying (excluding run-off portfolios
16,385
(1,630)
(280)
(1,350)
(150)
1,172
1,129
167
45
122
5
1.8
1.5
(1.0)
(0.6)
(1.1)
(3.0)
21,872
13,861
(4,901)
(429)
(4,472)
–
and Card and Retail Services) .....................
18,165
957
1.9
18,762
908
For footnotes, see page 120.
Reconciliation of reported and underlying average risk-weighted assets
RWAs66
US$bn
1,154
1,077
169
33
136
–
RoRWA
66,67
%
1.9
1.3
(2.9)
(1.3)
(3.3)
–
2.1
Average reported RWAs66 ..........................................................................................
Currency translation adjustment24 ..............................................................................
Acquisitions, disposals and dilutions ................................................................................
Average underlying RWAs66 ......................................................................................
Year ended 31 December
2012
US$bn
1,172
–
(43)
1,129
2011
US$bn
Change
%
1,154
(7)
(70)
1,077
2
5
The table below presents the contribution of
these businesses and investments to the historical
results of the Group. We do not expect the historical
results to be indicative of future results because of
disposals or run-offs. Fixed allocated costs, included
in total operating costs, will not necessarily be
removed upon disposal and have been separately
identified.
Disposals, held for sale and run-off
portfolios
In implementing our strategy, we have sold or
agreed to sell a number of businesses and
investments across the Group. The sale of these
businesses and investments will have a significant
effect on both our revenue and profitability in the
future. In addition, we have substantial portfolios
which are being run down. We expect the losses on
these portfolios to continue to affect the Group in the
future.
52
Summary income statements for disposals, held for sale and run-off portfolios69,70
2012
Card and
Retail
Services
US$m
Ping An
US$m
Other
disposals
US$m
Held
Run-off portfolios
for sale
excluding
US CML
US CML
and other71
US$m
US$m
Legacy
credit in
GB&M
US$m
Net interest income/(expense) ............................
Net fee income/(expense) ...................................
Net trading income/(expense) ............................
Net income/(expense) from financial instruments
designated at fair value ..................................
Gains less losses from financial investments .....
Dividend income .................................................
Net earned insurance premiums .........................
Other operating income/(expense) .....................
1,267
395
–
–
–
–
–
7
Total operating income/(expense) ...................
1,669
Net insurance claims incurred and movement in
liabilities to policyholders .............................
Net operating income/(expense)21.....................
Loan impairment charges and other
credit risk provisions .....................................
Net operating income/(expense) ......................
Total operating expenses ....................................
Operating profit/(loss) ......................................
Share of profit in associates and joint ventures ..
Profit/(loss) before tax ......................................
By global business
Retail Banking and Wealth Management ..........
Commercial Banking ..........................................
Global Banking and Markets ..............................
Global Private Banking ......................................
Other ...................................................................
Profit/(loss) before tax ........................................
By geographical region
Europe .................................................................
Hong Kong .........................................................
Rest of Asia-Pacific ............................................
Middle East and North Africa ............................
North America ....................................................
Latin America .....................................................
Profit/(loss) before tax ........................................
Other information
Gain on sale ........................................................
Fixed allocated costs included in total operating
expenses ..........................................................
–
1,669
(322)
1,347
(729)
618
–
618
618
–
–
–
–
618
–
–
–
–
618
–
618
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
763
763
622
82
59
–
–
763
–
–
763
–
–
–
763
352
13
67
3
8
–
430
10
883
(218)
665
(16)
649
(467)
182
12
194
99
40
65
(9)
(1)
194
(1)
45
(31)
46
25
110
194
303
(35)
22
5
27
–
315
5
642
(225)
417
(77)
340
(344)
(4)
9
5
2,561
33
(226)
(785)
–
3
–
37
1,623
–
1,623
(2,569)
(946)
(1,106)
(2,052)
2
(2,050)
(29) (1,274)
24
28
–
(18)
9
–
–
(785)
5
(2,050)
–
–
22
–
(25)
8
5
–
–
–
–
(2,050)
–
(2,050)
(28)
(17)
99
10
(72)
–
–
(3)
(11)
–
(11)
(168)
(179)
(101)
(280)
–
(280)
–
–
(280)
–
–
(280)
(281)
1
(2)
–
2
–
(280)
3,148
3,012
1,579
188
–
77
52
230
–
US$bn
US$bn
US$bn
US$bn
US$bn
US$bn
Reduction in RWAs on disposal72 ......................
RWAs72 ...............................................................
39.3
24.9
7.5
Share of HSBC’s profit before tax .....................
Cost efficiency ratio ...........................................
For footnotes, see page 120.
%
3.0
43.7
%
3.7
–
%
0.9
70.2
8.8
9.3
%
–
82.5
107.1
%
(10.0)
68.1
38.6
%
(1.4)
–
53
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Financial summary > Critical accounting policies
Critical accounting policies
(Audited)
Introduction
The results of HSBC are sensitive to the accounting
policies, assumptions and estimates that underlie the
preparation of our consolidated financial statements.
The significant accounting policies are described in
Note 2 on the Financial Statements.
The accounting policies that are deemed critical
to our results and financial position, in terms of the
materiality of the items to which the policies are
applied and the high degree of judgement involved,
including the use of assumptions and estimation, are
discussed below.
Impairment of loans and advances
Our accounting policy for losses arising from the
impairment of customer loans and advances is
described in Note 2g on the Financial Statements.
Loan impairment allowances represent
management’s best estimate of losses incurred
in the loan portfolios at the balance sheet date.
Management is required to exercise judgement
in making assumptions and estimates when
calculating loan impairment allowances on both
individually and collectively assessed loans and
advances.
The majority of the collectively assessed loan
impairment allowances are in North America, where
they were US$5.2bn, representing 54% (2011:
US$6.8bn; 62%) of the Group’s total collectively
assessed loan impairment allowances and 32% of the
Group’s total impairment allowances. Of the North
American collective impairment allowances
approximately 86% (2011: 75%) related to the
US CML portfolio.
The methods used to calculate collective
impairment allowances on homogeneous groups
of loans and advances that are not considered
individually significant are disclosed in Note 2g
on the Financial Statements. They are subject to
estimation uncertainty, in part because it is not
practicable to identify losses on an individual loan
basis because of the large number of individually
insignificant loans in the portfolio.
The estimation methods include the use of
statistical analyses of historical information,
supplemented with significant management
judgement, to assess whether current economic and
credit conditions are such that the actual level of
inherent losses is likely to be greater or less than
that suggested by historical experience. Where
54
changes in economic, regulatory or behavioural
conditions result in the most recent trends in
portfolio risk factors being not fully reflected in the
statistical models, risk factors are taken into account
by adjusting the impairment allowances derived
solely from historical loss experience.
Risk factors include loan portfolio growth,
product mix, unemployment rates, bankruptcy trends,
geographical concentrations, loan product features,
economic conditions such as national and local
trends in housing markets, the level of interest rates,
portfolio seasoning, account management policies
and practices, changes in laws and regulations, and
other influences on customer payment patterns.
Different factors are applied in different regions
and countries to reflect local economic conditions,
laws and regulations. The methodology and the
assumptions used in calculating impairment losses
are reviewed regularly in the light of differences
between loss estimates and actual loss experience.
For example, roll rates, loss rates and the expected
timing of future recoveries are regularly
benchmarked against actual outcomes to ensure
they remain appropriate.
In 2012, a portfolio risk factor adjustment of
US$225m was made to increase the collective
loan impairment allowances for our US mortgage
lending portfolios. The adjustment was made
following a review completed in the fourth quarter of
2012 which concluded that the estimated average
period of time from current status to write-off was
ten months for real estate loans (previously a period
of seven months was used). During 2013, this
revised estimate will be incorporated into the
statistical impairment allowance models.
Where loans are individually assessed for
impairment, management judgement is required in
determining whether there is objective evidence that
a loss event has occurred, and if so, the measurement
of the impairment allowance. In determining
whether there is objective evidence that a loss event
has occurred, judgement is exercised in evaluating
all relevant information on indicators of impairment,
which is not restricted to the consideration of
whether payments are contractually past-due but
includes broader consideration of factors indicating
deterioration in the financial condition and outlook
of borrowers affecting their ability to pay. A higher
level of judgement is required for loans to borrowers
showing signs of financial difficulty in market
sectors experiencing economic stress, particularly
where the likelihood of repayment is affected by the
prospects for refinancing or the sale of a specified
asset. For those loans where objective evidence of
impairment exists, management determine the size
of the allowance required based on a range of factors
such as the realisable value of security, the likely
dividend available on liquidation or bankruptcy, the
viability of the customer’s business model and the
capacity to trade successfully out of financial
difficulties and generate sufficient cash flow to
service debt obligations.
Under certain specified conditions, we provide
loan forbearance to borrowers experiencing financial
difficulties by agreeing to modify the contractual
payment terms of loans in order to improve the
management of customer relationships, maximise
collection opportunities and, if possible, avoid
default or repossession. Where forbearance activities
are significant, higher levels of judgement and
estimation uncertainty are involved in determining
their effects on loan impairment allowances.
Forbearance activities take place in both retail
and wholesale loan portfolios, but our largest
concentration is in the US, in HSBC Finance’s
CML portfolio.
The exercise of judgement requires the use of
assumptions which are highly subjective and very
sensitive to the risk factors, in particular to changes
in economic and credit conditions across a large
number of geographical areas. Many of the factors
have a high degree of interdependency and there
is no single factor to which our loan impairment
allowances as a whole are sensitive, though they are
particularly sensitive to general economic and credit
conditions in North America. For example, a 10%
increase in impairment allowances on collectively
assessed loans and advances in North America
would have increased loan impairment allowances
by US$0.5bn at 31 December 2012 (2011: US$0.7bn).
It is possible that the outcomes within the next
financial year could differ from the assumptions
used, and this could result in a material adjustment
to the carrying amount of loans and advances.
Goodwill impairment
Our accounting policy for goodwill is described in
Note 2p on the Financial Statements. Note 23 on the
Financial Statements lists our cash generating units
(‘CGU’s) by geographical region and global
business. HSBC’s total goodwill amounted to
US$21bn at 31 December 2012 (2011: US$21bn).
The review of goodwill for impairment reflects
management’s best estimate of the future cash flows
of the CGUs and the rates used to discount these
cash flows, both of which are subject to uncertain
factors as follows:
55
•
•
the future cash flows of the CGUs are sensitive
to the cash flows projected for the periods for
which detailed forecasts are available and to
assumptions regarding the long-term pattern
of sustainable cash flows thereafter. Forecasts
are compared with actual performance and
verifiable economic data, but they necessarily
reflect management’s view of future business
prospects at the time of the assessment; and
the rates used to discount future expected cash
flows are based on the costs of capital assigned
to individual CGUs and the rates can have a
significant effect on their valuation. The cost
of capital percentage is generally derived from a
Capital Asset Pricing Model, which incorporates
inputs reflecting a number of financial and
economic variables, including the risk-free
interest rate in the country concerned and a
premium for the risk of the business being
evaluated. These variables are subject to
fluctuations in external market rates and
economic conditions beyond our control and
are consequently subject to uncertainty and
require the exercise of significant judgement.
A decline in a CGU’s expected cash flows
and/or an increase in its cost of capital reduces the
CGU’s estimated recoverable amount. If this is
lower than the carrying value of the CGU, a charge
for impairment of goodwill is recognised in our
income statement for the year.
The accuracy of forecast cash flows is subject
to a high degree of uncertainty in volatile market
conditions. In such market conditions, management
retests goodwill for impairment more frequently than
annually to ensure that the assumptions on which the
cash flow forecasts are based continue to reflect
current market conditions and management’s best
estimate of future business prospects.
During 2012, no impairment of goodwill was
identified (2011: nil). In addition to the annual
impairment test which was performed as at 1 July
2012, management reviewed the current and expected
performance of the CGUs as at 31 December 2012
and determined that there was no indication of
potential impairment of the goodwill allocated to
them, except for the GB&M – Europe CGU, which
experienced significantly reduced profitability in
the second half of 2012 compared with the first half
of 2012. The reduced forecast profitability resulted
in a reduction in the recoverable amount of the CGU
over its carrying amount (‘headroom’).
Consequently, the results of the goodwill impairment
testing for this CGU are more sensitive to key
assumptions used. Management retested the goodwill
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Financial summary > Critical accounting policies
for this CGU and concluded that there was no
impairment.
Note 23 on the Financial Statements includes
details of the CGUs with significant balances of
goodwill, states the key assumptions used to assess
the goodwill in each of those CGUs for impairment
and provides a discussion of the sensitivity of the
carrying value of goodwill to changes in key
assumptions.
Valuation of financial instruments
Our accounting policy for determining the fair value
of financial instruments is described in Note 2d on
the Financial Statements. The best evidence of fair
value is a quoted price for the instrument being
measured in an actively traded market. In the event
that the market for a financial instrument is not
active, a valuation technique is used. The majority
of valuation techniques employ only observable
market data and so the reliability of the fair value
measurement is high. However, certain financial
instruments are valued on the basis of valuation
techniques that include one or more significant
market inputs that are unobservable. Valuation
techniques that rely to a greater extent on
unobservable inputs require a higher level of
management judgement to calculate a fair value
than those based wholly on observable inputs.
Valuation techniques used to calculate fair
values are discussed in Note 15 on the Financial
Statements. The main assumptions and estimates
which management consider when applying a model
with valuation techniques are:
•
•
•
the likelihood and expected timing of future cash
flows on the instrument. These cash flows are
estimated based on the terms of the instrument,
and judgement may be required when the ability
of the counterparty to service the instrument in
accordance with the contractual terms is in
doubt. Future cash flows may be sensitive to
changes in market rates;
selecting an appropriate discount rate for
the instrument. The determination of this rate
is based on an assessment of what a market
participant would regard as the appropriate
spread of the rate for the instrument over the
appropriate risk-free rate; and
judgement to determine what model to use to
calculate fair value in areas where the choice of
valuation model is particularly subjective, for
example, when valuing complex derivative
products.
56
When applying a model with unobservable
inputs, estimates are made to reflect uncertainties
in fair values resulting from a lack of market data
inputs, for example, as a result of illiquidity in
the market. For these instruments, the fair value
measurement is less reliable. Inputs into valuations
based on unobservable data are inherently uncertain
because there is little or no current market data
available from which to determine the level at
which an arm’s length transaction would occur under
normal business conditions. However, in most cases
there is some market data available on which to base
a determination of fair value, for example historical
data, and the fair values of most financial
instruments are based on some market observable
inputs even when unobservable inputs are
significant.
The fair values of financial assets and liabilities
of US$718bn (2011: US$665bn) and US$622bn
(2011: US$569bn), respectively, were determined
using valuation techniques which represented 60%
(2011: 61%) and 83% (2011: 82%), respectively, of
financial assets and liabilities measured at fair value.
The methodology for estimating credit
valuation adjustments (‘CVA’) and debit valuation
adjustments (‘DVA’) has been revised as at
31 December 2012 as a result of changing market
practices in response to regulatory and accounting
changes, as well as general market developments.
A key input into the calculation of CVA is the
probability of default (‘PD’). Prior to the revision
of the methodology, the PD was based on HSBC’s
internal credit rating for the counterparty. The
revised methodology maximises the use of PD based
on market-observable data, such as credit default
swap (‘CDS’) spreads. Where CDS spreads are not
available, PDs are estimated having regard to market
practice, considering relevant data including CDS
indices and historical rating transition matrices.
In addition, HSBC aligned its methodology for
determining DVA to be consistent with that applied
for CVA as at 31 December 2012. Historically,
HSBC considered that a zero spread was appropriate
in respect of own credit risk and consequently did
not adjust derivative liabilities for its own credit risk.
The types and amounts of adjustments made in
determining the fair value of financial instruments
measured at fair value using valuation techniques,
and a sensitivity analysis of fair values for financial
instruments with significant unobservable inputs to
reasonably possible alternative assumptions, are
described in Note 15 on the Financial Statements.
Given the uncertainty and subjective nature
of valuing financial instruments at fair value, it is
possible that the outcomes in the next financial year
could differ from the assumptions used, and this
could result in a material adjustment to the carrying
amount of financial instruments measured at fair
value.
Deferred tax assets
Our accounting policy for the recognition of deferred
tax assets is described in Note 2s on the Financial
Statements. The recognition of a deferred tax asset
relies on an assessment of the probability and
sufficiency of future taxable profits, future reversals
of existing taxable temporary differences and
ongoing tax planning strategies.
The most significant judgements concern the US
deferred tax asset, given the recent history of losses
in our US operations. The net US deferred tax asset
amounted to US$4.6bn or 61% (2011: US$5.2bn;
68%) of deferred tax assets recognised on the
Group’s balance sheet. These judgements take into
consideration the reliance placed on the use of tax
planning strategies.
The most significant tax planning strategy is the
retention of capital in our US operations to ensure
the realisation of the deferred tax assets. The
principal strategy involves generating future taxable
profits through the retention of capital in the US in
excess of normal regulatory requirements in order
to reduce deductible funding expenses or otherwise
deploy such capital or increase levels of taxable
income. Management expects that, with this strategy,
the US operations will generate sufficient future
profits to support the recognition of the deferred
tax assets. If HSBC Holdings were to decide not to
provide this ongoing support, the full recovery of the
deferred tax asset may no longer be probable and
could result in a significant reduction of the deferred
tax asset which would be recognised as a charge in
the income statement.
Provisions
The accounting policy for provisions is described in
Note 2w on the Financial Statements. Note 32 on the
Financial Statements discloses the major categories
of provisions recognised. The closing balance of
provisions amounted to US$5.3bn (2011:
US$3.3bn), of which US$1.7bn (2011: US$1.5bn)
relates to legal proceedings and regulatory matters
and US$2.4bn (2011: US$1.1bn) relates to customer
remediation.
Judgement is involved in determining whether
a present obligation exists, and in estimating the
probability, timing and amount of any outflows.
Professional expert advice is taken on litigation
57
provisions, property provisions (including onerous
contracts) and similar liabilities.
Provisions for legal proceedings and regulatory
matters typically require a higher degree of
judgement than other types of provisions. When
cases are at an early stage, accounting judgements
can be difficult because of the high degree of
uncertainty associated with determining whether a
present obligation exists, and estimating the
probability and amount of any outflows that may
arise. As matters progress through various stages
of development, management and legal advisers
evaluate on an ongoing basis whether provisions
should be recognised and their estimated amounts,
revising previous judgements and estimates as
appropriate. At more advanced stages, it is typically
possible to make judgements and estimates around
a better defined set of possible outcomes. However,
such judgements can be very difficult and the
amount of any provision can be very sensitive to
the assumptions used. There could be a wide range
of possible outcomes for any pending legal
proceedings, investigations or inquiries. As a result,
it is often not practicable to quantify a range of
possible outcomes for individual matters. It is also
not practicable to meaningfully quantify ranges
of potential outcomes in aggregate for these types
of provisions because of the diverse nature and
circumstances of such matters and the wide range of
uncertainties involved. For a detailed description of
the nature of uncertainties and assumptions and the
effect on the amount and timing of possible cash
outflows on material matters, see Note 43 on the
Financial Statements.
Provisions for customer remediation also require
significant levels of estimation and judgement. The
amounts of provisions recognised depend on a
number of different assumptions, for example, the
volume of inbound complaints, the projected period
of inbound complaint volumes, the decay rate of
complaint volumes, the population identified as
systemically mis-sold and the number of policies per
customer complaint.
In view of the inherent uncertainties and the
high level of subjectivity involved in the recognition
and measurement of provisions, it is possible that the
outcomes in the next financial year could differ from
those on which management’s estimates are based,
resulting in materially different amounts of
provisions recognised and outflows of economic
benefits from those estimated by management for
the purposes of the 2012 Financial Statements.
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Global businesses > Summary
Global businesses
Summary ..........................................................................
Products and services .......................................................
Retail Banking and Wealth Management ........................
Commercial Banking .......................................................
Global Banking and Markets ...........................................
Global Private Banking ...................................................
Other ................................................................................
Analysis by global business .............................................
Disposals, held for sale and run-off portfolios ................
58
60
62
65
68
72
74
76
78
Summary
HSBC reviews operating activity on a number of
bases, including by geographical region and by
global business.
The commentaries below present global
businesses followed by geographical regions
(page 79). Performance is discussed in this order
because certain strategic themes, business initiatives
and trends affect more than one geographical region.
All commentaries are on a constant currency basis
(page 25) unless stated otherwise.
Profit/(loss) before tax
Basis of preparation
The results of global businesses are presented in accordance
with the accounting policies used in the preparation of HSBC’s
consolidated financial statements. Our operations are closely
integrated and, accordingly, the presentation of global business
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 these
can be meaningfully attributed to operational business lines.
While such allocations have been made on a systematic and
consistent basis, they necessarily involve some subjectivity.
Where relevant, income and expense amounts presented
include the results of inter-segment funding as well as inter-
company and inter-business line transactions. All such
transactions are undertaken on arm’s length terms.
The expense of the UK bank levy is included in the
Europe geographical region as HSBC regards the levy as a
cost of being headquartered in the UK. For the purposes of the
segmentation by global business, the cost of the levy is
included in ‘Other’.
The fines and penalties paid as part of the settlement of
investigations into past inadequate compliance with anti-
money laundering and sanctions laws of US$1.9bn are
included in the North America (US$1.5bn) and Europe
(US$0.4bn) geographical regions, and in ‘Other’ for the
purposes of the segmentation by global business.
Retail Banking and Wealth Management ................
Commercial Banking ...............................................
Global Banking and Markets ...................................
Global Private Banking ...........................................
Other73 ......................................................................
Total assets74
2012
US$m
%
9,575
8,535
8,520
1,009
(6,990)
46.4
41.3
41.3
4.9
(33.9)
2011
US$m
4,270
7,947
7,049
944
1,662
%
19.6
36.3
32.2
4.3
7.6
2010
US$m
3,839
6,090
9,215
1,054
(1,161)
%
20.2
32.0
48.4
5.5
(6.1)
20,649
100.0
21,872
100.0
19,037 100.0
Retail Banking and Wealth Management ...............................................................
Commercial Banking ..............................................................................................
Global Banking and Markets ..................................................................................
Global Private Banking ..........................................................................................
Other .......................................................................................................................
Intra-HSBC items ...................................................................................................
For footnotes, see page 120.
At 31 December
2012
2011
US$m
%
US$m
%
536,244
363,659
1,942,470
118,440
201,741
(470,016)
19.9
13.5
72.1
4.4
7.5
(17.4)
540,548
334,966
1,877,627
119,839
180,126
(497,527)
21.2
13.1
73.5
4.7
7.0
(19.5)
2,692,538
100.0
2,555,579
100.0
58
Risk-weighted assets
Retail Banking and Wealth Management ...............................................................
Commercial Banking ..............................................................................................
Global Banking and Markets ..................................................................................
Global Private Banking ..........................................................................................
Other .......................................................................................................................
Selected items included in profit before tax by global business
Acquisitions, disposals and dilutions75
Retail Banking and Wealth Management ...................................................................
Commercial Banking ..................................................................................................
Global Banking and Markets ......................................................................................
Global Private Banking ..............................................................................................
Other73 .........................................................................................................................
For footnotes, see page 120.
At 31 December
2012
US$bn
276.6
397.0
403.1
21.7
25.5
%
24.6
35.3
35.9
1.9
2.3
2011
US$bn
351.2
382.9
423.0
22.5
29.9
%
29.0
31.7
35.0
1.9
2.4
1,123.9
100.0
1,209.5
100.0
2012
US$m
5,574
594
149
55
3,107
9,479
2011
US$m
3,328
76
114
(9)
141
3,650
2010
US$m
3
119
262
–
250
634
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Global businesses > Products and services
Products and services
Retail Banking and Wealth Management
RBWM serves over 54 million personal customers. We
take deposits and provide transactional banking
services to enable customers to manage their day-to-
day finances and save for the future. We selectively
offer credit facilities to assist customers in their short
or longer-term borrowing requirements; and we
provide financial advisory, broking, insurance and
investment services to help them to manage and protect
their financial futures.
We develop products designed to meet the needs
of specific customer segments, which may include a
range of different services and delivery channels.
Typically, customer offerings include:
•
•
•
liability-driven services: deposits and account
services;
asset-driven services: credit and lending, both
secured and unsecured; and
fee-driven and other services: financial advisory,
broking, life insurance manufacturing and asset
management.
We deliver services through four principal channels: branches,
self-service terminals, telephone service centres and digital
(internet and mobile). Customers can transact with the bank via
a combination of these channels, through the following offerings:
• HSBC Premier: we provide preferential banking services and
global recognition to our mass affluent customers and their
immediate families with a dedicated relationship manager,
specialist wealth advice and tailored solutions. Customers can
access emergency travel assistance, priority telephone banking
and an online ‘global view’ of their Premier accounts around
the world.
• HSBC Advance: we provide a range of preferential products
and services to simplify the banking needs of customers and
to help them manage and plan their money to achieve their
financial goals and ambitions.
• Wealth Solutions & Financial Planning: a financial
planning process designed around individual customer needs
to help our clients to protect, grow and manage their wealth
through investment and wealth insurance products
manufactured by Global Asset Management, Global Markets
and HSBC Insurance and by selected third-party providers.
• Basic Banking: we increasingly provide globally
standardised but locally delivered, reliable, easy to understand,
good-value banking products and services using global
product platforms and globally set service standards.
Commercial Banking
We segment our CMB business into Corporate, to
serve both corporate and mid-market companies with
more sophisticated financial needs, and Business
Banking, to serve SMEs, enabling differentiated
coverage of our target customers. This allows us to
provide continuous support to companies as they grow
both domestically and internationally, and ensures a
clear focus on internationally aspirant customers.
We place particular emphasis on international
connectivity to meet the needs of our business
customers. We aim to be recognised as the leading
international trade and business bank by focusing
on faster-growing markets, repositioning towards
international business and enhancing collaboration
across the Group. This will be underpinned by
reducing complexity and operational risk and driving
efficiency gains through adopting a global operating
model.
• Credit and Lending: we offer a broad range of domestic and
cross-border financing, including overdrafts, corporate cards,
term loans and syndicated, leveraged, acquisition and project
finance. Asset finance is also offered in selected countries.
• International trade and receivables finance: we provide
the services and finance our clients need throughout the trade
cycle including; letters of credit, collections, guarantees;
receivables finance; supply chain solutions; commodity and
structured finance; and risk distribution. HSBC is supporting
the development of renminbi as a trade currency, with
renminbi capabilities in more than 50 markets.
• Payments and Cash Management: we are a leading
provider of domestic and cross-border payments, collections,
liquidity management and account services offering local,
regional and global solutions delivered via e-enabled platforms
designed to address the current and future needs of our clients.
• Insurance and Investments: we offer business and
financial protection, trade insurance, employee benefits,
corporate wealth management and a variety of other
commercial risk insurance products in selected countries.
• GB&M: our CMB franchise represents a key client base for
GB&M products and services, including foreign exchange and
interest rate products, together with capital raising on debt and
equity markets and advisory services.
60
• Global Markets operations consist of treasury and capital
markets services. Products include foreign exchange; currency,
interest rate, bond, credit, equity and other derivatives;
government and non-government fixed income and money
market instruments; precious metals and exchange-traded
futures; equity services; distribution of capital markets
instruments; and securities services, including custody and
clearing services and funds administration to both domestic
and cross-border investors.
• Global Banking offers financing, advisory and transaction
services. Products include:
– capital raising, advisory services, bilateral and syndicated
lending, leveraged and acquisition finance, structured and
project finance, lease finance and non-retail deposit taking;
– international, regional and domestic payments and cash
management services; and trade services for large corporate
clients.
Global Banking and Markets
GB&M provides tailored financial solutions to major
government, corporate and institutional clients and
private investors worldwide. Managed as a global
business, GB&M operates a long-term relationship
management approach to build a full understanding
of clients’ financial requirements. Sector-focused
client service teams comprising relationship managers
and product specialists develop financial solutions
to meet individual client needs. With a presence in
over 60 countries/territories and access to HSBC’s
worldwide presence and capabilities, this business
serves subsidiaries and offices of our clients on a
global basis.
GB&M is managed as two principal business
lines: Global Markets and Global Banking. This
structure allows us to focus on relationships and
sectors that best fit the Group’s geographic reach
and facilitate seamless delivery of our products and
services to clients.
In addition, Balance Sheet Management is
responsible for the management of liquidity and
funding. It also manages structural interest rate
positions within the Global Markets limit structure.
Global Private Banking
GPB provides investment management and trustee
solutions to high net worth individuals and their
families globally. We aim to meet the needs of our
clients by providing excellent customer service,
utilising our global reach and offering a comprehensive
suite of solutions.
Drawing on the strength of the HSBC Group and
the most suitable products from the marketplace, we
work with our clients to provide solutions to grow,
manage, and preserve wealth for today and for the
future.
• Private Banking services comprise multicurrency and
fiduciary deposits, account services, and credit and specialist
lending. GPB also accesses HSBC’s universal banking
capabilities to offer products and services such as credit cards,
internet banking, and corporate and investment banking
solutions.
• Investment Management comprises advisory and
discretionary investment services, as well as brokerage across
asset classes. This includes a complete range of investment
vehicles, portfolio management, security services and
alternatives.
• Private Trust Solutions comprise trusts and estate planning,
designed to protect wealth and preserve it for future
generations through structures tailored to meet the individual
needs of each client.
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Report of the Directors: Operating and Financial Review (continued)
Global businesses > RBWM
Retail Banking and Wealth Management
Review of performance
RBWM provides banking and wealth
management services for our personal
customers to help them to manage
their finances and protect and build
their financial futures.
Net interest income ..........
Net fee income .................
Other income ...................
2012
US$m
20,298
7,205
6,358
2011
US$m
24,101
8,226
1,206
2010
US$m
24,166
8,397
1,048
Net operating income21 ..
33,861
33,533
33,611
LICs76 ...............................
(5,515)
(9,319)
(11,259)
Net operating income ....
28,346
24,214
22,352
Total operating expenses ..
(19,769)
(21,202)
(19,539)
Operating profit .............
8,577
Income from associates77 .
998
Profit before tax .............
9,575
RoRWA66 .........................
3.1%
3,012
1,258
4,270
1.2%
2,813
1,026
3,839
1.1%
Underlying revenue growth
in all faster-growing regions
Announced
34
disposals or closures since
the start of 2011 and completed
12
in 2012
Best in Wealth Management
in Hong Kong
(The Asian Banker, March 2012)
Strategic direction
RBWM provides retail banking and wealth management services
for personal customers in markets where we have, or can build,
the scale to do so cost effectively.
We focus on three strategic imperatives:
• building a consistent, high standard, customer needs-driven
wealth management service for retail customers drawing on
our Insurance and Asset Management businesses;
• leveraging global expertise to improve customer service and
productivity, to provide a high standard of banking solutions
and service to our customers efficiently; and
• simplifying and re-shaping the RBWM portfolio of businesses
globally, to focus our capital and resources on key markets.
For footnotes, see page 120.
The commentary is on a constant currency basis unless stated
otherwise.
62
• RBWM reported profit before tax of US$9.6bn
compared with US$4.3bn in 2011 (US$4.2bn on
a constant currency basis). This included net
gains resulting from a number of strategic
transactions, including US$3.7bn from the
disposals of the Card and Retail Services
(‘CRS’) business and non-strategic branches in
the US.
• On an underlying basis, profit before tax
increased by US$3.1bn, largely driven by lower
loan impairment charges in the US run-off
portfolio and higher insurance profits in Hong
Kong and Brazil. These were partly offset by
charges relating to the customer redress
programmes in the UK of US$1.8bn, compared
with US$868m in 2011 (US$875m as reported).
RBWM – profit/(loss) before tax
RBWM excluding US CRS
and US run-off portfolio .
US CRS ..............................
US run-off portfolio ...........
2012
US$m
2011
US$m
2010
US$m
7,083
3,766
(1,274)
6,681
2,061
(4,472)
5,936
1,979
(4,076)
9,575
4,270
3,839
• Loss before tax in the US run-off portfolio
declined significantly, mainly due to lower
loan impairment charges reflecting the decline
in average lending balances. In addition,
revenue benefited from lower adverse
movements on the fair value of non-qualifying
hedges in HSBC Finance of US$227m,
compared with US$1.2bn in 2011. This was
partly offset by a fall in net interest income
largely driven by the continued reduction in
lending balances.
• Profit before tax for RBWM excluding US
CRS and the US run-off portfolio increased
by US$472m, with revenue growth in Hong
Kong, Latin America and Rest of Asia-Pacific
partly offset by a fall in profit in the UK due
to a US$883m increase in customer redress
provisions and the non-recurrence of a credit of
US$256m (US$264m as reported) relating to
defined benefit pension obligations.
• Revenue grew by 13% in Hong Kong reflecting
wider deposit spreads, higher lending and
deposit balances and the gains on sale of
the general insurance businesses and our shares
in Global Payments Asia-Pacific Ltd. Insurance
income also increased due to higher investment
returns and strong sales and renewals of life
insurance products. This was partly offset by the
non-recurrence of the implementation benefit
from refining the PVIF asset calculation in
2011.
• Revenue in Rest of Asia-Pacific increased by
3% due to the gain on sale of our operations in
Thailand, partly offset by the loss of operating
revenues associated with this disposal and the
discontinuation of our HSBC Premier (‘Premier’)
service in Japan. Net interest income remained
broadly in line with 2011. Mortgage and deposit
balances grew, primarily in Singapore, mainland
China, Australia and Malaysia, although the
effect was offset by narrower asset and deposit
spreads.
In Latin America, revenue grew by 6%, driven
by higher insurance revenues from strong sales
of unit-linked pension and term life products
and the favourable effect of the recognition of a
PVIF asset (US$144m) in Brazil. In addition,
we reported a gain on sale of the general
insurance business in Argentina. Net interest
income increased due to growth in personal
loans and deposit balances. Growth was partly
offset by the loss on sale of certain businesses as
well as the non-recurrence of gains on the sale
and leaseback of branches and the sale of HSBC
Afore, both in Mexico during 2011.
In Europe, revenue remained broadly in line
with 2011. Revenue decreased in the UK,
largely driven by deposit spread compression.
This was partly offset by higher mortgage
spreads and average balances in the UK and
business expansion in Turkey, which led to
higher net interest income following growth in
personal lending and mortgage balances.
•
•
• Loan impairment charges in RBWM excluding
US CRS and the US run-off portfolio were
broadly in line with 2011. Reductions in Europe,
driven by lower delinquencies across both the
secured and unsecured lending portfolios,
particularly in the UK, were offset by higher
impairments in Brazil, where delinquency rates
increased as economic growth slowed in 2012.
• Operating expenses in RBWM excluding US
CRS and the US run-off portfolio increased
only modestly, despite significantly higher
customer redress provisions and the non-
recurrence of a pension credit in the UK.
Excluding these items, expenses decreased
through both our organisational effectiveness
programmes and the transactions undertaken
as part of our portfolio management activities,
detailed below. These led to a reduction of more
than 13,500 FTEs, with all regions contributing
to sustainable cost savings of more than
US$350m.
•
Share of profit from associates and joint
ventures decreased by 22%, mainly from Ping
An due to market valuation losses on equity
securities held by their insurance business,
reflecting volatile domestic equity markets.
Following the disposal of our associate, Ping
An, our remaining shareholding has been
classified as a financial investment.
Strategic imperatives
Developing a high standard of wealth
management for retail customers
•
In 2012, we accelerated the transformation of
the Wealth Management business in HSBC,
investing significantly in infrastructure to
improve customer experience and revenue
generation, although further progress is required
to achieve our strategic goals.
• Wealth Management revenues increased by over
US$550m in 2012 to US$6.4bn, primarily due
to growth from insurance, mutual funds and
foreign exchange. Wealth insurance revenues
improved, driven by higher investment returns,
notably in Hong Kong and France and strong
sales of life insurance products in Hong Kong
and Brazil. Mutual funds sales grew, with
revenues increasing by 17% to US$935m.
Revenues from foreign exchange transactions
benefited from infrastructure investments,
including the successful deployment of our web-
enabled foreign currency ‘Get Rate’ system
across key markets in Europe and Asia towards
the end of 2011.
• Foreign exchange services are a core component
of our wealth strategy, and we continue to invest
in order to further enhance our customer
offering. By 31 December 2012, over 220,000
of our customers were using our Global View
and Global Transfer products, making cross-
border transfers amounting to more than
US$13bn in the year. We enhanced our
international wire services by improving limits
and pricing. We also completed the online
launch of dual-currency deposits in Asian
markets, and improved market access for
foreign exchange trading.
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Global businesses > RBWM / CMB
• Sales of our long-term fund products, including
our managed solutions, continued to grow. We
launched the HSBC Asia Focused Income Fund
in May which grew to US$1bn by the end of
2012. World Selection and Premier Investment
Management Services for retail customers
continued to grow, with total net sales
amounting to US$2bn during the year, resulting
in a 20% increase to US$19bn in FuM related
to these portfolios.
• HSBC Global Asset Management’s investment
performance was strong in 2012, with over
70% of its Equity, Multi-Asset and Fixed
Income funds by value ranking above median.
As a result, 71% of eligible funds were in the
top two quartiles over the three-year period to
31 December 2012.
• We made significant investments to reinforce
the wealth risk management framework,
introducing enhanced risk profiling and strategic
financial planning tools to enable more effective
control of compliance and regulatory risks.
• As part of the drive to enhance customer
experience, we started the global roll-out of a
new Wealth Dashboard, which allows customers
easy access and analysis of personal holdings
and enables ongoing comparison with reference
portfolios. Additionally, in a number of markets
we introduced a global insurance point-of-sale
system which offers customers a faster, more
integrated service.
Leveraging global expertise in retail banking
• We continued to enhance our digital banking
capabilities with the launch of the first mobile
payment solution in Hong Kong enabling
contactless credit card transactions through Visa
payWave terminals, the first deployment of a
global application platform in the US, and the
roll-out of mortgage digital sales tools in the
UK, India, UAE and Malaysia.
• Our business re-engineering programme is
driving cost reduction and efficiency
improvements through standardisation. We
used our global scale to improve cost controls
and progressively standardised the design
of our Contact Centres. In addition, we are
successfully deploying enhanced analytical
capabilities to improve customer experience.
Portfolio management to drive superior returns
• Good progress was made in portfolio
management activities with 17 disposals or
64
closures announced in 2012 and a further four in
2013, following the 13 announced in 2011, and
12 transactions completed in 2012. During
2012, we completed the sale or closure of our
retail businesses in Thailand, Honduras, El
Salvador and Costa Rica, disposed of the Card
and Retail Services business and upstate New
York branches in the US and the full service
retail brokerage business in Canada and
recorded an investment loss on a subsidiary.
Additionally, we announced the sale of our retail
banking operations in Colombia, Peru, Uruguay,
Paraguay and Pakistan and the closure of the
consumer finance business in Canada. In
December 2012 we disposed of our associate,
Ping An, with our remaining shareholding
classified as a financial investment, and also
completed the sale of our shares in Global
Payments Asia-Pacific Ltd. Following
completion of all the announced transactions we
will have refocused our business to 20 home and
priority markets (representing 98% of 2012
profit before tax) and a limited number of
network and small markets.
• We are exiting the general insurance
manufacturing business and focusing on life
insurance manufacturing where we have scale.
In 2012, we completed the sale of our general
insurance businesses in Hong Kong, Singapore,
Argentina and Ireland, announced the sale of
our insurance manufacturing businesses in the
US and Taiwan and reached an agreement to sell
a portfolio of general insurance assets and
liabilities in Mexico.
•
In October 2012, we completed the acquisition
of the onshore retail banking business of Lloyds
Banking Group in the UAE, following the
merger in the second quarter of our Omani
operations with OIB.
• We remained focused on managing the run-off
of balances in our CML portfolio, with year-end
lending balances, including loans held for sale,
declining by 14% from December 2011 to
US$43bn. In the third quarter of 2012, we
reclassified US$3.7bn of non-real estate
personal loan balances, net of impairment
allowances, from our consumer finance
portfolio to ‘Assets held for sale’ as we actively
marketed the portfolio. We also identified real
estate secured loan balances which we plan to
actively market in multiple transactions over the
next two years.
Commercial Banking
Review of performance
CMB offers a full range of commercial
financial services and tailored solutions
to more than three million customers
ranging from small and medium-sized
enterprises to publicly quoted
companies in more than 60 countries.
Net interest income ..........
Net fee income .................
Other income ...................
2012
US$m
10,361
4,470
1,720
2011
US$m
9,931
4,291
1,389
2010
US$m
8,487
3,964
1,383
Net operating income21 ..
16,551
15,611
13,834
LICs76 ...............................
(2,099)
(1,738)
(1,805)
Net operating income ....
14,452
13,873
12,029
Total operating expenses ..
(7,598)
(7,221)
(6,831)
Operating profit/(loss) ...
Income from associates77 .
Profit/(loss) before tax ...
6,854
1,681
8,535
RoRWA66 .........................
2.2%
6,652
1,295
7,947
2.2%
5,198
892
6,090
2.0%
Record reported profit before tax
US$8.5bn
9%
increase in customer deposits, driven by
Payments and Cash Management
Number one global trade finance
bank in the world
(Oliver Wyman Global Transaction Banking Survey 2012)
Strategic direction
CMB aims to be the banking partner of choice for international
businesses by building on our rich heritage, international
capabilities and relationships to enable connectivity and support
trade and capital flows around the world, thereby strengthening
our leading position in international business and trade.
We have four strategic imperatives:
• focus on faster-growing markets while connecting revenue and
investment flows with developed markets;
• capture growth in international SMEs and corporate businesses;
• enhance collaboration across all global businesses to provide
our customers with access to the full range of the Group’s
services; and
• simplify processes and enhance risk management controls by
adopting a global operating model.
For footnotes, see page 120.
The commentary is on a constant currency basis unless stated
otherwise.
65
• CMB reported a record profit before tax of
US$8.5bn in 2012, 7% higher than in 2011. On
a constant currency basis, profit before tax
increased by 10%. This included gains totalling
US$468m mainly from the sale of branches in
the US, the disposal of general insurance
businesses in Argentina and Hong Kong and the
sale of our shares in Global Payments Asia-
Pacific Ltd in Hong Kong.
• On an underlying basis, profit before tax
increased by 3%. This was driven by strong
revenue growth and higher income from our
associates, substantially offset by a rise in
operating expenses which reflected the effect of
notable cost items that included a customer
redress provision of US$268m relating to
interest rate protection products in the UK. Loan
impairment charges also rose, driven by higher
individually assessed provisions in Europe and
Rest of Asia-Pacific, and a rise in collective
charges in Latin America.
• Revenue grew by 10% in the year, with
increases in all regions. This reflected strong net
interest income growth, higher net fee income
and a rise in other income driven by the gains
on disposals.
• Net interest income increased by 8% as a result
of average balance sheet growth. Customer
loans and advances rose in all regions, with over
half this growth coming from our faster growing
regions of Hong Kong, Rest of Asia-Pacific and
Latin America, driven by higher trade-related
lending as demand for export finance increased.
In Europe, despite muted demand for credit, net
interest income from lending activities also rose
as a result of growth in average lending
balances, notably in the UK. Net interest income
from customer accounts rose as we continued to
attract deposits through our Payments and Cash
Management products. Net interest income from
deposits also benefited from higher liability
spreads in Hong Kong, reflecting an increase in
short-term interest rates.
• Net fee income benefited from higher transaction
volumes of Payments and Cash Management
products, mainly in Europe, Latin America and
Hong Kong. Net fee income from Global Trade
and Receivables Finance products also rose in
Hong Kong, due to continued demand for export
finance as we captured international trade and
capital flows, and in Europe as we continued
to expand our Trade and Commodity and
Structured Trade Finance offerings. In addition,
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Report of the Directors: Operating and Financial Review (continued)
Global businesses > CMB
our collaboration with GB&M led to higher
revenues generated primarily from sales of
foreign exchange products.
• Loan impairment charges and other credit risk
provisions increased by US$442m, driven
by higher individually assessed loan
impairments in Europe, reflecting the
challenging economic conditions in the UK,
Greece, Spain and Turkey, and in Rest of
Asia-Pacific in respect of a small number
of customers in our Corporate segment.
Collective impairment provisions also rose in
Latin America, mainly in Brazil from increased
delinquency in the Business Banking portfolio.
• Operating expenses increased by 10%, primarily
due to a US$268m customer redress provision
relating to interest rate protection products in
the UK (see page 32). The rise in costs also
reflected the non-recurrence of a credit in 2011
of US$206m (US$212m as reported), arising
from a change in the measurement of defined
benefit pension obligations in the UK. In
addition, we continued to invest in and
strengthen our Risk and Compliance function
as part of our global operating model. Operating
expenses also increased in our faster-growing
regions of Latin America and Rest of Asia-
Pacific due to inflationary pressures and
continued investment in front line and support
staff.
•
Income from associates grew by 28% as our
associates in mainland China benefited from a
rise in lending and associated fee income,
reflecting continued economic growth.
Strategic imperatives
Focus on faster-growing markets while
connecting with developed markets
• We continued to position the business for
growth, maintaining our investment in our
faster-growing regions, where revenues rose by
12 percentage points from 2011 and represented
over 54% of our revenues. Our top 20 markets
contributed over 90% of our profit before tax in
2012, with 14 of these countries located in the
faster-growing regions.
• Our strong network helps connect customers
with both developed and developing markets as
they expand internationally. During 2012, we
were the first bank to settle cross-border
renminbi trade across six continents with our
ability to provide related services in over 50
countries offering a competitive advantage to
our customers as the renminbi is positioned as a
major global trade and investment currency. We
have expanded our global network of dedicated
China desks to cover our top markets,
representing about half of the world’s GDP.
These are staffed by Mandarin-speaking experts
who support mainland Chinese businesses to
identify new opportunities to expand overseas.
• As reported in the Oliver Wyman Global
Transaction Banking Survey 2012, we
maintained our position as the world’s largest
global trade finance bank with a market share of
global trade finance revenue that increased from
9% in 2011 to 10% in the first half of 2012, in
spite of a slowdown in world trade growth. Our
Global Trade and Receivables Finance revenues
increased by 11% as our network provided
customers with access to over 75% of world
trade flows. In addition, we continued to expand
our Commodity and Structured Trade Finance
offering across CMB and GB&M, establishing
new teams in four countries, which brought the
total to seven by the end of 2012. Our team of
product specialists more than doubled from 31
at the end of 2011 to 78 across Europe, Hong
Kong and Rest of Asia-Pacific, with plans for
further expansion in Latin America, Middle East
and North Africa, North America and additional
countries in Rest of Asia-Pacific by the end of
2013.
•
International payments volumes in Payments
and Cash Management have grown at twice the
rate of the market globally since 2010 with year-
on-year revenue increasing by 15% in 2012.
This growth reflected new mandates and
investments in new products such as HSBCnet
mobile to improve our customers’ experience.
Double digit revenue growth was reported in the
UK, Brazil and Hong Kong, all of which are top
markets for CMB, reflecting the strength of the
franchise in both developed and developing
markets. In 2012, HSBC was the first bank to be
named ‘Best Cash Management Bank’ globally
for both ‘Financial Institutions’ and ‘Non-
Financial Institutions’ in the same year by
Euromoney’s customer survey. Also in this poll,
we were named ‘Best Domestic Cash
Management Provider’ in over 20 countries.
Capture growth in international businesses
• Our strong international network offers a
distinctive presence in key markets with major
trade flows, facilitating growth for international
businesses. Our international customer base
generated around 40% of our revenues.
66
•
In Business Banking, we continued to attract
and serve an increasing number of international
SMEs and further differentiated our service
offering to them by extending our global
network of specialist International Relationship
Managers (‘IRM’s) who focus on high value
international clients. During 2012, we added
over 165 IRMs in France, Brazil and the UK
and plan to expand the model into other key
Business Banking markets in 2013.
• We continued to support SMEs through the
economic recovery, with a particular focus
on those with international aspirations. In the
first half of 2012, we launched an international
SME fund in the UK to support UK businesses
that trade, or aspire to trade, internationally.
By the end of 2012, we had approved lending
through the fund of £5.1bn (US$8.2bn),
exceeding our original target of £4.0bn
(US$6.5bn), and provided £12bn (US$20bn) of
gross new lending to UK SMEs, including the
renewal of overdraft and other lending facilities.
Over 80% of small business lending
applications received during the year were
approved. Similarly, in the UAE, we launched
our third SME fund of AED1bn (US$272m)
targeted at international trade customers.
• Our global expertise helped connect our
customers with new market opportunities. We
held three ‘Global Connections International
Exchanges’ in Brazil, mainland China and
Dubai in 2012, where we were joined by clients
from all of our top 20 markets who were able to
make contacts, share their specialist market
knowledge and identify new business
opportunities.
Strong partnership with global businesses
• Our collaboration with GB&M has delivered
nearly US$0.7bn in incremental gross revenue
since 2010. Gross revenues from sales of
GB&M products to CMB customers which are
shared across the two global businesses grew
by over US$0.1bn in 2012 or by 5%, mainly
driven by sales of foreign exchange products.
• We continued to benefit from GB&M’s e-FX
platform to deliver our standard foreign
exchange products to customers more
efficiently. We also addressed demand for
alternative sources of finance, providing our
customers with access to debt and equity capital
markets and offering specialised financing, such
as Project and Export Finance, via GB&M.
• Dedicated executives are now in place in both
CMB and GPB to promote cross-business
referral activities and support the collaboration
between the businesses. For example, the Global
Priority Clients initiative was launched in 2012
to service the Group’s largest ultra-high net
worth clients’ corporate and personal needs
jointly.
•
In 2012, we launched our trade credit insurance
offering in Hong Kong, Brazil and the UK. It
will be rolled out to further markets in the first
half of 2013, including Turkey, France,
Singapore and Malaysia.
Simplify processes and enhance risk management
controls by adopting a global operating model
• The successful adoption of a global model has
enabled us to deliver a number of benefits,
notably simplified processes for our customers,
enhanced governance and compliance oversight,
and sustainable cost savings across the business.
• We have made significant progress in
simplifying and reducing the time to complete
our credit renewal process, implementing
improvements in 17 key markets with further
countries in scope for the first quarter of 2013.
In addition, we have deployed a consistent
model for cross-border account opening to
facilitate the on-boarding of new international
customers.
• The sustainable cost savings of over US$100m
achieved through process re-engineering and
organisational effectiveness have been
reinvested in both front line staff and our Risk
and Compliance function. We introduced
enhanced consistent Know Your Customer
procedures, a global product governance board
and dedicated resources to improve governance
oversight. This investment, combined with our
values-based approach to relationship
management, is helping to foster a disciplined
and constructive culture of risk management
in CMB while encouraging balanced and
sustainable growth.
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Report of the Directors: Operating and Financial Review (continued)
Global businesses > GB&M
Global Banking and Markets
GB&M provides tailored financial
solutions to major government,
corporate and institutional clients
worldwide.
Net interest income ..........
Net fee income .................
Net trading income78 ........
Other income ....................
2012
US$m
6,960
3,329
5,690
2,294
2011
US$m
7,263
3,227
5,204
1,363
2010
US$m
7,343
3,664
5,830
2,075
Net operating income21 ..
18,273
17,057
18,912
LICs76 ...............................
(670)
(984)
(990)
Net operating income ....
17,603
16,073
17,922
•
Total operating expenses ..
(9,907)
(9,722)
(9,228)
Operating profit .............
7,696
6,351
Income from associates77 ...
Profit before tax .............
RoRWA66 .........................
824
8,520
2.1%
698
7,049
1.8%
8,694
521
9,215
2.5%
Review of performance
• GB&M reported profit before tax of US$8.5bn,
21% higher than in 2011. On a constant
currency basis, profit before tax increased by
24% despite a significant net charge relating
to credit and debit derivative valuation
adjustments. The rise in profit before tax was
driven by strong revenue growth, notably in
Rates and Credit, together with significantly
lower credit risk provisions than in 2011, partly
offset by higher operating expenses. GB&M is
well positioned for growth in faster-growing
regions with record reported revenues in Hong
Kong (US$2.8bn), Rest of Asia-Pacific
(US$4.0bn) and Latin America (US$1.8bn).
In the fourth quarter a net charge of US$385m
was reported in net trading income as a result of
a change in estimation methodology in respect
of credit valuation adjustments on derivative
assets of US$903m and debit valuation
adjustments on derivative liabilities of
US$518m to reflect evolving market practices
(see Note 15 on the Financial Statements).
Record reported revenues from
corporate and institutional
debt issuance
77%
of profit before tax
from faster-growing regions
Most Innovative
Investment Bank of the Year
(The Banker Investment Banking Awards 2012)
Strategic direction
GB&M continues to pursue its well-established ‘emerging
markets-led and financing-focused’ strategy, with the objective of
being a leading international wholesale bank. This strategy has
evolved to include a greater emphasis on connectivity between the
global businesses, across the regions and within GB&M,
leveraging the Group’s extensive distribution network.
We focus on four strategic imperatives:
• reinforce client coverage and client-led solutions for major
government, corporate and institutional clients;
• continue to selectively invest in the business to support the
delivery of an integrated suite of products and services;
• enhance collaboration with other global businesses, particularly
CMB, to appropriately service the needs of our international
client base; and
• focus on business re-engineering to optimise operational
efficiency and reduce costs.
For footnotes, see page 120.
The commentary is on a constant currency basis unless stated
otherwise.
• Notwithstanding the charge noted above,
revenues rose by 10%, primarily due to
significantly higher trading revenues in
Rates and Credit, notably in Europe, as spreads
tightened and investor sentiment improved
following stimuli by central banks globally.
Balance Sheet Management reported higher
gains on the disposal of available-for-sale debt
securities, largely in the UK, while Payments
and Cash Management benefited from growth in
average liability balances, increased transaction
volumes and new mandates. These increases
were partly offset by a fall in revenues from our
Equities business due to lower client activity
as market volumes declined. Revenues in 2012
also included adverse fair value movements
from own credit spreads on structured liabilities
of US$629m compared with a favourable fair
value movement of US$458m reported in 2011.
• Loan impairment charges and other credit risk
provisions decreased by US$300m compared
with 2011. Credit risk provisions declined
significantly, from US$515m in 2011 to
US$117m in 2012, driven by lower impairment
charges on Greek sovereign debt, and on
available-for-sale ABSs in our legacy portfolio
reflecting an improvement in underlying asset
prices. This was partly offset by a US$97m
increase in loan impairment charges as a result
of a small number of specific impairments in
68
Global Banking and on the legacy credit loans
and receivables portfolio.
• Operating expenses increased by US$393m to
US$9.9bn, predominantly due to a customer
redress provision of US$330m relating to
interest rate protection products in the UK (see
page 32). Performance costs rose, albeit at a
lower rate of growth than net operating income,
which resulted in a lower total compensation
ratio than in 2011. 2011 also included a credit
of US$108m (US$111m as reported) relating to
defined benefit pension obligations in the UK,
which did not recur.
Management view of total operating income
2012
US$m
8,733
779
1,771
3,215
679
1,663
2011
US$m
8,098
335
1,341
3,272
961
1,673
2010
US$m
9,173
1,649
2,052
2,752
755
1,511
626
516
454
5,568
5,401
4,621
3,071
3,233
2,852
1,744
1,534
1,133
753
634
636
3,738
125
518
(409)
3,488
209
–
(139)
4,102
319
–
697
Global Markets79 ........
Credit .....................
Rates ......................
Foreign Exchange ..
Equities ..................
Securities Services .
Asset and Structured
Finance ................
Global Banking ..........
Financing and Equity
Capital Markets ..
Payments and Cash
Management80 .....
Other transaction
services81 .............
Balance Sheet
Management82 ........
Principal Investments
Debit valuation
adjustment ..............
Other83 ........................
Total operating
income......................
18,273
17,057
18,912
Balance Sheet Management revenues included a notional tax
credit on income earned from tax-exempt investments of
US$116m in 2012 (2011: US$85m; 2010: US$50m), which is
offset above within ‘Other.’
For footnotes, see page 120.
•
Included in the table above are the following
amounts in relation to the change in credit
valuation adjustment estimation methodology:
Credit ....................................................................
Rates .....................................................................
Foreign Exchange .................................................
Equities .................................................................
Total ......................................................................
2012
US$m
(52)
(837)
(7)
(7)
(903)
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• Global Markets delivered a strong performance
in an uncertain financial and economic
environment, in part due to a US$444m increase
in Rates revenues. This was despite significant
adverse fair value movements from own credit
spreads on structured liabilities as spreads
tightened, compared with favourable
movements reported in 2011, together with a
credit valuation adjustment of US$837m in
2012. Revenues in Credit increased by
US$453m due to strong trading income, mainly
in Europe, as spreads tightened on corporate
debt securities. Additionally, we achieved
record reported revenues from primary market
issuance, mainly within Credit, with revenues
in Europe, Hong Kong and North America
increasing as we enhanced regional coverage
and actively captured growth in client demand
for debt capital financing.
• Foreign Exchange income was broadly in line
with 2011, as higher revenues from enhanced
collaboration between GB&M and CMB, and
increased volumes from the improvement in our
electronic pricing and distribution capabilities,
offset the effect of less volatile markets in 2012.
Notwithstanding the capture of higher market
share within a number of our target emerging
markets, Equities revenues decreased by 27%,
driven by lower client activity as market
volumes declined against the backdrop of
economic and fiscal uncertainty in Europe and
North America. This was coupled with adverse
fair value movements on structured liabilities
compared with favourable movements in 2011.
•
In Global Banking, Financing and Equity
Capital Markets revenues were broadly
unchanged compared with 2011 as lower
advisory and underwriting fees, mainly in
Europe, reflecting the challenging market
environment, were partly offset by higher
Project and Export Finance revenues, as deal
volumes increased, and as we captured a higher
market share of public and private sector
investment in infrastructure development in
emerging markets. Payments and Cash
Management revenues increased by 15% due to
higher average liability balances and an increase
in transaction volumes. We increased our focus
on cross-selling Payments and Cash
Management products to selected international
customers and saw a rise in new mandates.
•
In ‘Other transaction services’, revenues
increased by 24% as the Global Trade and
Receivables Finance business benefited from
enhanced collaboration between Global Banking
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Report of the Directors: Operating and Financial Review (continued)
Global businesses > GB&M
relationship managers and specialist sales teams
and the expansion of the Commodity and
Structured Trade Finance offering leading to
higher revenues in Europe and Rest of Asia-
Pacific. Revenues in Rest of Asia-Pacific also
increased as a result of growth in export lending
and improved spreads.
• Balance Sheet Management revenues rose by
US$324m due to higher gains on the disposal
of available-for-sale debt securities as part of
structural interest rate risk management of the
balance sheet, notably in Europe. Net interest
income declined in Europe, however, as yield
curves continued to flatten and liquidity from
maturities and sales of available-for-sale debt
securities was re-invested at lower prevailing
rates. In addition, we placed a greater portion
of our liquidity with central banks. Higher net
interest income was reported in Rest of Asia-
Pacific due to higher yields and portfolio growth
in mainland China, and in Latin America due to
lower funding costs in Brazil as interest rates
declined.
• Principal Investments revenue declined by
US$76m compared with 2011 owing to higher
impairments, mainly on three available-for-sale
equity securities, two of which were in our
direct investment business in run-off. This
was offset in part by higher realised gains on
disposals.
Strategic imperatives
Reinforce client coverage and client-led solutions
• Our multinational coverage teams continued to
expand our offerings of cross-product solutions
for our clients and delivered revenue growth,
particularly in faster-growing regions as we
successfully executed a number of notable cross-
border transactions. This included providing
financing and advisory services to clients through
our Project and Export Financing business, which
resulted in HSBC being awarded ‘Best Project
Finance House’ in Asia, the Middle East and
Latin America in the Euromoney Awards for
Excellence 2012.
• To further strengthen client coverage and product
expertise, we invested in selective recruitment in
key strategic markets. In Rest of Asia-Pacific, we
enhanced our advisory, debt capital markets and
credit and lending businesses through a number
of senior appointments in the Resources and
Energy and the Financial Institutions groups.
We also appointed a Co-Head of Global Banking
in Brazil to drive strategic dialogue with key
clients and develop our advisory business in
Latin America.
• We continued to develop our distinctive
geographical franchise to enhance client
coverage, particularly within debt capital
markets. A number of successfully executed
transactions, notably in emerging markets,
demonstrated the benefit of partnering between
regional and global product teams. These
partnerships facilitated the delivery of
innovative solutions and alternative funding
opportunities for our clients. As a result, HSBC
was awarded ‘Best Global Emerging Market
Debt House’ in the Euromoney Awards for
Excellence 2012. Additionally, we increased our
market share of, and maintained our leading
position in, emerging markets debt issuance.
Enhance core product strengths and selectively
develop new capabilities
• We continued to develop cross-product
•
capabilities in the growing renminbi market.
Earlier in the year, we issued the first
international renminbi bond outside Chinese
sovereign territory. Since then, a number of
significant transactions were supported by in-
depth collaboration between regional teams,
reinforcing HSBC’s position as the leading
house for international renminbi issuance. In
recognition of these achievements, HSBC was
awarded ‘RMB House of the Year’ in the 2012
Asia Risk Awards, along with ‘Best for overall
products/services’ and ‘Most likely RMB
products/services provider’ in the 2012
Asiamoney Offshore RMB Services survey.
In Foreign Exchange, we remained focused on
enhancing product offerings in our e-FX
platforms for a broader client base, particularly
for CMB and RBWM customers. This included
the launch of our ‘Dynamic Currency
Conversion’ product within our transactional
Foreign Exchange business in the UK in time
for the Olympics, along with a real-time online
foreign currency margin trading product in
Hong Kong. Our strength in foreign exchange
capabilities, particularly in emerging markets,
was recognised by several awards during the
year including ‘Best Bank for Foreign
Exchange’ in Asia-Pacific and ‘Best Bank for
Emerging Asian currencies’ in the 2012 FX
Week Best Banks Awards. Our innovation and
achievements in the renminbi market
contributed to HSBC also being awarded
‘Foreign Exchange House of the Year’ in the
2012 Structured Products Asia Awards.
70
• As a result of recent investment in our equity
execution platform and research capabilities in
emerging markets, we progressed in repositioning
the business for future growth and enhanced our
ability to respond to client needs. We are now
ranked in the top five of equities brokers in Hong
Kong, while our ranking in the Asiamoney 2012
Brokers Poll for Asian Equity Research and Sales
rose from fifth in 2011 to second in 2012.
•
In a challenging economic environment, our
clients demand visibility and control of their
intra-day cash positions. To facilitate this,
we expanded the Global Liquidity Solutions
platform within Payments and Cash
Management, and it is now live in 27 countries.
We were also the first foreign bank to gain
approval to establish an automated, cross-border
pooling structure in mainland China. The pilot
scheme, which aims to centralise foreign
currency management for multinational
companies by connecting their onshore and
offshore cash management structures, will
enable our clients to manage their cash positions
more efficiently.
• We are actively managing our legacy credit
exposures and exited from certain positions,
including ABSs in the UK and certain structured
credit positions and related hedges in the US
during 2012. We will look to reduce the size of
this portfolio further as opportunities arise,
using the economic framework put in place in
2011 (see page 18).
Collaborate with other global businesses to deliver
incremental revenues
• We have worked closely with CMB to provide
their clients with appropriate GB&M products
and this has delivered nearly US$0.7bn in
incremental gross revenue since 2010. Gross
revenues, which are shared across the two global
businesses, grew by over US$0.1bn in 2012, or
by 5%, mainly driven by sales of foreign
exchange products. A number of appointments
during the year, including a new Head of
Commercial Banking Coverage for Asia-Pacific
in Global Banking, further strengthened
collaboration efforts and enhanced our ability
to meet the financing needs of our clients.
• We continued to enhance collaboration across the
Group through the Institutional Private Clients
(‘IPC’) initiative with GPB and the Premier
referrals initiative with RBWM, leading to higher
revenues and increased Premier account openings
respectively, compared with 2011. We also
appointed a Head of Coverage in Hong Kong to
strengthen our Global Banking franchise and
deliver on IPC initiatives in the region.
Strategic re-engineering to deliver sustainable
cost savings
• The successful implementation of the
organisational design we announced in 2011,
and our continued resource optimisation through
re-engineering, delivered over US$200m of
sustainable savings in 2012.
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Report of the Directors: Operating and Financial Review (continued)
Global businesses > GPB
Review of performance
• Reported profit before tax of US$1.0bn was 7%
higher than in 2011 on a reported basis and 8%
higher on a constant currency basis.
• On an underlying basis, which excludes the gain
on the sale of our operations in Japan (US$67m)
and associated operating results, profit before
tax was broadly unchanged as lower operating
expenses and decreased loan impairment
charges and other credit risk provisions were
largely offset by reduced revenues.
• Revenue declined by 3%, primarily due to lower
fee income. Brokerage fees fell, reflecting a
reduction in client transaction volumes due, in
part, to lower volatility. Fees from assets under
management and account service fees also
declined as challenging market conditions in the
latter half of 2011 led to a fall in average client
assets in 2012, coupled with a reduction in client
numbers as we repositioned our target client
base. Net interest income was lower as higher
yielding positions matured, opportunities for
reinvestment were limited by lower prevailing
yields and we selectively managed our
exposures to eurozone sovereign debt. Narrower
liability spreads and lower deposit balances in
Switzerland and the sale of our operations in
Japan also contributed to the fall in net interest
income. These factors were partly offset by
gains on the sale of our operations in Japan and
our headquarters building in Switzerland of
US$67m and US$53m, respectively.
• Loan impairment charges and other credit risk
provisions reduced by 68% as a result of the
non-recurrence of charges relating to available-
for-sale Greek sovereign debt securities and
lower individually assessed and collective
impairments in the UK. These factors were
partly offset by lower recoveries in the US.
• Operating expenses decreased by 4%, primarily
due to a managed reduction in average staff
numbers and lower performance costs. The
decrease in staff costs was partly offset by
higher customer redress provisions, costs
relating to the merger of pension funds in
Switzerland, and increased restructuring and
other related costs.
Global Private Banking
GPB serves high net worth individuals
and families with complex and
international needs.
2012
US$m
1,294
1,232
646
3,172
2011
US$m
1,439
1,382
471
3,292
2010
US$m
1,345
1,299
449
3,093
Net interest income ..........
Net fee income .................
Other income ...................
Net operating income21 ..
LIC (charges)/
recoveries76 ...................
(27)
(86)
12
Net operating income ....
3,145
3,206
3,105
Total operating expenses ..
(2,143)
(2,266)
(2,035)
Operating profit .............
1,002
940
1,070
Income/(expense) from
associates77 ....................
7
Profit before tax .............
1,009
4
944
RoRWA66 .........................
4.6%
3.9%
(16)
1,054
4.1%
Significant progress towards rationalising
and repositioning our business
Over US$70m
of sustainable cost savings
Outstanding Private Bank
in Asia-Pacific and in the Middle East
(Private Banker International Awards, 2012)
Strategic direction
GPB works with high net worth clients to manage and preserve
their wealth while connecting them to global opportunities. We
focus on three strategic imperatives:
• implementing a new operating model to manage the business
globally and better service client needs, with an enhanced
systems platform and adherence to the highest risk and
compliance standards in the industry;
• intensifying collaboration within the Group, particularly with
CMB, to access entrepreneur wealth creation; and
• capturing growth by focusing investment on the most attractive
developed and faster-growing wealth markets, where GPB can
access the Group’s client franchise and its strong local and
international product capabilities.
For footnotes, see page 120.
The commentary is on a constant currency basis unless stated
otherwise.
72
Client assets84
At 1 January ......................................
Net new money .................................
Value change .....................................
Exchange and other ..........................
At 31 December ................................
2012
US$bn
2011
US$bn
377
(7)
17
11
398
390
13
(20)
(6)
377
• Client assets, which include FuM and cash
deposits, increased by US$21bn, driven by the
inclusion of custody assets in client assets and
favourable market and foreign exchange
movements, partly offset by negative net new
money and the disposal of our operations in
Japan. Negative net new money included a
small number of large client withdrawals and
reflected lower inflows as we became more
selective in establishing new client
relationships, as well as the adoption of more
stringent compliance and tax transparency
standards. We also stopped marketing in
certain non-strategic countries. In addition, we
implemented a redefined segmentation model
to reposition our client base towards higher net
worth international and domestic relationships.
This programme, along with a review of certain
client relationships with a view to reducing
control risk, resulted in a reduction of around
US$4.5bn of client assets in 2012.
•
‘Total client assets’, which also include some
non-financial assets held in client trusts,
increased from US$496bn at 31 December 2011
to US$517bn at 31 December 2012 largely due
to market movements partly offset by negative
net new money as noted above.
• Our return on assets, defined as the percentage
of our revenues to our average client assets,
was unchanged as the reduction in revenues
corresponded with the fall in average client
assets.
Strategic imperatives
•
2012 was a year of transition for GPB as we
repositioned our business model and target
client base to focus investment in selected
priority markets, enhance our compliance and
risk frameworks and encourage better alignment
with the other global businesses. We are
targeting higher net worth international and
domestic customers and have built on existing
product strengths and leveraged Group
capabilities to meet their needs. We expect
this period of transition and implementation
to continue throughout 2013.
73
Implementing a more focused business model that
better services client needs
• We implemented a new target operating model
based on six ‘global markets’ (North Asia;
South East Asia; North America; Latin America;
Europe; and Middle East, North Africa and
Turkey). This enables us to operate as an
integrated global business rather than a
federation of private banks and to provide our
clients with globally consistent products and
services and improved co-ordination of
marketing and servicing activity.
• We sold or closed a number of non-strategic,
underperforming businesses in order to
rationalise our business and focus on priority
markets. Disposals included our operations in
Japan, our UK property advisory business, a
portfolio of non-strategic clients in Monaco,
our domestic trust business in Malaysia and a
branch of our UK business in Ireland.
• Our compliance and risk framework was
strengthened by the establishment of a GPB
Global Standards Committee and a revised risk
appetite framework. The implementation of
ongoing workstreams including tax transparency
and cross-border marketing will be accelerated
in 2013.
• We enhanced our global front office systems
with the roll out of Global Vision in
Switzerland, Global Client Relationship
Management in the US and Global Private
Wealth Solutions in the Channel Islands, which
provide integrated databases to support effective
client management. We will continue to roll
these systems out to other locations during
2013.
Developing closer collaboration across the Group
• We leveraged existing relationships across the
Group in order to access wealth created by
entrepreneurs who already bank with HSBC
on the business side. Referral flows from other
global businesses generated net new money of
US$5.4bn. To further support referrals with
CMB, a collaboration framework was put in
place, dedicated executives appointed and
referral targets agreed.
• We worked with RBWM to define and promote
a Group-wide wealth offering. GPB and RBWM
now operate a systematic process for the review
and referral of clients to ensure they receive the
service most appropriate to their needs.
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Global businesses > GPB / Other
• The Global Priority Clients initiative was
Other73
launched with GB&M and CMB to service
jointly the Group’s largest ultra-high net worth
clients with corporate and personal needs
through a dedicated single point of contact. The
framework has been defined, clients identified
for joint coverage and investment specialists
assigned, and we have begun to roll out a new
credit advisory model to fund credit
transactions.
Capturing growth in faster-growing and domestic
markets
• We continued to focus on faster-growing
markets, and attracted positive net new money
of US$1.9bn and US$0.5bn from clients in Asia
and the Middle East, respectively.
• Our product range was further developed
during 2012; in particular, we made progress in
strengthening our Alternatives platform, with
four new real estate ‘club deals’ and two private
equity launches in the year raising more than
US$1.3bn. Further launches are expected
in 2013.
‘Other’ contains the results of certain
property transactions, unallocated
investment activities, centrally held
investment companies, movements in
fair value of own debt, central support
and functional costs with associated
recoveries, HSBC’s holding company
and financing operations.
2012
US$m
(730)
194
(537)
2011
US$m
(911)
34
(355)
2010
US$m
(998)
32
(311)
Net interest expense ........
Net fee income ................
Net trading expense ........
Change in credit spread
on long-term debt .........
(4,327)
4,161
(258)
Other changes in fair
value .............................
(1,136)
78
42
Net income/(expense)
from financial
instruments designated
at fair value ..................
Other income ..................
Net operating income21 .
LIC recoveries76 ..............
(5,463)
8,868
2,332
–
4,239
6,138
9,145
–
Net operating income ....
2,332
9,145
Total operating expenses
(9,369)
(7,492)
Operating profit/(loss) ..
(7,037)
1,653
Income from associates77
47
9
(216)
6,153
4,660
3
4,663
(5,918)
(1,255)
94
Profit/(loss) before tax ..
(6,990)
1,662
(1,161)
For footnotes, see page 120.
The commentary is on a constant currency basis unless stated
otherwise.
74
Notes
• The reported loss before tax of US$7.0bn in
2012 compared with reported profit before tax
of US$1.7bn in 2011. On a constant currency
basis, pre-tax loss increased by US$8.7bn.
• These results included adverse movements of
US$5.2bn on the fair value of our own debt
attributable to a tightening of our own credit
spreads in 2012, notably in Europe and North
America, compared with favourable movements
of US$3.9bn in 2011. Reported results also
included a number of gains and losses on
disposal (see page 27). These included a gain of
US$3.0bn on the disposal of our associate, Ping
An. Our remaining shareholding has been
classified as a financial investment (see Note 26
on the Financial Statements). In addition, we
reported a gain on disposal of US$130m from
the sale of our shareholding in a property
company in the Philippines. Reported profits in
2011 included accounting gains of US$181m
relating to the dilution of our shareholding in
Ping An, partly offset by a remeasurement loss
of US$48m relating to Ping An’s consolidation
of Ping An Bank (formerly known as Shenzhen
Development Bank).
• On an underlying basis, excluding the items
noted above, the pre-tax loss increased by
US$2.5bn, driven by higher operating expenses,
notably the charge of US$1.9bn relating to US
fines and penalties paid as part of the settlement
of investigations into past inadequate
compliance with anti-money laundering and
sanctions laws. In addition, revenues declined
due to adverse fair value movements
of US$553m on the contingent forward sale
contract relating to Ping An.
• Net fee income increased by US$166m, due
in part to fees received under the transition
services agreement entered into following the
sale of the Card and Retail Services business
in North America.
• Net trading expense increased from US$353m
to US$537m, driven by adverse fair value
movements on the contingent forward sale
contract relating to Ping An. This was partly
offset by lower adverse fair value movements on
non-qualifying hedges in 2012. This was driven
by non-qualifying hedges in HSBC Holdings,
mainly related to cross-currency swaps used to
economically hedge fixed rate long-term debt,
on which there were favourable movements of
US$122m in 2012 compared with adverse fair
value movements of US$276m in 2011.
• Gains less losses from financial investments
included gains of US$314m on the sale of our
non-strategic investments in four Indian banks.
• Excluding the movements in the fair value of
our own debt, Net expense from financial
instruments designated at fair value of
US$248m compared with net income of
US$293m in 2011. This was due to adverse fair
value movements in 2012 from interest and
exchange rate ineffectiveness in the hedging of
long-term debt designated at fair value, issued
principally by HSBC Holdings and its European
and North American subsidiaries, compared
with favourable fair value movements in 2011.
• We reported a gain of US$3.0bn on the disposal
of our associate, Ping An. Our remaining
shareholding has been classified as a financial
investment.
• Other operating income decreased by 9%, due
to lower intra-group recharges from centralised
operational activities due to divestments and on-
going cost savings, notably in North America.
This was partly offset by a gain of US$130m
from the sale of our shareholding in a property
company in the Philippines.
• Operating expenses increased by 27% to
US$9.4bn, primarily due to fines and penalties
paid as part of the settlement of investigations
into past inadequate compliance with anti-
money laundering and sanctions laws of
US$1.9bn, of which US$1.5bn was attributed
to and paid by HNAH and its subsidiaries and
US$375m was paid by HSBC Holdings. In
addition, there were inflationary pressures
in certain of our Latin American and Asian
markets. However, the charge relating to the
UK bank levy declined as the current year
charge of US$571m was partly offset by an
adjustment of US$99m in the 2011 bank levy
charge of US$570m as the basis of calculation
was clarified. Costs related to operational
activities also fell due to divestments and on-
going cost savings, notably in North America.
These costs are recorded in ‘Other’ and charged
to global businesses through a recharge
mechanism, with income reported in ‘Other
operating income’.
75
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Global businesses > Analysis
Analysis by global business
HSBC profit/(loss) before tax and balance sheet data
Retail
Banking
and Wealth
Management
US$m
Commercial
Banking
US$m
2012
Global
Banking
and
Markets
US$m
Global
Private
Banking
US$m
Inter–
segment
elimination85
US$m
Other73
US$m
Profit before tax
Net interest income/(expense) ....
20,298
10,361
Net fee income ............................
7,205
4,470
Trading income/(expense)
excluding net interest
income ....................................
Net interest income on
trading activities .....................
Net trading income/(expense)78 ..
Changes in fair value of long-
term debt issued and related
derivatives ..............................
Net income/(expense) from
other financial instruments
designated at fair value ...........
Net income/(expense) from
financial instruments
designated at fair value ...........
Gains less losses from
financial investments ..............
Dividend income .........................
Net earned insurance premiums .
Gains on disposal of US branch
network, US cards business
and Ping An ............................
Other operating income ..............
6,960
3,329
3,588
2,102
5,690
276
28
304
617
16
633
–
–
–
1,893
250
1,094
1,893
250
1,094
96
24
11,191
3,735
1,472
22
18
1,786
277
536
730
148
25
–
313
Total operating income ............
46,218
18,353
18,289
Net insurance claims86 ................
Net operating income21 .............
(12,357)
33,861
(1,802)
16,551
(16)
18,273
Loan impairment charges and
other credit risk provisions .....
(5,515)
(2,099)
(670)
Net operating income ...............
28,346
14,452
17,603
Employee expenses87 ..................
Other operating expenses ...........
(5,532)
(14,237)
Total operating expenses ............
(19,769)
Operating profit/(loss) ..............
8,577
Share of profit in associates
and joint ventures ...................
Profit/(loss) before tax ..............
998
9,575
%
Share of HSBC’s profit
before tax ................................
Cost efficiency ratio ...................
46.4
58.4
(2,247)
(5,351)
(7,598)
6,854
1,681
8,535
%
41.3
45.9
(3,764)
(6,143)
(9,907)
7,696
824
8,520
%
41.3
54.2
(511)
–
–
511
511
–
–
–
–
–
–
–
(5,859)
(5,859)
–
5,859
5,859
–
–
–
1,294
1,232
476
14
490
–
–
–
(3)
6
42
–
151
3,212
(40)
3,172
(27)
3,145
(915)
(1,228)
(2,143)
1,002
(730)
194
(549)
12
(537)
(4,327)
(1,136)
(5,463)
344
25
–
3,012
5,487
2,332
–
(8,033)
(1,336)
(9,369)
(7,037)
7
47
1,009
(6,990)
%
4.9
67.6
%
(33.9)
–
Balance sheet data74
Loans and advances to
customers (net) .......................
Total assets .................................
Customer accounts ......................
US$m
US$m
US$m
US$m
US$m
378,040
536,244
562,151
288,033
363,659
338,405
283,842
1,942,470
332,115
45,213
118,440
105,772
2,495
201,741
1,571
(470,016)
76
Total
US$m
37,672
16,430
4,408
2,683
7,091
(4,327)
2,101
(2,226)
1,189
221
13,044
7,024
2,100
82,545
(20,491)
(22,436)
(42,927)
17,092
3,557
20,649
%
100.0
62.8
US$m
997,623
2,692,538
1,340,014
–
(14,215)
2,332
(5,859)
68,330
–
–
(8,311)
2,332
(5,859)
60,019
Retail
Banking
and Wealth
Management
US$m
Commercial
Banking
US$m
Global
Banking
and
Markets
US$m
Inter–
segment
elimination85
US$m
Other73
US$m
7,263
3,227
3,306
1,898
5,204
–
(72)
(72)
761
75
47
577
Profit before tax
Net interest income/(expense) ....
24,101
Net fee income ............................
8,226
9,931
4,291
Trading income/(expense)
excluding net interest
income ....................................
Net interest income on
trading activities .....................
Net trading income/(expense)78 ..
Changes in fair value of long-
term debt issued and related
derivatives ..............................
Net income/(expense) from
other financial instruments
designated at fair value ...........
Net income/(expense) from
financial instruments
designated at fair value ...........
Gains less losses from
financial investments ..............
Dividend income .........................
Net earned insurance premiums .
Other operating income ..............
Total operating income ...............
Net insurance claims86 ................
Net operating income21 ...............
Loan impairment charges and
(562)
43
(519)
–
(761)
565
19
584
–
33
(761)
33
124
27
10,882
907
42,987
(9,454)
33,533
20
15
1,956
483
17,313
(1,702)
15,611
Employee expenses87 ..................
Other operating expenses ...........
(6,538)
(14,664)
Total operating expenses ............
(21,202)
Operating profit ..........................
3,012
(2,184)
(5,037)
(7,221)
6,652
1,295
7,947
%
36.3
46.3
(4,196)
(5,526)
(9,722)
6,351
698
7,049
%
32.2
57.0
1,258
4,270
%
19.6
63.2
Share of profit in associates
and joint ventures ...................
Profit before tax ..........................
Share of HSBC’s profit
before tax ................................
Cost efficiency ratio ...................
Balance sheet data74
Loans and advances to
customers (net) .......................
Total assets .................................
Customer accounts ......................
For footnotes, see page 120.
2011
Global
Private
Banking
US$m
1,439
1,382
415
16
431
–
–
–
3
7
–
30
(86)
3,206
(1,351)
(915)
(2,266)
940
4
944
%
4.3
68.8
(911)
34
(441)
86
(355)
4,161
78
4,239
(1)
25
(13)
6,127
9,145
–
(1,161)
–
–
1,161
1,161
–
–
–
–
–
–
(6,358)
(6,358)
–
6,358
6,358
–
–
–
(6,897)
(595)
(7,492)
1,653
9
1,662
%
7.6
81.9
Total
US$m
40,662
17,160
3,283
3,223
6,506
4,161
(722)
3,439
907
149
12,872
1,766
83,461
(21,166)
(20,379)
(41,545)
18,608
3,264
21,872
%
100.0
57.5
US$m
940,429
2,555,579
1,253,925
17,082
3,292
(25)
–
17,057
3,292
9,145
(6,358)
72,280
–
(11,181)
other credit risk provisions .....
(9,319)
(1,738)
(984)
Net operating income .................
24,214
13,873
16,073
–
–
(12,127)
9,145
(6,358)
60,153
US$m
US$m
US$m
US$m
US$m
357,907
540,548
529,017
262,039
334,966
306,174
276,463
1,877,627
306,454
41,856
119,839
111,814
2,164
180,126
466
(497,527)
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Report of the Directors: Operating and Financial Review (continued)
Global businesses > Disposals, held for sale and run-off portfolios // Geographical regions > Summary
Disposals, held for sale and run-off
portfolios
portfolios to continue to affect the global businesses
in the future.
In implementing our strategy, we have sold or
agreed to sell a number of businesses and
investments across the Group. We expect these
disposals to have a significant effect on both the
revenue and the profitability of the global businesses
in the future. In addition, significant portfolios are
being run down. We expect the losses on these
The table below presents the contribution of
these businesses and investments to the historical
results of global businesses. We do not expect the
historical results to be indicative of future results
because of disposal or run-off. Fixed allocated costs,
included in total operating costs, will not necessarily
be removed upon disposal and have been separately
identified on page 53.
Summary income statements for disposals, held for sale and run-off portfolios69,70
Retail
Banking
and Wealth
Management
US$m
Commercial
Banking
US$m
2012
Global
Banking
and
Markets
US$m
Global
Private
Banking
US$m
Net interest income/(expense) ......................................
Net fee income ..............................................................
Net trading income/(expense)78 ....................................
Net income/(expense) from financial instruments
designated at fair value ............................................
Gains less losses from financial investments ...................
Dividend income ...........................................................
Net earned insurance premiums ...................................
Other operating income/(expense) ...............................
4,281
380
(204)
6
32
3
518
40
Total operating income/(expense) .............................
5,056
Net insurance claims incurred and movement in
liabilities to policyholders ........................................
Net operating income/(expense)21 ..............................
Loan impairment charges and other credit
risk provisions ..........................................................
Net operating income/(expense) ................................
Total operating expenses ..............................................
Operating profit/(loss) ................................................
Share of profit in associates and joint ventures ............
Profit/(loss) before tax ................................................
By geographical region
Europe ...........................................................................
Hong Kong ...................................................................
Rest of Asia-Pacific ......................................................
Middle East and North Africa ......................................
North America ..............................................................
Latin America ...............................................................
Profit/(loss) before tax ..................................................
(297)
4,759
(2,980)
1,779
(2,376)
(597)
633
36
2
27
612
10
(656)
41
36
Gain on sale ..................................................................
4,074
For footnotes, see page 120.
133
–
4
2
1
–
203
20
363
(129)
234
(4)
230
(164)
66
89
155
–
13
91
–
9
42
155
476
35
1
160
10
(70)
–
25
(3)
158
(17)
141
(168)
(27)
(165)
(192)
64
(128)
(283)
6
57
36
2
54
(128)
22
8
8
–
–
–
–
–
(1)
15
–
15
–
15
(24)
(9)
–
(9)
(1)
–
(8)
–
–
–
(9)
64
Other
US$m
(2)
–
2
(785)
–
–
(1)
–
(786)
–
(786)
–
(786)
(18)
(804)
–
(804)
–
–
–
–
(785)
(19)
(804)
3,103
78
Geographical regions
Summary
Summary ......................................................................
Europe ..........................................................................
Hong Kong ...................................................................
Rest of Asia-Pacific .....................................................
79
81
88
93
Middle East and North Africa .....................................
99
North America ............................................................. 104
Latin America .............................................................. 111
Disposals, held for sale and run-off portfolios ............ 117
Profit/(loss) before tax
Additional information on results in 2012 may be
found in the ‘Financial Summary’ on pages 25 to 54.
In the analysis of profit by geographical regions
that follows, operating income and operating expenses
include intra-HSBC items of US$3,358m (2011:
US$3,421m; 2010: US$3,125m).
Europe .......................................................................
Hong Kong ...............................................................
Rest of Asia-Pacific ..................................................
Middle East and North Africa ..................................
North America ..........................................................
Latin America ...........................................................
Total assets74
2012
US$m
%
(3,414)
7,582
10,448
1,350
2,299
2,384
(16.5)
36.7
50.6
6.5
11.1
11.6
2011
US$m
4,671
5,823
7,471
1,492
100
2,315
%
21.3
26.6
34.2
6.8
0.5
10.6
2010
US$m
4,302
5,692
5,902
892
454
1,795
%
22.6
29.9
31.0
4.7
2.4
9.4
20,649
100.0
21,872
100.0
19,037 100.0
At 31 December
2012
US$m
%
2011
US$m
Europe ......................................................................................................................
Hong Kong ..............................................................................................................
Rest of Asia-Pacific .................................................................................................
Middle East and North Africa .................................................................................
North America .........................................................................................................
Latin America ..........................................................................................................
Intra-HSBC items ....................................................................................................
1,389,240
518,334
342,269
62,605
490,247
131,277
(241,434)
51.6
19.3
12.7
2.3
18.2
4.9
(9.0)
1,281,945
473,024
317,816
57,464
504,302
144,889
(223,861)
%
50.3
18.5
12.4
2.2
19.7
5.7
(8.8)
2,692,538
100.0
2,555,579
100.0
Risk-weighted assets88
At 31 December
2012
US$bn
%
Total .........................................................................................................................
1,123.9
Europe ......................................................................................................................
Hong Kong ..............................................................................................................
Rest of Asia-Pacific .................................................................................................
Middle East and North Africa .................................................................................
North America .........................................................................................................
Latin America ..........................................................................................................
314.7
111.9
302.2
62.2
253.0
97.9
27.6
9.8
26.4
5.4
22.2
8.6
For footnotes, see page 120.
2011
US$bn
1,209.5
340.2
105.7
279.3
58.9
337.3
102.3
%
27.8
8.6
22.8
4.8
27.6
8.4
79
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Geographical regions > Europe
Selected items included in profit before tax by geographical region
Fair value movements arising from changes in own credit spreads26
Europe .........................................................................................................................
Hong Kong .................................................................................................................
Rest of Asia-Pacific ....................................................................................................
Middle East and North Africa ....................................................................................
North America ............................................................................................................
Acquisitions, disposals and dilutions75
Europe .........................................................................................................................
Hong Kong .................................................................................................................
Rest of Asia-Pacific ....................................................................................................
Middle East and North Africa ....................................................................................
North America ............................................................................................................
Latin America .............................................................................................................
For footnotes, see page 120.
2012
US$m
(4,110)
–
(3)
(12)
(1,090)
(5,215)
2012
US$m
(3)
420
4,048
(18)
4,888
144
9,479
2011
US$m
2,947
–
2
14
970
3,933
2011
US$m
–
82
1,141
54
2,192
181
3,650
2010
US$m
(198)
(6)
(1)
–
142
(63)
2010
US$m
286
136
188
(42)
66
–
634
80
Europe
Economic background
Our principal banking operations in Europe are
HSBC Bank plc in the UK, HSBC France, HSBC
Bank A.S. in Turkey, HSBC Bank Malta p.l.c.,
HSBC Private Bank (Suisse) SA and HSBC
Trinkaus & Burkhardt AG. Through these
subsidiaries we provide a wide range of
banking, treasury and financial services to
personal, commercial and corporate customers
across Europe.
Net interest income ..........
Net fee income .................
Net trading income ..........
Other income/(expense) ...
2012
US$m
10,394
6,169
2,707
(1,662)
2011
US$m
11,001
6,236
2,161
4,848
2010
US$m
11,250
6,371
2,863
2,266
Net operating income21 ..
17,608
24,246
22,750
LICs76 ...............................
(1,921)
(2,512)
(3,020)
Net operating income ....
15,687
21,734
19,730
Total operating expenses .
(19,095)
(17,069)
(15,445)
Operating profit/(loss) ...
(3,408)
4,665
4,285
Income/(expense) from
associates77 ....................
(6)
6
17
Profit/(loss) before tax ...
(3,414)
4,671
4,302
Cost efficiency ratio ........ 108.4%
RoRWA66 .........................
(1.0%)
70.4%
1.5%
67.9%
1.3%
Year-end staff numbers ...
70,061
74,892
75,698
Strong Rates and Credit performance
as investor sentiment improved
40%
reduction in RBWM
loan impairment charges
US$2.3bn
of customer redress
provisions in the UK
For footnotes, see page 120.
81
The UK economy remained weak in 2012, with little
growth in underlying activity. Preliminary data
showed that the level of real Gross Domestic Product
(‘GDP’) contracted by 0.3% in the fourth quarter, as
economic activity fell back after a boost related to
the Olympic Games. Despite the lacklustre economy,
the labour market remained fairly resilient, with the
unemployment rate in the three months to December
down to 7.8% from 8.4% in the same period in 2011.
In response to the stagnating economy, the Bank of
England (‘BoE’) increased the size of its Asset
Purchase Facility to £375bn (US$606bn) and
launched a new scheme, Funding for Lending, aimed
at increasing the supply of credit. Consumer Prices
Index (‘CPI’) inflation fell during the first half of the
year but remained above the BoE’s 2% target. In the
fourth quarter, it rose back to 2.7%, partly due to
increases in tuition fees and energy prices.
The eurozone returned to recession in 2012 as
the initial resilience in France and Germany was
more than offset by deepening contractions in the
periphery, where domestic demand was dragged
down by austerity and private sector deleveraging.
Inflation slowed from 2.7% at the end of 2011 to
2.2% in 2012 and the European Central Bank
(‘ECB’) cut the refinance (‘refi’) rate by 0.25% to
0.75% in July. The sovereign crisis worsened again
in the first half of 2012 but early signs of a roadmap
for future integration of the economic and monetary
union, additional support for Greece and, most
importantly, the ECB’s commitment to supporting
the euro through its Outright Monetary Transactions
bond-buying programme succeeded in lowering
peripheral government bond spreads to their lowest
level since March 2012.
Review of performance
Our operations in Europe reported a pre-tax loss of
US$3.4bn, compared with a profit of US$4.7bn in
2011. On a constant currency basis, pre-tax profits
declined by US$8.0bn.
In 2012, there were adverse movements of
US$4.1bn on our own debt designated at fair value,
resulting from changes in credit spreads, compared
with favourable movements of US$2.9bn in 2011.
On an underlying basis, pre-tax profits decreased
by US$930m due to higher operating expenses
reflecting a US$1.4bn increase in the provision for
customer redress programmes in the UK, in
particular relating to the possible mis-selling of PPI
and interest rate protection products. This was partly
offset by higher GB&M revenues, notably in the
Rates and Credit businesses as spreads on eurozone
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Geographical regions > Europe
Profit/(loss) before tax by country within global businesses
Retail
Banking
and Wealth
Management
US$m
Global
Banking
and
Markets
US$m
Commercial
Banking
US$m
Global
Private
Banking
US$m
2012
UK ........................................................
France60 ................................................
Germany ..............................................
Malta ....................................................
Switzerland ..........................................
Turkey ..................................................
Other ....................................................
2011
UK ........................................................
France60 ................................................
Germany ..............................................
Malta ....................................................
Switzerland ..........................................
Turkey ..................................................
Other ....................................................
2010
UK ........................................................
France60 ................................................
Germany ..............................................
Malta ....................................................
Switzerland ..........................................
Turkey ..................................................
Other ....................................................
For footnote, see page 120.
343
135
29
39
–
(32)
(5)
509
1,330
69
36
31
–
7
(151)
1,322
1,181
138
36
37
–
64
(144)
1,312
bonds tightened and investor sentiment improved. In
addition, impairment charges fell due to lower credit
risk provisions in GB&M, notably in the legacy
credit portfolio, and improved delinquency rates in
RBWM in the UK as we continued to improve the
quality of these portfolios with a higher proportion
of secured lending.
We made significant progress in reshaping
our business in Europe. The disposal of non-core
businesses simplified our European portfolio,
allowing us to concentrate resources on businesses
where we can deliver sustainable profits and growth
while managing risks effectively. We exited from
Hungary, Georgia, Slovakia, and RBWM in Russia
and Poland, and sold Property Vision in the UK, our
insurance and reinsurance businesses in Ireland and
the retail equities brokerage in Greece.
During 2012, we made progress with our
restructuring programme to align our businesses
in each country to their respective global business
operating models in order to reduce complexity
and lower our costs in a sustainable way. Total
restructuring costs (including impairment of assets)
832
203
64
52
2
71
(16)
1,208
1,227
192
69
72
(8)
62
73
1,687
827
135
32
56
(5)
80
80
1,205
82
(111)
514
283
31
1
104
164
986
(265)
(194)
203
21
–
87
225
77
1,772
376
231
17
–
105
202
2,703
235
(11)
40
–
133
–
102
499
192
16
28
–
225
2
94
557
223
18
30
–
265
1
103
640
Other
US$m
(6,355)
(263)
(72)
–
–
1
73
(6,616)
1,037
18
16
–
–
–
(43)
1,028
(1,605)
26
4
–
–
–
17
(1,558)
Total
US$m
(5,056)
578
344
122
136
144
318
(3,414)
3,521
101
352
124
217
158
198
4,671
2,398
693
333
110
260
250
258
4,302
of US$299m were incurred across Europe as a
result of organisational effectiveness and other
initiatives, which delivered sustainable cost savings
of approximately US$770m.
In RBWM, we continued to drive strong growth
in mortgage lending in the UK through the success
of our competitive offerings and marketing
campaigns. Our share of new UK mortgage lending
in 2012 was 12%, up from the 10% share of new
lending in 2011, while maintaining a loan-to-value
ratio of 58%. We have approved new mortgage
lending of £19bn (US$32bn) during 2012, compared
with our original lending commitment of £15bn
(US$24bn), with £5bn (US$8bn) approved for first
time buyers. Wealth Management revenue was
marginally lower during the year reflecting the
challenging economic environment. Our Wealth
Management products and services were redesigned
in accordance with the FSA’s Retail Distribution
Review, which was introduced on 1 January 2013,
and we continue to offer a competitive fee-based
financial advice service to Premier customers. The
expansion of the RBWM business continued in
Turkey, where we are targeting mass affluent
customers.
In CMB, we continued to invest in the UK, and
have increased the number of International
Relationship Managers to over 200 during the year.
In the first half of 2012, we launched an
International SME fund in the UK to support UK
businesses that trade, or aspire to trade,
internationally. By the end of 2012, we had approved
lending through the fund of £5.1bn (US$8.2bn),
exceeding the original target of £4.0bn (US$6.5bn),
and provided £12bn (US$20bn) of gross new lending
to UK SMEs, including the renewal of overdraft and
other lending facilities. Over 80% of small business
lending applications received during the year were
approved. Revenue from international customers
increased and our focus on this client base, together
with targeted growth initiatives such as deposit
acquisition and regional pricing strategies, led to
a rise in Payments and Cash Management and
Global Trade and Receivable Finance income.
Revenues from CMB’s collaboration with
GB&M increased primarily from sales of foreign
exchange products. During the year, we made a
provision for the possible mis-selling of interest rate
protection products and the sale of these products to
customers in our Business Banking segment, which
serves SMEs, was withdrawn.
GB&M continued to develop cross-product
capabilities in the growing renminbi market. Early in
the year, we issued the first international renminbi
bond outside sovereign Chinese territory. Since then,
a number of significant transactions were supported
by in-depth collaboration between European and
other regional teams which reinforced our position
as the leading house for international renminbi
issuance. In Foreign Exchange, the focus remained
on enhancing product offerings in our e-FX
platforms for a broader client base, particularly to
RBWM and CMB customers. This included the
launch of a ‘Dynamic Currency Conversion’ product
within the transactional Foreign Exchange business.
To enhance coverage efforts in Global Banking, the
Corporate Finance Group was established to
strengthen the financial advisory and event financing
business. Payments and Cash Management won a
number of mandates and implemented the Global
Liquidity Solutions platform to provide advanced
liquidity management functionality for its clients. In
addition, our legacy credit exposure was reduced in
Europe by exiting from certain positions and the
business will reduce the size of this portfolio further
as opportunities arise.
83
In GPB, we revised our medium-term strategic
plan to focus the business on investing in priority
markets with a redefined client offering that
builds on product strengths and leverages Group
capabilities. We concentrated on higher net worth
international and domestic customers, enhancing our
compliance and risk framework and improving
alignment with the other global businesses.
Our activities are likely to be affected by
proposed legislation in the UK arising from the
recommendations of the UK Independent
Commission on Banking (‘ICB’) to ring-fence the
retail bank from wholesale operations and to require
the retail bank to have a greater primary loss
absorbing capacity. Proposed changes in regulations
are likely to affect how we conduct activities, with
the potential to curtail the types of business we carry
out and increase the costs of doing business. The
implementation of any proposed changes will take a
considerable amount of time and involve significant
cost (see page 132).
The following commentary is on a constant
currency basis.
Net interest income decreased by 3%. Balance
Sheet Management revenues declined, principally in
the UK, as yield curves continued to flatten and
liquidity arising from maturities and sales of
available-for-sale debt securities was re-invested at
lower prevailing rates. In addition we placed a
greater portion of our liquidity with central banks.
GPB was similarly affected as higher yielding
positions matured and as we managed selectively our
exposures to eurozone sovereign debt. Legacy credit
revenues in the UK also fell as a result of higher
interest expense on structured debt issued at the end
of 2011, coupled with lower effective yields on
assets. RBWM net interest income declined mainly
in the UK due to lower deposit spreads reflecting
strong competition in the low interest rate
environment. This was partly offset by strong growth
in average residential mortgage balances and
improved lending spreads in the UK, along with
higher personal lending and cards balances in
Turkey as the business expanded. In addition, net
interest income in CMB benefited from higher
average customer account balances as we continued
to attract deposits through our Payments and Cash
Management products as a result of competitive
pricing, while average lending balances also rose,
mainly in the UK, despite muted demand for credit.
Net fee income increased by 2%. CMB fee
income rose due to higher transaction volumes
reflecting new mandates in Payments and Cash
Management. RBWM fee income also increased due
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Geographical regions > Europe
to lower commissions paid as a result of the run-off
and subsequent disposal of the insurance businesses
in Ireland. These increases were partly offset by a
fall in brokerage fees in GPB, reflecting a reduction
in client transaction volumes, due in part to lower
market volatility. Fees from assets under
management and account services also declined, as
challenging market conditions in the latter half of
2011 led to a fall in average client assets in 2012,
coupled with a reduction in client numbers as we
repositioned our target client base.
Net trading income increased by 27%, primarily
due to significantly higher Rates trading revenues
in the UK and France, and higher Credit trading
revenues, mainly in the UK, as spreads tightened and
investor sentiment improved following stimuli by
central banks. This was despite significant adverse
fair value movements in Rates, including a charge
from own credit spreads on structured liabilities as
spreads tightened which compared with a gain
reported in 2011, together with a charge as a result
of a change in estimation methodology in respect of
credit valuation adjustments on derivative assets (see
Note 15 on the Financial Statements). Revenues in
our legacy credit portfolio increased due to price
appreciation and redemption at par of certain assets.
Foreign Exchange income was also stronger due to
higher income from GB&M’s ongoing collaboration
with CMB, and increased volumes from
improvements in our electronic pricing and
distribution capabilities, although this was partly
offset by the effect of less volatile markets in 2012.
In addition, trading income benefited from the
change in estimation methodology for debit
valuation adjustments on derivative liabilities
(see Note 15 on the Financial Statements).
There were lower adverse fair value movements
on non-qualifying hedges, driven by favourable fair
value movements on non-qualifying hedges in
HSBC Holdings, compared with adverse fair value
movements in 2011, reflecting the less pronounced
decline in long-term US interest rates relative to
sterling and euro interest rates than in 2011. This
was partly offset by higher adverse movements on
non-qualifying hedges in European operating entities
as interest rates fell.
Adverse foreign exchange movements were
reported on assets held as economic hedges of
foreign currency debt designated at fair value
compared with favourable movements in 2011.
These offset favourable foreign exchange
movements on the foreign currency debt which are
reported in ‘Net expense from financial instruments
designated at fair value’.
84
Net expense from financial instruments
designated at fair value increased by US$4.8bn.
Excluding adverse fair value movements due to the
change in credit spreads on our own debt held at
fair value, net income from financial instruments
designated at fair value of US$1.9bn in 2012
compared with a net expense of US$374m in
2011. This reflected favourable foreign exchange
movements on foreign currency debt designated
at fair value issued as part of our overall funding
strategy compared with adverse movements in 2011,
with an offset reported in ‘Net trading income’. In
addition, net investment gains were recognised on
the fair value of assets held to meet liabilities under
insurance and investment contracts as market
conditions improved, compared with net investment
losses in 2011. The corresponding movement in
liabilities to customers is recorded under ‘Net
insurance claims incurred and movement in
liabilities to policyholders’ to the extent that
these investment gains or losses are attributable to
policyholders holding unit-linked insurance policies
and insurance or investment contracts with DPF.
Gains less losses from financial investments
decreased by US$133m. This was driven by higher
impairments in GB&M in the UK of available-for-
sale equity securities due to significant write-downs
in 2012 on three holdings, two of which were in our
direct investment business in run-off. The decline
was also driven by losses on the disposal of legacy
assets, also in GB&M in the UK (see page 27),
together with the non-recurrence of gains in 2011 on
the disposal of available-for-sale debt securities in
our Insurance business in RBWM. These factors
were partly offset by higher gains on the disposal of
available-for-sale debt securities in Balance Sheet
Management, mainly in the UK, as part of structural
interest rate risk management activities, coupled
with a rise in disposal gains in Principal Investments
in GB&M.
Net earned insurance premiums decreased by
6%. This mainly reflected lower life insurance sales
in RBWM in France as a result of the adverse
economic environment and increased competition
from other banking products. The run-off and
subsequent disposal of the insurance businesses in
Ireland in 2012 also contributed to the decline. This
was partly offset by a rise in net earned premiums
in the UK due, in part, to the sale of a unit-linked
insurance product through two new third party
platforms.
Other operating income decreased by US$95m.
GB&M incurred losses on the sale of certain
syndicated loans in the UK. In addition, gains in
2011 on the disposal of a property fund did not
recur.
Net insurance claims incurred and movement
in liabilities to policyholders increased by 40%,
driven by net investment gains on the fair value of
the assets held to support policyholder contracts,
compared with net losses in 2011. This was partly
offset by lower reserves established for new
business, reflecting the decline in premiums in
France.
Loan impairment charges and other credit
risk provisions decreased by 22% to US$1.9bn.
GB&M reported lower credit risk provisions, mainly
in the UK, on available-for-sale ABSs, driven by an
improvement in underlying asset prices, as well as
lower charges on Greek sovereign debt. These were
coupled with a reduction in loan impairment charges
in RBWM, notably in the UK, as we continued to
pro-actively identify and monitor customers facing
financial hardship and focused on growing higher
quality lending. As a result, delinquency rates
improved across both the secured and unsecured
lending portfolios. This was partly offset by an
increase in loan impairment charges in RBWM in
Turkey, reflecting business expansion. In addition,
there were higher individually assessed provisions in
CMB reflecting, mainly, the challenging economic
conditions in the UK, Greece, Spain and Turkey.
Operating expenses increased by 15%, driven
by higher charges relating to UK customer redress
programmes with US$2.3bn reported in 2012,
compared with a charge of US$890m (US$898m as
reported) in 2011. In 2012 we included an additional
charge of US$1.7bn for estimated redress for the
possible mis-selling of PPI policies and US$598m in
relation to the possible mis-selling of interest rate
protection products in previous years, of which
US$268m related to the estimated redress to be paid
to customers and the remainder to costs of closing
out these positions and related administration costs.
A charge relating to the US Office of Foreign Asset
Control (‘OFAC’) investigation of US$375m was
also incurred in HSBC Holdings, along with the UK
bank levy of US$571m. This was partly offset by an
adjustment of US$99m in the 2011 bank levy charge
of US$570m as the basis of calculation was clarified.
In addition, 2011 included a credit of US$570m
(US$587m as reported) arising from the defined
benefit pension obligations in the UK which did
not recur. Restructuring costs of US$299m were
US$92m lower than in 2011, as the review initiated
in 2011 to improve cost efficiency continued to be
implemented and we completed disposals and exits
in Europe.
Excluding these items, operating expenses
marginally increased compared with 2011. Our
organisational effectiveness initiatives progressed,
delivering sustainable cost savings of approximately
US$770m in 2012. This enabled us to reinvest in,
and reallocate capital, to our designated growth
businesses such as our mortgage offering, our
international CMB business and our home and
priority growth markets (UK, France, Germany
and Turkey), as well as launching the M&S Bank in
the UK.
Operating expenses in Europe
HSBC Holdings ....................
UK .........................................
Continental Europe ...............
Intra-region eliminations ......
Total operating expenses ......
2012
US$m
2,063
11,993
5,237
(198)
19,095
2011
US$m
1,664
9,989
5,563
(147)
17,069
85
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n
a
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F
&
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i
t
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a
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Geographical regions > Europe
Profit/(loss) before tax and balance sheet data – Europe
Retail
Banking
and Wealth
Management
US$m
Commercial
Banking
US$m
2012
Global
Banking
and
Markets
US$m
Global
Private
Banking
US$m
Inter-
segment
elimination85
US$m
Other
US$m
Total
US$m
10,394
6,169
1,182
1,525
2,707
(3,091)
876
(2,215)
364
111
3,630
1,078
22,238
(4,630)
17,608
43
–
–
(43)
(43)
–
–
–
–
–
–
(9)
(9)
–
(9)
Profit before tax
Net interest income/(expense) ....
Net fee income ............................
5,437
2,622
3,228
1,658
Trading income excluding net
interest income .......................
Net interest income on trading
activities ..................................
Net trading income78 ...................
Changes in fair value of long-
term debt issued and related
derivatives ..............................
Net income/(expense) from
other financial instruments
designated at fair value ...........
Net income/(expense) from
financial instruments
designated at fair value ...........
Gains less losses from
financial investments ..............
Dividend income .........................
Net earned insurance premiums .
Other operating income ..............
Total operating income/
67
7
74
–
26
14
40
–
770
(5)
–
3,150
84
139
(1)
1
438
58
5,561
(536)
770
139
1,073
1,409
1,032
848
1,500
2,348
–
1,073
375
104
–
88
820
848
216
14
230
–
–
–
(3)
3
42
61
(543)
9
25
33
58
(3,091)
(1,106)
(4,197)
(2)
3
–
796
(expense) ................................
12,132
Net insurance claims86 ................
(4,054)
6,429
2,001
(3,876)
–
(40)
–
Net operating income/
(expense)21 .............................
Loan impairment charges and
8,078
5,025
6,429
1,961
(3,876)
other credit risk provisions .....
(347)
(1,109)
(436)
(29)
–
–
(1,921)
Net operating income/
(expense) ................................
7,731
Total operating expenses ............
(7,225)
Operating profit/(loss) ..............
506
Share of profit/(loss) in
associates and joint ventures ..
Profit/(loss) before tax ..............
3
509
%
Share of HSBC’s profit
before tax ................................
Cost efficiency ratio ...................
2.5
89.4
3,916
(2,708)
1,208
–
1,208
%
5.9
53.9
5,993
(4,999)
994
(8)
986
%
4.8
77.8
1,932
(1,431)
501
(2)
499
%
2.4
73.0
(3,876)
(2,741)
(6,617)
1
(6,616)
%
(32.0)
(70.7)
(9)
9
–
–
–
Balance sheet data74
Loans and advances to
customers (net) .......................
Total assets .................................
Customer accounts ......................
US$m
US$m
US$m
US$m
US$m
170,002
240,744
191,024
105,796
132,718
121,648
156,798
1,044,507
184,473
29,963
76,145
57,125
881
75,513
739
(180,387)
15,687
(19,095)
(3,408)
(6)
(3,414)
%
(16.5)
108.4
US$m
463,440
1,389,240
555,009
86
Retail
Banking
and Wealth
Management
US$m
Commercial
Banking
US$m
Global
Banking
and
Markets
US$m
2011
Global
Private
Banking
US$m
Inter-
segment
elimination85
US$m
Other
US$m
40
11
51
–
5
16
21
–
(672)
(21)
(65)
Profit before tax
Net interest income/(expense) ....
Net fee income ............................
5,653
2,633
3,107
1,640
Trading income/(expense)
excluding net interest
income ....................................
Net interest income on trading
activities ..................................
Net trading income/(expense)78 ..
Changes in fair value of long-
term debt issued and related
derivatives ..............................
Net income/(expense) from
other financial instruments
designated at fair value ...........
Net income/(expense) from
financial instruments
designated at fair value ...........
Gains less losses from
financial investments ..............
Dividend income .........................
Net earned insurance premiums .
Other operating income ..............
(672)
51
1
3,768
95
(21)
(1)
1
381
58
5,186
(287)
4,899
(960)
3,939
(2,252)
1,687
Total operating income ...............
11,580
Net insurance claims86 ................
Net operating income21 ...............
(3,212)
8,368
Loan impairment (charges)/
recoveries and other credit
risk provisions ........................
Net operating income .................
Total operating expenses ............
Operating profit ..........................
Share of profit/(loss) in
(596)
7,772
(6,450)
1,322
associates and joint ventures ..
–
–
Profit before tax ..........................
1,322
1,687
%
6.0
77.1
%
7.7
46.0
Share of HSBC’s profit
before tax ................................
Cost efficiency ratio ...................
Balance sheet data74
Loans and advances to
customers (net) .......................
Total assets .................................
Customer accounts ......................
For footnotes, see page 120.
2,102
989
602
1,205
1,807
–
(65)
453
42
–
187
936
942
191
16
207
–
–
–
1
4
–
5
(574)
32
(201)
53
(148)
3,180
46
3,226
11
1
(13)
760
5,515
2,095
3,295
–
–
–
5,515
2,095
3,295
(876)
4,639
(4,569)
70
7
77
%
0.4
82.8
(82)
2,013
(1,456)
557
–
557
%
2.5
69.5
2
3,297
(2,268)
1,029
(1)
1,028
%
4.7
68.8
US$m
US$m
US$m
US$m
US$m
150,205
210,140
176,134
98,154
124,049
104,530
156,903
1,021,486
154,208
28,378
77,410
58,265
696
63,141
267
(214,281)
87
(223)
–
–
223
223
–
–
–
–
–
–
74
74
–
74
–
74
–
–
–
Total
US$m
11,001
6,236
637
1,524
2,161
3,180
(712)
2,468
515
49
4,136
1,179
27,745
(3,499)
24,246
(2,512)
21,734
4,665
6
4,671
%
21.3
70.4
US$m
434,336
1,281,945
493,404
(74)
(17,069)
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Geographical regions > Hong Kong
Hong Kong
Economic background
HSBC’s principal banking subsidiaries in Hong
Kong are The Hongkong and Shanghai Banking
Corporation Limited and Hang Seng Bank
Limited. The former is the largest bank
incorporated in Hong Kong and is our flagship
bank in the Asia-Pacific region. It is one of Hong
Kong’s three note-issuing banks, accounting for
more than 60% by value of banknotes in
circulation in 2012.
Net interest income ..........
Net fee income .................
Net trading income ..........
Other income ...................
2012
US$m
5,316
3,335
1,463
2,308
2011
US$m
4,691
3,097
1,189
1,705
2010
US$m
4,246
2,962
1,312
1,682
Net operating income21 ..
12,422
10,682
10,202
LICs76 ...............................
(74)
(156)
(114)
Net operating income ....
12,348
10,526
10,088
Total operating expenses .
(4,848)
(4,758)
(4,431)
Operating profit .............
7,500
5,768
5,657
Income from associates77 .
82
55
35
Profit before tax .............
7,582
5,823
5,692
Cost efficiency ratio ........
RoRWA66 .........................
39.0%
7.0%
44.5%
5.3%
43.4%
5.0%
Year-end staff numbers ...
27,742
28,984
29,171
24%
growth in underlying profit before tax
Market leader in offshore renminbi bond
issuance
Best Commercial Bank 2012
(FinanceAsia)
For footnotes, see page 120.
88
The Hong Kong economy started 2012 on a strong
footing, but lost momentum in the second quarter as
global trade flows slowed and the mainland Chinese
economy cooled, causing GDP to contract slightly.
Domestic demand stayed resilient, however,
supported by continued wage growth, and firm job
market conditions and asset prices. This underpinned
investment and private consumption growth, leading
the economy back into expansion in the third quarter
(0.6%, quarter-on-quarter, seasonally adjusted).
Slower economic momentum and deflationary
pressures in mainland China allowed the pressure on
Hong Kong’s asset prices to ease through most of
2012, resulting in reduced CPI inflation of 4.1%,
compared with 5.3% in 2011.
Review of performance
Reported pre-tax profits from our operations in Hong
Kong were US$7.6bn compared with US$5.8bn in
2011, an increase of 30% on both a reported and a
constant currency basis.
Reported profits included gains on the sale of
our shares in Global Payments Asia-Pacific Ltd
of US$212m and the HSBC and Hang Seng Bank
general insurance businesses of US$117m and
US$46m, respectively. Excluding these gains and
associated operating results, underlying profit of
US$7.2bn increased by 24%, driven by higher
net interest income in CMB and RBWM, the gain of
US$314m on the sale of non-strategic investments in
India, higher trading revenues in GB&M, increased
fee income in both CMB and GB&M, and a
reduction in loan impairment charges. These
favourable movements were partly offset by higher
operating expenses.
In RBWM, we continue to develop our Wealth
Management services for our retail customers and
launched new investment funds, including the
Global High Yield Bond Fund which attracted over
US$1bn of subscriptions by the end of the year. The
sale of the general insurance businesses enabled us
to focus on life insurance manufacturing, where we
maintained our market leadership position. We also
led the market in deposits, mortgages, mandatory
provident funds and credit cards. We maintained our
prudent lending approach with average loan-to-value
ratios of 48% on new mortgage drawdowns and an
estimated 32% on the portfolio as a whole. We now
offer renminbi current accounts for non-residents
and launched the first mobile payment solution in the
region, enabling contactless credit card transactions
through Visa payWave terminals.
Profit/(loss) before tax by global business
Retail Banking and Wealth Management ..................................................................
Commercial Banking ..................................................................................................
Global Banking and Markets ......................................................................................
Global Private Banking ..............................................................................................
Other ...........................................................................................................................
2012
US$m
3,694
2,188
1,518
249
(67)
7,582
2011
US$m
3,022
1,608
1,316
188
(311)
5,823
2010
US$m
3,001
1,352
1,347
227
(235)
5,692
In CMB, we capitalised on our international
connectivity and our standing as a leading trade
finance bank to grow trade-related revenues by 10%,
particularly with mainland China. The collaboration
between CMB and GB&M continued to strengthen,
with revenue growth of 13%, most notably from the
provision of foreign exchange products to our
corporate customers. We won the FinanceAsia
award for ‘Best Commercial Bank 2012’ and ten
Asiamoney awards for Payments and Cash
Management, including the ‘Best Local Cash
Management Bank’ for small, medium and large
corporates.
In GB&M, we led the market in Hong Kong
dollar bond issuance and were the leading
bookrunner for corporate high yield bonds in Asia
excluding Japan. We continued to lead the market in
offshore renminbi bond issuance with several high-
profile deals completed in 2012 for multinationals
accessing the market.
We also reinforced our position as a leading
international bank for offshore renminbi products,
winning the Asia Risk ‘Renminbi House of the Year’
award and all seven product categories in
Asiamoney’s ‘Offshore Renminbi Survey’.
The following commentary is on a constant
currency basis.
Net interest income was 13% higher than
in 2011, notably in CMB and RBWM, driven by
increased customer loans and deposit balances and
by growth in the insurance portfolio.
In RBWM, we continued to grow our average
mortgage balances, reflecting continued strength in
the property market. In CMB, average term and
trade-related lending balances were higher as we
capitalised on trade and capital flows.
Asset spreads in CMB were marginally wider
than in 2011 on trade-related and other lending due
to repricing, though they began to narrow towards
the end of the year.
Net interest income also rose due to higher
average deposit balances, notably in RBWM, in
part reflecting reduced net outflows from customer
89
accounts into investments. In addition, deposit
spreads widened.
Net fee income of US$3.3bn was 7% higher than
in 2011. Fees rose from increased transaction
volumes in trade services, remittances and account
services as we continued to intermediate
international trade and capital flows. Fee income
also increased in both CMB and GB&M as we
arranged more debt issues for our customers to
satisfy their funding requirements while the market
for corporate debt improved. In RBWM, fees from
unit trusts rose reflecting increased sales volumes,
despite customers increasingly preferring lower
risk products with lower fees. These increases were
largely offset by a reduction in brokerage income
from lower market turnover as a result of weaker
investor sentiment.
Net trading income increased by 23% from
lower adverse fair value movements on derivatives
relating to certain provident funds, following
reductions in long-term investment returns in 2011.
There was also a strong performance in GB&M,
notably in Rates trading activities, which reflected
increased client demand for risk management
products, particularly in yen and renminbi, in part
from increased cross-currency debt issuance by
corporates. Credit trading revenues also rose, in
part due to increased client activity. This was
partly offset by a net charge as a result of a change in
estimation methodology in respect of the valuation
adjustments on derivatives.
Net income from financial instruments
designated at fair value was US$447m compared
with an expense of US$540m in 2011, due to net
investment gains on assets held by the Insurance
business (compared with net losses in 2011) as a
result of more favourable equity market conditions.
To the extent that these investment gains were
attributed to policyholders of unit-linked insurance
policies and insurance contracts with DPF, there was
a corresponding increase in ‘Net insurance claims
incurred and movement in liabilities to
policyholders’.
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Geographical regions > Hong Kong
Gains less losses from financial investments
were US$322m compared with US$25m in 2011,
largely from the gain of US$314m on the sale of our
shares in four non-strategic investments in India.
Net earned insurance premiums grew by 17%
following increased new sales and renewals of life
insurance products. The growth in premiums
resulted in a corresponding increase in ‘Net
insurance claims incurred and movement in
liabilities to policyholders’.
Other operating income of US$1.9bn was
US$235m higher than in 2011. We completed the
sale of our shares in Global Payments Asia-Pacific
Ltd and the HSBC and Hang Seng Bank general
insurance businesses, realising gains of US$212m,
US$117m and US$46m, respectively. While the
value of the PVIF asset rose, this was not to the same
extent as in 2011 as increased insurance sales in
2012 were more than offset by lower positive
assumption updates during 2012 compared with
2011and the non-recurrence of the benefit from the
refinement to the PVIF asset calculation in 2011.
Net insurance claims incurred and movement in
liabilities to policyholders increased by 38%, driven
by net investment gains on fair value of the assets
held to support policyholder contracts, compared
with net losses in 2011. In addition, policyholder
liabilities were established for new business,
reflecting the higher premiums, though this was
partly offset by the disposal of the insurance
businesses in 2012.
Loan impairment charges and other credit risk
provisions reduced to US$74m from US$157m
in 2011, largely due to lower specific impairment
charges in CMB and the non-recurrence of charges
relating to available-for-sale Greek sovereign debt
securities.
Operating expenses increased by 2%, primarily
due to higher systems implementation and
processing costs as we continued to invest in our
technology infrastructure, and increased property
rental costs. Salaries and wages were broadly
unchanged as wage inflation was largely offset by
reduced average staff numbers as we continued to
improve efficiency across our operations, generating
sustainable annual savings of approximately
US$190m.
90
Profit/(loss) before tax and balance sheet data – Hong Kong
Retail
Banking
and Wealth
Management
US$m
Commercial
Banking
US$m
2012
Global
Banking
and
Markets
US$m
Global
Private
Banking
US$m
Profit/(loss) before tax
Net interest income/(expense) ....
Net fee income ............................
2,851
1,769
1,629
850
Trading income/(expense)
excluding net interest
income ....................................
Net interest income on
trading activities .....................
Net trading income78 ...................
Changes in fair value of long-
term debt issued and related
derivatives ..............................
Net income/(expense) from
other financial instruments
designated at fair value ...........
Net income/(expense) from
financial instruments
designated at fair value ...........
Gains less losses from
financial investments ..............
Dividend income .........................
Net earned insurance premiums .
Other operating income ..............
Total operating income ............
11,322
Net insurance claims86 ................
Net operating income21 .............
(5,757)
5,565
Loan impairment (charges)/
recoveries and other credit
risk provisions ........................
Net operating income ...............
Total operating expenses ............
Operating profit/(loss) ..............
Share of profit in associates
(97)
5,468
(1,819)
3,649
176
10
186
163
2
165
–
–
511
(53)
511
–
–
5,294
711
(53)
–
1
655
253
3,500
(602)
2,898
3
2,901
(719)
2,182
1,087
548
666
352
1,018
–
23
23
2
5
8
77
2,768
(7)
2,761
17
2,778
(1,263)
1,515
and joint ventures ...................
45
6
3
Profit/(loss) before tax ..............
3,694
2,188
1,518
%
17.9
32.7
%
10.6
24.8
%
7.3
45.7
Share of HSBC’s profit
before tax ................................
Cost efficiency ratio ...................
Balance sheet data74
Loans and advances to
customers (net) .......................
Total assets .................................
Customer accounts ......................
149
155
170
–
170
–
–
–
7
–
–
13
494
–
494
3
497
(248)
249
–
249
%
1.2
50.2
(2)
8
6
–
(34)
(34)
313
18
–
1,152
986
–
986
–
986
(1,081)
(95)
28
(67)
%
(0.3)
109.6
Inter-
segment
elimination85
US$m
Other
US$m
(482)
13
82
–
Total
US$m
5,316
3,335
–
1,173
(82)
(82)
290
1,463
–
–
–
–
–
–
(282)
(282)
–
(282)
–
(282)
282
–
–
–
–
447
447
322
24
5,957
1,924
18,788
(6,366)
12,422
(74)
12,348
(4,848)
7,500
82
7,582
%
36.7
39.0
US$m
173,613
518,334
346,208
US$m
US$m
US$m
US$m
US$m
62,533
96,185
201,649
62,944
72,056
90,152
40,223
256,295
34,171
6,464
20,705
19,566
1,449
81,085
670
(7,992)
91
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Geographical regions > Hong Kong / Rest of Asia-Pacific
Profit/(loss) before tax and balance sheet data – Hong Kong (continued)
Retail
Banking
and Wealth
Management
US$m
Commercial
Banking
US$m
Global
Banking
and
Markets
US$m
2011
Global
Private
Banking
US$m
Inter-
segment
elimination85
US$m
Other
US$m
Profit/(loss) before tax
Net interest income/(expense) ....
Net fee income ............................
2,571
1,741
1,317
706
1,051
475
Trading income/(expense)
excluding net interest
income ....................................
Net interest income on
trading activities .....................
Net trading income/(expense)78 ..
Changes in fair value of long-
term debt issued and related
derivatives ..............................
Net income/(expense) from
other financial instruments
designated at fair value ...........
Net income/(expense) from
financial instruments
designated at fair value ...........
Gains less losses from
financial investments ..............
Dividend income .........................
Net earned insurance premiums .
Other operating income ..............
Total operating income ...............
Net insurance claims86 ................
Net operating income21 ...............
Loan impairment (charges)/
recoveries and other credit
risk provisions ........................
Net operating income .................
Total operating expenses ............
Operating profit/(loss) ................
Share of profit in associates
120
9
129
169
1
170
–
–
(475)
(72)
(475)
3
–
4,317
505
8,791
(3,887)
4,904
(77)
4,827
(1,811)
3,016
(72)
10
1
758
175
3,065
(697)
2,368
(66)
2,302
(703)
1,599
652
246
898
–
(5)
(5)
21
14
13
79
2,546
(9)
2,537
23
2,560
(1,248)
1,312
and joint ventures ...................
6
9
4
Profit/(loss) before tax ................
3,022
1,608
1,316
%
13.8
36.9
%
7.3
29.7
%
6.0
49.2
Share of HSBC’s profit
before tax ................................
Cost efficiency ratio ...................
Balance sheet data74
Loans and advances to
customers (net) .......................
Total assets .................................
Customer accounts ......................
For footnotes, see page 120.
43
–
–
(43)
(43)
–
–
–
–
–
–
(268)
(268)
–
(268)
–
(268)
268
–
–
–
173
160
135
–
135
–
–
–
–
–
–
8
476
–
476
(36)
440
(252)
188
–
188
%
0.9
52.9
(464)
15
(116)
16
(100)
–
15
15
(10)
24
–
1,185
665
–
665
–
665
(1,012)
(347)
36
(311)
%
(1.4)
152.2
Total
US$m
4,691
3,097
960
229
1,189
–
(537)
(537)
24
39
5,088
1,684
15,275
(4,593)
10,682
(156)
10,526
(4,758)
5,768
55
5,823
%
26.6
44.5
US$m
157,665
473,024
315,345
US$m
US$m
US$m
US$m
US$m
56,296
85,866
181,316
54,986
63,516
79,225
39,667
238,892
35,283
5,447
20,680
19,622
1,269
84,782
(101)
(20,712)
92
Rest of Asia-Pacific
Economic background
We offer a full range of banking and financial
services in mainland China, mainly through our
local subsidiary, HSBC Bank (China) Company
Limited. We also participate indirectly in
mainland China through our primary associate,
Bank of Communications.
Outside mainland China, we conduct
business in 21 countries and territories in the
Rest of Asia-Pacific region, primarily through
branches and subsidiaries of The Hongkong
and Shanghai Banking Corporation, with
particularly strong coverage in Australia, India,
Indonesia, Malaysia and Singapore.
Net interest income ...........
Net fee income ..................
Net trading income ...........
Other income ....................
2012
US$m
5,391
2,083
1,053
5,057
2011
US$m
5,102
2,111
1,658
1,842
Net operating income21 ...
13,584
10,713
LICs76 ................................
(436)
(267)
Net operating income .....
13,148
10,446
2010
US$m
3,828
1,932
1,618
1,854
9,232
(439)
8,793
Total operating expenses ..
(5,806)
(5,806)
(5,143)
Operating profit ..............
7,342
Income from associates77 ..
3,106
Profit before tax ..............
10,448
4,640
2,831
7,471
Cost efficiency ratio .........
RoRWA66 ..........................
42.7%
3.5%
54.2%
3.1%
3,650
2,252
5,902
55.7%
3.1%
Year-end staff numbers ....
85,024
91,051
91,607
Over US$3bn
gains recognised following
strategic disposals in 2012
9%
growth in lending balances
(on a constant currency basis)
‘Best Domestic Cash Management Bank’
(Euromoney)
across 14 countries in the region
For footnotes, see page 120.
93
In mainland China, economic growth slowed
through the first three quarters of 2012 due to a
decline in external demand driven by the eurozone
crisis, the effect of tightening domestic monetary
policy measures and sharp de-stocking by industry.
This greater than expected deceleration and
increasing pressure on the labour market prompted
policy makers to ease monetary policy in the
summer of 2012, following two interest rate
cuts totalling 50bps and two cuts in the reserve
requirement ratio amounting to 100bps in the
first half of the year, and speeded up the approval of
new infrastructure projects. As these measures took
effect, the mainland Chinese economy began to
show signs of recovery in the fourth quarter of 2012.
GDP slowed to 7.8% in 2012 from 9.3% in 2011, but
remained above Beijing’s target of 7.5%. CPI
inflation was a modest 2.6%.
Japan’s economy experienced a turbulent 2012.
After a very strong start supported by reconstruction
demand and government subsidies, growth turned
sharply negative in the third quarter as tepid overseas
demand prompted a deep slump in exports and
manufacturing. Sentiment improved by the end of
2012. The Bank of Japan took steps to ease monetary
policy in 2012, establishing a 1% inflation goal in
February 2012 and expanding its Asset Purchase
Programme by JPY46 trillion (US$534bn).
Slowing global trade reduced growth in the Rest
of Asia-Pacific region. South Korea’s full-year
growth slowed to 2.1% in 2012, the lowest annual
rate for three years, as the slowdown in global trade
hit the export-dependent economy hard in the third
quarter. To support domestic demand, the Bank of
Korea lowered its policy rate from 3.25% to 2.75%.
Singapore’s economy slowed notably, with GDP
growth declining to 1.2% in 2012 from 5% the year
before. 2012 was a tumultuous year for Taiwan’s
export-reliant economy, as both western and
mainland China demand weakened, particularly from
April onwards. However, the impetus provided by
key electronic product launches helped to maintain
manufacturing activity and jobs, enabling domestic
demand to underpin growth more effectively than it
did in earlier recessions. The other ASEAN
(Association of Southeast Asian Nations) countries
demonstrated more resilience, supported by domestic
growth. Growth in Indonesia was driven by
favourable demographics and a growing middle-
income class. In Thailand, rebuilding activity and
policy support after the floods in 2011 led to a
rebound in economic activity. Growth in India
continued to slow during the course of 2012, with
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Geographical regions > Rest of Asia-Pacific
Profit/(loss) before tax by country within global businesses
2012
Australia ...............................................
India .....................................................
Indonesia ..............................................
Mainland China ...................................
Ping An ............................................
Other associates ...............................
Other mainland China .....................
Malaysia ...............................................
Singapore .............................................
Taiwan .................................................
Vietnam.................................................
Other ....................................................
2011
Australia ...............................................
India .....................................................
Indonesia ..............................................
Mainland China ...................................
Ping An ............................................
Other associates ...............................
Other mainland China .....................
Malaysia ...............................................
Singapore .............................................
Taiwan .................................................
Vietnam.................................................
Other ....................................................
2010
Australia ...............................................
India .....................................................
Indonesia ..............................................
Mainland China ...................................
Ping An ............................................
Other associates ...............................
Other mainland China .....................
Malaysia ...............................................
Singapore .............................................
Taiwan .................................................
Vietnam.................................................
Other ....................................................
Retail
Banking
and Wealth
Management
US$m
Global
Banking
and
Markets
US$m
Commercial
Banking
US$m
Global
Private
Banking
US$m
Other
US$m
Total
US$m
97
41
29
838
622
268
(52)
183
201
62
9
57
38
89
124
1,724
82
1,466
176
131
139
36
45
276
184
497
146
1,257
60
591
606
242
296
136
57
510
–
7
–
(4)
–
–
(4)
–
97
–
–
59
(44)
175
7
2,525
2,459
–
66
8
(65)
–
9
230
275
809
306
6,340
3,223
2,325
792
564
668
234
120
1,132
1,517
2,602
3,325
159
2,845
10,448
88
(14)
6
1,112
946
233
(67)
173
183
45
–
48
106
122
89
1,340
–
1,150
190
118
133
23
51
264
108
539
157
1,116
63
466
587
228
189
130
79
543
1,641
2,246
3,089
59
(83)
12
839
797
176
(134)
120
169
31
(7)
22
96
71
94
833
–
746
87
88
87
36
50
201
95
508
116
683
51
392
240
194
100
87
61
644
1,162
1,556
2,488
–
5
–
(4)
–
–
(4)
1
97
–
–
(8)
91
–
4
–
(7)
–
–
(7)
–
84
–
–
–
81
5
161
7
117
117
–
–
9
(7)
12
24
76
307
813
259
3,681
1,126
1,849
706
529
595
210
154
923
404
7,471
8
179
(3)
217
188
–
29
(1)
84
(7)
7
131
615
258
679
219
2,565
1,036
1,314
215
401
524
147
111
998
5,902
weaker external demand, the lagged effects of
monetary policy normalisation and the absence in
recent years of structural policies and infrastructure
investment playing a role in the slowdown.
Encouragingly, the government embarked on a
reform programme towards the end of the year
which helped lift sentiment and stabilise growth.
Unemployment edged up to 5.4%. In response to
the global slowdown and to help re-balance growth
away from mining and towards the non-mining
sectors, the Reserve Bank of Australia reduced its
cash rate from 4.25% to 3.00%.
Review of performance
Growth in the Australian economy was uneven
in 2012 as it absorbed a mining boom which had the
effect of slowing investment in other sectors. For
2012 as a whole, growth was strong at around 3.5%.
Our operations in the Rest of Asia-Pacific region
reported pre-tax profits of US$10.4bn compared
with US$7.5bn in 2011, an increase of 40% or
41% on a constant currency basis.
94
Reported profits included a gain on the disposal
of our associate, Ping An of US$3.0bn. Our
remaining shareholding has been classified as a
financial investment (see Note 26 on the Financial
Statements). Reported profits also included gains
from the sale of the RBWM business in Thailand
(US$108m), the GPB business in Japan (US$67m)
and our interest in a property company in the
Philippines (US$130m). Reported profits in 2011
included an accounting gain of US$181m arising
from the dilution of our shareholding in Ping An,
offset by a remeasurement loss of US$48m on its
consolidation of Ping An Bank (formerly Shenzhen
Development Bank).
On an underlying basis, which excludes the
items described above and the associated operating
results, pre-tax profit rose by 2%. This was driven
by higher net interest income, notably from Balance
Sheet Management in GB&M in mainland China,
and strong growth in average lending balances
across most of the region, as well as increased profits
from our associates in mainland China. These factors
were partly offset by adverse fair value movements
of US$553m on the contingent forward sale contract
related to the Ping An sale, the effect of which was
offset in 2013 on completion of the transaction,
and higher operating expenses, in part due to
restructuring costs arising from the ongoing strategic
review of our businesses and support functions in
the region. Loan impairment charges also rose from
a small number of specific corporate impairment
charges, but remained low as credit quality remained
broadly stable.
We maintained our focus on our key priority
growth markets in the region. In mainland China,
we continued to invest in our branch network and
at the end of the year had 141 HSBC China outlets,
20 HSBC rural bank outlets and 46 Hang Seng
Bank outlets. We invested a further US$1.7bn in
BoCom to maintain our interest of 19.03% in this
strategically important associate and reinforce our
position as the leading foreign bank in mainland
China.
In Malaysia, we now have the largest branch
network amongst foreign banks and were designated
‘Best Bank’ for the 10th consecutive year by the
Asset Triple A Country Awards.
In RBWM, we made progress in re-shaping the
business in line with our strategy, completing the
disposal of the non-strategic business in Thailand
and announcing the sale of our life insurance
business in Taiwan. With our focus on secured
lending, we recorded mortgage growth in mainland
China, Singapore, Australia and Malaysia, reflecting
95
the continued strength of the property market and the
expansion of our distribution network.
In CMB, trade revenues grew as we capitalised
on our global network to capture cross-border trade
and capital flows, particularly with mainland China.
We continued to strengthen our infrastructure to
capture the outbound opportunities from mainland
China and now have 14 ‘China desks’ established
globally to assist customers with their international
trade requirements. Significant new mandates in
2012 in CMB and GB&M reflected investment in
our Payments and Cash Management infrastructure.
We were recognised as ‘Best Domestic Cash
Management Bank’ by Euromoney in fourteen
countries across the region, ‘Best Overall Cash
Management Bank in Asia’ by Global Finance and
‘Best International Trade Bank in China’ by Trade
Finance Magazine.
In GB&M, we continued to be a key participant
in the internationalisation of the renminbi and
enhanced our Payments and Cash Management
systems with renminbi capabilities. We continued to
build our debt and equity capital markets capabilities
in key countries in the region and were involved in
several significant government and large corporate
issues in Australia, Singapore, India and Indonesia.
Revenues from the collaboration between CMB
and GB&M increased by 13% as we enhanced sales
coordination between the global businesses.
The following commentary is on a constant
currency basis.
Net interest income increased by 8%, notably in
mainland China from Balance Sheet Management,
arising from growth in the debt securities portfolio
and improved yields, as well as from increased
trade-related and term lending in CMB and GB&M.
We grew average deposit balances, notably in
GB&M and CMB reflecting new Payments and Cash
Management mandates, and in RBWM from deposit
acquisition. The benefit of this growth was partly
offset by narrower liability spreads reflecting rate
cuts and liquidity easing measures by central banks.
In RBWM, residential mortgage balances grew,
primarily in Singapore, Australia, Malaysia and
mainland China, reflecting the continued strength of
property markets and expansion of our distribution
network. However, net interest income was broadly
unchanged due to the effect of the sale of the
RBWM business in Thailand and narrower asset
spreads in a number of countries attributable to
competitive pricing pressures.
Net fee income increased by US$29m, primarily
in GB&M, from higher fee income from our
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Report of the Directors: Operating and Financial Review (continued)
Geographical regions > Rest of Asia-Pacific
participation in more debt capital markets
transactions across the region as we continued to
strengthen our capabilities in this area, and lower
regulatory fee expenses on Foreign Exchange and
Rates transactions in mainland China as volumes
reduced. RBWM reported higher income from cards
in Australia from increased spending and card
issuance and Wealth Management fees in mainland
China. The increase from cards was more than offset
by the discontinuation of our Premier business in
Japan, the sale of our RBWM business in Thailand,
and a fall in fund management fees as we saw a
move into lower yielding products reflecting
investor’s lower risk appetite.
Net trading income decreased by 34% compared
with 2011, mainly from adverse fair value
movements on the contingent forward sale contract
of US$553m relating to Ping An (see Note 26 on
the Financial Statements). Trading income was also
lower, primarily in mainland China due to lower
GB&M revenues in Foreign Exchange reflecting
reduced volatility. These were partly offset by a
net favourable movement as a result of a change in
estimation methodology in respect of the valuation
adjustments on derivatives.
Net income from financial instruments designated
at fair value was US$110m in 2012 compared with a
net expense of US$19m in 2011. This was driven by
net investment gains on assets held by the Insurance
business, primarily in Singapore, due to positive
equity market movements. To the extent that these
investment gains were attributed to policyholders of
unit-linked insurance policies and insurance contracts
with DPF, there was a corresponding increase in ‘Net
insurance claims incurred and movement in liabilities
to policyholders’.
Gains less losses from financial investments
were US$16m compared with net losses of US$23m
in 2011, due to a disposal gain on investments
managed by a private equity fund and a gain on the
sale of government debt securities in India.
Net earned insurance premiums rose by 7%
to US$812m as a result of increased renewals and
new business volumes in mainland China, Singapore
and Taiwan. The growth in premiums resulted in a
corresponding increase in ‘Net insurance claims
incurred and movement in liabilities to
policyholders’.
We reported a Gain on disposal of Ping An, an
associate of Mainland China, of US$3.0bn. Our
remaining shareholding has been classified as a
financial investment.
96
Other operating income increased by US$201m
due to gains on the sale of our RBWM business in
Thailand of US$108m, our GPB business in Japan of
US$67m and our interest in a property company in
the Philippines of US$130m. These were partly
offset by the non-recurrence of an accounting gain
of US$181m arising from the dilution of our
shareholding in Ping An in 2011.
Net insurance claims incurred and movement in
liabilities to policyholders increased by 22%, driven
by net investment gains on the fair value of the
assets held to support the policyholder contracts
compared with net losses in 2011. In addition,
policyholder liabilities were established for new
business, reflecting the rise in premiums across
mainland China, Singapore and Taiwan.
Loan impairment charges and other credit risk
provisions increased by US$170m as a result of
individually assessed impairments on a single
corporate exposure in Australia and a small number
of corporate exposures in other countries in the
region as well as a credit risk provision on an
available-for-sale debt security in GB&M. These
were partly offset by an impairment release in
Singapore compared with a charge in 2011.
Operating expenses increased by 3%, due to
restructuring and other related costs of US$131m
(2011: US$45m) incurred across several countries
as part of the ongoing strategic review of our
businesses and support functions in the region.
This resulted in a net reduction of approximately
6,000 FTE staff numbers and generated sustainable
annual savings of approximately US$200m, which
were more than offset by inflationary pressures and
investment for business growth, including branch
expansion in mainland China. Costs also increased
from a litigation provision of US$98m made in
respect of a long-standing court case and the write
down by US$51m of our interest in a joint venture.
Share of profit from associates and joint ventures
increased by US$212m, driven by higher profits from
BoCom and Industrial Bank which reflected loan
growth and higher fee income, partly offset by
increased operating expenses and loan impairment
charges. The contribution from Ping An reduced due
to market valuation losses on equity securities held
by their insurance business, which reflected volatile
domestic equity markets, partly offset by increased
income from the banking business, Ping An Bank.
The disposal of Ping An and the dilution of our
holding in Industrial Bank, following its issue of
additional share capital to third parties on 7 January
2013, are expected to have a significant impact on
future profits in the region.
Profit before tax and balance sheet data – Rest of Asia-Pacific
Retail
Banking
and Wealth
Management
US$m
Commercial
Banking
US$m
2012
Global
Banking
and
Markets
US$m
Global
Private
Banking
US$m
Inter-
segment
elimination85
US$m
Other
US$m
Profit before tax
Net interest income .....................
Net fee income/(expense) ...........
1,787
854
1,396
499
Trading income/(expense)
excluding net interest income .
Net interest income/(expense)
on trading activities ................
Net trading income/(expense)78 ..
Changes in fair value of long-
term debt issued and related
derivatives ..............................
Net income/(expense) from
other financial instruments
designated at fair value ...........
Net income/(expense) from
financial instruments
designated at fair value ...........
Gains less losses from
financial investments ..............
Dividend income .........................
Net earned insurance premiums .
Gain on disposal of Ping An .......
Other operating income ..............
Total operating income ............
Net insurance claims86 ................
Net operating income21 .............
Loan impairment charges and
other credit risk provisions .....
Net operating income ...............
96
(6)
90
–
109
109
(1)
–
569
–
211
3,619
(523)
3,096
(234)
2,862
Total operating expenses ............
(2,238)
Operating profit ........................
624
893
1,517
%
7.3
72.3
Share of profit in associates
and joint ventures ...................
Profit before tax ........................
Share of HSBC’s profit
before tax ................................
Cost efficiency ratio ...................
Balance sheet data74
Loans and advances to
customers (net) .......................
Total assets .................................
Customer accounts ......................
2,156
666
1,002
100
1,102
–
(3)
(3)
(10)
1
–
–
82
3,994
–
3,994
(48)
3,946
(1,279)
2,667
658
3,325
%
16.1
32.0
102
71
67
–
67
–
–
–
–
–
–
–
68
308
–
308
–
308
(149)
159
–
159
%
0.8
48.4
137
(7)
(592)
14
(578)
(4)
3
(1)
25
4
–
3,012
1,571
4,163
–
(187)
–
–
187
187
–
–
–
–
–
–
–
(172)
(172)
–
–
(172)
172
–
–
–
–
4,163
(1,319)
2,844
1
2,845
%
13.8
31.7
188
(3)
185
–
1
1
2
–
243
–
64
2,390
(195)
2,195
(154)
2,041
(993)
1,048
1,554
2,602
%
12.6
45.2
4,163
(172)
13,584
Total
US$m
5,391
2,083
761
292
1,053
(4)
110
106
16
5
812
3,012
1,824
14,302
(718)
(436)
13,148
(5,806)
7,342
3,106
10,448
%
50.6
42.7
US$m
138,119
342,269
183,621
US$m
US$m
US$m
US$m
US$m
46,027
55,509
63,230
43,968
59,123
44,865
44,721
201,774
64,392
3,238
12,142
11,095
165
24,534
39
(10,813)
97
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Report of the Directors: Operating and Financial Review (continued)
Geographical regions > Rest of Asia-Pacific / Middle East and North Africa
Profit before tax and balance sheet data – Rest of Asia-Pacific (continued)
Retail
Banking
and Wealth
Management
US$m
Commercial
Banking
US$m
Global
Banking
and
Markets
US$m
2011
Global
Private
Banking
US$m
Inter-
segment
elimination85
US$m
Other
US$m
Profit before tax
Net interest income .....................
Net fee income/(expense) ...........
1,838
904
1,254
513
Trading income/(expense)
excluding net interest income .
Net interest income/(expense)
on trading activities ................
Net trading income/(expense)78 ..
Changes in fair value of long-
term debt issued and related
derivatives ..............................
Net income/(expense) from
other financial instruments
designated at fair value ...........
Net income/(expense) from
financial instruments
designated at fair value ...........
Gains less losses from
financial investments ..............
Dividend income .........................
Net earned insurance premiums .
Other operating income ..............
Total operating income ...............
Net insurance claims86 ................
Net operating income21 ...............
Loan impairment (charges)/
recoveries and other credit
risk provisions ........................
Net operating income .................
94
(2)
92
–
(38)
(38)
–
–
493
145
3,434
(351)
3,083
(222)
2,861
Total operating expenses ............
(2,409)
Operating profit ..........................
452
1,189
1,641
%
7.5
78.1
Share of profit/(loss) in
associates and joint ventures ..
Profit before tax ..........................
Share of HSBC’s profit
before tax ................................
Cost efficiency ratio ...................
Balance sheet data74
Loans and advances to
customers (net) .......................
Total assets .................................
Customer accounts ......................
For footnotes, see page 120.
1,964
621
1,153
76
1,229
–
1
1
(25)
2
–
75
3,867
–
3,867
(57)
3,810
(1,268)
2,542
547
3,089
%
14.1
32.8
116
82
66
–
66
–
–
–
1
–
–
5
270
–
270
2
272
(181)
91
–
91
%
0.4
67.0
123
(9)
(90)
11
(79)
4
15
19
(1)
–
–
1,592
1,645
–
(193)
–
–
193
193
–
–
–
–
–
–
(178)
(178)
–
–
(178)
178
–
–
–
–
1,645
(1,181)
464
(60)
404
%
1.9
71.8
156
1
157
–
2
2
2
–
266
72
2,266
(240)
2,026
10
2,036
(945)
1,091
1,155
2,246
%
10.3
46.6
1,645
(178)
10,713
Total
US$m
5,102
2,111
1,379
279
1,658
4
(20)
(16)
(23)
2
759
1,711
11,304
(591)
(267)
10,446
(5,806)
4,640
2,831
7,471
%
34.2
54.2
US$m
123,868
317,816
174,012
US$m
US$m
US$m
US$m
US$m
40,970
54,484
60,831
38,404
50,688
40,423
41,114
195,549
60,855
3,190
12,879
11,872
190
16,616
31
(12,400)
98
Middle East and North Africa
Economic background
The network of branches of HSBC Bank Middle
East Limited, together with HSBC’s subsidiaries
and associates, gives us the widest coverage in
the region. Our associate in Saudi Arabia, The
Saudi British Bank (40% owned), is the
Kingdom’s sixth largest bank by total assets.
Net interest income ..........
Net fee income .................
Net trading income ..........
Other income ...................
Net operating income21 ..
2012
US$m
1,470
595
390
(25)
2,430
2011
US$m
1,432
627
482
66
2,607
LICs76 ...............................
(286)
(293)
Net operating income ....
2,144
2,314
2010
US$m
1,367
677
370
(4)
2,410
(627)
1,783
Total operating expenses ..
(1,166)
(1,159)
(1,078)
Operating profit .............
Income from associates77 .
978
372
1,155
337
Profit before tax .............
1,350
1,492
705
187
892
Cost efficiency ratio ........
RoRWA66 .........................
48.0%
2.2%
44.5%
2.6%
44.7%
1.6%
Year-end staff numbers ...
8,765
8,373
8,676
Completed two acquisitions and
made progress on the
Group’s six filters
Approximately
US$70m
sustainable cost savings from our
organisational effectiveness programmes
4th
consecutive year:
5th
consecutive year:
Best Regional Cash
Management Provider
in the Middle East
(Euromoney)
Best Trade Finance
Bank in the Middle
East and North Africa
(Global Trade Review 2012)
For footnotes, see page 120.
99
Real GDP in the Middle East and North Africa
region grew by an estimated 4.5% in 2012.
However, this weighted aggregate figure masked a
wide disparity between oil producers (5.1%) and
non-oil producers (2.9%). For the Gulf Cooperation
Council’s top performers, energy output volumes
remained high and revenues rose, fuelling
government spending-driven domestic demand
which fed through to a stronger non-oil private
sector performance, job creation and a recovery in
bank lending. Saudi Arabia (which recorded growth
of nearly 7% in 2012), Qatar (6%) and Oman (5%)
fell into this category. In the UAE, more muted
fiscal and monetary stimuli meant overall growth
was slower, but Dubai’s export-oriented service
sector recorded a good recovery in 2012, and Abu
Dhabi picked up in the second half of the year.
Despite the strong growth, inflation remained low
across the Gulf region.
In Egypt, growth remained weak, held back by
ongoing political uncertainty which continued to
weigh on domestic and foreign investment and
consumption. Pressure on public finances and
Egypt’s external accounts remained pronounced,
with the Egyptian pound weakening significantly.
Elsewhere in the oil importing parts of the region,
the pressures were not as great, but in Lebanon,
Jordan, Morocco and Tunisia, growth fell and their
external balances deteriorated, with the latter three,
following a significant worsening of public finances,
approaching the International Monetary Fund for
assistance by the end of the year.
Review of performance
Our operations in the Middle East and North Africa
reported a profit before tax of US$1.4bn, a decrease
of 10% compared with 2011. On a constant currency
basis, pre-tax profits decreased by 9%.
Our reported results in 2012 included an
investment loss on a subsidiary of US$85m and
adverse movements of US$12m on our own debt
designated at fair value resulting from tightening
credit spreads, partly offset by gains recognised on
acquisitions totalling US$21m. Reported profits
in 2011 included a dilution gain of US$27m on our
holding in HSBC Saudi Arabia Ltd following its
merger with SABB Securities Ltd and a loss of
US$7m relating to the disposal of our Private Equity
business. On an underlying basis, excluding the
items noted above, profit before tax decreased by
3% as a result of a small number of significant
impairments on GB&M exposures.
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Geographical regions > Middle East and North Africa
Profit/(loss) before tax by country within global businesses
Retail
Banking
and Wealth
Management
US$m
Global
Banking
and
Markets
US$m
Commercial
Banking
US$m
Global
Private
Banking
US$m
Other
US$m
Total
US$m
2012
Egypt ....................................................
Qatar ....................................................
United Arab Emirates ..........................
Other ....................................................
MENA (excluding Saudi Arabia) ........
Saudi Arabia ........................................
2011
Egypt ....................................................
Qatar ....................................................
United Arab Emirates ..........................
Other ....................................................
MENA (excluding Saudi Arabia) ........
Saudi Arabia ........................................
2010
Egypt ....................................................
Qatar ....................................................
United Arab Emirates ..........................
Other ....................................................
MENA (excluding Saudi Arabia) ........
Saudi Arabia ........................................
67
9
143
(27)
192
60
252
43
(4)
134
17
190
57
247
38
19
17
19
93
25
118
71
36
235
125
467
120
587
55
35
240
109
439
98
537
82
52
186
57
377
107
484
157
84
141
29
411
170
581
129
81
200
93
503
140
643
77
67
121
(19)
246
53
299
–
–
1
–
1
9
10
–
–
(6)
–
(6)
4
(2)
–
–
1
–
1
(16)
(15)
(5)
–
(56)
(37)
(98)
18
(80)
(2)
–
7
–
5
62
67
(2)
–
(1)
–
(3)
9
6
290
129
464
90
973
377
1,350
225
112
575
219
1,131
361
1,492
195
138
324
57
714
178
892
During 2012, we focused on simplifying our
operations in the Middle East and North Africa by
disposing of non-strategic businesses and continuing
to improve our organisational efficiency while
investing in strategic acquisitions.
We made significant progress in integrating
our operations in Oman with OIB following the
merger in June 2012. The combined entity, HSBC
Bank Oman S.A.O.G., of which we own 51%, is
now the third largest bank in the Sultanate. We also
completed the acquisition of the onshore retail and
commercial banking business of Lloyds Banking
Group in the UAE in the fourth quarter of 2012.
Lloyds’ strong presence in expatriate retail banking
and commercial banking was a good strategic fit
with our position as the leading international bank in
the UAE. We also completed the disposal of 80.1%
of our Private Equity business in December. We
announced in September our agreement to sell our
operations in Pakistan and, in October, the
restructuring of our Amanah business in the region
outside Saudi Arabia.
We remained focused on our priority markets,
delivering profit growth in Egypt and Saudi Arabia.
The strong performance in Egypt was driven by
robust deposit growth in RBWM which led to higher
net interest income. We also achieved growth in
profits from our associates, mainly The Saudi British
Bank, which won the Euromoney award for
excellence as ‘The Best Bank in Saudi Arabia’ and
‘The Best Debt House in Saudi Arabia’. Although
profit before tax declined in the UAE as a result of
the impairments in GB&M noted above, it remains a
priority market for HSBC and the economy
continued to improve in 2012.
Delivery of sustainable cost savings remained
a priority for 2012. Our organisational effectiveness
initiatives included streamlining procedures by
delayering our management structure and
transferring additional operational processes to
our global service centres. We realised about
US$70m in sustainable savings from our
organisational effectiveness programmes.
In RBWM, we remained focused on growing
Wealth Management revenues. We entered into a
strategic alliance with Zurich Life International
(‘Zurich’) in 2012 to provide wealth and general
insurance products to our customers in the region.
Our focus on foreign exchange resulted in increased
transaction volumes, which provided us with higher
100
Wealth Management revenues for 2012. In addition,
we enhanced our internet banking capabilities in the
UAE to provide improved security and rolled out our
digital solution for mobile banking in the region to
allow customers greater accessibility.
In CMB, we continued to support internationally
oriented SMEs. This was evidenced by the launch
of our third SME fund in the UAE of AED1bn
(US$272m), targeted at international trade
customers. We continued to invest in the Global
Trade and Receivables Finance client service and
business development teams, and enhanced our
Receivables Finance products across the region. We
endeavoured to strengthen this position by holding
mainland China and Turkey events to focus on these
emerging trade routes.
Our Payments and Cash Management business
continued to record strong revenue growth, and was
named ‘The Best Cash Management House in the
Middle East 2012’ in the Euromoney awards for
excellence for the fourth consecutive year.
utilisation, partly offset by higher insurance revenues
as a result of the strategic alliance with Zurich. The
decline in fees was also attributable to our exit from
domestic private banking in the UAE. These factors
were partly offset by higher trade import fees in
CMB in Algeria, Oman and Jordan driven by higher
volumes from targeted sales activity.
Net trading income decreased by 18%, mainly
due to unfavourable credit valuation adjustments on
trading positions relating to a small number of
exposures in GB&M. We also reported adverse fair
value movements on certain economic hedges as well
as on structured liabilities as credit spreads tightened.
This was partly offset by higher revaluation gains on
equity holdings in Principal Investments.
Gains less losses from financial investments
increased by US$17m, driven by the non-recurrence
of impairments on two available-for-sale equity
securities in 2011, together with gains on the disposal
of available-for-sale equity and debt securities in
2012.
In GB&M, we continued to focus on ‘South-
Other operating income decreased by US$89m,
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South’ connectivity. We leveraged our global
expertise to provide access to Asian investors for
issuers in the region with funding requirements with
our dedicated coverage teams on our mainland China,
South Korea and India desks in the UAE and Saudi
Arabia. We also completed a significant number
of bond issuances, reflecting the continuing investor
appetite for the region’s debt. We won several
Euromoney awards for excellence including ‘The Best
Debt House in the Middle East’ and ‘The Best Flow
House in the Middle East’. GB&M also won Global
Investor’s ‘The Best Domestic Custodian’.
The following commentary is on a constant
currency basis.
Net interest income rose by 3%, driven by higher
average deposit balances in RBWM, primarily savings
accounts in Egypt, reflecting the competitive pricing
introduced at the beginning of the year. Despite this,
we benefited from wider spreads as interest rates rose
in Egypt. Net interest income in CMB was in line with
2011 as higher income resulting from the merger with
OIB was offset by competitive asset pricing across
most of the region.
Net fee income decreased by 4% due to a decline
in credit and lending, Securities Services and
advisory fees in GB&M, which were affected by
lower levels of deal activity and the challenging
political and economic environment. Fees also
declined in RBWM due to higher reward scheme
charges in the UAE following revisions to the
agreement with our partner aimed at improving card
101
driven by the US$85m investment loss on a
subsidiary.
Loan impairment charges and other credit
risk provisions decreased by US$6m. Lower
impairments in RBWM attributable to an
improvement in delinquency rates reflected the
repositioning of the book towards higher quality
lending in previous years. In addition, CMB recorded
a modest reduction in loan impairment charges as
higher customer recoveries were largely offset by
individually assessed impairments. These were partly
offset by significant loan impairment charges recorded
for a small number of large exposures in GB&M.
Operating expenses increased by 1% as a result
of employee and legal costs relating to the merger of
our Omani operations with OIB and the acquisition of
the onshore retail and commercial banking business of
Lloyds Banking Group in the UAE. This was partially
offset by the benefit arising from sustainable cost
saving initiatives implemented in 2011 and throughout
2012. Excluding the effect of the two acquisitions, we
reduced both our employee numbers and our cost
base.
Share of profits from associates and joint
ventures increased by 10%, mainly from The Saudi
British Bank. This was driven by higher revenue
resulting from strong balance sheet growth, together
with lower costs derived from effective control and
monitoring.
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Geographical regions > Middle East and North Africa
Profit/(loss) before tax and balance sheet data – Middle East and North Africa
Retail
Banking
and Wealth
Management
US$m
Commercial
Banking
US$m
2012
Global
Banking
and
Markets
US$m
Global
Private
Banking
US$m
Inter-
segment
elimination85
US$m
Other
US$m
Profit/(loss) before tax
Net interest income .....................
Net fee income/(expense) ...........
597
164
Trading income excluding net
interest income .......................
68
Net interest income/(expense)
on trading activities ................
Net trading income/(expense)78 ..
Net income from financial
instruments designated at
fair value .................................
Gains less losses from
financial investments ..............
Dividend income .........................
Other operating income/
(expense) ................................
Total operating income ............
Net insurance claims86 ................
Net operating income21 .............
Loan impairment charges and
other credit risk provisions .....
Net operating income ...............
Total operating expenses ............
Operating profit/(loss) ..............
Share of profit in associates
and joint ventures ...................
Profit/(loss) before tax ..............
–
68
–
–
–
(16)
813
–
813
(55)
758
(561)
197
55
252
%
Share of HSBC’s profit
before tax ................................
Cost efficiency ratio ...................
1.2
69.0
492
279
94
2
96
–
–
–
21
888
–
888
(110)
778
(311)
467
120
587
%
2.8
35.0
367
160
208
30
238
–
9
5
14
793
–
793
(119)
674
(264)
410
171
581
%
2.8
33.3
(29)
–
–
29
29
–
–
–
(94)
(94)
–
(94)
–
(94)
94
–
–
–
1
1
–
–
–
–
–
–
1
3
–
3
(2)
1
–
1
9
10
%
–
–
42
(9)
3
(44)
(41)
(12)
–
–
47
27
–
27
–
27
(124)
(97)
17
(80)
%
(0.3)
459.3
Balance sheet data74
Loans and advances to
customers (net) .......................
Total assets .................................
Customer accounts ......................
US$m
US$m
US$m
US$m
US$m
5,828
6,562
19,802
13,559
15,651
12,826
8,699
36,582
6,880
–
50
3
–
6,840
72
(3,080)
Total
US$m
1,470
595
373
17
390
(12)
9
5
(27)
2,430
–
2,430
(286)
2,144
(1,166)
978
372
1,350
%
6.5
48.0
US$m
28,086
62,605
39,583
102
Retail
Banking
and Wealth
Management
US$m
Commercial
Banking
US$m
Global
Banking
and
Markets
US$m
2011
Global
Private
Banking
US$m
Inter-
segment
elimination85
US$m
Other
US$m
Profit/(loss) before tax
Net interest income ......................
Net fee income/(expense) ............
Trading income/(expense)
excluding net interest income
Net interest income/(expense)
on trading activities .................
Net trading income/(expense)78 ...
Net income from financial
instruments designated at
fair value ..................................
Gains less losses from
financial investments ...............
Dividend income ..........................
Other operating income/
(expense) .................................
Total operating income ................
Net insurance claims86 .................
Net operating income21 ................
Loan impairment charges and
other credit risk provisions ......
Net operating income ..................
Total operating expenses .............
Operating profit/(loss) .................
Share of profit in associates
and joint ventures ....................
Profit/(loss) before tax .................
589
173
62
–
62
–
1
1
22
848
–
848
(126)
722
(535)
187
60
247
%
Share of HSBC’s profit
before tax .................................
Cost efficiency ratio ....................
1.1
63.1
496
271
95
–
95
–
1
1
11
875
–
875
(116)
759
(320)
439
98
537
%
2.5
36.6
371
173
266
32
298
–
(7)
3
11
849
–
849
(51)
798
(295)
503
140
643
%
2.9
34.7
2
13
1
–
1
–
–
–
(1)
15
–
15
–
15
(21)
(6)
4
(2)
%
–
140.0
(28)
–
–
28
28
–
–
–
(108)
(108)
–
(108)
–
(108)
108
–
–
–
2
(3)
(1)
(1)
(2)
10
(3)
–
124
128
–
128
–
128
(96)
32
35
67
%
0.3
75.0
Balance sheet data74
Loans and advances to
customers (net) ........................
Total assets ..................................
Customer accounts .......................
For footnotes, see page 120.
US$m
US$m
US$m
US$m
US$m
4,921
6,549
18,549
12,446
14,556
10,943
8,479
34,676
6,703
26
72
114
3
4,792
113
(3,181)
Total
US$m
1,432
627
423
59
482
10
(8)
5
59
2,607
–
2,607
(293)
2,314
(1,159)
1,155
337
1,492
%
6.8
44.5
US$m
25,875
57,464
36,422
103
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Geographical regions > North America
North America
Economic background
Our North American businesses are located in
the US, Canada and Bermuda. Operations in
the US are primarily conducted through HSBC
Bank USA, N.A., and HSBC Finance, a national
consumer finance company. HSBC Markets
(USA) Inc. is the intermediate holding company
of, inter alia, HSBC Securities (USA) Inc. HSBC
Bank Canada and HSBC Bank Bermuda operate
in their respective countries.
Net interest income ..........
Net fee income .................
Net trading income/
2012
US$m
8,117
2,513
2011
US$m
11,480
3,308
2010
US$m
12,439
3,664
(expense) .......................
507
(362)
314
Gains on disposals of US
branch network and
cards business ................
Other income/(expense) ...
4,012
(456)
–
1,574
–
630
Net operating income21 ..
14,693
16,000
17,047
LICs76 ...............................
(3,457)
(7,016)
(8,295)
Net operating income ....
11,236
8,984
8,752
Total operating expenses .
(8,940)
(8,919)
(8,322)
Operating profit .............
2,296
Income from associates77..
3
Profit before tax .............
2,299
65
35
100
430
24
454
Cost efficiency ratio ........
RoRWA66 .........................
60.8%
0.8%
55.7%
–
48.8%
0.1%
Year-end staff numbers ...
22,443
30,981
33,865
Gross balances in the CML portfolio,
including loans held for sale, down by
US$6.8bn to US$43bn
US$3.6bn
reduction in loan impairment charges,
including US$1.3bn relating to
Card and Retail Services
Record reported pre-tax profit of
US$1.1bn
from our Canadian operations
For footnotes, see page 120.
In the US, real GDP expanded by 2.2% in 2012,
following 1.8% growth in 2011. Consumer spending
increased at a moderate pace as households
continued to pay down debt and rebuild wealth.
The housing market improved in 2012. Residential
investment rose by 11.9%, climbing from a multi-
decade low in 2011. Sales of new and existing
homes also increased, and house prices rose
modestly during the year. The growth in fixed
investment by business faltered in the middle of
2012, evidenced by a slowdown in capital equipment
orders, but began to recover towards the end of the
year. Export growth slowed to 3.2% in 2012, about
half the growth recorded in 2011. Fiscal consolidation
continued to hold back the economy. Budgetary caps
on spending contributed to a 2.2% decline in federal
government expenditure in 2012, in real terms. State
and local government expenditure also continued to
contract, though the severity of the cutbacks
diminished compared with 2011.
Inflation was generally subdued in 2012.
Headline and core CPI inflation for the year were
each recorded at 2.1%. High unemployment and low
wage growth continued to hold back labour costs.
In addition, prices for goods imported into the US
experienced very little inflation in 2012. The Federal
Reserve continued to pursue a highly supportive
monetary policy. At meetings in January, September,
and December, the Federal Open Market Committee
adjusted its forward guidance for an exceptionally
low federal funds rate and agreed on open-ended
purchases of longer-term securities in an effort to
maintain downward pressure on interest rates,
support mortgage markets and help make broader
financial conditions more accommodating.
In Canada, GDP growth slowed in 2012 to 2.0%
from 2.6% in 2011. The slowdown in economic
activity was particularly notable in the second half of
the year. One factor contributing to the slowdown,
which took effect in July 2012, was the introduction
of measures by the federal government to cool the
housing market by tightening mortgage lending
conditions. House prices, home sales and housing
starts declined after those initiatives came into force.
In addition, exports fell sharply with the deceleration
in global manufacturing activity and global trade, and
temporary disruptions in energy production in
Eastern Canada and capacity constraints on Western
Canada pipelines. An uncertain US economic outlook
together with weakness in key Canadian commodity
prices and a sharp decline in corporate performance
104
Profit/(loss) before tax by country within global businesses
2012
US ........................................................
Canada .................................................
Bermuda ...............................................
2011
US ........................................................
Canada .................................................
Bermuda ...............................................
Other ....................................................
2010
US ........................................................
Canada .................................................
Bermuda ...............................................
Other ....................................................
Retail
Banking
and Wealth
Management
US$m
Global
Banking
and
Markets
US$m
Commercial
Banking
US$m
Global
Private
Banking
US$m
Other
US$m
Total
US$m
2,746
207
42
2,995
(2,861)
147
49
–
(2,665)
(2,305)
131
58
–
(2,116)
637
577
(15)
1,199
431
545
26
–
1,002
402
505
32
–
939
661
314
(18)
957
567
265
43
–
875
1,284
227
38
–
1,549
72
(1)
1
72
83
–
7
–
90
113
–
(3)
1
111
(2,901)
(16)
(7)
(2,924)
782
8
9
(1)
798
(39)
4
7
(1)
(29)
1,215
1,081
3
2,299
(998)
965
134
(1)
100
(545)
867
132
–
454
weighed on business investment. Headline CPI
inflation fell steadily through the year to 1.5%, from
2.9% in 2011. Though the Bank of Canada slightly
tightened monetary policy early in 2012, the
economic slowdown and the decline in the rate of
CPI inflation led the Bank to leave rates on hold
throughout the year.
Review of performance
Our operations in North America reported a profit
before tax of US$2.3bn in 2012, compared with
US$100m in 2011. Our reported profits included
gains in the US of US$3.1bn and US$864m
on completion of the sale of the Card and Retail
Services business in May 2012 and the 195 non-
strategic retail branches in May and August 2012,
respectively. Also included in our reported profits
was US$618m relating to profit before tax in
Card and Retail Services prior to the disposal (2011:
US$2.1bn). In addition, we recorded a gain of
US$83m from the sale of the full service retail
brokerage business in Canada. We also recognised
US$1.2bn of adverse movements on our own debt
designated at fair value resulting from tightening in
credit spreads, compared with favourable
movements of US$964m in 2011.
On an underlying basis, our pre-tax loss of
US$1.5bn in 2012 compared with a pre-tax loss
of US$3.1bn in 2011. This was due to lower loan
impairment charges, primarily in CML, reflecting
a decline in lending balances as the portfolio
continued to run off, lower delinquency levels, and
higher revenue mainly driven by lower adverse
movements on non-qualifying hedges in HSBC
Finance. This was partly offset by higher operating
expenses due to fines and penalties paid of
US$1.5bn by HNAH and its subsidiaries as part
of the settlement of investigations into inadequate
compliance with anti-money laundering laws in the
past.
Underlying profit before tax in Canada rose,
as revenues benefited from an increase in fees from
commercial lending activities and collaboration
with GB&M, higher Rates revenue due to increased
trading volumes, and higher revenues in Balance
Sheet Management reflecting an increase in gains on
sales of available-for-sale assets. These results were
partly offset by lower net interest income due to the
closure of the Canadian consumer finance company
to new business, spread compression from strong
competition and the prolonged low interest rate
environment. Our operations in Bermuda reported
a significantly reduced profit before tax, primarily
due to higher loan impairment charges on a small
number of exposures in GB&M and CMB.
We made significant progress in disposing of
businesses not aligned with our long-term strategy.
On completing the sale of our US Card and Retail
Services business, we transferred over 5,000
employees and certain real estate facilities to the
purchaser. In addition, we entered into a transition
services agreement to support some of the account
servicing operations until all systems, processes and
equipment are integrated into the purchaser’s
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Geographical regions > North America
existing infrastructure. We also completed the sale of
the retail branches, principally in upstate New York,
recognising gains of US$586m in RBWM and
US$278m in CMB.
In Canada, we completed the sale of the full
service retail brokerage business. We also
announced the closure of our consumer finance
business, which had net customer loan balances
of US$1.5bn at 31 December 2012, and ceased the
origination of loans as this business did not fit with
our core strategy.
We continued to manage the run-off of lending
balances in our CML portfolio and, in the third
quarter of 2012, we reclassified non-real estate
personal loan balances of US$3.7bn, net of
impairment allowances, from our CML portfolio
to ‘Assets held for sale’ as we actively marketed the
portfolio. We also identified real estate secured loan
balances, with a carrying amount of US$3.8bn,
which, as part of our strategy, we have announced
we plan to actively market in multiple transactions
over the next two years. At 31 December 2012, the
carrying value of the non-real estate and the real
estate secured loans which we intend to sell was
approximately US$1bn greater than their estimated
fair value. We expect to recognise a loss on sale for
these loans over the next few years, the actual
amount of which will depend on market conditions
at the time of the sales. It is expected that reduction
in these loans in our CML portfolio will be capital
accretive and will reduce funding requirements,
accelerate the winding down of the portfolio and also
alleviate some of the operational burdens, given that
these loans are servicing intensive and subject to
foreclosure delays.
At 31 December 2012, lending balances
in CML, including loans held for sale, were
US$43bn, a decline of 14% from December 2011, of
which 8% was attributable to the balances written
off.
We incurred costs of US$221m in 2012 (2011:
US$235m) as a result of restructuring activities in
the region. These costs were mainly related to the
business disposals, the closure of our consumer
finance operations in Canada and the continuation of
our organisational effectiveness initiatives. We also
achieved approximately US$230m of additional
sustainable cost savings in 2012, primarily derived
from operational efficiencies.
Following the disposals noted above, we are
reshaping our US operations to focus on core
activities and are continuing to reposition our
businesses in both the US and Canada towards
international customers.
106
In RBWM, we continued to develop our
Wealth Management capabilities across the region,
targeting internationally connected customers in key
US and Canadian urban centres. Our relationship-
based model offers a suite of wealth services
incorporating HSBC and third-party products,
enabling our internationally-minded customers to
invest in global markets. In the US, we launched a
renminbi fixed income fund to provide investors
with the opportunity to access mainland China’s
bond market.
In CMB, we increased the number of
relationship managers and specialist sales staff in
2012 in areas with strong international connectivity,
notably the West Coast, South East and Midwest of
the US, leading to higher lending balances than in
2011. In Canada, we introduced the first renminbi
currency account. We also established dedicated
sales teams to enhance CMB’s collaboration with
GB&M. In addition, in CMB and GB&M, we
continued to target companies with international
banking requirements, leading to a rise in Global
Trade and Receivables Finance revenues in both the
US and Canada.
In GB&M, we continued to work on delivering
integrated solutions for our customers across the
region, increasing our lending to Latin American
corporates. In addition, we actively reduced our
legacy credit exposure in the US by exiting certain
positions. We will continue to reduce the size of this
portfolio as opportunities arise.
The following commentary is on a constant
currency basis.
Net interest income decreased by 29% to
US$8.1bn, due to the loss of income from the Card
and Retail Services business together with the
continued reduction of the CML portfolio in run-off.
Also contributing to the decrease was a change in
composition of our lending book towards higher
levels of lower yielding real estate loans.
Net fee income decreased by 24% to US$2.5bn,
primarily due to the sale of the Card and Retail
Services business, the retail branches and the full
service retail brokerage business in Canada. This
was partly offset by fees from the transition service
agreement with the purchaser of the Card and Retail
Services business and increased revenues from debt
capital markets origination activity due to the strong
debt issuance market.
Net trading income of US$507m was US$871m
higher than in 2011, primarily due to lower adverse
fair value movements on non-qualifying hedges in
RBWM as long-term interest rates declined to a
lesser extent than in 2011. This was partly offset by
an increase from US$92m in 2011 to US$134m in
2012 of loss provisions for mortgage loan repurchase
obligations related to loans previously sold.
Net trading income increased in GB&M during
2012 as a result of the improved performance of
economic hedges used to manage interest rate risk,
which benefited from a more stable interest rate
environment. Rates revenue was higher due to
increased trading volumes. In addition, credit market
conditions generally reflected tighter credit spreads,
which led to higher income from our credit-related
products. These factors were partly offset by adverse
fair value movements on structured liabilities as own
credit spreads tightened, together with the closure of
our bank notes business in 2011, and a reduction in
foreign exchange revenue as a result of lower trading
volumes in less volatile markets.
Net loss from financial instruments designated
at fair value was US$1.2bn compared with net gains
of US$964m in 2011. We recognised adverse fair
value movements on our own debt designated at fair
value as credit spreads tightened during 2012, having
widened in 2011. In addition, there were adverse fair
value movements from interest rate ineffectiveness
in the economic hedging of our long-term debt
during the year.
Gains on disposal of US branch network and
cards business included a gain of US$3.1bn from the
sale of the Card and Retail Services business and
US$864m from the sale of 195 retail branches in
upstate New York.
Other operating income increased by US$176m
to US$405m, reflecting lower losses on foreclosed
properties due to the reduction in foreclosure
activity, less deterioration in housing prices during
2012 and, in some markets, improvements in pricing
compared with 2011.
Loan impairment charges and other credit risk
provisions decreased by 51% to US$3.5bn, mainly in
the US, reflecting lower lending balances in CML as
we continued to run off the portfolio, and lower
delinquency levels. Loan impairment charges
remained adversely affected by delays in expected
cash flows from mortgage loans due, in part, to
delays in foreclosure processing and the higher costs
to obtain and realise collateral, although the effects
were less pronounced than in 2011. In addition, loan
impairment charges declined by US$1.3bn due to the
sale of the Card and Retail Services business. These
decreases were partly offset by an adjustment made
following a review completed in the fourth quarter of
2012 which concluded that the estimated average
period of time from current status to write-off was
ten months for real estate loans (previously a period
of seven months was used).
In CMB and GB&M, loan impairment charges
increased, mainly in Bermuda, due to individually
assessed impairments on a small number of
exposures. Credit quality in Canada remained
broadly unchanged.
Operating expenses increased by less than 1% to
US$8.9bn, primarily due to a US$1.5bn charge for
the settlement of investigations noted above.
Compliance costs increased by US$307m, mainly
due to investment in process enhancements and
infrastructure related to anti-money laundering and
Bank Secrecy Act consent orders, along with actions
to address the regulatory consent orders relating to
foreclosure activities. In addition, following a review
of our mortgage foreclosure process, we entered into
an agreement in principle with US regulators to pay
into a fund and provide other customer assistance to
help eligible borrowers who were active in
foreclosure during 2009 and 2010 and were
financially disadvantaged during the process, for
which we recognised a US$104m expense in 2012.
These increases were partly offset by the effect of
the sale of the Card and Retail Services business and
organisational effectiveness initiatives to reduce
costs as we achieved approximately US$230m of
additional sustainable cost savings primarily derived
from operational efficiencies. Average employee
numbers decreased from organisational effectiveness
initiatives and business disposals. In addition,
marketing costs fell and costs of holding foreclosed
properties declined, while software impairment
charges in 2011 did not recur.
107
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Geographical regions > North America
Profit/(loss) before tax and balance sheet data – North America
Retail
Banking
and Wealth
Management
US$m
Commercial
Banking89
US$m
2012
Global
Banking
and
Markets
US$m
Global
Private
Banking
US$m
Inter-
segment
elimination85
US$m
Other
US$m
Profit/(loss) before tax
Net interest income .....................
Net fee income ............................
5,481
923
1,443
562
Trading income/(expense)
excluding net interest income
(216)
Net interest income on trading
activities ..................................
Net trading income/(expense)78 ..
Changes in fair value of long-
term debt issued and related
derivatives ..............................
Net income from other financial
instruments designated at
fair value .................................
Net expense from financial
instruments designated at
fair value .................................
Gains less losses from
financial investments ..............
Dividend income .........................
Net earned insurance premiums .
Gains on disposal of US branch
network and cards business ....
Other operating income ..............
17
(199)
–
–
–
27
15
193
3,735
173
47
1
48
–
–
–
–
11
–
277
149
948
716
466
91
557
–
–
–
223
32
–
–
191
Total operating income ............
10,348
2,490
2,667
Net insurance claims86 ................
(148)
–
–
Net operating income21 .............
10,200
2,490
2,667
Loan impairment (charges)/
recoveries and other
credit risk provisions ..............
Net operating income ...............
Total operating expenses ............
Operating profit/(loss) ..............
Share of profit in associates
(3,241)
6,959
(3,966)
2,993
(148)
2,342
(1,144)
1,198
and joint ventures ...................
2
1
Profit/(loss) before tax ..............
2,995
1,199
%
14.5
38.9
%
5.8
45.9
Share of HSBC’s profit
before tax ................................
Cost efficiency ratio ...................
Balance sheet data74
Loans and advances to customers
(net) reported in:
– loans and advances to
(71)
2,596
(1,639)
957
–
957
%
4.6
61.5
(65)
–
–
65
65
–
–
–
–
–
–
–
(1,899)
(1,899)
–
1,899
–
–
–
192
124
20
–
20
–
–
–
(7)
3
–
–
5
337
–
337
3
340
(268)
72
–
72
%
0.3
79.5
118
188
16
–
16
(1,219)
–
(1,219)
8
–
–
–
1,787
898
–
898
–
898
(3,822)
(2,924)
–
(2,924)
%
(14.2)
425.6
(1,899)
14,693
–
(3,457)
(1,899)
11,236
Total
US$m
8,117
2,513
333
174
507
(1,219)
–
(1,219)
251
61
193
4,012
406
14,841
(148)
(8,940)
2,296
3
2,299
%
11.1
60.8
US$m
140,756
3,899
490,247
149,037
US$m
US$m
US$m
US$m
US$m
customers (net) ....................
76,414
36,387
22,498
5,457
–
– assets held for sale
(disposal groups) .................
Total assets .................................
Customer accounts reported in:
3,899
101,103
–
48,604
–
345,040
–
8,828
–
12,659
(25,987)
– customer accounts ...............
57,758
48,080
29,595
13,553
51
108
Retail
Banking
and Wealth
Management
US$m
Commercial
Banking89
US$m
Global
Banking
and
Markets
US$m
2011
Global
Private
Banking
US$m
Inter-
segment
elimination85
US$m
Other
US$m
Profit/(loss) before tax
Net interest income .....................
Net fee income/(expense) ...........
8,931
1,836
1,528
551
Trading income/(expense)
excluding net interest income
(946)
Net interest income/(expense)
on trading activities ................
Net trading income/(expense)78 ..
Changes in fair value of long-
term debt issued and related
derivatives ..............................
Net income/(expense) from
other financial instruments
designated at fair value ...........
Net income/(expense) from
financial instruments
designated at fair value ...........
Gains less losses from
financial investments ..............
Dividend income .........................
Net earned insurance premiums .
Other operating income ..............
25
(921)
–
–
–
58
15
236
(125)
34
1
35
–
–
–
7
9
–
110
Total operating income ...............
10,030
2,240
Net insurance claims86 ................
Net operating income21 ...............
(154)
9,876
–
2,240
Loan impairment (charges)/
recoveries and other
credit risk provisions ..............
Net operating income .................
Total operating expenses ............
Operating profit/(loss) ................
Share of profit/(loss) in
(6,929)
2,947
(5,615)
(2,668)
(105)
2,135
(1,166)
969
associates and joint ventures ..
3
33
Profit/(loss) before tax ................
(2,665)
1,002
Share of HSBC’s profit
before tax ................................
Cost efficiency ratio ...................
(12.2)
56.9
%
%
4.6
52.1
893
773
261
205
466
–
(5)
(5)
195
13
–
193
2,528
–
2,528
(11)
2,517
(1,642)
875
–
875
%
4.0
65.0
187
149
17
–
17
–
–
–
–
3
–
11
367
–
367
30
397
(307)
90
–
90
%
0.4
83.7
Total
US$m
11,480
3,308
(660)
298
(362)
967
(3)
964
262
40
236
226
16,154
(154)
9
(1)
(26)
(1)
(27)
967
2
969
2
–
–
2,244
3,196
–
(68)
–
–
68
68
–
–
–
–
–
–
(2,207)
(2,207)
–
3,196
(2,207)
16,000
–
(2,207)
2,207
–
–
–
(1)
3,195
(2,396)
799
(1)
798
%
3.7
75.0
(7,016)
8,984
(8,919)
65
35
100
%
0.5
55.7
Balance sheet data74
Loans and advances to customers
(net) reported in:
– loans and advances to
US$m
US$m
US$m
US$m
US$m
US$m
customers (net) ....................
86,490
32,215
19,289
– assets held for sale
(disposal groups) .................
Total assets .................................
Customer accounts reported in:
– customer accounts ...............
– liabilities of disposal
31,058
144,278
520
43,747
–
320,783
63,558
47,003
30,465
14,862
groups held for sale .............
10,104
5,040
–
–
For footnotes, see page 120.
109
4,753
–
7,138
–
–
10,378
94
–
(22,022)
142,747
31,578
504,302
155,982
15,144
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Geographical regions > North America / Latin America
North America RBWM – profit/(loss) before tax and balance sheet data
2012
2011
Card and
Retail
Services
US$m
Run-off
portfolios
US$m
Rest of
RBWM
US$m
North
America
RBWM
US$m
Card and
Retail
Services
US$m
Run-off
portfolios
Rest of
RBWM
US$m
US$m
North
America
RBWM
US$m
Profit/(loss) before tax
Net interest income ....................
1,267
2,563
Net fee income/(expense) ..........
395
33
1,651
495
5,481
923
4,128
1,273
2,990
(49)
1,813
612
8,931
1,836
Trading income/(expense)
excluding net interest income
Net interest income on
trading activities ....................
Net trading income/(expense)78 .
Gains less losses from
financial investments .............
Dividend income ........................
Net earned insurance premiums .
Gains on disposal of US branch
network and cards business ...
Other operating income
–
–
–
–
–
–
3,148
(226)
–
(226)
–
3
–
–
/(expense) ..............................
7
23
10
17
27
27
12
193
587
143
(216)
17
(199)
27
15
193
3,735
–
–
–
–
–
–
–
(1,145)
–
(1,145)
55
5
230
–
199
25
224
3
10
6
–
(946)
25
(921)
58
15
236
–
173
61
(185)
(1)
(125)
Total operating income ...........
4,817
2,396
3,135
10,348
5,462
1,901
2,667
10,030
Net insurance claims86 ...............
–
–
(148)
(148)
–
(156)
2
Net operating income21 ............
4,817
2,396
2,987
10,200
5,462
1,745
2,669
(154)
9,876
Loan impairment charges and
other credit risk provisions ....
(322)
(2,569)
(350)
(3,241)
(1,600)
(4,982)
(347)
(6,929)
Net operating income/
(expense) ...............................
4,495
(173)
2,637
6,959
3,862
(3,237)
2,322
2,947
Total operating expenses ...........
(729)
(1,103)
(2,134)
(3,966)
(1,801)
(1,238)
(2,576)
(5,615)
Operating profit/(loss) .............
3,766
(1,276)
503
2,993
2,061
(4,475)
(254)
(2,668)
Share of profit in associates
and joint ventures ..................
–
2
Profit/(loss) before tax .............
3,766
(1,274)
Share of HSBC’s profit
before tax ...............................
Cost efficiency ratio ..................
18.2
15.1
(6.2)
46.0
%
%
–
503
%
2.4
71.4
2
–
3
–
3
2,995
2,061
(4,472)
(254)
(2,665)
%
14.5
38.9
%
9.4
33.0
%
%
%
(20.4)
70.9
(1.2)
96.5
(12.2)
56.9
Balance sheet data74
Loans and advances to customers
(net) reported in:
– loans and advances to
customers ...........................
– assets held for sale ............
Total assets ................................
Customer accounts reported in:
– customer accounts .............
– liabilities of disposal
groups held for sale ...........
For footnotes, see page 120.
US$m
US$m
US$m
US$m
US$m
US$m
US$m
US$m
–
–
–
–
–
34,260
3,463
54,382
42,154
436
46,721
76,414
3,899
101,103
–
29,137
30,635
43,543
–
56,830
42,947
1,921
56,813
86,490
31,058
144,278
–
–
57,758
57,758
–
–
–
–
–
–
63,558
63,558
10,104
10,104
110
Latin America
Economic background
Our operations in Latin America principally
comprise HSBC Bank Brasil S.A.-Banco
Múltiplo, HSBC México, S.A., HSBC Bank
Argentina S.A. and HSBC Bank (Panama) S.A.
In addition to banking services, we operate
insurance businesses in Brazil, Mexico,
Argentina and Panama.
Net interest income ..........
Net fee income .................
Net trading income ..........
Other income ...................
2012
US$m
6,984
1,735
971
1,261
2011
US$m
6,956
1,781
1,378
1,338
Net operating income21 ..
10,951
11,453
2010
US$m
6,311
1,749
733
938
9,731
LICs76 ...............................
(2,137)
(1,883)
(1,544)
Net operating income ....
8,814
9,570
8,187
Total operating expenses ..
(6,430)
(7,255)
(6,394)
Operating profit .............
2,384
2,315
1,793
Income from associates77 .
–
–
2
Profit before tax .............
2,384
2,315
1,795
Cost efficiency ratio ........
RoRWA66 .........................
58.7%
2.4%
63.3%
2.3%
65.7%
2.0%
Year-end staff numbers ...
46,556
54,035
56,044
Significant progress on reducing
fragmentation in our portfolio of businesses
Strong underlying revenue growth
across all global businesses
US$475m
increase in LICs76
(on an underlying basis)
For footnotes, see page 120.
111
Brazil’s GDP growth slowed further in 2012, mostly
due to the effects of higher input costs, concern
about global financial stability, and domestic
regulatory uncertainty. Despite growth remaining
low, consumer inflation remained above the 4.5%
inflation target pursued by the Central Bank, ending
2012 at 5.8%.
By contrast, growth held up well in Mexico
in 2012 led, in particular, by favourable industrial
exports to the US. Enhanced competitiveness helped
Mexican exports to gain a larger share of total US
imports. Domestically, demand stayed largely
unchanged, encouraged by labour reforms passed
by the new administration. Despite the growth
figures, inflation ended 2012 slightly below 4%
and converging on the 3% inflation target pursued
by Banco de Mexico.
Argentina reported a sharp slowdown in 2012.
Balance of payments restrictions gradually escalated
from capital flows to the current account, including
imports of intermediate goods, which generated
disruption in production and deterioration in
business confidence. Despite this sharp slowdown,
inflation continued to remain high, partly due to
regulated price increases and import restrictions that
lowered domestic supply.
Review of performance
Our operations in Latin America reported a profit
before tax of US$2.4bn in 2012, 3% higher than in
2011 and an increase of 16% on a constant currency
basis. This included a gain of US$102m following
the completion of the sale of our general insurance
manufacturing business in Argentina, a loss of
US$62m on the sale of our operations in Costa Rica,
Honduras and El Salvador and a loss of US$96m
recognised following the reclassification of our non-
strategic businesses in Colombia, Peru, and Paraguay
to ‘Assets held for sale.’
On an underlying basis, pre-tax profits rose by
19%, primarily due to increased revenues across
all global businesses, partly offset by higher loan
impairment charges. In RBWM, the revenue increase
reflected growth in average lending balances in
Argentina and a higher yielding portfolio mix in
Brazil while, in CMB, it resulted from continued
balance sheet growth in Brazil which was driven by
a strong demand for trade-related lending and higher
balances of Payment and Cash Management current
accounts in Argentina. In addition, there were higher
Balance Sheet Management revenues in Brazil
following a downward movement in interest rates
which lowered the cost of funding. In Brazil, loan
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Geographical regions > Latin America
Profit/(loss) before tax by country within global businesses
Retail
Banking
and Wealth
Management
US$m
Global
Banking
and
Markets
US$m
Commercial
Banking
US$m
Global
Private
Banking
US$m
Other
US$m
Total
US$m
2012
Argentina .............................................
Brazil ....................................................
Mexico .................................................
Panama .................................................
Other ....................................................
2011
Argentina .............................................
Brazil ....................................................
Mexico .................................................
Panama .................................................
Other ....................................................
2010
Argentina .............................................
Brazil ....................................................
Mexico .................................................
Panama .................................................
Other ....................................................
209
94
338
29
(62)
608
91
241
403
23
(55)
703
89
151
174
48
(100)
362
169
359
176
62
(15)
751
107
566
129
59
6
867
90
382
24
57
1
554
174
696
201
48
34
1,153
148
515
268
52
66
1,049
105
430
210
33
51
829
–
17
2
2
(1)
20
–
13
4
3
–
20
–
6
4
2
(2)
10
(46)
(43)
(18)
–
(41)
(148)
(2)
(105)
(178)
(9)
(30)
(324)
–
64
(11)
–
(13)
40
506
1,123
699
141
(85)
2,384
344
1,230
626
128
(13)
2,315
284
1,033
401
140
(63)
1,795
impairment charges rose, primarily as a result of
increased delinquency rates in RBWM and CMB,
particularly in the Business Banking portfolio,
reflecting lower economic growth in 2012. Loan
impairment charges improved during the second half
of 2012, mainly due to lower collective portfolio
provisions in Brazil.
We made significant progress in reducing the
fragmentation in our Latin American businesses
through disposals in our non-strategic markets. In
May 2012, we announced the sale of our businesses
in Colombia, Peru, Uruguay and Paraguay, with
completion expected in 2013. We will continue to
offer full branch services to our customers during
transition. In the second half of 2012, we completed
the sale of our businesses in Costa Rica, El Salvador
and Honduras. In addition, we completed the sale of
our general insurance manufacturing business in
Argentina and announced the agreement to sell a
portfolio of general insurance assets and liabilities in
Mexico with completion expected in 2013. Under
the terms of these agreements, the purchasers will
provide general insurance products to HSBC to sell
to our retail customers in the two countries. This
long-term collaboration will broaden and strengthen
the suite of general insurance products available to
our customers. In February 2013, we announced an
agreement to sell our operations in Panama. The
transaction is subject to regulatory approvals and
other conditions and is expected to complete by the
third quarter of 2013.
In our RBWM business, we made good progress
in developing a wealth management service that
addresses our customers’ needs and we strengthened
our sales force capabilities to capture wealth creation
in the region. Wealth Management revenues
increased by over US$275m or 36%. This included
the favourable effect of the recognition of a PVIF
asset in Brazil. Excluding this gain, Wealth
Management revenues rose by 17%, mainly from
insurance and mutual funds.
In CMB, we worked closely with GB&M
to ensure our clients had access to appropriate
products. In addition, our relationships with CMB
payroll customers enabled us to increase personal
lending to their employees, who became our RBWM
customers. We were able to provide support to
companies as they grow internationally through our
Global Trade and Receivables Finance products, and
used our international expertise to capture trade and
capital flows, notably in the Brazil-China trade
corridors. We continued to strengthen our service to
international SMEs by increasing the number of
specialist International Relationship Managers in
Brazil.
In GB&M, we continued to target international
corporate customers throughout Latin America.
112
We were awarded ‘First place in International Debt
Capital Markets’ by the Brazilian Financial and
Capital Markets Association and ‘Best Project
Finance House in Latin America’ from Euromoney.
We also maintained a strong presence in the foreign
exchange and derivatives markets.
Across the region, we continued to implement
measures to improve operational efficiency,
incurring US$167m of restructuring costs in 2012.
We achieved a 14% net reduction of almost 7,500
FTEs, including more than 4,000 employees
transferred with the disposals described earlier, and
approximately US$285m of additional sustainable
savings.
The following commentary is on a constant
currency basis.
Net interest income increased by 12% compared
with 2011, with growth across all global businesses.
In RBWM, net interest income rose due to
higher average lending volumes, mainly in personal
loans and credit cards in Argentina as a result
of successful marketing and sales campaigns. We
also benefited from a change in the composition
of the lending book in Brazil as we increased our
balances of higher yielding assets. Net interest
income from deposits also increased due to higher
balances in current accounts in Mexico and savings
accounts in Argentina supported by marketing
campaigns.
In CMB, higher net interest income reflected a
rise in average loans and advances to customers in
Brazil, driven by strong demand for trade-related
lending and our focus on corporate relationships and
sectors with potential for international expansion.
Net interest income also rose in Argentina, mainly in
Payments and Cash Management current accounts,
reflecting higher balances which were supported by
successful marketing campaigns, and wider spreads
driven by a rise in interest rates.
In GB&M, net interest income increased,
notably in Balance Sheet Management in Brazil, as
we benefited from the downward movements in
interest rates which lowered the cost of funding
assets in this portfolio.
Net fee income increased by 8% to US$1.7bn,
mainly due to higher Payments and Cash
Management revenues, which benefited from
mandates from new customers and repricing
initiatives in Argentina and Brazil. Fee income was
also higher as a result of the sale of the general
insurance business as fee expense associated with
this business was no longer incurred.
113
Net trading income of US$971m was 19% lower
than in 2011, primarily due to lower reverse repos
driven by positions in GB&M in Brazil that had
matured but had not been renewed, and lower
income related to government debt securities. This
was partly offset by gains in the Rates business as a
result of favourable rate movements.
Net income from financial instruments
designated at fair value increased by 39%, or
US$187m, mainly in Brazil, reflecting higher
investment gains arising from favourable equity and
debt market movements and growth in policyholder
assets from higher sales of unit-linked pension
products. To the extent that these investment gains
were attributed to policyholders there was a
corresponding increase in ‘Net insurance claims
incurred and movement in liabilities to
policyholders’.
Gains less losses from financial investments
of US$227m were 80% or US$100m higher than
in 2011, primarily in Brazil due to gains on sale of
shares in non-strategic investments and disposals of
government debt securities in GB&M in 2012, partly
offset by the non-recurrence of a gain in GB&M on
the sale of shares in a Mexican listed company in
2011.
Net earned insurance premiums increased by
5% to US$2.5bn, driven by increased sales in Brazil
of unit-linked pension products and term life
insurance products. Premiums also rose in Mexico,
mainly due to growth in sales of an endowment
product. In Argentina, premiums were lower,
following the sale of the general insurance business
in 2012.
Other operating income decreased by 8%
to US$253m, driven by a loss of US$62m on the
sale of our operations in Costa Rica, Honduras and
El Salvador, and a loss of US$96m recognised
following the reclassification of our non-strategic
businesses in Colombia, Peru, and Paraguay to held
for sale. In addition, in 2011, we reported a gain on
sale of the Mexican pension administration business,
HSBC Afore, of US$83m and a gain on the sale and
leaseback of branches of US$53m. These factors
were partly offset by the favourable effect of the
recognition of a PVIF asset in Brazil of US$119m
relating to unit-linked pensions, together with an
increase in the value of new term life business in
Brazil, as well as the gain on sale of the general
insurance business in Argentina of US$102m.
Net insurance claims incurred and movement in
liabilities to policyholders increased by 15%, driven
by higher net investment gains on the fair value of
the assets held to support policyholder contracts. In
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Report of the Directors: Operating and Financial Review (continued)
Geographical regions > Latin America
addition, liabilities to policyholders were established
for new business, reflecting the increase in premiums
in Brazil, though this was partly offset by the
disposal of the general insurance business in
Argentina in 2012.
Loan impairment charges and other credit risk
provisions increased by 29%. This was mainly in
Brazil, driven by increased delinquency rates in
RBWM and CMB, particularly in Business Banking,
reflecting lower economic growth in 2012. We took
a number of steps to reposition our portfolios in
RBWM and CMB including reducing third-party
originations and lowering credit limits where
appropriate. We also improved our collections
capabilities. Loan impairment charges improved
during the second half of the year in Brazil.
Operating expenses decreased by US$83m
compared with 2011. Restructuring costs declined
by US$137m as 2011 included costs associated with
the consolidation of the branch network and
the reorganisation of regional and country support
functions. These restructuring initiatives and our
continued efforts to exercise strict cost control and
progress with our organisational effectiveness
programmes resulted in approximately US$285m of
additional sustainable cost savings and a net 7%
reduction in average FTEs of around 4,000 in 2012.
These savings were partly offset by inflationary
pressures, union-agreed wage increases in Brazil and
Argentina and a payment of fines and penalties of
US$29m in connection with non-compliance with
anti-money laundering systems and controls
including requirements to report unusual
transactions, in Mexico.
114
Profit/(loss) before tax and balance sheet data – Latin America
Retail
Banking
and Wealth
Management
US$m
Commercial
Banking
US$m
2012
Global
Banking
and
Markets
US$m
Global
Private
Banking
US$m
Inter-
segment
elimination85
US$m
Other
US$m
99
–
99
–
163
21
5
450
(9)
3,524
(469)
3,055
(581)
2,474
Profit/(loss) before tax
Net interest income/(expense) ....
Net fee income ............................
4,145
873
2,173
622
Trading income excluding
net interest income .................
85
Net interest income on
trading activities .....................
Net trading income78 ...................
Changes in fair value of long-
term debt issued and related
derivatives ..............................
Net income from other financial
instruments designated at
fair value .................................
Net income from financial
instruments designated at
fair value .................................
Gains less losses from
financial investments ..............
Dividend income .........................
Net earned insurance premiums .
Other operating income/(expense)
Total operating income ............
Net insurance claims86 ................
Net operating income21 .............
–
85
–
503
75
9
1,985
309
7,984
(1,875)
6,109
503
163
Loan impairment charges and
other credit risk provisions .....
(1,541)
Net operating income ...............
4,568
Total operating expenses ............
(3,960)
(1,723)
Operating profit/(loss) ..............
608
Share of profit in associates
and joint ventures ...................
Profit/(loss) before tax ..............
–
608
%
Share of HSBC’s profit
before tax ................................
Cost efficiency ratio ...................
2.9
64.8
751
–
751
%
3.6
56.4
993
207
398
29
427
–
1
1
131
1
17
6
1,783
(9)
1,774
(13)
1,761
(608)
1,153
–
1,153
%
5.6
34.3
30
33
3
–
3
–
–
–
–
–
–
3
69
–
69
(2)
67
(47)
20
–
20
%
0.1
68.1
(355)
–
–
355
355
–
–
–
–
–
–
(190)
(190)
–
(190)
–
(190)
190
–
–
–
(2)
–
1
1
2
–
–
–
–
–
–
134
134
–
134
–
134
(282)
(148)
–
(148)
%
(0.7)
210.4
Balance sheet data74
Loans and advances to
customers (net) .......................
Total assets .................................
Customer accounts ......................
US$m
US$m
US$m
US$m
US$m
17,236
36,141
28,688
25,379
35,507
20,834
10,903
58,272
12,604
91
570
4,430
–
1,110
–
(323)
115
Total
US$m
6,984
1,735
586
385
971
–
667
667
227
15
2,452
253
13,304
(2,353)
10,951
(2,137)
8,814
(6,430)
2,384
–
2,384
%
11.6
58.7
US$m
53,609
131,277
66,556
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Report of the Directors: Operating and Financial Review (continued)
Geographical regions > Latin America / Disposals, held for sale and run-off portfolios
Profit/(loss) before tax and balance sheet data - Latin America (continued)
Retail
Banking
and Wealth
Management
US$m
Commercial
Banking
US$m
Global
Banking
and
Markets
US$m
2011
Global
Private
Banking
US$m
Inter-
segment
elimination85
US$m
Other
US$m
Profit/(loss) before tax
Net interest income/(expense) ....
Net fee income ............................
4,519
939
2,229
610
Trading income/(expense)
excluding net interest income
68
Net interest income on
trading activities .....................
Net trading income78 ...................
Changes in fair value of long-
term debt issued and related
derivatives ..............................
Net income from other financial
instruments designated at
fair value .................................
Net income from financial
instruments designated at
fair value .................................
Gains less losses from
financial investments ..............
Dividend income .........................
Net earned insurance premiums .
Other operating income ..............
Total operating income ...............
Net insurance claims86 ................
Net operating income21 ...............
Loan impairment charges and
106
–
106
–
68
–
–
424
124
424
11
10
2,068
265
8,304
(1,850)
6,454
124
1
3
551
57
3,681
(478)
3,203
(501)
2,702
other credit risk provisions .....
(1,369)
Net operating income .................
5,085
Total operating expenses ............
(4,382)
(1,835)
Operating profit/(loss) ................
703
Share of profit in associates
and joint ventures ...................
Profit/(loss) before tax ................
–
703
%
Share of HSBC’s profit
before tax ................................
Cost efficiency ratio ...................
3.2
67.9
867
–
867
%
4.0
57.3
882
196
372
134
506
–
2
2
124
1
34
32
1,777
(16)
1,761
(12)
1,749
(700)
1,049
–
1,049
%
4.8
39.8
25
36
5
–
5
–
–
–
1
–
–
2
69
–
69
–
69
(49)
20
–
20
%
0.1
71.0
(692)
–
–
692
692
–
–
–
–
–
–
(250)
(250)
–
(250)
–
(250)
250
–
–
–
(7)
–
(7)
8
1
–
–
–
–
–
–
222
216
–
216
(1)
215
(539)
(324)
–
(324)
%
(1.5)
249.5
Balance sheet data74
Loans and advances to
customers (net) .......................
Total assets .................................
Customer accounts ......................
For footnotes, see page 120.
US$m
US$m
US$m
US$m
US$m
19,025
39,231
28,629
25,834
38,410
24,050
11,011
66,241
18,940
62
1,660
7,079
6
417
62
(1,070)
116
Total
US$m
6,956
1,781
544
834
1,378
–
550
550
137
14
2,653
328
13,797
(2,344)
11,453
(1,883)
9,570
(7,255)
2,315
–
2,315
%
10.6
63.3
US$m
55,938
144,889
78,760
Disposals, held for sale and run-off
portfolios
continue to affect the geographical regions in the
future.
In implementing our strategy, we have sold or agreed
to sell a number of businesses and investments
across the Group. We expect these disposals to have
a significant effect on both the revenue and the
profitability of the geographical regions in the future.
In addition, significant portfolios are being run
down. We expect the losses on these portfolios to
The table below presents the contribution of
these businesses and investments to the historical
results of geographical regions. We do not expect the
historical results to be indicative of future results
because of disposal or run-off. Fixed allocated costs,
included in total operating costs, will not necessarily
be removed upon disposal and have been separately
identified on page 53.
Summary income statements for disposals, held for sale and run-off portfolios69,70
Europe
US$m
Hong Kong
US$m
2012
Rest of
Asia-Pacific
US$m
MENA
US$m
North
America
US$m
Latin
America
US$m
Net interest income ............................
Net fee income/(expense) ..................
Net trading income/(expense) ...........
Net income/(expense) from financial
instruments designated at
fair value .......................................
Gains less losses from financial
investments ...................................
Dividend income ................................
Net earned insurance premiums ........
Other operating income/(expense) ....
Total operating income/(expense) ..
Net insurance claims incurred
and movement in liabilities
to policyholders .............................
Net operating income/(expense)21 .....
Loan impairment charges and
other credit risk provisions ...........
Net operating income/(expense) .....
Total operating expenses ...................
Operating profit/(loss) .....................
Share of profit in associates
and joint ventures .........................
Profit/(loss) before tax......................
By global business
Retail Banking and Wealth
Management .................................
Commercial Banking .........................
Global Banking and Markets .............
Global Private Banking .....................
Other ..................................................
Profit/(loss) before tax .......................
Net gain/(loss) on sale .......................
For footnotes, see page 120.
(54)
(4)
68
10
(70)
–
1
(1)
(50)
(1)
(51)
(167)
(218)
(66)
(284)
2
(282)
2
–
(283)
(1)
–
(282)
(3)
15
(45)
(6)
–
–
–
229
–
193
(119)
74
–
74
(37)
37
9
46
27
13
6
–
–
46
40
(3)
5
5
–
–
133
17
197
(95)
102
–
102
(122)
(20)
772
752
612
91
57
(8)
–
752
31
10
54
–
–
–
–
–
4,051
401
(186)
(785)
26
3
190
29
95
3,729
–
95
(2)
93
(47)
46
–
46
10
–
36
–
–
46
(138)
3,591
(2,919)
672
(2,104)
(1,432)
2
(1,430)
(656)
9
2
–
(785)
(1,430)
4,095
372
30
27
3
7
–
192
11
642
(90)
552
(64)
488
(371)
117
1
118
41
42
54
–
(19)
118
40
375
3,317
(85)
117
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Geographical regions > Other information > FuM / Property / EDTF
Other information
Funds under management and assets held in
custody
Funds under management
Funds under management
At 1 January ................................
Net new money ...........................
Value change ..............................
Exchange and other ....................
At 31 December ..........................
Funds under management by
business
Global Asset Management .........
Global Private Banking ..............
Affiliates .....................................
Other ...........................................
2012
US$bn
2011
US$bn
847
5
49
9
910
925
2
(40)
(40)
847
At 31 December
2012
US$bn
2011
US$bn
425
288
3
194
910
396
259
3
189
847
Funds under management (‘FuM’) at 31 December
2012 amounted to US$910bn, an increase of 7%
compared with 31 December 2011. Total fund
holdings increased in 2012, reflecting favourable
market movements, the inclusion of custody assets
in client assets in GPB and net new money inflows
from Global Asset Management.
Global Asset Management funds, including
emerging market funds, increased by 7% to
US$425bn compared with 31 December 2011,
driven by favourable global market movements and
net inflows of US$16bn, mainly from sales of long-
term funds, notably fixed income and multi-asset
products, in Rest of Asia-Pacific, Hong Kong and
Latin America.
GPB funds increased by 11% on 31 December
2011 to US$288bn, mainly due to the inclusion of
custody assets in client assets and favourable equity
market and foreign exchange movements. Negative
net new money was driven by net outflows in
Europe, primarily due to a programme to reposition
our client base towards higher net worth
international and domestic relationships, and a
review of certain client relationships with a view to
reducing control risk, largely offset by net inflows
originating from emerging markets.
Other FuM increased by 3% to US$194bn,
primarily due to favourable equity market
movements partly offset by the disposal of the full
service retail brokerage business in Canada.
Assets held in custody and under
administration
Custody is the safekeeping and servicing of
securities and other financial assets on behalf of
clients. At 31 December 2012, we held assets as
custodian of US$6.0 trillion, 16% higher than
the US$5.2 trillion held at 31 December 2011. This
was mainly driven by favourable market movements
together with increased new business and favourable
movements in foreign exchange.
Our assets under administration business, which
includes the provision of various support function
activities including the valuation of portfolios of
securities and other financial assets on behalf of
clients, complements the custody business. At
31 December 2012, the value of assets held
under administration by the Group amounted to
US$2.9 trillion, compared with US$2.6 trillion
in 2011.
Property
At 31 December 2012, we operated from some
8,650 operational properties worldwide, of which
approximately 2,150 were located in Europe, 2,600
in Hong Kong and Rest of Asia-Pacific, 550 in North
America, 2,950 in Latin America and 400 in the
Middle East and North Africa. These properties had
an area of approximately 59.7m square feet (2011:
65.7m square feet).
Our freehold and long leasehold properties,
together with all our leasehold land in Hong Kong,
were valued in 2012. The value of these properties
was US$9.7bn (2011: US$8.9bn) in excess of their
carrying amount in the consolidated balance sheet an
historical cost based measure. In addition, properties
with a net book value of US$1.3bn (2011:
US$1.3bn) were held for investment purposes.
Our operational properties are stated at cost,
being historical cost or fair value at the date of
transition to IFRSs (their deemed cost) less any
impairment losses, and are depreciated on a basis
calculated to write off the assets over their estimated
useful lives. Properties owned as a consequence of
an acquisition are recognised initially at fair value.
Further details are included in Note 24 on the
Financial Statements.
118
Detailed list of disclosures in this report arising from EDTF recommendations
Type of risk
Recommendation Disclosure
General
Risk governance, risk
management and
business model
Capital adequacy and
risk-weighted assets
Liquidity
Funding
Market risk
Credit risk
Other risks
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
The risks to which the business is exposed.
Our risk appetite and stress testing.
Top and emerging risks, and the changes during the reporting period.
Discussion of future regulatory developments affecting our business
model and Group profitability, and its implementation in Europe.
Group Risk Committee, and their activities.
Risk culture and risk governance and ownership.
Diagram of the risk exposure by global business segment.
Stress testing and the underlying assumptions.
Page
124 to 126
126 to 128
130 to 136
132 and 288 to 292
323 to 328
124
20
127 to 128
Pillar 1 capital requirements, and the impact for global systemically
important banks.
294 to 296 and 291 to
292
For calculation of Pillar 1 capital requirements,
see pages 10 to 14 of Pillar 3 Disclosures 2012.
Reconciliation of the accounting balance sheet to the regulatory
balance sheet.
Flow statement of the movements in regulatory capital since the
previous reporting period, including changes in core tier 1, tier 1 and
tier 2 capital.
Discussion of targeted level of capital, and the plans on how to
establish this.
Analysis of risk-weighted assets by risk type, global business and
geographical region, and market risk RWAs.
For analysis of the capital requirements for each Basel asset class,
see pages 10 to 14, 23, 58 and 61 of Pillar 3 Disclosures 2012.
For analysis of credit risk for each Basel asset class,
see pages 23 to 28 and 32 to 38 of Pillar 3 Disclosures 2012.
287
285
288
282 to 283
Flow statements reconciling the movements in risk-weighted assets
for each risk-weighted asset type.
283 and 284
For discussion of Basel credit risk model performance,
see pages 39 to 41 of the Pillar 3 Disclosures 2012 document.
Analysis of the Group’s liquid asset buffer.
Encumbered and unencumbered assets analysed by balance sheet
category.
Consolidated total assets, liabilities and off-balance sheet
commitments analysed by remaining contractual maturity at the
balance sheet date.
Analysis of the Group’s sources of funding and a description of our
funding strategy.
Relationship between the market risk measures for trading and non-
trading portfolios and the balance sheet, by business segment.
Discussion of significant trading and non-trading market risk factors.
VAR assumptions, limitations and validation.
Discussion of stress tests, reverse stress tests and stressed VAR.
Analysis of the aggregate credit risk exposures, including details of
both personal and wholesale lending.
Discussion of the policies for identifying impaired loans, defining
impairments and renegotiated loans, and explaining loan forbearance
policies.
206 to 207
211 to 214
485 to 492
209 to 211
218 to 219
220 to 223
266 to 267
267
139 to 141
162 and 254 to 259
Reconciliations of the opening and closing balances of impaired loans
and impairment allowances during the year.
163 and 172
Analysis of counterparty credit risk that arises from derivative
transactions.
Discussion of credit risk mitigation, including collateral held for all
sources of credit risk.
Quantified measures of the management of operational risk.
Discussion of publicly known risk events.
145
163 to 168
227 to 230
130 to 136
The 32 recommendations listed above are made in the report ‘Enhancing the Risk Disclosures of Banks’ issued by the Enhanced Disclosure
Task Force of the Financial Stability Board on 29 October 2012.
119
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Footnotes
Footnotes to pages 3 to 119
Financial highlights
1 Dividends recorded in the financial statements are dividends per ordinary share declared in a year and are not dividends in respect of,
or for, that year. The third interim dividend for 2011 of US$0.09 was paid on 18 January 2012. The fourth interim dividend for 2011 of
US$0.14 was paid on 2 May 2012. First, second and third interim dividends for 2012, each of US$0.09 per ordinary share, were paid
on 5 July 2012, 4 October 2012 and 12 December 2012, respectively. Note 10 on the Financial Statements provides more information
on the dividends declared in 2012. On 4 March 2013 the Directors declared a fourth interim dividend for 2012 of US$0.18 per ordinary
share in lieu of a final dividend, which will be payable to ordinary shareholders on 8 May 2013 in cash in US dollars, or in pounds
sterling or Hong Kong dollars at exchange rates to be determined on 29 April 2013, with a scrip dividend alternative. The reserves
available for distribution at 31 December 2012 were US$38,175m.
Quarterly dividends of US$15.50 per 6.2% non-cumulative Series A US dollar preference share, equivalent to a dividend of US$0.3875
per Series A American Depositary Share, each of which represents one-fortieth of a Series A US dollar preference share, were paid on
15 March 2012, 15 June 2012, 17 September 2012 and 17 December 2012.
Quarterly coupons of US$0.508 per security were paid with respect to 8.125% capital securities on 17 January 2012, 16 April 2012,
16 July 2012 and 15 October 2012.
Quarterly coupons of US$0.50 per security were paid with respect to 8% capital securities on 15 March 2012, 15 June 2012,
17 September 2012 and 17 December 2012.
2 The return on average ordinary shareholders’ equity is defined as profit attributable to ordinary shareholders of the parent company
divided by average ordinary shareholders’ equity.
3 Return on average invested capital is based on the profit attributable to ordinary shareholders. Average invested capital is measured
as average total shareholders’ equity after adding back goodwill previously amortised or written-off directly to reserves, deducting
average equity preference shares issued by HSBC Holdings and deducting/(adding) average reserves for unrealised gains/(losses) on
effective cash flow hedges and available-for-sale securities and property revaluation reserves. This measure reflects capital initially
invested and subsequent profit.
4 The cost efficiency ratio is defined as total operating expenses divided by net operating income before loan impairment charges and
other credit risk provisions.
5 Each American Depositary Share represents five ordinary shares.
6 Total shareholder return is defined as the growth in share value and declared dividend income during the relevant period.
7 The Financial Times Stock Exchange 100 Index.
8 The Morgan Stanley Capital International World Index.
9 The Morgan Stanley Capital International World Bank Index.
10 The core tier 1 capital ratio for 2012 and 2011 includes the effect of the Basel 2.5 rules.
Business and operating models and KPIs
11 Based upon pro forma post-tax profits allocation. See page 349 for details.
12 Intermediation of securities, funds and insurance products, including Securities Services in GB&M.
13 Merger and acquisition, ECM, event and project financing, and co-investments in GPB.
14 Including Foreign Exchange, Rates, Credit and Equities.
15 Including portfolio management.
16 Including private trust and estate planning (for financial and non-financial assets).
17 Including hedge funds, real estate and private equity.
18 Vehicle Finance was sold in 2010.
19 ‘Transactions’ refers to the sale or closure of non-strategic businesses or non-core investment.
20 Hong Kong, Rest of Asia-Pacific, Middle East and North Africa, and Latin America.
21 Net operating income before loan impairment charges and other credit risk provisions, also referred to as ‘revenue.’
22 The sum of balances presented does not agree to consolidated amounts because inter-company eliminations are not presented here.
23 For definitions of HSBC UK, HBAP and HSBC US, see footnotes 40 to 42, respectively, on page 249. Subsidiaries of these entities are
not included unless there is unrestricted transferability of liquidity between the subsidiaries and the parent. ‘Other entities’ (footnote 43
on page 249) comprise our other main banking subsidiaries and, as such, includes businesses spread across a range of locations, in
many of which we may require a higher ratio of net liquid assets to customer liabilities to reflect local market conditions.
Reconciliations of reported and underlying profit/(loss) before tax
24 ‘Currency translation adjustment’ is the effect of translating the results of subsidiaries and associates for the previous year at the
average rates of exchange applicable in the current year.
25 Positive numbers are favourable: negative numbers are unfavourable.
26 Changes in fair value due to movements in own credit spread on long-term debt issued. This does not include the fair value changes
due to own credit spread on structured notes issued, derivatives and other hybrid instruments included within trading liabilities.
27 Other income in this context comprises where applicable net trading income, net income/(expense) from other financial instruments
designated at fair value, gains less losses from financial investments, dividend income, net earned insurance premiums and other
operating income less net insurance claims incurred and movement in liabilities to policyholders.
28 Individual reconciliations by global businesses and geographical regions are available on www.hsbc.com.
29 Underlying performance eliminates the effects of acquisitions, disposals and changes of ownership levels of subsidiaries, associates
and businesses so we can view results on a like-for-like basis. We achieve this by eliminating gains and losses on disposal or dilution in
the year incurred and by removing material results of operations from all the years presented. For example, if a disposal was made in
the current year after four months of operations, the results of the disposed of business would be removed from the results of the current
year and the previous year as if the disposed of business did not exist in those years.
30 In addition, the operating results of these disposals were removed from underlying results.
31 The presentation of the ‘Reconciliation of reported and underlying profit/(loss) before tax’ for 2011 compared with 2010 has not been
updated to reflect the change in presentation in 2012 splitting underlying reconciliations from the constant currency reconciliations.
The presentational change had no material impact on results.
32 These columns comprise the net increments or decrements in profits in the current year compared with the previous year which are
attributable to acquisitions or disposals, gains on the dilution of interests in associates and/or movements in fair value of own debt
120
attributable to credit spread. The inclusion of acquisitions and disposals is determined in the light of events each year.
33 Excluding adjustments in 2010.
Financial summary
34 In 2008, an impairment charge of US$10,564m to fully write off goodwill in PFS in North America was reported in ‘Total operating
expenses’. This amount is excluded from ‘Total operating expenses’ in calculating the ratio.
35 The effect of the bonus element of the rights issue in 2009 has been included within the basic and diluted earnings per share.
36 Dividends per ordinary share expressed as a percentage of basic earnings per share.
37 For full description of the Ping An forward contract, see page 470.
38 In 2011, ‘Deferred variable compensation awards-accelerated amortisation’ was included as a notable cost item. In 2012, this item
recurs but is now considered part of our operating cost base and therefore has been excluded from notable items in both years.
39 Net interest income includes the cost of funding trading assets, while the related external revenues are reported in ‘Trading income’.
In our global business results, the cost of funding trading assets is included with GB&M’s net trading income as interest expense.
40 Gross interest yield is the average annualised interest rate earned on average interest-earning assets (‘AIEA’).
41 Net interest spread is the difference between the average annualised interest rate earned on AIEA, net of amortised premiums and loan
fees, and the average annualised interest rate paid on average interest-bearing funds.
42 Net interest margin is net interest income expressed as an annualised percentage of AIEA.
43 In 2011, ‘Other interest-earning assets’ includes the average assets of disposal groups held for sale. In prior years other interest-
earning assets included intercompany eliminations. In 2012, intercompany eliminations have been included in the relevant line item.
44 Interest income on trading assets is reported as ‘Net trading income’ in the consolidated income statement.
45 Interest income on financial assets designated at fair value is reported as ‘Net income from financial instruments designated at fair
value’ in the consolidated income statement.
46 Including interest-bearing bank deposits only.
47 Interest expense on financial liabilities designated at fair value is reported as ‘Net income on financial instruments designated at fair
value’ in the consolidated income statement, other than interest on own debt which is reported in ‘Interest expense’.
48 Including interest-bearing customer accounts only.
49 The cost of internal funding of trading assets was US$511m (2011: US$1,161m; 2010: US$902m) and is excluded from the reported
‘Net trading income’ line and included in ‘Net interest income’. However, this cost is reinstated in ‘Net trading income’ in our global
business reporting.
50 Net trading income includes a charge of US$629m (2011: income of US$458m; 2010: income of US$23m), associated with changes in
the fair value of issued structured notes and other hybrid instrument liabilities derived from movements in HSBC issuance spreads.
51 Other changes in fair value include gains and losses arising from changes in the fair value of derivatives that are managed in
conjunction with HSBC’s long-term debt issued.
52 Discretionary participation features.
53 Net insurance claims incurred and movement in liabilities to policyholders arise from both life and non-life insurance business. For
non-life business, amounts reported represent the cost of claims paid during the year and the estimated cost of notified claims. For life
business, the main element of claims is the liability to policyholders created on the initial underwriting of the policy and any subsequent
movement in the liability that arises, primarily from the attribution of investment performance to savings-related policies. Consequently,
claims rise in line with increases in sales of savings-related business and with investment market growth.
Consolidated balance sheet
54 Net of impairment allowances.
55 The calculation of capital resources, capital ratios and risk-weighted assets for 2012 and 2011 is on a Basel 2.5 basis. All other
comparatives are on a Basel II basis.
56 Capital resources are total regulatory capital, the calculation of which is set out on page 286.
57 Including perpetual preferred securities, details of which can be found in Note 33 on the Financial Statements.
58 The definition of net asset value per share is total shareholders’ equity, less non-cumulative preference shares and capital securities,
divided by the number of ordinary shares in issue.
59 ‘Currency translation adjustment’ is the effect of translating the assets and liabilities of subsidiaries and associates for the previous
year-end at the rates of exchange applicable at the current year-end.
60 See Note 26 on the Financial Statements.
61 France primarily comprises the domestic operations of HSBC France, HSBC Assurances Vie and the Paris branch of HSBC Bank plc.
62 The classification of customer accounts by country within Europe has changed from amounts formerly disclosed. Certain balances
which were previously presented within the country of domicile of the consolidating legal entity are now presented on the basis of the
country of account origination. The most significant effect of this change is on Switzerland, where the balance of US$45,283m
previously disclosed at 31 December 2011 has been restated as US$19,888m on the new basis.
Economic profit
63 Expressed as a percentage of average invested capital.
64 Average invested capital is measured as average total shareholders’ equity after:
– adding back the average balance of goodwill amortised pre-transition to IFRSs or subsequently written-off, directly to reserves (less
goodwill previously amortised in respect of the French regional banks sold in 2008);
– deducting the average balance of HSBC’s revaluation surplus relating to property held for own use. This reserve was generated when
determining the deemed carrying cost of such properties on transition to IFRSs and will run down over time as the properties are sold;
– deducting average preference shares and other equity instruments issued by HSBC Holdings; and
– deducting average reserves for unrealised gains/(losses) on effective cash flow hedges and available-for-sale securities.
65 Return on invested capital is profit attributable to ordinary shareholders of the parent company, which can be found in Note 11 on the
Financial Statements on page 426.
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Report of the Directors: Operating and Financial Review (continued)
Footnotes // Risk > Risk profile
Reconciliation of RoRWA measures
66 Risk-weighted assets (‘RWA’s) and pre-tax return on average risk-weighted assets (‘RoRWA’).
67 Underlying RoRWA is calculated using underlying pre-tax return and reported average RWAs at constant currency and adjusted for the
effects of business disposals.
68 ‘Other’ includes treasury services related to the US Consumer and Mortgage Lending business and commercial operations in run-off.
US CML includes loan portfolios within the run-off business that are designated held for sale.
Disposals, held for sale and run-off portfolios
69 The results of operations of disposed businesses are stated up to and including the date of disposal. The results of operations of
businesses held for sale and run-off portfolios are for 2012.
70 The summary income statements present the historical results of disposals, held-for-sale and run-off portfolios to provide information
on trends. The historical results are those which appear in the Group IFRS income statement and include fixed allocated costs which
will not necessarily be removed or reduced upon disposal or run-off. Fixed allocated costs included in total operating expenses are
disclosed separately on page 38. The results of disposed businesses exclude gains on sale and post disposal income and expenditure
items; for example, restructuring costs. The results of businesses held for sale exclude losses recognised upon reclassification to the
held-for-sale category. These losses are disclosed in Note 26 on the Financial Statements.
71 ‘US CML’ includes non-real estate personal loans that were reclassified to ‘Assets held for sale’ during 2012. At 31 December 2012, the
carrying value of this portfolio, net of transferred impairment allowances, was US$3.4bn. The portfolio contributed interest income of
US$813m and loan impairment charges of US$347m to profit before tax in 2012. ‘Other’ includes treasury services related to the US
Consumer and Mortgage Lending business and commercial operations in run-off.
72 ‘Reduction in RWAs on disposal’ for disposal and held-for-sale portfolios are shown exclusive of operational risk RWAs as these are not
immediately released on disposal. RWAs for held-for-sale and run-off portfolios are shown inclusive of operational risk RWAs.
Global businesses and geographical regions
73 The main items reported under ‘Other’ are certain property activities, unallocated investment activities, centrally held investment
companies, gains arising from the dilution of interests in associates and joint ventures, part of the movement in the fair value of our
long-term debt designated at fair value (the remainder of the Group’s movement on own debt is included in GB&M) and HSBC’s
holding company and financing operations. The results also include net interest earned on free capital held centrally, operating costs
incurred by the head office operations in providing stewardship and central management services to HSBC, and costs incurred by the
Group Service Centres and Shared Service Organisations and associated recoveries. In addition, fines and penalties as part of the
settlement of investigations into past inadequate compliance with anti-money laundering and sanctions laws together with the UK bank
levy are recorded in ‘Other’.
74 Assets by geographical region and global businesses include intra-HSBC items. These items are eliminated, where appropriate, under
the heading ‘Intra-HSBC items’ or ‘inter-segment elimination’, as appropriate.
75 For divested businesses, this includes the gain or loss on disposal and material results of operations as described on page 26.
76 Loan impairment charges and other credit risk provisions.
77 Share of profit in associates and joint ventures.
78 In the analysis of global businesses, net trading income comprises all gains and losses from changes in the fair value of financial assets
and financial liabilities classified as held for trading, together with related external and internal interest income and interest expense,
and dividends received; in the statutory presentation internal interest income and expense are eliminated.
79 In 2012, Global Markets included an adverse fair value movement of US$629m on the widening of credit spreads on structured
liabilities (2011: favourable fair value movement of US$458m; 2010: favourable fair value movement of US$23m).
80 Total income earned on payments and cash management products in the Group amounted to US$6.2bn (2011: US$5.6bn; 2010:
US$4.4bn), of which US$4.5bn was in CMB (2011: US$4.0bn; 2010: US$3.3bn) and US$1.7bn was in GB&M (2011: US$1.5bn; 2010:
US$1.1bn).
81 Total income earned on other transaction services in the Group amounted to US$3.6bn (2011: US$3.2bn; 2010: US$2.7bn), of which
US$2.8bn was in CMB relating to trade and receivables finance (2011: US$2.6bn; 2010: US$2.1bn) and US$753m was in GB&M of
which US$738m related to trade and receivables finance (2011: US$601m; 2010: US$523m) and US$15m related to banknotes and
other (2011: US$33m; 2010: US$113m).
82 In each Group entity, Balance Sheet Management is responsible for managing liquidity and funding under the supervision of the local
Asset and Liability Management Committee. Balance Sheet Management also manages the non-trading interest rate positions of the
entity transferred to it within a Global Markets limit structure. Balance Sheet Management revenues include notional tax credits on
income earned from tax-exempt investments of US$116m in 2012, US$85m in 2011 and US$50m in 2010, which are offset within
‘Other’.
83 ‘Other’ in GB&M includes net interest earned on free capital held in the global business not assigned to products, allocated funding
costs and gains resulting from business disposals. Within the management view of total operating income, notional tax credits are
allocated to the businesses to reflect the economic benefit generated by certain activities which is not reflected within operating income,
for example notional credits on income earned from tax-exempt investments where the economic benefit of the activity is reflected in tax
expense. In order to reflect the total operating income on an IFRS basis, the offset to these tax credits are included within ‘Other’.
84 ‘Client assets’ are translated at the rates of exchange applicable for their respective period-ends, with the effects of currency translation
reported separately. The main components of client assets are funds under management, which are not reported on the Group’s balance
sheet, and customer deposits, which are reported on the Group’s balance sheet.
85 Inter-segment elimination comprises (i) the costs of shared services and Group Service Centres included within ‘Other’ which are
recovered from global businesses, and (ii) the intra-segment funding costs of trading activities undertaken within GB&M. HSBC’s
Balance Sheet Management business, reported within GB&M, provides funding to the trading businesses. To report GB&M’s ‘Net
trading income’ on a fully funded basis, ‘Net interest income’ and ‘Net interest income/(expense) on trading activities’ are grossed up to
reflect internal funding transactions prior to their elimination in the inter-segment column.
86 Net insurance claims incurred and movement in liabilities to policyholders.
87 ‘Employee expenses’ comprise costs directly incurred by each global business. The reallocation and recharging of employee and other
expenses directly incurred in the ‘Other’ category are shown in ‘Other operating expenses’.
88 RWAs are non-additive across geographical regions due to market risk diversification effects within the Group.
89 CMB results include US$128m (2011: US$110m) of net operating income and US$43m (2011: US$23m) of profit before tax, related to
low income housing tax credit investments in the US which are offset within the ‘Other’ segment.
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Risk
Risk profile2 .................................................... 123
Risk governance ..............................................
252
Page
App1
Managing risk2 ............................................... 124
Risks faced by HSBC ...................................... 124
Risk culture ...................................................... 124
Risk governance and ownership ...................... 124
Risk profile ...................................................... 126
Risk appetite .................................................... 126
Stress testing .................................................... 127
Areas of special interest ................................ 128
Compliance ...................................................... 128
Commercial real estate .................................... 128
Eurozone crisis ................................................. 129
Personal lending – US lending ......................... 130
Top and emerging risks2 ............................... 130
Macroeconomic and geopolitical risk ............. 131
Macro-prudential, regulatory and legal risks
to our business model .................................. 132
Risks related to our business operations,
governance and internal control systems .... 134
Credit risk4 ..................................................... 137
252
Eurozone exposures4 ...................................... 192
Liquidity and funding3 .................................. 203
Market risk4 .................................................... 217
Operational risk2 ............................................ 227
Compliance risk ............................................... 230
Fiduciary risk ................................................... 231
261
265
270
271
273
Risk management of insurance operations3 232
273
Other material risks2 ..................................... 246
Reputational risk .............................................. 246
Pension risk ...................................................... 246
Sustainability risk ............................................ 249
278
278
280
1 Appendix to Risk – risk policies and practices.
2 Unaudited. 3 Audited. 4 Audited where indicated.
For details of HSBC’s policies and practices
regarding risk management and governance
see the Appendix to Risk on page 252.
Risk profile
(Unaudited)
Managing our risk profile
• A strong balance sheet remains core to our
philosophy.
• Our portfolios remain aligned to our risk appetite
and strategy.
• Our risk management framework is supported by
strong forward-looking risk identification.
Maintaining capital strength and
strong liquidity position
• Our core tier 1 capital ratio remains strong at
12.3%.
• We have sustained our strong liquidity position
throughout 2012.
• Our ratio of customer advances to deposits
remains below 90%.
Strong governance
• Robust risk governance and accountability is
embedded across the Group.
• The Board, advised by the Group Risk
Committee, approves our risk appetite.
• The compliance control function is being
restructured and expanded to improve focus on
financial crime and regulatory compliance.
• Our global risk operating model supports
adherence to globally consistent standards and
risk management policies across the Group.
Our top and emerging risks
• Macroeconomic and geopolitical risk.
• Macro-prudential, regulatory and legal risk to our
business model.
• Risks related to our business operations,
governance and internal control systems.
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Report of the Directors: Operating and Financial Review (continued)
Risk > Managing risk
Managing risk
(Unaudited)
Risks faced by HSBC
All of our activities involve, to varying degrees, the
analysis, evaluation, acceptance and management of
risks or combinations of risks. These are described in
the table below.
Risk culture
All staff are required to identify, assess and
manage risk within the scope of their assigned
responsibilities. Our global standards set the tone
from the top and are central to our approach to
balancing risk and reward. Personal accountability
is reinforced by our HSBC Values, with staff
expected to act with courageous integrity in
conducting their duties and being:
•
•
•
dependable, doing the right thing;
open to different ideas and culture; and
connected to our customers, regulators and each
other.
Staff are supported by a disclosure line which
enables them to raise concerns in a confidential
manner. We also have in place a suite of mandatory
training to ensure a clear and consistent attitude is
communicated to staff; our mandatory training not
only focuses on the technical aspects of risk but also
on our attitude towards risk and the behaviours
expected by our policies.
Our risk culture is reinforced by our approach to
remuneration, which is discussed in the Report of the
Remuneration Committee on page 347. Individual
awards are based on the achievement of both
financial and non-financial (relating to our values)
objectives which are aligned to our global strategy.
Risk governance and ownership
An established risk governance framework and
ownership structure ensures oversight of and
accountability for the effective management of risk
at Group, regional and global business levels. The
governance structure for the management of risk is
set out in the report of the Group Risk Committee on
page 323, with similar arrangements in place in
major operating subsidiaries. This structure has been
augmented by the establishment of the Financial
System Vulnerabilities Committee, details of which
are set out on page 328. Our risk management
framework fosters the continuous monitoring of the
risk environment and an integrated evaluation of
risks and their interactions. Integral to our risk
management framework are risk appetite, stress
testing and the identification of top and emerging
risks, all of which are discussed below.
Description of risks
Risks
Credit risk
Arising from
Measurement, monitoring and management of risk
The risk of financial loss if a
customer or counterparty fails
to meet an obligation under a
contract.
Credit risk arises principally
from direct lending, trade
finance and leasing business,
but also from certain other
products such as guarantees
and derivatives.
Credit risk:
• is measured as the amount which could be lost if a customer or
counterparty fails to make repayments. In the case of derivatives, the
measurement of exposure takes into account the current mark to
market value to HSBC of the contract and the expected potential
change in that value over time caused by movements in market rates;
• is monitored within limits, approved by individuals within a
framework of delegated authorities. These limits represent the peak
exposure or loss to which HSBC could be subjected should the
customer or counterparty fail to perform its contractual obligations;
and
• is managed through a robust risk control framework which outlines
clear and consistent policies, principles and guidance for risk
managers.
Liquidity and funding risk
The risk that we do not have
sufficient financial resources
to meet our obligations as they
fall due or that we can only do
so at excessive cost.
Liquidity risk arises from
mismatches in the timing of
cash flows.
Funding risk arises when the
liquidity needed to fund
illiquid asset positions cannot
be obtained at the expected
terms and when required.
Liquidity and funding risk:
• is measured using internal metrics including stressed operational cash
flow projections, coverage ratio and advances to core funding ratios;
• is monitored against the Group’s liquidity and funding risk framework
and overseen by regional Asset and Liability Management
Committees (‘ALCO’s), Group ALCO and the Risk Management
Meeting; and
• is managed on a stand-alone basis with no reliance on any Group
entity (unless pre-committed) or central bank unless this represents
routine established business as usual market practice.
124
Arising from
Measurement, monitoring and management of risk
Market risk:
• is measured in terms of value at risk, which is used to estimate
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, augmented with stress testing to evaluate the potential
impact on portfolio values of more extreme, though plausible, events
or movements in a set of financial variables;
• is monitored using measures including the sensitivity of net interest
income and the sensitivity of structural foreign exchange which are
applied to the market risk positions within each risk type; and
• is managed using risk limits approved by the GMB for HSBC
Holdings and our various global businesses. These units are allocated
across business lines and to the Group’s legal entities.
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
comprise positions that
primarily arise from the
interest rate management of
our retail and commercial
banking assets and
liabilities, financial
investments designated as
available for sale and held
to maturity, and exposures
arising from our insurance
operations
Operational risk arises from
day to day operations or
external events, and is relevant
to every aspect of our business
Operational risk:
• is measured using both the top risk analysis process and the risk
and control assessment process, which assess the level of risk and
effectiveness of controls;
Risks
Market risk
The risk that movements in
market factors, including
foreign exchange rates and
commodity prices, interest
rates, credit spreads and
equity prices, will reduce our
income or the value of our
portfolios.
Operational risk
The risk of loss resulting from
inadequate or failed internal
processes, people and systems
or from external events,
including legal risk (along
with accounting, tax, security
and fraud, people, systems,
projects, operations and
organisational change risk).
Compliance risk
The risk that we fail to observe
the letter and spirit of all
relevant laws, codes, rules,
regulations and standards of
good market practice, and
incur fines and penalties and
suffer damage to our business
as a consequence.
Compliance risk is part of
operational risk, and arises
from rules, regulations, other
standards and Group policies,
including those relating to
anti-money laundering, anti-
bribery and corruption,
conduct of business, counter-
terrorist financing and
sanctions compliance.
Insurance risk
The risk that over time, the
combined cost of acquiring
and administering a contract,
claims and benefits may
exceed the aggregate amount
of premiums received and
investment income.
Insurance risk arises from
mortality and morbidity
experience. Lapse and
surrender rates and if, the
policy has a savings element,
the performance of the assets
held to support the liabilities
also impact the cost of claims
and benefits. The performance
of assets supporting insurance
liabilities depends on financial
risks such as market, credit
and liquidity.
• is monitored using key indicators and other internal control activities;
and
• is primarily managed by global business and functional managers.
They identify and assess risks, implement controls to manage
them and monitor the effectiveness of these controls utilising the
operational risk management framework. The Global Operational Risk
and Internal Control function is responsible for the framework and for
overseeing the management of operational risks within businesses and
functions.
Compliance risk:
• is measured by reference to identified metrics, incident assessments
(whether affecting HSBC or the wider industry), regulatory feedback
and the judgement and assessment of the managers of our global
businesses and functions;
• is monitored against our compliance risk assessments and metrics, the
results of the monitoring and control activities of the second line of
defence functions, including the Global Compliance function, and the
results of internal and external audits and regulatory inspections; and
• is managed by establishing and communicating appropriate 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.
Insurance risk:
• is measured in terms of life insurance liabilities and non-life written
premiums for their respective contract types;
• is monitored by the Group Insurance Risk Management Committee,
which checks the risk profile of the insurance operations against a risk
appetite for insurance business agreed by the GMB; and
• is managed both centrally and locally using product design,
underwriting, reinsurance and claims-handling procedures.
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Report of the Directors: Operating and Financial Review (continued)
Risk > Managing risk
Risks
Arising from
Measurement, monitoring and management of risk
Fiduciary risk
The risk of breaching our
fiduciary duties.
Reputational risk
The risk that illegal, unethical
or inappropriate behaviour by
the Group itself, members of
staff or clients or
representatives of the Group
will damage HSBC’s
reputation, leading,
potentially, to a loss of
business, fines or penalties.
Fiduciary risk arises from our
business activities where we
act in a fiduciary capacity as
Trustee, Investment Manager
or as mandated by law or
regulation.
Fiduciary risk:
• is measured by monitoring against risk appetite;
• is monitored through the use of key indicators; and
• is managed within the designated businesses via a comprehensive
policy framework.
Reputational risk encompasses
negative reaction not only to
activities which may be illegal
or against regulations, but also
to activities that may be
counter to societal standards,
values and expectations. It
arises from a wide variety of
causes, including how we
conduct our business and the
way in which clients to whom
we provide financial services,
and bodies who represent
HSBC, conduct themselves.
Reputational risk:
• is measured by reference to our reputation as indicated by our dealings
with all relevant stakeholders, including media, regulators, customers
and employees;
• is monitored through a reputational risk management framework,
taking into account the results of the compliance risk monitoring
activity outlined above; and
• is managed by every member of staff and is covered by a number of
policies and guidelines. There is a clear structure of committees and
individuals charged with mitigating reputational risk, including the
Group Reputational Risk Policy Committee and regional/business
equivalents.
Pension risk
The risk that contributions
from Group companies and
members fail to generate
sufficient funds to meet the
cost of accruing benefits for
the future service of active
members, and the risk that the
performance of assets held in
pension funds is insufficient to
cover existing pension
liabilities.
Pension risk arises from
investments delivering an
inadequate return, economic
conditions leading to
corporate failures, adverse
changes in interest rates or
inflation, or members living
longer than expected
(longevity risk).
Pension risk includes
operational risks listed above.
Sustainability risk
The risk that the
environmental and social
effects of providing financial
services outweigh the
economic benefits.
Sustainability risk arises from
the provision of financial
services to companies or
projects which run counter to
the needs of sustainable
development.
Pension risk:
• is measured in terms of the schemes’ ability to generate sufficient
funds to meet the cost of their accrued benefits;
• is monitored through the specific risk appetite that has been developed
at both Group and regional levels; and
• is managed locally through the appropriate pension risk governance
structure and globally through the Risk Management Meeting.
Sustainability risk:
• is measured by assessing the potential sustainability effect of a
customer’s activities and assigning a Sustainability Risk Rating to
all high risk transactions;
• is monitored quarterly by the Risk Management Meeting and monthly
by Group Sustainability Risk management; and
• is managed using sustainability risk policies covering project finance
lending and sector-based sustainability polices for sectors with high
environmental or social impacts.
Risk profile
Risks are assumed by our global businesses in
accordance with their risk appetite and are managed
at Group, global business and regional levels. All
risks are identified through our risk map process,
which sets out the Group’s risk profile in relation to
key risk categories in different regions and global
businesses. In addition to those listed above, risks
including model, financial management, capital,
Islamic finance and strategic risk are identified and
monitored through the risk map process.
These risks are then regularly assessed through
our risk appetite framework, subjected to stress
testing and considered for classification as top and
emerging risks. These processes are discussed in
further detail below.
Credit, market and operational risks are measured
using the Pillar 1 framework for regulatory capital
through the allocation of risk-weighted assets. We
measure other risks using our economic capital model
under Pillar 2 (as described in our Pillar 3 Disclosures
2012 report.)
Risk appetite
Risk appetite is set out in the Group’s Risk Appetite
Statement, which describes the types and levels of
risk that the Group is prepared to accept in executing
our strategy. It is approved by the Board on the
advice of the Group Risk Committee, and is a key
126
Stress testing
Our stress testing and scenario analysis programme
is central to the monitoring of top and emerging risks.
We conduct a range of Group stress-testing scenarios
including, but not limited to, severe global economic
downturn, country, sector and counterparty failures
and a variety of projected major operational risk
events. The outcomes of the stress testing are used
to assess the potential demand for regulatory capital
under the various scenarios. We also participate,
where appropriate, in scenario analyses requested by
regulatory bodies.
In the course of 2012, we examined several
scenarios reflecting potential developments in the
eurozone and more widely. Those reported to senior
management during 2012 included an assessment of
the annual operating plan 2012 under two
macroeconomic stress scenarios, as described below.
The results of the two scenarios demonstrated that
HSBC would remain satisfactorily capitalised under
the mild and severe scenarios after taking account of
assumed management actions.
In addition to the suite of risk scenarios
considered for the Group, each major HSBC
subsidiary conducts regular macroeconomic and
event-driven scenario analyses specific to their region.
Stress testing is used across risk categories such
as market risk, liquidity and funding risk and credit
risk to evaluate the potential impact of stress scenarios
on portfolio values, structural long-term funding
positions, income or capital.
component of our risk management framework. It
is central to the annual planning process, in which
global businesses, geographical regions and
functions are required to articulate their risk
appetite statements. These are aligned with Group
strategy, and provide a risk profile of each global
business, region or function in the context of the
risk categories discussed above.
Quantitative and qualitative metrics are assigned
to nine key categories: earnings, capital, liquidity
and funding, securitisations, cost of risk, intra-group
lending, strategic investments, risk categories and
risk diversification and concentration. Measurement
against the metrics:
•
•
•
•
guides underlying business activity, ensuring
it is aligned to risk appetite statements;
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.
Some of the core metrics that are measured,
monitored and presented to the Board monthly are
tabulated below:
Risk appetite metrics
Core tier 1 ratio ...........
Return on equity .........
Return on RWAs ........
Dividend payout ratio .
Cost efficiency ratio ...
Advances to customer
accounts ratio...........
Cost of risk (LICs) ......
Target
9.5% to 10.5%
12% to 15%
1.8% to 2.6%
40% to 60%
48% to 52%
Below 90%
Below 20% of
operating income
Stress scenario assumptions
Actual
12.3%
8.4%
1.8%
55.4%
62.8%
74.4%
9.9%
Scenario
Assumptions
Mild scenario assumptions
Severe scenario assumptions
• the situation in Greece worsens and there is
an orderly default in Greece;
• Greek banks also default and, with support from the
EU and the International Monetary Fund, are bailed
out;
• increasing bond yields in Portugal, Ireland, Spain
and Italy trigger further fiscal austerity measures,
and governments strive to disassociate their
countries from Greece;
• through financial and trade linkages, an orderly
default in Greece results in the spread of contagion
to the rest of the world;
• the UK, US and emerging markets are adversely
affected, albeit to varying degrees; and
• slower global demand curbs growth and increases
the risk premium on interest rates as well as
commodity prices.
• a disorderly default in Greece, where the eurozone
governments are unable to ring-fence peripheral
countries and their banks;
• default of Portugal and Ireland with increases in
bond yields for high debt countries;
• the ensuing credit crunch together with declining
business and consumer confidence more than offset
any relief gained from the depreciation of the euro;
• investors become increasingly uncomfortable with
the US and the UK’s fiscal positions, with the severe
scenario resulting in a global slowdown; and
• emerging economies are less affected by the
financial shock.
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Report of the Directors: Operating and Financial Review (continued)
Risk > Managing risk / Areas of special interest
We also conduct reverse stress testing.
Reverse stress testing is a process of working
backwards from the event of non-viability of the
business model to identification of a range of events
that could bring that event about. Non-viability
might occur before the bank’s capital is depleted,
and could result from a variety of events. These
include idiosyncratic, systemic or combinations of
events, and/or could imply failure of the Group’s
holding company or one of its major subsidiaries and
does not necessarily mean the simultaneous failure
of all the major subsidiaries.
We use reverse stress testing as part of our risk
management process to strengthen resilience by
helping to inform early-warning triggers,
management actions and contingency plans to
mitigate against potential stresses and vulnerabilities
which the Group might face.
Areas of special interest
(Unaudited)
Compliance
In 2012, we experienced increasing levels of
compliance risk as regulators and other agencies
pursued investigations into historical activities,
and we continued to work with them in relation
to existing issues. Manifestation of these risks
included an appearance before the US Senate
Permanent Subcommittee on Investigations and the
Deferred Prosecution Agreement reached with US
authorities in relation to investigations regarding
inadequate compliance with anti-money laundering
and sanctions law, plus a related undertaking with
the FSA. We have also been involved in
investigations into the mis-selling of interest
rate derivative products to SMEs in the UK and
investigations and reviews related to certain past
submissions made by panel banks and the process
for making submissions in connection with the
setting of Libor, Euribor and other benchmark
interest and foreign exchange rates.
With a new senior leadership team and a new
strategy in place since 2011, we have already taken
significant steps to address these issues including
making changes to strengthen compliance, risk
management and culture. These steps, which should
also enhance our compliance risk management
capabilities, include the following:
•
•
the creation of a new global structure which will
make HSBC easier to manage and control;
simplifying our business through the ongoing
implementation of our organisational
128
effectiveness programme and our five economic
filters strategy;
developing a sixth global risk filter which
should help to standardise our approach to
doing business in higher risk countries;
substantially increasing resources, doubling
global expenditure and significantly
strengthening Compliance as a control
(rather than as an advisory) function;
continuing to roll out the HSBC Values
programme that defines the way everyone
in the Group should act;
appointing a new Chief Legal Officer and Head
of Group Financial Crime Compliance with
particular expertise and experience in US law
and regulation;
appointing a new Global Head of Regulatory
Compliance and starting to restructure the
Global Compliance function accordingly;
designing and implementing new global
standards by which we conduct our businesses;
and
enforcing a consistent global sanctions policy.
•
•
•
•
•
•
•
It is clear from both our own and wider industry
experience that the level of activity among regulators
and law enforcement agencies in investigating
possible breaches of regulations has increased, and
that the direct and indirect costs of such breaches can
be significant. Coupled with a substantial increase in
the volume of new regulation, much of which has
some element of extra-territorial reach, and the
geographical spread of our businesses, we believe
that the level of inherent compliance risk that we
face as a Group will continue to remain high for the
foreseeable future.
Commercial real estate
Our exposure to commercial real estate lending
continued to be concentrated in Hong Kong, the UK,
Rest of Asia-Pacific and North America. The market
in Hong Kong and most other Asian markets in
which we conduct commercial real estate lending,
after relative buoyancy in 2011, began to stabilise
in 2012, partly due to initiatives taken by various
supervisory authorities. In the UK, many regions
were negatively affected by weak growth in the
economy, though London and the South East, where
more than 50% of our UK CRE lending is based,
continued to exhibit relative strength. In North
America, the market remained stable, in part
supported by the continued low levels of interest
rates.
Refinance risk, which is subject to close
scrutiny in key commercial real estate markets, is
the risk that a loan which is due to be repaid through
refinancing over the short term cannot, at maturity,
be refinanced on current market terms. Such cases
may either lead to the loan being treated as impaired
because the borrower’s ability to pay is considered
doubtful or, if refinanced by HSBC, may result in it
being treated as a renegotiated loan because of the
degree of forbearance required (see page 158 for
a description of renegotiated loans). In commercial
real estate markets, refinance risk can arise
particularly when a loan is serviced exclusively by
the property to which it relates, i.e. when the bank
does not, or is not able to, place principal reliance
on other cash flows available to the borrower.
We monitor the commercial real estate portfolio,
assessing those drivers that may indicate potential
issues with refinancing. The principal driver is the
vintage of the loan, where origination reflected
previous market norms which no longer apply in the
current market. Examples are higher loan-to-value
ratios and/or lower interest cover ratios. The range
of refinancing sources in the local market is also an
important consideration, with concern increasing
when this is restricted to banks and when bank
liquidity is limited. In addition, the quality of
underlying fundamentals such as tenant reliability,
ability to let, and the condition of the property itself
is also important, as it influences property value.
With the exception of the UK, in our material
commercial real estate portfolios globally, the
behaviour of the market and the quality of assets
does not cause undue concern. In the UK, the above
drivers combine to cause a concern regarding our
sensitivity to risks of refinance that warrant
enhanced management attention.
At 31 December 2012, the UK had US$24.5bn
of commercial real estate loans, of which US$7.4bn
were due to be refinanced within the next 12 months,
of which US$2.4bn were assessed as possessing
characteristics that indicated an increased risk of
refinancing difficulty. Such cases are monitored
closely with US$1.9bn already under special
management within our Loan Management Units.
US$0.9bn were disclosed as impaired with
impairment allowances of US$0.4bn. Where these
loans are not considered impaired it is because,
while they may possess characteristics that indicate a
potential issue with refinancing, as described above,
there is no evidence to indicate that all contractual
cash flows will not be recovered or that the loans
will need to be refinanced on terms we would
consider below market norms.
The relevance of current market conditions to
impairment assessment is particularly relevant over
a 12-month period. Over a 12 to 24-month horizon,
US$3.3bn of UK commercial real estate and
other property-related lending loans are due to be
refinanced. Reviews of more sensitive assets due
between 12 and 24 months have been conducted
to ensure that there are no further cases currently
requiring special management or that should be
considered impaired.
Eurozone crisis
Eurozone countries are members of the EU and
part of the euro single currency bloc. The peripheral
eurozone countries are those that have exhibited
levels of market volatility that exceeded other
eurozone countries, demonstrating fiscal or political
uncertainty which may persist through the first half
of 2013. In 2012, in spite of improvements through
austerity and structural reforms, the peripheral
eurozone countries of Greece, Ireland, Italy,
Portugal, Spain and Cyprus continued to exhibit
a high ratio of sovereign debt to GDP or short to
medium-term maturity concentration of their
liabilities, with Greece, Spain and Cyprus seeking
assistance.
Exposure to eurozone countries is analysed in
the table on page 193.
Risk reduction in 2012
At 31 December 2012, our net exposure to the
peripheral eurozone countries was US$38bn,
including net exposure to sovereign borrowers,
agencies and banks of US$12bn. During the year,
we continued to reduce our overall net exposure
to sovereigns, agencies and banks of peripheral
eurozone countries. In addition, we continued to
actively reduce exposures to counterparties
domiciled in other eurozone countries that had
exposures to sovereigns and/or banks in peripheral
eurozone countries of sufficient size to threaten their
on-going viability in the event of an unfavourable
conclusion to the current crisis.
This was undertaken through an analysis of
publicly available information, reviews of external
analyst reports and meetings with the counter-
parties’ officials. Vulnerable counterparties were
identified and subjected to enhanced monitoring, and
our exposure was managed in a similar manner to
the monitoring and management of direct exposures
to the peripheral eurozone countries. One of the
primary issues underpinning this process was the
management of our surplus liquidity, resulting in the
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Report of the Directors: Operating and Financial Review (continued)
Risk > Areas of special interest / Top and emerging risks
placement of funds directly with central banks in the
most highly-rated countries.
Our businesses in peripheral eurozone countries
are funded from a mix of local deposits, local
wholesale funding and intra-Group loans extended
from HSBC operations with surplus funds. Intra-
Group funding carries the risk that a member country
might exit the eurozone and redenominate its
national currency, which could result in a significant
currency devaluation. A description of risks relating
to currency redenomination in the event of the exit
of a eurozone member is provided on page 131.
Risk management and contingency planning
There is an established framework for dealing with
counterparty and systemic crisis situations, both
regionally and globally, which is complemented by
regular specific and enterprise-wide stress testing
and scenario planning. The framework functions
both in pre and in-crisis situations and ensures that
we have detailed operational plans in the event of
an adverse scenario materialising. It was deployed in
2011 and has continued to operate throughout 2012
to ensure that pre-crisis preparation remains apposite
and robust.
The main focus of preparation for eurozone exit
continues to be on Greece and Spain although, as the
eurozone situation has developed in 2012, we have
also considered other scenarios including contagion
risk to non-eurozone countries or the exit of a higher
impact eurozone member. Management actions
include regular meetings of a Eurozone Major
Incident Group and a tested regional eurozone
contingency plan covering all global businesses and
functions. The plan considers payments, legal, client
account, internal and external communication and
regulatory and compliance issues associated with
eurozone breakup.
Personal lending – US lending
The slight improvement in US economic conditions
continued throughout 2012. Real GDP grew by 2.2%
and consumer spending growth remained moderate.
Threats to economic growth remained, primarily
with the uncertainty in the housing market and
elevated unemployment levels, although both of
them demonstrated modest improvements during the
year.
We remained focused on managing the run-off
of balances in our HSBC Finance portfolio and
completed the sales of our US Card and Retail
Services business and 195 retail branches principally
in upstate New York in 2012. Total lending
balances, including loans held for sale, within HSBC
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Finance were US$43bn at 31 December 2012, a
decline of US$6.8bn compared with the end of 2011.
The rate at which balances in the CML portfolio are
declining continues to be affected by the lack of
refinancing opportunities available to customers and
the continued impact of the temporary suspension of
foreclosure activity in 2010. Foreclosure processing
has now resumed in substantially all states, although
there continues to be a backlog of loans which have
not yet been referred to foreclosure. In addition, our
loan modification programmes, which are designed
to improve cash collections and avoid foreclosure,
continued to slow repayment rates.
In the third quarter of 2012, we reclassified non-
real estate personal loan balances of US$3.7bn,
net of impairment allowances, from our consumer
finance portfolio to ‘Assets held for sale’ as we
actively marketed the portfolio. We also identified
real estate secured loan balances, with a carrying
amount of US$3.8bn which, as part of our strategy,
we have announced that we plan to actively market
in multiple transactions generally over the next two
years. At 31 December 2012, the carrying value of
the non-real estate and the real estate secured loans
which we intend to sell was approximately US$1bn
greater than their estimated fair value. We expect to
recognise a loss on sale for these loans over the next
few years, the actual amount of which will depend
on market conditions at the time of the sales.
Total mortgage lending in the US was US$55bn
at 31 December 2012, a decline of 7% compared
with the end of 2011, mainly due to the continued
run-off of the CML portfolio.
Top and emerging risks
(Unaudited)
Identifying and monitoring top and emerging risks
is integral to our approach to risk management. We
define a ‘top risk’ as being a current, emerged risk
which has arisen across any of our risk categories,
regions or global businesses and has the potential to
have a material impact on our financial results or our
reputation and the sustainability of our long-term
business model, and which may form and crystallise
within a one-year horizon. We consider an
‘emerging risk’ to be one which has large uncertain
outcomes that may form beyond a one-year horizon
which, if they were to crystallise, could have a
material effect on our long-term strategy. Our top
and emerging risk framework enables us to focus
on current and forward looking aspects of our risk
exposures and ensure our risk profile remains in line
with our risk appetite and that our appetite remains
appropriate. Our current top and emerging risks are
as follows:
Macroeconomic and geopolitical risk
• Emerging market slowdown.
• Macroeconomic risks within developed
economies.
•
Increased geopolitical risk in certain
regions.
Emerging market slowdown
World growth is slowing as demand in mature
economies is subdued and credit availability and
investment activity remain constrained. A number
of mature economies are implementing austerity
measures in order to reduce their deficits and public
debt. This is expected to help resolve the sovereign
and banking crisis in the medium term but, in the
short term, it is limiting growth, leaving labour
markets weak and thereby making fiscal
consolidation a bigger challenge. This is affecting
the rest of the world through lower trade, reduced
international financing as banks are deleveraging,
and the potential disruption to capital flows. In
addition, it makes emerging countries more
vulnerable to a slowdown in mature economies.
Potential impact on HSBC
• Trade and capital flows may contract as a result
of lower world production, banks deleveraging,
the introduction of protectionist measures in
certain markets or the emergence of geopolitical
risks, which in turn might curtail profitability.
• A prolonged period of low interest rates due
to policy actions taken to address the economic
crisis in mature economies will constrain
through spread compression and low returns
on assets the interest income we earn from
investing our excess deposits.
• During 2012, we continued to reduce our
sovereign and financial institution counterparty
credit positions in peripheral eurozone
countries. In addition, we actively sought to
identify and reduce exposures to those
counterparties domiciled in core European
countries that had exposures to sovereigns
and/or banks in peripheral eurozone countries of
sufficient size to threaten their ongoing viability
in the event of an unfavourable conclusion to
the current situation.
Macroeconomic risks within developed
economies
There is still some risk of one or more countries
leaving the euro, although the situation improved
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in 2012. Even without a eurozone break-up,
the currency will remain vulnerable to market
perception. Banks in some countries remain very
fragile and the rest of the European banking industry
could be affected through its exposure to the weakest
countries. Banks are therefore expected to continue
to deleverage. In the current context of very low
growth due to austerity measures, this could further
aggravate the economic crisis and could push
European countries into a vicious circle of economic
crisis and sovereign difficulties. Although our
exposure to the peripheral eurozone countries is
relatively limited, we are exposed to counterparties
in the core European countries which could be
affected by any sovereign or currency crisis. Our
eurozone exposures are described in more detail on
page 192.
Potential impact on HSBC
• We could incur significant losses stemming
from the exit of one or more countries from
the eurozone and the redenomination of their
currencies.
• Our exposures to European banks may come
under stress, heightening the potential for credit
and market risk losses, if the sovereign debt and
banking system crisis in the region increases the
need to recapitalise parts of the sector.
•
In the event of contagion from stress in the
peripheral eurozone sovereign and financial
sectors, our ability to borrow from other
financial institutions or to engage in funding
transactions may be adversely affected by
market dislocation and tightening liquidity.
• A sovereign default without co-ordinated
intervention to protect the rest of the eurozone
could trigger banking defaults in companies
with which we do business and have a knock-on
effect on the global banking system. We have
actively managed the risk of sovereign defaults
during 2012 by reducing exposures and other
measures.
•
In seeking to manage and mitigate these risks,
we have prepared and tested detailed operational
contingency plans to deal with such a scenario.
However, such plans may not be adequate or
may not prove effective.
Increased geopolitical risk in certain regions
Weak global economic growth is exacerbating the
risk of protectionism and some countries may
impose restrictions on trade or on capital flows to
protect their domestic economies.
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Report of the Directors: Operating and Financial Review (continued)
Risk > Top and emerging risks
In Egypt, the political process remains in
transition with a continuing risk of instability. In
addition, the fighting in Syria may disrupt global
international relations, with tensions between Israel
and Iran adding to the risks in the region.
Potential impact on HSBC
• Our results are subject to the risk of loss from
unfavourable political developments, currency
fluctuations, social instability and changes in
government policies on matters such as
expropriation, authorisations, international
ownership, interest-rate caps, foreign exchange
transferability and tax in the jurisdictions in
which we operate. Actual conflict could bring
about loss of life among our staff and physical
damage to our assets.
• We have increased our monitoring of the
geopolitical and economic outlook, in particular
in countries where we have material exposures
and a physical presence. Our internal credit risk
rating of sovereign counterparties takes these
factors into account and drives our appetite for
conducting business in those countries. Where
necessary, we adjust our country limits and
exposures to reflect our appetite and mitigate
these risks as appropriate.
Macro-prudential, regulatory and legal risks
to our business model
• Regulatory developments affecting our
business model and Group profitability.
• Regulatory investigations, fines,
sanctions and requirements relating to
conduct of business and financial crime
negatively affecting our results and
brand.
• Dispute risk.
Financial service providers face increasingly
stringent and costly regulatory and supervisory
requirements, particularly in the areas of capital
and liquidity management, conduct of business,
operational structures and the integrity of financial
services delivery. Increased government intervention
and control over financial institutions, together with
measures to reduce systemic risk, may significantly
alter the competitive landscape. These measures may
be introduced as formal requirements in a supra-
equivalent manner and to differing timetables across
regulatory regimes.
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Regulatory developments affecting our
business model and Group profitability
Several regulatory changes are likely to affect our
activities, both of the Group as a whole and of some
or all of our principal subsidiaries. These changes
include (i) the introduction of Basel III measures in
the EU through CRD IV and uncertainty on both the
timing and final form of implementation given that
certain areas, such as, the operation of capital buffers
have yet to be finalised and the technical guidance
from the European Banking Authority (‘EBA’)
across numerous areas has yet to be published, (ii) a
new regulatory structure within the UK comprising
the Financial Policy Committee (‘FPC’), Prudential
Regulatory Authority (‘PRA’) and Financial
Conduct Authority (‘FCA’) and, in particular, the
effects of the ability of the FPC to seek additional
capital for lending to sectors perceived as higher
risk, (iii) the designation of the Group by the
Financial Stability Board as a global systemically
important bank; (iv) proposed legislation in the UK
to give effect to the recommendations of the ICB in
relation to ‘ring-fencing’ of the UK retail banking
from wholesale banking activities, the structural
separation of other activities envisaged in legislative
proposals in the US (including the Volcker Rule
proposed under the Dodd-Frank Act) and in France
and, in the EU, considerations following the
Liikanen Group recommendations; (v) changes in
the regime for the operation of capital markets with
increasing standardisation, central clearing, reporting
and margin requirements; (vi) requirements flowing
from arrangements for the recovery and resolution of
the Group and its main operating entities; and (v)
changing standards for the conduct of business.
There is also continued risk of further changes to
regulation relating to remuneration and other taxes.
Potential impact on HSBC
• Proposed changes relating to capital and
liquidity requirements, remuneration and/or
taxes could increase the Group’s cost of doing
business, reducing future profitability.
• Proposed changes in and the implementation of
regulations for derivatives and central
counterparties, the ICB ring-fencing proposals,
recovery and resolution plans, the Volcker Rule
and the Foreign Account Tax Compliance Act
(‘FATCA’) may affect the manner in which we
conduct our activities and structure ourselves,
with the potential both to increase the costs of
doing business and curtail the types of business
we can carry out, with the risk of decreased
profitability as a result. Due to the fact that the
development and implementation of many of
these various regulations are in their early
stages, it is not possible to estimate the effect,
if any, on our operations.
We are closely engaged with the governments
and regulators in the countries in which we operate
to help ensure that the new requirements are properly
considered and can be implemented in an effective
manner. We are also ensuring that our capital and
liquidity plans take into account the potential effects
of the changes. Capital allocation and liquidity
management disciplines have been expanded to
incorporate future increased capital and liquidity
requirements and drive appropriate risk management
and mitigating actions.
Regulatory investigations, fines, sanctions
and requirements relating to conduct of
business and financial crime negatively
affecting our results and brand
Financial service providers are at risk of regulatory
sanctions or fines related to conduct of business
and financial crime. The incidence of regulatory
proceedings and other adversarial proceedings
against financial service firms is increasing.
In December 2012, HSBC reached agreement
with US authorities in relation to investigations
regarding inadequate compliance with anti-money
laundering, the US Bank Secrecy Act and sanctions
law. This includes a DPA with the US Department of
Justice (‘DoJ’). We also reached agreement to
achieve a resolution with all other US government
agencies that have investigated our past conduct
related to these issues, and finalised an undertaking
with the FSA to comply with certain forward-
looking obligations with respect to anti-money
laundering and sanctions requirements over a five-
year term. Under these agreements, we made
payments totalling US$1,921m to US authorities
and undertook to continue cooperating fully with US
and UK regulatory and law enforcement authorities
and take further action to strengthen our compliance
policies and procedures. Over the five-year term
of the agreement with the DoJ and the FSA, an
independent monitor (who will, for FSA purposes,
be a ‘skilled person’ under section 166 of the
Financial Services and Markets Act (FSMA)) will
evaluate and assess our progress in fully
implementing these and other measures it
recommends and will produce regular assessments of
the effectiveness of our Compliance function.
As reflected in the agreement entered into with
the Office of the Comptroller of the Currency
(‘OCC’) in December 2012 (the ‘GLBA
Agreement’), the OCC has determined that HSBC
133
Bank USA is not in compliance with the
requirements which provide that a national bank and
each depository institution affiliate of the national
bank must be both well capitalised and well
managed in order to own or control a financial
subsidiary. As a result, HSBC Bank USA and its
parent holding companies, including HSBC, no
longer meet the qualification requirements for
financial holding company status, and may not
engage in any new types of financial activities
without the prior approval of the Federal Reserve
Board. In addition, HSBC Bank USA may not
directly or indirectly acquire control of, or hold an
interest in, any new financial subsidiary, nor
commence a new activity in its existing financial
subsidiary, unless it receives prior approval from the
OCC.
In the UK, the FSA has continued to increase its
focus on ‘conduct risk’ including attention to sales
processes and incentives, product and investment
suitability and conduct of business concerns more
generally. These measures are concerned principally,
but not exclusively, with the conduct of business
with retail customers and in conjunction with this
focus, the UK regulators are making increasing use
of existing and new powers of intervention and
enforcement, including powers to consider past
business undertaken and implement customer
compensation and redress schemes or other,
potentially significant remedial work. Additionally,
the UK and other regulators increasingly take actions
in response to customer complaints either specific to
an institution or more generally in relation to a
particular product. We have seen recent examples of
this approach in the context of the mis-selling of
payment protection insurance and of interest rate
derivative products to SMEs.
The Group also continues to be subject to a
number of other regulatory proceedings, including
investigations and reviews by various regulators and
competition and enforcement authorities around the
world, including in the UK, the US, Canada, the
EU, Switzerland and Asia, who are conducting
investigations and reviews related to certain past
submissions made by panel banks and the process
for making submissions in connection with the
setting of London interbank offered rates (‘Libor’),
European interbank offered rates (‘Euribor’) and
other benchmark interest and foreign exchange rates.
As certain HSBC entities are members of such
panels, HSBC and/or its subsidiaries have been the
subject of regulatory demands for information and
are cooperating with those investigations and
reviews. In addition, HSBC and other panel banks
have been named as defendants in private lawsuits
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Report of the Directors: Operating and Financial Review (continued)
Risk > Top and emerging risks
filed in the US with respect to the setting of Libor,
including putative class action lawsuits which have
been consolidated before the US District Court for
the Southern District of New York. The complaints
in those actions assert claims against HSBC and
other panel banks under various US laws including
US antitrust laws, the US Commodities Exchange
Act, and state law.
Potential impact on HSBC
•
•
•
It is difficult to predict the outcome of the
regulatory proceedings involving our
businesses. Unfavourable outcomes may have
a material adverse effect on our reputation,
brand and results, including loss of business
and withdrawal of funding.
In relation to the DPA, the Group has committed
to take or continue to adhere to a number of
remedial measures. Breach of the DPA at any
time during its term may allow the DoJ or the
New York County District Attorney’s Office to
prosecute HSBC in relation to the matters which
are the subject of the DPA.
In relation to the GLBA Agreement, if all of our
affiliate depositary institutions are not in
compliance with these requirements within the
time periods specified in the GLBA Agreement,
HSBC could be required either to divest HSBC
Bank USA or to divest or terminate any
financial activities conducted in reliance on the
Gramm-Leach Bliley Act (‘GLB Act’). Similar
consequences could result for subsidiaries of
HSBC Bank USA that engage in financial
activities in reliance on expanded powers
provided for in the GLB Act. Any such
divestiture or termination of activities would
have an adverse material effect on the
consolidated results and operation of HSBC.
• The UK and other regulators may identify future
industry-wide mis-selling or other issues that
could affect the Group. This may lead from
time to time to: (i) significant direct costs or
liabilities (including in relation to mis-selling);
and (ii) changes in the practices of such
businesses which benefit customers at a cost
to shareholders. Further, decisions taken in the
UK by the Financial Ombudsman Service in
relation to customer complaints (or any overseas
equivalent that has jurisdiction) could, if applied
to a wider class or grouping of customers, have
a material adverse effect on the operating
results, financial condition and prospects of
the Group.
Steps to address many of the requirements of
the DPA and the GLBA Agreement have either
already been taken or are under way. These
include simplifying the Group’s control structure,
strengthening the governance structure with new
leadership appointments, revising key policies and
establishing bodies to implement single global
standards shaped by the highest or most effective
standards available in any location where the Group
operates, as well as substantially increasing spending
and staffing in the anti-money laundering and
regulatory compliance areas in the past few years.
There can be no assurance that these steps will be
effective or that HSBC will not have to take
additional remedial measures in the future to comply
with the terms of the DPA or the GLBA Agreement.
Dispute risk
The current economic environment has increased the
Group’s exposure to actual and potential litigation.
Further details are provided in Note 43 on the
Financial Statements.
Potential impact on HSBC
Dispute risk gives rise to potential financial loss
and significant reputational damage which could
adversely affect customer and investor confidence.
Risks related to our business operations,
governance and internal control systems
• Regulatory commitments and consent
orders including under the Deferred
Prosecution Agreements.
• Challenges to achieving our strategy in
a downturn.
Internet crime and fraud.
Level of change creating operational
complexity and heightened operational
risk.
Information security risk.
•
•
•
• Model risk.
Regulatory commitments and consent
orders including under the Deferred
Prosecution Agreements
There is a risk that we fail to meet our deadlines or
we are judged to have material gaps in our plans or
implementation compared with the requirements of
the DPAs and other orders. Further details of this
risk are provided on page 128.
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Potential impact on HSBC
If, during the term of the DPA, HSBC is determined
to have breached the DPA, the DoJ or the New York
County District Attorney’s Office may prosecute
HSBC in relation to the matters which are the
subject of the DPA. The FSA may, in similar vein,
take enforcement action against the Group as a result
of a breach of the DPA or of our related
undertakings to the FSA.
rely on external suppliers or vendors to provide
services to us and our customers.
• We have increased our defences through
enhanced monitoring and have implemented
additional controls, such as two-factor
authentication, to reduce the possibility of
losses from fraud. We continually assess these
threats as they evolve and adapt our controls to
mitigate them.
Challenges to achieving our strategy in a
downturn
Level of change creating operational
complexity and heightened operational risk
The external environment remains challenging
and the structural changes which the financial
sector is going through are creating obstacles to
the achievement of strategic objectives. This,
combined with the prolonged global economic
slowdown, could affect the achievement of our
strategic targets for the Group as a whole and our
global businesses.
Potential impact on HSBC
• The slowdown may put pressure on our ability
to earn returns on equity in excess of our cost
of equity while operating within the overall
parameters of our risk appetite.
• Through our strategic initiatives, which have
heightened the focus on capital allocation and
cost efficiency, we are actively seeking to
manage and mitigate this risk.
Internet crime and fraud
With the ever-growing acceptance of and demand
for internet and mobile services by customers, HSBC
is increasingly exposed to fraudulent and criminal
activities via these channels. Internet crime could
result in financial loss and/or customer data and
sensitive information being compromised. Along
with internet fraud, the overall threat of external
fraud may increase during adverse economic
conditions, particularly in retail and commercial
banking.
We also face the risk of breakdowns in
processes or procedures and systems failure or
unavailability, and our business is subject to
disruption from events that are wholly or partially
beyond our control, such as internet crime and acts
of terrorism.
Potential impact on HSBC
•
Internet crime and fraud may give rise to losses
in service to customers and/or economic loss to
HSBC. The same threats apply equally when we
135
There are many drivers of change affecting HSBC
and the banking industry, including new banking
regulations, the increased globalisation of economic
and business activities, new products and delivery
channels and organisational change.
Operational complexity has the potential to
heighten all types of operational risk arising from
our activities. These risks include process errors,
systems failures and fraud. Complexity can also
increase operational costs.
The implementation of our strategy to simplify
our business, which involves withdrawing from
certain markets, presents disposal risks which
must be carefully managed. Implementing
organisational changes to support the Group’s
strategy also requires close management oversight.
Potential impact on HSBC
• The implementation of our strategy has involved
the re-organisation and clarification of
management accountabilities. There is
consequently a risk that issues are missed during
the transition. This change activity is being
monitored through a comprehensive review
programme and robust governance
arrangements.
• Critical systems failure and a prolonged loss of
service availability could cause serious damage
to our ability to serve our customers, breach
regulations under which we operate and cause
long-term damage to our business, reputation
and brand. Systems and controls could be
degraded as a result of organisational
effectiveness initiatives unless there is strong
governance and an oversight framework to
monitor the risk and control environment.
We seek to ensure that our critical systems
infrastructure, including IT services, essential
buildings, offshore processes and key vendors,
is constantly monitored and properly resourced
to mitigate against systems failures.
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Risk > Top and emerging risks // Credit risk
• We pro-actively review relevant external events
and assess the impact they may have on our
systems. Within HSBC, we have a strong focus
on industry best practices. We rigorously test
and review all planned updates to our systems
environment. All changes are risk-assessed, and
appropriate mitigating controls are required for
any planned changes classified as high risk.
During periods of heightened risk, comprehensive
change embargoes are imposed to minimise the
risk of customers being affected. Following the
systems outage at a major UK bank in 2012, we
assessed our own exposure to similar risks and
implemented appropriate steps in mitigation.
We also assessed the systems scheduling tools
used in the Group. There are controls in place to
manage inter-dependencies, report exceptions
and alert file data corruption. These additional
controls are intended to ensure that the effect of
any similar product failure at HSBC would be
limited. In addition, a continuity test of a similar
problem within our major datacentres in the UK
and Hong Kong was conducted in the second
half of 2012.
• The potential effects of disposal risks include
regulatory breaches, industrial action, loss of
key personnel and interruption to systems and
processes during business transformation, and
they can have both financial and reputational
implications. Steps taken to manage these risks
proactively include maintaining a close dialogue
with regulators and customers and involving
HR, legal, compliance and other functional
experts. Some disposals also involve
Transitional Service Agreements where there
are ongoing risks, which are subject to close
management oversight.
Information security risk
The security of our information and technology
infrastructure is crucial for maintaining our banking
applications and processes while protecting our
customers and the HSBC brand.
Potential impact on HSBC
• These risks give rise to potential financial loss
and reputational damage which could adversely
affect customer and investor confidence. Loss
of customer data would also trigger regulatory
breaches which could result in fines and
penalties being incurred.
• We have invested significantly in addressing
this risk through increased training to raise staff
awareness of the requirements and enhanced
multi-layered controls protecting our
information and technical infrastructure.
Model risk
More stringent regulatory requirements governing
the development of parameters applied to and
controls around models used for measuring risk can
give rise to changes, including increases in capital
requirements. Furthermore, the changing external
economic and legislative environment and changes
in customer behaviour can lead to the assumptions
we have made in our models becoming invalid.
Potential impact on HSBC
• These model risks can result in a potentially
increased and volatile capital requirement.
• We continue to address these risks through
enhanced model development, independent
review and model oversight to ensure our
models remain fit for purpose.
136
Credit risk
Page
App1
Tables
Page
Credit risk management .........................................
252
Summary of credit risk in 2012 .......................... 139
Impairment of loans and advances ........................ 143
Assets held for sale ................................................ 143
Credit exposure .................................................... 144
Maximum exposure to credit risk .......................... 144
Personal lending ................................................... 147
Mortgage lending ................................................... 148
Mortgage lending in the US .................................. 150
Credit quality of personal lending in the US ......... 151
Wholesale lending ................................................ 152
Corporate and commercial .................................... 154
Financial (non-bank) .............................................. 154
Loans and advances to banks ................................ 154
Maximum exposure to credit risk .......................................... 139
Loans and advances excluding held for sale: total
exposure, impairment allowances and charges ................ 139
Personal lending ................................................................... 140
Wholesale lending ................................................................. 141
Credit quality of gross loans and advances .......................... 142
LICs by geographical region ................................................ 143
LICs by industry .................................................................... 143
Loans and advances to customers and banks measured at
amortised cost ................................................................... 143
Loan impairment charges and other credit risk provisions . 144
Maximum exposure to credit risk .......................................... 146
Loans and other credit-related commitments ....................... 146
Total personal lending .......................................................... 147
Mortgage lending products ................................................... 149
HSBC Finance US CML – residential mortgages ................ 150
HSBC Finance: foreclosed properties in the US .................. 151
Trends in two months and over contractual delinquency
in the US ............................................................................ 152
Total wholesale lending ........................................................ 153
Credit quality of financial instruments ............. 154
2012 compared with 2011 ..................................... 154
Past due but not impaired gross financial
253 Credit quality classification .................................................. 253
Distribution of financial instruments by credit quality ......... 155
Past due but not impaired loans and advances to
instruments ........................................................ 156
customers and banks by geographical region .................. 157
Renegotiated loans and forbearance ...................... 158
254
2012 compared with 2011 ..................................... 159
HSBC Finance loan modifications and re-ageing . 159
Corporate and commercial forbearance ................ 161
Impaired loans ....................................................... 162
Collateral .............................................................. 163
Collateral and other credit enhancements held ..... 163
Collateral and other credit enhancements obtained 168
Ageing analysis of days past due but not impaired gross
financial instruments ......................................................... 157
Renegotiated loans and advances to customers ................... 158
Renegotiated loans and advances to customers by
geographical region .......................................................... 158
Gross loan portfolio of HSBC Finance real estate
secured balances ............................................................... 161
Movement in HSBC Finance renegotiated real estate
balances ............................................................................. 161
Number of renegotiated real estate secured accounts
remaining in HSBC Finance’s portfolio ........................... 161
Movement in impaired loans by geographical region .......... 163
Residential mortgage loans ................................................... 164
Commercial real estate loans and advances by collateral ... 165
Other corporate, commercial and financial (non-bank)
loans and advances by collateral ..................................... 166
Loans and advances to banks including loan commitments
by collateral ...................................................................... 167
Carrying amount ................................................................... 168
Impairment of loans and advances .................... 168
258
Impairment allowances on loans and advances to
2012 compared with 2011 ..................................... 170
Further analysis of impairment .............................. 172
customers by geographical region .................................... 169
Net loan impairment charge to the income statement by
geographical region .......................................................... 170
Movement in impairment allowances by industry sector ..... 174
Movement in impairment allowances on loans and
advances to customers and banks ..................................... 175
137
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Risk > Credit risk > Summary in 2012
Page
App1
Tables
Page
Impairment of loans and advances
Further analysis of impairment (continued)
Impairment assessment ..........................................
Concentration of exposure .................................. 178
258
259
Individually and collectively assessed impairment charge
to the income statement by industry sector ....................... 175
Net loan impairment charge to the income statement .......... 176
Charge for impairment losses as a percentage of gross
loans and advances to customers by geographical region 176
Charge for impairment losses as a percentage of average
gross loans and advances to customers ............................ 177
Reconciliation of reported and constant currency changes
by geographical region ..................................................... 177
Trading assets ........................................................................ 178
Gross loans and advances by industry sector........................ 179
Gross loans and advances to customers by industry sector
and by geographical region .............................................. 181
Loans and advances to banks by geographical region ......... 182
Gross loans and advances to customers by country ............. 182
HSBC Holdings .................................................... 184
HSBC Holdings – maximum exposure to credit risk ............ 184
Securitisation exposures and other structured
products ............................................................ 184
Business model ...................................................... 185
Exposure in 2012 ................................................... 185
Securities investment conduits .............................. 186
Impairment methodologies .................................... 186
Analysis of exposures and significant
movements ......................................................... 186
Transactions with monoline insurers ..................... 189
259
260
Overall exposure of HSBC .................................................... 185
Movement in the available-for-sale reserve ......................... 186
Available-for-sale reserve and economic first loss
protection in SICs, excluding Solitaire ............................. 186
Carrying amount of HSBC’s consolidated holdings of ABSs,
and direct lending held at fair value through profit or loss 187
HSBC’s exposure to derivative transactions entered into
directly with monoline insurers ........................................ 189
Leveraged finance transactions .......................... 190
HSBC’s exposure to leveraged finance transactions ............ 190
Representations and warranties related to
mortgage sales and securitisation activities .. 191
1 Appendix to Risk - risk policies and practices.
138
Credit risk is the risk of financial loss if a
customer or counterparty fails to meet an
obligation under a contract. It arises
principally from direct lending, trade finance
and leasing business, but also from certain
other products such as guarantees and credit
derivatives and from holding assets in the
form of debt securities.
There were no material changes to our policies and
practices for the management of credit risk in 2012.
A summary of our current policies and
practices regarding credit risk is provided in
the Appendix to Risk on page 252.
Summary of credit risk in 2012
(Unaudited)
Maximum exposure to credit risk
At 31 December
2012
US$m
2011
US$m
367,177
309,449
12,714
357,450
12,926
346,379
Trading assets ................................
Financial assets designated at
fair value ....................................
Derivatives .....................................
Loans and advances held at
amortised cost ............................ 1,150,169 1,121,416
152,546 180,987
– to banks ...................................
997,623 940,429
– to customers ............................
Financial investments ....................
Assets held for sale ........................
Other assets ....................................
Off-balance sheet exposures ..........
415,312
9,292
203,561
624,462
392,834
37,808
192,024
694,228
– financial guarantees and
similar contracts ....................
44,993
39,324
– loan and other credit-related
commitments .........................
579,469 654,904
3,140,137
3,107,064
In 2012, net loans and advances to customers
continued to represent our most significant exposure
to credit risk, making up 32% of total credit
exposure compared with 30% in 2011. Other
significant components of our credit exposures were
financial investments at 13%, unchanged from 2011,
trading assets at 12% (2011: 10%) and derivatives at
11% (unchanged from 2011). Loans and advances to
banks fell as a proportion of the Group’s credit
exposure from 6% in 2011 to 5% in 2012. Off-
balance sheet assets contributed 20% of our total
credit exposure, mainly relating to loan and other
credit-related commitments (2011: 22%).
Of our net loans and advances to customers,
corporate and commercial lending made up the
largest proportion at 51% (2011: 49%), with
significant exposures in Europe, Hong Kong and
139
Rest of Asia-Pacific. First lien residential mortgages
represented 30% of total gross loans and advances,
mainly in the UK, the US and Hong Kong. Other
personal lending (including second lien residential
mortgages) made up the bulk of the remaining
exposure.
Loans and advances excluding held for sale: total
exposure, impairment allowances and charges
(Unaudited)
At 31 December
Total gross loans and advances (A)
Impairment allowances ...................
– as a percentage of A ................
Loans and advances net of
2012
2011
US$bn US$bn
1,166.3
16.2
1.39%
1,139.1
17.6
1.55%
impairment allowances..................
1,150.2
1,121.5
Year ended 31 December
Impairment charges ........................
8.2
11.5
The increase in corporate and commercial
lending stemmed mainly from Europe, due to a rise
in overdrafts which did not meet accounting criteria
for netting against corresponding current account
balances. Increases in North America reflected
CMB’s focus on target segments in the US, partly
offset by the continued decline in balances in the
run-off CML portfolio. In addition, during the year
we reclassified US$3.7bn of non-real estate personal
loan balances in the CML portfolio and US$2.2bn of
lending balances associated with certain operations
in Latin America, net of impairment allowances, to
‘Assets held for sale’. The disposal of the Card and
Retail Services business in the US during the year
did not contribute to the decline as the related
balances had been transferred to ‘Assets held for
sale’ during 2011.
The increase in first lien residential mortgages
reflected the success of marketing campaigns and
competitive pricing in the UK, the continued strength
of the property market in Hong Kong and distribution
network expansion in Rest of Asia-Pacific.
Within net loans and advances, loan impairment
allowances fell by US$1.4bn, driven by run-off in the
CML portfolio and the reclassification of non-real
estate personal loan balances to ‘Assets held for sale’.
Trading assets include debt securities
(principally government and government-related
securities), reverse repo and stock borrowing
balances. Balances recovered in 2012 from the
subdued levels seen at the end of 2011, when client
activity declined due to the eurozone debt concerns
dominating the global economy.
Loans and advances to banks fell, driven by a
reduction in reverse repo balances, in part reflecting
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Risk > Credit risk > Summary in 2012
the redeployment of liquidity in Europe to central
banks, together with maturities and repayments in
Hong Kong.
Loan and other credit-related commitments
declined from US$655bn to US$579bn. The
Personal lending
(Unaudited)
reduction in exposure in 2012 was largely driven by
the sale of Card and Retail Services in the US.
For a more detailed analysis of our maximum exposure
to credit risk, see page 144.
Europe
US$m
Hong
Kong
US$m
Rest of
Asia-
Pacific
US$m
MENA
US$m
Latin
North
America
Total
America
US$m US$m US$m
2012
First lien residential mortgages
Gross amount (B) ..................................................
Impairment allowances .........................................
– as a percentage of B ..........................................
135,172
489
0.4%
Other personal lending1
Gross amount (C) ..................................................
Impairment allowances .........................................
– as a percentage of C ..........................................
51,102
977
1.9%
Total personal lending
Gross amount (D) .................................................
Impairment allowances .........................................
– as a percentage of D ...........................................
186,274
1,466
0.8%
2011
First lien residential mortgages
Gross amount (E) ..................................................
Impairment allowances .........................................
– as a percentage of E ..........................................
119,902
441
0.4%
Other personal lending1
Gross amount (F) ..................................................
Impairment allowances .........................................
– as a percentage of F ..........................................
46,245
1,111
2.4%
Total personal lending
Gross amount (G) .................................................
Impairment allowances .........................................
– as a percentage of G ..........................................
166,147
1552
0.9%
For footnote, see page 249.
Our personal lending balances increased from
US$394bn at 31 December 2011 to US$415bn at
31 December 2012. This was primarily due to
growth in residential mortgages in Europe, Hong
Kong and Rest of Asia-Pacific. In Europe, this was
due to successful marketing campaigns and
competitive pricing in the UK. The growth in
mortgage balances in Hong Kong was driven by the
low interest rate environment, and robust residential
property market. The latter was also a factor in Rest
of Asia-Pacific, most notably in Singapore, mainland
China, Australia and Malaysia. This growth in total
personal lending balances was partly offset by a
decline in North America, in part due to the run-off
of the CML portfolio and the reclassification of non-
real estate personal loan balances to ‘Assets held for
sale’. In Latin America personal lending decreased,
mainly reflecting the transfer of balances relating
52,296
4
0.0%
18,045
57
0.3%
70,341
61
0.1%
46,817
12
0.0%
16,364
52
0.3%
63,181
64
0.1%
36,906
66
0.2%
12,399
143
1.2%
49,305
209
0.4%
32,136
58
0.2%
11,445
138
1.2%
43,581
196
0.4%
2,144
136
6.3%
4,088
189
4.6%
6,232
325
5.2%
1,837
126
6.9%
3,432
198
5.8%
5,269
324
6.1%
70,133
4,163
5.9%
5,211
47
0.9%
301,862
4,905
1.6%
14,221
684
4.8%
13,376
1,257
9.4%
113,231
3,307
2.9%
84,354
4,847
5.7%
18,587
1,304
7.0%
415,093
8,212
2.0%
73,278
4,578
6.2%
4,993
106
2.1%
278,963
5,321
1.9%
22,058
1,768
8.0%
15,118
1,172
7.8%
114,662
4,439
3.9%
95,336
6,346
6.7%
20,111
1,278
6.4%
393,625
9,760
2.5%
to the operations in Colombia, Peru and Paraguay to
‘Assets held for sale’ in the second quarter of 2012,
as well as lower balances in Brazil, where we
continued to manage down our exposure to non-
strategic portfolios.
Impairment allowances declined by 16%,
primarily in North America in the CML portfolio,
reflecting the reclassification of non-real estate
personal loan balances to ‘Assets held for sale’ and
the continued run-off. In Hong Kong and Rest of
Asia-Pacific, impairment allowances remained at
low levels throughout 2012. In Europe, in other
personal lending, impairment allowances as a
percentage of lending balances, declined from 2.4%
to 1.9% as we focused our lending growth on higher
quality assets.
For a more detailed analysis of our personal lending, see
page 147.
140
Wholesale lending
(Unaudited)
2012
Corporate and commercial
Europe
US$m
Hong
Kong
US$m
Rest of
Asia-
Pacific
US$m
MENA
US$m
Latin
North
America
Total
America
US$m US$m US$m
Gross amount (H) .................................................
Impairment allowances .........................................
– as a percentage of H ..........................................
226,755
3,537
1.56%
99,199
383
0.39%
85,305
526
0.62%
22,452
1,312
5.84%
48,083
732
1.52%
35,590
856
2.41%
517,384
7,346
1.42%
Financial2
Gross amount (I) ...................................................
Impairment allowances .........................................
– as a percentage of I ...........................................
101,052
358
0.35%
28,046
29
0.10%
48,847
11
0.02%
10,394
174
1.67%
27,400
37
18,122
2
0.14%
0.01%
233,861
611
0.26%
2011
Corporate and commercial
Gross amount (J) ...................................................
Impairment allowances .........................................
– as a percentage of J ...........................................
209,760
3,256
1.55%
91,592
492
0.54%
77,887
576
0.74%
21,152
1,242
5.87%
41,775
756
1.81%
35,930
729
2.03%
478,096
7,051
1.47%
Financial2
Gross amount (K) .................................................
Impairment allowances .........................................
– as a percentage of K ..........................................
118,077
484
0.41%
38,632
26
0.07%
50,492
11
0.02%
9,739
166
1.70%
27,648
135
0.49%
22,743
3
0.01%
267,331
825
0.31%
For footnote, see page 249.
At 31 December 2012, our corporate and
commercial lending balances were US$517bn. The
increase of 8% compared with the end of 2011 was
mainly in the international trade and services sector,
largely in Europe despite muted demand for credit,
and in Hong Kong, driven by growth in trade finance
volumes as we capitalised on trade and capital flows.
In the manufacturing sector in Europe, balances
increased due to growth in the UK of overdraft
balances and corresponding customer accounts
which did not, however, meet netting criteria under
accounting rules.
Financial sector lending decreased from
US$267bn at 31 December 2011 to US$234bn
at 31 December 2012. This was mainly in Europe
due to a fall in reverse repo activity as liquidity was
redeployed to central banks, together with maturities
and repayments in Hong Kong and Rest of Asia-
Pacific.
Impairment allowances remained at low levels
as a percentage of wholesale lending balances. In
North America, impairment allowances as a
percentage of financial lending balances declined
from 0.49% to 0.14% reflecting a few large write-
offs in 2012. Lending balances in this category
remained broadly unchanged. In Europe, impairment
allowances declined from US$484m to US$358m
reflecting the disposal of a small number of
exposures.
For a more detailed analysis of our wholesale lending,
see page 152.
141
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Risk > Credit risk > Summary in 2012
Credit quality of gross loans and advances
(Unaudited)
Europe
US$m
Hong
Kong
US$m
Rest of
Asia-
Pacific
US$m
MENA
US$m
Latin
North
America
America
Total
US$m US$m US$m
2012
Neither past due nor impaired ...................................
Of which renegotiated ...........................................
500,599
3,871
200,110
275
179,337
199
35,628
1,300
127,457
6,061
65,520 1,108,651
12,815
1,109
Past due but not impaired ..........................................
Of which renegotiated ...........................................
2,339
371
Impaired ....................................................................
Of which renegotiated ...........................................
11,145
5,732
1,311
8
477
109
2,974
35
1,147
318
975
168
7,721
3104
2,474
921
20,345
16,997
3,591
133
3,188
1516
18,911
3,819
38,776
25,593
2011
Neither past due nor impaired ...................................
Of which renegotiated ...........................................
480,173
5,136
191,691
309
168,571
264
32,550
1,532
131,785
6,570
72,534 1,077,304
14,720
909
Past due but not impaired ..........................................
Of which renegotiated ...........................................
1,990
282
Impaired ....................................................................
Of which renegotiated ...........................................
11,819
6,046
1,107
4
608
134
2,319
47
1,070
137
1,165
311
2,445
812
10,216
4,061
22,758
17,844
3,212
168
3,039
1,399
20,009
4,873
41,739
26,372
At 31 December 2012, US$1,109bn of gross loans
and advances were classified as neither past due nor
impaired. This was an increase of 3%, mainly in
Europe and in Rest of Asia-Pacific.
At 31 December 2012, US$19bn of gross loans
and advances were classified as past due but not
impaired compared with US$20bn at the end of
2011. The largest concentration of these balances
was in HSBC Finance. The decline of 5% was
mainly in North America due to the reclassification
of non-real estate personal loan balances to ‘Assets
held for sale’, as well as the continued run-off of the
mortgage balances in the CML portfolio. This was
partly offset by an increase in Rest of Asia-Pacific
in the personal and corporate and commercial
sectors.
Gross loans and advances classified as impaired
decreased by 7%, mainly in North America due to
the continued run-off of the CML portfolio, as well
as the reclassification of non-real estate personal
loan balances to ‘Assets held for sale’ in our CML
portfolio.
Renegotiated loans totalled US$42bn at
31 December 2012, compared with US$46bn at
the end of 2011. North America accounted for the
largest volume of renegotiated loans which
amounted to US$26bn or 62% of total renegotiated
loans at 31 December 2012 (2011: US$28bn or
62%), most of which were first lien residential
mortgages held by HSBC Finance. Of the total
renegotiated loans in North America, US$17bn were
presented as impaired at 31 December 2012 (2011:
US$18bn). Of total renegotiated loans, US$3.8bn
were presented as past due but not impaired at
31 December 2012, down from US$4.9bn at 31
December 2011. This was mainly in North America
in the CML portfolio due to the reclassification of
non-real estate personal loan balances to ‘Assets
held for sale’ as well as the continued run-off of the
lending balances.
For a more detailed analysis of the credit quality of
financial instruments, see page 154.
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Impairment of loans and advances
(Unaudited)
Loan impairment charges by geographical region
2012
2011
US$m
7,500
6,000
4,500
3,000
1,500
0
This was in part reduced by higher loan
impairment charges in Latin America. In Brazil,
delinquencies in RBWM and CMB increased,
reflecting lower economic growth in 2012. In Rest
of Asia-Pacific, loan impairment charges increased
as a result of individually assessed impairments on a
single corporate exposure in Australia and a small
number of corporate exposures in other countries.
For a more detailed analysis of the impairment of loans
and advances, see page 168.
Europe
Hong Kong
Rest of
Asia-Pacific
MENA
North
America
Latin
America
Assets held for sale
Loan impairment charges by industry
2012
2011
US$m
6,000
5,000
4,000
3,000
2,000
1,000
0
First lien
residential
mortgages
Other
personal
lending
Corporate
commercial
Commercial
real estate
Financial
Loan impairment charges decreased from US$12bn
to US$8.2bn on a reported basis, a decline of 29%
compared with 2011. On a constant currency basis,
they were 27% lower.
The improvement in loan impairment charges
was most significant in RBWM in North America
due to the continued decline in the CML portfolio
that is in run-off and the sale of the Card and Retail
Services business.
During 2012, the growth in gross loans and advances
was affected by a reclassification of certain lending
balances to ‘Assets held for sale’. Disclosures
relating to assets held for sale are provided in the
following credit risk management tables, primarily
where the disclosure is relevant to the measurement
of these financial assets:
• Maximum exposure to credit risk (page 146);
• Distribution of financial instruments by credit
quality (page 155); and
• Ageing analysis of days past due but not
impaired gross financial instruments (page 157).
Although gross loans and advances and related
impairment allowances are reclassified from ‘Loans
and advances to customers’ and ‘Loans and
advances to banks’ in the balance sheet, there is no
equivalent income statement reclassification. As a
result, charges for loan impairment losses shown in
the credit risk disclosures include loan impairment
charges relating to financial assets classified as
‘Assets held for sale’.
Loans and advances to customers and banks measured at amortised cost
(Audited)
Reported in ‘Loans and advances to customers and banks’ .........
Reported in ‘Assets held for sale’ ................................................
At 31 December 2012
At 31 December 2011
Gross
loans and
advances
US$m
1,166,338
7,350
1,173,688
Impairment
allowances
on loans and
advances
US$m
16,169
718
16,887
Gross
loans and
advances
US$m
1,139,052
37,273
1,176,325
Impairment
allowances
on loans and
advances
US$m
17,636
1,614
19,250
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Risk > Credit risk > Summary in 2012 / Credit exposure
The lending balances in ‘Assets held for sale’
at the end of 2012 included non-real estate personal
loan balances from our CML portfolio in North
America and balances associated with the disposal
of our operations in Colombia, Paraguay and Peru,
net of impairment allowances. The lending balances
and impairment allowances reported in ‘Assets held
for sale’ at the end of 2011 included the US Card
and Retail Services portfolio which was disposed
of in 2012. As the latter was reclassified in 2011,
the disposal had no impact on the year-on-year
movement in loans and advances or impairment
allowances in 2012.
Lending balances held for sale continue to be
measured at amortised cost less allowances for
impairment; such carrying amounts may differ from
fair value. Any difference between the carrying
amount and the sales price, which is the fair value
at the time of sale, would be recognised as a gain or
loss. See Note 16 on the Financial Statements for the
carrying amount and the fair value at 31 December
2012 of loans and advances to banks and customers
classified as held for sale.
The table below analyses the amount of loan
impairment charges and other credit risk provisions
(‘LIC’s) arising from assets held for sale. They
primarily related to the non-real estate personal loans
reclassified to held-for-sale in the CML portfolio, as
well as to the US Card and Retail Services business
classified as such at 31 December 2011 which was
sold in 2012.
Loan impairment charges and other credit risk
provisions
(Unaudited)
LICs arising from:
– disposals and assets held for sale ........
– assets not held for sale .........................
2012
US$m
766
7,545
8,311
Credit exposure
Maximum exposure to credit risk
(Audited)
In 2012, our exposure to credit risk remained well
diversified across asset classes. We increased our
overall exposure to credit risk in 2012, largely from
increases in trading assets in Europe and North
America, driven by higher client trading activity.
Loans and advances to customers also rose, mainly
in the UK, Hong Kong and Rest of Asia-Pacific.
144
‘Maximum exposure to credit risk’ table (page 146)
The table presents our maximum exposure to credit risk from
balance sheet and off-balance sheet financial instruments
before taking account of any collateral held or other credit
enhancements (unless such enhancements meet accounting
offsetting requirements). For financial assets recognised on
the balance sheet, the maximum exposure to credit risk equals
their carrying amount; for financial guarantees and similar
contracts 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 that are
irrevocable over the life of the respective facilities, it is
generally the full amount of the committed facilities.
Loans and advances
Our maximum exposure to loans and advances
carried at amortised cost increased by 3% compared
with the end of 2011. The rise primarily reflected
growth in residential mortgage balances in the UK
following the continued focus on sales and
competitive pricing, the ongoing strength of the
property market in Hong Kong and in Rest of Asia-
Pacific, coupled with expansion of our distribution
network in the latter. Term and trade-related lending
rose in Europe despite muted demand for credit in
the UK and in Hong Kong and Rest of Asia-Pacific,
reflecting our focus on corporate and commercial
customers that trade internationally. Lending also
rose in Europe as overdraft balances that did not
meet netting criteria increased in the UK, with a
corresponding rise in related customer accounts. In
North America corporate and commercial lending
increased, reflecting our focus on target segments in
the US.
These increases were partly offset by a decline
in North America from repayments and write-offs
on the run-off CML portfolio. In addition, during
the year we reclassified US$3.7bn of non real estate
personal loan balances in the CML portfolio and
US$2.2bn of lending balances associated with
certain operations in Latin America, net of
impairment allowances, to ‘Assets held for sale’.
Reverse repo balances also declined, mainly in
Europe.
Our exposure to loans and advances to banks
decreased in Hong Kong and Rest of Asia-Pacific
due to maturities and repayments, and in Europe as
reverse repo balances declined due, in part, to the
redeployment of liquidity to central banks. Balances
also decreased in Latin America.
The loans and advances offset adjustment in the
table on page 146 primarily relates to customer loans
and deposits and balances arising from repo and
reverse repo transactions 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 management 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.
Financial investments
Maximum exposure to financial investments
increased by 6% compared with the end of 2011.
This largely reflected the deployment of surplus
liquidity into available-for-sale investments, notably
treasury bills in Hong Kong and highly-rated debt
securities in North America.
Trading assets
In 2012, our exposure to trading assets rose by 19%
reflecting increased client activity compared with the
subdued levels seen in 2011. This resulted in higher
reverse repo balances in Europe and North America,
and higher securities borrowing balances in Rest of
Asia-Pacific and Europe, which vary in line with
levels of trading activity.
Cash and balances at central banks
The Group’s maximum exposure to cash and
balances at central banks increased by 9%, driven
by redeployment of excess liquidity in Europe and
Hong Kong to central banks. This reflected the
Group’s risk appetite coupled with growth in
customer deposit balances. In North America, we
reduced balances at the US Federal Reserve as
surplus liquidity was redeployed into highly-rated
financial investments.
Derivatives
Our maximum exposure to derivatives increased
slightly, primarily reflecting a rise in the fair value
of interest rate derivative contracts in Europe and,
to a lesser extent, in the US due to downward
movements in yield curves in major currencies.
This was partly offset by a decrease in the fair value
of credit derivative contracts, primarily in Europe
and the US, as credit spreads tightened. Nearly half
of all trades are exchange traded or otherwise settled
centrally, the majority of these being interest rate
derivatives.
The derivative offset amount in the table on
page 146 relates to exposures where the counterparty
has an offsetting derivative exposure with HSBC, a
master netting arrangement is in place and the credit
risk exposure is managed on a net basis, or the
position is specifically collateralised, normally in
the form of cash. At 31 December 2012, the total
amount of such offsets was US$311bn (2011:
US$306bn), of which US$270bn (2011: US$272bn)
were offsets under a master netting arrangement,
US$39bn (2011: US$33bn) was collateral received
in cash and US$1.8bn (2011: US$0.7bn) was other
collateral. These amounts do not qualify for net
presentation for accounting purposes as settlement
is not intended to be made on a net basis.
Other credit risk mitigants
While not disclosed as offset in the maximum
exposure to credit risk table on page 146, other
arrangements including short positions in securities
and financial assets held as part of linked insurance/
investment contracts where the risk is predominately
borne by the policyholder, reduce our maximum
exposure to credit risk. In addition, we hold
collateral in respect of individual loans and advances
(see page 163).
Loans and other credit-related commitments
Loans and other credit-related commitments remain
well diversified across geographical regions. For
more details, see page 146.
Counterparty analysis of notional contract amounts of derivatives by product type
(Unaudited)
Traded on
recognised
exchanges
US$m
Traded over the counter
Settled by
central
counterparties
US$m
counterparties
US$m
Not settled
by central
Total
US$m
At 31 December 2012
HSBC
Foreign exchange ..........................................................................
Interest rate ...................................................................................
Equity ............................................................................................
Credit ............................................................................................
Commodity and other ...................................................................
27,869
837,604
225,452
−
19,006
11,156
12,316,673
−
73,281
−
4,413,532
8,459,665
270,216
828,226
61,213
4,452,557
21,613,942
495,668
901,507
80,219
1,109,931
12,401,110
14,032,852
27,543,893
The purpose for which HSBC uses derivatives is set out in Note 19 on the Financial Statements.
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Risk > Credit risk > Credit exposure / Personal lending
Maximum exposure to credit risk
(Audited)
At 31 December 2012
At 31 December 2011
Cash and balances at central banks ....................
Items in the course of collection from other
Maximum
exposure
US$m
141,532
banks ...............................................................
7,303
Hong Kong Government certificates of
indebtedness ...................................................
22,743
Trading assets .....................................................
Treasury and other eligible bills .....................
Debt securities ................................................
Loans and advances to banks .........................
Loans and advances to customers ..................
Financial assets designated at fair value ............
Treasury and other eligible bills .....................
Debt securities ................................................
Loans and advances to banks .........................
Loans and advances to customers ..................
367,177
26,282
144,677
78,271
117,947
12,714
54
12,551
55
54
Maximum
Offset
US$m
Net
US$m
exposure
US$m
Offset
US$m
–
–
–
141,532
129,902
7,303
8,208
22,743
20,922
(19,700)
–
–
–
(19,700)
–
–
–
–
–
347,477
26,282
144,677
78,271
98,247
12,714
54
12,551
55
54
309,449
34,309
130,487
75,525
69,128
12,926
123
11,834
119
850
–
–
–
(4,656)
–
–
–
(4,656)
–
–
–
–
–
Derivatives ..........................................................
357,450
(310,859)
46,591
346,379
(305,616)
Net
US$m
129,902
8,208
20,922
304,793
34,309
130,487
75,525
64,472
12,926
123
11,834
119
850
40,763
Loans and advances held at amortised cost ........
– to banks ........................................................
– to customers .................................................
1,150,169
152,546
997,623
(95,578)
(3,732)
(91,846)
1,054,591
148,814
905,777
1,121,416
180,987
940,429
(87,978)
(3,066)
(84,912)
1,033,438
177,921
855,517
Financial investments .........................................
Treasury and other similar bills ......................
Debt securities ................................................
Assets held for sale .............................................
– disposal groups ............................................
– non-current assets held for sale ...................
Other assets .........................................................
Endorsements and acceptances ......................
Other ...............................................................
415,312
87,550
327,762
9,292
5,359
3,933
31,983
12,032
19,951
Financial guarantees and similar contracts ........
Loan and other credit-related commitments3 .....
44,993
579,469
–
–
–
(164)
(164)
–
–
–
–
–
–
415,312
87,550
327,762
9,128
5,195
3,933
31,983
12,032
19,951
392,834
65,223
327,611
37,808
37,746
62
32,992
11,010
21,982
44,993
579,469
39,324
654,904
–
–
–
(204)
(204)
–
–
–
–
–
–
392,834
65,223
327,611
37,604
37,542
62
32,992
11,010
21,982
39,324
654,904
3,140,137
(426,301)
2,713,836
3,107,064
(398,454)
2,708,610
For footnote, see page 249.
Loan and other credit-related commitments
(Unaudited)
At 31 December 2012
Personal..........................................................................................
Corporate and commercial ...........................................................
Financial ........................................................................................
At 31 December 2011
Personal..........................................................................................
Corporate and commercial ...........................................................
Financial ........................................................................................
Asia
US$m
79,021
139,897
10,330
229,248
76,901
122,618
8,646
208,165
Europe
US$m
80,596
91,957
15,080
187,633
76,658
84,797
21,060
182,515
Americas
US$m
31,566
110,401
20,621
162,588
139,458
101,861
22,905
264,224
Total
US$m
191,183
342,255
46,031
579,469
293,017
309,276
52,611
654,904
A description of loan and other credit related
commitments is set out in Note 40 on the Financial
Statements. The reduction in the total amount from
2011 to 2012 is mainly due to the disposal of the US
Cards business and US branch network in 2012. In
the table above, Asia includes amounts in Hong
Kong, Rest of Asia-Pacific and the Middle East and
North Africa.
146
Personal lending
(Unaudited)
We provide a broad range of secured and unsecured
personal lending products to meet customer needs.
Given the diverse nature of the markets in which
we operate, the range is not standard across
all countries but is tailored to meet the demands
of individual markets.
Personal lending includes advances to customers
for asset purchases, such as residential property,
where the loans are typically secured by the assets
being acquired. We also offer loans secured on
existing assets, such as first and second liens on
residential property; unsecured lending products
such as overdrafts, credit cards and payroll loans;
and debt consolidation loans which may be secured
or unsecured.
Total personal lending
(Unaudited)
At 31 December 2012
First lien residential mortgages ............
Other personal lending .........................
– motor vehicle finance ....................
– credit cards ....................................
– second lien residential mortgages .
– other ...............................................
UK
US$m
127,024
23,446
–
11,369
508
11,569
Rest of
Europe
US$m
8,148
27,656
24
3,060
–
24,572
Hong
Kong
US$m
52,296
18,045
–
5,930
–
12,115
Rest of
North
America
US$m
20,716
6,839
20
735
363
5,721
US4
US$m
49,417
7,382
–
821
5,959
602
Other
regions5
US$m
44,261
29,863
3,871
8,881
131
16,980
Total
US$m
301,862
113,231
3,915
30,796
6,961
71,559
Total personal lending (A) ....................
150,470
35,804
70,341
56,799
27,555
74,124
415,093
Impairment allowances on personal
lending
First lien residential mortgages ........
Other personal lending .....................
– motor vehicle finance ....................
– credit cards ....................................
– second lien residential mortgages .
– other ...............................................
(425)
(576)
–
(150)
(44)
(382)
Total ......................................................
(1,001)
– as a percentage of A ............................
0.7%
(64)
(401)
(4)
(184)
–
(213)
(465)
1.3%
(4)
(57)
–
(28)
–
(29)
(61)
0.1%
(4,133)
(590)
–
(40)
(542)
(8)
(30)
(94)
(1)
(14)
(6)
(73)
(249)
(1,589)
(144)
(385)
–
(1,060)
(4,905)
(3,307)
(149)
(801)
(592)
(1,765)
(4,723)
(124)
(1,838)
(8,212)
8.3%
0.5%
2.5%
2.0%
At 31 December 2011
First lien residential mortgages ............
Other personal lending .........................
– motor vehicle finance ....................
– credit cards ....................................
– second lien residential mortgages .
– other ...............................................
111,224
22,218
–
11,279
694
10,245
8,678
24,027
24
2,192
–
21,811
46,817
16,364
–
5,304
–
11,060
52,484
14,087
20
833
7,063
6,171
20,794
7,971
29
1,262
468
6,212
38,966
29,995
4,494
8,618
233
16,650
278,963
114,662
4,567
29,488
8,458
72,149
Total personal lending (B) ....................
133,442
32,705
63,181
66,571
28,765
68,961
393,625
Impairment allowances on personal
lending
First lien residential mortgages ........
Other personal lending .....................
– motor vehicle finance ....................
– credit cards ....................................
– second lien residential mortgages .
– other ...............................................
(383)
(745)
–
(177)
(42)
(526)
Total ......................................................
(1,128)
– as a percentage of B ............................
0.8%
For footnotes, see page 249.
(58)
(366)
(4)
(148)
(1)
(213)
(424)
1.3%
(12)
(52)
–
(22)
–
(30)
(64)
0.1%
(4,551)
(1,659)
–
(46)
(740)
(873)
(27)
(109)
–
(35)
(9)
(65)
(290)
(1,508)
(164)
(406)
–
(938)
(5,321)
(4,439)
(168)
(834)
(792)
(2645)
(6,210)
(136)
(1,798)
(9,760)
9.3%
0.5%
2.6%
2.5%
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Risk > Credit risk > Personal lending
In 2012, the credit quality of the majority of
our personal lending portfolios improved, reflecting
the continued low levels of interest rates and strong
customer repayments in many markets, as well
as actions taken in previous years to tighten our
lending criteria and focus on higher quality and
secured assets.
In the US, the origination of new personal
lending was limited as we have discontinued all
new consumer finance real estate lending following
the closure of the consumer finance distribution
network. Customer lending balances across HSBC
Finance portfolios continued to decline and, in May
and August 2012 respectively, we completed the
sales of the Card and Retail Services business and
non-strategic branches, in the US. We continue to
explore options to accelerate the liquidation of the
CML portfolio and, to this effect, reclassified certain
non-real estate personal loan balances, net of
impairment allowances, to ‘Assets held for sale’
as we actively marketed this portfolio.
The commentary that follows is on a constant
currency basis.
At 31 December 2012, the Group’s exposure
to personal lending was US$415bn, 3% higher than
at 31 December 2011, reflecting a rise in first lien
residential mortgage lending, partly offset
by a reduction in other personal lending. Loan
impairment allowances on our personal lending
portfolios were US$8.2bn compared with US$9.8bn
at the end of 2011, while the ratio of loan
impairment allowances to total personal lending
reduced from 2.4% at 31 December 2011 to 2.0%
at 31 December 2012. This decline reflected
volume and performance-based improvements,
predominantly in our US portfolios, due to the
continued run-off of the CML portfolio as well as
the reclassification of impairment allowances on
non-real estate personal loan balances to ‘Assets
held for sale’. We also continued to focus on
growing our lower-risk residential mortgage
portfolios in the UK, Hong Kong and rest of Asia-
Pacific, where our loss experience and impairment
allowance requirements are typically lower.
Loan impairment charges in our personal
lending portfolios were US$5.4bn in 2012,
US$3.8bn or 41% lower than in 2011 and
representing 66% of the overall Group’s LICs.
The decline was predominantly in the US reflecting
the reduction in balances in the CML portfolio and
the sale of the Card and Retail Services business in
May 2012.
At 31 December 2012, total personal lending
increased by US$13.7bn reflecting growth in first
lien residential mortgages, notably in the UK, Hong
Kong and Rest of Asia-Pacific. Balances in the
UK increased following the success of marketing
campaigns and competitive pricing. The rise in Hong
Kong reflected the low interest rate environment and
active property market, whereas growth in the
Rest of Asia-Pacific, mainly in Singapore, mainland
China, Australia and Malaysia, reflected the
continued strength of property markets and
expansion of our distribution network.
Total personal lending balances in the US at
31 December 2012 were US$57bn, a decrease of
15% compared with the end of 2011. The decline
reflected the run-off of our CML portfolio, which
also fell due to the reclassification of non-real estate
personal loan balances to ‘Assets held for sale’.
In Latin America, personal lending decreased by
4% compared with 31 December 2011, following a
reduction in other personal lending in Brazil, where
we managed down our exposure to non-strategic
portfolios and focused on higher quality lending
including first lien residential mortgage lending.
This complemented a range of corrective actions,
including improving our collections capabilities,
reducing third party originations and improving
credit scoring models. These actions were
implemented to limit our exposure to further market
weakness following a rise in delinquency in 2011
which continued in 2012. We also reclassified
lending balances in Colombia, Paraguay and Peru to
‘Assets held for sale’.
Mortgage lending
(Unaudited)
We offer a wide range of mortgage products
designed to meet customer needs, including capital
repayment, interest-only, affordability and offset
mortgages.
Group credit policy prescribes the range of
acceptable residential property loan-to-value
(‘LTV’) thresholds with the maximum upper limit
for new loans set between 75% and 95%. Specific
LTV thresholds and debt-to-income ratios are
managed at regional and country levels and,
although the parameters must comply with Group
policy, strategy and risk appetite, they differ in the
various locations in which we operate to reflect the
local economic and housing market conditions,
regulations, portfolio performance, pricing and other
product features.
148
The commentary that follows is on a constant
currency basis.
At 31 December 2012, total mortgage lending,
comprising first lien and second lien residential
mortgages, was US$309bn, 5% higher than at the
end of 2011. Our most significant concentrations
of mortgage lending were in the UK, the US and
Hong Kong.
Mortgage lending products
(Unaudited)
At 31 December 2012
First lien residential mortgages ............
Second lien residential mortgages.........
UK
US$m
127,024
508
Rest of
Europe
US$m
8,148
–
Hong
Kong
US$m
52,296
–
Rest
of North
America
US$m
US4
US$m
Other
regions5
US$m
Total
US$m
49,417
5,959
20,716
363
44,261
131
301,862
6,961
Total mortgage lending (A) ..................
127,532
8,148
52,296
55,376
21,079
44,392
308,823
Second lien as a percentage of A .........
0.4%
–
0.0%
10.8%
1.7%
0.3%
2.3%
Impairment allowances on mortgage
lending ..............................................
First lien residential mortgages ........
Second lien residential mortgages ....
(469)
(425)
(44)
Interest-only (including offset)
mortgages ..........................................
49,650
Affordability mortgages, including
adjustable-rate mortgages (‘ARM’s)...
Other .....................................................
6
99
Total interest-only, affordability
mortgages and other .........................
49,755
– as a percentage of A .......................
39.0%
At 31 December 2011
First lien residential mortgages ............
Second lien residential mortgages ........
111,224
694
Total mortgage lending (B) ..................
111,918
Second lien as a percentage of B ..........
0.6%
Impairment allowances on mortgage
lending ..............................................
First lien residential mortgages ........
Second lien residential mortgages ...
(425)
(383)
(42)
Interest-only (including offset)
mortgages .........................................
46,886
Affordability mortgages, including
ARMs ...............................................
Other .....................................................
177
106
Total interest-only, affordability
mortgages and other .........................
47,169
– as a percentage of B .......................
42.1%
For footnotes, see page 249.
(64)
(64)
–
52
532
–
584
7.2%
8,678
–
8,678
–
(59)
(58)
(1)
48
496
–
544
6.3%
(4)
(4)
–
30
19
–
(4,675)
(4,133)
(542)
(36)
(30)
(6)
(249)
(249)
–
(5,497)
(4,905)
(592)
–
531
1,146
51,409
18,456
–
–
–
5,135
204
24,148
303
49
18,456
531
6,485
75,860
0.1%
33.3%
2.5%
14.6%
24.6%
46,817
–
52,484
7,063
20,794
468
38,966
233
278,963
8,458
46,817
59,547
21,262
39,199
287,421
–
11.9%
2.2%
0.6%
2.9%
(12)
(12)
–
46
31
–
(5,291)
(4,551)
(740)
–
17,089
–
(36)
(27)
(9)
667
277
–
(290)
(290)
–
(6,113)
(5,321)
(792)
1,210
48,857
6,863
189
24,933
295
77
17,089
944
8,262
74,085
0.2%
28.7%
4.4%
21.1%
25.8%
Mortgage lending in the UK was US$128bn at
The credit quality of our UK mortgage portfolio
31 December 2012, representing the Group’s largest
concentration of mortgage exposure, an increase of
9% compared with the end of 2011.
remained high, reflecting actions taken in previous
years which included restrictions on lending to
purchase residential property for the purpose of
149
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Risk > Credit risk > Personal lending
rental. Almost all lending was originated through our
own sales force, and the self-certification of income
was not permitted. The majority of our mortgage
lending in the UK was to existing customers who
held current or savings accounts with HSBC. The
average LTV ratio for new business was 59% during
December 2012, while loan impairment charges and
delinquency levels in our UK mortgage book
remained stable, aided by the continued low levels
of interest rates.
Interest-only mortgage products in the UK
totalled US$50bn or 39% of the UK mortgage
portfolio, US$23bn or (47%) of which related to the
first direct offset product where customers may
adopt a capital repayment profile or make significant
regular or one-off repayments, but are able to redraw
additional funds within the agreed limit.
Our affordability underwriting criteria for
interest-only products are consistent with those
for equivalent capital repayment mortgages, and
such products are typically originated at more
conservative LTV ratios. We monitor specific risk
characteristics within the interest-only portfolio,
such as current LTV ratio, age at expiry, current
income levels and credit bureau scores. There
are currently no concentrations of higher risk
characteristics that cause the interest-only portfolio
to be considered as carrying unduly high credit
risk, and delinquency and impairment charges
remain low, demonstrating similar performance
characteristics to our capital repayment products.
We run contact programmes to ensure we build an
informed relationship with customers whereby they
receive the appropriate support in meeting the final
repayment of principal and understand the
alternative repayment options available.
In Hong Kong, mortgage lending was US$52bn,
an increase of 11% compared with the end of 2011.
The quality of our mortgage book was strong with
loan impairment charges at very low levels. The
average LTV ratio on new mortgage lending was
48% and the average LTV for the overall portfolio
was 32%.
Mortgage balances in Rest of Asia-Pacific grew
by 10% to US$37bn, mainly in Singapore, mainland
China, Australia and Malaysia reflecting the
continued strength of property markets and
expansion of our distribution networks.
Mortgage lending in the US
(Unaudited)
In the US, total mortgage lending balances were
US$55bn at 31 December 2012, a decline of
7% compared with the end of 2011. Overall, US
mortgage lending represented 13% of our total
personal lending and 18% of our total mortgage
lending, compared with 15% and 20%, respectively,
at 31 December 2011.
HSBC Finance
At 31 December 2012, mortgage lending balances
at HSBC Finance were US$39bn, a decline of 12%
compared with the end of 2011 due to the continued
run-off of the CML portfolio.
Our CML portfolio continued to be affected
by high unemployment levels and a housing market
that is slow to recover. In addition, our loan
modification programmes, which are designed
to manage customer relationships, improve cash
collections and avoid foreclosure, contributed to
slower loan repayment rates.
HSBC Finance US CML6 – residential mortgages
(Unaudited)
Residential mortgages
First lien .......................................
Second lien ...................................
At 31 December
2012
US$m
2011
US$m
35,092
3,651
39,608
4,520
Total (A) ......................................
38,743
44,128
Impairment allowances ................
– as a percentage of (A) ...........
4,480
11.6%
5,088
11.5%
For footnote, see page 249.
HSBC Bank USA
In HSBC Bank USA, we continued to sell a
substantial portion of new originations to the
secondary market as a means of managing our
interest rate risk and improving structural liquidity.
Mortgage lending balances of US$17bn at
31 December 2012 remained broadly unchanged
compared with the end of 2011, despite an increase
in first lien residential mortgages, driven by
increased origination to our Premier customers
including higher balances of adjustable-rate
mortgages. This was offset by a decline in other
mortgages.
150
Credit quality of personal lending in the US
(Unaudited)
balances were US$477m at 31 December 2012
compared with US$674m at 31 December 2011.
For further information on renegotiated loans in
North America, see page 158.
Mortgage lending
In our CML first lien residential mortgage portfolio,
two months and over delinquent balances were
US$7.6bn at 31 December 2012, compared with
US$7.9bn at 31 December 2011. The decline mainly
reflected the continued run-off of balances and the
improvement in economic conditions. The reduction
was partly offset by the increase in late stage
delinquency driven by the suspension of foreclosure
activities which began in late 2010. In our HSBC
Bank USA portfolio, two months and over
delinquent balances increased by 8% to US$1.4bn
due also to foreclosure delays.
In the US, second lien mortgage balances
declined by 16% to US$6.0bn at 31 December 2012,
representing 11% of the overall US mortgage
lending portfolio. Two months and over delinquent
HSBC Finance: foreclosed properties in the US
(Unaudited)
The majority of second lien residential
mortgages are taken up by customers who hold
a first lien mortgage issued by a third party. Second
lien residential mortgage loans have a risk profile
characterised by higher LTV ratios, because in
the majority of cases the loans were taken out
to complete the refinancing of properties. Loss
severity on default of second lien loans has typically
approached 100% of the amount outstanding, as any
equity in the property is consumed through the
repayment of the first lien loan.
Impairment allowances for these loans are
determined by applying a roll-rate migration analysis
which captures the propensity of these loans to
default based on past experience. Once we believe
that a second lien residential mortgage loan is likely
to progress to write-off, the loss severity assumed in
establishing our impairment allowance is close to
100% in the CML portfolios, and more than 80% in
HSBC Bank USA.
Year ended
31 December
2012
Half-year ended
31 December
2012
30 June
2012
Number of foreclosed properties at end of period ...................................
Number of properties added to foreclosed inventory in the period .............
Average loss on sale of foreclosed properties7 ........................................
Average total loss on foreclosed properties8 ............................................
Average time to sell foreclosed properties (days) ....................................
2,973
6,827
6%
54%
172
2,973
3,212
6%
53%
166
2,836
3,615
7%
55%
179
Year
ended
2011
3,511
11,187
8%
56%
185
For footnotes, see page 249.
In late 2010, we suspended all new foreclosure
proceedings and, in early 2011, ceased foreclosures
where judgement had yet to be entered while we
enhanced our processes. We have now resumed the
processing of suspended foreclosures in substantially
all states, although there remains a significant
backlog which will take time to resolve. Loss
severities may be increased by any additional delays
in the processing of foreclosures.
The number of foreclosed properties at HSBC
Finance at 31 December 2012 decreased compared
with the end of December 2011 as the rate at which
properties were added to real estate owned inventory
was slow as a result of the backlog in foreclosure
activities and the continuing sales of these properties
during 2012. We expect that the number of foreclosed
properties added to the inventory will increase
and this will continue to be affected by ongoing
refinements to our processes and extended
foreclosure timelines.
The average total loss on foreclosed properties
and the average loss on sale of foreclosed properties
decreased compared with 2011. This reflected a
greater proportion of properties sold where we
had accepted a deed-in-lieu. Typically, losses on a
deed-in-lieu are lower than losses from properties
acquired through a standard foreclosure process.
The decrease in the loss on sale also reflected a
slowdown in the rate of decline in house prices
during 2012 and, in some markets, improvements
in pricing compared with 2011.
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Risk > Credit risk > Personal lending / Wholesale lending
Valuation of foreclosed properties in the US
We obtain real estate by foreclosing on the collateral pledged
as security for residential mortgages. Prior to foreclosure,
carrying amounts of the loans in excess of fair value less costs
to sell are written down to the discounted cash flows expected
to be recovered, including from the sale of the property.
Broker price opinions are obtained and updated every 180 days
and real estate price trends are reviewed quarterly to reflect
any improvement or additional deterioration. Our methodology
is regularly validated by comparing the discounted cash flows
expected to be recovered based on current market conditions
(including estimated cash flows from the sale of the property)
to the updated broker price opinion, adjusted for the estimated
historical difference between interior and exterior appraisals.
The fair values of foreclosed properties are initially determined
based on broker price opinions. Within 90 days of foreclosure,
a more detailed property valuation is performed reflecting
information obtained from a physical interior inspection of
the property and additional allowances or write-downs are
recorded as appropriate. Updates to the valuation are
performed no less than once every 45 days until the property
is sold, with declines or increases recognised through changes
to allowances.
Credit cards
In the first half of 2012 we completed the sale
of our US Card and Retail Services business,
transferring general and private label credit card
lending balances to the purchaser. The residual
balances in the US at 31 December 2012 were
related to HSBC Bank USA’s credit card
programme.
Personal non-credit card lending
Personal non-credit card lending balances and two
months and over delinquent balances in the US fell,
largely due to the reclassification of non-real estate
personal loan balances to ‘Assets held for sale’ and
portfolio run-off, as this business is closed to new
advances.
Trends in two months and over contractual delinquency in the US
(Unaudited)
In personal lending in the US
First lien residential mortgages ..................................................................................
Consumer and Mortgage Lending ..........................................................................
Other mortgage lending ..........................................................................................
Second lien residential mortgages ..............................................................................
Consumer and Mortgage Lending ..........................................................................
Other mortgage lending ..........................................................................................
Credit card ..................................................................................................................
Private label ................................................................................................................
Personal non-credit card .............................................................................................
Total ............................................................................................................................
As a percentage of the relevant loans and receivables balances
First lien residential mortgages ..................................................................................
Second lien residential mortgages ..............................................................................
Credit card ..................................................................................................................
Private label ................................................................................................................
Personal non-credit card .............................................................................................
Total ............................................................................................................................
At 31 December
2011
US$m
9,065
7,922
1,143
674
501
173
714
316
513
2010
US$m
8,632
7,618
1,014
847
668
179
957
404
811
11,282
11,651
%
17.1
8.5
3.8
2.5
8.3
11.4
%
15.0
9.1
4.7
3.0
9.5
10.7
2012
US$m
8,926
7,629
1,297
477
350
127
27
–
335
9,765
%
18.1
8.0
3.3
–
7.4
16.1
Wholesale lending
(Unaudited)
Wholesale lending covers the range of credit
facilities granted to sovereign borrowers, banks,
non-bank financial institutions, corporate entities
and commercial borrowers. Our wholesale portfolios
are well diversified across geographical and industry
sectors, with certain exposures subject to specific
portfolio controls.
152
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Latin
MENA
US$m
America
America
US$m
US$m
Total
US$m
Total wholesale lending
(Unaudited)
At 31 December 2012
Corporate and commercial ...................
– Manufacturing ...............................
– International trade and services .....
– Commercial real estate ..................
– Other property-related ...................
– Government ...................................
– Other commercial9 .........................
Financial (non-bank financial
institutions)........................................
Asset-backed securities reclassified ......
Loans and advances to banks ...............
Hong
Kong
US$m
99,199
10,354
33,832
23,384
16,399
2,838
12,392
4,546
–
23,500
Rest of
Asia-
Pacific
US$m
85,305
19,213
32,317
9,286
6,641
1,136
16,712
4,255
–
44,592
Europe
US$m
223,061
56,690
70,954
33,279
7,402
2,393
52,343
55,732
3,694
45,320
22,452
3,373
9,115
865
2,103
1,662
5,334
1,196
–
9,198
Total wholesale lending (A) .................
327,807
127,245
134,152
32,846
Impairment allowances on wholesale
lending
Corporate and commercial ...................
– Manufacturing ...............................
– International trade and services .....
– Commercial real estate ..................
– Other property-related ...................
– Government ...................................
– Other commercial ..........................
Financial (non-bank financial
institutions) .......................................
Loans and advances to banks ...............
3,537
611
992
1,011
164
15
744
318
40
Total ......................................................
3,895
383
86
233
5
20
–
39
29
–
412
526
129
185
62
81
–
69
11
–
537
1,312
210
360
156
241
42
303
157
17
1,486
47,886
9,731
13,419
6,572
7,607
774
9,783
13,935
197
13,465
75,483
732
84
189
214
102
2
141
37
–
769
35,590
12,788
9,752
3,374
380
1,982
7,314
1,594
–
16,528
53,712
856
287
329
103
13
–
124
2
–
513,493
112,149
169,389
76,760
40,532
10,785
103,878
81,258
3,891
152,603
751,245
7,346
1,407
2,288
1,551
621
59
1,420
554
57
858
7,957
– as a percentage of A ......................
1.19%
0.32%
0.40%
4.52%
1.02%
1.60%
1.06%
At 31 December 2011
Corporate and commercial ...................
– Manufacturing ...............................
– International trade and services .....
– Commercial real estate ..................
– Other property-related ...................
– Government ...................................
– Other commercial9 .........................
Financial (non-bank financial
institutions) .......................................
Asset-backed securities reclassified ......
Loans and advances to banks ...............
204,984
45,632
64,604
32,099
7,595
3,143
51,911
63,671
4,776
54,406
91,592
9,004
29,066
20,828
17,367
2,918
12,409
3,473
–
35,159
77,887
16,909
29,605
9,537
6,396
962
14,478
3,183
–
47,309
21,152
3,517
8,664
1,002
1,770
1,563
4,636
1,168
–
8,571
Total wholesale lending (B) ..................
327,837
130,224
128,379
30,891
Impairment allowances on wholesale
lending
Corporate and commercial ...................
– Manufacturing ...............................
– International trade and services .....
– Commercial real estate ..................
– Other property-related ...................
– Government ...................................
– Other commercial ..........................
Financial (non-bank financial
institutions) .......................................
Loans and advances to banks ...............
3,256
571
962
892
155
4
672
435
49
Total ......................................................
3,740
492
107
316
4
15
–
50
26
–
518
576
287
154
39
22
–
74
11
–
587
– as a percentage of B ......................
1.14%
0.40%
0.46%
For footnote, see page 249.
1,242
202
428
159
154
28
271
149
17
1,408
4.56%
41,271
7,888
10,710
7,069
5,729
656
9,219
12,817
504
14,831
69,423
756
95
166
179
154
1
161
76
59
891
35,930
13,104
10,060
3,406
682
1,837
6,841
1,907
–
20,836
58,673
729
243
298
83
16
–
89
3
–
472,816
96,054
152,709
73,941
39,539
11,079
99,494
86,219
5,280
181,112
745,427
7,051
1,505
2,324
1,356
516
33
1,317
700
125
732
7,876
1.28%
1.25%
1.06%
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Risk > Credit risk > Wholesale lending / Credit quality of financial instruments
Corporate and commercial
Corporate and commercial lending, excluding
commercial real estate and other property-related
lending, increased from US$365bn at 31 December
2011 to US$400bn at 31 December 2012.
At 31 December 2012, this represented 39%
of total gross loans and advances to customers,
compared with 38% at 31 December 2011. The
growth was mainly in the international trade and
services sector, where balances mainly increased
in Europe despite muted demand for credit and, in
Hong Kong, driven by growth in trade finance
volumes as we capitalised on trade and capital flows.
In the manufacturing sector, balances increased in
Europe due to growth in the UK of overdraft balances
and corresponding customer accounts which did not
meet netting criteria under accounting rules.
The aggregate of our commercial real estate
and other property-related lending was US$117bn
at 31 December 2012, 3% higher than at 31 December
2011, representing 12% of total loans and advances to
customers. This growth was mainly in Hong Kong,
where demand for funds remained strong despite a
degree of market stabilisation after a sustained period
of buoyancy in the property investment and property
development sectors. Commercial real estate and
other property-related lending also grew in North
America due to an increase in originations in
commercial mortgages, which reflected our continued
focus on expanding our core offering to gain a larger
presence in key growth markets, including the West
Coast, Southeast and Midwest of the US.
For information on refinancing in commercial
real estate lending, see page 128.
Financial (non-bank)
Financial (non-bank) lending decreased from
US$86bn at 31 December 2011 to US$81bn at
31 December 2012. This was mainly in Europe due
to a decline in reverse repo activity, partly offset
by higher balances in North America, due to an
increase in reverse repo balances in Canada, and
in Hong Kong and Rest of Asia-Pacific, driven by
an increase in loans drawn by financial planning
companies, leasing companies and insurance
companies reflecting higher demand for funds
from a small number of corporates.
Loans and advances to banks
Loans and advances to banks decreased from
US$181bn at 31 December 2011 to US$153bn at
31 December 2012. This was mainly driven by
maturities and repayments in Hong Kong together
154
with a decline in reverse repos in Europe reflecting, in
part, the redeployment of liquidity to central banks.
Credit quality of financial instruments
(Audited)
A summary of our current policies and
practices regarding the credit quality of
financial instruments is provided in the
Appendix to Risk on page 253.
The five classifications describing the credit
quality of our lending, debt securities portfolios
and derivatives are defined on page 253. Additional
credit quality information in respect of our
consolidated holdings of ABSs is provided
on page 259.
For the purpose of the following disclosure,
retail loans which are past due up to 89 days and are
not otherwise classified as impaired in accordance
with our disclosure convention (see page 253), are
not disclosed within the expected loss (‘EL’) grade
to which they relate, but are separately classified as
past due but not impaired.
2012 compared with 2011
(Unaudited)
We assess credit quality on all financial instruments
which are subject to credit risk, as shown in the table
on page 155. The balance of these financial
instruments was US$2,516bn at 31 December 2012,
an increase of 4% over 2011, of which US$1,690bn
or 67% was classified as ‘strong’. This percentage
declined marginally compared with 68% at
31 December 2011. The proportion of financial
instruments classified as ‘good’ remained broadly
stable at 16% and the proportion of ‘satisfactory’
balances increased marginally from 12% to 14%.
The proportion of ‘sub-standard’ financial
instruments remained low at 2% in both 2012
and 2011.
The proportion of trading assets classified as
‘strong’ declined from 75% to 65%. Overall trading
assets rose, largely in Europe, due to an increase in
holdings of debt securities from 2011’s subdued
levels which, coupled with the downgrading of
certain eurozone countries, resulted in an absolute
and relative increase in debt securities classified as
‘good’. In addition, holdings of ‘strong’ treasury and
other eligible bills fell both absolutely and relative to
the rest of trading assets primarily in Hong Kong due
to maturities without replacement of government
bonds, while increased levels of reverse repo and
stock lending balances with customers increased
the proportion of ‘good’ and ‘satisfactory’
classifications compared with ‘strong’.
The proportion of financial investments
categorised as ‘strong’ remained high at 86% and
87%, at 31 December 2012 and 31 December 2011
respectively, as the year-on-year increase in
balances was mainly due to the deployment of
surplus liquidity into highly-rated government,
quasi-government and supranational debt securities
in North America and Hong Kong.
The proportion of cash and balances at central
banks considered ‘strong’ remained high at 98%,
reflecting deployment of surplus liquidity into
Distribution of financial instruments by credit quality
(Audited)
central banks in Europe, Hong Kong and Rest of
Asia-Pacific.
The proportion of loans and advances held at
amortised cost and categorised as ‘strong’ remained
broadly flat compared with the end of 2011 at 54%.
Derivative balances classified as ‘strong’ declined
marginally from 81% to 79%; the movement in
balances was mainly in Europe reflecting fair value
movements of existing contracts.
The following table shows our distribution of
financial instruments by measures of credit quality:
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Neither past due nor impaired
Strong
US$m
Good Satisfactory
US$m
US$m
Sub-
standard
US$m
Past due
but not
impaired Impaired
Impair-
ment
allowances10
US$m
US$m
US$m
At 31 December 2012
Cash and balances at central
banks ....................................
138,124
3,235
Items in the course of
collection from other banks..
6,661
Hong Kong Government
certificates of indebtedness ..
22,743
203
–
147
439
–
26
–
–
Trading assets11 ........................
237,078
60,100
66,537
3,462
– treasury and other
eligible bills ..................
– debt securities ...................
– loans and advances:
20,793
106,453
to banks ........................
to customers .................
49,133
60,699
4,108
16,685
21,018
18,289
1,340
20,931
7,418
36,848
Financial assets designated at
fair value11 ...........................
– treasury and other eligible
bills ...............................
– debt securities ...................
– loans and advances:
to banks ........................
to customers .................
6,186
5,884
54
6,089
43
–
–
5,830
–
54
401
–
391
10
–
41
608
702
2,111
243
–
241
2
–
Derivatives11 ............................
284,115
46,214
24,877
2,244
Loans and advances held at
amortised cost ......................
– to banks .............................
– to customers12 ...................
625,091
117,220
507,871
246,323
23,921
222,402
213,241
10,575
202,666
23,996
772
23,224
18,911
10
18,901
Financial investments ..............
– treasury and other similar
357,452
27,428
21,143
6,759
bills ...............................
– debt securities ...................
80,320
277,132
Assets held for sale ..................
– disposal groups .................
– non-current assets held
2,425
2,033
3,818
23,610
3,287
1,118
1,957
19,186
2,311
1,789
for sale ..........................
392
2,169
522
1,455
5,304
314
268
46
Other assets ..............................
9,679
6,007
13,845
1,759
– endorsements and
acceptances ...................
– accrued income and other
1,995
7,684
4,344
1,663
5,195
8,650
483
1,276
–
–
–
387
118
269
231
7
224
Total
US$m
141,532
7,303
22,743
367,177
26,282
144,677
78,271
117,947
12,714
54
12,551
55
54
357,450
38,776
105
38,671
2,530
–
2,530
1,286
82
(16,169)
(57)
(16,112)
1,150,169
152,546
997,623
415,312
87,550
327,762
(718)
(49)
9,292
5,359
1,204
(669)
3,933
462
8
454
31,983
12,032
19,951
Total financial instruments ...... 1,689,554
398,681
342,941
38,803
19,529
43,054
(16,887)
2,515,675
155
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Risk > Credit risk > Credit quality of financial instruments
Distribution of financial instruments by credit quality (continued)
Neither past due nor impaired
Strong
US$m
Good Satisfactory
US$m
US$m
Sub-
standard
US$m
Past due
but not
Impair-
ment
impaired Impaired
allowances10
US$m
US$m
US$m
Total
US$m
At 31 December 2011
Cash and balances at central
banks ....................................
126,926
2,678
Items in the course of
collection from other banks..
7,707
Hong Kong Government
certificates of indebtedness ..
20,922
150
–
263
350
–
35
1
–
Trading assets11 ........................
231,594
37,182
39,171
1,502
– treasury and other
eligible bills ..................
– debt securities ...................
– loans and advances:
33,199
103,163
to banks ........................
to customers .................
49,021
46,211
538
8,497
20,699
7,448
564
18,188
5,186
15,233
Financial assets designated at
fair value11 ...........................
– treasury and other eligible
bills ...............................
– debt securities ...................
– loans and advances:
to banks ........................
to customers .................
7,176
4,728
123
6,148
55
850
–
4,728
–
–
830
–
767
63
–
8
639
619
236
192
–
191
1
–
Derivatives11 ............................
279,557
45,858
18,627
2,337
Loans and advances held at
amortised cost ......................
– to banks .............................
– to customers12 ...................
609,081
144,815
464,266
245,352
28,813
216,539
194,661
6,722
187,939
28,210
568
27,642
20,009
39
19,970
Financial investments ..............
– treasury and other similar
340,173
24,757
22,139
3,532
bills ...............................
– debt securities ...................
58,627
281,546
Assets held for sale ..................
– disposal groups .................
– non-current assets held
14,365
14,317
3,348
21,409
12,587
12,587
3,144
18,995
7,931
7,931
for sale ..........................
48
–
–
104
3,428
536
536
–
Other assets ..............................
11,956
6,526
12,379
1,193
– endorsements and
acceptances ...................
– accrued income and other .
1,789
10,167
4,075
2,451
4,629
7,750
504
689
–
–
–
2,524
2,522
2
421
10
411
129,902
8,208
20,922
309,449
34,309
130,487
75,525
69,128
12,926
123
11,834
119
850
346,379
41,739
155
41,584
2,233
–
2,233
1,479
1,467
12
517
3
514
(17,636)
(125)
(17,511)
1,121,416
180,987
940,429
392,834
65,223
327,611
37,808
37,746
(1,614)
(1,614)
–
62
32,992
11,010
21,982
Total financial instruments ...... 1,649,457
379,818
296,351
37,538
22,954
45,968
(19,250)
2,412,836
For footnotes, see page 249.
Past due but not impaired gross financial
instruments
(Audited)
Past due but not impaired loans are those in respect
of which the customer is in the early stages of
delinquency and has failed to make a payment or a
partial payment in accordance with the contractual
terms of the loan agreement. This is typically when
a loan is less than 90 days past due and there are no
other indicators of impairment.
Further examples of exposures past due but not
impaired include individually assessed mortgages
that are in arrears more than 90 days, but there are
no other indicators of impairment and the value of
collateral is sufficient to repay both the principal
debt and all potential interest for at least one year, or
short-term trade facilities past due more than
90 days for technical reasons such as delays in
documentation but there is no concern over the
creditworthiness of the counterparty. When groups
of loans are collectively assessed for impairment,
156
collective impairment allowances are recognised for
loans classified as past due but not impaired.
At 31 December 2012, US$19bn of loans and
advances held at amortised cost were classified as
past due but not impaired (2011: US$20bn). The
largest concentration of these balances was in HSBC
Finance. The decrease in 2012 was primarily in
North America in the CML portfolio, due to the
reclassification of non-real estate personal loan
balances to ‘Assets held for sale’ as well as the
continued run-off of the lending balances. This was
partly offset by increases in Rest of Asia-Pacific
relating to a number of corporate exposures across the
region. The rise in Latin America was mainly in
Panama in the corporate and commercial sector across
various industries. In Europe, the increase in past due
but not impaired loans mainly related to business
expansion in Turkey. In Hong Kong, the rise was
mainly in overdrafts and term lending.
Past due but not impaired loans and advances to customers and banks by geographical region
(Audited)
Rest of
Asia-
Pacific
US$m
MENA
US$m
North
America
US$m
Latin
America
US$m
Total
US$m
31 December 2012
Banks ..............................................................
Customers .......................................................
Personal ...........................................................
Corporate and commercial .............................
Financial (non-bank financial institutions) ....
Europe
US$m
–
2,339
1,416
909
14
Hong
Kong
US$m
–
1,311
638
579
94
10
2,964
1,961
953
50
31 December 2011
Banks ..............................................................
Customers .......................................................
Personal ...........................................................
Corporate and commercial .............................
Financial (non-bank financial institutions) ....
2,339
1,311
2,974
–
1,990
1,362
614
14
38
1,069
715
346
8
1
2,318
1,626
680
12
–
975
248
726
1
975
–
1,165
166
997
2
–
–
10
7,721
5,806
1,910
5
3,591
2,198
1,360
33
18,901
12,267
6,437
197
7,721
3,591
18,911
–
10,216
7,941
2,159
116
–
3,212
2,141
1,059
12
39
19,970
13951
5855
164
1,990
1,107
2,319
1,165
10,216
3,212
20,009
Ageing analysis of days past due but not impaired gross financial instruments
(Audited)
At 31 December 2012
Loans and advances held at amortised cost ..........................
– to banks ..........................................................................
– to customers ...................................................................
Assets held for sale ...............................................................
– disposal groups ..............................................................
– non-current assets held for sale .....................................
Other assets ...........................................................................
– endorsements and acceptances ......................................
– other ...............................................................................
Up to 29
days
US$m
14,236
10
14,226
251
87
164
122
6
116
30-59
days
US$m
3,189
–
3,189
84
17
67
37
1
36
60-89
days
US$m
1,262
–
1,262
48
11
37
24
–
24
90-179
days
US$m
180 days
and over
US$m
200
–
200
2
1
1
12
–
12
24
–
24
2
2
–
36
–
36
Total
US$m
18,911
10
18,901
387
118
269
231
7
224
14,609
3,310
1,334
214
62
19,529
At 31 December 2011
Loans and advances held at amortised cost ..........................
– to banks ..........................................................................
– to customers ...................................................................
Assets held for sale ...............................................................
– disposal groups ..............................................................
– non-current assets held for sale .....................................
Other assets ...........................................................................
– endorsements and acceptances ......................................
– other ...............................................................................
14,239
39
14,200
1,563
1,563
–
225
7
218
3,680
–
3,680
644
644
–
80
2
78
1,727
–
1,727
307
307
–
37
–
37
223
–
223
8
7
1
22
1
21
140
–
140
2
1
1
57
–
57
20,009
39
19,970
2,524
2,522
2
421
10
411
16,027
4,404
2,071
253
199
22,954
157
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Risk > Credit risk > Credit quality of financial instruments
Renegotiated loans and forbearance
(Audited)
Current policies and procedures regarding
renegotiated loans and forbearance are
described in the Appendix to Risk on page
254.
The contractual terms of a loan may be modified for
a number of reasons, which include changing market
conditions, customer retention and other factors not
related to the current or potential credit deterioration
of a customer. Loans are classified as ‘renegotiated
Renegotiated loans and advances to customers
(Audited)
loans’ when their contractual payment terms have
been modified because we have significant concerns
about the borrowers’ ability to meet contractual
payments when due. For the purposes of this
disclosure, the term ‘forbearance’ is synonymous
with the renegotiation of loans for these reasons.
The following tables show the gross carrying
amounts of the Group’s holdings of renegotiated
loans and advances to customers by industry sector,
geography and credit quality classification.
At 31 December 2012
At 31 December 2011
Neither
past
due nor
impaired
US$m
Past due
but not
impaired
US$m
Impaired
US$m
Total
US$m
Neither
past
due nor
impaired
US$m
Past due
but not
impaired Impaired
US$m
US$m
Total
US$m
Personal ......................................
7,952
3,524
18,279
29,755
8,133
4,401
19,125
31,659
First lien residential
mortgages ..........................
Other personal1 ......................
Corporate and commercial .........
Manufacturing and
international trade
services ..............................
Commercial real estate and
other property-related ........
Governments .........................
Other commercial9 .................
Financial ....................................
5,861
2,091
4,608
2,381
1,796
177
254
255
2,828
696
295
15,459
2,820
24,148
5,607
6,892
11,795
5,916
2,217
6,338
3,560
841
15,932
3,193
25,408
6,251
472
6,756
13,566
154
10
–
131
–
3,012
5,547
2,396
255
2,755
5,406
3,484
–
396
422
5,290
177
781
677
2,949
113
880
249
122
2
93
–
3,550
132
319
491
6,621
247
1,292
740
12,815
3,819
25,593
42,227
14,720
4,873
26,372
45,965
Total renegotiated loans and advances to customers as a percentage
of total gross loans and advances to customers ....................................
4.2%
For footnotes, see page 249.
Renegotiated loans and advances to customers by geographical region
(Audited)
31 December 2012
Personal ...........................................................
First lien residential mortgages ..................
Other personal1 ...........................................
Corporate and commercial .............................
Manufacturing and international trade
Europe
US$m
2,817
1,896
921
6,829
services ...................................................
3,002
Commercial real estate and other
property-related ......................................
Governments ..............................................
Other commercial9 ......................................
Financial .........................................................
Total impairment allowances on
renegotiated loans .......................................
Individually assessed ..................................
Collectively assessed ..................................
3,641
–
186
328
9,974
1,547
1,545
2
4.8%
Total
US$m
29,755
24,148
5,607
Rest of
Asia-
Pacific
US$m
Hong
Kong
US$m
MENA
US$m
North
America
US$m
Latin
America
US$m
248
78
170
300
193
37
–
70
4
190
112
78
25,474
21,896
3,578
781
98
683
1,859
685
1,975
11,795
659
899
2
299
340
191
1,480
5,547
486
–
8
3
202
175
118
2
5,290
177
781
677
552
2,389
26,162
2,758
42,227
96
63
33
546
543
3
3,864
39
3,825
485
213
272
6,554
2,418
4,136
245
68
177
147
22
25
–
100
–
392
16
15
1
158
Rest of
Asia-
Pacific
US$m
Hong
Kong
US$m
MENA
US$m
North
America
US$m
Latin
America
US$m
590
72
518
Total
US$m
31,659
25,408
6,251
220
93
127
27,773
23,442
4,331
2,198
700
1,877
13,566
887
913
5
393
237
174
522
–
4
2
1,196
5,406
215
242
224
9
6,621
247
1,292
740
267
85
182
181
104
45
–
32
–
448
2,655
28,475
2,476
45,965
64
41
23
300
300
–
5,017
44
4,973
448
147
301
7,670
2,311
5,359
and international trade services sector lending of
30% (2011: 26%).
Forbearance within Latin America (primarily in
Mexico and Brazil) was predominantly undertaken
in the manufacturing and international trade services
sector. The largest increase in renegotiated loans
compared with 2011 was in this sector in Mexico.
In addition, renegotiation activity in the personal
lending portfolios increased in Brazil, where a
collections campaign led to a significant increase
in both the refinancing and debt consolidation
portfolios.
In the Middle East and North Africa,
renegotiated loans decreased compared with 2011,
mainly in the corporate and commercial sector due to
repayments and reduced exposures. Forbearance
activity in Hong Kong and Rest of Asia-Pacific
remained insignificant.
HSBC Finance loan modifications and re-ageing
(Unaudited)
HSBC Finance maintains loan modification and
re-age (‘loan renegotiation’) programmes in order to
manage customer relationships, improve collection
opportunities and, if possible, avoid foreclosure.
Since 2006, HSBC Finance has implemented
an extensive loan renegotiation programme, and a
significant portion of its loan portfolio has been
subject to renegotiation at some stage in the life of
the customer relationship as a consequence of the
economic conditions in the US and the nature of
HSBC Finance’s customer base.
31 December 2011
Personal ...........................................................
First lien residential mortgages ...................
Other personal1 ...........................................
Corporate and commercial .............................
Manufacturing and international
Europe
US$m
2,524
1,630
894
8,453
trade services ..........................................
3,013
Commercial real estate and other
property-related ......................................
Governments ..............................................
Other commercial9 ......................................
4,897
–
543
Financial .........................................................
487
Total impairment allowances on
renegotiated loans .......................................
Individually assessed ..................................
Collectively assessed ..................................
11,464
1,821
1,760
61
For footnotes, see page 249.
2012 compared with 2011
(Unaudited)
Renegotiated loans totalled US$42bn at
31 December 2012 (2011: US$46bn). North
America accounted for the largest volume of
renegotiated loans which amounted to US$26bn or
62% of total renegotiated loans at 31 December 2012
(2011: US$28bn or 62%), most of which were first
lien residential mortgages held by HSBC Finance.
Of the total renegotiated loans in North America,
US$17bn were impaired at 31 December 2012
(2011: US$18bn). The ratio of total impairment
allowances to impaired loans at 31 December 2012
was 23% (2011: 28%). This decrease was driven by
a reduction in both impaired loans and impairment
allowances as we continued to run-off the CML
portfolio. As the portfolio has been closed to new
business since 2007, the volume of first time
renegotiations has reduced significantly.
In Europe, renegotiated loans at 31 December
2012 amounted to US$10bn (2011: US$11bn),
constituting 24% of total renegotiated loans (2011:
25%). Of the total renegotiated loans in Europe,
US$5.7bn were impaired at 31 December 2012
(2011: US$6.0bn), and the ratio of total impairment
allowances to impaired loans at 31 December 2012
was 27% (2011: 30%). This decline was driven by a
reduction in both impaired loans and impairment
allowances due to releases and write-offs of a
number of non-performing loans as well as the sale
of a number of exposures. The renegotiated loans in
Europe largely consisted of commercial real estate
and other property-related sector lending of 37%
(2011: 43%) mainly in the UK, and manufacturing
285
86
199
157
32
29
–
96
5
447
20
19
1
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Risk > Credit risk > Credit quality of financial instruments
The volume of loans that qualify for modification
Qualifying criteria
has reduced significantly in recent years. We expect
this trend to continue as HSBC Finance believes the
percentage of its customers with unmodified loans
who would benefit from loan modification in a way
that would avoid non-payment of future cash flows
is decreasing. In addition, volumes of new loan
modifications are expected to decrease due to gradual
improvements in economic conditions, the cessation
of new real estate secured and personal non-credit
card receivables originations and the continued run-
off of the CML portfolio.
Types of loan renegotiation programme in HSBC Finance
• A temporary modification is a change to the contractual
terms of a loan that results in the giving up of a right to
contractual cash flows over a pre-defined period. With a
temporary modification the loan is expected to revert back
to the original contractual terms, including the interest rate
charged, after the modification period. An example is
reduced interest payments.
A substantial number of HSBC Finance modifications
involve interest rate reductions. These modifications
lower the amount of interest income HSBC Finance is
contractually entitled to receive in future periods.
Historically, modifications have generally been for six
months, although extended modification periods are
now more common.
Loans that have been re-aged are classified as impaired with
the exception of first-time loan re-ages that were less than
60 days past due at the time of re-age. These remain
classified as impaired until they have demonstrated a history
of payment performance against their original contracted
terms for at least 12 months.
• A permanent modification is a change to the contractual
terms of a loan that results in giving up a right to contractual
cash flows over the life of the loan. An example is a
permanent reduction in the interest rate charged.
Permanent or long-term modifications which are due to an
underlying hardship event remain classified as impaired for
their full life.
• The term ‘re-age’ describes a renegotiation by which the
contractual delinquency status of a loan is reset to current
after demonstrating payment performance. The overdue
principal and/or interest is deferred and paid at a later date.
Loan re-ageing enables customers who have been unable
to make a small number of payments to have their loan
delinquency status reset to current so that their credit score
is not affected by the overdue balances.
Loans that have been re-aged remain classified as impaired
until they have demonstrated a history of payment
performance against the original contractual terms for at
least 12 months.
A temporary or permanent modification may also lead to a
re-ageing of a loan although a loan may be re-aged without
any modification to its original terms and conditions.
Where loans have been granted multiple concessions,
subject to the qualifying criteria discussed below, the
concession is deemed to have been made due to concern
regarding the borrower’s ability to pay, and the loan is
disclosed as impaired. The loan remains disclosed as
impaired from that date forward until the borrower has
demonstrated a history of repayment performance for the
period of time required for either modifications or re-ages,
as described above.
160
For an account to qualify for renegotiation it must
meet certain criteria. However, HSBC Finance
retains the right to decline a renegotiation. The
extent to which HSBC Finance renegotiates
accounts that are eligible under its existing policies
will vary depending upon its view of prevailing
economic conditions and other factors which may
change from year to year. In addition, exceptions
to policies and practices may be made in specific
situations in response to legal or regulatory
agreements or orders.
Renegotiated real estate secured and personal
lending receivables are not eligible for a subsequent
renegotiation for twelve or six months, respectively,
with a maximum of five renegotiations permitted
within a five-year period. Borrowers must be
approved for a modification and generally make
two minimum qualifying monthly payments within
60 days to activate a modification.
In certain circumstances where the debt has
been restructured in bankruptcy proceedings, fewer
or no payments may be required. Accounts whose
borrowers are subject to a Chapter 13 plan filed
with a bankruptcy court generally may be re-aged
upon receipt of one qualifying payment, whereas
accounts whose borrowers have filed for Chapter 7
bankruptcy protection may be re-aged upon receipt
of a signed reaffirmation agreement. In addition, for
some products, accounts may be re-aged without
receipt of a payment in certain special circumstances
(e.g. in the event of a natural disaster or a hardship
programme).
2012 compared with 2011
At 31 December 2012, renegotiated real estate secured
accounts in HSBC Finance represented 86% (2011:
86%) of North America’s total renegotiated loans;
US$14bn (2011: US$16bn) of these renegotiated real
estate secured loans were classified as impaired. This
decline was mainly due to lower lending balances as
we continued to run-off the CML portfolio. A
significant portion of HSBC Finance’s renegotiated
portfolio has received multiple renegotiations.
Consequently, a significant proportion of loans
included in the table below have undergone multiple
re-ages or modifications. In this regard, multiple
modifications have remained consistent at 75% to
80% of total modifications. Further details of HSBC
Finance’s real estate secured accounts and
renegotiation programmes are provided below.
Gross loan portfolio of HSBC Finance real estate secured balances
(Unaudited)
Modified
Re-aged13
US$m
and re-aged Modified
US$m
US$m
Total re-
negotiated
loans
US$m
Total non-
renegotiated
loans
US$m
31 December 2012 ........
31 December 2011 .........
9,640
10,265
11,660
12,829
1,121
1,494
22,421
24,588
16,261
19,540
Total
gross
loans
US$m
38,743
44,128
Total
impair-
ment
allowances
US$m
Impair-
ment
allowances/
gross loans
%
4,481
5,088
12
12
For footnote, see page 249.
Movement in HSBC Finance renegotiated real estate balances
(Unaudited)
At 1 January ..............................................................................................................................................................................
Additions ...................................................................................................................................................................................
Payments ...................................................................................................................................................................................
Write-offs ..................................................................................................................................................................................
Transfer to ‘Assets held for sale’ and ‘Other assets’ ...............................................................................................................
At 31 December ........................................................................................................................................................................
2012
US$m
24,588
1,221
(1,133)
(1,796)
(459)
22,421
Number of renegotiated real estate secured accounts remaining in HSBC Finance’s portfolio
(Unaudited)
Number of renegotiated loans (000s)
Re-aged
Modified
and re-aged Modified
31 December 2012 ...........................................................
31 December 2011 ............................................................
117
121
107
112
11
14
Total
number of
loans (000s)
427
469
Total
235
246
During 2012, the aggregate number of
renegotiated loans reduced due to the run-off of the
portfolio. Within the constraints of our Group credit
policy, HSBC Finance’s policies allow for multiple
renegotiations under certain circumstances, and a
significant number of accounts received a second (or
further) renegotiation during the year which does not
appear in the statistics tabulated above because they
present a loan as an addition to the volume of
renegotiated loans on its first renegotiation only.
At 31 December 2012, renegotiated loans were 58%
(2011: 56%) of the total portfolio of HSBC
Finance’s real estate secured accounts.
Corporate and commercial forbearance
(Unaudited)
For the current policies and procedures
regarding forbearance in the corporate and
commercial sector, see the Appendix to Risk
on page 257.
Renegotiated loan balances in the corporate and
commercial sector decreased by US$1.8bn. The
majority of the decrease was due to falling
renegotiated loan balances in the commercial real
estate and other property-related sector in 2012,
which fell by US$1.3bn. This was primarily in
Europe although the commercial real estate sector,
particularly in the UK, continued to experience
weaker property values, with fewer financial
institutions financing commercial real estate lending,
renegotiated loan balances fell as refinements in
forbearance identification procedures reduced the
renegotiated loan balances in UK commercial real
estate and other property-related lending. Excluding
the change in basis of reporting renegotiated loans,
total renegotiated loans in the commercial real estate
and other property-related sector remained broadly
unchanged.
Within the commercial real estate and other
property-related loans, the balances classified as
‘impaired’ declined marginally compared with 2011.
Balances classified as ‘past due but not impaired’
declined by US$112m, mainly in the Middle East
and North Africa relating to a small number of
exposures in the UAE. Balances classified as
‘neither past due nor impaired’ declined by 39%,
mainly in Europe reflecting the reduction in balances
in the commercial real estate sector described above.
The commercial real estate mid-market
sector continued to experience higher levels of
renegotiation activity than larger corporates, where
borrowers remained generally better capitalised
with access to wider funding market opportunities.
When considering acceptable restructuring terms
for commercial real estate loans in Europe, we take
into account the ability of the customer to service
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Risk > Credit risk > Credit quality of financial instruments / Collateral
the revised interest payments as a prerequisite.
Similarly, for principal payment modifications,
we require the customer to be capable of complying
with the revised terms as a necessary pre-condition.
When principal payments are modified and
permanent forgiveness results, or when it is
otherwise considered that there is no longer a
realistic prospect of recovering outstanding
principal, the affected balances are written off.
When principal repayments are postponed, the
customer is expected to be able to pay in line with
the renegotiated terms, including meeting the
postponed principal repayment if due from
refinancing. In all cases, a loan renegotiation is
only granted when it is expected that the customer
will be able to meet the revised terms.
Renegotiated loan balances in the manufacturing
and international trade services sector increased in
2012, mainly in Latin America from the restructuring
of a small number of loans in Mexico. In the Middle
East and North Africa, renegotiated loan balances
decreased, partly due to the repayment of a significant
loan in the UAE.
Impaired loans
(Audited)
Impaired loans and advances are those that meet
any of the following criteria:
•
•
loans and advances classified as CRR 9,
CRR 10, EL 9 or EL 10 (a description of our
internal credit rating grades is provided on
page 253);
retail exposures 90 days or more past due,
unless individually they have been assessed
as not impaired; or
•
renegotiated loans and advances that have been
subject to a change in contractual cash flows as
a result of a concession which the lender would
not otherwise consider, and where it is probable
that without the concession the borrower would
be unable to meet its contractual payment
obligations in full, unless the concession is
insignificant and there are no other indicators
of impairment. Renegotiated loans remain
classified as impaired until there is sufficient
evidence to demonstrate a significant reduction
in the risk of non-payment of future cash flows,
and there are no other indicators of impairment.
For loans that are assessed for impairment
on a collective basis, the evidence to support
reclassification as no longer impaired typically
comprises a history of payment performance against
the original or revised terms, depending on the
nature and volume of forbearance and the credit
risk characteristics surrounding the renegotiation.
For loans that are assessed for impairment on an
individual basis, all available evidence is assessed
on a case by case basis.
In HSBC Finance, where a significant majority
of HSBC’s loan forbearance activity occurs, the
history of payment performance is assessed with
reference to the original terms of the contract,
reflecting the higher credit risk characteristics of
this portfolio. The payment performance periods are
monitored to ensure they remain appropriate to the
levels of recidivism observed within the portfolio.
Further disclosure about loans subject to
forbearance is provided on page 254. Renegotiated
loans and forbearance disclosures are subject to
evolving industry practice and regulatory guidance.
162
Movement in impaired loans by geographical region
(Unaudited)
Europe
US$m
Hong
Kong
US$m
Rest of
Asia-
Pacific
US$m
MENA
US$m
Latin
North
America
America
Total
US$m US$m US$m
Impaired loans at 1 January 2012 .............................
Personal ................................................................
Corporate and commercial ...................................
Financial2 ..............................................................
Classified as impaired during the year .....................
Personal ................................................................
Corporate and commercial ...................................
Financial2 ..............................................................
Transferred from impaired to unimpaired
during the year ......................................................
Personal ................................................................
Corporate and commercial ...................................
Financial2 ..............................................................
Amounts written off .................................................
Personal ................................................................
Corporate and commercial ...................................
Financial2 ..............................................................
Net repayments and other..........................................
Personal ................................................................
Corporate and commercial ...................................
Financial2 ..............................................................
At 31 December 2012 ..............................................
Personal ................................................................
Corporate and commercial ...................................
Financial2 ..............................................................
11,819
2,797
8,113
909
3,482
933
2,481
68
(1,164)
(279)
(858)
(27)
(1,891)
(632)
(1,212)
(47)
(1,101)
(353)
(466)
(282)
11,145
2,466
8,058
621
For footnote, see page 249.
Collateral
Collateral and other credit enhancements
held
(Audited)
Loans and advances held at amortised cost
Although collateral can be an important mitigant
of credit risk, it is the Group’s practice to lend on
the basis of the customer’s ability to meet their
obligations out of 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. However, for
other lending a charge over collateral is obtained and
considered in determining the credit decision and
pricing. In the event of default, the bank may utilise
the collateral as a source of repayment.
Depending on its form, collateral can have a
significant financial effect in mitigating our exposure
to credit risk.
The tables below provide a quantification of
the value of fixed charges we hold over a borrower’s
specific asset (or assets) where we have a history
of enforcing, and are able to enforce, the collateral in
608
190
372
46
292
169
123
–
(47)
(38)
(5)
(4)
(217)
(127)
(90)
–
(159)
(22)
(133)
(4)
477
172
267
38
1,070
388
667
15
924
549
375
–
(85)
(69)
(15)
(1)
(564)
(373)
(191)
–
(198)
(56)
(136)
(6)
1,147
439
700
8
2,445
428
1,798
219
648
73
531
44
(321)
(32)
(289)
–
(264)
(96)
(143)
(25)
(34)
(5)
(26)
(3)
2,474
368
1,872
234
22,758
21,094
1,517
147
8,130
7,363
739
28
(4,223)
(4,124)
(99)
–
(3,514)
(3,227)
(202)
(85)
(2,806)
(2,380)
(363)
(63)
20,345
18,726
1,592
27
3,039
1,646
1,391
2
4,507
2,807
1,696
4
(1,765)
(1,124)
(640)
(1)
(2,112)
(1,521)
(590)
(1)
(481)
(228)
(253)
–
41,739
26,543
13,858
1,338
17,983
11,894
5,945
144
(7,605)
(5,666)
(1,906)
(33)
(8,562)
(5,976)
(2,428)
(158)
(4,779)
(3,044)
(1,377)
(358)
3,188
1,580
1,604
4
38,776
23,751
14,093
932
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 in the
tables below excludes any adjustments for obtaining
and selling the collateral.
We may also manage our risk by employing
other types of collateral and credit risk
enhancements, such as second charges, other
liens and unsupported guarantees, but the valuation
of such mitigants is less certain and their financial
effect has not been quantified. In particular, loans
shown in the tables below as not collateralised or
partially collateralised may benefit from such credit
mitigants.
Certain credit mitigants are used strategically in
portfolio management activities. While single name
concentrations arise in portfolios managed by Global
Banking and Corporate Banking, it is only in Global
Banking that their size requires the use of portfolio
level credit mitigants. Across Global Banking risk
limits and utilisations, maturity profiles and risk
quality are monitored and managed pro-actively.
This process is key to the setting of risk appetite
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Report of the Directors: Operating and Financial Review (continued)
Risk > Credit risk > Collateral
for these larger, more complex, geographically
distributed customer groups. While the principal
form of risk management continues to be at the
point of exposure origination, through the lending
decision-making process, Global Banking also
utilises loan sales and credit default swap (‘CDS’)
hedges to manage concentrations and reduce risk.
Personal lending
These transactions are the responsibility of a
dedicated Global Banking portfolio management
team. Hedging activity is carried out within agreed
credit parameters, and is subject to market risk limits
and a robust governance structure. CDS mitigants
are held at portfolio level and are not reported in the
presentation below.
Residential mortgage loans including loan commitments by level of collateral
(Audited)
At 31 December 2012
Fully collateralised .....................
Loan to value (‘LTV’) ratio:
– less than 25% .......................
– 25% to 50% .........................
– 51% to 75% .........................
– 76% to 90% .........................
– 91% to 100% .......................
Partially collateralised:
– greater than 100% LTV .......
– collateral value ....................
Europe
US$m
Hong
Kong
US$m
Rest of
Asia-Pacific
US$m
MENA
US$m
North
America
Latin
America
US$m
US$m
Total
US$m
141,673
53,478
43,662
2,106
59,799
5,193
305,911
11,733
36,038
60,395
27,118
6,389
2,967
2,565
8,090
30,155
12,770
1,931
532
4,438
12,752
19,625
6,195
652
2
1
376
323
125
623
1,001
189
168
85
76
3,703
10,934
26,582
12,307
6,273
10,210
8,684
319
1,522
2,295
871
186
28,408
92,022
122,668
48,611
14,200
16
12
13,656
11,661
Total residential mortgages .........
144,640
53,480
44,038
2,191
70,009
5,209
319,567
At 31 December 2011
Fully collateralised .....................
LTV ratio:
– less than 25% ......................
– 25% to 50% .........................
– 51% to 75% .........................
– 76% to 90% .........................
– 91% to 100% .......................
Partially collateralised:
– greater than 100% LTV .......
– collateral value ....................
125,702
46,532
38,381
1,761
60,794
4,891
278,061
9,898
31,601
52,656
23,919
7,628
3,275
2,821
5,364
19,643
17,748
2,884
893
2,383
9,978
18,006
7,624
390
484
466
295
37
58
336
895
304
168
174
135
3,576
10,593
25,138
13,590
7,897
12,503
10,566
282
1,350
2,221
876
162
21,561
73,501
116,664
49,197
17,138
102
24
16,833
14,049
Total residential mortgages .........
128,977
47,016
38,676
1,935
73,297
4,993
294,894
The above table shows residential mortgage lending
including off-balance sheet loan commitments by
level of collateral. Off-balance sheet commitments
include loans that have been approved but which the
customer has not yet drawn, and the undrawn portion
of loans that have a flexible drawdown facility such
as the offset mortgage product. The collateral
included in the table above consists of first charges
on real estate.
The LTV ratio is calculated as the gross on-
balance sheet carrying amount of the loan and any
off-balance sheet loan commitment at the balance
sheet date divided by the value of collateral. The
methodologies for obtaining residential property
collateral values vary throughout the Group, but
are typically determined through a combination
of professional appraisals, house price indices or
statistical analysis. Valuations must be updated on
a regular basis and, as a minimum, at intervals of
every three years. Valuations are conducted more
frequently when market conditions or portfolio
performance are subject to significant change or
when a loan is identified and assessed as impaired.
The LTV ratio bandings are consistent with
our internal risk management reporting. While we
do have mortgages in the higher LTV bands, our
appetite for such lending is restricted and the larger
portion of our portfolio is concentrated in the lower
risk LTV bandings of 75% and below.
Other personal lending
Other personal lending consists primarily of
overdrafts, credit cards and second lien mortgage
portfolios. Second lien lending is supported by
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collateral but the claim on the collateral is
subordinate to the first lien charge. The majority of
our second lien portfolios were originated in North
America where loss experience on defaulted
second lien loans has typically approached 100%;
consequently, we do not generally attach any
significant financial value to this type of collateral.
Credit cards and overdrafts are usually unsecured.
Corporate, commercial and financial (non-bank)
lending
Collateral held is analysed separately below for
commercial real estate and for other corporate,
commercial and financial (non-bank) lending. This
reflects the difference in collateral held on the
portfolios. In each case, the analysis includes off-
balance sheet loan commitments, primarily undrawn
credit lines.
Commercial real estate loans and advances including loan commitments by level of collateral
(Audited)
Europe
US$m
Hong
Kong
US$m
Rest of
Asia-Pacific
US$m
MENA
US$m
North
America
Latin
America
US$m
US$m
At 31 December 2012
Rated CRR/EL 1 to 7
Not collateralised ........................
Fully collateralised .....................
Partially collateralised (A)...........
– collateral value on A ................
Rated CRR/EL 8 to 10
Not collateralised ........................
Fully collateralised .....................
LTV ratio:
– less than 25% .......................
– 25% to 50% .........................
– 51% to 75% .........................
– 76% to 90% .........................
– 91% to 100% .......................
Partially collateralised (B) ..........
– collateral value on B ................
Total commercial real estate
7,068
23,450
3,088
2,780
10,790
17,355
1,476
1,179
3,647
6,106
1,150
464
33,606
29,621
10,903
418
1,261
34
119
437
501
170
1,585
938
3,264
–
2
–
1
–
–
1
–
–
2
–
60
1
55
2
1
1
51
15
111
569
92
33
29
694
14
8
–
7
–
–
1
204
111
226
Total
US$m
24,338
57,903
7,713
5,276
181
9,054
1,063
401
2,083
1,846
903
423
10,298
4,832
89,954
34
408
25
86
69
58
170
377
265
819
105
141
10
8
28
63
32
24
13
571
1,880
70
276
536
623
375
2,241
1,342
270
4,692
loans and advances .................
36,870
29,623
11,014
920
11,117
5,102
94,646
At 31 December 2011
Rated CRR/EL 1 to 7
Not collateralised ........................
Fully collateralised .....................
Partially collateralised (C) ..........
– collateral value on C ................
Rated CRR/EL 8 to 10
Not collateralised ........................
Fully collateralised .....................
LTV ratio:
– less than 25% .......................
– 25% to 50% .........................
– 51% to 75% .........................
– 76% to 90% .........................
– 91% to 100% .......................
Partially collateralised (D) ..........
– collateral value on D ................
Total commercial real estate
5,730
24,547
3,099
1,775
12,552
11,734
916
591
2,973
6,929
1,032
280
33,376
25,202
10,934
434
1,413
24
140
935
159
155
1,921
1,083
3,768
2
2
–
2
–
–
–
–
–
4
10
23
–
–
1
2
20
42
26
75
631
65
50
39
746
55
74
–
–
–
74
–
181
89
310
97
8,506
1,635
311
2,136
1,706
999
559
24,119
53,487
7,731
3,555
10,238
4,841
85,337
135
521
65
5
217
61
173
401
246
127
196
9
21
28
117
21
3
1
763
2,229
98
168
1,181
413
369
2,548
1,445
1,057
326
5,540
loans and advances .................
37,144
25,206
11,009
1,056
11,295
5,167
90,877
The collateral included in the table above
consists of fixed first charges on real estate and
charges over cash for commercial real estate. These
facilities are disclosed as not collateralised if they
are unsecured or benefit from credit risk mitigation
from guarantees, which are not quantified for the
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Risk > Credit risk > Collateral / Impairment of loans and advances
purposes of this disclosure. In Hong Kong, market
practice is for lending to major property companies
to be typically secured by guarantees or unsecured.
In Europe, facilities of a working capital nature are
generally not secured by a first fixed charge and are
therefore disclosed as not collateralised.
The value of commercial real estate collateral is
determined through a combination of professional
and internal valuations and physical inspection.
Due to the complexity of valuing collateral for
commercial real estate, local valuation policies
determine the frequency of review based on local
market conditions. Revaluations are sought with
greater frequency when, as part of the regular credit
assessment of the obligor, material concerns arise in
relation to the transaction which may reflect on the
underlying performance of the collateral, or in
circumstances where an obligor’s credit quality
has declined sufficiently to cause concern that
the principal payment source may not fully meet
the obligation (i.e. the obligor’s credit quality
classification indicates it is at the lower end,
that is sub-standard, or approaching impaired).
Where such concerns exist the revaluation method
selected will depend upon the loan-to-value
relationship, the direction in which the local
commercial real estate market has moved since the
last valuation and, most importantly, the specific
characteristics of the underlying commercial real
estate which is of concern.
Other corporate, commercial and financial (non-bank) loans and advances including loan commitments by level of
collateral rated CRR/EL 8 to 10 only
(Audited)
Europe
US$m
Hong
Kong
US$m
Rest of
Asia-Pacific
US$m
MENA
US$m
North
America
Latin
America
US$m
US$m
At 31 December 2012
Not collateralised ........................
Fully collateralised .....................
LTV ratio:
– less than 25% .......................
– 25% to 50% .........................
– 51% to 75% .........................
– 76% to 90% .........................
– 91% to 100% .......................
Partially collateralised (A)...........
– collateral value on A ................
5,110
1,463
77
192
290
196
708
1,106
628
260
82
3
4
39
24
12
84
41
7,679
426
At 31 December 2011
Not collateralised ........................
Fully collateralised .....................
LTV ratio:
– less than 25% .......................
– 25% to 50% .........................
– 51% to 75% .........................
– 76% to 90% .........................
– 91% to 100% .......................
Partially collateralised (B)...........
– collateral value on B ................
5,583
1,765
173
274
587
153
578
1,367
558
8,715
349
63
4
47
11
–
1
100
55
512
1,186
132
–
6
33
18
75
828
124
533
478
11
49
131
96
191
753
359
1,023
284
68
84
61
17
54
273
108
Total
US$m
8,684
2,585
170
397
585
362
1,071
3,295
1,349
2,146
1,764
1,580
14,564
1,695
60
3
3
31
20
3
498
103
801
441
16
38
51
128
208
1,206
541
1,546
602
10,769
3,078
106
74
96
21
305
390
214
312
465
808
354
1,139
3,717
1,547
572
146
11
62
31
11
31
251
89
969
795
147
10
29
32
32
44
156
76
1,098
2,253
2,448
2,538
17,564
The collateral used in the assessment of the
above lending primarily includes first legal charges
over real estate and charges over cash in the
commercial and industrial sector, and charges over
cash and marketable financial instruments in the
financial sector. Government sector lending is
generally unsecured.
for corporate and commercial lending such as
unsupported guarantees and floating charges over
the assets of a customer’s business. While such
mitigants have value, often providing rights in
insolvency, their assignable value is insufficiently
certain and they are assigned no value for disclosure
purposes.
It should be noted that the table above excludes
other types of collateral which are commonly taken
As with commercial real estate, the value of
real estate collateral included in the table above is
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generally determined through a combination of
professional and internal valuations and physical
inspection. The frequency of revaluation is
undertaken on a similar basis to commercial real
estate loans and advances; however, for financing
activities in corporate and commercial lending that
are not predominantly commercial real estate-
oriented, collateral value is not as strongly correlated
to principal repayment performance. Collateral
values will generally be refreshed when an obligor’s
general credit performance deteriorates and it is
necessary to assess the likely performance of
secondary sources of repayment should reliance
upon them prove necessary. For this reason, the table
above reports values only for customers with CRR 8
to 10, recognising that these loans and advances
generally have valuations which are comparatively
recent. For the table above, cash is valued at its
nominal value and marketable securities at their
fair value.
The difference between the collateral value and
the value of partially collateralised lending disclosed
in the tables above cannot be directly compared with
any impairment allowances recognised in respect of
impaired loans, as the loans may be performing in
accordance with their contractual terms. When
loans are not performing in accordance with their
contractual terms, the recovery of cash flows may be
affected by other cash resources of the customer, or
other credit risk enhancements not quantified for the
tables above. The Group’s policy for determining
impairment allowances, including the effect of
collateral on these impairment allowances, is
described on page 258.
Loans and advances to banks
The following table shows loans and advances to
banks, including off-balance sheet loan
commitments by level of collateral.
Loans and advances to banks including loan commitments by level of collateral
(Audited)
At 31 December 2012
Not collateralised ........................
Fully collateralised .....................
Partially collateralised (A)...........
– collateral value on A ............
At 31 December 2011
Not collateralised ........................
Fully collateralised .....................
Partially collateralised (B)...........
– collateral value on B ............
Europe
US$m
36,043
25,496
62
61
Hong
Kong
US$m
Rest of
Asia-Pacific
US$m
MENA
US$m
North
America
Latin
America
US$m
US$m
24,622
2,294
1,459
1,452
40,694
5,667
1,207
1,135
7,290
–
–
–
9,050
811
–
–
12,838
3,691
–
–
Total
US$m
130,537
37,959
2,728
2,648
61,601
28,375
47,568
7,290
9,861
16,529
171,224
25,896
31,515
146
104
34,892
1,365
50
50
42,586
6,927
445
207
9,337
32
–
–
14,132
978
784
702
19,516
1,238
114
88
146,359
42,055
1,539
1,151
57,557
36,307
49,958
9,369
15,894
20,868
189,953
The collateral used in the assessment of the
above lending relates primarily to cash and
marketable securities. Loans and advances to banks
are typically unsecured. Certain products such as
reverse repos and stock borrowing are effectively
collateralised and have been included in the
above as fully or partly collateralised. The fully
collateralised loans and advances to banks for
Europe in the table above consist primarily of
reverse repo agreements and stock borrowing.
Derivatives
The International Swaps and Derivatives Association
(‘ISDA’) Master Agreement is our preferred
agreement for documenting derivatives activity. It
provides the contractual framework within which
dealing activity across a full range of over-the-
counter (‘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 another
pre-agreed termination event occurs. It is common,
and our 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 counterparty risk inherent in outstanding
positions. The majority of our CSAs are with
financial institutional clients.
We manage our counterparty exposure arising
due to market risk on OTC derivative contracts
through the use of collateral agreements with
counterparties and netting agreements. We do not
currently undertake active management of our
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Risk > Credit risk > Collateral / Impairment of loans and advances
Collateral and other credit enhancements
obtained
(Audited)
The carrying amount of assets obtained by taking
possession of collateral held as security, or calling
upon other credit enhancements, is as follows:
Carrying amount at
31 December
2012
2011
US$m
Nature of assets
Residential property .....................
Commercial and industrial
property ....................................
Other ............................................
US$m
353
88
3
444
420
64
17
501
The significant reduction in residential
properties was due to the suspension of foreclosure
activities at the end of 2011 and during the first half
of 2012 (see page 151).
We make repossessed properties available for
sale in an orderly fashion, with the proceeds used
to reduce or repay the outstanding indebtedness. If
excess funds arise after the debt has been repaid,
they are made available to repay other secured
lenders with lower priority or returned to the
customer. We do not generally occupy repossessed
properties for our business use.
Impairment of loans and advances
(Audited)
A summary of our current policies and
practices regarding impairment assessment
is provided in the Appendix to Risk on
page 258.
The tables below analyse by geographical region the
impairment allowances recognised for impaired
loans and advances that are either individually
assessed or collectively assessed, and collective
impairment allowances on loans and advances
classified as not impaired.
general OTC derivative counterparty exposure
in the credit markets, although we may manage
individual exposures in certain circumstances.
A description of the derivative offset amount
in the ‘Maximum exposure to credit risk’ table is
provided on page 145.
Other credit risk exposures
In addition to collateralised lending described above,
other credit enhancements are employed and
methods used to mitigate credit risk arising from
financial assets. These are described in more detail
below.
Securities issued by governments, banks and
other financial institutions may benefit from
additional credit enhancement, notably through
government guarantees that reference these assets.
Details of government guarantees are included in
Notes 6, 10 and 12 on the Financial Statements.
Corporate issued debt securities 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 CDS
protection. Disclosure of the Group’s holdings of
ABSs and associated CDS protection is provided
on page 184.
Trading assets include loans and advances held
with trading intent, the majority of which consist of
reverse repos and stock borrowing which, by their
nature, are collateralised. Collateral accepted as
security that the Group is permitted to sell or
repledge under these arrangements is described
in Note 36 on the Financial Statements. Trading
assets also include money market term placements,
which are unsecured.
The Group’s maximum exposure to credit
risk includes financial guarantees and similar
arrangements that we issue or enter into, and 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.
Further information about these arrangements is
provided in Note 40 on the Financial Statements.
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Impairment allowances on loans and advances to customers by geographical region
(Audited)
Europe
US$m
Hong
Kong
US$m
Rest of
Asia-
Pacific
US$m
MENA
US$m
Latin
North
America
Total
America
US$m US$m US$m
At 31 December 2012
Gross loans and advances to customers
Individually assessed impaired loans14 (A) ..............
9,959
398
1,019
2,251
1,849
1,295
16,771
Collectively assessed15 (B) .......................................
Impaired loans14 ...................................................
Non-impaired loans16 ...........................................
458,802
1,121
457,681
173,688
79
173,609
137,846
128
137,718
27,629
197
27,432
144,523
18,482
126,041
54,476
1,893
52,583
996,964
21,900
975,064
Total (C) ....................................................................
468,761
174,086
138,865
29,880
146,372
55,771 1,013,735
Impairment allowances (C) ......................................
Individually assessed (A) .....................................
Collectively assessed (B) .....................................
5,321
3,781
1,540
473
192
281
746
442
304
1,794
1,323
471
5,616
428
5,188
2,162
406
1,756
16,112
6,572
9,540
Net loans and advances ............................................
463,440
173,613
138,119
28,086
140,756
53,609
997,623
Allowances as a percentage of loans and advances:
– individually assessed (A) ..................................
– collectively assessed (B) ...................................
– total (C) ..............................................................
38.0
0.3
1.1
48.2
0.2
0.3
43.4
0.2
0.5
58.8
1.7
6.0
23.1
3.6
3.8
31.4
3.2
3.9
39.2
1.0
1.6
%
%
%
%
%
%
%
At 31 December 2011
Gross loans and advances to customers
Individually assessed impaired loans14 (E) ..............
10,490
519
963
2,187
1,832
563
16,554
US$m
US$m
US$m
US$m
US$m US$m US$m
Collectively assessed15 (F) ........................................
Impaired loans14 ...................................................
Non-impaired loans16 ...........................................
429,088
1,261
427,827
157,727
85
157,642
123,687
106
123,581
25,402
238
25,164
148,096
20,864
127,232
57,386
2,476
54,910
941,386
25,030
916,356
Total (G) ...................................................................
439,578
158,246
124,650
27,589
149,928
57,949
957,940
Impairment allowances (G) ......................................
Individually assessed (E) ......................................
Collectively assessed (F) ......................................
5,242
3,754
1,488
581
288
293
782
505
277
1,714
1,250
464
7,181
416
6,765
2,011
324
1,687
17,511
6,537
10,974
Net loans and advances ............................................
434,336
157,665
123,868
25,875
142,747
55,938
940,429
Allowances as a percentage of loans and advances:
– individually assessed (E) ...................................
– collectively assessed (F) ....................................
– total (G) .............................................................
35.8
0.3
1.2
55.5
0.2
0.4
52.4
0.2
0.6
57.2
1.8
6.2
22.7
4.6
4.8
57.4
2.9
3.5
39.5
1.2
1.8
%
%
%
%
%
%
%
For footnotes, see page 249.
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Risk > Credit risk > Impairment of loans and advances
Net loan impairment charge to the income statement by geographical region
(Unaudited)
Europe
US$m
Hong
Kong
US$m
Rest of
Asia-
Pacific
US$m
MENA
US$m
Latin
North
America
Total
America
US$m US$m US$m
2012
Individually assessed impairment allowances .........
New allowances ....................................................
Release of allowances no longer required ...........
Recoveries of amounts previously written off .....
Collectively assessed impairment allowances .........
New allowances net of allowance releases ..........
Recoveries of amounts previously written off .....
Total charge for impairment losses ..........................
Customers ............................................................
2011
Individually assessed impairment allowances .........
New allowances ....................................................
Release of allowances no longer required ...........
Recoveries of amounts previously written off .....
Collectively assessed impairment allowances .........
New allowances net of allowance releases ..........
Recoveries of amounts previously written off .....
Total charge for impairment losses ..........................
Banks ...................................................................
Customers ............................................................
1,387
1,960
(516)
(57)
487
839
(352)
1,874
1,874
1,262
1,670
(378)
(30)
640
1,181
(541)
1,902
(11)
1,913
2012 compared with 2011
(Unaudited)
The following commentary is on a constant currency
basis.
Loan impairment allowances were US$16.2bn, a
decline of 9% compared with 2011, reflecting lower
lending balances in our US CML portfolio which
included the reclassification of impairment
allowances on non-real estate personal loan
balances to ‘Assets held for sale’. Releases and
recoveries of US$2.1bn were 3% lower, mainly in
North America due to lower customer repayments in
the corporate and commercial sector, as well as the
non-recurrence of a number of releases and
recoveries incurred in 2011 in Hong Kong and Rest
of Asia-Pacific.
Impaired loans were 3% of total gross loans and
advances at the end of 2012, compared with 4% at
31 December 2011.
In Europe, new loan impairment allowances
were US$2.8bn, broadly unchanged compared with
2011. New collectively assessed loan impairment
allowances declined by 28%, mainly in the UK
personal lending book, as we focused our lending
growth on higher quality assets and continued to
pro-actively identify and monitor customers
(8)
32
(34)
(6)
92
117
(25)
84
84
18
79
(41)
(20)
99
126
(27)
117
–
117
97
239
(117)
(25)
243
368
(125)
340
340
67
207
(114)
(26)
207
366
(159)
274
–
274
205
369
(133)
(31)
50
94
(44)
255
255
199
328
(80)
(49)
93
147
(54)
292
–
292
258
380
(85)
(37)
3,204
3,296
(92)
3,462
3,462
243
398
(111)
(44)
6,807
6,894
(87)
7,050
(5)
7,055
200
292
(49)
(43)
1,945
2,254
(309)
2,139
3,272
(934)
(199)
6,021
6,968
(947)
2,145
2,145
8,160
8,160
126
222
(74)
(22)
1,915
2,904
(798)
(191)
1,744
2,111
(367)
9,590
10,825
(1,235)
1870
–
1,870
11,505
(16)
11,521
facing financial hardship. This resulted in lower
delinquency rates across both the secured and
unsecured lending portfolios. Individually assessed
new loan impairment allowances increased by 21%
across a range of sectors reflecting the challenging
economic conditions in the UK, Greece, Spain and
Turkey. In addition, a rise in impairments in Turkey
was due to strong balance sheet growth in customer
loans and advances in RBWM, notably in credit
cards and personal loans, driven by business
expansion. Impaired loans of US$11.1bn were 9%
lower than at 31 December 2011, mainly due to
increased focus on higher quality loans, lower
delinquency rates and the continued low interest
rate environment.
Releases and recoveries in Europe were
US$925m, broadly unchanged on 2011.
In Hong Kong, new individually assessed loan
impairment allowances fell by 28% compared
with 2011 due to lower specific impairment charges
in CMB. New collectively assessed loan impairment
allowances also declined as delinquency rates
continued to improve, reflecting stable loan growth
and sound underlying economic conditions. Impaired
loans declined by 22% from 31 December 2011, as a
number of corporate loans in the international
170
trade sector were written off or upgraded following
repayments, and delinquency rates reduced.
Releases and recoveries in Hong Kong were
US$65m, 27% lower than at the end of 2011 when
an allowance relating to a loan in GB&M that was
no longer considered impaired was released.
New loan impairment allowances in Rest of
Asia-Pacific increased by 8% to US$607m.
This reflected higher new collectively assessed
loan impairment allowances, mainly from the
growth in Singapore of RBWM’s credit card
portfolio. New individually assessed loan
impairment allowances also increased, as a result of
the impairment of a corporate exposure in Australia
and individual charges on a small number of
corporate exposures in India. Impaired loans in the
region increased by 4% to US$1.1bn in 2012 due to
the downgrade of a number of customers in Australia
and Taiwan, partly offset by the restructuring of a
significant loan in Singapore following the
renegotiation of terms, which is therefore regarded
as no longer impaired.
Releases and recoveries in the region decreased
by 7%, mainly in India as the cards portfolio
continued to run off, and in Thailand following
the sale of the RBWM business. These were
partly offset by an impairment allowance release
in Singapore compared with a charge in 2011.
In the Middle East and North Africa, new
loan impairment allowances decreased by 2% to
US$463m in 2012. New collectively assessed loan
impairment allowances declined, primarily in the
UAE, due to the improvement in credit quality
reflecting the repositioning of the book towards
higher quality lending in previous years. New
individually assessed loan impairment allowances
rose due to significant loan impairment charges
recorded for a small number of large exposures
in GB&M. Impaired loans remained broadly
unchanged compared with 31 December 2011.
Releases and recoveries in the region increased
by 14% to US$208m in 2012, mainly relating to
a small number of exposures in UAE.
In North America, new loan impairment
allowances fell sharply, reducing by 50% to
US$3.7bn. New collectively assessed loan
impairment allowances declined, largely in the CML
portfolio due to the reclassification of impairment
allowances on non-real estate personal loan balances
to ‘Assets held for sale’ as well as the continued run-
off in the residential portfolios. This was partly
offset by a portfolio risk factor adjustment of
US$225m which was made to increase the collective
loan impairment allowances for our US mortgage
lending portfolios. The adjustment was made
following a review completed in the fourth quarter
of 2012 which concluded that the estimated average
period of time from current status to write-off was
ten months for real estate loans (previously a period
of seven months was used). During 2013, this
revised estimate will be incorporated into the
statistical impairment allowance models. It
was also partly offset by new loan impairment
allowances by HSBC Bank Bermuda on a small
number of exposures. Releases and recoveries in
North America declined by 11% to US$214m. This
reflected lower levels of impairments being booked
due to improving market conditions within the
corporate and commercial sector.
Impaired loans decreased by 11% in 2012 to
US$20.3bn, due to the continued run-off of the CML
portfolio which included the reclassification
of certain non-real estate personal loan balances to
held for sale.
In Latin America, new loan impairment
allowances increased by 23% to US$2.5bn.
The increase in new collectively assessed loan
impairment allowances was mainly in Brazil, driven
by higher delinquency rates in RBWM and CMB,
particularly in the Business Banking portfolio,
reflecting lower economic growth in 2012. Impaired
loans were 9% higher than at the end of 2011, driven
by past growth in the CMB portfolio in Brazil.
Releases and recoveries in Latin America
decreased by 2% from the end of 2011 to US$401m,
mainly in Brazil.
For an analysis of loan impairment charges and
other credit risk provisions by global business, see
page 76.
171
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Risk > Credit risk > Impairment of loans and advances
Further analysis of impairment
Movement in impairment allowances by industry sector and by geographical region
(Unaudited)
Europe
US$m
Hong
Kong
US$m
Rest of
Asia-
Pacific
US$m
MENA
US$m
Latin
North
America
America
Total
US$m US$m US$m
Impairment allowances at 1 January 2012 ................
5,292
Amounts written off .................................................
Personal ..................................................................
– first lien residential mortgages ........................
– other personal1 .................................................
(2,375)
(828)
(28)
(800)
Corporate and commercial .....................................
(1,428)
– manufacturing and international trade
581
(219)
(128)
–
(128)
(91)
782
(540)
(347)
(7)
(340)
(193)
1,731
7,239
2,011
17,636
(305)
(126)
(2)
(124)
(154)
(4,181)
(3,862)
(1,952)
(1,910)
(2,192)
(1,614)
(70)
(1,544)
(9,812)
(6,905)
(2,059)
(4,846)
(234)
(577)
(2,677)
and services ......................................................
(661)
(91)
(164)
(137)
(59)
(498)
(1,610)
– commercial real estate and other property-
related ...............................................................
– other commercial9 ............................................
Financial2 ...............................................................
Recoveries of amounts written off in previous
years .......................................................................
Personal ..................................................................
– first lien residential mortgages ........................
– other personal1 .................................................
Corporate and commercial .....................................
– manufacturing and international trade
and services ......................................................
– commercial real estate and other property-
related ...............................................................
– other commercial9 ............................................
Financial2 ...............................................................
Charge to income statement .....................................
Personal ..................................................................
– first lien residential mortgages ........................
– other personal1 .................................................
Corporate and commercial .....................................
– manufacturing and international trade
and services ......................................................
– commercial real estate and other property-
related ...............................................................
– other commercial9 ............................................
Financial2 ...............................................................
Exchange and other movements18 ............................
(377)
(390)
(119)
409
354
34
320
51
16
9
26
4
1,874
348
(56)
404
1,547
670
444
433
(21)
161
–
–
–
31
30
4
26
1
1
–
–
–
84
96
(11)
107
(14)
(12)
7
(9)
2
(4)
(8)
(21)
–
150
132
2
130
18
5
11
2
–
340
234
14
220
102
32
55
15
4
14
(6)
(11)
(25)
75
50
5
45
25
2
–
23
–
255
57
7
50
169
80
62
27
29
55
(97)
(78)
(85)
129
88
46
42
38
7
19
12
3
3,462
3,228
1,986
1,242
252
62
94
96
(18)
(18)
(61)
(1)
352
312
49
263
39
28
2
9
1
2,145
1,399
(30)
1,429
746
(506)
(561)
(230)
1,146
966
140
826
172
59
41
72
8
8,160
5,362
1,910
3,452
2,802
625
1,457
28
93
–
690
655
(4)
(1,033)
(154)
(961)
At 31 December 2012...............................................
5,361
473
746
1,811
5,616
2,162
16,169
Impairment allowances against banks:
– individually assessed .........................................
40
Impairment allowances against customers:
– individually assessed .........................................
– collectively assessed17 .......................................
At 31 December 2012...............................................
3,781
1,540
5,361
–
192
281
473
–
442
304
746
17
–
–
57
1,323
471
1,811
428
5,188
5,616
406
1,756
6,572
9,540
2,162
16,169
172
Europe
US$m
Hong
Kong
US$m
Rest of
Asia-
Pacific
US$m
MENA
US$m
Latin
North
America
America
Total
US$m US$m US$m
Impairment allowances at 1 January 2011 ................
5,740
Amounts written off .................................................
Personal ..................................................................
– first lien residential mortgages ........................
– other personal1 .................................................
(2,781)
(1,685)
(25)
(1,660)
Corporate and commercial .....................................
(1,066)
– manufacturing and international trade
and services ......................................................
(554)
– commercial real estate and other property-
related ...............................................................
– other commercial9 ............................................
Financial2 ...............................................................
Recoveries of amounts written off in previous
years .......................................................................
Personal ..................................................................
– first lien residential mortgages ........................
– other personal1 .................................................
Corporate and commercial .....................................
– manufacturing and international trade
and services ......................................................
– commercial real estate and other property-
related ...............................................................
– other commercial9 ............................................
Financial2 ...............................................................
Charge to income statement .....................................
Personal ..................................................................
– first lien residential mortgages ........................
– other personal1 .................................................
Corporate and commercial .....................................
– manufacturing and international trade
and services ......................................................
– commercial real estate and other property-
related ...............................................................
– other commercial9 ............................................
Financial2 ...............................................................
Exchange and other movements18 ............................
(265)
(247)
(30)
572
525
21
504
44
19
7
18
3
1,902
610
98
512
1,277
416
498
363
15
(141)
At 31 December 2011 ...............................................
5,292
Impairment allowances against banks:
– individually assessed .........................................
50
Impairment allowances against customers:
– individually assessed .........................................
– collectively assessed17 .......................................
At 31 December 2011 ...............................................
3,754
1,488
5,292
For footnotes, see page 249.
629
(210)
(116)
–
(116)
(94)
(64)
(6)
(24)
–
47
31
4
27
16
16
–
–
–
117
77
(10)
87
37
57
–
(20)
3
(2)
581
–
288
293
581
959
(554)
(391)
(6)
(385)
(161)
(120)
(13)
(28)
(2)
185
168
3
165
12
8
1
3
5
274
215
5
210
55
35
9
11
4
(82)
782
–
505
277
782
1,669
9,234
2,010
20,241
(187)
(172)
(2)
(170)
(15)
(6,830)
(6,591)
(2,545)
(4,046)
(1,918)
(1,476)
(84)
(1,392)
(12,480)
(10,431)
(2,662)
(7,769)
(233)
(440)
(2,009)
(4)
(100)
(295)
(1,137)
(10)
(1)
–
102
53
–
53
49
2
–
47
–
292
124
42
82
146
25
150
(29)
22
(83)
(50)
(6)
132
101
39
62
30
8
8
14
1
7,050
6,887
3,899
2,988
122
42
48
32
41
(15)
(130)
(2)
388
297
19
278
91
82
4
5
–
(392)
(480)
(40)
1,426
1,175
86
1,089
242
135
20
87
9
1,870
1,405
69
1,336
11,505
9,318
4,103
5,215
477
2,114
326
59
92
(12)
901
764
449
73
(145)
(2,347)
(339)
(3,056)
1,731
7,239
2,011
17,636
17
58
–
125
1,250
464
1,731
416
6,765
7,239
324
1,687
6,537
10,974
2,011
17,636
173
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Risk > Credit risk > Impairment of loans and advances
Movement in impairment allowances by industry sector
(Unaudited)
Impairment allowances at 1 January ...........................................
17,636
20,241
25,649
23,972
19,212
2012
US$m
2011
US$m
2010
US$m
2009
US$m
2008
US$m
Amounts written off ....................................................................
Personal ...................................................................................
– first lien residential mortgages .........................................
– other personal1 ..................................................................
Corporate and commercial ......................................................
– manufacturing and international trade and services ........
– commercial real estate and other property-related ..........
– other commercial9 ............................................................
Financial2 .................................................................................
Recoveries of amounts written off in previous years ..................
Personal ...................................................................................
– first lien residential mortgages .........................................
– other personal1 ..................................................................
Corporate and commercial ......................................................
– manufacturing and international trade and services ........
– commercial real estate and other property-related ..........
– other commercial9 ............................................................
Financial2 .................................................................................
Charge to income statement ........................................................
Personal ...................................................................................
– first lien residential mortgages .........................................
– other personal1 ..................................................................
Corporate and commercial ......................................................
– manufacturing and international trade and services ........
– commercial real estate and other property-related ..........
– other commercial9 ............................................................
Financial2 .................................................................................
Exchange and other movements18 ...............................................
(9,812)
(6,905)
(2,059)
(4,846)
(2,677)
(1,610)
(506)
(561)
(230)
1,146
966
140
826
172
59
41
72
8
8,160
5,362
1,910
3,452
2,802
1,457
690
655
(4)
(961)
At 31 December ...........................................................................
16,169
Impairment allowances against banks:
(12,480)
(10,431)
(2,662)
(7,769)
(2,009)
(1,137)
(392)
(480)
(40)
1,426
1,175
86
1,089
242
135
20
87
9
11,505
9,318
4,103
5,215
2,114
901
764
449
73
(3,056)
17,636
(19,300)
(16,458)
(4,163)
(12,295)
(2,789)
(1,050)
(1,280)
(459)
(53)
1,020
846
93
753
156
92
21
43
18
13,548
11,187
3,461
7,726
2,198
909
660
629
163
(676)
(24,840)
(22,703)
(4,704)
(17,999)
(1,984)
(1,093)
(327)
(564)
(153)
890
712
61
651
170
123
9
38
8
24,942
19,781
4,185
15,596
4,711
2,392
1,492
827
450
685
20,241
25,649
(17,955)
(16,625)
(2,110)
(14,515)
(1,294)
(789)
(115)
(390)
(36)
834
686
19
667
142
76
6
60
6
24,131
20,950
5,000
15,950
2,879
1,573
755
551
302
(2,250)
23,972
– individually assessed ............................................................
57
125
158
107
63
Impairment allowances against customers:
– individually assessed ............................................................
– collectively assessed .............................................................
6,572
9,540
At 31 December ...........................................................................
16,169
6,537
10,974
17,636
6,457
13,626
20,241
6,494
19,048
25,649
3,284
20,625
23,972
For footnotes, see page 249.
174
Movement in impairment allowances on loans and advances to customers and banks
(Audited)
Banks
individually
assessed
US$m
Customers
Individually
assessed
US$m
Collectively
assessed
US$m
2012
At 1 January ..................................................................................
Amounts written off .....................................................................
Recoveries of loans and advances previously written off ............
Charge to income statement .........................................................
Exchange and other movements18 ................................................
At 31 December ............................................................................
Impairment allowances on loans; and advances to customers ....
– personal ................................................................................
– corporate and commercial ....................................................
– financial ................................................................................
As a percentage of loans and advances19,20 ..............................
2011
At 1 January ..................................................................................
Amounts written off .....................................................................
Recoveries of loans and advances previously written off ............
Charge to income statement .........................................................
Exchange and other movements18 ................................................
At 31 December ............................................................................
Impairment allowances on loans and advances to customers ......
– personal ................................................................................
– corporate and commercial ....................................................
– financial ................................................................................
As a percentage of loans and advances19,20 ..............................
For footnotes, see page 249.
125
(70)
–
–
2
57
%
0.05
US$m
158
(16)
–
(16)
(1)
125
%
0.09
6,537
(2,361)
199
2,139
58
6,572
6,572
685
5,407
480
%
0.67
US$m
6,457
(1,633)
191
1,931
(409)
6,537
6,537
694
5,231
612
%
0.71
10,974
(7,381)
947
6,021
(1,021)
9,540
9,540
7,527
1,939
74
%
0.98
13,626
(10,831)
1,235
9,590
(2,646)
10,974
10,974
9,066
1,820
88
%
1.20
US$m
US$m
Individually and collectively assessed impairment charge to the income statement by industry sector
(Unaudited)
Individually
assessed
US$m
2012
Collectively
assessed
US$m
Banks ..................................................................
Personal ...............................................................
First lien residential mortgages ......................
Other personal1 ...............................................
–
96
40
56
Corporate and commercial .................................
2,029
Manufacturing and international trade
and services ................................................
Commercial real estate and other
property-related ..........................................
Other commercial9 ..........................................
Financial .............................................................
910
604
515
14
–
5,266
1,870
3,396
773
547
86
140
(18)
Individually
assessed
2011
Collectively
assessed
US$m
US$m
(16)
141
104
37
1,703
572
768
363
87
–
9,177
3,999
5,178
411
329
(4)
86
2
Total
US$m
–
5,362
1,910
3,452
2,802
1,457
690
655
(4)
Total charge to income statement .......................
2,139
6,021
8,160
1,915
9,590
11,505
For footnotes, see page 249.
175
Total
US$m
17,636
(9,812)
1,146
8,160
(961)
16,169
16,112
8,212
7,346
554
%
1.48
20,241
(12,480)
1,426
11,505
(3,056)
17,636
17,511
9,760
7,051
700
%
1.67
Total
US$m
(16)
9,318
4,103
5,215
2,114
901
764
449
89
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Risk > Credit risk > Impairment of loans and advances
Net loan impairment charge to the income statement
(Unaudited)
Individually assessed impairment allowances ............................
New allowances .......................................................................
Release of allowances no longer required ..............................
Recoveries of amounts previously written off ........................
Collectively assessed impairment allowances ............................
New allowances net of allowance releases .............................
Recoveries of amounts previously written off ........................
Total charge for impairment losses .............................................
Banks ......................................................................................
Customers ...............................................................................
At 31 December
Impaired loans .............................................................................
Impairment allowances ................................................................
2012
US$m
2,139
3,272
(934)
(199)
6,021
6,968
(947)
8,160
–
8,160
2011
US$m
1,915
2,904
(798)
(191)
9,590
10,825
(1,235)
11,505
(16)
11,521
2010
US$m
2009
US$m
2,625
3,617
(847)
(145)
10,923
11,798
(875)
13,548
12
13,536
4,458
5,173
(581)
(134)
20,484
21,240
(756)
24,942
70
24,872
2008
US$m
2,064
2,742
(565)
(113)
22,067
22,788
(721)
24,131
54
24,077
38,776
16,169
41,739
17,636
47,064
20,241
30,845
25,649
25,422
23,972
Charge for impairment losses as a percentage of average gross loans and advances to customers by
geographical region
(Unaudited)
Europe
%
Hong
Kong
%
Rest of
Asia-
Pacific
%
MENA
%
North
America
%
Latin
America
%
2012
New allowances net of allowance releases ..............
Recoveries ................................................................
Total charge for impairment losses ..........................
Amount written off net of recoveries .......................
2011
New allowances net of allowance releases ..............
Recoveries ................................................................
Total charge for impairment losses ..........................
Amount written off net of recoveries .......................
0.58
(0.10)
0.07
(0.02)
0.37
(0.11)
1.16
(0.26)
2.31
(0.08)
4.36
(0.62)
0.48
0.50
0.05
0.11
0.26
0.30
0.90
0.81
2.23
3.74
2.57
3.21
0.59
(0.14)
0.11
(0.03)
0.38
(0.15)
1.46
(0.38)
4.01
(0.07)
3.54
(0.61)
0.45
0.52
0.08
0.11
0.23
0.31
1.08
0.32
3.94
2.93
3.74
2.39
Total
%
1.00
(0.12)
0.88
0.93
1.34
(0.15)
1.19
1.14
176
Charge for impairment losses as a percentage of average gross loans and advances to customers
(Unaudited)
New allowances net of allowance releases .................................
Recoveries ...................................................................................
Total charge for impairment losses .............................................
Amount written off net of recoveries ..........................................
2012
%
1.00
(0.12)
0.88
0.93
2011
%
1.34
(0.15)
1.19
1.14
2010
%
1.65
(0.12)
1.53
2.08
2009
%
2.92
(0.10)
2.82
2.71
2008
%
2.54
(0.09)
2.45
1.75
Loans and advances to customers are excluded
from average balances when reclassified to ‘Assets
held for sale’. Including these loans and advances to
customers, the total new allowances net of allowance
releases would be 1.00%, recoveries 0.12%, and
amounts written off net of recoveries 0.93%.
Reconciliation of reported and constant currency changes by geographical region
(Unaudited)
31 Dec 11
as reported
US$m
Currency
translation
adjustment21
US$m
31 Dec 11
at 31 Dec 12
exchange
rates
US$m
Movement
on a
constant
currency
basis
US$m
31 Dec 12
as reported
US$m
Reported
change22
%
Constant
currency
change22
%
Impaired loans
Europe .........................................
Hong Kong .................................
Rest of Asia-Pacific ....................
Middle East and North Africa ....
North America ............................
Latin America .............................
Impairment allowances
Europe .........................................
Hong Kong .................................
Rest of Asia-Pacific ....................
Middle East and North Africa ....
North America ............................
Latin America .............................
For footnotes, see page 249.
11,819
608
1,070
2,445
22,758
3,039
41,739
5,292
581
782
1,731
7,239
2,011
17,636
451
1
27
(6)
17
(108)
382
203
2
17
(5)
14
(114)
117
12,270
609
1,097
2,439
22,775
2,931
42,121
5,495
583
799
1,726
7,253
1,897
17,753
(1,125)
(132)
50
35
(2,430)
257
(3,345)
(134)
(110)
(53)
85
(1,637)
265
(1,584)
11,145
477
1,147
2,474
20,345
3,188
38,776
5,361
473
746
1,811
5,616
2,162
16,169
(6)
(22)
7
1
(11)
5
(7)
1
(19)
(5)
5
(22)
8
(8)
(9)
(22)
5
1
(11)
9
(8)
(2)
(19)
(7)
5
(23)
13
(9)
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Risk > Credit risk > Concentration of exposure
Reconciliation of reported and constant currency impairment charge to the income statement
(Unaudited)
31 Dec 11
as reported
US$m
Currency
translation
adjustment21
US$m
31 Dec 11
at 31 Dec 12
exchange
rates
US$m
Movement
on a
constant
currency
basis
US$m
31 Dec 12
as reported
US$m
Reported
change22
%
Constant
currency
change22
%
Europe
Charge for impairment losses .....
New allowances ......................
Releases ..................................
Recoveries ..............................
Hong Kong
Charge for impairment losses .....
New allowances ......................
Releases ..................................
Recoveries ..............................
Rest of Asia-Pacific
Charge for impairment losses .....
New allowances ......................
Releases ..................................
Recoveries ..............................
MENA
Charge for impairment losses .....
New allowances ......................
Releases ..................................
Recoveries ..............................
North America
Charge for impairment losses .....
New allowances ......................
Releases ..................................
Recoveries ..............................
Latin America
Charge for impairment losses .....
New allowances ......................
Releases ..................................
Recoveries ..............................
Total
Charge for impairment losses .....
New allowances ......................
Releases ..................................
Recoveries ..............................
1,902
3,033
(560)
(571)
117
268
(104)
(47)
274
681
(222)
(185)
292
630
(235)
(103)
7,050
7,566
(385)
(131)
1,870
2,421
(162)
(389)
11,505
14,599
(1,668)
(1,426)
(47)
(82)
29
6
–
–
–
–
(1)
(17)
10
6
–
–
–
–
–
–
–
–
(217)
(239)
(24)
46
(265)
(338)
15
58
1,855
2,951
(531)
(565)
117
268
(104)
(47)
273
664
(212)
(179)
292
630
(235)
(103)
7,050
7,566
(385)
(131)
1,653
2,182
(186)
(343)
11,240
14,261
(1,653)
(1,368)
19
92
(229)
156
(33)
(44)
(5)
16
67
13
25
29
(37)
(50)
(15)
28
(3,588)
(3,677)
87
2
492
399
102
(9)
(3,080)
(3,267)
(35)
222
1,874
3,043
(760)
(409)
84
224
(109)
(31)
340
677
(187)
(150)
255
580
(250)
(75)
3,462
3,889
(298)
(129)
2,145
2,581
(84)
(352)
8,160
10,994
(1,688)
(1,146)
(1)
0
36
(28)
(28)
(16)
5
(34)
24
(1)
(16)
(19)
(13)
(8)
6
(27)
(51)
(49)
(23)
(2)
15
7
(48)
(10)
(29)
(25)
1
(20)
Concentration of exposure
(Unaudited)
Trading assets
(Unaudited)
1
3
43
(28)
(28)
(16)
5
(34)
25
2
(12)
(16)
(13)
(8)
6
(27)
(51)
(49)
(23)
(2)
30
18
(55)
3
(27)
(23)
2
(16)
Concentrations of credit risk are described
in the Appendix to Risk on page 259.
An analysis of credit quality is provided on
page 154.
The diversification of our lending portfolio across
the regions, together with our broad range of global
businesses and products, ensured that we were not
overly dependent on a few countries or markets
to generate income and growth in 2012. Our
geographical diversification also supported our
strategies for growth in faster-growing markets
and those with international connectivity.
2012
2011
US$bn US$bn
213
78
118
409
186
76
69
331
Trading securities23 ..........................
Loans and advances to banks .........
Loans and advances to customers ..
For footnote, see page 249.
The largest concentration of securities held-for-
trading within trading assets was in government
and government agency debt securities. We had
significant exposures to US Treasury and
government agency securities (US$28bn) and
178
UK (US$12bn) and Hong Kong (US$6bn)
government securities. For an analysis of securities
held for trading, see Note 14 on the Financial
Statements.
Financial investments
Our holdings of available-for-sale government and
government agency debt securities, corporate debt
securities, ABSs and other securities were spread
across a wide range of issuers and geographical
regions, with 14% invested in securities issued by
banks and other financial institutions. We also hold
assets backing insurance and investment contracts.
For an analysis of financial investments, see Note 20
on the Financial Statements.
Derivatives
Derivative assets were US$357bn at 31 December
2012 (2011: US$346bn), of which the largest
concentrations were interest rate and, to a lesser
extent, foreign exchange derivatives. Our exposure
Gross loans and advances by industry sector
(Unaudited)
to derivatives increased, mainly due to a rise in the
fair value of interest rate contracts following the
downward movements in yield curves in major
currencies, largely in Europe. However, this was
partly offset by a rise in netting from an increase in
trading through clearing houses coupled with the rise
in fair values. For an analysis of derivatives, see
Note 19 on the Financial Statements.
Loans and advances
Gross loans and advances to customers (excluding
the financial sector) of US$932bn increased by
US$61bn or 7% at 31 December 2012 compared
with 2011, or 5% on a constant currency basis.
The following tables analyse loans by industry
sector and by the location of the principal operations
of the lending subsidiary or, in the case of the
operations of The Hongkong and Shanghai Banking
Corporation, HSBC Bank, HSBC Bank Middle East
and HSBC Bank USA, by the location of the lending
branch.
Personal .................................................
First lien residential mortgages24 .....
Other personal1 .................................
Corporate and commercial ...................
Manufacturing ..................................
International trade and services ........
Commercial real estate .....................
Other property-related ......................
Government ......................................
Other commercial9 ............................
Financial ...............................................
Non-bank financial institutions ........
Settlement accounts ..........................
2012
US$m
415,093
301,862
113,231
513,493
112,149
169,389
76,760
40,532
10,785
103,878
81,258
79,817
1,441
Asset-backed securities reclassified .....
3,891
Total gross loans and advances to
Currency
effect
US$m
Move-
ment
US$m
7,741
6,776
965
8,376
1,392
2,727
1,544
406
184
2,123
1,963
1,966
(3)
208
13,727
16,123
(2,396)
32,301
14,703
13,953
1,275
587
(478)
2,261
(6,924)
(7,424)
500
(1,597)
2011
US$m
393,625
278,963
114,662
472,816
96,054
152,709
73,941
39,539
11,079
99,494
86,219
85,275
944
2010
US$m
425,320
268,681
156,639
445,512
91,121
146,573
71,880
34,838
8,594
92,506
101,725
100,163
1,562
2009
US$m
434,206
260,669
173,537
383,090
80,487
115,641
69,389
30,520
6,689
80,364
96,650
95,237
1,413
2008
US$m
440,227
243,337
196,890
407,474
81,103
128,737
70,969
30,739
6,544
89,382
101,085
99,536
1,549
5,280
5,892
7,827
7,991
customers ..........................................
1,013,735
18,288
37,507
957,940
978,449
921,773
956,777
Gross loans and advances to banks ......
152,603
1,439
(29,948)
181,112
208,429
179,888
153,829
Total gross loans and advances (A) ......
1,166,338
19,727
7,559
1,139,052
1,186,878
1,101,661
1,110,606
Impaired loans and advances ................
– as a percentage of A .....................
38,671
3.3%
379
(3,292)
41,584
4.3%
46,871
4.8%
30,606
3.3%
25,352
2.6%
Impairment allowances on loans and
advances ...........................................
– as a percentage of A .....................
16,112
1.4%
114
(1,513)
17,511
1.8%
20,083
25,542
2.1%
2.8%
23,909
2.5%
179
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Risk > Credit risk > Concentration of exposure
Gross loans and advances by industry sector (continued)
Year ended 31 December
Currency
effect
US$m
Move-
ment
US$m
2011
US$m
2010
US$m
2009
US$m
2008
US$m
1,558
(4,903)
11,505
13,548
24,942
24,131
1,500
58
(5,125)
222
12,931
(1,426)
14,568
(1,020)
25,832
(890)
24,965
(834)
2012
US$m
8,160
9,306
(1,146)
Charge for impairment losses ...............
New allowances net of allowance
releases .........................................
Recoveries ........................................
For footnotes, see page 249.
The following commentary is on a constant
Commercial real estate lending represented 8%
currency basis (see page 179):
Personal lending was 41% of gross lending to
customers at 31 December 2012. Personal lending
balances of US$415bn were 3% higher than at
31 December 2011 for reasons explained under
‘Personal lending’ (see page 24). First lien
residential mortgage lending continued to represent
the Group’s largest concentration in a single
exposure type, the most significant balances being
in the UK (42%), Hong Kong (17%) and the
US (16%).
Corporate and commercial lending was 51%
of gross lending to customers at 31 December
2012, representing our largest lending category.
International trade and services was the biggest
portion of the corporate and commercial lending
category, which increased by 9% compared with
31 December 2011, mainly in Hong Kong and Rest
of Asia-Pacific as we focused on corporate and
commercial customers that trade internationally as
well as in the UK, despite muted demand for credit.
The most significant concentrations of international
trade and services lending were in the UK, Hong
Kong and Rest of Asia-Pacific. Our concentration
in respect of the manufacturing sector increased,
mainly driven by higher lending balances in Europe,
due to growth in the UK of overdraft balances and
corresponding customer accounts which did not meet
netting criteria under accounting rules.
of total gross lending to customers. Lending
increased marginally, as the demand for funds
in property investment and development remained
strong in Hong Kong. The main concentrations of
commercial real estate lending were in the UK and
Hong Kong.
Lending to non-bank financial institutions
was US$81bn, a decrease of 8% compared with
31 December 2011 due to a decline in reverse repo
balances, mainly in Europe. Our exposure was
spread across a range of institutions, with the most
significant concentration in the UK, France and
the US.
Loans and advances to banks were widely
distributed across many countries and decreased by
16% in 2012 as reverse repo balances declined,
reflecting redeployment of liquidity to central banks,
mainly in Europe.
The tables that follow provide information
on loans and advances by geographical region and
by country. The commentary on these loans and
advances can be found in the ‘Personal lending’ and
‘Wholesale lending’ sections on pages 147 to 152.
180
Gross loans and advances to customers by industry sector and by geographical region
(Audited)
Gross loans and advances to customers
Hong
Kong
Europe
US$m US$m
Rest of
Asia-
Pacific
US$m
MENA
US$m
North
America
US$m
Latin
America
US$m
Total
US$m
As a %
of total
gross
loans
At 31 December 2012
Personal ..............................................
First lien residential mortgages24 ..
Other personal1 ..............................
Corporate and commercial ................
Manufacturing ...............................
International trade and services .....
Commercial real estate ..................
Other property-related ...................
Government ...................................
Other commercial9 .........................
Financial ............................................
Non-bank financial institutions .....
Settlement accounts .......................
186,274
135,172
51,102
223,061
56,690
70,954
33,279
7,402
2,393
52,343
55,732
55,262
470
Asset-backed securities reclassified ..
3,694
Total gross loans and advances to
70,341
52,296
18,045
99,199
10,354
33,832
23,384
16,399
2,838
12,392
4,546
4,070
476
–
49,305
36,906
12,399
85,305
19,213
32,317
9,286
6,641
1,136
16,712
4,255
3,843
412
–
6,232
2,144
4,088
22,452
3,373
9,115
865
2,103
1,662
5,334
1,196
1,194
2
84,354
70,133
14,221
47,886
9,731
13,419
6,572
7,607
774
9,783
13,935
13,935
–
18,587
5,211
13,376
35,590
12,788
9,752
3,374
380
1,982
7,314
1,594
1,513
81
415,093
301,862
113,231
513,493
112,149
169,389
76,760
40,532
10,785
103,878
81,258
79,817
1,441
–
197
–
3,891
41.0
29.8
11.2
50.6
11.1
16.6
7.6
4.0
1.1
10.2
8.0
7.9
0.1
0.4
customers (A) ................................
468,761
174,086
138,865
29,880
146,372
55,771
1,013,735
100.0
Percentage of A by geographical
region .............................................
46.3%
17.2%
13.7%
2.9%
14.4%
5.5% 100.0%
Impaired loans ...................................
11,080
– as a percentage of A ...................
2.4%
Total impairment allowances ............
– as a percentage of A ...................
5,321
1.1%
At 31 December 2011
Personal ..............................................
First lien residential mortgages24 ..
Other personal1 ..............................
Corporate and commercial ................
Manufacturing ...............................
International trade and services .....
Commercial real estate ..................
Other property-related ...................
Government ...................................
Other commercial9 .........................
Financial ............................................
Non-bank financial institutions .....
Settlement accounts .......................
166,147
119,902
46,245
204,984
45,632
64,604
32,099
7,595
3,143
51,911
63,671
63,313
358
Asset-backed securities reclassified ..
4,776
Total gross loans and advances to
477
0.3%
473
0.3%
63,181
46,817
16,364
91,592
9,004
29,066
20,828
17,367
2,918
12,409
3,473
3,192
281
–
1,147
0.8%
746
0.5%
43,580
32,136
11,444
77,887
16,909
29,605
9,537
6,396
962
14,478
3,183
2,937
246
–
2,448
8.2%
1,794
6.0%
5,269
1,837
3,432
21,152
3,517
8,664
1,002
1,770
1,563
4,636
1,168
1,162
6
20,331
13.9%
5,616
3.8%
95,336
73,278
22,058
41,271
7,888
10,710
7,069
5,729
656
9,219
12,817
12,817
–
3,188
5.7%
2,162
3.9%
38,671
3.8%
16,112
1.6%
20,112
4,993
15,119
35,930
13,104
10,060
3,406
682
1,837
6,841
1,907
1,854
53
393,625
278,963
114,662
472,816
96,054
152,709
73,941
39,539
11,079
99,494
86,219
85,275
944
–
504
–
5,280
41.1
29.1
12.0
49.3
10.0
15.9
7.7
4.1
1.2
10.4
9.0
8.9
0.1
0.6
customers (B) ................................
439,578
158,246
124,650
27,589
149,928
57,949
957,940
100.0
Percentage of B by geographical
region .............................................
45.9%
16.5%
13.0%
2.9%
15.7%
6.0%
100.0%
Impaired loans ...................................
11,751
– as a percentage of B ...................
2.7%
Total impairment allowances ............
– as a percentage of B ...................
5,242
1.2%
604
0.4%
581
0.4%
1,069
0.9%
782
0.6%
2,425
8.8%
1,714
6.2%
22,696
15.1%
7,181
4.8%
3,039
5.2%
2,011
3.5%
41,584
4.3%
17,511
1.8%
For footnotes, see page 249.
181
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Risk > Credit risk > Concentration of exposure
Loans and advances to banks by geographical region
(Unaudited)
Hong
Europe
Kong
US$m US$m
Rest of
Asia-
Pacific
US$m
MENA
US$m
North
America
US$m
Latin
America
US$m
Loans and
advances
to banks
US$m
Impair-
ment
allowances25
US$m
At 31 December 2012 ......................
At 31 December 2011 .......................
At 31 December 2010 .......................
At 31 December 2009 .......................
At 31 December 2008 .......................
45,320
54,406
78,239
65,614
62,012
23,500
35,159
33,585
36,197
29,646
44,592
47,309
40,437
35,648
28,665
9,198
8,571
9,335
8,435
7,476
13,465
14,831
19,479
15,386
11,458
16,528
20,836
27,354
18,608
14,572
152,603
181,112
208,429
179,888
153,829
(57)
(125)
(158)
(107)
(63)
For footnote, see page 249.
Gross loans and advances to customers by country
(Unaudited)
First lien
residential
mortgages
US$m
Other
personal
US$m
Property-
related
US$m
Commercial,
international
trade and other
US$m
At 31 December 2012
Europe ............................................................
UK ...................................................................
France .............................................................
Germany .........................................................
Malta ...............................................................
Switzerland .....................................................
Turkey .............................................................
Other ...............................................................
Hong Kong .....................................................
Rest of Asia-Pacific .......................................
Australia ..........................................................
India ................................................................
Indonesia .........................................................
Mainland China ..............................................
Malaysia ..........................................................
Singapore ........................................................
Taiwan ............................................................
Vietnam ...........................................................
Other ...............................................................
Middle East and North Africa
(excluding Saudi Arabia) ...........................
Egypt ...............................................................
Qatar ...............................................................
UAE ................................................................
Other ...............................................................
North America ..............................................
US ...................................................................
Canada ............................................................
Bermuda ..........................................................
Latin America ...............................................
Argentina ........................................................
Brazil ...............................................................
Mexico ............................................................
Panama ............................................................
Other ...............................................................
135,172
127,024
2,643
9
1,821
298
1,062
2,315
52,296
36,906
10,037
1,000
83
3,539
5,025
10,123
3,323
50
3,726
2,144
2
11
1,743
388
70,133
49,417
19,040
1,676
5,211
28
1,745
1,989
1,402
47
51,102
23,446
10,960
284
563
9,403
4,084
2,362
18,045
12,399
1,490
394
508
302
2,175
4,812
597
252
1,869
4,088
479
385
1,822
1,402
14,221
7,382
6,444
395
13,376
1,532
8,042
2,756
1,023
23
40,681
30,342
8,465
126
454
66
317
911
39,783
15,927
2,311
521
95
5,078
1,813
3,938
120
60
1,991
2,968
124
484
1,533
827
14,179
9,449
4,136
594
3,754
85
1,287
1,280
1,049
53
241,806
179,799
42,891
5,212
1,631
191
3,356
8,726
63,962
73,633
7,208
5,389
5,349
19,083
5,880
9,854
5,180
1,710
13,980
20,680
2,600
1,082
12,264
4,734
47,839
29,315
17,369
1,155
33,430
2,465
18,022
9,447
2,405
1,091
Total
US$m
468,761
360,611
64,959
5,631
4,469
9,958
8,819
14,314
174,086
138,865
21,046
7,304
6,035
28,002
14,893
28,727
9,220
2,072
21,566
29,880
3,205
1,962
17,362
7,351
146,372
95,563
46,989
3,820
55,771
4,110
29,096
15,472
5,879
1,214
301,862
113,231
117,292
481,350
1,013,735
182
At 31 December 2011
Europe .............................................................
UK ...................................................................
France .............................................................
Germany .........................................................
Malta ...............................................................
Switzerland .....................................................
Turkey .............................................................
Other ...............................................................
Hong Kong .....................................................
Rest of Asia-Pacific ........................................
Australia ..........................................................
India ................................................................
Indonesia .........................................................
Mainland China ..............................................
Malaysia ..........................................................
Singapore ........................................................
Taiwan ............................................................
Vietnam ...........................................................
Other ...............................................................
Middle East and North Africa
(excluding Saudi Arabia) ...........................
Egypt ...............................................................
Qatar ...............................................................
UAE ................................................................
Other ...............................................................
North America ................................................
US ...................................................................
Canada ............................................................
Bermuda ..........................................................
Latin America .................................................
Argentina ........................................................
Brazil ...............................................................
Mexico ............................................................
Panama ............................................................
Other ...............................................................
First lien
residential
mortgages
US$m
119,902
111,224
3,353
10
1,708
1,803
767
1,037
46,817
32,136
9,251
830
81
2,769
4,329
7,919
3,062
42
3,853
1,837
2
9
1,520
306
73,278
52,484
19,045
1,749
4,993
32
1,657
1,847
1,240
217
Other
personal
US$m
Property-
related
US$m
Commercial,
international
trade and other
US$m
46,245
22,218
9,305
343
567
10,684
2,797
331
16,364
11,444
1,327
461
463
317
2,166
4,108
550
184
1,868
3,432
441
445
1,882
664
22,058
14,087
7,518
453
15,119
1,379
9,802
2,261
1,014
663
39,694
29,191
8,160
112
520
156
255
1,300
38,195
15,933
2,357
809
97
5,078
1,351
3,690
139
42
2,370
2,772
100
354
1,464
854
12,798
7,850
4,391
557
4,088
114
1,660
1,284
923
107
233,737
160,236
49,572
4,518
1,591
1,918
3,652
12,250
56,870
65,137
6,073
3,914
4,577
15,665
5,898
9,433
4,555
1,397
13,625
19,548
2,775
1,098
12,070
3,605
41,794
27,307
13,600
887
33,749
2,331
18,638
8,210
2,537
2,033
Total
US$m
439,578
322,869
70,390
4,983
4,386
14,561
7,471
14,918
158,246
124,650
19,008
6,014
5,218
23,829
13,744
25,150
8,306
1,665
21,716
27,589
3,318
1,906
16,936
5,429
149,928
101,728
44,554
3,646
57,949
3,856
31,757
13,602
5,714
3,020
278,963
114,662
113,480
450,835
957,940
183
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Risk > Credit risk > HSBC Holdings / Securitisation exposures and other structured products
HSBC Holdings
(Audited)
Risk in HSBC Holdings is overseen by the HSBC
Holdings Asset and Liability Management
Committee (‘ALCO’). The major risks faced by
HSBC Holdings are credit risk and market risk (in
the form of interest rate risk and foreign exchange
risk), of which the most significant is credit risk.
Credit risk in HSBC Holdings primarily arises
from transactions with Group subsidiaries and from
guarantees issued in support of obligations assumed
by certain Group operations in the normal conduct
of their business.
These risks are reviewed and managed within
regulatory and internal limits for exposures by our
HSBC Holdings – maximum exposure to credit risk
(Audited)
Global Risk function, which provides high-level
centralised oversight and management of our credit
risks worldwide.
HSBC Holdings’ maximum exposure to credit
risk at 31 December 2012 is shown below. Its
financial assets principally represent claims on
Group subsidiaries in Europe and North America.
All of the derivative transactions are with HSBC
undertakings which are banking counterparties
(2011: 100%) and for which HSBC Holdings has in
place master netting arrangements. From 2012, the
credit risk exposure has been managed on a net basis
and the remaining net exposure specifically
collateralised in the form of cash.
At 31 December 2012
At 31 December 2011
Cash at bank and in hand:
– balances with HSBC undertakings ..............
Derivatives ..........................................................
Loans and advances to HSBC undertakings ......
Financial investments .........................................
Financial guarantees and similar contracts ........
Loan and other credit-related commitments ......
Maximum
exposure
US$m
353
3,768
41,675
1,208
49,402
1,200
97,606
The credit quality of the loans and advances to
HSBC undertakings is assessed as ‘strong’ or ‘good’,
with 100% of the exposure being neither past due
nor impaired (2011: 100%). The financial
investments held by HSBC Holdings were rated by
Standard and Poor’s (‘S&P’) at A– (2011: within the
range of A to A–).
Securitisation exposures and other
structured products
(Audited)
This section contains information about our exposure
to the following:
•
asset-backed securities (‘ABS’s), including
mortgage-backed securities (‘MBS’s) and
related collateralised debt obligations (‘CDO’s);
direct lending at fair value through profit or
loss;
•
• monoline insurance companies (‘monolines’);
Offset
US$m
–
(3,768)
–
–
–
–
(3,768)
•
•
Exposure to
credit risk
(net)
US$m
Maximum
exposure
US$m
Exposure to
credit risk
(net)
US$m
Offset
US$m
353
–
41,675
1,208
49,402
1,200
93,838
316
3,568
28,048
1,078
49,402
1,810
84,222
–
–
–
–
–
–
–
316
3,568
28,048
1,078
49,402
1,810
84,222
leveraged finance transactions; and
representations and warranties related to
mortgage sales and securitisation activities.
Within the above is included information on
the GB&M legacy credit activities in respect of
Solitaire, the securities investment conduits (‘SIC’s),
the ABSs trading portfolios and derivative
transactions with monolines. Further information
in respect of Solitaire and the SICs is provided in
Note 42 on the Financial Statements.
Accounting policies
Our accounting policies for the classification and measurement
of financial instruments are in accordance with the
requirements of IAS 32 ‘Financial Instruments: Presentation’
and IAS 39 ‘Financial Instruments: Recognition and
Measurement’, as described in Note 2 on the Financial
Statements, and the use of assumptions and estimates in
respect of the valuation of financial instruments is described
in Note 15 on the Financial Statements.
184
Business model
(Unaudited)
Balance Sheet Management (see page 222) holds
ABSs primarily issued by government agency and
sponsored enterprises as part of our investment
portfolios.
Our investment portfolios include SICs and
money market funds. We also originate leveraged
finance loans for the purpose of syndicating or
selling them down to generate trading profit or
holding them to earn interest margin over their lives.
Exposure in 2012
(Audited)
2012 saw an improvement in the US housing
market with home prices rising during the year. This
Overall exposure of HSBC
(Audited)
improvement coincided with decreasing concerns
around sovereign credit, particularly in the second
half of the year, and gave rise to price appreciation
across this range of ABS asset classes. Unrealised
losses in our available-for-sale portfolios reduced in
the year from US$5.1bn to US$2.2bn, mainly as a
result of price appreciation.
Within the following table are assets held in
the GB&M legacy credit portfolio with a carrying
value of US$31.6bn (2011: US$35.4bn).
A summary of the nature of HSBC’s
exposures is provided in the Appendix to Risk
on page 259.
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At 31 December 2012
At 31 December 2011
Carrying
amount26
US$bn
Including
sub-prime
and Alt-A
US$bn
Carrying
amount26
US$bn
Including
sub-prime
and Alt-A
US$bn
Asset-backed securities ............................................................................
– fair value through profit or loss ........................................................
– available for sale27 .............................................................................
– held to maturity27 ...............................................................................
– loans and receivables .........................................................................
Direct lending at fair value through profit or loss ....................................
59.0
3.4
49.6
1.6
4.4
1.0
7.0
0.2
6.1
0.1
0.6
0.6
Total asset-backed securities and direct lending at fair value through
profit or loss .........................................................................................
60.0
7.6
Less securities subject to risk mitigation from credit derivatives with
monolines and other financial institutions ...........................................
Leveraged finance loans ...........................................................................
– fair value through profit or loss ........................................................
– loans and receivables .........................................................................
(1.9)
58.1
2.8
–
2.8
60.9
Exposure including securities subject to risk mitigation from credit
derivatives with monolines and other financial institutions ................
62.8
(0.2)
7.4
–
–
–
7.4
7.6
65.6
3.0
54.6
2.0
6.0
1.2
66.8
(1.9)
64.9
3.6
0.2
3.4
68.5
70.4
6.9
0.2
5.7
0.2
0.8
0.8
7.7
(0.2)
7.5
–
–
–
7.5
7.7
For footnotes, see page 249.
ABSs classified as available for sale
Our principal holdings of available-for-sale ABSs
are in GB&M through special purpose entities
(‘SPE’s), which were established from the outset
with the benefit of external investor first loss
protection support, together with positions held
directly and by Solitaire, where we provide first
loss protection of US$1.2bn through credit
enhancement and a liquidity facility.
185
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Risk > Credit risk > Securitisation exposures and other structured products
Movement in the available-for-sale reserve
(Audited)
2012
2011
Directly
held/
Solitaire28
US$m
(3,085)
1,195
339
164
(86)
(1,473)
SPEs
US$m
(2,061)
914
394
174
(141)
(720)
Total
US$m
(5,146)
2,109
733
338
(227)
(2,193)
Directly
held/
Solitaire28
US$m
(4,102)
622
383
162
(150)
(3,085)
SPEs
US$m
(2,306)
(137)
339
183
(140)
(2,061)
Total
US$m
(6,408)
485
722
345
(290)
(5,146)
Available-for-sale reserve at 1 January ..............
Increase/(decrease) in fair value of securities ....
Effect of impairments29 ......................................
Repayment of capital ..........................................
Other movements ................................................
Available-for-sale reserve at 31 December ........
For footnotes, see page 249.
Securities investment conduits
(Unaudited)
The total carrying amount of ABSs held through
SPEs in the above table represents holdings in
which significant first loss protection is provided
through capital notes issued by SICs, excluding
Solitaire.
At each reporting date, we assess whether
there is any objective evidence of impairment in
the value of the ABSs held by SPEs. Impairment
charges incurred on these assets are offset by a
credit to the impairment line for the amount of the
loss allocated to capital note holders, subject to
the carrying amount of the capital notes being
sufficient to offset the loss. During the year
impairment charges in one SPE, Mazarin Funding
Ltd (‘Mazarin’), exceeded the carrying value of the
capital notes liability and a charge of US$119m
(2011: US$26m) was borne by HSBC as shown in
the table below. In respect of the SICs, the capital
notes held by third parties are expected to absorb
the cash losses in the vehicles.
Available-for-sale reserve and economic first loss protection in SICs, excluding Solitaire
(Unaudited)
Available-for-sale reserve ..............................................................................................................................
– related to asset-backed securities ............................................................................................................
Economic first loss protection ........................................................................................................................
Carrying amount of capital notes liability ......................................................................................................
Impairment charge for the year:
– borne by HSBC .......................................................................................................................................
– allocated to capital note holders ..............................................................................................................
SICs excluding Solitaire at
31 December
2012
US$m
2011
US$m
(787)
(720)
2,286
249
119
–
(2,701)
(2,061)
2,286
154
26
313
Impairment methodologies
(Audited)
The accounting policy for impairment and
indicators of impairment is set out in Note 2 on the
Financial Statements.
A summary of our impairment
methodologies is provided in the Appendix
to Risk on page 260.
Analysis of exposures and significant
movements
(Audited)
Sub-prime residential mortgage-related assets
The assets in the table below included US$2.2bn
(2011: US$2.4bn) relating to US-originated assets
and US$1.3bn (2011: US$1.0bn) relating to UK
non-conforming residential mortgage-related
assets.
At 31 December 2012, 13% (US$0.5bn) of our
sub-prime residential mortgage-related assets were
rated AA or AAA (2011: 25% (US$0.9bn)).
186
Carrying amount of HSBC’s consolidated holdings of ABSs, and direct lending held at fair value through profit or loss26
(Audited)
Trading
US$m
Available
for sale
US$m
Held to
maturity
US$m
Designated
at fair value
through
profit or loss
US$m
Loans and
receivables
US$m
Total
US$m
Of which
held through
consolidated
SPEs
US$m
Gross
principal
exposure30
US$m
Credit
default
swap
protection31
US$m
Net
principal
exposure32
US$m
At 31 December 2012
Mortgage-related assets:
Sub-prime residential ...................................
Direct lending ...........................................
MBSs and MBS CDOs ............................
US Alt-A residential .....................................
Direct lending ...........................................
MBSs ........................................................
US Government agency and sponsored
enterprises:
MBSs ........................................................
Other residential ...........................................
Direct lending ...........................................
MBSs ........................................................
Commercial property
MBSs and MBS CDOs ............................
Leveraged finance-related assets:
ABSs and ABS CDOs ..................................
Student loan-related assets:
ABSs and ABS CDOs ..................................
Other assets:
ABSs and ABS CDOs ..................................
1
8
7
698
566
132
157
71
86
369
695
322
373
164
2,083
450
179
1,511
4,223
2,455
–
2,455
3,658
–
3,658
–
–
–
118
–
118
23,341
1,455
2,084
–
2,084
6,995
38,533
5,330
4,219
1,553
49,635
–
–
–
–
1,573
–
–
–
1,573
–
–
–
–
–
–
–
–
–
–
109
109
–
–
49
158
435
–
435
157
–
157
–
499
–
499
1,319
2,410
284
156
1,537
4,387
3,588
566
3,022
4,090
71
4,019
25,165
3,278
322
2,956
8,587
44,708
6,064
4,554
4,650
59,976
2,723
482
2,241
2,994
–
2,994
5,483
1,221
4,262
6,992
77
6,915
–
23,438
1,459
–
1,459
5,959
13,135
4,303
3,722
1,140
22,300
3,888
322
3,566
9,489
49,290
6,726
5,826
5,769
67,611
130
–
130
100
–
100
–
87
–
87
–
317
717
199
1,318
2,551
5,353
1,221
4,132
6,892
77
6,815
23,438
3,801
322
3,479
9,489
48,973
6,009
5,627
4,451
65,060
Shareholder Information
Financial Statements
Corporate Governance
Operating & Financial Review
Overview
Carrying amount of HSBC’s consolidated holdings of ABSs, and direct lending held at fair value through profit or loss26 (continued)
Trading
US$m
Available
for sale
US$m
Held to
maturity
US$m
Designated
at fair value
through
profit or loss
US$m
Loans and
receivables
US$m
Total
US$m
Of which
held through
consolidated
SPEs
US$m
Gross
principal
exposure30
US$m
Credit
default
swap
protection31
US$m
Net
principal
exposure32
US$m
At 31 December 2011
Mortgage-related assets:
Sub-prime residential ...................................
Direct lending ...........................................
MBSs and MBS CDOs ............................
US Alt-A residential .....................................
Direct lending ...........................................
MBSs ........................................................
US Government agency and sponsored
enterprises:
MBSs ........................................................
Other residential ...........................................
Direct lending ...........................................
MBSs ........................................................
Commercial property
MBSs and MBS CDOs ............................
Leveraged finance-related assets:
ABSs and ABS CDOs ..................................
Student loan-related assets:
ABSs and ABS CDOs ..................................
Other assets:
ABSs and ABS CDOs ..................................
1
8
8
896
733
163
190
114
76
38
670
314
356
300
2,094
362
179
1,477
4,112
2,134
–
2,134
3,516
–
3,516
–
–
–
166
–
166
26,152
1,813
3,286
–
3,286
7,240
42,328
5,566
4,665
2,044
54,603
–
–
–
–
1,979
–
–
–
1,979
–
–
–
–
–
–
–
–
–
–
107
107
–
–
94
201
598
–
598
243
–
243
–
978
–
978
1,816
3,635
347
153
1,818
5,953
3,628
733
2,895
4,115
114
4,001
28,003
4,934
314
4,620
9,463
50,143
6,275
4,997
5,433
66,848
2,367
487
1,880
2,827
–
2,827
6,222
1,684
4,538
8,610
119
8,491
–
26,498
2,098
–
2,098
5,795
13,087
4,324
4,114
1,473
22,998
5,702
309
5,393
11,222
58,254
7,112
6,681
7,539
79,586
275
–
275
100
–
100
–
–
–
–
–
375
782
199
1,391
2,747
5,947
1,684
4,263
8,510
119
8,391
26,498
5,702
309
5,393
11,222
57,879
6,330
6,482
6,148
76,839
For footnotes, see page 249.
The above table excludes leveraged finance transactions, which are shown separately on page 190.
H
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Of the non-high grade assets held of US$3.1bn
(2011: US$2.7bn), US$1.4bn (2011: US$1.2bn)
related to US-originated assets.
There was an increase in market prices for sub-
prime assets during the course of 2012. Write-backs
of US$44m on assets were recognised in 2012
(2011: impairments of US$42m). Of the above
write-backs, there were US$67m of write-backs
(2011: US$5m of write-backs) in the SICs, of which
US$27m (2011: US$5m) were attributed to capital
noteholders.
US Alt-A residential mortgage-related assets
In respect of US Alt-A securities, there were write-
backs of US$19m (2011: impairments of US$687m).
Despite the overall write-backs, impairments of
US$190m (2011: US$344m) occurred in the SICs,
of which US$32m (2011: US$318m) was borne by
the capital noteholders.
At 31 December 2012, 5% (US$0.2bn) of these
assets were rated AA or AAA (2011: 9%
(US$0.4bn)).
Commercial property mortgage-related assets
Of our total of US$8.6bn (2011: US$9.5bn)
of commercial property mortgage-related assets,
US$4.1bn related to US-originated assets (2011:
US$4.9bn). Spreads tightened on both US and non-
US commercial property mortgage-related assets
during 2012. Impairments of US$125m were
recognised in 2012 (2011: US$36m).
Transactions with monoline insurers
(Audited)
HSBC’s exposure to derivative transactions
entered into directly with monolines
Our principal exposure to monolines is through
a number of OTC derivative transactions, mainly
CDSs. We entered into these CDSs primarily to
purchase credit protection against securities held
at the time within the trading portfolio.
During 2012, our overall credit exposure to
monolines decreased, primarily as a result of the
tightening of credit spreads which reduced the fair
value of the derivatives. The table below sets out the
fair value, essentially the replacement cost, of the
remaining derivative transactions at 31 December
2012, and hence the amount at risk if the CDS
protection purchased were to be wholly ineffective
because, for example, the monoline insurer was
unable to meet its obligations. In order to further
analyse that risk, the value of protection purchased
is shown subdivided between those monolines
that were rated by S&P at ‘BBB- or above’ at
31 December 2012, and those that were ‘below
BBB–’ (BBB– is the S&P cut-off for an investment
grade classification). The ‘Credit valuation
adjustment’ column indicates the valuation
adjustment taken against the net exposures, and
reflects our best estimate of the likely loss of
value on purchased protection arising from the
deterioration in creditworthiness of the monolines.
These valuation adjustments, which reflect a
measure of the irrecoverability of the protection
purchased, have been charged to the income
statement.
HSBC’s exposure to derivative transactions entered into directly with monoline insurers
(Audited)
At 31 December 2012
Derivative transactions with monoline counterparties
Monoline – investment grade (BBB– or above) ..............
Monoline – sub-investment grade (below BBB–) ...........
At 31 December 2011
Derivative transactions with monoline counterparties
Monoline – investment grade (BBB– or above) ..............
Monoline – sub-investment grade (below BBB–) ...........
For footnotes, see page 249.
Net exposure
before credit
valuation
adjustment33
US$m
Notional
amount
US$m
Credit
valuation
adjustment34
US$m
Net exposure
after credit
valuation
adjustment
US$m
4,191
957
5,148
4,936
1,552
6,488
606
303
909
873
370
1,243
(121)
(158)
(279)
(87)
(217)
(304)
485
145
630
786
153
939
189
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Risk > Credit risk > Securitisation exposures / Leveraged finance transactions / Representations and warranties
Market prices are generally not readily available
for CDSs, so they are valued on the basis of market
prices of the referenced securities.
As described on page 56, during 2012 we
amended our methodology for the calculation of
credit valuation adjustments and debit valuation
adjustments to reflect evolving market practice.
As a result, our monoline credit and debit valuation
adjustment calculations utilise a methodology based
on CDS spreads with no adjustments being made
based on the credit rating of the monoline.
Credit valuation adjustments for monolines
For monolines, the standard credit valuation adjustment
methodology (as described on page 56) applies, with
the exception that the future exposure profile is deemed to be
constant (equal to the current market value) over the weighted
average life of the referenced security.
HSBC’s exposure to debt securities which benefit
from guarantees provided by monolines
Within both the trading and available-for-sale
portfolios, we hold bonds that are ‘wrapped’ with
a credit enhancement from a monoline. As the
bonds are traded explicitly with the benefit of this
enhancement, any deterioration in the credit profile
of the monoline is reflected in market prices and,
therefore, in the carrying amount of these securities
at 31 December 2012. For wrapped bonds held in
our trading portfolio, the mark-to-market movement
HSBC’s exposure to leveraged finance transactions
(Audited)
is reflected through the income statement. For
wrapped bonds held in the available-for-sale
portfolio, the mark-to-market movement is reflected
in equity unless there is objective evidence of
impairment, in which case the impairment loss is
reflected in the income statement. No wrapped bonds
were included in the reclassification of financial
assets described in Note 17 on the Financial
Statements.
Leveraged finance transactions
(Audited)
Leveraged finance transactions include sub-
investment grade acquisition or event-driven
financing. The following table shows our exposure
to leveraged finance transactions arising from
primary transactions. Our additional exposure to
leveraged finance loans through holdings of ABSs
from our trading and investment activities is shown
in the table on page 187.
We held leveraged finance commitments of
US$2.8bn at 31 December 2012 (2011: US$3.7bn),
of which US$2.6bn (2011: US$3.3bn) was funded.
At 31 December 2012, our principal exposures
were to companies in two sectors: US$0.7bn to
data processing (2011: US$1.3bn) and US$1.8bn
to communications and infrastructure (2011:
US$1.9bn).
Exposures at 31 December 2012
Exposures at 31 December 2011
Funded35 Unfunded36
US$m
2,108
414
2,522
2,522
–
US$m
162
92
254
252
2
Total
US$m
2,270
506
2,776
2,774
2
Funded35 Unfunded36
US$m
US$m
2,795
445
3,240
3,120
120
253
126
379
328
51
Total
US$m
3,048
571
3,619
3,448
171
Europe ..................................................
North America .....................................
Held within:
– loans and receivables ....................
– fair value through profit or loss ...
For footnotes, see page 249.
190
Representations and warranties related to
mortgage sales and securitisation activities
(Unaudited)
We have been involved in various activities related
to the sale and securitisation of residential mortgages
which are not recognised on our balance sheet.
These activities include:
•
the purchase of US$24bn of third-party
originated mortgages by HSBC Bank USA and
the securitisation of these by HSBC Securities
(USA) Inc. (‘HSI’) between 2005 and 2007;
• HSI acting as underwriter for third-party
issuance of private label MBSs with an original
issuance value of US$37bn, most of which were
sub-prime; and
•
the origination and sale by HSBC Bank USA of
mortgage loans, primarily to government
sponsored entities.
In sales and securitisations of mortgage loans,
various representations and warranties regarding the
loans may be made to purchasers of the mortgage
loans and MBSs. In respect of the purchase and
securitisation of third party originated mortgages and
the underwriting of third party MBSs, the obligation
to repurchase loans in the event of a breach of
loan level representations and warranties resides
predominantly with the organisation that originated
the loan.
Participants in the US mortgage securitisation
market that purchased and repackaged whole loans
have been the subject of lawsuits and governmental
and regulatory investigations and inquiries which
have been directed at groups within the US mortgage
market such as servicers, originators, underwriters,
trustees or sponsors of securitisations. Further
information is provided in Note 43 on the Financial
Statements.
At 31 December 2012, a liability of US$219m
was recognised in respect of various representations
and warranties relating to the origination and sale by
HSBC Bank USA of mortgage loans, primarily to
government sponsored entities (2011: US$237m).
These relate to, among other things, the ownership of
the loans, the validity of the liens, the loan selection
and origination process and compliance with the
origination criteria established by the agencies. In
the event of a breach of our representations and
warranties, HSBC Bank USA may be obliged to
repurchase the loans with identified defects or to
indemnify the buyers. The liability is estimated
based on the level of outstanding repurchase
demands, the level of outstanding requests for loan
files and estimated future demands in respect of
mortgages sold to date which are either two or
more payments delinquent or expected to become
delinquent at an estimated conversion rate.
Repurchase demands of US$89m were outstanding
at 2012 (2011: US$113m).
191
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Risk > Eurozone exposures
Eurozone exposures
(Unaudited)
Page
Tables
Page
Exposures to countries in the eurozone ........................... 192
Basis of preparation ............................................................. 192
Credit default swaps and off-balance sheet ......................... 193
Exposures to peripheral eurozone countries ........................ 194
Summary of exposures to eurozone countries ....................... 193
Exposures to Spain ................................................................ 194
Exposures to Ireland ............................................................. 195
Exposures to Italy .................................................................. 196
Exposures to Greece .............................................................. 197
Exposures to Portugal ........................................................... 198
Commentary on exposures .................................................. 199
Exposures to other eurozone countries ................................ 200
Summary of exposures to other eurozone countries ............. 200
Redenomination risk ......................................................... 201
In-country funding exposure ................................................. 202
Exposures to countries in the eurozone
(Audited)
The tables in this section summarise our exposures
to selected eurozone countries, including:
•
•
•
•
governments and central banks along with quasi
government agencies;
banks;
other financial institutions and corporates; and
personal lending.
Exposures to banks, other financial institutions,
other corporates and personal lending are based upon
the counterparty’s country of domicile.
Basis of preparation
The gross exposure represents the on-balance sheet
carrying amounts recorded in accordance with IFRSs
and off-balance sheet exposures.
The net exposure is stated after taking into
account mitigating offsets that are incorporated into
the risk management view of the exposure but do
not meet accounting offset requirements. These risk
mitigating offsets include:
•
•
•
short positions managed together with trading
assets;
derivative liabilities for which a legally
enforceable right of offset with derivative assets
exists; and
collateral received on derivative assets.
Short positions managed together with trading
assets mitigate risk to which HSBC is exposed at the
balance sheet date when, in the event of default, the
trading asset and related short position crystallise
gains and losses simultaneously. When such
relationships exist, an element of the risk will remain
where the short and long positions do not match
exactly, for example, the maturity of the short
position is less than the trading asset or the short
position does not represent an identical security. The
remaining risk is reflected in the gross balance sheet
exposure shown before risk mitigation. However, as
the net position best reflects the effects of a credit
event should it occur at the balance sheet date, we
consider that this measure is a key view of risk
at that date.
Credit risk mitigation includes derivative
liabilities with the same counterparty when a master
netting arrangement is in place and the credit risk
exposure is managed on a net basis or the position
is specifically collateralised, normally in the form
of cash. These amounts do not qualify for net
presentation for accounting purposes as settlement
may not actually be made on a net basis, though we
consider the net presentation more accurately reflects
the risk exposure.
The effect of the transfer of risk to policyholders
under unit-linked insurance contracts, as well as
trading assets which represent collateral to support
associated liabilities, are separately disclosed in the
detailed peripheral country exposures, but are not
deducted from the total net exposure.
CDSs reported in the detailed peripheral
eurozone country tables are not included in the
derivative exposure line as they are typically
transacted with counterparties incorporated or
domiciled outside the country whose exposure they
reference.
192
Credit default swaps and off-balance sheet
exposures
The CDSs were transacted with banks with
investment grade credit ratings, and would pay out
in the event of the default of the referenced security
and certain other credit events. CDS contracts
disclosed in the tables below were principally
entered into for customer facilitation with banks
and financial institutions where their terms are
typically drawn up in accordance with the guidance
set out in the 2003 ISDA Credit Derivatives
Definitions and the 2009 Supplement. The credit
events that trigger the payout of CDSs may differ
as they are based on the terms of each agreement
Summary of exposures to eurozone countries
(Unaudited)
between the counterparties. Such credit events
normally include bankruptcy, payment default
on a reference asset or assets, restructuring and
repudiation or moratoria.
Off-balance sheet exposures mainly relate to
commitments to lend and the amounts shown in the
tables represent the amounts that could be drawn
down by the counterparties. In some instances,
limitations are imposed on a counterparty’s ability
to draw down on a facility. These limitations are
governed by the documentation, which differs from
counterparty to counterparty. In the majority of
cases, we are bound to fulfil commitments made
to third parties.
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At 31 December 2012
Spain ...............................................................
Ireland .............................................................
Italy .................................................................
Greece .............................................................
Portugal ...........................................................
Cyprus .............................................................
France .............................................................
Germany .........................................................
The Netherlands ..............................................
Others ..............................................................
At 31 December 2011
Spain ...............................................................
Ireland .............................................................
Italy .................................................................
Greece .............................................................
Portugal ...........................................................
Cyprus..............................................................
France .............................................................
Germany .........................................................
The Netherlands ..............................................
Others ..............................................................
On-balance
sheet
exposures
US$bn
Off-balance
sheet
exposures
US$bn
Total
gross
exposures
US$bn
Risk
mitigation
US$bn
Total
net
exposure
US$bn
15.3
20.7
12.6
5.9
1.1
0.3
158.3
112.4
39.7
38.0
404.3
15.7
14.1
16.4
6.6
1.7
0.2
154.8
86.3
70.1
36.1
402.0
3.2
1.3
3.0
0.7
0.3
0.1
28.0
11.6
4.1
4.9
57.2
2.0
0.3
1.4
1.6
–
0.2
26.5
10.1
1.8
4.0
47.9
18.5
22.0
15.6
6.6
1.4
0.4
186.3
124.0
43.8
42.9
461.5
17.7
14.4
17.8
8.2
1.7
0.4
181.3
96.4
71.9
40.1
449.9
(6.4)
(12.1)
(6.0)
(0.8)
(0.4)
–
(40.8)
(56.6)
(14.4)
(14.3)
(151.8)
(5.4)
(8.6)
(9.4)
(0.6)
(0.6)
–
(31.3)
(38.0)
(6.2)
(14.0)
(114.1)
12.1
9.9
9.6
5.8
1.0
0.4
145.5
67.4
29.4
28.6
309.7
12.3
5.8
8.4
7.6
1.1
0.4
150.0
58.4
65.7
26.1
335.8
193
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Exposures to peripheral eurozone countries
Exposures to Spain
(Audited)
At 31 December 2012
Sovereign
and
agencies
US$bn
Other
financial
institutions
and
corporates
US$bn
Banks
US$bn
Personal
US$bn
Sovereign
and
agencies
US$bn
Total
US$bn
At 31 December 2011
Other
financial
institutions
and
corporates
US$bn
Banks
US$bn
Personal
US$bn
Total
US$bn
Cash and balances at central banks ............................
Loans and advances ....................................................
– gross .....................................................................
– impairment allowances ........................................
Financial investments available for sale37 ..................
– amortised cost ......................................................
Trading assets .............................................................
Derivative assets .........................................................
Gross balance sheet exposure before risk
mitigation ...............................................................
–
–
–
–
0.4
0.2
1.4
0.1
1.9
–
0.1
0.1
–
0.3
0.4
1.9
4.8
7.1
1
9
4
Risk mitigation ...........................................................
– short trading positions .........................................
– collateral and derivative liabilities ......................
(0.9)
(0.9)
–
(4.6)
(0.1)
(4.5)
Net on-balance sheet exposure ................................
Off-balance sheet exposures .......................................
– commitments .......................................................
– guarantees and other ............................................
Total net exposure ....................................................
Of which:
– net trading assets representing cash
collateral posted ..............................................
– on-balance sheet exposures held to meet
DPF insurance liabilities .................................
Total credit default swaps
– CDS bought positions ..........................................
– CDS sold positions ..............................................
– CDS bought notionals .........................................
– CDS sold notionals ..............................................
For footnote, see page 249.
For commentary, see page 199.
1.0
–
–
–
1.0
–
0.2
0.4
(0.3)
6.8
6.4
2.5
0.3
–
0.3
2.8
1.5
0.3
–
–
2.8
2.7
–
5.0
5.1
(0.1)
0.1
0.1
0.1
1.1
6.3
(0.9)
(0.1)
(0.8)
5.4
2.9
2.3
0.6
8.3
–
0.1
–
–
1.2
1.2
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
5.1
5.2
(0.1)
0.8
0.7
3.4
6.0
15.3
(6.4)
(1.1)
(5.3)
8.9
3.2
2.3
0.9
12.1
1.5
0.6
0.4
(0.3)
10.8
10.3
0.1
–
–
–
0.9
0.9
1.8
0.2
3.0
(1.8)
(1.7)
(0.1)
1.2
1.0
1.0
–
2.2
0.1
0.4
0.4
(0.4)
3.3
3.5
–
0.2
0.2
–
0.4
0.4
2.4
3.6
6.6
(3.5)
(0.4)
(3.1)
3.1
0.4
–
0.4
3.5
1.3
0.4
0.1
(0.1)
1.5
1.4
–
5.6
5.7
(0.1)
0.1
0.1
0.2
0.2
6.1
(0.1)
(0.1)
–
6.0
0.6
0.1
0.5
6.6
–
0.1
0.1
(0.1)
1.4
1.3
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
0.1
5.8
5.9
(0.1)
1.4
1.4
4.4
4.0
15.7
(5.4)
(2.2)
(3.2)
10.3
2.0
1.1
0.9
12.3
1.4
0.9
0.6
(0.6)
6.2
6.2
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Exposures to Ireland
(Audited)
Loans and advances ....................................................
– gross .....................................................................
– impairment allowances ........................................
Financial investments held to maturity ......................
– fair value ..............................................................
Financial investments available for sale ....................
– amortised cost ......................................................
– available-for-sale reserve ....................................
Trading assets .............................................................
Derivative assets .........................................................
Gross balance sheet exposure before risk
mitigation ..............................................................
Risk mitigation ...........................................................
– short trading positions .........................................
– collateral and derivative liabilities .......................
Net on-balance sheet exposure ...................................
Off-balance sheet exposures .......................................
– commitments .......................................................
– guarantees and others ..........................................
Total net exposure ....................................................
Of which:
– net trading assets representing cash
collateral posted ..............................................
– on-balance sheet exposures held to meet
DPF insurance liabilities .................................
Total credit default swaps
– CDS bought positions ..........................................
– CDS sold positions ..............................................
– CDS bought notionals .........................................
– CDS sold notionals ..............................................
For commentary, see page 199.
At 31 December 2012
Sovereign
and
agencies
US$bn
Other
financial
institutions
and
corporates
US$bn
Banks
US$bn
Personal
US$bn
Sovereign
and
agencies
US$bn
Total
US$bn
At 31 December 2011
Other
financial
institutions
and
corporates
US$bn
Banks
US$bn
Personal
US$bn
Total
US$bn
–
–
–
–
–
0.1
0.1
–
0.3
0.7
1.1
(0.7)
(0.1)
(0.6)
0.4
–
–
–
0.4
0.1
0.1
–
–
1.5
1.5
0.1
0.1
–
0.2
0.2
–
–
–
1.5
11.1
12.9
(11.1)
–
(11.1)
1.8
–
–
–
1.8
1.5
0.2
–
–
–
–
2.5
2.5
–
–
–
2.3
2.5
(0.2)
0.8
1.0
6.6
(0.3)
–
(0.3)
6.3
1.3
1.1
0.2
7.6
–
–
–
–
0.5
0.2
0.1
0.2
(0.1)
–
–
–
–
–
–
–
0.1
–
–
–
0.1
–
–
–
0.1
–
–
–
–
–
–
2.7
2.8
(0.1)
0.2
0.2
2.4
2.6
(0.2)
2.6
12.8
20.7
(12.1)
(0.1)
(12.0)
8.6
1.3
1.1
0.2
9.9
1.6
0.3
–
–
2.0
1.7
–
–
–
–
–
0.1
0.1
–
0.3
0.3
0.7
(0.4)
(0.1)
(0.3)
0.3
–
–
–
0.3
0.1
0.1
0.2
(0.2)
0.9
0.9
0.1
0.1
–
0.2
0.2
0.4
0.4
–
0.9
8.3
9.9
(8.0)
–
(8.0)
1.9
–
–
–
1.9
0.6
0.2
–
–
–
–
2.1
2.1
–
–
–
0.3
0.4
(0.1)
0.3
0.7
3.4
(0.2)
–
(0.2)
3.2
0.3
0.1
0.2
3.5
–
–
–
–
0.3
0.3
0.1
0.2
(0.1)
–
–
–
–
–
–
–
0.1
–
–
–
0.1
–
–
–
0.1
–
–
–
–
–
–
2.3
2.4
(0.1)
0.2
0.2
0.8
0.9
(0.1)
1.5
9.3
14.1
(8.6)
(0.1)
(8.5)
5.5
0.3
0.1
0.2
5.8
0.7
0.3
0.2
(0.2)
1.2
1.2
1
9
5
Shareholder Information
Financial Statements
Corporate Governance
Operating & Financial Review
Overview
1
9
6
Exposures to Italy
(Audited)
Loans and advances ....................................................
– gross .....................................................................
Financial investments held to maturity ......................
– fair value ..............................................................
Financial investments available for sale37 ..................
– amortised cost ......................................................
Financial assets designated at fair value ....................
Trading assets .............................................................
Derivative assets .........................................................
Gross balance sheet exposure before risk
mitigation ..............................................................
Risk mitigation ...........................................................
– short trading positions .........................................
– collateral and derivative liabilities .......................
Net on-balance sheet exposure ...................................
Off-balance sheet exposures .......................................
– commitments .......................................................
– guarantees and others ..........................................
Total net exposure ....................................................
Of which:
– net trading assets representing cash
collateral posted ..............................................
– on-balance sheet exposures held to meet
DPF insurance liabilities .................................
Total credit default swaps
– CDS bought positions ..........................................
– CDS sold positions ..............................................
– CDS bought notionals .........................................
– CDS sold notionals ..............................................
For footnote, see page 249.
For commentary, see page 199.
At 31 December 2012
Sovereign
and
agencies
US$bn
Other
financial
institutions
and
corporates
US$bn
Banks
US$bn
Personal
US$bn
Sovereign
and
agencies
US$bn
Total
US$bn
At 31 December 2011
Other
financial
institutions
and
corporates
US$bn
Banks
US$bn
Personal
US$bn
Total
US$bn
–
–
0.1
0.1
0.8
0.8
–
5.2
0.5
6.6
(3.9)
(3.9)
–
2.7
–
–
–
2.7
–
0.3
0.6
(0.5)
9.9
10.3
0.1
0.1
0.2
0.2
0.3
0.3
–
0.7
1.7
3.0
(1.6)
–
(1.6)
1.4
0.2
–
0.2
1.6
0.6
0.4
0.1
(0.1)
6.1
6.1
1.2
1.2
–
–
0.3
0.3
0.1
0.1
1.2
2.9
(0.5)
–
(0.5)
2.4
2.8
1.8
1.0
5.2
–
0.2
0.1
–
3.6
3.6
0.1
0.1
–
–
–
–
–
–
–
0.1
–
–
–
0.1
–
–
–
0.1
–
–
–
–
–
–
1.4
1.4
0.3
0.3
1.4
1.4
0.1
6.0
3.4
12.6
(6.0)
(3.9)
(2.1)
6.6
3.0
1.8
1.2
9.6
0.6
0.9
0.8
(0.6)
19.6
20.0
–
–
0.1
0.1
0.8
0.8
–
8.3
0.7
9.9
(7.6)
(6.9)
(0.7)
2.3
–
–
–
2.3
–
0.3
0.6
(0.6)
3.9
3.8
0.5
0.5
0.2
0.2
0.3
0.3
–
0.6
1.9
3.5
(1.5)
–
(1.5)
2.0
0.1
–
0.1
2.1
0.5
0.4
0.5
(0.5)
3.5
3.5
1.4
1.4
–
–
0.3
0.2
–
0.2
1.0
2.9
(0.3)
–
(0.3)
2.6
1.3
0.9
0.4
3.9
–
0.2
0.3
(0.2)
3.7
3.5
0.1
0.1
–
–
–
–
–
–
–
0.1
–
–
–
0.1
–
–
–
0.1
–
–
–
–
–
–
2.0
2.0
0.3
0.3
1.4
1.3
–
9.1
3.6
16.4
(9.4)
(6.9)
(2.5)
7.0
1.4
0.9
0.5
8.4
0.5
0.9
1.4
(1.3)
11.1
10.8
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Exposures to Greece
(Audited)
Loans and advances ....................................................
– gross .....................................................................
– impairment allowances ........................................
Financial investments available for sale ....................
– cumulative impairment ........................................
Trading assets .............................................................
Derivative assets .........................................................
Gross balance sheet exposure before risk
mitigation ..............................................................
Risk mitigation ...........................................................
– short trading positions .........................................
– collateral and derivative liabilities .......................
Net on-balance sheet exposure ...................................
Off-balance sheet exposures .......................................
– commitments .......................................................
– guarantees and others ..........................................
Total net exposure ....................................................
Total credit default swaps
– CDS bought positions ..........................................
– CDS sold positions ..............................................
– CDS bought notionals .........................................
– CDS sold notionals ..............................................
For commentary, see page 199.
1
9
7
At 31 December 2012
Sovereign
and
agencies
US$bn
Other
financial
institutions
and
corporates
US$bn
Banks
US$bn
Personal
US$bn
Sovereign
and
agencies
US$bn
Total
US$bn
At 31 December 2011
Other
financial
institutions
and
corporates
US$bn
Banks
US$bn
Personal
US$bn
Total
US$bn
0.1
0.1
–
–
–
–
–
0.1
–
–
–
0.1
–
–
–
0.1
–
–
–
–
–
–
–
–
–
0.6
0.8
1.4
(0.8)
–
(0.8)
0.6
–
–
–
0.6
–
–
–
–
3.4
3.4
–
–
–
–
–
3.4
–
–
–
3.4
0.7
0.2
0.5
4.1
–
–
0.4
0.4
1.0
1.0
–
–
–
–
–
1.0
–
–
–
1.0
–
–
–
1.0
–
–
–
–
4.5
4.5
–
–
–
0.6
0.8
5.9
(0.8)
–
(0.8)
5.1
0.7
0.2
0.5
5.8
–
–
0.4
0.4
–
–
–
0.1
0.2
0.4
–
0.5
(0.1)
(0.1)
–
0.4
–
–
0.4
1.2
(0.7)
1.8
1.0
0.1
0.1
–
–
–
0.4
0.7
1.2
(0.5)
–
(0.5)
0.7
0.2
–
0.2
0.9
–
–
–
–
3.8
4.0
(0.2)
–
–
–
0.1
3.9
–
–
–
3.9
1.4
0.8
0.6
5.3
0.1
(0.1)
0.2
0.3
1.0
1.0
–
–
–
–
–
1.0
–
–
–
1.0
–
–
–
1.0
–
–
–
–
4.9
5.1
(0.2)
0.1
0.2
0.8
0.8
6.6
(0.6)
(0.1)
(0.5)
6.0
1.6
0.8
0.8
7.6
1.3
(0.8)
2.0
1.3
Shareholder Information
Financial Statements
Corporate Governance
Operating & Financial Review
Overview
Exposures to Portugal
(Audited)
At 31 December 2012
Sovereign
and
agencies
US$bn
Other
financial
institutions
and
corporates
US$bn
Banks
US$bn
Personal
US$bn
Sovereign
and
agencies
US$bn
Total
US$bn
At 31 December 2011
Other
financial
institutions
and
corporates
US$bn
Banks
US$bn
Personal
US$bn
Total
US$bn
1
9
8
Loans and advances ....................................................
– gross .....................................................................
Financial investments available for sale ....................
– cumulative impairment ........................................
– amortised cost ......................................................
– available-for-sale reserve ....................................
Trading assets .............................................................
Derivative assets .........................................................
Gross balance sheet exposure before risk
mitigation ..............................................................
Risk mitigation ...........................................................
– short trading positions .........................................
– collateral and derivative liabilities .......................
Net on-balance sheet exposure ...................................
Off-balance sheet exposures .......................................
– commitments .......................................................
– guarantees and others ..........................................
Total net exposure ....................................................
Of which:
– net trading assets representing cash
collateral posted ..............................................
– on-balance sheet exposures held to meet
DPF insurance liabilities .................................
Total credit default swaps
– CDS bought positions ..........................................
– CDS sold positions ..............................................
– CDS bought notionals .........................................
– CDS sold notionals ..............................................
For commentary, see page 199.
–
–
0.1
–
0.1
–
0.3
–
0.4
(0.2)
(0.2)
–
0.2
–
–
–
0.2
–
0.1
0.1
(0.1)
1.6
1.5
0.3
0.3
–
–
–
–
–
0.2
0.5
(0.2)
–
(0.2)
0.3
0.1
–
0.1
0.4
–
–
–
–
0.9
0.9
0.2
0.2
–
–
–
–
–
–
0.2
–
–
–
0.2
0.2
0.2
–
0.4
–
–
–
–
0.8
0.8
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
0.5
0.5
0.1
–
0.1
–
0.3
0.2
1.1
(0.4)
(0.2)
(0.2)
0.7
0.3
0.2
0.1
1.0
–
0.1
0.1
(0.1)
3.3
3.2
–
–
0.1
–
0.1
–
0.6
0.3
1.0
(0.5)
(0.2)
(0.3)
0.5
–
–
–
0.5
–
0.1
0.4
(0.3)
1.2
1.2
0.3
0.3
–
–
–
–
0.1
0.2
0.6
(0.1)
–
(0.1)
0.5
–
–
–
0.5
0.1
–
0.1
(0.1)
0.6
0.5
–
–
0.1
–
0.1
–
–
–
0.1
–
–
–
0.1
–
–
–
0.1
–
0.1
0.1
(0.1)
0.6
0.7
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
0.3
0.3
0.2
–
0.2
–
0.7
0.5
1.7
(0.6)
(0.2)
(0.4)
1.1
–
–
–
1.1
0.1
0.2
0.6
(0.5)
2.4
2.4
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Commentary on exposures
Spain
At 31 December 2012, our total net exposure to
Spain was US$12.1bn, US$0.2bn lower than at the
end of 2011.
Our total net exposure to Spanish sovereign and
agencies was US$1.0bn, US$1.2bn lower than at the
end of 2011. The reduction was primarily due to
lower off-balance sheet positions.
Our total net exposure to Spanish banks was
US$2.8bn, US$0.7bn lower than at the end of 2011.
The reduced exposure was due to increased risk
mitigation. Our total net exposure to Spanish other
financial institutions and corporates was US$8.3bn,
an increase of US$1.7bn primarily due to higher
off-balance sheet commitments. Our exposure to
Spanish other financial institutions and corporates
mainly comprised large multinational companies
and other financial institutions with significant
operations outside Spain, which mitigated the risk.
Exposure to the commercial real estate sector in
Spain remained insignificant.
Ireland
At 31 December 2012, our total net exposure to
Ireland was US$9.9bn, US$4.1bn higher than at the
end of 2011. This increase was in respect of exposures
to other financial institutions and corporates.
Our total net exposure to Irish other financial
institutions and corporates was US$7.6bn, US$4.1bn
higher than at the end of 2011. The increase was
primarily in financial investments available for sale
for which the underlying risk is not predominantly
Irish. A significant portion of our exposure related to
foreign-owned entities incorporated in Ireland.
Italy
At 31 December 2012, our total net exposure to Italy
was US$9.6bn, US$1.2bn higher than at the end of
2011.
Our total net exposure to Italian sovereign
agencies was US$2.7bn, US$0.4bn higher than at the
end of 2011. This was due to a decrease in risk
mitigation.
Our total net exposure to Italian banks was
US$1.6bn, US$0.5bn lower than at the end of 2011.
The reduced exposure was primarily due to lower
amounts of loans and advances.
Our total net exposure to other financial
institutions and corporates at 31 December 2012 was
US$5.2bn, an increase of US$1.3bn. Our exposure to
199
Italian other financial institutions and corporates
mainly comprised large multinational companies
and other financial institutions with significant
operations outside Italy, which mitigated the risk.
Greece
At 31 December 2012, our total net exposure to
Greece was US$5.8bn, US$1.8bn lower than at the
end of 2011. Although there was a reduction in
exposure levels to all Greek counterparties in the
first half of 2012, the majority of the reduction was
in respect of exposures to other financial institutions
and corporates.
Our total net exposure to Greek sovereign and
agencies was US$0.1bn, US$0.3bn lower than at the
end of 2011. Our Greek sovereign exposure
decreased as a result of the debt restructuring in
March 2012 and the associated settlement of CDS
contracts.
Our total net exposure to Greek banks was
US$0.6bn, US$0.3bn lower than at the end of 2011.
The decrease was primarily due to lower off-balance
sheet positions.
Our total net exposure to Greek other financial
institutions and corporates was US$4.1bn, US$1.2bn
lower than at the end of 2011. The reduction was
primarily due to lower level of off-balance sheet
positions. At 31 December 2012, our exposure to
Greek shipping companies amounted to US$2.2bn.
We believe the industry is less sensitive to the Greek
economy as it is mainly dependent on international
trade.
Portugal
At 31 December 2012, our total net exposure to
Portugal was US$1.0bn, similar to the end of 2011.
Our total net exposure to Portuguese other
financial institutions and corporates was US$0.4bn,
US$0.3bn higher than at the end of 2011. The
increase was primarily due to higher off-balance
sheet commitments, which were in support of
internationally active corporates with significant
operations outside Portugal, which reduced the risk.
Cyprus
Our gross on-balance sheet exposure to Cyprus of
US$0.3bn (2011: US$0.2bn) consisted primarily of
loans and advances to other financial institutions and
corporates of US$0.3bn (2011: US$0.2bn). We have
also provided off-balance sheet commitments and
guarantees to other financial institutions and
corporates of US$0.1bn (2011: US$0.1bn).
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Risk > Eurozone exposures > Redenomination risk
Exposures to other eurozone countries
Summary of exposures to other eurozone countries
(Unaudited)
Sovereign
and agencies
US$bn
Other
financial
institutions
and corporates
US$bn
Banks
US$bn
Personal
US$bn
Total
US$bn
At 31 December 2012
France
On-balance sheet exposure ..........................
Off-balance sheet exposure .........................
Total gross exposure.....................................
Risk mitigation ............................................
Total net exposure .......................................
Germany
On-balance sheet exposure ..........................
Off-balance sheet exposure .........................
Total gross exposure.....................................
Risk mitigation ............................................
Total net exposure .......................................
The Netherlands
On-balance sheet exposure ..........................
Off-balance sheet exposure .........................
Total gross exposure.....................................
Risk mitigation ............................................
Total net exposure .......................................
Others
On-balance sheet exposure ..........................
Off-balance sheet exposure .........................
Total gross exposure.....................................
Risk mitigation ............................................
Total net exposure .......................................
At 31 December 2011
France
On-balance sheet exposure ..........................
Off-balance sheet exposure .........................
Total gross exposure.....................................
Risk mitigation ............................................
Total net exposure .......................................
Germany
On-balance sheet exposure ..........................
Off-balance sheet exposure .........................
Total gross exposure.....................................
Risk mitigation ............................................
Total net exposure .......................................
The Netherlands
On-balance sheet exposure ..........................
Off-balance sheet exposure .........................
Total gross exposure.....................................
Risk mitigation ............................................
Total net exposure .......................................
Others
On-balance sheet exposure ..........................
Off-balance sheet exposure .........................
Total gross exposure.....................................
Risk mitigation ............................................
Total net exposure .......................................
43.7
25.3
69.0
(3.3)
65.7
14.8
11.1
25.9
(0.8)
25.1
14.8
4.0
18.8
(4.8)
14.0
8.4
4.0
12.4
(0.4)
12.0
37.1
21.7
58.8
(1.7)
57.1
7.4
8.2
15.6
(0.6)
15.0
10.4
1.6
12.0
(1.6)
10.4
9.2
2.9
12.1
(0.3)
11.8
15.5
0.8
16.3
–
16.3
0.3
0.3
0.6
–
0.6
0.1
–
0.1
–
0.1
2.6
0.6
3.2
–
3.2
14.0
1.1
15.1
(0.2)
14.9
0.3
0.4
0.7
–
0.7
0.1
–
0.1
–
0.1
2.3
0.8
3.1
–
3.1
158.3
28.0
186.3
(40.8)
145.5
112.4
11.6
124.0
(56.6)
67.4
39.7
4.1
43.8
(14.4)
29.4
38.0
4.9
42.9
(14.3)
28.6
154.8
26.5
181.3
(31.3)
150.0
86.3
10.1
96.4
(38.0)
58.4
70.1
1.8
71.9
(6.2)
65.7
36.1
4.0
40.1
(14.0)
26.1
55.0
1.7
56.7
(26.2)
30.5
56.5
0.2
56.7
(42.4)
14.3
10.4
0.1
10.5
(5.2)
5.3
14.0
0.3
14.3
(10.7)
3.6
67.0
1.8
68.8
(19.9)
48.9
47.6
1.5
49.1
(26.4)
22.7
16.3
0.2
16.5
(1.3)
15.2
14.3
0.3
14.6
(10.7)
3.9
44.1
0.2
44.3
(11.3)
33.0
40.8
–
40.8
(13.4)
27.4
14.4
–
14.4
(4.4)
10.0
13.0
–
13.0
(3.2)
9.8
36.7
1.9
38.6
(9.5)
29.1
31.0
–
31.0
(11.0)
20.0
43.3
–
43.3
(3.3)
40.0
10.3
–
10.3
(3.0)
7.3
200
At 31 December 2012, our net on-balance sheet
exposure to France, Germany and the Netherlands was
US$199bn, US$37bn lower than at the end of 2011.
Our net on-balance sheet exposure to the sovereign
and agency debt of France, Germany and the
Netherlands was US$70bn, US$17bn lower than at the
end of 2011. Our exposure to France and Germany was
commensurate with the size of our operations in these
countries. In 2012, cash balances held with the Dutch
Central Bank were reduced and redirected to the French
Central Bank to align more closely with our underlying
operations. The cash placements continued to be put into
the euro clearing system managed by the ECB.
At 31 December 2012, our net on-balance sheet
exposure to the bank debt of France, Germany, and the
Netherlands was US$48bn, US$35bn lower than at the
end of 2011. The decrease reflected our ongoing efforts
to reduce exposure to counterparties domiciled in these
countries with exposures to sovereigns and/or banks in
peripheral eurozone countries of sufficient size to
threaten the counterparties’ on-going viability in the
event of an unfavourable conclusion to the current
crisis.
At 31 December 2012, our net on-balance sheet
exposure to the corporate and other financial institution
debt of France, Germany and the Netherlands was
US$64bn, US$13bn higher than at the end of 2011.
Off-balance sheet exposures increased by US$3.6bn in
France. Our exposure in Germany and France was
commensurate with the size of our operations and was
well diversified across portfolios, sectors and products.
Our relationships in these countries are mostly with
large global entities that have significant operations
outside their respective domestic markets. This
mitigates our risk as these corporates have diversified
the sources of their revenue and, more importantly,
their ability to raise finance internationally should their
domestic markets become strained.
In France, our net exposure to personal lending at
31 December 2012 was US$16bn, US$1bn higher than
at the end of 2011. The exposure was mainly in
residential mortgages, loans secured by a national
guarantee scheme and unsecured personal loans, and
both delinquency and impairment charges remained
low.
Exposure to other eurozone countries
In addition to the countries disclosed above,
HSBC had net on-balance sheet exposures of
US$24bn , US$1.6bn higher than in 2011 to
eurozone countries that were not significant to
the Group. Of these, the largest exposure was
represented by our retail and corporate banking
201
operations in Malta, which had a net on-balance
sheet exposure of US$5.8bn, US$0.2bn lower than in
2011. Our second largest exposure was in Finland
with US$4.3bn of net on-balance sheet exposure to
sovereign, agencies and banks (of which US$2.6bn
was cash collateral held in respect of derivative
liabilities). We also had US$3.3bn of net on-balance
sheet exposure to sovereigns, agencies and banks in
Belgium (of which US$1.4bn was fully
collateralised) and US$1.2bn to other financial
institutions and corporates. Our remaining net on-
balance sheet exposure to the eurozone was less than
5% of the Group’s total equity.
Redenomination risk
(Unaudited)
As the peripheral eurozone countries continue to
exhibit distress, there is continuing possibility of a
member state exiting from the eurozone. There
remains no established legal framework within the
European treaties to facilitate such an event;
consequently, it is not possible to accurately predict
the course of events and legal consequences that
would ensue.
Our current view is that there would be a greater
impact on HSBC from a euro exit of Greece, Italy or
Spain than from Ireland, Portugal or Cyprus.
Key risks associated with an exit by a eurozone
member include:
Foreign exchange losses: an exit would
probably be accompanied by the passing of laws
in the country concerned establishing a new local
currency and providing for a redenomination of
euro-denominated assets into the new local currency.
The value of assets and liabilities in the country
would immediately fall assuming the value of the
redenominated currency is less than the original
euros when translated into the carrying amounts. It
is not possible to predict what the total consequential
loss might be as it is uncertain which assets and
liabilities would be legally re-denominated or what
the extent of the devaluation would be. However,
in order to provide an indication of one part of the
possible exposure, the table below identifies assets
and liabilities booked in our banking operations in
Greece, Italy and Spain (described as ‘in-country’).
These assets and liabilities predominantly comprise
loans and deposits arising from our commercial
banking operations in these countries. The net assets
represent our net funding exposure to those countries
which we consider most likely to be affected by a
redenomination event. The table also identifies in-
country off-balance sheet exposures as these are at
risk of redenomination should they be called, giving
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Risk > Eurozone exposures > Redenomination risk // Liquidity and funding
rise to a balance sheet exposure. It is to be noted that
this analysis can only be an indication as it does not
include euro-denominated exposures booked by
HSBC outside the countries at risk which are
connected with those countries (see ‘external
contracts’ below).
External contracts redenomination risk:
contracts entered into between HSBC businesses
based outside a country exiting the euro with in-
country counterparties or those otherwise closely
connected with the relevant country, may be affected
by redenomination. The effect remains subject to a
high level of uncertainty. Factors such as the country
law under which the contract is documented, the
HSBC entity involved and the payment mechanism
may all be relevant to this assessment, as will the
precise exit scenario as the consequences for
external contracts of a disorderly exit or one
In-country funding exposure
(Unaudited)
At 31 December 2012
Greece
In-country assets ......................................................
In-country liabilities .................................................
Italy
Spain
Net in-country funding exposure .............................
Off-balance sheet exposure .....................................
In-country assets ......................................................
In-country liabilities38 ..............................................
Net in-country funding exposure .............................
Off-balance sheet exposure .....................................
In-country assets ......................................................
In-country liabilities .................................................
Net in-country funding exposure .............................
Off-balance sheet exposure .....................................
At 31 December 2011
Greece
In-country assets ......................................................
In-country liabilities .................................................
Italy
Spain
Net in-country funding exposure .............................
Off-balance sheet exposure .....................................
In-country assets ......................................................
In-country liabilities38 ..............................................
Net in-country funding exposure .............................
Off-balance sheet exposure .....................................
In-country assets ......................................................
In-country liabilities .................................................
Net in-country funding exposure .............................
Off-balance sheet exposure .....................................
For footnote, see page 249.
202
sanctioned under EU law may be different. In
addition, capital controls could be introduced which
may affect the ability to repatriate funds including
currencies not affected by the redenomination event.
We continue to identify and monitor potential
redenomination risks and, where possible, take steps
to mitigate them and/or reduce our overall exposure
to losses that might arise in the event of a
redenomination. We continue to emphasise,
however, that a euro exit could take different forms
in a number of different scenarios. These give rise to
distinct legal consequences which could significantly
alter the potential effectiveness of any steps taken,
and it is accordingly not possible to predict how
effective particular measures may be until they are
tested against the precise circumstances of a
redenomination event.
Denominated in:
euros
US$bn
US dollars
US$bn
other
currencies
US$bn
Total
US$bn
2.1
(1.5)
0.6
(0.3)
1.0
(2.0)
(1.0)
0.8
2.4
(1.7)
0.7
0.7
2.9
(2.1)
0.8
0.2
2.1
(2.6)
(0.5)
0.8
4.4
(1.7)
2.7
2.4
0.1
(0.8)
(0.7)
0.2
–
–
–
–
0.8
(0.1)
0.7
0.2
2.2
(1.6)
0.6
–
–
–
–
–
0.6
(0.1)
0.5
0.5
–
(0.1)
(0.1)
0.2
–
–
–
–
–
–
–
–
0.1
(0.1)
–
–
–
–
–
–
0.1
–
0.1
–
2.2
(2.4)
(0.2)
0.1
1.0
(2.0)
(1.0)
0.8
3.2
(1.8)
1.4
0.9
5.2
(3.8)
1.4
0.2
2.1
(2.6)
(0.5)
0.8
5.1
(1.8)
3.3
2.9
Liquidity and funding
Page
App1
Tables
Page
Liquidity and funding .........................................
Primary sources of funding ...................................
Liquidity and funding in 2012 ............................ 204
Customer deposit markets ..................................... 204
Wholesale funding market ..................................... 205
Management of liquidity and funding risk ....... 205
Inherent liquidity risk categorisation .....................
Core deposits .........................................................
Advances to core funding ratio .............................. 205
Stressed coverage ratios ......................................... 205
Stressed scenario analysis ......................................
Liquid assets of HSBC’s principal
operating entities ............................................... 206
Net contractual cash flows ..................................... 207
Wholesale debt monitoring ....................................
Liquidity behaviouralisation ..................................
Contingent liquidity risk arising from
committed lending facilities ............................ 208
Sources of funding ............................................... 209
261
261
261
261
262
262
262
262
263
264
264
265
261
Funding of HSBC Finance .................................... 211
Advances to core funding ratios ............................................ 205
Stressed one-month and three-month coverage ratios .......... 206
Liquid assets of HSBC’s principal entities ............................ 207
Net cash flows for intra-bank loans and intra-group deposits
and reverse repo, repo and short positions ....................... 208
Group’s contractual undrawn exposures monitored under
the contingent liquidity risk limit structure ..................... 209
Funding sources and uses .....................................................
Wholesale funding cash flows payable by HSBC under
210
financial liabilities by remaining contractual maturities .
210
Encumbered and unencumbered assets ............ 211
Summary of assets available to support potential future
funding and collateral needs (on and off-balance sheet) ..
211
The effect of active collateral management .......... 212
Off-balance sheet collateral received and pledged
for reverse repo and stock borrowing
transactions ........................................................ 212
Off-balance sheet non-cash collateral received
and pledged for derivative transactions ............ 212
Analysis of on-balance sheet encumbered and
Analysis of on-balance sheet encumbered and
unencumbered assets ......................................... 212
Additional contractual obligations ........................ 213
Additional information .......................................... 214
unencumbered assets ......................................................... 213
Contractual maturity of financial liabilities ..... 214
Cash flows payable by HSBC under financial liabilities by
remaining contractual maturities ..................................... 215
Management of cross-currency liquidity
and funding risk .................................................
265
HSBC Holdings .................................................... 215
265 Cash flows payable by HSBC Holdings under financial
liabilities by remaining contractual maturities ................ 216
Liquidity regulation ............................................. 216
1 Appendix to Risk – risk policies and practices
203
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Risk > Liquidity and funding > In 2012 / Management of liquidity and funding risk
Liquidity risk is the risk that the Group does
not have sufficient financial resources to
meet its obligations as they fall due, or will
have to do so at an excessive cost. The risk
arises from mismatches in the timing of cash
flows.
There were no material changes to our policies and
practices for the management of liquidity and
funding risks in 2012.
A summary of our current policies and practices
regarding liquidity and funding is provided in the
Appendix to Risk on page 261.
Our liquidity and funding risk management framework
The objective of our liquidity framework is to allow us to
withstand very severe liquidity stresses. It is designed to be
adaptable to changing business models, markets and
regulations.
Our liquidity and funding risk management framework
requires:
• liquidity to be managed by operating entities on a stand-
alone basis with no implicit reliance on the Group or central
banks;
• all operating entities to comply with their limits for the
advances to core funding ratio; and
• all operating entities to maintain a positive stressed cash
flow position out to three months under prescribed
Group stress scenarios.
Further details of the metrics are provided in the Appendix
to Risk on page 261.
Liquidity and funding in 2012
(Unaudited)
The liquidity position of the Group strengthened
in 2012, and we continued to enjoy strong inflows
of customer deposits and maintained good access
to wholesale markets. During 2012, customer
accounts grew by 7% (US$86bn) while loans
and advances to customers increased by 6%
(US$57bn), leading to a small decrease in our
advances to deposits ratio to 74% (2011: 75%).
HSBC UK (see footnote 40 on page 249)
recorded an increase in its advances to core funding
ratio to 106% at 31 December 2012 (2011: 100%).
During 2012, HSBC UK continued to fund the
majority of its growth in advances with growth in
core deposits and remained within its advances to
core funding limit.
The Hongkong and Shanghai Banking
Corporation (see footnote 41 on page 249)
recorded a decrease in its advances to core funding
ratio to 73% at 31 December 2012 (2011: 75%),
mainly as a result of its core deposits increasing
more than advances.
The completion of the sale of the US cards
business and branch network during 2012 improved
the liquidity and funding position of both HSBC
Finance and HSBC USA (see footnote 42 on page
249), the latter recording a decrease in its advances
to core funding ratio to 78% as at 31 December 2012
(2011: 86%).
Customer deposit markets
Customer accounts increased by 7% year on year.
After excluding repo balances, the year-on-year
increase was 7%.
Retail Banking and Wealth Management
We continued to grow our RBWM customer
accounts, which increased by 6%, by providing
differentiated products and services to different
segments. The growth in retail deposits benefited
from the wider macroeconomic trend of expanded
money supply, customer deleveraging and weak loan
growth, which partially offset the competitive
pressure in some of our key markets for retail
deposits and savers’ reluctance to place funds into
low-rate deposits.
Global Private Banking
As economic conditions remained subdued
and interest rates continued to fall, part of the GPB
customer base realigned its risk appetite and made
use of the wide range of products available, with
some asset reallocation to higher yielding off-
balance sheet products including equities, funds and
bonds. As a result, customer accounts decreased by
5% year on year.
Commercial Banking
Customer accounts increased by 11% year on year,
with the majority of this increase resulting from
increases in Payments and Cash Management
accounts. The growth in these customer accounts and
the strong growth in payment volumes demonstrated
a funding source that is correlated to the operational
services that HSBC provides to the CMB customer
base.
204
Global Banking and Markets
Advances to core funding ratio
Customer accounts increased by 8% year on year.
After excluding repo balances with customers,
GB&M deposits increased by 10% year on year,
with the majority of this rise resulting from increases
in Payments and Cash Management accounts. The
growth in these customer accounts and the strong
growth in payment volumes demonstrated a funding
source that is strongly linked to the operational
services that HSBC provides to the GB&M customer
base.
Wholesale funding markets
Wholesale funding markets gradually improved
during 2012, although the volume of term debt
issued by banks was low by recent standards,
influenced to a significant extent by reduced bank
funding requirements. Globally, market conditions
across public wholesale funding markets were
predominantly driven by sovereign-related and more
general events in the eurozone.
HSBC continued to have good access to debt
capital markets throughout 2012 with Group entities
issuing US$10.5bn of public transactions of which
US$9.8bn was senior unsecured debt.
In January 2013 the Group repaid €5bn
(US$6.6bn) of funding raised through the ECB’s
Long Term Repo Operations (‘LTRO’), leaving only
€473m (US$624m) outstanding.
Management of liquidity and funding risk
(Audited)
Our liquidity and funding risk management
framework (‘LFRF’) employs two key measures to
define, monitor and control the liquidity and funding
risk of each of our operating entities. The advances
to core funding ratio is used to monitor the structural
long-term funding position, and the stressed
coverage ratio, incorporating Group-defined stress
scenarios, is used to monitor the resilience to severe
liquidity stresses.
The three principal entities listed in the tables
below represented 62% (2011: 61%) of the Group’s
customer accounts (excluding repos). Including other
principal entities, the percentage was 94% (2011:
96%).
The table below shows the extent to which loans
and advances to customers in our principal banking
entities were financed by reliable and stable sources
of funding.
Advances to core funding limits set for
operating entities at 31 December 2012 ranged
between 70% and 115%, except for one operating
entity reported within the total of HSBC’s other
principal entities which operated with a limit of
125% during 2012. This limit has been reduced to
115% for 2013.
Advances to core funding ratios39
(Audited)
At 31 December
2012
%
106
106
100
103
2011
%
100
103
98
101
73
75
71
73
78
86
68
78
91
92
85
88
75
79
70
76
86
90
80
85
86
90
86
89
HSBC UK40
Year-end ..................................
Maximum ................................
Minimum .................................
Average ....................................
The Hongkong and Shanghai
Banking Corporation41
Year-end ..................................
Maximum ................................
Minimum .................................
Average ....................................
HSBC USA42
Year-end ..................................
Maximum ................................
Minimum .................................
Average ....................................
Total of HSBC’s other
principal entities43
Year-end ..................................
Maximum ................................
Minimum .................................
Average ....................................
For footnotes, see page 249.
Stressed coverage ratios
The stressed coverage ratios tabulated below express
stressed cash inflows as a percentage of stressed cash
outflows over both one-month and three-month time
horizons. Operating entities are required to maintain
a ratio of 100% or greater out to three months.
Inflows included in the numerator of the
stressed coverage ratio are those that are assumed to
be generated from liquid assets net of assumed
haircuts, and cash inflows related to assets
contractually maturing within the time period.
In general, customer advances are assumed to be
renewed and as a result do not generate a cash
inflow.
205
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Risk > Liquidity and funding > Management of liquidity and funding risk
Stressed one-month and three-month coverage ratios39
(Audited)
HSBC UK40
Year-end ...................................................................................
Maximum .................................................................................
Minimum ..................................................................................
Average ....................................................................................
The Hongkong and Shanghai Banking Corporation41
Year-end ...................................................................................
Maximum .................................................................................
Minimum ..................................................................................
Average ....................................................................................
HSBC USA42
Year-end ...................................................................................
Maximum .................................................................................
Minimum ..................................................................................
Average ....................................................................................
Total of HSBC’s other principal entities43
Year-end ...................................................................................
Maximum .................................................................................
Minimum ..................................................................................
Average ....................................................................................
For footnotes, see page 249.
Stressed one-month coverage
ratios at 31 December
Stressed three-month coverage
Ratios at 31 December
2012
%
114
117
108
112
129
134
123
129
126
137
115
127
127
127
117
121
2011
%
116
118
109
113
123
145
116
124
118
128
109
119
118
120
116
118
2012
%
103
103
101
102
126
126
118
123
119
130
113
123
117
117
108
111
2011
%
102
102
99
100
118
126
110
116
113
122
105
116
108
113
107
109
The stressed coverage ratios for HSBC UK
remained broadly unchanged.
Liquid assets of HSBC’s principal operating
entities
The stressed coverage ratios for The Hongkong
and Shanghai Banking Corporation improved as the
increase in core deposits exceeded the increase in
loans and advances to customers. The resulting
surplus was deployed in liquid assets, thereby
improving the stressed coverage ratios.
The stressed coverage ratios for HSBC USA
improved as a result of the net effect of selling the
US Card and Retail Services business and non-
strategic branches during 2012, which resulted in a
reduction in core deposits that was lower than the
reduction in loans and advances to customers. The
resulting surplus was deployed in liquid assets,
thereby improving the stressed coverage ratios.
The three-month stressed coverage ratio for
the total of HSBC’s other principal entities remained
broadly unchanged. The one-month stressed
coverage ratio improved as a result of an increase
in contractual maturities between one month and
three months.
The table below shows the estimated liquidity value
(before assumed haircuts) of assets categorised as
liquid used for the purposes of calculating the three-
month stressed coverage ratios, as defined under the
LFRF.
Any unencumbered asset held as a consequence
of a reverse repo transaction with a residual
contractual maturity within the stressed coverage
ratio time period and unsecured interbank loans
maturing within three months are not included in
liquid assets, as these assets are reflected as
contractual cash inflows.
Liquid assets are held and managed on a
standalone operating entity basis. Most of the liquid
assets shown are held directly by each operating
entity’s Balance Sheet Management function,
primarily for the purpose of managing liquidity risk,
in line with the LFRF.
Liquid assets also include any unencumbered
liquid assets held outside Balance Sheet
Management for any other purpose. The LFRF gives
ultimate control of all unencumbered assets and
sources of liquidity to Balance Sheet Management.
206
Liquid assets of HSBC’s principal entities
HSBC UK40
Level 1 ....................................................................................................................
Level 2 ....................................................................................................................
Level 3 ....................................................................................................................
Non-government assets ..........................................................................................
The Hongkong and Shanghai Banking Corporation41
Level 1 ....................................................................................................................
Level 2 ....................................................................................................................
Level 3 ....................................................................................................................
Non-government assets ..........................................................................................
HSBC USA42
Level 1 ....................................................................................................................
Level 2 ....................................................................................................................
Level 3 ....................................................................................................................
Other .......................................................................................................................
Non-government assets ..........................................................................................
Total of HSBC’s other principal entities43
Level 1 ....................................................................................................................
Level 2 ....................................................................................................................
Level 3 ....................................................................................................................
Other .......................................................................................................................
Non-government assets ..........................................................................................
Estimated liquidity value44
31 Dec 2012
Audited
US$m
30 Jun 2012
Unaudited
US$m
31 Dec 2011
Audited
US$m
138,812
374
27,656
–
166,842
112,167
5,740
3,968
–
121,875
60,981
15,609
5,350
6,521
–
88,461
154,445
18,048
6,468
2,447
–
181,408
120,690
475
9,320
–
130,485
104,943
5,929
4,889
–
115,761
62,966
16,511
8,405
6,238
–
94,120
118,616
36,713
11,205
–
–
166,534
114,596
344
–
23,007
137,947
107,056
–
2,151
109,207
86,060
1,369
–
–
19,093
106,522
138,085
2,827
–
–
23,584
164,496
For footnotes, see page 249.
Our liquid asset policy was refined at 1 January
2012 to apply a more granular classification of liquid
assets, as described in the Appendix to Risk on page
261. Under the previous framework, liquid assets
were classified into two categories: central
government, central bank and US agency MBS
exposures; and all other non-government exposures.
Central government, central bank and US agency
MBS exposures qualify as Level 1 or Level 2 under
the new policy and are shown as such in the
comparatives.
All assets held within the liquid asset portfolio
are unencumbered.
Liquid assets held by HSBC UK increased as a
result of a rise in customer accounts, which led to an
increase in the level of non-core deposits and,
consequently, liquid assets.
Liquid assets held by The Hongkong and
Shanghai Banking Corporation also rose as a result
of an increase in customer accounts. As the growth
in core deposits exceeded the increases in loans and
advances to customers, the difference was deployed
into liquid assets and the level of liquid assets held
grew accordingly.
207
Liquid assets held by HSBC USA decreased
as a result of the sale of the US Card and Retail
Services business and non-strategic branches during
2012.
Net contractual cash flows
The following table quantifies the contractual cash
flows from interbank and intergroup loans and
deposits, and reverse repo, repo (including
intergroup transactions) and short positions for the
principal entities shown. These contractual cash
inflows and outflows are reflected gross in the
numerator and denominator, respectively, of the one
and three-month stressed coverage ratios and should
be considered alongside the level of liquid assets.
Outflows included in the denominator of the
stressed coverage ratios include the principal
outflows associated with the contractual maturity
of wholesale debt securities reported in the table
headed ‘Wholesale funding cash flows payable
by HSBC under financial liabilities by remaining
contractual maturities’ on page 210.
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Risk > Liquidity and funding > Management of liquidity and funding risk / Contingent liquidity risk
Net cash inflows/(outflows) for interbank and intra-group loans and deposits and reverse repo, repo and short positions
(Audited)
Interbank and intra-group loans and deposits
HSBC UK40 ...................................................................................
The Hongkong and Shanghai Banking Corporation41 .................
HSBC USA42 ................................................................................
Total of HSBC’s other principal entities43 ...................................
Reverse repo, repo, stock borrowing, stock lending and
outright short positions (including intra-group)
HSBC UK40 ...................................................................................
The Hongkong and Shanghai Banking Corporation41 .................
HSBC USA42 ................................................................................
Total of HSBC’s other principal entities43 ...................................
For footnotes, see page 249.
Net cash flow arising from interbank and intra-
group loans and deposits
Under the LFRF, a net cash inflow within three
months arising from interbank and intra-group loans
and deposits will give rise to a lower liquid asset
requirement. Conversely, a net cash outflow within
three months arising from interbank and intra-group
loans and deposits will give rise to a higher liquid
assets requirement.
Net cash flow arising from reverse repo, repo,
stock borrowing, stock lending and outright short
positions (including intra-group)
A net cash inflow represents additional liquid
resources, in addition to liquid assets, because any
unencumbered asset held as a consequence of a
reverse repo transaction with a residual contractual
maturity within the stressed coverage ratio time
period is not reflected as a liquid asset.
The impact of net cash outflow depends on
whether the underlying collateral encumbered as a
result will qualify as a liquid asset when released at
the maturity of the repo. The majority of the Group’s
repo transactions are collateralised by liquid assets
and, as such, any net cash outflow shown is offset by
the return of liquid assets, which are excluded from
the liquid asset table above.
At 31 December 2012
At 31 December 2011
Cash flows
within
one month
US$m
Cash flows
from one to
three months
US$m
Cash flows
within
one month
US$m
Cash flows
from one to
three months
US$m
(16,464)
4,402
(30,269)
5,419
(4,184)
13,672
(4,003)
(31,951)
(1,429)
9,685
(473)
10,511
(13,776)
2,501
62
(231)
(12,832)
8,715
(32,154)
14,053
(558)
7,393
(3,872)
(6,597)
446
9,246
213
2,589
(171)
(487)
(377)
10,162
Contingent liquidity risk arising from
committed lending facilities
(Audited)
The Group’s operating entities provide commitments
to various counterparts. In terms of liquidity risk, the
most significant risk relates to committed lending
facilities which, whilst undrawn, give rise to
contingent liquidity risk, as these could be drawn
during a period of liquidity stress. Commitments are
given to customers and committed lending facilities
are provided to consolidated multi-seller conduits,
established to enable clients to access a flexible
market-based source of finance (see page 209),
consolidated securities investment conduits and
third-party sponsored conduits.
The consolidated securities investment conduits
primarily represent Solitaire and Mazarin (see
pages 186). These conduits issue asset-backed
commercial paper secured against the portfolio of
securities held by these conduits. At 31 December
2012, HSBC UK had undrawn committed lending
facilities to these conduits of US$18bn (2011:
US$22bn), of which Solitaire represented US$13bn
(2011: US$16bn) and the remaining US$5.1bn
(2011: US$6.2bn) pertained to Mazarin. At
31 December 2012, the commercial paper issued by
Solitaire and Mazarin was entirely held by HSBC
208
UK. Since HSBC controls the size of the portfolio
of securities held by these conduits, no contingent
liquidity risk exposure arises as a result of these
undrawn committed lending facilities.
The table below shows the level of undrawn
commitments to customers outstanding for the five
largest single facilities and the largest market sector,
and the extent to which they are undrawn.
The Group’s contractual undrawn exposures at 31 December monitored under the contingent liquidity risk
limit structure
(Audited)
HSBC UK
2012
2011
US$bn US$bn
HSBC USA
2012
US$bn
2011
US$bn
HSBC Canada
2012
US$bn
2011
2011
US$bn US$bn US$bn
The Hongkong and
Shanghai Banking
Corporation
2012
Commitments to conduits
Consolidated multi-seller
conduits
– total lines ...........................
– largest individual lines ......
Consolidated securities
investment conduits
– total lines ............................
Third party conduits
7.8
0.7
11.4
0.7
18.1
22.1
– total lines ............................
–
–
Commitments to customers
– five largest45 .......................
– largest market sector46 .......
6.0
11.0
3.4
7.5
For footnotes, see page 249.
Sources of funding
(Audited)
Our primary sources of funding are customer current
accounts and customer savings deposits payable on
demand or at short notice. We issue wholesale
securities (secured and unsecured) to supplement
our customer deposits and change the currency
mix, maturity profile or location of our liabilities.
The funding sources and uses table, which
provides a consolidated view of how our balance
sheet is funded, should be read in the 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. The assets and
2.3
0.5
–
0.8
6.0
7.5
0.9
0.3
–
1.4
5.7
6.5
1.0
0.8
–
–
1.7
4.5
0.7
0.5
–
–
–
–
–
–
–
–
–
–
1.8
3.8
2.1
2.4
1.9
2.5
liabilities that do not arise from operating activities
are presented as a net balancing source or
deployment of funds.
The level of customer accounts continued to
exceed the level of loans and advances to customers.
Excluding the effect of repos from customer
accounts and reverse repos from loans and advances
to customers, the adjusted advances to deposits ratio
at 31 December 2012 was 73.4% (2011: 73.5%). The
positive funding gap was predominantly deployed
into liquid assets; cash and balances with central
banks and financial investments, as required by the
LFRF.
Loans and other receivables due from banks
continued to exceed deposits taken from banks.
The Group remained a net unsecured lender to the
banking sector.
209
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Risk > Liquidity and funding > Contingent liquidity risk / Encumbered and unencumbered assets
Funding sources and uses
(Audited)
Sources
Customer accounts .......................
– repos ..........................................
– cash deposits .............................
2012
US$m
2011
US$m
1,340,014
28,618
1,311,396
1,253,925
30,785
1,223,140
Uses
Loans and advances to customers
– reverse repos ..............................
– loans or other receivables ..........
Deposits by banks ........................
– repos ..........................................
– cash deposits .............................
107,429
11,949
95,480
112,822
17,617
95,205
Loans and advances to banks .......
– reverse repos ..............................
– loans or other receivables ..........
2012
US$m
2011
US$m
997,623
34,651
962,972
152,546
35,461
117,085
940,429
41,419
899,010
180,987
41,909
139,078
Debt securities issued ..................
119,461
131,013
Assets held for sale .......................
19,269
39,558
Liabilities of disposal groups
held for sale ...............................
5,018
22,200
Subordinated liabilities ................
29,479
30,606
Financial liabilities designated at
Trading assets ...............................
– reverse repos ..............................
– stock borrowing .........................
– other trading assets ....................
408,811
118,681
16,071
274,059
330,451
79,848
9,459
241,144
fair value ...................................
87,720
85,724
Financial investments ...................
421,101
400,044
Liabilities under insurance
Cash and balances with
contracts ....................................
68,195
61,259
central banks ..............................
141,532
129,902
Trading liabilities .........................
– repos ..........................................
– stock lending .............................
– other trading liabilities ..............
304,563
130,223
6,818
167,522
265,192
86,838
4,595
173,759
Total equity ..................................
183,129
166,093
Net deployment in other
balance sheet assets and
liabilities ....................................
104,126
107,463
2,245,008
2,128,834
2,245,008
2,128,834
Wholesale funding cash flows payable by HSBC under financial liabilities by remaining contractual maturities
(Unaudited)
At 31 December 2012
Debt securities issued .................
Unsecured CDs and CP ..............
Unsecured senior MTNs .............
Unsecured senior structured
notes ........................................
Secured covered bonds ...............
Secured ABCP ............................
Secured ABS ...............................
Others ..........................................
Subordinated liabilities ...............
Subordinated debt securities .......
Preferred securities .....................
On
demand
US$m
Due
within
3 months
US$m
2,419
–
1
2,234
–
–
16
168
7
7
–
41,139
22,158
6,306
1,329
51
10,358
782
155
838
573
265
Due
within
3 to 12
months
US$m
50,697
10,125
33,363
3,978
2,467
–
646
118
1,864
1,509
355
Total due
within
1 year
US$m
94,255
32,283
39,670
7,541
2,518
10,358
1,444
441
2,709
2,089
620
Due
between
1 and 5
years
US$m
97,198
5,344
68,949
6,942
8,840
–
4,557
2,566
14,641
12,625
2,016
Due
after
5 years
US$m
31,217
–
23,478
5,325
542
–
707
1,165
77,930
57,503
20,427
Total
US$m
222,670
37,627
132,097
19,808
11,900
10,358
6,708
4,172
95,280
72,217
23,063
2,426
41,977
52,561
96,964
111,839
109,147
317,950
210
At 31 December 2011
Debt securities issued .................
Unsecured CDs and CP ..............
Unsecured senior MTNs .............
Unsecured senior structured
notes ........................................
Secured covered bonds ...............
Secured ABCP ............................
Secured ABS ...............................
Others ..........................................
Subordinated liabilities ...............
Subordinated debt securities .......
Preferred securities .....................
On
demand
US$m
1,907
280
122
1,505
–
–
–
–
6
6
–
Due
within
3 months
US$m
49,923
28,918
3,704
575
607
10,446
326
5,347
913
694
219
Due
within
3 to 12
months
US$m
39,011
8,143
26,541
1,858
1,549
–
546
374
6,004
5,552
452
Total due
within
1 year
US$m
90,841
37,341
30,367
3,938
2,156
10,446
872
5,721
6,923
6,252
671
Due
between
1 and 5
years
US$m
104,689
9,713
80,884
1,878
7,649
–
3,071
1,494
15,134
12,908
2,226
Due
after
5 years
US$m
37,028
26
29,081
1,156
3,694
–
1,779
1,292
78,569
58,051
20,518
Total
US$m
232,558
47,080
140,332
6,972
13,499
10,446
5,722
8,507
100,626
77,211
23,415
1,913
50,836
45,015
97,764
119,823
115,597
333,184
The balances in the table above will not agree
directly with those in our consolidated balance sheet
as the table incorporates, on an undiscounted basis,
all cash flows relating to principal and future coupon
payments.
Funding of HSBC Finance
We do not expect the professional markets to be
a source of funding for HSBC Finance in the future
in view of the sale of the Card and Retail Services
business and the run-off of its remaining portfolio.
HSBC Finance expects to meet future funding
needs by asset sales and affiliate funding. As a
consequence, no new external third-party funding,
including commercial paper, is being originated by
HSBC Finance.
Encumbered and unencumbered assets
(Unaudited)
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.
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 bank to
secure funding, satisfy collateral needs or be sold
to reduce the funding requirement. An asset is
therefore categorised as unencumbered if it has
not been pledged against an existing liability.
Unencumbered assets are then further analysed into
four separate sub-categories; ‘readily realisable
assets’, ‘other realisable assets’, ‘reverse repo/stock
borrowing receivables and derivative assets’ and
‘cannot be pledged as collateral’.
The disclosure is not designed to identify assets
which would be available to meet the claims of
211
creditors or to predict assets that would be available
to creditors in the event of a resolution or
bankruptcy.
The table below summarises the total on
and off-balance sheet assets that are capable of
supporting future funding and collateral needs and
shows the extent to which these assets are currently
pledged for this purpose.
Summary of assets available to support potential
future funding and collateral needs (on and off-
balance sheet)
(Unaudited)
Total on-balance sheet assets ........................
Less:
Reverse repo/stock borrowing receivables
and derivative assets .............................
Other assets that cannot be pledged as
collateral ...............................................
Total on-balance sheet assets that can support
funding and collateral needs .....................
Add off-balance sheet assets:
Fair value of collateral received from
reverse repo/stock borrowing that is
available to sell or repledge ..................
Fair value of collateral received from
derivatives that is available to sell or
repledge .................................................
2012
US$bn
2,693
562
247
1,884
296
6
Total assets that can support funding and
collateral needs (on and off-balance sheet)
2,186
Less:
On-balance sheet assets pledged ...............
Off-balance sheet collateral received from
reverse repo/stock borrowing which has
been repledged or sold ..........................
Off-balance sheet collateral received from
derivative transactions which has been
repledged or sold ..................................
233
203
1
Assets available to support funding and
collateral needs ..........................................
1,749
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Risk > Liquidity and funding > Encumbered and unencumbered assets
At 31 December 2012, the Group held
US$1,749bn of unencumbered assets that could
be used to support potential future funding and
collateral needs, representing 80% of the total assets
that can support funding and collateral needs (on
and off-balance sheet). Of this amount, US$764bn
(US$666bn on-balance sheet) were assessed to be
readily realisable.
The effect of active collateral management
Collateral is managed on an operating entity basis,
consistent with the operating entity management of
liquidity and funding. The available collateral held
by each operating entity is managed as a single
collateral pool. In managing this collateral and
deciding which collateral to pledge, each operating
entity will seek to optimise the use of the available
collateral pool, within the confines of the LFRF,
irrespective of whether the collateral pledged is
recognised on-balance sheet or was received in
respect of reverse repo, stock borrowing or
derivative transactions.
As a result of managing collateral in this
manner, in terms of asset encumbrance presentation,
we may encumber on-balance sheet holdings while
maintaining available unencumbered off-balance
sheet holdings, even though we are not seeking to
directly finance the on-balance sheet holdings
pledged.
In quantifying the level of encumbrance of
negotiable securities, the encumbrance has been
analysed on an individual security basis. In doing so
where a particular security has been encumbered and
HSBC has holdings of the security both on-balance
sheet and off-balance sheet with the right to
repledge, it is assumed for the purpose of this
disclosure that the off-balance sheet holding is
encumbered ahead of the on-balance sheet holding.
An on balance-sheet encumbered and off-
balance sheet unencumbered asset will occur, for
example, if we receive a specific security as a result
of a reverse repo/stock borrow transaction, but
finance the cash lent by pledging a generic collateral
basket, even if the security received is eligible for
the collateral basket pledged. This will also occur if
we receive a generic collateral basket as a result of a
reverse repo transaction but finance the cash lent by
pledging specific securities, even if the securities
pledged are eligible for the collateral basket.
Off-balance sheet collateral received and
pledged for reverse repo and stock
borrowing transactions
The fair value of assets accepted as collateral that
HSBC is permitted to sell or repledge in the absence
of default was US$296bn at 31 December 2012
(2011: US$302bn). The fair value of any such
collateral that has been sold or repledged was
US$203bn (2011: US$189bn). HSBC is obliged
to return equivalent securities. These transactions
are conducted under terms that are usual and
customary to standard reverse repo and stock
borrowing transactions.
The fair value of collateral received and
repledged in relation to reverse repo and stock
borrowing are reported on a gross basis. The related
balance sheet receivables and payables are reported
on a net basis where required under IFRS netting
criteria.
As a result of reverse repo and stock borrowing
transactions where the collateral received can be sold
or re-pledged, but has not been sold or re-pledged,
we held US$93bn of unencumbered collateral
available to support potential future funding and
collateral needs at 31 December 2012.
Off-balance sheet non-cash collateral
received and pledged for derivative
transactions
The fair value of assets accepted as collateral related
to derivative transactions that we are permitted to
sell or repledge in the absence of default was
US$6.0bn. The fair value of any such collateral
that has been sold or repledged was US$0.8bn. We
are obliged to return equivalent securities. These
transactions are conducted under terms that are
usual and customary to derivative transactions.
Analysis of on-balance sheet encumbered
and unencumbered assets
The table on page 213 presents an analysis of
on-balance sheet holdings only, and shows the
amounts of balance sheet assets that are encumbered.
The table therefore excludes any available off-
balance sheet holdings received in respect of
reverse repo, stock borrowing or derivatives.
212
Analysis of on-balance sheet encumbered and unencumbered assets
(Unaudited)
Encumbered
Unencumbered
At 31 December 2012
Cash and balances at central banks ............
Items in the course of collection from
other banks .............................................
Hong Kong Government certificates of
indebtedness ...........................................
Trading assets .............................................
– Treasury and other eligible bills ........
– debt securities .....................................
– equity securities ..................................
– loans and advances to banks ..............
– loans and advances to customers .......
Financial assets designated at fair value ....
– Treasury and other eligible bills ........
– debt securities .....................................
– equity securities ..................................
– loans and advances to banks ..............
– loans and advances to customers .......
Derivatives ..................................................
Loans and advances to banks .....................
Loans and advances to customers ..............
Financial investments .................................
– Treasury and other eligible bills ........
– debt securities .....................................
– equity securities ..................................
Assets held for sale .....................................
Other assets .................................................
Current tax assets ........................................
Prepayments and accrued income ..............
Interest in associates and joint ventures .....
Goodwill and intangible assets ...................
Property, plant and equipment ....................
Deferred tax ................................................
Assets
pledged as
collateral
US$m
–
–
–
143,019
2,309
97,157
5,592
20,588
17,373
–
–
–
–
–
–
–
1,191
40,792
46,678
2,024
44,654
–
–
1,600
–
–
–
–
–
–
Readily
realisable
assets
US$m
139,963
–
–
116,395
23,973
47,311
35,420
1,909
7,782
447
14
431
2
–
–
–
4,722
85,626
300,255
84,991
214,545
719
–
18,601
–
–
–
–
–
–
Other
realisable
assets
US$m
220
–
–
10,330
–
205
622
2,582
6,921
610
–
128
482
–
–
–
81,802
827,903
7,990
156
4,112
3,722
19,269
11,621
–
–
17,480
–
6,772
–
Unencumbered – cannot be
pledged as collateral
Reverse
repo/stock
borrowing
receivables
& derivative
Cannot
be pledged
as collateral
US$m
assets
US$m
Total
US$m
–
–
1,349
141,532
7,303
7,303
–
134,752
–
–
–
50,376
84,376
–
–
–
–
–
–
357,450
35,461
34,664
–
–
–
–
–
–
–
–
–
–
–
–
22,743
4,315
–
4
–
2,816
1,495
32,525
40
11,992
20,384
55
54
–
29,370
8,638
66,178
379
64,451
1,348
–
22,894
515
9,502
354
29,853
3,816
7,570
22,743
408,811
26,282
144,677
41,634
78,271
117,947
33,582
54
12,551
20,868
55
54
357,450
152,546
997,623
421,101
87,550
327,762
5,789
19,269
54,716
515
9,502
17,834
29,853
10,588
7,570
233,280
666,009
983,997
562,327
246,925
2,692,538
Cash collateral posted to satisfy margin
requirements on derivatives, is reported as
encumbered under trading assets within loans
or advances to banks and loans and advances to
customers.
The US$41bn of loans and advances to
customers reported in the table above as encumbered
have been pledged predominantly to support the
issuance of secured debt instruments, such as
covered bonds and ABSs including asset-backed
commercial paper issued by consolidated multi-
seller conduits. It also includes those pledged in
relation to any other form of secured borrowing.
In total, the Group has pledged US$152bn of
negotiable securities, predominantly as a result of
market-making in securities financing to our clients.
Additional contractual obligations
Under the terms of our current collateral obligations
under derivative contracts, we estimate based on the
positions as at 31 December 2012 that HSBC could
be required to post additional collateral of up to
US$1.5bn (2011: US$3bn) in the event of a one
notch downgrade in credit ratings, which would
increase to US$2.5bn (2011: US$3.8bn) in the event
of a two notch downgrade.
213
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Risk > Liquidity and funding > Encumbered and unencumbered assets / Contractual maturity of financial liabilities
Definitions of the categories included in the table ‘Analysis
of encumbered and unencumbered assets’:
• Encumbered assets are assets on our balance sheet which
have been pledged as collateral against an existing liability,
and as a result are assets which are unavailable to the bank
to secure funding, satisfy collateral needs or be sold to
reduce potential future funding requirements.
• Unencumbered – readily realisable assets are assets
regarded by the bank to be readily realisable in the normal
course of business, to secure funding, meet collateral needs,
or be sold to reduce potential future funding requirements,
and are not subject to any restrictions on their use for these
purposes.
• Unencumbered – other realisable assets are assets where
there are no restrictions on their use to secure funding, meet
collateral needs, or be sold to reduce potential future
funding requirements, but are not readily realisable in the
normal course of business in their current form.
• Unencumbered – reverse repo/stock borrow receivables and
derivative assets are assets related specifically to reverse
repo, stock borrowing and derivative transactions. These are
shown separately as these on-balance sheet assets cannot be
pledged, but often give rise to the receipt of non-cash assets
which are not recognised on the balance sheet, and can
additionally be used to raise secured funding, meet
additional collateral requirements or be sold.
• Unencumbered – cannot be pledged as collateral are assets
that have not been pledged but which we have assessed
could not be pledged and therefore could not be used to
secure funding, meet collateral needs, or be sold to reduce
potential future funding requirements, for example assets
held by the Group’s insurance subsidiaries that back
liabilities to policyholders and support the solvency of these
entities.
Historically, the Group has not recognised any contingent
liquidity value for assets other than those assets defined under
the LFRF as being liquid assets, and any other negotiable
instruments that under stress are assumed to be realisable after
three months, even though they may currently be realisable.
This approach has generally been driven by our risk appetite
not to place any reliance on central banks. In a few cases, we
have recognised the contingent value of discrete pools of
assets, but the amounts involved are insignificant. As a result,
we have reported the majority of our loans and advances to
customers and banks in the category ‘Other realisable assets’
as management would need to perform additional actions in
order to make the assets transferable and readily realisable.
Additional information
The amount of such assets reported in Note 36 on the
Financial Statements may be greater than the book
value of assets reported as being encumbered in the
table on page 213. Examples of where such
differences will occur are:
• ABSs and covered bonds where the amount of
liabilities issued plus the required mandatory
over-collateralisation is lower than the book
value of assets pledged to the pool. Any
difference is categorised in the table above
as ‘Unencumbered – readily realisable assets;’
•
•
negotiable securities held by custodians or
settlement agents, where a floating charge has
been given over the entire holding to secure
intra-day settlement liabilities, are only reported
as encumbered to the extent that we have a
liability to the custodian or settlement agent at
the reporting date, with the balance reported as
‘Unencumbered – readily realisable assets;’ and
assets pre-positioned with central banks or
government agencies are only reported as
encumbered to the extent that we have secured
funding with the collateral. The unutilised
pre-positioned collateral is reported as
‘Unencumbered – readily realisable assets.’
Contractual maturity of financial liabilities
(Audited)
The balances in the table below will not agree
directly with those in our consolidated balance sheet
as the table incorporates, on an undiscounted basis,
all cash flows relating to principal and future
coupon payments (except for trading liabilities
and derivatives not treated as hedging derivatives).
Undiscounted cash flows payable in relation to
hedging derivative liabilities are classified according
to their contractual maturities. Trading liabilities and
derivatives not treated as hedging derivatives are
included in the ‘On demand’ time bucket and not
by contractual maturity. A maturity analysis of repos
and debt securities in issue included in trading
liabilities is presented on page 485.
In addition, loan and other credit-related
commitments and financial guarantees and similar
contracts are generally not recognised on our balance
sheet. The undiscounted cash flows potentially
payable under financial guarantees and similar
contracts are classified on the basis of the earliest
date they can be called.
214
Cash flows payable by HSBC under financial liabilities by remaining contractual maturities
(Audited)
At 31 December 2012
Deposits by banks .........................................................
Customer accounts ........................................................
Trading liabilities ..........................................................
Financial liabilities designated at fair value .................
Derivatives ....................................................................
Debt securities in issue .................................................
Subordinated liabilities .................................................
Liabilities of disposal groups held for sale47 ................
Other financial liabilities ..............................................
Loan and other credit-related commitments ................
Financial guarantees and similar contracts ..................
At 31 December 2011
Deposits by banks .........................................................
Customer accounts ........................................................
Trading liabilities ..........................................................
Financial liabilities designated at fair value .................
Derivatives ....................................................................
Debt securities in issue .................................................
Subordinated liabilities .................................................
Liabilities of disposal groups held for sale47 ................
Other financial liabilities ..............................................
Loan and other credit-related commitments ................
Financial guarantees and similar contracts ..................
On
demand
US$m
Due within
3 months
US$m
Due between
3 and 12
months
US$m
Due between
1 and 5 years
US$m
Due after
5 years
US$m
45,290
1,035,636
304,564
7,778
351,367
64
7
1,416
26,963
1,773,085
375,818
14,321
2,163,224
47,659
914,762
265,192
7,066
340,394
117
6
3,108
25,452
1,603,756
355,366
12,460
1,971,582
51,321
229,642
–
1,211
355
37,938
386
993
31,557
353,403
76,394
5,506
435,303
59,096
252,226
–
930
394
48,465
528
1,721
28,137
391,497
65,245
7,585
464,327
4,495
62,650
–
7,825
995
37,167
1,149
707
5,381
120,369
51,330
12,104
183,803
3,578
72,993
–
9,789
497
27,520
1,834
1,045
5,845
123,101
94,120
12,107
229,328
11,718
17,508
–
42,683
4,785
45,433
9,058
201
3,467
134,853
57,506
9,266
201,625
11,048
20,508
–
39,915
2,858
57,507
9,616
211
2,023
143,686
111,061
5,899
260,646
789
720
–
62,279
1,855
6,034
46,322
24
829
118,852
18,421
3,796
141,069
997
1,094
–
57,295
1,007
7,019
47,715
150
1,377
116,654
29,113
1,273
147,040
For footnote, see page 249.
HSBC Holdings
(Audited)
During 2012, HSBC Holdings issued US$2.0bn
of senior debt (2011: US$5.3bn). The eligibility
requirements for non-equity instruments under
Basel III rules have not been clearly defined in the
UK, so HSBC Holdings issued no debt instruments
which qualified as capital in 2012 (2011: nil).
The balances in the table below will not
agree directly with those on the balance sheet
of HSBC Holdings as the table incorporates, on
an undiscounted basis, all cash flows relating to
principal and future coupon payments (except for
derivatives not treated as hedging derivatives).
Undiscounted cash flows payable in relation to
hedging derivative liabilities are classified according
to their contractual maturities. Derivatives not
treated as hedging derivatives are included in the
‘On demand’ time bucket.
In addition, loan commitments and financial
guarantees and similar contracts are generally not
recognised on our balance sheet. The undiscounted
cash flows potentially payable under financial
guarantees and similar contracts are classified on
the basis of the earliest date they can be called.
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Risk > Liquidity and funding > Liquidity regulation // Market risk
Cash flows payable by HSBC Holdings under financial liabilities by remaining contractual maturities
(Audited)
On
Due within
demand
US$m
3 months
US$m
Due between
3 and 12
months
US$m
Due between
1 and 5 years
US$m
Due after
5 years
US$m
At 31 December 2012
Amounts owed to HSBC undertakings ...................
Financial liabilities designated at fair value ............
Derivatives ...............................................................
Debt securities in issue ............................................
Subordinated liabilities ............................................
Other financial liabilities .........................................
Loan commitments ..................................................
Financial guarantees and similar contracts .............
At 31 December 2011
Amounts owed to HSBC undertakings ...................
Financial liabilities designated at fair value ............
Derivatives ...............................................................
Debt securities in issue ............................................
Subordinated liabilities ............................................
Other financial liabilities .........................................
Loan commitments ..................................................
Financial guarantees and similar contracts .............
3,032
–
760
–
–
–
3,792
1,200
49,402
54,394
–
–
1,067
–
–
–
1,067
1,810
49,402
52,279
Liquidity regulation
(Unaudited)
In December 2010, the Basel Committee published
the ‘International framework for liquidity risk
measurement, standards and monitoring’. The
framework comprises two liquidity metrics: the
liquidity coverage ratio (‘LCR’) and the net stable
funding ratio (‘NSFR’). The ratios are subject to
an observation period that began in 2011, and are
expected to become established standards by 2015 and
2018, respectively. During the observation period, the
standards are under review by the Basel Committee.
In January 2013, the Basel Committee announced
several changes to the calibration of the LCR which
604
269
–
36
205
394
1,508
–
–
1,096
807
–
107
614
211
2,835
–
–
1,918
5,345
–
1,946
3,273
–
12,482
–
–
7,570
31,970
–
1,487
25,049
–
66,076
–
–
1,508
2,835
12,482
66,076
1,110
281
–
35
216
1,252
2,894
–
–
81
3,530
–
104
649
208
4,572
–
–
1,428
4,987
–
1,975
3,461
–
11,851
–
–
–
28,988
–
1,490
27,558
–
58,036
–
–
2,894
4,572
11,851
58,036
included reducing the outflow applied to non-
operational non-financial corporate deposits from
75% to 40% and reducing the outflow applied to
committed liquidity facilities from 100% to 30%.
A significant level of interpretation is required
applying the definitions as currently drafted, in
particular, the definition of operational deposits.
Uncertainty around LCR also arises from the fact that
the implementation of the Basel LCR framework still
requires EU endorsement. In addition, the final
calibration of the NSFR is highly uncertain and is
expected to remain so, with no announcement on this
expected from the Basel Committee until 2014.
216
Market risk
Page
App1
Tables
Page
Market risk in 2012 ............................................. 218
Overview of market risk in global businesses .......
Monitoring and limiting market risk exposures ....
Sensitivity analysis ...............................................
Value at risk and stressed value at risk ..................
Stress testing ..........................................................
265
265
266
266
267
Trading and non-trading portfolios ................... 218
Market risk reporting measures ............................. 218
Value at risk of the trading and non-trading
portfolios ............................................................ 219
Trading portfolios ................................................ 220
Value at risk of the trading portfolios .................... 220
268
Stressed value at risk of the trading portfolio ....... 221
Gap risk ..................................................................
ABS/MBS exposures .............................................
Non-trading portfolios ......................................... 221
Value at risk of the non-trading portfolios ............ 221
268
268
268
Credit spread risk for available-for-sale debt
securities ............................................................ 221
Equity securities classified as available for sale ... 222
268
Structural foreign exchange exposures .............. 222
268
Non-trading interest rate risk ............................. 222
Types of risk by global business ............................................ 218
Overview of risk reporting .................................................... 218
Market risk linkages to the accounting balance sheet ..........
219
Trading and non-trading value at risk ..................................
Daily trading and non-trading VAR ......................................
219
219
Trading value at risk ............................................................. 220
Daily VAR (trading portfolios) .............................................. 220
Daily revenue ......................................................................... 220
Daily distribution of Global Markets’ trading and other
trading revenues ................................................................ 220
VAR by risk type for trading activities .................................. 220
Stressed value at risk (1-day equivalent) .............................. 221
Non-trading value at risk ...................................................... 221
Daily VAR (non-trading portfolios) ...................................... 221
Fair value of equity securities ............................................... 222
Balance Sheet Management ................................ 222
Analysis of third party assets in Balance Sheet
Sensitivity of net interest income ........................ 223
269
Management ...................................................................... 223
Sensitivity of projected net interest income ........................... 223
Sensitivity of reported reserves to interest rate movements . 224
Defined benefit pension schemes ........................ 224
269 HSBC’s defined benefit pension schemes .............................. 224
Additional market risk measures
applicable only to the parent company ......... 224
Foreign exchange risk ............................................ 225
Sensitivity of net interest income .......................... 225
270
Interest rate repricing gap table ............................. 226
1 Appendix to Risk – risk policies and practices.
HSBC Holdings - foreign exchange VAR .............................. 225
Sensitivity of HSBC Holdings net interest income to
interest rate movements .................................................... 225
Repricing gap analysis of HSBC Holdings ........................... 226
217
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Risk > Market risk > In 2012 / Trading and non-trading portfolios
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
our income or the value of our portfolios.
improved market sentiment, primarily because the
ECB pledged to support the euro. This led to a
more benign market environment and generally
subdued volatilities of credit spreads and other
market risk factors.
There were no material changes to our policies and
practices for the management of market risk in 2012.
Trading and non-trading portfolios
(Audited)
A summary of our current policies and practices
regarding market risk is provided in the Appendix
to Risk on page 265.
Exposure to market risk
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 comprise positions that primarily
arise from the interest rate management of our retail and
commercial banking assets and liabilities, financial
investments designated as available for sale and held to
maturity, and exposures arising from our insurance
operations (see page 239).
Monitoring and limiting market risk exposures
Our objective is to manage and control market risk exposures
while maintaining a market profile consistent with our risk
appetite.
We use a range of tools to monitor and limit market risk
exposures, including:
• sensitivity measures include sensitivity of net interest
income and sensitivity for structural foreign exchange,
which are used to monitor the market risk positions within
each risk type;
• value at risk (‘VAR’) is a technique that estimates the
potential losses that could occur 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;
and
• in recognition of VAR’s limitations we augment VAR with
stress testing to evaluate the potential impact on portfolio
values of more extreme, though plausible, events or
movements in a set of financial variables. Examples of
scenarios reflecting current market concerns are the
slowdown of mainland China and the potential effects of a
sovereign debt default, including its wider contagion
effects.
Market risk in 2012
(Audited)
Some credit spread and interest rate exposures to
sovereign borrowers were managed down during
2012 against the backdrop of continued concerns
around eurozone sovereigns and financial
institutions, the global economic slowdown and
uncertainty about fiscal policy in the US. The
second half of the year was characterised by
The following tables provide an overview of the
types of risks within the different global businesses.
Types of risk by global business
Risk types
Global businesses
GB&M including Balance
Sheet Management (‘BSM’)
Trading risk
– Foreign exchange
and commodities
– Interest rate
– Equities
– Credit spread
Non-trading risk
GB&M including BSM,
– Foreign exchange (structural) RBWM, CMB and GPB
– Interest rate
– Credit spread
The market risk for insurance operations is
reported separately on page 239.
Market risk reporting measures
The following table provides an overview of the
reporting of risks within this section:
Overview of risk reporting
Risk type
Foreign exchange and
commodity ..........................
Interest rate ..............................
Equity ......................................
Credit spread ...........................
Structural foreign exchange ....
Portfolio
Trading Non-trading
VAR
VAR
VAR
VAR
n/a
VAR
VAR/
Sensitivity
Sensitivity
VAR
Sensitivity
Structural foreign exchange risk is monitored
using sensitivity analysis (see page 268). The
reporting of commodity risk is consolidated with
foreign exchange risk. There is no commodity risk
in the non-trading portfolios. The interest rate risk
on the fixed-rate securities issued by HSBC
Holdings is not included in the Group VAR.
The management of this risk is described on
page 270.
218
Market risk linkages to the accounting balance sheet
Trading assets and liabilities
The Group’s trading assets and liabilities are in substantially all
cases originated by GB&M. As described on page 393, the assets
and liabilities are classified as held for trading if they have been
acquired or incurred principally for the purpose of selling
or repurchasing in the near term, or form part of a portfolio of
identified financial instruments that are managed together and for
which there is evidence of a recent pattern of short-term profit-
taking. These assets and liabilities are treated as traded risk for the
purposes of market risk management, other than a limited number
of exceptions, primarily in Global Banking where the short-term
acquisition and disposal of the assets are linked to other non-
trading related activities such as loan origination.
Financial assets designated at fair value
Financial assets designated at fair value within HSBC are
predominantly held within the Insurance entities. The majority of
these assets are linked to policyholder liabilities for either unit-
linked or insurance and investment contracts with DPF. Further
information in respect of these assets is given on page 393. The
risks of these assets largely offset the market risk on the liabilities
under the policyholder contracts, and are risk managed on a non-
trading basis. Market risk for insurance operations is covered on
page 239.
create risk management solutions for clients, to manage the
portfolio risks arising from client business and to manage and
hedge HSBC’s own risks. Most of HSBC’s derivative exposures
arise from sales and trading activities within GB&M and are
treated as traded risk for market risk management purposes.
Within derivative assets and liabilities there are portfolios of
derivatives which are not risk managed on a trading intent basis
and are treated as non-traded risk for VAR measurement purposes.
These arise when the derivative was entered into in order to
manage risk arising from non-traded exposures. These include
non-qualifying hedging derivatives, and derivatives qualifying for
fair value and cash flow hedge accounting. The use of non-
qualifying hedges whose primary risks relate to interest rate and
foreign exchange exposure is described on page 397. Details of
derivatives in fair value and cash flow hedge accounting
relationships are given in Note 19 on the Financial Statements.
HSBC’s primary risks in respect of these instruments relate to
interest rate and foreign exchange risks.
Loans and advances to customers
The primary risk on assets within loans and advances to
customers is the credit risk of the borrower. The risk of these
assets is treated as non-trading risk for market risk management
purposes.
Financial liabilities designated at fair value
Financial investments
Financial liabilities designated at fair value within HSBC are
primarily fixed-rate securities issued by HSBC entities for
funding purposes. As described on page 393, an accounting
mismatch would arise if the debt securities were accounted for
at amortised cost because the derivatives which economically
hedge market risks on the securities would be accounted for at
fair value with changes recognised in the income statement. The
market risks of these liabilities are treated as non-traded risk, the
principal risks being interest rate and/or foreign exchange risks.
We also incur liabilities to customers under investment contracts,
where the liabilities on unit-linked contracts are based on the fair
value of assets within the unit-linked funds. The exposures on
these funds are treated as non-traded risk and the principal risks
are those of the underlying assets in the funds.
Derivative assets and liabilities
As described in Note 19 on the Financial Statements HSBC
undertakes derivative activity for three primary purposes; to
Financial investments include assets held on an available-for-sale
and held-to-maturity basis. An analysis of the Group’s holdings
of these securities by accounting classification and issuer type is
shown on page 457 and by business activity on page 20. The
majority of these securities are mainly held within Balance Sheet
Management in GB&M. The positions which are originated in
order to manage structural interest rate and liquidity risk are
treated as non-trading risk for the purposes of market risk
management. Available-for-sale security holdings within
insurance entities are treated as non-trading risk and are largely
held to back non-linked insurance policyholder liabilities. Market
risk for insurance operations is covered on page 239.
The other main holdings of available-for-sale assets are the
ABSs within GB&M’s legacy credit business, which are treated
as non-trading risk for market risk management purposes, the
principal risk being the credit risk of the obligor.
The Group’s held-to-maturity securities are principally held
within the Insurance business. Risks of held-to-maturity assets
are treated as non-trading for risk management purposes.
Value at risk of the trading and non-trading
portfolios
Daily trading and non-trading VAR (US$m)
(Unaudited)
Our Group VAR, both trading and non-trading, was
as tabulated below. For a description of HSBC’s
fair value and price verification controls, see
page 438.
Trading and non-trading value at risk
(Audited)
At 31 December .......................
Average ....................................
Minimum .................................
Maximum .................................
2012
US$m
181.3
244.4
163.8
383.9
2011
US$m
367.0
301.6
231.5
404.3
400
350
300
250
200
150
100
Jan-12
Mar-12
May-12
Aug-12
Oct-12
Dec-12
The decrease of Group trading and non-trading
VAR during 2012 was driven primarily by the
reduced effect of credit spreads, as a result of
subdued volatilities and lower credit spread
baselines utilised in the VAR calculations.
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Report of the Directors: Operating and Financial Review (continued)
Risk > Market risk > Trading portfolios / Non-trading portfolios
For a description of the parameters used in
calculating VAR, see the ‘Appendix to Risk’ on
page 266.
Trading portfolios
(Audited)
Value at risk of the trading portfolios
Our Group trading VAR was as shown below:
Trading value at risk
At 31 December .......................
Average ....................................
Minimum .................................
Maximum .................................
2012
US$m
78.8
74.2
47.3
130.9
2011
US$m
118.3
101.8
62.2
143.9
Almost all trading VAR resides within Global
Markets. The VAR for trading activity at
31 December 2012 was lower than at 31 December
2011 due primarily to the reduced contribution of
credit spread exposures to sovereigns. This reduction
was driven by positions being managed down,
together with the lower credit spread volatilities
and baselines in the VAR calculations.
We routinely validate the accuracy of our VAR
models by back-testing the actual daily profit and
loss results, adjusted to remove non-modelled
items such as fees and commissions, against the
corresponding VAR numbers. We expect on average
to see losses in excess of VAR 1% of the time over
a one-year period. The actual number of losses in
excess of VAR over this period can therefore be used
to gauge how well the models are performing. In
2012, there were no exceptions at the Group level.
Daily VAR (trading portfolios) (US$m)
(Unaudited)
150
Daily revenue
(Unaudited)
120
90
60
30
Jan-12
Mar-12
May-12
Aug-12
Oct-12
2012
US$m
31.8
22.8
2011
US$m
27.3
32.3
Average daily revenue ...................
Standard deviation48 .......................
Ranges of most frequent
– daily revenues ........................
20 to 30
20 to 30
Dec-12
– daily occurrences ...................
Days of negative revenue ..............
days
60
8
days
41
40
Daily distribution of Global Markets’ trading and other trading revenues49
(Unaudited)
2012
Number of days
2011
Number of days
65
65
60
55
50
45
40
35
30
25
20
15
10
5
0
60
45
43
43
24
21
1
0
2
0
0
5
4
4
3
2
0
0
1
0
2
60
55
50
45
40
35
30
25
20
15
10
5
0
41
36
37
31
18
27
14
10
4
1
1
1
0
2
5
3
3
0
11
9
6
-60
-50
-40
-30
-20
-10
0
10
20
30
40
50
60
70
80
90
100 110 120 130 140 150
-100 -90 -80 -70 -60 -50 -40 -30 -20 -10
0
10
20
30
40
50
60
70
80
90 100 130 140
Profit and loss frequency
Profit and loss frequency
Revenues (US$m)
Revenues (US$m)
For footnotes, see page 249.
VAR by risk type for trading activities50
(Audited)
Foreign
exchange and
commodity
At 31 December 2012 ......
Average .............................
Minimum ..........................
Maximum ..........................
US$m
20.5
23.5
6.9
46.0
Interest
rate
US$m
37.5
42.7
29.5
60.0
Equity
US$m
17.7
9.3
2.7
24.9
Credit
spread
US$m
Portfolio
diversification51
US$m
16.1
26.8
12.2
77.9
(12.9)
(28.1)
–
–
Total52
US$m
78.8
74.2
47.3
130.9
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Foreign
exchange and
commodity
At 31 December 2011 .......
Average .............................
Minimum ..........................
Maximum ..........................
For footnotes, see page 249.
US$m
18.6
16.8
7.6
31.9
Interest
rate
US$m
49.4
54.2
30.1
80.2
Equity
US$m
7.4
8.0
2.5
17.2
Credit
spread
US$m
75.2
57.3
34.7
103.2
Portfolio
diversification51
US$m
(32.3)
(34.4)
–
–
Total52
US$m
118.3
101.8
62.2
143.9
Stressed value at risk of the trading
portfolios
(Unaudited)
Stressed VAR is primarily used for regulatory capital
purposes but is integrated into the risk management
process to facilitate efficient capital management and
to highlight potentially risky positions based on
previous market volatility.
Our Group stressed VAR for trading portfolios
was as follows:
Stressed value at risk (1-day equivalent)
(Unaudited)
2012
US$m
2011
US$m
At 31 December .......................
172.4
293.6
Stressed VAR for trading portfolios reduced
primarily as a result of the de-risking of exposures to
eurozone sovereigns and managing down of interest
rate risks, together with the impact of lower credit
spread levels on the VAR calculation.
Non-trading portfolios
(Audited)
Value at risk of the non-trading portfolios
Non-trading value at risk
At 31 December .......................
Average ....................................
Minimum .................................
Maximum .................................
2012
US$m
119.2
197.9
118.1
322.5
2011
US$m
310.9
244.2
182.2
354.8
The daily levels of non-trading VAR over the course
of 2012 are set out in the graph below.
Daily VAR (non-trading portfolios) (US$m)
(Unaudited)
350
300
250
200
150
100
50
0
Jan-12
Mar-12
May-12
Aug-12
Oct-12
Dec-12
221
Most of the Group non-trading VAR relates to
Balance Sheet Management (‘BSM’) or local
treasury management functions. Contributions to
Group non-trading VAR are driven by interest rates
and credit spread risks arising from all global
businesses as illustrated on page 265). The decrease
of non-trading VAR during 2012 was due primarily
to the reduced contribution of credit spread risks as a
result of lower volatilities and credit spread baselines
utilised in the VAR calculations. This movement
includes the reduction in credit spread risks relating
to the Group’s holdings of available for sale debt
securities (excluding those held in insurance
operations), which is discussed further in the
following section.
Non-trading VAR also includes the interest
rate risk of non-trading financial instruments held
by the global businesses and transferred into
portfolios managed by Global Markets or local
treasury 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 Balance Sheet Management.
Non-trading VAR excludes equity risk on
available for sale securities, structural foreign
exchange risk, and interest rate risk on fixed
rate securities issued by HSBC Holdings, the
management of which is described in the relevant
sections below. These sections together describe the
scope of HSBC’s management of market risks in
non-trading books.
Credit spread risk for available-for-sale debt
securities
Credit spread VAR for available-for-sale debt
securities, excluding those held in insurance
operations, is included in the Group non-trading VAR.
At 31 December 2012, the sensitivity of equity
capital to the effect of movements in credit spreads
on our available-for-sale debt securities, including
the gross exposure for the SICs consolidated within
our balance sheet, based on credit spread VAR, was
US$150m (2011: US$389m). This sensitivity was
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Risk > Market risk > Structural FX exposures / Non-trading interest rate risk / BSM / Sensitivity of NII
calculated before taking into account losses which
would have been absorbed by the capital note
holders. Excluding the gross exposure for SICs
consolidated in our balance sheet, this exposure
reduced to US$119m (2011: US$325m).
The decrease in this sensitivity at 31 December
2012 compared with 31 December 2011 was due
mainly to the effect of the lower volatility in credit
spreads observed during 2012.
At 31 December 2012, the capital note holders
would absorb the first US$2.3bn (2011: US$2.3bn)
of any losses incurred by the SICs before we incur
any equity losses.
Equity securities classified as available
for sale
Fair value of equity securities
(Audited)
2012
US$bn
2011
US$bn
Private equity holdings53 ............
Funds invested for short-term
2.9
cash management ...................
0.2
Investment to facilitate
ongoing business54 ..................
Other strategic investments ........
For footnotes, see page 249.
1.1
1.6
5.8
3.0
0.2
1.1
2.9
7.2
The fair value of the constituents of equity securities
classified as available for sale can fluctuate
considerably. The table above sets out maximum
possible loss on shareholder’s equity from available-
for-sale equity securities.
For details of the impairment incurred on
available-for-sale equity securities, see
‘Securitisation exposures and other structured
products’ on page 184.
Structural foreign exchange exposures
(Unaudited)
Our policies and procedures for managing structural
foreign exchange exposures are described on
page 268. For details of structural foreign exchange
exposures see Note 35 on the Financial Statements.
Non-trading interest rate risk
(Unaudited)
Asset, Liability and Capital Management (‘ALCM’)
is responsible for measuring and controlling non-
trading interest rate risk under the supervision of the
Risk Management Meeting (‘RMM’). Its primary
responsibilities are:
222
•
•
•
to define the rules governing the transfer of
interest rate risk from the global businesses to
BSM;
to ensure that all market interest rate risk
that can be hedged is transferred from the global
businesses to BSM; and
to define the rules and metrics for monitoring
the residual interest rate risk in the global
businesses.
The different types of non-trading interest
rate risk and the controls which we use to quantify
and limit exposure to these risks can be categorised
as follows:
•
•
•
risk which is transferred to BSM and managed
by BSM within a defined risk mandate (see
below);
risk which remains outside BSM because it
cannot be hedged or which arises due to our
behaviouralised transfer pricing assumptions.
This risk is captured by our net interest income
or Economic Value of Equity (‘EVE’) sensitivity
and corresponding limits are part of our global
and regional risk appetite statements for non-
trading interest rate risk. A typical example
would be margin compression created by
unusually low rates in key currencies;
basis risk which is transferred to BSM when
it can be hedged. Any residual basis risk
remaining in the global businesses is reported to
ALCO. A typical example would be a managed
rate savings product transfer-priced using a
Libor-based interest rate curve; and
• model risks which cannot be captured by net
interest income or EVE sensitivity, but are
controlled by our stress testing framework. A
typical example would be prepayment risk on
residential mortgages or pipeline risk.
Balance Sheet Management
(Unaudited)
Effective governance across BSM is supported by
the dual reporting lines it has to the CEO of GB&M
and to the Group Treasurer. In each operating entity,
BSM is responsible for managing liquidity and
funding under the supervision of the local ALCO. It
also manages the non-trading interest rate positions
transferred to it within a Global Markets limit
structure.
BSM reinvests excess liquidity into highly-
rated liquid assets. The majority of the liquidity is
invested in central bank deposits and government,
supranational and agency securities with most of
the remainder held in short-term interbank and
central bank loans.
BSM does not manage the structural credit risk of
any Group entity balance sheets.
Analysis of third party assets in Balance Sheet
Management
(Unaudited)
Cash and balances at central banks .............
Trading assets ..............................................
Financial assets designated at fair value .....
Loans and advances:
– to banks .....................................................
– to customers ..............................................
Financial investments ..................................
Other ............................................................
At
31 December
2012
US$m
93,946
8,724
74
72,771
22,052
293,421
2,948
493,936
Central bank deposits are accounted for as cash
balances. Interbank loans and loans to central banks
are accounted for as loans and advances to banks.
BSM’s holdings of securities are accounted for as
available-for-sale or to a lesser extent, held to
maturity assets.
BSM is permitted to use derivatives as part of
its mandate to manage interest rate risk. Derivative
activity is predominantly through the use of vanilla
interest rate swaps which are part of cash flow
hedging and fair value hedging relationships.
Credit risk in BSM is predominantly limited
to short-term bank exposure created by interbank
lending and exposure to central banks as well as high
quality sovereigns, supranationals or agencies which
constitute the majority of BSM’s liquidity portfolio.
Sensitivity of projected net interest income55
(Unaudited)
BSM is permitted to enter into single name and
index credit derivatives activity, but it does so to
manage credit risk on the exposure specific to its
securities portfolio in limited circumstances only.
The risk limits are extremely limited and closely
monitored. At 31 December 2012 and 31 December
2011 BSM had no open credit derivative index risk.
VAR is calculated on both trading and non-
trading positions held in BSM. It is calculated by
applying the same methodology used for the Global
Markets business and utilised as a tool for market
risk control purposes.
BSM holds trading portfolio instruments in
only very limited circumstances. Positions and the
associated VAR were not significant during 2012
and 2011.
Sensitivity of net interest income
(Unaudited)
The table below sets out the effect on our future net
interest income of an incremental 25 basis points
parallel rise or fall in all yield curves worldwide at
the beginning of each quarter during the 12 months
from 1 January 2013. Assuming no management
actions, a sequence of such rises would increase
planned net interest income for 2013 by US$1,391m
(2012: US$1,571m), while a sequence of such falls
would decrease planned net interest income by
US$1,471m (2012: US$1,909m). These figures
incorporate the effect of any option features in the
underlying exposures.
US dollar
bloc
US$m
Rest of
Americas
bloc
US$m
Hong Kong
dollar
bloc
US$m
Rest of
Asia
bloc
US$m
Sterling
bloc
US$m
Euro
bloc
US$m
Total
US$m
Change in 2013 projected net
interest income arising from
a shift in yield curves of:
+25 basis points at the
beginning of each quarter .....
133
–25 basis points at the
beginning of each quarter .....
(366)
Change in 2012 projected net
interest income arising from
a shift in yield curves of:
+25 basis points at the
beginning of each quarter .....
209
–25 basis points at the
beginning of each quarter .....
(465)
For footnote, see page 249.
246
(305)
237
(168)
679
44
1,403
(602)
(57)
(1,550)
263
(443)
232
(166)
729
76
1,571
(708)
(68)
(1,909)
64
(52)
62
(59)
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Risk > Market risk > Sensitivity of NII / DBS Scheme / Parent company
The interest rate sensitivities set out above
are illustrative only and are based on simplified
scenarios. The limitations of this analysis are
discussed in the Appendix to Risk on page 269.
The year-on-year change in the sensitivity of
the Group’s net interest income to the change in rates
shown in the table above is largely driven by lower
implied yield curves, reducing the capacity to shock
interest rates down. Net interest income and its
associated sensitivity as reflected in the table above
include the expense of internally funding trading
assets, while related revenue is reported in ‘Net
trading income’.
We monitor the sensitivity of reported reserves
to interest rate movements on a monthly basis by
assessing the expected reduction in valuation of
available-for-sale portfolios and cash flow hedges
due to parallel movements of plus or minus 100bps
in all yield curves. The table below describes the
sensitivity of our reported reserves to these
movements and the maximum and minimum
month-end figures during the year:
Sensitivity of reported reserves to interest rate movements
(Unaudited)
At 31 December 2012
+ 100 basis point parallel move in all yield curves ....................................................
As a percentage of total shareholders’ equity ............................................................
– 100 basis point parallel move in all yield curves ....................................................
As a percentage of total shareholders’ equity ............................................................
At 31 December 2011
+ 100 basis point parallel move in all yield curves ....................................................
As a percentage of total shareholders’ equity ............................................................
– 100 basis point parallel move in all yield curves ....................................................
As a percentage of total shareholders’ equity ............................................................
Maximum
impact
US$m
Minimum
impact
US$m
(5,748)
(3.3%)
5,418
3.1%
(6,178)
(3.9%)
6,411
4.0%
(5,166)
(2.9%)
4,734
2.7%
(5,594)
(3.5%)
5,397
3.4%
US$m
(5,602)
(3.2%)
4,996
2.9%
(5,594)
(3.5%)
5,397
3.4%
The sensitivities above are illustrative only and
are based on simplified scenarios. The table shows
the potential sensitivity of reported reserves to
valuation changes in available-for-sale portfolios and
from cash flow hedges following the specified shifts
in yield curves. These particular exposures form only
a part of our overall interest rate exposures. The
accounting treatment of our remaining interest rate
exposures, while economically largely offsetting the
exposures shown in the above table, does not require
revaluation movements to go to reserves.
Defined benefit pension schemes
(Audited)
Market risk arises within our defined benefit pension
schemes to the extent that the obligations of the
schemes are not fully matched by assets with
determinable cash flows.
HSBC’s defined benefit pension schemes
(Audited)
2012
US$bn
2011
US$bn
Liabilities (present value) ........
38.1
35.0
Assets:
Equities ....................................
Debt securities .........................
Other (including property) .......
%
18
71
11
%
15
73
12
100
100
For details of our defined benefit schemes, see
Note 7 on the Financial Statements, and for pension
risk management, see page 269.
Additional market risk measures applicable
only to the parent company
(Audited)
The principal tools used in the management of
market risk are VAR for foreign exchange rate risk,
and the projected sensitivity of HSBC Holdings’ net
interest income to future changes in yield curves and
interest rate gap re-pricing tables for interest rate risk.
224
Foreign exchange risk
Total foreign exchange VAR arising within HSBC
Holdings in 2012 was as follows:
HSBC Holdings – foreign exchange VAR
(Audited)
At 31 December ..............................
Average ...........................................
Minimum ........................................
Maximum ........................................
2012
US$m
2011
US$m
69.9
51.4
39.2
69.9
47.7
43.3
38.2
48.3
The foreign exchange risk largely arises from
loans to subsidiaries of a capital nature that are not
denominated in the functional currency of either the
provider or the recipient and which are accounted
for as financial assets. Changes in the carrying
amount of these loans due to foreign exchange rate
differences are taken directly to HSBC Holdings’
income statement. These loans, and most of the
associated foreign exchange exposures, are
eliminated on a Group consolidated basis.
Sensitivity of net interest income
(Audited)
HSBC Holdings monitors net interest income
sensitivity over a 5-year time horizon reflecting
the longer-term perspective on interest rate risk
management appropriate to a financial services
holding company. The table below sets out the effect
on HSBC Holdings’ future net interest income over
a 5-year time horizon of incremental 25 basis point
parallel falls or rises in all yield curves worldwide at
the beginning of each quarter during the 12 months
from 1 January 2013.
Assuming no management actions, a sequence
of such rises would increase planned net interest
income for the next five years by US$532m (2011:
decrease of US$269m), while a sequence of such
falls would decrease planned net interest income
by US$329m (2011: increase of US$248m). These
figures incorporate the effect of any option features
in the underlying exposures.
Sensitivity of HSBC Holdings’ net interest income to interest rate movements55
(Audited)
US dollar
bloc
US$m
Sterling
bloc
US$m
Euro
bloc
US$m
Total
US$m
Change in projected net interest income as at 31 December
arising from a shift in yield curves
2012
of + 25 basis points at the beginning of each quarter
0-1 year .................................................................................
2-3 years ...............................................................................
4-5 years ...............................................................................
of – 25 basis points at the beginning of each quarter
0-1 year .................................................................................
2-3 years ...............................................................................
4-5 years ...............................................................................
Change in projected net interest income as at 31 December
arising from a shift in yield curves
2011
of + 25 basis points at the beginning of each quarter
0-1 year .................................................................................
2-3 years ...............................................................................
4-5 years ...............................................................................
of – 25 basis points at the beginning of each quarter
0-1 year .................................................................................
2-3 years ...............................................................................
4-5 years ...............................................................................
For footnote, see page 249.
The interest rate sensitivities tabulated above
are illustrative only and are based on simplified
scenarios. The figures represent hypothetical
movements in net interest income based on our
projected yield curve scenarios, HSBC Holdings’
current interest rate risk profile and assumed changes
to that profile during the next five years. The main
driver of the change in the US dollar projected net
225
83
303
319
(34)
(139)
(306)
(13)
(161)
(244)
14
127
244
(23)
(108)
(120)
21
65
118
11
33
21
(11)
(27)
(21)
4
37
37
(2)
(17)
(35)
4
33
47
(4)
(27)
(47)
64
232
236
(15)
(91)
(223)
2
(95)
(176)
(1)
73
176
interest income sensitivity was a change in the
assumptions for projected capital funding. The change
to the GBP projected net interest income sensitivity
was caused by changes in the composition of HSBC
Holdings’ investments. Changes to assumptions
concerning the risk profile over the next five years
can have a significant impact on the net interest income
sensitivity for that period. However, the figures do not
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Risk > Market risk > Parent company // Operational risk > ORMF
issued by HSBC Holdings is not included within the
Group VAR but is managed on a repricing gap basis.
The interest rate repricing gap table below analyses
the full-term structure of interest rate mismatches
within HSBC Holdings’ balance sheet.
Between
1 and 5
years
US$m
Up to
1 year
US$m
Between
5 and 10
years
US$m
More than
10 years
US$m
Non-interest
bearing
US$m
–
–
–
300
–
–
300
–
(6,334)
–
(1,648)
–
(808)
–
(8,790)
6,348
(2,142)
4,147
–
–
1,175
300
–
–
1,475
–
(6,423)
–
(1,617)
–
(774)
–
(8,814)
6,405
(934)
1,044
–
–
1,477
731
–
–
2,208
–
(7,708)
–
–
–
(2,110)
–
–
–
630
–
–
–
630
–
(4,301)
–
(1,051)
–
(8,828)
–
41
3,768
1,095
177
92,234
246
97,561
(597)
(3,198)
(760)
8
(1,048)
(161)
(87,027)
(9,818)
(14,180)
(92,783)
7,341
(269)
3,878
4,325
(9,225)
(5,347)
569
5,347
–
–
–
279
731
–
–
1,010
–
(6,157)
–
–
–
(2,070)
–
–
–
603
–
–
–
603
–
(5,156)
–
(1,006)
–
(8,671)
–
36
3,568
618
47
90,621
231
95,121
(219)
(721)
(1,067)
10
(1,919)
(159)
(82,183)
(8,227)
(14,833)
(86,258)
5,749
(1,468)
(424)
5,048
(9,182)
(9,606)
743
(9,606)
–
take into account the effect of actions that could be
taken to mitigate this interest rate risk.
Interest rate repricing gap table
The interest rate risk on the fixed-rate securities
Repricing gap analysis of HSBC Holdings
(Audited)
At 31 December 2012
Cash at bank and in hand:
– balances with HSBC undertakings ..............
Derivatives ..........................................................
Loans and advances to HSBC undertakings ......
Financial investments .........................................
Investments in subsidiaries .................................
Other assets .........................................................
Total
US$m
353
3,768
41,675
1,208
92,234
246
Total assets ..........................................................
139,484
Amounts owed to HSBC undertakings ..............
Financial liabilities designated at fair values .....
Derivatives ..........................................................
Debt securities in issue .......................................
Other liabilities ...................................................
Subordinated liabilities .......................................
Total equity .........................................................
(12,856)
(23,195)
(760)
(2,691)
(1,048)
(11,907)
(87,027)
312
–
38,473
–
–
–
38,785
(12,259)
(1,654)
–
–
–
–
–
Total liabilities and equity ..................................
(139,484)
(13,913)
Off-balance sheet items attracting interest rate
sensitivity ........................................................
Net interest rate risk gap .....................................
Cumulative interest rate gap ...............................
–
–
–
(18,583)
6,289
6,289
At 31 December 2011
Cash at bank and in hand:
– balances with HSBC undertakings ..............
Derivatives ..........................................................
Loans and advances to HSBC undertakings ......
Financial investments .........................................
Investments in subsidiaries .................................
Other assets .........................................................
316
3,568
28,048
1,078
90,621
231
Total assets ..........................................................
123,862
Amounts owed to HSBC undertakings ..............
Financial liabilities designated at fair values .....
Derivatives ..........................................................
Debt securities in issue .......................................
Other liabilities ...................................................
Subordinated liabilities .......................................
Total equity .........................................................
(2,479)
(21,151)
(1,067)
(2,613)
(1,919)
(12,450)
(82,183)
Total liabilities and equity ..................................
(123,862)
280
–
25,373
–
–
–
25,653
(2,260)
(2,694)
–
–
–
(776)
–
(5,730)
Off-balance sheet items attracting interest rate
sensitivity ........................................................
Net interest rate risk gap .....................................
Cumulative interest rate gap ...............................
–
–
–
(17,945)
1,978
1,978
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Operational risk
(Unaudited)
Page App1
Tables
Page
Operational risk ....................................................
270
Operational risk management framework ......... 227
Three lines of defence ............................................................ 227
Operational risk management framework ............................ 228
Operational risk in 2012 ....................................... 228
Frequency and amount of operational risk losses ... 229
Frequency of operational risk incidents by risk category .... 229
Distribution of operational risk losses in US dollars by risk
category ................................................................................. 230
Compliance risk ..................................................... 230
Legal risk ................................................................
Global security and fraud risk .............................
Systems risk ...........................................................
Vendor risk management .....................................
271
271
271
272
272
Fiduciary risk ........................................................ 231
273
1 Appendix to Risk - risk policies and practices.
Operational risk is relevant to every aspect
of our business, and covers a wide spectrum
of issues, in particular legal, compliance,
security and fraud. Losses arising from
breaches of regulation and law, unauthorised
activities, error, omission, inefficiency, fraud,
systems failure or external events all fall
within the definition of operational risk.
We continued to enhance our operational risk
management framework (‘ORMF’) policies and
procedures in 2012, including the implementation
of a top risk analysis process to improve the
quantification and management of material risks
through scenario analysis. This provides a top down,
forward-looking view of risks to help determine
whether they are being effectively managed within
our risk appetite or whether further management
action is required.
Responsibility for minimising operational
risk management lies with HSBC’s management and
staff. Each regional, global business, country,
business unit and functional head is required to
maintain oversight over operational risk and internal
control covering all business and operational
activities for which they are responsible.
Operational risk management framework
The Group Operational Risk function and the ORMF
assist business management in discharging their
responsibilities.
The ORMF defines minimum standards and
processes, and the governance structure for
operational risk and internal control across the
Group. Inherent to the ORMF is a ‘three lines of
defence’ model for the management of risk, as
described below:
Three lines of defence
First
line of
defence
Every employee at HSBC is responsible for the
risks that are a part of their day to day jobs.
The first line of defence ensures all key risks
within their operations are identified, mitigated
and monitored by appropriate internal controls
within an overall control environment.
Second
line of
defence
Consists of the Global Functions such as Global
Risk, Finance and HR who are responsible for
providing assurance, challenge and oversight
of the activities conducted by the first line.
Third
line of
defence
Internal Audit provides independent assurance
over the first and second lines of defence.
A summary of our current policies and practices
regarding operational risk is provided in the
Appendix to Risk on page 270.
A diagrammatic representation of the ORMF is
presented below:
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Risk > Market risk > Operational risk > In 2012
Operational risk management framework
Operational risks
• Operations
• Accounting
• Compliance
• Fiduciary
• Internal fraud
• External fraud
• Physical
• Business continuity
• Information
• Legal
• Tax
• Technology
• People
• Project
• Political
1
Risk and Control Assessment (‘RCA’)
2
Key indicators (‘KI’s)
3
Internal incidents
4
External events
Capital Modelling
Top Risk
Analysis
(‘TRA’)
Action
Governance
Identify
Set risk
appetite
Assess
Control
Report
• RCAs are used to inform the evaluation of the effectiveness of controls over top risks.
• KIs are linked to TRAs to help monitor the risks and controls in the operational risk system.
•
• External sources (e.g. Fitch and ORX databases) are used to inform the assessment of extreme TRAs.
Internal incidents are used to forecast typical losses.
Operational risk in 2012
During 2012, our top and emerging risk profile was
dominated by compliance and legal risks as referred
to in the ‘Top and emerging risks’ section and Note
43 on the Financial Statements. A number of other
material losses were realised in 2012, which related
largely to events that occurred in previous years.
These events included the possible historical mis-
selling of PPI and interest rate protection products in
the UK (see Note 32 on the Financial Statements). A
number of mitigating actions continue to be taken to
prevent future mis-selling incidents including
enhanced new product approval processes.
The incidence of regulatory proceedings and
other adversarial proceedings against financial
service firms is increasing. Proposed changes
relating to capital and liquidity requirements,
remuneration and/or taxes could increase our cost of
doing business, reducing future profitability. Various
regulators and competition authorities around the
world are also investigating and reviewing certain
past submissions made by panel banks and the
process for making submissions in connection with
the setting of Libor, Euribor and other benchmark
interest and foreign exchange rates. In response, we
have undertaken a number of initiatives which seek
to address the issues identified, including creating a
new global management structure, enhancing our
governance and oversight, increasing our compliance
function resource, emphasising HSBC Values and
designing and implementing new global standards as
described on page 6. For further information,
see Note 43 on the Financial Statements.
•
•
•
Other significant operational risks included:
challenges to achieving our strategy in a
downturn: businesses and geographical regions
have prioritised strategy and annual operating
plans to reflect current economic conditions.
Performance against plan is monitored through a
number of means including the use of balanced
scorecards and performance reporting at all
relevant management committees;
internet crime and fraud: the threat of external
fraud, especially in retail and commercial
banking, may increase during adverse economic
conditions. We have increased our defences
through enhanced monitoring and have
implemented additional controls, such as two-
factor authentication, to mitigate the possibility
of losses from fraud risks. We continually assess
these threats as they evolve and adapt our
controls to mitigate these risks;
level of change creating operational complexity:
the Risk function is engaged with business
management in business transformation
initiatives to ensure robust internal controls are
maintained, including through participation in
all relevant management committees. For
example, we undertake rigorous testing and
review of all planned updates to our systems
environment. All changes are risk assessed and
228
•
•
•
appropriate mitigating controls are required for
any planned high risk changes;
information security: the security of our
information and technology infrastructure is
crucial for maintaining our banking applications
and processes while protecting our customers
and the HSBC brand. In common with other
banks and multinational organisations, we face a
growing threat of cyber attacks. A failure of our
defences against such attacks could result in
financial loss, loss of customer data and other
sensitive information which could undermine
both our reputation and our ability to retain
the trust of our customers. We experienced a
number of cyber attacks in 2012, none of which
resulted in financial loss or the loss of customer
data. Significant investment has already been
made in enhancing controls, including increased
training to raise staff awareness of the
requirements, improved controls around
data access and heightened monitoring of
information flows. The threat from cyber attacks
is a concern for our organisation and failure to
protect our operations from internet crime or
cyber attacks may result in financial loss, loss
of customer data or other sensitive information
which could undermine our reputation and our
ability to attract and keep customers. This area
will continue to be a focus of ongoing initiatives
to strengthen the control environment;
vendor risk management: this continues to
evolve, with a project underway to accelerate
the review of existing contracts, including those
that support key economic functions, and a
global project to manage the performance of
critical outsourced vendors; and
compliance with regulatory agreements and
orders: in relation to the Deferred Prosecution
Agreements (‘DPA’s), the Group has committed
to take or continue to adhere to a number of
remedial measures. Breach of the DPAs at any
time during its term may allow the DoJ or the
New York County District Attorney’s Office to
prosecute HSBC in relation to the matters which
are the subject of the DPAs. For further detail
please see ‘Top and emerging risks’.
Other operational risks are also monitored and
managed through the use of the ORMF, including
investments made to further improve the resilience
of our payments infrastructure.
Further information on the nature of these
risks is provided in ‘Top and emerging risks’ on
page 130.
Frequency and amount of operational risk
losses
The profile of operational risk incidents and
associated losses is summarised below, showing the
distribution of operational risk incidents in terms of
their frequency of occurrence and total loss amount
in US dollars.
The operational risk incident profile in 2012
comprised both high frequency, low impact events
and high impact events that occurred much less
frequently. For example, losses due to external fraud
incidents such a credit card fraud occurred more
often than other types of event, but the amounts
involved were often small in value. Fraud incidents
continued to account for over 50% of the total
number of incidents but only 4% of operational
risk losses.
By contrast, operational risk incidents in the
compliance category remained relatively low
frequency events, but the total cost was significant.
Compliance-related losses increased in 2012 to 79%
of total operational risk losses due to significant
historical events including the possible mis-selling
of PPI and interest rate protection products in the
UK and the incidence of regulatory matters
described in Note 43 on the Financial Statements.
Frequency of operational risk incidents by
risk category
Compliance
4%
5%
Fraud
Legal
8%
8%
Operations
and Systems
28%
25%
People
3%
6%
Other
3%
1%
54%
55%
2011
2012
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Risk > Operational risk > Compliance risk / Fiduciary risk
Distribution of operational risk losses in US dollars
by risk category
61%
79%
2011
2012
Compliance
Fraud
Legal
10%
4%
13%
5%
Operations
and Systems
12%
9%
People
1%
0%
Other
3%
3%
Compliance risk
(Unaudited)
Compliance risk is the risk that we fail to
observe the letter and spirit of all relevant
laws, codes, rules, regulations and standards
of good market practice, and incur fines and
penalties and suffer damage to our business
as a consequence.
All Group companies are required to observe the
letter and spirit of all relevant laws, codes, rules,
regulations and standards of good market practice.
In 2012, we experienced increasing levels of
compliance risk as regulators and other agencies
pursued investigations into historical activities and
as we continued to work with them in relation to
already identified issues. These included:
•
•
•
an appearance before the US Senate Permanent
Subcommittee on Investigations and the DPAs
reached with US authorities in relation to
investigations regarding inadequate compliance
with anti-money laundering, the US Bank
Secrecy Act and sanctions laws, plus a related
undertaking with the FSA;
investigations into the possible mis-selling of
interest rate derivative products to SMEs in the
UK; and
investigations and reviews related to certain past
submissions made by panel banks and the
process for making submissions in connection
with the setting of Libor, Euribor and other
benchmark interest and foreign exchange rates.
As some HSBC entities are members of such
panels, HSBC Holdings and certain of its
subsidiaries have been the subject of regulatory
demands for information.
With a new senior leadership team and strategy
in place since 2011, we have already taken steps to
address these issues including making significant
changes to strengthen compliance, risk management
and culture. These steps, which will also enhance our
compliance risk management capabilities, including
the following:
•
•
•
•
•
•
the creation of a new global structure, which
will make HSBC easier to manage and control;
simplifying our business through the ongoing
implementation of our organisational
effectiveness programme and our five
economic filters strategy;
introducing a sixth global risk filter which will
standardise the way we do business in high risk
countries;
substantially increasing resources, doubling
global expenditure and significantly
strengthening Compliance as a control (rather
than as an advisory) function;
continuing to roll out an HSBC Values
programme that defines the way everyone
in the Group should act; and
adopting and enforcing the most effective
standards globally, including a globally
consistent approach to knowing and retaining
our customers.
Additionally, we have substantially revised
our governance framework in this area, appointing a
new Chief Legal Officer with particular expertise
and experience in US law and regulation, and
creating and appointing experienced individuals to
the new roles of Head of Group Financial Crime
Compliance and Global Head of Regulatory
Compliance.
It is clear from both our own and wider industry
experience that there is a significantly increased
level of activity from regulators and law
enforcement agencies in pursuing investigations in
relation to possible breaches of regulation and that
the direct and indirect costs of such breaches can
be significant. Coupled with a substantial increase
in the volume of new regulation, much of which
has some level of extra-territorial effect, and the
geographical spread of our businesses, we believe
that the level of inherent compliance risk that we
face will continue to remain high for the foreseeable
future.
230
Fiduciary risk
(Unaudited)
Fiduciary risk is the risk to the Group of
breaching our fiduciary duties when we
act in a fiduciary capacity as trustee or
investment manager or as mandated by
law or regulation.
A fiduciary duty is one where HSBC holds,
manages, oversees or has responsibility for assets for
a third party that involves a legal and/or regulatory
duty to act with the highest standard of care and with
utmost good faith. A fiduciary must make decisions
and act in the best interests of the third party and
must place the wants and needs of the client first,
above the needs of the Group.
We may be held liable for damages or other
penalties caused by failure to act in accordance with
those duties. Fiduciary duties may also arise in other
circumstances, such as when we act as an agent for a
principal, unless the fiduciary duties are specifically
excluded (e.g. under the agency appointment
contract).
During 2012, our principal fiduciary businesses
(the ‘designated businesses’) developed fiduciary
risk appetite statements for their various fiduciary
roles and a joint review was commissioned by
Global Operational Risk and RBWM to identify
businesses other than designated businesses
conducting fiduciary activities to ensure that they
were subject to adequate review and oversight.
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Risk > Risk management of insurance operations > Bancassurance / In 2012
Risk management of insurance operations
(Audited)
Page
App1
Tables
Page
HSBC’s bancassurance model ............................ 233
Overview of insurance products ............................
Nature and extent of risks ......................................
Insurance risk .........................................................
273
273
274
Risk management of insurance operations
in 2012 ............................................................... 233
Insurance risk ......................................................... 233
Balance sheet of insurance manufacturing
subsidiaries ....................................................... 235
Analysis of life insurance risk – liabilities to policyholders 234
Analysis of non-life insurance risk – net written insurance
premiums .......................................................................... 234
Balance sheet of insurance manufacturing subsidiaries:
– by type of contract ............................................................ 236
– by geographical region .................................................... 237
Financial risks ...................................................... 238
275
Financial assets held by insurance manufacturing
Market risk ............................................................. 239
275
subsidiaries ...................................................................... 238
Liabilities to policyholders .................................................. 239
Sensitivity of HSBC’s insurance manufacturing
subsidiaries to market risk factors .................................. 240
Credit risk .............................................................. 240
277
Treasury bills, other eligible bills and debt securities in
Liquidity risk ......................................................... 242
277
Present value of in-force long-term insurance
business ............................................................. 243
HSBC’s insurance manufacturing subsidiaries .............. 240
Reinsurers’ share of liabilities under insurance contracts . 242
Expected maturity of insurance contract liabilities ............ 242
Remaining contractual maturity of investment contract
liabilities .......................................................................... 243
Movements in PVIF and total equity of insurance operations 244
Key assumptions used in the computation of PVIF for main
life insurance operations ................................................. 244
Economic assumptions ........................................ 244
Sensitivity of PVIF to changes in economic assumptions ... 244
Non-economic assumptions ................................. 245
Sensitivity analysis ............................................................... 245
1 Appendix to Risk - policies and practices.
232
The majority of the risk in our Insurance
business derives from manufacturing
activities and can be categorised as
insurance risk and financial risk. Insurance
risk is the risk, other than financial risk,
of loss transferred from the holder of the
insurance contract to the issuer (HSBC).
Financial risks include market risk, credit
risk and liquidity risk.
There were no material changes to our policies and
practices for the management of risks arising in the
insurance operations, including the risks relating to
different life and non-life products, during 2012.
A summary of our policies and practices
regarding the risk management of insurance
operations, and the main contracts we
manufacture, are provided in the Appendix to
Risk on page 273.
HSBC’s bancassurance model
We operate an integrated bancassurance model
which provides wealth and protection insurance
products principally for customers with whom we
have a banking relationship. Insurance products are
sold through all global businesses, predominantly by
RBWM and CMB, through our branches and direct
channels worldwide.
The insurance contracts we sell largely 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.
Where we have operational scale and risk
appetite, mostly in life insurance, these insurance
products are manufactured by HSBC subsidiaries.
Manufacturing insurance allows us to retain the risks
and rewards associated with writing insurance
contracts as part of the underwriting profit,
investment income and distribution commission
are kept within the Group.
Where we do not have the risk appetite or
operational scale to be an effective insurance
manufacturer, we engage through 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 Group a
combination of commissions, fees and profit-share.
233
We distribute insurance products in all of our
geographical regions. We have core life insurance
manufacturing entities, the majority of which are
direct subsidiaries of legal banking entities, in seven
countries (Argentina, Brazil, Mexico, France, UK,
Hong Kong and Singapore). Our life insurance
manufacturing entities in the US are held-for-sale
at 31 December 2012.
Risk management of insurance operations in
2012
This section provides disclosures on the risks arising
from insurance manufacturing operations, including
insurance risk and financial risks such as market
risk, credit risk and liquidity risk.
Risks in these operations are managed within
the insurance entities using methodologies and
processes appropriate to the insurance activities,
but remain subject to oversight at Group level.
The consolidated Group liquidity and market
risk management disclosures exclude insurance
operations. The assets of the insurance
manufacturing subsidiaries are included within
the consolidated Group credit risk disclosures.
Operational and sustainability risks are covered
by the Group’s overall respective risk management
processes and are not included in this section.
Insurance risk
Insurance risk is principally measured in two ways:
•
•
liabilities to policyholders on life insurance
contracts; and
net written insurance premiums for non-life
contracts.
The insurance risk profile of our life insurance
manufacturing businesses did not change materially
during 2012 despite the increase in liabilities to
policyholders on these contracts to US$68bn
(2011: US$60bn). This growth in liabilities largely
resulted from market value gains on underlying
financial assets in addition to new business
generated during 2012.
The insurance risk profile of our non-life
insurance manufacturing businesses changed during
the year as net written insurance premiums declined
to US$656m (2011: US$993m). This was in line
with our strategy to focus on the manufacturing of
life insurance products, with non-life manufacturing
entities or portfolios in Argentina, Hong Kong,
Ireland and Singapore sold during 2012.
A principal risk we continue to face is that, over
time, the cost of acquiring and administering
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Risk > Risk management of insurance operations > In 2012 / Balance sheet of manufacturing subsidiaries
a contract, claims and benefits may exceed the
aggregate amount of premiums received and
investment income. The cost of claims and benefits
can be influenced by many factors, including
mortality and morbidity experience, lapse and
surrender rates and, if the policy has a savings
element, the performance of the assets held to
support the liabilities.
In respect of financial risks, subsidiaries
manufacturing products with guarantees are usually
exposed to falls in market interest rates and equity
prices to the extent that the market exposure
cannot be managed by utilising any discretionary
participation (or bonus) features (‘DPF’) within
the policy contracts they issue.
The following tables analyse our insurance risk
exposures by geographical region and by type of
business. The insurance risk profile and related
exposures remained largely consistent with those
observed at 31 December 2011.
Analysis of life insurance risk – liabilities to policyholders56
(Audited)
At 31 December 2012
Life (non-linked) .................................................
Insurance contracts with DPF58 ......................
Credit life ........................................................
Annuities ........................................................
Term assurance and other long-term
contracts .....................................................
Life (linked) ........................................................
Investment contracts with DPF58,59 .....................
Insurance liabilities to policyholders ..................
At 31 December 2011
Life (non-linked) .................................................
Insurance contracts with DPF58 ......................
Credit life ........................................................
Annuities ........................................................
Term assurance and other long-term
contracts .....................................................
Life (linked) ........................................................
Investment contracts with DPF58,59 .....................
Insurance liabilities to policyholders ..................
For footnotes, see page 249.
Europe
US$m
1,319
353
160
586
220
3,249
24,370
28,938
1,163
335
219
517
92
2,508
21,477
25,148
Hong
Kong
US$m
25,615
23,685
–
–
1,930
3,786
–
Rest of
Asia-
Pacific
US$m
1,587
439
61
122
965
594
4
29,401
2,185
21,460
20,109
–
–
1,351
3,393
–
1,227
338
58
78
753
476
11
North
America57
US$m
Latin
America
US$m
–
–
–
–
–
–
–
–
982
–
34
741
207
–
–
Total
US$m
30,684
24,477
221
2,287
3,699
13,056
24,374
68,114
26,926
20,782
311
2,882
2,951
11,210
21,488
59,624
2,163
–
–
1,579
584
5,427
–
7,590
2,094
–
–
1,546
548
4,833
–
6,927
24,853
1,714
982
Our most significant life insurance products are
investment contracts with DPF issued in France,
insurance contracts with DPF issued in Hong Kong
and unit-linked contracts issued in Latin America,
Hong Kong and the UK. The decline in life
insurance liabilities in North America reflects the
classification of this business as held for sale at
31 December 2012.
Analysis of non-life insurance risk – net written insurance premiums60
(Audited)
2012
Accident and health ............................................
Motor ..................................................................
Fire and other damage ........................................
Liability ...............................................................
Credit (non-life) ..................................................
Marine, aviation and transport ............................
Other non-life insurance contracts .....................
Total net written insurance premiums ................
Net insurance claims incurred and movement
in liabilities to policyholders ..........................
Hong
Kong
US$m
181
14
20
15
–
7
33
270
Rest of
Asia-
Pacific
US$m
North
Latin
America
US$m
America
US$m
Total
US$m
7
20
15
4
–
4
1
51
–
–
24
–
36
–
3
63
34
161
20
1
1
13
30
260
229
195
79
20
37
24
72
656
(117)
(22)
(24)
(116)
(284)
Europe
US$m
7
–
–
–
–
–
5
12
(5)
234
2011
Accident and health ............................................
Motor ..................................................................
Fire and other damage ........................................
Liability ...............................................................
Credit (non-life) ..................................................
Marine, aviation and transport ............................
Other non-life insurance contracts .....................
Total net written insurance premiums ................
Net insurance claims incurred and movement
in liabilities to policyholders ..........................
2010
Accident and health ............................................
Motor ..................................................................
Fire and other damage ........................................
Liability ...............................................................
Credit (non-life) ..................................................
Marine, aviation and transport ............................
Other non-life insurance contracts .....................
Europe
US$m
23
–
5
1
6
–
7
42
56
78
–
38
–
25
3
20
Total net written insurance premiums ................
164
Net insurance claims incurred and movement
Hong
Kong
US$m
186
17
29
16
–
10
39
297
Rest of
Asia-
Pacific
US$m
8
25
13
5
–
3
1
55
North
America
US$m
Latin
America
US$m
Total
US$m
–
–
30
–
48
–
7
85
39
328
29
1
1
25
91
514
256
370
106
23
55
38
145
993
(127)
(26)
(22)
(231)
(350)
174
15
29
20
–
10
39
287
8
28
11
4
–
4
1
56
3
–
16
–
53
–
9
81
37
267
22
2
2
18
84
432
300
310
116
26
80
35
153
1,020
in liabilities to policyholders ..........................
(169)
(117)
(25)
(13)
(201)
(525)
For footnotes, see page 249.
Our motor business was written predominantly
in Argentina; this business was sold in May 2012.
Our accident and health and fire and other
damage to property contracts was written in all
regions but mainly in Hong Kong; this business was
sold in November 2012.
Credit non-life insurance, which was historically
originated in conjunction with the provision of loans
but now in run-off, was concentrated in the US.
Balance sheet of insurance manufacturing
subsidiaries
(Audited)
A principal tool used to manage exposures to both
financial and insurance risk, in particular for life
insurance contracts, is asset and liability matching.
In many markets in which we operate it is neither
possible nor appropriate to follow a perfect asset
and liability matching strategy. For long-dated
non-linked contracts in particular, this results in a
duration mismatch between assets and liabilities.
We therefore structure portfolios to support
projected liabilities from non-linked contracts.
In the absence of insurable events occurring,
unit-linked contracts match assets more directly with
liabilities. This results in the policyholder bearing
the majority of the financial risk exposure.
The tables below show the composition of assets
and liabilities by contract and by geographical region
and demonstrate that there were sufficient assets to
cover the liabilities to policyholders in each case at
the end of 2012.
235
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Risk > Risk management of insurance operations > Balance sheet of insurance manufacturing subsidiaries
Balance sheet of insurance manufacturing subsidiaries by type of contract
(Audited)
Insurance contracts
Investment contracts
With
DPF
US$m
Unit-
linked
US$m
Annu-
ities
Term
assur-
ance61
US$m US$m
Non-life
US$m
With
DPF59
US$m
Unit-
linked
US$m
Other
US$m
Other
assets62 Total
US$m
US$m
24,288
–
12,619
–
1,785
4
4,350
–
356
–
23,620
–
8,780
–
4,315
–
4,692
–
84,805
4
2,333
40
18,283
3,632
12,440
4
–
175
593
–
124
–
448
571
–
932
278
494
–
756
6
3,315
273
320
–
196
–
73
87
14
–
11
6,043
117
16,022
1,438
–
–
754
8,206
13
–
561
1,486
86
1,853
890
987
69
2,928
708
–
–
22
4,847
33,018
335
43,406
8,042
1,567
4,847
–
–
24
7
34
110
28
2,420
3,836
At 31 December 2012
Financial assets ..................
– trading assets ................
– financial assets
designated at fair value .
– derivatives ....................
– financial investments ...
– other financial assets ....
Reinsurance assets .............
PVIF63 ................................
Other assets and
investment properties ......
Total assets .........................
24,860
13,219
2,313
4,780
381
24,374
8,804
4,343
11,981
95,055
Liabilities under investment
contracts:
– designated at fair value
– carried at amortised cost
Liabilities under
–
–
–
–
–
–
–
–
insurance contracts ..........
Deferred tax .......................
Other liabilities ..................
24,477
13
–
13,056
–
–
2,287
13
–
3,920
12
–
Total liabilities ...................
24,490
13,056
2,300
3,932
Total equity ........................
–
–
–
–
–
–
81
1
–
82
–
–
–
8,691
–
3,765
455
–
–
12,456
455
24,374
–
–
–
–
–
–
–
–
–
1,161
2,760
68,195
1,200
2,760
24,374
8,691
4,220
3,921
85,066
–
–
–
9,989
9,989
Total equity and
liabilities64 ......................
At 31 December 2011
Financial assets ..................
– trading assets ................
– financial assets
designated at fair value .
– derivatives ....................
– financial investments ...
– other financial assets ....
Reinsurance assets .............
PVIF63 ................................
Other assets and
24,490
13,056
2,300
3,932
82
24,374
8,691
4,220
13,910
95,055
20,520
–
10,355
–
2,531
3
3,398
–
1,656
24
20,745
–
7,843
–
4,103
–
7,219
–
78,370
27
1,730
23
15,523
3,244
10,101
1
1
252
12
–
903
–
426
–
1,778
324
441
–
594
–
2,540
264
196
–
206
–
791
635
250
–
169
5,491
231
13,732
1,291
–
–
744
7,191
7
–
645
1,515
89
1,913
586
1,616
7
4,008
1,588
–
–
42
4,092
28,870
358
40,286
8,829
1,844
4,092
–
–
28
investment properties ......
384
6
14
188
34
753
2,320
Total assets .........................
20,916
11,264
2,986
3,782
2,075
21,489
7,871
4,137
12,106
86,626
Liabilities under investment
contracts:
– designated at fair value
– carried at amortised cost
Liabilities under
–
–
–
–
–
–
–
–
–
–
–
–
7,813
–
3,586
435
–
–
11,399
435
insurance contracts ..........
Deferred tax .......................
Other liabilities ..................
20,782
15
–
11,210
–
–
2,882
21
–
3,262
6
–
1,635
1
–
21,488
–
–
–
–
–
–
–
–
–
931
1,930
61,259
974
1,930
Total liabilities ...................
20,797
11,210
2,903
3,268
1,636
21,488
7,813
4,021
2,861
75,997
Total equity ........................
–
–
–
–
–
–
–
–
10,629
10,629
Total equity and
liabilities64 ......................
For footnotes, see page 249.
20,797
11,210
2,903
3,268
1,636
21,488
7,813
4,021
13,490
86,626
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North
Latin
America57
America
US$m
US$m
Total
US$m
84,805
4
33,018
335
43,406
8,042
1,567
4,847
3,836
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6,702
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1,998
550
35
557
201
Balance sheet of insurance manufacturing subsidiaries by geographical region56
(Audited)
At 31 December 2012
Financial assets ...................................................
– trading assets ...............................................
– financial assets designated at fair value ......
– derivatives ...................................................
– financial investments ...................................
– other financial assets ...................................
Reinsurance assets ..............................................
PVIF63 .................................................................
Other assets and investment properties ..............
Hong
Kong
US$m
35,632
–
7,356
126
23,275
4,875
715
2,846
983
Rest of
Asia-
Pacific
US$m
2,594
–
1,370
6
994
224
8
304
230
Europe
US$m
37,325
–
17,590
203
17,139
2,393
809
1,140
849
Total assets .........................................................
40,123
40,176
3,136
Liabilities under investment contracts:
– designated at fair value ................................
– carried at amortised cost ..............................
Liabilities under insurance contracts ..................
Deferred tax ........................................................
Other liabilities ...................................................
Total liabilities ....................................................
Total equity .........................................................
7,783
–
28,954
403
782
37,922
2,201
4,673
–
29,402
532
347
34,954
5,222
Total equity and liabilities64 ...............................
40,123
40,176
At 31 December 2011
Financial assets ...................................................
– trading assets ...............................................
– financial assets designated at fair value ......
– derivatives ...................................................
– financial investments ...................................
– other financial assets ...................................
Reinsurance assets ..............................................
PVIF63 .................................................................
Other assets and investment properties ..............
34,163
–
15,583
244
15,531
2,805
746
1,097
909
30,126
–
5,875
114
19,858
4,279
912
2,322
946
–
–
2,200
88
267
2,555
581
3,136
2,093
–
1,155
–
617
321
39
282
31
–
–
–
–
–
–
–
–
1,573
1,573
–
–
–
–
1,037
1,037
536
1,573
2,414
–
–
–
1,846
568
19
65
24
10,047
95,055
–
455
7,639
177
327
8,598
1,449
12,456
455
68,195
1,200
2,760
85,066
9,989
10,047
95,055
9,574
27
6,257
–
2,434
856
128
326
410
78,370
27
28,870
358
40,286
8,829
1,844
4,092
2,320
Total assets .........................................................
36,915
34,306
2,445
2,522
10,438
86,626
Liabilities under investment contracts:
– designated at fair value ................................
– carried at amortised cost ..............................
Liabilities under insurance contracts ..................
Deferred tax ........................................................
Other liabilities ...................................................
Total liabilities ....................................................
Total equity .........................................................
6,961
–
25,795
352
1,200
34,308
2,607
4,405
–
25,160
408
269
30,242
4,064
Total equity and liabilities64 ...............................
36,915
34,306
For footnotes, see page 249.
33
–
1,802
60
69
1,964
481
2,445
–
–
1,079
28
13
1,120
1,402
2,522
–
435
7,423
126
379
8,363
2,075
10,438
11,399
435
61,259
974
1,930
75,997
10,629
86,626
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Report of the Directors: Operating and Financial Review (continued)
Risk > Risk management of insurance operations > Financial risks
Financial risks
(Audited)
Financial risk exposures can be categorised into:
• Market risk – risks arising from changes in the
fair values of financial assets or their future cash
flows from fluctuations in variables such as
interest rates, foreign exchange rates and equity
prices;
• Credit risk – the risk of financial loss following
the default of third parties to meet their
obligations; and
• Liquidity risk – the risk of not being able to
make payments to policyholders as they fall due
as there are insufficient assets that can be
realised as cash.
Further details on the nature of these financial
risks and how they are managed are provided in the
Appendix to Risk on page 252.
The following table analyses the assets held in
our insurance manufacturing subsidiaries at
31 December 2012 by type of contract, and provides
a view of the exposure to financial risk. For linked
contracts, which pay benefits to policyholders which
are determined by reference to the value of the
investments supporting the policies, we typically
designate assets at fair value; for non-linked
contracts, the classification of the assets is driven
by the nature of the underlying contract.
Financial assets held by insurance manufacturing subsidiaries
(Audited)
Life linked Life non-linked
contracts65
US$m
contracts66
US$m
Non-life
insurance67
US$m
Other
assets62
US$m
At 31 December 2012
Trading assets
Debt securities ............................................
Financial assets designated at fair value ........
Treasury bills ..............................................
Debt securities ............................................
Equity securities .........................................
Financial investments
Held-to-maturity: debt securities ....................
Available-for-sale: ..........................................
– debt securities ..........................................
– equity securities .......................................
Derivatives ......................................................
Other financial assets68 ...................................
–
20,646
–
8,028
12,618
–
–
–
–
17
736
Total financial assets64 ....................................
21,399
At 31 December 2011
Trading assets
Debt securities ............................................
Equity securities .........................................
Financial assets designated at fair value ........
Treasury bills ..............................................
Debt securities ............................................
Equity securities .........................................
Financial investments
Held-to-maturity: debt securities ....................
Available-for-sale: ..........................................
– other eligible bills ....................................
– debt securities ..........................................
– equity securities .......................................
Derivatives ......................................................
Other financial assets68 ...................................
–
–
17,292
4
6,823
10,465
–
1
–
–
1
8
897
Total financial assets64 ....................................
18,198
For footnotes, see page 249.
4
11,189
39
3,607
7,543
20,245
20,160
20,160
–
249
6,511
58,358
3
–
9,756
107
3,198
6,451
17,506
17,980
–
17,963
17
343
5,709
51,297
–
196
–
196
–
–
73
66
7
–
87
356
–
24
206
–
206
–
175
616
–
599
17
–
635
1,656
–
987
–
408
579
1,548
1,380
1,354
26
69
708
4,692
–
–
1,616
–
795
821
1,300
2,708
50
2,520
138
7
1,588
7,219
Total
US$m
4
33,018
39
12,239
20,740
21,793
21,613
21,580
33
335
8,042
84,805
3
24
28,870
111
11,022
17,737
18,981
21,305
50
21,082
173
358
8,829
78,370
238
Approximately 65.6% of financial assets were
invested in debt securities at 31 December 2012
(2011: 65.2%) with 24.5% (2011: 22.9%) invested
in equity securities.
In life linked insurance, premium income less
charges levied is invested in a portfolio of assets. We
manage the financial risks of this product on behalf
of the policyholders by holding appropriate assets in
segregated funds or portfolios to which the liabilities
are linked. These assets represented 25.2% (2011:
23.2%) of the total financial assets of our insurance
manufacturing subsidiaries at the end of 2012.
The remaining financial risks are managed
either solely on behalf of the shareholder, or jointly
on behalf of the shareholder and policyholders where
DPF exist.
Market risk
(Audited)
Market risk arises when mismatches occur between
product liabilities and the investment assets which
back them. For example, mismatches between asset
and liability yields and maturities give rise to interest
rate risk.
Liabilities to policyholders69
(Audited)
Long-term insurance or investment products
may incorporate benefits that are guaranteed. Where
mismatches exist as a result of current yields falling
below guaranteed levels for a prolonged period, the
risk that shareholder capital is required to meet
liabilities to policyholders increases. The table below
shows, in respect of each category of guarantee, the
total liabilities to policyholders established for
guaranteed products manufactured by our insurance
subsidiaries. The table also shows the range of
investment returns on the assets supporting these
products and the implied investment returns that
would enable the business to meet the guarantees.
Immediate annuities, where current investment
returns are below guarantees, relate to a closed
portfolio in the US which is held for sale at
31 December 2012. Annual return guarantees
between 4.5-6%, where current investment returns
are below guarantees, is a closed portfolio in Hong
Kong. The only other portfolio of contracts
identified where current investment returns are
below guarantees relate to a closed portfolio in
France. This portfolio has reserves of US$495m for
which current portfolio yields are 3.25% but
investment returns implied by the guarantees are
4.5%.
2012
Investment
returns
implied by
guarantee64
%
Amount of
reserve
US$m
Annuities in payment ..........................................
Deferred annuities ..............................................
Immediate annuities70 .........................................
Annual return ......................................................
Annual return ......................................................
Annual return ......................................................
Capital .................................................................
1,379
179
485
23,878
4,315
155
18,779
0.0 – 11.7
0.0 – 6.0
6.0 – 12.0
0.0 – 2.5
2.5 – 4.5
4.5 – 6.0
–
For footnotes, see page 249.
2011
Investment
returns
implied by
guarantee64
%
Amount of
reserve
US$m
Current
yields
%
1,414
0.0 – 9.6
0.0 – 6.0
175
538 6.0 – 12.0
0.0 – 2.5
2.5 – 4.5
4.5 – 6.0
–
20,465
3,849
163
17,400
4.2 – 25.2
3.2 – 22.7
5.3 – 5.4
0.0 – 6.9
3.3 – 10.0
6.4 – 6.5
2.3 – 7.8
Current
yields
%
4.6 – 20.8
3.3 – 20.4
5.4 – 5.5
1.4 – 4.7
3.3 – 6.7
4.1 – 4.2
0.0 – 7.2
The following table illustrates the effects of
selected interest rate, equity price, foreign exchange
rate and credit spread scenarios on our profit for the
year and total equity of our insurance manufacturing
subsidiaries.
Where appropriate, we include the impact of the
stress on the PVIF in the results of the sensitivity
tests. The relationship between the profit and total
equity and the risk factors is non-linear and,
therefore, the results disclosed should not be
extrapolated to measure sensitivities to different
levels of stress. The sensitivities are stated before
allowance for management actions which may
mitigate the effect of changes in market rates, and
for any factors such as policyholder behaviour that
may change in response to changes in market risk.
239
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Risk > Risk management of insurance operations > Financial risks
Sensitivity of HSBC’s insurance manufacturing subsidiaries to market risk factors
(Audited)
2012
Effect on
profit for
the year
US$m
Effect on
total
equity
US$m
2011
Effect on
profit for
the year
US$m
Effect on
total
equity
US$m
+ 100 basis points parallel shift in yield curves ...........................
– 100 basis points parallel shift in yield curves ...........................
10% increase in equity prices .......................................................
10% decrease in equity prices ......................................................
10% increase in US dollar exchange rate
compared to all currencies .......................................................
10% decrease in US dollar exchange rate
compared to all currencies .......................................................
Sensitivity to credit spread increases ...........................................
125
(208)
91
(92)
40
(40)
(18)
(263)
205
91
(92)
40
(40)
(50)
108
(115)
106
(164)
31
(31)
(30)
(178)
191
106
(164)
31
(31)
(75)
Credit risk
(Audited)
Credit risk can give rise to losses through default
and can lead to volatility in our income statement
and balance sheet figures through movements in
credit spreads, principally on the US$48bn
(2011: US$44bn) non-linked bond portfolio.
As tabulated above, the sensitivity of the net
profit after tax of our insurance subsidiaries to the
effects of increases in credit spreads has decreased
since 2011 due to narrowing of credit spreads
experienced in 2012. The balance and related
movement are small because about 90% of the debt
securities held by our insurance subsidiaries are
classified as either held to maturity or available for
sale, and consequently any changes in the fair value
of these financial investments, absent impairment,
would have no effect on the profit after tax. We
calculate the sensitivity using simplified assumptions
based on a one-day movement in credit spreads over
a two-year period. A confidence level of 99%,
consistent with our Group VAR, is applied.
Credit quality
(Audited)
The following table presents an analysis of treasury
bills, other eligible bills and debt securities within
our Insurance business by measures of credit quality.
The five credit quality classifications are defined in
the Appendix to Risk on page 253. Only assets
supporting liabilities under non-linked insurance
and investment contracts and shareholders’ funds
are included in the table as financial risk on assets
supporting linked liabilities is predominantly borne
by the policyholder. 83.5% (2011: 86.6%) of the
assets included in the table are invested in
investments rated as strong.
Treasury bills, other eligible bills and debt securities in HSBC’s insurance manufacturing subsidiaries
(Audited)
Neither past due nor impaired
Strong62
US$m
Good
US$m
Satisfactory Sub-standard
US$m
US$m
Total
US$m
At 31 December 2012
Supporting liabilities under non-linked
insurance and investment contracts
Trading assets – debt securities ......................................
Financial assets designated at fair value ........................
– treasury and other eligible bills ...............................
– debt securities ..........................................................
Financial investments .....................................................
– debt securities ..........................................................
–
638
–
638
4,265
4,265
4,903
3
219
–
219
1,627
1,627
1,849
–
178
–
178
187
187
365
4
3,842
39
3,803
40,471
40,471
44,317
1
2,807
39
2,768
34,392
34,392
37,200
240
Neither past due nor impaired
Strong62
US$m
Good
US$m
Satisfactory Sub-standard
US$m
US$m
Total
US$m
146
146
353
353
499
–
784
–
784
4,618
4,618
5,402
–
168
–
168
2,716
2,716
2,884
348
348
560
–
560
908
–
516
–
516
3,276
–
3,276
3,792
13
13
131
131
144
3
232
–
232
1,758
1,758
1,993
2
349
–
349
1,269
1,269
1,620
61
61
83
–
83
144
2
410
–
410
1,352
–
1,352
1,764
20
20
62
62
82
–
198
–
198
249
249
447
–
143
–
143
196
196
339
45
45
29
–
29
74
–
188
–
188
225
–
225
413
408
408
2,902
2,902
3,310
4
4,250
39
4,211
43,373
43,373
47,627
3
3,511
107
3,404
36,243
36,243
39,757
795
795
3,870
50
3,820
4,665
3
4,306
107
4,199
40,113
50
40,063
44,422
below. Our exposure to third parties under the
reinsurance agreements described in the Appendix to
Risk on page 274 is included in this table.
Supporting shareholders’ funds71
Financial assets designated at fair value ........................
– debt securities ..........................................................
Financial investments .....................................................
– debt securities ..........................................................
Total64
Trading assets – debt securities ......................................
Financial assets designated at fair value ........................
– treasury and other eligible bills ...............................
– debt securities ..........................................................
Financial investments .....................................................
– debt securities ..........................................................
At 31 December 2011
Supporting liabilities under non-linked
insurance and investment contracts
Trading assets – debt securities ....................................
Financial assets designated at fair value ......................
– treasury and other eligible bills .............................
– debt securities ........................................................
Financial investments ...................................................
– debt securities ........................................................
Supporting shareholders’ funds71
Financial assets designated at fair value ......................
– debt securities ........................................................
Financial investments ...................................................
– other eligible bills ..................................................
– debt securities ........................................................
Total64
Trading assets – debt securities ....................................
Financial assets designated at fair value ......................
– treasury and other eligible bills .............................
– debt securities ........................................................
Financial investments ...................................................
– other eligible bills ..................................................
– debt securities ........................................................
For footnotes, see page 249.
Credit risk also arises when assumed insurance
risk is ceded to reinsurers. The split of liabilities
ceded to reinsurers and outstanding reinsurance
recoveries, analysed by credit quality, is shown
229
229
2,356
2,356
2,585
1
3,036
39
2,997
36,748
36,748
39,785
1
2,851
107
2,744
32,062
32,062
34,914
341
341
3,198
50
3,148
3,539
1
3,192
107
3,085
35,260
50
35,210
38,453
241
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Risk > Risk management of insurance operations > Financial risks / PVIF
Reinsurers’ share of liabilities under insurance contracts
(Audited)
Neither past due nor impaired
Strong
US$m
Good
US$m
Satisfactory
US$m
Sub-
standard
US$m
Past due
but not
impaired
US$m
55
936
991
19
45
782
827
18
400
4
404
133
858
10
868
2
–
6
6
–
–
104
104
9
–
–
–
–
–
3
3
1
–
6
6
8
–
–
–
12
Total
US$m
455
952
1,407
160
903
899
1,802
42
period of risk. There is a greater spread of expected
maturities for the life business where, in a large
proportion of cases, the liquidity risk is borne in
conjunction with policyholders (wholly borne by the
policyholder in the case of unit-linked business).
The profile of the expected maturity of the
insurance contracts at 31 December 2012 remained
comparable with 2011.
At 31 December 2012
Linked insurance contracts .................................
Non-linked insurance contracts ..........................
Total64 .................................................................
Reinsurance debtors ............................................
At 31 December 2011
Linked insurance contracts .................................
Non-linked insurance contracts ..........................
Total64 .................................................................
Reinsurance debtors ............................................
For footnote, see page 249.
Liquidity risk
(Audited)
The following tables show the expected
undiscounted cash flows for insurance contract
liabilities and the remaining contractual maturity of
investment contract liabilities at 31 December 2012.
A significant proportion of our non-life insurance
business is viewed as short-term, with the settlement
of liabilities expected to occur within one year of the
Expected maturity of insurance contract liabilities
(Audited)
At 31 December 2012
Non-life insurance ..........................................
Life insurance (non-linked) ............................
Life insurance (linked) ...................................
Total64 .............................................................
At 31 December 2011
Non-life insurance ..........................................
Life insurance (non-linked) ............................
Life insurance (linked) ...................................
Total64 .............................................................
For footnote, see page 249.
Expected cash flows (undiscounted)
Within 1 year
US$m
1-5 years
US$m
5-15 years
US$m
78
4,176
1,243
5,497
742
2,006
920
3,668
3
12,199
3,761
15,963
704
12,243
3,262
16,209
–
23,420
10,446
33,866
176
21,332
9,070
30,578
Over 15 years
US$m
–
27,836
13,497
41,333
13
25,990
15,546
41,549
Total
US$m
81
67,631
28,947
96,659
1,635
61,571
28,798
92,004
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Remaining contractual maturity of investment contract liabilities
(Audited)
At 31 December 2012
Remaining contractual maturity:64
– due within 1 year ...................................................................
– due between 1 and 5 years ....................................................
– due between 5 and 10 years ..................................................
– due after 10 years ..................................................................
– undated72 ................................................................................
At 31 December 2011
Remaining contractual maturity:64
– due within 1 year ...................................................................
– due between 1 and 5 years ....................................................
– due between 5 and 10 years ..................................................
– due after 10 years ..................................................................
– undated72 ................................................................................
For footnotes, see page 249.
Present value of in-force long-term
insurance business
(Audited)
Our life insurance business is accounted for using
the embedded value approach which, inter alia,
provides a risk and valuation framework. The PVIF
asset at 31 December 2012 was US$4.8bn (2011:
US$4.1bn), representing the present value of the
shareholders’ interest in the profits expected to
emerge from the book of in-force policies at that
date.
The PVIF calculation projects expected cash
flows, adjusted for a variety of assumptions made
by each insurance operation to reflect local market
conditions and management’s judgement of future
trends. The main assumptions relate to economic
and non-economic assumptions and policyholder
behaviour. Assumptions are subject to uncertainty
and can contribute to volatility in the results of the
Insurance business.
The key drivers of the movement in the value
of the PVIF asset are the expected cash flows from:
•
new business adjusted for anticipated maturities
and assumptions relating to policyholder
behaviour (‘Value of new business written
during the year’);
Liabilities under investment contracts by
insurance manufacturing subsidiaries
Linked
investment
contracts
US$m
Other
investment
contracts
US$m
Investment
contracts
with DPF
US$m
195
675
731
2,061
5,029
8,691
191
595
548
2,063
4,416
7,813
458
–
–
–
3,762
4,220
438
–
–
–
3,583
4,021
4
–
–
–
24,370
24,374
8
3
–
–
21,477
21,488
Total
US$m
657
675
731
2,061
33,161
37,285
637
598
548
2,063
29,476
33,322
•
•
•
•
•
unwind of the discount rate less the reversal
of expected cash flows for the period (‘Expected
return’);
changes in non-economic operating assumptions
such as mortality or lapse rates (‘Change in
operating assumptions’);
impacts arising from changes in projected future
cash flows associated with operating assumption
experience variances compared to those
assumed at the start of the period (‘Experience
variances’);
changes related to future investment returns
(‘Changes in investment assumptions’); and
the impact of actual investment experience on
future cash flows compared to those assumed at
the start of the period (‘Investment return
variances’).
The valuation of the PVIF asset includes explicit
risk margins for non-economic risks in the projection
assumptions and explicit allowances for financial
options and guarantees using stochastic methods.
Risk discount rates are set on an active basis with
reference to market risk free yields.
The following table shows the movements
recorded during the year in respect of total equity
and PVIF of insurance operations.
243
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Risk > Risk management of insurance operations > Economic assumptions / Non-economic assumptions
Movements in PVIF and total equity of insurance operations
(Audited)
2012
2011
At 1 January ..................................................................................
Change in PVIF of long-term insurance business ........................
Value of new business written during the year73 ..........................
Movements arising from in-force business:
– expected return ......................................................................
– experience variances74 ...........................................................
– changes in operating assumptions .........................................
Investment return variances ..........................................................
Changes in investment assumptions .............................................
Other adjustments .........................................................................
Return on net assets ......................................................................
Capital transactions ......................................................................
Disposals of subsidiaries/portfolios .............................................
Exchange differences and other ...................................................
PVIF
US$m
4,092
737
1,027
(420)
12
(3)
(18)
78
61
–
–
–
18
At 31 December ............................................................................
4,847
Total
equity
US$m
10,629
737
1,232
(1,525)
(382)
(702)
9,989
PVIF
US$m
3,440
726
943
(428)
1
(222)
(103)
294
241
–
–
–
(74)
Total
equity
US$m
9,778
726
1,057
(500)
(96)
(336)
4,092
10,629
For footnotes, see page 249.
Other adjustments for 2012 included a one-off
gain of US$119m for a PVIF asset recognised on
linked insurance business in Brazil. For 2011, other
adjustments related to the US$243m gain recognised
upon refinement of the PVIF calculation.
Key assumptions used in the computation of PVIF for main life insurance operations
(Audited)
2012
UK
%
Hong Kong
%
France
%
Risk free rate ..........................................................
Risk discount rate ..................................................
Expense inflation ...................................................
1.53
2.03
2.84
0.60
7.46
3.00
2.12
4.05
2.00
2011
UK Hong Kong
%
2.24
2.74
3.45
%
1.47
8.00
3.00
France
%
2.77
5.95
2.00
Economic assumptions
(Audited)
The following table shows the effect on the PVIF of
reasonably possible changes in the main economic
assumption, risk-free rates, across all insurance
manufacturing subsidiaries.
Due to certain characteristics of the contracts,
the relationships are non-linear and the results of
the sensitivity testing should not be extrapolated to
higher levels of stress. The sensitivities shown are
before actions that could be taken by management
to mitigate effects and before resultant changes in
policyholder behaviour.
Sensitivity of PVIF to changes in economic
assumptions
(Audited)
+ 100 basis point shift in
risk-free rate ................
– 100 basis point shift in
risk-free rate ................
PVIF at 31 December
2012
US$m
2011
US$m
137
(191)
128
(91)
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Non-economic assumptions
(Audited)
We determine the policyholder liabilities for non-life
manufacturers by reference to non-economic
assumptions including claims costs and expense
rates.
Policyholder liabilities and PVIF for life
manufacturers are determined by reference to non-
economic assumptions including mortality and/or
morbidity, lapse rates and expense rates. The table
below shows the sensitivity of profit for 2012 and
total equity at 31 December 2012 to reasonably
possible changes in these non-economic assumptions
at that date across all our insurance manufacturing
subsidiaries, with comparatives for 2011.
The cost of claims is a risk associated with non-
life insurance business. An increase in claims costs
would have a negative effect on profit. Sensitivities
have significantly decreased since 2011 due to the
disposal of the non-life entities or portfolios in
Argentina, Hong Kong, Ireland and Singapore
during 2012.
Sensitivity analysis
(Audited)
Mortality and morbidity risk is typically
associated with life insurance contracts. The effect
on profit of an increase in mortality or morbidity
depends on the type of business being written. Our
largest exposures to mortality and morbidity risk
exist in Brazil, France, Hong Kong and the US.
Sensitivity to lapse rates depends on the type
of contracts being written. For insurance contracts,
claims are funded by premiums received and income
earned on the investment portfolio supporting the
liabilities. For a portfolio of term assurance, an
increase in lapse rates typically has a negative effect
on profit due to the loss of future premium income
on the lapsed policies. However, some contract
lapses have a positive effect on profit due to the
existence of policy surrender charges. Brazil, France,
Hong Kong and the UK are where we are most
sensitive to a change in lapse rates.
Expense rate risk is the exposure to a change in
expense rates. To the extent that increased expenses
cannot be passed on to policyholders, an increase in
expense rates will have a negative impact on our
profits.
Effect on profit and total
equity at 31 December
Non-life
US$m
Life
US$m
2012
20% increase in claims costs .................................................................
20% decrease in claims costs ................................................................
10% increase in mortality and/or morbidity rates .................................
10% decrease in mortality and/or morbidity rates ................................
50% increase in lapse rates ....................................................................
50% decrease in lapse rates ...................................................................
10% increase in expense rates ...............................................................
10% decrease in expense rates ..............................................................
2011
20% increase in claims costs .................................................................
20% decrease in claims costs ................................................................
10% increase in mortality and/or morbidity rates .................................
10% decrease in mortality and/or morbidity rates ................................
50% increase in lapse rates ....................................................................
50% decrease in lapse rates ...................................................................
10% increase in expense rates ...............................................................
10% decrease in expense rates ..............................................................
–
–
(88)
92
(491)
842
(105)
106
–
–
(100)
110
(349)
609
(89)
89
(12)
12
–
–
–
–
(1)
1
(135)
135
–
–
–
–
(12)
12
Total
US$m
(12)
12
(88)
92
(491)
842
(106)
107
(135)
135
(100)
110
(349)
609
(101)
101
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Risk > Other material risks / Reputational risk / Pension risk
Other material risks
Page
App1
Tables
Page
The principal plan – target asset allocation ......................... 247
Benefit payments (US$m) ...................................................... 247
Reputational risk ................................................. 246
Pension risk .......................................................... 246
Pension plans in the UK ........................................
The principal plan .................................................. 246
Future developments .............................................. 248
Pension plans in Hong Kong .................................
The HSBC Group Hong Kong Local Staff
Retirement Benefit Scheme ............................... 248
Pension plans in North America ............................
The HSBC North America (US) Retirement
Income Plan ....................................................... 249
278
278
279
279
280
Sustainability risk ................................................ 249
280
1 Appendix to Risk – risk policies and practices.
Reputational risk
(Unaudited)
Pension risk
(Audited)
The safeguarding of our reputation is
paramount. It is the responsibility of all
members of staff, supported by a global risk
management structure underpinned by
relevant policies and practices, readily
available guidance, and regular training.
We have acknowledged, in the context of last
year’s US Senate Permanent Subcommittee on
Investigations, the Deferred Prosecution Agreements
with US authorities and the undertakings with the
UK FSA, that it was not enough to fix the
specific issues that they focused on. Additionally,
therefore, we have outlined our implementation of
a global strategy to tackle the root causes of these
identified deficiencies.
With a new senior leadership team and a new
strategy in place since 2011, HSBC has already
taken steps to augment the framework to address
these issues including making significant changes
to strengthen compliance, risk management and
culture. These steps, which should also serve, over
time, to enhance our reputational risk management,
are discussed further on page 278.
Success in detecting and preventing illicit
actors’ access to the global financial system calls for
constant vigilance and HSBC will continue to work
in close cooperation with all governments to achieve
this. This is integral to the execution of HSBC’s
strategy, to our core values and to preserving and
enhancing our reputation.
We operate a number of pension plans
throughout the world. Some are defined
benefit plans, of which the largest is the
HSBC Bank (UK) Pension Scheme (‘the
principal plan’).
There were no material changes to our policies and
procedures for the management of pension risk in
2012.
During 2012, the Group’s defined benefit
pension plans reduced from a net liability of
US$0.2bn to a net asset of US$0.03bn. This was
mainly due to growth in the value of the principal
plan’s assets outstripping the comparable growth in
liabilities.
The principal plan
(Audited)
In 2006 the principal plan assets consisted of a
strategic portfolio. At the time, HSBC and the trustee
of the principal plan agreed to change the investment
strategy in order to reduce the investment risk. The
target asset allocations for this strategy at that time,
as revised in 2011 and at this year end are shown
below, demonstrating the ongoing evolution of the
strategy. The strategy is to hold the majority of
assets in bonds, with the remainder in a more diverse
range of investments, and includes a commitment
to undertake a programme of swap arrangements
(see Note 44 on the Financial Statements) by which
the principal plan makes Libor-related interest
payments in exchange for the receipt of cash
flows which are based on projected future benefit
payments to be made from the principal plan.
246
The principal plan – target asset allocation
Equities ...........................
Bonds ..............................
Alternative assets75 .........
Property ...........................
Cash ................................
2012
%
2011
%
15.5
60.5
9.5
9.0
5.5
15.5
60.5
9.5
9.0
5.5
2006
%
15.0
50.0
10.0
10.0
15.0
100.0
100.0
100.0
the mortality assumptions were set, based on the
SAPS S1 series of tables adjusted to reflect the
pensioner experience. Allowance was made for
future improvements to mortality rates in line
with the Continuous Mortality Investigation core
projections with a long run improvement rate set at
2% for males and 1.5% for females. The benefits
payable from the defined benefit plan from 2013 are
expected to be as shown in the chart below.
For footnote, see page 249.
Benefit payments (US$m)
As a result of a special contribution to the
principal plan in June 2010 of £1,760m
(US$2,638m), a cash generating portfolio was
established. The portfolio comprised supra-national,
agency and government-guaranteed securities,
ABSs, corporate subordinated debt and auction
rate securities. A further special contribution in
December 2011 of £184m (US$286m) added to this
portfolio. The contribution was used to
purchase ABSs from HSBC at an arm’s length value
determined by the Scheme’s independent third-party
advisers. However, these assets may be
supplemented with other assets from time to time.
The latest actuarial valuation of the principal
plan was made as at 31 December 2011 by
C G Singer, Fellow of the Institute of Actuaries, of
Towers Watson Limited. At that date, the market
value of the HSBC Bank (UK) Pension Scheme’s
assets was £18.3bn (US$28.3bn) (including assets
relating to the defined benefit plan, the defined
contribution plan and additional voluntary
contributions). The market value of the plan assets
represented 100% of the amount expected to be
required, on the basis of the assumptions adopted,
to provide the benefits accrued to members after
allowing for expected future increases in earnings.
There was therefore no resulting surplus/deficit.
The method adopted for this valuation was the
projected unit method.
The expected cash flows from the principal plan
were projected by reference to the Retail Price Index
(‘RPI’) swap break-even curve at 31 December
2011. Salary increases were assumed to be 0.5%
per annum above RPI and inflationary pension
increases, subject to a minimum of 0% and a
maximum of 5% (maximum of 3% per annum in
respect of service accrued since 1 July 2009), were
assumed to be in line with RPI. The projected cash
flows were discounted at the Libor swap curve at
31 December 2011 plus a margin for the expected
return on the investment strategy of 160bps per
annum. The mortality experience of the principal
plan’s pensioners over the six-year period (2006-
2011) was analysed and, on the basis of this analysis,
247
2,000
1,750
1,500
1,250
1,000
750
500
250
0
3
1
0
2
9
1
0
2
5
2
0
2
1
3
0
2
7
3
0
2
3
4
0
2
9
4
0
2
5
5
0
2
1
6
0
2
7
6
0
2
3
7
0
2
9
7
0
2
5
8
0
2
1
9
0
2
7
9
0
2
As part of the 31 December 2011 valuation,
calculations were also carried out as to the amount
of assets that might be needed to meet the liabilities
if the Scheme was discontinued and the members’
benefits bought out with an insurance company
(although in practice this may not be possible for
a plan of this size) or the Trustee continued to run
the plan without the support of HSBC. The amount
required under this approach was estimated to be
£26.2bn (US$40.6bn) as at 31 December 2011.
In arriving at this estimation, a more prudent
assumption about future mortality was made than
for the assessment of the ongoing position and it was
assumed that the Trustee would alter the investment
strategy to be an appropriately matched portfolio of
UK government bonds. An explicit allowance for
expenses was also included.
Based on the latest valuation as at 31 December
2011 and there being no deficit, no Technical
Provisions Recovery Plan is required and the
schedule of future funding payments agreed after
the 2008 actuarial valuation was dissolved.
HSBC and the Trustee have developed a general
framework, which, over time, will see the Scheme’s
asset strategy evolve to be less risky and further
aligned to future cash-flows, referred to as the Target
Matching Portfolio (‘TMP’). Evolution to the TMP
can be achieved by asset returns in excess of that
assumed and/or additional funding. In February
2013, HSBC agreed to make three general
framework contributions of £64m (US$103m) in
each of the calendar years 2013, 2014 and 2015.
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Risk > Other material risks / Pension risk / Sustainability risk / Footnotes
After the 2008 valuation, HSBC considered that
the agreed recovery plan payments, together with
investment returns (at an expected level of 240 basis
points above the Libor swap curve), would be
sufficient to meet the deficit as at 31 December 2008
over the agreed period. HSBC also agreed with the
Trustee, that at each subsequent actuarial valuation
any shortfall in investment returns relative to this
expected level, subject to a maximum of 50 basis
points per annum, would be eliminated by payment
of equal cash instalments over the remaining years to
the end of the recovery plan period.
Although the 2011 triennial valuation disclosed
no deficit and therefore no technical provisions
recovery plan is required, HSBC and the Trustee
have agreed to maintain this investment performance
underwriting agreement. The investment
performance will be assessed every three years,
with an end date of 31 December 2017. Any
payments due would only be payable if a Technical
Provisions deficit is present at the reference date.
HSBC Bank is also making ongoing
contributions to the principal plan in respect of
the accrual of benefits of defined benefit section
members. Since April 2010, after completion of the
2008 valuation, HSBC has paid contributions at the
rate of 34% of pensionable salaries (less member
contributions).
Following completion of the 2011 triennial
valuation, HSBC will pay contributions at the rate
of 43% of pensionable salaries (less member
contributions) from 1 April 2013. An additional
employer contribution will be paid on or before
30 April 2013 equal to 9% of pensionable salaries,
in respect of the period 1 January 2012 to 31 March
2013.
Future developments
(Unaudited)
In January 2013, as part of a wider review of
employee benefits, HSBC announced proposals to
cease future accrual of service for active members of
the Defined Benefit Section with effect from 30 June
2014. Under the proposals, all active members of the
Defined Benefit Section will become deferred
members from 30 June 2014 (and will become
members of the Defined Contribution Section from
1 July 2014).
The valuation of the Scheme’s defined benefit
obligation is sensitive to changes in actuarial
assumptions. The proposed removal of future salary
escalation from the pay assumptions is estimated to
reduce the defined benefit obligation by
approximately US$0.3bn and the proposed change in
248
the underlying inflation assumption for indexation
from RPI, for active members, to CPI, for deferred
members, by a further US$0.5bn. The proposed
cessation of the Scheme to provide ill-health benefits
to members, to be covered by insurance policies
provided by HSBC under these proposals, is
estimated to reduce the defined benefit obligation by
approximately US$0.5bn.
The consultation period for these proposals will
end, and a final decision is expected to be made, in
the second quarter of 2013 at which time a past
service credit will be recognised in the income
statement.
The future effect of these proposed changes on
the income statement is dependent primarily on the
level of pension contributions made by HSBC and
employees to the Defined Contribution Section, the
final outcome of which remains uncertain. In all
reasonably likely scenarios, the net effect on
earnings over time is not expected to be material.
The HSBC Group Hong Kong Local Staff
Retirement Benefit Scheme
(Audited)
The scheme mainly invests in bonds with a smaller
portion in equities and each investment manager
has been assigned an investment mandate with the
targeted asset allocation. The ranges of target asset
allocations for the portfolio are as follows: Bonds
and cash 55-100%, Equity 0-25% and Alternative
Investments 0-20%. Alternative Investments refer to
high-return and high-risk alternatives, including but
not limited to private equity funds, hedge funds,
energy, gold, agriculture, commodities and
distressed assets.
The latest actuarial valuation of the defined
benefit scheme was made at 31 December 2010 by
Wing Lui, Fellow of the Society of Actuaries, of
Towers Watson Hong Kong Limited. At that
valuation date, the market value of the defined
benefit scheme’s assets was US$1,109m. On an
ongoing basis, the defined benefit scheme's assets
represented 104% of the actuarial present value of
the benefits accrued to members, after allowing for
expected future increases in salaries, and the
resulting surplus amounted to US$41m. On a wind-
up basis, the scheme’s assets represented 110% of
the members’ vested benefits, based on current
salaries, and the resulting surplus amounted to
US$105m. The attained age method has been
adopted for the valuation and the major assumptions
used in this valuation were a discount rate of 6% per
annum and long-term salary increases of 5% per
annum. The recommended employer contribution
rate as a percentage of scheme salaries is 14.3% over
the period 1 January 2011 to 31 December 2013. No
additional special contributions have been agreed.
The HSBC North America (US) Retirement
Income Plan
(Audited)
In 2010, the Investment Committee (the ‘Committee’)
unanimously agreed to transition the Plan’s target
asset allocation mix to 40% equity securities,
59% fixed income securities and 1% cash over a
24-month period. In 2011, the Committee decided
to accelerate this shift to the 2011 year-end and the
target asset allocation mix was maintained during
2012. Should interest rates rise faster than currently
projected by the Committee, a further shift to a
higher percentage of fixed income securities may
be made.
In the third quarter of 2012, it was agreed to
cease all future contributions under the cash balance
formula and freeze the plan with effect from
1 January 2013. While participants with existing
balances continue to receive interest credits until the
account is distributed, they no longer accrue benefits
beginning in 2013.
The most recent actuarial valuation of the plan
to determine compliance with US statutory funding
requirements was made at 1 January 2012 by
Jennifer Jakubowski, Fellow of the Society of
Actuaries, Enrolled Actuary, member of the
American Academy of Actuaries, formerly of
Mercer. At that date, the market value of the plan’s
Footnotes to Risk
assets was US$3,194m. The assets represented 118%
of the benefits accrued to members as valued under
the provisions of the Pension Protection Act of 2006
that was effective for the plan year beginning
1 January 2008. The resulting surplus amounted to
US$479m. The method employed for this valuation
was the traditional unit credit method and the
discount rate was determined using a segment rate
method as selected by HSBC under the relevant
regulations, which resulted in an effective interest
rate of 7.13% per annum.
Sustainability risk
(Unaudited)
Assessing the environmental and social
impacts of providing finance to our
customers is integral to our overall risk
management processes.
In 2012, we implemented several changes to
our policies and procedures to streamline our
management of sustainability risks. This ranged
from producing guidelines on how we extend the
Equator Principles beyond project finance into
corporate loans, to technical fixes in our systems
to improve the accuracy of our management
information.
A summary of our current policies and
practices regarding reputational risk, pension
risk and sustainability risk is provided in the
Appendix to Risk on page 278.
Credit risk
1 ‘Other personal loans and advances’ include second lien mortgages and other property-related lending.
2 ‘Financial’ includes loans and advances to banks.
3 The amount of the loan commitments reflects, where relevant, the expected level of take-up of pre-approved loan offers made by
mailshots to personal customers. In addition to those amounts, there is a further maximum possible exposure to credit risk of US$28bn
(2011: US$171bn), reflecting the full take-up of such irrevocable loan commitments. The take-up of such offers is generally at modest
levels.
4 Includes residential mortgages of HSBC Bank USA and HSBC Finance.
5 Comprising Rest of Asia-Pacific, Middle East and North Africa, and Latin America.
6 HSBC Finance lending is shown on a management basis and includes loans transferred to HSBC USA Inc. which are managed by
HSBC Finance.
7 Property acquired through foreclosure is initially recognised at the lower of the carrying amount of the loan or its fair value less
estimated costs to sell (‘Initial Foreclosed Property Carrying Amount’). The average loss on sale of foreclosed properties is calculated
as cash proceeds less the Initial Foreclosed Properties Carrying Amount divided by the unpaid loan principal balance prior to write-
down (excluding any accrued finance income) plus certain other ancillary disbursements that, by law, are reimbursable from the cash
proceeds (e.g. real estate tax advances) and were incurred prior to our taking title to the property. This ratio represents the portion of
our total loss on foreclosed properties that occurred after we took title to the property.
8 The average total loss on foreclosed properties includes both the loss on sale of the foreclosed property as discussed in footnote 7 and
the cumulative write-downs recognised on the loans up to the time we took title to the property.
9 ‘Other commercial loans and advances’ include advances in respect of agriculture, transport, energy and utilities.
10 Impairment allowances are not reported for financial instruments whereby the carrying amount is reduced directly for impairment and
not through the use of an allowance account.
11 Impairment is not measured for assets held in trading portfolios or designated at fair value as assets in such portfolios are managed
according to movements in fair value, and the fair value movement is taken directly to the income statement. Consequently, we report
all such balances under ‘Neither past due nor impaired’.
12 ‘Loans and advances to customers’ includes asset-backed securities that have been externally rated as strong (2012: US$2.3bn; 2011:
US$3.5bn), good (2012: US$457m; 2011: US$476m), satisfactory (2012: US$390m; 2011: US$428m), sub-standard (2012: US$422m;
2011: US$556m) and impaired (2012: US$259m; 2011: US$229m).
249
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Risk > Footnotes
13 Included in this category are loans of US$2.3bn (2011: US$2.9bn) that have been re-aged once and were less than 60 days past due at
the point of re-age. These loans are not classified as impaired following re-age due to the overall expectation that these customers will
perform on the original contractual terms of their borrowing in the future.
14 ‘Impaired loans and advances’ are those classified as CRR 9, CRR 10, EL 9 or EL 10, retail loans 90 days or more past due, unless
individually they have been assessed as not impaired (see page 156, ‘Past due but not impaired gross financial instruments’) and
renegotiated loans and advances meeting the criteria to be disclosed as impaired (see page 162).
15 ‘Collectively assessed loans and advances’ comprise homogeneous groups of loans that are not considered individually significant, and
loans subject to individual assessment where no impairment has been identified on an individual basis, but on which a collective
impairment allowance has been calculated to reflect losses which have been incurred but not yet identified.
16 ‘Collectively assessed loans and advances not impaired’ are those classified as CRR1 to CRR8 and EL1 to EL8 but excluding retail
loans 90 days past due and renegotiated loans and advances meeting the criteria to be disclosed as impaired.
17 ‘Collectively assessed impairment allowances’ are allocated to geographical segments based on the location of the office booking the
allowances or provisions. Consequently, the collectively assessed impairment allowances booked in Hong Kong may cover assets
booked in branches located outside Hong Kong, principally in Rest of Asia-Pacific, as well as those booked in Hong Kong.
18 Included within ‘Exchange and other movements’ is US$0.8bn of impairment allowances reclassified to held for sale (2011: US$1.6bn).
19 Net of repo transactions, settlement accounts and stock borrowings.
20 As a percentage of loans and advances to banks and loans and advances to customers, as applicable.
21 ‘Currency translation’ is the effect of translating the results of subsidiaries and associates for the previous year at the average rates of
exchange applicable in the current year.
22 Negative numbers are favourable: positive numbers are unfavourable.
23 Equity securities not included.
24 ‘First lien residential mortgages’ include Hong Kong Government Home Ownership Scheme loans of US$3.2bn at 31 December 2012
(2011: US$3.3bn). Where disclosed, earlier comparatives were 2010: US$3.5bn; 2009: US$3.5bn; 2008: US$3.9bn.
25 The impairment allowances on loans and advances to banks in 2012 relate to the geographical regions, Europe, North America, and
Middle East and North Africa. (2011: Europe and North America).
26 Carrying amount of the net principal exposure.
27 Total includes holdings of ABSs issued by The Federal Home Loan Mortgage Corporation (‘Freddie Mac’) and The Federal National
Mortgage Association (‘Fannie Mae’).
28 ‘Directly held’ includes assets held by Solitaire where we provide first loss protection and assets held directly by the Group.
29 ‘Effect of impairments’ represents the reduction or increase in the reserve on initial impairment and subsequent reversal of impairment
of the assets.
30 The gross principal is the redemption amount on maturity or, in the case of an amortising instrument, the sum of the future redemption
amounts through the residual life of the security.
31 Credit default swap (‘CDS’) gross protection is the gross principal of the underlying instrument that is protected by CDSs.
32 Net principal exposure is the gross principal amount of assets that are not protected by CDSs. It includes assets that benefit from
monoline protection, except where this protection is purchased with a CDS.
33 Net exposure after legal netting and any other relevant credit mitigation prior to deduction of the credit valuation adjustment.
34 Cumulative fair value adjustment recorded against exposures to OTC derivative counterparties to reflect their creditworthiness.
35 Funded exposures represent the loan amount advanced to the customer, less any fair value write-downs, net of fees held on deposit.
36 Unfunded exposures represent the contractually committed loan facility amount not yet drawn down by the customer, less any fair value
write-downs, net of fees held on deposit.
Eurozone exposures
37 Our available-for-sale holdings in sovereign and agency debt of Italy and Spain include debt held to support insurance contracts which
provide discretionary profit participation to policyholders. For such contracts, unrealised movements in liabilities are recognised in
other comprehensive income, following the treatment of the unrealised movements on related available-for-sale assets. To the extent
that the movements are matched, no movement in the available-for-sale reserve is recognised. For those available-for-sale debt
instruments described above that are not held to support insurance contracts which provide discretionary profit participation to
policyholders, the available-for-sale reserves at 31 December 2012 were insignificant.
38 ‘In-country liabilities’ in Italy include liabilities issued under local law but booked outside the country.
Liquidity and funding
39 The most favourable metrics are a smaller advances to core funding and larger stressed one-month and three-month coverage ratios.
40 The HSBC UK entity shown comprises three legal entities; HSBC Bank plc (including SPEs consolidated by HSBC Bank plc for
Financial Statement purposes, HFC Bank Ltd, and all overseas branches), Marks and Spencer Financial Services Limited and HSBC
Trust Company (UK) Limited, managed as a single operating entity, in line with the application of UK liquidity regulation as agreed
with the UK FSA.
41 The Hongkong and Shanghai Banking Corporation represents the bank in Hong Kong including all overseas branches. Each branch is
monitored and controlled for liquidity and funding risk purposes as a stand-alone operating entity.
42 The HSBC USA principal entity shown represents the HSBC USA Inc consolidated group; predominantly HSBC USA Inc and HSBC
Bank USA, NA. The HSBC USA Inc consolidated group is managed as a single operating entity.
43 The total shown for other principal HSBC operating entities represents the combined position of all the other operating entities
overseen directly by the Risk Management Meeting of the GMB.
44 Estimated liquidity value represents the expected realisable value of assets prior to management assumed haircuts.
45 The undrawn balance for the five largest committed liquidity facilities provided to customers other than facilities to conduits.
46 The undrawn balance for the total of all committed liquidity facilities provided to the largest market sector, other than facilities to
conduits.
47 As a result of the significant level of disposal groups held for sale at 31 December 2012, the financial liabilities of the disposal groups
held for sale has been separately shown in the table. For further details of the disposal groups held for sale, refer to Note 30 on the
Financial Statements.
250
Market risk
48 The standard deviation measures the variation of daily revenues about the mean value of those revenues.
49 Revenues within the daily distribution graph include all revenues booked in Global Markets (gross of brokerage fees). The effect of any
month-end adjustments, not attributable to a specific daily market move, is spread evenly over the days in the month in question. The
2012 daily distribution of trading revenues excludes the effect of the one-off credit valuation adjustment on derivative assets of
US$903m.
50 Trading intent portfolios include positions arising from market-making and position taking.
51 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 and minimum occur on
different days for different risk types, it is not meaningful to calculate a portfolio diversification benefit for these measures.
52 The total VAR is non-additive across risk types due to diversification effects.
53 Investments in private equity are primarily made through managed funds that are subject to limits on the amount of investment. Potential
new commitments are subject to risk appraisal to ensure that industry and geographical concentrations remain within acceptable levels for
the portfolio as a whole. Regular reviews are performed to substantiate the valuation of the investments within the portfolio.
54 Investments held to facilitate ongoing business include holdings in government-sponsored enterprises and local stock exchanges.
55 Instead of assuming that all interest rates move together, we group our interest rate exposures into currency blocs whose rates are
considered likely to move together. See ‘Cautionary Statement regarding Forward-Looking Statements’ on page 525.
Risk management of insurance operations
56 HSBC has no insurance manufacturing subsidiaries in the Middle East and North Africa.
57 The decline in life insurance liabilities in North America reflects the classification of the majority of this business as held for sale at
31 December 2012. At 31 December 2012, the held-for-sale North American life insurance liabilities by contract type comprised credit
life contracts (US$15m), annuities (US$723m) and term assurance and other long-term contracts (US$205m).
58 Insurance contracts and investment contracts with discretionary participation features (‘DPF’) can give policyholders the contractual
right to receive, as a supplement to their guaranteed benefits, additional benefits that may be a significant portion of the total
contractual benefits, but whose amount and timing are determined by HSBC. These additional benefits are contractually based on the
performance of a specified pool of contracts or assets, or the profit of the company issuing the contracts.
59 Although investment contracts with DPF are financial investments, HSBC continues to account for them as insurance contracts as
permitted by IFRS 4.
60 Net written insurance premiums represent gross written premiums less gross written premiums ceded to reinsurers.
61 Term assurance includes credit life insurance.
62 The Other assets column shows shareholder assets as well as assets and liabilities classified as held for sale. The majority of the assets
for insurance businesses classified as held for sale are reported as ‘Other assets and investment properties’ and totalled US$2.0bn at
31 December 2012 (2011: US$0.1bn). Assets classified as held for sale consist primarily of debt securities, the majority of which have a
‘strong’ credit rating at 31 December 2012. All liabilities for insurance businesses classified as held for sale are reported in ‘Other
liabilities’ and totalled US$1.2bn at 31 December 2012 (2011: US$0.1bn). The majority of these liabilities were life and non-life
policyholder liabilities expected to mature after 5 years.
63 Present value of in-force long-term insurance contracts and investment contracts with DPF.
64 Does not include associated insurance companies, SABB Takaful Company and Bao Viet Holdings, or joint venture insurance
companies, Hana Life and Canara HSBC Oriental Bank of Commerce Life Insurance Company Limited.
65 Comprise life linked insurance contracts and linked long-term investment contracts.
66 Comprise life non-linked insurance contracts and non-linked long-term investment contracts.
67 Comprise non-life insurance contracts.
68 Comprise mainly loans and advances to banks, cash and intercompany balances with other non-insurance legal entities.
69 The table excludes contracts where the risk is 100% reinsured.
70 The majority of reserves for immediate annuities with guarantees are within insurance businesses that are held for sale at 31 December
2012.
71 Shareholders’ funds comprise solvency and unencumbered assets.
72 In most cases, policyholders have the option to terminate their contracts at any time and receive the surrender values of their policies.
These may be significantly lower than the amounts shown.
73 Value of net new business during the year is the present value of the projected stream of profits from the business.
74 Experience variances include the effect of the difference between demographic, expense and persistency assumptions used in the
previous PVIF calculation and actual experience observed during the year to the extent this impacts profits on future business.
Pension risk
75 In 2011 and 2012, alternative assets included ABSs, MBSs and infrastructure assets. In 2006, alternative assets included loans and
infrastructure assets.
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Risk > Appendix – Risk policies and practices > Risk governance / Credit risk
Appendix to Risk
Risk policies and practices
This appendix describes the significant policies and practices employed by HSBC in managing our credit risk, liquidity
and funding, market risk, operational risk (including compliance risk, legal risk and fiduciary risk), insurance risk,
reputational risk, pension risk and sustainability risk.
Risk governance
(Unaudited)
Our strong risk governance reflects the importance placed by the Board on shaping the Group’s risk strategy and
managing risks effectively. It is supported by a clear policy framework of risk ownership, by the cascading from
the Group Management Board (‘GMB’) of performance scorecards that align business and risk objectives, and
by the accountability of all staff for identifying, assessing and managing risks within the scope of their assigned
responsibilities. This personal accountability, reinforced by the governance structure, experience and mandatory
learning, helps to foster a disciplined and constructive culture of risk management and control throughout HSBC.
Credit risk
Credit risk management
(Audited)
The role of an independent credit control unit is fulfilled by the Global Risk function. Credit approval authorities
are delegated by the Board to certain executive officers of HSBC Holdings plc. Similar credit approval authorities
are delegated by the boards of subsidiary companies to executive officers of the relevant subsidiaries. In each
major subsidiary, a Chief Risk Officer reports to the local Chief Executive Officer on credit-related issues, while
maintaining a direct functional reporting line to the Group Chief Risk Officer in Global Risk. Details of the roles
and responsibilities of the credit risk management function and the policies and procedures for managing credit risk
are set out below. Apart from the creation of a new Group Models Oversight Committee and supportive framework
there were no significant changes in 2012.
The high-level oversight and management of credit risk provided globally by the Credit Risk function in Global Risk
• to formulate Group credit policy. Compliance, subject to approved dispensations, is mandatory for all operating companies which must
develop local credit policies consistent with Group policies;
• to guide operating companies on our 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. Global Risk assesses all commercial non-bank 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 Group policy on large credit exposures, ensuring that concentrations of exposure by counterparty, sector or geography do not
become excessive in relation to our capital base, and remain within internal and regulatory limits;
• to control our cross-border exposures (see page 259);
• to maintain and develop our risk rating framework and systems, the governance of which is under the general oversight of the Group
Model Oversight Committee (‘MOC’). The Group MOC meets bi-monthly and reports to the Risk Management Meeting. It is chaired by
the risk function and its membership is drawn from Global Risk and global businesses;
• to report to the Risk Management Meeting, the Group Risk Committee and the Board on high risk portfolios, risk concentrations,
country limits and cross-border exposures, large impaired accounts, impairment allowances, stress testing results and recommendations
and retail portfolio performance; and
• to act on behalf of HSBC Holdings as the primary interface, for credit-related issues, with the Bank of England, the FSA, local
regulators, rating agencies, analysts and counterparts in major banks and non-bank financial institutions.
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Principal objectives of our credit risk management
•
•
•
to maintain across HSBC a strong culture of responsible lending and a robust risk policy and control framework;
to both partner and challenge our 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 their mitigation.
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 that are predominantly
within our wholesale businesses, risk ratings are reviewed regularly and any amendments are implemented promptly.
Within our retail businesses, 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 (‘IRB’) approach under Basel II adopted by the Group to
support calculation of our minimum credit regulatory capital requirement. For further details see definitions of our
credit quality classifications below.
Special attention is paid to problem exposures in order to accelerate remedial action. When appropriate, our operating
companies use specialist units to provide customers with support to help them avoid default wherever possible.
Group and regional Credit Review and Risk Identification teams regularly review exposures and processes in order
to provide an independent, rigorous assessment of credit risk across the Group, reinforce secondary risk management
controls and share best practice. Internal audit, as a tertiary control function, focuses on risks with a global
perspective and on the design and effectiveness of primary and secondary controls, carrying out oversight audits via
the sampling of global/regional control frameworks, themed audits of key or emerging risks and project audits to
assess major change initiatives.
The five credit quality classifications defined below each encompass a range of more granular, internal credit rating
grades assigned to wholesale and retail lending businesses, as well as the external ratings attributed by external
agencies to debt securities.
There is no direct correlation between the internal and external ratings at granular level, except to the extent each
falls within a single quality classification.
Credit quality classification
(Unaudited)
Debt securities
and other bills
Wholesale lending
and derivatives
External
credit rating
Internal
credit rating
12 month
probability of
default %
Retail lending
Internal
credit rating1
Expected
loss %
Quality classification
Strong ...........................
Good ............................
Satisfactory ..................
Sub-standard ................
Impaired .......................
A– and above
BBB+ to BBB–
BB+ to B+ and
unrated
CRR1 to CRR2
CRR3
0 – 0.169
0.170 – 0.740
EL1 to EL2
EL3
0 – 0.999
1.000 – 4.999
CRR4 to CRR5
B to C
CRR6 to CRR8
Default CRR9 to CRR10
0.741 – 4.914
4.915 – 99.999
100
EL4 to EL5
5.000 – 19.999
EL6 to EL8
20.000 – 99.999
EL9 to EL10 100+ or defaulted2
1 We observe the disclosure convention that, in addition to those classified as EL9 to EL10, retail accounts classified EL1 to EL8 that are
delinquent by 90 days or more are considered impaired, unless individually they have been assessed as not impaired (see page 156,
‘Past due but not impaired gross financial instruments’).
2 The EL percentage is derived through a combination of PD and LGD, and may exceed 100% in circumstances where the LGD is above
100% reflecting the cost of recoveries.
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Risk > Appendix – Risk policies and practices > Credit risk
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. Retail accounts operate within product parameters and only exceptionally show any period of delinquency.
• ‘Good’ exposures require closer monitoring and demonstrate a good capacity to meet financial commitments, with low default risk.
Retail accounts typically show only short periods of delinquency, with any losses expected to be minimal following the adoption of
recovery processes.
• ‘Satisfactory’ exposures require closer monitoring and demonstrate an average to fair capacity to meet financial commitments, with
moderate default risk. Retail accounts typically show only short periods of delinquency, with any losses expected to be minor following
the adoption of recovery processes.
• ‘Sub-standard’ exposures require varying degrees of special attention and default risk is of greater concern. Retail portfolio segments
show longer delinquency periods of generally up to 90 days past due and/or expected losses are higher due to a reduced ability to
mitigate these through security realisation or other recovery processes.
• ‘Impaired’ exposures have been assessed as impaired. Wholesale exposures where the bank considers that either the customer is unlikely
to pay its credit obligations in full, without recourse by the bank to the actions such as realising security if held, or the customer is past
due more than 90 days on any material credit obligation. Retail loans and advances greater than 90 days past due unless individually they
have been assessed as not impaired. Renegotiated loans that have met the requirements to be disclosed as impaired and have not yet met
the criteria to be returned to the unimpaired portfolio (see page 255).
The customer risk rating (‘CRR’) 10-grade scale summarises a more granular underlying 23-grade scale of obligor
probability of default (‘PD’). All HSBC customers are rated using the 10 or 23-grade scale, depending on the degree
of sophistication of the Basel II approach adopted for the exposure.
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. The ratings of Standard and Poor’s are cited, with those of other agencies being treated equivalently.
Debt securities with short-term issue ratings are reported against the long-term rating of the issuer of those securities.
If major rating agencies have different ratings for the same debt securities, a prudent rating selection is made in line
with regulatory requirements.
Renegotiated loans and forbearance
(Audited)
A range of forbearance strategies is employed in order 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.
Our 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 the borrowing and is expected to be able to meet the revised obligations.
For retail lending our credit risk management policy sets out restrictions on the number and frequency of
renegotiations, the minimum period an account must have been opened before any renegotiation can be considered
and the number of qualifying payments that must be received. The application of this policy varies according to the
nature of the market, the product and the management of customer relationships through the occurrence of
exceptional events.
Identifying renegotiated loans
The contractual terms of a loan may be modified for a number of reasons including changing market conditions,
customer retention and other factors not related to the current or potential credit deterioration of a customer. When
the contractual payment terms of a loan have been modified because we have significant concerns about the
borrower’s ability to meet contractual payments when due, these loans are classified as ‘renegotiated loans’. For the
purposes of this disclosure the term ‘forbearance’ is synonymous with the renegotiation of loans.
For retail lending, when considering whether there is ‘significant concern’ regarding a customer’s ability to meet
contractual loan repayments when due, we assess the customer’s delinquency status, account behaviour, repayment
history, current financial situation and continued ability to repay. Where the customer is not meeting contractual
repayments or it is evident that they will be unable to do so without the renegotiation, there will be a significant
254
concern regarding their ability to meet contractual payments, and the loan will be disclosed as impaired, unless the
concession granted is insignificant as discussed below.
For loan restructurings in wholesale lending, indicators of significant concerns regarding a borrower’s ability to pay
include:
•
•
•
•
•
•
the debtor is currently in default on any of its debt;
the debtor has declared or is in the process of declaring bankruptcy or entering into a similar process;
there is significant doubt as to whether the debtor will continue to be a going concern;
currently, the debtor has securities that have been delisted, are in the process of being delisted, or are under
threat of being delisted from an exchange as a result of trading or financial difficulties;
based on estimates and projections that only encompass the current business capabilities, the bank forecasts
that the debtor’s entity-specific cash flows will be insufficient to service the debt (both interest and principal) in
accordance with the contractual terms of the existing agreement through maturity. Thus actual payment default
may not yet have occurred; and
absent the modification, the debtor cannot obtain funds from sources other than the existing creditors at an
effective interest rate equal to the current market interest rate for similar debt for a non-distressed debtor.
Where the modification of contractual payment terms of a loan represents a concession for economic or legal reasons
relating to the borrower’s financial difficulty, and is a concession that we would not otherwise consider, then the
renegotiated loan is disclosed as impaired in accordance with our impaired loan disclosure convention described
in more detail on page 162, unless the concession is insignificant and there are no other indicators of impairment.
Insignificant concessions are primarily restricted to our CML portfolio in HSBC Finance, where loans which are in
the early stages of delinquency (less than 60 days delinquent), and typically have the equivalent of two payments
deferred for the first time, are excluded from our impaired loan classification as the contractual payment deferrals are
deemed to be insignificant compared with payments due on the loan as a whole. For details of HSBC Finance’s loan
renegotiated programmes and portfolios, see pages 158 to 162.
Credit quality classification of renegotiated loans
(Audited)
Under IFRSs, an entity is required to assess whether there is objective evidence that financial assets are impaired
at the end of each reporting period. A loan is impaired, and an impairment allowance is recognised, when there is
objective evidence of a loss event that has an effect on the cash flows of the loan which can be reliably estimated.
When we grant a concession to a customer that we would not otherwise consider, as a result of their financial
difficulty, this is objective evidence of impairment and impairment losses are measured accordingly.
A renegotiated loan is presented as impaired when:
•
•
there has been a change in contractual cash flows as a result of a concession which the lender would otherwise
not consider, and
it is probable that without the concession, the borrower would be unable to meet contractual payment obligations
in full.
This presentation applies unless the concession is insignificant and there are no other indicators of impairment.
The renegotiated loan will continue to be disclosed as impaired until there is sufficient evidence to demonstrate a
significant reduction in the risk of non-payment of future cash flows, and there are no other indicators of impairment.
For loans that are assessed for impairment on a collective basis, the evidence typically comprises a history of
payment performance against the original or revised terms, as appropriate to the circumstances. For loans that are
assessed for impairment on an individual basis, all available evidence is assessed on a case by case basis.
For retail lending the minimum period of payment performance required depends on the nature of loans in the
portfolio, but is typically not less than six months. Where portfolios have more significant levels of forbearance
activity, such as that undertaken by HSBC Finance, the minimum repayment performance period required may be
substantially more (for further details on HSBC Finance see page 150). Payment performance periods are monitored
to ensure they remain appropriate to the levels of recidivism observed within the portfolio. These performance
periods are in addition to the receipt of a minimum of two payments within a 60 day period which must be received
for the customer to initially qualify for the renegotiation (in the case of HSBC Finance, in certain circumstances, for
example where debt has been restructured in bankruptcy proceedings, fewer or no qualifying payments may be
required). The qualifying payments are required in order to demonstrate that the renegotiated terms are sustainable
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Risk > Appendix – Risk policies and practices > Credit risk
for the borrower. For corporate and commercial loans, which are individually assessed for impairment and where
non-monthly payments are more commonly agreed, the history of payment performance will depend on the
underlying structure of payments agreed as part of the restructure.
Renegotiated loans are classified as unimpaired where the renegotiation has resulted from significant concern about
a borrower’s ability to meet their contractual payment terms but the renegotiated terms are based on current market
rates and contractual cash flows are expected to be collected in full following the renegotiation. Unimpaired
renegotiated loans also include previously impaired renegotiated loans that have demonstrated satisfactory
performance over a period of time or have been assessed based on all available evidence as having no remaining
indicators of impairment.
Loans that have been identified as renegotiated retain this designation until maturity or derecognition. When a loan is
restructured as part of a forbearance strategy and the restructuring results in derecognition of the existing loan, such
as in some debt consolidations, the new loan is disclosed as renegotiated.
When determining whether a loan that is restructured should be derecognised and a new loan recognised, we consider
the extent to which the changes to the original contractual terms result in the renegotiated loan, considered as a
whole, being a substantially different financial instrument. The following are examples of circumstances that are
likely to result in this test being met and derecognition accounting being applied:
•
an uncollateralised loan becomes fully collateralised;
•
the addition or removal of cross collateralisation provisions;
• multiple facilities are consolidated into a single new facility;
•
•
•
•
removal or addition of conversion features attached to the loan agreement;
a change in the currency in which the principal or interest is denominated;
a change in the liquidation preference or ranking of the instrument; or
the contract is altered in any other manner so that the terms under the new or modified contract are substantially
different from those under the original contract.
The following are examples of factors that we consider may indicate that the revised loan is a substantially different
financial instrument, but are unlikely to be conclusive in themselves:
•
•
•
change in guarantees or loan covenants provided;
less significant changes to collateral arrangements; or
the addition of repayment provisions or prepayment premium clauses.
Renegotiated loans and recognition of impairment allowances
(Audited)
For retail lending, renegotiated loans are segregated from other parts of the loan portfolio for collective impairment
assessment to reflect the higher rates of losses often encountered in these segments. When empirical evidence
indicates an increased propensity to default and higher losses on such accounts, such as for re-aged loans in the US,
the use of roll-rate methodology ensures these factors are taken into account when calculating impairment allowances
by applying roll rates specifically calculated on the pool of loans subject to forbearance. When the portfolio size is
small or when information is insufficient or not reliable enough to adopt a roll-rate methodology, a basic formulaic
approach based on historical loss rate experience is used. As a result of our roll-rate methodology, we recognise
collective impairment allowances on homogeneous groups of loans, including renegotiated loans, where there is
historical evidence that there is a likelihood that loans in these groups will progress through the various stages of
delinquency, and ultimately prove irrecoverable as a result of events occurring before the balance sheet date. This
treatment applies irrespective of whether or not those loans are presented as impaired in accordance with our
impaired loans disclosure convention. When we consider that there are additional risk factors inherent in the
portfolios that may not be fully reflected in the statistical roll rates or historical experience, these risk factors are
taken into account by adjusting the impairment allowances derived solely from statistical or historical experience.
For further details of the risk factor adjustments see ‘Critical accounting policies’ on page 54.
In the corporate and commercial sectors, renegotiated loans are typically assessed individually. Credit risk ratings are
intrinsic to the impairment assessment. A distressed restructuring is classified as an impaired loan. The individual
impairment assessment takes into account the higher risk of the non-payment of future cash flows inherent in
renegotiated loans.
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Corporate and commercial forbearance
(Unaudited)
In the corporate and commercial sectors, forbearance activity is undertaken selectively where it has been identified
that repayment difficulties against the original terms already have, or are very likely to, materialise. These cases are
treated as impaired loans where:
•
•
the customer is experiencing, or is very likely to experience, difficulty in meeting a payment obligation to the
bank (i.e. due to current credit distress); and
the bank is offering to the customer revised payment arrangements which constitute a concession (i.e. it is
offering terms it would not normally be prepared to offer).
These cases are described as distressed restructurings. The agreement of a restructuring which meets the criteria
above requires all loans, advances and counterparty exposures to the customer to be treated as impaired. Against the
background of this requirement, as a customer approaches the point that it becomes clear that there is an increasing
risk that a restructuring of this kind might be necessary, the exposures will typically be regarded as sub-standard to
reflect the deteriorating credit risk profile, and will be graded as impaired when the restructure is proposed for
approval, or sooner if there is sufficient concern regarding the customer’s likeliness to pay.
For the purposes of determining whether changes to a customer’s agreement should be treated as a distressed
restructuring the following types of modification are regarded as concessionary:
•
•
transfers from the customer of receivables from third parties, real estate, or other assets to satisfy fully or
partially a debt;
issuance or other granting of an equity interest to satisfy fully or partially a debt unless the equity interest is
granted pursuant to existing terms for converting the debt into an equity interest; and
• modification of the terms of a debt, such as one or more of the following:
–
–
–
–
reduction (absolute or contingent) of the stated interest rate for the remaining original life of the debt;
extension of the maturity date or dates at a stated interest rate lower than the current market rate for new
debt with similar risk;
reduction (absolute or contingent) of the face amount or maturity amount of the debt; and
reduction (absolute or contingent) of accrued interest.
Modifications that are unrelated to payment arrangements, such as the restructuring of collateral or security
arrangements or the waiver of rights under covenants within documentation, are not regarded by themselves to be
evidence of credit distress affecting payment capacity. Typically, covenants are in place to give the bank rights of
repricing or acceleration, but they are frequently set at levels where payment capacity has yet to be affected. They
provide rights of action at earlier stages of credit deterioration. However, when these modifications are made in
conjunction with modifications affecting payment arrangements as a result of significant concerns regarding the
payment of contractual cash flows, they are treated as a distressed restructuring.
In assessing whether payment-related forbearance is a satisfactory and sustainable strategy, the customer’s entire
exposure and facilities will be reviewed and the customer’s ability to meet the terms of both the revised obligation
and other credit facilities not amended in the renegotiation is assessed. Should this assessment identify that a
renegotiation will not deal with a customer’s payment capacity issues satisfactorily, other special management
options may be applied. This process may identify the need to provide assistance to a customer specifically to
restructure their business operations and activities so as to restore satisfactory payment capacity.
Modifications may be made on a temporary basis when time is needed for the customer to make arrangements for
payment, when deterioration in payment capacity is expected to be acute but short lived, or when more time is
needed to accommodate discussions regarding a more permanent accommodation with other bankers, for example
in syndicated facilities where multilateral negotiation commonly features.
If a restructuring proceeds and the customer demonstrates satisfactory performance over a period of time, the case
may be returned to a non-impaired grade (CRR1-8) provided no other indicators of impairment remain. Such a case
cannot be returned to a non-impaired grade when a specific impairment reserve remains against any of the customer’s
credit facilities. The period of performance will vary depending on the frequency of payments to be made by the
customer under the amended agreement and the extent to which the customer’s financial position is considered to
have improved.
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Risk > Appendix – Risk policies and practices > Credit risk
Impairment assessment
(Audited)
It is our policy that each operating company in HSBC creates impairment allowances for impaired loans promptly
and appropriately.
For details of our impairment policies on loans and advances and financial investments, see Notes 2g and 2j on the
Financial Statements.
Impairment and credit risk mitigation
The existence of collateral has an impact when calculating impairment on individually assessed impaired loans.
When we no longer expect to recover the principal and interest due on a loan in full or in accordance with the
original terms and conditions, it is assessed for impairment. If exposures are secured, the current net realisable value
of the collateral will be taken into account when assessing the need for an impairment allowance. No impairment
allowance is recognised in cases where all amounts due are expected to be settled in full on realisation of the security.
Personal lending portfolios are generally assessed for impairment on a collective basis as the portfolios typically
consist of large groups of homogeneous loans. Two methods are used to calculate allowances on a collective basis:
a roll rate methodology or a more basic formulaic approach based on historical losses.
The historical loss methodology is typically used to calculate collective impairment allowances for secured, or low
default portfolios such as mortgages, until the point at which they are individually identified and assessed as
impaired. For loans which are collectively assessed using historical loss methodology, the historical loss rate is
derived from the average contractual write-off net of recoveries over a defined period. The net contractual write-off
rate is the actual amount of loss experienced after the realisation of collateral and receipt of recoveries.
A roll rate methodology is more commonly adopted for unsecured portfolios when there are sufficient volumes of
empirical data to develop robust statistical models. In certain circumstances mortgage portfolios have a statistically
significant number of defaults and losses available, enabling reliable roll rates to be generated. In these cases a roll
rate methodology is applied until the point at which the loans are individually identified and assessed as impaired,
and the average loss rate for each delinquency bucket is adjusted to reflect the average loss expected following
realisation of security and receipt of recoveries. The average loss expected is derived from average historical
collateral realisation values.
The nature of the collective allowance assessment prevents individual collateral values or loan-to-value (‘LTV’)
ratios from being included within the calculation. However, the loss rates used in the collective assessment are
adjusted for the collateral realisation experiences which will vary depending on the LTV composition of the
portfolio. For example mortgage portfolios under a historical loss rate methodology with lower LTV ratios will
typically experience lower loss history and consequently a lower net contractual write-off rate.
For wholesale collectively assessed loans historical loss methodologies are applied to measure loss event
impairments which have been incurred but not reported. Loss rates are derived from the observed contractual write-
off net of recoveries over a defined period, typically 60 months. The net contractual write-off rate is the actual
amount of loss experienced after realisation of collateral and receipt of recoveries. These historical loss rates are
adjusted by an economic factor which adjusts the historical averages to better represent current economic conditions
affecting the portfolio. In order to reflect the likelihood of a loss event not being identified and assessed an
emergence period assumption is applied. This reflects the period between a loss occurring and its identification. The
emergence period is estimated by local management for each identified portfolio. The factors that may influence this
estimation include economic and market conditions, customer behaviour, portfolio management information, credit
management techniques and collection and recovery experiences in the market. A fixed range for the period between
a loss occurring and its identification is not defined across the Group and as it is assessed empirically on a periodic
basis, it may vary over time as these factors change. Given that credit management policies require all customers to
be reviewed at least annually, we expect this estimated period would be at most 12 months.
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Write-off of loans and advances
For details of our policy on the write-off of loans and advances, see Note 2g on the Financial Statements.
In HSBC Finance, the carrying amounts of residential mortgage and second lien loans in excess of net realisable
value are written off at or before the time foreclosure is completed or settlement is reached with the borrower. If there
is no reasonable expectation of recovery, and foreclosure is pursued, the loan is normally written off no later than the
end of the month in which the loan becomes 180 days contractually past due.
Unsecured personal facilities, including credit cards, are generally written off at between 150 and 210 days past due,
the standard period being the end of the month in which the account becomes 180 days contractually delinquent.
Write-off periods may be extended, generally to no more than 360 days past due but, in very exceptional
circumstances, exceeding that figure in a few countries where local regulation or legislation constrain earlier
write-off, or where the realisation of collateral for secured real estate lending extends to this time.
In the event of bankruptcy or analogous proceedings, write-off may occur earlier than at the periods stated above.
Collections procedures may continue after write-off.
Concentration of exposure
(Audited)
Concentrations of credit risk arise when a number of counterparties or exposures have comparable economic
characteristics, or such counterparties are engaged in similar activities or operate in the same geographical areas or
industry sectors, so that their collective ability to meet contractual obligations is uniformly affected by changes in
economic, political or other conditions. We use a number of controls and measures to minimise undue concentration
of exposure in our portfolios across industry, country and global businesses. These include portfolio and counterparty
limits, approval and review controls, and stress testing.
Wrong-way risk is an aggravated form of concentration risk and arises when there is a strong correlation between the
counterparty’s probability of default and the mark-to-market value of the underlying transaction. 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.
Cross-border exposures
We assess the vulnerability of countries to foreign currency payment restrictions, including economic and political
factors, when considering impairment allowances on cross-border exposures. Impairment allowances are assessed in
respect of all qualifying exposures within vulnerable countries unless these exposures and the inherent risks are:
performing, trade-related and of less than one year’s maturity;
•
• mitigated by acceptable security cover which is, other than in exceptional cases, held outside the country
•
•
concerned;
in the form of securities held for trading purposes for which a liquid and active market exists, and which are
measured at fair value daily; and
performing facilities with a principal (excluding security) of US$1m or below and/or with maturity dates shorter
than three months.
Nature of HSBC’s securitisation and other structured exposures
(Audited)
Mortgage-backed securities (‘MBS’s) are securities that represent interests in groups of mortgages and provide
investors with the right to receive cash from future mortgage payments (interest and/or principal). An MBS which
references mortgages with different risk profiles is classified according to the highest risk class.
Collateralised debt obligations (‘CDO’s) are securities backed by a pool of bonds, loans or other assets such as asset-
backed securities (‘ABS’s). CDOs may include exposure to sub-prime or Alt-A mortgage assets where these are part
of the underlying assets or reference assets. As there is often uncertainty surrounding the precise nature of the
underlying collateral supporting CDOs, all CDOs supported by residential mortgage-related assets are classified as
sub-prime. Our holdings of ABSs and CDOs and direct lending positions, and the categories of mortgage collateral
and lending activity, are described overleaf.
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Risk > Appendix – Risk policies and practices > Credit risk / Liquidity and funding
Our exposure to non-residential mortgage-related ABSs and direct lending includes securities with collateral relating
to:
•
•
•
•
commercial property mortgages;
leveraged finance loans;
student loans; and
other assets, such as securities with other receivable-related collateral.
Definition
Classification
Categories of
ABSs and CDOs
Sub-prime
US Home Equity Lines
of Credit (‘HELoC’s)
US Alt-A
Loans to customers who have limited credit histories,
modest incomes or high debt-to-income ratios or have
experienced credit problems caused by occasional
delinquencies, prior charge-offs, bankruptcy or other
credit-related actions.
A form of revolving credit facility provided to
customers, which is supported in the majority of
circumstances by a second lien or lower ranking charge
over residential property.
Lower risk loans than sub-prime, but they share higher
risk characteristics than lending under fully conforming
standard criteria.
US Government agency
and sponsored
enterprises mortgage-
related assets
Securities that are guaranteed by US Government
agencies such as the Government National Mortgage
Association (‘Ginnie Mae’), or by US Government
sponsored entities including the Federal National
Mortgage Association (‘Fannie Mae’) and the Federal
Home Loan Mortgage Corporation (‘Freddie Mac’).
UK non-conforming
mortgages
UK mortgages that do not meet normal lending criteria.
Examples include mortgages where the expected level
of documentation is not provided (such as income with
self-certification), or where poor credit history
increases risk and results in pricing at a higher than
normal lending rate.
For US mortgages, a FICO score of 620 or less has
primarily been used to determine whether a loan is sub-
prime. For non-US mortgages, management judgement
is used.
Holdings of HELoCs are classified as sub-prime.
US credit scores and the completeness of
documentation held (such as proof of income), are
considered when determining whether an Alt-A
classification is appropriate. Non sub-prime mortgages
in the US are classified as Alt-A if they are not eligible
for sale to the major US Government mortgage
agencies or sponsored entities.
Holdings of US Government agency and US
Government sponsored enterprises’ mortgage-related
assets are classified as prime exposures.
UK non-conforming mortgages are treated as sub-
prime exposures.
Other mortgages
Residential mortgages, including prime mortgages, that
do not meet any of the classifications described above.
Prime residential mortgage-related assets are included
in this category.
Impairment methodologies
(Audited)
To identify objective evidence of impairment for available-for-sale ABSs, an industry standard valuation model is
normally applied which uses data with reference to the underlying asset pools and models their projected future cash
flows. The estimated future cash flows of the securities are assessed at the specific financial asset level to determine
whether any of them are unlikely to be recovered as a result of loss events occurring on or before the reporting date.
The principal assumptions and inputs to the models are typically the delinquency status of the underlying loans, the
probability of delinquent loans progressing to default, the prepayment profiles of the underlying assets and the loss
severity in the event of default. However, the models utilise other variables relevant to specific classes of collateral to
forecast future defaults and recovery rates. Management uses externally available data and applies judgement when
determining the appropriate assumptions in respect of these factors. We use a modelling approach which incorporates
historically observed progression rates to default to determine if the decline in aggregate projected cash flows from
the underlying collateral will lead to a shortfall in contractual cash flows. In such cases, the security is considered to
be impaired.
In respect of CDOs, expected future cash flows for the underlying collateral are assessed to determine whether there
is likely to be a shortfall in the contractual cash flows of the CDO.
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When a security benefits from a contract provided by a monoline insurer that insures payments of principal and
interest, the expected recovery on the contract is assessed in determining the total expected credit support available
to the ABS.
Liquidity and funding
(Audited)
The management of liquidity and funding is primarily undertaken locally (by country) in our operating entities in
compliance with the Group’s liquidity and funding risk management framework (the ‘LFRF’), and with practices
and limits set by the GMB through the Risk Management Meeting and approved by the Board. These limits vary
according to the depth and the liquidity of the markets in which the entities operate. Our general policy is that each
defined operating entity should be self-sufficient in funding its own activities. Where transactions exist between
operating entities, they are reflected symmetrically in both entities.
As part of our Asset, Liability and Capital Management (‘ALCM’) structure, we have established ALCOs at Group
level, in the regions and in operating entities. The terms of reference of all ALCOs include the monitoring and
control of liquidity and funding.
The primary responsibility for managing liquidity and funding within the Group’s framework and risk appetite
resides with the local operating entity ALCO. Our most significant operating entities are overseen by regional
ALCOs, Group ALCO and the Risk Management Meeting. The remaining smaller operating entities are overseen
by regional ALCOs, with appropriate escalation of significant issues to Group ALCO and the Risk Management
Meeting.
Operating entities are predominately defined on a country basis to reflect our local management of liquidity and
funding. Typically, an operating entity will be defined as a single legal entity. However, to take account of the
situation where operations in a country are booked across multiple subsidiaries or branches:
•
•
an operating entity may be defined as a wider sub-consolidated group of legal entities if they are incorporated
in the same country, liquidity and funding are freely fungible between the entities and permitted by local
regulation, and the definition reflects how liquidity and funding are managed locally; or
an operating entity may be defined more narrowly as a principal office (branch) of a wider legal entity operating
in multiple countries, reflecting the local country management of liquidity and funding.
The list of entities it directly oversees and the composition of these entities is reviewed and agreed annually by the
Risk Management Meeting.
Primary sources of funding
(Audited)
Customer deposits in the form of current accounts and savings deposits payable on demand or at short notice form
a significant part of our funding, and we place considerable importance on maintaining their stability. For deposits,
stability depends upon maintaining depositor confidence in our capital strength and liquidity, and on competitive and
transparent pricing.
We also access wholesale funding markets by issuing senior secured and unsecured debt securities (publically and
privately) and borrowing from the secured repo markets against high quality collateral, in order to obtain funding for
non-banking subsidiaries that do not accept deposits, to align asset and liability maturities and currencies and to
maintain a presence in local wholesale markets.
The management of funding and liquidity risk
Inherent liquidity risk categorisation
We place our operating entities into one of three categories (low, medium and high) to reflect our assessment of their
inherent liquidity risk, considering political, economic and regulatory factors within the host country and factors
specific to the operating entities themselves, such as the local market, market share and balance sheet strength. The
categorisation involves management judgement and is based on the perceived liquidity risk of an operating entity
relative to other entities in the Group. The categorisation is intended to reflect the possible impact of a liquidity
event, not the probability of an event. The categorisation is part of our risk appetite and is used to determine the
prescribed stress scenario that we require our operating entities to be able to withstand, and to manage to.
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Risk > Appendix – Risk policies and practices > Credit risk / Liquidity and funding
Core deposits
A key assumption of our internal framework is the categorisation of customer deposits into core and non-core based
on our expectation of the behaviour of these deposits during liquidity stress. This characterisation takes into account
the inherent liquidity risk categorisation of the operating entity originating the deposit, the nature of the customer and
the size and pricing of the deposit. No deposit is considered to be core in its entirety unless it is contractually
collateralising a loan. The core deposit base in each operating entity is considered to be a long-term source of funding
and therefore is assumed not to be withdrawn in the liquidity stress scenario that we use to calculate our principal
liquidity risk metrics.
The three filters considered in assessing whether a deposit in any operating entity is core are:
•
•
•
price: any deposit priced significantly above market or benchmark rates is generally treated as entirely non-core;
size: depositors with total funds above certain monetary thresholds are excluded. Thresholds are established by
considering the business line and inherent liquidity risk categorisation; and
line of business: the element of any deposit remaining after the application of the price and size filters is
assessed on the basis of the line of business to which the deposit is associated. The proportion of any customer
deposit that can be considered core under this filter is between 35% and 90%.
Repo transactions and bank deposits cannot be categorised as core deposits.
Advances to core funding ratio
Core customer deposits are an important source of funding to finance lending to customers, and mitigate against
reliance on short-term wholesale funding. Limits are placed on operating entities to restrict their ability to increase
loans and advances to customers without corresponding growth in core customer deposits or long-term debt funding
with a residual maturity beyond one year; this measure is referred to as the ‘advances to core funding’ ratio.
Advances to core funding ratio limits are set by the Risk Management Meeting for the most significant operating
entities, and by regional ALCOs for smaller operating entities, and are monitored by ALCM teams. The ratio
describes current loans and advances to customers as a percentage of the total of core customer deposits and term
funding with a remaining term to maturity in excess of one year. In general, customer loans are assumed to be
renewed and are included in the numerator of the advances to core funding ratio, irrespective of the contractual
maturity date. Reverse repo arrangements are excluded from the advances to core funding ratio.
Stressed coverage ratios
Stressed coverage ratios are derived from stressed cash flow scenario analyses and express the stressed cash inflows
as a percentage of stressed cash outflows over one-month and three-month time horizons.
The stressed cash inflows include:
•
•
inflows (net of assumed haircuts) expected to be generated from the realisation of liquid assets; and
contractual cash inflows from maturing assets that are not already reflected as a utilisation of liquid assets.
In line with the approach adopted for the advances to core funding ratio, customer loans are, in general, assumed not
to generate any cash inflows under stress scenarios and are therefore excluded from the numerator of the stressed
coverage ratios, irrespective of the contractual maturity date.
A stressed coverage ratio of 100% or higher reflects a positive cumulative cash flow under the stress scenario being
monitored. Group operating entities are required to maintain a ratio of 100% or greater out to three months under the
combined market-wide and HSBC-specific stress scenario defined by the inherent liquidity risk categorisation of the
operating entity concerned.
Compliance with operating entity limits is monitored by ALCM teams and reported monthly to the Risk Management
Meeting for the main operating entities and to regional ALCOs for the smaller operating entities.
Stressed scenario analysis
We use a number of standard Group stress scenarios designed to model:
combined market-wide and HSBC-specific liquidity crisis scenarios; and
•
• market-wide liquidity crisis scenarios.
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These scenarios are modelled by all operating entities. The appropriateness of the assumptions for each scenario is
reviewed by ALCM regularly and formally approved by the Risk Management Meeting and the Board annually as
part of the liquidity and funding risk appetite approval process.
Stressed cash outflows are determined by applying a standard set of prescribed stress assumptions to the Group’s
cash flow model. Our framework prescribes the use of two market-wide scenarios and three further combined
market-wide and HSBC-specific stress scenarios of increasing severity. In addition to our standard stress scenarios,
individual operating entities are required to design their own scenarios to reflect specific local market conditions,
products and funding bases.
The three combined market-wide and HSBC-specific scenarios model a more severe scenario than the two market-
wide scenarios. The relevant combined market-wide and HSBC-specific stress scenario that an operating entity
manages to is based upon its inherent liquidity risk categorisation. The key assumptions factored into the three
combined market-wide and HSBC-specific stress scenarios are summarised as follows:
•
•
•
•
•
•
•
•
•
all non-core deposits are deemed to be withdrawn within three months (80% within one month), with the level
of non-core deposits dependent on the operating entity’s inherent liquidity risk categorisation;
the ability to access interbank funding and unsecured term debt markets ceases for the duration of the scenario;
the ability to generate funds from illiquid asset portfolios (securitisation and secured borrowing) is restricted to
25-75% of the lower of issues in the last six months or the expected issues in the next six months. The restriction
is based on current market conditions and is dependent on the operating entity’s inherent liquidity risk
categorisation;
the ability to access repo funding ceases for any asset not classified as liquid under our liquid asset policy for
the duration of the scenario;
drawdowns on committed lending facilities must be consistent with the severity of the market stress being
modelled and dependent on the inherent liquidity risk categorisation of the operating entity;
outflows are triggered by a defined downgrade in long-term ratings. We maintain an on-going assessment of
the appropriate number of notches to reflect;
customer loans are assumed to be renewed at contractual maturity;
interbank loans and reverse repos are assumed to run off contractually; and
assets defined as liquid assets are assumed to be realised in cash ahead of their contractual maturity, after
applying a defined stressed haircut of up to 20%.
Liquid assets of HSBC’s principal operating entities
Stressed scenario analysis and the numerator of the coverage ratio include the assumed cash inflows that would be
generated from the realisation of liquid assets, after applying the appropriate stressed haircut. These assumptions are
made based on management’s expectation of when an asset is deemed to be realisable.
Liquid assets are unencumbered assets that meet the Group’s definition of liquid assets and are either held outright
or as a consequence of a reverse repo transaction with a residual contractual maturity beyond the time horizon of the
stressed coverage ratio being monitored. Any unencumbered asset held as a result of reverse repo transactions with a
contractual maturity within the time horizon of the stressed coverage ratio being monitored is excluded from the
stock of liquid assets and instead reflected as a contractual cash inflow.
Our framework defines the asset classes that can be assessed locally as high quality and realisable within one month
and between one month and three months. Each local ALCO has to be satisfied that any asset which may be treated
as liquid in accordance with the Group’s liquid asset policy will remain liquid under the stress scenario being
managed to.
Inflows from the utilisation of liquid assets within one month can generally only be based on confirmed
withdrawable central bank deposits, gold or the sale or repo of government and quasi-government exposures
generally restricted to those denominated in the sovereign’s domestic currency. High quality ABSs (predominantly
US MBSs) and covered bonds are also included but inflows assumed for these assets are capped.
Inflows after one month are also reflected for high quality non-financial and non-structured corporate bonds and
equities within the most liquid indices.
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Risk > Appendix – Risk policies and practices > Liquidity and funding / Market risk
Internal categorisation
Cash inflow recognised
Asset classes
Level 1
Within one month
Central government
Central bank (including confirmed withdrawable reserves)
Supranationals
Multilateral development banks
Level 2
Within one month but capped
Local and regional government
Public sector entities
Secured covered bonds and pass-through ABSs
Gold
Level 3
From one to three months
Unsecured non-financial entity securities
Equities listed on recognised exchanges and within liquid indices
Any entity owned and controlled by central or local/regional government but not explicitly guaranteed is treated as a
public sector entity.
Any exposure explicitly guaranteed is reflected as an exposure to the ultimate guarantor.
In terms of the criteria used to ensure liquid assets are of a high quality, the Group’s liquid asset policy sets out the
following additional criteria:
1. Central bank and central government exposures denominated in the domestic currency of the related sovereign
and held onshore in the domestic banking system qualify as level 1 liquid assets.
2. Central bank and central government exposures denominated in the domestic currency of the related sovereign
and held offshore must be risk weighted 20% or lower under the Basel standardised risk weighting methodology,
to qualify as level 1 liquid assets.
3. Central bank and central government exposures denominated in a currency other than the currency of the related
sovereign (i.e. foreign currency) must be risk weighted 20% or lower under the Basel standardised risk
weighting methodology and issued in a limited number of major currencies, to qualify as level 1 liquid assets.
The treatment of eurozone countries using the euro as their domestic currency depends on whether the exposures
are held onshore in the domestic banking system or offshore. Central bank and central government exposures held
onshore in the domestic banking system qualify as level 1 liquid assets under criteria 1, but central bank and central
government exposures held offshore are considered to be denominated in a foreign currency and considered under
criteria 3.
4. Local/regional government exposures held onshore and considered by the local regulator to be the same risk as
central government exposures can be considered central government exposures.
5. Supranationals and multilateral development banks must be 0% risk weighted under the Basel standardised risk
weighting methodology, to qualify as level 1 liquid assets.
6. To qualify as a level 2 liquid asset the exposure must be risk weighted 20% or lower under the Basel
standardised risk weighting methodology.
7. To qualify as a level 3 liquid asset an unsecured non-financial corporate debt exposure must satisfy a minimum
internal rating requirement.
Wholesale debt monitoring
Where wholesale debt term markets are accessed to raise funding, ALCO is required to establish cumulative rolling
three-month and 12-month debt maturity limits to ensure no concentration of maturities within these timeframes.
Liquidity behaviouralisation
Liquidity behaviouralisation is applied to reflect our assessment of the expected period for which we are confident
that we will have access to our liabilities, even under a severe liquidity stress scenario, and the expected period for
which we must assume that we will need to fund our assets. Behaviouralisation is applied when the contractual terms
do not reflect the expected behaviour. Liquidity behaviouralisation is reviewed and approved by local ALCO in
compliance with policies set by the Risk Management Meeting. Our approach to liquidity risk management will often
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mean a different approach is applied to assets and liabilities. For example, management may assume a shorter life for
liabilities and a longer-term funding requirement for assets.
Contingent liquidity risk
Operating entities provide customers with committed facilities and committed backstop lines to the conduit vehicles
we sponsor. These facilities increase our funding requirements when customers draw down. The liquidity risk
associated with the potential drawdown on non-cancellable committed facilities is factored into our stressed scenarios
and limits are set for these facilities.
Management of cross-currency liquidity and funding risk
Our liquidity and funding risk framework also considers the ability of each entity to continue to access foreign
exchange markets under stress when a surplus in one currency is used to meet a deficit in another currency, for
example, by the use of the foreign currency swap markets. Where appropriate, operating entities are required to
monitor stressed coverage ratios and advances to core funding ratios for non-local currencies.
HSBC Holdings
(Audited)
HSBC Holdings’ primary sources of cash are dividends received from subsidiaries, interest on and repayment of
intra-group loans and interest earned on its own liquid funds. HSBC Holdings also raises ancillary funds in the debt
capital markets through subordinated and senior debt issuance. Cash is primarily used for the provision of capital to
subsidiaries, interest payments to debt holders and dividend payments to shareholders.
HSBC Holdings is also subject to contingent liquidity risk by virtue of loan and other credit-related commitments and
guarantees and similar contracts issued. Such commitments and guarantees are only issued after due consideration of
HSBC Holdings’ ability to finance the commitments and guarantees and the likelihood of the need arising.
HSBC Holdings actively manages the cash flows from its subsidiaries to optimise the amount of cash held at the
holding company level. The ability of subsidiaries to pay dividends or advance monies to HSBC Holdings depends
on, among other things, their respective regulatory capital requirements, statutory reserves, and financial and
operating performance. The wide range of our activities means that HSBC Holdings is not dependent on a single
source of profits to fund its dividend payments to shareholders.
Market risk
Overview of market risk in global businesses
The diagram below illustrates the main business areas where trading and non-trading market risks reside.
Trading risk
Non-trading risk
Risk
types
– Interest rates
– Foreign exchange and commodities
– Credit spreads
– Equities
– Interest rates
– Credit spreads
– Foreign exchange (structural)
– GB&M
Global
businesses
(including Balance Sheet Management
(‘BSM’))
GB&M
(including
BSM)
GPB
CMB
RBWM
Monitoring and limiting market risk exposures
(Audited)
We employ a range of tools to monitor and limit market risk exposures. These include sensitivity analysis, value at
risk (‘VAR’), stressed VAR and stress testing. While VAR provides the GMB with a measure of the market risk in
the Group, sensitivity analysis and VAR are more commonly utilised for the management of the business units.
Stress testing and stressed VAR complement these measures with potential losses arising from market turmoil.
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Report of the Directors: Operating and Financial Review (continued)
Risk > Appendix – Risk policies and practices > Market risk
Market risk is managed and controlled through limits approved by the GMB for HSBC Holdings and our
various global businesses. These limits are allocated across business lines and to the Group’s legal entities.
The management of market risk is principally undertaken in Global Markets, where 85% of the total value at risk of
HSBC Holdings (excluding Insurance) and almost all trading VAR resides, using risk limits approved by the GMB.
Limits are set for portfolios, products and risk types, with market liquidity being a primary factor in determining the
level of limits set. Group Risk, an independent unit within Group Head Office, is responsible for our 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 Group Risk, and monitoring and reporting these exposures against the prescribed limits on a
daily basis. The risk appetite is governed according to the framework illustrated below.
HSBC Holdings Board
Chairman / CEO
Group Management Board
Risk Management Meeting
Group Traded Risk
Entity Risk
Management Committee
Principal Office Manager
Business / Desk / Trader
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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 Global Markets unit
for management, or to separate books managed under
the supervision of the local ALCO. Our aim is to
ensure that all market risks are consolidated within
operations that have the necessary skills, tools,
management and governance to manage them
professionally. In certain cases where the market risks
cannot be fully transferred, we identify the impact of
varying scenarios on valuations or on net interest
income resulting from any residual risk positions.
Further details on the control and management
process for residual risks are provided on pages 268
to 269.
Sensitivity analysis
(Unaudited)
We use sensitivity measures to monitor the market
risk positions within each risk type, for example, the
present value of a basis point movement in interest
rates for interest rate risk. 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 and stressed value at risk
(Audited)
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. Stressed VAR is primarily used for
Regulatory Capital purposes but is integrated into the risk management process to facilitate efficient capital
management and to highlight possible high-risk positions based on previous market volatility.
Both the VAR and Stressed VAR models we use 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,
(unaudited) potential market movements employed for stressed VAR calculations are based on a continuous one-
year period of stress for the trading portfolio; the choice of period (March 2008 to February 2009) is based on
the assessment at the Group level of the most volatile period in recent history; and
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• VAR measures are calculated to a 99% confidence level and use a one-day holding period scaled to 10 days,
whereas stressed VAR uses a 10-day holding period.
The nature of the VAR models means that an increase in observed market volatility will lead to an increase in VAR
without any changes in the underlying positions.
We routinely validate the accuracy of our VAR models by back-testing the actual daily profit and loss results,
adjusted to remove non-modelled items such as fees and commissions, against the corresponding VAR numbers.
We expect on average to see losses in excess of VAR 1% of the time over a one-year period.
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 one-day holding period assumes that all positions can be liquidated or the risks offset in one day.
This may not fully reflect the market risk arising at times of severe illiquidity, when a one-day holding period
may be insufficient to liquidate or hedge all positions fully;
the use of a 99% confidence level does not take into account losses that might occur beyond this level of
confidence;
• VAR is calculated on the basis of exposures outstanding at the close of business and therefore does not
necessarily reflect intra-day exposures; and
• VAR is unlikely to reflect loss potential on exposures that only arise under significant market moves.
Our VAR model is designed to capture significant basis risks such as CDS vs bond, asset swap spreads and cross-
currency basis. Other basis risks which are not completely covered in VAR, such as the Libor tenor basis, are
complemented by our risk-not-in-VAR calculations and are integrated into our capital framework. Stress testing is
also used as one of the market risk tools for managing basis risks.
Stress testing
(Audited)
In recognition of the limitations of VAR, we augment it with stress testing to evaluate the potential impact on
portfolio values of more extreme, although plausible, events or movements in a set of financial variables.
Stress testing is implemented at the legal entity, regional and the overall Group levels. A standard set of scenarios is
utilised consistently across all regions within the Group. Scenarios are tailored in order 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.
The process is governed by the Stress Testing Review Group forum which, in conjunction with regional risk
management, determines the scenarios to be applied at portfolio and consolidated levels, as follows:
•
•
•
•
single risk factor stress scenarios that are unlikely to be captured within the VAR models, such as the break of a
currency peg;
technical scenarios consider the largest move in each risk factor without consideration of any underlying market
correlation;
hypothetical scenarios consider potential macroeconomic events, for example, the slowdown in mainland China
and the potential effects of a sovereign debt default, including its wider contagion effects; and
historical scenarios incorporate historical observations of market movements during previous periods of stress
which would not be captured within VAR.
Stress testing results are submitted to the GMB and Risk Management Committee (‘RMC’) meetings in order to
provide senior management with an assessment of the financial effect such events would have.
In addition, the reverse stress test is based upon the premise that there is a fixed loss. The stress test 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 (see page 268),
provide management with insights regarding the ‘tail risk’ beyond VAR. HSBC appetite for tail risk is limited.
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Report of the Directors: Operating and Financial Review (continued)
Risk > Appendix – Risk policies and practices > Market risk
Trading portfolios
(Audited)
Our control of market risk in the trading portfolios is based on a policy of restricting individual operations to trading
within a list of permissible instruments authorised for each site by Group Risk, of enforcing new product approval
procedures, and of restricting trading in the more complex derivative products only to offices with appropriate levels
of product expertise and robust control systems.
Gap risk
Certain transactions are structured to render the risk to HSBC negligible under a wide range of market conditions or
events, however, there exists a remote possibility that a gap event could lead to loss. A gap event could arise from a
significant change in market price with no accompanying trading opportunity, with the result that the threshold is
breached beyond which the risk profile changes from no risk to full exposure to the underlying structure. Such
movements may occur, for example, when, in reaction to an adverse event or unexpected news announcement, the
market for a specific investment becomes illiquid, making hedging impossible.
Given their characteristics, these transactions make little or no contribution to VAR or to traditional market risk
sensitivity measures. We capture their risks within our stress testing scenarios and monitor gap risk on an ongoing
basis. We regularly consider the probability of gap loss, and fair value adjustments are booked against this risk where
significant.
Gap risk derived from certain transactions in legacy portfolios continued to be managed down during 2012. The
residual exposure is immaterial. We did not incur any material gap loss in 2012.
ABS/MBS exposures
The ABS/MBS exposures within the trading portfolios are managed within sensitivity and VAR limits as described
on page 220, and are included within the stress testing scenarios described above.
Non-trading portfolios
(Audited)
The principal objective of market risk management of non-trading portfolios is to optimise net interest income.
Interest rate risk in non-trading portfolios arises principally from mismatches between the future yield on assets
and their funding cost, as a result of interest rate changes. Analysis of this risk is complicated by having to make
assumptions on embedded optionality within certain product areas such as the incidence of mortgage prepayments,
and from behavioural assumptions regarding the economic duration of liabilities which are contractually repayable
on demand such as current accounts.
Our control of market risk in the non-trading portfolios is based on transferring the risks to the books managed by
Global Markets or the local ALCO. The net exposure is typically managed through the use of interest rate swaps
within agreed limits. The VAR for these portfolios is included within the Group VAR.
Credit spread risk for available-for-sale debt instruments
The risk associated with movements in credit spreads is primarily managed through sensitivity limits, stress testing
and VAR. The VAR shows the effect on income from a one-day movement in credit spreads over a two-year period,
calculated to a 99% confidence interval.
Available for sale equity securities
Potential new commitments are subject to risk appraisal to ensure that industry and geographical concentrations
remain within acceptable levels for the portfolio. Regular reviews are performed to substantiate the valuation of the
investments within the portfolio and investments held to facilitate ongoing business, such as holdings in government-
sponsored enterprises and local stock exchanges.
Structural foreign exchange exposures
(Unaudited)
Structural foreign exchange exposures represent net investments in subsidiaries, branches and associates, the
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functional currencies of which are currencies other than the US dollar. An entity’s functional currency is that of
the primary economic environment in which the entity operates.
Exchange differences on structural exposures are recognised in other comprehensive income. We use the US dollar
as our presentation currency in our consolidated financial statements because the US dollar and currencies linked
to it form the major currency bloc in which we transact and fund our business. Our consolidated balance sheet is,
therefore, affected by exchange differences between the US dollar and all the non-US dollar functional currencies
of underlying subsidiaries.
We hedge structural foreign exchange exposures only in limited circumstances. Our structural foreign exchange
exposures are managed with the primary objective of ensuring, where practical, that our consolidated capital ratios
and the capital ratios of individual banking subsidiaries are largely protected from the effect of changes in exchange
rates. This is usually achieved by ensuring that, for each subsidiary bank, the ratio of structural exposures in a given
currency to risk-weighted assets denominated in that currency is broadly equal to the capital ratio of the subsidiary in
question.
We may also transact hedges where a currency in which we have structural exposures is considered likely to revalue
adversely, and it is possible in practice to transact a hedge. Any hedging is undertaken using forward foreign
exchange contracts which are accounted for under IFRSs as hedges of a net investment in a foreign operation, or by
financing with borrowings in the same currencies as the functional currencies involved.
Sensitivity of net interest income
(Unaudited)
A principal part of our management of market risk in non-trading portfolios is to monitor the sensitivity of projected
net interest income under varying interest rate scenarios (simulation modelling). We aim, through our management
of market risk in non-trading portfolios, to mitigate the effect of prospective interest rate movements which could
reduce future net interest income, while balancing the cost of such hedging activities on the current net revenue
stream.
Entities apply a combination of scenarios and assumptions relevant to their local businesses, and standard scenarios
which are required throughout HSBC. The latter are consolidated to illustrate the combined pro forma effect on our
consolidated net interest income.
Projected net interest income sensitivity figures represent the effect of the pro forma movements in net interest
income based on the projected yield curve scenarios and the Group’s current interest rate risk profile. This effect,
however, does not incorporate actions which would probably be taken by Balance Sheet Management or in the
business units to mitigate the effect of interest rate risk. In reality, Balance Sheet Management seeks proactively to
change the interest rate risk profile to minimise losses and optimise net revenues. The net interest income sensitivity
calculations assume that interest rates of all maturities move by the same amount in the up shock scenario. Rates are
not assumed to become negative in the down shock scenario which may, in certain currencies, effectively result in
non-parallel shock. In addition, the net interest income sensitivity calculations take account of the effect on net
interest income of anticipated differences in changes between interbank interest rates and interest rates over which
the entity has discretion in terms of the timing and extent of rate changes.
Defined benefit pension schemes
(Audited)
Market risk arises within our defined benefit pension schemes to the extent that the obligations of the schemes are
not fully matched by assets with determinable cash flows. Pension scheme obligations fluctuate with changes in
long-term interest rates, inflation, salary levels and the longevity of scheme members. Pension scheme assets include
equities and debt securities, the cash flows of which change as equity prices and interest rates (and credit risk) vary.
There is a risk that market movements in equity prices and interest rates could result in asset values which, taken
together with regular ongoing contributions, are insufficient over time to cover the level of projected obligations
and these, in turn, could increase with a rise in inflation and members living longer. Management, together with
the trustees who act on behalf of the pension scheme beneficiaries, assess these risks using reports prepared by
independent external actuaries, take action and, where appropriate, adjust investment strategies and contribution
levels accordingly.
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Report of the Directors: Operating and Financial Review (continued)
Risk > Appendix – Risk policies and practices > Market risk / Operational risk
HSBC Holdings
(Audited)
As a financial services holding company, HSBC Holdings has limited market risk activity. Its activities
predominantly involve maintaining sufficient capital resources to support the Group’s diverse activities; allocating
these capital resources across our businesses; earning dividend and interest income on its investments in our
businesses; providing dividend payments to HSBC Holdings’ equity shareholders and interest payments to providers
of debt capital; and maintaining a supply of short-term cash resources. It does not take proprietary trading positions.
The main market risks to which HSBC Holdings is exposed are interest rate risk and foreign currency risk. Exposure
to these risks arises from short-term cash balances, funding positions held, loans to subsidiaries, investments in long-
term financial assets and financial liabilities including debt capital issued. The objective of HSBC Holdings’ market
risk management strategy is to reduce exposure to these risks and minimise volatility in economic income, cash flows
and distributable reserves. Market risk for HSBC Holdings is monitored by HSBC Holdings ALCO, which reviews
foreign exchange VAR, repricing gap and net interest income and EVE sensitivities on a monthly basis.
HSBC Holdings has entered into a number of cross-currency swaps to manage the market risk arising on certain
long-term debt capital issues for which hedge accounting has not been applied. Changes in the market values of these
swaps are recognised directly in the income statement. HSBC Holdings expects that these swaps will be held to final
maturity with the accumulated changes in market value consequently trending to zero.
Certain loans to subsidiaries of a capital nature that are not denominated in the functional currency of either the
provider or the recipient are accounted for as financial assets. Changes in the carrying amount of these assets due to
exchange differences are taken directly to the income statement. These loans, and the associated foreign exchange
exposures, are eliminated on a Group consolidated basis.
Operational risk
(Unaudited)
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, as defined by the GMB.
Operational risk is organised as a specific risk discipline within Group Risk, and a formal governance structure
provides oversight over its management. The Group Operational Risk function reports to the Group Chief Risk
Officer and supports the Global Operational Risk and Control Committee. It is responsible for establishing and
maintaining the operational risk management framework (‘ORMF’), monitoring the level of operational losses and
the effectiveness of the control environment. It is also responsible for operational risk reporting at Group level,
including the preparation of reports for consideration by the Risk Management Meeting and Group Risk Committee.
The Global Operational Risk and Control Committee meets at least quarterly to discuss key risk issues and review
the effective implementation of the ORMF.
The ORMF defines minimum standards and processes and the governance structure for the management of
operational risk and internal control in our geographical regions, global businesses and global functions. The ORMF
has been codified in a high level standards manual supplemented with detailed policies, which describe our approach
to identifying, assessing, monitoring and controlling operational risk and give guidance on mitigating action to be
taken when weaknesses are identified.
Business managers throughout the 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 centralised database is used to record the results of the operational risk management process. Operational risk and
control self-assessments are input and maintained by business units. Business and functional management and
Business Risk and Control Managers monitor the progress of documented action plans to address shortcomings. To
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 US$10,000, and to aggregate all other
operational risk losses under US$10,000. Losses are entered into the operational risk system and are reported to the
Group Operational Risk function quarterly.
For further details, see the Pillar 3 Disclosures 2012 report, page 61.
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Compliance risk
(Unaudited)
Compliance risk falls within the definition of operational risk. All Group companies are required to observe the
letter and spirit of all relevant laws, codes, rules, regulations and standards of good market practice. These rules,
regulations, other standards and Group policies include those relating to anti-money laundering, anti-bribery and
corruption, conduct of business, counter-terrorist financing and sanctions compliance.
The Global Compliance Function is a control function, working as part of our Global Risk Function. It is responsible
for resourcing decisions, performance reviews, objectives, strategy, budget and accountability within the Compliance
Function and is empowered to set standards and has the authority to ensure those standards are met. The Group’s
Compliance Function is currently being reorganised under a Head of Group Financial Crime Compliance and a
Global Head of Regulatory Compliance, each of whom reports to the Group Chief Risk Officer. There are
compliance teams in all of the countries where we operate and in all global businesses lines. These compliance teams
are principally overseen by Regional Compliance Officers located in Europe, the US, Canada, Latin America, the
Middle East and North Africa and Asia-Pacific and each business line is supported by a Global Business Compliance
Officer. There is an Assurance team within Compliance that reviews the effectiveness of the Regional and Global
Business Compliance Officers.
Global Compliance policies and procedures require the prompt identification and escalation to Group Compliance
of all actual or suspected breaches of any law, rule, regulation, policy or other relevant requirement. These escalation
procedures are supplemented by a requirement for the submission of compliance certificates at the half-year and
year-end by all Group companies detailing any known breaches as above. The contents of these escalation and
certification processes are used for reporting to the Risk Management Meeting, the Group Risk Committee and the
Board and disclosure in the Annual Report and Accounts and Interim Report, if appropriate.
Legal risk
(Unaudited)
Each operating company is required to have processes and procedures in place to manage legal risk that conform to
Group standards.
Legal risk falls within the definition of operational risk and includes:
•
contractual risk, which is the risk that the rights and/or obligations of an HSBC company within a contractual
relationship are defective;
•
•
•
dispute risk, which is made up of the risks that an HSBC company is subject to when it is involved in or
managing a potential or actual dispute;
legislative risk, which is the risk that an HSBC company fails to adhere to the laws of the jurisdictions in which
it operates; and
non-contractual rights risk, which is the risk that an HSBC company’s assets are not properly owned or are
infringed by others, or an HSBC company infringes another party’s rights.
We have a global legal function to assist management in controlling legal risk. There are legal departments in 58 of
the countries in which we operate. There are also regional legal functions in each of Europe, North America, Latin
America, the Middle East and North Africa and Asia-Pacific headed by Regional General Counsels as well as
General Counsel responsible for each of the global businesses.
Global security and fraud risk
(Unaudited)
Security and fraud risk issues are managed at Group level by Global Security and Fraud Risk. This unit, which
has responsibility for physical risk, fraud, information and contingency risk, and geopolitical risk and business
intelligence is fully integrated within the central Group Risk function. This enables management to identify and
mitigate the permutations of these and other non-financial risks to its business lines across the jurisdictions in which
we operate.
The Fraud Risk function is responsible for ensuring that effective protection measures are in place against all
forms of fraudulent activity, whether initiated internally or externally, and is available to support any part of the
business. To achieve that and to attain the level of integration needed to face the threat, the management of all types
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Report of the Directors: Operating and Financial Review (continued)
Risk > Appendix – Risk policies and practices > Operational risk / Risk management of insurance operations
of fraud (e.g. card fraud, non-card fraud and internal fraud, including investigations), is established within one
management structure and is part of the Global Risk function.
We use technology extensively to prevent and detect fraud. For example, customers’ credit and debit card spending is
monitored continuously and suspicious transactions are highlighted for verification, internet banking sessions are
reviewed and transactions monitored in a similar way and all new account applications are screened for fraud. We
have a fraud systems strategy which is designed to provide minimum standards and allow easier sharing of best
practices to detect fraud and minimise false alerts.
We have developed a holistic and effective anti-fraud strategy comprising fraud prevention policies and practices, the
implementation of strong internal controls, an investigations response team and liaison with law enforcement where
appropriate.
The Contingency Risk function is responsible for ensuring that in any circumstances where our employees,
customers or buildings are exposed to a disaster or other catastrophic event, normal business operations can be
restored promptly.
Within this wider risk, Business Continuity Management covers the pre-planning for the recovery, seeking to
minimise the adverse effects of major business disruption, either globally, regionally or within country, against a
range of actual or emerging risks. The pre-planning concentrates on the protection of customer services, our staff,
revenue generation and the integrity of data and documents.
Each business has its own recovery plan, which is developed following the completion of a Business Impact
Analysis. This determines how much time the business could sustain an outage before the level of losses becomes
unacceptable, i.e. its criticality. These plans are reviewed and tested every year. The planning is undertaken against
Group policy and standards and each business confirms in an annual compliance certificate that all have been met.
Should there be exceptions, these are raised and their short-term resolution is overseen by Group and regional
business continuity teams.
It is important that plans are dynamic and meet all risks, particularly those of an emerging nature such as possible
pandemics and the eurozone crisis. The operational risk framework is used to measure our resilience to these risks,
and is confirmed to Group and regional risk committees.
Resilience is managed through various risk mitigation measures. These include agreeing with IT acceptable recovery
times of systems, ensuring our critical buildings have the correct infrastructure to enable ongoing operations,
requiring critical vendors to have their own recovery plans and arranging with Group insurance appropriate cover
for business interruption costs.
Systems risk
(Unaudited)
Systems risk is the risk of failure or other deficiency in the automated platforms that support the Group’s daily
execution (application systems) and the systems infrastructure on which they reside (data centres, networks and
distributed computers).
The management of systems risk is overseen globally by the HSBC Technology and Services (‘HTS’) organisation.
Oversight is provided through monthly risk management committee meetings that provide a comprehensive overview
of existing and emerging top risks.
HTS line management manages the control environment over systems risks using Risk and Control Assessments and
Top Risk Analysis. Key risk indicators are used to assure a consistent basis of risk evaluation across geographic and
line of business boundaries.
Business critical services have been identified through a central, global oversight body. Quantitative scorecards,
called Risk Appetite Statements, have been established for each of these services.
Vendor risk management
(Unaudited)
Our vendor risk management (‘VRM’) is a global framework for managing risk with third party vendors, especially
where we are reliant on outsourced agreements to provide critical services to our customers. VRM contains a
rigorous process to identify material contracts and their key risks and ensure controls are in place to manage and
mitigate these risks.
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Fiduciary risk
(Unaudited)
Business activities in which fiduciary risk is inherent should only be undertaken within designated lines of business.
Fiduciary risk is managed within the designated businesses via a comprehensive policy framework and monitoring of
key indicators. The Group’s principal fiduciary businesses (‘designated businesses’) are:
• HSBC Securities Services, where it is exposed to fiduciary risk via its Securities Services and Corporate Trust
activities;
• HSBC Asset Management, which is exposed to fiduciary risks via its investment activities on behalf of clients;
• HSBC Private Banking, which is exposed to fiduciary risks via its Private Wealth Services division and
discretionary investment management; and
• HSBC Insurance, which is exposed to fiduciary risks via the investment management activities it undertakes
when providing insurance products and services.
The Group’s requirements for the management of fiduciary risk are laid down in the Fiduciary Functional Instruction
Manual (‘Fiduciary FIM’), which is owned by Group Operational Risk. No business other than the designated
businesses may undertake fiduciary activities without notifying Global Operational Risk and receiving specific
dispensations from the relevant Fiduciary FIM requirements.
Other policies around the provision of advice, including investment advice and corporate advisory, and the
management of potential conflicts of interest, also mitigate our fiduciary risks.
Risk management of insurance operations
Overview of insurance products
(Audited)
The main contracts we manufacture are listed below:
Life insurance business
•
•
•
•
•
•
•
•
life insurance contracts with discretionary participation features (‘DPF’);
credit life insurance business;
annuities;
term assurance and critical illness policies;
linked life insurance;
investment contracts with DPF;
unit-linked investment contracts; and
other investment contracts (including pension contracts written in Hong Kong).
Non-life insurance business
Non-life insurance contracts include motor, fire and other damage to property, accident and health, repayment
protection and commercial insurance.
Nature and extent of risks
(Audited)
The majority of the risks in our Insurance business derive from manufacturing activities and can be categorised
between insurance risk and financial risks; financial risks include market risk, credit risk and liquidity risk.
Operational and sustainability risks are also present and are covered by the Group’s overall respective risk
management processes.
The following sections describe how insurance risk and financial risks are managed. The assets of insurance
manufacturing subsidiaries are included within the consolidated risk disclosures on pages 123 to 251, although
separate disclosures in respect of insurance manufacturing subsidiaries are provided in the ‘Risk management of
insurance operations’ section. The consolidated liquidity risk and market risk disclosures focus on banking entities
and exclude insurance operations. Disclosures specific to the insurance manufacturing subsidiaries are provided in
the ‘Risk management of insurance operations’ section on pages 232 to 245.
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Risk > Appendix – Risk policies and practices > Risk management of insurance operations
Insurance manufacturers set their own control procedures in addition to complying with guidelines issued by
the Group Insurance Head Office. The control framework for monitoring risk includes the Group Insurance Risk
Management Committee, which oversees the status of the significant risk categories in the insurance operations. Five
sub-committees of this Committee focus on products and pricing, market and liquidity risk, credit risk, operational
risk and insurance risk, respectively. The Group Insurance Risk Management Committee monitors the risk profile
of the insurance operations against a risk appetite for insurance business agreed by the GMB. Any issues requiring
escalation from the Group Insurance Risk Management Committee would be reported to the RBWM Risk
Management Committee.
In addition, local ALCOs and Risk Management Committees monitor certain risk exposures, mainly for life business
where the duration and cash flow matching of insurance assets and liabilities are reviewed.
All insurance products, whether manufactured internally or by a third party, are subjected to a product approval
process prior to introduction. Approval by Group Insurance Head Office may be required depending on the type of
product and its risk profile. The approval process is formalised through the Product and Pricing Committee, which
comprises the heads of the relevant risk functions within insurance.
Insurance risk
(Audited)
Insurance risk is the risk, other than financial risk, of loss transferred from the holder of the insurance contract to
the issuer (HSBC). The principal risk we face in manufacturing insurance contracts is that, over time, the cost of
acquiring and administering a contract, claims and benefits may exceed the aggregate amount of premiums received
and investment income.
The cost of claims and benefits can be influenced by many factors, including mortality and morbidity experience,
lapse and surrender rates and, if the policy has a savings element, the performance of the assets held to support the
liabilities.
Life and non-life business insurance risks are controlled by high-level policies and procedures set both centrally and
locally, taking into account where appropriate local market conditions and regulatory requirements. Formal
underwriting, reinsurance and claims-handling procedures designed to ensure compliance with regulations are
applied, supplemented with stress testing.
As well as exercising underwriting controls, we use reinsurance as a means of mitigating exposure to insurance risk.
Where we manage our exposure to insurance risk through the use of third-party reinsurers, the associated revenue
and manufacturing profit is ceded to the reinsurers. Although reinsurance provides a means of managing insurance
risk, such contracts expose us to credit risk, the risk of default by the reinsurer.
The principal drivers of our insurance risk are described below. The liabilities for long-term contracts are set by
reference to a range of assumptions around these drivers. These typically reflect the issuers’ own experiences. The
type and quantum of insurance risk arising from life insurance depends on the type of business, and varies
considerably.
•
• mortality and morbidity: the main contracts which generate exposure to these risks are term assurance, whole life
products, critical illness and income protection contracts and annuities. The risks are monitored on a regular
basis, and are primarily mitigated by underwriting controls and reinsurance and by retaining the ability in certain
cases to amend premiums in the light of experience;
lapses and surrenders: the risks associated with this are generally mitigated by product design, the application
of surrender charges and management actions, for example, managing the level of bonus payments to
policyholders. A detailed persistency analysis at a product level is carried out at least on an annual basis; and
expense risk is mitigated by pricing, for example, retaining the ability in certain cases to amend premiums
and/or policyholder charges based on experience, and cost management discipline.
•
Liabilities are affected by changes in assumptions (see ‘Sensitivity analysis’ on page 245).
The main risks associated with non-life business are:
•
•
underwriting: the risk that premiums are not appropriate for the cover provided; and
claims experience: the risk that claims exceed expectations.
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We manage these risks through pricing (for example, imposing restrictions and deductibles in the policy terms and
conditions), product design, risk selection, claims handling and reinsurance policy. The majority of our non-life
insurance contracts are renewable annually, providing added flexibility to the underwriting terms and conditions.
Financial risks
(Audited)
Our Insurance businesses are exposed to a range of financial risks, including market risk, credit risk and liquidity
risk. Market risk includes interest rate, equity and foreign exchange risks. The nature and management of these risks
is described below.
Manufacturing subsidiaries are exposed to financial risks when, for example, the proceeds from financial assets
are not sufficient to fund the obligations arising from insurance and investment contracts. In many jurisdictions, local
regulatory requirements prescribe the type, quality and concentration of assets that these subsidiaries must maintain
to meet insurance liabilities. These requirements complement Group-wide policies.
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Market risk
(Audited)
Description of market risk
The main features of products manufactured by our insurance manufacturing subsidiaries which generate market risk,
and the market risk to which these features expose the subsidiaries, are discussed below.
Interest rate risk arises to the extent that yields on the assets are lower than the investment returns implied by the
guarantees payable to policyholders by insurance manufacturing subsidiaries. When the asset yields are below
guaranteed yields, products may be discontinued, repriced or restructured. A list of the different types of guarantees
within our insurance contracts is outlined below.
Categories of guaranteed benefits
• annuities in payment;
• deferred/immediate annuities: these consist of two phases – the savings and investing phase and the retirement income phase;
• annual return: the annual return is guaranteed to be no lower than a specified rate. This may be the return credited to the policyholder
every year, or the average annual return credited to the policyholder over the life of the policy, which may occur on the maturity date or
the surrender date of the contract; and
• capital: policyholders are guaranteed to receive no less than the premiums paid plus declared bonuses less expenses.
The proceeds from insurance and investment products with DPF are primarily invested in bonds with a proportion
allocated to other asset classes in order to provide customers with the potential for enhanced returns. Subsidiaries
with portfolios of such products are exposed to the risk of falls in market prices which cannot be fully reflected in
the discretionary bonuses. An increase in market volatility could also result in an increase in the value of the
guarantee to the policyholder.
Long-term insurance and investment products typically permit the policyholder to surrender the policy or let it lapse
at any time. When the surrender value is not linked to the value realised from the sale of the associated supporting
assets, the subsidiary is exposed to market risk. In particular, when customers seek to surrender their policies when
asset values are falling, assets may have to be sold at a loss to fund redemptions.
A subsidiary holding a portfolio of long-term insurance and investment products, especially with DPF, may attempt
to reduce exposure to its local market by investing in assets in countries other than that in which it is based. These
assets may be denominated in currencies other than the subsidiary’s local currency. Where the foreign exchange
exposure associated with these assets is not hedged, for example because it is not cost effective to do so, this exposes
the subsidiary to the risk of its local currency strengthening against the currency of the related assets.
For unit-linked contracts, market risk is substantially borne by the policyholder, but market risk exposure typically
remains as fees earned for management are related to the market value of the linked assets.
Asset and liability matching
It is not always possible to match asset and liability durations, partly because there is uncertainty over policyholder
behaviour, which introduces uncertainty over the receipt of all future premiums and the timing of claims, and partly
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Risk > Appendix – Risk policies and practices > Risk management of insurance operations
because the forecast payment dates of liabilities may exceed the duration of the longest dated investments available.
We use models to assess the effect of a range of future scenarios on the values of financial assets and associated
liabilities, and ALCOs employ the outcomes in determining how to best structure asset holdings to support liabilities.
The scenarios include stresses applied to factors which affect insurance risk such as mortality and lapse rates. Of
particular importance is assessing the expected pattern of cash inflows against the benefits payable on the underlying
contracts, which can extend for many years.
Our current portfolio of assets includes debt securities issued at a time when yields were higher than those observed
in the current market. As a result, yields on extant holdings of debt securities exceed those available on current
issues. We reduced short-term bonus rates paid to policyholders on certain participating contracts to manage the
immediate strain on the business. Should interest rates and yield curves remain low further reductions may be
necessary.
How market risk is managed
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 some or all of the techniques listed below, depending on the nature of the contracts they write.
Techniques for managing market risk
• for products with 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;
• structuring asset portfolios to support projected liability cash flows;
• using derivatives, to a limited extent, 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;
• including features designed to mitigate market risk in new products, such as charging surrender penalties to recoup losses incurred when
policyholders surrender their policies;
• exiting, to the extent possible, investment portfolios whose risk is considered unacceptable; and
• repricing of premiums charged to policyholders.
In the product approval process, the risks embedded in new products are identified and assessed. When, for example,
options and guarantees are embedded in new products, the due diligence process ensures that complete and
appropriate risk management procedures are in place. For all but the simplest of guaranteed benefits the assessment is
undertaken by Group Insurance Head Office. Management reviews certain exposures more frequently when markets
are more volatile to ensure that any matters arising are dealt with in a timely fashion.
How the exposure to market risk is measured
Our insurance manufacturing subsidiaries monitor exposures against mandated limits regularly and report them to
Group Insurance Head Office. Exposures are aggregated and reported on a quarterly basis to senior risk management
forums in the Group, including the Group Insurance Market and Liquidity Risk Committee, Group Insurance Risk
Management Committee and the Group Stress Test Review Group.
In addition, large insurance manufacturing subsidiaries perform a high-level monthly assessment of market risk
exposure against risk appetite. This is submitted to Group Insurance Head Office and a global assessment presented
to the RBWM RMC.
Standard measures for quantifying market risks
• for interest rate risk, the sensitivities of the net present values of asset and expected liability cash flows, in total and by currency, to a one
basis point parallel shift in the discount curves used to calculate the net present values;
• for equity price risk, the total market value of equity holdings and the market value of equity holdings by region and country; and
• for foreign exchange risk, the total net short foreign exchange position and the net foreign exchange positions by currency.
The standard measures are relatively straightforward to calculate and aggregate, but they have limitations. The most
significant one is that a parallel shift in yield curves of one basis point does not capture the non-linear relationships
between the values of certain assets and liabilities and interest rates. Non-linearity arises, for example, from
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investment guarantees and product features which enable policyholders to surrender their policies. We bear the
shortfall if the yields on investments held to support contracts with guaranteed benefits are less than the investment
returns implied by the guaranteed benefits.
We recognise these limitations and augment our standard measures with stress tests which examine the effect of
a range of market rate scenarios on the aggregate annual profits and total equity of our insurance manufacturing
subsidiaries, after taking into consideration tax and accounting treatments where material and relevant. The results
of these tests are reported to Group Insurance Head Office and risk committees every quarter.
See also ‘Sensitivity of HSBC’s insurance subsidiaries to market risk factors’ on page 240) which indicates the
sensitivity of insurance manufacturers profit and total equity to market risk factors.
Credit risk
(Audited)
Description of credit risk
Credit risk arises in two main areas for our insurance manufacturers:
i)
ii)
risk of 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.
How credit risk is managed
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 local insurance manufacturing subsidiaries, and are
aggregated and reported to Group Credit Risk, the Group Insurance Credit Risk Committee and the Group Insurance
Risk Management Committee. Stress testing is performed by Group Insurance Head Office on the investment credit
exposures using credit spread sensitivities and default probabilities. The stresses are reported to the Group Insurance
Credit Risk Meeting.
We use a number of tools to manage and monitor credit risk. These include a Credit Watch Report which contains a
watch-list of investments with current credit concerns and is circulated fortnightly to senior management in Group
Insurance Head Office and the individual Country Chief Risk Officers to identify investments which may be at risk
of future impairment.
Liquidity risk
(Audited)
Description of liquidity risk
It is an inherent characteristic of almost all insurance contracts that there is uncertainty over the amount of claims
liabilities that may arise and the timing of their settlement, and this creates liquidity risk.
There are three aspects to liquidity risk. The first arises in normal market conditions and is referred to as funding
liquidity risk; specifically, the capacity to raise sufficient cash when needed to meet payment obligations. Secondly,
market liquidity risk arises when the size of a particular holding may be so large that a sale cannot be completed
around the market price. Finally, standby liquidity risk refers to the capacity to meet payment terms in abnormal
conditions.
How liquidity risk is managed
Our insurance manufacturing subsidiaries primarily fund cash outflows arising from claim liabilities from the
following sources of cash inflows:
•
•
•
premiums from new business, policy renewals and recurring premium products;
interest and dividends on investments and principal repayments of maturing debt investments;
cash resources; and
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Risk > Appendix – Risk policies and practices > Reputational risk / Pension risk
•
the sale of investments.
They manage liquidity risk by utilising some or all of the following techniques:
• matching cash inflows with expected cash outflows using specific cash flow projections or more general asset
and liability matching techniques such as duration matching;
• maintaining sufficient cash resources;
•
investing in good credit-quality investments with deep and liquid markets to the degree to which they exist;
• monitoring investment concentrations and restricting them where appropriate, for example, by debt issues or
issuers; and
establishing committed contingency borrowing facilities.
•
Each of these techniques contributes to mitigating the three types of liquidity risk described above.
Every quarter, our insurance manufacturing subsidiaries are required to complete and submit liquidity risk reports
to Group Insurance Head Office for collation and review by the Group Insurance Market and Liquidity Risk
Committee. Liquidity risk is assessed in these reports by measuring changes in expected cumulative net cash flows
under a series of stress scenarios designed to determine the effect of reducing expected available liquidity and
accelerating cash outflows. This is achieved, for example, by assuming new business or renewals are lower, and
surrenders or lapses are greater, than expected.
Reputational risk
(Unaudited)
We regularly review our policies and procedures for safeguarding against reputational risk. This is an evolutionary
process which takes account of relevant developments, industry guidance, best practice and societal expectations.
We have always aspired to the highest standards of conduct and, as a matter of routine, take account of reputational
risks to our business. Reputational risks can arise from a wide variety of causes. As a banking group, our good
reputation depends not only upon the way in which we conduct our business, but also by the way in which clients,
to whom we provide financial services, conduct themselves.
Group functions with responsibility for activities that attract reputational risk are represented at the Group
Reputational Risk Policy Committee (‘GRRPC’), which is chaired by the Group Chairman. The primary role of the
GRRPC is to consider areas and activities presenting significant reputational risk and, where appropriate, to make
recommendations to the Global Standards Steering Committee for policy or procedural changes to mitigate such risk.
Reputational Risk Policy Committees, which have been established in each of the Group’s geographical regions, are
required to ensure that reputational risks are also considered at a regional level. Minutes from the regional
committees are tabled at GRRPC.
Standards on all major aspects of business are set for HSBC and for individual subsidiaries, businesses and functions.
Reputational risks, including environmental, social and governance matters, are considered and assessed by the
Board, the GMB, the Risk Management Meeting, the Global Standards Steering Committee, subsidiary company
boards, Board committees and senior management during the formulation of policy and the establishment of our
standards. These policies, which form an integral part of the internal control system (see page 332), are
communicated through manuals and statements of policy and are promulgated through internal communications and
training. The policies set out our risk appetite and operational procedures in all areas of reputational risk, including
money laundering deterrence, counter-terrorist financing, environmental impact, anti-bribery and corruption
measures and employee relations. The policy manuals address risk issues in detail and co-operation between Group
departments and businesses is required to ensure a strong adherence to our risk management system and our
sustainability practices.
Pension risk
(Audited)
We operate a number of pension plans throughout the world, as described in Note 7 on the Financial Statements, the
Pension risk section on page 224 and below. Some of them are defined benefit plans, of which the largest is the
HSBC Bank (UK) Pension Scheme (‘the principal plan’).
In order to fund the benefits associated with these plans, sponsoring Group companies (and, in some instances,
employees) make regular contributions in accordance with advice from actuaries and in consultation with the
278
scheme’s trustees (where relevant). The defined benefit plans invest these contributions in a range of investments
designed to meet their long-term liabilities.
The level of these contributions has a direct impact on HSBC’s cash flow and would normally be 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 will be required when plan assets are considered insufficient to cover the existing pension
liabilities. Contribution rates are typically revised annually or triennially, depending on the plan. The agreed
contributions to the principal plan are revised triennially.
A deficit in a defined benefit plan may arise from a number of factors, including
• investments delivering a return below that required to provide the projected plan benefits. This could arise, for example, when there is a
fall in the market value of equities, or when increases in long-term interest rates cause a fall in the value of fixed income securities held;
• 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 which causes an increase in the value of the scheme liabilities; and
• scheme members living longer than expected (known as longevity risk).
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A plan’s investment strategy is determined after taking into consideration the market risk inherent in the investments
and its consequential impact on potential future contributions. The long-term investment objectives of both HSBC
and, where relevant and appropriate, the trustees are:
•
•
to limit the risk of the assets failing to meet the liabilities of the plans over the long-term; and
to maximise returns consistent with an acceptable level of risk so as to control the long-term costs of the defined
benefit plans.
In pursuit of these long-term objectives, a benchmark is established for the allocation of the defined benefit plan
assets between asset classes. In addition, each permitted asset class has its own benchmarks, such as stock market or
property valuation indices and, where relevant, desired levels of out-performance. The benchmarks are reviewed
at least triennially within 18 months of the date at which an actuarial valuation is made, or more frequently if
required by local legislation or circumstances. The process generally involves an extensive asset and liability review.
Ultimate responsibility for investment strategy rests with either the trustees or, in certain circumstances, a
Management Committee. The degree of independence of the trustees from HSBC varies in different jurisdictions.
Pension plans in the UK
The largest plan globally exists in the UK, where the HSBC Bank (UK) Pension Scheme (‘the Scheme’) covers
employees of HSBC Bank plc and certain other employees of HSBC. This comprises a funded final salary defined
benefit plan (‘the principal plan’), which is closed to new entrants, and a defined contribution plan which was
established in July 1996 for new employees.
The principal plan, which accounts for approximately 70% of the obligations of our defined benefit pension plans,
is overseen by a corporate trustee who has a fiduciary responsibility for the operation of the pension scheme. The
Trustee is responsible for monitoring and managing the investment strategy and administration of scheme benefits.
The principal plan holds a diversified portfolio of investments to meet future cash flow liabilities arising from
accrued benefits as they fall due to be paid. The trustee of the principal plan is required to produce a written
Statement of Investment Principles which governs decision-making about how investments are made and the need
for adequate diversification is taken into account in the choice of asset allocation and manager structure in the
Defined Benefit Section.
Longevity risk in the principal plan is assessed as part of the measurement of the pension liability and managed
through the funding process of the scheme.
Pension plans in Hong Kong
In Hong Kong, the HSBC Group Hong Kong Local Staff Retirement Benefit Scheme covers employees of The
Hongkong and Shanghai Banking Corporation and certain other employees of HSBC. The scheme comprises a
funded defined benefit scheme and a defined contribution scheme. The defined benefit section of the scheme is a
final salary lump sum scheme and therefore its exposure to longevity risk is limited; it was closed to new members
from 1999.
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Risk > Appendix – Risk policies and practices > Pension risk / Sustainability risk // Capital
The trustee assumes the overall responsibility for the scheme but a management committee and a number of sub-
committees have also been established. These committees have been established to broaden the governance and
manage the concomitant issues. The finance and investment sub-committee manages the various issues in relation to
both assets and liabilities of the scheme.
Pension plans in North America
The HSBC North America (US) Retirement Income Plan covers all employees of HSBC Bank USA, HSBC Finance
and other HSBC entities in the US who have reached the age of 21 and met the one year of service participation
requirement. The Retirement Income Plan is a funded defined benefit plan which provides final average pay benefits
to legacy participants and cash balance benefits to all other participants. Prior to 1 January 2013 all new employees
participate in the cash balance section of the plan. In November 2009, the Board of Directors of HSBC North
America Holdings, Inc. (‘HNAH’) approved actions to cease all future benefit accruals for legacy participants under
the final average pay formula components of the HSBC North America Retirement Income Plan with effect from 1
January 2011.
The Plan is governed by the Employee Retirement Security Act of 1974 (‘ERISA’), ERISA regulations serve as
guidance for the management of plan assets. In this regard, an Investment Committee (the ‘Committee’) for the Plan
has been established and its members have been appointed by the Chief Executive Officer as authorized by the Board
of Directors of HSBC North America. The Committee is responsible for establishing the funding policy and
investment objectives supporting the Plan including allocating the assets of the Plan, monitoring the diversification of
the Plan’s investments and investment performance, assuring the Plan does not violate any provisions of ERISA and
the appointment, removal and monitoring of investment advisers and the trustee.
A key factor shaping the Committee’s attitude towards risk is the generally long-term nature of the underlying benefit
obligations. The asset allocation decision reflects this long-term horizon as well as the ability and willingness to
accept some short-term variability in the performance of the portfolio in exchange for the expectation of competitive
long-term investment results for its participants.
Sustainability risk
(Unaudited)
Sustainability risks arise from the provision of financial services to companies or projects which run counter to the
needs of sustainable development; in effect this risk arises when the environmental and social effects outweigh
economic benefits. Within Group Head Office, a separate function, Group Corporate Sustainability, is mandated to
manage these risks globally working through local offices as appropriate. Sustainability Risk Managers have regional
or national responsibilities for advising on and managing environmental and social risks.
Group Corporate Sustainability’s risk management responsibilities include:
•
•
•
formulating sustainability risk policies. This includes oversight of our sustainability risk standards, management
of the Equator Principles for project finance lending, and sector-based sustainability policies covering those
sectors with high environmental or social impacts (forestry, freshwater infrastructure, chemicals, energy, mining
and metals, and defence-related lending); undertaking an independent review of transactions where sustainability
risks are assessed to be high, and supporting our operating companies to assess similar risks of a lower
magnitude;
building and implementing systems-based processes to ensure consistent application of policies, reduce the costs
of sustainability risk reviews and capture management information to measure and report on the effect of our
lending and investment activities on sustainable development; and
providing training and capacity building within our operating companies to ensure sustainability risks are
identified and mitigated consistently to either our own standards, international standards or local regulations,
whichever is higher.
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Capital
Capital overview .................................................. 282
Capital ratios ....................................................................... 282
Page
App1
Tables
Page
Capital management ............................................
Approach and policy ..............................................
Stress testing ..........................................................
Risks to capital .......................................................
Risk-weighted asset targets ...................................
Capital generation ..................................................
Capital measurement and allocation .................
Regulatory capital ..................................................
Pillar 1 capital requirements ..................................
Pillar 2 capital requirements ..................................
Pillar 3 disclosure requirements ............................
Risk-weighted assets ............................................ 282
Credit risk RWAs .................................................. 283
Counterparty credit risk and market risk RWAs ... 284
Operational risk RWAs ......................................... 285
RWA movement by key driver – basis of
preparation and supporting notes .................
Credit risk drivers – definitions and
quantification .....................................................
Market risk drivers – definitions and
quantification .....................................................
293
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295
296
296
296
296
298
RWAs by risk type ................................................................ 282
Market risk RWAs ................................................................ 282
RWAs by global businesses .................................................. 282
RWAs by geographical regions ........................................... 283
RWA movement by key driver – credit risk – IRB only ....... 283
RWA movement by key driver - counterparty
credit risk – IRB only ....................................................... 284
RWA movement by key driver – market risk – internal
model based ..................................................................... 284
Movement in total regulatory capital in 2012.... 285
Source and application of total regulatory capital ............. 285
Capital structure .................................................. 286
Regulatory and accounting consolidations ............ 288
Basel III and its implementation in Europe ........... 288
Basis of preparation of the estimated effect
of the CRD IV end point applied to the
31 December 2012 position .............................
Regulatory adjustments applied to core tier 1
in respect of amounts subject to CRD IV
treatment ............................................................
Changes to capital requirements introduced by
CRD IV ..............................................................
Future developments ........................................... 291
Systemically important banks ................................ 291
UK regulatory reform ............................................ 291
Structural banking reform ...................................... 292
1 Appendix to Capital
Composition of regulatory capital ....................................... 286
Regulatory impact of management actions ......................... 287
Reconciliation of accounting and regulatory
balance sheets .................................................................. 287
Estimated effect of CRD IV end point rules applied to the
298
31 December 2012 position ............................................. 289
298
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Capital > Capital overview / RWAs
Our objective in the management of Group
capital is to maintain appropriate levels of
capital to support our business strategy and
meet our regulatory requirements.
Risk-weighted assets
RWAs by risk type
(Unaudited)
At 31 December
Capital highlights
• Core tier 1 capital ratio 12.3%, up
from 10.1% in 2011, as a result of capital
generation and management actions.
• CRD IV, which implements Basel III in
Europe, remains unfinalised and the
timetable for implementation is
uncertain.
Capital overview
Capital ratios
(Unaudited)
Core tier 1 ratio ..........................
Tier 1 ratio .................................
Total capital ratio .......................
At 31 December
2012
%
12.3
13.4
16.1
2011
%
10.1
11.5
14.1
Our approach to managing Group capital has been to
ensure that we exceed current, and are well placed to
meet expected future, regulatory requirements.
Within the remit of Pillar 2, the FSA has defined a
common equity tier 1 (‘CET1’) capital resources
floor for the Group. This is expressed as a minimum
target CETI ratio calculated on a Basel III end point
basis, to be achieved by December 2013. In effect
this accelerates our full implementation date for
Basel III even though there remains uncertainty
around the precise requirements in Europe.
We currently manage our capital position to
meet an internal target CET1 ratio in the range
9.5%-10.5% for 31 December 2013 and will review
this on an ongoing basis.
The eligibility requirements in the UK for
non-equity capital securities, under Basel III rules,
remained under review so we did not issue any
such capital securities during 2012.
A summary of our policies and practices
regarding capital management, measurement
and allocation is provided in the Appendix to
Capital on page 294.
Credit risk .................................
Standardised approach ..............
IRB foundation approach ..........
IRB advanced approach ............
Counterparty credit risk ............
Standardised approach1 .............
IRB approach ............................
2012
US$m
898,416
374,469
10,265
513,682
48,319
2,645
45,674
Market risk ................................
Operational risk ........................
54,944
122,264
2011
US$m
958,189
372,039
8,549
577,601
53,792
3,163
50,629
73,177
124,356
Total ..........................................
1,123,943
1,209,514
Of which:
Run-off portfolios .................
Legacy credit in GB&M .......
US CML and Other ..............
Card and Retail Services2 .....
145,689
38,587
107,102
6,858
181,657
50,023
131,634
52,080
For footnotes, see page 292.
Market risk RWAs
(Unaudited)
At 31 December
VAR ..........................................
Stressed VAR ............................
Incremental risk charge ............
Comprehensive risk measure ....
Other VAR and stressed VAR ....
2012
US$m
7,616
11,048
11,062
3,387
11,355
Internal model based ....................
44,468
FSA standard rules ....................
10,476
54,944
2011
US$m
11,345
19,117
5,249
6,013
12,957
54,681
18,496
73,177
RWAs by global businesses
(Unaudited)
Retail Banking and Wealth
Management .........................
Commercial Banking ................
Global Banking and Markets ....
Global Private Banking ............
Other .........................................
At 31 December
2012
US$bn
2011
US$bn
276.6
397.0
403.1
21.7
25.5
351.2
382.9
423.0
22.5
29.9
Total ..........................................
1,123.9
1,209.5
282
RWAs by geographical regions3
(Unaudited)
At 31 December
2012
US$bn
2011
US$bn
Total ...........................................
1,123.9
1,209.5
Europe ........................................
Hong Kong ................................
Rest of Asia-Pacific ...................
MENA ........................................
North America ...........................
Latin America ............................
For footnote, see page 292.
314.7
111.9
302.2
62.2
253.0
97.9
340.2
105.7
279.3
58.9
337.3
102.3
RWAs reduced by US$86bn to US$1,124bn in
2012, due to a combination of management actions
and business growth.
Credit risk RWAs
(Unaudited)
Credit risk RWAs are calculated using three
approaches as permitted by the UK regulator. For
consolidated Group reporting we have adopted the
advanced IRB approach for the majority of our
business, with a small proportion on the foundation
IRB approach and the remaining portfolios being on
the standardised approach.
For portfolios treated under the standardised
approach, credit risk RWA movements were
RWA movement by key driver – credit risk – IRB only
(Unaudited)
primarily due to the increase of US$30bn in
our associates in mainland China, mainly from loan
growth in BoCom and Industrial Bank. This was
partially offset by the first tranche sale of Ping An,
which resulted in its banking subsidiary no longer
being included in the regulatory consolidation for
RWAs. The remaining holding, at year end, was
treated as a deduction from capital, giving a year-on-
year reduction in RWAs of US$21bn. For further
details see page 39.
In Europe, a reduction in standardised RWAs
for CMB and GB&M of US$6.5bn reflected reduced
corporate lending in selected eurozone countries and
a movement to the IRB supervisory slotting
approach for the shipping portfolio in Greece. In
Latin America, corporate lending growth in the
region was more than offset by the reduction in
corporate exposure from the sale of operations in
Costa Rica, El Salvador and Honduras, and the
managing down of vehicle finance and payroll loan
portfolios in Brazil.
Credit risk RWA movements by key driver
for portfolios treated under the IRB approach are set
out in the table below. For the basis of preparation,
see the Appendix to Capital on page 298. Foreign
exchange movements had an impact of US$6.2bn;
the discussion of the remaining drivers excludes the
effect of foreign exchange.
Europe
US$bn
Hong
Kong
US$bn
Rest of
Asia-
Pacific
US$bn
MENA
US$bn
North
America
US$bn
Latin
America
US$bn
Total
US$bn
RWAs at 1 January 2012 ............
156.5
68.0
Foreign exchange movement ......
Acquisitions and disposals .........
Book size ....................................
Book quality ...............................
Model updates .............................
Portfolios moving onto
IRB approach .....................
New/updated models ..............
Methodology and policy .............
Internal updates ......................
External updates .....................
4.7
–
(1.8)
(6.6)
0.4
1.4
(1.0)
(2.5)
(1.3)
(1.2)
Total RWA movement ...............
(5.8)
RWAs at 31 December 2012 ......
150.7
0.1
–
3.6
1.5
–
–
–
(3.0)
(3.0)
–
2.2
70.2
Management actions in the North America
RBWM business, most notably the disposal of the
Card and Retail Services business and the non-
strategic branches in upstate New York, reduced
RWAs by US$40bn.
82.3
0.8
(0.1)
5.4
(1.1)
–
–
–
4.8
4.8
–
9.8
92.1
12.9
(0.2)
(0.7)
1.0
(0.3)
0.1
0.1
–
(0.2)
(0.2)
–
(0.3)
12.6
254.5
0.7
(40.3)
(7.6)
(17.9)
–
–
–
(2.3)
(2.3)
–
(67.4)
187.1
12.0
586.2
0.1
(0.9)
(0.6)
0.1
–
–
–
0.5
0.5
–
(0.8)
11.2
6.2
(42.0)
–
(24.3)
0.5
1.5
(1.0)
(2.7)
(1.5)
(1.2)
(62.3)
523.9
Movements in book quality in the RBWM
North America retail business accounted for
US$14bn of the US$18bn reduction in RWAs. These
retail reductions were mainly due to a refinement in
risk metrics for mortgage exposures with a
US$6.1bn RWA impact attained through
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Capital > RWAs / Movement in total regulatory capital in 2012
recalibration with more recent data observations.
Further reductions of US$7.4bn were due to positive
credit quality migration and the progression of assets
into default as a result of the challenging conditions
in the US mortgage market. As assets approach and
go into default, capital requirements are increasingly
reflected in an expected loss deduction from capital,
rather than having a direct effect on RWAs (see
‘Deductions’ within ‘Composition of regulatory
capital’ on page 286). Additionally, RBWM
continued to manage down the residual balances in
our North America retail portfolios through a
combination of run-off and write-off which resulted
in a reduction in RWAs of US$12bn. In our North
America wholesale portfolios, there was an increase
in book size with RWA growth of US$4.9bn, mainly
in our CMB and GB&M businesses. This was
partially offset by favourable movements in book
quality for those portfolios which reduced RWAs
by US$4.5bn.
Corporate and commercial lending and trade
finance activity in our CMB and GB&M businesses
were the primary drivers of the book size RWA
growth of US$9.0bn in Rest of Asia-Pacific and
Hong Kong, while the book quality was relatively
stable overall. Data enhancements in Rest of Asia-
Pacific and Hong Kong allowed us to improve the
quantification of exposure and risk metrics, and are
reflected in internal methodology and policy
updates.
In Europe, rating agency actions on ABSs held
in GB&M business were one of the main drivers for
the movement in book quality of a reduction of
US$6.6bn in RWAs. Lower grade investments are
deducted from capital rather than risk-weighted,
such that the effect is reflected in reduced RWAs
and increased capital deductions (see ‘Deductions’
within ‘Composition of regulatory capital’ on
page 286). Other drivers of the movement in book
quality included an improvement in the credit quality
of the corporate portfolio in CMB and retail
portfolios in RBWM. Reductions in the Europe IRB
book size were from lower corporate and
institutional exposures in GB&M, partly offset by
corporate exposure growth in the top CMB markets.
A change in methodology for the regulatory
treatment of European Economic Area (‘EEA’)
central bank exposures, to include them in the
standardised approach, resulted in a reduction of
US$1.2bn.
In the Middle East and Latin America, book size
and book quality levels were stable, with the main
credit risk RWA movements reflecting mergers and
acquisitions, including purchases in Oman and the
284
UAE and disposals in Costa Rica, Honduras and El
Salvador.
Counterparty credit risk and market risk
RWAs
(Unaudited)
Trading portfolio movements for the modelled
approaches to market risk and counterparty credit
risk (‘CCR’) RWAs are outlined in the tables below.
For the basis of preparation, see the Appendix to
Capital on page 295.
RWA movement by key driver – counterparty credit
risk – IRB only
(Unaudited)
RWAs at 1 January 2012 .............................
Book size ......................................................
Book quality .................................................
Model updates ..............................................
Methodology and policy...............................
Internal updates .......................................
External updates ......................................
Total RWA movement .................................
RWAs at 31 December 2012 .......................
US$bn
50.6
(0.8)
0.1
(0.2)
(4.0)
(4.0)
–
(4.9)
45.7
CCR RWAs decreased by US$4.9bn during
the year, primarily due to methodology and policy
changes in GB&M. The main drivers of the change
arose through the increased application of
counterparty netting within the calculation and from
counterparty data refinement which allowed us to
apply lower potential future exposure add-on factors.
There were reductions in book size in North
America, due to a decrease in the GB&M legacy
credit portfolio and from maturing trades, and in
Latin America due to reduced repo activity with
central banks and lower exposure in respect of
derivative transactions.
RWA movement by key driver – market risk –
internal model based
(Unaudited)
RWAs at 1 January 2012 .............................
Foreign exchange movement and other .......
Movement in risk levels ..............................
Model updates ..............................................
Methodology and policy...............................
Internal updates .......................................
External updates ......................................
Total RWA movement .................................
RWAs at 31 December 2012 .......................
US$bn
54.7
(0.4)
(7.4)
–
(2.4)
(2.4)
–
(10.2)
44.5
Market risk RWAs decreased by US$10bn
in 2012 with the main driver being a reduction in
risk levels of US$11bn in GB&M, primarily as
a result of decreasing VAR due to reductions in
exposure and improvements in market conditions.
The factors affecting the reductions in VAR also
drove the reductions in the levels of stressed VAR.
The effect was partly offset by a US$4.0bn risk level
increase in the incremental risk charge as a result of
a recalibration of the sovereign correlation matrix.
RWA changes due to methodology and policy of
US$2.4bn were due to a reduction in the VAR
multiplier in France.
Movement in total regulatory capital in 2012
(Audited)
Source and application of total regulatory capital
Market risk RWA movements for portfolios
not within scope of modelled approaches showed a
reduction of US$8.0bn. This was mainly driven by
management actions by GB&M to reduce legacy
positions in North America.
Operational risk RWAs
(Unaudited)
Operational risk RWAs remained stable in 2012,
being calculated on a three-year average of revenues.
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Movement in total regulatory capital
(Audited)
Opening core tier 1 capital .......................................................................................................................
Contribution to core tier 1 capital from profit for the year ..................................................................
Consolidated profits attributable to shareholders of the parent company .......................................
Removal of own credit spread net of tax .........................................................................................
Net dividends ........................................................................................................................................
Dividends .........................................................................................................................................
Add back: shares issued in lieu of dividends ...................................................................................
Decrease in goodwill and intangible assets deducted ..........................................................................
Ordinary shares issued .........................................................................................................................
Foreign currency translation differences .............................................................................................
Other, including regulatory adjustments ..............................................................................................
At 31 December
2012
US$m
2011
US$m
122,496
17,827
14,027
3,800
(5,613)
(8,042)
2,429
1,686
594
989
810
116,116
14,011
16,797
(2,786)
(5,271)
(7,501)
2,230
582
96
(2,705)
(333)
Closing core tier 1 capital ......................................................................................................................
138,789
122,496
Opening other tier 1 capital ......................................................................................................................
Hybrid capital securities redeemed ......................................................................................................
Unconsolidated investments .................................................................................................................
Other, including regulatory adjustments ..............................................................................................
17,094
(776)
(4,120)
61
17,063
–
71
(40)
Closing tier 1 capital ...............................................................................................................................
151,048
139,590
Opening tier 2 capital ...............................................................................................................................
Redeemed capital .................................................................................................................................
Other, including regulatory adjustments ..............................................................................................
30,744
(1,483)
497
34,376
(3,360)
(272)
Closing total regulatory capital .............................................................................................................
180,806
170,334
We complied with the FSA’s capital adequacy
requirements throughout 2011 and 2012. Internal
capital generation contributed US$12bn to core tier 1
capital, being profits attributable to shareholders of
the parent company after regulatory adjustment for
own credit spread and net of dividends. The table
below sets out the composition of our capital under
the current regulatory requirements.
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H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Capital > Capital structure
Capital structure
Composition of regulatory capital
(Audited)
Tier 1 capital
Shareholders’ equity ......................................................................................................................
Shareholders’ equity per balance sheet4 ....................................................................................
Preference share premium .........................................................................................................
Other equity instruments ...........................................................................................................
Deconsolidation of special purpose entities5 ............................................................................
Non-controlling interests ...............................................................................................................
Non-controlling interests per balance sheet ..............................................................................
Preference share non-controlling interests ................................................................................
Non-controlling interests transferred to tier 2 capital ...............................................................
Non-controlling interests in deconsolidated subsidiaries .........................................................
Regulatory adjustments to the accounting basis ...........................................................................
Unrealised losses on available-for-sale debt securities6 ...........................................................
Own credit spread ......................................................................................................................
Defined benefit pension fund adjustment7 ................................................................................
Reserves arising from revaluation of property and unrealised gains on
available-for-sale equities .........................................................................................................
Cash flow hedging reserve ........................................................................................................
Deductions .....................................................................................................................................
Goodwill and intangible assets .................................................................................................
50% of securitisation positions .................................................................................................
50% of tax credit adjustment for expected losses .....................................................................
50% of excess of expected losses over impairment allowances ...............................................
Core tier 1 capital ........................................................................................................................
Other tier 1 capital before deductions ...........................................................................................
Preference share premium .........................................................................................................
Preference share non-controlling interests ................................................................................
Hybrid capital securities ............................................................................................................
Deductions .....................................................................................................................................
Unconsolidated investments8 ....................................................................................................
50% of tax credit adjustment for expected losses .....................................................................
Ref
a
b
c
a
d
e
f
d
g
h
i
b
e
j
At 31 December
2012
US$m
167,360
175,242
(1,405)
(5,851)
(626)
4,348
7,887
(2,428)
(501)
(610)
(2,437)
1,223
112
(469)
(3,290)
(13)
(30,482)
(25,733)
(1,776)
111
(3,084)
2011
US$m
154,148
158,725
(1,405)
(5,851)
2,679
3,963
7,368
(2,412)
(496)
(497)
(4,331)
2,228
(3,608)
(368)
(2,678)
95
(31,284)
(27,419)
(1,207)
188
(2,846)
138,789
122,496
17,301
1,405
2,428
13,468
(5,042)
(5,153)
111
17,939
1,405
2,412
14,122
(845)
(1,033)
188
Tier 1 capital ................................................................................................................................
151,048
139,590
Tier 2 capital
Total qualifying tier 2 capital before deductions ..........................................................................
Reserves arising from revaluation of property and unrealised gains on
available-for-sale equities .........................................................................................................
k
Collective impairment allowances ............................................................................................
Perpetual subordinated debt ......................................................................................................
l
Term subordinated debt ............................................................................................................. m
f
Non-controlling interests in tier 2 capital .................................................................................
Total deductions other than from tier 1 capital
Unconsolidated investments8 ....................................................................................................
50% of securitisation positions .................................................................................................
50% of excess of expected losses over impairment allowances ...............................................
Other deductions .......................................................................................................................
i
48,231
48,676
3,290
2,717
2,778
39,146
300
(18,473)
(13,604)
(1,776)
(3,084)
(9)
2,678
2,660
2,780
40,258
300
(17,932)
(13,868)
(1,207)
(2,846)
(11)
Total regulatory capital ..............................................................................................................
180,806
170,334
For footnotes, see page 292.
The references (a) – (m) identify balance sheet components on page 287 which are used in the calculation of regulatory capital.
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Regulatory impact of management actions
(Unaudited)
At 31 December 2012
Risk-
weighted
assets
Core tier 1
capital
Tier 1
capital
Total
regulatory
capital
Reported capital ratios before management actions ................................
12.3%
13.4%
16.1%
Reported totals (US$m) ............................................................................
Management actions completed in 2013 (US$m) ....................................
Dilution of our shareholding in Industrial Bank and the subsequent
change in accounting treatment .......................................................
Completion of the second tranche of the sale of Ping An ...................
1,123,943
138,789
151,048
180,806
(38,073)
–
981
553
(423)
4,637
(1,827)
7,984
Estimated total after management actions completed in 2013 (US$m) ..
1,085,870
140,323
155,262
186,963
Estimated capital ratios after management actions completed in 2013 ....
12.9%
14.3%
17.2%
Reconciliation of accounting and regulatory balance sheets
(Unaudited)
At 31 December 2012
Accounting
balance
sheet
US$m
Ref
Decon-
solidation
of insurance/
other entities
US$m
Consolidation
of banking
associates
US$m
Regulatory
balance
sheet
US$m
Assets
Trading assets ...............................................................................
Loans and advances to customers ................................................
of which:
– impairment allowances on IRB portfolios ...........................
– impairment allowances on STD portfolios ..........................
Financial investments ...................................................................
Capital invested in insurance and other entities ...........................
Interests in associates and joint ventures .....................................
of which:
– positive goodwill on acquisition ..........................................
Goodwill and intangible assets .....................................................
Other assets ...................................................................................
of which:
– goodwill and intangible assets of disposal groups
held for sale ..........................................................................
– retirement benefits assets .....................................................
– impairment allowances on asset held for sale .....................
of which:
– IRB portfolios ...................................................................
– STD portfolios ..................................................................
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k
h
h
h
g
i
k
408,811
997,623
(10,255)
(5,857)
421,101
–
17,834
670
29,853
817,316
146
2,846
(703)
(691)
(12)
(144)
(11,957)
1,477
119,698
410,144
1,105,364
–
–
(50,256)
8,384
–
–
(2,726)
33,110
–
(17,127)
(10,255)
(8,583)
403,955
8,384
707
(640)
30
(4,983)
(34,672)
687
82,469
25,557
865,113
(117)
–
–
–
–
–
–
–
–
–
29
2,846
(703)
(691)
(12)
Total assets ..................................................................................
2,692,538
(93,628)
220,314
2,819,224
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Report of the Directors: Operating and Financial Review (continued)
Capital > Capital structure
At 31 December 2012
Accounting
balance
sheet
US$m
Ref
Decon-
solidation
of insurance/
other entities
US$m
Consolidation
of banking
associates
US$m
Regulatory
balance
sheet
US$m
Liabilities and equity
Deposits by banks .........................................................................
Customer accounts ........................................................................
Trading liabilities ..........................................................................
Financial liabilities designated at fair value .................................
of which:
– term subordinated debt included in tier 2 capital ............... ..
– hybrid capital securities included in tier 1 capital .............. ..
Debt securities in issue .................................................................
Retirement benefits liabilities .......................................................
Subordinated liabilities .................................................................
of which:
– hybrid capital securities included in tier 1 capital. ..............
– perpetual subordinated debt included in tier 2 capital .........
– term subordinated debt included in tier 2 capital ............ …
Other liabilities .............................................................................
of which:
– contingent liabilities and contractual commitments ............
of which:
– credit-related provisions on IRB portfolios .........................
– credit-related provisions on STD portfolios ........................
Total shareholders’ equity ............................................................
of which:
– other equity instruments included in tier 1 capital ..............
– preference share premium included in tier 1 capital ...........
Non-controlling interests ..............................................................
of which:
– non-cumulative preference shares issued by subsidiaries
included in tier 1 capital .......................................................
– non-controlling interests included in tier 2 capital,
cumulative preferred stock ...................................................
– non-controlling interests attributable to holders of
m
j
g
j
l
m
i
k
a
c, j
b
d
e
f
ordinary shares in subsidiaries included in tier 2 capital .....
f,m
107,429
1,340,014
304,563
87,720
16,863
4,696
119,461
3,905
29,479
2,828
2,778
23,873
(202)
(652)
(131)
(12,437)
–
–
(11,390)
(21)
3
–
–
–
51,296
158,631
119
–
158,523
1,497,993
304,551
75,283
–
–
1,888
52
2,953
–
–
–
16,863
4,696
109,959
3,936
32,435
2,828
2,778
23,873
516,838
(67,562)
5,375
454,651
301
267
34
–
–
–
–
–
–
301
267
34
175,242
(626)
(0)
174,616
5,851
1,405
7,887
2,428
300
201
–
–
(610)
–
–
–
–
–
0
–
–
–
5,851
1,405
7,277
2,428
300
201
Total liabilities and equity .........................................................
2,692,538
(93,628)
220,314
2,819,224
For footnote, see page 292.
The references (a) – (m) identify balance sheet components which are used in the calculation of regulatory capital on page 286.
Regulatory and accounting consolidations
(Unaudited)
The basis of consolidation for financial accounting
purposes is described in Note 1 on the Financial
Statements and differs from that used for regulatory
purposes. The table above provides a reconciliation
of the financial accounting balance sheet to the
regulatory balance sheet. Not all items are
reconcilable, due to regulatory adjustments that are
applied, for example to non-core capital instruments
before they can be included in the Group’s
regulatory capital base. It is the regulatory balances,
and not the financial accounting balance sheet,
which form the basis for the regulatory capital
calculations. Investments in banking associates
are equity accounted in the financial accounting
consolidation, whereas their assets and liabilities are
proportionally consolidated for regulatory purposes.
Subsidiaries and associates engaged in insurance and
non-financial activities are excluded from the
regulatory consolidation and are deducted from
regulatory capital. The regulatory consolidation does
not include SPEs where significant risk has been
transferred to third parties. Exposures to these
SPEs are risk-weighted as securitisation positions
for regulatory purposes. Entities in respect of which
the basis of consolidation for financial accounting
purposes differs from that used for regulatory
purposes can be found in the Pillar 3 Disclosures
2012 report.
Basel III and its implementation in Europe
(Unaudited)
In July 2011, the European Commission published
proposals for a new Regulation and Directive,
known collectively as CRD IV, to give effect to the
Basel III framework in the EU. The majority of the
Basel III proposals are in the Regulation, removing
288
national discretion. However, capital buffers such
as those for countercyclical and capital conservation
are in the Directive and are subject to transposition
into national law by member states. CRD IV
implementation has been delayed and the timetable
for finalisation is uncertain.
In October 2012, the FSA wrote to large firms
to set out the disclosures they are required to make
of capital resources on a first year transitional basis
under CRD IV. We have made these disclosures in
appendix III of the Pillar 3 Disclosures 2012 report.
Following the FSA’s setting of a Capital
Resources Floor, and in order to manage our
transition to Basel III under CRD IV, we provide
below some insight for investors of the possible
effects of these rules on our capital position. We have
estimated our pro-forma CET1 ratio by applying
our interpretation of the CRD IV draft July 2011
text post the transition period (end point CRD IV)
to our balance sheet position at 31 December 2012.
In managing our capital position to meet our
internal CET1 target, we consider management
actions resulting from our six filters strategy that
we either have already taken or would take, if the
CRD IV rules were to be finalised in the July 2011
form. These are reflected in the table below under
‘Estimated regulatory impact of management
actions’. Other management actions could be taken
depending upon the finalised rules and timing of
implementation but, as such, have not been included.
The application of the CRD IV rules on this
basis would translate into an estimated CET1 ratio
of 9.0% before management actions and 10.3% after
such actions, as detailed in the table below.
Estimated effect of CRD IV end point rules applied to the 31 December 2012 position
(Unaudited)
Reported core tier 1 capital under the current regime ....................................................................................
Regulatory adjustments applied to core tier 1 in respect of amounts subject to CRD IV treatment
Investments in own shares through the holding of composite products of which HSBC is a component
(exchange traded funds, derivatives, and index stock)...........................................................................
Surplus non-controlling interest disallowed in CET1 ...............................................................................
Removal of filters under current regime
– Unrealised gains/(losses) on available-for-sale debt securities .............................................................
– Unrealised gains on available-for-sale equities ......................................................................................
– Reserves arising from revaluation of property ......................................................................................
– Defined benefit pension fund liabilities .................................................................................................
Excess of expected losses over impairment allowances deducted 100% from CET1 ..............................
Removal of 50% of tax credit adjustment for expected losses ..................................................................
Securitisations positions risk-weighted under CRD IV..............................................................................
Deferred tax liabilities on intangibles ........................................................................................................
Deferred tax assets that rely on future profitability (excluding those arising from temporary differences)
Additional valuation adjustment (referred to as PVA) ..............................................................................
Debit valuation adjustment ........................................................................................................................
Individually immaterial holdings in CET1 capital of banks, financial institutions and insurance in
aggregate above 10% of HSBC CET1 ..................................................................................................
Deductions under threshold approach
Amount exceeding the 10% threshold:
– Significant investments in CET1 capital of banks, financial institutions and insurance ......................
Amount in aggregate exceeding the 15% threshold:
– Significant investments in CET1 capital of banks, financial institutions and insurance ......................
– Deferred tax assets .................................................................................................................................
Estimated CET1 capital under CRD IV ....................................................................................................
At 31 December 2012
RWAs
US$m
Capital
US$m
138,789
(1,322)
(2,299)
(1,223)
2,088
1,202
(1,596)
(3,084)
(111)
1,776
267
(456)
(1,720)
(372)
(5,994)
(6,697)
(2,265)
(1,532)
115,451
Reported total RWAs .....................................................................................................................................
1,123,943
Changes to capital requirements introduced by CRD IV
Credit valuation adjustment .......................................................................................................................
Counterparty credit risk (other than credit valuation adjustment) .............................................................
Amounts in aggregate below 15% threshold and therefore subject to 250% risk weight .........................
Securitisation positions and free deliveries risk-weighted under CRD IV ...............................................
Investments in commercial entities now risk-weighted ............................................................................
Deferred tax assets moved to threshold deduction under CRD IV ...........................................................
60,360
25,682
43,295
44,513
393
(8,976)
Estimated total RWAs under CRD IV .......................................................................................................
1,289,210
Estimated CET1 ratio ..................................................................................................................................
9.0%
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Report of the Directors: Operating and Financial Review (continued)
Capital > Capital structure / Future developments
At 31 December 2012
RWAs
US$m
Capital
US$m
Estimated regulatory impact of management actions
Management actions completed in 2013:
Dilution of our shareholding in Industrial Bank and the subsequent change in accounting treatment ....
Completion of the second tranche of the sale of Ping An .........................................................................
(38,880)
3,522
(2,150)
9,393
Estimated total after management actions completed in 2013 .......................................................................
1,253,852
122,694
Estimated CET1 ratio after management actions completed in 2013 ....................................................
9.8%
Planned short-term management actions if rules are finalised in their current form:
Mitigation of immaterial holdings9 ............................................................................................................
2,645
7,052
Estimated total after planned management actions ........................................................................................
1,256,497
129,746
Estimated CET1 ratio after planned management actions ......................................................................
10.3%
For the detailed basis of preparation, see
page 298 of the Appendix to Capital.
of US$6.0bn. The effect on capital is exacerbated
by its impact on the threshold for other deductions.
The table above presents a reconciliation of our
reported core tier 1 capital and RWAs position at
31 December 2012 to the pro-forma estimated
CET1 end point capital and estimated RWAs based
on our interpretation of the July 2011 draft CRD IV
regulation, supplemented by FSA guidance and, in
lieu of guidance, our expectation of how these draft
rules will be updated following EU negotiations.
CRD IV is not yet in law and its provisions are
subject to ongoing negotiation and amendment. As
such, the finalised rules could have a materially
different effect on CET1 and RWAs.
The CRD IV rule changes introduce a revised
definition of regulatory capital, primarily focused
on CET1 capital as the predominant form of going
concern capital, with a greater quantum to be held
by banks. There are increased capital deductions and
new regulatory adjustments affecting this higher tier
of capital. The new rules also introduce increased
RWA requirements, mainly for CCR.
The largest impact on our CET1 capital is the
deduction of unconsolidated significant investments
in banks, financial institutions and insurance entities
of US$9.0bn (shown as US$6.7bn and US$2.3bn in
the table above). This results from a reallocation of
current deductions to this higher tier of capital and
new rules for calculating the amounts to be
deducted.
Adding to the above, the regulatory treatment
applied to immaterial unconsolidated investments in
banks, financial institutions and insurance entities,
whereby a maturity restriction does not recognise the
netting of long and short positions when the short
position is less than one year residual maturity,
even though they are hedged from a market risk
perspective. This results in an estimated deduction
The rules are currently in draft and subject to
ongoing negotiation. If they were to be finalised in
their current form, the holdings of such positions
would generate a disproportionate capital cost and
potentially the relevant business could be curtailed,
closed or our hedging would be adjusted to negate
the impact.
Capital management initiatives and management
actions already adopted by the Group, in accordance
with our six filters strategic framework, have
contributed to mitigating the effect of the future
rules. In 2012, this included the continuing run-off
of capital intensive portfolios including the US
CML and the GB&M legacy credit portfolios and
the sale of the Card and Retail Services business.
Post year-end, we sold our remaining investment
in Ping An and reduced our percentage holding
in Industrial Bank following a private placement
by the company.
Although the effect of the future CRD IV rules
is shown above on an end point basis, the rules allow
for a transition period of six years to phase in the
new deductions and regulatory adjustments. On a
CRD IV first year transitional basis our CET1 ratio,
if applied to our year end 2012 position, would be
11.5% before management actions.
As a result of the capital resources floor, we
currently manage our capital position to meet an
internal target CET1 ratio on an end point basis for
year end 2013. We will continue to manage our
capital position to ensure that it exceeds current
regulatory requirements and is well placed to meet
expected future regulatory requirements. We will
review our capital target ratios on an ongoing basis,
reflecting any changes in the regulatory environment
as they develop.
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Future developments
Systemically important banks
(Unaudited)
In parallel with the Basel III proposals, the Basel
Committee issued a consultative document in July
2011, ‘Global systemically important banks:
assessment methodology and the additional loss
absorbency requirement’. In November 2011, it
published its rules and the Financial Stability Board
(‘FSB’) issued the initial list of global systemically
important banks (‘G-SIB’s). This list, which
included HSBC and 28 other major banks from
around the world, will be re-assessed periodically
through annual re-scoring of the individual banks
and a triennial review of the methodology.
The requirements, initially for those banks
identified in November 2014 as G-SIBs, will be
phased in from 1 January 2016, becoming fully
effective on 1 January 2019. National regulators
have discretion to introduce higher thresholds than
the minima. In November 2012, the FSB published a
revised list of G-SIBs and their current assessment of
the appropriate capital charge. HSBC was assigned
an add-on of 2.5%.
UK regulatory reform
(Unaudited)
The FSA supervises HSBC on a consolidated basis.
However, the UK financial services regulatory
structure is currently in the process of substantial
reform. Legislation has been passed to abolish the
FSA and establish three new regulatory bodies from
1 April 2013.
The three new bodies will comprise the
Financial Policy Committee (‘FPC’) of the Bank
of England, the Prudential Regulation Authority
(‘PRA’) and the Financial Conduct Authority
(‘FCA’). The FPC will not directly supervise firms,
being responsible for macro-prudential regulation
and considering systemic risk affecting economic
and financial stability. The PRA and the FCA will
inherit the majority of the FSA’s existing functions
as the micro-prudential supervisors. Some
subsidiaries such as HSBC Bank will be ‘dual-
regulated’ firms, subject to prudential regulation
by the PRA and to conduct regulation by the FCA.
These reforms will endow the new regulatory bodies
with additional powers. For example, under certain
circumstances the PRA and FCA will be able to
issue directions to unregulated qualifying parent
undertakings such as HSBC Holdings.
In the case of the FPC, its January 2013 Draft
Policy Statement, ‘The Financial Policy Committee’s
power to supplement capital requirements’, states that
291
it will have two main powers: the first is to make
recommendations, and the second is a power to direct
the FCA and the PRA to adjust specific macro-
prudential tools, namely the countercyclical capital
buffer (‘CCB’) and sectoral capital requirements
(‘SCR’s’). The UK Government is proposing to make
the FPC responsible for setting the CCB, a Basel III
global requirement applied to certain financial
institutions in the UK. The CCB is a macro-
prudential tool at the disposal of national authorities
that can be deployed to protect the banking sector
from future potential losses when the FPC judges
that threats to financial stability have arisen in the
UK which increase system-wide risk. Should a CCB
be required, it is expected to be set in the range of
0-2.5%.
It is also planned under the new legislation to
give the FPC ‘direction power’, over SCR’s. The
SCR tool is more targeted and would allow the FPC
to change capital requirements above minimum
regulatory standards for exposures to three broad
sectors judged to pose a risk to the system as a whole
(residential property, including mortgages;
commercial property; and other parts of the financial
sector). However, on occasion this may be applied to
more granular sub-sectors (for example, to
mortgages with high loan to value or loan to income
ratios at origination). This will include both banking
book and trading book exposures and be irrespective
of the domicile of the ultimate borrower.
The CCB and SCR tools are described as broad
tools designed to reduce the likelihood and severity
of financial crises, their primary purpose being to
tackle cyclical risks. They provide the FPC with the
means to increase the amount of capital that banks
must hold when threats to financial stability are
judged to be emerging. However, the scale of capital
add-ons in respect of SCR has not been quantified.
There is also a proposal for a systemic risk
buffer for the banking system as a whole (or a subset
thereof) to mitigate structural macro-prudential risk.
Potential effect of regulatory proposals on
HSBC’s capital requirements
Given the above it is uncertain what HSBC’s final
capital requirement will be. However, quantified
Pillar 1 capital requirements are as follows:
CET1 requirements from 1 January 2019
Minimum CET1
Capital conservation buffer
G-SIB buffer
4.5%
2.5%
2.5%
Against the backdrop of eurozone instability,
on a temporary basis, the EBA recommended that
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Report of the Directors: Operating and Financial Review (continued)
Capital > Future developments // Appendix to Capital > Capital management
banks aim to reach a 9% EBA defined core tier 1
ratio by the end of June 2012. In October 2012 the
EBA announced that they would no longer monitor
the core tier 1 ratio but instead expect banks to hold
an equivalent nominal amount of capital. This new
EBA recommendation on capital conservation will
require banks to maintain a nominal amount of
core tier 1 capital corresponding to the level of
9% of RWAs at the end of June 2012. This equates
to US$104bn for HSBC. We will continue to review
our internal target CETI ratio of 9.5% to 10.5% as
the applicable regulatory capital requirements evolve
during the period until 1 January 2019.
We also hold additional capital in respect of
Pillar 2, the process of internal capital adequacy
assessment and supervisory review which leads to a
final determination by the FSA of individual capital
guidance and any capital planning buffer that may
be required.
Complementing the above, and also within the
Pillar 2 process, the FSA first advised the Group in
2012 of a capital resources floor. This is expressed
as a minimum target CET1 ratio calculated on a
Basel III end point basis, to be achieved by
December 2013.
In 2013 the FSA will introduce new industry-
wide capital measures. They will floor all sovereign
loss given defaults (‘LGD’s) at 45% and we estimate
the effect of this to be an increase of US$19bn
RWAs. Additionally, a stringent supervisory
slotting approach for our UK commercial real estate
portfolio will be introduced. For HSBC, this will roll
out across the relevant business during 2013.
Furthermore, the FSA have informed HSBC of a
Footnotes to Capital
framework which will be used when assessing
wholesale portfolios with a low number of defaults.
This framework will impose LGD and exposure at
default (‘EAD’) floors based on the foundation
approach for portfolios with less than 20 events of
default per country.
Structural banking reform
(Unaudited)
In September 2011, the Independent Commission on
Banking (‘ICB’) recommended heightened capital
requirements for UK banking groups. In June 2012,
the UK Government published its consultation,
‘Banking reform: delivering stability and supporting
a sustainable economy’, which set out its detailed
proposals for implementing the ICB’s
recommendations, such as ring-fencing and bail-in
debt. In October 2012, the UK Government
published draft primary legislation. This legislation
was presented for pre-legislative scrutiny to the
UK’s Parliamentary Commission on Banking
Standards who presented their initial findings in
December 2012. In February 2013, the UK
Government responded to these findings and issued
a revised Bill. The Government intends to enact the
legislation by the end of this parliament in 2015
and to have reforms in place by 2019.
In October 2012, the Liikanen Report delivered
its recommendations to the EC to reform the
structure of the European banking sector. This also
recommends ring-fencing, focused on isolating
trading activities (rather than deposits as in the ICB
recommendations) and, in principle, additional bail-
in debt. We continue to monitor these developments.
1 The value represents marked-to-market method only.
2 Operational risk RWAs, under the standardised approach, are calculated using an average of the last three years’ revenues. For
business disposals, the operational risk RWAs are not released immediately on disposal, but diminish over a period of time. The RWAs
for the Card and Retail Services business at 31 December 2012 represent the remaining operational risk RWAs for the business.
3 RWAs are non-additive across geographical regions due to market risk diversification effects within the Group.
4 Includes externally verified profits for the year ended 31 December 2012.
5 Mainly comprises unrealised gains/losses on available-for-sale debt securities related to SPEs.
6 Under FSA rules, unrealised gains/losses on debt securities net of tax must be excluded from capital resources.
7 Under FSA rules, any defined benefit asset is derecognised and a defined benefit liability may be substituted with the additional funding
that will be paid into the relevant schemes over the following five-year period.
8 Mainly comprise investments in insurance entities and the AFS investment in Ping An. Due to the expiry of the transitional provision,
with effect from 1 January 2013, material insurance holding companies acquired prior to 20 July 2006, will be deducted 50% from tier
1 and 50% from total capital.
9 This management action potentially arises only under rules on a CRD IV basis and has therefore not been included in the composition
of regulatory capital table, which is drawn up on the basis of the current rules.
292
Appendix to Capital
Capital management, capital measurement and RWA movement
Capital management
(Audited)
Approach and policy
Our approach to capital management is driven by our strategic and organisational requirements, taking into account
the regulatory, economic and commercial environment in which we operate. Pre-tax return on risk-weighted assets
(‘RoRWA’) is an operational metric by which the global businesses are managed on a day-to-day basis. The metric
combines return on equity and regulatory capital efficiency objectives. It is our objective to maintain a strong capital
base to support the risks inherent in our business and invest in accordance with our six filters framework, exceeding
both consolidated and local regulatory capital requirements at all times.
Our policy on capital management is underpinned by a capital management framework which enables us to
manage our capital in a consistent manner. The framework, which is approved by the GMB annually, incorporates
a number of different capital measures including market capitalisation, invested capital, economic capital and
regulatory capital. Following the FSA setting of a capital resources floor as a Basel III ratio, whilst also monitoring
capital at a Group level on a Basel II basis, we set our internal target on an end point Basel III CET1 basis.
Capital measures
• market capitalisation is the stock market value of HSBC;
• invested capital is the equity capital invested in HSBC by our shareholders, adjusted for certain reserves and goodwill previously
amortised or written off;
• economic capital is the internally calculated capital requirement which we deem necessary to support the risks to which we are exposed;
and
• regulatory capital is the capital which we are required to hold in accordance with the rules established by the FSA for the consolidated
Group and by our local regulators for individual Group companies.
Our assessment of capital adequacy is aligned to our assessment of risks, including: credit, market, operational,
interest rate risk in the banking book, pension fund, insurance, structural foreign exchange risk and residual risks.
Stress testing
We incorporate stress testing in capital plans because it helps us to understand how sensitive the core assumptions
in our capital plans are to the adverse effect of extreme but plausible events. Stress testing allows us to formulate
our response and mitigate risk in advance of conditions exhibiting the identified stress scenarios. The actual market
stresses which occurred throughout the financial system in recent years have been used to inform our capital planning
process and enhance the stress scenarios we employ. In addition to our internal stress tests, others are undertaken,
both at the request of regulators and by the regulators themselves using their prescribed assumptions. We take into
account the results of all such regulatory stress testing when assessing our internal capital requirements.
Risks to capital
Outside the stress-testing framework, a list of top and emerging risks is regularly evaluated for their effect on the core
tier 1 capital ratio. In addition, there are risks identified that are technically not within the scope of this list, but which
still have the potential to affect our RWAs and/or capital position. These risks are also included in the evaluation
of risks to capital. The downside or upside scenarios are assessed against our capital management objectives and
mitigating actions are assigned as necessary. The responsibility for global capital allocation principles and decisions
rests with the GMB. Through our internal governance processes, we seek to maintain discipline over our investment
and capital allocation decisions and seek to ensure that returns on investment are adequate after taking into account
capital costs. Our strategy is to allocate capital to businesses and entities on the basis of their ability to achieve
established RoRWA objectives and their regulatory and economic capital requirements.
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Report of the Directors: Operating and Financial Review (continued)
Capital > Appendix to Capital > Capital measurement and allocation
Risk-weighted asset targets
Top-down RWA targets are established for the global business lines, in accordance with the Group’s strategic
direction and risk appetite. As these targets are deployed to lower levels of management, action plans for
implementation are developed. These may include growth strategies; active portfolio management; restructuring;
business and/or customer-level reviews; RWA efficiency and optimisation initiatives and risk-mitigation. Our capital
management process is articulated in the annual Group capital plan which is approved by the Board.
RWA targets are approved by the GMB on an annual basis and business performance against them is monitored
through regular reporting to the Group ALCO. The management of capital deductions is also addressed in the RWA
monitoring framework through additional notional charges for these items.
A range of analysis is employed in the RWA monitoring framework to identify the key drivers of movements in
the position, such as book size and book quality. Particular attention is paid to identifying and segmenting items
within the day-to-day control of the business and those items that are driven by changes in risk models or regulatory
methodology.
Capital generation
HSBC Holdings is the primary provider of equity capital to its subsidiaries and also provides them with non-equity
capital where necessary. These investments are substantially funded by HSBC Holdings’ own capital issuance and
profit retention. As part of its capital management process, HSBC Holdings seeks to maintain a prudent balance
between the composition of its capital and its investment in subsidiaries.
Capital measurement and allocation
(Unaudited)
The FSA supervises HSBC on a consolidated basis and therefore receives information on the capital adequacy of,
and sets capital requirements for, the Group as a whole. Individual banking subsidiaries are directly regulated by their
local banking supervisors, who set and monitor their capital adequacy requirements. In 2012, we calculated capital at
a Group level using the Basel II framework as amended for CRD III, commonly known as Basel 2.5.
Our policy and practice in capital measurement and allocation at Group level is underpinned by the Basel II rules and
Basel III proposals. However, local regulators are at different stages of implementation and some local reporting,
notably in the US, is still on a Basel I basis. In most jurisdictions, non-banking financial subsidiaries are also subject
to the supervision and capital requirements of local regulatory authorities.
Basel II is structured around three ‘pillars’: minimum capital requirements, supervisory review process and market
discipline. The CRD implemented Basel II in the EU and the FSA then gave effect to the CRD by including the
latter’s requirements in its own rulebooks.
Regulatory capital
For regulatory purposes, our capital base is divided into three main categories, namely core tier 1, other tier 1 and tier
2, depending on the degree of permanency and loss absorbency exhibited.
•
•
•
core tier 1 capital comprises shareholders’ equity and related non-controlling interests. The book values of
goodwill and intangible assets are deducted from core tier 1 capital and other regulatory adjustments are made
for items reflected in shareholders’ equity which are treated differently for the purposes of capital adequacy;
qualifying capital instruments such as non-cumulative perpetual preference shares and hybrid capital securities
are included in other tier 1 capital; and
tier 2 capital comprises qualifying subordinated loan capital, related non-controlling interests, allowable
collective impairment allowances and unrealised gains arising on the fair valuation of equity instruments held as
available for sale. Tier 2 capital also includes reserves arising from the revaluation of properties.
To ensure the overall quality of the capital base, the FSA’s rules set restrictions on the amount of hybrid capital
instruments that can be included in tier 1 capital relative to core tier 1 capital, and limits overall tier 2 capital to no
more than tier 1 capital.
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Pillar 1 capital requirements
Pillar 1 covers the capital resources requirements for credit risk, market risk and operational risk. Credit risk includes
counterparty credit risk and securitisation requirements. These requirements are expressed in terms of RWAs.
Credit risk capital requirements
Basel II applies three approaches of increasing sophistication to the calculation of Pillar 1 credit risk capital
requirements. The most basic, the standardised approach, requires banks to use external credit ratings to determine
the risk weightings applied to rated counterparties. Other counterparties are grouped into broad categories and
standardised risk weightings are applied to these categories. The next level, the internal ratings-based (‘IRB’)
foundation approach, allows banks to calculate their credit risk capital requirements on the basis of their internal
assessment of a counterparty’s probability of default (‘PD’), but their estimates of exposure at default (‘EAD’) and
loss given default (‘LGD’) are subject to standard supervisory parameters. Finally, the IRB advanced approach
allows banks to use their own internal assessment in both determining PD and quantifying EAD and LGD.
The capital resources requirement, which is intended to cover unexpected losses, is derived from a formula specified
in the regulatory rules which incorporates PD, LGD, EAD and other variables such as maturity and correlation.
Expected losses under the IRB approaches are calculated by multiplying PD by EAD and LGD. Expected losses
are deducted from capital to the extent that they exceed total accounting impairment allowances.
For credit risk we have adopted the IRB advanced approach for the majority of our portfolios, with the remainder on
either IRB foundation or standardised approaches.
Under our Basel II rollout plans, a number of our Group companies and portfolios are in transition to advanced IRB
approaches. At the end of 2012, portfolios in most of Europe, Hong Kong, Rest of Asia-Pacific and North America
were on advanced IRB approaches. Others remain on the standardised or foundation approaches under Basel II,
pending definition of local regulations or model approval, or under exemptions from IRB treatment.
• Counterparty credit risk
CCR arises for OTC derivatives and securities financing transactions. It is calculated in both the trading and non-
trading books and is the risk that the counterparty to a transaction may default before completing the satisfactory
settlement of the transaction. Three approaches to calculating CCR and determining exposure values are defined
by Basel II: standardised, mark-to-market and internal model method. These exposure values are used to
determine capital requirements under one of the credit risk approaches: standardised, IRB foundation and IRB
advanced.
We use the mark-to-market and internal model method approaches for CCR. Our longer-term aim is to migrate
more positions from the mark-to-market to the internal model method approach.
•
Securitisation
Securitisation positions are held in both the trading and non-trading books. For non-trading book securitisation
positions, Basel II specifies two methods for calculating credit risk requirements, the standardised and the IRB
approaches. Both rely on the mapping of rating agency credit ratings to risk weights, which range from 7% to
1,250%. Positions that would otherwise be weighted at 1,250% are deducted from capital.
Within the IRB approach, we use the ratings-based method for the majority of our non-trading book
securitisation positions, and the internal assessment approach for unrated liquidity facilities and programme-wide
enhancements for asset-backed securitisations.
The majority of securitisation positions in the trading book are treated for capital purposes as if they are held in
the non-trading book under the standardised or IRB approaches. Other traded securitisation positions, known as
correlation trading, are treated under an internal model approach approved by the FSA.
Market risk capital requirement
The market risk capital requirement is measured using internal market risk models where approved by the FSA, or
the FSA’s standard rules. Our internal market risk models comprise VAR, stressed VAR, incremental risk charge and
correlation trading under the comprehensive risk measure.
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Report of the Directors: Operating and Financial Review (continued)
Capital > Appendix to Capital > RWA movement by key driver
Operational risk capital requirement
Basel II includes a capital requirement for operational risk, again utilising three levels of sophistication. The capital
required under the basic indicator approach is a simple percentage of gross revenues, whereas under the standardised
approach it is one of three different percentages of total operating income less insurance premiums allocated to each
of eight defined business lines. Both these approaches use an average of the last three financial years’ revenues.
Finally, the advanced measurement approach uses banks’ own statistical analysis and modelling of operational risk
data to determine capital requirements. We have adopted the standardised approach in determining our operational
risk capital requirements.
Pillar 2 capital requirements
We conduct an Internal Capital Adequacy Assessment Process (‘ICAAP’) to determine a forward looking assessment
of our capital requirements given our business strategy, risk profile, risk appetite and capital plan. This process
incorporates the Group’s risk management processes and governance framework. A range of stress tests are applied
to our base capital plan. These, coupled with our economic capital framework and other risk management practices,
are used to assess our internal capital adequacy requirements.
The ICAAP is examined by the FSA as part of its Supervisory Review and Evaluation Process, which occurs
periodically to enable the regulator to define the individual capital guidance or minimum capital requirements for
HSBC and capital planning buffer where required.
Pillar 3 disclosure requirements
Pillar 3 of Basel II is related to market discipline and aims to make firms more transparent by requiring them to
publish specific, prescribed details of their risks, capital and risk management under the Basel II framework at least
annually. Our Pillar 3 Disclosures 2012 report is published on the HSBC website, www.hsbc.com.
RWA movement by key driver - basis of preparation and supporting notes
(Unaudited)
Credit risk and counterparty credit risk drivers – definitions and quantification
The causal analysis of RWA movements splits the total movement in IRB RWAs into six drivers, described below.
The first four relate to specific, identifiable and measurable changes. The remaining two, book size and book quality,
are derived after accounting for movements in the first four specific drivers.
1. Foreign exchange movements
This is the movement in RWAs as a result of changes in the exchange rate between the functional currency of the
HSBC company owning each portfolio and US dollars, being our presentation currency for consolidated reporting.
Our structural foreign exchange exposures are managed with the primary objective of ensuring, where practical, that
our consolidated capital ratios and the capital ratios of individual banking subsidiaries are largely protected from the
effect of changes in exchange rates.
2. Acquisitions and disposals
This is the movement in RWAs as a result of the disposal or acquisition of business operations. This can be whole
businesses or parts of a business. The movement in RWAs is quantified based on the credit risk exposures as at the
end of the month preceding a disposal or following an acquisition.
3. Model updates
New/updated models
RWA movements arising from the implementation of new models and from changes to existing parameter models
are allocated to this driver. This figure will also include changes which arise following review of modelling
assumptions. Where a model recalibration reflects an update to more recent performance data, the resulting RWA
changes are not assigned here, but instead reported under book quality.
RWA changes are estimated based on the impact assessments made in the testing phase prior to implementation.
These values are used to simulate the impact of new or updated models on the portfolio at the point of
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implementation, assuming there were no major changes in the portfolio from the testing phase to implementation
phase.
Portfolios moving onto IRB approach
Where a portfolio moves from the standardised approach to the IRB approach, the RWA movement by key driver
statement shows the increase in IRB RWAs, but does not show the corresponding reduction in standardised approach
RWAs as its scope is limited to IRB only.
The movement in RWAs is quantified at the date at which the IRB approach is applied, and not during the testing
phase as with a new/updated model.
4. Methodology and policy
Internal updates
This captures the RWA impact resulting from changing the internal treatment of exposures. This may include, but is
not limited to, identification of netting and credit risk mitigation.
External updates
This specifies the impact resulting from additional or changing regulatory requirements. This includes, but is not
limited to, regulatory-prescribed changes to the RWA calculation. The movement in RWAs is quantified by
comparing the RWAs calculated for that portfolio under the old and the new requirements.
5. Book size
RWA movements attributed to this driver are those we would expect to experience for the given movement in
exposure, as measured by EAD, assuming a stable risk profile. These RWA movements arise in the normal course of
business, such as growth in credit exposures or reduction in book size from run-offs and write-offs.
The RWA movement is quantified as follows:
• RWA and EAD changes captured in the four drivers above are excluded from the total movements to create an
adjusted movement in EAD and RWA for the period.
• The average RWA to EAD percentage is calculated for the opening position and is applied to the adjusted
movement in EAD. This results in an estimated book size RWA movement based on the assumption that the
EAD to RWA percentage is constant throughout the period.
As the calculation relies on averaging, the output is dependent upon the degree of portfolio aggregation and the
number of discrete time periods for which the calculation is undertaken. For each quarter of 2012 this calculation was
performed for each HSBC company with an IRB portfolio, split by the main Basel categories of credit exposures, as
described in the table below:
Basel categories of IRB credit exposures within HSBC
Central governments and central banks
Corporate foundation IRB
Qualifying revolving retail exposures
Institutions
Corporate advanced IRB
Other advanced IRB
Retail mortgages
Retail SME
Other retail
The total of the results is shown in book size within the RWA movement by key driver table.
6. Book quality
This represents RWA movements resulting from changes in the underlying credit quality of customers. These are
caused by changes to IRB risk parameters which arise from actions such as, but not limited to, model recalibration,
change in counterparty external rating, or the influence of new lending on the average quality of the book. The
change in RWAs attributable to book quality is calculated as the balance of RWA movements after taking account of
all drivers described above.
The RWA movement by key driver statement includes only movements which are calculated under the IRB
approach. Certain classes of credit risk exposure are treated as capital deductions and therefore reductions are not
shown in this statement. If the treatment of a credit risk exposure changes from RWA to capital deduction in the
period, then only the reduction in RWAs would appear in the RWA movement by key driver tables. In this instance,
a reduction in RWAs does not necessarily indicate an improvement in the capital position.
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Report of the Directors: Operating and Financial Review (continued)
Capital > Appendix to Capital > CRD IV end point
Market risk drivers – definitions and quantification
The RWA movement by key driver for market risk combines the credit risk drivers 5 and 6 into a single driver called
‘Movements in risk levels’. The market risk RWA driver called ‘Foreign exchange movements and other’ includes
foreign exchange movements and additional items which can not be reasonably assigned to any of the other drivers.
Basis of preparation of the estimated effect of the CRD IV end point applied to the 31 December
2012 position.
(Unaudited)
The table on page 289 presents a reconciliation of our reported core tier 1 and RWA position at 31 December 2012 to
the pro-forma estimated CET1 and estimated RWAs based on the Group’s interpretation of the draft July 2011
CRD IV legislation and/or guidance provided by the FSA and, in lieu of guidance, our current expectation of how
these draft 2011 rules will be updated by subsequent EU deliberations.
CRD IV has not yet become law and its provisions are subject to on-going negotiation and amendment. In addition,
formal Implementing Technical Standards (‘ITS’) due for issue by the EBA are still to be drafted and finalised,
leaving the CRD IV rules subject to significant interpretation. Despite the uncertainty around a number of areas
in the rules, our disclosures are based on the draft July 2011 CRD IV text. Pending finalisation of CRD IV, we have
not definitively upgraded the models and systems used to calculate capital numbers in a CRD IV environment which,
as a consequence, are subject to change. Consequently, the final CRD IV impact on the Group’s CET1 and RWAs
may be different from our current estimates.
The detailed basis of preparation is described below for items that are different from our current treatment under
Basel II. For individual immaterial holdings in banks, financial institutions and insurance that are, in aggregate,
above 10% of the Group’s CET1 capital, we have included specific short term management actions that could be
taken to negate the capital deduction. For other CRD IV proposals, additional management actions could also be
taken dependent upon the finalised rules and timing of implementation but, as such, have not been included.
Regulatory adjustments applied to core tier 1 in respect of amounts subject to CRD IV treatment
Investments in own shares through the holding of composite products of which HSBC is a component
(exchange traded funds, derivatives, and index stock): the value of our holdings of own CET1 instruments,
where it is not already deducted under IFRSs, is deducted from CET1. Under CRD IV, deduction comprises not only
direct but also indirect, actual and contingent, banking and trading book gross long positions. Trading book positions
are calculated net of short positions only where there is no counterparty credit risk on these short positions (this
restriction does not apply to index positions). We have not recognised the benefit of non-index short positions, even
where they are executed with central counterparties or are fully collateralised. Under current rules, there is no
regulatory adjustment made on the amounts already deducted under IFRS rules.
Surplus non-controlling interest disallowed in CET1: non-controlling interests arising from the issue of common
shares by our banking subsidiaries receive limited recognition. The excess over a minimum of 7% of the CET1 of the
relevant subsidiary is not allowable in the Group’s CET1 to the extent it is attributable to minority shareholders.
Under current rules, there is no regulatory restriction applied to these items.
Unrealised gains/(losses) on available-for-sale debt securities: under CRD IV, there is no adjustment to remove
from CET1 capital unrealised gains and losses on available-for-sale debt securities. Under current FSA rules, these
are removed from capital (net of tax).
Unrealised gains on available-for-sale equities and reserves arising from revaluation of property: there is no
adjustment for unrealised gains and losses on reserves arising from the revaluation of property and on available-for-
sale equities. Under current FSA rules, unrealised net gains on these items are included in tier 2 capital (net of
deferred tax) and net losses are deducted from tier 1 capital.
Defined benefit pension fund liabilities: the amount of retirement benefit liabilities as reported on the balance sheet
is fully recognised in CET1 rather than being replaced by any committed funding plans as current FSA rules permit.
Excess of expected losses over impairment allowances deducted 100% from CET1: the amount of excess
expected loss over impairment allowance is deducted 100% from CET1. Under current FSA rules, this amount is
deducted 50% from core tier 1 (‘CT1’) and 50% from total capital.
298
Removal of 50% of tax credit adjustment for expected losses: the amount of expected losses in excess of
impairment allowances that is deducted from CET1 capital is not reduced for any related tax effects. Under current
FSA rules, any related tax credit offset is recognised 50% in CT1 and 50% in tier 1 capital.
Securitisation positions risk-weighted under CRD IV: securitisation positions that were deducted from core tier 1
under current rules have been included in RWAs at 1,250%.
Deferred tax liabilities on intangibles: the amount of intangible assets deducted from CET1 has been reduced by
the related deferred tax liability. Under current rules, the goodwill and intangibles are deducted at their accounting
value.
Deferred tax assets that rely on future profitability (excluding those arising from temporary differences): the
deferred tax assets that rely on future profitability and do not arise from temporary differences are deducted 100%
from CET1. The deferred tax assets that rely on future profitability and arise from temporary differences are subject
to the separate threshold deduction approach detailed separately. Under current rules, these items receive a risk
weighting of 100%.
Additional valuation adjustment (referred to as prudent valuation adjustment or ‘PVA’): under current FSA
rules, banks are required to comply with requirements for prudent and reliable valuation of any balance sheet position
measured at market or fair value. Under CRD IV, all assets and derivatives measured at fair value are subject to
specified standards for prudent valuation, covering uncertainty around the input factors into the fair value valuation
models – namely, uncertainty around the mark to market of positions, model risk, valuation of less liquid positions
and credit valuation adjustments (‘CVA’).
Where the accounting fair value calculated under IFRS is higher than the valuation amount resulting from the
application of the prudential adjustments, this would result in an additional valuation adjustment or PVA deduction
from common equity tier 1 capital.
Following FSA direction, we have included an estimate of the impact of PVA, although there is guidance outstanding
following a recent consultation on a related EBA draft regulatory technical standard issued on 13 November 2012.
Further clarity on the requirements following finalisation of the EBA process and discussions with our regulator
could potentially change this figure.
Debit valuation adjustment (‘DVA’): the amount of gains and losses on OTC derivative liabilities that results from
changes to our own credit spread are derecognised from CET1.
Individually immaterial holdings in CET1 capital of banks, financial institutions and insurance in aggregate
above 10% of HSBC CET1: under CRD IV, the investments in CET1 instruments of banks, financial institutions
and insurance entities, where we have a holding of not more than 10% of the CET1 instruments issued by those
entities, are deducted from CET1, to the extent the aggregate amount of such holdings exceeds 10% of our CET1
(calculated before any threshold deductions).
The estimated deduction follows the draft July 2011 CRD IV rules and guidance provided by the FSA, which impose
a restriction on the netting of long and short positions held in the trading book, whereby the maturity of the short
positions has to match the maturity of the long position, or have a residual maturity of no less than a year.
While rules are in draft and this aspect is still being debated, we have disclosed the impact of the rules as written.
However, a range of management actions from adjustment to the hedging strategy, curtailment or closure of the
business could be applied to mitigate the capital deduction.
Deductions under threshold approach: under CRD IV, where we have a holding of more than 10% of the CET1
instruments issued by banks, financial institutions and insurance entities which is not part of our regulatory
consolidation, that holding is subject to a threshold deduction approach. Under current rules, these exposures are
deducted 50% from tier 1 capital and 50% from total capital, except for certain insurance holdings that met the
requirements under the transitional provision of the current rules and until 31 December 2012 were allowed to be
deducted 100% from total capital.
Deferred tax assets that rely on the future profitability of the bank to be realised and which arise from temporary
differences are also subject to this threshold deduction approach. Under current rules, these assets would be subject to
100% risk weighting.
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Report of the Directors: Operating and Financial Review (continued)
Capital > Appendix to Capital > CRD IV end point // Corporate Governance > Report / Letter from Group Chairman
Under CRD IV, the amount of such deferred tax assets and significant investments which individually and in
aggregate exceed 10% and 15%, respectively, of our CET1 are fully deducted from CET1 capital. Amounts falling
below the 10% and 15% thresholds are risk weighted at 250%.
Changes to capital requirements introduced by CRD IV
Credit valuation adjustment: introduced as a new requirement under CRD IV rules, this is a capital charge to cover
the risk of mark-to-market losses on expected counterparty risk and referred to as a regulatory CVA risk capital
charge.
We have estimated our regulatory CVA risk capital charge based on the draft July 2011 CRD IV text, calculated on a
full range of OTC derivative counterparties without exemptions that may be available under the final CRD IV text.
Where we have both specific risk VAR approval and internal model method approval for a product, the CVA VAR
approach has been used to calculate the CVA capital charge. Where we do not hold both approvals, the standardised
approach has been applied.
Counterparty credit risk (other than credit valuation adjustment): the additional requirements introduced by
CRD IV and included in the CCR charge include: the increase in the asset value correlation multiplier for financial
counterparties, additional requirements for collateralised counterparties, margin period of risk and new requirements
for exposures to central clearing counterparties (‘CCPs’).
In estimating the amount included for CCPs, we have assumed that all our CCPs are ‘qualifying’ under the
requirements of CRD IV, although this will ultimately depend on confirmation from the competent regulatory
authority of the CCP in question that the CCP complies with all the recommendations for CCPs published by the
Committee on payment and settlement systems and by the technical committee of the International Organisation of
Securities Commissions. Where we do not have full data disclosed for a given CCP, we have assumed full deduction
of default fund exposures.
Amounts in aggregate below 15% threshold and therefore subject to 250% risk weight: as explained above,
items that fall under the threshold approach treatment under CRD IV, and which are below the 10% and 15%
thresholds, are risk-weighted at 250%.
Securitisation positions and free deliveries risk-weighted under CRD IV: securitisation positions which were
deducted 50% from core tier 1 and 50% from total capital, and free deliveries that were deducted from total capital
under current rules, are now included in RWAs at 1,250%.
Investment in commercial entities now risk-weighted: under CRDIV investments in commercial entities that are
not qualifying holdings are risk weighted. These were deducted under the current rules.
Deferred tax assets moved to threshold approach or deduction under CRD IV: deferred tax assets, which were
risk-weighted at 100% under the standardised approach under current rules, are treated as a capital deduction from
CET1 to the extent they rely on the future profitability of the bank to be realised. Those that do not rely on future
profitability shall continue to be risk weighted.
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H S B C H O L D I N G S P L C
Report of the Directors: Corporate Governance
Corporate Governance Report / Letter from the Group Chairman
Corporate Governance
Letter from the Group Chairman
Page App1
Dear Shareholder
Corporate Governance Report .................. 301
Letter from the Group Chairman ............. 301
Directors ....................................................... 302
Secretary ...................................................... 307
Adviser to the Board ................................... 307
Group Managing Directors ........................ 308
Board of Directors ....................................... 309
Directors ........................................................ 309
Corporate governance codes ......................... 316
Board committees ........................................ 318
Group Management Board ............................ 318
Group Audit Committee ................................ 319
Group Risk Committee ................................. 323
Financial System Vulnerabilities
Committee ..................................................... 328
Group Remuneration Committee .................. 329
Nomination Committee ................................. 329
Corporate Sustainability Committee ............. 330
Internal control ............................................ 332
Going concern basis .................................... 334
Employees .................................................... 335
Global People Survey .................................... 335
Reward .......................................................... 335
Employee relations ........................................ 335
Diversity and inclusion ................................. 335
Staff development ......................................... 335
Employment of disabled persons .................. 336
Health and safety ........................................... 336
Remuneration policy ..................................... 336
Employee share plans .................................... 336
Other required disclosures ......................... 339
Share capital ..................................................
Directors’ interests ........................................
Supplier payment policy ...............................
Dividends and shareholders ..........................
340
343
344
344
2013 Annual General Meeting ................... 339
1 Appendix to Report of the Directors.
Corporate Governance Report
The statement of corporate governance practices
set out on pages 301 to 370 and information
incorporated by reference constitutes the Corporate
Governance Report of HSBC Holdings. The reports
of Board Committees are contained within the
Corporate Governance Report.
301
At HSBC, we are committed to the highest standards
of corporate governance. This is more important than
ever in light of developments and changes in
regulatory policy for financial services, society’s
view of the role of banks and the need to maintain
investor confidence. We believe that a strong and
transparent corporate governance framework is
directly linked to the long-term success of the
Group.
A values-led culture, high behavioural standards
and robust procedures are fundamental to a strong
corporate governance framework. As we reported
to you last year, a renewed emphasis has been placed
on values at HSBC, ensuring our employees are
empowered to do the right thing and act with
courageous integrity. The role played by HSBC
Values in daily operating practice is fundamental
to our culture and HSBC Values continue to be
embedded in how we conduct our business.
In my statement to shareholders on pages 4 to 7
of the Annual Report and Accounts 2012, I outline
the significant challenges faced by the Group, both
during the year and in the future, and the way we
endeavour to address these challenges. We now have
the structure to help us reduce complexity and to run
the Group more effectively on a global basis. We are
formulating and implementing global standards to
ensure that our conduct matches our values.
In this Corporate Governance Report, we outline
the way in which the Group’s corporate governance
framework operates, including the role and
responsibilities of the Board and each of its
Committees. We continue to review and develop this
framework in light of changes in the Group’s
businesses and the external environment, taking
into account the views of external parties where
appropriate. As in previous years, we have benefited
from input from a third-party facilitator whose report
was used by the Board in its annual review of its own
effectiveness.
Ensuring there is an appropriate balance
of skills, knowledge and experience on the Board is
an important aspect of corporate governance. The
expertise and experience of our Board was
augmented in 2012 with the appointments of
Joachim Faber, former Chief Executive Officer of
Allianz Global Investors AG, and John Lipsky,
former First Deputy Managing Director of the
International Monetary Fund. It was augmented
further in 2013 with the appointments of Renato
Fassbind, former Chief Financial Officer of Credit
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Report of the Directors: Corporate Governance (continued)
Letter from the Group Chairman / Directors
Suisse Group SA, and Jim Comey, former United
States Deputy Attorney General.
We have also taken steps to strengthen non-
executive oversight of matters relating to anti-money
laundering, sanctions, terrorist financing and
proliferations financing. A new Board committee, the
Financial System Vulnerabilities Committee
(‘FSVC’), will provide governance, oversight and
policy guidance over the framework of controls and
procedures designed to identify areas where HSBC
may become exposed, and through that exposure,
expose the financial system more broadly to
financial crime or system abuse. The FSVC will use
the knowledge and experience of its members to
place the Group in a position of leadership in this
area and will provide the Board with a forward-
looking perspective on financial crime risk.
The executive committee structure has been
enhanced during the year with the establishment
of a regular separate meeting of the Group
Management Board to focus on developing and
implementing global standards reflecting best
practices which must be adopted and adhered to
consistently throughout the Group.
During the year, the Board adopted a Board
diversity policy, which is consistent with the Group’s
strategic focus on ethnicity, age and gender diversity
for the employee base. At the 2011 Annual General
Meeting, I stated the Board’s intention to exceed the
aspirational target set by Lord Davies in his report
Women on Boards of 25% female representation on
the boards of FTSE 100 companies by 2015. Our
policy re-states this intention.
We recognise that our strategy to be the world’s
leading international bank relies on a foundation of
good corporate governance and we endeavour to be
at the forefront of this field in the coming years.
D J Flint, Group Chairman
4 March 2013
Directors
D J Flint, CBE, 57
Group Chairman
Skills and experience: extensive governance
experience gained through membership of the
Boards of HSBC and BP p.l.c.; considerable
knowledge of finance and risk management in
banking, multinational financial reporting, treasury
and securities trading operations; honoured with a
CBE in recognition of his services to the finance
industry; member of the Institute of Chartered
Accountants of Scotland and the Association of
Corporate Treasurers. Fellow of The Chartered
Institute of Management Accountants. Joined HSBC
in 1995.
Appointed to the Board: 1995
Current appointments include: director of The
Hong Kong Association; and Chairman of the
Institute of International Finance since 6 June 2012.
A member of the Mayor of Beijing’s International
Business Leaders’ Advisory Council as well as the
Mayor of Shanghai’s International Business Leaders’
Advisory Council; and a member of the International
Advisory Board of the China Europe International
Business School, Shanghai.
Former appointments include: Group Finance
Director and Chief Financial Officer; and Executive
Director, Risk and Regulation. Co-Chairman of the
Counterparty Risk Management Policy Group III;
Chairman of the Financial Reporting Council’s
review of the Turnbull Guidance on Internal Control;
member of the Accounting Standards Board and the
Standards Advisory Council of the International
Accounting Standards Board; served on the Large
Business Forum on Tax and Competitiveness and the
Consultative Committee of the Large Business
Advisory Board of HM Revenue and Customs;
partner in KPMG; and non-executive director and
Chairman of the Audit Committee of BP p.l.c.
S T Gulliver, 53
Group Chief Executive
Skills and experience: a career banker with over
30 years’ international experience with HSBC; has
held a number of key roles in the Group’s operations
worldwide, including in London, Hong Kong,
Tokyo, Kuala Lumpur and the United Arab Emirates;
played a leading role in developing and expanding
Global Banking and Markets, the wholesale banking
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division of the Group with operations in over 65
countries and territories. Joined HSBC in 1980.
Appointed to the Board: 2008
Current appointments include: Chairman of The
Hongkong and Shanghai Banking Corporation
Limited; and Chairman of the Group Management
Board. A member of the Monetary Authority of
Singapore International Advisory Panel since 1 June
2012 and a member of the International Advisory
Council of the China Banking Regulatory
Commission since 10 July 2012.
Former appointments include: Chairman, Europe,
Middle East and Global Businesses and Chairman of
HSBC Bank plc, HSBC Bank Middle East Limited
and HSBC Private Banking Holdings (Suisse) SA.
Head of Global Banking and Markets; Co-Head of
Global Banking and Markets; Head of Global
Markets; Head of Treasury and Capital Markets in
Asia-Pacific; Deputy Chairman of HSBC Trinkaus
& Burkhardt AG and a member of its Supervisory
Board. Ceased to be Chairman of HSBC France on
22 November 2012.
S A Catz†, 51
Skills and experience: a background in international
business leadership, having helped transform Oracle
into the largest producer of business management
software and the world’s leading supplier of software
for information management.
Appointed to the Board: 2008
Current appointments include: President and
Chief Financial Officer of Oracle Corporation.
Joined Oracle in 1999 and appointed to the board
of directors in 2001.
Former appointments include: Managing Director
of Donaldson, Lufkin & Jenrette.
L M L Cha†, GBS, 63
Member of the Corporate Sustainability Committee
and, since 1 January 2013, Chairman.
Skills and experience: extensive regulatory and
policy making experience in the finance and securities
sector in Hong Kong and mainland China; formerly
Vice Chairman of the China Securities Regulatory
Commission, being the first person outside mainland
China to join the Central Government of the People’s
Republic of China at vice-ministerial rank; awarded
Gold and Silver Bauhinia Stars by the Hong Kong
Government for public service; formerly Deputy
Chairman of the Securities and Futures Commission
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in Hong Kong; and has worked in the US and Asia.
Appointed to the Board: 2011
Current appointments include: non-executive
Deputy Chairman of The Hongkong and Shanghai
Banking Corporation Limited; non-official member
of the Executive Council of Hong Kong SAR; a
Hong Kong Deputy to the 12th National People’s
Congress of China; non-executive director of China
Telecom Corporation Limited; member of the
Advisory Board of the Yale School of Management;
Senior International Advisor for Foundation Asset
Management Sweden AB; member of the State Bar
of California; and Chairman of the Financial Services
Development Council of Hong Kong SAR since
17 January 2013. Appointed a non-executive director
of Unilever PLC with effect from 14 May 2013.
Former appointments include: non-executive
director of Bank of Communications Co., Ltd.,
Baoshan Iron and Steel Co. Limited; Johnson
Electric Holdings Limited; and Chairman of the
University Grants Committee in Hong Kong.
Ceased to be a director of Hong Kong Exchanges
and Clearing Limited on 24 April 2012; Tata
Consultancy Services Limited on 29 June 2012;
Chairman of the ICAC Advisory Committee on
Corruption on 31 December 2012; and Chairman
of the Task Force on the Financial Services
Development Council of Hong Kong SAR on
17 January 2013.
M K T Cheung†, GBS, OBE, 65
Member of the Group Audit Committee.
Skills and experience: a background in international
business and financial accounting, particularly in
Greater China and the wider Asian economy; retired
from KPMG Hong Kong in 2003 after more than
30 years; awarded the Gold Bauhinia Star by the
Hong Kong Government. Fellow of the Institute
of Chartered Accountants in England and Wales.
Appointed to the Board: 2009
Current appointments include: non-executive
director of Hang Seng Bank Limited and HKR
International Limited; non-executive Chairman of
the Airport Authority Hong Kong and the Council
of the Hong Kong University of Science and
Technology; director of The Association of Former
Council Members of The Stock Exchange of Hong
Kong Limited and The Hong Kong International
Film Festival Society Ltd; and a member of the
Working Group on Transportation under the
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Report of the Directors: Corporate Governance (continued)
Directors
Appointed to the Board: 2005
Current appointments include: non-executive
Chairman of Hogg Robinson Group plc and non-
executive Chairman of Home Retail Group plc since
4 July 2012.
Former appointments include: executive director
and Chief Financial Officer of GlaxoSmithKline plc;
non-executive director of GUS plc; member of the
Supervisory Board of Siemens AG; Chairman of The
Hundred Group of Finance Directors; and member
of the Accounting Standards Board. Ceased to be a
council member of The Royal Academy of Arts on
18 September 2012.
J Faber†, 62
Member of the Group Risk Committee since 1 March
2012.
Skills and experience: a background in banking
and asset management with significant international
experience, having worked in Germany, Tokyo, New
York and London. Former Chief Executive Officer
of Allianz Global Investors AG and member of the
management board of Allianz SE; 14 years’
experience with Citigroup Inc. holding positions in
Trading and Project Finance and as Head of Capital
Markets for Europe, North America and Japan. Has a
doctorate from the University of Administrative
Sciences in Speyer.
Appointed to the Board: 1 March 2012
Current appointments include: Chairman of the
supervisory board of Deutsche Börse AG; Chairman
of the Shareholder Committee of Joh A. Benckiser
SARL from 1 January 2012; independent director of
Coty Inc.; director of Allianz France S.A., Allianz
Investment Management GmbH and Allianz Climate
Solutions GmbH; and member of the advisory
boards of the Siemens Group Pension Board, the
European School for Management and Technology
and the German Council for Sustainable
Development.
Former appointments include: Chairman of
Allianz Global Investors Kapitalanlagegesellschaft
and Allianz Global Investors Deutschland GmbH;
Chairman of the board of Allianz Global Investors
SGR; and member of the board of Allianz SpA and
of the supervisory board of Bayerische Boerse AG.
Economic Development Commission of the Hong
Kong SAR Government since 17 January 2013.
Former appointments include: non-executive
director of Sun Hung Kai Properties Limited and
Hong Kong Exchanges and Clearing Limited;
Chairman and Chief Executive Officer of KPMG
Hong Kong; and council member of the Open
University of Hong Kong. Ceased to be a non-
official member of the Executive Council of the
Hong Kong SAR on 1 July 2012.
J B Comey†, 52
Member of the Financial System Vulnerabilities
Committee on 4 March 2013.
Skills and experience: extensive experience in both
the public and private sectors in the US federal and
state justice systems and as General Counsel to
leading international businesses. Former US Deputy
Attorney General responsible for supervising
operations of the US Department of Justice. As US
Attorney for the Southern District of New York,
oversaw the prosecution of corporate executives on
fraud and securities-related charges and international
drug cartels.
Appointed to the Board: 4 March 2013
Current appointments include: Columbia
University Law School, Senior Research Scholar
and Hertog Fellow on National Security Law.
Former appointments include: General Counsel
of Bridgewater Associates, LP; Senior Vice
President and General Counsel of Lockheed Martin
Corporation; US Deputy Attorney General; US
Attorney for the Southern District of New York;
and Assistant US Attorney for the Eastern District
of Virginia.
J D Coombe†, 67
Chairman of the Group Audit Committee and
member of the Group Risk Committee and Group
Remuneration Committee.
Skills and experience: a background in
international business, financial accounting and the
pharmaceutical industry. Formerly Chief Financial
Officer of GlaxoSmithKline plc with responsibility
for the group’s financial operations globally. Fellow
of the Institute of Chartered Accountants in England
and Wales.
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R A Fairhead†, CBE, 51
Chairman of the Group Risk Committee and the
Financial System Vulnerabilities Committee, and
member of the Group Audit Committee and
Nomination Committee.
Skills and experience: a background in international
industry, publishing, finance and general
management. Formerly Finance Director of Pearson
plc with responsibility for overseeing the day-to-day
running of the finance function and directly
responsible for global financial reporting and
control, tax and treasury. Has a Master’s in Business
Administration from the Harvard Business School.
Appointed to the Board: 2004
Current appointments include: Chairman and
director of Financial Times Group Limited; director
of Pearson plc and non-executive director of The
Economist Newspaper Limited. Will retire from
these appointments on 27 April 2013. Non-executive
member of the board of the UK Government’s
Cabinet Office.
Former appointments include: Executive Vice
President, Strategy and Group Control of Imperial
Chemical Industries plc; Finance Director of Pearson
plc; and Chairman and director of Interactive Data
Corporation.
R Fassbind†, 57
Member of the Group Audit Committee and the
Group Remuneration Committee since 1 March
2013.
Skills and experience: a background in financial
accounting and international business. Formerly
Chief Financial Officer of Credit Suisse Group SA
and ABB Group. Has a Master’s in Business
Administration and a PhD in Economics from the
University of Zurich.
Appointed to the Board: 1 January 2013
Current appointments include: Vice Chairman of
the Supervisory Board and member of the audit and
compensation committees of Swiss Reinsurance
Company; member of the supervisory board and
audit committee of Kühne + Nagel International
AG; independent director of Oanda Corporation;
and member of the supervisory board of the Swiss
Federal Audit Oversight Authority.
Former appointments include: Chief Financial
Officer of Credit Suisse Group AG; Senior Advisor
to the Chief Executive, Credit Suisse Group AG;
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Chief Executive Officer of Diethelm Keller Group;
Chief Financial Officer of ABB Group; Chairman
of ABB (Switzerland) AG and DKSH AG; and a
member of the supervisory board of Winterthur
Insurance Company.
J W J Hughes-Hallett†, CMG , SBS, 63
Member of the Nomination Committee and until
31 July 2012, the Group Risk Committee. Member
of the Corporate Sustainability Committee since
1 January 2013.
Skills and experience: a background in financial
accounting and experience of management of
a broad range of international businesses,
including aviation, insurance, property, shipping,
manufacturing and trading in the Far East, UK, US
and Australia. Awarded the Silver Bauhinia Star by
the Hong Kong Government. Fellow of the Institute
of Chartered Accountants in England and Wales.
Appointed to the Board: 2005
Current appointments include: Chairman of
John Swire & Sons Limited; non-executive director
of Cathay Pacific Airways Limited and Swire
Pacific Limited; a trustee of the Esmée Fairbairn
Foundation; member of The Hong Kong
Association; and Chairman of the Governing
Board of the Courtauld Institute of Art.
Former appointments include: non-executive
director of The Hongkong and Shanghai Banking
Corporation Limited and a trustee of the Dulwich
Picture Gallery until 31 December 2012.
W S H Laidlaw†, 57
Member of the Group Remuneration Committee.
Skills and experience: significant international
experience, particularly in the energy sector, having
had responsibility for businesses in four continents.
Qualified Solicitor and Master’s in Business
Administration from INSEAD.
Appointed to the Board: 2008
Current appointments include: Chief Executive
Officer of Centrica plc; and Lead Non-executive
Board Member of the UK Department for Transport.
Former appointments include: Executive Vice
President of Chevron Corporation; non-executive
director of Hanson PLC; Chief Executive Officer
of Enterprise Oil plc; and President and Chief
Operating Officer of Amerada Hess Corporation.
Ceased to be a member of the UK Prime Minister’s
Business Advisory Group on 31 December 2012.
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Report of the Directors: Corporate Governance (continued)
Directors / Secretary / Adviser to the Board
J P Lipsky†, 66
Member of the Group Risk Committee since 1 March
2012 and Nomination Committee since 24 May
2012.
Skills and experience: international experience
having worked in Chile, New York, Washington and
London and interacted with financial institutions,
central banks and governments in many countries.
Served at the International Monetary Fund as First
Deputy Managing Director, Acting Managing
Director and as Special Advisor. Has a PhD from
Stanford University.
Appointed to the Board: 1 March 2012
Current appointments include: Distinguished
Visiting Scholar, International Economics
Program at the Paul H. Nitze School of Advanced
International Studies, Johns Hopkins University.
Co-chairman of the Aspen Institute Program on the
World Economy; director of the National Bureau of
Economic Research; and member of the advisory
board of the Stanford Institute for Economic Policy
Research and the Council on Foreign Relations.
A director of the Center for Global Development
since 1 May 2012; and Global Policy Advisor for
Anderson Global Macro, LLC since 4 February
2013.
Former appointments include: Vice Chairman
J P Morgan Investment Bank; director of the
American Council on Germany and the Japan
Society; and a trustee of the Economic Club of
New York.
J R Lomax†, 67
Member of the Group Audit Committee and Group
Risk Committee.
Skills and experience: experience in both the public
and private sectors and a deep knowledge of the
operation of the UK government and financial system.
Appointed to the Board: 2008
Current appointments include: Chairman of the
International Regulatory Strategy Group and a
director of TheCityUK since 1 January 2013;
non-executive director of The Scottish American
Investment Company PLC, Reinsurance Group of
America Inc., Arcus European Infrastructure Fund
GP LLP and Heathrow Airport Holdings Limited
(formerly BAA Limited); member of the Council
of Imperial College, London; and President of the
Institute of Fiscal Studies.
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Former appointments include: Deputy Governor,
Monetary Stability, at the Bank of England and
member of the Monetary Policy Committee;
Permanent Secretary at the UK Government
Departments for Transport and Work and Pensions
and the Welsh Office; and Vice President and Chief
of Staff to the President of the World Bank.
I J Mackay, 51
Group Finance Director
Skills and experience: extensive financial and
international experience, having worked in London,
Paris, US and Asia. Member of the Institute of
Chartered Accountants of Scotland. Joined HSBC
in 2007.
Appointed to the Board: 2010
Current appointments include: member of the
Group Management Board.
Former appointments include: director of Hang
Seng Bank Limited; Chief Financial Officer, Asia-
Pacific; and Chief Financial Officer, HSBC North
America Holdings Inc; Vice President and Chief
Financial Officer of GE Consumer Finance and
Vice President and Chief Financial Officer of
GE Healthcare – Global Diagnostic Imaging.
Sir Simon Robertson†, 72
Deputy Chairman and senior independent
non-executive Director
Chairman of the Nomination Committee and member
of the Financial System Vulnerabilities Committee.
Skills and experience: a background in international
corporate advisory with a wealth of experience in
mergers and acquisitions, merchant banking,
investment banking and financial markets; honoured
with a knighthood in recognition of his services to
business; extensive international experience having
worked in France, Germany, the UK and the US.
Appointed to the Board: 2006
Current appointments include: non-executive
Chairman of Rolls-Royce Holdings plc until 2 May
2013. The founding member of Robertson Robey
Associates LLP, formerly Simon Robertson
Associates LLP; non-executive director of Berry
Bros. & Rudd Limited, The Economist Newspaper
Limited; and, since 8 May 2012, Troy Asset
Management; partner of NewShore Partners LLP;
and trustee of the Eden Project Trust and the Royal
Opera House Endowment Fund.
Secretary
R G Barber, 62
Group Company Secretary and Head of Corporate
Governance
Joined HSBC in 1980. Group Company Secretary
since 1986 and Company Secretary of HSBC
Holdings plc since 1990. Appointed a Group General
Manager in 2006. Chairman of the Disclosure
Committee. A member of the Listing Authority
Advisory Committee of the Financial Services
Authority and of the Primary Markets Group of
the London Stock Exchange. Fellow of the Institute
of Chartered Secretaries and Administrators. Former
HSBC appointments include: Corporation Secretary
of The Hongkong and Shanghai Banking
Corporation Limited and Company Secretary
of HSBC Bank plc.
Adviser to the Board
D J Shaw, 66
Adviser to the Board since 1998. Director of HSBC
Bank Bermuda Limited. Ceased to be a director of
HSBC Private Banking Holdings (Suisse) SA and
HSBC Private Bank (Suisse) SA on 19 September
2012. An independent non-executive director
of Kowloon Development Company Limited and
Shui On Land Limited. A solicitor and formerly a
partner in Norton Rose.
Former appointments include: Managing Director
of Goldman Sachs International and Chairman of
Dresdner Kleinwort Benson. Ceased to be a non-
executive director of Royal Opera House, Covent
Garden Limited on 31 July 2012.
J L Thornton†, 59
Chairman of the Group Remuneration Committee.
Skills and experience: experience that bridges
developed and developing economies and the public
and private sectors. A deep knowledge of financial
services and education systems, particularly in Asia.
During his 23-year career with Goldman Sachs, he
played a key role in the firm’s global development
and was Chairman of Goldman Sachs Asia.
Appointed to the Board: 2008
Current appointments include: non-executive
Chairman and director of HSBC North America
Holdings Inc.; Director and Co-Chairman of Barrick
Gold Corporation since 15 February 2012 and 5 June
2012 respectively; professor and director of the
Global Leadership Program at the Tsinghua
University School of Economics and Management;
Chairman of the Brookings Institution Board of
Trustees; non-executive director of Ford Motor
Company and China Unicom (Hong Kong) Limited;
director of National Committee on United States-
China Relations; trustee of China Institute and the
China Foreign Affairs University; and member of
the Council on Foreign Relations and the China
Securities Regulatory Commission International
Advisory Committee.
Former appointments include: non-executive
director of Industrial and Commercial Bank of China
Limited and Intel Corporation, Inc.; trustee of Asia
Society; and President of the Goldman Sachs Group,
Inc. Ceased to be a non-executive director of News
Corporation, Inc. on 30 November 2012.
† Independent non-executive Director.
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Report of the Directors: Corporate Governance (continued)
Group Managing Directors / Board of Directors > Directors
Group Managing Directors
A Almeida, 56
Group Head of Human Resources and Corporate
Sustainability
Joined HSBC in 1992. A Group Managing Director
since 2008. Former HSBC appointments include:
Global Head of Human Resources for Global
Banking and Markets, Global Private Banking,
Global Transaction Banking and HSBC Amanah.
S Assaf, 52
Chief Executive, Global Banking and Markets
Joined HSBC in 1994. A Group Managing Director
since 2011. Chairman of HSBC France since
22 November 2012. A director of HSBC Trinkaus &
Burkhardt AG. Former HSBC appointments include:
director of HSBC Global Asset Management
Limited; Head of Global Markets; and Head of
Global Markets for Europe, Middle East and Africa.
Ceased to be a director of HSBC Bank Egypt S.A.E.
on 7 November 2012.
Asset Management; Group Treasurer; and Deputy
Head of Global Markets.
M P Kaur, 49
Group Head of Internal Audit
Will join HSBC and become a Group Managing
Director on 1 April 2013. Former appointments
include: Global Head of Group Audit for Deutsche
Bank AG; Chief Financial Officer & Chief
Operating Officer, Restructuring & Risk Division,
Royal Bank of Scotland Group plc; Group Head of
Compliance and Anti-Money Laundering, Lloyds
TSB; and Global Director of Compliance, Global
Consumer Group, Citigroup.
A M Keir, 54
Global Head of Commercial Banking
Joined HSBC in 1981. A Group Managing Director
since 2011. Former HSBC appointments include:
Group General Manager, Commercial Banking,
Europe and Global Co-Head, Global Commercial
Banking.
I M Dorner, 58
President and Chief Executive Officer of HSBC
USA
S A Levey, 49
Chief Legal Officer
Joined HSBC in 1986. A Group Managing Director
since 1 February 2013. Chairman of HSBC Bank
USA, National Association and HSBC USA Inc.;
President and Chief Executive Officer of HSBC
North America Inc. Former HSBC appointments
include: Chairman of HSBC Amanah Malaysia
Berhad and HSBC Amanah Takaful (Malaysia)
Sendirian Berhad; Deputy Chairman and Chief
Executive Officer of HSBC Bank Malaysia Berhad;
Chief Operating Officer, Treasury and Capital
Markets; General Manager of Marketing, General
Manager of Human Resources; and General
Manager of Premier and Wealth Management,
HSBC Bank plc.
J M Flint, 44
Chief Executive, Retail Banking and Wealth
Management
Joined HSBC in 1989. A Group Managing Director
since 1 January 2013. A director of HSBC Bank
Canada since 15 February 2012. Former HSBC
appointments include: Chief of Staff to the Group
Chief Executive and Group Head of Strategy and
Planning; Chief Executive Officer, HSBC Global
Joined HSBC on 13 January 2012. A Group
Managing Director since 18 January 2012. Former
appointments include: Under Secretary for Terrorism
and Financial Intelligence in the US Department of
Treasury; Senior Fellow for National Security and
Financial Integrity at the Council on Foreign
Relations; Principal Associate Deputy Attorney
General at the US Department of Justice; and Partner
at Miller, Cassidy, Larroca & Lewin LLP and Baker
Botts LLP.
A M Losada, 58
Chief Executive, Latin America and the Caribbean
Joined HSBC in 1973. A Group Managing Director
since 1 December 2012. Chairman of HSBC Bank
(Panama) S.A. since 6 February 2012. A director of
HSBC Bank Argentina S.A. since 2 May 2012 and
a director of HSBC Mexico, S.A., Institucion de
Banca Multiple, Grupo Financiero HSBC and Grupo
Financiero HSBC, S.A. de C.V. since 20 February
2012. Former HSBC appointments include: Chief
Executive Officer, HSBC Argentina; and Deputy
Head, Personal Financial Services, Brazil.
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M M Moses, 55
Group Chief Risk Officer
Joined HSBC in 2005. A Group Managing Director
since 2010. Director of HSBC Insurance (Bermuda)
Limited. A director of HSBC Private Bank (Suisse)
SA and HSBC Private Banking Holdings (Suisse)
SA since 19 September 2012. Former HSBC
appointments include Chief Financial and Risk
Officer, Global Banking and Markets.
S P O’Sullivan, 57
Group Chief Operating Officer
Joined HSBC in 1980. A Group Managing Director
since 2011. Former HSBC appointments include:
Group Chief Technology and Services Officer;
director and Chief Operating Officer of HSBC Bank
plc; and Chief Operating Officer of HSBC Bank
Canada.
B Robertson, 58
Chief Executive, HSBC Bank plc
Joined HSBC in 1975. A Group Managing Director
since 2008. Chairman of HSBC Life (UK) Limited.
Director of HSBC Bank Bermuda Limited since
1 January 2012. Former HSBC appointments
include: Group Chief Risk Officer; Group General
Manager, Group Credit and Risk; and Head of
Global Banking and Markets for North America.
P T S Wong, 61
Chief Executive, The Hongkong and Shanghai
Banking Corporation Limited
Joined HSBC in 2005. A Group Managing Director
since 2010. Chairman of HSBC Bank (China)
Company Limited and HSBC Bank Malaysia
Berhad. Non-executive director of Hang Seng Bank
Limited and Bank of Communications Co., Ltd.
Independent non-executive director of Cathay
Pacific Airways Limited. Former HSBC
appointments include: director of HSBC Bank
Australia Limited. Ceased to be Vice Chairman of
HSBC Bank (Vietnam) Ltd on 16 January 2012 and
a director of Ping An Insurance (Group) Company of
China, Ltd on 7 December 2012.
Board of Directors
The purpose of HSBC’s management structure,
headed by the Board of Directors of HSBC Holdings
(the ‘Board’) and led by the Group Chairman, is to
promote the long-term success of the Company and
deliver sustainable value to our shareholders. The
Board sets the strategy and risk appetite for the
Group and approves capital and operating plans
presented by management for the achievement of
the strategic objectives it has set. Implementation
of the strategy set by the Board is delegated to the
Group Management Board (‘GMB’) which is led by
the Group Chief Executive.
Directors
HSBC Holdings has a unitary Board. The authority
of the Directors is exercised in Board meetings
where the Board acts collectively. At the time of
approval of the Annual Report and Accounts 2012
on 4 March 2013, the Board comprised the Group
Chairman, Group Chief Executive, the Group
Finance Director and 13 non-executive Directors
whose names and brief biographical particulars are
included on pages 302 to 307. The Group Chairman,
Group Chief Executive and the Group Finance
Director are HSBC employees. Non-executive
Directors are not HSBC employees and do not
participate in the daily business management of
HSBC; they bring an external perspective,
constructively challenge and help develop proposals
on strategy, scrutinise the performance of
management in meeting agreed goals and objectives
and monitor the risk profile and the reporting of
performance. The non-executive Directors bring
experience from a number of industries and business
sectors, including the leadership of large complex
multinational enterprises.
Terms of appointment
The Board has determined the time commitment
expected of non-executive Directors to be 30 to 36
days per annum. Time devoted to the Company
could be considerably more, particularly if serving
on Board committees.
Letters setting out the terms and conditions of
appointment of each of the non-executive Directors,
including the time commitment expected of each
of them, are available for inspection at 8 Canada
Square, London E14 5HQ and will be made
available for 15 minutes before the Annual General
Meeting and during the Meeting itself.
309
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H S B C H O L D I N G S P L C
Report of the Directors: Corporate Governance (continued)
Board of Directors > Directors
Powers of the Board
The Board is responsible for managing the business
of HSBC Holdings and, in doing so, may exercise its
powers, subject to any relevant laws and regulations
and to the Articles of Association. In particular, the
Board may exercise all the powers of the Company
to borrow money and to mortgage or charge all or
any part of the undertaking, property or assets
(present or future) of HSBC Holdings and may also
exercise any of the powers conferred on it by the
Companies Act 2006 and/or by shareholders. The
Board is able to delegate and confer on any Director
holding executive office any of its powers,
authorities and discretions (including the power to
sub-delegate) for such time and on such terms as it
thinks fits. In addition, the Board may establish any
local or divisional boards or agencies for managing
the business of HSBC Holdings in any specified
locality and delegate and confer on any local or
divisional board, manager or agent so appointed any
of its powers, authorities and discretions (including
the power to sub-delegate) for such time and on such
terms as it thinks fit. The Board may also, by power
of attorney or otherwise, appoint any person or
persons to be the agent of HSBC Holdings and may
delegate to any such person or persons any of its
powers, authorities and discretions (including the
power to sub-delegate) for such time and on such
terms as it thinks fit.
The Board delegates the management and day-
to-day running of HSBC to the GMB but retains to
itself approval of certain matters including operating
plans, risk appetite and performance targets,
procedures for monitoring and controlling operations,
the authority or the delegation of authority to
approve credit, market risk limits, acquisitions,
disposals, investments, capital expenditure or
realisation or creation of a new venture, specified
senior appointments and any substantial change in
balance sheet management policy.
During 2012 the Board adopted terms of
reference which are available at www.hsbc.com/1/2/
about/board-of-directors. The Board will review its
terms of reference annually.
The Directors who served during the year
were S A Catz, L M L Cha, M K T Cheung,
J D Coombe, J Faber (appointed 1 March 2012),
R A Fairhead, D J Flint, A A Flockhart (retired
31 July 2012), S T Gulliver, J W J Hughes-Hallett,
W S H Laidlaw, J P Lipsky (appointed 1 March
2012), J R Lomax, I J Mackay, G Morgan (retired
25 May 2012), N R N Murthy (retired 31 December
2012), Sir Simon Robertson, J L Thornton and
Sir Brian Williamson (retired 25 May 2012).
310
HSBC Holdings was registered in Hong Kong
under part XI of the Companies Ordinance on
17 January 1991.
Board meetings
Eight Board meetings and a one-day strategy
meeting were held in 2012. At least one Board
meeting each year is held in a key strategic location
outside the UK. During 2012, Board meetings were
held in Hong Kong and Washington D.C.
The table below shows each Director’s
attendance at meetings of the Board held while he or
she was a Director during 2012. One meeting of the
Board was held at short notice in 2012.
Twelve meetings of committees of the Board
appointed to discharge specific business were held
during 2012. These meetings are not shown in the
table below.
During 2012, the non-executive Directors and
the Group Chairman met twice without the other
executive Directors. The non-executive Directors
also met twice without the Group Chairman,
including to appraise the Group Chairman’s
performance.
Attendance record
Meetings
eligible to
attend as
a Director
Meetings
attended
S A Catz ..................................
L M L Cha ...............................
M K T Cheung ........................
J D Coombe ............................
J Faber1,2 ..................................
R A Fairhead3 ..........................
D J Flint ..................................
A A Flockhart4 ........................
S T Gulliver ............................
J W J Hughes-Hallett ..............
W S H Laidlaw .......................
J P Lipsky1 ..............................
J R Lomax ...............................
I J Mackay ...............................
G Morgan5 ...............................
N R N Murthy6 ........................
Sir Simon Robertson ...............
J L Thornton ...........................
Sir Brian Williamson5 .............
Meetings held in 2012 ...........
8
8
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6
6
8
4
8
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8
6
8
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7
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8
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8
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8
8
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6
8
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8
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1 Appointed a Director on 1 March 2012.
2 Also attended one meeting by invitation before becoming a
Director.
3 Took a temporary leave of absence due to illness.
4 Retired as a Director on 31 July 2012.
5 Retired as a Director on 25 May 2012.
6 Retired as a Director on 31 December 2012.
Group Chairman and Group Chief Executive
The roles of Group Chairman and Group Chief
Executive are separate and held by experienced
full-time Directors. There is a clear division of
responsibilities at the head of the Company between
the running of the Board and the executive
responsibility for running HSBC’s business. The
key responsibilities of the Group Chairman and
the Group Chief Executive are set out below.
Key responsibilities
Group Chairman – D J Flint1
• Leads the Board and ensures its effectiveness.
• Develops relationships with governments, regulators and
investors.
• Leads the Group’s interactions on matters of public policy and
regulatory reform with regard to the banking and financial
services industry.
• Maintains corporate reputation and character.
• Undertakes performance management of the Group Chief
Executive.
1 Appointed Group Chairman in December 2010.
Group Chief Executive – S T Gulliver1
• Develops, and delivers performance against, business plans.
• Develops Group strategy, in agreement with the Group
Chairman, for recommendation to the Board.
• As Chairman of the GMB, drives performance within strategic
goals and commercial objectives agreed by the Board.
1 Appointed Group Chief Executive in January 2011.
The Group Chief Executive has an office in
London and in Hong Kong.
Deputy Chairman and senior independent
non-executive Director
The key responsibilities of the Deputy Chairman and
senior independent non-executive Director are set
out below.
Key responsibilities
Deputy Chairman and senior independent non-executive
Director – Sir Simon Robertson1
• Deputises for the Group Chairman at meetings of the Board or
shareholders.
• Supports the Group Chairman in his role.
• Acts as an intermediary for other non-executive Directors
when necessary.
• Leads the non-executive Directors in the oversight of the
Group Chairman.
• Ensures there is a clear division of responsibility between the
Group Chairman and Group Chief Executive.
• Is available to shareholders should they have concerns which
contact through the normal channels cannot resolve or for
which such contact would be inappropriate.
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1 Appointed senior independent non-executive Director in
2007 and Deputy Chairman in December 2010.
Board balance and independence of
Directors
The Board includes a strong presence of both
executive and non-executive Directors and no
individual or small group can dominate its decision
making. The size of the Board is appropriate given
the complexity and geographical spread of our
business and the significant time demands placed on
the non-executive Directors, particularly those who
serve as members of Board committees.
The Nomination Committee regularly reviews
the structure, size and composition of the Board
(including the skills, knowledge and experience
required of Directors) necessary to address and
challenge adequately key risks and issues that
confront, or may confront, the Board and makes
recommendations to the Board with regard to any
changes.
During 2012, the Board adopted a Board
diversity policy. Further information on this policy
can be found on page 329.
The Board considers all of the non-executive
Directors to be independent in character and
judgement. The Board has determined S A Catz,
L M L Cha, M K T Cheung, J B Comey,
J D Coombe, J Faber, R A Fairhead, R Fassbind,
J W J Hughes-Hallett, W S H Laidlaw, J P Lipsky,
J R Lomax, Sir Simon Robertson and J L Thornton
to be independent. When determining independence
the Board considers that calculation of the length of
service of a non-executive Director begins on the
date of his or her first election by shareholders as a
Director of HSBC Holdings. Given the complexity
and geographical spread of our business, the
experience of previous service on a HSBC
subsidiary company board can be a considerable
benefit and does not detract from a Director’s
independence. In reaching its determination of each
non-executive Director’s independence, the Board
has concluded that there are no relationships or
circumstances which are likely to affect a Director’s
judgement and any relationships or circumstances
which could appear to do so were considered not to
be material. From the conclusion of the Annual
General Meeting in 2013, R A Fairhead will have
served on the Board for more than nine years and, in
that respect only, will not meet the usual criteria for
independence set out in the UK Corporate
Governance Code.
In accordance with the Rules Governing the
Listing of Securities on the Stock Exchange of
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H S B C H O L D I N G S P L C
Report of the Directors: Corporate Governance (continued)
Board of Directors > Directors
Hong Kong Limited, each non-executive Director
determined by the Board to be independent has
provided an annual confirmation of his or her
independence to HSBC Holdings.
Information and support
The Board regularly reviews reports on progress
against financial objectives, business developments
and investor and external relations. The chairmen of
Board committees and the Group Chief Executive
report to each meeting of the Board on the activities
of the committees since the previous Board meeting.
The Board receives regular reports and presentations
on strategy and developments in the global
businesses and principal geographical areas. Regular
reports are also provided to the Board and Board
committees on the Group’s risk appetite profile,
top and emerging risks, risk management, credit
exposures and the Group’s loan portfolio, asset
and liability management, liquidity, litigation,
compliance and reputational issues. The agenda and
supporting papers are distributed in advance of all
Board and Board committee meetings to allow
time for appropriate review and to facilitate full
discussion at the meetings. All Directors have full
and timely access to all relevant information and
may take independent professional advice if
necessary at the Company’s expense.
The Directors have free and open contact with
management at all levels. When attending Board
offsites and when travelling for other reasons,
non-executive Directors are encouraged to take
opportunities to see business operations at first hand
and to meet management.
Non-executive Directors have an open invitation
to attend meetings of the GMB to further enhance
their understanding and awareness of our businesses
and the senior leadership team.
Induction
Full, formal and tailored induction programmes,
with particular emphasis on risk management and
internal controls systems, are arranged for newly
appointed Directors. The programmes consist of a
series of meetings with other Directors and senior
executives to enable new Directors to familiarise
themselves with our strategy, risk appetite and risk
management, operations and internal controls.
Directors also receive comprehensive guidance on
directors’ duties and liabilities. As part of the
induction process the Group Company Secretary will
coordinate a development programme based on an
individual Director’s needs. Induction programmes
312
are also arranged for newly appointed members of
committees.
Training and Development
Focused in-house training sessions are arranged in
conjunction with scheduled Board meetings. Unless
otherwise indicated, all Directors1 attended Board
Meetings in 2012 at which briefings on the following
topics were given:
• Capital market perspectives on HSBC2,3
• CMB strategy2 and business update
• GB&M strategy2 and business update
• RBWM strategy2 and business update
• GPB strategy2 and business update3
• Macroeconomic outlook2
• Europe strategy2
• US strategy2
• China strategy2
• Outlook for Greater China2
• Marks and Spencer Bank
• Latin America
• Global geopolitics
•
IT infrastructure
Except:
1 R Fassbind and J B Comey who were not Directors at the
time of the briefings.
2 J Faber and J P Lipsky who were not Directors at the time
of the briefing.
3 R A Fairhead who was unable to attend the briefing.
Executive Directors
In the performance of their roles as Group Chairman,
Group Chief Executive and Group Finance Director,
respectively, D J Flint, S T Gulliver and I J Mackay
develop and refresh their skills and knowledge of the
Group’s businesses and operations through day-to-
day interactions and briefings with senior
management of the Group’s businesses and
functions; and presenting on the Group’s businesses
to investors and analysts. They remain abreast of
developments affecting the financial services sector,
and banking in particular, by representing HSBC’s
interests at conferences, advisory groups and other
events and meetings with regulators and other
authorities. During 2012, this included the activities
set out below:
D J Flint
Chairman of the International Institute of Finance,
including leading member’s meetings and giving
keynote speeches. Participated in panel discussions
and gave key note speeches on economic growth and
financial regulation at a number of leading events
including the International Monetary Conference, the
Hong Kong Trade Development Council’s Think
Asia Event, City Week 2012, a Chatham House
conference, St. Gallen Symposium and The Salzburg
Global Seminar. Gave the Aileen Beattie Memorial
Lecture at the Institute of Chartered Accountants
of Scotland on the opportunities to improve the
financial services sector following the crisis.
Presented to the Cambridge Executive Leadership
Programme on leadership. Attended and participated
in panel discussions at the World Economic Forum
in Davos. Attended prudential regulation meetings
with the FSA.
S T Gulliver
Gave keynote speeches at the Fung Global Institute
annual forum and a Conservative Parliamentary
China Group meeting on UK trade links with China.
Gave presentations at several Asian-focussed events
including the China Development Forum in Beijing,
the China Investment Corporation global investment
forum, the Association of Southeast Asian Nations
Finance Minsters Investors Summit in Hong Kong
and the International Advisory Council of the China
Banking Regulatory Commission. Attended the
World Economic Forum in Davos. Attended
prudential regulation meetings with the FSA.
Chaired the Group’s strategy day for investors in
London. Gave the keynote speech at an HSBC-led
international corporate and structured banking event
for UK exporters.
I J Mackay
Participated in meetings of the European Chief
Financial Officers Network, the FSA Chief Financial
Officers Group and the Bank for International
Settlements. Attended conferences focused on Asian
investment and European finance. Attended
prudential regulation meetings with the FSA and the
Hong Kong Monetary Authority. Presented at the
Group’s strategy day for investors in London and
hosted regular meetings with investors in the UK,
US and Hong Kong.
Non-executive Directors
A personalised approach to training and
development of non-executive Directors is applied.
Non-executive Directors are given opportunities to
update and develop their skills and knowledge
through briefings by senior executives and externally
run seminars. Non-executive Directors have access
to internal training and development resources.
Development plans and records of training and
development activities are maintained by the
Group Company Secretary to facilitate the Group
Chairman’s annual review of each non-executive
Director.
313
In addition to the briefings given at Board
Meetings of HSBC Holdings, the following non-
executive Directors undertook bespoke training
sessions and other activities, including attending
Board committee meetings at which briefings were
given during 2012 to develop and refresh their
knowledge and skills as set out below:
S A Catz
Attended bespoke briefings on managing operational
and reputational risk and recovery and resolution
planning.
L M L Cha
Gave keynote speeches at the Institute of Directors
in Hong Kong on the need for a financial services
development council and at the Hong Kong
Economic Summit. Participated in the Global
Agenda Council on Global Financial system at the
World Economic Forum. Attended bespoke briefings
from HSBC Holdings on: senior management
succession planning and diversity; extraterritorial
application of laws and their impact on HSBC’s
global businesses; HSBC brand management and
sponsorship portfolio; the Group’s compliance
assurance model; regulation and its impact on risk;
and the FSA’s ‘Three lines of defence’ operational
risk model. As a director and Vice Chairman of
The Hongkong and Shanghai Banking Corporation
attended bespoke briefings or board meetings at
which briefings were given on: the Group’s business
in Asia-Pacific; international operations; information
technology; CMB; financial regulation; GB&M; the
Hong Kong SAR’s relationships with India and
China; and RBWM in India. Participated in the
annual forum for HSBC Group non-executive
directors.
M K T Cheung
Attended events for independent non-executive
directors organised by KPMG and Deloitte and
a seminar on international financial reporting
standards organised by the Hong Kong Institute of
Certified Public Accountants. Attended meetings of
the Group Audit Committee at which briefings were
given on developments in regulatory and accounting
requirements and the regulatory environment. As
a director of Hang Seng Bank attended bespoke
briefings or board meetings at which briefings were
given on: Basel III requirements; RBWM strategy;
the Hong Kong Competition Ordinance; supervisory
requirements of the Hong Kong Monetary Authority;
changes to the Hong Kong Stock Exchange Listing
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Report of the Directors: Corporate Governance (continued)
Board of Directors > Directors
Rules; obligations under the Hong Kong Securities
and Futures Ordinance; and mechanisms for core
risk appetite measures. Participated in the annual
forum for HSBC Group non-executive directors.
J D Coombe
Attended events for non-executive directors run by
Tapestry Networks and Ernst & Young on bank
governance and by PricewaterhouseCoopers on
updates in financial accounting. Attended bespoke
briefings on prudential regulation, reform of the UK
financial services industry regulatory authorities and
managing operational risk in the Finance global
function. Attended meetings of Board committees at
which briefings were given on the regulatory
environment and developments in accounting
requirements, risk and executive remuneration, the
risk control frameworks for the global businesses,
Group recovery and resolution planning and legal
reform. Chaired the annual forum for the chairmen
of HSBC Group audit and risk committees.
Participated in the annual forum for HSBC Group
non-executive directors.
J Faber
Undertook a personal induction programme
comprising bespoke briefings on: CMB and GB&M,
with particular focus on operations in the UK and
Europe; the structure and responsibilities of a
number of the Group’s global functions, including:
Strategy and Planning; Corporate Sustainability;
Risk (including Compliance); Finance; and Legal;
and corporate governance (including Directors’
duties and obligations, HSBC’s governance
structure, Global Standards and Business Principles,
international corporate governance codes and listing
obligations). Attended bespoke briefings on
prudential regulation and HSBC’s business in
Germany. Attended meetings of the Group Risk
Committee at which briefings were given on the risk
control frameworks for the global businesses, Group
recovery and resolution planning and legal and
regulatory reform.
R A Fairhead
Attended bespoke briefings on prudential regulation.
Attended meetings of committees of the Board at
which briefings were given on the regulatory
environment and developments in accounting
requirements and risk, the risk control frameworks
for the global businesses, Group recovery and
resolution planning and legal and regulatory reform.
Participated in a risk workshop co-hosted by HSBC
and Cambridge University Centre for Risk Studies.
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R Fassbind1
Undertook a personal induction programme
comprising bespoke briefings on: each of the
Group’s global businesses; the structure and
responsibilities of a number of the Group’s global
functions, including: Strategy and Planning;
Corporate Sustainability; Risk; Finance; Human
Resources; and Internal Audit; corporate governance
(including Directors’ duties and obligations, HSBC’s
governance structure, Global Standards and Business
Principles, international corporate governance codes
and listing obligations); IT and Operations; and the
Group’s Insurance business.
J W J Hughes-Hallet
Attended meetings of the Group Risk Committee at
which bespoke briefings were given on the risk
control frameworks for the global businesses, Group
recovery and resolution planning and legal and
regulatory reform.
W S H Laidlaw
Attended bespoke briefings on individual liquidity
adequacy assessment in the UK. Attended meetings
of the Group Remuneration Committee at which
briefings were given on regulatory developments in
executive remuneration.
J P Lipsky
Undertook a personal induction programme
comprising bespoke briefings on: GB&M; the
structure and responsibilities of a number of the
Group’s global functions, including: Strategy and
Planning; Risk (including compliance); Finance ;
Legal ; and governance (including Directors’ duties
and obligations, HSBC’s governance structure,
Global Standards and Business Principles,
international corporate governance codes and
listing obligations). Attended bespoke briefings on
prudential regulation. Attended meetings of the
Group Risk Committee at which briefings were
given on the risk control frameworks for the global
businesses, Group recovery and resolution planning
and legal and regulatory reform. Participated in the
annual forum for HSBC Group non-executive
directors.
J R Lomax
Attended an event for non-executive directors run
by Tapestry Networks and Ernst & Young on bank
governance and the Trilateral Commission’s Europe
conference in Helsinki. Attended meetings of
committees of the Board at which briefings
were given on the regulatory environment and
developments in regulatory and accounting
requirements and risk, the risk control frameworks
for the global businesses, Group recovery and
resolution planning and legal and regulatory reform.
Participated in a risk workshop co-hosted by HSBC
and Cambridge University Centre for Risk Studies
and in the annual forum for HSBC Group non-
executive directors.
Sir Simon Robertson
Attended bespoke briefings on prudential regulation,
GPB, GB&M, Legal (including US regulatory
matters), and Strategy and Planning. Attended a
briefing from the external auditor on its role in the
Group’s financial reporting. Develops and refreshes
knowledge of the Group’s businesses and operations
through regular interactions with, and receipt of
briefings from, the Group Chairman and Group
Chief Executive. Participated in the annual forum
for HSBC Group non-executive directors.
J L Thornton
Attended bespoke briefings on prudential regulation
and anti-money laundering and compliance.
Attended meetings of the Group Remuneration
Committee at which briefings were given on
regulatory developments in executive remuneration.
As chairman of HSBC North America Holdings Inc.
attended board meetings at which briefings were
given on: the Dodd-Frank Act; key US strategic
considerations comprising the transformation of the
US business (including regulatory and remediation
planning, business disposals and demise, core
business re-engineering and changing the culture);
and the Group’s global businesses in the US
including, in particular, the US consumer and
mortgage lending business.
Performance evaluation
In September 2012, Bvalco Ltd was commissioned
to facilitate and report on the review of effectiveness
of the Board, with particular focus on the
effectiveness of committees and their interaction
with the Board, the relationship and information
flows between the subsidiaries and the Board, the
balance of skills on the Board and the level of time
commitment required from Directors. A legal firm
which is engaged from time to time by the Company
to provide legal services holds a 20% shareholding
in Bvalco Ltd. Bvalco Ltd has confirmed that it does
not have any other connection with the Company.
Bvalco’s report was prepared following interviews
with Directors and senior members of management
315
and a review of relevant documents. Factors assessed
during Bvalco’s review included the Group’s culture,
handling of reputational issues, composition of the
Board, effectiveness of the Group Chairman,
interaction between Board members and
management, and Board Committee structure.
Bvalco’s evaluation of the Board considered
the balance of skills, experience, independence
and knowledge of the Company on the Board, its
diversity, including gender, how the Board works
together as a unit and other factors relevant to its
effectiveness.
The Bvalco report concluded that the Board
operates effectively with a number of important
strengths. The report is used by the Board in its
annual evaluation of its own performance and that
of its committees and by the Group Chairman in his
review of the individual performance of Directors.
The Board will monitor implementation of actions
arising from its 2012 performance evaluation. All
actions arising from the Board’s 2011 performance
evaluation have been implemented.
It is the intention of the Board to continue to
undertake an evaluation of its performance and that
of its committees and individual Directors annually,
with external input to the process at least every third
year.
Formal evaluation of the individual performance
of each Director is undertaken annually by the Group
Chairman using the findings of the performance
evaluation process undertaken by the Board and, as
appropriate, the records of training and development
activities undertaken by Directors. During this
evaluation, the Group Chairman discusses the
contribution of the Director and the time spent by
them in performing their responsibilities. The
Group Chairman has confirmed that all of the non-
executive Directors continue to perform effectively
and to demonstrate commitment to their roles.
The non-executive Directors, led by the Deputy
Chairman and senior independent non-executive
Director, are responsible for the evaluation of the
performance of the Group Chairman.
Appointment, retirement and re-election of
Directors
The Board may at any time appoint any person who
is willing to act as a Director, either to fill a vacancy
or as an addition to the existing Board, but the total
number of Directors shall not exceed twenty-five.
Any Director so appointed by the Board shall retire
at the Annual General Meeting following his or her
appointment and shall be eligible for re-election but
would not be taken into account in determining the
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H S B C H O L D I N G S P L C
Report of the Directors: Corporate Governance (continued)
Board of Directors > Directors / Corporate governance codes
number of Directors who are to retire by rotation at
such meeting in accordance with the Articles of
Association. The Board may appoint any Director
to hold any employment or executive office and
may revoke or terminate any such appointment.
Shareholders may, by ordinary resolution, appoint
a person a Director or remove any Director before
the expiration of his period of office. On the
recommendation of the Nomination Committee
and in compliance with provision B.7.1 of the UK
Corporate Governance Code, the Board has decided
that all of the Directors should be subject to annual
re-election by shareholders. Accordingly, all of the
Directors will retire at the forthcoming Annual
General Meeting and offer themselves for re-
election. Each of the executive Directors is
employed, on a rolling contract which requires
12 months’ notice to be given by either party. None
of the non-executive Directors has a service contract
with HSBC.
Relations with shareholders
All Directors are encouraged to develop an
understanding of the views of major shareholders.
Non-executive Directors are invited to attend analyst
presentations and other meetings with institutional
investors and their representative bodies. Directors
also meet representatives of institutional
shareholders annually to discuss corporate
governance matters.
All executive Directors and certain other senior
executives hold regular meetings with institutional
investors. The Board receives a regular investor
relations activity report which provides feedback
from meetings with institutional shareholders and
brokers, analysts’ forecasts, information from
research reports and share price performance data.
Twice each year the Board also receives a report
from one of our corporate brokers on market views
and investor relations.
On several occasions during 2012, non-
executive Directors, including the senior
independent non-executive Director, met or
corresponded with institutional investors and
their representatives to discuss governance and
remuneration.
As senior independent non-executive Director,
Sir Simon Robertson is available to shareholders
should they have concerns which contact through
the normal channels of Group Chairman, Group
Chief Executive, Group Finance Director or other
executives cannot resolve or for which such contact
would be inappropriate. He may be contacted
316
through the Group Company Secretary at 8 Canada
Square, London E14 5HQ.
During 2012, the Board established a
shareholder communication policy which is
available on www.hsbc.com.
Conflicts of interest, indemnification of
Directors, relevant audit information and
contracts of significance
The Board has authority to approve Directors’
conflicts and potential conflicts of interest and
has adopted a policy and procedures for the
determination of terms of authorisation for such
situations. The Board’s powers to authorise conflicts
are operating effectively and the procedures are
being followed. A review of situational conflicts
which have been authorised from time to time and
the terms of those authorisations is undertaken by
the Board annually.
Our Articles of Association provide that
Directors are entitled to be indemnified out of the
assets of HSBC Holdings against claims from
third parties in respect of certain liabilities. Such
indemnity provisions have been in place during
the financial year but have not been utilised by the
Directors.
Each person who is a Director at the time of
approval of this report confirms that so far as he or
she is aware, there is no relevant audit information
of which the auditor is unaware and the Director has
taken all the steps that he or she ought to have taken
as a Director in order to make himself or herself
aware of any relevant audit information and to
establish that the auditor is aware of that
information. This confirmation is given pursuant to
section 418 of the Companies Act 2006 and should
be interpreted in accordance therewith and subject
to the provisions thereof.
None of the Directors had, during the year or
at the end of the year, a material interest, directly
or indirectly, in any contract of significance with
any HSBC company.
Corporate governance codes
HSBC is committed to high standards of corporate
governance. HSBC has complied during 2012
with the applicable code provisions of: (i) The UK
Corporate Governance Code issued by the Financial
Reporting Council; (ii) the Code on Corporate
Governance Practices set out in Appendix 14 to the
Rules Governing the Listing of Securities on The
Stock Exchange of Hong Kong Limited, from
1 January 2012 until its amendment and replacement
by the Hong Kong Corporate Governance Code on
1 April 2012; and (iii) the Hong Kong Corporate
Governance Code from 1 April 2012 to
31 December 2012, save that the Group Risk
Committee (all the members of which are
independent non-executive Directors), which was
established in accordance with the recommendations
of the Report on Governance in UK banks and
other financial industry entities, is responsible
for the oversight of internal control (other than
internal control over financial reporting) and
risk management systems (Hong Kong Corporate
Governance Code provision C.3.3 paragraphs (f),
(g) and (h)). If there were no Group Risk Committee,
these matters would be the responsibility of the
Group Audit Committee. At its meeting on 24 May
2012, the Board adopted Terms of Reference and
approved a shareholder communication policy
as required under the Hong Kong Corporate
Governance Code. The UK Corporate Governance
Code is available at www.frc.org.uk and the Hong
Kong Corporate Governance Code is available at
www.hkex.com.hk.
The Board has adopted a code of conduct for
transactions in HSBC Group securities by Directors.
The code of conduct complies with The Model Code
in the Listing Rules of the FSA and with The Model
Code for Securities Transactions by Directors of
Listed Issuers (‘Hong Kong Model Code’) set out in
the Rules Governing the Listing of Securities on The
Stock Exchange of Hong Kong Limited, save that
The Stock Exchange of Hong Kong Limited has
granted certain waivers from strict compliance with
the Hong Kong Model Code. The waivers granted
by The Stock Exchange of Hong Kong Limited
primarily take into account accepted practices in the
UK, particularly in respect of employee share plans.
Following specific enquiry, each Director has
confirmed that he or she has complied with the
code of conduct for transactions in HSBC Group
securities throughout the year, save that, on 15 June
2012, an independent non-executive Director
acquired an interest as beneficial owner in 3,950
retail bonds and as non-beneficial owner in 1,170
retail bonds of RMB10,000 each issued by HSBC
Bank plc before giving notification and receiving
written clearance to deal. On 10 January 2013, an
independent non-executive Director disposed of
an interest as beneficial owner in 500 units of euro-
denominated preferred securities of EUR1,000 each
issued by HSBC Capital Funding (Euro 2) L.P.
before giving notification. All Directors have since
been reminded of their obligations under the code of
conduct for transactions in HSBC Group Securities.
317
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H S B C H O L D I N G S P L C
Report of the Directors: Corporate Governance (continued)
Board committees > Group Management Board / Group Audit Committee
Board committees
Board
Group
Remuneration
Committee
Nomination
Committee
Corporate
Sustainability
Committee
Group
Management
Board
Non-executive
responsibility
for setting the
overarching
principles,
parameters
and gover-
nance frame-
work of the
Group’s
remuneration
policy and the
remuneration
of senior
executives.
Non-executive
responsibility
for leading
the process
for Board
appointments
and for
identifying and
nominating,
for approval
by the Board,
candidates
for appoint-
ment to
the Board.
Non-executive
responsibility
for advising
the Board,
committees
of the Board
and executive
management
on corporate
sustainability
policies,
including
environmental,
social and
ethical issues.
Executive
management
committee
which is
responsible for
management
and day-to-day
running of
HSBC under
the direct
authority of
the Board.
Group Audit
Committee
Group Risk
Committee
Non-executive
responsibility
for oversight
of, and advice
to the
Board on,
matters
relating to
financial
reporting.
Non-executive
responsibility
for oversight
of, and advice
to the Board
on, high level
risk-related
matters
and risk
governance.
E
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E
K
Financial
System
Vulnerabilities
Committee
Non-executive
responsibility
for oversight of
(i) controls and
procedures to
identify areas
where HSBC
and the
financial
system may
become
exposed to
financial crime
or system
abuse, and (ii)
HSBC policies
and procedures
sufficient to
ensure the
continuing
obligations to
regulatory and
law enforce-
ment agencies
are met.
The Board has established a number of committees
consisting of Directors, Group Managing Directors
and, in the case of the Financial System
Vulnerabilities Committee and Corporate
Sustainability Committee, co-opted non-director
members. The key roles of the principal committees
are described above. The Chairman of each non-
executive Board committee reports to each meeting
of the Board on the activities of the committee since
the previous Board meeting.
The terms of reference of the non-executive
Board committees are available at
www.hsbc.com/boardcommittees. Each non-
executive Board committee reviews its terms of
reference annually.
Appointments of Directors to each non-
executive Board committee are made for periods
of up to three years, extendable by no more than
two additional three-year periods.
Group Management Board
Members1,2
S T Gulliver (Chairman) and I J Mackay,
who are executive Directors, and A Almeida,
S Assaf, I M Dorner, J M Flint, A M Keir,
S A Levey, A M Losada, M M Moses,
S P O’Sullivan, B Robertson and P T S Wong,
all of whom are Group Managing Directors.
1 As at 4 March 2013.
2 M P Kaur has been appointed a member with effect from 1
April 2013.
The head of each global business and global function
and the chief executive of each region attend GMB
meetings, either as members or by invitation.
The GMB meets frequently and exercises the
powers, authorities and discretions of the Board in so
far as they concern the management and day-to-day
running of HSBC Holdings. Matters reserved for
approval by the Board are described on page 310.
318
The GMB is a key element of our management
reporting and control structure such that all of our
line operations are accountable either to a member of
the GMB or directly to the Group Chief Executive,
who in turn reports to the Group Chairman. The
Board has set objectives and measures for the GMB.
These align senior executives’ objectives and
measures with the strategy and operating plans
throughout HSBC.
The Group Chief Executive (who is Chairman
of the GMB) reports to each meeting of the Board
on the activities of the GMB.
Regular Risk Management Meetings of GMB,
chaired by the Group Chief Risk Officer, are held
to establish, maintain and periodically review the
policy and guidelines for the management of risk
within the Group.
Regular Global Standards Steering Meetings of
the GMB, co-chaired by the Group Chief Risk
Officer and Group Chief Legal Officer, are held to
develop and implement global standards reflecting
best practices which must be adopted and adhered to
consistently throughout the Group.
Group Audit Committee
The Group Audit Committee (‘GAC’) has non-
executive responsibility for oversight of, and advice
to, the Board on matters relating to financial
reporting and for non-executive oversight of internal
controls over financial reporting.
Members1
J D Coombe (Chairman) .........
M K T Cheung ........................
R A Fairhead ...........................
J R Lomax ...............................
Meetings held in 2012 ...........
Meetings
attended
Meetings
eligible
to attend
5
5
5
5
5
5
5
5
5
1 All members are independent non-executive Directors.
R Fassbind was appointed a member of the
GAC on 1 March 2013.
The Board has determined that M K T Cheung,
J D Coombe, R A Fairhead, R Fassbind and
J R Lomax are independent according to SEC
criteria and may be regarded as audit committee
financial experts for the purposes of section 407 of
the Sarbanes-Oxley Act and have recent and relevant
financial experience for the purposes of the UK
Corporate Governance Code.
The governance structure for the oversight of
financial reporting is set out below. Each major
operating subsidiary has established a board
committee with non-executive responsibility for
oversight of matters relating to financial reporting.
Governance
Authority
Membership
Responsibilities include:
Board
GAC
Executive and non-
executive Directors
• Financial reporting
• Appoints senior financial officers
• Delegates authorities in relation to financial matters
Independent non-executive
Directors
• Monitors the integrity of financial statements
• Oversees the internal control systems over financial reporting, including reviewing their
effectiveness
• Monitors and reviews the effectiveness of the internal audit function
• Reviews the Company’s financial and accounting policies and practices
• Advises the Board on appointment of the external auditor and is responsible for oversight and
remuneration of the external auditor
Disclosure
Committee
Representatives from
global businesses,
functions and certain
Group companies
• Reviews the Group’s material communications with investors
• Assists the Group Chief Executive and Group Finance Director to discharge their
obligations relating to financial reporting under the Securities Exchange Act of 1934
• Monitors and reviews the effectiveness of controls and procedures established to ensure
that information is disclosed appropriately and on a timely basis
• Reports findings and makes recommendations to the Group Chief Executive, Group
Finance Director and the GAC
• Provide certification to the GAC or intermediate audit committee on financial statements and
internal controls over financial reporting of relevant subsidiaries or businesses, as appropriate
Independent non-executive
directors and/or
independent members, as
appropriate
Subsidiary board
committees
responsible for
oversight of
financial
reporting and
global business
audit committees
319
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Report of the Directors: Corporate Governance (continued)
Board committees > Group Audit Committee
Committee activities
The GAC undertook the following activities in the
discharge of its responsibilities:
• Financial reporting. The Committee advised
the Board on meeting its external financial
reporting obligations through its reviews of
financial statements, interim reports and interim
management statements prior to approval by the
Board. The Committee also undertook the
following:
−
−
−
−
−
−
−
−
endorsed the going concern statement and
the statement of compliance with the UK
Corporate Governance Code and Hong
Kong Corporate Governance Code
(formerly the Code on Corporate
Governance Practices in Appendix 14 to the
Rules Governing the Listing of Securities
on The Stock Exchange of Hong Kong
Limited) for inclusion in the financial
statements;
advised the Board that the annual report and
accounts, taken as a whole, is fair, balanced
and understandable;
received reports on proposed changes to the
Group’s disclosures in the financial
statements and the adequacy of procedures
to identify transactions and matters
requiring disclosure under certain
accounting standards;
reviewed accounting policies and practices,
including approval of the critical accounting
policies;
considered provisioning for, and disclosure
of, certain litigation and regulatory matters
with external legal counsel providing a
status update on these matters;
received a presentation from the Global
Head of Tax on current tax issues;
received a report on the European Banking
Authority Capital Exercise 2012 to monitor
adherence to recommended core tier 1
ratios; and
reviewed the procedures for the submission
by employees of concerns regarding
accounting and/or auditing matters.
During 2012, the GAC considered the
significant accounting issues described below.
In addressing these issues the Committee
considered the appropriateness of management’s
judgements and estimates and, where
appropriate, discussed these judgements and
320
estimates with the external auditor. The
Committee considered:
−
the circumstances leading to the recognition
of a provision at 30 June 2012 relating to
US regulatory and law enforcement
investigations into inadequate compliance
with anti-money laundering, US Bank
Secrecy and sanctions laws. The Committee
noted that management had considered the
available information, recent developments,
the opinions of external legal counsel and
the outcome of past cases on similar
matters. The Committee discussed the
judgements exercised by management in
forming a best estimate of the amount that
might have been required to settle the
matter, and agreed that a provision of
US$700m should be made, while noting
that this estimate was highly uncertain, and
that the amount, when determined, could be
higher, possibly significantly so. In the third
quarter, the Committee considered the latest
developments in this matter and discussed
the possibility of a criminal prosecution
being brought against one or more Group
companies and the possible implications.
The Committee agreed with management’s
judgement that the provision should be
increased to US$1.5bn, while continuing to
note that the final amount could be
significantly higher. Subsequently, the
Committee noted the payments made in
December 2012 under the agreements to
achieve resolution with US and UK
government agencies, and the terms of the
Deferred Prosecution Agreement;
−
the developments in the industry
investigations and reviews into the setting
of Libor, Euribor and other benchmark
interest and foreign exchange rates by
various regulators and competition and
enforcement authorities around the world.
The Committee discussed the high degree
of uncertainty as to the resolution of these
regulatory investigations and reviews,
including the timing and potential impact;
− HSBC’s exposure to the payment of redress
in respect of the possible mis-selling of
payment protection insurance policies in the
UK and the related provisions. The
Committee considered the key assumptions
which determine the provisions and the
factors driving the increase during the year.
Management’s assessment was that the
amount of provision at 31 December 2012
of US$1.3bn is based on appropriate
assumptions about future expected redress
payments, while noting the sensitivity of the
provision to different outcomes from those
assumed;
− HSBC’s involvement in the sale of interest
rate swaps to small and medium sized
businesses in the UK and the potential costs
of remediation. The Committee noted that
the provision of US$598m at 31 December
2012 reflected the outcome of the FSA’s
findings from the pilot reviews completed
by banks on the selling of these products to
customers;
−
the level of loan impairment allowances and
charges throughout the year, discussing
with management the reasons for significant
increases, notably in Brazil as a result of
economic conditions and strong growth in
lending in recent periods. The Committee
considered the judgements and estimates
involved in applying roll rate
methodologies and noted the recognition of
an additional impairment allowance of
US$225m in respect of the US mortgage
lending portfolios to reflect a longer
estimated average period of time from
current status to write-off. In response to an
industry letter from the FSA concerning the
application of loan impairment
methodologies to loan portfolios vulnerable
to credit stresses, the Committee considered
reports on the application of HSBC’s
accounting policies and loan impairment
methodologies. The Committee also
considered a report on credit exposures and
the extent of refinancing risk in HSBC’s
UK corporate real estate lending portfolio,
and how this is reflected in loan impairment
allowances;
−
the recoverability of major deferred tax
assets balances recognised, including the
deferred tax asset balances recognised in
the US, Mexico and Brazil;
− management’s judgements involved in the
change in estimation methodology for credit
valuation adjustments and debit valuation
adjustments on derivative financial
instruments as at 31 December 2012 as a
result of changing market practices;
−
the impairment test performed on HSBC’s
investment in Bank of Communications
Co., Limited as at 31 December 2012.
During the year, the market value of the
321
•
investment was below the carrying amount
for a period of approximately ten months,
which gave rise to an indicator of
impairment. The impairment test identified
that, based on an assessment of the value in
use of the investment, the investment is not
impaired; and
− management’s conclusion that goodwill
relating to GB&M Europe is not impaired
following reduced profitability in the
second half of 2012 which triggered the re-
testing of the related goodwill as at
31 December 2012. The Committee noted
that disclosure has been made with regards
to the extent to which a change in key
assumptions would result in the recoverable
amount to be equal to its carrying amount
(see note 23 on the financial statements).
Internal controls over financial reporting.
The Committee undertook an annual review of
HSBC’s systems of internal controls over
financial reporting. During 2012, the Committee
monitored the effectiveness of such internal
controls and reported regularly to the Board as
described on page 334. The Committee received
regular reports from the Group Finance
Director, the Group Chief Accounting Officer,
and the Group Head of Internal Audit. Minutes
of the Group Risk Committee (‘GRC’) and
executive committee meetings including
the GMB and Risk Management Meetings were
provided to the Committee members. The
Committee also reviewed the adequacy of
resources, qualifications and experience of staff
in the Finance function. Reports were submitted
to the Committee on internal control matters in
relation to the Sarbanes-Oxley Act. The Group
Finance Director, the Group Chief Risk Officer,
the Group Head of Internal Audit, the Group
Chief Accounting Officer, Group Company
Secretary, external auditor and other senior
executives attended Committee meetings. The
Committee had regular discussions with the
external auditor and the Group Head of Internal
Audit, with an opportunity at each meeting for
discussions to take place without management
present.
• Effectiveness of the internal audit function.
The Committee satisfied itself that the internal
audit function was effective and adequately
resourced through regular meetings held with,
and reports provided by, the Group Head of
Internal Audit on internal audit issues, including
the effectiveness and adequacy of resources.
KPMG undertook a quality assurance review of
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H S B C H O L D I N G S P L C
Report of the Directors: Corporate Governance (continued)
Board committees > Group Audit Committee / Group Risk Committee
the internal audit function and concluded that
overall, the internal audit function generally
conformed to the Institute of Internal Auditors’
International Standards and Code of Ethics for
the Professional Practice on Internal Auditing.
The Committee received reports over the course
of 2012 on the activities of the internal audit
function and reviewed its planned activities for
the following year.
• Legal and regulatory environment. The
Committee received regular reports on litigation
and on the application of changes in law,
regulation, accounting policies and practices
and regulatory developments, including reports
on developments in the programme to change
International Financial Reporting Standards,
Basel III, the recommendations of the
Independent Commission on Banking, Dodd-
Frank Act and changes in the UK Corporate
Governance Code and Guidance on Audit
Committees.
• External auditor. The Committee provided
oversight of the external auditor through regular
meetings with the external auditor, including
meetings without management present, and
receiving reports on the external auditor’s
strategy in relation to the audit of financial
statements and the progress of the audit. The
Committee monitored the effectiveness of the
audit process through a review of the public
report published by the Financial Reporting
Council’s Audit Inspection Unit on the
inspection of the external auditor, an assessment
against a best practice checklist for evaluating
external auditors, an external audit assessment
questionnaire completed by the chief financial
officers of the Group’s major geographical
regions, a review of the relationship between the
Group and the external auditor at a senior level
and considered the results of feedback provided
to the external auditor by members of the
finance function throughout the Group. The
Committee approved the remuneration and
terms of engagement and recommended to the
Board the re-appointment of the external
auditor.
• Terms of reference and effectiveness of the
Committee. The Committee undertook an
annual review of its terms of reference and of
its own effectiveness. Changes were made to
the Committee’s terms of reference to reflect
changes to the requirements of the UK
Corporate Governance Code applicable to
financial years beginning on or after 1 October
322
2012 and the Hong Kong Corporate Governance
Code.
In addition to the scheduled Committee
meetings, the Chairman met regularly with the
Group Finance Director, the Group Chief
Accounting Officer, the Group Chief Risk Officer,
the Group Head of Internal Audit, other senior
executives and the external auditor.
Terms of reference and subsidiary company
audit oversight
The GAC is responsible for non-executive oversight
of internal controls over financial reporting.
To ensure consistency of scope and approach
by subsidiary company audit committees, the
GAC has established core terms of reference to
guide subsidiary companies when adopting terms
of reference for their audit committees. The
Committee’s endorsement is required for any
proposed material changes to subsidiary audit
committee terms of reference and for appointments
to such committees.
A forum for the chairmen of our principal
subsidiary company committees with responsibility
for non-executive oversight of financial reporting
and risk-related matters was held in June 2012 to
share understanding and to facilitate a consistent
approach to the way in which these subsidiary
company committees operate. The next forum will
be held in June 2013.
Arrangements relating to the external
auditor
The Committee has recommended to the Board that
KPMG Audit Plc be reappointed as auditor at the
forthcoming Annual General Meeting.
KPMG has been the Group’s auditor since 1991,
when HSBC Holdings became the ultimate holding
company of the Group, without a tender process for
the external audit contract having taken place. It is
our intention that a tender process for the external
audit contract will be undertaken, with the successful
audit firm being appointed by 2015.
The Board has approved, on the
recommendation of the Committee, a policy for
the employment by HSBC of former employees
of KPMG. The Committee receives an annual report
on such former employees who are employed and
the number in senior positions. This report enables
the Committee to consider whether there has been
any impairment, or appearance of impairment, of the
external auditor’s judgement, objectivity or
independence in respect of the audit. The external
auditor provided written confirmation of its
independence under industry standards.
The policies for the pre-approval of specific
services that may be provided by the principal
auditor are kept under review by the Committee and
amended as necessary to meet the dual objectives of
ensuring that we benefit in a cost effective manner
from the cumulative knowledge and experience of
our auditor, while also ensuring that our external
auditor maintains the necessary degree of
independence and objectivity. These pre-approval
policies apply to all services where any HSBC
company pays for the service, or is a beneficiary
or addressee of the service, and has selected or
influenced the choice of KPMG. All services
provided by KPMG during 2012 were pre-approved
by the Committee or were entered into under pre-
approval policies established by the Committee.
The pre-approved services relate to regulatory
reviews, agreed-upon procedures reports, other types
of attestation reports, the provision of advice and
other non-audit services allowed under SEC
independence rules. The services fall into the
categories of audit services, audit-related services,
tax services and other services.
An analysis of the remuneration paid in respect
of audit and non-audit services provided by KPMG
for each of the past three years is disclosed in
Note 8 on the Financial Statements.
Group Risk Committee
The GRC is responsible for advising the Board on
high-level risk-related matters and risk governance
and for non-executive oversight of risk management
and internal controls (other than over financial
reporting).
Members1
R A Fairhead2 (Chairman) ......
J D Coombe ............................
J Faber3 ....................................
J W J Hughes-Hallett4 .............
J P Lipsky3 ..............................
J R Lomax ...............................
Meetings held in 2012 ...........
Meetings
attended
Meetings
eligible
to attend
6
7
5
4
5
7
7
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5
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7
1 All members are independent non-executive Directors.
2 Took a temporary leave of absence due to illness.
3 Appointed a member of the Committee on 1 March 2012.
4 Retired as a member of the Committee on 31 July 2012.
John Trueman, a non-executive director of
HSBC Bank plc and Chairman of its risk and audit
committees has continued to attend meetings of
the GRC by invitation during 2012. Robert
Herdman, a non-executive director of HSBC North
America Holdings Inc. and HSBC Bank USA, has
been invited by the GRC to attend its meetings from
the beginning of 2013. Their experience of risk-
related matters in the financial services industry
is valued by the Committee.
Governance
All of HSBC’s activities involve, to varying degrees,
the measurement, evaluation, acceptance and
management of risk or combinations of risks. The
Board, advised by the Committee, requires and
encourages a strong risk governance culture which
shapes the Group’s attitude to risk. The Board
and the Committee oversee the maintenance
and development of a strong risk management
framework by continually monitoring the risk
environment, top and emerging risks facing the
Group and mitigating actions planned and taken.
The Committee monitors the effectiveness of
the Group’s risk management and internal controls
systems other than over financial reporting, which
are monitored by the GAC.
The governance structure for the management
of risk is set out in the following table. Each major
operating subsidiary has established a board
committee with non-executive responsibility for
oversight of risk-related matters and an executive
committee with responsibility for risk-related
matters.
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Report of the Directors: Corporate Governance (continued)
Board committees > Group Risk Committee
Governance structure for the management of risk
Authority
Board
Membership
Executive and non-executive
Directors
Responsibilities include:
• Approves risk appetite, strategy and performance targets
for the Group
• Approves appointment of senior risk officers
• Delegates authority for risk management
• Encourages a strong risk governance culture which shapes
the Group’s attitude to risk
GRC
Independent non-executive Directors
• Advises the Board on:
– risk appetite and alignment with strategy
– alignment of remuneration with risk appetite (through
advice to the Group Remuneration Committee)
– risks associated with proposed strategic acquisitions and
disposals
• Reviews the effectiveness of the Group’s systems of risk
management and internal controls (other than over
financial reporting)
• Oversees the maintenance and development of a
supportive culture in relation to the management of risk
• Oversees controls and procedures designed to identify
areas of exposure to financial crime or system abuse
• Oversees matters relating to anti-money laundering,
sanctions, terrorist financing and proliferation financing
• Reviews policies and procedures to ensure continuing
obligations to regulatory and law enforcement agencies are
met
• Formulates high-level global risk policy
• Exercises delegated risk management authority
• Oversees implementation of risk appetite and controls
• Monitors all categories of risk and determines appropriate
mitigating action
• Promotes a supportive Group culture in relation to risk
management
• Develops and implements global standards reflecting best
practices which must be adopted and adhered to
throughout the Group
• Oversees initiatives to ensure our conduct matches our
values
• Supports the Risk Management Meeting and the Group
Chief Risk Officer in providing strategic direction for the
Global Risk function, sets priorities and oversees their
execution
• Oversees consistent approach to accountability for, and
mitigation of, risk across the Global Risk function
Financial System Vulnerabilities
Committee
Executive Directors and co-opted
non-director members
Risk Management Meeting of the
GMB
Group Chief Risk Officer
Group Chief Legal Officer
Group Chief Executive
Group Finance Director
All other Group Managing Directors
Global Standards Steering Meeting
of the GMB
Group Chief Risk Officer
Group Chief Legal Officer
Group Chief Executive
Group Finance Director
All other Group Managing Directors
Global Risk Management Board
Group Chief Risk Officer
Chief Risk Officers of HSBC’s global
businesses and regions
Heads of risk areas within the Global
Risk Function
Subsidiary board committees
responsible for risk-related matters
and global business risk
committees
Independent non-executive directors
and/or other independent members, as
appropriate
• Provides certification to the GRC or intermediate risk
committee on risk-related matters and internal controls
(other than over financial reporting) of relevant
subsidiaries or businesses, as appropriate
Risk reporting and monitoring
The GRC regularly monitors:
•
•
•
the Group’s risk appetite and risk profile against
key performance/risk indicators, as set out in the
Group’s Risk Appetite Statement, on a Group-
wide, global business and regional basis;
the top and emerging risks facing the Group;
and
the risk profiles for separate categories of risk
within the Group’s business identified in the
Group’s Risk Appetite Statement, on a Group-
wide, global business and regional basis;
and reviews the mitigating actions proposed by
management.
Reports on these items are presented at each
meeting of the Committee. Regular reports from the
Risk Management Meeting, which is the executive
body responsible for overseeing risk, are also
presented.
In carrying out its responsibilities the
Committee is closely supported by the Group Chief
Risk Officer. The Committee also receives regular
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presentations from the Group Head of Compliance,
Group Head of Internal Audit, the Chief Legal
Officer and other business, function and risk heads.
•
continue to embed and develop risk appetite
statements throughout the global businesses and
functions.
Risk appetite
Risk appetite is a key component of our management
of risk. The Board, advised by the GRC, approves
the Group’s risk appetite, which describes the types
and levels of risk that the Group is prepared to
accept in executing our strategy and which is set out
in the Group’s Risk Appetite Statement. Embedding
risk appetite statements and the related monitoring
and reporting framework across the Group has
continued to be an area of significant focus in 2012
with initiatives undertaken to:
•
further integrate consideration of risk appetite
into the process for developing the Annual
Operating Plan and to enhance alignment
between Group strategy and risk appetite; and
Our risk appetite framework is underpinned by
the following core characteristics:
Risk appetite: core characteristics
• Risk must be commensurate with sustainable returns
• Strong balance sheet
• Healthy capital position
• Conservative liquidity management
• Strong brand
• Robust Group structure of separate legal entities
• The global businesses should produce sustainable long-term
earnings growth
• Risk diversification
These core characteristics are applied to define
the risk appetite statements on a Group-wide, global
business and regional level. The relevant strategic
and operational objectives, within which we expect
businesses and regions to operate, are expressed
quantitatively across the following dimensions:
Strategic and operational objectives
Earnings
Capital and liquidity
1. Generate sustainable economic profit commensurate with the risks taken
2. Maintain capital in excess of regulatory and internal economic capital requirements
3. Maintain a strong tier 1 ratio comprising a high proportion of core tier 1
4. Maintain a well diversified funding structure with a particular focus on advances to core funding ratios
5. Off-balance sheet vehicles should not be material in size relative to the total balance sheet
6. Manage impairments and expected losses within the Group’s tolerance
7. Manage all risk categories within the risk appetite
8. Harness benefits from business diversification to generate non-volatile and sustainable earnings
9. Compete for business with international customers where market connectivity is critical, businesses with
local customers where we have local scale and products where global scale is critical to effectiveness
10. Use robust and appropriate scenario stress testing to assess the potential impact on the Group’s capital
adequacy and strategic plans
Impairments and
expected losses
Risk category and
diversification
Scenario and
stress testing
Top and emerging risks
Identifying and monitoring top and emerging risks
is integral to our approach to risk management. We
define a ‘top risk’ as being a current, emerged risk
which has arisen across any of our risk categories,
regions or global businesses and has the potential to
have a material impact on our financial results or
our reputation and the sustainability of our long-term
business model, and which may form and crystallise
within a one year horizon. We consider an ‘emerging
risk’ to be one which has large uncertain outcomes
which may form and crystallise beyond a one-year
horizon and, if it were to crystallise, could have a
material effect on our long-term strategy.
The GRC discusses top and emerging risks with
management at each of its meetings. Current top and
emerging risks, which are summarised below, are
viewed as falling into three broad categories:
macroeconomic and geopolitical; macro-prudential,
regulatory and legal risks to our business model; and
risks related to our business operations, governance
and internal control systems.
The following table shows the current top and
emerging risks identified through our risk
management processes:
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Report of the Directors: Corporate Governance (continued)
Board committees > Group Risk Committee
Current top and emerging risks
Categories
Macroeconomic and geopolitical risk
Macro-prudential, regulatory and legal risks to our
business model
Risks related to our business operations, governance
and internal control systems
Top and emerging risks
• Emerging market slow down
• Macroeconomic risks within developed economies
• Increased geopolitical risk in certain regions
• Regulatory developments affecting our business model and Group
profitability
• Regulatory investigations, fines, sanctions and requirements relating to
conduct of business and financial crime negatively affecting our results and
brand
• Dispute risk
• Regulatory commitments and consent orders including under the Deferred
Prosecution Agreement
• Challenges to achieving our strategy in a downturn
• Internet crime and fraud
• Level of change creating operational complexity and heightened operational
risk
• Information security risk
• Model risk
Stress testing
Our stress testing and scenario analysis programme
is central to the monitoring of top and emerging
risks. It highlights the vulnerabilities of our business
and capital plans to the adverse effects of extreme
but plausible events.
The outcome of the testing and analysis is also
used to assess the potential impact of the relevant
scenarios on the demand for regulatory capital
compared with its supply.
Management develops action plans to mitigate
risks identified. The extent to which those action
plans are implemented depends on management’s
evaluation of the risks and their potential
consequences, taking into account HSBC’s risk
appetite.
Further information on scenario stress testing is
set out on pages 127 and 128.
Stress tests and scenario tests fall into three
main classifications: regulatory scenarios; Group-
wide business scenarios; and specific business or
exposure scenarios.
During the year, the GRC reviewed the outcome
of a number of stress tests undertaken by the Group
and the implementation of action plans to mitigate
risks where appropriate; including stress tests on the
Annual Operating Plan under mild and severe
macroeconomic scenarios, a Group reverse liquidity
stress test, a Group reverse solvency stress test and a
eurozone break-up stress test.
Internal Audit has conducted a review of
stress testing within the Group including model
development, validation and use, and the
methodology, governance and management of
enterprise-wide stress testing. The development of
HSBC’s stress testing and scenario testing analysis
programme will continue to be an area of focus for
the Committee.
Committee activities
The GRC undertook the following key activities in
the discharge of its responsibilities:
• Oversight of executive risk management.
Regular reports and presentations were received
from the Group Chief Risk Officer including at
each meeting a presentation of a ‘risk map’,
which provided analysis, on a Group-wide,
global business and regional basis, of risk
profiles for categories of risk identified in the
Group Risk Appetite Statement, and a top
and emerging risks report which summarised
proposed mitigating actions for identified risks.
• Legal and regulatory environment. Reports
were received from the Chief Legal Officer on
forward-looking legal risks, the Group Head of
Compliance on forward-looking compliance
risks and the Head of Group Performance and
Reward. Regular updates were received on the
investigations by US regulatory and law
enforcement authorities and US dispute risk and
compliance matters in the US and the steps
taken to remediate these compliance issues. The
Group Finance Director, Group Chief Risk
Officer, Group Chief Accounting Officer, Group
Company Secretary and the external auditor and
other senior executives attended Committee
meetings.
• Stress testing. The Committee reviewed the
outcome of certain stress tests referred to in the
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section headed ‘Stress Testing’ on pages 127
and 128.
• Review of effectiveness of internal controls.
The Committee undertook an annual review of
HSBC’s systems of internal controls, other than
over financial reporting. During 2012, the
Committee monitored the effectiveness of such
internal controls and reported regularly to the
Board as described on page 334. A series of
presentations were made, and reports submitted,
by the Group Chief Risk Officer and other
business and function heads to the Committee
on the risk control framework in their respective
business or function. Reports from the Group
Head of Internal Audit on the internal audit
process and weaknesses identified in internal
controls (other than over financial reporting)
were presented to the Committee, as well as
reports from regulators relating to the internal
control systems.
• Risk appetite. The Committee reviewed the
alignment of risk appetite and Group strategy.
Regular reviews were undertaken of the Group’s
risk profile against the key performance
indicators set out in the risk appetite statement
which considered the need for any adjustment to
the risk appetite. Refinements to the 2012 Risk
Appetite Statement were approved with the
refined 2012 Risk Appetite Statement being
used in the preparation of the Annual Operating
Plan for 2013. Reports and presentations were
received from the Group Chief Risk Officer,
including on the results of HSBC’s stress testing
and scenario analysis programme.
• Alignment of remuneration with risk
appetite. Presentations and reports were
received on remuneration-related proposals to
assist the Committee in giving advice to the
Group Remuneration Committee on the
alignment of remuneration with risk appetite.
The GRC considered risk-related issues to have
been appropriately taken into account by the
Group Remuneration Committee, including
when determining the total variable pay funding
pool for the 2012 performance year and the
proposed design of the performance scorecard
for the 2013 performance year. The Committee
received presentations on the procedure for
determining individual variable pay awards,
including the risk assessment process for
identifying matters for which risk-related
adjustments may be made to individual and
team awards. The process by which an
individual’s adherence to HSBC Values and the
Group’s risk-related policies and procedures is
327
taken into account in performance assessment
and determination of variable pay was also
reported to the Committee. The Committee
provided advice and feedback on risk-related
matters to the Group Remuneration Committee
where appropriate.
• Top and emerging risks. In monitoring top and
emerging risks the Committee received reports
from the Group Chief Risk Officer and the
Group Head of Compliance as well as other
members of senior management on risks
identified and developments in the Group’s
business, including the changing regulatory
environment; the implications of regulatory
investigations and global market risk such as the
implications of an emerging market slowdown
and the impact on trade and capital flows.
• Acquisitions and disposals. The Committee
received reports and presentations on risk issues
relating to proposed strategic acquisitions and
the risk management of disposals and advised
the Board appropriately. The Group Head of
Mergers and Acquisitions and other members
of senior management involved in proposed
acquisitions and disposals attended meetings
of the Committee as appropriate.
• Oversight of risk governance framework.
Minutes of the GAC, Group Remuneration
Committee and executive committee meetings
including the GMB, the Risk Management
Meeting and the Group Reputational Risk
Policy Committee were provided to Committee
members. From January 2013 the minutes of the
Global Standards Steering Meeting and from
February 2013 the minutes of the Financial
System Vulnerabilities Committee will be made
available to the Committee.
• Terms of reference and Committee
effectiveness. The Committee undertook a
review of its terms of reference and of its own
effectiveness. The Committee recommended to
the Board a change to its terms of reference to
maintain consistency with the terms of reference
of the GAC which were amended to comply
with changes to the requirements of the Hong
Kong Corporate Governance Code.
•
In addition to the scheduled Committee
meetings, the Chairman met regularly with the
Group Chief Risk Officer, the Group Head of
Internal Audit, the Group Finance Director, the
Chief Legal Officer and other senior executives
as required.
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Report of the Directors: Corporate Governance (continued)
Board committees > Financial System Vulnerabilities Committee / Group Remuneration Committee / Nomination Committee
Professional external advice on US compliance
matters has been provided by Promontory Financial
Group, US financial consultants.
Terms of reference and subsidiary company
risk oversight
The GRC is responsible for non-executive oversight
of risk management and internal controls, other than
internal controls over financial reporting which is
the responsibility of the GAC.
To ensure consistency of scope and approach
by subsidiary company committees, the GRC has
established core terms of reference to guide
subsidiary companies when adopting terms of
reference for their non-executive risk committees
(or audit committees if those committees are also
responsible for the oversight of risk related matters).
The Committee’s endorsement is required for
any proposed material changes to subsidiary
company risk committee terms of reference and
for appointments to such committees.
A forum for the chairmen of HSBC’s principal
subsidiary company committees with responsibility
for non-executive oversight of financial reporting
and risk-related matters was held in June 2012 to
share understanding and to facilitate a consistent
approach to the way in which these subsidiary
committees operate. The next forum will be held
in June 2013.
Financial System Vulnerabilities Committee
Members1
R A Fairhead (Chairman)
J B Comey2
N Fishwick3
D Hartnett3, 4
W Hughes3
Sir Simon Robertson
L H Schrank3
J C Zarate3, 5
1 All members appointed on 18 January 2013, unless
otherwise indicated.
2 Appointed on 4 March 2013, being the date he became a
Director.
3 Co-opted non-director member of the Committee.
4 Appointed on 1 February 2013.
5 Also provides advisory services to the board of HSBC North
America Holdings Inc.
The Financial System Vulnerabilities Committee,
established by resolution of the Board in January
2013, has non-executive responsibility for
governance, oversight and policy guidance over the
framework of controls and procedures designed to
identify areas where HSBC may become exposed
and through that exposure, expose the financial
system more broadly to financial crime or system
abuse. The Committee will also have oversight of
328
matters relating to anti-money laundering, sanctions,
terrorist financing and proliferation financing,
including the establishment, implementation,
maintenance and review of adequate policies and
procedures sufficient to ensure the continuing
obligations to regulatory and law enforcement
agencies are met.
The Committee will oversee and report to the
Board on implementation of the actions necessary
to build assurance in these areas and will seek to
provide the Board with a forward-looking
perspective on financial crime risk.
The Committee will meet at least four times
each year.
Co-opted non-director members
Five co-opted non-director members have been
appointed advisers to the Committee to support its
work. Brief biographical particulars are set out
below:
N Fishwick, CMG: former senior official in the
Foreign and Commonwealth Office (‘FCO’),
specialising in security and counter-terrorism;
seconded from 2001 to 2004 to HM Customs and
Excise as Head of Intelligence (Law Enforcement),
focusing on international counter-narcotics, tax and
excise fraud; awarded the CMG in 2009.
D Hartnett, CB: former Permanent Secretary for
Tax at HM Revenue and Customs; focused on tax
policy development, compliance and enforcement
and international tax issues during his 36-year career
in tax administration; former deputy chairman of the
Organisation for Economic Co-operation and
Development's Forum on Tax Administration.
W Hughes, CBE QPM: former head of the UK’s
Serious Organised Crime Agency; international
experience in the disruption, dismantling and
criminal investigation of organised crime.
L H Schrank: former chief executive officer of
SWIFT, the global financial messaging system
which supplies secure standardised financial
messaging services and interface software to
financial institutions; oversaw SWIFT’s relationship
with the US Treasury Department and other
countries on counter-terrorism issues.
The Honourable J C Zarate: Senior Adviser at the
Center for Strategic and International Studies; the
Senior National Security Analyst for CBS News; a
Visiting Lecturer of Law at the Harvard Law School;
national security consultant; former Deputy Assistant
to the President and Deputy National Security
Advisor for Combating Terrorism responsible
for developing and implementing the US
Government’s counter-terrorism strategy and
policies related to transnational security threats;
former Assistant Secretary of the Treasury for
Terrorist Financing and Financial Crime; and former
federal prosecutor who served on terrorism
prosecution teams.
Group Remuneration Committee
Members1
J L Thornton (Chairman) ........
J D Coombe ............................
W S H Laidlaw .......................
G Morgan2 ..............................
Meetings held in 2012 ...........
Meetings
attended
Meetings
eligible
to attend
7
8
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5
8
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5
1 All members are independent non-executive Directors.
2 Retired as a Director on 25 May 2012.
R Fassbind has been appointed a member of the
Committee since March 2013.
The Group Remuneration Committee is
responsible for approving remuneration policy. As
part of its role, it considers the terms of annual
incentive plans, share plans, other long-term
incentive plans and the individual remuneration
packages of executive Directors and other senior
Group employees, including all in positions of
significant influence and those having an impact on
our risk profile and in doing so takes into account the
pay and conditions across the Group. No Directors
are involved in deciding their own remuneration.
The Directors’ Remuneration Report is set out
on pages 347 to 367.
Nomination Committee
Members1
Sir Simon Robertson
(Chairman) ..........................
R A Fairhead2 .........................
J W J Hughes-Hallett ..............
J P Lipsky3 ..............................
Sir Brian Williamson4 .............
Meetings held in 2012 ...........
Meetings
attended
Meetings
eligible
to attend
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3
4
2
1
4
4
4
4
2
2
1 All members are independent non-executive Directors.
2 Took a temporary leave of absence due to illness.
3 Appointed a member of the Committee on 24 May 2012.
4 Retired as a Director on 25 May 2012.
329
Committee activities
The Committee undertook the following key
activities in the discharge of its responsibilities:
• Appointments of new Directors. The
Committee oversaw the process for the
appointments of J Faber, R Fassbind and
J P Lipsky as Directors. An external search
consultancy, MWM Consulting, was used
in relation to these appointments. MWM
Consulting has no other connection with HSBC.
The Committee also oversaw the process for the
appointment of J B Comey, who was introduced
to us by a member of senior management.
Having regard to his public and private sector
roles neither external consultants nor advertising
were considered necessary in relation to this
appointment.
• Board appointment process. The Committee
leads the process for Board appointments,
with the support of external consultants as
appropriate. The Board has satisfied itself that
the Committee has appropriate plans in place
for orderly succession to the Board reflecting
an appropriate balance of skills and experience
on the Board.
• Forward planning. The Committee adopts
a forward-looking approach to potential
candidates for appointment to the Board that
takes into account the needs and development
of the Group’s businesses and the expected
retirement dates of current Directors.
• Size, structure and composition. The
Committee monitored the size, structure and
composition of the Board through consideration
of the skills, knowledge and experience required
of the Board and the skills, knowledge and
experience of the current Directors. The
Committee considered the re-election of
Directors at the Annual General Meeting and
has recommended to the Board that all Directors
should stand for re-election.
• Diversity. During the year, the Board adopted
a policy on Board diversity which is consistent
with the Group’s strategic focus on ethnicity,
age and gender diversity for the employee base.
Board appointments will continue to be made
based on merit and candidates will be
considered against objective criteria, having
due regard for the benefits of diversity on
the Board, including gender. The Committee
developed measurable objectives to implement
this policy and monitored progress towards
achieving these objectives. The Board diversity
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Report of the Directors: Corporate Governance (continued)
Board committees > Corporate Sustainability Committee
policy is available at www.hsbc.com/investor-
relations/governance/corporate-governance-
codes. The benefits of diversity continue to
influence succession planning and are key
criteria in the instructions to external search
consultants.
• Director training and development. The
Committee reviewed and monitored the training
and continuous professional development of
Directors and senior management.
• Time commitment and independence of non-
executive Directors. The Committee made
recommendations to the Board, having assessed
the independence of, and time required from, the
non-executive Directors.
• Terms of reference and Committee
effectiveness. The Committee undertook a
review of its terms of reference and its own
effectiveness including the Committee’s role in
assessing the independence of the non-executive
Directors as required following changes made to
The Hong Kong Corporate Governance Code.
Before recommending an appointment to the
Board, the Committee evaluates the balance of skills,
knowledge and experience of the Board and, in light
of this, and taking into account the needs of the
Group’s businesses, identifies the role and
capabilities required for a particular appointment.
Candidates are considered on merit against these
criteria. Care is taken to ensure that appointees
have enough time to devote to us. Prospective
Directors are asked to identify any significant other
commitments and confirm they have sufficient time
to discharge what is expected of them.
Corporate Sustainability Committee
Members
L M L Cha (Chairman)1 ..........
N R N Murthy2 ........................
G V I Davis3 ............................
Lord May4 ...............................
Dame Mary Marsh4 .................
Meetings held in 2012 ...........
Meetings
attended
Meetings
eligible
to attend
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4
4
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1 Appointed Chairman on 1 January 2013.
2 Retired as a Director and Chairman of the Committee on
31 December 2012.
3 Retired as a co-opted non-director member of the
Committee on 29 November 2012.
4 Co-opted non-director member of the Committee.
J W J Hughes-Hallett has been a member of the
Committee since 1 January 2013.
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Sustainability governance
The Corporate Sustainability Committee is
responsible for advising the Board, committees of
the Board and executive management on corporate
sustainability policies across the Group including
environmental, social and ethical issues.
Corporate Sustainability exists as a global
function. Senior executives are charged with
implementing sustainable business practice in all
major regions through inclusion in the HSBC Global
Standards Manuals; and, through induction and
developmental training. Local teams are in charge
of embedding corporate sustainability strategies
within banking activities.
HSBC reports on its progress in developing
and implementing its sustainability strategy
annually in the HSBC Sustainability Report, which
is independently verified and prepared using the
Global Reporting Initiative framework. The HSBC
Sustainability Report 2012 will be issued on 24 May
2013 and will be available at www.hsbc.com/
sustainability.
Corporate sustainability
At HSBC, we understand that the success of our
business is closely connected to the environmental,
social and economic landscape. For us, corporate
sustainability means achieving sustainable profit
growth so that we can continue to reward
shareholders and employees, build long-lasting
relationships with customers and suppliers, pay taxes
and duties in those countries where we operate, and
invest in communities for future growth. The way
we do business is as important as what we do: our
responsibilities to our customers, employees and
shareholders as well as to the countries and
communities in which we operate go far wider
than simply being profitable.
Our continuing financial success depends,
in part, on our ability to identify and address
environmental, social and ethical factors which
present risks or opportunities for the business.
These can affect our reputation, drive employee
engagement, help manage the risks of lending,
leverage savings through eco-efficiency and secure
new revenue streams. They generally fall into one
or more of the four broad areas discussed below.
Business finance
We aim to build long-term customer relationships
around the world through the provision of a
consistent and high-quality service and customer
experience. We use the benefits of our scale,
financial strength, geographical reach and strong
brand value to achieve this.
We aim to take advantage of the opportunities
and manage the risks presented by emerging global
trends by developing sustainable business models
to address them. We understand that the world is
changing and the threats of climate change and its
impact on availability of natural resources are
becoming ever more real. Increasing urbanisation,
a growing population and rising commodity prices
all raise concerns over potential resource constraints.
For example, as recent HSBC research shows,
climate change means that past hydrological trends
are no longer indicative of future availability of
freshwater; we face local water supply shortages
as global demand increases.
HSBC continues to play a leading role in
shaping the market response to these challenges,
identifying how business can adapt in ways that
bring both social and environmental benefits, while
providing viable economic returns. Throughout
2012, our Climate Change Centre of Excellence has
continued to research the likely effects that climate
change, and the responses to it, will have on our
business and those of our customers. In the past year,
HSBC Global Research has published reports on
‘Water Stress – Analysing the global challenges’ and
‘Less Bread for your Dough – The impact of rising
food prices on the global economy’.
HSBC’s Climate Business Council continues
to support Global Businesses to identify customer
opportunities arising from the shift to a low carbon
economy. HSBC’s Global Banking and Markets
teams played a leading role in some of the largest
renewable energy projects announced in 2012.
HSBC provided a range of financial services to the
largest offshore wind project in Europe and the most
powerful wind farm in Latin America. The two
projects combined will provide over 666 megawatts
of clean energy – equivalent of enough electricity
to power over half a million homes. These deals
highlight HSBC’s credentials in providing asset
finance within the low carbon energy market and the
strength of commercial teams working across several
markets.
Operational environmental efficiency
We focus our environmental initiatives primarily on
addressing and responding to issues associated with
climate change, including energy use, water and
waste management. This issue has the potential to
affect materially our customers and, by extension,
our long-term success, introducing new risks to
business activity. We continue to focus on the ten
331
goals of our operational sustainability strategy,
which we announced at the end of 2011. Between
2012 and 2020 we aim to reduce our annual
employee carbon emissions by one tonne, from
3.5 to 2.5 tonnes.
HSBC’s carbon dioxide emissions
For the period 1 October 2011 to 30 September 2012,
carbon dioxide emissions from HSBC’s global
operations were 963,000 tonnes. This was 3% less
than the 991,000 tonnes emitted in 2011. This figure
is subject to independent verification. Further
information on the Group’s carbon dioxide emissions
will be given in the HSBC Sustainability Report 2012.
Community investment
We have a long-standing commitment to the
communities in which we operate. Many of our key
markets are emerging economies. Our operations
bring benefits to our host countries through tax
contributions, and to local people and businesses
through employment, training, purchasing and
investment. Beyond our core business, we aim to
encourage social and economic opportunity through
community investment activities. Our focus is on
education and the environment because we believe
they are essential building blocks for the
development of communities and are prerequisites
for economic growth. These philanthropic
programmes aim to involve employees in the work
of local non-government organisations (‘NGOs’) and
charities. Our global education programmes focus on
helping disadvantaged children, promoting financial
literacy and international and cultural understanding.
In 2012, we launched our new flagship
environmental programme, the HSBC Water
Programme. This is a five-year, US$100m
programme in partnership with three NGOs
which rank amongst the world’s most respected
environmental and development organisations.
Together with Earthwatch, WaterAid and WWF, the
Programme will deliver the powerful combination
of water provision, protection, information and
education; resulting in the most ground-breaking
water programme committed to by a financial
organisation. The Programme will benefit
communities in need and enable economies to
prosper, driving development and social-economic
growth. Following the success of our previous
HSBC Climate Partnership, this programme will
create a community of employees and opportunities
for employee involvement and volunteering.
In 2012, we donated a total of US$120m to
community investment projects (2011: US$96m).
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Report of the Directors: Corporate Governance (continued)
Internal control
Employee issues
‘Employee engagement’ describes employees’
emotional and intellectual commitment to their
organisation and its success and is critical to the
long-term ability of the Group to deliver the highest
quality of financial services. Our Global People
Survey is carried out every other year and shows
that employees value our commitment to sustainable
business practices and view us as being a leader in
this regard. In the latest survey, taken in 2011,
81% of colleagues said they were satisfied with the
actions HSBC is taking to embed sustainability (e.g.
environmental and social issues) into the way we
run our business.
Sustainability risk
Our approach to managing sustainability risk is
detailed in the Appendix to Risk on page 280.
Internal control
The Directors are responsible for internal control
in HSBC and for reviewing its effectiveness.
Procedures have been designed for safeguarding
assets against unauthorised use or disposal; for
maintaining proper accounting records; and for the
reliability and usefulness of financial information
used within the business or for publication. Such
procedures are designed to manage and mitigate the
risk of failure to achieve business objectives and can
only provide reasonable and not absolute assurance
against material misstatement, errors, losses or fraud.
The procedures also enable HSBC Holdings to
discharge its obligations under the ‘Handbook of
Rules and Guidance’ issued by the FSA, HSBC’s
lead regulator.
The key procedures that the Directors have
established are designed to provide effective internal
control within HSBC and accord with the ‘Internal
Control: Revised Guidance for Directors on the
Combined Code’ issued by the Financial Reporting
Council. Such procedures for the ongoing
identification, evaluation and management of the
significant risks faced by HSBC have been in place
throughout the year and up to 4 March 2013, the date
of approval of the Annual Report and Accounts
2012. In the case of companies acquired during the
year, the internal controls in place are being
reviewed against HSBC’s benchmarks and integrated
into HSBC’s processes.
HSBC’s key internal control procedures include
the following:
• Global standards. Functional, operating,
financial reporting and certain management
reporting standards are established by global
332
function management committees, for
application throughout HSBC. These are
supplemented by operating standards set by
functional and local management as required for
the type of business and geographical location
of each subsidiary.
• Delegation of authority within limits set by
the Board. Authority to operate the various
subsidiaries and responsibilities for financial
performance against plans and for capital
expenditure are delegated to their respective
chief executive officers within limits set by the
Board. Delegation of authority from the Board
to individuals requires those individuals to
maintain a clear and appropriate apportionment
of significant responsibilities and to oversee the
establishment and maintenance of systems of
control appropriate to the business. The
appointment of executives to the most senior
positions within HSBC requires the approval of
the Board.
• Risk identification and monitoring. Systems
and procedures are in place in HSBC to identify,
control and report on the major risks including
credit, market, liquidity, capital, financial
management, model, reputational, pension,
strategic, sustainability, operational (including
accounting, tax, legal, compliance, fiduciary,
information, external fraud, internal fraud,
political, physical, business continuity, systems
operations, project and people risk) and Islamic
finance risk. Exposure to these risks is
monitored by risk management committees,
asset and liability committees and executive
committees in subsidiaries and, for the Group, in
Risk Management Meetings (‘RMM’) of the
GMB which are chaired by the Group Chief
Risk Officer. RMM meets each month (except
August) to address asset, liability and risk
management issues. HSBC’s operational risk
profile and the effective implementation of the
Group’s operational risk management
framework is monitored by the Global
Operational Risk and Control Committee
(‘GORCC’), which reports to the RMM. Model
risks are monitored by the Model Oversight
Committee which also reports to the RMM. The
minutes of the GMB meetings and the RMM are
provided to members of the GAC, the GRC and
the Board.
• 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 HSBC to heightened risk
of loss or reputational damage. During 2012,
attention was focused on:
global functions and certain legal entities.
• Financial reporting. The Group financial
−
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severe economic slowdown in mature
economies impacting global growth;
eurozone members departure from the
currency union;
increased geopolitical risk;
emerging market slowdown;
−
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− macroeconomic risks within developed
−
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economies;
regulatory developments affecting our
business model and Group profitability;
regulatory investigations, fines, sanctions
and requirements relating to conduct of
business and financial crime negatively
affecting our results and brand;
− dispute risk;
−
regulatory commitments and consent orders
including the Deferred Prosecution
Agreements;
challenges to achieving our strategy in a
downturn;
internet crime and fraud;
social media risk;
level of change creating operational
complexity and heightened operational risk;
information risk; and
−
−
−
−
−
− model risk.
reporting process for preparing the consolidated
Annual Report and Accounts 2012 is controlled
using documented accounting policies and
reporting formats, supported by a chart of
accounts with detailed instructions and guidance
on reporting requirements, issued by Group
Finance to all reporting entities within the
Group in advance of each reporting period end.
The submission of financial information from
each reporting entity to Group Finance is subject
to certification by the responsible financial
officer, and analytical review procedures at
reporting entity and Group levels.
• Responsibility for risk management.
Management of global businesses and global
functions are primarily accountable for
managing, measuring and monitoring their
risks and controls. Processes consistent with
the Three Lines of Defence principle are in
place to ensure weaknesses are escalated to
senior management and addressed.
•
IT operations. Centralised functional control
is exercised over all IT developments and
operations. Common systems are employed for
similar business processes wherever practicable.
• Strategic plans. Periodic strategic plans are
• Functional management. Global functional
prepared for global businesses, global functions
and certain geographical regions within the
framework of the Group’s strategy. Annual
Operating Plans, informed by detailed analysis
of risk appetite describing the types and
quantum of risk that we are prepared to take in
executing our strategy, are prepared and adopted
by all major HSBC operating companies and set
out the key business initiatives and the likely
financial effects of those initiatives.
• Disclosure Committee. The Disclosure
Committee reviews material public disclosures
made by HSBC Holdings for any material
errors, misstatements or omissions. The
membership of the Disclosure Committee,
which is chaired by the Group Company
Secretary, includes the heads of Global Finance,
Legal, Risk and Compliance, Communications,
Investor Relations and Internal Audit functions
and representatives from the principal regions
and global businesses. The integrity of
disclosures is underpinned by structures and
processes within the Finance and Risk functions
that support expert and rigorous analytical
review of financial reporting complemented by
certified reviews by heads of global businesses,
management is responsible for setting policies,
procedures and standards for the following
risks: credit, market, liquidity, capital, financial
management, model, reputational, pension,
strategic, sustainability and operational risk
(including accounting, tax, legal, compliance,
fiduciary, information security, security and
fraud, systems and people risk). Authorities to
enter into credit and market risk exposures are
delegated with limits to line management of
Group companies. The concurrence of the
appropriate global function is required, however,
to credit proposals with specified higher risk
characteristics. Credit and market risks are
measured and reported on in subsidiaries and
aggregated for review of risk concentrations on
a Group-wide basis.
• CEO Attestation process. Global Operational
Risk coordinate the annual CEO Attestation
process under which the chief executive officer
of each of the Group’s material subsidiaries
confirms that the internal control framework
applicable to that subsidiary has been assessed
and any significant open issues have been
identified, with action plans in place to address
weaknesses. The remediation of these issues is
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Report of the Directors: Corporate Governance (continued)
Internal control > Going concern basis / Employees
monitored by the Operational Risk and Internal
Control (‘ORIC’) teams for the relevant
regions/global businesses and reports on
progress are presented to their ORIC
committees and quarterly to Global Operational
Risk. An annual report and updates on identified
issues and remediation plans are presented to the
GRC and the GAC.
Internal Audit. The establishment and
maintenance of appropriate systems of internal
control is primarily the responsibility of
business management. The Global Internal
Audit function, which is centrally controlled,
provides independent assurance in respect of the
design and operating effectiveness of the risk
management and control frameworks across the
Group, focusing on the areas of greatest risk to
HSBC using a risk-based approach. The head of
this function reports to the Group Chairman, the
Group Chief Executive Officer, the GAC and
the GRC on risk-related matters.
Internal Audit recommendations. Executive
management is responsible for ensuring that
recommendations made by the Internal Audit
function are implemented within an appropriate
and agreed timetable. Confirmation to this effect
must be provided to Internal Audit.
•
•
• Reputational risk. Policies to guide subsidiary
companies and management at all levels in the
conduct of business to safeguard the Group’s
reputation are established by the Board and its
committees, subsidiary company boards and
their committees and senior management.
Reputational risks can arise from a variety of
causes including environmental, social and
governance issues, as a consequence of
operational risk events and as a result of
employees acting in a manner inconsistent with
HSBC’s Values. As a banking group, HSBC’s
good reputation depends upon the way in
which it conducts its business but it can also be
affected by the way in which clients, to which
it provides financial services, conduct their
business or use financial products and services.
The GAC has non-executive responsibility for
oversight of internal controls over financial reporting
and the GRC has non-executive responsibility for
internal controls other than over financial reporting.
The GRC and the GAC have kept under review
the effectiveness of this system of internal control
and have reported regularly to the Board of
Directors. In carrying out their reviews the GRC and
the GAC receive regular business and operational
risk assessments; regular reports from the Group
334
Chief Risk Officer and the Head of Global Internal
Audit; reports on the annual reviews of the internal
control framework of HSBC Holdings which
cover all internal controls, both financial and
non-financial; annual confirmations from chief
executives of principal subsidiary companies as
to whether there have been any material losses,
contingencies or uncertainties caused by weaknesses
in internal controls; internal audit reports; external
audit reports; prudential reviews; and regulatory
reports. The GRC monitors the status of top and
emerging risks which impact or may impact the
Group 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
GRC and the GAC 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.
The Directors, through the GRC and the GAC,
have conducted an annual review of the effectiveness
of our system of internal control covering all
material controls, including financial, operational
and compliance controls, risk management systems,
the adequacy of resources, qualifications and
experience of staff of the accounting and financial
reporting function and the risk function, and their
training programmes and budget. The review does
not extend to joint ventures or associates. The
GRC and the GAC have received confirmation that
executive management has taken or is taking the
necessary actions to remedy any failings or
weaknesses identified through the operation of
our framework of controls.
Going concern basis
The financial statements are prepared on a going
concern basis, as the Directors are satisfied that the
Group and parent company have the resources to
continue in business for the foreseeable future.
In making this assessment, the Directors have
considered a wide range of information relating
to present and future conditions, including future
projections of profitability, cash flows and capital
resources. Further information relevant to the
assessment is provided elsewhere in this report.
In particular, HSBC’s principal activities, business
and operating models, strategic direction and top
and emerging risks are described in the ‘Overview’
section; a financial summary, including a review of
the consolidated income statement and consolidated
balance sheet, is provided in the ‘Operating and
Financial Review’ section; HSBC’s objectives,
policies and processes for managing credit, liquidity
and market risk are described in the ‘Risk’ section;
and HSBC’s approach to capital management and
allocation is described in the ‘Capital’ section.
Employees
At 31 December 2012 we had a total workforce of
270,000 full-time and part-time employees compared
with 298,000 at the end of 2011 and 307,000 at the
end of 2010. Our main centres of employment are
the UK with approximately 48,000 employees, India
30,000, Hong Kong 28,000, Brazil 23,000, mainland
China 18,000, Mexico 18,000, the US 17,000 and
France 10,000.
In the context of the current global financial
services operating environment, a high performance
and values-led work force is critical. We encourage
open and honest communication in decision making.
Employment issues and financial, economic,
regulatory and competitive factors affecting
HSBC’s performance are regularly shared with
our employees.
Global People Survey
In 2012, quarterly Pulse Surveys were introduced
to assess in a more timely way the understanding and
execution of our Group strategy, our culture, our
performance and the engagement of our people
generally. Every three months, a quarter of the
Group’s employees are randomly sampled and hence
all employees are covered over the course of the
year. A Global People Survey will take place
biennially, the next one being in 2013.
Over 2012, the Group strategy index score
improved by 2% to 54% in the fourth quarter and the
average participation rate was 56%, which is around
median for comparable surveys externally.
Reward
Our approach to reward is meritocratic and market
competitive, underpinned by an ethical and values
based performance culture which aligns the interests
of our employees, shareholders, regulators and
customers. See ‘Employee share plans’ on pages 336
to 337.
Employee relations
We negotiate and consult with recognised unions as
appropriate. The five highest concentrations of union
membership are in Argentina, Brazil, mainland
China, Malta and Mexico. 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.
Diversity and inclusion
HSBC is committed to building a values-driven high
performance culture where all employees are valued,
respected and where their opinions count. We remain
committed to meritocracy, which requires a diverse
and inclusive culture where employees believe that
their views are heard, their concerns are attended
to and they work in an environment where bias,
discrimination and harassment on any matter,
including gender, age, ethnicity, religion, sexuality
and disability are not tolerated and where
advancement is based on objectivity. Our inclusive
culture helps us respond to our diverse customer
base, while developing and retaining a secure supply
of skilled, committed employees. Our culture will be
strengthened by employing the best people and
optimising their ideas, abilities and differences.
Oversight of our diversity and inclusion agenda
and related activities resides with executives on the
Group Diversity Committee, complemented by the
Group People Committee and local People/Diversity
Committees.
Staff development
The development of employees in both developed
and emerging markets is essential to the future
strength of our business. We have implemented a
systematic approach to identifying, developing
and deploying talented employees to ensure an
appropriate supply of high calibre individuals with
the values, skills and experience for current and
future senior management positions.
In 2012, we continued to build global
consistency across our learning curricula and to
improve the relevance and quality of learning
programmes. We have endeavoured to achieve a
standard of excellence focusing on leadership,
values and technical capability.
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Report of the Directors: Corporate Governance (continued)
Employees
Employment of disabled persons
We believe in providing equal opportunities for all
employees. The employment of disabled persons is
included in this commitment and the recruitment,
training, career development and promotion of
disabled persons is 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.
Health and safety
The maintenance of appropriate health and safety
standards remains a key responsibility of all
managers and we are committed to proactively
managing all health and safety risks associated with
our business. Our objectives are to identify, remove,
reduce or control material risks relating to fires and
accidents or injuries to employees, customers and
visitors.
Group policies, standards and guidance for the
management of health and safety are set by global
Corporate Real Estate. Achieving these in each
country in which we operate is the responsibility
of the Chief Operating Officer of that country with
support and coordination provided by the Health
and Safety Coordinator for that country.
In terms of physical and geopolitical risk,
Global Security and Fraud Risk provide regular
security risk assessments to assist management in
judging the level of terrorist and violent criminal
threat. Regional Security and Fraud Risk functions
conduct regular security reviews of all Group
buildings to ensure measures to protect our staff,
buildings, assets and information are appropriate
to the level of threat.
We remain committed to maintaining our
preparedness and to ensuring the highest standards
of health and safety wherever in the world we
operate.
Remuneration policy
The quality and commitment of our human capital
is fundamental to our success and accordingly the
Board aims to attract, retain and motivate the very
best people. As trust and relationships are vital in our
business our goal is to recruit those who are
committed to making a long-term career with the
organisation.
HSBC’s reward strategy supports this objective
through balancing of both short-term and sustainable
performance. Our reward strategy aims to reward
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success, not failure, and be properly aligned with our
risk framework and related outcomes. In order to
ensure alignment between remuneration and our
business strategy, individual remuneration is
determined through assessment of performance
delivered against both annual and long-term
objectives summarised in performance scorecards
as well as adherence to the HSBC Values of being
‘open, connected and dependable’ and acting with
‘courageous integrity’. Altogether, performance is
judged, not only on what is achieved over the short
and long-term, but also on how it is achieved, as the
latter contributes to the sustainability of the
organisation.
The financial and non-financial measures
incorporated in the annual and long-term scorecards
are carefully considered to ensure alignment with the
long-term strategy of the Group.
Further information on the Group’s approach
to remuneration is given on page 347.
Employee share plans
Share options and discretionary awards of shares
granted under HSBC share plans align the interests
of employees with those of shareholders. The tables
on the following pages set out the particulars of
outstanding options, including those held by
employees working under employment contracts
that are regarded as ‘continuous contracts’ for the
purposes of the Hong Kong Employment Ordinance.
The options were granted at nil consideration. No
options have been granted to substantial shareholders,
suppliers of goods or services, or in excess of the
individual limit for each share plan. No options were
cancelled by HSBC during the year.
A summary for each plan of the total number
of the options which were granted, exercised or
lapsed during 2012 is shown in the following tables.
Further details required to be disclosed pursuant
to Chapter 17 of the Rules Governing the Listing
of Securities on The Stock Exchange of Hong
Kong Limited are available on our website at
www.hsbc.com by selecting ‘Investor Relations’,
then ‘Governance’, then ‘Share Plans’, and on the
website of The Stock Exchange of Hong Kong
Limited at www.hkex.com.hk or can be obtained
upon request from the Group Company Secretary,
8 Canada Square, London E14 5HQ. Particulars of
options held by Directors of HSBC Holdings are
set out on page 363.
Note 7 on the Financial Statements gives details
on share-based payments, including discretionary
awards of shares granted under HSBC share plans.
All-employee share option plans
All-employee share option plans have operated
within the Group and employees on the first working
day of the year were eligible to be granted options to
acquire HSBC Holdings ordinary shares. Options
under the plans are usually exercisable after one,
three or five years. The exercise of options may be
advanced to an earlier date in certain circumstances,
for example on retirement, and may be extended in
certain circumstances, for example on the death of a
participant, the executors of the participant’s estate
may exercise options up to six months beyond the
HSBC Holdings All-employee Share Option Plans
normal exercise period. The middle market closing
price for HSBC Holdings ordinary shares quoted
on the London Stock Exchange, as derived from the
Daily Official List on 23 April 2012, the day before
options were granted in 2012, was £5.46. A review
of the plans will be undertaken in 2013 and there
will be no grant of options while that review is
ongoing.
The all-employee share option plans will
terminate on 27 May 2015 unless the Directors
resolve to terminate the plans at an earlier date.
HSBC Holdings ordinary shares
Dates of awards
from
Exercise price
to
from
to
Savings-Related Share Option Plan1
(£)
26 Apr
24 Apr
2012
(£)
3.3116
2006
6.6870
Exercisable
from
to
1 Aug
2011
31 Jan
2018
Savings-Related Share Option Plan: International2
26 Apr
24 Apr
2012
(£)
3.3116
(£)
6.6870
1 Aug
2011
31 Jan
2018
2006
26 Apr
2006
24 Apr
2012
(US$)
4.8876
(US$)
12.0958
1 Aug
2011
31 Jan
2018
26 Apr
2006
24 Apr
2012
(€)
3.6361
(€)
9.5912
1 Aug
2011
31 Jan
2018
26 Apr
2006
24 Apr
2012
(HK$)
37.8797
(HK$)
94.5057
1 Aug
2011
31 Jan
2018
At
1 Jan 2012 during year during year during year 31 Dec 2012
Granted Exercised
Lapsed
At
68,499,109
20,726,298
25,390,031
8,859,311
54,976,065
26,615,253
8,549,570
12,032,666
5,663,420
17,468,737
9,752,066
2,666,374
3,440,522
2,489,024
6,488,894
3,176,265
827,832
1,407,390
416,444
2,180,263
45,422,511
12,098,312
21,684,534
4,198,449
31,637,840
1 The weighted average closing price of the shares immediately before the dates on which options were exercised was £5.46.
2 The weighted average closing price of the shares immediately before the dates on which options were exercised was £5.45.
Discretionary Share Option Plans
There have been no grants of discretionary share options under employee share plans since 30 September 2005.
Dates of awards
from
to
Exercise
price (£)
from
to
Exercisable
from
to
At
1 Jan 2012
Exercised
during year
Lapsed
during year
At
31 Dec 2012
HSBC Holdings ordinary shares
HSBC Holdings Group Share Option Plan1,2
7 May
20 Apr
2005
2002
6.0216
7.9606
7 May
2005
20 Apr
2015
120,797,419
1,606,032
32,018,464
87,172,923
HSBC Share Plan
30 Sep
2005
7.9911
30 Sep
2008
30 Sep
2015
86,046
–
–
86,046
1 The HSBC Holdings Group Share Option Plan expired on 26 May 2005. No options have been granted under the Plan since that date.
2 The weighted average closing price of the shares immediately before the dates on which options were exercised was £6.43.
Subsidiary company share plans
HSBC France
When it was acquired in 2000, HSBC France and
certain of its subsidiary companies operated
employee share option plans under which options
could be granted over their respective shares.
Under the terms of the employee share option
plan, holders of options to acquire shares of HSBC
France were obliged to exchange the HSBC France
shares they received on exercise of these options for
HSBC Holdings ordinary shares. Details of options
to acquire shares in HSBC France are set out in the
following table. No further options will be granted
under this share plan.
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Report of the Directors: Corporate Governance (continued)
Employees > Other required disclosures / 2013 AGM
HSBC France
Date of award
Exercise
price (€)
Exercisable
from
to
At
1 Jan 20121
Exercised
during year
Lapsed
during year
At
31 Dec 20121
1 Oct 2002 ..............
142.84
2 Oct
2005
1 Oct
2012
22,645
–
22,645
–
HSBC France shares of €5
1 If options over HSBC France Shares had been exercised, these options would have been exchanged for HSBC Holdings ordinary shares
in the ratio of 13.499897 HSBC Holdings ordinary shares for each HSBC France share. At 31 December 2012, The CCF Employee
Benefit Trust 2001 (Private Banking France) held 989,502 HSBC Holdings ordinary shares.
HSBC Finance
Upon the acquisition of HSBC Finance in 2003, all
outstanding options over, and rights to receive,
HSBC Finance common shares were converted into
options over, and rights to receive, HSBC Holdings
ordinary shares in the same ratio as the share
exchange offer for the acquisition of HSBC Finance
(2.675 HSBC Holdings ordinary shares for each
HSBC Finance common share). The exercise price
payable for each option was adjusted using the same
exchange ratio.
Details of options to acquire shares in HSBC
Holdings under the share plan of HSBC Finance are
set out in the following table. No further options will
be granted under this share plan.
HSBC Finance: 1996 Long-Term Executive Incentive Compensation Plan
Date of award
Exercise
price (US$)
Exercisable
from
to
At
1 Jan 2012
HSBC Holdings ordinary shares
Lapsed
during year
Exercised
during year1
At
31 Dec 20122
20 Nov 2002 .......
9.29
20 Nov 2003 20 Nov 2012
2,429,538
2,053,838
375,700
–
1 The weighted average closing price of the shares immediately before the dates on which options were exercised was £6.06.
2 At 31 December 2012, the HSBC (Household) Employee Benefit Trust 2003 held 281,477 HSBC Holdings ordinary shares and 1,455
American Depositary Shares, each of which represents five HSBC Holdings ordinary shares.
HSBC Bank Bermuda
Upon the acquisition of HSBC Bank Bermuda
Limited (‘HSBC Bank Bermuda’) in 2004, all
outstanding options over HSBC Bank Bermuda
shares were converted into options to acquire HSBC
Holdings ordinary shares using an exchange ratio
calculated by dividing US$40 (being the
consideration paid for each HSBC Bank Bermuda
share) by the average price of HSBC Holdings
ordinary shares over the five day period to the
completion of the acquisition. The exercise price
payable for each option was adjusted using the same
exchange ratio.
Details of options to acquire shares in HSBC
Holdings under the share plans of HSBC Bank
Bermuda are set out in the following table. No
further options will be granted under the share plans
of HSBC Bank Bermuda.
HSBC Bank Bermuda
Dates of awards
from
to
Share Option Plan 2000
30 Jan
21 Apr
Exercise
price (US$)
from
to
Exercisable
from
to
At
1 Jan 2012
Exercised
during year
Lapsed
At
during year 31 Dec 20121
HSBC Holdings ordinary shares
2002
2003
9.32
14.02
Directors’ Share Option Plan
3 Apr
2002
13.95
30 Jan
2003
21 Apr
2013
1,014,026
3 Apr
2003
3 Apr
2012
16,881
–
–
864,102
149,924
16,881
–
1 At 31 December 2012, the HSBC (Bank of Bermuda) Employee Benefit Trust 2004 held 2,108,830 HSBC Holdings ordinary shares
which may be used to satisfy the exercise of employee share options.
338
Other required disclosures
Further information about share capital, directors’
interests, supplier payment policy, dividends and
shareholders is set out in the Appendix to this section
on pages 340 to 346.
2013 Annual General Meeting
Our Annual General Meeting in 2013 will be held at
the Barbican Hall, Barbican Centre, London EC2 on
24 May 2013 at 11.00am.
An informal meeting of shareholders will be
held at 1 Queen’s Road Central, Hong Kong on
Monday 20 May 2013 at 4.30pm.
Resolutions to receive the Annual Report and
Accounts 2012, approve the Directors’ Remuneration
Report, elect or re-elect Directors and reappoint
KPMG Audit Plc as auditor will be submitted to
the Annual General Meeting. KPMG Audit Plc has
expressed its willingness to continue in office and
the Group Audit Committee and the Board has
recommended that KPMG Audit Plc be reappointed.
Resolutions will also be submitted to the Annual
General Meeting to renew the authority for the
allotment of shares, disapply pre-emption rights,
renew the authority for the purchase of ordinary
shares, and approve general meetings (other than
Annual General Meetings) being called on a
minimum of 14 clear days’ notice.
A live webcast of the Annual General Meeting
will be available on www.hsbc.com. From shortly
after the conclusion of the Annual General Meeting
until 30 June 2013 a recording of the proceedings
will be available on www.hsbc.com.
On behalf of the Board
D J Flint, Group Chairman
HSBC Holdings plc
Registered number 617987
4 March 2013
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H S B C H O L D I N G S P L C
Report of the Directors: Corporate Governance (continued)
Appendix > Other required disclosures > Share capital
Appendix to Report of the Directors
Other required disclosures
Share capital
Issued share capital
The nominal value of our issued share capital paid up at 31 December 2012 was US$9,238,018,832 divided into
18,476,008,664 ordinary shares of US$0.50 each, 1,450,000 non-cumulative preference shares of US$0.01 each and
1 non-cumulative preference share of £0.01.
The percentage of the nominal value of our total issued share capital paid up at 31 December 2012 represented by the
ordinary shares of US$0.50 each, non-cumulative preference shares of US$0.01 each and the non-cumulative
preference share of £0.01 was approximately 99.9998%, 0.0002%, and 0%, respectively.
Rights and obligations attaching to shares
The rights and obligations attaching to each class of shares in our share capital are set out in our Articles of
Association subject to certain rights and obligations that attach to each class of preference share as determined by the
Board prior to allotment of the relevant preference shares. Set out below is a summary of the rights and obligations
attaching to each class of shares with respect to voting, dividends, capital and, in the case of the preference shares,
redemption.
To be registered, a transfer of shares must be in relation to shares which are fully paid up and on which we have no
lien and to one class of shares denominated in the same currency. The transfer must be in favour of a single transferee
or no more than four joint transferees and it must be duly stamped (if required). The transfer must be delivered to our
registered office or our Registrars accompanied by the certificate to which it relates or such other evidence that
proves the title of the transferor.
If a shareholder or any person appearing to be interested in our shares has been sent a notice under section 793 of the
Companies Act 2006 (which confers upon public companies the power to require information from any person whom
we know or have reasonable cause to believe to be interested in the shares) and has failed in relation to any shares
(the ‘default shares’) to supply the information requested within the period set out in the notice, then the member,
unless the Board otherwise determines, is not entitled to be present at or to vote the default shares at any general
meeting or to exercise any other right conferred by being a shareholder. If the default shares represent at least 0.25%
in nominal value of the issued shares of that class, unless the Board otherwise determines, any dividend shall be
withheld by the Company without interest, no election may be made for any scrip dividend alternative, and no
transfer of any shares held by the member will be registered except in limited circumstances.
Ordinary shares
Subject to the Companies Act 2006 and the Articles of Association, HSBC Holdings may, by ordinary resolution,
declare dividends to be paid to the holders of ordinary shares, though no dividend shall exceed the amount
recommended by the Board. The Board may pay interim dividends as appears to the Board to be justified by the
profits available for distribution. All dividends shall be apportioned and paid proportionately to the percentage of the
nominal amount paid up on the shares during any portion or portions of the period in respect of which the dividend is
paid, but if any share is issued on terms providing that it shall rank for dividend as from a particular date, it shall
rank for dividend accordingly. Subject to the Articles of Association, the Board may, with the prior authority of an
ordinary resolution passed by the shareholders and subject to such terms and conditions as the Board may determine,
offer to any holders of ordinary shares the right to elect to receive ordinary shares of the same or a different currency,
credited as fully paid, instead of cash in any currency in respect of the whole (or some part, to be determined by the
Board) of any dividend specified by the ordinary resolution. At the 2012 Annual General Meeting shareholders gave
authority to the Directors to offer a scrip dividend alternative until the earlier of the conclusion of the Annual
General Meeting in 2017 or 24 May 2017.
Preference shares
There are three classes of preference shares in the share capital of HSBC Holdings, non-cumulative preference
shares of US$0.01 each (the ‘Dollar Preference Shares’), non-cumulative preference shares of £0.01 each (the
340
‘Sterling Preference Shares’) and non-cumulative preference shares of €0.01 (the ‘Euro Preference Shares’). The
Dollar Preference Shares in issue are Series A Dollar Preference Shares and the Sterling Preference Share in issue is
a Series A Sterling Preference Share. There are no Euro Preference Shares in issue.
Dollar Preference Shares
Holders of the Dollar Preference Shares are only entitled to attend and vote at general meetings if any dividend
payable on the relevant preference shares in respect of such period as the Board shall determine prior to allotment
thereof is not paid in full or in such other circumstances, and upon and subject to such terms, as the Board may
determine prior to allotment of the relevant preference shares. In the case of the Dollar Preference Shares in issue at
4 March 2013 the relevant period determined by the Board is four consecutive dividend payment dates. Whenever
holders of the Dollar Preference Shares are entitled to vote on a resolution at a general meeting, on a show of hands
every such holder who is present in person or by proxy shall have one vote and on a poll every such holder who is
present in person or by proxy shall have one vote per preference share held by him or her or such number of votes per
share as the Board shall determine prior to allotment of such share.
Subject to the Articles of Association, holders of the Dollar Preference Shares have the right to a non-cumulative
preferential dividend at such rate, on such dates and on such other terms and conditions as may be determined by the
Board prior to allotment thereof in priority to the payment of any dividend to the holders of ordinary shares and any
other class of shares of HSBC Holdings in issue (other than (i) the other preference shares in issue and any other
shares expressed to rank pari passu therewith as regards income; and (ii) any shares which by their terms rank in
priority to the relevant preference shares as regards income). A dividend of US$62 per annum is payable on each
Dollar Preference Share in issue at 4 March 2013. The dividend is paid at the rate of US$15.50 per quarter at the sole
and absolute discretion of the Board.
A dividend will not be declared or paid on the Dollar Preference Shares if payment of the dividend would cause
HSBC Holdings not to meet the applicable capital adequacy requirements of the FSA or the profit of HSBC
Holdings available for distribution as dividends is not sufficient to enable HSBC Holdings to pay in full both
dividends on the relevant preference shares and dividends on any other shares that are scheduled to be paid on the
same date and that have an equal right to dividends. Dividends will not be declared or paid on any class of shares of
HSBC Holdings ranking lower in the right to dividends than the Dollar Preference Shares nor redeem nor purchase
in any manner any of its other shares ranking equal with or lower than the Dollar Preference Shares unless it has paid
in full, or set aside an amount to provide for payment in full, the dividends on the Dollar Preference Shares for the
then-current dividend period.
The Dollar Preference Shares carry no rights to participate in the profits or assets of HSBC Holdings other than as set
out in the Articles of Association and subject to the Companies Act 2006, do not confer any right to participate in
any offer or invitation by way of rights or otherwise to subscribe for additional shares in HSBC Holdings, do not
confer any right of conversion and do not confer any right to participate in any issue of bonus shares or shares issued
by way of capitalisation of reserves.
Subject to the relevant insolvency laws and the Articles of Association of HSBC Holdings, holders of the Dollar
Preference Shares have the right in a winding up of HSBC Holdings to receive out of the assets of HSBC Holdings
available for distribution to its shareholders, in priority to any payment to the holders of the ordinary shares and any
other class of shares of HSBC Holdings in issue (other than (i) the other relevant preference shares and any other
shares expressed to rank pari passu therewith as regards repayment of capital; and (ii) any shares which by their
terms rank in priority to the relevant preference shares as regards repayment of capital), a sum equal to any unpaid
dividend on the Dollar Preference Shares which is payable as a dividend in accordance with or pursuant to the
Articles of Association and the amount paid up or credited as paid up on the Dollar Preference Shares together with
such premium (if any) as may be determined by the Board prior to allotment thereof. In the case of the Dollar
Preference Shares in issue at 4 March 2013, the premium is US$999.99 per Dollar Preference Share.
The Dollar Preference Shares may be redeemed in accordance with the Articles of Association and the terms on
which Dollar Preference Shares were issued and allotted. In the case of the Dollar Preference Shares in issue at
4 March 2013, HSBC Holdings may redeem such shares in whole at any time on or after 16 December 2010, subject
to the prior consent of the FSA.
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H S B C H O L D I N G S P L C
Report of the Directors: Corporate Governance (continued)
Appendix > Other required disclosures > Share capital / Directors’ interests
Sterling Preference Shares
The Sterling Preference Shares carry the same rights and obligations under the Articles of Association as the Dollar
Preference Shares, save in respect of certain rights and obligations that attach to Sterling Preference Shares to be
determined by the Board prior to allotment of the relevant preference shares and the timing and payment of proceeds
from the redemption of each class of share. The one Sterling Preference Share in issue at 4 March 2013 carries the
same rights and obligations as the Dollar Preference Shares in issue at 4 March 2013 to the extent described in the
section above save as follows:
1.
2.
3.
the holder of the Sterling Preference Share is not entitled to attend or vote at general meetings;
the Sterling Preference Share may be redeemed in whole on any date as may be determined by the Board; and
the exceptions to the circumstances in which a dividend will not be declared or paid do not apply.
A dividend of £0.04 per annum is payable on the Sterling Preference Share in issue at 4 March 2013. The
dividend is paid at the rate of £0.01 per quarter at the sole and absolute discretion of the Board.
Euro Preference Shares
The Euro Preference Shares carry the same rights and obligations under the Articles of Association as the Dollar
Preference Shares, save in respect of certain rights and obligations that attach to Euro Preference Shares which are to
be determined by the Board prior to allotment of the relevant preference shares and the timing and payment of
proceeds from the redemption of each class of share.
Share capital during 2012
The following events occurred during the year in relation to the ordinary share capital of HSBC Holdings:
Scrip dividends
Issued in lieu of
HSBC Holdings ordinary shares
In
Third interim dividend for 2011 .....................................
Fourth interim dividend for 2011 ...................................
First interim dividend for 2012 ......................................
Second interim dividend for 2012 ..................................
Third interim dividend for 2012 .....................................
January 2012
May 2012
July 2012
October 2012
December 2012
All-Employee share plans
HSBC Holdings savings-related share option plans
HSBC ordinary shares issued in £ ..................................................
HSBC ordinary shares issued in HK$ .............................................
HSBC ordinary shares issued in US$ .............................................
HSBC ordinary shares issued in € ..................................................
Options over HSBC ordinary shares lapsed ........................................
Options over HSBC ordinary shares granted in response to
approximately 53,000 applications from HSBC employees
in over 60 countries and territories on 24 April 2012 .....................
Plan d’Epargne Entreprise
HSBC ordinary shares issued for the benefit of non-UK resident
Number
96,994,187
28,357,393
91,127,385
87,820,228
65,036,059
Number
37,422,697
21,684,534
3,440,522
1,407,390
21,626,648
£
HK$
US$
€
44,868,386
Market value
US$
7.4224
9.1170
8.2065
8.9127
9.8255
Exercise price
from
3.3116
37.8797
4.8876
3.6361
£
4.7461
5.7466
5.2022
5.6560
6.1138
to
6.1760
63.9864
8.7225
6.0657
employees of HSBC France and its subsidiaries ............................
2,274,523
€
5.695
Discretionary share incentive plans
Options exercised under:
HSBC ordinary
shares issued
Exercise price
(£)
Options
lapsed
The HSBC Holdings Group Share Option Plan ...............
1,606,032
6.0216
32,018,464
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Authority to allot shares
At the Annual General Meeting in 2012, shareholders renewed the general authority for the Directors to allot new
shares. The general authority is to allot up to 3,624,050,000 ordinary shares, 15,000,000 non-cumulative preference
shares of £0.01 each, 15,000,000 non-cumulative preference shares of US$0.01 each and 15,000,000 non-cumulative
preference shares of €0.01 each. Within this, the Directors have authority to allot up to a maximum of 906,012,000
ordinary shares wholly for cash to persons other than existing shareholders.
Other than as described above, the Directors did not allot any shares during 2012.
Treasury shares
In accordance with the terms of a waiver granted by the Hong Kong Stock Exchange on 19 December 2005, HSBC
Holdings will comply with the applicable law and regulation in the UK in relation to the holding of any shares in
treasury and with the conditions of the waiver in connection with any shares it may hold in treasury. No shares are
currently held in treasury.
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Directors’ interests
Pursuant to the requirements of the UK Listing Rules and according to the register of Directors’ interests maintained
by HSBC Holdings pursuant to section 352 of the Securities and Futures Ordinance of Hong Kong, the Directors of
HSBC Holdings at 31 December 2012 had the following interests, all beneficial unless otherwise stated, in the shares
and loan capital of HSBC Holdings and its associated corporations:
Directors’ interests – shares and loan capital
At 31 December 2012
At
1 January
2012
21,139
21,300
272,861
2,731,100
46,952
31,872
–
133,648
176,709
10,250
Beneficial
owner
22,387
–
313,326
2,553,592
–
32,252
15,000
118,813
9,486
–
Child
under 18
or spouse
–
–
–
176,885
–
–
–
–
–
10,250
Jointly
with
another
person
–
21,300
–
–
–
–
–
–
–
–
Trustee
–
–
37,1622
–
–
1,4162
–
–
167,7502
–
Total
interests1
22,387
21,300
350,488
2,730,477
–
33,668
15,000
118,813
177,236
10,250
US$000
US$000
US$000
US$000
US$000
US$000
300
300
–
–
–
300
RMBm
RMBm
RMBm
RMBm
RMBm
RMBm
–
5.1
–
–
–
5.1
HSBC Holdings ordinary shares
J D Coombe ......................................
R A Fairhead .....................................
D J Flint ............................................
S T Gulliver ......................................
J W J Hughes-Hallett ........................
W S H Laidlaw .................................
J P Lipsky3 ........................................
I J Mackay .........................................
Sir Simon Robertson .........................
J L Thornton4 ....................................
HSBC Holdings
6.5% Subordinated Notes 2036
L M L Cha ........................................
HSBC Bank 2.875% Notes 2015
J Faber5 ..............................................
1 Details of executive Directors’ other interests in HSBC Holdings ordinary shares arising from the HSBC Holdings savings-related share
option plans, the HSBC Share Plan and the HSBC Share Plan 2011 are set out in the Directors’ Remuneration Report on page 363. At
31 December 2012, the aggregate interests under the Securities and Futures Ordinance of Hong Kong in HSBC Holdings ordinary
shares, including interests arising through employee share plans were: D J Flint – 566,423; S T Gulliver – 5,178,992 and I J Mackay –
536,205. Each Director’s total interests represents less than 0.03% of the shares in issue.
2 Non-beneficial.
3 Interest in 3,000 listed American Depositary Shares (‘ADS’), which are categorised as equity derivatives under Part XV of the Securities
and Futures Ordinance of Hong Kong. Each ADS represents five HSBC Holdings ordinary shares.
4 Interest of spouse in 2,050 listed ADS.
5 Non-beneficial interest in renminbi (RMB) 1.2m 2.875% Notes 2015.
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Report of the Directors: Corporate Governance (continued)
Appendix > Other required disclosures > Supplier payment policy / Dividends and shareholders
S T Gulliver ceased to have an interest as beneficial owner in one share of €5 in HSBC France (representing less than
0.01 per cent of the shares in issue), following his resignation as a director of that company on 22 November 2012.
S T Gulliver had waived his rights to receive dividends on the share and had undertaken to transfer the share to
HSBC on ceasing to be a director of HSBC France.
No Directors held any short position as defined in the Securities and Futures Ordinance of Hong Kong in the shares
and loan capital of HSBC Holdings and its associated corporations. Save as stated above, none of the Directors had
an interest in any shares or debentures of HSBC Holdings or any associated corporation at the beginning or at the end
of the year, and none of the Directors or members of their immediate families were awarded or exercised any right to
subscribe for any shares or debentures in any HSBC corporation during the year. Since the end of the year, the
aggregate interests of the following Director has increased by the number of HSBC Holdings ordinary shares shown
against his name:
HSBC Holdings ordinary shares
D J Flint (beneficial owner) ....................................................................................................................................................
351
1 The acquisition of shares in the HSBC Holdings UK Share Incentive Plan through regular monthly contributions.
Since the end of the year, the aggregate interests of the following Director have decreased by the number of
debentures shown against his name.
HSBC Capital Funding (Euro 2) L.P. 5.3687% Preferred Securities 2014
R Fassbind (beneficial owner) ................................................................................................................................................
EUR000
500
There have been no other changes in the share and loan capital interests of the Directors from 31 December 2012 to
the date of this Report. Any subsequent changes up to the last practicable date before the publication of the Notice of
Annual General Meeting will be set out in the notes to that Notice.
At 31 December 2012, non-executive Directors and senior management (being executive Directors and Group
Managing Directors of HSBC Holdings) held, in aggregate, beneficial interests in 14,450,028 HSBC Holdings
ordinary shares (0.08% of the issued ordinary shares).
At 31 December 2012, executive Directors and senior management held, in aggregate, options to subscribe for
357,509 of HSBC Holdings ordinary shares under the HSBC Holdings savings-related share option plans and HSBC
Holdings Group Share Option Plan. These options are exercisable between 2012 and 2016 at prices ranging from
£3.3116 to £7.2181 per ordinary share.
Supplier payment policy
HSBC has signed up to the Government’s Prompt Payment Code (further information on, and copies of, the Code
can be obtained by visiting www.promptpaymentcode.org.uk).
Our policy is to settle terms of payment with our suppliers when agreeing the terms of each transaction, to ensure that
those suppliers are made aware of the terms of payment and to abide by the terms of payment.
The amount due to trade creditors at 31 December 2012 represented 39 days’ average daily purchases of goods
and services received from such creditors, calculated in accordance with the Companies Act 2006, as amended by
Statutory Instrument 2008 No. 410. The average amount due to trade creditors during 2012 represented 28 days'
average daily purchases of goods and services received from such creditors.
Dividends and shareholders
Dividends for 2012
First, second and third interim dividends for 2012, each of US$0.09 per ordinary share, were paid on 5 July 2012,
4 October 2012 and 12 December 2012 respectively. Note 10 on the Financial Statements gives more information
on the dividends declared in 2012. On 4 March 2013, the Directors declared a fourth interim dividend for 2012 of
US$0.18 per ordinary share in lieu of a final dividend, which will be payable on 8 May 2013 in cash in US dollars,
or in sterling or Hong Kong dollars at exchange rates to be determined on 29 April 2013, with a scrip dividend
alternative. As the fourth interim dividend for 2012 was declared after 31 December 2012 it has not been included
344
in the balance sheet of HSBC as a debt. The reserves available for distribution at 31 December 2012
were US$38,175m.
A quarterly dividend of US$15.50 per 6.20% non-cumulative US Dollar Preference Share, Series A (‘Series A Dollar
Preference Share’), (equivalent to a dividend of US$0.3875 per Series A American Depositary Share, each of which
represents one-fortieth of a Series A Dollar Preference Share), was paid on 15 March, 15 June, 17 September and
17 December 2012.
Dividends for 2013
The proposed timetable for interim dividends in respect of 2013 on the ordinary shares is set out in the Shareholder
Information section on page 516.
Quarterly dividends of US$15.50 per Series A Dollar Preference Share (equivalent to a dividend of US$0.3875 per
Series A American Depositary Share, each of which represents one-fortieth of a Series A Dollar Preference Share)
and £0.01 per Series A Sterling Preference Share were declared on 7 February 2013 for payment on 15 March 2013.
Communication with shareholders
Communication with shareholders is given high priority. The Board has adopted a shareholder communication policy
which is available on www.hsbc.com. Extensive information about our activities is provided to shareholders in the
Annual Report and Accounts, the Annual Review and the Interim Report which are available on www.hsbc.com.
There is regular dialogue with institutional investors and enquiries from individuals on matters relating to their
shareholdings and our business are welcomed and are dealt with in an informative and timely manner. All
shareholders are encouraged to attend the Annual General Meeting or the informal meeting of shareholders held in
Hong Kong to discuss our progress. Shareholders may send enquiries to the Board in writing to the Group Company
Secretary, HSBC Holdings plc, 8 Canada Square, London E14 5HQ or by sending an email to
shareholderquestions@hsbc.com.
Shareholders may require the Directors to call a general meeting, other than an annual general meeting as provided
by the UK Companies Act 2006. Requests to call a general meeting may be made by members representing at least
5% of the paid-up capital of the Company as carries the right of voting at general meetings of the Company
(excluding any paid-up capital held as treasury shares). A request must state the general nature of the business to be
dealt with at the meeting and may include the text of a resolution that may properly be moved and is intended to be
moved at the meeting. A resolution may properly be moved at a meeting unless it would, if passed, be ineffective
(whether by reason of inconsistency with any enactment or the Company's constitution or otherwise); it is defamatory
of any person; or it is frivolous or vexatious. A request may be in hard copy form or in electronic form and must be
authenticated by the person or persons making it. A request may be made in writing to the postal address referred to
in the paragraph above or by sending an email to shareholderquestions@hsbc.com. At any meeting convened on such
request no business shall be transacted except that stated by the requisition or proposed by the Board.
Notifiable interests in share capital
At 31 December 2012, we had received the following disclosures (which have not been subsequently changed) of
major holdings of voting rights pursuant to the requirements of Rule 5 of the FSA Disclosure Rules and Transparency
Rules:
• Legal & General Group Plc gave notice on 9 March 2010 that it had a direct interest on 8 March 2010 in
696,851,431 HSBC Holdings ordinary shares, representing 3.99% of the total voting rights at that date; and
• BlackRock, Inc. gave notice on 9 December 2009 that on 7 December 2009 it had the following: an indirect
interest in HSBC Holdings ordinary shares of 1,142,439,457; qualifying financial instruments with 705,100 voting
rights that may be acquired if the instruments are exercised or converted; and financial instruments with similar
economic effect to qualifying financial instruments which refer to 234,880 voting rights, each representing 6.56%,
0.0041% and 0.0013% respectively, of the total voting rights at that date.
At 31 December 2012, according to the register maintained by HSBC Holdings pursuant to section 336 of the
Securities and Futures Ordinance of Hong Kong:
•
JPMorgan Chase & Co. gave notice on 7 November 2012 that on 30 October 2012 it had the following interests
in HSBC Holdings ordinary shares: a long position of 1,261,592,952 shares; a short position of 71,252,702
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Report of the Directors: Corporate Governance (continued)
Appendix – Other required disclosures > Dividends and shareholders // DRR
shares; and a lending pool of 1,007,026,189 shares, each representing 6.85%, 0.39% and 5.47%, respectively,
of the ordinary shares in issue at that date. Since 31 December 2012 and following interim notifications on 14,
17, 23 January and 13 February 2013, JPMorgan Chase & Co. gave notice on 15 February 2013 that on 12
February 2013 it had the following interests in HSBC Holdings ordinary shares: a long position of 1,294,366,810
shares; a short position of 64,591,997 shares; and a lending pool of 1,017,759,703 shares each representing
7.00%, 0.35% and 5.51% respectively, of the ordinary shares in issue at that date.
• BlackRock, Inc. gave notice on 10 November 2012 that on 7 November 2012 it had the following interests in
HSBC Holdings ordinary shares: a long position of 1,103,721,816 shares and a short position of 35,922,568
shares, each representing 5.99% and 0.19%, respectively, of the ordinary shares in issue at that date. Since
31 December 2012 and following interim notifications on 3 and 4 January 2013, BlackRock, Inc. gave notice on
8 January 2013 that on 3 January 2013 it had the following interests in HSBC Holdings ordinary shares: a long
position of 1,110,172,768 shares and a short position of 35,234,325 shares, each representing 6.00% and 0.19%,
respectively, of the ordinary shares in issue at that date.
In compliance with the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited at
least 25% of the total issued share capital has been held by the public at all times during 2012 and up to the date of
this Report.
Dealings in HSBC Holdings shares
Except for dealings as intermediaries by HSBC Bank and The Hongkong and Shanghai Banking Corporation, which
are members of a European Economic Area exchange, neither we nor any of our subsidiaries have purchased, sold or
redeemed any of our listed securities during the year ended 31 December 2012.
346
H S B C H O L D I N G S P L C
Directors’ Remuneration Report (continued)
Summary letter from the Group Remuneration Committee Chairman
Report of the Group
Remuneration Committee
Page App1
Summary letter from the Group
Remuneration Committee Chairman ... 347
Summary of remuneration policy ............. 351
Summary of 2012 remuneration outcomes 354
Additional disclosures ................................
Emoluments table .........................................
Non-executive Directors’ fees ......................
Other directorships .......................................
Share plans ....................................................
Pensions ........................................................
Employee compensation and benefits ..........
1 Appendix to Directors’ Remuneration Report
361
361
362
363
363
365
366
Summary letter from the Group
Remuneration Committee Chairman
Dear Shareholder
This report covers the reporting period from
1 January 2012 to 31 December 2012 and provides
details of the Group Remuneration Committee
(‘the Committee’) and remuneration policy of the
Company.
This report has been prepared by the Committee
with reference to the draft regulations put forward
by the UK Government Department of Business,
Innovation and Skills regarding the requirements
for the content of a Directors’ Remuneration Report.
The regulations will apply to all UK companies
listed on a major stock exchange with financial years
ending on or after October 2013, and this report is
therefore prepared using the new standards on a
voluntary basis, to meet best practice in reporting.
In line with this draft legislation, the report
is provided in three sections: the summary of the
report, a section outlining HSBC’s forward-looking
remuneration policy and a section setting out
remuneration outcomes for 2012. Additional
disclosures as required under Schedule 8 of the
Large and Medium-sized Companies and Groups
(Accounts and Reports) Regulations 2008 and other
disclosure requirements are provided at the end of
the report in the appendix.
Remuneration strategy
The quality and commitment of our human capital
is fundamental to our success and accordingly the
Board aims to attract, retain and motivate the very
best people. As trust and relationships are vital in
our business, our goal is to recruit those who are
347
committed to maintaining a long-term career with
the organisation.
HSBC’s reward strategy supports this objective
through balancing both short-term and sustainable
performance. Our reward strategy aims to reward
success, not failure, and be properly aligned with
our risk framework and risk outcomes.
In order to ensure alignment between
remuneration and our business strategy, individual
remuneration is determined through assessment
of performance delivered against both annual and
long-term objectives summarised in performance
scorecards as well as adherence to the HSBC Values
of being ‘open, connected and dependable’ and
acting with ‘courageous integrity’. Altogether,
performance is judged, not only on what is achieved
over the short and long term, but also on how it is
achieved, as the latter contributes to the
sustainability of the organisation.
The financial and non-financial measures
incorporated in the annual and long-term scorecards
are carefully considered to ensure alignment with the
long-term strategy of the Group.
Structure of remuneration
In order to simplify remuneration, elements are
limited to the following:
•
•
•
•
fixed pay;
benefits;
annual incentive; and
the Group Performance Share Plan.
The Group Performance Share Plan (‘GPSP’)
was developed to incentivise senior executives to
deliver sustainable long-term business performance.
A key feature of the GPSP is that participants are
required to hold the awards, once they have vested,
until retirement, thereby enhancing the alignment of
interest between the senior executives of the Group
and shareholders. Further details are given on
page 351.
Executive Directors, Group Managing Directors
and Group General Managers participate in both
performance-related plans, namely the annual
incentive and the GPSP. Other employees across the
Group are eligible to participate in annual incentive
arrangements. Both the annual incentive and long-
term incentive awards are funded from a single
annual variable pay pool from which individual
awards are considered. Funding of the Group’s
annual variable pay pool is determined in the
context of Group profitability, capital strength,
and shareholder returns. This approach ensures
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Directors’ Remuneration Report (continued)
Summary letter from the Group Remuneration Committee Chairman
that performance related awards for any global
business, global function, geography or level of
staff are considered in a holistic fashion.
Overall performance summary of 2012
During 2012, management continued to execute the
Board endorsed strategy to simplify, restructure and
grow the Group. The Group announced 26 disposals
or closures exiting non-strategic markets and selling
businesses and non-core investments. The Group
also recorded an additional US$2.0bn in sustainable
cost savings, which takes total annualised savings to
US$3.6bn. This surpasses the cumulative target of
US$2.5bn to US$3.5bn on sustainable savings since
2011. A focus on positioning the business for growth
delivered underlying revenue growth in most priority
markets. The growth in these markets was a factor
in generating a record reported profit before tax in
CMB as HSBC maintained its position as the
world’s largest global trade finance bank, as reported
in the Oliver Wyman Global Transaction Banking
Survey 2012.
The following summarises the Group’s 2012
financial performance:
•
•
•
•
reported profit before tax fell compared with
2011, but rose on an underlying basis;
underlying revenue grew by 7%, led by GB&M
which recorded growth in the majority of its
businesses, most notably in Credit and Rates,
as spreads tightened and investor sentiment
improved in Europe. CMB also recorded
revenue growth as customer loans and advances
increased in all regions, with over half of this
growth coming from the faster-growing regions
of Hong Kong, Rest of Asia-Pacific and Latin
America, driven by higher trade-related lending.
In Europe, lending balances increased, notably
in the UK, despite muted demand for credit. In
addition, RBWM experienced revenue growth
in all faster-growing regions, in particular Hong
Kong and Latin America;
loan impairment charges and other credit risk
provisions reduced significantly, notably in
North America, primarily reflecting the
continued decline in lending balances and
lower delinquency rates in CML;
notwithstanding the sustainable savings noted
above, the cost efficiency ratio increased from
57.5% in 2011 to 62.8% in 2012 and remained
outside the Group’s target range. This was
primarily due to fines and penalties paid as
part of the settlement of the investigations into
our past inadequate compliance with anti-
money laundering and sanctions laws,
348
additional provisions in respect of UK customer
redress programmes and a credit in 2011
relating to defined benefit pension obligations
in the UK which did not recur. The increase also
reflected inflationary pressures on wages and
salaries in certain of our Latin American and
Asian markets, investment in strategic
initiatives, including certain business expansion
projects, enhanced processes and technology
capabilities, and increased investment in
regulatory and compliance infrastructure,
primarily in the US;
• we maintained a strong balance sheet, with a
ratio of customer advances to customer accounts
of 74.4%;
•
•
•
return on average ordinary shareholders’
equity was 8.4%, down from 10.9% in 2011,
primarily reflecting adverse movements in the
fair value of our own debt attributable to credit
spreads, a higher tax charge and higher average
shareholders’ equity;
dividends in respect of 2012 to our shareholders
were increased from US$0.41 per ordinary
share in 2011 to US$0.45 per ordinary share;
and
core tier 1 capital increased during 2012
through capital generation and the reduction
of risk-weighted assets following business
disposals.
Group variable pay pool
(Unaudited)
The 2012 Group variable pay pool was considered in
the context of the Group’s underlying profit before
tax. This calculation of profit excludes movements
in the fair value of own debt attributable to credit
spread and the impact of acquisitions and disposals
and includes the costs of the US regulatory and law
enforcement fines and penalties and other items of
redress arising in 2012. For the purposes of
considering the variable pay pool the normal profits
from the disposed businesses up to their actual
disposal are included in the calculation.
Specific actions taken in respect of 2012
•
In addition to the cost of fines and penalties and
redress being taken into account in the initial
determination of the variable pay pool through
their impact on underlying profits, a further
reduction was made to the overall 2012 pool by
the Committee to reflect the reputational damage
incurred from the US legal and regulatory fines
and penalties and to shift a higher proportion of
the impact to the variable pay pool.
• Additionally, for annual incentive awards in
• The Committee has further exercised its
respect of 2012 for executive Directors, Group
Managing Directors and Group General
Managers, the deferred element of the 2012
incentive will be deferred for an extended period
of five years and will vest subject to satisfactory
completion of the Deferred Prosecution
Agreements and subject to the terms of the
GPSP.
Total variable pay pool .................................................................
Variable compensation incentive pool as a percentage of
underlying pre-tax profit (pre-variable pay)1 ...........................
Proportion of incentive that is deferred ........................................
discretion and reduced the performance outcome
of the 2012 long-term scorecard. For further
details see page 357.
• Clawback has been exercised by the Committee
during 2012 and 2013 principally in respect of
the US regulatory and law enforcement fines
and penalties.
Group
2012
US$m
3,689
%
17
17
2011
US$m
4,223
%
18
16
Global Banking
and Markets
2012
US$m
1,266
%
13
28
2011
US$m
1,210
%
14
27
1 The 2012 Group pre-tax profit pre-variable pay calculation is described on page 348. The 2011 Group pre-tax profit pre-variable pay
includes the add-back of restructuring costs incurred during the year, and the adjustment for movements in the fair value of own debt
attributable to credit spread.
Change in key metrics
(Unaudited)
The table and charts below show the percentage
change in profit, dividends and overall expenditure
on staff pay.
Underlying
profit Dividend
%
%
Overall
expenditure
on staff pay
%
Change:
2012 from 2011 .....
+18
+10
–3
On a pro forma basis, attributable profits
(excluding movements in the fair value of own debt
and before variable pay distributions) are allocated
in the proportions shown in the charts below.
Pro forma post-tax profits allocation
2012
2011
Retained
earnings/
capital
60%
Dividends¹
29%
Variable pay²
11%
Retained
earnings/
capital
50%
Dividends¹
35%
Variable pay²
15%
1 Inclusive of dividends to holders of other equity instruments and net of scrip issuance. Dividends per ordinary share declared in respect
of 2012 were US$0.45, an increase of 10% compared with 2011.
2 Total variable pay pool net of tax and portion to be delivered by the award of HSBC shares.
Role, membership and activities of the
Committee
Within the authority delegated by the Board, the
Committee is responsible for approving the Group’s
remuneration policy. The Committee also determines
the remuneration of Directors, senior employees,
employees in positions of significant influence and
employees whose activities have or could have an
impact on our risk profile and, in doing so, takes into
account the pay and conditions across the Group.
No Directors are involved in deciding their own
remuneration.
The members of the Committee during 2012
were J L Thornton (Chairman), J D Coombe,
W S H Laidlaw and G Morgan (retired as a Director
on 25 May 2012). R Fassbind was appointed a
member of the Committee on 1 March 2013.
349
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Directors’ Remuneration Report (continued)
Summary letter from the Group Remuneration Committee Chairman / Summary of remuneration policy
There were eight meetings of the Committee
during 2012. The table on page 329 gives details
of Directors’ attendance at these meetings. The
Committee has decided to not use external advisers
except in exceptional circumstances. During 2012,
Freshfields Bruckhaus Deringer were engaged to
provide legal advice in connection with the clawback
process. During the year, the Group Chief Executive
provided regular briefings to the Committee and the
Committee received advice from the Group
Managing Director, Group Head of Human
Resources and Corporate Sustainability, A Almeida,
the Group Head of Performance and Reward,
T Roberts and the Group Chief Risk Officer,
M M Moses, all of whom provided advice as
part of their executive role as employees of HSBC.
The Committee also received advice and feedback
from the Group Risk Committee on risk-related
matters relevant to remuneration and the alignment
of remuneration with risk appetite.
J L Thornton
Chairman of the Group Remuneration Committee
4 March 2013
350
Summary of remuneration policy
The following remuneration policy for Directors is
subject to a binding shareholder vote every three
years commencing with the 2013 financial year. The
section on service contracts and exit payments is
also subject to the binding vote and can be found on
page 359.
Purpose and link to strategy
Operation and planned changes to policy
Opportunity and performance metrics
Fixed pay
Takes account of experience and
personal contribution to the
individual’s role.
Benefits
Takes account of local market
practice.
No fixed pay increases are proposed for executive
n/a
Directors in 2013.
Benefits include the provision of medical insurance,
other insurance cover, tax return preparation and
travel assistance. No changes were made to
HSBC’s benefits policy during the year.
n/a
Annual incentive1
Drives and rewards performance
against annual financial and
non-financial measures and
adherence to HSBC Values
which are consistent with the
medium to long-term strategy.
Awards are delivered in the form of cash and shares
Maximum incentive is three times fixed pay.
with the structure and deferral meeting the FSA
Remuneration Code requirements.
The total vesting period of deferred awards will be
no less than 3 years as mandated under the FSA
Remuneration Code. Where the total vesting period
is three years the share awards will be subject to a
six month retention period upon vesting.
Performance is measured against an annual
scorecard, based on a mixture of financial and
non-financial measures. The scorecards vary by
individual. Further detail on each scorecard for
the most recent awards can be found on page 355.
The policy for determining awards is set out on
page 352.
Group Performance Share
Plan (‘GPSP’)1
Incentivises sustainable long-
term performance and alignment
with shareholder interests.
Award levels are determined by considering
performance up to the date of grant against
enduring performance measures set out in the
long-term performance scorecard.
The award is subject to a five-year vesting period
during which the Committee has the authority to
claw back all or part of the award. See page 353
for more details on clawback.
On vesting, the shares (net of tax) must be retained
until the participant retires.
Maximum award is six times fixed pay.
The long-term scorecard against which
performance will be assessed in 2013 is detailed
below. The 2013 scorecard remains consistent
with 2012. Overall performance is to be judged on
performance outcomes and adherence to HSBC
Values being a gating mechanism. See page 356
for further details.
Pension
No pension changes proposed for 2013.
Non-executive Director
Non-executive Directors receive only fees and are
not eligible to receive benefits, pension or any
annual or long-term incentives.
n/a
n/a
The current fee, which was approved by
shareholders in 2011, is £95,000 per annum. A fee
of £45,000 per annum is payable to the senior
independent non-executive Director. In addition,
non-executive Directors received the following fees
for service on Board Committees:
• Group Audit, Group Risk, Group Remuneration
and Financial System Vulnerabilities
Committees:
– Chairman: £50,000
– Member: £30,000
• Nomination and Corporate Sustainability
Committees:
– Chairman: £40,000
– Member: £25,000
1 This approach applies to all executive Directors with the exception of the Group Chairman, D J Flint, who, from 2011, is not eligible for
an annual incentive and is not expected to be granted awards under the GPSP other than in exceptional circumstances.
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H S B C H O L D I N G S P L C
Directors’ Remuneration Report (continued)
Summary of remuneration policy
Long-term Incentive Plan – Group Performance
Share Plan 2013 long-term scorecard
Measure
target range Weighting
Long-term
12% – 15%
48% – 52%
>10%
Return on equity ..................
Cost efficiency ratio ............
Capital strength ....................
Progressive dividend payout
40% – 60%
within 40% - 60% range ......
Strategy ................................
Judgement
Brand equity ........................ Top 3 rating and
improve US$bn
Compliance and reputation ...
People ...................................
value
Judgement
Judgement
15%
15%
15%
15%
20%
5%
10%
5%
100%
Material factors taken into account when
setting pay policy
The Committee takes into account a variety of
factors when determining the remuneration policy
for Directors. A summary of these factors is
provided below.
Internal factors
Funding
HSBC considers pay across the Group when
determining remuneration levels for its executive
Directors. Eligibility for the GPSP is restricted to
executive Directors, Group Managing Directors and
Group General Managers. Other employees across
the Group are also eligible to participate in annual
incentive arrangements. Both the annual incentive
and long-term incentive awards are funded from a
single annual variable pay pool from which
individual awards are considered.
The dilution limits set out in the HSBC share
plans comply with the Association of British
Insurers’ guidelines. Prior to 2012, all equity-settled
awards of Performance Shares and Restricted Shares
vesting under the HSBC Share Plans were satisfied
by the transfer of existing shares held under a trust.
To create additional core tier 1 capital and retain
funds within HSBC, Restricted Share vestings since
2012 have been satisfied by a mixture of existing
shares from the trust and new issue shares.
External factors
Regulation
There is still a wide divergence in how regulations
operate globally and this presents significant
challenges to HSBC, which operates in 81 countries
and territories worldwide. In order to deliver long-
term sustainable performance, it is important we
352
have market-competitive remuneration and
equivalence of reward across geographical
boundaries in order to attract, motivate and retain
talented and committed employees around the world.
We ensure our remuneration policies are aligned
with both new regulatory practices and the interests
of shareholders and confirm that HSBC is fully
compliant with the Financial Stability Board and
the FSA guidance and rules on remuneration.
Comparator group
The Committee considers market data for executive
Directors’ remuneration packages from a defined
remuneration comparator group. This group consists
of nine global financial services companies, namely
Banco Santander, Bank of America, Barclays, BNP
Paribas, Citigroup, Deutsche Bank, JPMorgan Chase
& Co, Standard Chartered and UBS. These
companies were selected on the basis of their
broadly similar business coverage, size and
international scope, and are subject to annual review
for continuing relevance.
Shareholder context
See page 360.
Variable pay pool determination
The Committee considers many factors in
determining the Group’s variable pay pool funding.
The variable pay pool takes into account the
performance of the Group which is considered
within the context of its Risk Appetite Statement.
This helps to ensure that the variable pay pool is
shaped by risk considerations. The Risk Appetite
Statement describes and measures the amount and
types of risk that HSBC is prepared to take in
executing its strategy. It shapes the integrated
approach to business, risk and capital management
and supports achievement of the Group’s objectives.
The Group Chief Risk Officer regularly updates the
Committee on the Group’s performance against
the Risk Appetite Statement.
The Committee uses these updates when
considering remuneration to ensure that return,
risk and remuneration are aligned.
We use a counter-cyclical funding methodology
which is categorised by both a floor and a ceiling
and the payout ratio reduces as performance
increases to avoid pro-cyclicality risk. The floor
recognises that franchise protection is typically
required irrespective of performance levels.
The ceiling recognises that at higher levels of
performance it is possible to limit reward as it is
not necessary to continue to increase the variable
pay pool, thereby limiting the risk of inappropriate
behaviour to drive financial performance.
In addition, our funding methodology considers
the relationship between capital, dividends and
variable pay to ensure that the distribution of post-
tax profits between these three elements is
considered appropriate (see page 349 for the 2012
and the 2011 split). It is deemed fundamental to the
Group that a majority of post-tax profit should be
allocated to capital and to shareholders, particularly
when a strong performance is delivered.
Finally, the commercial requirement to remain
competitive in the market and overall affordability
are considered.
Clawback
In order to reward genuine performance and not
failure, individual awards are made on the basis
of a risk-adjusted view of both financial and non-
financial performance. However, if the assessment
of performance subsequently proves to be inaccurate
or incorrect, then unvested deferred awards made
since 2010 can be clawed back by the Committee.
Individual awards
Individual awards are based on the achievement of
both financial and non-financial objectives. These
objectives, which are aligned with the Group’s
strategy, are detailed in participants’ annual
performance scorecards and the collective long-term
performance scorecard of participants in the GPSP.
Performance is then measured and reviewed against
the objectives on a regular basis.
Overall performance under both scorecards
is judged on outcomes but, most importantly,
adherence to HSBC Values as described on
page 347 is a prerequisite before any individual
can be considered for any variable pay. In other
words, adherence with the values acts as a gating
item. These values are key to the running of a sound,
sustainable bank. Specifically, our most senior
employees had a separate values rating for 2012
which directly influenced their overall performance
rating and, accordingly, their variable pay.
In addition, the Global Risk and Compliance
functions carry out annual reviews for senior
executives and risk-takers (defined as HSBC Code
Staff). These reviews determine whether there are
any instances of non-compliance with Risk and
Compliance procedures and expected behaviour.
Instances of non-compliance are escalated to senior
management for consideration in variable pay
decisions, clawback and ongoing employment.
Group-wide thematic reviews of risk are
also carried out to determine if there are any
transgressions which could affect the amount of
current year variable pay or any instances where
clawback of previously awarded variable pay is
required. Risk and Compliance input is a critical
part of the assessment process in determining the
performance of HSBC Code Staff (which includes
the executive Directors) and in ensuring that their
individual remuneration has been appropriately
assessed with regard to risk.
We require a proportion of variable pay awards
above certain thresholds to be deferred into awards
of HSBC shares. This is to ensure that the Group’s
interests and those of its employees are aligned
with those of the Group’s shareholders, that the
Group’s approach to risk management supports the
interests of all stakeholders and that remuneration is
consistent with effective risk management.
In considering individual awards, a comparison
of the pay and employment conditions of our
employees, Directors and senior executives is
considered by the Committee.
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H S B C H O L D I N G S P L C
Directors’ Remuneration Report (continued)
Summary of remuneration policy / 2012 remuneration outcomes
Remuneration scenarios
(Unaudited)
S T Gulliver
Value of package (£000)
Composition of package (%)
Maximum
Target
Minimum
£0
£3,000
£6,000
£9,000
£12,000
£15,000
0%
20%
40%
60%
80%
100%
I J Mackay
Value of package (£000)
Composition of package (%)
Maximum
Target
Minimum
£0
£3,000
£6,000
£9,000
£12,000
£15,000
0%
20%
40%
60%
80%
100%
Fixed1
Annual incentive2
Long-term incentive plan3
1 Salary paid in the year for executive Directors, taxable benefits, pension and cash in lieu of pensions.
2 Maximum award level as stated in policy. Includes deferred portion of award. Target has been defined as 50% of the maximum award.
3 Maximum award level as stated in policy. Target has been defined as 50% of the maximum award. The GPSP scorecard has not been
designed with a targeted or expected value of performance. For the purposes of the new regulations, 50% of the maximum award is
deemed as target.
The following Directors have not been included
in the disclosure above: D J Flint, who has not been
eligible for an annual incentive since 2011 and is not
expected to be granted awards under the GPSP other
than in exceptional circumstances, and
A A Flockhart, who ceased to be an executive
Director on 30 April 2012. Non-executive Directors
are not eligible to receive incentive awards.
Summary of 2012 remuneration outcomes
Single figure of remuneration for each executive Director
(Unaudited)
Base salary
£000
Benefits1
£000
Pension3
£000
Annual
incentive
£000
Long-term
incentive
£000
Executive Directors
D J Flint ........................
A A Flockhart2 ..............
S T Gulliver ..................
I J Mackay ....................
1,500
325
1,250
700
855
239
1,220
421
–
6
13
–
–
–
1,950
1,348
–
–
3,000
1,400
2012
total
£000
2,355
570
7,433
3,869
2011
total
£000
2,348
3,639
8,047
3,213
1 The emoluments table on page 361 provides further details on the benefits included.
2 Ceased to be an executive Director on 30 April 2012.
3 As disclosed on page 358.
• Base salary: salary paid in year for executive
Directors.
• Benefits: taxable benefits including cash in lieu
of pension.
• Annual incentive: annual incentive award cash
and share payments (including deferred awards)
for the 2012 performance year. The outcomes of
the performance conditions which determined
the award are described in the next section.
Forty per cent of the annual incentive in respect
of the 2012 performance year is non-deferred.
The non-deferred incentive is split between
50% cash and 50% payable in HSBC Holdings
Restricted Shares, which are subject to a six-
month retention period. 60% of the full annual
incentive award is deferred equally between
cash and shares and vests 100% after five years
subject to the successful completion of the
Deferred Prosecution Agreements and subject
to the terms of the Plan.
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• Long-term incentives: long-term incentives
include all other awards where final vesting is
determined as a result of the achievement of
performance conditions that end in the year
being reported on. For 2012 this would only
include the 2013 GPSP.
The GPSP awards to be granted in 2013 in
respect of 2012 were assessed against the 2012 long-
term scorecard detailed on page 357. The award is
subject to a five-year vesting period during which
the Committee has the authority to claw back part
or all of the award. On vesting, the net of tax shares
must be retained until the participant retires.
Variable pay outcomes
(Unaudited)
Maximum
multiple
2012
multiple
awarded
Salary1 .........................................
Annual incentive2 ........................
GPSP awards3 .............................
1.00
3.00
6.00
1.00
1.56
2.40
Total ............................................
S T Gulliver
I J Mackay
2012
£000
1,250
1,950
3,000
6,200
2012
multiple
awarded
1.00
1.92
2.00
2011
£000
1,250
2,156
3,750
7,156
2012
£000
700
1,348
1,400
3,448
2011
£000
700
1,086
700
2,486
1 As disclosed in the Directors’ emoluments table on page 361.
2 50% of the annual incentive is delivered in cash with the remaining 50% in shares. 60% of the annual incentive for 2012 is deferred for
five years. 100% vests on the fifth anniversary of grant subject to the successful completion of the Deferred Prosecution Agreements.
During the vesting period the Committee has the authority to claw back part or all of the award.
3 As disclosed in the 2012 long-term scorecard and performance outcome on page 357. The award is subject to a five-year vesting period
during which the Committee has the authority to claw back part or all of the award. On vesting, the net of tax shares must be retained
until the participant retires.
Annual incentive
Director
S T Gulliver ..............................................................................................
I J Mackay ................................................................................................
300%
300%
52%
64%
Maximum face
value of award
Performance
outcome
Awards
made
156%
192%
Determining executive Directors’
performance
S T Gulliver
The annual incentive award made to S T Gulliver
in respect of 2012 reflected the Committee’s
assessment of the extent to which he had achieved
the personal and corporate objectives set for him
within his performance scorecard as agreed by
the Board at the beginning of the year. This
measurement took into account his performance
against both the financial and non-financial measures
which had been set to reflect the risk appetite and
strategic priorities determined by the Board to be
appropriate for 2012.
In order for any award of annual incentive to
be made under the above performance scorecard,
the Committee firstly had to satisfy itself that
S T Gulliver had personally met and shown
leadership in promoting HSBC Values. This over-
riding test assessed behaviour around the HSBC
Values principles of being ‘open, connected and
dependable’ and acting with ‘courageous integrity’.
Independent feedback was taken from direct reports
and others lower in the organisation as well as from
the Group Chairman. Taking this into account
as well as its own experience and observation,
including noting how S T Gulliver had dealt with
situations where HSBC Values had not been met,
the Committee concluded that S T Gulliver had
exhibited strong leadership and personal behaviour
in this area and so met the required standard.
In aggregate, in assessing the calibration of
S T Gulliver’s 2012 annual incentive against his
theoretical maximum opportunity of three times
base salary, an overall score of 52% (2011: 57.5%)
of that maximum opportunity was judged to have
been achieved. The achievement of the financial
element of the scorecard was scored marginally
higher than the non-financial measures. A summary
of the assessment and rationale for the conclusions
is set out below. Unless otherwise indicated, the
figures in parentheses denote the opportunity within
the scorecard.
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H S B C H O L D I N G S P L C
Directors’ Remuneration Report (continued)
2012 remuneration outcomes
Financial (60% weighting – achieved 32%)
The Committee continued to judge Capital Strength
(10%) and Dividend Payout (10%) as critically
important reflections of financial performance
as they encapsulate a number of key factors of
importance to shareholders. In essence these
elements demonstrate a combination of profit
generation, control of capital usage, cash availability
at the holding company and regulatory satisfaction
with the preceding factors sufficient to support
HSBC’s progressive dividend policy. In essence,
these elements are important indicators of the
sustainability of shareholder reward. Reflecting a
higher dividend in 2012 and a stronger core tier 1
capital ratio, the Committee awarded full weighting
of these elements of the scorecard.
An opportunity of 15% was available in respect
of delivering pre-tax profit improvement (on the
underlying basis described on page 348 used to
assess management performance) and this was
judged to have been substantially met with the
Committee awarding 80% of the available
opportunity (12% award). Driving this assessment
were the strong performances across the faster-
growing markets, particularly in Hong Kong, the
turnaround in GB&M’s performance in Europe, the
delivery of above-target sustainable cost savings and
lower loan impairment charges driven by marked
improvement in the US.
Return on Equity (15%) did not meet the
benchmark return. The Cost Efficiency Ratio (10%)
also fell outside the required measure, in large part
attributable to the significant regulatory and law
enforcement fines and penalties incurred in the US
and customer redress costs suffered in the UK.
Non-financial (40% weighting – achieved 20%)
25% of the available opportunity in this area related
to Strategy Execution and 80% was judged to
have been achieved (20% awarded). This strong
performance reflected a combination of growing
capital deployment into targeted areas of
opportunity, particularly into faster-growing
markets, strategic cost efficiency initiatives
successfully deployed, evidence of further benefits
from global business integration, progress on
building wealth management revenues and personal
commitment to developing client relationships.
The final opportunity under non-financial
measures (15%) related to Risk and Compliance and,
in light of the US regulatory and law enforcement
fines and penalties and further customer redress in
the UK, no award was made under this element.
356
The same deliberations and assessments with
regard to performance and adherence to HSBC
Values were undertaken by the Committee with
regard to the performance of I J Mackay. This is
summarised below.
I J Mackay
The performance scorecard for I J Mackay was
weighted 30% financial, 70% non-financial. In
aggregate, in assessing the quantum of the 2012
annual incentive against the theoretical maximum
opportunity of three times base salary, an overall
score of 64% of that maximum opportunity was
judged to have been achieved.
The Committee considered that performance
against the financial targets of Cost Disciplines and
Capital and Liquidity Management had been met
or were in progress.
The Committee considered that performance
against the non-financial targets including People,
Reporting and Planning, Maintaining a Strong
Control Environment and Regulatory Change had
been met or were in progress. With regard to
Compliance and Reputation, in light of the US
regulatory and law enforcement fines and penalties
and further customer redress in the UK, no award
was made under this element of the scorecard.
Awards under the GPSP
Awards to be granted in 2013 in respect of 2012
were assessed against the 2012 long-term scorecard
published in the Annual Report and Accounts 2011
and reproduced below.
The performance assessment under the 2012
long-term scorecard took into account achievements
under both financial and non-financial objectives,
both of which were set within the context of the risk
appetite and strategic direction agreed by the Board.
Notwithstanding the detail or extent of
performance delivery against the objectives, an
individual’s eligibility for a GPSP award requires
confirmation of adherence to HSBC Values which
acts in effect as a gating mechanism to GPSP
participation. Within the GPSP, the weighting
between financial and non-financial measures
in respect of 2012 was set at 60% and 40%,
respectively.
In aggregate in respect of the objectives set
for 2012, and in light of the significance of the legal
and regulatory fines and penalties incurred in 2012,
an overall performance outcome of 40% (2011:50%)
of the scorecard was judged to have been achieved;
this outcome applies to all eligible participants in the
GPSP. A summary of the assessment and rationale
for the conclusions is set out below. Figures in
parentheses reflect the available opportunity under
the GPSP.
Measure
Return on equity ...........................................................
Cost efficiency ratio .....................................................
Capital strength .............................................................
Dividends (payout ratio) ...............................................
Strategy .........................................................................
Brand equity .................................................................
Long-term
target range
12% – 15%
48% – 52%
> 10%
40% – 60%
Judgement
Top 3 rating and
improve US$bn value
Compliance and reputation ...........................................
People and values .........................................................
Judgement
Judgement
Performance outcome ...................................................
Committee discretion.....................................................
1 As reported in the Annual Report and Accounts 2012.
2 Based on results from The Brand Finance® Banking 500 2013 survey.
Actual 2012
performance
8.4%¹
62.8%¹
12.3%¹
55.4%¹
Judgement
Top 3 rating but
drop in value²
Not met
Judgement
Weighting
15%
15%
15%
15%
20%
5%
10%
5%
100%
Outcome
0%
0%
15.0%
15.0%
15.0%
0%
0%
3.75%
48.75%
40.00%
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The performance outcome of 40% was then
applied to maximum face values (expressed as a
percentage of salary) for each participant. The
awards to be made in respect of 2012 are detailed
below.
Director
S T Gulliver ..............................................................................................
I J Mackay ................................................................................................
600%
500%
40%
40%
Maximum face
value of award
Performance
outcome
Awards
made
240%
200%
Financial (60% weighting – achieved 30%)
The opportunity of 60% was equally split in 2012
between Capital Strength, Dividend Progression,
Return on Equity and Cost Efficiency ratio.
While the annual assessment looked at point in
time achievement of the same performance elements,
under the long-term plan consideration was given to
progress made towards stated targets where these
had not been met in the short term and to the
sustainability of positive short-term performance.
With regard to Capital Strength, the Committee
considered favourably the steps taken to meet the
Basel III targets in the accelerated timetable being
required by the Group’s lead regulator. In addition to
achieved and planned operating profit generation,
the Committee noted favourably the extensive
capital generated from business disposals, both
from gains realised on sale and from release of risk-
weighted assets. Further support for a positive view
of performance accrued from actions noted as having
been taken to reduce the capital drag from legacy
assets and exit portfolios and from steps being taken
to mitigate the impact of the more onerous capital
requirements arising from regulatory changes yet
to take effect. Having reviewed these factors the
Committee awarded the full opportunity (15%).
On Dividend Progression, the Committee noted
favourably the capacity to maintain a progressive
policy, subject to performance, reflected in the
Group’s capital position, its distributable reserves,
its cash position and its planning assumptions. The
Committee also noted external commentary on
dividend paying capacity and regulatory interactions
around the Group’s capital position. Having
considered these factors the Committee awarded
the full opportunity (15%).
As noted in the assessment of the annual
performance awards, the Group has not yet
reached its target Return on Equity of 12-15%. The
Committee deliberated on the benefits arising from
the considerable restructuring and reshaping of the
business which has been undertaken under the
Group’s Six Filters framework, the delivery of
sustainable cost savings ahead of target, the growth
being achieved from investment in faster-growing
markets and the progress made in run-off of the exit
portfolios and in reducing legacy underperforming
assets. The Committee also reflected on the
additional costs that would be incurred and revenues
foregone from the programme of strengthening
controls and compliance which is underway and
from applying global standards in all markets. There
was also note made of the continuing uncertainties
from an incomplete regulatory reform agenda,
from contingent legal risks and from the continuing
significant customer redress costs from legacy
activities being borne. As a consequence, the
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H S B C H O L D I N G S P L C
Directors’ Remuneration Report (continued)
2012 remuneration outcomes
Committee felt unable to make any award under
this opportunity (15%).
Similarly, under the Cost Efficiency Ratio
(‘CER’) element of the scorecard, despite good
progress on sustainable cost savings, the CER
remains well above the target range of 48-52%.
The Committee noted that a major element of the
underperformance relates to legal and regulatory
fines and penalties and customer redress costs which
it cannot view as non-recurring. As a consequence
the Committee judged that no award could be made
under this opportunity (15%).
Non-financial (40% weighting – achieved 18.75%)
Half the opportunity in this section related to the
execution of strategic priorities laid down by the
Board (20%). In assessing performance the
Committee noted but looked beyond the short-term
deliverables of targeted disposals and investments to
review the frameworks being established to improve
capital deployment, establish and enforce Global
Standards, improve cost efficiency while
maintaining strong operational and risk controls
and enhance global business co-operation and
integration. The Committee concluded that it
would be an appropriate reflection of management
achievement to award 75% of the available
opportunity, namely 15%.
A separate but connected appraisal was made
of the human aspect of long-term strategy delivery
where the Committee looked at recruitment of key
personnel to fill critical roles, succession planning,
values training and enforcement and the retention,
motivation and collegiality of the senior
management team in what had been a stressed
environment. Once again the Committee awarded
75% of the available opportunity of 5%, adding
3.75% to the scorecard.
With regard to Compliance and Reputation
(10%), given the legal and regulatory fines and
penalties incurred in 2012 and the continuation of
significant further customer redress costs in the
UK, the Committee concluded no award could be
contemplated.
This conclusion was followed through when
assessing Brand Equity (5%), which technically
scored 50% of the available opportunity as HSBC
maintained a top three ranking in its peer group. The
Committee used its discretion to reduce this award to
nil in light of the reputational damage incurred from
the US legal and regulatory fines and penalties.
This performance assessment resulted in an
overall score of 48.75%. Notwithstanding this,
taking into account the significance of the legal and
regulatory fines and penalties incurred in 2012, the
Committee determined that the initial performance
outcome should be reduced further to give a final
performance outcome for 2012 of 40%.
Contributions and allowances in lieu of
pension entitlements
D J Flint received an allowance of 50% of annual
basic salary in lieu of personal pension
arrangements. The allowance for 2012 amounted
to £750,000.
A A Flockhart retired as an executive Director
on 30 April 2012 and until that date received
employer contributions of 1.8% of basic salary into a
pension plan and an allowance of 48.2% of basic
salary. The employer contributions and the
allowance for 1 January 2012 to 30 April 2012
amounted to £162,500.
S T Gulliver received employer contributions of
4% of basic salary into a personal pension plan and
an allowance of 46% of basic salary from 1 January
2012 to 31 March 2012. From 1 April 2012,
S T Gulliver received an allowance of 50% of basic
salary in lieu of personal pension arrangements. The
employer contributions and the allowance for the
whole of 2012 amounted to £625,000.
I J Mackay received an allowance of 50% of
annual basic salary in lieu of personal pension
arrangements. The allowance for 2012 amounted
to £350,000.
TSR Chart
HSBC TSR and FTSE100 index
Pursuant to the Large and Medium-sized Companies
and Groups (Accounts and Reports) Regulations
2008, the graph below shows the TSR performance
against the FTSE 100 index for the five-year period
ended 31 December 2012. The FTSE 100 index has
been chosen as this is a recognised broad equity
market index of which HSBC Holdings is a member.
120%
110%
100%
90%
80%
70%
Dec 2007
Dec 2008
Dec 2009
Dec 2010
Dec 2011
Dec 2012
HSBC TSR
FTSE 100
Source: International Data Corporation
358
Service contracts and exit payments
Our policy is to employ executive Directors on one
year rolling contracts although longer initial terms
may be approved by the Committee if considered
appropriate. The Committee will, consistent with
the best interests of the Group, seek to minimise
termination payments.
Director
Contract date
(rolling)
Notice period
(Director & HSBC)
Compensation on termination by the company without
notice or cause
D J Flint
14 February 2011
12 months
A A Flockhart¹
14 February 2011
12 months
S T Gulliver2
10 February 2011
12 months
I J Mackay
4 February 2011
12 months
Payment in lieu of notice equal to fixed pay, pension
entitlements and other benefits.
Payment in lieu of notice equal to fixed pay, pension
entitlements and other benefits. Eligible to be considered
for a variable pay award upon termination of employment
other than where the executive has resigned or the
Company has terminated the executive’s employment with
the contractual right to do so.
Payment in lieu of notice equal to fixed pay, pension
entitlements and other benefits. Eligible to be considered
for a variable pay award upon termination of employment
other than where the executive has resigned or the
Company has terminated the executive’s employment with
the contractual right to do so.
Payment in lieu of notice equal to fixed pay, pension
entitlements and other benefits. Eligible to be considered
for a variable pay award upon termination of employment
other than where the executive has resigned or the
Company has terminated the executive’s employment with
the contractual right to do so.
1 Service contract terminated on 30 April 2012 – the date of retirement as an executive Director.
2 The other benefits as part of the payment in lieu of notice do not include the accommodation and car provided in Hong Kong.
Exit payments made in year
Share ownership guidelines
A A Flockhart retired for health reasons as an
executive of the Group and from his position as
Chairman of Europe, Middle East, Africa, Latin
America, Commercial Banking on 30 April 2012.
A A Flockhart remained on the Board up to 31 July
2012 in a non-executive Director capacity. Upon
retirement on 30 April 2012, A A Flockhart received
no compensation for loss of office other than
contractual retirement benefits and was granted
good leaver status on his unvested deferred cash and
share awards as per the HSBC Share Plan rules.
Subject to the terms of the Plan, the awards will vest
in line with the vesting schedule at time of grant.
To ensure appropriate alignment with our
shareholders, we operate a formal share ownership
policy, expressed as a number of shares, for
executive Directors and Group Managing Directors.
The Committee considers that material share
ownership by executives creates a community
of interest between senior management and
shareholders.
Under the existing guidelines, the
shareholding is expected to be achieved within
five years of the executive’s appointment. All
executive Directors exceed the expected holdings.
Shareholding requirements for the Group executive
Directors and Group Managing Directors are set
out below. The Directors’ shareholdings at
31 December 2012 are also set out below. There
are no shareholding requirements for non-executive
Directors.
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Directors’ Remuneration Report (continued)
2012 remuneration outcomes / Appendix to DRR > Additional disclosures
At 31 December 2012
(or date of retirement)
Shares awarded subject to deferral
Shareholding
requirement
(number)
Shares
legally
owned1
without
performance
conditions2
with
performance
conditions
Total
shareholding3
(number)
Estimated
value
£000
Executive Directors
D J Flint ...............................
A A Flockhart4 .....................
S T Gulliver .........................
I J Mackay ...........................
Group Managing Directors6
Non-executive Directors
J D Coombe .........................
R A Fairhead ........................
W S H Laidlaw ....................
J P Lipsky ............................
G Morgan .............................
Sir Simon Robertson ............
J L Thornton ........................
Sir Brian Williamson ...........
400,000
200,000
600,000
200,000
125,000
313,326
978,0774
2,730,477
118,813
n/a
211,269
568,9734
2,448,515
417,392
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
22,387
21,300
32,252
15,0007
84,3479
9,486
10,25011
40,1649
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
–
–
–
–
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
524,595
1,547,0504
5,178,992
536,205
n/a
22,387
21,300
32,252
15,0007
84,3479
9,486
10,25011
40,1649
3,394
10,0085
33,503
3,469
n/a
145
138
209
978
54610
61
668
26010
1 Includes interests held as beneficial owner and interests held by connected persons and excludes interests held non-beneficially as
trustee.
2 Includes GPSP awards which are made following an assessment of performance over the prior year but are then awarded subject to a
five-year vesting period.
3 For the purposes of our shareholding guidelines, unvested awards of Restricted Shares and GPSP awards are included.
4 Interests at 31 July 2012, the date of retirement as a Director.
5 Estimated value at 31 July 2012, the date of retirement as a Director.
6 All of the Group Managing Directors except one (who was appointed a Group Managing Director during 2012 and is therefore within
the five years permitted to achieve the expected holding) exceed the expected holdings.
7 Interest in 3,000 listed American Depositary Shares (‘ADS’), which are categorised as equity derivatives under Part XV of the
Securities and Futures Ordinance of Hong Kong. Each ADS represents five HSBC Holdings ordinary shares.
8 The ADS closing price on 31 December 2012 on the New York Stock Exchange was US$53.07.
9 Interests at 25 May 2012, the date of retirement as a Director.
10 Estimated value at 25 May 2012, the date of retirement as a Director.
11 Interest of spouse in 2,050 listed ADS.
The Committee monitors compliance with the
share ownership guidelines annually. The Committee
has full discretion in determining any penalties in
cases of non-compliance, which could include a
reduction of future awards of GPSP and/or an
increase in the proportion of the annual variable
pay that is deferred into shares.
Advisory vote on 2011 remuneration report ........
8,467,146,094
Number of
votes cast
Shareholder context
During the year the Chairman of the Remuneration
Committee met with institutional shareholders to
collect their views on current and developing
remuneration practices. The Group considers these
meetings vital to ensure that our reward strategy
continues to be aligned with the long-term interests
of our shareholders.
The table below shows the advisory vote on the
2011 Directors’ Remuneration Report at the May
2012 Annual General Meeting.
For
Against
Withheld
7,603,837,582
(89.80%)
863,308,512
(10.20%)
342,947,482
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Appendix to Directors’ Remuneration Report
Additional disclosures
This appendix provides disclosures required under Schedule 8 of the Large and Medium-sized Companies and
Groups (Accounts and Reports) Regulations 2008, and by the FSA.
The following table shows the 2012 total remuneration of the Group Chairman and executive Directors of HSBC
Holdings with annual incentives disclosed on a 2012 performance year basis, pursuant to the UK Listing Rules.
Explanations of the constituent parts of the incentives calculated pursuant to the UK Companies Act 2006 and the
UK Listing Rules are given in footnotes 4 and 5, respectively.
Directors’ remuneration
(Audited)
Salary, allowances and benefits in kind ..........
Annual incentive2 .............................................
D J Flint
2012
£000
2,355
–
2011
£000
2,348
–
A A Flockhart1
2012
£000
564
–
2011
£000
1,578
1,926
S T Gulliver
2012
£000
2,470
1,950
2011
£000
2,043
2,156
I J Mackay
2012
£000
1,121
1,348
2011
£000
1,427
1,086
Total remuneration ..........................................
2,355
2,348
564
3,504
4,420
4,199
2,469
2,513
US$000
Total remuneration ..........................................
3,7323
3,763
894
5,616
7,004
6,729
3,913
4,027
Emoluments table
The following table shows the 2012 emoluments of the Group Chairman and executive Directors of HSBC Holdings,
with annual incentives disclosed on an actual paid basis, pursuant to section 421 of the UK Companies Act 2006 and
the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008:
Directors’ emoluments
(Audited)
Salary ...............................................................
Allowances4 .....................................................
Benefits in kind5 ...............................................
Prior years deferred annual incentive now
released6 .........................................................
Current year non-deferred annual incentive7 ...
D J Flint
2012
£000
1,500
750
105
1,364
–
2011
£000
1,500
750
98
1,054
–
Total emoluments ............................................
3,719
3,402
A A Flockhart1
2012
£000
2011
£000
S T Gulliver
2012
£000
2011
£000
I J Mackay
2012
£000
2011
£000
325
207
32
218
–
782
975
366
237
857
770
1,250
613
607
5,648
780
1,250
527
266
3,697
862
700
350
71
275
539
700
364
363
12
434
3,205
8,898
6,602
1,935
1,873
US$000
Total emoluments ............................................
5,893
5,452
1,239
5,136
14,100
10,581
3,066
3,002
1 Retired as an executive Director on 30 April 2012.
2 The annual incentive for 2012 comprises the deferred and non-deferred annual incentives.
3 The reduction in Total Remuneration in US$ between 2012 and 2011 is due to foreign exchange movements.
4 Allowances include an executive allowance paid to fund personal pension arrangements.
5 Benefits in kind include provision of medical insurance, other insurance cover, tax return preparation and travel assistance. S T Gulliver
is also provided with HSBC-owned accommodation whilst in Hong Kong. In accordance with the Large and Medium-sized Companies
and Groups (Accounts and Reports) Regulations 2008, the taxable rental value of the property is shown for the whole period
notwithstanding that it is only occupied when S T Gulliver is in Hong Kong.
6 Where applicable, comprise, subject to the rules of the respective share plans: (i) the estimated monetary value of 33% of the award of
HSBC Holdings Restricted Shares will vest on 12 March 2013 arising from the 2011 annual incentive awarded in March 2012 that was
partly deferred into awards of HSBC Holdings Restricted Shares; (ii) the estimated monetary value of 33% of the award of HSBC
Holdings Restricted Shares that will vest on 4 March 2013 arising from the 2010 annual incentive awarded in March 2011 that was
partly deferred into awards of HSBC Holdings Restricted Shares; (iii) the estimated monetary value of the remainder of the award of
HSBC Holdings Restricted Shares that will vest on 5 March 2013 arising from the 2009 annual incentive awarded in March 2010 that
was fully deferred into awards of HSBC Restricted Shares; and (iv) 33% of the deferred cash award that will vest on 15 March 2013
arising from the 2010 annual incentive awarded in March 2011.
7 Comprises 40% of the annual incentive in respect of the 2012 performance year that is non-deferred. The non-deferred incentive is
payable in HSBC Holdings Restricted Shares, 50% of which are subject to a six month retention period.
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Directors’ Remuneration Report (continued)
Appendix to DRR > Additional disclosures
Non-executive Directors’ fees
Non-executive Directors’ fees are regularly reviewed and compared with other large international companies of
comparable complexity. The current fee, which was approved by shareholders in 2011, is £95,000 per annum.
A fee of £45,000 per annum is payable to the senior independent non-executive Director. In addition, non-executive
Directors received the following fees for service on Board Committees:
Board Committee annual fees
Chairman
£000
Member
£000
Number of
meetings
held during
2012
Group Audit Committee .............................................................................................
Group Risk Committee ...............................................................................................
Group Remuneration Committee ...............................................................................
Financial System Vulnerabilities Committee1 ...........................................................
Nomination Committee ..............................................................................................
Corporate Sustainability Committee ..........................................................................
50
50
50
50
40
40
1 Established on 18 January 2013.
Fees paid to non-executive Directors
(Audited)
S A Catz ....................................................................................................................................................
L M L Cha1 ...............................................................................................................................................
M K T Cheung2 .........................................................................................................................................
J D Coombe ..............................................................................................................................................
J Faber3 .....................................................................................................................................................
R A Fairhead .............................................................................................................................................
A A Flockhart4 ..........................................................................................................................................
J W J Hughes-Hallett ................................................................................................................................
W S H Laidlaw .........................................................................................................................................
J P Lipsky3 ................................................................................................................................................
J R Lomax .................................................................................................................................................
G Morgan5 ................................................................................................................................................
N R N Murthy6 ..........................................................................................................................................
Sir Simon Robertson .................................................................................................................................
J L Thornton7 ............................................................................................................................................
Sir Brian Williamson5 ...............................................................................................................................
Total8 .........................................................................................................................................................
Total (US$000)8 ........................................................................................................................................
30
30
30
30
25
25
2012
£000
95
548
166
205
104
200
70
138
125
119
155
50
135
180
1,092
48
3,430
5,435
5
7
8
–
4
4
2011
£000
95
465
165
205
–
200
–
150
125
–
155
125
135
166
1,081
120
3,187
5,108
1 Includes fees as non-executive Director and Deputy Chairman of The Hongkong and Shanghai Banking Corporation Limited and a
member of its nomination committee.
2 Includes fees as non-executive Director and member of the audit committee of Hang Seng Bank Limited.
3 Appointed on 1 March 2012.
4 A non-executive Director from 1 May to 31 July 2012. Includes fees as a non-executive Director and Chairman of HSBC Bank plc and a
non-executive Director of HSBC Bank Middle East Limited from 1 May to 31 July 2012.
5 Retired on 25 May 2012.
6 Retired on 31 December 2012.
7 Includes fees as non-executive Chairman of HSBC North America Holdings Inc.
8 Total fees for 2011 and 2012 include the fees of non-executive Directors who retired in that year.
Non-executive Directors are appointed for fixed terms not exceeding three years, subject to their re-election by
shareholders at Annual General Meetings. Non-executive Directors have no service contract and are not eligible to
participate in our share plans. Non-executive Directors’ current terms of appointment will expire as follows:
•
•
•
in 2013, R A Fairhead;
in 2014, S A Catz, L M L Cha, J D Coombe, J W J Hughes-Hallett and W S H Laidlaw; and
in 2015, M K T Cheung, J Faber, J P Lipsky, J R Lomax, Sir Simon Robertson and J L Thornton.
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Subject to their re-election by shareholders, the terms of appointment of R Fassbind and J B Comey will expire in
2016.
Other directorships
Executive Directors, if so authorised by either the Nomination Committee or the Board, may accept appointments
as non-executive directors of suitable companies which are not part of HSBC. Approval will not be given for
an executive Director to accept a non-executive directorship of more than one FTSE 100 company nor the
chairmanship of such a company. When considering a non-executive appointment, the Nomination Committee
or Board will take into account the expected time commitment of such appointment. The time commitment for
executive Directors’ external appointments will be reviewed as part of the annual Board review. Any remuneration
receivable in respect of an external appointment is normally paid to HSBC, unless otherwise approved by the
Nomination Committee.
Share Plans
At 31 December 2012, the undernamed Directors held options and awards of Restricted Shares under the HSBC
Share Plan and the HSBC Share Plan 2011 (including conditional awards of shares under the GPSP) to acquire the
number of HSBC Holdings ordinary shares set against their respective names.
HSBC Holdings savings-related share option plans
(Audited)
HSBC Holdings ordinary shares
Dates of
award
Exercise
price (£)
Exercisable
from1
until
At
31 Dec 2012
At
1 Jan
(or date of
2012 retirement)
D J Flint ............................................. 25 Apr 2007
D J Flint ............................................. 24 Apr 2012
A A Flockhart .................................... 29 Apr 2009
6.1760
4.4621
3.3116
1 Aug 2012
1 Aug 2015
1 Aug 2014
31 Jan 2013
31 Jan 2016
31 Jan 2015
2,650
–
4,529
I J Mackay ......................................... 30 Apr 2008
US$
11.8824
1 Aug 2011
31 Jan 2012
1,531
2,650
2,016
–2
–3
The HSBC Holdings savings-related share option plans are all-employee share plans under which eligible employees may be granted
options to acquire HSBC Holdings ordinary shares. Employees may make contributions of up to £250 (or equivalent) each month over a
period of one, three or five years which may be used on the first, third or fifth anniversary of the commencement of the relevant savings
contract, at the employee’s election, to exercise the options. The plans help align the interests of employees with the creation of
shareholder value. The options were awarded for nil consideration and are exercisable at a 20% discount to the average market value of
the ordinary shares on the five business days immediately preceding the invitation date. There are no performance criteria conditional
upon which the outstanding options are exercisable and there have been no variations to the terms and conditions since the awards were
made. The market value per ordinary share at 31 December 2012 was £6.47. The highest and lowest market values per ordinary share
during the year were £6.55 and £4.91. Market value is the mid-market price derived from the London Stock Exchange Daily Official List
on the relevant date. Under the Securities and Futures Ordinance of Hong Kong, the options are categorised as unlisted physically settled
equity derivatives.
1 May be advanced to an earlier date in certain circumstances, e.g. retirement.
2 Options lapsed on 31 October 2012 following the end of the six month period following retirement within which employees may exercise
options under the HSBC Holdings savings-related share option plans. A A Flockhart retired as an employee on 30 April 2012.
3 Option lapsed on 31 January 2012 following the end of the exercise period.
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Directors’ Remuneration Report (continued)
Appendix to DRR > Additional disclosures
Awards of Restricted Shares
HSBC Share Plan
(Audited)
HSBC Holdings ordinary shares
Year in
which
awards
may vest
Date of
award
D J Flint ............ 1 Mar 2010 2011-20132
15 Mar 2011 2012-20142
A A Flockhart5 .. 2 Mar 2009
2012
1 Mar 2010 2011-20132
15 Mar 2011 2012-20142
S T Gulliver ...... 1 Mar 2010 2011-20132
15 Mar 2011 2012-20142
I J Mackay ........ 2 Mar 2009
2012
1 Mar 2010 2011-20132
15 Mar 2011 2012-20142
Awards
held at
1 Jan
2012
220,201
133,280
535,162
212,927
86,062
943,723
825,072
104,244
41,263
35,954
Awards made
during year
Awards vested
during year
Number
Monetary
value
£000
Number
Monetary
value
£000
Awards
held at
31 Dec 2012
(or date of
retirement)1
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
111,3403
44,5164
541,6516
107,6623
28,7454
477,1743
275,5754
105,5086
20,8643
12,0084
617
256
3,028
596
165
2,644
1,585
590
116
69
116,700
94,569
–
110,704
59,906
500,148
585,436
–
21,868
25,513
Vesting of Restricted Share awards is normally subject to the Director remaining an employee on the vesting date. The vesting date may be
advanced to an earlier date in certain circumstances, e.g. death. Under the Securities and Futures Ordinance of Hong Kong, interests in
Restricted Share awards are categorised as the interests of a beneficial owner.
1 Includes additional shares arising from scrip dividends.
2 33% of the award vests on each of the first and second anniversaries of the date of the award, with the balance vesting on the third
anniversary of the date of the award. In the case of the awards granted on 15 March 2011 the shares (net of tax) are subject to a six
month retention period following each vesting date.
3 At the date of vesting, 27 February 2012, the market value per share was £5.54. The market value per share on the date of the award,
1 March 2010, was £6.82.
4 At the date of vesting, 15 March 2012, the market value per share was £5.75. The market value per share on the date of the award,
15 March 2011, was £6.46.
5 Retired as an executive Director on 30 April 2012. The vesting of the awards will continue in line with the vesting schedule set at the
date of grant and will also continue to accrue scrip dividends subject to the terms of the Plan.
6 At the date of vesting, 5 March 2012, the market value per share was £5.59. The market value per share on the date of the award,
2 March 2009, was £3.99.
Awards of Restricted Shares
HSBC Share Plan 2011
(Audited)
HSBC Holdings ordinary shares
Year in
which
awards
may vest
Date of
award
Awards
held at
1 Jan
2012
Awards made
during year
Awards vested
during year
Number
Monetary
value
£000
Number
Monetary
value
£000
Awards
held at
31 Dec 2012
(or date of
retirement)1
A A Flockhart2 ...... 28 Feb 20123
12 Mar 20124
12 Mar 20125
S T Gulliver .......... 28 Feb 20123
12 Mar 20124
12 Mar 20125
I J Mackay ............ 28 Feb 20123
12 Mar 20124
12 Mar 20125
2012
2013-2015
2012
2012
2013-2015
2012
2012
2013-2015
2012
–
–
–
–
–
–
–
–
–
68,941
207,546
69,182
77,167
232,312
77,437
38,854
116,968
38,989
385
1,154
385
431
1,292
431
217
650
217
68,941
–
69,182
77,167
–
77,437
38,854
–
38,989
385
–
385
431
–
431
217
–
217
–
213,044
–
–
243,078
–
–
122,390
–
Vesting of Restricted Share awards is normally subject to the Director remaining an employee on the vesting date. The vesting date may be
advanced to an earlier date in certain circumstances, for example, death. Under the Securities and Futures Ordinance of Hong Kong,
interests in Restricted Share awards are categorised as the interests of a beneficial owner.
364
1 Includes additional shares arising from scrip dividends.
2 Retired as an executive Director on 30 April 2012. The vesting of the awards will continue in line with the vesting schedule set at the
date of grant and will also continue to accrue scrip dividends subject to the terms of the plan.
3 The non-deferred award vested immediately on 28 February 2012. At the date of vesting the market value per share was £5.59.
4 At the date of the award, 12 March 2012, the market value per share was £5.56. 50% of these deferred awards are subject to a six month
retention period upon vesting. 33% of the awards vest on each of the first and second anniversaries of the date of the awards, with the
balance vesting on the third anniversary of the date of the award.
5 The non-deferred award vested immediately on 12 March 2012 and the shares (net of tax) were subject to a six month retention period.
At the date of vesting, the market value per share was £5.56.
Conditional Awards under the GPSP
HSBC Share Plan 2011
(Audited)
HSBC Holdings ordinary shares
Date of
award
A A Flockhart3 ................................... 23 Jun 2011
S T Gulliver ....................................... 23 Jun 2011
12 Mar 2012
I J Mackay ......................................... 23 Jun 2011
12 Mar 2012
Year in
which
awards
may vest
2016
2016
2017
2016
2017
Awards
held at
1 Jan
2012
178,373
392,119
–
109,626
–
Awards made
during year1
Monetary
value
£000
Awards
held at
31 Dec 2012
(or date of
retirement)2
–
–
3,744
–
699
185,319
415,270
704,583
116,099
131,522
Number
–
–
673,370
–
125,695
The GPSP is the long-term incentive plan under the HSBC Share Plan 2011. Vesting of GPSP awards is normally subject to the Director
remaining an employee on the vesting date. Any shares (net of tax) which the Director becomes entitled to on the vesting date are subject to
a retention requirement until cessation of employment. Under the Securities and Futures Ordinance of Hong Kong, interests in awards are
categorised as the interests of a beneficial owner.
1 At the date of award, 12 March 2012, the market value per share was £5.56.
2 Includes additional shares arising from scrip dividends.
3 Retired as an executive Director on 30 April 2012. The vesting of the awards will continue in line with the vesting schedule set at the
date of grant and will also continue to accrue scrip dividends.
Pensions
Defined Benefit Pension arrangements
(Audited)
Accrued
annual
pension at
31 December
Increase in
accrued
pension
during
A A Flockhart2 .
2012
£000
339
2012
£000
Transfer
value
of accrued
pension at
31 December
20111
£000
Transfer
value
of accrued
pension at
31 December
20121
£000
Transfer value
(less personal
contributions) at
31 December 2012
relating to increase
in accrued pension
during 2012,
excluding any
increase for inflation1
£000
Increase of
transfer value
of accrued
pension (less
personal
contributions)
in 20121
£000
Increase in
accrued
pension
during 2012,
excluding
any increase
for inflation
£000
32
15
5,638
6,105
467
251
1 The transfer value represents a liability of HSBC’s pension fund (the International Staff Retirement Benefits Scheme (‘ISRBS’)) and not
a sum paid or due to the individual; it cannot therefore meaningfully be added to annual remuneration.
2 A A Flockhart ceased accrual of pension in the ISRBS on 30 November 2008 and he has deferred commencement of his pension. The
ISRBS retains a liability for a contingent spouse’s pension of £140,000 per annum as at 31 December 2012. Although A A Flockhart
retired as an executive Director on 30 April 2012, this does not affect his benefits within the ISRBS.
The following table shows unfunded pension payments, in respect of which provision has been made, during 2012 to
six former Directors of HSBC Holdings.
The payments in respect of R Delbridge and Sir Brian Pearse were made by HSBC Bank plc as former directors of
that bank. The payment in respect of C F W de Croisset was made by HSBC France as a former director of that bank.
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Directors’ Remuneration Report (continued)
Appendix to DRR > Additional disclosures
Unfunded pension payments
(Audited)
B H Asher .................................................................................................................................................
C F W de Croisset .....................................................................................................................................
R Delbridge ...............................................................................................................................................
Lord Green ................................................................................................................................................
Sir Brian Pearse ........................................................................................................................................
Sir William Purves ....................................................................................................................................
2012
£
111,763
239,423
160,754
42,174
67,036
118,313
739,463
2011
£
106,441
250,910
153,099
40,946
63,844
112,679
727,919
Employee compensation and benefits
(Unaudited)
Set out below are details of emoluments paid to senior management (being executive Directors and Group Managing
Directors of HSBC Holdings) for the year ended 31 December 2012 or for the period of appointment as a Director or
Group Managing Director.
Emoluments of senior management
Basic salaries, allowances and benefits in kind .....................................................................................................................
Pension contributions .............................................................................................................................................................
Performance-related pay paid or receivable ...........................................................................................................................
Inducements to join paid or receivable ..................................................................................................................................
Compensation for loss of office .............................................................................................................................................
Total ........................................................................................................................................................................................
Total (US$000) .......................................................................................................................................................................
Senior
management
£000
15,461
315
33,066
–
715
49,557
78,531
The aggregate emoluments of senior management for the year ended 31 December 2012 was US$78,531,390. The
emoluments of senior management were within the following bands:
£0 – £1,000,000 ......................................................................................................................................................................
£1,000,001 – £2,000,000 ........................................................................................................................................................
£2,000,001 – £3,000,000 ........................................................................................................................................................
£3,000,001 – £4,000,000 ........................................................................................................................................................
£4,000,001 – £5,000,000 ........................................................................................................................................................
£7,000,001 – £8,000,000 ........................................................................................................................................................
Number
senior
management
3
1
5
4
1
2
The aggregate amount set aside or accrued to provide pension, retirement or similar benefits for executive Directors
and senior management for the year ended 31 December 2012 was US$499,285.
Set out below are details of remuneration paid to the five individuals whose emoluments were the highest in HSBC
(including two executive Directors and two Group Managing Directors of HSBC Holdings), for the year ended
31 December 2012.
Emoluments of the five highest paid employees
Basic salaries, allowances and benefits in kind .....................................................................................................................
Pension contributions .............................................................................................................................................................
Performance-related pay paid or receivable ...........................................................................................................................
Inducements to join paid or receivable ..................................................................................................................................
Compensation for loss of office .............................................................................................................................................
Total ........................................................................................................................................................................................
Total (US$000) .......................................................................................................................................................................
5 highest paid
employees
£000
6,112
155
21,513
–
–
27,780
44,022
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The emoluments of the five highest paid employees were within the following bands:
Number of
5 highest paid
employees
£3,800,001 – £3,900,000 ........................................................................................................................................................
£4,600,001 – £4,700,000 ........................................................................................................................................................
£4,800,001 – £4,900,000 ........................................................................................................................................................
£7,000,001 – £7,100,000 ........................................................................................................................................................
£7,400,001 – £7,500,000 ........................................................................................................................................................
1
1
1
1
1
Remuneration of eight highest paid senior executives (members of the GMB, but not Directors of HSBC Holdings)
1
£000
2
£000
3
£000
4
£000
5
£000
6
£000
7
£000
8
£000
Employee
Fixed
Cash based .....................
Total fixed ......................
Annual incentive1
Cash ...............................
Non-deferred shares2 ......
Deferred cash3 ................
Deferred shares3..............
650
650
955
955
1,433
1,433
632
632
331
331
496
496
650
650
262
262
393
393
650
650
340
340
510
510
650
650
277
277
415
415
650
650
272
272
407
407
851
851
227
227
341
341
Total annual incentive ...
4,776
1,654
1,310
1,700
1,384
1,358
1,136
488
488
180
180
270
270
900
Long-term incentive
plan (GPSP)
Deferred shares ..............
Total variable pay ..........
1,560
6,336
1,517
3,171
1,560
2,870
1,040
2,740
780
2,164
780
681
976
2,138
1,817
1,876
Total remuneration ........
6,986
3,803
3,520
3,390
2,814
2,788
2,668
2,364
US$000
Total remuneration .........
11,070
6,026
5,578
5,372
4,459
4,418
4,228
3,746
1 Annual incentive in respect of performance year 2012.
2 Awards vested, subject to a six month retention period.
3 Awards vest 100% after five years subject to the successful completion of the Deferred Prosecution Agreements and subject to the terms
of the Plan.
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Statement of Directors’ Responsibilities
Statement
The following statement, which should be read in conjunction with the Auditor’s statement of their responsibilities
set out in their report on pages 369 and 370, is made with a view to distinguishing for shareholders the respective
responsibilities of the Directors and of the Auditor in relation to the financial statements. The Directors are
responsible for preparing the Annual Report and Accounts 2012 comprising the consolidated financial statements
of HSBC Holdings and its subsidiaries (the ‘Group’) and holding company financial statements for HSBC Holdings
(the ‘parent company’) in accordance with applicable laws and regulations.
Company law requires the Directors to prepare Group and parent company financial statements for each
financial year. The Directors are required to prepare the Group financial statements in accordance with IFRSs as
endorsed by the EU and have elected to prepare the parent company financial statements on the same basis.
The Group and parent company financial statements are required by law and IFRSs as endorsed by the EU to
present fairly the financial position, the performance for that period and for IFRSs purposes the cash flows of the Group
and the parent company. The Companies Act 2006 provides in relation to such financial statements that references in
the relevant part of that Act to financial statements giving a true and fair view are references to their achieving a fair
presentation. In addition, in order to meet certain US requirements, HSBC is required to present its financial statements
in accordance with IFRSs as issued by the International Accounting Standards Board (‘IASB’). Currently, there are no
differences in application to HSBC between IFRSs endorsed by the EU and IFRSs issued by the IASB.
In preparing each of the Group and parent company financial statements, the Directors are required to:
select suitable accounting policies and then apply them consistently;
•
• make judgements and estimates that are reasonable and prudent;
•
•
state whether they have been prepared in accordance with IFRSs as endorsed by the EU; and
prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group
and the parent company will continue in business. Since the Directors are satisfied that the Group and parent
company have the resources to continue in business for the foreseeable future, the financial statements continue
to be prepared on the going concern basis.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain
the parent company’s transactions and disclose with reasonable accuracy at any time the financial position of the
parent company and enable them to ensure that its financial statements comply with the Companies Act 2006. The
Directors have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of
the Group and to prevent and detect fraud and other irregularities.
The Directors are responsible for preparing, in accordance with applicable laws and regulations, a Directors’
Report, Directors’ Remuneration Report and the Corporate Governance statement on pages 2 to 367 of this Annual
Report and Accounts 2012 and for the maintenance and integrity of the Annual Report and Accounts 2012 as they
appear on the Company’s website. UK legislation governing the preparation and dissemination of financial
statements may differ from legislation in other jurisdictions.
The Directors, the names of whom are set out in the ‘Report of the Directors: Corporate Governance’ section
on pages 302 to 307 of the Annual Report and Accounts 20121, confirm that:
•
•
•
to the best of their knowledge, the consolidated financial statements, which have been prepared in accordance
with IFRSs as issued by the IASB and as endorsed by the EU, have been prepared in accordance with the
applicable set of accounting standards and give a true and fair view of the assets, liabilities, financial position
and profit or loss of the Company and the undertakings included in the consolidation taken as a whole;
to the best of their knowledge, the management report represented by the Report of the Directors includes a
fair review of the development and performance of the business and the position of the Company and the
undertakings included in the consolidation taken as a whole, together with a description of the principal risks
and uncertainties that they face; and
they consider that the Annual Report and Accounts 2012, taken as a whole, is fair, balanced and understandable
and provides the information necessary for shareholders to assess the Company’s performance, business model
and strategy.
On behalf of the Board
D J Flint
Group Chairman
4 March 2013
1 Other than J B Comey, who was not a Director at the time of approval of the Annual Report and Accounts 2012.
368
H S B C H O L D I N G S P L C
Independent Auditor’s Report to the Members of HSBC Holdings plc
Report
We have audited the Group and parent company financial statements of HSBC Holdings plc for the year ended
31 December 2012 set out on pages 372 to 515. The financial reporting framework that has been applied in their
preparation is applicable law and International Financial Reporting Standards (‘IFRSs’) as adopted by the EU and
as issued by the International Accounting Standards Board (‘IASB’) and, as regards the parent company financial
statements, as applied in accordance with the provisions of the Companies Act 2006.
This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the
Companies Act 2006 and, in respect of the separate opinion in relation to IFRSs as issued by the IASB, on terms
that have been agreed. Our audit work has been undertaken so that we might state to the company's members those
matters we are required to state to them in an auditor’s report and, in respect of the separate opinion in relation to
IFRSs as issued by IASB, those matters that we have agreed to state to them in our report, and for no other purpose.
To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company
and the company’s members, as a body, for our audit work, for this report, or for the opinions we have formed.
Respective responsibilities of directors and auditor
As explained more fully in the Statement of Directors’ Responsibilities Statement set out on page 368, the Directors
are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair
view. Our responsibility is to audit, and express an opinion on, the financial statements in accordance with applicable
law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the
Auditing Practices Board’s Ethical Standards for Auditors.
Scope of the audit of the financial statements
A description of the scope of an audit of financial statements is provided on the Financial Reporting Council’s
website at www.frc.org.uk/auditscopeukprivate.
Opinion on financial statements
In our opinion:
•
•
•
•
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 2012 and of the Group’s profit for the year then ended;
the Group financial statements have been properly prepared in accordance with IFRSs as adopted by the EU;
the parent company financial statements have been properly prepared in accordance with IFRSs as adopted by
the EU and as applied in accordance with the provisions of the Companies Act 2006; and
the financial statements 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.
Separate opinion in relation to IFRSs as issued by the IASB
As explained in Note 1(a) to the Group financial statements, in addition to complying with its legal obligation to
apply IFRSs as adopted by the EU, the Group has also applied IFRSs as issued by the IASB.
In our opinion, the Group financial statements comply with IFRSs as issued by the IASB.
Opinion on other matters prescribed by the Companies Act 2006
In our opinion:
•
•
the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the
Companies Act 2006; and
the information given in the Directors’ Report for the financial year for which the financial statements are
prepared is consistent with the financial statements.
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H S B C H O L D I N G S P L C
Independent Auditor’s Report to the Members of HSBC Holdings plc (continued)
Report
Matters on which we are required to report by exception
We have nothing to report in respect of the following:
Under the Companies Act 2006 we are required to report to you if, in our opinion:
•
•
•
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
the parent company financial statements and the part of the Directors’ Remuneration Report to be audited are
not in agreement with the accounting records and returns; or
certain disclosures of Directors’ remuneration specified by law are not made; or
• we have not received all the information and explanations we require for our audit.
Under the Listing Rules we are required to review:
•
•
•
the Directors’ Statement, set out on page 334, in relation to going concern;
the part of the Corporate Governance Statement relating to the company’s compliance with the nine provisions
of the June 2010 edition of the UK Corporate Governance Code specified for our review; and
certain elements of the report to shareholders by the Board on Directors’ remuneration.
G Bainbridge (Senior Statutory Auditor)
For and on behalf of KPMG Audit Plc, Statutory Auditor
Chartered Accountants
London, England
4 March 2013
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Financial Statements
Contents
Financial Statements and Notes on the Financial Statements
18 Financial assets designated at fair value ...........
19 Derivatives ........................................................
20 Financial investments ........................................
21 Transfers of financial assets ..............................
22
Interests in associates and joint ventures ..........
23 Goodwill and intangible assets .........................
24 Property, plant and equipment ..........................
25
Investments in subsidiaries ...............................
26 Assets held for sale and other assets .................
27 Trading liabilities ..............................................
28 Financial liabilities designated at fair value .....
29 Debt securities in issue ......................................
30 Liabilities of disposal groups held for sale
and other liabilities ........................................
31 Liabilities under insurance contracts ................
32 Provisions ..........................................................
33 Subordinated liabilities ......................................
34 Maturity analysis of assets, liabilities and off-
balance sheet commitments ...........................
35 Foreign exchange exposures .............................
36 Assets charged as security for liabilities and
collateral accepted as security for assets ......
37 Non-controlling interests ...................................
38 Called up share capital and other equity
instruments ....................................................
39 Notes on the statement of cash flows ................
40 Contingent liabilities, contractual commitments
and guarantees ...............................................
41 Lease commitments ...........................................
42 Special purpose entities .....................................
43 Legal proceedings and regulatory matters ........
44 Related party transactions .................................
45 Events after the balance sheet date ...................
Page
451
452
456
458
460
463
467
469
471
473
473
474
475
475
478
480
485
493
493
494
495
498
500
501
502
506
512
515
Page
Financial Statements
Consolidated income statement ................................... 372
Consolidated statement of comprehensive income ..... 373
Consolidated balance sheet ......................................... 374
Consolidated statement of cash flows.......................... 375
Consolidated statement of changes in equity .............. 376
HSBC Holdings balance sheet .................................... 379
HSBC Holdings statement of cash flows..................... 380
HSBC Holdings statement of changes in equity ......... 381
Notes on the Financial Statements
1 Basis of preparation ..........................................
2 Summary of significant accounting policies .....
3 Net income/(expense) from financial
instruments designated at fair value .............
4 Net earned insurance premiums ........................
5 Net insurance claims incurred and movement
in liabilities to policyholders ........................
6 Operating profit .................................................
7 Employee compensation and benefits ..............
383
387
406
407
407
408
409
8 Auditors’ remuneration .....................................
419
9 Tax ..................................................................... 421
10 Dividends ..........................................................
425
11 Earnings per share .............................................
12 Segmental analysis ............................................
13 Analysis of financial assets and liabilities
by measurement basis ...................................
14 Trading assets ....................................................
426
426
432
436
15 Fair values of financial instruments
carried at fair value .......................................
437
16 Fair values of financial instruments
not carried at fair value .................................
17 Reclassification of financial assets ...................
447
450
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H S B C H O L D I N G S P L C
Financial Statements (continued)
Consolidated income statement / Consolidated statement of comprehensive income
Consolidated income statement for the year ended 31 December 2012
Notes
Interest income ................................................................................................
Interest expense ...............................................................................................
Net interest income ..........................................................................................
Fee income .......................................................................................................
Fee expense ......................................................................................................
Net fee income .................................................................................................
Trading income excluding net interest income ...............................................
Net interest income on trading activities .........................................................
Net trading income ..........................................................................................
Changes in fair value of long-term debt issued and related derivatives .........
Net income/(expense) from other financial instruments designated
at fair value .................................................................................................
Net income/(expense) from financial instruments designated at fair value ...
3
Gains less losses from financial investments ..................................................
Dividend income ..............................................................................................
Net earned insurance premiums ......................................................................
Gains on disposal of US branch network, US cards business and Ping An
Insurance (Group) Company of China, Limited ........................................
Other operating income ...................................................................................
4
26
Total operating income .................................................................................
Net insurance claims incurred and movement in liabilities to
2012
US$m
56,702
(19,030)
37,672
20,149
(3,719)
16,430
4,408
2,683
7,091
(4,327)
2,101
(2,226)
1,189
221
13,044
7,024
2,100
82,545
2011
US$m
63,005
(22,343)
40,662
21,497
(4,337)
17,160
3,283
3,223
6,506
4,161
(722)
3,439
907
149
12,872
–
1,766
83,461
2010
US$m
58,345
(18,904)
39,441
21,117
(3,762)
17,355
4,680
2,530
7,210
(258)
1,478
1,220
968
112
11,146
–
2,562
80,014
policyholders ..............................................................................................
5
(14,215)
(11,181)
(11,767)
Net operating income before loan impairment charges and
other credit risk provisions ......................................................................
Loan impairment charges and other credit risk provisions .............................
6
Net operating income ....................................................................................
Employee compensation and benefits .............................................................
General and administrative expenses ..............................................................
Depreciation and impairment of property, plant and equipment ....................
Amortisation and impairment of intangible assets ..........................................
7
24
23
Total operating expenses ...............................................................................
Operating profit .............................................................................................
6
Share of profit in associates and joint ventures ...............................................
22
Profit before tax .............................................................................................
Tax expense .....................................................................................................
9
Profit for the year ..........................................................................................
Profit attributable to shareholders of the parent company ..............................
Profit attributable to non-controlling interests ................................................
Basic earnings per ordinary share ...................................................................
Diluted earnings per ordinary share ................................................................
11
11
68,330
(8,311)
60,019
(20,491)
(19,983)
(1,484)
(969)
(42,927)
17,092
3,557
20,649
(5,315)
15,334
14,027
1,307
US$
0.74
0.74
72,280
(12,127)
60,153
(21,166)
(17,459)
(1,570)
(1,350)
(41,545)
18,608
3,264
21,872
(3,928)
17,944
16,797
1,147
US$
0.92
0.91
68,247
(14,039)
54,208
(19,836)
(15,156)
(1,713)
(983)
(37,688)
16,520
2,517
19,037
(4,846)
14,191
13,159
1,032
US$
0.73
0.72
The accompanying notes on pages 383 to 515 form an integral part of these financial statements1.
For footnote, see page 382.
372
Consolidated statement of comprehensive income for the year ended 31 December 2012
Profit for the year ........................................................................................................
Other comprehensive income/(expense)
Available-for-sale investments ...................................................................................
– fair value gains2 ..................................................................................................
– fair value gains transferred to the income statement on disposal ......................
– amounts transferred to the income statement in respect of impairment
losses ..................................................................................................................
– income taxes .......................................................................................................
Cash flow hedges ........................................................................................................
– fair value gains/(losses) ......................................................................................
– fair value (gains)/losses transferred to the income statement ............................
– income taxes .......................................................................................................
Actuarial gains/(losses) on defined benefit plans ......................................................
– before income taxes ............................................................................................
– income taxes .......................................................................................................
Share of other comprehensive income/(expense) of associates and joint
ventures ..................................................................................................................
– share for the year .................................................................................................
– reclassified to income statement on disposal .....................................................
2012
US$m
15,334
5,070
6,396
(1,872)
1,002
(456)
109
552
(423)
(20)
(195)
(391)
196
533
311
222
2011
US$m
17,944
674
1,279
(820)
583
(368)
187
(581)
788
(20)
1,009
1,267
(258)
(710)
(710)
–
Exchange differences ..................................................................................................
1,017
(2,865)
– foreign exchange gains reclassified to income statement on disposal of a
foreign operation .................................................................................................
– other exchange difference ..................................................................................
Income tax attributable to exchange differences ........................................................
Other comprehensive income for the year, net of tax ................................................
Total comprehensive income for the year ..................................................................
Total comprehensive income for the year attributable to:
– shareholders of the parent company ..................................................................
– non-controlling interests ....................................................................................
(1,128)
2,145
–
6,534
21,868
20,455
1,413
21,868
–
(2,865)
165
(1,540)
16,404
15,366
1,038
16,404
The accompanying notes on pages 383 to 515 form an integral part of these financial statements1.
For footnote, see page 382.
2010
US$m
14,191
5,835
6,368
(1,174)
1,118
(477)
(271)
(178)
(164)
71
(61)
(60)
(1)
107
107
–
(567)
–
(567)
–
5,043
19,234
18,087
1,147
19,234
373
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H S B C H O L D I N G S P L C
Financial Statements (continued)
Consolidated balance sheet / Consolidated statement of cash flows
Consolidated balance sheet at 31 December 2012
Notes
2012
US$m
2011
US$m
Assets
Cash and balances at central banks ...............................................................................................
Items in the course of collection from other banks .......................................................................
Hong Kong Government certificates of indebtedness ..................................................................
Trading assets ................................................................................................................................
Financial assets designated at fair value .......................................................................................
Derivatives .....................................................................................................................................
Loans and advances to banks ........................................................................................................
Loans and advances to customers .................................................................................................
Financial investments ....................................................................................................................
Assets held for sale ........................................................................................................................
Other assets ....................................................................................................................................
Current tax assets ...........................................................................................................................
Prepayments and accrued income .................................................................................................
Interests in associates and joint ventures ......................................................................................
Goodwill and intangible assets ......................................................................................................
Property, plant and equipment .......................................................................................................
Deferred tax assets .........................................................................................................................
14
18
19
20
26
26
22
23
24
9
141,532
7,303
22,743
408,811
33,582
357,450
152,546
997,623
421,101
19,269
54,716
515
9,502
17,834
29,853
10,588
7,570
129,902
8,208
20,922
330,451
30,856
346,379
180,987
940,429
400,044
39,558
48,699
1,061
10,059
20,399
29,034
10,865
7,726
Total assets ....................................................................................................................................
2,692,538
2,555,579
Liabilities and equity
Liabilities
Hong Kong currency notes in circulation .....................................................................................
Deposits by banks ..........................................................................................................................
Customer accounts .........................................................................................................................
Items in the course of transmission to other banks .......................................................................
Trading liabilities ...........................................................................................................................
Financial liabilities designated at fair value ..................................................................................
Derivatives .....................................................................................................................................
Debt securities in issue ..................................................................................................................
Liabilities of disposal groups held for sale ...................................................................................
Other liabilities ..............................................................................................................................
Current tax liabilities .....................................................................................................................
Liabilities under insurance contracts .............................................................................................
Accruals and deferred income .......................................................................................................
Provisions ......................................................................................................................................
Deferred tax liabilities ...................................................................................................................
Retirement benefit liabilities .........................................................................................................
Subordinated liabilities ..................................................................................................................
27
28
19
29
30
30
31
32
9
7
33
22,742
107,429
1,340,014
7,138
304,563
87,720
358,886
119,461
5,018
33,862
1,452
68,195
13,184
5,252
1,109
3,905
29,479
20,922
112,822
1,253,925
8,745
265,192
85,724
345,380
131,013
22,200
27,967
2,117
61,259
13,106
3,324
1,518
3,666
30,606
Total liabilities ...............................................................................................................................
2,509,409
2,389,486
Equity
Called up share capital ...................................................................................................................
Share premium account .................................................................................................................
Other equity instruments ...............................................................................................................
Other reserves ................................................................................................................................
Retained earnings ..........................................................................................................................
38
Total shareholders’ equity .............................................................................................................
Non-controlling interests ...............................................................................................................
37
Total equity ....................................................................................................................................
9,238
10,084
5,851
29,722
120,347
175,242
7,887
183,129
8,934
8,457
5,851
23,615
111,868
158,725
7,368
166,093
Total equity and liabilities .............................................................................................................
2,692,538
2,555,579
The accompanying notes on pages 383 to 515 form an integral part of these financial statements1.
For footnote, see page 382.
D J Flint, Group Chairman
374
Consolidated statement of cash flows for the year ended 31 December 2012
Cash flows from operating activities
Profit before tax ...............................................................................................
20,649
21,872
19,037
Notes
2012
US$m
2011
US$m
2010
US$m
Adjustments for:
– net gain from investing activities .............................................................
– share of profits in associates and joint ventures ......................................
– gain on disposal of US branch network, US cards business and
Ping An Insurance (Group) Company of China, Limited ......................
– other non-cash items included in profit before tax ..................................
– change in operating assets ........................................................................
– change in operating liabilities ..................................................................
– elimination of exchange differences3 .......................................................
– dividends received from associates ..........................................................
– contributions paid to defined benefit plans ..............................................
– tax paid .....................................................................................................
39
39
39
Net cash (used in)/generated from operating activities ...................................
Cash flows from investing activities
Purchase of financial investments ...................................................................
Proceeds from the sale and maturity of financial investments .......................
Purchase of property, plant and equipment .....................................................
Proceeds from the sale of property, plant and equipment ...............................
Proceeds from the sale of loan portfolios ........................................................
Net purchase of intangible assets ....................................................................
Net cash outflow from acquisition of subsidiaries ..........................................
Net cash inflow from disposal of US branch network and US
cards business...............................................................................................
Net cash inflow/(outflow) from disposal of other subsidiaries
and businesses .............................................................................................
Net cash outflow from acquisition of or increase in stake of associates ........
Net cash outflow from the deconsolidation of funds ......................................
Proceeds from disposal of Ping An Insurance (Group) Company of China,
Limited .........................................................................................................
Proceeds from disposal of other associates and joint ventures .......................
Net cash generated/(used) in investing activities ............................................
Cash flows from financing activities
Issue of ordinary share capital .........................................................................
Issue of other equity instruments ....................................................................
Net sales/(purchases) of own shares for market-making and
investment purposes ....................................................................................
Net sales/(purchases) of own shares to meet share awards and share
option awards ..............................................................................................
On exercise of share options ...........................................................................
Subordinated loan capital issued .....................................................................
Subordinated loan capital repaid .....................................................................
Net cash inflow/(outflow) from change in stake in subsidiaries ....................
Dividends paid to shareholders of the parent company ..................................
Dividends paid to non-controlling interests ....................................................
Dividends paid to holders of other equity instruments ...................................
Net cash generated from/(used in) financing activities ...................................
Net increase/(decrease) in cash and cash equivalents ................................
Cash and cash equivalents at 1 January ..........................................................
Exchange differences in respect of cash and cash equivalents .......................
Cash and cash equivalents at 31 December ....................................................
39
(2,094)
(3,557)
(7,024)
19,778
(116,521)
89,070
(3,626)
489
(733)
(5,587)
(9,156)
(342,974)
329,926
(1,318)
241
–
(1,008)
–
20,905
(863)
(1,804)
–
1,954
594
5,653
594
–
(25)
–
–
37
(1,754)
(14)
(5,925)
(572)
(573)
(8,232)
(11,735)
325,449
1,594
315,308
(1,196)
(3,264)
–
19,878
(7,412)
44,012
10,840
304
(1,177)
(4,095)
79,762
(319,008)
311,702
(1,505)
300
–
(1,571)
–
–
216
(90)
–
–
25
(1,698)
(2,517)
–
18,887
(13,267)
42,272
(1,799)
441
(3,321)
(2,293)
55,742
(341,202)
321,846
(2,533)
4,373
4,243
(1,179)
(86)
–
466
(1,589)
(19,566)
–
254
(9,931)
(34,973)
96
–
(225)
(136)
–
7
(3,777)
104
(5,014)
(568)
(573)
(10,086)
59,745
274,076
(8,372)
325,449
180
3,718
163
11
2
4,481
(2,475)
(229)
(3,441)
(595)
(413)
1,402
22,171
250,766
1,139
274,076
The accompanying notes on pages 383 to 515 form an integral part of these financial statements1.
For footnote, see page 382.
375
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S
Consolidated statement of changes in equity for the year ended 31 December 2012
Called up
share
capital
US$m
Share
premium4
US$m
Other
equity
instru-
ments
US$m
Retained
earnings
5,6,7
US$m
Available-
for-sale
fair value
reserve
US$m
Cash flow
hedging
reserve8
US$m
Foreign
exchange
reserve
US$m
Merger
reserve5,9
US$m
Total
share-
holders’
equity
US$m
Non-
controlling
interests
US$m
Total
equity
US$m
2012
Other reserves
At 1 January ..............................................................................
8,934
8,457
5,851
111,868
(3,361)
3
7
6
Profit for the year ......................................................................
Other comprehensive income (net of tax) ................................
Available-for-sale investments ............................................
Cash flow hedges .................................................................
Actuarial gains/(losses) on defined benefit plans ................
Share of other comprehensive income of associates and
joint ventures ....................................................................
Exchange differences ...........................................................
Total comprehensive income for the year ................................
Shares issued under employee remuneration and
share plans ............................................................................
Shares issued in lieu of dividends and amounts arising
thereon4 .................................................................................
Dividends to shareholders10 ......................................................
Tax credit on distributions.........................................................
Own shares adjustment .............................................................
Cost of share-based payment arrangements .............................
Income taxes on share-based payments ...................................
Other movements ......................................................................
Acquisition and disposal of subsidiaries ..................................
Changes in ownership interests in subsidiaries that
did not result in loss of control ............................................
–
–
–
–
–
–
–
–
119
185
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1,812
(185)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
14,027
321
–
–
(212)
533
–
–
5,010
5,010
–
–
–
–
(95)
–
108
–
108
–
–
–
14,348
5,010
108
(1,337)
2,429
(8,042)
32
2
988
42
(26)
–
43
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(237)
27,308
158,725
7,368
166,093
–
989
–
–
–
–
989
989
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
14,027
6,428
5,010
108
(212)
533
989
1,307
106
60
1
17
15,334
6,534
5,070
109
(195)
–
28
533
1,017
20,455
1,413
21,868
594
–
594
2,429
(8,042)
32
2
988
42
(26)
–
–
(707)
–
–
–
–
(20)
(108)
2,429
(8,749)
32
2
988
42
(46)
(108)
43
(59)
(16)
At 31 December ........................................................................
9,238
10,084
5,851
120,347
1,649
13
752
27,308
175,242
7,887
183,129
H
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B
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i
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q
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i
t
y
Called up
share
capital
US$m
Share
premium4
US$m
Other
equity
instru-
ments
US$m
Retained
earnings
5,6,7
US$m
Available-
for-sale
fair value
reserve
US$m
Cash flow
hedging
reserve8
US$m
Foreign
exchange
reserve
US$m
Merger
reserve5,9
US$m
Total
share-
holders’
equity
US$m
Non-
controlling
interests
US$m
Total
equity
US$m
2011
Other reserves
At 1 January ..............................................................................
8,843
8,454
5,851
99,105
(4,077)
(285)
2,468
27,308
147,667
7,248
154,915
Profit for the year ......................................................................
Other comprehensive income (net of tax) ................................
Available-for-sale investments ............................................
Cash flow hedges .................................................................
Actuarial gains/(losses) on defined benefit plans ................
Share of other comprehensive income of associates and
joint ventures ....................................................................
Exchange differences ...........................................................
Total comprehensive income for the year ................................
Shares issued under employee share plans ..............................
Shares issued in lieu of dividends and amounts arising
thereon4 .................................................................................
Dividends to shareholders10 ......................................................
Tax credit on distributions.........................................................
Own shares adjustment .............................................................
Cost of share-based payment arrangements .............................
Income taxes on share-based payments ...................................
Other movements ......................................................................
Acquisition and disposal of subsidiaries ..................................
Changes in ownership interests in subsidiaries that
did not result in loss of control ............................................
–
–
–
–
–
–
–
–
6
85
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
90
(87)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
16,797
368
–
–
1,078
(710)
–
–
716
716
–
–
–
–
–
190
–
190
–
–
–
–
(2,705)
–
–
–
–
(2,705)
17,165
716
190
(2,705)
–
2,232
(7,501)
128
(361)
1,154
21
(75)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
16,797
(1,431)
716
190
1,078
(710)
(2,705)
1,147
(109)
(42)
(3)
(69)
17,944
(1,540)
674
187
1,009
–
5
(710)
(2,700)
15,366
1,038
16,404
96
–
96
2,230
(7,501)
128
(361)
1,154
21
(75)
–
–
(815)
–
–
–
28
(252)
2,230
(8,316)
128
(361)
1,154
21
(47)
(252)
–
121
121
At 31 December ........................................................................
8,934
8,457
5,851
111,868
(3,361)
(95)
(237)
27,308
158,725
7,368
166,093
3
7
7
Shareholder Information
Financial Statements
Corporate Governance
Operating & Financial Review
Overview
Consolidated statement of changes in equity for the year ended 31 December 2012 (continued)
Called up
share
capital
US$m
Share
premium4
US$m
Other
equity
instru-
ments
US$m
Retained
earnings
5,6,7
US$m
Available-
for-sale
fair value
reserve
US$m
Cash flow
hedging
reserve8
US$m
Foreign
exchange
reserve
US$m
Merger
reserve5,9
US$m
Total
share-
holders’
equity
US$m
Non-
controlling
interests
US$m
Total
equity
US$m
2010
Other reserves
At 1 January ..............................................................................
8,705
8,413
2,133
88,737
(9,965)
2,994
27,308
128,299
7,362
135,661
Profit for the year ......................................................................
Other comprehensive income (net of tax) ................................
Available-for-sale investments .................................................
Cash flow hedges ......................................................................
Actuarial losses on defined benefit plans .................................
Share of other comprehensive income of associates
and joint ventures .................................................................
Exchange differences ...............................................................
Total comprehensive income for the year ................................
Shares issued under employee share plans ..............................
Shares issued in lieu of dividends and amounts arising
thereon4 .................................................................................
Capital securities issued11 .........................................................
Dividends to shareholders10 ......................................................
Tax credit on distributions ........................................................
Own shares adjustment .............................................................
Cost of share-based payment arrangements .............................
Income taxes on share-based payments ...................................
Other movements ......................................................................
Acquisition and disposal of subsidiaries ..................................
Changes in ownership interests in subsidiaries that
did not result in loss of control ............................................
–
–
–
–
–
–
–
–
12
126
–
–
–
–
–
–
–
–
–
3
7
8
–
–
–
–
–
–
–
–
168
(127)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
3,718
–
–
–
–
–
–
–
13,159
49
–
–
(58)
107
–
–
5,671
5,671
–
–
–
–
(26)
–
(266)
–
(266)
–
–
–
–
(526)
–
–
–
–
(526)
13,208
5,671
(266)
(526)
–
2,524
–
(6,350)
122
174
812
(14)
(58)
–
–
–
–
–
–
–
–
–
217
–
–
–
–
–
–
–
–
–
–
7
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(50)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
13,159
4,928
5,671
(266)
(58)
107
(526)
1,032
115
164
(5)
(3)
–
(41)
14,191
5,043
5,835
(271)
(61)
107
(567)
18,087
1,147
19,234
180
–
180
2,523
3,718
(6,350)
122
174
812
(14)
166
–
–
–
(725)
–
–
–
–
3
(436)
2,523
3,718
(7,075)
122
174
812
(14)
169
(436)
(50)
(103)
(153)
At 31 December ........................................................................
8,843
8,454
5,851
99,105
(4,077)
(285)
2,468
27,308
147,667
7,248
154,915
The accompanying notes on pages 383 to 515 form an integral part of these financial statements1.
For footnotes, see page 382.
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HSBC Holdings balance sheet at 31 December 2012
Notes
2012
US$m
2011
US$m
Assets
Cash at bank and in hand:
– balances with HSBC undertakings ........................................................................................
Derivatives .....................................................................................................................................
Loans and advances to HSBC undertakings .................................................................................
Financial investments ....................................................................................................................
Current tax assets ...........................................................................................................................
Prepayments and accrued income .................................................................................................
Investments in subsidiaries ............................................................................................................
Property, plant and equipment .......................................................................................................
Deferred tax assets .........................................................................................................................
19
25
9
353
3,768
41,675
1,208
147
82
92,234
3
14
316
3,568
28,048
1,078
104
32
90,621
4
91
Total assets ....................................................................................................................................
139,484
123,862
Liabilities and equity
Liabilities
Amounts owed to HSBC undertakings .........................................................................................
Financial liabilities designated at fair value ..................................................................................
Derivatives .....................................................................................................................................
Debt securities in issue ..................................................................................................................
Other liabilities ..............................................................................................................................
Accruals and deferred income .......................................................................................................
Subordinated liabilities ..................................................................................................................
Total liabilities ...............................................................................................................................
Equity
Called up share capital ...................................................................................................................
Share premium account .................................................................................................................
Other equity instruments ...............................................................................................................
Other reserves ................................................................................................................................
Retained earnings ..........................................................................................................................
Total equity ....................................................................................................................................
28
19
29
30
33
38
12,856
23,195
760
2,691
30
1,018
11,907
52,457
9,238
10,084
5,828
37,170
24,707
87,027
2,479
21,151
1,067
2,613
911
1,008
12,450
41,679
8,934
8,457
5,828
36,849
22,115
82,183
Total equity and liabilities .............................................................................................................
139,484
123,862
The accompanying notes on pages 383 to 515 form an integral part of these financial statements1.
For footnote, see page 382.
D J Flint, Group Chairman
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H S B C H O L D I N G S P L C
Financial Statements (continued)
HSBC Holdings statement of cash flows / Statement of changes in equity
HSBC Holdings statement of cash flows for the year ended 31 December 2012
Cash flows from operating activities
Profit before tax .............................................................................................................................
Adjustments for:
– non-cash items included in profit before tax .........................................................................
– change in operating assets ......................................................................................................
– change in operating liabilities ................................................................................................
– net loss from investing activities ............................................................................................
– tax paid ...................................................................................................................................
39
39
39
Notes
Net cash generated from operating activities ................................................................................
Cash flows from investing activities
Proceeds from sale of financial investments .................................................................................
Net cash outflow from acquisition of or increase in stake of subsidiaries ...................................
Net cash from/(used in) investing activities ..................................................................................
Cash flows from financing activities
Issue of ordinary share capital .......................................................................................................
Sales of own shares to meet share awards and share option awards ............................................
Subordinated loan capital repaid ...................................................................................................
Debt securities issued ....................................................................................................................
Debt securities repaid ....................................................................................................................
Dividends paid ...............................................................................................................................
Dividends paid to holders of other equity instruments .................................................................
Net cash used in financing activities .............................................................................................
Net increase/(decrease) in cash and cash equivalents ..............................................................
Cash and cash equivalents at 1 January ........................................................................................
Cash and cash equivalents at 31 December ..................................................................................
39
2012
US$m
8,679
535
(4,011)
2,951
–
(549)
7,605
–
(1,973)
(1,973)
1,905
178
(760)
2,000
(2,420)
(5,925)
(573)
(5,595)
37
316
353
2011
US$m
5,758
77
(5,489)
(414)
570
(57)
445
941
(626)
315
96
–
(750)
5,338
–
(5,014)
(573)
(903)
(143)
459
316
The accompanying notes on pages 383 to 515 form an integral part of these financial statements1.
For footnote, see page 382.
380
HSBC Holdings statement of changes in equity for the year ended 31 December 2012
Called up
share
capital
US$m
Share
premium4
US$m
Other
equity
instru-
ments
US$m
Retained
earnings
12
US$m
Available-
for-sale
fair value
reserve
US$m
Other
paid-in
capital13
US$m
Merger
and other
reserves9
US$m
Total
share-
holders’
equity
US$m
Other reserves
At 1 January 2012 .................................
8,934
8,457
5,828
22,115
Profit for the year ..................................
Other comprehensive income
(net of tax) ........................................
Available-for-sale investments .............
Income tax ............................................
Total comprehensive income for
the year .............................................
Shares issued under employee share
–
–
–
–
–
–
–
–
–
–
plans ..................................................
119
1,812
Shares issued in lieu of dividends
and amounts arising thereon4 ...........
Dividends to shareholders10 .....................
Tax credit on distributions ....................
Own shares adjustment .........................
Exercise and lapse of share options ......
Cost of share-based payment
arrangements ....................................
Income taxes on share-based payments
Equity investments granted to
employees of subsidiaries under
employee share plans .......................
185
–
–
–
–
–
–
–
(185)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Profit for the year ..................................
Other comprehensive income
(net of tax) ........................................
Available-for-sale investments .............
Income tax ............................................
Total comprehensive income for
the year .............................................
Shares issued under employee share
plans ..................................................
Shares issued in lieu of dividends
and amounts arising thereon4 ...........
Dividends to shareholders10 .....................
Tax credit on distributions ....................
Own shares adjustment .........................
Exercise and lapse of share options ......
Cost of share-based payment
arrangements ....................................
Equity investments granted to
employees of subsidiaries under
employee share plans .......................
Other movements ..................................
–
–
–
–
–
6
85
–
–
–
–
–
–
–
–
–
–
–
–
90
(87)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
8,082
–
–
–
12
–
102
129
(27)
8,082
102
(26)
2,429
(8,042)
32
379
(219)
55
10
(108)
–
–
–
–
–
–
–
–
–
5,471
–
–
–
56
–
(44)
(61)
17
5,471
(44)
–
2,232
(7,501)
128
(265)
(127)
57
674
6
–
–
–
–
–
–
–
–
–
1,710
35,127
82,183
–
–
–
–
–
–
–
–
–
–
219
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
8,082
102
129
(27)
8,184
1,905
2,429
(8,042)
32
379
–
55
10
(108)
1,583
35,127
81,331
–
–
–
–
–
–
–
–
–
–
127
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
5,471
(44)
(61)
17
5,427
96
2,230
(7,501)
128
(265)
–
57
674
6
At 31 December 2012 ..........................
9,238
10,084
5,828
24,707
114
1,929
35,127
87,027
At 1 January 2011 .................................
8,843
8,454
5,828
21,440
At 31 December 2011 ...........................
8,934
8,457
5,828
22,115
12
1,710
35,127
82,183
Dividends per ordinary share at 31 December 2012 were US$0.41 (2011: US$0.39; 2010: US$0.34).
The accompanying notes on pages 383 to 515 form an integral part of these financial statements1.
For footnotes, see page 382.
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H S B C H O L D I N G S P L C
Financial Statements (continued)
Footnotes // Notes on the Financial Statements > 1 – Basis of preparation
Footnotes to Financial Statements
1 The ‘Critical accounting policies’ on pages 54 to 57, the audited sections of ‘Risk’ on pages 123 to 280 and the audited sections of
‘Capital’ on pages 281 to 300 are also an integral part of these financial statements.
2 Fair value gains in available-for-sale investments for 2012 include US$737m relating to the investment in Ping An classified as assets
held for sale.
3 Adjustment to bring changes between opening and closing balance sheet amounts to average rates. This is not done on a line-by-line
basis, as details cannot be determined without unreasonable expense.
4 Share premium includes a nil deduction in respect of issuance costs incurred during the year (2011: US$2m; 2010: US$1m).
5 Cumulative goodwill amounting to US$5,138m has been charged against reserves in respect of acquisitions of subsidiaries prior to
1 January 1998, including US$3,469m charged against the merger reserve arising on the acquisition of HSBC Bank plc. The balance
of US$1,669m has been charged against retained earnings.
6 Retained earnings include 86,394,826 (US$874m) of own shares held within HSBC’s Insurance business, retirement funds for the
benefit of policyholders or beneficiaries within employee trusts for the settlement of shares expected to be delivered under employee
share schemes or bonus plans, and the market-making activities in Global Markets (2011: 98,498,019 (US$1,320m); 2010:
123,331,979 (US$1,799m)).
7 The movement in reserves relating to equity-settled share-based payment arrangement is recognised in ‘Retained earnings’ in the
‘Consolidated Statement of change in equity’ with effect from 1 January 2011. Previously it was disclosed separately in a ‘Share-based
payment reserve’ within ‘Other reserves’. Comparative data have been restated accordingly. The adjustment reduced ‘Other reserves’
and increased ‘Retained earnings’ by US$1,982m at 31 December 2012 (2011: US$2,274m; 2010: US$1,755m). There was no effect on
basic or diluted earnings per share following this change.
8 Amounts transferred to the income statement in respect of cash flow hedges include US$43m gain (2011: US$104m gain; 2010:
US$605m gain) taken to ‘Net interest income’ and US$380m gain (2011: US$893m loss; 2010: US$441m loss) taken to ‘Net trading
income’.
9 Statutory share premium relief under Section 131 of the Companies Act 1985 (the ‘Act’) was taken in respect of the acquisition of
HSBC Bank plc in 1992, HSBC France in 2000 and HSBC Finance Corporation in 2003 and the shares issued were recorded at their
nominal value only. In HSBC’s consolidated financial statements the fair value differences of US$8,290m in respect of HSBC France
and US$12,768m in respect of HSBC Finance Corporation were recognised in the merger reserve. The merger reserve created on the
acquisition of HSBC Finance Corporation subsequently became attached to HSBC Overseas Holdings (UK) Limited (‘HOHU’),
following a number of intra-group reorganisations. During 2009, pursuant to Section 131 of the Companies Act 1985, statutory share
premium relief was taken in respect of the rights issue and US$15,796m was recognised in the merger reserve. The merger reserve
includes the deduction of US$614m in respect of costs relating to the rights issue, of which US$149m was subsequently transferred to
the income statement. Of this US$149m, US$121m was a loss arising from accounting for the agreement with the underwriters as a
contingent forward contract. The merger reserve excludes the loss of US$344m on a forward foreign exchange contract associated with
hedging the proceeds of the rights issue.
10 Including distributions paid on preference shares and capital securities classified as equity.
11 During June 2010, HSBC Holdings issued US$3,800m of Perpetual Subordinated Capital Securities, Series 2 (‘capital securities’) on
which there were US$82m of external issuance costs and US$23m of intra-group issuance costs which are classified as equity under
IFRSs. The capital securities are exchangeable at HSBC Holdings’ option into non-cumulative US dollar preference shares on any
coupon payment date. Interest on the captial securities is paid quarterly and may be deferred at the discretion of HSBC Holdings. The
capital securities may only be redeemed at the option of HSBC Holdings.
12 Retained earnings include 3,903,901 (US$57m) of own shares held to fund employee share plans (2011: 33,557,764 (US$563m)).
13 Other paid-in capital arises from the exercise and lapse of share options granted to employees of HSBC Holdings subsidiaries.
382
H S B C H O L D I N G S P L C
Notes on the Financial Statements
1 – Basis of preparation
1 Basis of preparation
(a) Compliance with International Financial Reporting Standards
The consolidated financial statements of HSBC and the separate financial statements of HSBC Holdings have
been prepared in accordance with International Financial Reporting Standards (‘IFRSs’) as issued by the
International Accounting Standards Board (‘IASB’) and as endorsed by the EU. EU-endorsed IFRSs may differ
from IFRSs as issued by the IASB if, at any point in time, new or amended IFRSs have not been endorsed by
the EU.
At 31 December 2012, there were no unendorsed standards effective for the year ended 31 December 2012
affecting these consolidated and separate financial statements, and there was no difference between IFRSs
endorsed by the EU and IFRSs issued by the IASB in terms of their application to HSBC. Accordingly, HSBC’s
financial statements for the year ended 31 December 2012 are prepared in accordance with IFRSs as issued by
the IASB.
IFRSs comprise accounting standards issued by the IASB and its predecessor body as well as interpretations
issued by the IFRS Interpretations Committee (‘IFRIC’) and its predecessor body.
As a result of changing market practices in response to regulatory and accounting changes, as well as general
market developments, HSBC revised its methodology for estimating the credit valuation adjustment (‘CVA’) for
derivatives at 31 December 2012. Previously, the probability of default (‘PD’) used in the CVA calculation was
based on HSBC’s internal credit rating for the counterparty taking into account how credit ratings may
deteriorate over the duration of the exposure based on historical rating transition matrices. The revised
methodology maximises the use of the PDs based on market-observable data, such as credit default swap
(‘CDS’) spreads. Where CDS spreads are not available, PDs are estimated having regard to market practice,
considering relevant data including both CDS indices and historical rating transition matrices. In addition, HSBC
aligned its methodology for estimating the debit valuation adjustment (‘DVA’) to be consistent with that applied
for CVA as at 31 December 2012. Historically, HSBC considered that a zero spread was appropriate in respect
of own credit risk and consequently did not adjust derivative liabilities for its own credit risk.
At 31 December 2012, the effect of the changes in fair value estimates as a result of the revisions to
methodology was to reduce derivative liabilities by US$518m and to reduce derivative assets by US$899m
resulting in a reduction in net trading income of US$381m. It is impracticable to estimate the effect of the
changes in fair value estimates on future periods. See Note 15 for further information on CVA and DVA
methodologies.
During 2012, HSBC adopted a number of interpretations and amendments to standards which had an
insignificant effect on the consolidated financial statements of HSBC and the separate financial statements of
HSBC Holdings.
(b) Differences between IFRSs and Hong Kong Financial Reporting Standards
There are no significant differences between IFRSs and Hong Kong Financial Reporting Standards in terms
of their application to HSBC and consequently there would be no significant differences had the financial
statements been prepared in accordance with Hong Kong Financial Reporting Standards. The Notes on the
Financial Statements, taken together with the Report of the Directors, include the aggregate of all disclosures
necessary to satisfy IFRSs and Hong Kong reporting requirements.
(c) Presentation of information
Disclosures under IFRS 4 ‘Insurance Contracts’ and IFRS 7 ‘Financial Instruments: Disclosures’ concerning the
nature and extent of risks relating to insurance contracts and financial instruments have been included in the
audited sections of the ‘Report of the Directors: Risk’ on pages 123 to 280.
Capital disclosures under IAS 1 ‘Presentation of Financial Statements’ have been included in the audited
sections of ‘Report of the Directors: Capital’ on pages 281 to 300.
Disclosures relating to HSBC’s securitisation activities and structured products have been included in the
audited section of ‘Report of the Directors: Risk’ on pages 123 to 280.
In accordance with HSBC’s policy to provide disclosures that help investors and other stakeholders understand
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Notes on the Financial Statements (continued)
1 – Basis of preparation
the Group’s performance, financial position and changes thereto, the information provided in the Notes on the
Financial Statements and the Report of the Directors goes beyond the minimum levels required by accounting
standards, statutory and regulatory requirements and listing rules. In particular, HSBC has provided additional
disclosures following the issue of the Enhanced Disclosures Task Force (‘EDTF’) report ‘Enhancing the Risk
Disclosures of Banks’ in 2012 and will further enhance its risk disclosures in 2013. The report aims to help
financial institutions identify areas that investors had highlighted needed better and more transparent information
about banks’ risks, and how these risks relate to performance measurement and reporting. The recommendations
for disclosure improvement focused on the principal risks faced by the banking industry, and included
disclosures about risk governance, capital adequacy, liquidity, funding, credit risk, market risk and other risks. In
addition, HSBC follows the British Bankers’ Association Code for Financial Reporting Disclosure (‘the BBA
Code’). The BBA Code aims to increase the quality and comparability of UK banks’ disclosures and sets out five
disclosure principles together with supporting guidance. In line with the principles of the BBA Code, HSBC
assesses good practice recommendations issued from time to time by relevant regulators and standard setters and
will assess the applicability and relevance of such guidance, enhancing disclosures where appropriate.
In publishing the parent company financial statements here together with the Group financial statements, HSBC
Holdings has taken advantage of the exemption in section 408(3) of the Companies Act 2006 not to present its
individual income statement and related notes that form a part of these financial statements.
HSBC’s consolidated financial statements are presented in US dollars which is also HSBC Holdings’ functional
currency. HSBC Holdings’ functional currency is the US dollar because the US dollar and currencies linked to
it are the most significant currencies relevant to the underlying transactions, events and conditions of its
subsidiaries, as well as representing a significant proportion of its funds generated from financing activities.
HSBC uses the US dollar as its presentation currency in its consolidated financial statements because the US
dollar and currencies linked to it form the major currency bloc in which HSBC transacts and funds its business.
(d) Use of estimates and assumptions
The preparation of financial information requires the use of estimates and assumptions about future conditions.
The use of available information and the application of judgement are inherent in the formation of estimates;
actual results in the future may differ from estimates upon which financial information is prepared. Management
believes that HSBC’s critical accounting policies where judgement is necessarily applied are those which relate
to impairment of loans and advances, goodwill impairment, the valuation of financial instruments, deferred tax
assets and provisions for liabilities. See ‘Critical accounting policies’ on pages 54 to 57, which form an integral
part of these financial statements.
Further information about key assumptions concerning the future, and other key sources of estimation
uncertainty, are set out in the Notes on the Financial Statements.
(e) Consolidation
The consolidated financial statements of HSBC comprise the financial statements of HSBC Holdings and its
subsidiaries made up to 31 December, with the exception of the banking and insurance subsidiaries of HSBC
Bank Argentina, whose financial statements are made up to 30 June annually to comply with local regulations.
Accordingly, HSBC uses their audited interim financial statements, drawn up to 31 December annually.
Subsidiaries are consolidated from the date that HSBC gains control. The acquisition method of accounting is
used when subsidiaries are acquired by HSBC. The cost of an acquisition is measured at the fair value of the
consideration, including contingent consideration, given at the date of exchange. Acquisition-related costs are
recognised as an expense in the income statement in the period in which they are incurred. The acquired
identifiable assets, liabilities and contingent liabilities are generally measured at their fair values at the date of
acquisition. Goodwill is measured as the excess of the aggregate of the consideration transferred, the amount of
non-controlling interest and the fair value of HSBC’s previously held equity interest, if any, over the net of the
amounts of the identifiable assets acquired and the liabilities assumed. The amount of non-controlling interest is
measured either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s identifiable
net assets. In a business combination achieved in stages, the previously held equity interest is remeasured at the
acquisition-date fair value with the resulting gain or loss recognised in the income statement. In the event that the
amount of net assets acquired is in excess of the aggregate of the consideration transferred, the amount of non-
controlling interest and the fair value of HSBC’s previously held equity interest, the difference is recognised
384
immediately in the income statement.
Changes in a parent’s ownership interest in a subsidiary that do not result in a loss of control are treated as
transactions between equity holders and are reported in equity.
Entities that are controlled by HSBC are consolidated until the date that control ceases.
In the context of Special Purpose Entities (‘SPE’s), the following circumstances may indicate a relationship in
which, in substance, HSBC controls and consequently consolidates an SPE:
•
the activities of the SPE are being conducted on behalf of HSBC according to its specific business needs so
that HSBC obtains benefits from the SPE’s operation;
• HSBC has the decision-making powers to obtain the majority of the benefits of the activities of the SPE or,
by setting up an ‘autopilot’ mechanism, HSBC has delegated these decision-making powers;
• HSBC has rights to obtain the majority of the benefits of the SPE and therefore may be exposed to risks
incidental to the activities of the SPE; or
• HSBC retains the majority of the residual or ownership risks related to the SPE or its assets in order to
obtain benefits from its activities.
HSBC performs a re-assessment of consolidation whenever there is a change in the substance of the relationship
between HSBC and an SPE.
All intra-HSBC transactions are eliminated on consolidation.
The consolidated financial statements of HSBC also include the attributable share of the results and reserves
of joint ventures and associates. These are based on financial statements made up to 31 December, with the
exception of BoCom, Ping An and Industrial Bank which are included on the basis of financial statements
made up for the twelve months to 30 September. These are equity accounted three months in arrears in order
to meet the requirements of the Group’s reporting timetable. HSBC takes into account the effect of significant
transactions or events that occur between the period from 1 October to 31 December that would have a material
effect on its results. As discussed further in Note 26, HSBC announced disposal of its entire shareholding in Ping
An. As a result of the disposal of the first tranche of shares on 7 December 2012, HSBC no longer had
significant influence over Ping An at 31 December 2012 and ceased to account for it as an associate.
(f) Future accounting developments
At 31 December 2012, a number of standards and amendments to standards had been issued by the IASB which
are not effective for these consolidated financial statements. In addition to the projects to complete financial
instrument accounting, the IASB is continuing to work on projects on insurance, revenue recognition and lease
accounting which, together with the standards described below, could represent significant changes to
accounting requirements in the future.
Amendments issued by the IASB
Standards applicable in 2013
In May 2011, the IASB issued IFRS 10 ‘Consolidated Financial Statements,’ IFRS 11 ‘Joint Arrangements’ and
IFRS 12 ‘Disclosure of Interests in Other Entities.’ In June 2012, the IASB issued amendments to IFRS 10, IFRS
11 and IFRS 12 ‘Transition Guidance’. The standards and amendments are effective for annual periods
beginning on or after 1 January 2013 with early adoption permitted. IFRSs 10 and 11 are required to be applied
retrospectively.
Under IFRS 10, there is one approach for determining consolidation for all entities, based on the concept
of power, variability of returns and their linkage. This replaced the approach which applies to these financial
statements which emphasises legal control or exposure to risks and rewards, depending on the nature of the
entity. IFRS 11 places more focus on the investors’ rights and obligations than on the structure of the
arrangement, and introduces the concept of a joint operation. IFRS 12 is a comprehensive standard on disclosure
requirements for all forms of interests in other entities, including for unconsolidated structured entities.
We do not expect the overall effect of IFRS 10 and IFRS 11 on the financial statements to be material.
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Notes on the Financial Statements (continued)
1 – Basis of preparation / 2 – Summary of significant accounting policies
In May 2011, the IASB also issued IFRS 13 ‘Fair Value Measurement.’ This standard is effective for annual
periods beginning on or after 1 January 2013 with early adoption permitted. IFRS 13 is required to be applied
prospectively from the beginning of the first annual period in which it is applied. The disclosure requirements of
IFRS 13 do not require comparative information to be provided for periods prior to initial application.
IFRS 13 establishes a single source of guidance for all fair value measurements required or permitted by IFRSs.
The standard clarifies the definition of fair value as an exit price, which is defined as a price at which an orderly
transaction to sell the asset or to transfer the liability would take place between market participants at the
measurement date under current market conditions, and enhances disclosures about fair value measurement.
The effect of IFRS 13 is not expected to be material to HSBC.
In June 2011, the IASB issued amendments to IAS 19 ‘Employee Benefits’ (‘IAS 19 revised’). The revised
standard is effective for annual periods beginning on or after 1 January 2013 with early adoption permitted.
IAS 19 revised is required to be applied retrospectively.
The most significant amendment for HSBC is the replacement of interest cost and expected return on plan assets
by a finance cost component comprising the net interest on the net defined benefit liability or asset. This finance
cost component is determined by applying the same discount rate used to measure the defined benefit obligation
to the net defined benefit liability or asset. The difference between the actual return on plan assets and the return
included in the finance cost component in the income statement will be presented in other comprehensive
income. The effect of this change is to increase the pension expense by the difference between the current
expected return on plan assets and the return calculated by applying the relevant discount rate.
Based on our estimate of the effect of this particular amendment on the 2012 consolidated financial statements,
the change would have an immaterial effect on pre-tax profit and total operating expenses, with no effect on the
pension liability. Therefore, the effect at the date of adoption on 1 January 2013 was not material to HSBC.
In December 2011, the IASB issued amendments to IFRS 7 ‘Disclosures – Offsetting Financial Assets and
Financial Liabilities’ which requires the disclosures about the effect or potential effects of offsetting financial
assets and financial liabilities and related arrangements on an entity’s financial position. The amendments are
effective for annual periods beginning on or after 1 January 2013 and interim periods within those annual
periods. The amendments are required to be applied retrospectively.
Standards applicable in 2014
In December 2011, the IASB issued amendments to IAS 32 ‘Offsetting Financial Assets and Financial
Liabilities’ which clarify the requirements for offsetting financial instruments and address inconsistencies
in current practice when applying the offsetting criteria in IAS 32 ‘Financial Instruments: Presentation’. The
amendments are effective for annual periods beginning on or after 1 January 2014 and are required to be applied
retrospectively.
Based on our initial assessment, we do not expect the amendments to IAS 32 to have a material effect on
HSBC’s financial statements.
In October 2012, the IASB issued amendments to IFRS 10, IFRS 12 and IAS 27 ‘Investment Entities’, which
introduced an exception to the principle that all subsidiaries shall be consolidated. The amendments require a
parent that is an investment entity to measure its investments in particular subsidiaries at fair value through
profit or loss instead of consolidating all subsidiaries in its consolidated and separate financial statements. The
amendments are effective from 1 January 2014 with early adoption permitted. Based on our initial assessment,
we do not expect the amendments to have a material effect on HSBC’s consolidated financial statements.
Standards applicable in 2015
In November 2009, the IASB issued IFRS 9 ‘Financial Instruments’ which introduced new requirements for the
classification and measurement of financial assets. In October 2010, the IASB issued an amendment to IFRS 9
incorporating requirements for financial liabilities. Together, these changes represent the first phase in the
IASB’s planned replacement of IAS 39 ‘Financial Instruments: Recognition and Measurement.’
Following the IASB’s decision in December 2011 to defer the effective date, the standard is effective for annual
periods beginning on or after 1 January 2015 with early adoption permitted. IFRS 9 is required to be applied
retrospectively but prior periods need not be restated.
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The second and third phases in the IASB’s project to replace IAS 39 will address the impairment of financial
assets and hedge accounting.
The IASB is in the process of amending the requirements for classification and measurement in IFRS 9 to
address practice and other issues.
The final IFRS 9 requirements for classification and measurement and impairment remain uncertain and so
HSBC remains unable to provide a date by which it will apply IFRS 9 as a whole and it remains impracticable
to quantify the effect of IFRS 9 as at the date of the publication of these financial statements.
EU endorsement
All the standards applicable in 2013 and 2014 have been endorsed for use in the EU, except for the amendments
to IFRS 10, IFRS 11 and IFRS 12 ‘Transition Guidance’ and the amendments to IFRS 10, IFRS 12 and IAS 27
‘Investment Entities’. Until these amendments are endorsed, the relief they provide for comparatives disclosures
in accordance with IFRS 12 will not be available for use in the EU.
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(a) Interest income and expense
Interest income and expense for all financial instruments except for those classified as held for trading or
designated at fair value (except for debt securities issued by HSBC and derivatives managed in conjunction with
those debt securities) are recognised in ‘Interest income’ and ‘Interest expense’ in the income statement using
the effective interest method. The effective interest method is a way of calculating the amortised cost of a
financial asset or a financial liability (or groups of financial assets or financial liabilities) and of allocating the
interest income or interest expense over the relevant period.
The effective interest rate is the rate that exactly discounts estimated future cash receipts or payments through
the expected life of the financial instrument or, where appropriate, a shorter period, to the net carrying amount of
the financial asset or financial liability. When calculating the effective interest rate, HSBC estimates cash flows
considering all contractual terms of the financial instrument but excluding future credit losses. The calculation
includes all amounts paid or received by HSBC that are an integral part of the effective interest rate of a financial
instrument, including transaction costs and all other premiums or discounts.
Interest on impaired financial assets is recognised using the rate of interest used to discount the future cash flows
for the purpose of measuring the impairment loss.
(b) Non-interest income
Fee income is earned from a diverse range of services provided by HSBC to its customers. Fee income is
accounted for as follows:
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income earned on the execution of a significant act is recognised as revenue when the act is completed (for
example, fees arising from negotiating, or participating in the negotiation of, a transaction for a third party,
such as an arrangement for the acquisition of shares or other securities);
income earned from the provision of services is recognised as revenue as the services are provided (for
example, asset management, portfolio and other management advisory and service fees); and
income which forms an integral part of the effective interest rate of a financial instrument is recognised as
an adjustment to the effective interest rate (for example, certain loan commitment fees) and recorded in
‘Interest income’.
Net trading income comprises all gains and losses from changes in the fair value of financial assets and
financial liabilities held for trading, together with the related interest income, expense and dividends.
Net income from financial instruments designated at fair value includes all gains and losses from changes
in the fair value of financial assets and financial liabilities designated at fair value through profit or loss. Interest
income and expense and dividend income arising on these financial instruments are also included, except for
interest arising from debt securities issued by HSBC, and derivatives managed in conjunction with those debt
securities, which is recognised in ‘Interest expense’ (Note 2a).
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Notes on the Financial Statements (continued)
2 – Summary of significant accounting policies
Dividend income is recognised when the right to receive payment is established. This is the ex-dividend date for
listed equity securities, and usually the date when shareholders have approved the dividend for unlisted equity
securities.
(c) Operating segments
Due to the nature of the Group, HSBC’s chief operating decision-maker regularly reviews operating activity on
a number of bases, including by geographical region and by global business. HSBC considers that geographical
operating segments represent the most appropriate information for the users of the financial statements to best
evaluate the nature and financial effects of the business activities in which HSBC engages, and the economic
environments in which it operates. This reflects the importance of geographic factors on business strategy and
performance, the allocation of capital resources, and the role of geographical regional management in executing
strategy. As a result, HSBC’s operating segments are considered to be geographical regions.
Measurement of segmental assets, liabilities, income and expenses is in accordance with the Group’s accounting
policies. Segmental income and expenses include transfers between segments and these transfers are conducted
on arm’s length terms and conditions. Shared costs are included in segments on the basis of the actual recharges
made. The expense of the UK bank levy is included in the Europe geographical region as HSBC regards the levy
as a cost of being headquartered in the UK.
(d) Valuation of financial instruments
All financial instruments are recognised initially at fair value. In the normal course of business, the fair value of
a financial instrument on initial recognition is the transaction price (that is, the fair value of the consideration
given or received). In certain circumstances, however, the fair value will be based on other observable current
market transactions in the same instrument, without modification or repackaging, or on a valuation technique
whose variables include only data from observable markets, such as interest rate yield curves, option volatilities
and currency rates. When such evidence exists, HSBC recognises a trading gain or loss on inception of the
financial instrument, being the difference between the transaction price and the fair value. When unobservable
market data have a significant impact on the valuation of financial instruments, the entire initial difference in
fair value from the transaction price as indicated by the valuation model is not recognised immediately in the
income statement. Instead, it is recognised over the life of the transaction on an appropriate basis, when the
inputs become observable, the transaction matures or is closed out, or when HSBC enters into an offsetting
transaction.
Subsequent to initial recognition, the fair values of financial instruments measured at fair value are measured in
accordance with HSBC’s valuation methodologies, which are described in Notes 15 and 16.
(e) Reclassification of financial assets
Non-derivative financial assets (other than those designated at fair value through profit or loss upon initial
recognition) may be reclassified out of the fair value through profit or loss category in the following
circumstances:
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financial assets that would have met the definition of loans and receivables at initial recognition (if the
financial asset had not been required to be classified as held for trading) may be reclassified out of the fair
value through profit or loss category if there is the intention and ability to hold the financial asset for the
foreseeable future or until maturity; and
financial assets (except financial assets that would have met the definition of loans and receivables at initial
recognition) may be reclassified out of the fair value through profit or loss category and into another
category in rare circumstances.
When a financial asset is reclassified as described in the above circumstances, the financial asset is reclassified at
its fair value on the date of reclassification. Any gain or loss already recognised in the income statement is not
reversed. The fair value of the financial asset on the date of reclassification becomes its new cost or amortised
cost, as applicable.
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(f) Loans and advances to banks and customers
Loans and advances to banks and customers include loans and advances originated by HSBC which are not
classified as held for trading or designated at fair value. Loans and advances are recognised when cash is
advanced to a borrower. They are derecognised when either the borrower repays its obligations, or the loans
are sold or written off, or substantially all the risks and rewards of ownership are transferred. They are initially
recorded at fair value plus any directly attributable transaction costs and are subsequently measured at amortised
cost using the effective interest method, less any reduction from impairment or uncollectibility. Where exposures
are hedged by derivatives designated and qualifying as fair value hedges, the carrying value of the loans and
advances so hedged includes a fair value adjustment relating only to the hedged risk.
Loans and advances are reclassified to ‘Assets held for sale’ when their carrying amounts are to be recovered
principally through sale, they are available for sale in their present condition and their sale is highly probable
(Note 2ac); however, such loans and advances continue to be measured in accordance with the policy described
above.
HSBC may commit to underwrite loans on fixed contractual terms for specified periods of time, where the
drawdown of the loan is contingent upon certain future events outside the control of HSBC. Where the loan
arising from the lending commitment is expected to be held for trading, the commitment to lend is recorded as
a derivative and measured at fair value through profit or loss. On drawdown, the loan is classified as held for
trading and measured at fair value through profit or loss. Where it is not HSBC’s intention to trade but hold the
loan, a provision on the loan commitment is only recorded where it is probable that HSBC will incur a loss. This
may occur, for example, where a loss of principal is probable or the interest rate charged on the loan is lower
than the cost of funding. On inception of the loan, the loan to be held is recorded at its fair value and
subsequently measured at amortised cost using the effective interest method. For certain transactions, such as
leveraged finance and syndicated lending activities, the cash advanced is not necessarily the best evidence of the
fair value of the loan. For these loans, where the initial fair value is lower than the cash amount advanced (for
example, due to the rate of interest charged on the loan being below the market rate of interest), the write-down
is charged to the income statement. The write-down will be recovered over the life of the loan, through the
recognition of interest income using the effective interest method, unless the loan becomes impaired. The write-
down is recorded as a reduction to other operating income.
Financial assets which have been reclassified into the loans and receivables category are initially recorded at the
fair value at the date of reclassification and are subsequently measured at amortised cost, using the effective
interest rate determined at the date of reclassification.
(g) Impairment of loans and advances
Losses for impaired loans are recognised promptly when there is objective evidence that impairment of a loan or
portfolio of loans has occurred. Impairment allowances are calculated on individual loans and on groups of loans
assessed collectively. Impairment losses are recorded as charges to the income statement. The carrying amount
of impaired loans on the balance sheet is reduced through the use of impairment allowance accounts. Losses
which may arise from future events are not recognised.
Individually assessed loans and advances
The factors considered in determining whether a loan is individually significant for the purposes of assessing
impairment include:
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the size of the loan;
the number of loans in the portfolio; and
the importance of the individual loan relationship, and how this is managed.
Loans that meet the above criteria will be individually assessed for impairment, except when volumes of defaults
and losses are sufficient to justify treatment under a collective assessment methodology.
Loans considered as individually significant are typically to corporate and commercial customers and are for
larger amounts, which are managed on an individual relationship basis. Retail lending portfolios are generally
assessed for impairment on a collective basis as the portfolios generally consist of large pools of homogeneous
loans.
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Notes on the Financial Statements (continued)
2 – Summary of significant accounting policies
For all loans that are considered individually significant, HSBC assesses on a case-by-case basis at each balance
sheet date whether there is any objective evidence that a loan is impaired. The criteria used by HSBC to
determine that there is such objective evidence include:
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known cash flow difficulties experienced by the borrower;
contractual payments of either principal or interest being past due for more than 90 days;
the probability that the borrower will enter bankruptcy or other financial realisation;
a concession granted to the borrower for economic or legal reasons relating to the borrower’s financial
difficulty that results in forgiveness or postponement of principal, interest or fees, where the concession is
not insignificant; and
there has been deterioration in the financial condition or outlook of the borrower such that its ability to
repay is considered doubtful.
For those loans where objective evidence of impairment exists, impairment losses are determined considering the
following factors:
– HSBC’s aggregate exposure to the customer;
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the viability of the customer’s business model and their capacity to trade successfully out of financial
difficulties and generate sufficient cash flow to service debt obligations;
the amount and timing of expected receipts and recoveries;
the likely dividend available on liquidation or bankruptcy;
the extent of other creditors’ commitments ranking ahead of, or pari passu with, HSBC and the likelihood
of other creditors continuing to support the company;
the complexity of determining the aggregate amount and ranking of all creditor claims and the extent to
which legal and insurance uncertainties are evident;
the realisable value of security (or other credit mitigants) and likelihood of successful repossession;
the likely deduction of any costs involved in recovery of amounts outstanding;
the ability of the borrower to obtain, and make payments in, the currency of the loan if not denominated in
local currency; and
– when available, the secondary market price of the debt.
The realisable value of security is determined based on the current market value when the impairment
assessment is performed. The value is not adjusted for expected future changes in market prices; however,
adjustments are made to reflect local conditions such as forced sale discounts.
Impairment losses are calculated by discounting the expected future cash flows of a loan, which includes
expected future receipts of contractual interest, at the loan’s original effective interest rate and comparing the
resultant present value with the loan’s current carrying amount. The impairment allowances on individually
significant accounts are reviewed at least quarterly and more regularly when circumstances require. This
normally encompasses re-assessment of the enforceability of any collateral held and the timing and amount of
actual and anticipated receipts. Individually assessed impairment allowances are only released when there is
reasonable and objective evidence of a reduction in the established loss estimate.
Collectively assessed loans and advances
Impairment is assessed on a collective basis in two circumstances:
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to cover losses which have been incurred but have not yet been identified on loans subject to individual
assessment; and
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for homogeneous groups of loans that are not considered individually significant.
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Incurred but not yet identified impairment
Individually assessed loans for which no evidence of impairment has been specifically identified on an
individual basis are grouped together according to their credit risk characteristics for the purpose of calculating
an estimated collective impairment. These credit risk characteristics may include country of origination, type of
business involved, type of products offered, security obtained or other relevant factors. This reflects impairment
losses that HSBC has incurred as a result of events occurring before the balance sheet date, which HSBC is not
able to identify on an individual loan basis, and that can be reliably estimated. These losses will only be
individually identified in the future. As soon as information becomes available which identifies losses on
individual loans within the group, those loans are removed from the group and assessed on an individual basis
for impairment.
The collective impairment allowance is determined after taking into account:
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historical loss experience in portfolios of similar credit risk characteristics (for example, by industry sector,
loan grade or product);
the estimated period between impairment occurring and the loss being identified and evidenced by the
establishment of an appropriate allowance against the individual loan; and
– management’s experienced judgement as to whether current economic and credit conditions are such that
the actual level of inherent losses at the balance sheet date is likely to be greater or less than that suggested
by historical experience.
The period between a loss occurring and its identification is estimated by local management for each identified
portfolio. The factors that may influence this estimation include economic and market conditions, customer
behaviour, portfolio management information, credit management techniques and collection and recovery
experiences in the market. As it is assessed empirically on a periodic basis the estimated period between a loss
occurring and its identification may vary over time as these factors change.
Homogeneous groups of loans and advances
Statistical methods are used to determine impairment losses on a collective basis for homogeneous groups of
loans that are not considered individually significant, because individual loan assessment is impracticable.
Losses in these groups of loans are recorded on an individual basis when individual loans are written off, at
which point they are removed from the group. Two alternative methods are used to calculate allowances on a
collective basis:
− When appropriate empirical information is available, HSBC utilises roll rate methodology. This
methodology employs statistical analyses of historical data and experience of delinquency and default to
estimate the amount of loans that will eventually be written off as a result of the events occurring before the
balance sheet date which HSBC is not able to identify on an individual loan basis, and that can be reliably
estimated. Under this methodology, loans are grouped into ranges according to the number of days past due
and statistical analysis is used to estimate the likelihood that loans in each range will progress through the
various stages of delinquency, and ultimately prove irrecoverable. In addition to the delinquency groupings,
loans are segmented according to their credit characteristics as described above. Current economic
conditions are also evaluated when calculating the appropriate level of allowance required to cover
inherent loss. The estimated loss is the difference between the present value of expected future cash flows,
discounted at the original effective interest rate of the portfolio, and the carrying amount of the portfolio.
In certain highly developed markets, sophisticated models also take into account behavioural and account
management trends as revealed in, for example, bankruptcy and rescheduling statistics.
− When the portfolio size is small or when information is insufficient or not reliable enough to adopt a roll
rate methodology, HSBC adopts a basic formulaic approach based on historical loss rate experience. The
period between a loss occurring and its identification is explicitly estimated by local management, and is
typically between six and twelve months.
The inherent loss within each portfolio is assessed on the basis of statistical models using historical data
observations, which are updated periodically to reflect recent portfolio and economic trends. When the most
recent trends arising from changes in economic, regulatory or behavioural conditions are not fully reflected in
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Notes on the Financial Statements (continued)
2 – Summary of significant accounting policies
the statistical models, they are taken into account by adjusting the impairment allowances derived from the
statistical models to reflect these changes as at the balance sheet date.
These additional portfolio risk factors may include recent loan portfolio growth and product mix, unemployment
rates, bankruptcy trends, geographic concentrations, loan product features (such as the ability of borrowers to
repay adjustable-rate loans where reset interest rates give rise to increases in interest charges), economic
conditions such as national and local trends in housing markets and interest rates, portfolio seasoning, account
management policies and practices, current levels of write-offs, adjustments to the period of time between loss
identification and write-off, changes in laws and regulations and other factors which can affect customer
payment patterns on outstanding loans, such as natural disasters. These risk factors, where relevant, are taken
into account when calculating the appropriate level of impairment allowances by adjusting the impairment
allowances derived solely from historical loss experience.
Roll rates, loss rates and the expected timing of future recoveries are regularly benchmarked against actual
outcomes to ensure they remain appropriate.
Write-off of loans and advances
Loans (and the related impairment allowance accounts) are normally written off, either partially or in full, when
there is no realistic prospect of recovery. Where loans are secured, this is generally after receipt of any proceeds
from the realisation of security. In circumstances where the net realisable value of any collateral has been
determined and there is no reasonable expectation of further recovery, write-off may be earlier.
Reversals of impairment
If the amount of an impairment loss decreases in a subsequent period, and the decrease can be related objectively
to an event occurring after the impairment was recognised, the excess is written back by reducing the loan
impairment allowance account accordingly. The write-back is recognised in the income statement.
Reclassified loans and advances
Where financial assets have been reclassified out of the fair value through profit or loss category to the loans and
receivables category, the effective interest rate determined at the date of reclassification is used to calculate any
impairment losses.
Following reclassification, where there is a subsequent increase in the estimates of future cash receipts as a result
of increased recoverability of those cash receipts, the effect of that increase is recognised as an adjustment to the
effective interest rate from the date of change in the estimate rather than as an adjustment to the carrying amount
of the asset at the date of change in the estimate.
Assets acquired in exchange for loans
Non-financial assets acquired in exchange for loans as part of an orderly realisation are recorded as assets held
for sale and reported in ‘Other assets’ if the carrying amounts of the assets are recovered principally through
sale, the assets are available for sale in their present condition and their sale is highly probable. The asset
acquired is recorded at the lower of its fair value less costs to sell and the carrying amount of the loan (net of
impairment allowance) at the date of exchange. No depreciation is charged in respect of assets held for sale. Any
subsequent write-down of the acquired asset to fair value less costs to sell is recognised in the income statement,
in ‘Other operating income’. Any subsequent increase in the fair value less costs to sell, to the extent this does
not exceed the cumulative write-down, is also recognised in ‘Other operating income’, together with any realised
gains or losses on disposal.
Renegotiated loans
Loans subject to collective impairment assessment whose terms have been renegotiated are no longer considered
past due, but are treated as up to date loans for measurement purposes once a minimum number of payments
required have been received. Loans subject to collective impairment assessment whose terms have been
renegotiated are segregated from other parts of the loan portfolio for the purposes of collective impairment
assessment, to reflect their risk profile. Loans subject to individual impairment assessment, whose terms have
been renegotiated, are subject to ongoing review to determine whether they remain impaired. The carrying
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amounts of loans that have been classified as renegotiated retain this classification until maturity or
derecognition.
A loan that is renegotiated is derecognised if the existing agreement is cancelled and a new agreement made on
substantially different terms, or if the terms of an existing agreement are modified, such that the renegotiated
loan is substantially a different financial instrument.
(h) Trading assets and trading liabilities
Treasury bills, debt securities, equity securities, loans, deposits, debt securities in issue, and short positions in
securities are classified as held for trading if they have been acquired or incurred principally for the purpose of
selling or repurchasing in the near term, or they form part of a portfolio of identified financial instruments that
are managed together and for which there is evidence of a recent pattern of short-term profit-taking. These
financial assets or financial liabilities are recognised on trade date, when HSBC enters into contractual
arrangements with counterparties to purchase or sell the financial instruments, and are normally derecognised
when either sold (assets) or extinguished (liabilities). Measurement is initially at fair value, with transaction costs
taken to the income statement. Subsequently, the fair values are remeasured, and gains and losses from changes
therein are recognised in the income statement in ‘Net trading income’.
(i) Financial instruments designated at fair value
Financial instruments, other than those held for trading, are classified in this category if they meet one or more of
the criteria set out below, and are so designated by management. HSBC may designate financial instruments at
fair value when the designation:
–
eliminates or significantly reduces measurement or recognition inconsistencies that would otherwise arise
from measuring financial assets or financial liabilities, or recognising gains and losses on them, on different
bases. Under this criterion, the main classes of financial instruments designated by HSBC are:
Long-term debt issues. The interest payable on certain fixed rate long-term debt securities issued has been
matched with the interest on ‘receive fixed/pay variable’ interest rate swaps as part of a documented interest
rate risk management strategy. An accounting mismatch would arise if the debt securities issued were
accounted for at amortised cost, because the related derivatives are measured at fair value with changes in
the fair value recognised in the income statement. By designating the long-term debt at fair value, the
movement in the fair value of the long-term debt will also be recognised in the income statement.
Financial assets and financial liabilities under unit-linked insurance and unit-linked investment
contracts. Liabilities to customers under linked contracts are determined based on the fair value of the
assets held in the linked funds, with changes recognised in the income statement. If no designation was
made for the assets relating to the customer liabilities they would be classified as available for sale and the
changes in fair value would be recorded in other comprehensive income. These financial instruments are
managed on a fair value basis and management information is also prepared on this basis. Designation at fair
value of the financial assets and liabilities under investment contracts allows the changes in fair values to be
recorded in the income statement and presented in the same line;
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applies to groups of financial assets, financial liabilities or combinations thereof that are managed, and their
performance evaluated, on a fair value basis in accordance with a documented risk management or
investment strategy, and where information about the groups of financial instruments is reported to
management on that basis. Under this criterion, certain financial assets held to meet liabilities under non-
linked insurance contracts are the main class of financial instrument so designated. HSBC has documented
risk management and investment strategies designed to manage such assets at fair value, taking into
consideration the relationship of assets to liabilities in a way that mitigates market risks. Reports are
provided to management on the fair value of the assets. Fair value measurement is also consistent with the
regulatory reporting requirements under the appropriate regulations for these insurance operations; and
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relates to financial instruments containing one or more embedded derivatives that significantly modify the
cash flows resulting from those financial instruments, including certain debt issues and debt securities held.
The fair value designation, once made, is irrevocable. Designated financial assets and financial liabilities are
recognised when HSBC enters into the contractual provisions of the arrangements with counterparties, which
is generally on trade date, and are normally derecognised when either sold (assets) or extinguished (liabilities).
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Notes on the Financial Statements (continued)
2 – Summary of significant accounting policies
Measurement is initially at fair value, with transaction costs taken to the income statement. Subsequently, the
fair values are remeasured, and gains and losses from changes therein are recognised in the income statement in
‘Net income from financial instruments designated at fair value’.
(j) Financial investments
Treasury bills, debt securities and equity securities intended to be held on a continuing basis, other than those
designated at fair value, are classified as available for sale or held to maturity. Financial investments are
recognised on trade date when HSBC enters into contractual arrangements with counterparties to purchase
securities, and are normally derecognised when either the securities are sold or the borrowers repay their
obligations.
(i) Available-for-sale financial assets are initially measured at fair value plus direct and incremental transaction
costs. They are subsequently remeasured at fair value, and changes therein are recognised in other
comprehensive income in ‘Available-for-sale investments – fair value gains/(losses)’ until the financial
assets are either sold or become impaired. When available-for-sale financial assets are sold, cumulative
gains or losses previously recognised in other comprehensive income are recognised in the income statement
as ‘Gains less losses from financial investments’.
Interest income is recognised on available-for-sale debt securities using the effective interest rate, calculated
over the asset’s expected life. Premiums and/or discounts arising on the purchase of dated investment
securities are included in the calculation of their effective interest rates. Dividends are recognised in the
income statement when the right to receive payment has been established.
At each balance sheet date an assessment is made of whether there is any objective evidence of impairment
in the value of a financial asset. Impairment losses are recognised if, and only if, there is objective evidence
of impairment as a result of one or more events that occurred after the initial recognition of the financial
asset (a ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the
financial asset that can be reliably estimated.
If the available-for-sale financial asset is impaired, the difference between the financial asset’s acquisition
cost (net of any principal repayments and amortisation) and the current fair value, less any previous
impairment loss recognised in the income statement, is removed from other comprehensive income and
recognised in the income statement.
Impairment losses for available-for-sale debt securities are recognised within ‘Loan impairment charges
and other credit risk provisions’ in the income statement and impairment losses for available-for-sale equity
securities are recognised within ‘Gains less losses from financial investments’ in the income statement.
The impairment methodologies for available-for-sale financial assets are set out in more detail below.
– Available-for-sale debt securities. When assessing available-for-sale debt securities for objective
evidence of impairment at the reporting date, HSBC considers all available evidence, including
observable data or information about events specifically relating to the securities which may result in a
shortfall in recovery of future cash flows. These events may include a significant financial difficulty of
the issuer, a breach of contract such as a default, bankruptcy or other financial reorganisation, or the
disappearance of an active market for the debt security because of financial difficulties relating to the
issuer.
These types of specific event and other factors such as information about the issuers’ liquidity, business
and financial risk exposures, levels of and trends in default for similar financial assets, national and
local economic trends and conditions, and the fair value of collateral and guarantees may be considered
individually, or in combination, to determine if there is objective evidence of impairment of a debt
security.
In addition, when assessing available-for-sale asset-backed securities (‘ABS’s) for objective evidence
of impairment, HSBC considers the performance of underlying collateral and the extent and depth of
market price declines. Changes in credit ratings are considered but a downgrade of a security’s credit
rating is not, of itself, evidence of impairment. The primary indicators of potential impairment are
considered to be adverse fair value movements and the disappearance of an active market for a security.
ABS impairment methodologies are described in more detail in ‘Impairment methodologies’ on
page 260.
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– Available-for-sale equity securities. Objective evidence of impairment for available-for sale equity
securities may include specific information about the issuer as detailed above, but may also include
information about significant changes in technology, markets, economics or the law that provides
evidence that the cost of the equity securities may not be recovered.
A significant or prolonged decline in the fair value of the asset below its cost is also objective evidence
of impairment. In assessing whether it is significant, the decline in fair value is evaluated against the
original cost of the asset at initial recognition. In assessing whether it is prolonged, the decline is
evaluated against the period in which the fair value of the asset has been below its original cost at initial
recognition.
Once an impairment loss has been recognised on an available-for-sale financial asset, the subsequent
accounting treatment for changes in the fair value of that asset differs depending on the nature of the
available-for-sale financial asset concerned:
–
–
for an available-for-sale debt security, a subsequent decline in the fair value of the instrument is
recognised in the income statement when there is further objective evidence of impairment as a result
of further decreases in the estimated future cash flows of the financial asset. Where there is no further
objective evidence of impairment, the decline in the fair value of the financial asset is recognised in
other comprehensive income. If the fair value of a debt security increases in a subsequent period, and
the increase can be objectively related to an event occurring after the impairment loss was recognised in
the income statement, the impairment loss is reversed through the income statement. If there is no
longer objective evidence that the debt security is impaired, the impairment loss is also reversed through
the income statement;
for an available-for-sale equity security, all subsequent increases in the fair value of the instrument
are treated as a revaluation and are recognised in other comprehensive income. Impairment losses
recognised on the equity security are not reversed through the income statement. Subsequent decreases
in the fair value of the available-for-sale equity security are recognised in the income statement, to the
extent that further cumulative impairment losses have been incurred in relation to the acquisition cost
of the equity security.
(ii) Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and
fixed maturities that HSBC positively intends, and is able, to hold to maturity. Held-to-maturity investments
are initially recorded at fair value plus any directly attributable transaction costs, and are subsequently
measured at amortised cost using the effective interest rate method, less any impairment losses.
(k) Sale and repurchase agreements (including stock lending and borrowing)
When securities are sold subject to a commitment to repurchase them at a predetermined price (‘repos’), they
remain on the balance sheet and a liability is recorded in respect of the consideration received. Securities
purchased under commitments to sell (‘reverse repos’) are not recognised on the balance sheet and the
consideration paid is recorded in ‘Loans and advances to banks’, ‘Loans and advances to customers’ or ‘Trading
assets’ as appropriate. The difference between the sale and repurchase price is treated as interest and recognised
over the life of the agreement for loans and advances to banks and customers, and as net trading income for
trading assets.
Securities lending and borrowing transactions are generally secured, with collateral taking the form of securities
or cash advanced or received. The transfer of securities to counterparties under these agreements is not normally
reflected on the balance sheet. Cash collateral advanced or received is recorded as an asset or a liability
respectively.
Securities borrowed are not recognised on the balance sheet. If they are sold on to third parties, an obligation to
return the securities is recorded as a trading liability and measured at fair value, and any gains or losses are
included in ‘Net trading income’.
(l) Derivatives and hedge accounting
Derivatives are recognised initially, and are subsequently remeasured, at fair value. Fair values of exchange-
traded derivatives are obtained from quoted market prices. Fair values of over-the-counter derivatives are
obtained using valuation techniques, including discounted cash flow models and option pricing models.
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Notes on the Financial Statements (continued)
2 – Summary of significant accounting policies
Derivatives may be embedded in other financial instruments, for example, a convertible bond with an embedded
conversion option. Embedded derivatives are treated as separate derivatives when their economic characteristics
and risks are not clearly and closely related to those of the host contract; the terms of the embedded derivative
would meet the definition of a stand-alone derivative if they were contained in a separate contract; and the
combined contract is not held for trading or designated at fair value. These embedded derivatives are measured
at fair value with changes therein recognised in the income statement.
Derivatives are classified as assets when their fair value is positive, or as liabilities when their fair value is
negative. Derivative assets and liabilities arising from different transactions are only offset if the transactions
are with the same counterparty, a legal right of offset exists, and the parties intend to settle the cash flows on a
net basis.
The method of recognising fair value gains and losses depends on whether derivatives are held for trading or are
designated as hedging instruments, and if the latter, the nature of the risks being hedged. All gains and losses
from changes in the fair value of derivatives held for trading are recognised in the income statement. When
derivatives are designated as hedges, HSBC classifies them as either: (i) hedges of the change in fair value of
recognised assets or liabilities or firm commitments (‘fair value hedges’); (ii) hedges of the variability in highly
probable future cash flows attributable to a recognised asset or liability, or a forecast transaction (‘cash flow
hedges’); or (iii) a hedge of a net investment in a foreign operation (‘net investment hedges’). Hedge accounting
is applied to derivatives designated as hedging instruments in a fair value, cash flow or net investment hedge
provided certain criteria are met.
Hedge accounting
At the inception of a hedging relationship, HSBC documents the relationship between the hedging instruments
and the hedged items, its risk management objective and its strategy for undertaking the hedge. HSBC also
requires a documented assessment, both at hedge inception and on an ongoing basis, of whether or not the
hedging instruments, primarily derivatives, that are used in hedging transactions are highly effective in offsetting
the changes attributable to the hedged risks in the fair values or cash flows of the hedged items. Interest on
designated qualifying hedges is included in ‘Net interest income’.
Fair value hedge
Changes in the fair value of derivatives that are designated and qualify as fair value hedging instruments are
recorded in the income statement, along with changes in the fair value of the hedged assets, liabilities or group
thereof that are attributable to the hedged risk.
If a hedging relationship no longer meets the criteria for hedge accounting, the cumulative adjustment to the
carrying amount of the hedged item is amortised to the income statement based on a recalculated effective
interest rate over the residual period to maturity, unless the hedged item has been derecognised, in which case,
it is released to the income statement immediately.
Cash flow hedge
The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow
hedges is recognised in other comprehensive income within ‘Cash flow hedges – fair value gains/(losses)’. Any
gain or loss in fair value relating to an ineffective portion is recognised immediately in the income statement.
The accumulated gains and losses recognised in other comprehensive income are reclassified to the income
statement in the periods in which the hedged item will affect profit or loss. However, when the forecast
transaction that is hedged results in the recognition of a non-financial asset or a non-financial liability, the gains
and losses previously recognised in other comprehensive income are removed from equity and included in the
initial measurement of the cost of the asset or liability.
When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting,
any cumulative gain or loss recognised in other comprehensive income at that time remains in equity until the
forecast transaction is eventually recognised in the income statement. When a forecast transaction is no longer
expected to occur, the cumulative gain or loss that was recognised in other comprehensive income is
immediately reclassified to the income statement.
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Net investment hedge
Hedges of net investments in foreign operations are accounted for in a similar way to cash flow hedges. A gain
or loss on the effective portion of the hedging instrument is recognised in other comprehensive income; a gain or
loss on the ineffective portion is recognised immediately in the income statement. Gains and losses previously
recognised in other comprehensive income are reclassified to the income statement on the disposal, or part
disposal, of the foreign operation.
Hedge effectiveness testing
To qualify for hedge accounting, HSBC requires that at the inception of the hedge and throughout its life, each
hedge must be expected to be highly effective (prospective effectiveness), and demonstrate actual effectiveness
(retrospective effectiveness) on an ongoing basis.
The documentation of each hedging relationship sets out how the effectiveness of the hedge is assessed. The
method adopted by an entity to assess hedge effectiveness will depend on its risk management strategy.
For prospective effectiveness, the hedging instrument must be expected to be highly effective in offsetting
changes in fair value or cash flows attributable to the hedged risk during the period for which the hedge is
designated. For actual effectiveness to be achieved, the changes in fair value or cash flows must offset each
other in the range of 80% to 125%.
Hedge ineffectiveness is recognised in the income statement in ‘Net trading income’.
Derivatives that do not qualify for hedge accounting
All gains and losses from changes in the fair values of derivatives that do not qualify for hedge accounting are
recognised immediately in the income statement. These gains and losses are reported in ‘Net trading income’,
except where derivatives are managed in conjunction with financial instruments designated at fair value (other
than derivatives managed in conjunction with debt securities issued by HSBC), in which case gains and losses
are reported in ‘Net income from financial instruments designated at fair value’. The interest on derivatives
managed in conjunction with debt securities issued by HSBC which are designated at fair value is recognised in
‘Interest expense’. All other gains and losses on these derivatives are reported in ‘Net income from financial
instruments designated at fair value’.
Derivatives that do not qualify for hedge accounting include non-qualifying hedges entered into as part of
documented interest rate management strategies for which hedge accounting was not, or could not, be applied.
The size and direction of changes in fair value of non-qualifying hedges can be volatile from year to year, but do
not alter the cash flows expected as part of the documented management strategies for both the non-qualifying
hedge instruments and the assets and liabilities to which the documented interest rate strategies relate. Non-
qualifying hedges therefore operate as economic hedges of the related assets and liabilities.
(m) Derecognition of financial assets and liabilities
Financial assets are derecognised when the contractual right to receive cash flows from the assets has expired; or
when HSBC has transferred its contractual right to receive the cash flows of the financial assets, and either:
–
substantially all the risks and rewards of ownership have been transferred; or
– HSBC has neither retained nor transferred substantially all the risks and rewards, but has not retained
control.
Financial liabilities are derecognised when they are extinguished, that is when the obligation is discharged,
cancelled, or expires.
(n) Offsetting financial assets and financial liabilities
Financial assets and financial liabilities are offset and the net amount is reported in the balance sheet when there
is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or
realise the asset and settle the liability simultaneously.
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Notes on the Financial Statements (continued)
2 – Summary of significant accounting policies
(o) Subsidiaries, associates and joint ventures
HSBC classifies investments in entities which it controls as subsidiaries. Where HSBC is a party to a contractual
arrangement whereby, together with one or more parties, it undertakes an economic activity that is subject to
joint control, HSBC classifies its interest in the venture as a joint venture. HSBC classifies investments in
entities over which it has significant influence, and that are neither subsidiaries nor joint ventures, as associates.
For the purpose of determining this classification, control is considered to be the power to govern the financial
and operating policies of an entity so as to obtain benefits from its activities.
HSBC Holdings’ investments in subsidiaries are stated at cost less any impairment losses. An impairment loss
recognised in prior periods shall be reversed through the income statement if, and only if, there has been a
change in the estimates used to determine the recoverable amount of the investment in subsidiary since the last
impairment loss was recognised.
Investments in associates and interests in joint ventures are recognised using the equity method. Under this
method, such investments are initially stated at cost, including attributable goodwill, and are adjusted thereafter
for the post-acquisition change in HSBC’s share of net assets.
(p) Goodwill and intangible assets
(i) Goodwill arises on the acquisition of subsidiaries, when the aggregate of the fair value of the consideration
transferred, the amount of any non-controlling interest and the fair value of any previously held equity
interest in the acquiree exceed the amount of the identifiable assets and liabilities acquired. If the amount
of the identifiable assets and liabilities acquired is greater, the difference is recognised immediately in the
income statement. Goodwill arises on the acquisition of interests in joint ventures and associates when the
cost of investment exceeds HSBC’s share of the net fair value of the associate’s or joint venture’s
identifiable assets and liabilities.
Intangible assets are recognised separately from goodwill when they are separable or arise from contractual
or other legal rights, and their fair value can be measured reliably.
Goodwill is allocated to cash-generating units (‘CGU’) for the purpose of impairment testing, which is
undertaken at the lowest level at which goodwill is monitored for internal management purposes. HSBC’s
cash-generating units are based on geographical regions subdivided by global business. Impairment testing
is performed at least annually, and whenever there is an indication that the CGU may be impaired, by
comparing the recoverable amount of a CGU with its carrying amount. The carrying amount of a CGU is
based on the assets and liabilities of each CGU, including attributable goodwill. The recoverable amount of
an asset is the higher of its fair value less cost to sell, and its value in use. Value in use is the present value
of the expected future cash flows from a cash-generating unit. If the recoverable amount is less than the
carrying value, an impairment loss is charged to the income statement. Goodwill is stated at cost less
accumulated impairment losses.
Goodwill on acquisitions of interests in joint ventures and associates is included in ‘Interests in associates
and joint ventures’ and is not tested separately for impairment.
At the date of disposal of a business, attributable goodwill is included in HSBC’s share of net assets in the
calculation of the gain or loss on disposal.
Goodwill is included in a disposal group if the disposal group is a CGU to which goodwill has been
allocated or it is an operation within such a CGU. The amount of goodwill included in a disposal group is
measured on the basis of the relative values of the operation disposed of and the portion of the CGU
retained.
(ii) Intangible assets include the present value of in-force long-term insurance business, computer software,
trade names, mortgage servicing rights, customer lists, core deposit relationships, credit card customer
relationships and merchant or other loan relationships. Computer software includes both purchased and
internally generated software. The cost of internally generated software comprises all directly attributable
costs necessary to create, produce and prepare the software to be capable of operating in the manner
intended by management. Costs incurred in the ongoing maintenance of software are expensed immediately
as incurred.
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Intangible assets are subject to impairment review if there are events or changes in circumstances that
indicate that the carrying amount may not be recoverable. Where:
–
–
intangible assets have an indefinite useful life, or are not yet ready for use, they are tested for
impairment annually. This impairment test may be performed at any time during the year, provided it is
performed at the same time every year. An intangible asset recognised during the current period is
tested before the end of the current year; and
intangible assets have a finite useful life, except for the present value of in-force long-term insurance
business, they are stated at cost less amortisation and accumulated impairment losses and are amortised
over their estimated useful lives. Estimated useful life is the lower of legal duration and expected useful
life. The amortisation of mortgage servicing rights is included within ‘Net fee income’.
For the accounting policy governing the present value of in-force long-term insurance business (see
Note 2y).
(iii) Intangible assets with finite useful lives are amortised, generally on a straight-line basis, over their useful
lives as follows:
Trade names ............................................................................................................................
Mortgage servicing rights .......................................................................................................
Internally generated software ..................................................................................................
Purchased software ..................................................................................................................
Customer/merchant relationships ............................................................................................
Other ........................................................................................................................................
10 years
generally between 5 and 12 years
between 3 and 5 years
between 3 and 5 years
between 3 and 10 years
generally 10 years
(q) Property, plant and equipment
Land and buildings are stated at historical cost, or fair value at the date of transition to IFRSs (‘deemed cost’),
less any impairment losses and depreciation calculated to write-off the assets over their estimated useful lives as
follows:
–
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freehold land is not depreciated;
freehold buildings are depreciated at the greater of 2% per annum on a straight-line basis or over their
remaining useful lives; and
leasehold land and buildings are depreciated over the shorter of their unexpired terms of the leases or their
remaining useful lives.
Equipment, fixtures and fittings (including equipment on operating leases where HSBC is the lessor) are stated
at cost less any impairment losses and depreciation, is calculated on a straight-line basis to write-off the assets
over their useful lives, which run to a maximum of 35 years but are generally between 5 years and 20 years.
Property, plant and equipment is subject to an impairment review if there are events or changes in circumstances
which indicate that the carrying amount may not be recoverable.
HSBC holds certain properties as investments to earn rentals or for capital appreciation, or both. Investment
properties are included in the balance sheet at fair value with changes in fair value recognised in the income
statement. Fair values are determined by independent professional valuers who apply recognised valuation
techniques.
(r) Finance and operating leases
Agreements which transfer to counterparties substantially all the risks and rewards incidental to the ownership of
assets, but not necessarily legal title, are classified as finance leases. When HSBC is a lessor under finance leases
the amounts due under the leases, after deduction of unearned charges, are included in ‘Loans and advances to
banks’ or ‘Loans and advances to customers’, as appropriate. The finance income receivable is recognised in
‘Net interest income’ over the periods of the leases so as to give a constant rate of return on the net investment
in the leases.
When HSBC is a lessee under finance leases, the leased assets are capitalised and included in ‘Property, plant
and equipment’ and the corresponding liability to the lessor is included in ‘Other liabilities’. A finance lease and
its corresponding liability are recognised initially at the fair value of the asset or, if lower, the present value of
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Notes on the Financial Statements (continued)
2 – Summary of significant accounting policies
the minimum lease payments. Finance charges payable are recognised in ‘Net interest income’ over the period of
the lease based on the interest rate implicit in the lease so as to give a constant rate of interest on the remaining
balance of the liability.
All other leases are classified as operating leases. When acting as lessor, HSBC includes the assets subject to
operating leases in ‘Property, plant and equipment’ and accounts for them accordingly. Impairment losses are
recognised to the extent that residual values are not fully recoverable and the carrying value of the assets is
thereby impaired. When HSBC is the lessee, leased assets are not recognised on the balance sheet. Rentals
payable and receivable under operating leases are accounted for on a straight-line basis over the periods of the
leases and are included in ‘General and administrative expenses’ and ‘Other operating income’, respectively.
(s) Income tax
Income tax comprises current tax and deferred tax. Income tax is recognised in the income statement except to
the extent that it relates to items recognised in other comprehensive income or directly in equity, in which case it
is recognised in the same statement in which the related item appears.
Current tax is the tax expected to be payable on the taxable profit for the year, calculated using tax rates enacted
or substantively enacted by the balance sheet date, and any adjustment to tax payable in respect of previous
years. HSBC provides for potential current tax liabilities that may arise on the basis of the amounts expected to
be paid to the tax authorities. Current tax assets and liabilities are offset when HSBC intends to settle on a net
basis and the legal right to offset exists.
Deferred tax is recognised on temporary differences between the carrying amounts of assets and liabilities in the
balance sheet and the amounts attributed to such assets and liabilities for tax purposes. Deferred tax liabilities are
generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent
that it is probable that future taxable profits will be available against which deductible temporary differences can
be utilised.
Deferred tax is calculated using the tax rates expected to apply in the periods in which the assets will be realised
or the liabilities settled, based on tax rates and laws enacted, or substantively enacted, by the balance sheet date.
Deferred tax assets and liabilities are offset when they arise in the same tax reporting group and relate to income
taxes levied by the same taxation authority, and when HSBC has a legal right to offset.
Deferred tax relating to actuarial gains and losses on post-employment benefits is recognised in other
comprehensive income. Deferred tax relating to share-based payment transactions is recognised directly in
equity to the extent that the amount of the estimated future tax deduction exceeds the amount of the related
cumulative remuneration expense. Deferred tax relating to fair value re-measurements of available-for-sale
investments and cash flow hedging instruments which are charged or credited directly to other comprehensive
income, is also charged or credited to other comprehensive income and is subsequently recognised in the income
statement when the deferred fair value gain or loss is recognised in the income statement.
(t) Pension and other post-employment benefits
HSBC operates a number of pension and other post-employment benefit plans throughout the world. These plans
include both defined benefit and defined contribution plans and various other post-employment benefits such as
post-employment healthcare.
Payments to defined contribution plans and state-managed retirement benefit plans, where HSBC’s obligations
under the plans are equivalent to a defined contribution plan, are charged as an expense as the employees render
service.
The defined benefit pension costs and the present value of defined benefit obligations are calculated at the
reporting date by the schemes’ actuaries using the Projected Unit Credit Method. The net charge to the income
statement mainly comprises the current service cost, plus the unwinding of the discount rate on plan liabilities,
less the expected return on plan assets, and is presented in operating expenses. Past service costs are charged
immediately to the income statement to the extent that the benefits have vested, and are otherwise recognised
on a straight-line basis over the average period until the benefits vest. Actuarial gains and losses comprise
experience adjustments (the effects of differences between the previous actuarial assumptions and what has
actually occurred), as well as the effects of changes in actuarial assumptions. Actuarial gains and losses are
recognised in other comprehensive income in the period in which they arise.
400
The defined benefit liability recognised in the balance sheet represents the present value of defined benefit
obligations adjusted for unrecognised past service costs and reduced by the fair value of plan assets. Any net
defined benefit surplus is limited to unrecognised past service costs plus the present value of available refunds
and reductions in future contributions to the plan.
The cost of obligations arising from other post-employment defined benefit plans, such as defined benefit health-
care plans, are accounted for on the same basis as defined benefit pension plans.
(u) Share-based payments
HSBC enters into both equity-settled and cash-settled share-based payment arrangements with its employees as
compensation for services provided by employees. Equity-settled share-based payment arrangements entitle
employees to receive equity instruments of HSBC. Cash-settled share-based payment arrangements entitle
employees to receive cash or other assets based on the price or value of the equity instruments of HSBC.
The cost of equity-settled share-based payment arrangements with employees is measured by reference to the
fair value of equity instruments on the date they are granted and recognised as an expense on a straight-line basis
over the vesting period, with a corresponding credit to ‘Retained earnings’. The vesting period is the period
during which all the specified vesting conditions of the arrangement are to be satisfied. The fair value of equity
instruments that are made available immediately, with no vesting period attached to the award, are expensed
immediately.
For cash-settled share-based payment arrangements, the services acquired and liability incurred are measured at
the fair value of the liability, as the employees render service. Until settlement, the fair value of the liability is
remeasured, with changes in fair value recognised in the income statement.
Fair value is determined by using appropriate valuation models, taking into account the terms and conditions of
the award. Vesting conditions include service conditions and performance conditions; any other features of the
arrangement are non-vesting conditions. Market performance conditions and non-vesting conditions are taken
into account when estimating the fair value of the award at the date of grant, so that an award is treated as
vesting irrespective of whether these conditions are satisfied, provided all other vesting conditions are satisfied.
Vesting conditions, other than market performance conditions, are not taken into account in the initial estimate
of the fair value at the grant date. They are taken into account by adjusting the number of equity instruments
included in the measurement of the transaction, so that the amount recognised for services received as
consideration for the equity instruments granted shall be based on the number of equity instruments that
eventually vest. On a cumulative basis, no expense is recognised for equity instruments that do not vest because
of a failure to satisfy non-market performance or service conditions.
Where an award has been modified, as a minimum, the expense of the original award continues to be recognised
as if it had not been modified. Where the effect of a modification is to increase the fair value of an award or
increase the number of equity instruments, the incremental fair value of the award of the extra equity instruments
is recognised in addition to the expense of the original grant, measured at the date of modification, over the
modified vesting period.
A cancellation that occurs during the vesting period is treated as an acceleration of vesting, and recognised
immediately for the amount that would otherwise have been recognised for services over the vesting period.
Where HSBC Holdings enters into share-based payment arrangements involving employees of subsidiaries,
the cost is recognised in ‘Investment in subsidiaries’ and credited to the ‘Retained earnings’ over the vesting
period. When a subsidiary funds the share-based payment arrangement, ‘Investment in subsidiaries’ is reduced
by the fair value of the equity instruments.
(v) Foreign currencies
Items included in the financial statements of each of HSBC’s entities are measured using the currency of the
primary economic environment in which the entity operates (‘the functional currency’). HSBC’s consolidated
financial statements are presented in US dollars which is also HSBC Holdings’ functional currency.
Transactions in foreign currencies are recorded in the functional currency at the rate of exchange prevailing on
the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated into
the functional currency at the rate of exchange ruling at the balance sheet date. Any resulting exchange
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H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
2 – Summary of significant accounting policies
differences are included in the income statement. Non-monetary assets and liabilities that are measured at
historical cost in a foreign currency are translated into the functional currency using the rate of exchange at the
date of the initial transaction. Non-monetary assets and liabilities measured at fair value in a foreign currency are
translated into the functional currency using the rate of exchange at the date the fair value was determined. Any
exchange component of a gain or loss on a non-monetary item is recognised in other comprehensive income if
the gain or loss on the non-monetary item is recognised in other comprehensive income. Any exchange
component of a gain or loss on a non-monetary item is recognised in the income statement if the gain or loss
on the non-monetary item is recognised in the income statement.
In the consolidated financial statements, the assets, including related goodwill where applicable, and liabilities of
branches, subsidiaries, joint ventures and associates whose functional currency is not US dollars, are translated
into the Group’s presentation currency at the rate of exchange ruling at the balance sheet date. The results of
branches, subsidiaries, joint ventures and associates whose functional currency is not US dollars are translated
into US dollars at the average rates of exchange for the reporting period. Exchange differences arising from the
retranslation of opening foreign currency net assets, and exchange differences arising from retranslation of the
result for the reporting period from the average rate to the exchange rate prevailing at the period end, are
recognised in other comprehensive income. Exchange differences on a monetary item that is part of a net
investment in a foreign operation are recognised in the income statement of the separate financial statements.
In consolidated financial statements these exchange differences are recognised in other comprehensive income.
On disposal of a foreign operation, exchange differences relating thereto and previously recognised in other
comprehensive income are reclassified to the income statement as a reclassification adjustment when the gain
or loss on disposal is recognised.
(w) Provisions
Provisions are recognised when it is probable that an outflow of economic benefits will be required to settle a
current legal or constructive obligation, which has arisen as a result of past events, and for which a reliable
estimate can be made of the amount of the obligation.
Contingent liabilities, which include certain guarantees and letters of credit pledged as collateral security, are
possible obligations that arise from past events whose existence will be confirmed only by the occurrence, or
non-occurrence, of one or more uncertain future events not wholly within the control of HSBC; or are present
obligations that have arisen from past events but are not recognised because it is not probable that settlement will
require the outflow of economic benefits, or because the amount of the obligations cannot be reliably measured.
Contingent liabilities are not recognised in the financial statements but are disclosed unless the probability of
settlement is remote.
(x) Financial guarantee contracts
Liabilities under financial guarantee contracts which are not classified as insurance contracts are recorded
initially at their fair value, which is generally the fee received or receivable. Subsequently, financial guarantee
liabilities are measured at the higher of the initial fair value, less cumulative amortisation, and the best estimate
of the expenditure required to settle the obligations.
HSBC Holdings has issued financial guarantees and similar contracts to other Group entities. Where it has
previously asserted explicitly that it regards such contracts as insurance contracts and has used accounting
applicable to insurance contracts, HSBC may elect to account for guarantees as an insurance contract in HSBC
Holdings’ financial statements. This election is made on a contract by contract basis, but the election for each
contract is irrevocable. Where these guarantees have been classified as insurance contracts, they are measured
and recognised as insurance liabilities.
(y) Insurance contracts
Through its insurance subsidiaries, HSBC issues contracts to customers that contain insurance risk, financial risk
or a combination thereof. A contract under which HSBC accepts significant insurance risk from another party by
agreeing to compensate that party on the occurrence of a specified uncertain future event, is classified as an
insurance contract. An insurance contract may also transfer financial risk, but is accounted for as an insurance
contract if the insurance risk is significant.
402
While investment contracts with discretionary participation features are financial instruments, they continue to
be treated as insurance contracts as permitted by IFRS 4.
Insurance premiums
Premiums for life insurance contracts are accounted for when receivable, except in unit-linked insurance
contracts where premiums are accounted for when liabilities are established.
Gross insurance premiums for non-life insurance business are reported as income over the term of the insurance
contracts based on the proportion of risks borne during the accounting period. The unearned premium (the
proportion of the business underwritten in the accounting year relating to the period of risk after the balance
sheet date) is calculated on a daily or monthly pro rata basis.
Reinsurance premiums are accounted for in the same accounting period as the premiums for the direct insurance
contracts to which they relate.
Insurance claims and reinsurance recoveries
Gross insurance claims for life insurance contracts reflect the total cost of claims arising during the year,
including claim handling costs and any policyholder bonuses allocated in anticipation of a bonus declaration.
Claims arising during the year include maturities, surrenders and death claims.
Maturity claims are recognised when due for payment. Surrenders are recognised when paid or at an earlier date
on which, following notification, the policy ceases to be included within the calculation of the related insurance
liabilities. Death claims are recognised when notified.
Gross insurance claims for non-life insurance contracts include paid claims and movements in outstanding
claims liabilities.
Reinsurance recoveries are accounted for in the same period as the related claim.
Liabilities under insurance contracts
Liabilities under non-linked life insurance contracts are calculated by each life insurance operation based on
local actuarial principles. Liabilities under unit-linked life insurance contracts are at least equivalent to the
surrender or transfer value which is calculated by reference to the value of the relevant underlying funds or
indices.
Outstanding claims liabilities for non-life insurance contracts are based on the estimated ultimate cost of all
claims incurred but not settled at the balance sheet date, whether reported or not, together with related claim-
handling costs and a reduction for the expected value of salvage and other recoveries. Liabilities for claims
incurred but not reported are made on an estimated basis, using appropriate statistical techniques.
A liability adequacy test is carried out on insurance liabilities to ensure that the carrying amount of the liabilities
is sufficient in the light of current estimates of future cash flows. When performing the liability adequacy test, all
contractual cash flows are discounted and compared with the carrying value of the liability. When a shortfall is
identified it is charged immediately to the income statement.
Future profit participation on insurance contracts with discretionary participation features
Where contracts provide discretionary profit participation benefits to policyholders, liabilities for these contracts
include provisions for the future discretionary benefits to policyholders. These provisions reflect actual
performance of the investment portfolio to date and management expectation on the future performance in
connection with the assets backing the contracts, as well as other experience factors such as mortality, lapses
and operational efficiency, where appropriate. This benefit may arise from the contractual terms, regulation, or
past distribution policy.
Investment contracts
Unit-linked and non-linked
Customer liabilities under linked and certain non-linked investment contracts and the corresponding financial
assets are designated at fair value. Movements in fair value are recognised in ‘Net income from financial
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Notes on the Financial Statements (continued)
2 – Summary of significant accounting policies
investments designated at fair value’. Premiums receivable and amounts withdrawn are accounted for as
increases or decreases in the liability recorded in respect of investment contracts.
Liabilities under linked investment contracts are at least equivalent to the surrender or transfer value which is
calculated by reference to the value of the relevant underlying funds or indices.
Investment management fees receivable are recognised in the income statement over the period of the provision
of the investment management services, in ‘Net fee income’.
The incremental costs directly related to the acquisition of new investment contracts or renewing existing
investment contracts are deferred and amortised over the period during which the investment management
services are provided.
Investment contracts with discretionary participation features
While investment contracts with discretionary participation features are financial instruments, they continue to
be treated as insurance contracts as permitted by IFRS 4. The Group therefore recognises the premiums for those
contracts as revenue and recognises as an expense the resulting increase in the carrying amount of the liability.
In the case of net unrealised investment gains on these contracts, whose discretionary benefits principally reflect
the actual performance of the investment portfolio, the corresponding increase in the liabilities is recognised in
either the income statement or other comprehensive income, following the treatment of the unrealised gains on
the relevant assets. In the case of net unrealised losses, a deferred participating asset is recognised only to the
extent that its recoverability is highly probable. Movements in the liabilities arising from realised gains and
losses on relevant assets are recognised in the income statement.
Present value of in-force long-term insurance business
The value placed on insurance contracts that are classified as long-term insurance business or long-term
investment contracts with discretionary participating features (‘DPF’) and are in force at the balance sheet date
is recognised as an asset. The asset represents the present value of the equity holders’ interest in the issuing
insurance companies’ profits expected to emerge from these contracts written at the balance sheet date.
The present value of in-force long-term insurance business and long-term investment contracts with DPF,
referred to as ‘PVIF’, is determined by discounting the equity holders’ interest in future profits expected to
emerge from business currently in force using appropriate assumptions in assessing factors such as future
mortality, lapse rates and levels of expenses, and a risk discount rate that reflects the risk premium attributable to
the respective contracts. The PVIF incorporates allowances for both non-market risk and the value of financial
options and guarantees. The PVIF asset is presented gross of attributable tax in the balance sheet and movements
in the PVIF asset are included in ‘Other operating income’ on a gross of tax basis.
(z) Debt securities issued and deposits by customers and banks
Financial liabilities are recognised when HSBC enters into the contractual provisions of the arrangements with
counterparties, which is generally on trade date, and initially measured at fair value, which is normally the
consideration received, net of directly attributable transaction costs incurred. Subsequent measurement of
financial liabilities, other than those measured at fair value through profit or loss and financial guarantees, is
at amortised cost, using the effective interest method to amortise the difference between proceeds received, net
of directly attributable transaction costs incurred, and the redemption amount over the expected life of the
instrument.
(aa) Share capital
Shares are classified as equity when there is no contractual obligation to transfer cash or other financial assets.
Incremental costs directly attributable to the issue of equity instruments are shown in equity as a deduction from
the proceeds, net of tax.
HSBC Holdings plc shares held by HSBC are recognised in equity as a deduction from retained earnings until
they are cancelled. When such shares are subsequently sold, reissued or otherwise disposed of, any consideration
received is included in equity, net of any directly attributable incremental transaction costs and related income
tax effects.
404
(ab) Cash and cash equivalents
For the purpose of the statement of cash flows, cash and cash equivalents include highly liquid investments that
are readily convertible to known amounts of cash and which are subject to an insignificant risk of change in
value. Such investments are normally those with less than three months’ maturity from the date of acquisition.
Cash and cash equivalents include cash and balances at central banks, treasury bills and other eligible bills, loans
and advances to banks, items in the course of collection from or in transmission to other banks, and certificates
of deposit.
(ac) Assets held for sale
Non-current assets and disposal groups (including both the assets and liabilities of the disposal groups) are
classified as held for sale when their carrying amounts will be recovered principally through sale, they are
available for sale in their present condition and their sale is highly probable. Non-current assets held for sale
and disposal groups are measured at the lower of their carrying amount and fair value less cost to sell, except
for those assets and liabilities that are not within the scope of the measurement requirements of IFRS 5
‘Non-current Assets Held for Sale and Discontinued Operations’ such as deferred taxes, financial instruments,
investment properties, insurance contracts and assets and liabilities arising from employee benefits. These are
measured in accordance with the accounting policies described above. Immediately before the initial
classification as held for sale, the carrying amounts of the asset (or assets and liabilities in the disposal group) are
measured in accordance with applicable IFRSs. On subsequent remeasurement of a disposal group, the carrying
amounts of the assets and liabilities noted above that are not within the scope of the measurement requirements
of IFRS 5 are remeasured in accordance with applicable IFRSs before the fair value less costs to sell of the
disposal group is determined.
Income earned and expenses incurred on assets held for sale and liabilities of disposal groups held for sale
continue to be recognised in the appropriate line items in the income statement until the transaction is complete.
Loan impairment charges incurred on assets held for sale continue to be recognised in ‘Loan impairment charges
and other credit risk provisions’ and interest income and expense continue to be recognised in ‘Net interest
income’. Once classified as held for sale, movements arising from the initial measurement or subsequent
remeasurement of the non-current assets (or disposal groups) are recognised in ‘Other operating income’.
405
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H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
3 – Net income from financial instruments at fair value / 4 – Net earned insurance premiums / 5 – Net insurance claims incurred
3 Net income/(expense) from financial instruments designated at fair value
Net income/(expense) from financial instruments designated at fair value includes:
•
•
•
all gains and losses from changes in the fair value of financial assets and liabilities designated at fair value,
including liabilities under investment contracts;
all gains and losses from changes in the fair value of derivatives that are managed in conjunction with financial
assets and liabilities designated at fair value; and
interest income, interest expense and dividend income in respect of:
– financial assets and liabilities designated at fair value; and
– derivatives managed in conjunction with the above,
except for interest arising from HSBC’s issued debt securities and derivatives managed in conjunction with those
debt securities, which is recognised in ‘Interest expense’.
Net income/(expense) from financial instruments designated at fair value
Net income/(expense) arising on:
– financial assets held to meet liabilities under insurance and investment
contracts .............................................................................................................
– other financial assets designated at fair value ........................................................
– derivatives managed in conjunction with other financial assets
designated at fair value ......................................................................................
– liabilities to customers under investment contracts ...............................................
– HSBC’s long-term debt issued and related derivatives .........................................
– changes in own credit spread on long-term debt ...............................................
– derivatives managed in conjunction with HSBC’s issued debt securities ........
– other changes in fair value .................................................................................
– other financial liabilities designated at fair value ..................................................
– derivatives managed in conjunction with other financial liabilities
designated at fair value ......................................................................................
2012
US$m
2,980
83
35
3,098
(996)
(4,327)
(5,215)
431
457
(23)
22
(5,324)
(2,226)
HSBC Holdings
Net income/(expense) arising on HSBC Holdings long-term debt issued and related derivatives
Net income/(expense) arising on:
– changes in own credit spread on long-term debt ....................................................
– derivatives managed in conjunction with HSBC Holdings issued
debt securities .....................................................................................................
– other changes in fair value ......................................................................................
2012
US$m
(2,260)
456
(474)
(2,278)
2011
US$m
(933)
1,050
(182)
(65)
231
4,161
3,933
3,165
(2,937)
(911)
23
3,504
3,439
2011
US$m
1,657
1,368
(1,113)
1,912
2010
US$m
2,349
230
(149)
2,430
(946)
(258)
(63)
(275)
80
(18)
12
(1,210)
1,220
2010
US$m
248
(482)
373
139
406
4 Net earned insurance premiums
Non-life
insurance
US$m
Life
insurance
(non-linked)
US$m
Life
insurance
(linked)
US$m
Investment
contracts
with DPF1
US$m
2012
Gross earned premiums ................................................
– gross written premiums .........................................
– movement in unearned premiums .........................
Reinsurers’ share of gross earned premiums ................
– gross written premiums ceded to reinsurers ..........
– reinsurers’ share of movement in unearned
premiums ...............................................................
2011
Gross earned premiums ................................................
– gross written premiums .........................................
– movement in unearned premiums .........................
Reinsurers’ share of gross earned premiums ................
– gross written premiums ceded to reinsurers ..........
– reinsurers’ share of movement in unearned
premiums ...............................................................
2010
Gross earned premiums ................................................
– gross written premiums .........................................
– movement in unearned premiums .........................
Reinsurers’ share of gross earned premiums ................
– gross written premiums ceded to reinsurers ..........
– reinsurers’ share of movement in unearned
716
760
(44)
(107)
(104)
(3)
609
1,144
1,175
(31)
(180)
(182)
2
964
1,275
1,192
83
(160)
(172)
premiums ...............................................................
12
Total
US$m
13,602
13,599
3
(558)
(520)
(38)
6,862
6,815
47
(443)
(408)
(35)
3,325
3,325
–
(8)
(8)
–
2,699
2,699
–
–
–
–
6,419
3,317
2,699
13,044
6,238
6,207
31
(278)
(255)
(23)
2,801
2,804
(3)
(8)
(8)
–
3,155
3,155
–
–
–
–
13,338
13,341
(3)
(466)
(445)
(21)
5,960
2,793
3,155
12,872
5,427
5,357
70
(289)
(266)
(23)
1,956
1,956
–
(14)
(8)
(6)
2,951
2,951
–
–
–
–
11,609
11,456
153
(463)
(446)
(17)
1 Discretionary participation features.
5 Net insurance claims incurred and movement in liabilities to policyholders
1,115
5,138
1,942
2,951
11,146
Non-life
insurance
US$m
Life
insurance
(non-linked)
US$m
Life
insurance
(linked)
US$m
Investment
contracts
with DPF1
US$m
6,558
1,566
4,992
(479)
(160)
(319)
3,984
1,810
2,174
223
(681)
904
3,645
2,525
1,120
–
–
–
6,079
4,207
3,645
14,215
Total
US$m
14,529
6,240
8,289
(314)
(898)
584
2012
Gross claims incurred and movement in liabilities ...........
– claims, benefits and surrenders paid .....................
– movement in liabilities ..........................................
Reinsurers’ share of claims incurred and
movement in liabilities ............................................
– claims, benefits and surrenders paid .....................
– movement in liabilities ..........................................
342
339
3
(58)
(57)
(1)
284
407
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H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
6 – Operating profit / 7 – Employee compensation and benefits
Net insurance claims incurred and movement in liabilities to shareholders (continued)
Non-life
insurance
US$m
Life
insurance
(non-linked)
US$m
Life
insurance
(linked)
US$m
Investment
contracts
with DPF1
US$m
2011
Gross claims incurred and movement in liabilities ...........
– claims, benefits and surrenders paid .....................
– movement in liabilities ..........................................
Reinsurers’ share of claims incurred and
movement in liabilities ............................................
– claims, benefits and surrenders paid .....................
– movement in liabilities ..........................................
2010
Gross claims incurred and movement in liabilities ...........
– claims, benefits and surrenders paid .....................
– movement in liabilities ..........................................
Reinsurers’ share of claims incurred and
movement in liabilities ............................................
– claims, benefits and surrenders paid .....................
– movement in liabilities ..........................................
435
631
(196)
(85)
(81)
(4)
350
625
815
(190)
(100)
(114)
14
525
Total
US$m
11,631
6,181
5,450
(450)
(301)
(149)
5,729
1,793
3,936
(254)
(164)
(90)
2,462
1,129
1,333
(111)
(56)
(55)
3,005
2,628
377
–
–
–
5,475
2,351
3,005
11,181
5,108
1,355
3,753
(201)
(143)
(58)
2,520
507
2,013
99
(45)
144
3,716
2,023
1,693
–
–
–
11,969
4,700
7,269
(202)
(302)
100
4,907
2,619
3,716
11,767
1 Discretionary participation features.
6 Operating profit
Operating profit is stated after the following items of income, expense, gains and losses:
Income
Interest recognised on impaired financial assets1 .......................................................
Fees earned on financial assets or liabilities not held for trading nor designated
at fair value, other than fees included in effective interest rate calculations on
these types of assets and liabilities .........................................................................
Fees earned on trust and other fiduciary activities where HSBC holds
or invests assets on behalf of its customers ...........................................................
Income from listed investments ..................................................................................
Income from unlisted investments ..............................................................................
Gain arising from dilution of interests in associates and joint ventures ....................
Expense
Interest on financial instruments, excluding interest on financial liabilities
2012
US$m
1,261
2011
US$m
1,604
2010
US$m
516
10,042
11,318
11,445
2,897
5,850
7,677
–
3,072
8,283
8,031
208
3,074
7,418
7,187
188
held for trading or designated at fair value ............................................................
(17,625)
(20,965)
(17,549)
Fees payable on financial assets or liabilities not held for trading nor designated
at fair value, other than fees included in effective interest rate calculations on
these types of assets and liabilities .........................................................................
Fees payable relating to trust and other fiduciary activities where
HSBC holds or invests assets on behalf of its customers ......................................
UK bank levy ..............................................................................................................
Auditors’ remuneration (see Note 8) ..........................................................................
Gains/(losses)
Gain on disposal or settlement of loans and advances ...............................................
Impairment of available-for-sale equity securities .....................................................
Gains on disposal of property, plant and equipment, intangible assets and
non-financial investments ......................................................................................
Loan impairment charges and other credit risk provisions .................................
Net impairment charge on loans and advances ..........................................................
Impairment of available-for-sale debt securities ........................................................
Release/(impairment) in respect of other credit risk provisions ................................
(1,501)
(1,697)
(1,529)
(170)
(472)
(49)
24
(420)
187
(8,311)
(8,160)
(99)
(52)
(182)
(570)
(51)
116
(177)
57
(12,127)
(11,505)
(631)
9
(151)
–
(51)
121
(105)
701
(14,039)
(13,548)
(472)
(19)
408
1 During 2011 the Group adopted a more stringent treatment for impaired loans for geographical regions with significant levels of
forbearance. As a result loans and advances have been classified as impaired that under the previous disclosure convention would
otherwise have been classified as neither past due nor impaired or past due but not impaired. The effect of this change on 2011 reported
numbers was to increase interest earned on impaired loans from US$0.3bn to US$1.5bn. Restatement of comparative data prior to
31 December 2010 is impracticable (see page 162, ‘Impaired loans disclosure’, for further details).
7 Employee compensation and benefits
Wages and salaries ......................................................................................................
Social security costs ....................................................................................................
Post-employment benefits ..........................................................................................
Average number of persons employed by HSBC during the year
Europe .........................................................................................................................
Hong Kong .................................................................................................................
Rest of Asia-Pacific ....................................................................................................
Middle East and North Africa ....................................................................................
North America ............................................................................................................
Latin America .............................................................................................................
2012
US$m
17,780
1,633
1,078
20,491
2012
77,204
28,764
88,015
8,645
27,396
54,162
2011
US$m
18,923
1,754
489
21,166
2011
81,263
30,323
92,685
8,816
34,871
58,026
2010
US$m
17,193
1,567
1,076
19,836
2010
79,902
29,105
89,737
8,983
36,822
57,778
Total ............................................................................................................................
284,186
305,984
302,327
Included in ‘Wages and salaries’ above are share-based payment arrangements, as follows:
Share-based payments income statement charge
Restricted and performance share awards1 .................................................................
Savings-related and other share option plans .............................................................
Equity-settled share-based payments ..........................................................................
Cash-settled share-based payments ............................................................................
2012
US$m
912
96
1,008
988
20
2011
US$m
1,041
121
1,162
1,154
8
2010
US$m
685
127
812
812
–
1 Restricted share awards include awards granted under the Group Performance Share Plan (‘GPSP’).
The share-based payment income statement charge above includes US$837m (2011: US$974m; 2010: US$610m)
relating to deferred share awards. These awards are generally granted to employees early in the year following the
year to which the award relates. The charge for these awards is recognised from the start of the period to which the
service relates to the end of the vesting period. The vesting period is the period over which the employee satisfies
certain service conditions in order to become entitled to the award. Due to the staggered vesting profile of certain
deferred share awards, the employee becomes entitled to a portion of the award at the end of each year during the
vesting period. The income statement charge reflects this vesting profile.
In addition, wages and salaries also includes US$111m (2011: US$88m; 2010: US$15m) in respect of deferred cash
awards for current and prior performance years. The reconciliation of total incentive awards (both deferred and non-
deferred) to income statement charge is as follows:
409
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Notes on the Financial Statements (continued)
7 – Employee compensation and benefits
Reconciliation of total incentive awards granted to incentive awards in employee compensation and benefits
Total incentive awards approved and granted for the current year1 ..........................
Less: deferred bonuses awarded for the current year but not amortised ....................
Total incentives awarded and recognised in the current year ....................................
Current year charges for deferred bonuses from previous years ...............................
Other2 ..........................................................................................................................
Total incentive awards for the current year included in employee compensation
2012
US$m
3,689
(355)
3,334
671
(28)
2011
US$m
3,966
(369)
3,597
897
(261)
2010
US$m
4,297
(778)
3,519
625
(109)
and benefits ............................................................................................................
3,977
4,233
4,035
1 This represents the amount of the Group variable pay pool that has been approved and granted. The total amount of Group variable pay
pool approved by the Group Remuneration Committee is disclosed in the Directors’ Remuneration Report on page 347.
2 This mainly comprises incentive awards paid to employees acting as selling agents, which form an integral part of the effective interest
of a financial instrument, recognised as an adjustment to the effective interest rate and recorded in ‘Interest income’.
The following table identifies the charge recognised in the current year, or expected to be recognised in future years,
in relation to deferred bonus awards from the current year and prior year bonus pools.
Income statement charge for current and prior year bonus pools
Current year
bonus pool1
US$m
Prior year
bonus pools
US$m
2012
Charge recognised in 2012 .........................................................................................
Deferred share awards .............................................................................................
Deferred cash awards ...............................................................................................
Charge expected to be recognised in 2013 or later ....................................................
Deferred share awards .............................................................................................
Deferred cash awards ...............................................................................................
2011
Charge recognised in 2011 .........................................................................................
Deferred share awards .............................................................................................
Deferred cash awards ...............................................................................................
Charge expected to be recognised in 2012 or later ....................................................
Deferred share awards .............................................................................................
Deferred cash awards ...............................................................................................
2010
Charge recognised in 2010 .........................................................................................
Deferred share awards .............................................................................................
Deferred cash awards ...............................................................................................
Charge expected to be recognised in 2011 or later ....................................................
Deferred share awards .............................................................................................
Deferred cash awards ...............................................................................................
277
224
53
355
315
40
165
131
34
369
289
80
–
–
–
778
759
19
671
613
58
376
335
41
897
843
54
731
652
79
625
610
15
802
801
1
Total
US$m
948
837
111
731
650
81
1,062
974
88
1,100
941
159
625
610
15
1,580
1,560
20
1 Current year bonus pool relates to the bonus pool declared for the reporting period (2012 for the current year, 2011 for the 2011
comparatives and 2010 for the 2010 comparatives).
410
Share-based payments
HSBC share awards
Award
Restricted
share awards
(including
GPSP awards)
Policy
• Vesting of awards generally subject to continued
employment with HSBC.
Purpose
• Rewards employee performance and potential and
supports retention of key employees.
• Vesting is generally staggered over three years. GPSP
• To defer variable pay.
awards vest after five years.
• Certain shares subject to a retention requirement post-
vesting. In the case of GPSP awards retention applies
until cessation of employment.
• Awards generally not subject to performance conditions.
• Awards granted from 2010 onwards are subject to
clawback provision prior to vesting.
Movement on HSBC share awards
Restricted share awards1
Performance share awards2
Outstanding at 1 January ..............................................................
Additions during the year .............................................................
Released in the year ......................................................................
Forfeited in the year ......................................................................
2012
Number
(000s)
262,241
107,928
(193,692)
(10,888)
Outstanding at 31 December ........................................................
165,589
Weighted average fair value of awards granted (US$) ................
8.93
2011
Number
(000s)
229,092
100,819
(56,301)
(11,369)
262,241
10.11
2012
Number
(000s)
–
–
–
–
–
–
2011
Number
(000s)
4,425
154
(883)
(3,696)
–
–
1 Restricted share awards include awards granted under the Group Performance Share Plan (‘GPSP’).
2 Additions during 2011 comprised reinvested dividend equivalents. The last award of performance shares was made in 2008, and shares
under the plan were released in March 2011.
HSBC share option plans
Main plans
Savings-
related share
option plans
Policy
• Exercisable within three months following the first
Purpose
• Eligible employees save up to £250 per month (or its
anniversary of the commencement of a one-year savings
contract or within six months following either the third or
fifth anniversaries of the commencement of three-year or
five-year contracts, respectively.
• The exercise price is set at a 20% (2011: 20%) discount to
the market value immediately preceding the date of
invitation (except for the one-year options granted under
the US sub-plan where a 15% discount is applied).
equivalent in US dollars, Hong Kong dollars or euros),
with the option to use the savings to acquire shares.
• To align the interests of all employees with the creation of
shareholder value.
HSBC
Holdings
Group share
option plan
• Plan ceased in May 2005.
• Exercisable between third and tenth anniversaries of the
date of grant.
• Long-term incentive plan between 2000 and 2005 during
which certain HSBC employees were awarded share
options.
The table on page 412 shows the movement on HSBC share option plans during the year.
Calculation of fair values
The fair values of share options at the date of grant of the option are calculated using a Black-Scholes model.
The fair value of a share award is based on the share price at the date of the grant. The fair value of a share option
is inherently subjective and uncertain due to the assumptions made and the limitations of the model used.
411
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Notes on the Financial Statements (continued)
7 – Employee compensation and benefits
Significant weighted average assumptions used to estimate the fair value of options granted
Savings-related share option plans
1-year plan
3-year plans
5-year plans
2012
Risk-free interest rate1 (%) .........................................................................................
Expected life (years) ...................................................................................................
Expected volatility2 (%) ..............................................................................................
Share price at grant date (£) ........................................................................................
2011
Risk-free interest rate1 (%) .........................................................................................
Expected life (years) ...................................................................................................
Expected volatility2 (%) ..............................................................................................
Share price at grant date (£) ........................................................................................
2010
Risk-free interest rate1 (%) .........................................................................................
Expected life (years) ...................................................................................................
Expected volatility2 (%) ..............................................................................................
Share price at grant date (£) ........................................................................................
0.4
1
25
5.46
0.8
1
25
6.37
0.7
1
30
6.82
0.6
3
25
5.46
1.7
3
25
6.37
1.9
3
30
6.82
1.2
5
25
5.46
2.5
5
25
6.37
2.9
5
30
6.82
1 The risk-free rate was determined from the UK gilts yield curve. A similar yield curve was used for the HSBC Holdings Savings-Related
Share Option Plan: International.
2 Expected volatility is estimated by considering both historic average share price volatility and implied volatility derived from traded
options over HSBC Holdings ordinary shares of similar maturity to those of the employee options.
The expected US dollar denominated dividend yield was determined to be 5.0% per annum in line with consensus
analyst forecasts (2011: 4.5%; 2010: 4.5%).
HSBC subsidiary company share option plans
There are a number of employee share option plans relating to HSBC France, HSBC Finance and HSBC Bank
Bermuda as a result of the acquisition of these entities.
Options granted prior to public announcement of the acquisitions vested on acquisition and are not included in the
table below. HSBC France and HSBC Finance granted share options after announcement of the acquisition which
vested in subsequent years. Of these, at 31 December 2012, none remained outstanding (2011: 2.4m). Full details of
all options outstanding under these plans can be found in Note 38.
Movement on HSBC share option plans
Savings-related
share option plans
WAEP1
£
Number
(000s)
HSBC Holdings Group
share option plan
Number
(000s)
WAEP1
£
HSBC Finance
share option plan
WAEP1
US$
(000s)
Number
2012
Outstanding at 1 January ......................................................
Granted during the year2 .......................................................
Exercised during the year3 ....................................................
Expired during the year ........................................................
153,465
44,868
(63,954)
(21,627)
Outstanding at 31 December ................................................
112,752
At 31 December 2012
Exercise price range (£):
3.00 – 4.50 ........................................................................
4.51 – 6.00 ........................................................................
6.01 – 7.50 ........................................................................
7.51 – 7.96 ........................................................................
Of which exercisable ............................................................
Weighted average remaining contractual life (years) ..........
95,333
16,129
1,290
–
4,538
2.26
2011
Outstanding at 1 January ......................................................
Granted during the year2 .......................................................
Exercised during the year3 ....................................................
Expired during the year ........................................................
157,855
23,199
(7,439)
(20,150)
Outstanding at 31 December ................................................
153,465
3.80
4.44
3.47
4.82
4.04
120,792
–
(1,606)
(32,013)
87,173
7.02
–
6.02
7.29
6.94
–
–
82,278
4,895
87,173
1.11
9.29
–
9.29
9.29
–
2,429
–
(2,054)
(375)
–
–
–
–
–
–
–
3.87
5.11
5.27
4.71
3.80
152,758
–
(646)
(31,320)
120,792
7.12
–
6.06
7.56
7.02
2,429
–
–
–
2,429
9.29
–
–
–
9.29
412
Savings-related
share option plans
WAEP1
£
Number
(000s)
HSBC Holdings Group
share option plan
HSBC Finance
share option plan
Number
(000s)
WAEP1
£
Number
(000s)
WAEP1
US$
At 31 December 2011
Exercise price range (£):
3.00 – 4.50 .........................................................................
4.51 – 6.00 .........................................................................
6.01 – 7.50 .........................................................................
7.51 – 9.29 .........................................................................
Of which exercisable ............................................................
Weighted average remaining contractual life (years) ..........
117,387
32,778
2,341
959
3,209
2.04
–
–
115,901
4,891
120,792
1.66
–
–
–
2,429
2,429
0.89
1 Weighted average exercise price.
2 The weighted average fair value of options granted during the year was US$1.63 (2011: US$2.11).
3 The weighted average share price at the date the options were exercised was US$8.78 (2011: US$8.65) and US$9.00 (2011: US$9.51)
for the savings-related share option plans and HSBC Holdings Group share option plan, respectively.
Post-employment benefit plans
Income statement charge
Defined benefit pension plans ....................................................................................
– HSBC Bank (UK) Pension Scheme ....................................................................
– other plans ...........................................................................................................
Defined contribution pension plans ...........................................................................
Defined benefit healthcare plans ................................................................................
Defined contribution healthcare plans ........................................................................
2012
US$m
427
169
258
599
1,026
49
3
1,078
Net assets/(liabilities) recognised on balance sheet in respect of defined benefit plans
Defined benefit pension plans
HSBC Bank (UK) Pension Scheme .....................................................................................................
– fair value of plan assets ................................................................................................................
– present value of defined benefit obligations ................................................................................
Other plans ...........................................................................................................................................
– fair value of plan assets ................................................................................................................
– present value of defined benefit obligations ................................................................................
– effect of limit on plan surpluses ...................................................................................................
– unrecognised past service cost .....................................................................................................
2011
US$m
(172)
(428)
256
626
454
32
3
489
2012
US$m
2,617
29,092
(26,475)
(2,585)
9,015
(11,600)
(19)
19
2010
US$m
468
308
160
545
1,013
58
5
1,076
2011
US$m
2,237
26,604
(24,367)
(2,445)
8,232
(10,680)
(18)
21
Total ......................................................................................................................................................
32
(208)
Defined benefit healthcare plans
– fair value of plan assets ....................................................................................................................
– present value of defined benefit obligations ....................................................................................
– unrecognised past service cost .........................................................................................................
Total ......................................................................................................................................................
Fair value of plan assets ...........................................................................................................................
Present value of defined benefit obligations ............................................................................................
Effect of limit on plan surpluses ...............................................................................................................
Retirement benefit liabilities ....................................................................................................................
Retirement benefit assets ..........................................................................................................................
189
(1,261)
(19)
(1,091)
38,296
(39,336)
(19)
(1,059)
(3,905)
2,846
151
(1,091)
(21)
(961)
34,987
(36,138)
(18)
(1,169)
(3,666)
2,497
413
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Notes on the Financial Statements (continued)
7 – Employee compensation and benefits
Cumulative actuarial gains/(losses) recognised in other comprehensive income
At 1 January ....................................................................................................................
HSBC Bank (UK) Pension Scheme ...............................................................................
Other plans ......................................................................................................................
Healthcare plans .............................................................................................................
Change in the effect of limit on plan surpluses1 .............................................................
Total actuarial gains/(losses) recognised in other comprehensive income ....................
2012
US$m
(3,453)
208
(440)
(154)
(5)
(391)
2011
US$m
(4,720)
1,945
(642)
(61)
25
1,267
2010
US$m
(4,660)
321
(275)
(112)
6
(60)
At 31 December2 .............................................................................................................
(3,844)
(3,453)
(4,720)
1 Excludes exchange loss of US$4m (2011: US$4m loss; 2010: US$6m gain)
2 Includes cumulative movements related to the limit on plan surpluses. This limit was US$19m at 31 December 2012 (2011: US$18m;
2010: US$47m)
HSBC pension plans
Number of plans worldwide ........................................................................................
Percentage of HSBC employees:
– enrolled in defined contribution plans ................................................................
– enrolled in defined benefit plans .........................................................................
– covered by HSBC pension plans .........................................................................
2012
225
%
62
23
85
2011
230
%
64
25
89
2010
218
%
63
27
90
HSBC has been progressively offering all new employees membership of defined contribution plans.
The majority of the Group’s defined benefit plans are funded plans. The assets of most of the larger plans are held
in trusts or similar funds separate from HSBC. The plans are reviewed at least annually or in accordance with local
practice and regulations by qualified actuaries. The actuarial assumptions used to calculate the defined benefit
obligations and related current service costs vary according to the economic conditions of the countries in which
the plans are situated.
At 31 December 2012, the present values of the defined benefit obligations of The HSBC Bank (UK) Pension
Scheme was US$26,475m (2011: US$24,367m), The HSBC Group Hong Kong Local Staff Retirement Benefit
Scheme was US$1,476m (2011:US$1,523m) and the HSBC North America (US) Retirement Income Plan was
US$4,374m (2011: US$3,895m). These defined benefit pension plans covered 12% of HSBC’s employees and
represented 82% of the Group’s present value of defined benefit obligations. The Pension Risk section on page 246
and the Appendix to Risk on page 252 contain details about the characteristics and risks and amount, timing and
uncertainty of future cash flows and policies and practices associated with these three schemes.
The determinations described in the Pension Risk section on page 246 for actuarial funding valuation purposes are
based on different methods and assumptions from those used for financial reporting purposes, and as a result should
neither be compared nor related to other determinations included in these financial statements. There is no actuarial
deficit in the Principal plan.
HSBC healthcare benefits plans
HSBC also provides post-employment healthcare benefits under plans in the UK, the US, Bermuda, Canada, Mexico
and Brazil, the majority of which are unfunded. The majority of post-employment healthcare benefits plans are
defined benefit plans and are accounted for in the same manner as defined benefit pension plans. The plans are
reviewed at least annually or in accordance with local practice and regulations by qualified actuaries. The actuarial
assumptions used to calculate the defined benefit obligation and related current service cost vary according to the
economic conditions of the countries in which they are situated.
At 31 December 2012, the present value of the defined benefit obligation of HSBC’s healthcare benefit plans was
US$1,261m (2011: US$1,091m). In aggregate, healthcare benefit plans comprised 3% of HSBC’s present value of
defined benefit obligations.
414
Defined benefit pension plans
Net asset/(liability) under defined benefit pension plans
HSBC Bank (UK) Pension Scheme
2011
US$m
2012
US$m
Other plans
2012
US$m
Fair value of plan assets
At 1 January ..................................................................................
Expected return on plan assets .....................................................
Contributions by HSBC ................................................................
– normal ....................................................................................
– special ....................................................................................
Contributions by employees .........................................................
Experience gains ...........................................................................
Benefits paid .................................................................................
Assets distributed on settlements .................................................
Exchange differences ....................................................................
26,604
1,245
238
238
–
37
680
(907)
–
1,195
22,236
1,325
600
314
286
34
3,426
(803)
–
(214)
8,232
486
475
191
284
20
410
(630)
(16)
38
At 31 December ............................................................................
29,092
26,604
9,015
Present value of defined benefit obligations
At 1 January ..................................................................................
Current service cost ......................................................................
Interest cost ...................................................................................
Contributions by employees .........................................................
Actuarial losses .............................................................................
Benefits paid .................................................................................
Past service cost – vested immediately ........................................
Past service cost – unvested benefits ............................................
Reduction in liabilities resulting from curtailments .....................
Liabilities extinguished on settlements ........................................
Exchange differences ....................................................................
At 31 December ............................................................................
Funded ......................................................................................
Unfunded ..................................................................................
Effect of limit on plan surpluses ...................................................
Unrecognised past service cost .....................................................
Net asset/(liability) .......................................................................
Retirement benefit liabilities recognised in the balance sheet .....
Retirement benefit assets recognised in the balance sheet
(within ‘Other assets’) ..............................................................
(24,367)
(236)
(1,178)
(36)
(472)
906
–
–
–
–
(1,092)
(26,475)
(26,475)
–
–
–
2,617
–
2,617
(22,858)
(251)
(1,233)
(34)
(1,481)
804
587
–
–
–
99
(24,367)
(24,367)
–
–
–
2,237
–
2,237
(10,680)
(310)
(404)
(21)
(850)
743
(47)
2
11
26
(70)
(11,600)
(10,956)
(644)
(19)
19
(2,585)
(2,814)
229
2011
US$m
7,559
481
565
176
389
22
200
(495)
(25)
(75)
8,232
(9,785)
(299)
(456)
(22)
(842)
569
(40)
2
59
29
105
(10,680)
(10,074)
(606)
(18)
21
(2,445)
(2,705)
260
Plan assets of the Group’s pension schemes included US$20m (2011: US$45m) of equities and no bonds (2011: nil)
issued by HSBC and US$292m (2011: US$1,228m) of other assets placed or transacted with HSBC. The fair value of
plan assets included derivatives entered into with HSBC Bank plc by the HSBC Bank (UK) Pension Scheme with a
positive fair value of US$5,226m at 31 December 2012 (2011: US$5,560m positive fair value) and US$328m
positive fair value (2011: US$297m positive fair value) in respect of the HSBC International Staff Retirement
Benefits Scheme. Further details of these swap arrangements are included in Note 44.
In December 2011, HSBC Bank plc made a £184m (US$286m) special contribution to the HSBC Bank (UK) Pension
Scheme. Following the contribution the Scheme purchased asset-backed securities from HSBC at an arm’s length
value, determined by the Scheme’s independent third-party advisers.
The special contributions of US$284m to other plans include an additional contribution of US$181m to the HSBC
North America (US) Retirement Income Plan which was made to maintain a minimum funding level.
The actual return on plan assets for the year ended 31 December 2012 was a positive return of US$2,784m (2011:
positive US$5,432m).
HSBC expects to make US$604m of contributions to defined benefit pension plans during 2013. Benefits expected to
be paid from the plans to retirees over each of the next five years, and in aggregate for the five years thereafter, are as
follows:
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Notes on the Financial Statements (continued)
7 – Employee compensation and benefits
Benefits expected to be paid from plans
HSBC Bank (UK) Pension Scheme ..
Other plans .........................................
2013
US$m
745
556
2014
US$m
776
541
2015
US$m
810
557
2016
US$m
849
577
2017
US$m
2018-2022
US$m
899
624
5,411
3,595
Total (income)/expense recognised in the income statement in ‘Employee compensation and benefits’
HSBC Bank (UK) Pension Scheme
2010
US$m
252
1,148
(1,092)
–
–
–
308
2012
US$m
Other plans
2011
US$m
310
404
(486)
51
(11)
(10)
258
299
456
(481)
45
(59)
(4)
256
HSBC Bank (UK) Pension Scheme
2011
US$m
(24,367)
26,604
2,237
(383)
3,426
(1,098)
1,945
2011
US$m
(10,680)
8,232
(2,448)
(78)
200
(764)
(642)
2010
US$m
(22,858)
22,236
(622)
(327)
1,772
(1,124)
321
Other plans
2010
US$m
(9,785)
7,559
(2,226)
(73)
394
(596)
(275)
2009
US$m
(21,523)
17,701
(3,822)
(234)
871
(4,329)
(3,692)
2009
US$m
(9,109)
6,822
(2,287)
20
65
94
179
2010
US$m
300
438
(437)
12
(151)
(2)
160
2008
US$m
(15,257)
14,865
(392)
(49)
(2,861)
3,081
171
2008
US$m
(8,787)
6,024
(2,763)
(52)
(1,452)
(306)
(1,810)
Current service cost ...........................
Interest cost ........................................
Expected return on plan assets ..........
Past service cost .................................
Gains on curtailments ........................
Gains on settlements ..........................
Total (income)/expense .....................
Summary
2012
US$m
236
1,178
(1,245)
–
–
–
169
Present value of defined benefit obligation ..................
Fair value of plan assets ...............................................
Net surplus/(deficit) ......................................................
Experience gains/(losses) on plan liabilities ................
Experience gains/(losses) on plan assets ......................
Gains/(losses) from changes in actuarial
2011
US$m
251
1,233
(1,325)
(587)
–
–
(428)
2012
US$m
(26,475)
29,092
2,617
880
680
assumptions ..............................................................
(1,352)
Total net actuarial gains/(losses) ..................................
208
Present value of defined benefit obligation ..................
Fair value of plan assets ...............................................
Net deficit .....................................................................
Experience gains/(losses) on plan liabilities ................
Experience gains/(losses) on plan assets ......................
Gains/(losses) from changes in actuarial
assumptions ..............................................................
Total net actuarial gains/(losses) ..................................
2012
US$m
(11,600)
9,015
(2,585)
56
410
(906)
(440)
416
Post-employment defined benefit plans’ principal actuarial financial assumptions
The principal actuarial financial assumptions used to calculate the Group’s obligations for the largest defined benefit
pension plans at 31 December for each period, and used as the basis for measuring periodic costs under the plans in
the following periods, were as follows:
Principal actuarial assumptions
Discount
rate
%
Inflation
rate
%
Rate of
increase for
pensions
%
Rate
of pay
increase
%
At 31 December 2012
UK1 ...............................................................................................
Hong Kong ...................................................................................
US .................................................................................................
At 31 December 2011
UK1 ...............................................................................................
Hong Kong ...................................................................................
US .................................................................................................
At 31 December 2010
UK1 ...............................................................................................
Hong Kong ...................................................................................
US .................................................................................................
4.50
0.60
3.95
4.80
1.47
4.60
5.40
2.85
5.41
3.10
n/a
2.50
3.20
n/a
2.50
3.70
n/a
2.50
2.90
n/a
n/a
3.10
n/a
n/a
3.50
n/a
n/a
3.60
4.00
2.75
3.70
5.00
2.75
4.20
5.00
2.75
1 Rate of increase for pensions in the UK is for pensions in payment only, capped at 5%. Deferred pensions are projected to increase in
line with the CPI, capped at 5%. For 2010, deferred pensions were projected to increase in line with the RPI, capped at 5%.
HSBC determines the discount rates to be applied to its obligations in consultation with the plans’ local actuaries,
on the basis of current average yields of high quality (AA rated or equivalent) debt instruments, with maturities
consistent with those of the defined benefit obligations. In countries where there is not a deep market in corporate
bonds, government bond yields have been used. The yield curve has been extrapolated where the term of the
liabilities is longer than the duration of available bonds and the discount rate used then takes into account the term
of the liabilities and the shape of the yield curve. When determining the discount rate with reference to a bond index,
an appropriate index for the specific region has been used.
Mortality tables and average life expectancy at age 65
Mortality table
At 31 December 2012
UK ...................................................................... SAPS S11
Hong Kong2 ....................................................... n/a
US ...................................................................... RP 2000 fully generational3
At 31 December 2011
UK ...................................................................... SAPS MC4
Hong Kong2 ....................................................... n/a
US ...................................................................... RP 2000 fully generational3
Life expectancy at
age 65 for a male
member currently:
Aged 65
Aged 45
Life expectancy at
age 65 for a female
member currently:
Aged 65
Aged 45
23.9
n/a
21.1
22.5
n/a
19.4
25.6
n/a
23.1
24.4
n/a
20.9
25.4
n/a
23.2
23.5
n/a
21.3
27.7
n/a
25.0
25.4
n/a
22.2
1 SAPS S1 with Continuous Mortality Investigation 2011 improvements and a 1.25% long-term allowance improvement. Light table with
1.01 rating for male pensioners and 1.02 rating for female pensioners.
2 The significant plans in Hong Kong are lump sum plans which do not use a post-retirement mortality table.
3 The projections scale applied to the mortality rates has changed from AA at 31 December 2011 to BB at 31 December 2012, to better
reflect observed mortality improvements.
4 SAPS MC projections with 1% minimum improvement beyond 2002. Light table with 1.08 rating for male pensioners and standard table
with 1.06 rating for female pensioners.
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Notes on the Financial Statements (continued)
7 – Employee compensation and benefits / 8 – Auditors’ remuneration
Expected rates of return
HSBC Bank (UK) Pension Scheme
Fair value of plan assets ...............................................................
Equities .....................................................................................
Bonds ........................................................................................
Property ....................................................................................
Other .........................................................................................
Other plans
Fair value of plan assets ...............................................................
Equities .....................................................................................
Bonds ........................................................................................
Property ....................................................................................
Other .........................................................................................
2012
Expected
rates of return1
%
7.1
4.0
6.7
3.1
7.9
4.1
5.0
3.6
2011
Expected
rates of return1
%
7.2
4.1
6.7
2.8
7.7
4.7
4.6
4.0
Value
US$m
29,092
3,899
22,258
1,583
1,352
9,015
2,688
4,963
107
1,257
Value
US$m
26,604
3,190
20,737
1,524
1,153
8,232
2,184
4,659
106
1,283
1 The expected rates of return are used to measure the net defined benefit pension costs in each subsequent year, and weighted on the
basis of the fair value of the plan assets. In 2013 the basis will change as described on page 386.
The expected return on plan assets represents the best estimate of long-term future asset returns, which takes into
account historical market returns plus additional factors such as the current rate of inflation and interest rates.
Actuarial assumption sensitivities
The discount rate is sensitive to changes in market conditions arising during the reporting period. The mortality rates
used are sensitive to experience from the plan member profile. The following table shows the effect of changes in
these and the other key assumptions on the principal defined benefit pension plan:
The effect of changes in key assumptions on the principal plan
HSBC Bank (UK) Pension Scheme
2011
US$m
2012
US$m
Discount rate
Change in pension obligation at year end from a 25bps increase .......................................................
Change in pension obligation at year end from a 25bps decrease .......................................................
Change in 2013 pension cost from a 25bps increase1 ..........................................................................
Change in 2013 pension cost from a 25bps decrease1 .........................................................................
(1,191)
1,275
(78)
76
Rate of inflation
Change in pension obligation at year end from a 25bps increase .......................................................
Change in pension obligation at year end from a 25bps decrease .......................................................
Change in 2013 pension cost from a 25bps increase1 ..........................................................................
Change in 2013 pension cost from a 25bps decrease1 .........................................................................
Rate of increase for pensions in payment and deferred pensions
Change in pension obligation at year end from a 25bps increase .......................................................
Change in pension obligation at year end from a 25bps decrease .......................................................
Change in 2013 pension cost from a 25bps increase1 ..........................................................................
Change in 2013 pension cost from a 25bps decrease1 .........................................................................
Rate of pay increase
Change in pension obligation at year end from a 25bps increase .......................................................
Change in pension obligation at year end from a 25bps decrease .......................................................
Change in 2013 pension cost from a 25bps increase1 ..........................................................................
Change in 2013 pension cost from a 25bps decrease1 .........................................................................
Investment return
Change in 2013 pension cost from a 25bps increase1 ..........................................................................
Change in 2013 pension cost from a 25bps decrease1 .........................................................................
881
(842)
48
(47)
719
(692)
36
(34)
175
(173)
15
(13)
–
–
Mortality
Change in pension obligation from each additional year of longevity assumed .................................
663
(980)
1,045
2
(2)
1,026
(978)
57
(54)
876
(841)
43
(42)
248
(240)
19
(15)
(65)
67
619
1 The change in 2013 pension cost from a 25bps increase/decrease was calculated based on the requirements of IAS 19 revised, which
will be adopted from 1 January 2013. The comparative numbers, which show the change in 2012 pension cost from a 25bps
increase/decrease, were calculated in accordance with the accounting policy set out in Note 2(t).
418
The effect of changes in the discount rate and in mortality rates on plans other than the principal plan
Change in defined benefit obligation at year end from a 25bps increase in discount rate ......................
Change in 2013 pension cost from a 25bps increase in discount rate1 ....................................................
Increase in defined benefit obligation from each additional year of longevity assumed ........................
Other plans
2012
US$m
(379)
(17)
174
2011
US$m
(325)
–
144
1 The change in 2013 pension cost from a 25bps increase/decrease was calculated based on the requirements of IAS 19 revised, which
will be adopted from 1 January 2013. The comparative numbers, which show the change in 2012 pension cost from a 25bps
increase/decrease, were calculated in accordance with the accounting policy set out in Note 2(t).
HSBC Holdings
Employee compensation and benefit expense in respect of HSBC Holdings’ employees in 2012 amounted to
US$439m (2011: US$413m). The average number of persons employed by HSBC Holdings during 2012 was 1,323
(2011: 1,212).
Employees of HSBC Holdings who are members of defined benefit pension plans are principally members of either
the HSBC Bank (UK) Pension Scheme or the HSBC International Staff Retirement Benefits Scheme. HSBC
Holdings pays contributions to such plans for its own employees in accordance with the schedules of contributions
determined by the Trustees of the plan.
Directors’ emoluments
The aggregate emoluments of the Directors of HSBC Holdings, computed in accordance with the Companies Act
2006 and the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 were:
Fees .............................................................................................................................
Salaries and other emoluments ...................................................................................
Annual incentives .......................................................................................................
Total .............................................................................................................................
Vesting of long-term incentive awards ......................................................................
2012
US$000
5,435
10,316
13,983
29,734
5,733
2011
US$000
5,108
12,906
12,516
30,530
2,596
2010
US$000
3,597
12,841
14,294
30,732
8,523
In addition, there were payments under retirement benefit agreements with former Directors of US$1,171,796 (2011:
US$1,166,580). The provision at 31 December 2012 in respect of unfunded pension obligations to former Directors
amounted to US$19,285,971 (2011: US$18,006,894).
During the year, aggregate contributions to pension schemes in respect of Directors were US$29,078 (2011:
US$373,310). Discretionary annual incentives for Directors are based on a combination of individual and corporate
performance and are determined by the Group Remuneration Committee. Details of Directors’ remuneration, share
options and awards under the HSBC Share Plan and HSBC Share Plan 2011 are included in the ‘Directors’
Remuneration Report’ on pages 347 to 367.
8 Auditors’ remuneration
Audit fees payable to KPMG1 ....................................................................................
Audit fees payable to non-KPMG entities .................................................................
Total auditors’ remuneration ......................................................................................
2012
US$m
47.2
1.4
48.6
2011
US$m
48.8
1.9
50.7
2010
US$m
49.1
2.3
51.4
1 Fees payable to KPMG for HSBC Holdings’ statutory audit and audit of HSBC’s subsidiaries, pursuant to legislation.
The following fees were payable by HSBC to the Group’s principal auditor, KPMG Audit Plc and its associates
(together ‘KPMG’):
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Notes on the Financial Statements (continued)
8 – Auditors’ remuneration / 9 – Tax
Fees payable by HSBC to KPMG
2012
US$m
2011
US$m
2010
US$m
Fees for HSBC Holdings’ statutory audit1 .................................................................
– relating to current year .......................................................................................
– relating to prior year ...........................................................................................
Fees for other services provided to HSBC .................................................................
Audit of HSBC’s subsidiaries2 ...............................................................................
Audit-related assurance services3 ...........................................................................
Taxation-related services:
– taxation compliance services .........................................................................
– taxation advisory services ..............................................................................
Other assurance services ........................................................................................
Other non-audit services4 .......................................................................................
13.2
12.8
0.4
67.3
34.0
23.6
2.1
1.3
1.1
5.2
12.7
12.4
0.3
74.4
36.1
25.7
2.8
1.5
1.3
7.0
11.8
11.8
–
66.5
37.3
20.8
1.5
0.9
1.4
4.6
Total fees payable .......................................................................................................
80.5
87.1
78.3
1 Fees payable to KPMG for the statutory audit of the consolidated financial statements of HSBC and the separate financial statements of
HSBC Holdings. They include amounts payable for services relating to HSBC Holdings’ subsidiaries consolidation returns which are
clearly identifiable as being in support of the Group audit opinion, with effect from 1 January 2012. Previously these fees were included
in ‘Fees for other services provided to HSBC’. Comparative information has been updated accordingly. The adjustment reduced ‘Fees
for other services provided to HSBC’ and increased ‘Fees for HSBC Holdings’ statutory audit’ by US$11.0m in 2012 (2011: US$10.5m;
2010: US$9.4m). There was no effect on basic or diluted earnings per share following the change.
2 Fees payable for the statutory audit of HSBC’s subsidiaries financial statements.
3 Including services for assurance and other services that relate to statutory and regulatory filings, including comfort letters and interim
reviews.
4 Including valuation and actuarial services, translation services, ad-hoc accounting advice, review of financial models, advice on IT
security and business continuity, corporate finance transactions and performing agreed-upon IT testing procedures.
No fees were payable by HSBC to KPMG for the following types of services: internal audit services, services related
to litigation and recruitment and remuneration.
Fees payable by HSBC’s associated pension schemes to KPMG
2012
US$000
2011
US$000
2010
US$000
Audit of HSBC’s associated pension schemes ...........................................................
Taxation-related services ............................................................................................
– taxation compliance services .............................................................................
– taxation advisory services ..................................................................................
256
–
–
–
Total fees payable .......................................................................................................
256
248
11
–
11
259
384
–
–
–
384
No fees were payable by HSBC’s associated pension schemes to KPMG for the following types of services: audit
related assurance services, internal audit services, other assurance services, services related to corporate finance
transactions, valuation and actuarial services, litigation, recruitment and remuneration, and information technology.
In addition to the above, KPMG estimate they have been paid fees of US$3.3m (2011: US$8.6m; 2010: US$14.9m)
by parties other than HSBC but where HSBC is connected with the contracting party and therefore may be involved
in appointing KPMG. These fees arise from services such as auditing mutual funds managed by HSBC and reviewing
the financial position of corporate concerns which borrow from HSBC.
Fees payable to KPMG for non-audit services for HSBC Holdings are not disclosed separately because such fees are
disclosed on a consolidated basis for HSBC Group.
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9 Tax
Tax charged to the income statement
Current tax
UK corporation tax .....................................................................................................
– for this year ...........................................................................................................
– adjustments in respect of prior years ....................................................................
Overseas tax1 ..............................................................................................................
– for this year ...........................................................................................................
– adjustments in respect of prior years ....................................................................
Deferred tax ................................................................................................................
Origination and reversal of temporary differences .................................................
Effect of changes in tax rates ..................................................................................
Adjustments in respect of prior years ......................................................................
2012
US$m
250
60
190
5,560
5,421
139
5,810
(495)
(269)
66
(292)
2011
US$m
820
462
358
4,255
4,155
100
5,075
(1,147)
(1,178)
(3)
34
Total tax charged to the income statement..................................................................
5,315
3,928
2010
US$m
383
404
(21)
3,328
3,235
93
3,711
1,135
1,176
31
(72)
4,846
1 Overseas tax included Hong Kong profits tax of US$1,049m (2011: US$997m; 2010: US$962m). The Hong Kong tax rate applying to
the profits of subsidiaries assessable in Hong Kong was 16.5% (2011: 16.5%; 2010: 16.5%). Other overseas subsidiaries and overseas
branches provided for taxation at the appropriate rates in the countries in which they operate.
Tax reconciliation
The tax charged to the income statement differs to the tax charge that would apply if all profits had been taxed at the
UK corporation tax rate as follows:
Profit before tax ................................................................
Tax at 24.5% (2011: 26.5%; 2010: 28.0%) .....................
Impact of differently taxed overseas profits ....................
Adjustments in respect of prior period liabilities ............
Deferred tax temporary differences not recognised/
(previously not recognised) .........................................
Effect of profits in associates and joint ventures ............
Tax impact of intra-group transfer of subsidiary ............
Tax impact of disposal of Ping An ..................................
Non taxable income and gains .........................................
Permanent disallowables .................................................
Change in tax rates ..........................................................
Local taxes and overseas withholding taxes ........................
Other items........................................................................
2012
US$m
20,649
5,057
(57)
37
374
(872)
–
(204)
(542)
1,092
78
581
(229)
%
24.5
(0.3)
0.2
1.8
(4.3)
–
(1.0)
(2.6)
5.3
0.4
2.8
(1.1)
2011
US$m
21,872
%
2010
US$m
19,037
%
5,796
(492)
495
26.5
(2.2)
2.3
5,330
(744)
–
28.0
(3.9)
–
(923)
(865)
–
–
(613)
467
(3)
267
(201)
(4.2)
(4.0)
–
–
(2.8)
2.1
–
1.2
(0.9)
(6)
(758)
1,216
–
(700)
355
31
224
(102)
–
(4.0)
6.4
–
(3.7)
1.9
0.2
1.2
(0.6)
Total tax charged to the income statement ......................
5,315
25.7
3,928
18.0
4,846
25.5
The effective tax rate for the year was 25.7% compared with 18.0% for 2011. The higher effective tax rate in
2012 reflects the non tax deductible effect of fines and penalties as part of the settlement of investigations into past
inadequate compliance with anti-money laundering and sanction laws, together with the non-recognition of the tax
benefit in respect of the accounting charge associated with negative fair value movements on own debt. The lower
effective tax rate in 2011 included the benefit of deferred tax of US$0.9bn in respect of foreign tax credits in the US.
The UK corporation tax rate applying to HSBC Holdings and its subsidiaries was 24.5% (2011: 26.5%; 2010: 28%).
The UK Government announced that the main rate of corporation tax for the year beginning 1 April 2012 will reduce
from 26% to 24% to be followed by a 1% reduction to 23% for the year beginning 1 April 2013 and a further 2%
reduction to 21% for the year beginning 1 April 2014. The reduction in the corporate tax rate to 24% was
substantively enacted in the first half of 2012 and this results in a weighted average rate of 24.5% for 2012
421
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H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
9 – Tax
(2011: 26.5%). The reduction to 23% was enacted through the 2012 Finance Act in July and the reduction to 21%
announced in the 2012 Autumn Statement is expected to be enacted through the 2013 Finance Act. It is not expected
that the proposed future rate reductions will have a significant effect on the Group.
The Group’s legal entities are subject to routine review and audit by tax authorities in the territories in which the
Group operates. The Group provides for potential tax liabilities that may arise on the basis of the amounts expected to
be paid to the tax authorities. The amounts ultimately paid may differ materially from the amounts provided
depending on the ultimate resolution of such matters. A substantial proportion of the material open issues related
to the UK of which the principal matter concerned the application of the UK Controlled Foreign Company (‘CFC’)
rules. Following further discussion with Her Majesty’s Revenue and Customs, the CFC and certain other open UK
issues have now been resolved.
Deferred taxation
The table overleaf shows the gross deferred tax assets and liabilities recognised in the balance sheet and the related
amounts recognised in the income statement, other comprehensive income and directly in equity.
The amounts presented in the balance sheet are different from the amounts disclosed in the table overleaf as they are
presented after offsetting asset and liability balances where HSBC has the legal right to set-off and intends to settle
on a net basis.
US
Of the total net deferred tax assets of US$6.5bn at 31 December 2012 (2011: US$6.2bn), the net deferred tax asset
relating to HSBC’s operations in the US was US$4.6bn (2011: US$5.2bn). The deferred tax assets included in this
total reflected the carry forward of no tax losses and tax credits (2011: US$1.2bn), deductible temporary differences
in respect of loan impairment allowances of US$2.0bn (2011: US$2.7bn) and other temporary differences of
US$2.6bn (2011: US$1.3bn).
Deductions for loan impairments for US tax purposes generally occur when the impaired loan is charged off, often in
the period subsequent to that in which the impairment is recognised for accounting purposes. As a result, the amount
of the associated deferred tax asset should generally move in line with the impairment allowance balance. The taxable
gains on the disposal of the US branch network and Card and Retail Services business has resulted in a reduction in
the amount of deferred tax assets related to carried forward tax losses and tax credits. This was offset in part by the
reversal of deferred tax liabilities as a result of these disposals.
On the evidence available, including historical levels of profitability, management projections of future income and
HSBC Holdings’ commitment to continue to invest sufficient capital in North America to recover the deferred tax
asset, it is expected that there will be sufficient taxable income generated by the business to realise these assets.
Management projections of profits from the US operations are prepared for a 10-year period and include assumptions
about future house prices and US economic conditions, including unemployment levels.
The current level of the deferred tax asset in respect of loan impairment allowances is projected to reduce over the
10-year period in line with the reduction in the Consumer and Mortgage Lending portfolio.
As there has been a recent history of losses in HSBC’s US operations, management’s analysis of the recognition of
these deferred tax assets significantly discounts any future expected profits from the US operations and relies to a
greater extent on capital support from HSBC Holdings, including tax planning strategies in relation to such support.
The principal strategy involves generating future taxable profits through the retention of capital in the US in excess of
normal regulatory requirements in order to reduce deductible funding expenses or otherwise deploy such capital to
increase levels of taxable income.
422
Movement of deferred tax assets and liabilities before offsetting balances within countries
Retirement
benefits
US$m
Loan
impairment
provisions
US$m
Unused tax
losses and
tax credits
US$m
Accelerated
capital
allowances
US$m
Available-
for-sale
investments
US$m
Cash flow
hedges
US$m
Share-
based
payments
US$m
Assets
leased to
customers
US$m
Revaluation
of property
US$m
Fee
income
US$m
Other
US$m
Total
US$m
2012
Assets .........................................................
Liabilities ...................................................
At 1 January ..............................................
Acquisitions and disposals ........................
Income statement .......................................
Other comprehensive income ....................
Equity ........................................................
Foreign exchange and other adjustments ..
At 31 December .......................................
Assets .........................................................
Liabilities ...................................................
4
2
3
2011
Assets .........................................................
Liabilities ...................................................
At 1 January ..............................................
Acquisitions and disposals ........................
Income statement .......................................
Other comprehensive income ....................
Equity ........................................................
Foreign exchange and other adjustments ..
At 31 December .........................................
Assets .........................................................
Liabilities ...................................................
742
(107)
635
–
(313)
174
–
(27)
469
469
–
1,538
–
1,538
3
(437)
(322)
–
(147)
635
742
(107)
4,448
–
4,448
–
(590)
–
–
54
3,912
3,912
–
4,799
–
4,799
–
(224)
–
–
(127)
4,448
4,448
–
1,328
–
1,328
–
(692)
(33)
–
14
617
617
–
351
(3)
348
11
945
–
–
24
1,328
1,328
–
117
–
117
–
168
–
–
(50)
235
289
(54)
109
(126)
(17)
–
137
–
–
(3)
117
117
–
–
(557)
(557)
–
(270)
(395)
–
19
(1,203)
–
(1,203)
11
(135)
(124)
(3)
10
(533)
–
93
(557)
–
(557)
487
(137)
350
–
(9)
(90)
–
(10)
241
285
(44)
352
(88)
264
(5)
14
53
–
24
350
487
(137)
286
–
286
–
(52)
–
45
26
305
305
–
241
–
241
1
1
–
27
16
286
286
–
14
(595)
(581)
–
569
–
–
24
12
184
(172)
–
(707)
(707)
–
93
–
–
33
(581)
14
(595)
–
(227)
(227)
–
111
–
–
19
(97)
–
(97)
–
(225)
(225)
22
(36)
–
–
12
(227)
–
(227)
–
(737)
(737)
–
616
–
–
16
(105)
–
(105)
–
(756)
(756)
–
17
–
–
2
(737)
–
(737)
1,709
(563)
1,146
3
957
–
–
(31)
2,075
2,965
(890)
957
(400)
557
(6)
627
–
–
(32)
1,146
1,709
(563)
9,131
(2,923)
6,208
3
495
(344)
45
54
6,461
9,026
(2,565)
8,358
(2,440)
5,918
23
1,147
(802)
27
(105)
6,208
9,131
(2,923)
Shareholder Information
Financial Statements
Corporate Governance
Operating & Financial Review
Overview
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
9 – Tax / 10 – Dividends
Brazil
The net deferred tax asset relating to HSBC’s operations in Brazil was US$0.9bn (2011: US$0.7bn). The deferred tax
assets included in this total arose primarily in relation to deductible temporary differences in respect of loan
impairment allowances. Deductions for loan impairments for Brazilian tax purposes generally occur in periods
subsequent to those in which they are recognised for accounting purposes and, as a result, the amount of the
associated deferred tax assets move in line with the impairment allowance balance.
Loan impairment deductions are recognised for tax purposes typically within 24 months of accounting recognition.
On the evidence available, including historic levels of profitability, management projections of income and the state
of the Brazilian economy, it is anticipated that there will be sufficient taxable income generated by the business to
realise these assets when deductible for tax purposes.
There were no material carried forward tax losses or tax credits recognised within the Group’s deferred tax assets in
Brazil.
Mexico
The net deferred tax asset relating to HSBC’s operations in Mexico was US$0.6bn (2011: US$0.5bn). The deferred
tax assets included in this total related primarily to deductible temporary differences in respect of accounting
provisions for impaired loans, including losses realised on sales of impaired loans. The annual deduction for loan
impairments is capped under Mexican legislation at 2.5% of the average qualifying loan portfolio. The balance is
carried forward to future years without expiry but with the annual deduction subject to the 2.5% cap.
On the evidence available, including historic and projected levels of loan portfolio growth, loan impairment rates
and profitability, it is anticipated that the business will realise these assets within the next 15 years. The projections
assume that loan impairment rates will remain at levels consistently below the annual 2.5% cap over the medium
term.
There were no material carried forward tax losses or tax credits recognised within the Group’s deferred tax assets in
Mexico.
UK
The net deferred tax asset relating to HSBC’s operations in the UK was US$0.3bn (2011: liability US$0.2bn). The
deferred tax assets included in this total relate primarily to the carry forward of tax losses.
On the evidence available, including historical levels of profitability and management projections of future income it
is anticipated that there will be sufficient taxable income generated by the business to recover the deferred tax asset
over the next 12 months.
Unrecognised deferred tax
The amount of temporary differences, unused tax losses and tax credits for which no deferred tax asset is recognised
in the balance sheet was US$16.6bn (2011: US$14.7bn). These amounts included unused state losses arising in our
US operations of US$12.6bn (2011: US$12.5bn).
Of the total amounts unrecognised, US$3.9bn (2011: US$2.4bn) had no expiry date, US$0.3bn (2011: US$0.1bn)
was scheduled to expire within 10 years (2011: 10 years) and the remaining will expire after 10 years.
Deferred tax is not recognised in respect of the Group’s investments in subsidiaries and branches where remittance or
other realisation is not probable, and for those associates and interests in joint ventures where it has been determined
that no additional tax will arise. No amount is disclosed for the unrecognised deferred tax or the 2012 and 2011
temporary differences associated with such investments as it is impracticable to determine the amount of income
taxes that would be payable when any temporary differences reverse. Deferred tax of US$0.3bn (2011: US$0.2bn)
has, however, been provided in respect of distributable reserves of associates that, on distribution, would attract
withholding tax.
424
HSBC Holdings
Movement of deferred tax assets
Accelerated
capital
allowances
US$m
Short-term
timing
differences
US$m
Available-
for-sale
investments
US$m
Fair valued
assets and
liabilities
US$m
Share-
based
payments
US$m
Unused
tax
losses
US$m
Total
US$m
2012
At 1 January ................................
Income statement ........................
Other comprehensive income .....
Equity ..........................................
At 31 December .........................
2011
At 1 January ................................
Income statement ........................
Other comprehensive income .....
At 31 December ..........................
–
2
–
–
2
–
–
–
–
–
–
–
–
–
1
(1)
–
–
(4)
–
(27)
–
(31)
(21)
–
17
(4)
46
(15)
–
–
31
61
(15)
–
46
9
(7)
–
10
12
16
(7)
–
9
40
(40)
–
–
–
–
40
–
40
91
(60)
(27)
10
14
57
17
17
91
The amount of unused tax losses for which no deferred tax asset is recognised in the balance sheet was US$1,775m
(2011: US$8m) of which US$9m (2011: US$8m) relate to capital losses. The losses have no expiry date.
10 Dividends
Dividends to shareholders of the parent company
2012
2011
2010
Per
share
US$
Total
US$m
Settled
in scrip
US$m
Per
share
US$
Total
US$m
Settled
in scrip
US$m
Per
share
US$
Total
US$m
Settled
in scrip
US$m
Dividends declared on ordinary shares
In respect of previous year:
– fourth interim dividend .......................
0.14
2,535
259
0.12
2,119
1,130
0.10
1,733
838
In respect of current year:
– first interim dividend ...........................
– second interim dividend ......................
– third interim dividend ..........................
0.09
0.09
0.09
1,633
1,646
1,655
748
783
639
0.09
0.09
0.09
1,601
1,603
1,605
204
178
720
0.08
0.08
0.08
1,394
1,402
1,408
746
735
205
0.41
7,469
2,429
0.39
6,928
2,232
0.34
5,937
2,524
Quarterly dividends on preference
shares classified as equity
March dividend ........................................... 15.50
June dividend .............................................. 15.50
September dividend .................................... 15.50
December dividend ..................................... 15.50
62.00
22
23
22
23
90
15.50
15.50
15.50
15.50
62.00
22
23
22
23
90
15.50
15.50
15.50
15.50
62.00
22
23
22
23
90
Quarterly coupons on capital securities classified as equity1
January coupon ..................................
March coupon ....................................
April coupon ......................................
June coupon .......................................
July coupon ........................................
September coupon .............................
October coupon ..................................
December coupon ..............................
2012
2011
2010
Per share
US$
Total
US$m
Per share
US$
Total
US$m
Per share
US$
Total
US$m
0.508
0.500
0.508
0.500
0.508
0.500
0.508
0.500
4.032
44
76
45
76
45
76
45
76
483
0.508
0.500
0.508
0.500
0.508
0.500
0.508
0.500
4.032
44
76
45
76
45
76
45
76
483
0.508
–
0.508
–
0.508
0.450
0.508
0.500
2.982
44
–
45
–
45
68
45
76
323
1 HSBC Holdings issued Perpetual Subordinated Capital Securities of US$3,800m in June 2010 and US$2,200m in April 2008, which are
classified as equity under IFRSs.
425
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H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
11 – Earnings per share / 12 – Segmental analysis
The Directors declared after the end of the year a fourth interim dividend in respect of the financial year ended
31 December 2012 of US$0.18 per ordinary share, a distribution of approximately US$3,327m. The fourth interim
dividend will be payable on 8 May 2013 to holders of record on 21 March 2013 on the Hong Kong Overseas Branch
Register and 22 March 2013 on the Principal Register in the UK or the Bermuda Overseas Branch Register. No
liability is recorded in the financial statements in respect of the fourth interim dividend for 2012.
On 15 January 2013, HSBC paid a further coupon on the capital securities of US$0.508 per security, a distribution of
US$44m. No liability is recorded in the balance sheet at 31 December 2012 in respect of this coupon payment.
11 Earnings per share
Basic earnings per ordinary share was calculated by dividing the profit attributable to ordinary shareholders of the
parent company by the weighted average number of ordinary shares outstanding, excluding own shares held. Diluted
earnings per ordinary share was calculated by dividing the basic earnings, which require no adjustment for the effects
of dilutive potential ordinary shares, by the weighted average number of ordinary shares outstanding, excluding own
shares held, plus the weighted average number of ordinary shares that would be issued on conversion of dilutive
potential ordinary shares.
Profit attributable to the ordinary shareholders of the parent company
Profit attributable to shareholders of the parent company .........................................
Dividend payable on preference shares classified as equity ......................................
Coupon payable on capital securities classified as equity .........................................
Profit attributable to the ordinary shareholders of the parent company .....................
Basic and diluted earnings per share
2012
US$m
14,027
(90)
(483)
13,454
2011
US$m
16,797
(90)
(483)
16,224
2010
US$m
13,159
(90)
(323)
12,746
Basic1 ..........................................................
Effect of dilutive potential ordinary shares ...
– Savings-related Share Option Plan ....
– Other plans .........................................
2012
Number
of shares
(millions)
18,125
146
Profit
US$m
13,454
Per
share
US$
Profit
US$m
0.74
16,224
2011
Number
of shares
(millions)
17,700
222
Per
share
US$
Profit
US$m
0.92 12,746
23
123
45
177
Per
share
US$
0.73
2010
Number
of shares
(millions)
17,404
229
55
174
Diluted1 .......................................................
13,454
18,271
0.74
16,224
17,922
0.91 12,746
17,633
0.72
1 Weighted average number of ordinary shares outstanding (basic) or assuming dilution (diluted).
The weighted average number of dilutive potential ordinary shares excluded 103m employee share options that were
anti-dilutive (2011: 151m; 2010: 150m).
12 Segmental analysis
HSBC’s operating segments are organised into six geographical regions, Europe, Hong Kong, Rest of Asia-Pacific,
Middle East and North Africa (‘MENA’), North America and Latin America.
Geographical information is classified by the location of the principal operations of the subsidiary or, for The
Hongkong and Shanghai Banking Corporation, HSBC Bank, HSBC Bank Middle East and HSBC Bank USA, by
the location of the branch responsible for reporting the results or advancing the funds.
HSBC’s chief operating decision-maker is the Group Management Board (‘GMB’) which operates as a general
management committee under the direct authority of the Board. Information provided to GMB to make decisions
about allocating resources to, and assessing the performance of, operating segments is measured in accordance with
IFRSs. The financial information shown below includes the effects of intra-HSBC transactions between operating
segments which are conducted on an arm’s length basis and are eliminated in arriving at the total. Shared costs are
included in operating segments on the basis of the actual recharges made.
426
Products and services
HSBC provides a comprehensive range of banking and related financial services to its customers in its six
geographical regions. The products and services offered to customers are organised by global business.
• Retail Banking and Wealth Management (‘RBWM’) offers a broad range of products and services to meet the
personal banking and wealth management needs of individual customers. Typically, customer offerings include
personal banking products (current and savings accounts, mortgages and personal loans, credit cards, debit cards
and local and international payment services) and wealth management services (insurance and investment
products, global asset management services and financial planning services).
• Commercial Banking (‘CMB’) offers a broad range of products and services to serve the needs of our
commercial customers, including small and medium sized enterprises, mid-market enterprises and corporates.
These include credit and lending, international trade and receivables finance, treasury management and liquidity
solutions (payments and cash management and commercial cards), commercial insurance and investments. We
also offer our customers access to products and services offered by other global businesses, for example Global
Banking and Markets (‘GB&M’) which include foreign exchange products, raising capital on debt and equity
markets and advisory services.
• GB&M provides tailored financial solutions to major government, corporate and institutional clients and private
investors worldwide. The client-focused business lines deliver a full range of banking capabilities including
financing, advisory and transaction services, a markets business that provides services in credit, rates, foreign
exchange, money markets and securities services, and principal investment activities.
• Global Private Banking (‘GPB’) provides a range of services to high net worth individuals and families with
complex and international needs.
Financial information
In the following segmental analysis, the benefit of shareholders’ funds impacts the analysis only to the extent that
these funds are actually allocated to businesses in the segment by way of intra-HSBC capital and funding structures.
427
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a
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p
O
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c
n
a
n
r
e
v
o
G
e
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a
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o
p
r
o
C
s
t
n
e
m
e
t
a
t
S
l
a
i
c
n
a
n
i
F
n
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a
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H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
12 – Segmental analysis
Profit/(loss) for the year
2012
Net interest income ...............................
Net fee income ......................................
Net trading income/(expense) ...............
Gains on disposal of US branch
network, US cards business and
Ping An .............................................
Other income ........................................
Europe
US$m
Hong
Kong
US$m
Rest of
Asia-
Pacific
US$m
MENA
US$m
North
America
US$m
Latin
America
US$m
Intra-
HSBC
items
US$m
10,394
6,169
2,707
5,316
3,335
1,463
5,391
2,083
1,053
1,470
595
390
8,117
2,513
507
6,984
1,735
971
–
–
–
Total
US$m
37,672
16,430
7,091
−
(1,662)
−
2,308
3,012
2,045
–
(25)
4,012
(456)
–
1,261
−
(3,358)
7,024
113
Net operating income1 ..........................
17,608
12,422
13,584
2,430
14,693
10,951
(3,358)
68,330
Loan impairment charges and other
credit risk provisions ........................
(1,921)
(74)
(436)
(286)
(3,457)
(2,137)
–
(8,311)
Net operating income ............................
15,687
12,348
13,148
2,144
11,236
8,814
(3,358)
60,019
Employee compensation and benefits ..
General and administrative expenses ...
Depreciation and impairment of
(8,070)
(10,059)
(2,572)
(1,860)
(3,140)
(2,433)
(652)
(459)
(3,243)
(5,413)
(2,814)
(3,117)
–
3,358
(20,491)
(19,983)
property, plant and equipment ..........
(597)
(236)
(191)
Amortisation and impairment of
intangible assets ................................
(369)
(180)
(42)
(44)
(11)
(195)
(221)
(89)
(278)
–
–
(1,484)
(969)
Total operating expenses ......................
(19,095)
(4,848)
(5,806)
(1,166)
(8,940)
(6,430)
3,358
(42,927)
Operating profit ....................................
(3,408)
7,500
7,342
978
2,296
2,384
−
17,092
Share of profit in associates and joint
ventures ............................................
(6)
82
3,106
372
3
–
Profit before tax ....................................
(3,414)
7,582
10,448
1,350
2,299
2,384
Tax income/(expense) ...........................
(173)
(1,095)
(1,616)
(254)
(1,313)
(864)
Profit for the year ..................................
(3,587)
6,487
8,832
1,096
986
1,520
–
–
–
–
3,557
20,649
(5,315)
15,334
2011
Net interest income ...............................
Net fee income ......................................
Net trading income/(expense) ...............
Other income ........................................
11,001
6,236
2,161
4,848
4,691
3,097
1,189
1,705
5,102
2,111
1,658
1,842
1,432
627
482
66
11,480
3,308
(362)
1,574
6,956
1,781
1,378
1,338
–
–
–
(3,421)
40,662
17,160
6,506
7,952
Net operating income1 ..........................
24,246
10,682
10,713
2,607
16,000
11,453
(3,421)
72,280
Loan impairment charges and other
credit risk provisions ........................
(2,512)
(156)
(267)
(293)
(7,016)
(1,883)
–
(12,127)
Net operating income ............................
21,734
10,526
10,446
2,314
8,984
9,570
(3,421)
60,153
Employee compensation and benefits ..
General and administrative expenses ...
Depreciation and impairment of
(7,621)
(8,473)
(2,610)
(1,724)
(3,179)
(2,378)
(659)
(458)
(3,928)
(4,404)
(3,169)
(3,443)
–
3,421
(21,166)
(17,459)
property, plant and equipment ..........
(581)
(245)
(198)
(36)
(261)
(249)
Amortisation and impairment of
intangible assets ................................
(394)
(179)
(51)
(6)
(326)
(394)
–
–
(1,570)
(1,350)
Total operating expenses ......................
(17,069)
(4,758)
(5,806)
(1,159)
(8,919)
(7,255)
3,421
(41,545)
Operating profit ....................................
4,665
5,768
4,640
1,155
65
2,315
Share of profit in associates and joint
ventures ............................................
6
55
Profit before tax ....................................
4,671
5,823
2,831
7,471
Tax income/(expense) ...........................
(1,589)
(1,043)
(1,315)
337
1,492
(266)
35
100
958
–
2,315
(673)
Profit for the year ..................................
3,082
4,780
6,156
1,226
1,058
1,642
–
–
–
–
–
18,608
3,264
21,872
(3,928)
17,944
428
Rest of
Asia-
Pacific
US$m
Hong
Kong
US$m
Europe
US$m
MENA
US$m
North
America
US$m
Latin
America
US$m
2010
Net interest income ...............................
Net fee income ......................................
Net trading income ...............................
Other income/(expense) ........................
11,250
6,371
2,863
2,266
4,246
2,962
1,312
1,682
Net operating income1 ..........................
22,750
10,202
3,828
1,932
1,618
1,854
9,232
1,367
677
370
(4)
12,439
3,664
314
630
2,410
17,047
6,311
1,749
733
938
9,731
Intra-
HSBC
items
US$m
–
–
–
(3,125)
Total
US$m
39,441
17,355
7,210
4,241
(3,125)
68,247
Loan impairment charges and other
credit risk provisions ........................
(3,020)
(114)
(439)
(627)
(8,295)
(1,544)
–
(14,039)
Net operating income ............................
19,730
10,088
8,793
1,783
8,752
8,187
(3,125)
54,208
Employee compensation and benefits ..
General and administrative expenses ...
Depreciation and impairment of
(7,875)
(6,499)
(2,341)
(1,686)
(2,719)
(2,181)
(579)
(450)
(3,672)
(4,179)
(2,650)
(3,286)
–
3,125
(19,836)
(15,156)
property, plant and equipment ..........
(719)
(237)
(189)
(42)
(288)
(238)
Amortisation and impairment of
intangible assets ................................
(352)
(167)
(54)
(7)
(183)
(220)
–
–
(1,713)
(983)
Total operating expenses ......................
(15,445)
(4,431)
(5,143)
(1,078)
(8,322)
(6,394)
3,125
(37,688)
Operating profit ....................................
4,285
5,657
3,650
705
430
1,793
Share of profit in associates and
joint ventures ....................................
17
35
Profit before tax ....................................
4,302
5,692
2,252
5,902
187
892
24
454
2
1,795
Tax income/(expense) ...........................
(1,006)
(987)
(962)
(138)
(1,180)
(573)
Profit/(loss) for the year ........................
3,296
4,705
4,940
754
(726)
1,222
–
–
–
–
–
16,520
2,517
19,037
(4,846)
14,191
1 Net operating income before loan impairment charges and other credit risk provisions.
429
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e
v
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i
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R
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o
C
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m
e
t
a
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S
l
a
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a
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d
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S
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
12 – Segmental analysis
Other information about the profit/(loss) for the year
Europe
US$m
15,687
14,484
1,203
Hong
Kong
US$m
12,348
11,233
1,115
Rest of
Asia-
Pacific
US$m
MENA
US$m
North
America
US$m
Latin
America
US$m
Intra-
HSBC
items
US$m
13,148
12,150
998
2,144
2,169
(25)
11,236
11,109
127
8,814
8,874
(60)
(3,358)
–
(3,358)
2012
Net operating income .................
External .................................
Inter-segment .........................
Profit for the year includes the
following significant
non-cash items:
Depreciation, amortisation
and impairment ..................
Loan impairment losses gross
of recoveries and other
credit risk provisions .........
Impairment of financial
2011
Net operating income .................
External .................................
Inter-segment .........................
Profit for the year includes the
following significant
non-cash items:
Depreciation, amortisation
and impairment ..................
Loan impairment losses gross
of recoveries and other
credit risk provisions .........
Impairment of financial
966
416
233
55
363
499
2,329
investments ........................
420
Changes in fair value of
long-term debt and related
derivatives .............................
Restructuring costs ....................
(3,091)
292
105
(21)
–
21
586
83
(4)
107
361
3,587
2,489
1
32
(13)
27
(1,219)
219
4
–
94
21,734
20,676
1,058
10,526
9,442
1,084
10,446
9,396
1,050
2,314
2,316
(2)
8,984
8,744
240
9,570
9,579
(9)
(3,421)
–
(3,421)
60,153
60,153
–
975
424
249
42
802
643
3,085
investments ........................
705
Changes in fair value of
long-term debt and related
derivatives .............................
Restructuring costs ....................
3,180
357
202
55
–
47
453
25
4
34
395
7,147
2,271
13
10
27
9
1
967
73
–
259
19,730
18,881
849
10,088
9,170
918
8,793
7,728
1,065
1,783
1,774
9
8,752
8,504
248
8,187
8,151
36
(3,125)
–
(3,125)
54,208
54,208
–
2010
Net operating income .................
External .................................
Inter-segment .........................
Profit for the year includes the
following significant
non-cash items:
Depreciation, amortisation
and impairment ..................
Loan impairment losses gross
of recoveries and other
credit risk provisions .........
Impairment of financial
3,303
investments ........................
33
Changes in fair value of
long-term debt and related
derivatives .............................
Restructuring costs ....................
(365)
86
1,071
404
243
49
576
458
169
41
(2)
15
615
684
8,476
1,812
4
(2)
36
5
–
5
21
111
13
1
–
3
430
Total
US$m
60,019
60,019
–
2,532
9,457
519
(4,327)
760
–
–
–
–
–
–
–
–
–
–
3,135
13,553
808
4,161
797
–
–
–
–
–
2,801
15,059
105
(258)
158
Balance sheet information
At 31 December 2012
Loans and advances to
Rest of
Asia-
Pacific
US$m
Hong
Kong
US$m
MENA
US$m
North
America
US$m
Latin
America
US$m
Intra-
HSBC
items
US$m
Total
US$m
Europe
US$m
customers (net) ......................
463,440
173,613
138,119
28,086
140,756
53,609
–
997,623
Interests in associates and
joint ventures .........................
178
Total assets ................................. 1,389,240
Customer accounts .....................
555,009
Total liabilities ........................... 1,327,487
224
518,334
346,208
496,640
15,085
342,269
183,621
308,815
2,262
62,605
39,583
53,498
85
490,247
149,037
450,480
–
131,277
66,556
113,923
–
17,834
(241,434) 2,692,538
1,340,014
(241,434) 2,509,409
–
Capital expenditure incurred1 ....
925
336
208
102
248
458
–
2,277
At 31 December 2011
Loans and advances to
customers (net) ......................
434,336
157,665
123,868
25,875
142,747
55,938
–
940,429
Interests in associates and
joint ventures .........................
150
Total assets ................................. 1,281,945
Customer accounts .....................
493,404
Total liabilities ........................... 1,224,386
196
473,024
315,345
458,179
17,916
317,816
174,012
288,485
2,036
57,464
36,422
49,005
101
504,302
155,982
464,990
–
144,889
78,760
128,302
–
20,399
(223,861) 2,555,579
1,253,925
(223,861) 2,389,486
–
Capital expenditure incurred1 ....
1,177
432
207
29
342
951
–
3,138
At 31 December 2010
Loans and advances to
customers (net) ......................
435,799
140,691
108,731
24,626
190,532
57,987
–
958,366
Interests in associates and
joint ventures .........................
186
Total assets ................................. 1,249,527
Customer accounts .....................
491,563
Total liabilities ........................... 1,189,996
207
429,565
297,484
422,101
15,035
278,062
158,155
246,989
1,661
52,757
33,511
45,379
104
492,487
158,486
459,301
5
139,938
88,526
123,655
–
17,198
(187,647) 2,454,689
1,227,725
(187,647) 2,299,774
–
Capital expenditure incurred1 ....
865
836
168
46
774
788
–
3,477
1 Expenditure incurred on property, plant and equipment and other intangible assets. Excludes assets acquired as part of business
combinations and goodwill.
431
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w
e
v
r
e
v
O
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i
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R
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a
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a
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S
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
12 – Segmental analysis / 13 – Analysis of financial assets and liabilities
Other financial information
Net operating income by global business
2012
Net operating income3 ................
External ..................................
Internal ....................................
2011
Net operating income3 ................
External ..................................
Internal ....................................
2010
Net operating income3 ................
External ..................................
Internal ....................................
RBWM1
US$m
33,861
31,980
1,881
33,533
32,024
1,509
33,611
32,056
1,555
CMB
US$m
16,551
17,295
(744)
15,611
15,362
249
13,834
13,224
610
GB&M1
US$m
GPB
US$m
18,273
20,410
(2,137)
17,057
19,881
(2,824)
18,912
21,812
(2,900)
3,172
2,413
759
3,292
2,207
1,085
3,093
2,182
911
Other2
US$m
2,332
(3,768)
6,100
9,145
2,806
6,339
4,660
(1,027)
5,687
Intra-
HSBC
items
US$m
(5,859)
–
(5,859)
(6,358)
–
(6,358)
(5,863)
–
(5,863)
Total
US$m
68,330
68,330
–
72,280
72,280
–
68,247
68,247
–
1 With effect from 1 March 2011, our Global Asset Management business was moved from Global Banking and Markets to Retail Banking
and Wealth Management.
2 The main items reported in the ‘Other’ category are certain property activities, unallocated investment activities, centrally held
investment companies, movements in fair value of own debt and HSBC’s holding company and financing operations. The ‘Other’
category also includes gains and losses on the disposal of certain significant subsidiaries or business units.
3 Net operating income before loan impairment charges and other credit risk provisions, also referred to as revenue. The table previously
reported net operating income after loan impairment charges and other credit risk provisions.
Information by country
UK .......................................................................
Hong Kong .........................................................
USA ....................................................................
France .................................................................
Brazil ...................................................................
Other countries ...................................................
2012
2011
2010
External
net
operating
income1,2
US$m
9,149
11,307
11,779
2,881
6,395
26,819
68,330
Non-
current
assets3
US$m
18,391
11,657
6,718
11,074
2,017
30,078
External
net
operating
income1,2
US$m
16,058
9,600
12,972
2,747
6,637
24,266
Non-
current
assets3
US$m
21,414
6,257
3,830
10,790
2,149
31,590
External
net
operating
income1,2
US$m
14,171
9,282
14,032
3,345
5,408
22,009
79,935
72,280
76,030
68,247
Non-
current
assets3
US$m
19,661
4,630
6,669
10,914
2,025
29,747
73,646
1 External net operating income is attributed to countries on the basis of the location of the branch responsible for reporting the results or
advancing the funds.
2 Net operating income before loan impairment charges and other credit risk provisions, also referred to as revenue. The table previously
reported net operating income after loan impairment charges and other credit risk provisions.
3 Non-current assets consist of property, plant and equipment, goodwill, other intangible assets, interests in associates and joint ventures
and certain other assets expected to be recovered more than twelve months after the reporting period.
13 Analysis of financial assets and liabilities by measurement basis
Financial assets and financial liabilities are measured on an ongoing basis either at fair value or at amortised cost. The
summary of significant accounting policies in Note 2 describes how the classes of financial instruments are measured,
and how income and expenses, including fair value gains and losses, are recognised. The following table analyses the
carrying amounts of the financial assets and liabilities by category as defined in IAS 39 and by balance sheet heading.
432
HSBC
At 31 December 2012
Held for
trading
US$m
Designated
at fair value
US$m
Held-to-
maturity
securities
US$m
Available-
for-sale
securities
US$m
Financial
assets and
liabilities at
amortised
cost
US$m
Derivatives
designated
as fair value
hedging
instruments
US$m
Derivatives
designated
as cash flow
hedging
instruments
US$m
4
3
3
Financial assets
Cash and balances at central banks .................................................................................
Items in the course of collection from other banks .........................................................
Hong Kong Government certificates of indebtedness ....................................................
Trading assets ..................................................................................................................
Financial assets designated at fair value .........................................................................
Derivatives .......................................................................................................................
Loans and advances to banks ..........................................................................................
Loans and advances to customers ...................................................................................
Financial investments ......................................................................................................
Assets held for sale ..........................................................................................................
Other assets ......................................................................................................................
Accrued income ...............................................................................................................
–
–
–
408,811
–
353,803
–
–
–
9
–
–
Total financial assets .......................................................................................................
762,623
Financial liabilities
Hong Kong currency notes in circulation .......................................................................
Deposits by banks ............................................................................................................
Customer accounts ...........................................................................................................
Items in the course of transmission to other banks .........................................................
Trading liabilities .............................................................................................................
Financial liabilities designated at fair value ....................................................................
Derivatives .......................................................................................................................
Debt securities in issue ....................................................................................................
Liabilities of disposal groups held for sale .....................................................................
Other liabilities ................................................................................................................
Accruals ...........................................................................................................................
Subordinated liabilities ....................................................................................................
–
–
–
–
304,563
–
352,195
–
8
–
–
–
Total financial liabilities ..................................................................................................
656,766
–
–
–
–
33,582
–
–
–
–
72
–
–
33,654
–
–
–
–
–
87,720
–
–
23
–
–
–
87,743
–
–
–
–
–
–
–
–
23,413
–
–
–
–
–
–
–
–
–
–
–
397,688
10,700
–
–
141,532
7,303
22,743
–
–
–
152,546
997,623
–
7,341
23,584
8,540
23,413
408,388
1,361,212
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
22,742
107,429
1,340,014
7,138
–
–
–
119,461
3,772
32,417
11,663
29,479
1,674,115
–
–
–
–
–
199
–
–
–
–
–
–
199
–
–
–
–
–
–
4,450
–
–
–
–
–
4,450
Total
US$m
141,532
7,303
22,743
408,811
33,582
357,450
152,546
997,623
421,101
18,122
23,584
8,540
–
–
–
–
–
3,448
–
–
–
–
–
–
3,448
2,592,937
–
–
–
–
–
–
2,241
–
–
–
–
–
22,742
107,429
1,340,014
7,138
304,563
87,720
358,886
119,461
3,803
32,417
11,663
29,479
2,241
2,425,315
Shareholder Information
Financial Statements
Corporate Governance
Operating & Financial Review
Overview
Analysis of financial assets and liabilities be measurement basis (continued)
HSBC
At 31 December 2011
Held for
trading
US$m
Designated
at fair value
US$m
Held-to-
maturity
securities
US$m
Available-
for-sale
securities
US$m
Financial
assets and
liabilities at
amortised
cost
US$m
Derivatives
designated
as fair value
hedging
instruments
US$m
Derivatives
designated
as cash flow
hedging
instruments
US$m
4
3
4
Financial assets
Cash and balances at central banks .................................................................................
Items in the course of collection from other banks .........................................................
Hong Kong Government certificates of indebtedness ....................................................
Trading assets ..................................................................................................................
Financial assets designated at fair value .........................................................................
Derivatives .......................................................................................................................
Loans and advances to banks ..........................................................................................
Loans and advances to customers ...................................................................................
Financial investments ......................................................................................................
Assets held for sale ..........................................................................................................
Other assets ......................................................................................................................
Accrued income ...............................................................................................................
–
–
–
330,451
–
342,914
–
–
–
308
–
–
Total financial assets .......................................................................................................
673,673
Financial liabilities
Hong Kong currency notes in circulation .......................................................................
Deposits by banks ............................................................................................................
Customer accounts ...........................................................................................................
Items in the course of transmission to other banks .........................................................
Trading liabilities .............................................................................................................
Financial liabilities designated at fair value ....................................................................
Derivatives .......................................................................................................................
Debt securities in issue ....................................................................................................
Liabilities of disposal groups held for sale .....................................................................
Other liabilities ................................................................................................................
Accruals ...........................................................................................................................
Subordinated liabilities ....................................................................................................
–
–
–
–
265,192
–
338,788
–
803
–
–
–
Total financial liabilities ..................................................................................................
604,783
–
–
–
–
30,856
–
–
–
–
–
–
–
30,856
–
–
–
–
–
85,724
–
–
16
–
–
–
85,740
–
–
–
–
–
–
–
–
21,199
–
–
–
–
–
–
–
–
–
–
–
378,845
482
–
–
129,902
8,208
20,922
–
–
–
180,987
940,429
–
37,018
24,040
8,951
21,199
379,327
1,350,457
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
20,922
112,822
1,253,925
8,745
–
–
–
131,013
21,181
25,911
11,799
30,606
1,616,924
–
–
–
–
–
446
–
–
–
–
–
–
446
–
–
–
–
–
–
4,332
–
–
–
–
–
4,332
–
–
–
–
–
3,019
–
–
–
–
–
–
3,019
2,458,977
–
–
–
–
–
–
2,260
–
–
–
–
–
20,922
112,822
1,253,925
8,745
265,192
85,724
345,380
131,013
22,000
25,911
11,799
30,606
2,260
2,314,039
H
S
B
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H
O
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D
I
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G
S
P
L
C
1
3
–
A
n
a
l
y
s
i
s
o
f
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a
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a
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a
s
s
e
t
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a
n
d
l
i
a
b
i
l
i
t
i
e
s
N
o
t
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s
o
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t
h
e
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a
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a
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S
t
a
t
e
m
e
n
t
s
(
c
o
n
t
i
n
u
e
d
)
Total
US$m
129,902
8,208
20,922
330,451
30,856
346,379
180,987
940,429
400,044
37,808
24,040
8,951
HSBC Holdings
At 31 December 2012
Financial assets
Cash at bank and in hand ....................................
Derivatives ..........................................................
Loans and advances to HSBC undertakings ......
Financial investments .........................................
Other assets .........................................................
Total financial assets ..........................................
Financial liabilities
Amounts owed to HSBC undertakings ..............
Financial liabilities designated at fair value .......
Derivatives ..........................................................
Debt securities in issue .......................................
Accruals ..............................................................
Subordinated liabilities .......................................
Total financial liabilities .....................................
At 31 December 2011
Financial assets
Cash at bank and in hand ....................................
Derivatives ..........................................................
Loans and advances to HSBC undertakings ......
Financial investments .........................................
Other assets .........................................................
Total financial assets ..........................................
Financial liabilities
Amounts owed to HSBC undertakings ..............
Financial liabilities designated at fair value .......
Derivatives ..........................................................
Debt securities in issue .......................................
Other liabilities ...................................................
Accruals ..............................................................
Subordinated liabilities .......................................
Total financial liabilities .....................................
Held for
trading
US$m
Designated
at fair value
US$m
Loans and
receivables
US$m
Available-
for-sale
securities
US$m
Other
financial
assets and
liabilities at
amortised
cost
US$m
Total
US$m
–
3,768
–
–
–
3,768
–
–
760
–
–
–
760
–
3,568
–
–
–
3,568
–
–
1,067
–
–
–
–
1,067
–
–
–
–
–
–
–
–
41,675
–
–
41,675
–
23,195
–
–
–
–
23,195
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
28,048
–
–
28,048
–
21,151
–
–
–
–
–
21,151
–
–
–
–
–
–
–
–
–
–
–
1,208
–
1,208
–
–
–
–
–
–
–
–
–
–
1,078
–
1,078
–
–
–
–
–
–
–
–
353
–
–
–
4
357
12,856
–
–
2,691
605
11,907
28,059
316
–
–
–
1
317
2,479
–
–
2,613
885
575
12,450
19,002
353
3,768
41,675
1,208
4
47,008
12,856
23,195
760
2,691
605
11,907
52,014
316
3,568
28,048
1,078
1
33,011
2,479
21,151
1,067
2,613
885
575
12,450
41,220
435
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H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
14 – Trading assets / 15 – Fair values of financial instruments carried at fair value
14 Trading assets
Trading assets:
– not subject to repledge or resale by counterparties ..........................................................................
– which may be repledged or resold by counterparties ......................................................................
Treasury and other eligible bills ...............................................................................................................
Debt securities ..........................................................................................................................................
Equity securities .......................................................................................................................................
Trading assets at fair value .......................................................................................................................
Loans and advances to banks ...................................................................................................................
Loans and advances to customers ............................................................................................................
Trading assets valued at fair value1
US Treasury and US Government agencies2 ............................................................................................
UK Government ........................................................................................................................................
Hong Kong Government ..........................................................................................................................
Other government .....................................................................................................................................
Asset-backed securities3 ...........................................................................................................................
Corporate debt and other securities ..........................................................................................................
Equity securities .......................................................................................................................................
2012
US$m
305,312
103,499
408,811
26,282
144,677
41,634
212,593
78,271
117,947
408,811
Fair value
2012
US$m
28,405
11,688
6,228
91,498
2,896
30,244
41,634
2011
US$m
235,916
94,535
330,451
34,309
130,487
21,002
185,798
75,525
69,128
330,451
2011
US$m
15,686
12,917
8,844
90,816
2,913
33,620
21,002
212,593
185,798
1 Included within these figures are debt securities issued by banks and other financial institutions of US$20,274m (2011: US$24,956m), of
which US$3,469m (2011: US$5,269m) are guaranteed by various governments.
2 Includes securities that are supported by an explicit guarantee issued by the US Government.
3 Excludes asset-backed securities included under US Treasury and US Government agencies.
Trading assets listed on a recognised exchange and unlisted
Fair value at 31 December 2012
Listed on a recognised exchange1 ................................................
Unlisted2 .......................................................................................
Fair value at 31 December 2011
Listed on a recognised exchange1 ................................................
Unlisted2 .......................................................................................
Treasury
and other
eligible bills
US$m
Debt
securities
US$m
Equity
securities
US$m
606
25,676
26,282
789
33,520
34,309
82,732
61,945
144,677
78,760
51,727
130,487
39,945
1,689
41,634
19,994
1,008
21,002
Total
US$m
123,283
89,310
212,593
99,543
86,255
185,798
1 Included within listed investments are US$2,828m (2011: US$2,836m) of investments listed in Hong Kong.
2 Unlisted treasury and other eligible bills primarily comprise treasury bills not listed on a recognised exchange but for which there is
a liquid market.
Loans and advances to banks held for trading
Reverse repos ............................................................................................................................................
Settlement accounts ..................................................................................................................................
Stock borrowing .......................................................................................................................................
Other .........................................................................................................................................................
2012
US$m
45,015
6,324
5,361
21,571
78,271
2011
US$m
45,490
7,555
5,531
16,949
75,525
436
Loans and advances to customers held for trading
Reverse repos .........................................................................................................................................
Settlement accounts ...............................................................................................................................
Stock borrowing ....................................................................................................................................
Other ......................................................................................................................................................
2012
US$m
73,666
8,186
10,710
25,385
117,947
2011
US$m
34,358
5,804
3,928
25,038
69,128
15 Fair values of financial instruments carried at fair value
The classification of financial instruments is determined in accordance with the accounting policies set out in Note 2.
The use of assumptions and estimation in valuing financial instruments is described on page 56.
Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing
parties in an arm’s length transaction.
Financial instruments carried at fair value and bases of valuation1
At 31 December 2012
Assets
Trading assets ........................................................................
Financial assets designated at fair value ...............................
Derivatives .............................................................................
Financial investments: available for sale ..............................
Liabilities
Trading liabilities ..................................................................
Financial liabilities designated at fair value ..........................
Derivatives .............................................................................
At 31 December 2011
Assets
Trading assets ........................................................................
Financial assets designated at fair value ...............................
Derivatives .............................................................................
Financial investments: available for sale ..............................
Liabilities
Trading liabilities ..................................................................
Financial liabilities designated at fair value ..........................
Derivatives .............................................................................
Valuation techniques
Using
observable
inputs
Level 2
US$m
With
significant
unobservable
inputs
Level 3
US$m
205,590
7,594
352,960
135,931
180,543
77,017
354,375
145,628
7,644
340,668
151,936
159,157
57,696
340,260
4,378
413
3,059
8,511
7,470
–
3,005
4,780
716
4,449
9,121
7,827
567
3,129
Quoted
market
price
Level 1
US$m
198,843
25,575
1,431
253,246
116,550
10,703
1,506
180,043
22,496
1,262
217,788
98,208
27,461
1,991
Total
US$m
408,811
33,582
357,450
397,688
304,563
87,720
358,886
330,451
30,856
346,379
378,845
265,192
85,724
345,380
1 The above table does not include financial instruments within the Assets held for sale and Liabilities of disposal groups held for sale
categorisations.
The increase in Level 1 trading assets and liabilities reflects an increase in equity securities and settlement account
balances, the latter varying considerably in proportion with the level of trading activity. The increase in Level 2
assets reflects higher reverse repo balances used to cover short positions and an increase in repo balances contributed
to the growth in Level 2 liabilities.
As described on page 446, HSBC Holdings transferred financial liabilities designated at fair value from Level 1 to
Level 2. There were no other material transfers between Level 1 and Level 2 in the year. An analysis of the
movements of Level 3 financial instruments is provided on page 447.
437
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H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
15 – Fair values of financial instruments carried at fair value
Control framework
Fair values are subject to a control framework designed to ensure that they are either determined or validated by a
function independent of the risk-taker.
For all financial instruments where fair values are determined by reference to externally quoted prices or observable
pricing inputs to models, independent price determination or validation is utilised. In inactive markets, direct
observation of a traded price may not be possible. In these circumstances, HSBC will source alternative market
information to validate the financial instrument’s fair value, with greater weight given to information that is
considered to be more relevant and reliable. The factors that are considered in this regard are, inter alia:
•
•
•
•
•
•
the extent to which prices may be expected to represent genuine traded or tradeable prices;
the degree of similarity between financial instruments;
the degree of consistency between different sources;
the process followed by the pricing provider to derive the data;
the elapsed time between the date to which the market data relates and the balance sheet date; and
the manner in which the data was sourced.
For fair values determined using a valuation model, the control framework may include, as applicable, development
or validation by independent support functions of (i) the logic within valuation models; (ii) the inputs to those
models; (iii) any adjustments required outside the valuation models; and (iv) where possible, model outputs.
Valuation models are subject to a process of due diligence and calibration before becoming operational and are
calibrated against external market data on an ongoing basis.
The fair value governance structure is as follows:
Group Finance Director
Finance
Valuation Committees
Responsible for determining
fair value:
• Establishing accounting
policies for fair value
• Establishing procedures
governing valuation
• Ensuring compliance
with all relevant
accounting standards
Provides
results
Consist of valuation experts
from several independent
support functions
(product control, market risk
management, quantitative
risk and valuation group
and finance), in addition
to senior management
Overseen by
and report
all valuations
considered
to have
material
subjectivity
Valuation Committee
Review Group
Chaired by Global Head of
Product Control,
Global Markets
Consists of heads of
Global Markets, finance
and risk functions
Determination of fair value
Fair values are determined according to the following hierarchy:
• Level 1 – quoted market price: financial instruments with quoted prices for identical instruments in active
markets.
• Level 2 – valuation technique using observable inputs: financial instruments with quoted prices for similar
instruments in active markets or quoted prices for identical or similar instruments in inactive markets and
financial instruments valued using models where all significant inputs are observable.
• Level 3 – valuation technique with significant unobservable inputs: financial instruments valued using valuation
techniques where one or more significant inputs are unobservable.
The best evidence of fair value is a quoted price in an actively traded market. The fair values of financial instruments
that are quoted in active markets are based on bid prices for assets held and offer prices for liabilities issued. Where a
financial instrument has a quoted price in an active market and it is part of a portfolio, the fair value of the portfolio is
calculated as the product of the number of units and quoted price. In the event that the market for a financial
instrument is not active, a valuation technique is used.
The judgement as to whether a market is active may include, but is not restricted to, the consideration of factors such
as the magnitude and frequency of trading activity, the availability of prices and the size of bid/offer spreads. The
438
bid/offer spread represents the difference in prices at which a market participant would be willing to buy compared
with the price at which they would be willing to sell. In inactive markets, obtaining assurance that the transaction
price provides evidence of fair value or determining the adjustments to transaction prices that are necessary to
measure the fair value of the instrument requires additional work during the valuation process.
Valuation techniques incorporate assumptions about factors that other market participants would use in their
valuations, including interest rate yield curves, exchange rates, volatilities, and prepayment and default rates. For
swaps with collateralised counterparties and in significant major currencies, HSBC uses a discounting curve that
reflects the overnight interest rate (‘OIS discounting’).
The majority of valuation techniques employ only observable market data. However, certain financial instruments are
valued on the basis of valuation techniques that feature one or more significant market inputs that are unobservable,
and for them the measurement of fair value is more judgemental. An instrument in its entirety is classified as valued
using significant unobservable inputs if, in the opinion of management, a significant proportion of the instrument’s
inception profit (‘day 1 gain or loss’) or greater than 5% of the instrument’s carrying value is driven by unobservable
inputs. ‘Unobservable’ in this context means that there is little or no current market data available from which to
determine the price at which an arm’s length transaction would be likely to occur. It generally does not mean that
there is no data available at all upon which to base a determination of fair value (consensus pricing data may, for
example, be used).
In certain circumstances, HSBC records its own debt in issue at fair value, based on quoted prices in an active market
for the specific instrument concerned, where available. An example of this is where own debt in issue is hedged with
interest rate derivatives. When quoted market prices are unavailable, the own debt in issue is valued using valuation
techniques, the inputs for which are either based upon quoted prices in an inactive market for the instrument, or are
estimated by comparison with quoted prices in an active market for similar instruments. In both cases, the fair value
includes the effect of applying the credit spread which is appropriate to HSBC’s liabilities. The change in fair value
of issued debt securities attributable to the Group’s own credit spread is computed as follows: for each security at
each reporting date, an externally verifiable price is obtained or a price is derived using credit spreads for similar
securities for the same issuer. Then, using discounted cash flow, each security is valued using a Libor-based discount
curve. The difference in the valuations is attributable to the Group’s own credit spread. This methodology is applied
consistently across all securities.
Structured notes issued and certain other hybrid instrument liabilities are included within trading liabilities and are
measured at fair value. The credit spread applied to these instruments is derived from the spreads at which HSBC
issues structured notes.
Gains and losses arising from changes in the credit spread of liabilities issued by HSBC reverse over the contractual
life of the debt, provided that the debt is not repaid at a premium or a discount.
Fair value adjustments
Fair value adjustments are adopted when HSBC considers that there are additional factors that would be considered
by a market participant that are not incorporated within the valuation model. The magnitude of fair value adjustments
depends upon many entity-specific factors, and therefore fair value adjustments may not be comparable across the
banking industry.
HSBC classifies fair value adjustments as either ‘risk-related’ or ‘model-related’. The majority of these adjustments
relate to GB&M.
Movements in the level of fair value adjustments do not necessarily result in the recognition of profits or losses
within the income statement. For example, as models are enhanced, fair value adjustments may no longer be required.
Similarly, fair value adjustments will decrease when the related positions are unwound, but this may not result in
profit or loss.
439
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H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
15 – Fair values of financial instruments carried at fair value
Global Banking and Markets fair value adjustments
Type of adjustment
Risk-related ...............................................................................................................................................
Bid-offer ...............................................................................................................................................
Uncertainty ...........................................................................................................................................
Credit valuation adjustment .................................................................................................................
Debit valuation adjustment ..................................................................................................................
Other .....................................................................................................................................................
Model-related ............................................................................................................................................
Model limitation ...................................................................................................................................
Other .....................................................................................................................................................
Inception profit (Day 1 P&L reserves) (Note 19) ....................................................................................
At 31 December
2012
US$m
2,013
638
142
1,747
(518)
4
162
161
1
181
2011
US$m
1,899
695
154
1,050
–
–
567
567
–
200
2,356
2,666
The increase in credit valuation adjustment and debit valuation adjustment reflects a refinement in methodology,
described on page 441. The decrease in model limitation adjustments reflects the inclusion of OIS discounting within
the modelled value of many interest rate derivatives such that an adjustment is no longer required outside the model,
in addition to market movements and the unwind or maturity of certain legacy credit structures.
Risk-related adjustments
Bid-offer
IAS 39 requires that financial instruments are marked at bid or offer, as appropriate. Valuation models will typically
generate mid-market values. The bid-offer adjustment reflects the cost that would be incurred if substantially all
residual net portfolio market risks were closed using available hedging instruments or by disposing of or unwinding
the actual position.
Uncertainty
Certain model inputs may be less readily determinable from market data, and/or the choice of model itself may
be more subjective. In these circumstances, there exists a range of possible values that the financial instrument or
market parameter may assume and an adjustment may be necessary to reflect the likelihood that in estimating the
fair value of the financial instrument, market participants would adopt more conservative values for uncertain
parameters and/or model assumptions than those used in the valuation model.
Credit valuation adjustment
The credit valuation adjustment is an adjustment to the valuation of OTC derivative contracts to reflect within fair
value the possibility that the counterparty may default and that HSBC may not receive the full market value of the
transactions.
Debit valuation adjustment
The debit valuation adjustment is an adjustment to the valuation of OTC derivative contracts to reflect within fair
value the possibility that HSBC may default, and that HSBC may not pay full market value of the transactions.
Model-related adjustments
Model limitation
Models used for portfolio valuation purposes may be based upon a simplifying set of assumptions that do not
capture all material market characteristics. Additionally, markets evolve, and models that were adequate in the
past may require development to capture all material market characteristics in current market conditions. In these
circumstances, model limitation adjustments are adopted. As model development progresses, model limitations are
addressed within the valuation models and a model limitation adjustment is no longer needed.
440
Inception profit (Day 1 P&L reserves)
Inception profit adjustments are adopted where the fair value estimated by a valuation model is based on one or more
significant unobservable inputs. The accounting for inception profit adjustments is discussed on page 388. An
analysis of the movement in the deferred Day 1 P&L reserve is provided on page 454.
Credit valuation adjustment/debit valuation adjustment methodology
HSBC calculates a separate credit valuation adjustment (‘CVA’) and debit valuation adjustment (‘DVA’) for each
HSBC legal entity, and within each entity for each counterparty to which the entity has exposure. The calculation of
the monoline CVA is described on page 189.
HSBC calculates the CVA by applying the probability of default (‘PD’) of the counterparty conditional on the non-
default of HSBC, to the expected positive exposure of HSBC to the counterparty, and multiplying the result by the
loss expected in the event of default. Conversely, HSBC calculates the DVA by applying the PD of HSBC,
conditional on the non-default of the counterparty, to the expected positive exposure of the counterparty to HSBC,
and multiplying by the loss expected in the event of default. Both calculations are performed over the life of the
potential exposure.
As set out on page 383, from 31 December 2012 HSBC revised its methodology for estimating the CVA and the
DVA for derivatives. The CVA calculation maximises the use of PD based on relevant, observable market data,
such as credit default swap (‘CDS’) spreads. Where CDS spreads are not available, PDs are estimated having regard
to market practice, considering relevant data including both CDS indices and historical rating transition matrices.
HSBC aligned its methodology for estimating the DVA to be consistent with that applied for the CVA as at
31 December 2012. Historically, HSBC considered that a zero spread was appropriate in respect of own credit
risk and consequently did not adjust derivative liabilities for its own credit risk.
For most products, to calculate the expected positive exposure to a counterparty, HSBC uses a simulation
methodology to incorporate the range of potential exposures across the portfolio of transactions with the counterparty
over the life of an instrument. The simulation methodology includes credit mitigants such as counterparty netting
agreements and collateral agreements with the counterparty. A standard loss given default assumption of 60% is
generally adopted for developed market exposures, and 75% for emerging market exposures. Alternative loss given
default assumptions may be adopted where both the nature of the exposure and the available data support this.
For certain types of exotic derivatives where the products are not currently supported by the simulation, or for
derivative exposures in smaller trading locations where the simulation tool is not yet available, HSBC adopts
alternative methodologies. These may involve mapping to the results for similar products from the simulation tool
or where such a mapping approach is not appropriate, a simplified methodology is used, generally following the same
principles as the simulation methodology. The calculation is applied at a trade level, with more limited recognition of
credit mitigants such as netting or collateral agreements than used in the simulation methodology described
previously.
The methodologies do not, in general, account for ‘wrong-way risk’. Wrong-way risk arises where the underlying
value of the derivative prior to any CVA is positively correlated to the probability of default of the counterparty.
Where there is significant wrong-way risk, a trade-specific approach is applied to reflect the wrong-way risk within
the valuation.
With the exception of certain central clearing parties, HSBC includes all third-party counterparties in the CVA and
DVA calculations and does not net these calculations across HSBC Group entities.
441
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v
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m
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t
a
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H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
15 – Fair values of financial instruments carried at fair value
Fair value valuation bases
Financial instruments measured at fair value using a valuation technique with significant unobservable inputs –
Level 3
Assets
Available
for sale
US$m
Held for
trading
US$m
Designated
at fair value
through
profit or loss Derivatives
US$m
US$m
Held for
trading
US$m
Liabilities
Designated
at fair value
through
profit or loss
Derivatives
US$m
US$m
At 31 December 2012
Private equity including strategic
investments ...................................
Asset-backed securities ....................
Loans held for securitisation ............
Structured notes ................................
Derivatives with monolines ..............
Other derivatives ...............................
Other portfolios .................................
At 31 December 2011
Private equity including strategic
investments ...................................
Asset-backed securities ....................
Loans held for securitisation ............
Structured notes ................................
Derivatives with monolines ..............
Other derivatives ...............................
Other portfolios .................................
3,582
2,288
–
–
–
–
2,641
8,511
4,565
2,584
–
–
–
–
1,972
9,121
92
652
547
23
–
–
3,064
4,378
88
710
682
92
–
–
3,208
4,780
377
–
–
–
–
–
36
413
432
–
–
–
–
–
284
716
–
–
–
–
630
2,429
–
3,059
–
–
–
–
940
3,509
–
4,449
–
–
–
6,987
–
–
483
7,470
–
–
–
7,340
–
–
487
7,827
–
–
–
–
–
–
–
–
–
–
–
–
–
–
567
567
–
–
–
–
–
3,005
–
3,005
–
–
7
–
–
3,122
–
3,129
Private equity and strategic investments
HSBC’s private equity and strategic investments are generally classified as available for sale and are not traded in
active markets. In the absence of an active market, an investment’s fair value is estimated on the basis of an analysis
of the investee’s financial position and results, risk profile, prospects and other factors, as well as by reference to
market valuations for similar entities quoted in an active market, or the price at which similar companies have
changed ownership.
Asset-backed securities
While quoted market prices are generally used to determine the fair value of these securities, valuation models are
used to substantiate the reliability of the limited market data available and to identify whether any adjustments to
quoted market prices are required. For ABSs including residential MBSs, the valuation uses an industry standard
model and the assumptions relating to prepayment speeds, default rates and loss severity based on collateral type,
and performance, as appropriate. The valuations output is benchmarked for consistency against observable data for
securities of a similar nature.
Loans, including leveraged finance and loans held for securitisation
Loans held at fair value are valued from broker quotes and/or market data consensus providers when available. In the
absence of an observable market, the fair value is determined using valuation techniques. These techniques include
discounted cash flow models, which incorporate assumptions regarding an appropriate credit spread for the loan,
derived from other market instruments issued by the same or comparable entities.
Structured notes
The fair value of structured notes valued using a valuation technique is derived from the fair value of the underlying
debt security, and the fair value of the embedded derivative is determined as described in the paragraph below
on derivatives.
442
Trading liabilities valued using a valuation technique with significant unobservable inputs principally comprised
equity-linked structured notes, which are issued by HSBC and provide the counterparty with a return that is linked to
the performance of certain equity securities, and other portfolios. The notes are classified as Level 3 due to the
unobservability of parameters such as long-dated equity volatilities and correlations between equity prices, between
equity prices and interest rates and between interest rates and foreign exchange rates.
Derivatives
OTC (i.e. non-exchange traded) derivatives are valued using valuation models. Valuation models calculate the
present value of expected future cash flows, based upon ‘no-arbitrage’ principles. For many vanilla derivative
products, such as interest rate swaps and European options, the modelling approaches used are standard across the
industry. For more complex derivative products, there may be some differences in market practice. Inputs to
valuation models are determined from observable market data wherever possible, including prices available from
exchanges, dealers, brokers or providers of consensus pricing. Certain inputs may not be observable in the market
directly, but can be determined from observable prices via model calibration procedures or estimated from historical
data or other sources. Examples of inputs that may be unobservable include volatility surfaces, in whole or in part, for
less commonly traded option products, and correlations between market factors such as foreign exchange rates,
interest rates and equity prices. The valuation of derivatives with monolines is discussed on page 189.
Derivative products valued using valuation techniques with significant unobservable inputs included certain types of
correlation products, such as foreign exchange basket options, equity basket options, foreign exchange interest rate
hybrid transactions and long-dated option transactions. Examples of the latter are equity options, interest rate and
foreign exchange options and certain credit derivatives. Credit derivatives include certain tranched CDS transactions.
Reconciliation of fair value measurements in Level 3 of the fair value hierarchy
The following table provides a reconciliation of the movement between opening and closing balances of Level 3
financial instruments, measured at fair value using a valuation technique with significant unobservable inputs:
Movement in Level 3 financial instruments
Assets
2012
At 1 January ......................................
Total gains/(losses) recognised in
Available
for sale
US$m
Held for
trading
US$m
9,121
4,780
profit or loss .................................
(414)
356
Total gains/(losses) recognised in
other comprehensive income1 ......
Purchases ..........................................
New issuances ...................................
Sales ..................................................
Settlements ........................................
Transfers out .....................................
Transfers in .......................................
472
1,738
–
(840)
(367)
(2,944)
1,745
At 31 December ................................
8,511
Total gains/(losses) recognised in
profit or loss relating to assets and
liabilities held on 31 December:
– net interest income ...................
– trading income excluding
net interest income ...................
– net interest income on
trading activities .......................
– net income from other
financial instruments
designated at fair value ............
– dividend income .......................
166
44
–
–
–
122
78
942
–
(1,408)
(617)
(298)
545
4,378
339
–
326
13
–
–
Designated
at fair value
through
profit or loss Derivatives
US$m
US$m
Held for
trading
US$m
Liabilities
Designated
at fair value
through
profit or loss
Derivatives
US$m
US$m
4,449
7,827
567
3,129
319
–
716
10
(32)
113
–
(69)
(25)
(350)
50
413
9
–
–
–
9
–
(974)
92
–
–
–
(14)
(571)
77
143
(368)
2,852
–
(1,604)
(1,901)
202
3,059
7,470
(1,294)
–
(1,294)
–
–
–
384
–
396
(12)
–
–
10
84
–
–
–
18
(291)
55
3,005
(395)
–
(395)
–
–
–
–
–
–
–
–
(567)
–
–
–
–
–
–
–
–
443
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H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
15 – Fair values of financial instruments carried at fair value
Movement in Level 3 financial instruments (continued)
Assets
Available
for sale
US$m
Held for
trading
US$m
8,237
5,689
222
(330)
Designated
at fair value
through
profit or loss
US$m
Derivatives
US$m
Held for
trading
US$m
Liabilities
Designated
at fair value
through
profit or loss
Derivatives
US$m
US$m
3,961
11,393
570
3,806
36
8
628
2011
At 1 January ......................................
Total gains/(losses) recognised in
profit or loss .................................
Total gains/(losses) recognised in
other comprehensive income1 ......
Purchases ..........................................
New issuances ...................................
Sales ..................................................
Settlements ........................................
Transfers out .....................................
Transfers in .......................................
(179)
1,858
–
(756)
(1,088)
(1,891)
2,718
At 31 December ................................
9,121
Total gains/(losses) recognised in
profit or loss relating to assets and
liabilities held on 31 December:
– net interest income ...................
– trading income/(expense)
excluding net interest income ..
– net interest income/(expense)
on trading activities ..................
– net income from other
financial instruments
designated at fair value ............
– dividend income .......................
134
105
–
–
–
29
(12)
1,483
–
(2,578)
(199)
(569)
1,296
4,780
(237)
–
(265)
28
–
–
587
11
(15)
242
–
(69)
(7)
(173)
140
716
36
–
–
–
36
–
767
(16)
–
–
–
(33)
(410)
180
11
(1,843)
4,569
–
(1,528)
(5,266)
455
4,449
7,827
617
–
617
–
–
–
101
–
119
(18)
–
–
(11)
–
–
–
–
–
–
567
8
–
–
–
8
–
–
–
–
–
(1,083)
(608)
386
3,129
80
–
80
–
–
–
1 Included in ‘Available-for-sale investments: Fair value gains/losses’ and ‘Exchange differences’ in the consolidated statement of
comprehensive income.
Available-for-sale securities: Purchases of Level 3 AFS assets relate principally to Emerging Market corporate
bonds. Sales of Level 3 AFS assets relate principally to private equity disposals. Transfers in and out of Level 3 relate
principally to ABS securities, and the excess of transfers out over transfers in reflects some improvement in ABS
liquidity over the year.
Derivatives: The reduction in Level 3 derivative assets predominantly reflected reductions in the fair value of legacy
structured credit assets as credit spreads narrowed and the unwind or maturity of certain other structured derivatives.
Trading liabilities: Movements in Level 3 trading liability balances primarily reflect issue and redemption of
structured notes, particularly equity-linked notes. Transfers out reflect structured notes, particularly equity
linked notes, becoming observable as their residual maturity decreased.
Effect of changes in significant unobservable assumptions to reasonably possible alternatives
As discussed above, the fair value of financial instruments are, in certain circumstances, measured using valuation
techniques that incorporate assumptions that are not evidenced by prices from observable current market transactions
in the same instrument and are not based on observable market data. The following table shows the sensitivity of
these fair values to reasonably possible alternative assumptions:
Sensitivity of fair values to reasonably possible alternative assumptions
Reflected in profit or loss
Favourable
changes
US$m
Unfavourable
changes
US$m
Reflected in other
comprehensive income
Favourable
changes
US$m
Unfavourable
changes
US$m
At 31 December 2012
Derivatives, trading assets and trading liabilities1 ........................
Financial assets and liabilities designated at fair value ................
Financial investments: available for sale .....................................
465
41
–
506
(384)
(41)
–
(425)
–
–
680
680
–
–
(710)
(710)
444
Reflected in profit or loss
Favourable
changes
US$m
Unfavourable
changes
US$m
Reflected in other
comprehensive income
Favourable
changes
US$m
Unfavourable
changes
US$m
At 31 December 2011
Derivatives, trading assets and trading liabilities1 ........................
Financial assets and liabilities designated at fair value ................
Financial investments: available for sale .....................................
369
72
–
441
(436)
(72)
–
(508)
–
–
814
814
–
–
(818)
(818)
1 Derivatives, trading assets and trading liabilities are presented as one category to reflect the manner in which these financial
instruments are risk-managed.
In derivatives, trading assets and trading liabilities greater pricing certainty has arisen during the year in respect of
legacy structured credit assets, as narrowing credit spreads have reduced exposures. This has been offset by greater
pricing uncertainty in some other areas, most notably in certain interest rate derivative products and the pricing of the
derivative representing the forward sale of Ping An.
The reduction in pricing uncertainty in available-for-sale securities reflects greater liquidity in the ABS market.
Sensitivity of fair values to reasonably possible alternative assumptions by Level 3 instrument type
At 31 December 2012
Private equity investments ............................................................
Asset-backed securities ................................................................
Loans held for securitisation ........................................................
Structured notes ............................................................................
Derivatives with monolines ..........................................................
Other derivatives ...........................................................................
Other portfolios .............................................................................
At 31 December 2011
Private equity investments ............................................................
Asset-backed securities ................................................................
Loans held for securitisation ........................................................
Structured notes ............................................................................
Derivatives with monolines ..........................................................
Other derivatives ...........................................................................
Other portfolios .............................................................................
Reflected in profit or loss
Favourable
changes
US$m
Unfavourable
changes
US$m
62
41
3
4
36
320
40
506
123
3
4
6
76
145
84
441
(62)
(27)
(3)
(5)
(20)
(267)
(41)
(425)
(83)
(3)
(4)
(6)
(178)
(154)
(80)
(508)
Reflected in other
comprehensive income
Favourable
changes
US$m
Unfavourable
changes
US$m
353
143
–
–
–
–
184
680
451
183
–
–
–
–
180
814
(353)
(139)
–
–
–
–
(218)
(710)
(451)
(175)
–
–
–
–
(192)
(818)
Favourable and unfavourable changes are determined on the basis of changes in the value of the instrument as a result
of varying the levels of the unobservable parameters using statistical techniques. When parameters are not amenable
to statistical analysis, quantification of uncertainty is judgemental.
When the fair value of a financial instrument is affected by more than one unobservable assumption, the above table
reflects the most favourable or most unfavourable change from varying the assumptions individually.
In respect of private equity investments, in many of the methodologies, the principal assumption is the valuation
multiple to be applied to the main financial indicators. This may be determined with reference to multiples for
comparable listed companies and includes discounts for marketability.
For ABSs, the principal assumptions in the models are based on benchmark information about prepayment speeds,
default rates, loss severities and the historical performance of the underlying assets.
For leveraged finance, loans held for securitisation and derivatives with monolines, the principal assumption concerns
the appropriate value to be attributed to the counterparty credit risk. This requires estimation of exposure at default,
probability of default and recovery in the event of default. For loan transactions, assessment of exposure at default is
straightforward. For derivative transactions, a future exposure profile is generated on the basis of current market data.
445
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Notes on the Financial Statements (continued)
15 – Fair values of financial instruments carried at fair value / 16 – Fair values of financial instruments not carried at fair value
Probabilities of default and recovery levels are estimated using available evidence, which may include financial
information, historical experience, CDS spreads and consensus recovery levels.
For structured notes and other derivatives, principal assumptions concern the value to be attributed to future volatility
of asset values and the future correlation between asset values. These principal assumptions include credit volatilities
and correlations used in the valuation of structured credit derivatives (including leveraged credit derivatives). For
such unobservable assumptions, estimates are based on available market data, which may include the use of a proxy
method to derive a volatility or a correlation from comparable assets for which market data is more readily available,
and/or an examination of historical levels.
HSBC Holdings
The following table provides an analysis of the basis for valuing financial assets and financial liabilities measured at
fair value in the financial statements:
Bases of valuing HSBC Holdings’ financial assets and liabilities measured at fair value
Valuation techniques
Quoted
market
price
Level 1
US$m
Using
observable
inputs
Level 2
US$m
With
significant
unobservable
inputs
Level 3
US$m
At 31 December 2012
Assets
Derivatives ................................................................................
Available for sale .....................................................................
Liabilities
Designated at fair value ............................................................
Derivatives ................................................................................
At 31 December 2011
Assets
Derivatives ................................................................................
Available for sale .....................................................................
–
–
–
–
–
–
Liabilities
Designated at fair value ............................................................
Derivatives ................................................................................
17,196
–
3,768
1,208
23,195
760
3,568
–
3,955
1,067
–
–
–
–
–
1,078
–
–
Total
US$m
3,768
1,208
23,195
760
3,568
1,078
21,151
1,067
Liabilities designated at fair value: Transfers out of Level 1 were to bring these instruments in line with the
classification methodology adopted for other corporate bonds within the Group.
Available for sale securities: Transfers out of Level 3 reflect increased observability in prices and improved market
liquidity for these financial investments.
Financial instruments measured at fair value – Level 3
Financial investments measured using a valuation technique with significant unobservable inputs (Level 3) comprise
fixed-rate preferred securities and senior notes purchased from HSBC undertakings. The unobservable elements of
the valuation technique include the use of implied credit spreads and simplified bond pricing assumptions.
446
Movement in Level 3 financial instruments available for sale
At 1 January ..............................................................................................................................................
Total gains or losses:
– recognised in profit or loss ...................................................................................................................
– recognised in other comprehensive income .........................................................................................
Settlements ................................................................................................................................................
Transfers out .............................................................................................................................................
At 31 December ........................................................................................................................................
Total gains or losses recognised in profit or loss relating to those assets and liabilities
held on 31 December ............................................................................................................................
2012
US$m
1,078
–
130
–
(1,208)
–
–
2011
US$m
2,025
55
(61)
(941)
–
1,078
18
In certain circumstances, the fair value of financial instruments are measured using valuation models that incorporate
assumptions that are not supported by prices from observable current market transactions in the same instrument and
are not based on observable market data. The following table shows the sensitivity of non-derivative financial
instruments to reasonably possible alternative assumptions:
Effect of changes in significant unobservable assumptions to reasonably possible alternatives
Reflected in equity
Favourable
changes
US$m
Unfavourable
changes
US$m
Financial investments: available for sale
At 31 December 2012 ..............................................................................................................................
At 31 December 2011 ...............................................................................................................................
–
69
–
(77)
16 Fair values of financial instruments not carried at fair value
The classification of financial instruments is determined in accordance with the accounting policies set out in Note 2.
Fair values of financial instruments which are not carried at fair value on the balance sheet
At 31 December 2012
At 31 December 2011
Carrying
amount
US$m
Fair
value
US$m
Carrying
amount
US$m
Assets and liabilities not held for sale
Assets
Loans and advances to banks ...............................................................
Loans and advances to customers ........................................................
Financial investments: debt securities ..................................................
Financial investments: treasury and other eligible bills .......................
152,546
997,623
23,413
–
152,823
973,741
25,458
–
180,987
940,429
21,018
181
Fair
value
US$m
181,302
914,485
22,500
181
Liabilities
Deposits by banks .................................................................................
Customer accounts ...............................................................................
Debt securities in issue .........................................................................
Subordinated liabilities .........................................................................
107,429
1,340,014
119,461
29,479
107,392
1,340,521
120,779
32,159
112,822
1,253,925
131,013
30,606
112,848
1,254,313
130,914
29,351
Loans and advances and customer accounts held for sale
Loans and advances to banks and customers .......................................
Customer accounts ...............................................................................
6,632
2,990
6,387
2,990
35,720
20,138
37,832
19,130
1 Including financial instruments within disposal groups held for sale.
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H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
16 – Fair values of financial instruments not carried at fair value
The following is a list of financial instruments whose carrying amount is a reasonable approximation of fair value
because, for example, they are short-term in nature or reprice to current market rates frequently:
Assets
Cash and balances at central banks
Items in the course of collection from other banks
Hong Kong Government certificates of indebtedness
Endorsements and acceptances
Short-term receivables within ‘Other assets’
Accrued income
Liabilities
Hong Kong currency notes in circulation
Items in the course of transmission to other banks
Investment contracts with discretionary participation features within ‘Liabilities under insurance contracts’
Endorsements and acceptances
Short-term payables within ‘Other liabilities’
Accruals
Analysis of loans and advances to customers by geographical segment
Loans and advances to customers
Europe .......................................................................................................
Hong Kong ...............................................................................................
Rest of Asia-Pacific ..................................................................................
Middle East and North Africa ..................................................................
North America ..........................................................................................
Latin America ...........................................................................................
At 31 December 2012
At 31 December 2011
Carrying
amount
US$m
463,440
173,613
138,119
28,086
140,756
53,609
997,623
Fair
value
US$m
453,382
171,926
138,015
27,954
128,637
53,827
973,741
Carrying
amount
US$m
434,336
157,665
123,868
25,875
142,747
55,938
940,429
Fair
value
US$m
426,039
154,054
123,662
25,758
128,608
56,364
914,485
Valuation
The calculation of fair value incorporates HSBC’s estimate of the amount at which financial assets could be
exchanged, or financial liabilities settled, between knowledgeable, willing parties in an arm’s length transaction. It
does not reflect the economic benefits and costs that HSBC expects to flow from the instruments’ cash flows over
their expected future lives. Other reporting entities may use different valuation methodologies and assumptions in
determining fair values for which no observable market prices are available.
The fair values of loans and advances to customers in the US are substantially lower than their carrying amount,
reflecting the market conditions at the balance sheet date. The secondary market demand and estimated value for US
loans and advances has been heavily influenced by the challenging economic conditions during the past number of
years, including house price depreciation, rising unemployment, changes in consumer behaviour, changes in discount
rates and the lack of financing options available to support the purchase of loans and advances. Many investors are
non-bank financial institutions or hedge funds with high equity levels and a high cost of debt. For certain consumer
loans, investors take a more conservative view of future performance than HSBC. As a result, third parties are likely
to assume higher charge-off levels and/or slower voluntary prepayment speeds than HSBC believes will ultimately
be the case. The investor discount rates reflect this difference in the overall cost of capital as well as the potential
volatility in the underlying cash flow assumptions, the combination of which may yield a significant pricing discount
from HSBC’s intrinsic value.
There was a modest decrease year on year in the fair value of loans and advances to customers in Europe relative to
their carrying amount, largely in the UK mortgage portfolio which is sensitive to changes in market pricing between
the balance sheet dates given its size and the competitive UK market. We also enhanced fair value estimation
processes for mortgage and corporate lending in the UK to reflect risk factors, product characteristics and prepayment
estimates at a more granular level. This overall decrease was mitigated by higher valuations of ABSs classified as
loans and receivables following improved market appetite for such securities.
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The fair values of loans and advances to customers in Latin America are higher than their carrying amount, primarily
driven by a decrease in market interest rates, and in particular for the mortgage portfolios.
Fair values of the assets and liabilities set out below are estimated for the purpose of disclosure as follows:
Loans and advances to banks and customers
The fair value of loans and advances is based on observable market transactions, where available. In the absence of
observable market transactions, fair value is estimated using valuation models that incorporate a range of input
assumptions. These assumptions may include value estimates from third party brokers which reflect over-the-counter
trading activity; forward looking discounted cash flow models using assumptions which HSBC believes are
consistent with those which would be used by market participants in valuing such loans; and trading inputs from
other market participants which includes observed primary and secondary trades.
Loans are grouped, as far as possible, into homogeneous groups and stratified by loans with similar characteristics to
improve the accuracy of estimated valuation outputs. The stratification of a loan book considers all material factors,
including vintage, origination period, estimates of future interest rates, prepayment speeds, delinquency rates, loan-
to-value ratios, the quality of collateral, default probability, and internal credit risk ratings.
Valuation techniques are calibrated on a regular basis and tested for validity using prices from observable current
market transactions in the same instrument, without modification or repackaging, or are based on any available
observable market data.
The fair value of a loan reflects both loan impairments at the balance sheet date and estimates of market participants’
expectations of credit losses over the life of the loans, and the fair value impact of repricing between origination and
the balance sheet date. For impaired loans, fair value is estimated by discounting the future cash flows over the time
period they are expected to be recovered.
Financial investments
The fair values of listed financial investments are determined using bid market prices. The fair values of unlisted
financial investments are determined using valuation techniques that take into consideration the prices and future
earnings streams of equivalent quoted securities.
Deposits by banks and customer accounts
For the purpose of estimating fair value, deposits by banks and customer accounts are grouped by remaining
contractual maturity. Fair values are estimated using discounted cash flows, applying current rates offered for
deposits of similar remaining maturities. The fair value of a deposit repayable on demand is assumed to be the
amount payable on demand at the balance sheet date.
Debt securities in issue and subordinated liabilities
Fair values are determined using quoted market prices at the balance sheet date where available, or by reference to
quoted market prices for similar instruments.
The fair values in this note are stated at a specific date and may be significantly different from the amounts which
will actually be paid on the maturity or settlement dates of the instruments. In many cases, it would not be possible to
realise immediately the estimated fair values given the size of the portfolios measured. Accordingly, these fair values
do not represent the value of these financial instruments to HSBC as a going concern.
HSBC Holdings
The methods used by HSBC Holdings to determine fair values of financial instruments for the purpose of
measurement and disclosure are described above.
The following table provides an analysis of the fair value of financial instruments not carried at fair value on the
balance sheet:
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Notes on the Financial Statements (continued)
17 – Reclassification of financial assets / 18 – Financial assets designated at fair value
Fair values of HSBC Holdings’ financial instruments not carried at fair value on the balance sheet
Assets
Loans and advances to HSBC undertakings ................................
Liabilities
Amounts owed to HSBC undertakings ........................................
Debt securities in issue .................................................................
Subordinated liabilities .................................................................
17 Reclassification of financial assets
At 31 December 2012
At 31 December 2011
Carrying
amount
US$m
Fair
value
US$m
Carrying
amount
US$m
Fair
value
US$m
41,675
42,843
28,048
27,562
12,856
2,691
11,907
13,133
3,188
14,865
2,479
2,613
12,450
2,485
2,922
13,052
In 2008, HSBC reclassified US$15.3bn and US$2.6bn of financial assets from the held-for-trading category to the
loans and receivables and available-for-sale classifications, respectively, as permitted by the relevant amendment to
IAS 39 and explained in Note 2(e) on the Financial Statements. No further reclassifications were undertaken.
Reclassification of HSBC’s financial assets
Reclassification to loans and receivables .....................................
Reclassification to available for sale ............................................
At 31 December 2012
Carrying
amount
US$m
Fair
value
US$m
6,378
12
6,390
5,616
12
5,628
At 31 December 2011
Carrying
amount
US$m
7,867
33
7,900
Fair
value
US$m
6,651
33
6,684
The following table shows the fair value gains and losses, income and expense recognised in the income statement in
respect of reclassified assets and the gains and losses that would have been recognised if no reclassification had taken
place:
Effect of reclassifying and not reclassifying financial assets
Reclassification to loans and receivables
Recorded in the income statement1 ..........................................................................
Assuming no reclassification2 .................................................................................
Net income statement effect of reclassification .........................................................
Reclassification to available for sale
Recorded in the income statement1 ..........................................................................
Assuming no reclassification2 .................................................................................
Net income statement effect of reclassification .........................................................
2012
US$m
179
653
(474)
–
1
(1)
2011
US$m
318
317
1
1
(2)
3
2010
US$m
610
1,260
(650)
56
59
(3)
1 ‘Income and expense’ recorded in the income statement include the accrual of the effective interest rate and, for 2012, includes US$84m
in respect of impairment (2011: US$69m; 2010: US$6m).
2 Effect on the income statement during the year had the reclassification not occurred.
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18 Financial assets designated at fair value
Financial assets designated at fair value:
– not subject to repledge or resale by counterparties ..........................................................................
– which may be repledged or resold by counterparties ......................................................................
Treasury and other eligible bills ...............................................................................................................
Debt securities ..........................................................................................................................................
Equity securities .......................................................................................................................................
Securities designated at fair value ............................................................................................................
Loans and advances to banks ...................................................................................................................
Loans and advances to customers ............................................................................................................
Securities designated at fair value1
Fair value
US Treasury and US Government agencies2 ...........................................................................................
UK Government .......................................................................................................................................
Hong Kong Government .........................................................................................................................
Other government ....................................................................................................................................
Asset-backed securities3 ..........................................................................................................................
Corporate debt and other securities .........................................................................................................
Equities ....................................................................................................................................................
At 31 December
2012
US$m
33,562
20
33,582
54
12,551
20,868
33,473
55
54
33,582
At 31 December
2012
US$m
37
625
135
4,508
158
7,142
20,868
33,473
2011
US$m
30,738
118
30,856
123
11,834
17,930
29,887
119
850
30,856
2011
US$m
35
812
151
3,964
201
6,794
17,930
29,887
1 Included within these figures are debt securities issued by banks and other financial institutions of US$3,509m (2011: US$3,497m), of
which US$5m (2011: US$40m) are guaranteed by various governments.
2 Includes securities that are supported by an explicit guarantee issued by the US Government.
3 Excludes asset-backed securities included under US Treasury and US Government agencies.
Securities listed on a recognised exchange and unlisted
Fair value at 31 December 2012
Listed on a recognised exchange1 ................................................
Unlisted .........................................................................................
Fair value at 31 December 2011
Listed on a recognised exchange1 ................................................
Unlisted .........................................................................................
Treasury
and other
eligible bills
US$m
Debt
securities
US$m
Equity
securities
US$m
–
54
54
4
119
123
3,007
9,544
12,551
3,607
8,227
11,834
14,063
6,805
20,868
11,859
6,071
17,930
Total
US$m
17,070
16,403
33,473
15,470
14,417
29,887
1 Included within listed investments are US$931m of investments listed in Hong Kong (2011: US$631m).
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Notes on the Financial Statements (continued)
19 – Derivatives
19 Derivatives
Fair values of derivatives by product contract type held by HSBC
At 31 December 2012
Foreign exchange ................................................
Interest rate .........................................................
Equity ..................................................................
Credit ..................................................................
Commodity and other .........................................
Trading
US$m
68,277
628,162
15,413
12,740
1,443
Gross total fair values .........................................
726,035
Netting ................................................................
Total ....................................................................
At 31 December 2011
Foreign exchange ................................................
Interest rate .........................................................
Equity ..................................................................
Credit ..................................................................
Commodity and other .........................................
74,958
510,652
15,262
25,694
2,198
Gross total fair values .........................................
628,764
Netting ................................................................
Total ....................................................................
Assets
Hedging
US$m
1,227
2,417
–
–
–
3,644
1,026
2,439
–
–
–
3,465
Liabilities
Hedging
US$m
239
6,491
–
–
–
6,730
371
6,221
–
–
–
6,592
Total
US$m
Trading
US$m
69,504
630,579
15,413
12,740
1,443
70,944
618,808
19,889
13,508
1,236
729,679
724,385
(372,229)
357,450
75,984
513,091
15,262
25,694
2,198
75,077
502,906
19,363
25,800
1,492
632,229
624,638
(285,850)
346,379
Total
US$m
71,183
625,299
19,889
13,508
1,236
731,115
(372,229)
358,886
75,448
509,127
19,363
25,800
1,492
631,230
(285,850)
345,380
The 3% increase in the fair value of derivative assets during 2012 was driven by increased interest rate derivative fair
values as major currency yield curves continued to decline, in particular, the euro. This drove both the increase in
gross fair values and the increase in the netting adjustment.
Fair values of derivatives by product contract type held by HSBC Holdings with subsidiaries
Foreign exchange ..........................................................................
Interest rate ...................................................................................
At 31 December 2012
Trading
assets
US$m
Trading
liabilities
US$m
1,636
2,132
3,768
760
–
760
At 31 December 2011
Trading
assets
US$m
1,546
2,022
3,568
Trading
liabilities
US$m
1,067
–
1,067
Derivatives are financial instruments that derive their value from the price of underlying items such as equities,
bonds, interest rates, foreign exchange, credit spreads, commodities and equity or other indices. Derivatives enable
users to increase, reduce or alter exposure to credit or market risks.
Derivatives are carried at fair value and shown in the balance sheet as separate totals of assets and liabilities. A
description of how the fair value of derivatives is derived is set out on page 443. Derivative assets and liabilities on
different transactions are only set off (netted) if the transactions are with the same counterparty, a legal right of set-
off exists and the cash flows are intended to be settled on a net basis.
Use of derivatives
HSBC transacts derivatives for three primary purposes: to create risk management solutions for clients, to manage the
portfolio risks arising from client business and to manage and hedge HSBC’s own risks. Derivatives (except for
derivatives which are designated as effective hedging instruments as defined in IAS 39) are held for trading. Within
the held-for-trading classification are two types of derivatives: those used in sales and trading activities, and those
used for risk management purposes but which for various reasons do not meet the qualifying criteria for hedge
accounting. The second category includes derivatives managed in conjunction with financial instruments designated
at fair value. These activities are described more fully below.
HSBC’s derivative activities give rise to significant open positions in portfolios of derivatives. These positions
are managed constantly to ensure that they remain within acceptable risk levels. When entering into derivative
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transactions, HSBC employs the same credit risk management framework to assess and approve potential credit
exposures that is used for traditional lending.
Trading derivatives
Most of HSBC’s derivative transactions relate to sales and trading activities. Sales activities include the structuring
and marketing of derivative products to customers to enable them to take, transfer, modify or reduce current or
expected risks. Trading activities in derivatives are entered into principally for the purpose of generating profits from
short-term fluctuations in price or margin and for the risk management of exposure arising from customer activities.
Positions may be traded actively or be held over a period of time to benefit from expected changes in exchange rates,
interest rates, equity prices or other market parameters. Trading includes market-making, positioning and arbitrage
activities. Market-making entails quoting bid and offer prices to other market participants for the purpose of
generating revenues based on spread and volume; positioning means managing market risk positions in the
expectation of benefiting from favourable movements in prices, rates or indices; arbitrage involves identifying and
profiting from price differentials between markets and products.
As mentioned above, other derivatives classified as held for trading include non-qualifying hedging derivatives,
ineffective hedging derivatives and the components of hedging derivatives that are excluded from assessing hedge
effectiveness. Non-qualifying hedging derivatives are entered into for risk management purposes but do not meet the
criteria for hedge accounting. Trading derivatives also include derivatives managed in conjunction with financial
instruments designated at fair value.
Gains and losses from changes in the fair value of derivatives, including the contractual interest, that do not qualify
for hedge accounting are reported in ‘Net trading income’ except for derivatives managed in conjunction with
financial instruments designated at fair value, where gains and losses are reported in ‘Net income from financial
instruments designated at fair value’ together with the gains and losses on the economically hedged items. Where the
derivatives are managed with debt securities in issue, the contractual interest is shown in ‘Interest expense’ together
with the interest payable on the issued debt. Substantially all of HSBC Holdings’ derivatives entered into with HSBC
undertakings are managed in conjunction with financial liabilities designated at fair value.
The notional contract amounts of derivatives held for trading purposes indicate the nominal value of transactions
outstanding at the balance sheet date; they do not represent amounts at risk. The 9% increase in the notional contract
amounts of HSBC’s derivatives during 2012 was primarily driven by an increase in the trading volumes of interest
rate contracts.
Notional contract amounts of derivatives held for trading purposes by product type
HSBC
At
31 December
2012
US$m
At
31 December
2011
US$m
HSBC Holdings
At
31 December
2012
US$m
At
31 December
2011
US$m
Foreign exchange ..........................................................................
Interest rate ...................................................................................
Equity ............................................................................................
Credit ............................................................................................
Commodity and other ...................................................................
4,435,729
21,355,749
495,668
901,507
80,219
3,945,774
19,788,710
265,577
1,049,147
76,487
27,268,872
25,125,695
17,576
11,554
–
–
–
29,130
18,942
10,954
–
–
–
29,896
Credit derivatives
HSBC trades credit derivatives through its principal dealing operations and acts as a principal counterparty to a broad
range of users, structuring transactions to produce risk management products for its customers, or making markets in
certain products. Risk is typically controlled through entering into offsetting credit derivative contracts with other
counterparties.
HSBC manages the credit risk arising on buying and selling credit derivative protection by including the related
credit exposures within its overall credit limit structure for the relevant counterparty. Trading of credit derivatives
is restricted to a small number of offices within the major centres which have the control infrastructure and market
skills to manage effectively the credit risk inherent in the products.
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Notes on the Financial Statements (continued)
19 – Derivatives
Credit derivatives are also deployed to a limited extent for the risk management of the Group’s loan portfolios.
The notional contract amount of credit derivatives of US$901,507m (2011: US$1,049,147m) consisted of protection
bought of US$446,410m (2011: US$517,737m) and protection sold of US$455,097m (2011: US$531,410m). The
credit derivative business operates within the market risk management framework described on page 265.
Derivatives valued using models with unobservable inputs
The difference between the fair value at initial recognition (the transaction price) and the value that would have been
derived had valuation techniques used for subsequent measurement been applied at initial recognition, less
subsequent releases, is as follows:
Unamortised balance of derivatives valued using models with significant unobservable inputs
Unamortised balance at 1 January ............................................................................................................
Deferral on new transactions ....................................................................................................................
Recognised in the income statement during the period:
– amortisation .......................................................................................................................................
– subsequent to unobservable inputs becoming observable ................................................................
– maturity, termination or offsetting derivative ...................................................................................
– risk hedged ........................................................................................................................................
Exchange differences ................................................................................................................................
Unamortised balance at 31 December1 .....................................................................................................
1 This amount is yet to be recognised in the consolidated income statement.
Hedge accounting derivatives
2012
US$m
200
149
(112)
(1)
(46)
(11)
2
181
2011
US$m
250
234
(143)
(71)
(60)
(8)
(2)
200
HSBC uses derivatives (principally interest rate swaps) for hedging purposes in the management of its own asset and
liability portfolios and structural positions. This enables HSBC to optimise the overall cost to the Group of accessing
debt capital markets, and to mitigate the market risk which would otherwise arise from structural imbalances in the
maturity and other profiles of its assets and liabilities.
The accounting treatment of hedge transactions varies according to the nature of the instrument hedged and the type of
hedge transactions. Derivatives may qualify as hedges for accounting purposes if they are fair value hedges, cash flow
hedges, or hedges of net investment in foreign operations. These are described under the relevant headings below.
The notional contract amounts of derivatives held for hedge accounting purposes indicate the nominal value of
transactions outstanding at the balance sheet date; they do not represent amounts at risk.
Notional contract amounts of derivatives held for hedge accounting purposes by product type
Foreign exchange ..........................................................................
Interest rate ...................................................................................
At 31 December 2012
Cash flow
hedge
US$m
Fair value
hedge
US$m
16,716
182,688
199,404
112
75,505
75,617
At 31 December 2011
Cash flow
hedge
US$m
12,078
228,052
240,130
Fair value
hedge
US$m
1,363
76,950
78,313
Fair value hedges
HSBC’s fair value hedges principally consist of interest rate swaps that are used to protect against changes in the fair
value of fixed-rate long-term financial instruments due to movements in market interest rates. For fair value hedges,
all changes in the fair value of the derivative and in the fair value of the item in relation to the risk being hedged are
recognised in the income statement. If the hedge relationship is terminated, the fair value adjustment to the hedged
item continues to be reported as part of the basis of the item and is amortised to the income statement as a yield
adjustment over the remainder of the hedging period.
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Fair value of derivatives designated as fair value hedges
At 31 December 2012
At 31 December 2011
Assets
US$m
Liabilities
US$m
Assets
US$m
Liabilities
US$m
Foreign exchange ..........................................................................
Interest rate ...................................................................................
–
199
199
Gains or losses arising from fair value hedges
Gains/(losses):
– on hedging instruments ..........................................................................................
– on the hedged items attributable to the hedged risk ...............................................
–
4,450
4,450
2012
US$m
(898)
871
(27)
77
369
446
2011
US$m
(4,082)
3,858
(224)
1
4,331
4,332
2010
US$m
(830)
868
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The gains and losses on ineffective portions of fair value hedges are recognised immediately in ‘Net trading income’.
Cash flow hedges
HSBC’s cash flow hedges consist principally of interest rate swaps, futures and cross-currency swaps that are used to
protect against exposures to variability in future interest cash flows on non-trading assets and liabilities which bear
interest at variable rates or which are expected to be re-funded or reinvested in the future. The amounts and timing of
future cash flows, representing both principal and interest flows, are projected for each portfolio of financial assets
and liabilities on the basis of their contractual terms and other relevant factors, including estimates of prepayments
and defaults. The aggregate principal balances and interest cash flows across all portfolios over time form the basis
for identifying gains and losses on the effective portions of derivatives designated as cash flow hedges of forecast
transactions. Gains and losses are initially recognised in other comprehensive income, and accumulated in the cash
flow hedging reserve, and are transferred to the income statement when the forecast cash flows affect the income
statement.
Fair value of derivatives designated as cash flow hedges
Foreign exchange ..........................................................................
Interest rate ...................................................................................
At 31 December 2012
At 31 December 2011
Assets
US$m
1,230
2,218
3,448
Liabilities
US$m
200
2,041
2,241
Assets
US$m
949
2,070
3,019
Liabilities
US$m
370
1,890
2,260
Forecast principal balances on which interest cash flows are expected to arise
At 31 December 2012
Assets ............................................................................................
Liabilities ......................................................................................
Net cash inflows exposure ............................................................
At 31 December 2011
Assets ............................................................................................
Liabilities ......................................................................................
Net cash inflows/(outflows) exposure ..........................................
3 months
or less
US$m
More than 3
months but less
than 1 year
US$m
5 years or less
but more than
1 year
US$m
More than
5 years
US$m
112,846
(68,534)
44,312
139,701
(77,898)
61,803
93,072
(43,800)
49,272
110,960
(50,480)
60,480
72,557
(29,401)
43,156
66,383
(36,296)
30,087
5,055
(4,777)
278
4,460
(4,693)
(233)
This table reflects the interest rate repricing profile of the underlying hedged items.
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Notes on the Financial Statements (continued)
20 – Financial investments
The gains and losses on ineffective portions of such derivatives are recognised immediately in ‘Net trading income’.
During the year to 31 December 2012 a gain of US$35m (2011: gain of US$26m; 2010: loss of US$9m) was
recognised due to hedge ineffectiveness.
Hedges of net investments in foreign operations
The Group applies hedge accounting in respect of certain consolidated net investments. Hedging is undertaken using
forward foreign exchange contracts or by financing with currency borrowings.
At 31 December 2012, the fair values of outstanding financial instruments designated as hedges of net investments
in foreign operations were assets of US$3m (2011: US$121m) and liabilities of US$50m (2011: US$36m) and
notional contract values of US$2,654m (2011: US$3,920m).
The ineffectiveness recognised in ‘Net trading income’ in the year ended 31 December 2012 that arose from hedges
in foreign operations was nil (2011 and 2010: nil).
20 Financial investments
Financial investments:
– not subject to repledge or resale by counterparties ..........................................................................
– which may be repledged or resold by counterparties ......................................................................
Carrying amount and fair value of financial investments
At 31 December
2012
US$m
399,613
21,488
421,101
2011
US$m
364,906
35,138
400,044
At 31 December 2012
Carrying
amount
US$m
Fair
value
US$m
At 31 December 2011
Carrying
amount
US$m
Fair
value
US$m
Treasury and other eligible bills ...................................................
– available for sale ..................................................................
– held to maturity ....................................................................
Debt securities ..............................................................................
– available for sale ..................................................................
– held to maturity ....................................................................
Equity securities ...........................................................................
– available for sale ..................................................................
87,550
87,550
–
327,762
304,349
23,413
5,789
5,789
87,550
87,550
–
329,807
304,349
25,458
5,789
5,789
65,223
65,042
181
327,611
306,593
21,018
7,210
7,210
65,223
65,042
181
329,093
306,593
22,500
7,210
7,210
Total financial investments ...........................................................
421,101
423,146
400,044
401,526
Financial investments at amortised cost and fair value
At 31 December 2012
US Treasury ..............................................................................................................................................
US Government agencies3 ........................................................................................................................
US Government sponsored entities3 .........................................................................................................
UK Government ........................................................................................................................................
Hong Kong Government ..........................................................................................................................
Other government .....................................................................................................................................
Asset-backed securities4 ...........................................................................................................................
Corporate debt and other securities ..........................................................................................................
Equities .....................................................................................................................................................
Amortised
cost1
US$m
60,657
22,579
5,262
17,018
42,687
146,507
29,960
86,099
4,284
415,053
Fair
value2
US$m
61,925
23,500
5,907
17,940
42,711
149,179
26,418
89,777
5,789
423,146
456
At 31 December 2011
US Treasury ..............................................................................................................................................
US Government agencies3 ........................................................................................................................
US Government sponsored entities3 .........................................................................................................
UK Government ........................................................................................................................................
Hong Kong Government ..........................................................................................................................
Other government .....................................................................................................................................
Asset-backed securities4 ...........................................................................................................................
Corporate debt and other securities ..........................................................................................................
Equities .....................................................................................................................................................
At 31 December 2010
US Treasury ..............................................................................................................................................
US Government agencies3 ........................................................................................................................
US Government sponsored entities3 .........................................................................................................
UK Government ........................................................................................................................................
Hong Kong Government ..........................................................................................................................
Other government .....................................................................................................................................
Asset-backed securities4 ...........................................................................................................................
Corporate debt and other securities ..........................................................................................................
Equities .....................................................................................................................................................
Amortised
cost1
US$m
43,848
25,079
4,425
32,165
33,359
125,623
35,096
94,110
5,122
398,827
37,380
20,895
5,029
31,069
29,770
108,947
39,845
124,704
5,605
403,244
Fair
value2
US$m
45,283
26,093
5,056
33,603
33,374
127,049
28,625
95,233
7,210
401,526
37,255
21,339
5,267
31,815
29,793
109,806
33,175
125,311
7,983
401,744
1 Represents the amortised cost or cost basis of the financial investment.
2 Included within these figures are debt securities issued by banks and other financial institutions of US$59,908m (2011: US$68,334m;
2010: US$99,733m), of which US$6,916m (2011: US$17,079m; 2010: US$38,862m) are guaranteed by various governments. The fair
value of the debt securities issued by banks and other financial institutions was US$60,616m (2011: US$68,765m; 2010:
US$100,070m).
3 Includes securities that are supported by an explicit guarantee issued by the US Government.
4 Excludes asset-backed securities included under US Government agencies and sponsored entities.
Financial investments listed on a recognised exchange and unlisted
Carrying amount at 31 December 2012
Listed on a recognised exchange1 ......................
Unlisted2 .............................................................
Carrying amount at 31 December 2011
Listed on a recognised exchange1 ......................
Unlisted2 .............................................................
Treasury
and other
eligible bills
available
for sale
US$m
Treasury
and other
eligible bills
held to
maturity
US$m
3,284
84,266
87,550
4,077
60,965
65,042
–
–
–
–
181
181
Debt
securities
available
for sale
US$m
113,399
190,950
Debt
securities
held to
maturity
US$m
5,599
17,814
Equity
securities
available
for sale
US$m
Total
US$m
536
5,253
122,818
298,283
304,349
23,413
5,789
421,101
121,303
185,290
4,370
16,648
535
6,675
130,285
269,759
306,593
21,018
7,210
400,044
1 The fair value of listed held-to-maturity debt securities as at 31 December 2012 was US$6,123m (2011: US$4,641m). Included within
listed investments were US$3,512m (2011: US$3,544m) of investments listed in Hong Kong.
2 Unlisted treasury and other eligible bills available for sale primarily comprise treasury bills not listed on a recognised exchange but for
which there is a liquid market.
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Notes on the Financial Statements (continued)
20 – Financial investments / 21 – Transfers of financial assets
Maturities of investments in debt securities at their carrying amount
Remaining contractual maturity of total debt securities:
1 year or less .........................................................................................................................................
5 years or less but over 1 year ..............................................................................................................
10 years or less but over 5 years ..........................................................................................................
Over 10 years ........................................................................................................................................
Remaining contractual maturity of debt securities available for sale:
1 year or less .........................................................................................................................................
5 years or less but over 1 year ..............................................................................................................
10 years or less but over 5 years ..........................................................................................................
Over 10 years ........................................................................................................................................
Remaining contractual maturity of debt securities held to maturity:
1 year or less .........................................................................................................................................
5 years or less but over 1 year ..............................................................................................................
10 years or less but over 5 years ..........................................................................................................
Over 10 years ........................................................................................................................................
At 31 December
2012
US$m
67,268
157,075
47,123
56,296
327,762
65,500
149,195
39,498
50,156
304,349
1,768
7,880
7,625
6,140
2011
US$m
87,080
128,192
52,251
60,088
327,611
85,821
120,763
44,946
55,063
306,593
1,259
7,429
7,305
5,025
23,413
21,018
Contractual maturities and weighted average yields of investment debt securities at 31 December 2012
Within one year
After one year but
within five years
After five years but
within ten years
After ten years
Amount
US$m
Yield
%
Amount
US$m
Yield
%
Amount
US$m
Yield Amount
US$m
%
Yield
%
Available for sale
US Treasury .............................................
US Government agencies ........................
US Government-sponsored agencies .......
UK Government .......................................
Hong Kong Government .........................
Other governments ..................................
Asset-backed securities ...........................
Corporate debt and other securities .........
12,306
6
5
162
946
38,327
336
13,312
Total amortised cost .................................
65,400
Total carrying value .................................
65,500
Held to maturity
US Treasury .............................................
US Government agencies ........................
US Government-sponsored agencies .......
Hong Kong Government .........................
Other governments ..................................
Asset-backed securities ...........................
Corporate debt and other securities .........
Total amortised cost .................................
Total carrying value .................................
22
–
1
–
71
–
1,674
1,768
1,768
0.4
2.6
2.0
0.2
0.5
2.5
0.1
3.2
4.2
–
8.1
–
2.8
–
4.4
30,334
7
360
13,793
686
60,048
2,682
39,667
147,577
149,195
21
1
6
30
480
–
7,342
7,880
7,880
0.5
5.3
2.6
1.5
2.0
2.7
0.4
2.5
4.4
7.6
7.8
0.4
3.8
–
3.8
6,113
94
2,968
1,286
–
10,198
7,643
8,123
36,425
39,498
50
3
1
10
254
–
7,307
7,625
7,625
2.0
1.9
3.1
5.9
–
4.4
0.2
3.5
4.8
7.7
7.8
4.1
5.2
–
4.2
2,237
22,128
807
634
–
2,112
19,181
3,325
50,424
50,156
143
338
1,113
3
562
118
3,863
6,140
6,140
3.5
2.9
3.7
5.1
–
3.8
0.2
5.1
4.4
6.5
6.2
1.2
5.1
6.3
4.2
The maturity distributions of asset-backed securities are presented in the above table on the basis of contractual
maturity dates. The weighted average yield for each range of maturities is calculated by dividing the annualised
interest income for the year ended 31 December 2012 by the book amount of available-for-sale debt securities at
that date. The yields do not include the effect of related derivatives.
21 Transfers of financial assets
HSBC enters into transactions in the normal course of business by which it transfers financial assets to third parties
including SPEs. Depending on the circumstances these transfers may either result in these financial assets being
derecognised or continuing to be recognised.
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• Full derecognition occurs when HSBC transfers its contractual right to receive cash flows from the financial
assets, or retains the right but assumes an obligation to pass on the cash flows from the asset, and transfers
substantially all the risks and rewards of ownership. The risks include credit, interest rate, foreign currency,
prepayment and other price risks.
• Derecognition does not occur when HSBC transfers its contractual right to receive cash flows from the financial
assets, or retains the right but assumes an obligation to pass on the cash flows from the asset, but either:
i)
retains substantially all of the risks and rewards of ownership of the transferred asset; or
ii) neither retains nor transfers substantially all of the risks and rewards of ownership but has retained control of
the financial asset. In this situation the financial assets are recognised on the balance sheet to the extent
of HSBC’s continuing involvement.
The majority of transferred financial assets that do not qualify for derecognition are (i) debt securities held by
counterparties as collateral under repurchase agreements or (ii) equity securities lent under securities lending
agreements.
As the substance of these transactions is secured borrowings the asset collateral continues to be recognised in full and
the related liability reflecting the Group’s obligation to repurchase the transferred assets for a fixed price at a future
date is recognised in deposits from banks or customers as appropriate. As a result of these transactions, the Group is
unable to use, sell or pledge the transferred assets for the duration of the transaction. The Group remains exposed to
interest rate risk and credit risk on these pledged instruments. The counterparty’s recourse is not limited to the
transferred assets.
Other transactions where the counterparty’s recourse is only to the transferred asset includes a Canadian government
sponsored securitisation programme, where HSBC Bank Canada assigns ownership and its right to sell or pledge
residential mortgages. HSBC Bank Canada remains exposed to credit and interest rate risk on the assigned residential
mortgages, which continue to be recorded as loans and advances. Third party funds received by HSBC Bank Canada
under the programme are accounted for as secured borrowings and presented as debt securities in issue on the
consolidated balance sheet.
In a small number of securitisation transactions, HSBC has neither transferred nor retained substantially all the risks
and rewards of ownership of the transferred assets, and has retained control of the transferred assets. Circumstances
in which HSBC has continuing involvement in the transferred assets may include retention of servicing rights over
the transferred assets, entering into a derivative transaction with the securitisation vehicle or retaining an interest in
the securitisation vehicle. Where HSBC has continuing involvement it continues to recognise the transferred assets
to the extent of its continuing involvement and recognises an associated liability. The net carrying amount of the
transferred assets and associated liabilities reflects the rights and obligations that HSBC has retained.
The following table analyses the carrying amount of financial assets that did not qualify for derecognition and their
associated financial liabilities, including those that are recognised to the extent of HSBC’s continuing involvement
and the associated liabilities.
Financial assets not qualifying for full derecognition and associated financial liabilities1
Carrying
amount of
assets
before
transfer
US$m
Carrying
amount of
transferred
assets
US$m
Carrying
amount of
associated
liabilities
US$m
Fair
value of
transferred
assets
US$m
Fair
value of
associated
liabilities
US$m
122,130
5,891
9,727
121,589
5,820
9,733
9,767
9,856
At 31 December 2012
Repurchase agreements ......................................
Securities lending agreements ............................
Other sales (recourse to transferred asset only) .
Securitisations recognised to the extent of
continuing involvement ..................................
17,427
12
6
12
6
Net
position
US$m
(89)
6
1 The disclosure for 2012 reflects amendments made to IFRS 7 that are effective prospectively for annual reporting periods beginning on
or after 1 July 2011.
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Notes on the Financial Statements (continued)
20 – Financial investments / 21 – Transfers of financial assets
At 31 December 2011, the carrying amount of transferred assets and associated liabilities for repurchase agreements
were US$124,982m and US$124,413m respectively, and for securities lending agreements were US$7,129m and
US$7,039m, respectively.
At 31 December 2011, the carrying amount of transferred assets and associated liabilities for securitisations
recognised to the extent of continuing involvement were US$22m and US$11m, respectively. The carrying amount of
these assets before transfer was US$17,427m.
Financial assets qualifying for full derecognition and associated financial liabilities1
At 31 December 2012
2012
Carrying amount
of continuing
involvement in
the balance sheet
Assets Liabilities
US$m
US$m
Fair value of
continuing
involvement
Assets
US$m
Liabilities
US$m
Gain or
loss
Maximum recognised
Income/
Income/
(expenses)
(expenses) recognised
cumulat-
ively
US$m
exposure at transfer recognised
in year
US$m
to loss
US$m
date
US$m
Type of continuing involvement
Interest in SPEs ..........................
393
–
354
–
393
10
8
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1 The disclosure for 2012 reflects amendments made to IFRS 7 that are effective prospectively for annual reporting periods beginning on
or after 1 July 2011.
The assets in the table above represent our continuing involvement in securitisations where HSBC has transferred
assets to an unconsolidated SPE, but has retained some of the notes issued by the SPE. These notes are reported in
loans and advances to customers. The maximum exposure to loss is the carrying amount of the notes.
22 Interests in associates and joint ventures
Associates
Principal associates of HSBC
Listed
Bank of Communications Co., Limited ........................................
Industrial Bank Co., Limited ........................................................
Ping An Insurance (Group) Company of China, Limited ............
The Saudi British Bank ................................................................
At 31 December 2012
Carrying
amount
US$m
Fair
value
US$m
11,770
2,851
–
2,135
16,756
10,633
3,665
–
3,189
17,487
At 31 December 2011
Carrying
amount
US$m
8,507
2,214
6,373
1,886
Fair
value
US$m
8,234
2,743
8,110
3,256
18,980
22,343
Listed
Bank of Communications Co., Limited ...........................................................
Industrial Bank Co., Limited ...........................................................................
The Saudi British Bank ...................................................................................
At 31 December 2012
Country of
incorporation
PRC1
PRC1
Saudi Arabia
HSBC’s
interest in
equity capital
Issued
equity
capital
19.03%
12.80%
40.00%
RMB74,263m
RMB10,786m
SR10,000m
Unlisted
Barrowgate Limited2 ........................................................................................
Vietnam Technological and Commercial Joint Stock Bank ............................
Yantai Bank Co., Limited3 ...............................................................................
Hong Kong
Vietnam
PRC1
24.64%
–
19.48% VND8,848,079m
RMB2,000m
20.00%
1 People’s Republic of China.
2 Issued equity capital is less than HK$1m.
3 The investment is held through Hang Seng Bank Limited, a 62.14% owned subsidiary of HSBC.
All the above investments in associates are owned by subsidiaries of HSBC Holdings.
Details of all HSBC associates and joint ventures, as required under Section 409 Companies Act 2006, will be
annexed to the next Annual Return of HSBC Holdings filed with the UK Registrar of Companies.
HSBC had US$11,770m (2011: US$14,880m) of investments in associates and joint ventures listed in Hong Kong.
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For the year ended 31 December 2012, HSBC’s share of associates and joint ventures’ tax on profit was US$959m
(2011: US$890m), which is included within ‘Share of profit in associates and joint ventures’ in the income statement.
Summarised aggregate financial information on associates
HSBC’s share of:
– assets ..................................................................................................................................................
– liabilities ............................................................................................................................................
– revenues .............................................................................................................................................
– profit after tax ....................................................................................................................................
At 31 December
2012
US$m
237,338
220,455
14,206
3,521
2011
US$m
249,461
230,902
12,009
3,221
HSBC’s investment in Bank of Communications Co., Limited (‘BoCom’) was equity accounted with effect from
August 2004. HSBC’s significant influence in BoCom was established as a result of representation on the Board
of Directors, and in accordance with the Technical Support and Assistance Agreements, HSBC is assisting in the
maintenance of financial and operating policies and a number of staff have been seconded to assist in this process.
During 2012, the market value of the investment in BoCom was below the carrying amount for a period of
approximately ten months. As a result, we performed impairment tests on the carrying amount of the investment in
BoCom. The result confirmed that there was no impairment. The impairment test was performed by comparing the
recoverable amount of BoCom, determined by a value in use (‘VIU’) calculation, with its carrying amount. The
calculation of VIU used discounted cash flow projections based on management’s estimates. Cash flows beyond the
next five years were then extrapolated in perpetuity using a long-term growth rate. The discount rate used was based
on a cost of capital used to evaluate investments in mainland China. Management judgement is required in estimating
the future cash flows of BoCom which are sensitive to the cash flows projected in the short- and medium-term, and
also to the key assumptions regarding the long-term sustainable cash flows thereafter. The key assumptions are
consistent with external sources of information.
HSBC’s investment in Industrial Bank Co., Limited (‘Industrial Bank’) was equity accounted with effect from
May 2004. HSBC’s significant influence has been established as a result of representation on the Board of Directors.
In January 2013 HSBC was no longer in a position to exercise significant influence over Industrial Bank and ceased
to account for it as an associate. For further details, see Note 45.
HSBC’s investment in Ping An Insurance (Group) Company of China Limited (‘Ping An’) was equity accounted with
effect from August 2005, reflecting HSBC’s significant influence over this associate. HSBC’s significant influence
was established as a result of representation on the Board of Directors. In June 2011, following a further issue of
shares by Ping An to a third party, HSBC’s holding was diluted to 15.57% and a dilution gain of US$181m was
recognised in ‘Other operating income’.
In July 2011, Ping An increased its ownership interest in Shenzhen Development Bank (‘SDB’) from 29.99% to
52.38%. As a result, the status of its investment in SDB changed from an interest in an associate to an investment
in subsidiary. As a result of this transaction, Ping An recognised a re-measurement loss; HSBC’s share of this re-
measurement loss was US$48m.
In December 2012 approximately 20.8% of HSBC’s holding in Ping An was disposed of. Following the disposal,
HSBC no longer has significant influence over Ping An and has ceased to account for Ping An as an associate. For
further details on investment in Ping An, see Note 26.
The statutory accounting reference date of BoCom, Ping An and Industrial Bank is 31 December. For the year ended
31 December 2012, these companies were included on the basis of financial statements made up for the twelve
months to 30 September 2012, taking into account changes in the subsequent period from 1 October 2012 to
31 December 2012 that would have materially affected their results.
HSBC acquired 15% of Vietnam Technological & Commercial Joint Stock Bank in October 2007. This investment
was equity accounted from that date due to HSBC’s representation on the Board of Directors and involvement in the
Technical Support and Assistance Agreement. In December 2007, as a result of a rights issue in which HSBC did not
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Notes on the Financial Statements (continued)
22 – Interests in associates and joint ventures / 23 – Goodwill and intangible assets
participate, HSBC’s equity interest was diluted to 14.44%. In September 2008, HSBC increased its equity interest to
20%. HSBC’s equity interest has been subsequently diluted to below 20% due to the issue of shares by the associate
to its own employees.
Joint ventures
Principal interests in joint ventures
Country of
incorporation
At 31 December 2012
Principal
activity
HSBC’s interest
in equity
capital
Issued
equity
capital
HSBC Saudi Arabia Limited .................................... Saudi Arabia
Vaultex UK Limited .................................................
England
Hana HSBC Life Insurance Co., Ltd ........................ South Korea
Canara HSBC Oriental Bank of Commerce
Investment banking
Cash management
Insurance manufacturing
SR500m
49.00%
50.00%
£10m
49.99% KRW110,201m
Life Insurance Company Limited ........................
India
Insurance manufacturing
26.00%
INR9,500m
Summarised aggregate financial information on joint ventures
HSBC’s share of:
– current assets .....................................................................................................................................
– non-current assets ..............................................................................................................................
– current liabilities ................................................................................................................................
– non-current liabilities ........................................................................................................................
– income ...............................................................................................................................................
– expenses .............................................................................................................................................
At 31 December
2012
US$m
1,964
202
924
961
347
311
2011
US$m
1,556
196
747
715
383
339
In December 2011, following the issue of shares by HSBC Saudi Arabia Limited to a third party, HSBC’s holding
was diluted from 60% to 49% and a dilution gain of US$27m was recognised in ‘Other operating income’.
Associates and joint ventures
Movements in investments in associates and joint ventures
At 1 January ..............................................................................................................................................
Additions ..................................................................................................................................................
Disposals ...................................................................................................................................................
Share of results .........................................................................................................................................
Dividends ..................................................................................................................................................
Exchange differences ................................................................................................................................
Share of other comprehensive income/(expense) of associates and joint ventures .................................
Other movements ......................................................................................................................................
2012
US$m
20,399
1,804
(7,580)
3,557
(489)
60
311
(228)
At 31 December ........................................................................................................................................
17,834
Goodwill included in carrying amount of associates and joint ventures
Gross amount
At 1 January ..............................................................................................................................................
Disposals ...................................................................................................................................................
Exchange differences ................................................................................................................................
Other changes ...........................................................................................................................................
At 31 December1 .......................................................................................................................................
1 Includes the carrying amount of goodwill arising from joint ventures of US$30m (2011: US$31m).
2012
US$m
1,551
(874)
3
(10)
670
2011
US$m
17,198
90
(25)
3,264
(304)
681
(710)
205
20,399
2011
US$m
1,518
–
57
(24)
1,551
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23 Goodwill and intangible assets
Goodwill ...................................................................................................................................................
Present value of in-force long-term insurance business (‘PVIF’)1 ..........................................................
Other intangible assets ..............................................................................................................................
At 31 December
2012
US$m
21,390
4,847
3,616
29,853
2011
US$m
21,338
4,092
3,604
29,034
1 Disclosures on PVIF are provided on page 243.
Goodwill
Reconciliation of goodwill
Gross amount
At 1 January 2012 .................................
Disposals ...............................................
Exchange differences ............................
Reclassified to held for sale ..................
Europe
US$m
14,433
(2)
229
–
At 31 December 2012 ...........................
14,660
Accumulated impairment losses
At 1 January 2012 .................................
Reclassified to held for sale ..................
At 31 December 2012 ...........................
Net carrying amount at
–
–
–
Hong
Kong
US$m
124
(4)
(6)
–
114
–
–
–
Rest of
Asia-
Pacific
US$m
1,063
(5)
(38)
–
1,020
–
–
–
North
Latin
MENA
US$m
America
America
US$m
US$m
Total
US$m
28,195
(32)
205
(529)
3,765
(21)
23
(121)
3,646
27,839
–
–
–
(6,857)
408
(6,449)
63
–
(3)
–
60
–
–
–
8,747
–
–
(408)
8,339
(6,857)
408
(6,449)
31 December 2012 ...........................
14,660
114
1,020
60
1,890
3,646
21,390
Gross amount
At 1 January 2011 .................................
Disposals ...............................................
Exchange differences ............................
Reclassified to held for sale ..................
Other changes .......................................
14,885
(3)
(449)
–
–
At 31 December 2011 ...........................
14,433
Accumulated impairment losses
At 1 January 2011 .................................
Reclassified to held for sale ..................
At 31 December 2011 ...........................
Net carrying amount at
–
–
–
124
–
–
–
–
124
–
–
–
1,115
–
(35)
–
(17)
1,063
–
–
–
65
–
(2)
–
–
63
–
–
–
12,465
–
(1)
(3,717)
–
4,316
(46)
(272)
(231)
(2)
32,970
(49)
(759)
(3,948)
(19)
8,747
3,765
28,195
(10,564)
3,707
(6,857)
–
–
–
(10,564)
3,707
(6,857)
31 December 2011 ...........................
14,433
124
1,063
63
1,890
3,765
21,338
Impairment testing
Timing of impairment testing
HSBC’s impairment test in respect of goodwill allocated to each cash-generating unit (‘CGU’) is performed as at
1 July each year. In line with the accounting policy set out in Note 2(p), goodwill is also retested for impairment
whenever there is an indication that it may be impaired. For the purpose of impairment testing, the Group’s CGUs are
based on geographical regions subdivided by global business. The CGUs represent the lowest level at which goodwill
is monitored for internal management purposes. The GB&M-Europe CGU experienced significantly reduced
profitability in the second half of 2012 and was retested for impairment as at 31 December 2012. For other CGUs
there was no indication of impairment in the period to 31 December 2012 and therefore goodwill has not been
retested since 1 July 2012.
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Notes on the Financial Statements (continued)
23 – Goodwill and intangible assets
Basis of the recoverable amount – value in use or fair value less costs to sell
The recoverable amount of all CGUs to which goodwill has been allocated was equal to its VIU at each respective
testing date for 2011 and 2012.
For each significant CGU, the VIU is calculated by discounting management’s cash flow projections for the CGU.
The discount rate used is based on the cost of capital HSBC allocates to investments in the countries within which the
CGU operates. The long-term growth rate is used to extrapolate the cash flows in perpetuity because of the long-term
perspective within the Group of the business units making up the CGUs. In 2012, management’s cash flow
projections until the end of 2014 were used.
Key assumptions in VIU calculation and management’s approach to determining the values assigned to each key
assumption
2012
2011
Goodwill at
1 July
2012
US$m
Discount
rate
%
Nominal
growth rate
beyond
initial
cash flow
projections
%
Goodwill at
1 July
2011
US$m
Discount
rate
%
Nominal
growth rate
beyond
initial
cash flow
projections
%
Cash-generating unit
Retail Banking and Wealth Management
– Europe ......................................................
Commercial Banking – Europe .......................
Global Private Banking – Europe ....................
Global Banking and Markets – Europe ...........
Retail Banking and Wealth Management
– Latin America ...........................................
Total goodwill in the CGUs listed above ........
4,054
2,968
4,139
3,016
1,994
16,171
10.0
10.2
9.1
10.2
15.3
3.9
3.7
3.2
3.5
8.7
4,794
3,574
4,456
3,139
2,537
18,500
10.0
10.1
10.0
10.2
16.0
4.7
4.5
4.3
4.4
9.3
At 1 July 2012, aggregate goodwill of US$4,741m (1 July 2011: US$5,091m) had been allocated to CGUs that were
not considered individually significant. These CGUs do not carry on their balance sheets any significant intangible
assets with indefinite useful lives, other than goodwill.
Nominal long-term growth rate: this growth rate reflects GDP and inflation for the countries within which the CGU
operates. The rates are based on IMF forecast growth rates as these rates are regarded as the most relevant estimate of
likely future trends. The rates used for 2011 and 2012 do not exceed the long-term growth rate for the countries
within which the CGU operates.
Discount rate: the discount rate used to discount the cash flows is based on the cost of capital assigned to each CGU,
which is derived using a Capital Asset Pricing Model (‘CAPM’). The CAPM depends on inputs reflecting a number
of financial and economic variables including the risk-free rate and a premium to reflect the inherent risk of the
business being evaluated. These variables are based on the market’s assessment of the economic variables and
management’s judgement. In addition, for the purposes of testing goodwill for impairment, management supplements
this process by comparing the discount rates derived using the internally generated CAPM with cost of capital rates
produced by external sources. HSBC uses externally-sourced cost of capital rates where, in management’s judgement,
those rates reflect more accurately the current market and economic conditions. For 2012 and 2011, internal costs of
capital rates were consistent with externally-sourced rates.
Management’s judgement in estimating the cash flows of a CGU: the cash flow projections for each CGU are
based on plans approved by the Group Management Board. The key assumptions in addition to the discount rate and
nominal long-term growth rate for each significant CGU are discussed below.
Retail Banking and Wealth Management – Europe and Commercial Banking – Europe: the assumptions included in
the cash flow projections for RBWM – Europe and CMB – Europe reflect the economic environment and financial
outlook of the European countries within these two CGUs. Key assumptions include the level of interest rates and the
level and change in unemployment rates. While current economic conditions in Europe continue to be challenging,
management’s cash flow projections are based primarily on these prevailing conditions. Risks include a further
recession in the UK and an uncertain regulatory environment. RBWM – Europe specifically, is sensitive to further
customer remediation costs in relation to PPI. Based on the conditions at the balance sheet date, management
464
determined that a reasonably possible change in any of the key assumptions described above would not cause an
impairment to be recognised in respect of RBWM – Europe or CMB – Europe.
Global Private Banking – Europe: the revenues in GPB – Europe are predominately generated through HSBC’s
client relationships. The cash flow forecast reflects current economic conditions and key assumptions include the
level of interest rates and client risk appetite. Further economic deterioration could result in a decrease in assets under
management and a reduction in fee and trading income through increased client risk aversion. Based on the
conditions at the balance sheet date, management determined that a reasonably possible change in any of the key
assumptions described above would not cause an impairment to be recognised in respect of GPB – Europe.
Global Banking and Markets – Europe: the key assumption included in the cash flow projection for GB&M – Europe
is that European markets will continue to recover during 2013. Accordingly, European revenues are forecast to
recover in 2013 and this recovery is assumed to continue over the projection period into 2014. Our ability to achieve
the forecast cash flows for GB&M – Europe could be adversely impacted by regulatory change during the forecast
period including but not limited to the extent that the recommendations set out in the Final Report by the Independent
Commission on Banking are implemented.
Based on management’s value in use calculation, GB&M – Europe has an excess of recoverable amount over
carrying amount (‘headroom’) of US$2.3bn as at 1 July 2012. Headroom was US$2.3bn as at 31 December 2012
based on goodwill at that point of US$3.1bn. The change in carrying value between 1 July 2012 and 31 December
2012 arises from retranslating goodwill into the presentation currency of the group. The same assumptions were used
in the impairment tests as at 1 July 2012 and 31 December 2012. The following changes to the key assumptions used
in the value in use calculation would be necessary in order to reduce headroom to nil:
Key assumption
Change to key assumption to reduce headroom to nil
Discount rate ......................................................................................................... Increase by 64 basis points
Nominal growth rate beyond initial cash flow projection .................................... Decrease by 69 basis points
Revenue compound annual growth rate ............................................................... Decrease from 10.3% to 8.3%
Retail Banking and Wealth Management – Latin America: the assumptions included in the cash flow projections for
RBWM – Latin America reflect the economic environment and financial outlook of the countries within this segment,
with Brazil and Mexico being two of the largest countries included within this segment. Key assumptions include the
growth in lending and deposit volumes and the credit quality of the loan portfolios. Mexico and Panama in particular
are sensitive to economic conditions in the US which could constrain demand. Based on the conditions at the balance
sheet date, management determined that a reasonably possible change in any of the key assumptions described above
would not cause an impairment to be recognised in respect of RBWM – Latin America.
Other intangible assets
Movement of intangible assets excluding goodwill and the PVIF
Cost
At 1 January 2012 .................................
Additions1 .............................................
Disposals ...............................................
Amount written off ...............................
Exchange differences ............................
Reclassified to held for sale ..................
Other changes .......................................
At 31 December 2012 ...........................
Mortgage
servicing
rights
US$m
Internally
generated
software
US$m
Trade
names
US$m
Purchased
software
US$m
Customer/
merchant
relation-
ships
US$m
Other
US$m
Total
US$m
60
1
–
–
–
–
–
61
591
30
(123)
–
–
–
–
498
5,598
765
(32)
(680)
62
(26)
16
5,703
856
78
(61)
(21)
–
(15)
78
915
1,354
120
(5)
(39)
(48)
(7)
(8)
1,367
454
48
–
–
12
(14)
4
504
8,913
1,042
(221)
(740)
26
(62)
90
9,048
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Notes on the Financial Statements (continued)
23 – Goodwill and intangible assets / 24 – Property, plant and equipment
Movement of intangible assets excluding goodwill and the PVIF (continued)
Mortgage
servicing
rights
US$m
Internally
generated
software
US$m
Trade
names
US$m
Purchased
software
US$m
(51)
(5)
–
2
–
–
–
(1)
(55)
(369)
(78)
–
123
–
(2)
–
–
(326)
(3,437)
(645)
(63)
28
680
(47)
24
(9)
(3,469)
(672)
(103)
(3)
53
21
1
9
(41)
(735)
Customer/
merchant
relation-
ships
US$m
Other
US$m
Total
US$m
(649)
(127)
–
5
39
15
5
8
(704)
(131)
(21)
(2)
–
–
(1)
10
2
(143)
(5,309)
(979)
(68)
211
740
(34)
48
(41)
(5,432)
Accumulated amortisation
At 1 January 2012 .................................
Charge for the year2 ..............................
Impairment ............................................
Disposals ...............................................
Amount written off ...............................
Exchange differences ............................
Reclassified to held for sale ..................
Other changes .......................................
At 31 December 2012 ...........................
Net carrying amount at
31 December 2012 ...........................
6
172
2,234
180
663
361
3,616
Cost
At 1 January 2011 .................................
Additions1 .............................................
Disposals ...............................................
Amount written off ...............................
Exchange differences ............................
Reclassified to held for sale ..................
Other changes .......................................
At 31 December 2011 ...........................
Accumulated amortisation
At 1 January 2011 .................................
Charge for the year2 ..............................
Impairment ............................................
Disposals ...............................................
Amount written off ...............................
Exchange differences ............................
Reclassified to held for sale ..................
Other changes .......................................
At 31 December 2011 ...........................
Net carrying amount at
68
–
–
–
(6)
(2)
–
60
(52)
(4)
–
–
–
3
2
–
(51)
636
40
(91)
–
–
–
6
591
(240)
(215)
–
91
–
–
–
(5)
(369)
5,202
1,129
(44)
(365)
(109)
(197)
(18)
5,598
(2,958)
(609)
(386)
29
365
44
50
28
(3,437)
1,065
102
(102)
(133)
(40)
(22)
(14)
856
(848)
(106)
(3)
100
133
31
18
3
(672)
1,987
379
(181)
–
(79)
(746)
(6)
1,354
(1,143)
(212)
–
111
–
29
563
3
(649)
503
6
(1)
(2)
(14)
(46)
8
454
(144)
(29)
(1)
3
2
–
36
2
(131)
9,461
1,656
(419)
(500)
(248)
(1,013)
(24)
8,913
(5,385)
(1,175)
(390)
334
500
107
669
31
(5,309)
31 December 2011 ...........................
9
222
2,161
184
705
323
3,604
1 At 31 December 2012, HSBC had no contractual commitments (2011: nil) to acquire intangible assets.
2 The amortisation charge for the year is recognised within the income statement under ‘Amortisation and impairment of intangible
assets’, with the exception of the amortisation of mortgage servicing rights which is recognised in ‘Net fee income’.
466
24 Property, plant and equipment
Freehold
land and
buildings
US$m
Long
leasehold
land and
buildings
US$m
Short
leasehold
land and
buildings1
US$m
Equipment,
fixtures
and fittings2
US$m
Equipment
on
operating
leases
US$m
Cost or fair value
At 1 January 2012 ........................................................
Additions at cost4 .........................................................
Fair value adjustments .................................................
Disposals ......................................................................
Reclassified to held for sale .........................................
Transfers ......................................................................
Exchange differences ...................................................
Other changes ..............................................................
At 31 December 2012 ..................................................
Accumulated depreciation and impairment
At 1 January 2012 ........................................................
Depreciation charge for the year .................................
Disposals ......................................................................
Reclassified to held for sale .........................................
Transfers ......................................................................
Impairment losses recognised ......................................
Exchange differences ...................................................
Other changes ..............................................................
At 31 December 2012 ..................................................
3,537
135
(35)
(141)
(10)
59
(59)
9
3,495
(544)
(72)
44
13
(26)
(9)
(8)
(67)
(669)
1,800
89
31
–
(36)
(7)
10
(23)
1,864
(332)
(57)
–
1
1
(4)
(2)
3
(390)
3,872
209
76
(68)
(6)
(55)
40
–
4,068
(1,181)
(201)
53
1
22
(11)
(15)
12
(1,320)
11,579
1,016
–
(915)
(70)
3
195
(148)
11,660
(7,909)
(1,055)
844
27
3
(63)
(137)
84
(8,206)
Total3
US$m
20,859
1,499
72
(1,138)
(122)
–
190
(162)
71
50
–
(14)
–
–
4
–
111
21,198
(28)
(12)
13
–
–
–
(1)
3
(25)
(9,994)
(1,397)
954
42
–
(87)
(163)
35
(10,610)
Net carrying amount at 31 December 2012 .................
2,826
1,474
2,748
3,454
86
10,588
Cost or fair value
At 1 January 2011 ........................................................
Additions at cost4 .........................................................
Fair value adjustments .................................................
Disposals ......................................................................
Reclassified to held for sale .........................................
Transfers ......................................................................
Exchange differences ...................................................
Other changes ..............................................................
At 31 December 2011 ..................................................
Accumulated depreciation and impairment
At 1 January 2011 ........................................................
Depreciation charge for the year .................................
Disposals ......................................................................
Reclassified to held for sale .........................................
Transfers ......................................................................
Impairment losses recognised ......................................
Exchange differences ...................................................
Other changes ..............................................................
At 31 December 2011 ..................................................
3,952
353
(15)
(188)
(424)
(12)
(203)
74
3,537
(586)
(88)
60
133
5
(13)
18
(73)
(544)
1,673
114
44
(19)
(19)
(35)
1
41
1,800
(307)
(51)
2
13
35
–
(1)
(23)
(332)
4,004
180
89
(279)
(158)
25
15
(4)
3,872
(1,268)
(211)
262
80
(34)
(16)
8
(2)
(1,181)
12,529
1,183
–
(1,400)
(260)
10
(395)
(88)
11,579
(8,506)
(1,157)
1,319
138
(6)
(25)
260
68
(7,909)
53
19
–
–
–
–
(1)
–
71
(23)
(9)
–
–
–
–
1
3
(28)
22,211
1,849
118
(1,886)
(861)
(12)
(583)
23
20,859
(10,690)
(1,516)
1,643
364
–
(54)
286
(27)
(9,994)
Net carrying amount at 31 December 2011 .................
2,993
1,468
2,691
3,670
43
10,865
1 Including assets held on finance leases with a net book value of US$5m (2011: US$7m).
2 Including assets held on finance leases with a net book value of US$182m (2011: US$210m).
3 Including assets with a net book value of US$39m (2011: US$33m) pledged as security for liabilities.
4 At 31 December 2012, HSBC had US$412m (2011: US$517m) of contractual commitments to acquire property, plant and equipment.
Leasehold land and buildings
Leasehold land and buildings are considered to be held under finance lease contracts where the value of the land
cannot reliably be separated from the value of the lease and the respective contracts do not meet the criteria for
classification as operating leases. Included within ‘Short leasehold land and buildings’ are the following amounts
in respect of assets classed as improvements to buildings, which are carried at depreciated historical cost:
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Notes on the Financial Statements (continued)
24 – Property, plant and equipment / 25 – Investments in subsidiaries
Leasehold land and buildings
2012
Accumulated
depreciation
US$m
Cost
US$m
2011
Accumulated
depreciation
US$m
Cost
US$m
At 1 January ..................................................................................
Additions ......................................................................................
Disposals .......................................................................................
Depreciation charge for the year ..................................................
Impairment loss recognised ..........................................................
Exchange differences ....................................................................
Reclassified as held for sale .........................................................
Other changes ...............................................................................
At 31 December ............................................................................
Net carrying amount at 31 December ...........................................
Investment properties
Movement on the fair value of investment properties
Fair value
At 1 January 2012 .........................................................................
Additions at cost ...........................................................................
Fair value adjustments ..................................................................
Reclassified to held for sale ..........................................................
Exchange differences ....................................................................
Other changes ...............................................................................
p
At 31 December 2012 ...................................................................
Fair value
At 1 January 2011 .........................................................................
Additions at cost ...........................................................................
Fair value adjustments ..................................................................
Disposals .......................................................................................
Exchange differences ....................................................................
Other changes ...............................................................................
At 31 December 2011 ...................................................................
1,669
119
(65)
–
–
28
(10)
(23)
1,718
852
(751)
–
47
(133)
(6)
(13)
(1)
(9)
(866)
1,944
171
(269)
–
–
(13)
(154)
(10)
1,669
918
Freehold
land and
buildings
US$m
Long
leasehold
land and
buildings
US$m
Short
leasehold
land and
buildings
US$m
745
9
(35)
–
(64)
(3)
652
667
242
(15)
(47)
(22)
(80)
745
192
–
31
(29)
–
1
195
156
–
44
(17)
1
8
192
402
–
76
–
1
8
487
310
–
89
–
1
2
402
(933)
–
262
(139)
(15)
2
73
(1)
(751)
Total
US$m
1,339
9
72
(29)
(63)
6
1,334
1,133
242
118
(64)
(20)
(70)
1,339
Investment properties are valued on a market value basis as at 31 December each year by independent professional
valuers who have recent experience in the location and type of properties. Investment properties in Hong Kong, the
Macau Special Administrative Region and mainland China, which represent more than 51% by value of HSBC’s
investment properties subject to revaluation, were valued by DTZ Debenham Tie Leung Limited whose valuers are
members of the Hong Kong Institute of Surveyors. Properties in other countries, which represent 49% by value of
HSBC’s investment properties, were valued by different independent professionally qualified valuers.
HSBC Holdings had no investment properties at 31 December 2012 or 2011.
HSBC properties leased to customers
HSBC properties leased to customers included US$694m at 31 December 2012 (2011: US$618m) let under operating
leases, net of accumulated depreciation of US$16m (2011: US$12m). None was held by HSBC Holdings.
At 31 December 2012, the classification of land and buildings in Hong Kong in accordance with Hong Kong
Companies Ordinance requirements was freehold nil (2011: nil), long leasehold US$1,319m (2011: US$1,363m),
medium leasehold US$1,600m (2011: US$1,484m) and short leasehold US$3m (2011: US$4m).
468
25 Investments in subsidiaries
Principal subsidiaries of HSBC Holdings
At 31 December 2012
Country of
incorporation
or registration
HSBC’s
interest in
equity capital
%
Issued
equity
capital
Share
class
Europe
HSBC Asset Finance (UK) Limited ...............................
HSBC Bank A.S. ............................................................
HSBC Bank Malta p.l.c. .................................................
HSBC Bank plc ..............................................................
England
Turkey
Malta
England
HSBC France ..................................................................
HSBC Bank International Limited .................................
HSBC Life (UK) Limited ...............................................
HSBC Private Banking Holdings (Suisse) SA ...............
HSBC Trinkaus & Burkhardt AG ..................................
Marks and Spencer Retail Financial Services
France
Jersey
England
Switzerland
Germany
Holdings Limited ........................................................
England
Hong Kong
Hang Seng Bank Limited1 ..............................................
HSBC Insurance (Asia) Limited ....................................
HSBC Life (International) Limited ................................
The Hongkong and Shanghai Banking Corporation
Hong Kong
Hong Kong
Bermuda
100
100
70.03
100
99.99
100
100
100
80.62
100
62.14
100
100
£797m
€88m
£265m
TRL652m
Ordinary £1
A–Common TRL1
B–Common TRL1
Ordinary €0.30
Ordinary £1
Preferred Ordinary £1
Series 2 Third Dollar
Preference US$0.01
Third Dollar
Preference US$0.01
Shares €5.00
Ordinary £1
Ordinary £1
CHF1,363m Ordinary CHF1,000
€28m Shares of no par value
€337m
£1m
£94m
£67m
Ordinary £1
HK$9,559m
Ordinary HK$5.00
HK$2,798m Ordinary HK$1,000
Ordinary HK$1.00
HK$2,778m
Limited .......................................................................
Hong Kong
100
HK$58,969m
Ordinary HK$2.50
CIP2 US$1.00
CRP3 US$1.00
NIP4 US$1.00
Rest of Asia-Pacific
HSBC Bank Australia Limited .......................................
Australia
100
A$60m
A$751m Ordinary no par value
Pref shares of
no par value
Ordinary CNY1.00
Ordinary RM0.50
100 RMB12,400m
RM115m
100
HSBC Bank (China) Company Limited .........................
HSBC Bank Malaysia Berhad ........................................
PRC5
Malaysia
Middle East and North Africa
HSBC Bank Middle East Limited ..................................
HSBC Bank Egypt S.A.E. ..............................................
North America
HSBC Bank Bermuda Limited .......................................
HSBC Bank Canada .......................................................
HSBC Bank USA, N.A. .................................................
HSBC Finance Corporation ............................................
HSBC Securities (USA) Inc. ..........................................
Latin America
HSBC Bank Argentina S.A. ...........................................
HSBC Bank Brasil S.A. – Banco Múltiplo ....................
HSBC Mexico, S.A., Institución de Banca Múltiple,
Grupo Financiero HSBC ............................................
HSBC Bank (Panama) S.A. ............................................
1 Listed in Hong Kong.
2 Cumulative Irredeemable Preference shares.
3 Cumulative Redeemable Preference shares.
4 Non-cumulative Irredeemable Preference shares.
Jersey
Egypt
Bermuda
Canada
US
US
US
Argentina
Brazil
Mexico
Panama
100
94.53
US$931m
Ordinary US$1.00
CRP3 US$1.00
EGP2,079m Ordinary EGP84.00
100
100
100
100
100
BMD30m
C$1,571m
US$2m
–7
–7
Common BMD1.00
Class 1 Pref of NPV6
Class 2 Pref of NPV6
Common of NPV6
Common US$100
Common US$0.01
Common US$0.05
99.99
100
ARS1,244m
Ordinary–A ARS1.00
Ordinary–B ARS1.00
BRL5,994m Shares of no par value
99.99 MXN5,261m Ordinary MXN2.00
Ordinary PAB1.00
US$10m
100
5 People’s Republic of China.
6 Preference shares of nil par value.
7 Issued equity capital is less than US$1m.
Details of the debt, subordinated debt and preference shares issued by the principal subsidiaries to parties external to the Group are
included in the Notes 29 ‘Debt securities in issue’, 33 ‘Subordinated liabilities’ and 37 ‘Non-controlling interests’, respectively.
All the above subsidiaries are included in the HSBC consolidated financial statements.
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Notes on the Financial Statements (continued)
25 – Investments in subsidiaries / 26 – Assets held for sale and other assets
Details of all HSBC subsidiaries will be annexed to the next Annual Return of HSBC Holdings filed with the UK
Registrar of Companies.
All the above make their financial statements up to 31 December except for HSBC Bank Argentina S.A., whose
financial statements are made up to 30 June annually.
The principal countries of operation are the same as the countries of incorporation except for HSBC Bank Middle
East Limited which operates mainly in the Middle East and North Africa and HSBC Life (International) Limited
which operates mainly in Hong Kong.
In February 2013, we announced an agreement to sell HSBC Bank (Panama) S.A. to Bancolombia S.A. For further
details see Note 45.
During 2012 and 2011, none of the Group’s subsidiaries experienced significant restrictions on paying dividends or
repaying loans and advances.
Acquisitions
In June 2012, HSBC merged its operations in Oman with the Oman International Bank S.A.O.G. for total
consideration of US$0.2bn. HSBC owns 51% of the combined entity, HSBC Bank Oman S.A.O.G., which had net
assets of US$0.8bn immediately following the merger.
In October 2012, HSBC acquired the onshore retail and commercial banking business of Lloyds Banking Group in
the United Arab Emirates for a total consideration of US$0.1bn. As a result of the transaction HSBC acquired net
assets of US$0.2bn.
SPEs consolidated by HSBC where HSBC owns less than 50% of the voting rights
Carrying value of total
consolidated assets
2012
US$bn
2011
US$bn
Nature of SPE
Barion Funding Limited .................................................................
Bryant Park Funding LLC ..............................................................
HSBC Home Equity Loan Corporation I .......................................
HSBC Home Equity Loan Corporation II ......................................
HSBC Receivables Funding, Inc. II ...............................................
Malachite Funding Limited ............................................................
Mazarin Funding Limited ...............................................................
Metrix Funding Ltd ........................................................................
Metrix Securities plc .......................................................................
Regency Assets Limited .................................................................
Solitaire Funding Ltd ......................................................................
3.9
0.9
2.0
2.2
–
3.4
8.0
–
–
10.1
11.3
3.8 Securities investment conduit
2.8 Conduit
2.1 Securitisation
2.4 Securitisation
1.9 Securitisation
3.6 Securities investment conduit
8.0 Securities investment conduit
0.7 Securitisation
0.4 Securitisation
7.5 Conduit
12.5 Securities investment conduit
In addition to the above, HSBC consolidates a number of individually insignificant SPEs with total assets of
US$17bn. For further details, see Note 42.
In each of the above cases, HSBC has less than 50% of the voting rights, but consolidates because it has the majority
of risks and rewards of ownership of the SPE, or the substance of the relationship with the SPE is such that its
activities are conducted on behalf of HSBC according to its specific business needs so that HSBC obtains benefit
from the SPE’s operation. The consolidation of SPEs sponsored by HSBC is discussed on page 384.
470
26 Assets held for sale and other assets
Assets held for sale
Disposal groups ........................................................................................................................................
Non-current assets held for sale:
– property, plant and equipment ..............................................................................................................
– investment in Ping An ..........................................................................................................................
– loans and advances to customers ..........................................................................................................
– other ......................................................................................................................................................
2012
US$m
5,797
13,472
500
8,168
3,893
911
2011
US$m
38,903
655
589
–
–
66
19,269
39,558
Disposal groups
At 31 December 2012, the following businesses represented the majority of disposal groups held for sale:
• Latin American businesses, which include banking operations in Peru, Colombia and Paraguay.
• US life insurance businesses.
The following significant businesses that were held for sale at 31 December 2011 were sold in 2012:
• The sale of the US Card and Retail Services business that was completed on 1 May 2012 with a gain on disposal
of US$3.1bn.
• The sale of 195 US branches were completed in several stages in 2012. 138 branches were sold on 18 May 2012,
recognising a gain of US$661m. The remaining branches were sold in the third quarter of 2012 with a gain of
US$203m.
• Central American businesses, which include banking operations in Costa Rica, El Salvador and Honduras were
sold in November and December 2012 with a loss on disposal of US$62m.
The major classes of assets and associated liabilities of disposal groups held for sale were as follows:
Assets of disposal groups held for sale
Trading assets ...............................................................................
Loans and advances to banks .......................................................
Loans and advances to customers ................................................
Financial investments ...................................................................
Prepayments and accrued income ................................................
Goodwill and intangible assets .....................................................
Other assets of disposal groups ....................................................
Total assets ....................................................................................
Liabilities of disposal groups held for sale (Note 30)
Deposits by banks .........................................................................
Customer accounts ........................................................................
Debt securities in issue .................................................................
Liabilities under insurance contracts ............................................
Other liabilities of disposal groups ...............................................
Total liabilities ..............................................................................
Net unrealised losses recognised in
‘other operating income’ as a result
of reclassification to held for sale ............................................
At 31 December 2012
South
America
businesses
US$m
US life
insurance
businesses
US$m
Other
US$m
Total
US$m
4
344
1,929
364
27
33
622
3,323
26
2,154
566
–
132
2,878
–
–
–
1,396
15
53
109
1,573
–
–
–
998
39
–
164
302
229
5
60
141
901
10
836
(1)
162
96
1,037
1,103
4
508
2,231
1,989
47
146
872
5,797
36
2,990
565
1,160
267
5,018
(96)
–
–
(96)
Expected date of completion ........................................................
Q4 2013
Operating segment ........................................................................ Latin America
Q1 2013
North America
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Notes on the Financial Statements (continued)
26 – Assets held for sale and other assets / 27 – Trading liabilities / 28 – Financial liabilities at fair value
Property, plant and equipment
The property, plant and equipment classified as held for sale is the result of repossession of property that had been
pledged as collateral by customers. Substantially all of these assets are disposed of within 12 months of acquisition.
The majority arose within the North America operating segment.
Investment in Ping An
On 5 December 2012, we entered into an agreement to dispose of our entire 15.57% shareholding in Ping An for
US$9.4bn. The disposal was carried out in two tranches, an initial tranche of 256,694,218 shares representing 3.24%
of Ping An’s issued share capital, then the remaining 976,121,395 shares representing 12.33% of Ping An’s issued
share capital. The selling price for both the tranches was fixed at HK$59 per share.
The first tranche of shares was disposed on 7 December 2012. Following this disposal, HSBC no longer had
significant influence over Ping An and ceased to account for it as an associate. The gain from the disposal of the first
tranche of shares and the gain from the consequent discontinuance of associate accounting for the remaining 12.33%
shareholding in Ping An totalled US$3bn, and was recognised in the income statement. The remaining 12.33%
shareholding was recognised as an available-for-sale investment, measured initially at fair value on the date of
discontinuance of associate accounting, and thereafter carried at fair value with unrealised gains or losses recorded in
other comprehensive income.
The fixing of the sale price gave rise to a contingent forward sale contract, the fair value of which at year end was
based on the difference between the agreed sale price and the market price for the shares, adjusted for an assessment
of the probability of the transaction being completed. The adverse fair value of this contract was US$553m at
31 December 2012, recorded in net trading income.
At 31 December 2012, the fair value of our 12.33% shareholding in Ping An was US$8.2bn included within ‘Assets
held for sale’ above, with US$737m accumulated unrealised gains in other comprehensive income which arose after
the date of the agreement and represent the difference between Ping An’s share price at the year-end and the share
price on the date of recognition as an available-for-sale investment.
The sale of the second tranche was completed on 6 February 2013 where the net impact of the change in fair value of
the contingent forward sale contract to the point of delivery of the shares and the derecognition of the available-for-
sale investment resulted in an income statement gain before tax in 2013 of US$553m.
Loans and advances to customers
Loans and advances to customers held for sale at 31 December 2012 include US personal loan balances of US$3.4bn,
net of impairment allowances.
Other assets
Bullion ......................................................................................................................................................
Reinsurers’ share of liabilities under insurance contracts (Note 31) .......................................................
Endorsements and acceptances .................................................................................................................
Retirement benefit assets ..........................................................................................................................
Other accounts ..........................................................................................................................................
At 31 December
2012
US$m
26,508
1,407
12,032
2,846
11,923
54,716
2011
US$m
19,824
1,801
11,010
2,497
13,567
48,699
472
27 Trading liabilities
Deposits by banks .....................................................................................................................................
Customer accounts ....................................................................................................................................
Other debt securities in issue (Note 29) ...................................................................................................
Other liabilities – net short positions in securities ...................................................................................
At 31 December
2012
US$m
61,686
150,705
31,198
60,974
304,563
2011
US$m
47,506
123,344
29,987
64,355
265,192
At 31 December 2012, the cumulative amount of change in fair value attributable to changes in HSBC credit risk was
a loss of US$29m (2011: gain of US$599m).
Deposits by banks held for trading
Repos ........................................................................................................................................................
Settlement accounts ..................................................................................................................................
Stock lending ............................................................................................................................................
Other .........................................................................................................................................................
Customer accounts held for trading
Repos ........................................................................................................................................................
Settlement accounts ..................................................................................................................................
Stock lending ............................................................................................................................................
Other .........................................................................................................................................................
28 Financial liabilities designated at fair value
HSBC
Deposits by banks and customer accounts ...............................................................................................
Liabilities to customers under investment contracts ................................................................................
Debt securities in issue (Note 29) .............................................................................................................
Subordinated liabilities (Note 33) ............................................................................................................
Preferred securities (Note 33) ...................................................................................................................
At 31 December
2012
US$m
26,740
7,647
4,523
22,776
61,686
At 31 December
2012
US$m
103,483
9,461
2,295
35,466
150,705
At 31 December
2012
US$m
496
12,456
53,209
16,863
4,696
87,720
2011
US$m
16,687
7,221
2,821
20,777
47,506
2011
US$m
70,151
6,909
1,774
44,510
123,344
2011
US$m
517
11,399
52,197
17,503
4,108
85,724
The carrying amount at 31 December 2012 of financial liabilities designated at fair value was US$7,032m more than
the contractual amount at maturity (2011: US$1,377m more). The cumulative amount of the change in fair value
attributable to changes in credit risk was a loss of US$88m (2011: gain of US$5,118m).
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Notes on the Financial Statements (continued)
29 – Debt securities in issue / 30 – Liabilities of disposal groups / 31 – Liabilities under insurance contracts
HSBC Holdings
Debt securities in issue (Note 29):
– owed to third parties ..........................................................................................................................
Subordinated liabilities (Note 33):
– owed to third parties ..........................................................................................................................
– owed to HSBC undertakings .............................................................................................................
At 31 December
2012
US$m
8,577
10,358
4,260
23,195
2011
US$m
5,753
11,443
3,955
21,151
The carrying amount at 31 December 2012 of financial liabilities designated at fair value was US$3,199m more than
the contractual amount at maturity (2011: US$722m more). The cumulative amount of the change in fair value
attributable to changes in credit risk was a loss of US$164m (2011: gain of US$2,096m).
29 Debt securities in issue
Bonds and medium-term notes .................................................................................................................
Other debt securities in issue ....................................................................................................................
Of which debt securities in issue reported as:
– trading liabilities (Note 27) ...............................................................................................................
– financial liabilities designated at fair value (Note 28) ......................................................................
At 31 December
2012
US$m
155,661
48,207
203,868
(31,198)
(53,209)
119,461
2011
US$m
151,367
61,830
213,197
(29,987)
(52,197)
131,013
Certain debt securities in issue are managed on a fair value basis as part of HSBC’s interest rate risk management
policies. The debt securities being hedged are presented within the balance sheet caption ‘Financial liabilities
designated at fair value’, with the remaining debt securities included within ‘Trading liabilities’. The following table
analyses the carrying amount of bonds and medium-term notes in issue at 31 December with original maturities
greater than one year:
Bonds and medium-term notes
HSBC
Fixed rate
Secured financing:
At 31 December
2012
US$m
0.01% to 3.99%: until 2056 .................................................................................................................
4.00% to 4.99%: until 2013 .................................................................................................................
5.00% to 5.99%: until 2019 .................................................................................................................
8.00% to 9.99%: until 2028 .................................................................................................................
7,514
231
189
252
Other fixed rate senior debt:
0.01% to 3.99%: until 2078 .................................................................................................................
4.00% to 4.99%: until 2046 .................................................................................................................
5.00% to 5.99%: until 2041 .................................................................................................................
6.00% to 6.99%: until 2046 .................................................................................................................
7.00% to 7.99%: until 2026 .................................................................................................................
8.00% to 9.99%: until 2036 .................................................................................................................
10.00% or higher: until 2028 ...............................................................................................................
Variable interest rate
Secured financings – 0.01% to 13.99%: until 2068 .................................................................................
FHLB advances – 0.01% to 0.99%: until 2036 ........................................................................................
Other variable interest rate senior debt – 0.01% to 12.99%: until 2057 ..................................................
48,620
18,722
14,766
5,207
713
199
108
96,521
7,897
1,000
43,104
52,001
474
2011
US$m
8,259
1,307
332
276
38,346
15,515
17,525
7,056
3,083
379
437
92,515
7,279
1,000
47,393
55,672
Brought forward .......................................................................................................................................
148,522
148,187
At 31 December
2012
US$m
2011
US$m
Structured notes
Interest rate, equity, equity index or credit-linked ...................................................................................
HSBC Holdings
Debt securities ..........................................................................................................................................
Of which debt securities in issue reported as:
– financial liabilities designated at fair value (Note 28) .....................................................................
Fixed rate senior debt, unsecured
3.00% to 3.99%: until 2016 .................................................................................................................
4.00% to 4.99%: until 2022 .................................................................................................................
5.00% to 5.99%: until 2021 .................................................................................................................
6.00% to 6.99%: until 2042 .................................................................................................................
30 Liabilities of disposal groups held for sale and other liabilities
Liabilities of disposal groups held for sale
Liabilities of disposal groups held for sale1 .............................................................................................
1 An analysis of liabilities of disposal groups held for sale is provided on page 471.
Other liabilities
7,139
3,180
155,661
151,367
At 31 December
2012
US$m
11,268
(8,577)
2,691
1,258
4,945
2,990
2,075
11,268
2011
US$m
8,366
(5,753)
2,613
1,177
2,573
2,730
1,886
8,366
HSBC
2012
US$m
5,018
2011
US$m
22,200
Amounts due to investors in funds consolidated by HSBC .........
Obligations under finance leases (Note 41) .................................
Dividend declared and payable by HSBC Holdings (Note 10) ...
Endorsements and acceptances .....................................................
Other liabilities .............................................................................
31 Liabilities under insurance contracts
HSBC
HSBC Holdings
2012
US$m
564
304
–
12,031
20,963
33,862
2011
US$m
720
428
885
11,009
14,925
27,967
2012
US$m
–
–
–
–
30
30
At 31 December 2012
Non-life insurance liabilities
Unearned premium provision .....................................................................................
Notified claims ............................................................................................................
Claims incurred but not reported ................................................................................
Other ...........................................................................................................................
Gross
US$m
Reinsurers’
share
US$m
34
29
12
6
81
(6)
(6)
–
(2)
(14)
2011
US$m
–
–
885
–
26
911
Net
US$m
28
23
12
4
67
475
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Notes on the Financial Statements (continued)
31 – Liabilities under insurance contracts
Liabilities under insurance contracts (continued)
Brought forward .........................................................................................................
Life insurance liabilities to policyholders
Life (non-linked) .........................................................................................................
Investment contracts with discretionary participation features1 .................................
Life (linked) ................................................................................................................
At 31 December 2011
Non-life insurance liabilities
Unearned premium provision .....................................................................................
Notified claims ............................................................................................................
Claims incurred but not reported ................................................................................
Other ...........................................................................................................................
Life insurance liabilities to policyholders
Life (non-linked) .........................................................................................................
Investment contracts with discretionary participation features1 .................................
Life (linked) ................................................................................................................
Gross
US$m
81
30,684
24,374
13,056
68,114
68,195
621
510
449
55
1,635
26,926
21,488
11,210
59,624
61,259
Reinsurers’
share
US$m
(14)
(938)
–
(455)
(1,393)
(1,407)
(112)
(91)
(51)
4
(250)
(649)
–
(903)
(1,552)
(1,802)
Net
US$m
67
29,746
24,374
12,601
66,721
66,788
509
419
398
59
1,385
26,277
21,488
10,307
58,072
59,457
1 Though investment contracts with discretionary participation features are financial instruments, HSBC treats them as insurance
contracts as permitted by IFRS 4.
Movement on non-life insurance liabilities
2012
Unearned premium reserve (‘UPR’)
At 1 January ................................................................................................................
Changes in UPR recognised as (income)/expense .....................................................
Gross written premiums .........................................................................................
Gross earned premiums ..........................................................................................
Disposals......................................................................................................................
Exchange differences and other movements ..............................................................
At 31 December ..........................................................................................................
Notified and incurred but not reported claims
At 1 January ................................................................................................................
Notified claims .......................................................................................................
Claims incurred but not reported ............................................................................
Claims paid in current year .........................................................................................
Claims incurred in respect of current year .................................................................
Claims incurred in respect of prior years ...................................................................
Disposals......................................................................................................................
Exchange differences and other movements ..............................................................
At 31 December ..........................................................................................................
Notified claims .......................................................................................................
Claims incurred but not reported ............................................................................
Other ...........................................................................................................................
Total non-life insurance liabilities ..............................................................................
Gross
US$m
Reinsurers’
share
US$m
Net
US$m
621
44
760
(716)
(497)
(134)
34
959
510
449
(339)
341
1
(486)
(435)
41
29
12
6
81
(112)
3
(104)
107
91
12
(6)
(142)
(91)
(51)
57
(53)
(5)
137
–
(6)
(6)
–
(2)
(14)
509
47
656
(609)
(406)
(122)
28
817
419
398
(282)
288
(4)
(349)
(435)
35
23
12
4
67
476
2011
Unearned premium reserve (‘UPR’)
At 1 January ................................................................................................................
Changes in UPR recognised as (income)/expense .....................................................
Gross written premiums .........................................................................................
Gross earned premiums ..........................................................................................
Exchange differences and other movements ..............................................................
At 31 December ..........................................................................................................
Notified and incurred but not reported claims
At 1 January ................................................................................................................
Notified claims .......................................................................................................
Claims incurred but not reported ............................................................................
Claims paid in current year .........................................................................................
Claims incurred in respect of current year .................................................................
Claims incurred in respect of prior years ...................................................................
Disposals .....................................................................................................................
Exchange differences and other movements ..............................................................
At 31 December ..........................................................................................................
Notified claims .......................................................................................................
Claims incurred but not reported ............................................................................
Other ...........................................................................................................................
Gross
US$m
727
31
1,175
(1,144)
(137)
621
1,624
879
745
(631)
481
(46)
(317)
(152)
959
510
449
55
Total non-life insurance liabilities ..............................................................................
1,635
Life insurance liabilities to policyholders
Reinsurers’
share
US$m
(129)
(2)
(182)
180
19
(112)
(305)
(230)
(75)
81
(99)
14
129
38
(142)
(91)
(51)
4
(250)
2012
Life (non-linked)
At 1 January ................................................................................................................
Benefits paid ...............................................................................................................
Increase in liabilities to policyholders ........................................................................
Exchange differences and other movements ..............................................................
At 31 December ..........................................................................................................
Investment contracts with discretionary participation features
At 1 January ................................................................................................................
Benefits paid ...............................................................................................................
Increase in liabilities to policyholders ........................................................................
Exchange differences and other movements1 .............................................................
At 31 December ..........................................................................................................
Life (linked)
At 1 January ................................................................................................................
Benefits paid ...............................................................................................................
Increase in liabilities to policyholders ........................................................................
Exchange differences and other movements2 .............................................................
At 31 December ..........................................................................................................
Total liabilities to policyholders .................................................................................
Gross
US$m
26,926
(1,566)
6,558
(1,234)
30,684
21,488
(2,525)
3,645
1,766
24,374
11,210
(1,810)
3,984
(328)
13,056
68,114
Reinsurers’
share
US$m
(649)
160
(479)
30
(938)
–
–
–
–
–
(903)
681
223
(456)
(455)
(1,393)
Net
US$m
598
29
993
(964)
(118)
509
1,319
649
670
(550)
382
(32)
(188)
(114)
817
419
398
59
1,385
Net
US$m
26,277
(1,406)
6,079
(1,204)
29,746
21,488
(2,525)
3,645
1,766
24,374
10,307
(1,129)
4,207
(784)
12,601
66,721
477
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Notes on the Financial Statements (continued)
32 – Provisions
Life insurance liabilities to policyholders (continued)
2011
Life (non-linked)
At 1 January ................................................................................................................
Benefits paid ...............................................................................................................
Increase in liabilities to policyholders ........................................................................
Exchange differences and other movements ..............................................................
At 31 December ..........................................................................................................
Investment contracts with discretionary participation features
At 1 January ................................................................................................................
Benefits paid ...............................................................................................................
Increase in liabilities to policyholders ........................................................................
Exchange differences and other movements1 .............................................................
At 31 December ..........................................................................................................
Life (linked)
At 1 January ................................................................................................................
Benefits paid ...............................................................................................................
Increase in liabilities to policyholders ........................................................................
Exchange differences and other movements2 .............................................................
At 31 December ..........................................................................................................
Total liabilities to policyholders .................................................................................
Gross
US$m
23,583
(1,793)
5,729
(593)
26,926
22,074
(2,628)
3,005
(963)
21,488
10,496
(1,129)
2,462
(619)
11,210
59,624
Reinsurers’
share
US$m
(673)
164
(254)
114
(649)
–
–
–
–
–
(760)
56
(111)
(88)
(903)
(1,552)
Net
US$m
22,910
(1,629)
5,475
(479)
26,277
22,074
(2,628)
3,005
(963)
21,488
9,736
(1,073)
2,351
(707)
10,307
58,072
1 Includes movement in liabilities relating to discretionary profit participation benefits due to policyholders arising from net unrealised
investment gains recognised in other comprehensive income.
2 Includes amounts arising under reinsurance agreements.
The increase in liabilities to policyholders represents the aggregate of all events giving rise to additional liabilities to
policyholders in the year. The key factors contributing to the movement in liabilities to policyholders include death
claims, surrenders, lapses, liabilities to policyholders created at the initial inception of the policies, the declaration of
bonuses and other amounts attributable to policyholders.
32 Provisions
Restruc-
turing
costs
US$m
Contingent
liabilities and
contractual
commitments
US$m
Legal
proceedings
and
regulatory
matters
US$m
Customer
remediation
US$m
Other
provisions
US$m
At 1 January 2012 ..............................
Additional provisions/increase
in provisions ..................................
Provisions utilised .............................
Amounts reversed ..............................
Unwinding of discounts .....................
Exchange differences and other
movements .....................................
At 31 December 2012 .......................
At 1 January 2011 ..............................
Additional provisions/increase
in provisions ..................................
Provisions utilised .............................
Amounts reversed ..............................
Unwinding of discounts .....................
Exchange differences and other
movements .....................................
At 31 December 2011 ........................
169
434
(320)
(89)
–
57
251
21
221
(58)
(14)
–
(1)
169
1,473
1,067
2,779
(2,510)
(104)
42
(13)
1,667
969
896
(367)
(28)
56
(53)
1,473
2,473
(1,022)
(137)
1
5
2,387
442
1,078
(386)
(87)
–
20
1,067
409
376
(153)
(63)
5
72
646
301
184
(71)
(86)
5
76
409
206
73
(2)
(58)
–
82
301
405
14
(5)
(41)
1
(168)
206
478
Total
US$m
3,324
6,135
(4,007)
(451)
48
203
5,252
2,138
2,393
(887)
(256)
62
(126)
3,324
Further details of legal proceedings and regulatory matters are set out in Note 43. Legal proceedings include
civil court, arbitration or tribunal proceedings brought against HSBC companies (whether by way of claim or
counterclaim) or civil disputes that may, if not settled, result in court, arbitration or tribunal proceedings. Regulatory
matters refer to investigations, reviews and other actions carried out by, or in response to the actions of, regulators
or law enforcement agencies in connection with alleged wrongdoing by HSBC. In December 2012, HSBC made
payments totalling US$1,921m to US authorities in relation to investigations regarding inadequate compliance with
anti-money laundering and sanctions laws. Further details of the agreements reached with the US authorities are set
out on page 510.
Customer remediation refers to activities carried out by HSBC to compensate customers for losses or damages
associated with a failure to comply with regulations or to treat customers fairly. Customer remediation is initiated
by HSBC in response to customer complaints and/or industry developments in sales practices, and not necessarily
initiated by regulatory action.
Payment protection insurance
An increase in provisions of US$1,681m was recognised during the year 2012 in respect of the estimated liability for
redress regarding the mis-selling of payment protection insurance (‘PPI’) policies in previous years. Cumulative
provisions made since the Judicial Review ruling in 2011 amount to US$2,397m, of which US$957m has been paid in
2012 (2011: US$325m). At 31 December 2012, the provision amounted to US$1,321m (2011: US$506m).
The estimated liability for redress is calculated based on the total premiums paid by the customer plus simple interest
of 8% per annum (or the rate inherent in the related loan product where higher). The basis for calculating the redress
liability is the same for single premium and regular premium policies. Future estimated redress levels are based on
historically observed redress per policy.
A total of 5.4 million PPI policies have been sold by HSBC since 2000, which generated estimated revenues of
US$4.1bn at 2012 average exchange rates. The gross written premiums on these polices was approximately
US$5.1bn at 2012 average exchange rates. At 31 December 2012, the estimated total complaints expected to be
received was 1.4 million, representing 25% of total policies sold. It is estimated that contact will be made with regard
to 1.8 million policies, representing 33% of total policies sold. This estimate includes inbound complaints as well as
HSBC’s proactive contact exercise on certain policies (‘outbound contact’).
During 2012, we increased the estimate of the total number of policies to be ultimately redressed, as the level of
complaints received was higher in volume and over a more sustained period than previously assumed. This change in
assumptions contributed approximately US$1.2bn to the increased provision for the year with the balance consisting
of US$0.2bn attributable to regulatory changes and US$0.3bn other assumption and model changes.
The following table details the cumulative number of complaints received at 31 December 2012 and the number of
claims expected in the future:
Cumulative to
31 December
Inbound complaints1 (000s of policies) ....................................................................................................
Outbound contact (000s of policies) .........................................................................................................
Response rate to outbound contact ...........................................................................................................
Average uphold rate per claim2 .................................................................................................................
Average redress per claim (US$) ..............................................................................................................
1 Excludes invalid claims where the complainant has not held a PPI policy.
2 Claims include inbound and responses to outbound contact.
2012
801
43
37%
78%
2,325
Future
expected
348
547
38%
79%
2,290
The main assumptions involved in calculating the redress liability are the volume of inbound complaints, the
projected period of inbound complaints, the decay rate of complaint volumes, the population identified as
systemically mis-sold and the number of policies per customer complaint. The main assumptions are likely to
evolve over time as root cause analysis continues, more experience is available regarding customer initiated
complaint volumes received, and we handle responses to our ongoing outbound contact.
A 100,000 increase/decrease in the total inbound complaints would increase/decrease the redress provision by
approximately US$180m. Each 1% increase/decrease in the response rate to our outbound contact exercise would
increase/decrease the redress provision by approximately US$10m.
479
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Notes on the Financial Statements (continued)
33 – Subordinated liabilities
In addition to these factors and assumptions, the extent of the required redress will also depend on the facts and
circumstances of each individual customer’s case. For these reasons, there is currently a high degree of uncertainty as
to the eventual costs of redress for this matter.
Interest rate derivatives
A provision of US$598m was recognised relating to the estimated liability for redress in respect of the possible mis-
selling of interest rate derivatives in the UK. Of this provision, US$272m related to the estimated redress payable to
customers in respect of historical payments under derivative contracts, US$254m covered the expected write-off by
the bank of open derivative contracts balances, and US$72m covers estimated project costs.
Following an FSA review of the sale of interest rate derivatives, HSBC agreed to pay redress to customers where
mis-selling of these products has occurred under the FSA’s criteria. On 31 January 2013, the FSA announced the
findings from their review of pilot cases completed by the banks. Following its review, the FSA clarified the
eligibility criteria to ensure the programme is focused on those small businesses that were unlikely to understand
the risks associated with those products. HSBC has also been working with the FSA and an independent ‘skilled
person’ adviser to clarify the standards against which it should assess sales, and how redress should be calculated (for
example, when it would be appropriate to assume a customer would have taken an alternative interest rate product).
The extent to which HSBC is required to pay redress depends on the responses of contacted and other customers
during the review period and the facts and circumstances of each individual case. For these reasons, there is currently
a high degree of uncertainty as to the eventual costs of redress related to this programme.
Brazilian labour, civil and fiscal claims
Within ‘legal proceedings and regulatory matters’ above are labour, civil and fiscal litigation provisions of US$506m
(2011: US$481m) which includes provisions in respect of labour and overtime litigation claims brought by past
employees against HSBC operations in Brazil following their departure from the bank. The main assumptions
involved in estimating the liability are the expected number of departing employees, individual salary levels and the
facts and circumstances of each individual case.
33 Subordinated liabilities
HSBC
Subordinated liabilities
At amortised cost ..............................................................................................................................................
– subordinated liabilities .................................................................................................................................
– preferred securities .......................................................................................................................................
Designated at fair value (Note 28) ...................................................................................................................
– subordinated liabilities .................................................................................................................................
– preferred securities .......................................................................................................................................
Subordinated liabilities
HSBC Holdings ................................................................................................................................................
Other HSBC .....................................................................................................................................................
At 31 December
2012
US$m
29,479
25,119
4,360
21,559
16,863
4,696
2011
US$m
30,606
25,543
5,063
21,611
17,503
4,108
51,038
52,217
20,569
30,469
51,038
21,456
30,761
52,217
Subordinated liabilities are capital securities which have been included in the capital base of HSBC and were issued
in accordance with the rules and guidance in the FSA’s General Prudential Sourcebook (‘GENPRU’). Where
applicable, these capital securities may be called and redeemed by HSBC subject to prior notification to the FSA and,
where relevant, the consent of the local banking regulator. If not redeemed at the first call date, interest coupons
payable may step-up or become floating rate related to interbank rates, and in some cases may be subject to a floor.
Interest rates on the floating rate capital securities are generally related to interbank offered rates. On the remaining
capital securities, interest is payable at fixed rates of up to 10.176%.
480
The balance sheet amounts disclosed below are presented on an IFRSs basis and do not reflect the amount that the
instruments contribute to regulatory capital. The IFRSs accounting and regulatory treatments differ due to the
inclusion of issuance costs and regulatory amortisation.
HSBC’s subordinated liabilities
Tier 1 capital securities
Tier 1 capital securities are perpetual subordinated securities on which investors are entitled, subject to certain
conditions, to receive distributions which are non-cumulative. Such securities do not generally carry voting rights
but rank above ordinary shares for coupon payments and in the event of a winding-up.
HSBC has the following qualifying tier 1 capital securities in issue which are accounted for as liabilities:
Tier 1 capital securities guaranteed by HSBC Holdings1
€600m
US$1,250m
€1,400m
£500m
€750m
US$900m
8.03% non-cumulative step-up perpetual preferred securities2 .........................
4.61% non-cumulative step-up perpetual preferred securities ..........................
5.3687% non-cumulative step-up perpetual preferred securities ......................
8.208% non-cumulative step-up perpetual preferred securities ........................
5.13% non-cumulative step-up perpetual preferred securities ..........................
10.176% non-cumulative step-up perpetual preferred securities, series 2 ........
First call
date
Jun 2012
Jun 2013
Mar 2014
Jun 2015
Mar 2016
Jun 2030
Tier 1 capital securities guaranteed by HSBC Bank plc1
£300m
£700m
5.862% non-cumulative step-up perpetual preferred securities ........................
5.844% non-cumulative step-up perpetual preferred securities ........................
Apr 2020
Nov 2031
At 31 December
2012
US$m
2011
US$m
–
1,250
1,933
806
1,033
891
5,913
480
1,131
1,611
776
1,163
1,693
771
872
891
6,166
378
1,084
1,462
1 See paragraph below, ‘Guaranteed by HSBC Holdings or HSBC Bank plc’.
2 In June 2012, HSBC redeemed these securities at par.
Guaranteed by HSBC Holdings or HSBC Bank plc
The five capital securities guaranteed, on a subordinated basis, by HSBC Holdings and the two capital securities
guaranteed, on a subordinated basis, by HSBC Bank are non-cumulative step-up perpetual preferred securities issued
by Jersey limited partnerships. The proceeds of the issues were on-lent to the respective guarantor by the limited
partnerships in the form of subordinated notes. The above preferred securities qualify as tier 1 capital for HSBC
Group and the two capital securities guaranteed by HSBC Bank also qualify as tier 1 capital for HSBC Bank (on a
solo and consolidated basis).
These preferred securities, together with the guarantee, are intended to provide investors with rights to income and
capital distributions, and distributions upon liquidation of the relevant issuer that are equivalent to the rights that
they would have had if they had purchased non-cumulative perpetual preference shares of the relevant issuer.
There are limitations on the payment of distributions if such payments are prohibited under UK banking regulations
or other requirements, if a payment would cause a breach of HSBC’s capital adequacy requirements, or if HSBC
Holdings or HSBC Bank has insufficient distributable reserves (as defined) respectively.
HSBC Holdings and HSBC Bank have individually covenanted that if prevented under certain circumstances from
paying distributions on the preferred securities in full, they will not pay dividends or other distributions in respect
of its ordinary shares, or effect repurchases or redemptions of its ordinary shares, until the distribution on preferred
securities has been paid in full.
With respect to preferred securities guaranteed by HSBC Holdings – if (i) HSBC’s total capital ratio falls below the
regulatory minimum ratio required, or (ii) the Directors expect that, in view of the deteriorating financial condition
of HSBC Holdings, that (i) will occur in the near term, then the preferred securities will be substituted by preference
shares of HSBC Holdings which have economic terms which are in all material respects equivalent to those of the
preferred securities and the guarantee taken together.
With respect to preferred securities guaranteed by HSBC Bank – if (i) any of the two issues of preferred securities are
outstanding in April 2049 or November 2048, respectively, or (ii) the total capital ratio of HSBC Bank on a solo and
481
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Notes on the Financial Statements (continued)
33 – Subordinated liabilities
consolidated basis falls below the regulatory minimum ratio required, or (iii) in view of the deteriorating financial
condition of HSBC Bank, the Directors expect (ii) to occur in the near term, then the preferred securities will be
substituted by preference shares of HSBC Bank having economic terms which are in all material respects equivalent
to those of the preferred securities and the guarantee taken together.
Upper tier 2 capital securities
Upper tier 2 capital securities are perpetual subordinated securities on which there is an obligation to pay coupons.
Such securities rank below lower tier 2 securities for coupon payments and in the event of a winding-up.
HSBC has the following qualifying upper tier 2 securities in issue:
HSBC Bank plc
US$750m
US$500m
US$300m
Undated floating rate primary capital notes ......................................................
Undated floating rate primary capital notes ......................................................
Undated floating rate primary capital notes, series 3 ........................................
First call
date
Jun 1990
Sep 1990
Jun 1992
The Hongkong and Shanghai Banking Corporation Ltd
US$400m
US$400m
US$400m
Primary capital undated floating rate notes .......................................................
Primary capital undated floating rate notes (second series) ..............................
Primary capital undated floating rate notes (third series) ..................................
Aug 1990
Dec 1990
Aug 1991
At 31 December
2012
US$m
2011
US$m
750
499
301
750
500
300
1,550
1,550
405
402
400
406
403
400
1,207
1,209
Other HSBC subsidiaries
Other perpetual subordinated loan capital less than US$100m ........................
21
21
Lower tier 2 capital securities
Lower tier 2 capital securities are dated securities on which there is an obligation to pay coupons. In accordance with
the FSA’s GENPRU, the capital contribution of lower tier 2 securities is amortised for regulatory purposes on a
straight-line basis in their final five years before maturity.
HSBC has the following qualifying lower tier 2 securities in issue:
First call
date
Maturity
date
At 31 December
2012
US$m
2011
US$m
HSBC Bank plc
£350m
£500m
£350m
£300m
£350m
£500m
£225m
£600m
€500m
US$300m
Callable subordinated variable coupon notes1 ...........................
4.75% callable subordinated notes2 ...........................................
5.00% callable subordinated notes3 ...........................................
6.50% subordinated notes ..........................................................
5.375% callable subordinated step-up notes4 ............................
5.375% subordinated notes ........................................................
6.25% subordinated notes ..........................................................
4.75% subordinated notes ..........................................................
Callable subordinated floating rate notes5 .................................
7.65% subordinated notes ..........................................................
Jun 2012
Sep 2015
Mar 2018
–
Nov 2025
–
–
–
Sep 2015
–
Jun 2017
Sep 2020
Mar 2023
Jul 2023
Nov 2030
Aug 2033
Jan 2041
Mar 2046
Sep 2020
May 2025
Hang Seng Bank Limited
US$300m
Callable subordinated floating rate notes1 .................................
Jul 2012
Jul 2017
HSBC Bank Australia Limited
AUD200m
AUD42m
Callable subordinated floating rate notes ..................................
Callable subordinated floating rate notes6 .................................
Nov 2015
Mar 2013
Nov 2020
Mar 2018
HSBC Bank Malaysia Berhad
MYR500m
MYR500m
4.35% subordinated bonds .........................................................
5.05% subordinated bonds .........................................................
Jun 2017
Nov 2022
Jun 2022
Nov 2027
–
844
630
483
630
925
362
958
606
394
550
759
533
463
493
678
346
917
550
374
5,832
5,663
–
–
207
44
251
164
168
332
300
300
203
42
245
158
162
320
482
First call
date
Maturity
date
At 31 December
2012
US$m
2011
US$m
HSBC USA Inc.
US$200m
US$200m
US$150m
US$150m
US$750m
US$250m
7.808% capital securities ...........................................................
Dec 2006
8.38% capital securities ............................................................. May 2007
9.50% subordinated debt ...........................................................
–
Nov 2016
7.75% Capital Trust pass through securities .............................
–
5.00% subordinated notes ..........................................................
7.20% subordinated debentures .................................................
–
Other subordinated liabilities each less than US$150m ............
Dec 2026
May 2027
Apr 2014
Nov 2026
Sep 2020
Jul 2097
HSBC Bank USA, N.A.
US$1,000m
US$500m
US$1,250m
US$1,000m
US$750m
US$700m
4.625% subordinated notes ........................................................
6.00% subordinated notes .........................................................
4.875% subordinated notes ........................................................
5.875% subordinated notes .......................................................
5.625% subordinated notes .......................................................
7.00% subordinated notes .........................................................
–
–
–
–
–
–
Apr 2014
Aug 2017
Aug 2020
Nov 2034
Aug 2035
Jan 2039
HSBC Finance Corporation
US$1,000m
US$2,939m
5.911% trust preferred securities7 ..............................................
6.676% senior subordinated notes8 ............................................
Nov 2015
–
Nov 2035
Jan 2021
HSBC Bank Brazil S.A.
BRL383m
BRL500m
Subordinated certificates of deposit ..........................................
Subordinated floating rate certificates of deposit ......................
Other subordinated liabilities each less than US$150m9 ...........
HSBC Mexico, S.A.
MXN1,818m Non-convertible subordinated obligations10 ..............................
MXN2,273m Non-convertible subordinated obligations10 ..............................
Non-convertible subordinated obligations10,11 ...........................
US$300m
–
–
–
–
–
Feb 2015
Dec 2016
Sep 2018
Dec 2018
Jun 2019
HSBC Bank Canada
CAD400m
CAD200m
CAD39m
4.80% subordinated notes ..........................................................
4.94% subordinated debentures .................................................
Floating rate debentures .............................................................
Apr 2017
–
–
Apr 2022
Mar 2021
Nov 2083
Other HSBC subsidiaries
Other subordinated liabilities each less than US$200m9 ...........
200
200
152
150
745
214
302
200
200
154
150
744
214
394
1,963
2,056
1,002
516
1,263
1,151
864
694
5,490
995
2,180
3,175
289
464
491
1,244
139
173
240
552
438
201
39
678
650
650
1,009
505
1,259
951
712
681
5,117
994
2,177
3,171
206
268
1,156
1,630
130
162
232
524
417
195
39
651
676
676
Total of subordinated liabilities issued by HSBC subsidiaries ............................................................................
Amounts owed to third parties by HSBC Holdings (page 480) ...........................................................................
30,469
20,569
51,038
30,761
21,456
52,217
1 In June2012 and July 2012, HSBC redeemed its £350m callable subordinated variable coupon note and its US$300m callable
subordinated floating rate notes respectively at par.
2 The interest rate payable after September 2015 is the sum of the three-month sterling Libor plus 0.82%.
3 The interest rate payable after March 2018 is the sum of the gross redemption yield of the then prevailing five-year UK gilt plus 1.80%.
4 The interest rate payable after November 2025 is the sum of the three-month sterling Libor plus 1.50%.
5 The interest margin increases by 0.5% from September 2015.
6 In February 2013, HSBC gave notice that it will call and redeem the notes at par in March 2013.
7 The distributions change in November 2015 to three-month dollar Libor plus 1.926%.
8 Approximately 25% of the senior subordinated notes is held by HSBC Holdings.
9 Some securities included here are ineligible for inclusion in the capital base of HSBC in accordance with guidance in FSA’s GENPRU.
10 These securities are ineligible for inclusion in the capital base of HSBC in accordance with FSA’s GENPRU.
11 Approximately US$60m of the subordinated obligations are held by HSBC Holdings.
483
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H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
33 – Subordinated liabilities / 34 – Maturity analysis
HSBC Holdings
Subordinated liabilities:
– at amortised cost ...........................................................................................................................................
– designated at fair value (Note 28) ................................................................................................................
HSBC Holdings’ subordinated liabilities
At 31 December
2012
US$m
11,907
14,618
26,525
2011
US$m
12,450
15,398
27,848
First call
date
Maturity
date
2012
US$m
2011
US$m
At 31 December
Amounts owed to third parties1
US$1,400m
US$488m
US$222m
US$2,000m
US$2,500m
US$1,500m
£250m
£900m
£650m
£650m
£750m
£900m
€1,000m
€1,600m
€1,750m
€700m
5.25% subordinated notes ..........................................................
7.625% subordinated notes ........................................................
7.35% subordinated notes ..........................................................
6.5% subordinated notes ............................................................
6.5% subordinated notes ............................................................
6.8% subordinated notes ............................................................
9.875% subordinated bonds2 .....................................................
6.375% callable subordinated notes3 .........................................
5.75% subordinated notes ..........................................................
6.75% subordinated notes ..........................................................
7.0% subordinated notes ............................................................
6.0% subordinated notes ............................................................
5.375% subordinated notes ........................................................
6.25% subordinated notes ..........................................................
6.0% subordinated notes ............................................................
3.625% callable subordinated notes4 .........................................
–
–
–
–
–
–
Apr 2013
Oct 2017
–
–
–
–
–
–
–
Jun 2015
Dec 2012
May 2032
Nov 2032
May 2036
Sep 2037
Jun 2038
Apr 2018
Oct 2022
Dec 2027
Sep 2028
Apr 2038
Mar 2040
Dec 2012
Mar 2018
Jun 2019
Jun 2020
Amounts owed to HSBC undertakings
€600m
US$1,250m
€1,400m
£500m
€750m
US$900m
8.03% subordinated step-up cumulative notes5 .........................
4.61% fixed/floating subordinated notes ...................................
5.3687% fixed/floating subordinated notes ...............................
8.208% subordinated step-up cumulative notes ........................
5.13% fixed/floating subordinated notes ...................................
10.176% subordinated step-up cumulative notes ......................
Jun 2012
Jun 2013
Mar 2014
Jun 2015
Mar 2016
Jun 2030
Jun 2040
Jun 2043
Dec 2043
Jun 2040
Dec 2044
Jun 2040
–
579
258
2,034
3,202
1,486
442
1,648
1,210
1,041
1,264
1,431
–
2,118
2,882
974
1,438
578
257
2,048
2,634
1,486
445
1,416
926
997
1,205
1,369
1,327
2,073
2,388
869
20,569
21,456
–
1,264
1,952
806
1,043
891
5,956
775
1,223
1,791
771
941
891
6,392
26,525
27,848
1 Amounts owed to third parties represent securities included in the capital base of HSBC as lower tier 2 securities in accordance with
guidance in the FSA’s GENPRU.
2 In February 2013, HSBC Holdings gave notice that it will call and redeem the bonds at par in April 2013.
3 The interest rate payable after October 2017 is the sum of the three-month sterling Libor plus 1.3%.
4 The interest rate payable after June 2015 is the sum of the three-month Euribor plus 0.93%.
5 In June 2012, HSBC Holdings redeemed its €600m 8.03% subordinated step-up cumulative notes at par.
484
34 Maturity analysis of assets, liabilities and off-balance sheet commitments
The table on page 486 provides an analysis of consolidated total assets, liabilities and off-balance sheet commitments
by residual contractual maturity at the balance sheet date. Asset and liability balances are included in the maturity
analysis as follows:
•
•
•
•
•
except for reverse repos, repos and debt securities in issue, trading assets and liabilities (including trading
derivatives) are included in the ‘Due less than one month’ time bucket, and not by contractual maturity because
trading balances are typically held for short periods of time;
financial assets and liabilities with no contractual maturity (such as equity securities) are included in the ‘Due
over five years’ time bucket. Undated or perpetual instruments are classified based on the contractual notice
period which the counterparty of the instrument is entitled to give. Where there is no contractual notice period,
undated or perpetual contracts are included in the ‘Due over five years’ time bucket;
non financial assets and liabilities with no contractual maturity (such as property, plant and equipment, goodwill
and intangible assets, current and deferred tax assets and liabilities and retirement benefit liabilities) are included
in the ‘Due over five years’ time bucket;
financial instruments included within assets and liabilities of disposal groups held for sale are classified on the
basis of the contractual maturity of the underlying instruments and not on the basis of the disposal transaction;
and
liabilities under insurance contracts are included in the ‘Due over five years’ time bucket. Liabilities under
investment contracts are classified in accordance with their contractual maturity. Undated investment contracts
are classified based on the contractual notice period investors are entitled to give. Where there is no contractual
notice period, undated contracts are included in the ‘Due over five years’ time bucket.
Loan and other credit-related commitments are classified on the basis of the earliest date they can be drawn down.
485
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HSBC
Maturity analysis of assets and liabilities
At 31 December 2012
Due
less than
1 month
US$m
Due
between
1 and 3
months
US$m
Due
between
3 and 6
months
US$m
Due
between
6 and 9
months
US$m
Due
between
9 months
and 1 year
US$m
Due
between
1 and 2
years
US$m
Due
between
2 and 5
years
US$m
Due
over
5 years
US$m
Financial assets
Cash and balances at central banks ..........................................................
Items in the course of collection from other banks ..................................
Hong Kong Government certificates of indebtedness .............................
Trading assets ...........................................................................................
– Reverse repos ....................................................................................
– Other trading assets ...........................................................................
Financial assets designated at fair value ..................................................
Derivatives ................................................................................................
– Trading ..............................................................................................
– Non-trading .......................................................................................
4
8
6
Loans and advances to banks ...................................................................
– Reverse repos ....................................................................................
– Other loans and advances to banks ..................................................:
Loans and advances to customers ............................................................
– Personal .............................................................................................
– Corporate and commercial ................................................................
– Financial ............................................................................................
Of which:
– Reverse repos ................................................................................
Financial investments ...............................................................................
Assets held for sale ...................................................................................
Accrued income ........................................................................................
Other financial assets ................................................................................
141,532
7,303
22,743
382,654
92,525
290,129
437
354,222
353,803
419
104,397
28,833
75,564
221,242
49,042
138,999
33,201
19,847
28,085
4,953
2,776
13,383
–
–
–
12,506
12,506
–
576
65
–
65
22,683
3,101
19,582
69,709
8,578
49,166
11,965
10,640
51,339
298
2,325
3,486
–
–
–
9,829
9,829
–
425
252
–
252
5,859
2,071
3,788
47,507
7,242
35,463
4,802
2,310
33,996
515
739
1,759
–
–
–
248
248
–
526
22
–
22
2,292
356
1,936
29,659
6,763
19,334
3,562
1,050
14,072
125
493
337
–
–
–
3,169
3,169
–
239
227
–
227
5,032
963
4,069
71,928
9,547
53,766
8,615
554
26,478
669
542
745
–
–
–
405
405
–
2,462
596
–
596
6,238
138
6,100
59,100
17,696
38,070
3,334
250
61,443
519
164
332
–
–
–
–
–
–
3,545
1,127
–
1,127
2,027
–
2,027
194,147
66,684
119,330
8,133
–
93,127
1,079
217
372
–
–
–
–
–
–
25,372
939
–
939
4,018
–
4,018
304,331
241,329
55,910
7,092
–
34,651
112,561
9,964
1,284
3,170
421,101
18,122
8,540
23,584
3
4
-
M
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t
u
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i
t
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a
n
a
l
y
s
i
s
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S
B
C
H
O
L
D
I
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G
S
P
L
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m
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n
t
s
(
c
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n
t
i
n
u
e
d
)
Total
US$m
141,532
7,303
22,743
408,811
118,682
290,129
33,582
357,450
353,803
3,647
152,546
35,462
117,084
997,623
406,881
510,038
80,704
Total financial assets ..............................................................................
1,283,727
162,987
100,881
47,774
109,029
131,259
295,641
461,639
2,592,937
Non financial assets ..................................................................................
–
–
–
–
–
–
–
99,601
99,601
Total assets ..............................................................................................
1,283,727
162,987
100,881
47,774
109,029
131,259
295,641
561,240
2,692,538
HIGHLY RESTRICTED
4
8
7
Financial liabilities
Hong Kong currency notes in circulation ................................................
Deposits by banks .....................................................................................
– Repos .................................................................................................
– Other deposits by banks ....................................................................
Due
less than
1 month
US$m
22,742
79,100
6,593
72,507
Customer accounts1 ..................................................................................
– Personal .............................................................................................
– Corporate and commercial ................................................................
– Financial ............................................................................................
1,193,736
539,792
473,370
180,574
Of which: repos ....................................................................................
22,446
Items in the course of transmission to other banks ..................................
Trading liabilities ......................................................................................
– Repos .................................................................................................
– Debt securities in issue ......................................................................
– Other trading liabilities .....................................................................
7,131
240,212
96,690
380
143,142
Financial liabilities designated at fair value .............................................
– Debt securities in issue: covered bonds ............................................
– Debt securities in issue: otherwise secured .......................................
– Debt securities in issue: unsecured ...................................................
– Subordinated liabilities and preferred securities ...............................
– Other ..................................................................................................
Derivatives ................................................................................................
– Trading ..............................................................................................
– Non-trading .......................................................................................
Debt securities in issue .............................................................................
– Covered bonds ...................................................................................
– Otherwise secured .............................................................................
– Unsecured ..........................................................................................
Liabilities of disposal groups held for sale ..............................................
Accruals ....................................................................................................
Subordinated liabilities .............................................................................
Other financial liabilities ..........................................................................
427
–
–
392
–
35
352,696
352,195
501
23,738
–
14,598
9,140
2,475
3,369
32
19,837
Due
between
1 and 3
months
US$m
–
12,029
4,645
7,384
67,638
35,260
24,018
8,360
3,869
7
29,003
27,002
2,001
–
81
–
8
49
–
24
75
–
75
12,368
–
1,894
10,474
242
4,173
44
4,881
Due
between
3 and 6
months
US$m
–
1,957
711
1,246
34,010
21,939
9,044
3,027
1,047
–
4,707
3,319
1,388
–
2,068
–
2,023
1
–
44
43
–
43
6,355
1,133
–
5,222
433
907
–
2,115
At 31 December 2012
Due
between
6 and 9
months
US$m
Due
between
9 months
and 1 year
US$m
Due
between
1 and 2
years
US$m
Due
between
2 and 5
years
US$m
–
437
–
437
11,939
7,900
2,925
1,114
345
–
1,820
985
835
–
2,163
–
–
2,117
–
46
29
–
29
2,840
422
184
2,234
254
521
10
519
–
2,155
–
2,155
16,019
11,100
3,354
1,565
567
–
5,197
2,227
2,970
–
1,605
–
22
1,357
–
226
2,408
–
2,408
27,992
757
753
26,482
188
1,200
–
867
–
1,695
–
1,695
7,034
4,687
1,069
1,278
344
–
3,867
–
3,867
–
2,916
–
2,040
690
–
186
628
–
628
11,992
2,328
1,634
8,030
166
232
1,481
599
–
9,440
–
9,440
8,985
3,916
1,193
3,876
–
–
9,736
–
9,736
–
28,902
4,633
228
23,495
21
525
1,212
–
1,212
29,100
1,920
5,779
21,401
45
419
1,516
1,409
Due
over
5 years
US$m
–
616
–
616
653
307
305
41
–
–
10,021
–
10,021
–
49,558
–
221
15,933
21,538
11,866
1,795
–
1,795
5,076
486
950
3,640
–
842
26,396
2,190
Total
US$m
22,742
107,429
11,949
95,480
1,340,014
624,901
515,278
199,835
28,618
7,138
304,563
130,223
31,198
143,142
87,720
4,633
4,542
44,034
21,559
12,952
358,886
352,195
6,691
119,461
7,046
25,792
86,623
3,803
11,663
29,479
32,417
Total financial liabilities ........................................................................
1,945,495
130,541
52,595
20,532
57,631
30,610
90,764
97,147
2,425,315
Non financial liabilities ............................................................................
–
–
–
–
–
–
–
84,094
84,094
Total liabilities ........................................................................................
1,945,495
130,541
52,595
20,532
57,631
30,610
90,764
181,241
2,509,409
HIGHLY RESTRICTED
Shareholder Information
Financial Statements
Corporate Governance
Operating & Financial Review
Overview
Maturity analysis of assets and liabilities (continued)
Financial assets
Cash and balances at central banks ..........................................................
Items in the course of collection from other banks ..................................
Hong Kong Government certificates of indebtedness .............................
Trading assets ...........................................................................................
– Reverse repos ....................................................................................
– Other trading assets ...........................................................................
Financial assets designated at fair value ..................................................
Derivatives ................................................................................................
– Trading ..............................................................................................
– Non-trading .......................................................................................
Loans and advances to banks ...................................................................
– Reverse repos ....................................................................................
– Other loans and advances to banks ...................................................
Loans and advances to customers ............................................................
– Personal .............................................................................................
– Corporate and commercial ................................................................
– Financial ............................................................................................
Of which:
– Reverse repos ................................................................................
Financial investments ...............................................................................
Assets held for sale ...................................................................................
Accrued income ........................................................................................
Other financial assets ................................................................................
4
8
8
Due
less than
1 month
US$m
129,902
8,208
20,922
318,031
67,428
250,603
595
343,980
342,914
1,066
123,370
35,372
87,998
211,680
47,609
123,130
40,941
23,704
25,546
4,922
2,787
8,878
3
4
–
M
a
t
u
r
i
t
y
a
n
a
l
y
s
i
s
H
S
B
C
H
O
L
D
I
N
G
S
P
L
C
N
o
t
e
s
o
n
t
h
e
F
i
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
(
c
o
n
t
i
n
u
e
d
)
Total
US$m
129,902
8,208
20,922
330,451
79,848
250,603
30,856
346,379
342,914
3,465
180,987
41,910
139,077
940,429
383,865
471,045
85,519
At 31 December 2011
Due
between
1 and 3
months
US$m
Due
between
3 and 6
months
US$m
Due
between
6 and 9
months
US$m
Due
between
9 months
and 1 year
US$m
Due
between
1 and 2
years
US$m
Due
between
2 and 5
years
US$m
Due
over
5 years
US$m
–
–
–
7,432
7,432
–
565
155
–
155
25,288
3,854
21,434
70,941
8,314
49,856
12,771
10,450
50,070
5,767
2,479
3,403
–
–
–
1,712
1,712
–
687
275
–
275
5,460
–
5,460
45,294
6,912
34,082
4,300
2,306
39,698
4,427
765
2,084
–
–
–
225
225
–
595
136
–
136
2,573
1,047
1,526
28,769
5,975
17,304
5,490
3,710
14,879
3,233
393
785
51,588
–
–
–
–
3,033
3,033
–
139
423
–
423
14,441
135
14,306
53,251
7,674
38,875
6,702
–
21,902
2,934
361
2,771
99,255
–
–
–
–
–
–
–
21,382
199
–
199
3,389
–
3,389
280,375
221,851
56,061
2,463
–
–
–
18
18
–
2,748
606
–
606
3,120
1,301
1,819
63,518
19,005
39,467
5,046
250
45,266
7,223
231
513
–
–
–
–
–
–
4,145
605
–
605
3,346
201
3,145
186,601
66,525
112,270
7,806
1,000
90,953
7,064
339
140
–
41,420
111,730
2,238
1,596
5,466
400,044
37,808
8,951
24,040
Total financial assets ................................................................................
1,198,821
166,100
100,402
Non financial assets ..................................................................................
–
–
–
123,243
293,193
426,375
2,458,977
–
–
96,602
96,602
Total assets ...............................................................................................
1,198,821
166,100
100,402
51,588
99,255
123,243
293,193
522,977
2,555,579
HIGHLY RESTRICTED
4
8
9
Financial liabilities
Hong Kong currency notes in circulation ................................................
Deposits by banks .....................................................................................
– Repos .................................................................................................
– Other deposits by banks ....................................................................
Due
less than
1 month
US$m
20,922
84,091
16,301
67,790
Customer accounts1 ..................................................................................
– Personal .............................................................................................
– Corporate and commercial ................................................................
– Financial ............................................................................................
1,054,843
488,966
405,015
160,862
Of which: repos ....................................................................................
13,299
Items in the course of transmission to other banks ..................................
Trading liabilities ......................................................................................
– Repos .................................................................................................
– Debt securities in issue ......................................................................
– Other trading liabilities .....................................................................
8,745
228,365
77,900
2,098
148,367
Financial liabilities designated at fair value .............................................
– Debt securities in issue: covered bonds ............................................
– Debt securities in issue: otherwise secured .......................................
– Debt securities in issue: unsecured ...................................................
– Subordinated liabilities and preferred securities ...............................
– Other ..................................................................................................
Derivatives ................................................................................................
– Trading ..............................................................................................
– Non-trading .......................................................................................
Debt securities in issue .............................................................................
– Covered bonds ...................................................................................
– Otherwise secured .............................................................................
– Unsecured ..........................................................................................
Liabilities of disposal groups held for sale ..............................................
Accruals ....................................................................................................
Subordinated liabilities .............................................................................
Other financial liabilities ..........................................................................
39
–
–
–
–
39
339,092
338,788
304
31,806
4
17,869
13,933
16,412
3,141
129
12,403
Due
between
1 and 3
months
US$m
–
12,056
336
11,720
84,853
40,522
32,088
12,243
6,921
–
7,757
6,056
1,701
–
22
–
–
–
–
22
103
–
103
15,900
627
5,293
9,980
1,164
4,921
–
5,415
Total financial liabilities ...........................................................................
Non financial liabilities ............................................................................
1,799,988
–
132,191
–
Total liabilities ..........................................................................................
1,799,988
132,191
1 Includes US$366,203m (2011: US$387,655m) insured by guarantee schemes
Due
between
3 and 6
months
US$m
–
2,145
–
2,145
35,792
19,917
12,754
3,121
3,444
–
1,782
716
1,066
–
2,846
–
–
2,802
–
44
68
–
68
4,920
383
273
4,264
462
1,142
–
2,419
51,576
–
51,576
At 31 December 2011
Due
between
6 and 9
months
US$m
Due
between
9 months
and 1 year
US$m
–
1,406
979
427
16,650
6,433
9,148
1,069
5,330
–
726
–
726
–
430
–
–
385
–
45
19
–
19
5,577
52
387
5,138
225
443
300
835
26,611
–
26,611
–
1,673
–
1,673
22,052
14,057
3,933
4,062
1,412
–
6,794
2,160
4,634
–
5,923
2
–
3,115
2,765
41
144
–
144
15,926
1,548
392
13,986
2,536
707
381
1,576
57,712
–
57,712
Due
between
1 and 2
years
US$m
–
1,681
–
1,681
12,982
6,214
5,484
1,284
379
–
4,185
6
4,179
–
4,575
–
2,164
2,093
1
317
389
–
389
14,438
2,277
704
11,457
343
415
10
814
39,832
–
39,832
Due
between
2 and 5
years
US$m
–
8,938
–
8,938
25,362
12,260
8,272
4,830
–
–
8,418
–
8,418
–
24,857
2,263
2,013
20,091
17
473
1,202
–
1,202
36,120
4,133
3,894
28,093
297
384
3,026
626
109,230
–
Due
over
5 years
US$m
–
832
–
832
1,391
723
599
69
Total
US$m
20,922
112,822
17,616
95,206
1,253,925
589,092
477,293
187,540
–
30,785
–
7,165
–
7,165
–
47,032
374
109
16,786
18,828
10,935
4,363
–
4,363
6,326
1,119
2,171
3,036
561
646
26,760
1,823
96,899
75,447
8,745
265,192
86,838
29,987
148,367
85,724
2,639
4,286
45,272
21,611
11,916
345,380
338,788
6,592
131,013
10,143
30,983
89,887
22,000
11,799
30,606
25,911
2,314,039
75,447
109,230
172,346
2,389,486
HIGHLY RESTRICTED
Shareholder Information
Financial Statements
Corporate Governance
Operating & Financial Review
Overview
Maturity analysis of off-balance sheet commitments received
At 31 December 2012
Loan and other credit-related commitments .............................................
At 31 December 2011
Loan and other credit-related commitments .............................................
Maturity analysis of off-balance sheet commitments given
At 31 December 2012
Loan and other credit-related commitments .............................................
Of which:
Due
less than
1 month
US$m
Due
between
1 and 3
months
US$m
Due
between
3 and 6
months
US$m
Due
between
6 and 9
months
US$m
Due
between
9 months
and 1 year
US$m
Due
between
1 and 2
years
US$m
Due
between
2 and 5
years
US$m
Due
over
5 years
US$m
Total
US$m
2,455
5,280
3
2
8
36
5
3
8
6
25
19
75
98
2,677
508
143
5,997
Due
less than
1 month
US$m
Due
between
1 and 3
months
US$m
Due
between
3 and 6
months
US$m
Due
between
6 and 9
months
US$m
Due
between
9 months
and 1 year
US$m
Due
between
1 and 2
years
US$m
Due
between
2 and 5
years
US$m
Due
over
5 years
US$m
Total
US$m
408,815
43,394
8,389
5,191
37,751
11,598
45,910
18,421
579,469
4
9
0
– Personal .............................................................................................
– Corporate and commercial ................................................................
– Financial ............................................................................................
153,255
225,899
29,661
6,999
34,368
2,027
704
6,365
1,320
185
4,951
55
19,049
15,412
3,290
1,216
9,488
894
1,616
37,179
7,115
8,159
8,593
1,669
191,183
342,255
46,031
At 31 December 2011
Loan and other credit-related commitments .............................................
Of which:
373,426
47,187
20,076
35,673
38,368
32,230
78,831
29,113
654,904
– Personal .............................................................................................
– Corporate and commercial ................................................................
– Financial ............................................................................................
246,570
114,741
12,115
7,569
36,866
2,752
2,124
15,289
2,663
4,848
19,589
11,236
4,431
25,890
8,047
7,507
20,767
3,956
12,262
57,853
8,716
7,706
18,281
3,126
293,017
309,276
52,611
3
4
–
M
a
t
u
r
i
t
y
a
n
a
l
y
s
i
s
H
S
B
C
H
O
L
D
I
N
G
S
P
L
C
N
o
t
e
s
o
n
t
h
e
F
i
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
(
c
o
n
t
i
n
u
e
d
)
HSBC Holdings
Maturity analysis of assets, liabilities and off-balance sheet commitments
At 31 December 2012
Due
less than
1 month
US$m
Due
between
1 and 3
months
US$m
Due
between
3 and 6
months
US$m
Due
between
6 and 9
months
US$m
Due
between
9 months
and 1 year
US$m
Due
between
1 and 2
years
US$m
Due
between
2 and 5
years
US$m
4
9
1
Financial assets
Cash at bank and in hand:
– balances with HSBC undertakings ...................................................
Derivatives ................................................................................................
Loans and advances to HSBC undertakings ............................................
Financial investments ...............................................................................
Other financial assets ................................................................................
353
3,768
6,275
23
4
Total financial assets ..............................................................................
10,423
Non financial assets ..................................................................................
–
–
–
2,395
–
–
2,395
–
–
–
3,992
8
–
4,000
–
Total assets ..............................................................................................
10,423
2,395
4,000
Financial liabilities
Amounts owing to HSBC undertakings ...................................................
Financial liabilities designated at fair value .............................................
– Debt securities in issue ..........................................................................
– Subordinated liabilities and preferred securities ...................................
Derivatives ................................................................................................
Debt securities in issue .............................................................................
Accruals ....................................................................................................
Subordinated liabilities .............................................................................
Total financial liabilities ........................................................................
Non financial liabilities ............................................................................
3,576
–
–
–
760
–
223
–
4,559
–
Total liabilities ........................................................................................
4,559
19
–
–
–
–
171
–
190
–
190
980
–
–
–
–
–
190
–
1,170
–
1,170
–
–
–
–
–
–
–
–
–
–
–
–
–
–
21
–
21
–
21
Off-balance sheet commitments given
Undrawn formal standby facilities, credit lines and other
commitments to lend ............................................................................
1,200
–
–
–
–
–
15
–
–
15
–
15
–
–
–
–
–
–
–
–
–
–
–
–
Due
over
5 years
US$m
–
–
28,328
1,177
–
29,505
92,476
Total
US$m
353
3,768
41,675
1,208
4
47,008
92,476
–
–
635
–
–
635
–
635
121,981
139,484
1,333
1,258
1,258
–
–
–
–
–
2,591
–
6,948
21,937
7,319
14,618
–
1,045
–
11,907
41,837
443
12,856
23,195
8,577
14,618
760
2,691
605
11,907
52,014
443
–
–
35
–
–
35
–
35
–
–
–
–
–
1,646
–
–
1,646
–
1,646
2,591
42,280
52,457
–
–
–
1,200
HIGHLY RESTRICTED
Shareholder Information
Financial Statements
Corporate Governance
Operating & Financial Review
Overview
Maturity analysis of assets, liabilities and off-balance sheet commitments (continued)
At 31 December 2011
Due
less than
1 month
US$m
Due
between
1 and 3
months
US$m
Due
between
3 and 6
months
US$m
Due
between
6 and 9
months
US$m
Due
between
9 months
and 1 year
US$m
Due
between
1 and 2
years
US$m
Due
between
2 and 5
years
US$m
Financial assets
Cash at bank and in hand:
– balances with HSBC undertakings ...................................................
Derivatives ................................................................................................
Loans and advances to HSBC undertakings ............................................
Financial investments ...............................................................................
Other financial assets ................................................................................
Total financial assets ................................................................................
Non financial assets ..................................................................................
316
3,568
5,518
22
1
9,425
–
Total assets ...............................................................................................
9,425
Financial liabilities
Amounts owing to HSBC undertakings ...................................................
Financial liabilities designated at fair value .............................................
– Debt securities in issue ..........................................................................
– Subordinated liabilities and preferred securities ...................................
Derivatives ................................................................................................
Debt securities in issue .............................................................................
Accruals ....................................................................................................
Subordinated liabilities .............................................................................
Other financial liabilities ..........................................................................
Total financial liabilities ...........................................................................
Non financial liabilities ............................................................................
1,101
–
–
–
1,067
–
200
–
885
3,253
–
Total liabilities ..........................................................................................
3,253
Off-balance sheet commitments given
Undrawn formal standby facilities, credit lines and other
4
9
2
–
–
973
–
–
973
–
973
–
–
–
–
–
–
167
–
–
167
–
167
–
–
4,028
9
–
4,037
–
4,037
64
–
–
–
–
–
188
–
–
252
–
252
–
–
366
–
–
366
–
366
–
–
–
–
–
–
20
–
–
20
–
20
–
–
1,312
–
–
1,312
–
1,312
–
2,765
–
2,765
–
–
–
–
–
2,765
–
2,765
commitments to lend ............................................................................
1,810
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Due
over
5 years
US$m
–
–
13,857
1,047
–
14,904
90,851
Total
US$m
316
3,568
28,048
1,078
1
33,011
90,851
–
–
1,994
–
–
1,994
–
1,994
105,755
123,862
1,314
1,177
1,177
–
–
1,612
–
–
–
4,103
–
–
17,209
4,576
12,633
–
1,001
–
12,450
–
30,660
459
2,479
21,151
5,753
15,398
1,067
2,613
575
12,450
885
41,220
459
4,103
31,119
41,679
–
–
1,810
H
S
B
C
H
O
L
D
I
N
G
S
P
L
C
N
o
t
e
s
o
n
t
h
e
F
i
n
a
n
c
i
a
l
S
t
a
t
e
m
e
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s
(
c
o
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t
i
n
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)
3
4
–
M
a
t
u
r
i
t
y
a
n
a
l
y
s
i
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/
3
5
–
F
o
r
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i
g
n
e
x
c
h
a
n
g
e
e
x
p
o
s
u
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s
/
3
6
–
A
s
s
e
t
s
c
h
a
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g
e
d
a
s
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c
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i
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a
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c
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35 Foreign exchange exposures
Structural foreign exchange exposures
HSBC’s structural foreign exchange exposures are represented by the net asset value of its foreign exchange equity
and subordinated debt investments in subsidiaries, branches, joint ventures and associates with non-US dollar
functional currencies. Gains or losses on structural foreign exchange exposures are recognised in other
comprehensive income. HSBC’s management of its structural foreign exchange exposures is discussed on page 268.
In its separate financial statements, HSBC Holdings recognises its foreign exchange gains and losses on structural
foreign exchange exposures in the income statement.
Net structural foreign exchange exposures
Currency of structural exposure
Pound sterling ...........................................................................................................................................
Euro ...........................................................................................................................................................
Chinese renminbi ......................................................................................................................................
Hong Kong dollars ...................................................................................................................................
Brazilian reais ...........................................................................................................................................
Mexican pesos ..........................................................................................................................................
Canadian dollars .......................................................................................................................................
Indian rupees .............................................................................................................................................
Swiss francs ..............................................................................................................................................
UAE dirhams ............................................................................................................................................
Saudi riyals ...............................................................................................................................................
Malaysian ringgit ......................................................................................................................................
Turkish lira ................................................................................................................................................
Australian dollars ......................................................................................................................................
Korean won ...............................................................................................................................................
Taiwanese dollars .....................................................................................................................................
Indonesian rupiah .....................................................................................................................................
Argentine pesos ........................................................................................................................................
Egyptian pounds .......................................................................................................................................
Vietnamese dong ......................................................................................................................................
Singapore dollars ......................................................................................................................................
Philippine pesos ........................................................................................................................................
Thailand baht .............................................................................................................................................
Qatari rial ..................................................................................................................................................
Others, each less than US$500m ..............................................................................................................
At 31 December
2012
US$m
27,305
23,945
19,060
14,466
6,279
5,948
5,024
3,967
2,925
2,807
2,219
2,165
1,787
1,602
1,520
1,513
1,317
1,054
699
762
874
787
653
599
4,169
2011
US$m
22,668
22,400
21,234
4,828
6,097
5,319
4,848
3,967
2,133
2,650
1,965
1,829
1,565
1,455
1,411
1,457
1,235
984
692
686
670
663
484
608
4,167
Total ..........................................................................................................................................................
133,446
116,015
Shareholders’ equity would decrease by US$2,562m (2011: US$2,146m) if euro and sterling foreign currency
exchange rates weakened by 5% relative to the US dollar.
36 Assets charged as security for liabilities and collateral accepted as security for assets
Financial assets pledged to secure liabilities
Treasury bills and other eligible securities ...............................................................................................
Loans and advances to banks ...................................................................................................................
Loans and advances to customers ............................................................................................................
Debt securities ..........................................................................................................................................
Equity shares .............................................................................................................................................
Other .........................................................................................................................................................
Assets pledged at 31 December
2011
US$m
2012
US$m
4,381
22,074
81,333
198,671
6,255
1,090
313,804
5,185
19,247
81,570
210,255
6,916
1,003
324,176
The table above shows assets over which a legal charge has been granted to secure liabilities. The amount of such
assets may be greater than the book value of assets utilised as collateral for funding purposes or to cover liabilities.
This is the case for securitisations and covered bonds where the amount of liabilities issued, plus any mandatory
over-collateralisation, is less than the book value of financial assets available for funding or collateral purposes in the
493
i
w
e
v
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Notes on the Financial Statements (continued)
37 – Non-controlling interests / 38 – Called up share capital and other equity instruments
relevant pool of assets. This is also the case where financial assets are placed with a custodian or settlement agent,
which has a floating charge over all the financial assets placed to secure any liabilities under settlement accounts.
These transactions are conducted under terms that are usual and customary to collateralised transactions, including,
where relevant, standard securities lending and repurchase agreements.
Collateral accepted as security for assets
The fair value of assets accepted as collateral that HSBC is permitted to sell or repledge in the absence of default
is US$295,709m (2011: US$302,285m). The fair value of any such collateral that has been sold or repledged was
US$202,662m (2011: US$188,682m). HSBC is obliged to return equivalent securities.
These transactions are conducted under terms that are usual and customary to standard securities borrowing and
reverse repurchase agreements.
37 Non-controlling interests
Non-controlling interests attributable to holders of ordinary shares in subsidiaries ...............................
Preferred securities issued by subsidiaries ...............................................................................................
At 31 December
2012
US$m
5,159
2,728
7,887
2011
US$m
4,656
2,712
7,368
Preferred securities issued by subsidiaries
Preferred securities are securities for which there is no obligation to pay a dividend and, if not paid, the dividend
may not be cumulative. Such securities do not generally carry voting rights but rank higher than ordinary shares for
dividend payments and in the event of a winding-up. These securities have no stated maturity date but may be called
and redeemed by the issuer, subject to prior notification to the FSA and, where relevant, the consent of the local
banking regulator. Dividends on the floating rate preferred securities are generally related to interbank offer rates.
Included in the capital base of HSBC are non-cumulative preferred securities classified as tier 1 capital and
cumulative preferred securities classified as tier 2 capital in accordance with the rules and guidance in the FSA’s
GENPRU.
HSBC’s subsidiaries have the following preferred securities in issue:
HSBC USA Inc.
US$150m
Depositary shares each representing 25% interest in a share of
US$150m
US$518m
US$374m
US$374m
adjustable-rate cumulative preferred stock, series D ....................................
Cumulative preferred stock ................................................................................
Floating rate non-cumulative preferred stock, series F .....................................
Floating rate non-cumulative preferred stock, series G ....................................
6.50% non-cumulative preferred stock, series H ..............................................
HSBC Finance Corporation
US$575m
6.36% non-cumulative preferred stock, series B ...............................................
HSBC Bank Canada
CAD175m
CAD175m
CAD250m
Non-cumulative redeemable class 1 preferred shares, series C ........................
Non-cumulative class 1 preferred shares, series D ............................................
Non-cumulative 5 year rate reset class 1 preferred shares, series E ..................
First call
date
Jul 1999
Oct 2007
Apr 2010
Jan 2011
Jul 2011
Jun 2010
Jun 2010
Dec 2010
Jun 2014
At 31 December
2012
US$m
2011
US$m
150
150
518
374
374
559
176
176
251
150
150
518
374
374
559
171
171
245
2,728
2,712
494
38 Called up share capital and other equity instruments
Issued and fully paid
HSBC Holdings ordinary shares1 .............................................................................................................
At 31 December
2012
US$m
9,238
2011
US$m
8,934
Number
US$m
HSBC Holdings ordinary shares of US$0.50 each
At 1 January 2012 ..................................................................................................................................... 17,868,085,646
238,587,766
Shares issued under HSBC employee share plans ...................................................................................
369,335,252
Shares issued in lieu of dividends ............................................................................................................
At 31 December 2012 ............................................................................................................................... 18,476,008,664
At 1 January 2011 ..................................................................................................................................... 17,686,155,902
11,354,577
Shares issued under HSBC employee share plans ...................................................................................
170,575,167
Shares issued in lieu of dividends ............................................................................................................
At 31 December 2011 ............................................................................................................................... 17,868,085,646
8,934
119
185
9,238
8,843
6
85
8,934
HSBC Holdings non-cumulative preference shares of US$0.01 each
At 1 January 2012 and 31 December 20122 .............................................................................................
1,450,000
At 1 January 2011 and 31 December 2011 ..............................................................................................
1,450,000
–
–
Number
US$m
1 All HSBC Holdings ordinary shares in issue confer identical rights in respect of capital, dividends, voting and otherwise.
2 Included in the capital base of HSBC as tier 1 capital in accordance with the rules and guidance in GENPRU.
Dividends on the HSBC Holdings non-cumulative dollar preference shares in issue (‘dollar preference shares’) are
paid quarterly at the sole and absolute discretion of the Board of Directors. The Board of Directors will not declare
a dividend on the dollar preference shares if payment of the dividend would cause HSBC Holdings not to meet the
applicable capital adequacy requirements of the FSA or the profit of HSBC Holdings available for distribution as
dividends is not sufficient to enable HSBC Holdings to pay in full both dividends on the dollar preference shares and
dividends on any other shares that are scheduled to be paid on the same date and that have an equal right to dividends.
HSBC Holdings may not declare or pay dividends on any class of its shares ranking lower in the right to dividends
than the dollar preference shares nor redeem nor purchase in any manner any of its other shares ranking equal with or
lower than the dollar preference shares unless it has paid in full, or set aside an amount to provide for payment in full,
the dividends on the dollar preference shares for the then-current dividend period. The dollar preference shares carry
no rights to conversion into ordinary shares of HSBC Holdings. Holders of the dollar preference shares will only be
entitled to attend and vote at general meetings of shareholders of HSBC Holdings if the dividend payable on the dollar
preference shares has not been paid in full for four consecutive dividend payment dates. In such circumstances,
holders of the dollar preference shares will be entitled to vote on all matters put to general meetings until such time
as HSBC Holdings has paid a full dividend on the dollar preference shares. HSBC Holdings may redeem the dollar
preference shares in whole at any time on or after 16 December 2010, subject to prior notification to the FSA.
HSBC Holdings non-cumulative preference shares of £0.01 each
The one non-cumulative sterling preference share of £0.01 in issue (‘sterling preference share’) has been in issue since
29 December 2010 and is held by a subsidiary of HSBC Holdings. Dividends on the sterling preference share are paid
quarterly at the sole and absolute discretion of the Board. The sterling preference share carries no rights of conversion
into ordinary shares of HSBC Holdings and no rights to attend and vote at general meetings of shareholders of HSBC
Holdings. HSBC Holdings may redeem it in whole at any time at the option of the Company.
Other equity instruments
Other equity instruments which have been included in the capital base of HSBC were issued in accordance with the
rules and guidance in the FSA’s GENPRU. These securities may be called and redeemed by HSBC subject to prior
notification to the FSA. If not redeemed at the first call date interest coupons remain unchanged.
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Notes on the Financial Statements (continued)
38 – Called up share capital and other equity instruments
Tier 1 capital securities
Tier 1 capital securities are perpetual subordinated securities on which coupon payments may be deferred at the
discretion of HSBC Holdings. While any coupon payments are unpaid or deferred, HSBC Holdings will not declare,
pay dividends or make distributions or similar periodic payments in respect of, or repurchase, redeem or otherwise
acquire any securities of lower or equal rank. Such securities do not generally carry voting rights but rank higher than
ordinary shares for coupon payments and in the event of a winding-up.
At HSBC Holdings’ discretion, and subject to certain conditions being satisfied, the capital securities may be
exchanged on any coupon payment date for non-cumulative preference shares to be issued by HSBC Holdings and
which would rank pari passu with the dollar and sterling preference shares in issue. The preference shares will be
issued at a nominal value of US$0.01 per share and a premium of US$24.99 per share, with both such amounts being
subscribed and fully paid.
HSBC has the following qualifying tier 1 capital securities in issue which are accounted for in equity:
US$2,200m
US$3,800m
8.125% perpetual subordinated capital securities .............................................
8.00% perpetual subordinated capital securities, Series 2 ................................
Apr 2013
Dec 2015
First call
date
At 31 December
2012
US$m
2011
US$m
2,133
3,718
5,851
2,133
3,718
5,851
Shares under option
Details of the options outstanding to subscribe for HSBC Holdings ordinary shares under the HSBC Holdings
Group Share Option Plan, the HSBC Share Plan and HSBC Holdings savings-related share option plans are given
in Note 7.
Aggregate options outstanding under these plans
31 December 2012 ...................................................
31 December 2011 ....................................................
31 December 2010 ....................................................
Number of
HSBC Holdings
ordinary shares
159,703,771
31,637,840
2,180,263
6,488,894
216,078,250
45,422,511
3,176,265
9,752,066
249,242,968
47,428,892
3,128,508
10,899,415
Period of exercise
Exercise price
2013 to 2018
2013 to 2018
2013 to 2018
2013 to 2018
2012 to 2017
2012 to 2017
2012 to 2017
2012 to 2017
2011 to 2016
2011 to 2016
2011 to 2016
2011 to 2016
£3.3116 – 7.9911
HK$37.8797 – 94.5057
€3.6361 – 9.5912
US$4.8876 – 12.0958
£3.3116 – 7.9911
HK$37.8797 – 94.5057
€3.6361 – 9.5912
US$4.8876 – 12.0958
£3.3116 – 8.4024
HK$37.8797 – 94.5057
€3.6361 – 9.5912
US$4.8876 – 12.0958
HSBC France plan
When it was acquired in 2000, HSBC France and certain of its subsidiary companies, including HSBC Private Bank
France, operated employee share option plans under which options could be granted over their respective shares.
There were outstanding options over the shares of HSBC Private Bank France, a subsidiary of HSBC France. On
exercise of those options, the HSBC Private Bank France shares were exchangeable for HSBC Holdings ordinary
shares at the ratio of 2.099984 HSBC Holdings ordinary shares for each HSBC Private Bank France share.
On 31 October 2011, HSBC Private Bank France merged with HSBC France. Options held over shares of HSBC
Private Bank France were converted into options over shares of HSBC France, at an exchange ratio of 7 HSBC
France shares for 45 HSBC Private Bank France shares. The options outstanding at 31 October 2011 were adjusted to
reflect the option exchange ratio. On exercise of these options, HSBC France shares would have been exchanged for
HSBC Holdings ordinary shares in the ratio of 13.499897 HSBC Holdings ordinary shares for each HSBC France
share.
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During 2011 and 2012 there were no HSBC Private Bank France shares issued and no shares were exchanged for
HSBC Holdings ordinary shares. During 2012, 22,645 options over HSBC France shares lapsed (2011: 141,525).
At 31 December 2012 no options over HSBC France shares were outstanding.
At 31 December 2012, The CCF Employee Benefit Trust 2001 (Private Banking France) held 989,502 (2011:
989,502) HSBC Holdings ordinary shares.
HSBC France options outstanding over HSBC Holdings ordinary shares
Number of HSBC
France shares
exchangeable for
HSBC Holdings
ordinary shares
Period of exercise
Exercise price
31 December 2012 ..........................................................
31 December 20111 ..........................................................
31 December 2010 ...........................................................
–
22,645
287,100
2012
2012
2011 to 2012
€142.84
€142.84
€20.80 – 22.22
1 These options replaced the options over shares in HSBC Private Bank France which were outstanding on 31 October 2011 prior to the
merger taking place.
HSBC Finance
Upon the acquisition of HSBC Finance in 2003, all outstanding options over, and rights to receive, HSBC Finance
common shares were converted into options over, and rights to receive, HSBC Holdings ordinary shares in the same
ratio as the share exchange offer for the acquisition of HSBC Finance (2.675 HSBC Holdings ordinary shares for
each HSBC Finance common share). The exercise price payable for each option was adjusted using the same ratio.
During 2012, 2,053,838 (2011: nil) options were exercised over HSBC Holdings ordinary shares and 2,053,838
(2011: nil) HSBC Holdings ordinary shares were delivered from The HSBC (Household) Employee Benefit Trust
2003. During 2012, options over 375,700 (2011: 8,688,288) HSBC Holdings ordinary shares lapsed. At
31 December 2012 no options over HSBC Holdings ordinary share were outstanding.
At 31 December 2012, The HSBC (Household) Employee Benefit Trust 2003 held a total of 281,477 (2011:
2,335,315) HSBC Holdings ordinary shares and 1,455 (2011: 1,455) ADSs. Each ADS represents five HSBC
Holdings ordinary shares.
Options outstanding over HSBC Holdings ordinary shares under the HSBC Finance share plan
31 December 2012 ..........................................................
31 December 2011 ...........................................................
31 December 2010 ...........................................................
HSBC Bank Bermuda plans
Number of
HSBC Holdings
ordinary shares
–
2,429,538
11,117,826
Period of exercise
Exercise price
2012
2012
2011 to 2012
US$9.29
US$9.29
US$9.29 – 18.62
Upon the acquisition of HSBC Bank Bermuda Limited (‘HSBC Bank Bermuda’) in 2004, all outstanding options
over HSBC Bank Bermuda shares were converted into options to acquire HSBC Holdings ordinary shares using an
exchange ratio calculated by dividing US$40 (being the consideration paid for each HSBC Bank Bermuda Share)
by the average price of HSBC Holdings ordinary shares over the five-day period to the completion of the acquisition.
The exercise price payable for each option was adjusted using the same exchange ratio.
During 2011 and 2012 there were no options exercised over HSBC Holdings ordinary shares and no shares were
delivered from the HSBC (Bank of Bermuda) Employee Benefit Trust 2004. During 2012, options over 880,983
(2011: 2,108,830) HSBC Holdings ordinary shares lapsed.
At 31 December 2012, the HSBC (Bank of Bermuda) Employee Benefit Trust 2004 held 2,108,830
(2011: 2,108,830) HSBC Holdings ordinary shares which may be used to satisfy the exercise of employee options.
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Notes on the Financial Statements (continued)
39 – Notes on the statement of cash flows
Options outstanding over HSBC Holdings ordinary shares under the HSBC Bank Bermuda share plan
31 December 2012 ..........................................................
31 December 2011 ...........................................................
31 December 2010............................................................
Number of
HSBC Holdings
ordinary shares
149,924
1,030,907
2,339,033
Period of exercise
Exercise price
2013
2012 to 2013
2011 to 2013
US$9.32 – 10.33
US$9.32 – 15.99
US$9.32 – 15.99
Maximum obligation to deliver HSBC Holdings ordinary shares
At 31 December 2012, the maximum obligation to deliver HSBC Holdings ordinary shares under all of the above
option arrangements, together with GPSP awards and restricted share awards granted under the HSBC Share
Plan and/or the HSBC Share Plan 2011, was 364,082,766 (2011: 538,265,410). The total number of shares at
31 December 2012 held by employee benefit trusts that may be used to satisfy such obligations to deliver HSBC
Holdings ordinary shares was 18,009,459 (2011: 31,840,893).
39 Notes on the statement of cash flows
Other non-cash items included in profit before tax
Depreciation, amortisation and impairment ....................
Gains arising from dilution of interests in associates ..........
Revaluations on investment property ..............................
Share-based payment expense .........................................
Loan impairment losses gross of recoveries and
other credit risk provisions ..........................................
Provisions ........................................................................
Impairment of financial investments ...............................
Charge/(credit) for defined benefit plans ........................
Accretion of discounts and amortisation of premiums ...
Change in operating assets
Change in loans to HSBC undertakings ...........................
Change in prepayments and accrued income ...................
Change in net trading securities and net derivatives ........
Change in loans and advances to banks ...........................
Change in loans and advances to customers ....................
Change in financial assets designated at fair value ..........
Change in other assets ......................................................
Change in operating liabilities
Change in accruals and deferred income ..........................
Change in deposits by banks ............................................
Change in customer accounts ...........................................
Change in debt securities in issue ....................................
Change in financial liabilities designated at fair value ....
Change in other liabilities .................................................
HSBC
2011
US$m
3,135
(208)
(118)
1,162
13,553
2,199
808
(140)
(513)
19,878
2010
US$m
2,801
(188)
(93)
812
15,059
680
105
526
(815)
18,887
HSBC Holdings
2012
US$m
2011
US$m
457
–
–
55
–
–
–
–
23
535
1
–
–
57
–
–
–
–
19
77
HSBC
HSBC Holdings
2011
US$m
–
1,907
27,058
2,618
(30,853)
(583)
(7,559)
(7,412)
2010
US$m
–
457
60,337
5,213
(79,283)
154
(145)
(13,267)
2012
US$m
(3,451)
(5)
(507)
–
–
–
(48)
(4,011)
2011
US$m
(4,548)
96
(1,001)
–
–
–
(36)
(5,489)
HSBC
HSBC Holdings
2011
US$m
(800)
2,238
48,401
(14,388)
5,468
3,093
44,012
2010
US$m
2012
US$m
2011
US$m
716
(14,288)
68,691
(1,495)
5,659
(17,011)
42,272
10
–
–
86
2,464
391
2,951
258
–
–
(45)
(475)
(152)
(414)
2012
US$m
2,531
–
(72)
988
9,358
5,732
519
476
246
19,778
2012
US$m
–
557
(36,829)
1,083
(72,619)
(2,698)
(6,015)
(116,521)
2012
US$m
78
(5,393)
90,071
(11,552)
2,549
13,317
89,070
498
Cash and cash equivalents
Cash at bank with HSBC undertakings ............................
Cash and balances at central banks ..................................
Items in the course of collection from other banks ..........
Loans and advances to banks of one month or less .........
Treasury bills, other bills and certificates of deposit
less than three months ..................................................
Less: items in the course of transmission to other banks .
Interest and dividends
Interest paid ......................................................................
Interest received ................................................................
Dividends received ...........................................................
2012
US$m
–
141,532
7,303
148,232
25,379
(7,138)
HSBC
2011
US$m
–
129,902
8,208
169,858
26,226
(8,745)
HSBC Holdings
2010
US$m
2012
US$m
2011
US$m
–
57,383
6,072
189,197
28,087
(6,663)
353
–
–
–
–
–
353
316
–
–
–
–
–
316
315,308
325,449
274,076
2012
US$m
(18,412)
61,112
766
HSBC
2011
US$m
(23,125)
66,734
602
HSBC Holdings
2010
US$m
(21,405)
63,696
563
2012
US$m
(2,661)
1,759
13,709
2011
US$m
(2,392)
1,559
6,874
The amount of cash and cash equivalents not available for use by HSBC at 31 December 2012 was US$32,368m
(2011: US$39,345m), of which US$20,464m (2011: US$25,819m) related to mandatory deposits at central banks.
Disposal of subsidiaries and businesses
Assets
Loans and advances to banks ...................................................................
Loans and advances to customers ............................................................
Financial investments ...............................................................................
Prepayments and accrued income ............................................................
Goodwill and intangible assets .................................................................
Other assets ...............................................................................................
Total assets excluding cash and cash equivalents ....................................
Liabilities
Deposits by banks .....................................................................................
Customer accounts ....................................................................................
Liabilities under insurance contracts ........................................................
Other liabilities .........................................................................................
Total liabilities ..........................................................................................
Aggregate net assets at date of disposal, excluding cash and cash
equivalents ............................................................................................
Non-controlling interests disposed............................................................
Gain on disposal including costs to sell ...................................................
Add back: costs to sell ..............................................................................
Selling price ..............................................................................................
Satisfied by:
Cash and cash equivalents received/(paid) as consideration ...............
Cash and cash equivalents sold ............................................................
Cash consideration received/(paid) up to 31 December 2012 .............
Cash still to be received at 31 December 2012 ....................................
Total cash consideration .......................................................................
US cards
business
US$m
US branch
network
US$m
Other
disposals
US$m
–
26,748
–
572
318
369
28,007
–
–
–
161
161
27,846
–
3,148
72
31,066
31,066
–
31,066
–
31,066
–
2,091
–
–
7
68
2,166
–
13,199
–
7
13,206
(11,040)
–
864
15
(10,161)
(10,091)
(70)
(10,161)
–
(10,161)
799
3,632
924
53
276
1,618
7,302
385
5,986
1,080
1,012
8,463
(1,161)
(81)
355
56
(831)
(542)
(321)
(863)
32
(831)
Total
US$m
799
32,471
924
625
601
2,055
37,475
385
19,185
1,080
1,180
21,830
15,645
(81)
4,367
143
20,074
20,433
(391)
20,042
32
20,074
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Notes on the Financial Statements (continued)
40 – Contingent liabilities, contractual commitments and guarantees / 41– Lease commitments
The completed US branch network disposal represents the sale of 195 US branches that were held for sale at
31 December 2011. HSBC received a total cash consideration of US$20,905m during 2012, which is included in
the cash flow statement under the line ‘Net cash inflow from disposal of US branch network and US cards business
on page 375. For further details refer to page 471.
40 Contingent liabilities, contractual commitments and guarantees
Guarantees and contingent liabilities
Guarantees ....................................................................................
Other contingent liabilities ...........................................................
Commitments
Documentary credits and short-term trade-related transactions ...
Forward asset purchases and forward forward deposits placed ...
Undrawn formal standby facilities, credit lines and other
commitments to lend ................................................................
HSBC
HSBC Holdings
2012
US$m
80,364
209
80,573
13,359
419
565,691
579,469
2011
US$m
75,672
259
75,931
13,498
87
641,319
654,904
2012
US$m
49,402
–
49,402
–
–
1,200
1,200
2011
US$m
49,402
–
49,402
–
–
1,810
1,810
The above table discloses the nominal principal amounts of commitments excluding capital commitments, which
are separately disclosed below, and guarantees and other contingent liabilities, which are mainly credit-related
instruments including both financial and non-financial guarantees and commitments to extend credit. Contingent
liabilities arising from legal proceedings and regulatory matters against Group companies are disclosed in Note 43.
Nominal principal amounts represent the amounts at risk should the contracts be fully drawn upon and clients default.
The amount of the loan commitments shown above reflects, where relevant, the expected level of take-up of pre-
approved loan offers made by mailshots to personal customers. As a significant portion of guarantees and
commitments is expected to expire without being drawn upon, the total of the nominal principal amounts is not
indicative of future liquidity requirements.
Guarantees
HSBC provides guarantees and similar undertakings on behalf of both third-party customers and other entities within
the HSBC Group. These guarantees are generally provided in the normal course of HSBC’s banking business. The
principal types of guarantees provided, and the maximum potential amount of future payments which HSBC could be
required to make at 31 December 2012, were as follows:
Guarantee type1
Financial guarantees2 ....................................................................
Credit-related guarantees3 .............................................................
Other guarantees ...........................................................................
At 31 December 2012
At 31 December 2011
Guarantees
by HSBC
Holdings
in favour of
other HSBC
Group entities
US$m
36,800
12,602
–
49,402
Guarantees
in favour of
third parties
US$m
32,036
12,957
35,371
80,364
Guarantees
by HSBC
Holdings
in favour of
other HSBC
Group entities
US$m
36,800
12,602
–
49,402
Guarantees
in favour of
third parties
US$m
26,830
12,494
36,348
75,672
1 The balances have been grouped by major category of guarantee, revised from prior periods to present financial guarantees separately.
2 Financial guarantees are contracts that require the issuer to make specified payments to reimburse the holder for a loss incurred
because a specified debtor fails to make payment when due in accordance with the original or modified terms of a debt instrument.
3 Credit related guarantees are contracts that have similar features to financial guarantee contracts but fail to meet the definition of a
financial guarantee contracts under IAS 39.
The amounts disclosed in the above table are nominal principal amounts and reflect HSBC’s maximum exposure
under a large number of individual guarantee undertakings. The risks and exposures arising from guarantees are
captured and managed in accordance with HSBC’s overall credit risk management policies and procedures.
500
Approximately half of the above guarantees have a term of less than one year. Guarantees with terms of more
than one year are subject to HSBC’s annual credit review process.
Financial Services Compensation Scheme
At 31 December 2012, HSBC recognised an accrual of US$157m in respect of its share of the estimated Financial
Services Compensation Scheme (‘FSCS’) levy (31 December 2011: US$87m).
The FSCS confirmed in February 2013 that the first of three annual instalments of approximately £363m (US$587m)
will be levied in total on participating financial institutions in Scheme Year 2013/14 to repay the balance of the loan
principal that is not expected to be recovered. The accrual recognised at 31 December 2012 represents HSBC’s share
of the interest on the borrowings outstanding and also its share of the principal to be levied over each of the next
three years. The interest rate to be applied on outstanding borrowings increased from 12-month Libor plus 30 basis
points to 12-month Libor plus 100 basis points from 1 April 2012.
Commitments
In addition to the commitments disclosed on page 500, at 31 December 2012 HSBC had US$607m (2011: US$715m)
of capital commitments contracted but not provided for and US$197m (2011: US$272m) of capital commitments
authorised but not contracted for.
Associates
HSBC’s share of associates’ contingent liabilities amounted to US$46,148m at 31 December 2012 (2011:
US$34,311m). No matters arose where HSBC was severally liable.
41 Lease commitments
Finance lease commitments
HSBC leases land and buildings (including branches) and equipment from third parties under finance lease
arrangements to support its operations.
At 31 December 2012
At 31 December 2011
Total future
minimum
payments
US$m
Future
interest
charges
US$m
Present value
of finance
lease
commitments
US$m
Total future
minimum
payments
US$m
Future
interest
charges
US$m
Present value
of finance
lease
commitments
US$m
81
153
196
430
(21)
(71)
(34)
(126)
60
82
162
304
98
216
362
676
(26)
(99)
(92)
(217)
72
117
270
459
Lease commitments:
– no later than one year ................
– later than one year and no later
than five years ...........................
– later than five years ...................
At 31 December 2012, future minimum sublease payments of US$244m (2011: US$413m) are expected to be
received under non-cancellable subleases at the balance sheet date.
Operating lease commitments
At 31 December 2012, HSBC was obligated under a number of non-cancellable operating leases for properties, plant
and equipment on which the future minimum lease payments extend over a number of years.
Future minimum lease payments under non-cancellable
operating leases:
– no later than one year ...........................................................
– later than one year and no later than five years ...................
– later than five years ..............................................................
At 31 December 2012
Land and
buildings
US$m
Equipment
US$m
At 31 December 2011
Land and
buildings
US$m
Equipment
US$m
943
2,495
2,246
5,684
23
23
–
46
1,130
2,656
2,496
6,282
18
18
–
36
501
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Notes on the Financial Statements (continued)
41– Lease commitments / 42 – Special purpose entities
At 31 December 2012, future minimum sublease payments of US$14m (2011: US$17m) are expected to be received
under non-cancellable subleases at the balance sheet date.
In 2012, US$1,166m (2011: US$973m; 2010: US$888m) was charged to ‘General and administrative expenses’
in respect of lease and sublease agreements, of which US$1,149m (2011: US$952m; 2010: US$869m) related to
minimum lease payments, US$17m (2011: US$20m; 2010: US$18m) to contingent rents, and US$0.4m (2011:
US$1m; 2010: US$1m) to sublease payments.
The contingent rent represents escalation payments made to landlords for operating, tax and other escalation expenses.
Finance lease receivables
HSBC leases a variety of assets to third parties under finance leases, including transport assets (such as aircraft),
property and general plant and machinery. At the end of lease terms, assets may be sold to third parties or leased for
further terms. Lessees may participate in any sales proceeds achieved. Lease rentals arising during the lease terms
will either be fixed in quantum or be varied to reflect changes in, for example, tax or interest rates. Rentals are
calculated to recover the cost of assets less their residual value, and earn finance income.
Total future
minimum
payments
US$m
At 31 December 2012
Unearned
finance
income
US$m
At 31 December 2011
Total future
minimum
payments
US$m
Unearned
finance
income
US$m
Present
value
US$m
Present
value
US$m
3,333
7,448
4,326
(379)
(966)
(951)
3,766
8,618
5,969
(459)
3,307
(1,055)
(1,204)
(2,718)
7,563
4,765
15,635
(2,296)
15,107
18,353
Lease receivables:
– no later than one year ................
– later than one year and
no later than five years ..............
– later than five years ...................
3,712
8,414
5,277
17,403
At 31 December 2012, unguaranteed residual values of US$253m (2011: US$267m) had been accrued, and the
accumulated allowance for uncollectible minimum lease payments receivable amounted to US$3m (2011: US$25m).
No contingent rents were received in 2012 (2011: nil).
42 Special purpose entities
HSBC enters into certain transactions with customers in the ordinary course of business which involve the
establishment of special purpose entities (‘SPE’s) to facilitate or secure customer transactions. HSBC structures that
utilise SPEs are authorised centrally when they are established, to ensure appropriate purpose and governance. The
activities of SPEs administered by HSBC are closely monitored by senior management.
SPEs are assessed for consolidation in accordance with the accounting policy set out in Note 1e.
Total consolidated assets held by SPEs by balance sheet classification
Conduits
US$bn
Securit-
isations
US$bn
Money
market
Non-money
market
investment
funds
US$bn
funds
US$bn
Total
US$bn
At 31 December 2012
Cash ......................................................................................
Trading assets .......................................................................
Financial assets designated at fair value ...............................
Derivatives ............................................................................
Loans and advances to banks ...............................................
Loans and advances to customers ........................................
Financial investments ...........................................................
Other assets ...........................................................................
0.6
–
0.1
–
–
11.3
25.0
1.4
38.4
–
0.5
–
–
1.5
7.0
–
–
9.0
–
–
–
–
–
–
–
–
–
0.2
1.5
7.4
0.2
–
–
–
1.6
10.9
0.8
2.0
7.5
0.2
1.5
18.3
25.0
3.0
58.3
502
At 31 December 2011
Cash ......................................................................................
Trading assets .......................................................................
Financial assets designated at fair value ..............................
Derivatives ............................................................................
Loans and advances to banks ...............................................
Loans and advances to customers ........................................
Financial investments ...........................................................
Other assets ...........................................................................
Conduits
US$bn
Securit-
isations
US$bn
Non-money
market
investment
Money
market
funds
US$bn
funds
US$bn
Total
US$bn
0.8
0.1
0.1
–
–
10.5
25.8
1.6
38.9
0.3
0.5
–
0.1
1.2
8.0
–
–
10.1
–
0.2
–
–
–
–
–
–
0.2
0.3
0.4
6.5
–
–
–
–
–
7.2
1.4
1.2
6.6
0.1
1.2
18.5
25.8
1.6
56.4
HSBC’s maximum exposure to SPEs
The following table shows the total assets of the various types of SPEs and the amount of funding provided by HSBC
to these SPEs. The table also shows HSBC’s maximum exposure to the SPEs and, within that exposure, the liquidity
and credit enhancements provided by HSBC. The maximum exposures to SPEs represent HSBC’s maximum possible
risk exposure that could occur as a result of the Group’s arrangements and commitments to SPEs. The maximum
amounts are contingent in nature, and may arise as a result of drawdowns under liquidity facilities, where these have
been provided, and any other funding commitments, or as a result of any loss protection provided by HSBC to the
SPEs. The conditions under which such exposure might arise differ depending on the nature of each SPE and
HSBC’s involvement with it.
Total assets of consolidated and unconsolidated SPEs and HSBC’s funding and maximum exposure
Consolidated SPEs
Unconsolidated SPEs
Total
assets
US$bn
Funding
provided
by HSBC
US$bn
Liquidity
and credit
enchance-
ments
US$bn
HSBC’s
maximum
exposure
US$bn
Total
assets
US$bn
Funding
provided
by HSBC
US$bn
HSBC’s
maximum
exposure
US$bn
At 31 December 2012
Conduits ......................................
Securities investment conduits
Multi-seller conduits ..............
Securitisations ................................
Money market funds ...................
Constant net asset value funds
Other .......................................
Non-money market investment
funds .......................................
Other ...........................................
At 31 December 2011
Conduits ......................................
Securities investment conduits
Multi-seller conduits ..............
Securitisations ................................
Money market funds ...................
Constant net asset value funds
Other .......................................
Non-money market investment
funds .......................................
Other ...........................................
38.4
26.6
11.8
9.0
–
–
–
10.9
–
58.3
38.9
27.9
11.0
10.1
0.2
–
0.2
7.2
–
56.4
43.1
28.8
14.3
4.7
–
–
–
10.2
–
58.0
48.5
33.5
15.0
3.8
0.2
–
0.2
6.9
–
59.4
–
–
–
6.8
64.2
51.7
12.5
303.3
20.0
394.3
–
–
–
8.1
73.9
54.4
19.5
260.8
19.4
362.2
–
–
–
–
1.7
0.8
0.9
5.9
5.2
–
–
–
–
1.7
0.8
0.9
5.9
5.3
12.8
12.9
–
–
–
–
0.9
0.7
0.2
1.7
3.7
6.3
–
–
–
–
0.9
0.7
0.2
1.7
4.6
7.2
28.9
28.8
0.1
2.6
–
–
–
10.2
–
41.7
27.7
27.4
0.3
1.6
0.2
–
0.2
6.9
–
32.4
18.1
14.3
–
–
–
–
–
–
32.4
37.1
22.1
15.0
0.1
–
–
–
–
–
36.4
37.2
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Notes on the Financial Statements (continued)
42 – Special purpose entities
Conduits
HSBC sponsors and manages two types of conduits: securities investment conduits (‘SIC’s) and multi-seller conduits.
Securities investment conduits
Solitaire, HSBC’s principal SIC, holds asset-backed securities (‘ABS’s) on behalf of HSBC. At 31 December 2012,
Solitaire held US$10.0bn of ABSs (2011: US$10.6bn). These are included within the disclosures of ABS ‘held
through consolidated SPEs’ on page 187. HSBC’s other SICs, Mazarin, Barion Funding Limited (‘Barion’) and
Malachite Funding Limited (‘Malachite’), evolved from the restructuring of HSBC’s sponsored structured investment
vehicles (‘SIV’s) in 2008.
Solitaire
During the year Solitaire redeemed the commercial paper (‘CP’) held by third parties, and is currently funded entirely
by CP issued to HSBC. Although HSBC continues to provide a liquidity facility, Solitaire has no need to draw on it
so long as HSBC purchases the CP issued, which it intends to do for the foreseeable future. Accordingly, there were
no amounts drawn under the liquidity facility provided by HSBC at 31 December 2012 (2011: US$9.3bn).
At 31 December 2012, HSBC held US$13.0bn of CP, which represented HSBC’s maximum exposure. At
31 December 2011, maximum exposure of US$15.6bn was represented by liquidity facility including undrawn
amounts.
Mazarin
HSBC is exposed to the par value of Mazarin’s assets through the provision of a liquidity facility equal to the lower
of the amortised cost of issued senior debt and the amortised cost of non-defaulted assets. At 31 December 2012, this
amounted to US$8.4bn (2011: US$9.5bn). First loss protection is provided through the capital notes issued by
Mazarin, which are substantially all held by third parties.
At 31 December 2012, HSBC held 1.3% of Mazarin’s capital notes (2011: 1.3%) which have a par value of US$17m
(2011: US$17m) and a carrying amount of nil (2011: nil).
Barion and Malachite
HSBC’s primary exposure to these SICs is represented by the amortised cost of the debt required to support the
non-cash assets of the vehicles. At 31 December 2012, this amounted to US$7.4bn (2011: US$8.4bn). First loss
protection is provided through the capital notes issued by these vehicles, which are substantially all held by third
parties.
At 31 December 2012, HSBC held 3.7% of the capital notes issued by these vehicles (2011: 3.7%) which have a par
value of US$36m (2011: US$35m) and a carrying amount of US$1.7m (2011: US$1.1m).
Multi-seller conduits
These vehicles were established for the purpose of providing access to flexible market-based sources of finance for
HSBC’s clients.
HSBC’s maximum exposure is equal to the transaction-specific liquidity facilities offered to the multi-seller conduits.
First loss protection is provided by the originator of the assets, and not by HSBC, through transaction-specific credit
enhancements. A layer of secondary loss protection is provided by HSBC in the form of programme-wide
enhancement facilities.
The following table sets out the weighted average life of the asset portfolios for the above mentioned conduits.
Weighted average life of portfolios
Weighted average life (years)
Solitaire
Other SICs
Total SICs
Total multi-
seller conduits
At 31 December 2012 .......................................................
At 31 December 2011 ........................................................
6.1
5.9
4.5
4.1
5.2
4.9
2.8
2.0
504
Securitisations
HSBC uses SPEs to securitise customer loans and advances that it has originated in order to diversify its sources of
funding for asset origination and for capital efficiency purposes. The loans and advances are transferred by HSBC to
the SPEs for cash, and the SPEs issue debt securities to investors to fund the cash purchases.
HSBC’s maximum exposure is the aggregate of any holdings of notes issued by these vehicles and the reserve
account positions intended to provide credit support under certain pre-defined circumstances to senior note holders.
In addition, HSBC uses SPEs to mitigate the capital absorbed by some of the customer loans and advances it has
originated. Credit derivatives are used to transfer the credit risk associated with these customer loans and advances
to an SPE, using securitisations commonly known as synthetic securitisations by which the SPE writes credit default
swap protection to HSBC. The SPE is funded by the issuance of notes with the cash held as collateral against the
credit default protection. From a UK regulatory perspective, the credit protection issued by the SPE in respect of the
customer loans allows the risk weight of the loans to be replaced by the risk weight of the collateral in the SPE and as
a result mitigates the capital absorbed by the customer loans. Any notes issued by the SPE and held by HSBC attract
the appropriate risk weight under the relevant regulatory regime. These SPEs are consolidated when HSBC is
exposed to the majority of risks and rewards of ownership.
Money market funds
HSBC has established and manages a number of money market funds which provide customers with tailored
investment opportunities within narrow and well-defined objectives.
HSBC’s maximum exposure to money market funds is represented by HSBC’s investment in the units of each fund, which
at 31 December 2012 amounted to US$1.7bn (2011: US$1.1bn).
Non-money market investment funds
HSBC has established a large number of non-money market investment funds to enable customers to invest in a range
of assets, typically equities and debt securities.
HSBC’s maximum exposure to non-money market investment funds is represented by its investment in the units of
each fund which at 31 December 2012 amounted to US$16.1bn (2011: US$8.6bn).
Other
HSBC also establishes SPEs in the normal course of business for a number of purposes, for example, structured
transactions for customers, to provide finance to public and private sector infrastructure projects, and for asset and
structured finance transactions.
In certain transactions HSBC is exposed to risk often referred to as gap risk. Gap risk typically arises in transactions
where the aggregate potential claims against the SPE by HSBC pursuant to one or more derivatives could be greater
than the value of the collateral held by the SPE and securing such derivatives. HSBC often mitigates such gap risk by
incorporating in the SPE transaction features which allow for deleveraging, a managed liquidation of the portfolio,
or other mechanisms including trade restructuring or unwinding the trade. Following the inclusion of such risk
reduction mechanisms, HSBC has, in certain circumstances, retained all or a portion of the underlying exposure in the
transaction. In these circumstances, HSBC assesses whether the exposure retained causes a requirement under IFRSs
to consolidate the SPE. When this retained exposure represents ABSs, it has been included in ‘Nature of HSBC’s
exposures’ on page 259.
Third-party sponsored SPEs
Through standby liquidity facility commitments, HSBC has exposure to third-party sponsored SIVs, conduits and
securitisations under normal banking arrangements on standard market terms. These exposures are not considered
significant to HSBC’s operations.
Additional off-balance sheet arrangements and commitments
Additional off-balance sheet commitments such as financial guarantees, letters of credit and commitments to lend are
disclosed in Note 41.
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Notes on the Financial Statements (continued)
43 – Legal proceedings and regulatory matters
Leveraged finance transactions
Loan commitments in respect of leveraged finance transactions are accounted for as derivatives where it is HSBC’s
intention to sell the loan after origination. Further information is provided on page 190.
43 Legal proceedings and regulatory matters
HSBC is party to legal proceedings, investigations and regulatory matters in a number of jurisdictions arising out of
its normal business operations. Apart from the matters described below, HSBC considers that none of these matters is
material, either individually or in the aggregate. HSBC recognises a provision for a liability in relation to these
matters when it is probable that an outflow of economic benefits will be required to settle an obligation which has
arisen as a result of past events, and for which a reliable estimate can be made of the amount of the obligation. While
the outcome of these matters is inherently uncertain, management believes that, based on the information available to
it, appropriate provisions have been made in respect of legal proceedings and regulatory matters as at 31 December
2012 (see Note 32).
Securities litigation
As a result of an August 2002 restatement of previously reported consolidated financial statements and other
corporate events, including the 2002 settlement with 46 State Attorneys General relating to real estate lending
practices, Household International (now HSBC Finance) and certain former officers were named as defendants in a
class action law suit, Jaffe v Household International Inc, et al No 2. C 5893 (N.D.Ill, filed 19 August 2002). The
complaint asserted claims under the US Securities Exchange Act of 1934. Ultimately, a class was certified on behalf
of all persons who acquired and disposed of Household International common stock between 30 July 1999 and
11 October 2002. The claims alleged that the defendants knowingly or recklessly made false and misleading
statements of material fact relating to Household’s Consumer Lending operations, including collections, sales
and lending practices, some of which ultimately led to the 2002 State settlement agreement, and facts relating to
accounting practices evidenced by the restatement.
A jury trial concluded in April 2009, which was decided partly in favour of the plaintiffs. Following post-trial
briefing, the District Court ruled that various legal challenges to the verdict, including as to loss causation and other
matters, would not be considered until after a second phase of the proceedings addressing issues of reliance and the
submission of claims by class members had been completed. The District Court ruled on 22 November 2010 that
claim forms should be mailed to class members to ascertain which class members may have claims for damages
arising from reliance on the misleading statements found by the jury. The District Court also set out a method for
calculating damages for class members who filed claims. As previously reported, lead plaintiffs, in court filings in
March 2010, estimated that damages could range ‘somewhere between US$2.4bn to US$3.2bn to class members’,
before pre-judgement interest.
In December 2011, the report of the court-appointed claims administrator to the District Court stated that the total
number of claims that generated an allowed loss was 45,921, and that the aggregate amount of these claims was
approximately US$2.23bn. Defendants filed legal challenges asserting that the presumption of reliance was defeated
as to the class and raising various objections with respect to compliance with the claims form requirements as to
certain claims.
In September 2012, the District Court rejected defendants’ arguments that the presumption of reliance generally had
been defeated either as to the class or as to particular institutional claimants. In addition, the District Court has made
various rulings with respect to the validity of specific categories of claims, and held certain categories of claims valid,
certain categories of claims invalid, and directed further proceedings before a court-appointed Special Master to
address objections regarding certain other claim submission issues. In light of those rulings and through various
agreements of the parties, currently there is approximately US$1.37bn in claims as to which there remain no
unresolved objections relating to the claims form submissions. In addition, approximately US$800m in claims remain
to be addressed before the Special Master with respect to various claims form objections, with a small portion of
those potentially subject to further trial proceedings. Therefore, based upon proceedings to date, the current range of
a possible final judgement, prior to imposition of pre-judgement interest (if any), is between approximately
US$1.37bn and US$2.17bn. With the imposition of pre-judgement interest calculated through 31 December 2012, the
top-end of a possible final judgement is approximately US$2.7bn. The District Court may wait for a resolution of all
disputes as to all claims before entering final judgement, or the District Court may enter a partial judgement on fewer
506
than all claims pending resolution of disputes as to the remaining claims. Post-verdict legal challenges remain to be
addressed by the District Court.
Despite the jury verdict and the various rulings of the District Court, HSBC continues to believe that it has
meritorious grounds for appeal of one or more of the rulings in the case, and intends to appeal the District Court’s
final judgement, partial or otherwise. Upon final judgement, partial or otherwise, HSBC Finance will be required to
provide security for the judgement in order to suspend its execution while the appeal is on-going by either depositing
cash in an interest-bearing escrow account or posting an appeal bond in the amount of the judgement (including any
pre-judgement interest awarded).
Given the complexity and uncertainties associated with the actual determination of damages, including the outcome
of any appeals, there is a wide range of possible damages. HSBC believes it has meritorious grounds for appeal on
matters of both liability and damages and will argue on appeal that damages should be nil or a relatively insignificant
amount. If the Appeals Court rejects or only partially accepts HSBC’s arguments, the amount of damages, based
upon the claims submitted and the potential application of pre-judgement interest may lie in a range from a relatively
insignificant amount to somewhere in the region of US$2.7bn (or higher should plaintiffs successfully cross-appeal
certain issues related to the validity of specific claims).
Bernard L. Madoff Investment Securities LLC
In December 2008, Bernard L. Madoff (‘Madoff’) was arrested for running a Ponzi scheme and a trustee was
appointed for the liquidation of his firm, Bernard L. Madoff Investment Securities LLC (‘Madoff Securities’), an
SEC-registered broker-dealer and investment adviser. Since his appointment, the trustee has been recovering assets
and processing claims of Madoff Securities customers. Madoff subsequently pleaded guilty to various charges and is
serving a 150 year prison sentence. He has acknowledged, in essence, that while purporting to invest his customers’
money in securities and, upon request, return their profits and principal, he in fact never invested in securities and
used other customers’ money to fulfil requests for the return of profits and principal. The relevant US authorities are
continuing their investigations into his fraud, and have brought charges against others, including certain former
employees and the former auditor of Madoff Securities.
Various non-US HSBC companies provided custodial, administration and similar services to a number of funds
incorporated outside the US whose assets were invested with Madoff Securities. Based on information provided by
Madoff Securities, as at 30 November 2008, the purported aggregate value of these funds was US$8.4bn, an amount
that includes fictitious profits reported by Madoff. Based on information available to HSBC to date, HSBC estimates
that the funds’ actual transfers to Madoff Securities minus their actual withdrawals from Madoff Securities during the
time that HSBC serviced the funds totalled approximately US$4bn.
Plaintiffs (including funds, fund investors, and the Madoff Securities trustee) have commenced Madoff-related
proceedings against numerous defendants in a multitude of jurisdictions. Various HSBC companies have been named
as defendants in suits in the US, Ireland, Luxembourg and other jurisdictions. Certain suits (which included four US
putative class actions) allege that the HSBC defendants knew or should have known of Madoff’s fraud and breached
various duties to the funds and fund investors.
In November 2011, the US District Court Judge overseeing three related putative class actions in the Southern
District of New York dismissed all claims against the HSBC defendants on forum non conveniens grounds, but
temporarily stayed this ruling as to one of the actions against the HSBC defendants – the claims of investors in
Thema International Fund plc – in light of a proposed amended settlement agreement, pursuant to which, subject
to various conditions, the HSBC defendants had agreed to pay from US$52.5m up to a maximum of US$62.5m.
In December 2011, the court lifted this temporary stay and dismissed all remaining claims against the HSBC
defendants, and declined to consider preliminary approval of the settlement. In light of the court’s decisions, HSBC
terminated the settlement agreement. The Thema plaintiff contests HSBC’s right to terminate. Plaintiffs in all three
actions have filed notices of appeal to the US Court of Appeals for the Second Circuit. Briefing in that appeal was
completed in September 2012; oral argument is expected in early 2013.
In November and December 2012, HSBC settled two of the individual claims commenced by investors in Thema
International Fund plc against HSBC in the Irish High Court.
In December 2010, the Madoff Securities trustee commenced suits against various HSBC companies in the US
Bankruptcy Court and in the English High Court. The US action (which also names certain funds, investment
managers, and other entities and individuals) sought US$9bn in damages and additional recoveries from HSBC and
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Notes on the Financial Statements (continued)
43 – Legal proceedings and regulatory matters
the various co-defendants. It sought damages against HSBC for allegedly aiding and abetting Madoff’s fraud and
breach of fiduciary duty. In July 2011, after withdrawing the case from the Bankruptcy Court in order to decide
certain threshold issues, the US District Court Judge dismissed the trustee’s various common law claims on the
grounds that the trustee lacks standing to assert them. In December 2011, the trustee filed a notice of appeal to the US
Court of Appeals for the Second Circuit. Briefing in that appeal was completed in April 2012, and oral argument was
held in November 2012. A decision is expected in 2013.
The District Court returned the remaining claims to the US Bankruptcy Court for further proceedings. Those claims
seek, pursuant to US bankruptcy law, recovery of unspecified amounts received by HSBC from funds invested with
Madoff, including amounts that HSBC received when it redeemed units HSBC held in the various funds. HSBC
acquired those fund units in connection with financing transactions HSBC had entered into with various clients.
The trustee’s US bankruptcy law claims also seek recovery of fees earned by HSBC for providing custodial,
administration and similar services to the funds. Between September 2011 and April 2012, the HSBC defendants and
certain other defendants moved again to withdraw the case from the Bankruptcy Court. The District Court granted
those withdrawal motions as to certain issues, and briefing and oral arguments on the merits of the withdrawn issues
are now complete. The District Court has issued rulings on two of the withdrawn issues, but decisions with respect to
all other issues are still pending and are expected in early 2013.
The trustee’s English action seeks recovery of unspecified transfers of money from Madoff Securities to or through
HSBC, on the grounds that the HSBC defendants actually or constructively knew of Madoff’s fraud. HSBC has not
been served with the trustee’s English action.
Between October 2009 and April 2012, Fairfield Sentry Limited, Fairfield Sigma Limited and Fairfield Lambda
Limited (‘Fairfield’), funds whose assets were directly or indirectly invested with Madoff Securities, commenced
multiple suits in the British Virgin Islands (‘BVI’) and the US against numerous fund shareholders, including various
HSBC companies that acted as nominees for clients of HSBC’s private banking business and other clients who
invested in the Fairfield funds. The Fairfield actions seek restitution of amounts paid to the defendants in connection
with share redemptions, on the ground that such payments were made by mistake, based on inflated values resulting
from Madoff’s fraud, and some actions also seek recovery of the share redemptions under BVI insolvency law. The
actions in the US are currently stayed in the Bankruptcy Court pending developments in related appellate litigation in
the BVI.
There are many factors which may affect the range of possible outcomes, and the resulting financial impact, of
the various Madoff-related proceedings, including but not limited to the circumstances of the fraud, the multiple
jurisdictions in which the proceedings have been brought and the number of different plaintiffs and defendants in
such proceedings. For these reasons, among others, it is not practicable at this time for HSBC to estimate reliably
the aggregate liabilities, or ranges of liabilities, that might arise as a result of all such claims but they could be
significant. In any event, HSBC considers that it has good defences to these claims and will continue to defend
them vigorously.
US mortgage-related investigations
In April 2011, HSBC Bank USA entered into a consent cease and desist order with the Office of the Comptroller of
the Currency and HSBC Finance and HSBC North America Holdings Inc. (‘HNAH’) entered into a similar consent
order with the Federal Reserve Board following completion of a broad horizontal review of industry residential
mortgage foreclosure practices. These consent orders require prescribed actions to address the deficiencies noted in
the joint examination and described in the consent orders. HSBC Bank USA, HSBC Finance and HNAH continue to
work with the Office of the Comptroller of the Currency and the Federal Reserve Board to align their processes with
the requirements of the consent orders and are implementing operational changes as required.
These consent orders required an independent review of foreclosures (the ‘Independent Foreclosure Review’)
pending or completed between January 2009 and December 2010 to determine if any customer was financially
injured as a result of an error in the foreclosure process. As required by the consent orders, an independent consultant
was retained to conduct that review.
On 28 February 2013, HSBC Bank USA entered into an agreement with the Office of the Comptroller of the
Currency, and HSBC Finance and HNAH entered into an agreement with the Federal Reserve Board, pursuant to
which the Independent Foreclosure Review will cease and we will make a cash payment of US$96m into a fund that
will be used to make payments to borrowers that were in active foreclosure during 2009 and 2010, and in addition,
will provide other assistance (e.g. loan modifications) to help eligible borrowers. These actions form HSBC’s portion
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of a larger agreement announced by the Federal Reserve Board and the Office of the Comptroller of the Currency in
January 2013 involving HSBC and twelve other mortgage servicers subject to foreclosure consent orders pursuant to
which the mortgage servicers would pay, in the aggregate, in excess of US$9.3bn in cash payments and other
assistance to help eligible borrowers. Pursuant to these agreements, the Independent Foreclosure Reviews will cease
and be replaced by a broader framework under which all eligible borrowers will receive compensation regardless of
whether they filed a request for independent review of their foreclosure and regardless of whether the borrower was
financially injured as a result of an error in the foreclosure process. Borrowers who receive compensation will not be
required to execute a release or waiver of rights and will not be precluded from pursuing litigation concerning
foreclosure or other mortgage servicing practices. For participating servicers, including HSBC Bank USA and HSBC
Finance, fulfilment of the terms of these agreements will satisfy the Independent Foreclosure Review requirements of
these consent orders. These consent orders do not preclude additional enforcement actions against HSBC Bank USA,
HSBC Finance or HNAH by bank regulatory, governmental or law enforcement agencies, such as the US Department
of Justice (‘DoJ’) or State Attorneys General, which could include the imposition of civil money penalties and other
sanctions relating to the activities that are the subject of the consent orders. Pursuant to the agreement with the Office
of the Comptroller of the Currency, however, the Office of the Comptroller of the Currency has agreed that it will not
assess civil money penalties or initiate any further enforcement action with respect to past mortgage servicing and
foreclosure-related practices addressed in the consent orders, provided the terms of the agreement are fulfilled. The
Office of the Comptroller of the Currency’s agreement not to assess civil money penalties is further conditioned on
HSBC North America making payments or providing borrower assistance pursuant to any agreement that may be
entered into with the DoJ in connection with the servicing of residential mortgage loans within two years. The
Federal Reserve Board has agreed that any assessment of civil money penalties by the Federal Reserve Board will
reflect a number of adjustments, including amounts expended in consumer relief and payments made pursuant to any
agreement that may be entered into with the DoJ in connection with the servicing of residential mortgage loans. In
addition, the agreement does not preclude private litigation concerning these practices.
Separate from the consent orders and settlement related to the Independent Foreclosure Review discussed above, it
has been announced that the five largest US mortgage servicers (not including HSBC Group companies) have
reached a settlement with the DoJ, the US Department of Housing and Urban Development and State Attorneys
General of 49 states with respect to foreclosure and other mortgage servicing practices. HNAH, HSBC Bank USA
and HSBC Finance have had discussions with US bank regulators and other governmental agencies regarding a
potential resolution, although the timing of any settlement is not presently known. HSBC recognised provisions of
US$257m in 2011 to reflect the estimated liability associated with a proposed settlement of this matter. Any such
settlement, however, may not completely preclude other enforcement actions by state or federal agencies, regulators
or law enforcement bodies related to foreclosure and other mortgage servicing practices, including, but not limited to
matters relating to the securitisation of mortgages for investors. In addition, such a settlement would not preclude
private litigation concerning these practices.
Participants in the US mortgage securitisation market that purchased and repackaged whole loans have been the
subject of lawsuits and governmental and regulatory investigations and inquiries, which have been directed at groups
within the US mortgage market, such as servicers, originators, underwriters, trustees or sponsors of securitisations,
and at particular participants within these groups. As the industry’s residential mortgage foreclosure issues continue,
HSBC Bank USA has taken title to an increasing number of foreclosed homes as trustee on behalf of various
securitisation trusts. As nominal record owner of these properties, HSBC Bank USA has been sued by municipalities
and tenants alleging various violations of law, including laws regarding property upkeep and tenants’ rights. While
HSBC believes and continues to maintain that the obligations at issue and the related liability are properly those of
the servicer of each trust, HSBC continues to receive significant and adverse publicity in connection with these and
similar matters, including foreclosures that are serviced by others in the name of ‘HSBC, as trustee’.
HSBC Bank USA and HSBC Securities (USA) Inc. have been named as defendants in a number of actions in
connection with residential mortgage-backed securities (‘RMBS’) offerings, which generally allege that the offering
documents for securities issued by securitisation trusts contained material misstatements and omissions, including
statements regarding the underwriting standards governing the underlying mortgage loans. These include an action
filed in September 2011 by the Federal Housing Finance Agency (‘FHFA’). This action is one of a series of similar
actions filed against 17 financial institutions alleging violations of federal and state securities laws in connection with
the sale of private-label RMBS purchased by Fannie Mae and Freddie Mac, primarily from 2005 to 2008. This action,
along with all of the similar FHFA RMBS actions, was transferred to a single judge, who directed the defendant in
the first-filed matter to file a motion to dismiss. In May 2012, the District Court filed its decision denying the motion
to dismiss FHFA’s securities law claims and granting the motion to dismiss FHFA’s negligent misrepresentation
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Notes on the Financial Statements (continued)
43 – Legal proceedings and regulatory matters
claims. The District Court’s ruling will form the basis for rulings on the other matters, including the action filed
against HSBC Bank USA and HSBC Securities (USA) Inc. Subsequently, the defendant in the first-filed matter
sought leave to appeal to the US Court of Appeals for the Second Circuit on certain issues raised in the motion to
dismiss. The District Court and the Court of Appeals granted the request for leave to appeal, and this appeal is
pending before the Court of Appeals. In December 2012, the District Court directed the parties to schedule mediation
with the Magistrate Judge assigned to this action. However, mediation has not yet been scheduled.
In 2012, HSBC Finance received notice of several claims from claimants related to its activities as sponsor and the
activities of its subsidiaries as originators in connection with RMBSs purchased between 2005 and 2007. The claims
are currently being evaluated and discussions continue to be held with the claimants, but it has not been concluded
that these claims are procedurally or substantively valid. In December 2010 and February 2011, HSBC Bank USA
has received subpoenas from the SEC seeking production of documents and information relating to its involvement
and the involvement of its affiliates in specified private label RMBS transactions as an issuer, sponsor, underwriter,
depositor, trustee, custodian or servicer. HSBC Bank USA has also had preliminary contacts with other government
authorities exploring the role of trustees in private label RMBS transactions. In February 2011, HSBC Bank USA
also received a subpoena from the US Attorney’s Office, Southern District of New York seeking production of
documents and information relating to loss mitigation efforts with respect to residential mortgages in the State of
New York. In January 2012, HSBC Securities (USA) Inc. was served with a Civil Investigative Demand from the
Massachusetts State Attorney General seeking documents, information and testimony related to the sale of RMBS to
public and private customers in the State of Massachusetts from January 2005 to the present.
HSBC expects this level of focus will continue and, potentially, intensify, so long as the US real estate markets
continue to be distressed. As a result, HSBC Group companies may be subject to additional claims, litigation and
governmental and regulatory scrutiny related to its participation in the US mortgage securitisation market, either
individually or as a member of a group. HSBC is unable to estimate reliably the financial effect of any action or
litigation relating to these matters. As situations develop it is possible that any related claims could be significant.
Anti-money laundering and sanctions-related
In October 2010, HSBC Bank USA entered into a consent cease and desist order with the Office of the Comptroller
of the Currency and the indirect parent of that company, HNAH, entered into a consent cease and desist order with
the Federal Reserve Board (the ‘Orders’). These Orders required improvements to establish an effective compliance
risk management programme across the Group’s US businesses, including various issues relating to US Bank Secrecy
Act (‘BSA’) and anti-money laundering (‘AML’) compliance. Steps continue to be taken to address the requirements
of the Orders to ensure compliance, and that effective policies and procedures are maintained.
In addition, in December 2012, HSBC, HNAH and HSBC Bank USA entered into agreements to achieve a resolution
with US and UK government agencies that have investigated HSBC’s conduct related to inadequate compliance with
anti-money laundering, BSA and sanctions laws, including the previously reported investigations by the DoJ, the
Federal Reserve, the Office of the Comptroller of the Currency and the US Department of Treasury’s Financial
Crimes Enforcement Network (‘FinCEN’) in connection with AML/BSA compliance, including cross-border
transactions involving our cash handling business in Mexico and banknotes business in the US, and the DoJ, the New
York County District Attorney’s Office, the Office of Foreign Assets Control (‘OFAC’), the Federal Reserve and the
Office of the Comptroller of the Currency regarding historical transactions involving Iranian parties and other parties
subject to OFAC economic sanctions. As part of the resolution, HSBC entered into a deferred prosecution agreement
among HSBC, HSBC Bank USA, the DoJ, the United States Attorney’s Office for the Eastern District of New York,
and the United States Attorney’s Office for the Northern District of West Virginia (the ‘US DPA’), and a deferred
prosecution agreement with the New York County District Attorney, and consented to a cease and desist order and,
along with HNAH, consented to a monetary penalty order with the Federal Reserve. In addition, HSBC Bank USA
entered into the US DPA, an agreement and consent orders with the Office of the Comptroller of the Currency, and
a consent order with FinCEN. HSBC also entered into an undertaking with the UK Financial Services Authority
(‘FSA’) to comply with certain forward-looking obligations with respect to anti-money laundering and sanctions
requirements over a five-year term.
Under these agreements, HSBC and HSBC Bank USA made payments totalling US$1,921m to US authorities and
will continue to cooperate fully with US and UK regulatory and law enforcement authorities and take further action
to strengthen their compliance policies and procedures. Over the five-year term of the agreement with the DoJ and
FSA, an independent monitor (who will, for FSA purposes, be a ‘skilled person’ under Section 166 of the Financial
Services and Markets Act (‘FSMA’)) will evaluate HSBC’s progress in fully implementing these and other measures
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it recommends, and will produce regular assessments of the effectiveness of HSBC’s compliance function. If HSBC
fulfils all of the requirements imposed by the US DPA and other agreements, the DOJ’s charges against it will be
dismissed at the end of the five-year period. The US DPA remains subject to certain proceedings before the United
States District Court for the Eastern District of New York. The DoJ or the New York County District Attorney’s
Office may prosecute HSBC in relation to the matters which are the subject of the US DPA if HSBC breaches the
terms of the US DPA.
Steps continue to be taken to address the requirements of the US DPA and the FSA undertaking to ensure
compliance, and that effective policies and procedures are maintained. In addition, the settlement with regulators does
not preclude private litigation relating to, among other things, HSBC’s compliance with applicable anti-money
laundering, BSA and sanctions laws.
In July 2012, HSBC Mexico paid a fine imposed by the Mexican National Banking and Securities Commission
amounting to 379m Mexican pesos (approximately US$28m), in connection with non-compliance with anti-money
laundering systems and controls.
US tax and broker-dealer investigations
HSBC continues to cooperate in ongoing investigations by the DoJ and the US Internal Revenue Service regarding
whether certain Group companies and employees acted appropriately in relation to certain customers who had US tax
reporting requirements. In connection with these investigations, HSBC Private Bank Suisse SA, with due regard for
Swiss law, has produced records and other documents to the DoJ and is cooperating with the investigation. Other
HSBC entities are also cooperating with the relevant US authorities, including with respect to US-based clients of
an HSBC Group company in India.
In April 2011, HSBC Bank USA received a summons from the US Internal Revenue Service directing HSBC Bank
USA to produce records with respect to US-based clients of an HSBC Group company in India. HSBC Bank USA
has cooperated fully by providing responsive documents in its possession in the US to the US Internal Revenue
Service.
Also in April 2011, HSBC Bank USA received a subpoena from the SEC directing HSBC Bank USA to produce
records in the US related to, among other things, HSBC Private Bank Suisse SA’s cross-border policies and
procedures and adherence to US broker-dealer and investment adviser rules and regulations when dealing with US
resident clients. HSBC Bank USA continues to cooperate with the SEC. HSBC Private Bank Suisse SA has also
produced records and other documents to the SEC and is cooperating with the SEC’s investigation.
Based on the facts currently known in respect of each of these investigations, there is a high degree of uncertainty as
to the terms on which the ongoing investigations will be resolved and the timing of such resolution, including the
amounts of any fines and/or penalties. As matters progress, it is possible that any fines and/or penalties could be
significant.
Investigations and reviews into the setting of London interbank offered rates, European interbank
offered rates and other benchmark interest and foreign exchange rates
Various regulators and competition and enforcement authorities around the world including in the UK, the US,
Canada, the EU, Switzerland and Asia, are conducting investigations and reviews related to certain past submissions
made by panel banks and the processes for making submissions in connection with the setting of London interbank
offered rates (‘Libor’), European interbank offered rates (‘Euribor’) and other benchmark interest and foreign
exchange rates. Several of these panel banks have reached settlements with various regulatory authorities. As certain
HSBC entities are members of such panels, HSBC and/or its subsidiaries have been the subject of regulatory
demands for information and are cooperating with those investigations and reviews. Based on the facts currently
known, there is a high degree of uncertainty as to the resolution of these regulatory investigations and reviews,
including the timing. The potential impact and size of any fines or penalties that could be imposed on HSBC cannot
be measured reliably.
In addition, HSBC and other panel banks have been named as defendants in private lawsuits filed in the US with
respect to the setting of Libor, including putative class action lawsuits which have been consolidated before the US
District Court for the Southern District of New York. The complaints in those actions assert claims against HSBC
and other panel banks under various US laws including US antitrust laws, the US Commodities Exchange Act, and
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44 – Related party transactions
state law. Based on the facts currently known, it is not practicable at this time for HSBC to predict the resolution of
these private lawsuits, including the timing and potential impact on HSBC.
44 Related party transactions
Related parties of the Group and HSBC Holdings include subsidiaries, associates, joint ventures, post-employment
benefit plans for HSBC employees, Key Management Personnel, close family members of Key Management
Personnel and entities which are controlled or jointly controlled by Key Management Personnel or their close family
members.
Key Management Personnel are defined as those persons having authority and responsibility for planning, directing
and controlling the activities of HSBC Holdings, being the Directors and Group Managing Directors of HSBC
Holdings.
Compensation of Key Management Personnel
Short-term employee benefits .....................................................................................
Post-employment benefits ..........................................................................................
Other long-term employee benefits ............................................................................
Share-based payments ................................................................................................
2012
US$m
37
1
10
43
91
HSBC
2011
US$m
34
2
7
53
96
2010
US$m
39
3
1
49
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Transactions, arrangements and agreements involving related parties
Particulars of advances (loans and quasi-loans), credits and guarantees entered into by subsidiaries of HSBC
Holdings during 2012 with Directors, disclosed pursuant to section 413 of the Companies Act 2006, are shown
below:
Advances and credits ................................................................................................................................
At 31 December
2012
US$m
7
2011
US$m
8
Particulars of transactions with related parties, disclosed pursuant to the requirements of IAS 24, are shown below.
The disclosure of the year-end balance and the highest amounts outstanding during the year in the table below is
considered to be the most meaningful information to represent the amount of the transactions and the amount of
outstanding balances during the year.
2012
2011
Balance at
31 December
US$m
Highest
amounts
outstanding
during year
US$m
Balance at
31 December
US$m
Highest
amounts
outstanding
during year
US$m
Key Management Personnel1
Advances and credits ....................................................................
Guarantees ....................................................................................
153
8
242
12
112
12
120
12
1 Includes Key Management Personnel, close family members of Key Management Personnel and entities which are controlled or jointly
controlled by Key Management Personnel or their close family members.
Some of the transactions were connected transactions, as defined by the Rules Governing The Listing of Securities on
The Stock Exchange of Hong Kong Limited but were exempt from any disclosure requirements under the provisions
of those rules. The above transactions were made in the ordinary course of business and on substantially the same
terms, including interest rates and security, as for comparable transactions with persons of a similar standing or,
where applicable, with other employees. The transactions did not involve more than the normal risk of repayment or
present other unfavourable features.
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Shareholdings, options and other securities of Key Management Personnel
Number of options held over HSBC Holdings ordinary shares under employee share plans .................
Number of HSBC Holdings ordinary shares held beneficially and non-beneficially .............................
Number of HSBC Holdings 6.5% Subordinated Notes 2036 held beneficially and non-beneficially ....
Number of HSBC Bank 2.875% Notes 2015 held beneficially and non-beneficially ............................
At 31 December
2012
(000s)
358
14,713
300
5
15,376
2011
(000s)
545
15,384
300
–
16,229
Transactions with other related parties of HSBC
Associates and joint ventures
The Group provides certain banking and financial services to associates and joint ventures, including loans,
overdrafts, interest and non-interest bearing deposits and current accounts. Details of the interests in associates and
joint ventures are given in Note 22. Transactions and balances during the year with associates and joint ventures were
as follows:
2012
2011
Highest
balance during
the year1
US$m
Balance at
31 December1
US$m
Highest
balance during
the year1
US$m
Balance at
31 December1
US$m
Amounts due from joint ventures:
– subordinated ..........................................................................
– unsubordinated ......................................................................
Amounts due from associates:
– unsubordinated ......................................................................
Amounts due to joint ventures ......................................................
Amounts due to associates ............................................................
Commitments ................................................................................
5
391
3,554
3,950
135
854
989
326
1
210
2,736
2,947
1
264
265
45
6
459
3,117
3,582
195
587
782
184
5
441
2,569
3,015
133
475
608
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1 The disclosure of the year-end balance and the highest balance during the year is considered the most meaningful information to
represent transactions during the year.
The above outstanding balances arose from the ordinary course of business and on substantially the same terms,
including interest rates and security, as for comparable transactions with third-party counterparties.
Post-employment benefit plans
At 31 December 2012, US$5bn (2011: US$4.6bn) of HSBC post-employment benefit plan assets were under
management by HSBC companies. Fees of US$20m (2011: US$20m) were earned by HSBC companies for these
management services provided to its post-employment benefit plans. HSBC’s post-employment benefit plans had
placed deposits of US$285m (2011: US$1.2bn) with its banking subsidiaries, on which interest payable to the
schemes amounted to US$1.9m (2011: US$3m). The above outstanding balances arose from the ordinary course
of business and on substantially the same terms, including interest rates and security, as for comparable transactions
with third-party counterparties.
HSBC Bank (UK) Pension Scheme entered into swap transactions with HSBC as part of the management of the
inflation and interest rate sensitivity of its liabilities. At 31 December 2012, the gross notional value of the swaps
was US$31bn (2011: US$25bn), the swaps had a positive fair value of US$5.2bn (2011: positive fair value of
US$5.6bn) to the scheme and HSBC had delivered collateral of US$7.1bn (2011: US$6.9bn) to the scheme in respect
of these swaps, on which HSBC earned no interest (2011: nil). All swaps were executed at prevailing market rates
and within standard market bid/offer spreads.
In order to satisfy diversification requirements, there are special collateral provisions for the swap transactions
between HSBC and the scheme. The collateral agreement stipulates that the scheme never posts collateral to HSBC.
Collateral is posted to the scheme by HSBC at an amount that provides the Trustee with a high level of confidence
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Notes on the Financial Statements (continued)
44 – Related party transactions / 45 – Events after the balance sheet date
that would be sufficient to replace the swaps in the event of default by HSBC Bank plc. With the exception of the
special collateral arrangements detailed above, all other aspects of the swap transactions between HSBC and the
scheme are on substantially the same terms as comparable transactions with third-party counterparties.
In December 2011, HSBC Bank plc made a £184m (US$286m) contribution to the HSBC Bank (UK) Pension
Scheme. Following the contribution the Scheme purchased asset-backed securities from HSBC at an arm’s length
value, determined by the Scheme’s independent third-party advisers.
In December 2011 HSBC International Staff Retirements Benefits Scheme (‘ISRBS’) purchased asset-backed
securities from HSBC at an arm’s length value of US$34m, determined by the Scheme’s independent third party
advisers. This followed an agreement by HSBC Asia Holdings BV to make a contribution of the same amount to
ISRBS. No gain or loss arose on the transaction.
ISRBS entered into swap transactions with HSBC to manage the inflation and interest rate sensitivity of the liabilities
and selected assets. At 31 December 2012, the gross notional value of the swaps was US$1.8bn (2011: US$1.7bn)
and the swaps had a net positive fair value of US$328m to the scheme (2011: US$297m). All swaps were executed at
prevailing market rates and within standard market bid/offer spreads.
HSBC Holdings
Details of HSBC Holdings’ principal subsidiaries are shown in Note 25. Transactions and balances during the year
with subsidiaries were as follows:
2012
2011
Highest
balance during
the year1
US$m
Balance at
31 December1
US$m
Highest
balance during
the year1
US$m
Balance at
31 December1
US$m
Assets
Cash at bank ..................................................................................
Derivatives ....................................................................................
Loans and advances ......................................................................
Financial investments ...................................................................
Investments in subsidiaries ...........................................................
429
4,122
41,675
1,208
92,234
353
3,768
41,675
1,208
92,234
471
4,220
28,821
2,093
93,008
316
3,568
28,048
1,078
90,621
Total related party assets ..............................................................
139,668
139,238
128,613
123,631
Liabilities
Amounts owed to HSBC undertakings ........................................
Derivatives ....................................................................................
Subordinated liabilities:
– at amortised cost ....................................................................
– designated at fair value ..........................................................
Total related party liabilities .........................................................
Guarantees ....................................................................................
Commitments ................................................................................
12,856
1,536
2,493
4,271
21,156
49,560
1,811
12,856
760
1,696
4,260
19,572
49,402
1,200
3,129
1,181
2,609
4,627
11,546
49,527
2,753
2,479
1,067
2,437
3,955
9,938
49,402
1,810
1 The disclosure of the year-end balance and the highest month-end balance during the year is considered the most meaningful
information to represent transactions during the year. The above outstanding balances arose in the ordinary course of business
and were on substantially the same terms, including interest rates and security, as for comparable transactions with third-party
counterparties. There were no exceptions (2011: US$63m) in respect of loans to HSBC subsidiaries from HSBC Holdings made at
an agreed zero per cent interest rate.
Some employees of HSBC Holdings are members of the HSBC Bank (UK) Pension Scheme, which is sponsored by a
separate Group company. HSBC Holdings incurs a charge for these employees equal to the contributions paid into
the scheme on their behalf. Disclosure in relation to the scheme is made in Note 7.
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45 Events after the balance sheet date
On 7 January 2013, Industrial Bank Co., Ltd. (‘Industrial Bank’), a principal associate, completed a private
placement of additional share capital to a number of third parties, thereby diluting the Group’s equity holding from
12.8% to 10.9%. As a result of this and other factors, the Group considers it is no longer in a position to exercise
significant influence over Industrial Bank and ceased to account for the investment as an associate from that date,
giving rise to an accounting gain of HK$9.5bn or US$1.2bn. Thereafter, the holding is recognised as an available-for-
sale financial investment.
The disposal of the second tranche of shares in Ping An was completed on 6 February 2013. A description of this
disposal is provided in Note 26.
On 19 February 2013, we announced an agreement to sell HSBC Bank Panama S.A., recorded as part of our Latin
America segment, to Bancolombia S.A. for a total consideration of US$2.1bn in cash. The transaction is subject to
regulatory approvals and other conditions and is expected to complete by the third quarter of 2013. The assets and
liabilities of these operations were not classified as held for sale at 31 December 2012 as the sale was not yet
considered highly probable at that time.
On 28 February 2013, HSBC Bank USA entered into an agreement with the Office of the Comptroller of the
Currency, and HSBC Finance and HNAH entered into an agreement with the Federal Reserve Board in relation to the
Independent Foreclosure Review. Additional information is provided in Note 43.
A fourth interim dividend for 2012 of US$0.18 per ordinary share (a distribution of approximately US$3,327m) was
declared by the Directors after 31 December 2012.
These accounts were approved by the Board of Directors on 4 March 2013 and authorised for issue.
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Shareholder Information
Interim dividends / Shareholder profile / 2012 Annual General Meeting
Shareholder Information
Page
Fourth interim dividend for 2012 ................................ 516
Interim dividends for 2013 .......................................... 516
Shareholder profile ...................................................... 517
2012 Annual General Meeting ..................................... 517
Interim Management Statements and Interim Results 518
Shareholder enquiries and communications ................ 518
Stock symbols .............................................................. 519
Investor relations .......................................................... 519
Fourth interim dividend for 2012
Page
Where more information about HSBC is
available ................................................................... 520
Simplified structure chart ............................................. 521
Taxation of shares and dividends ................................ 522
Cautionary statement regarding forward-looking
statements ................................................................ 525
Abbreviations .............................................................. 526
Glossary and Index ...................................................... 529
The Directors have declared a fourth interim dividend for 2012 of US$0.18 per ordinary share. Information on the
scrip dividend scheme and currencies in which shareholders may elect to have the cash dividend paid will be sent to
shareholders on or about 3 April 2013. The timetable for the dividend is:
Announcement ...................................................................................................................................................................
Shares quoted ex-dividend in London, Hong Kong, Paris and Bermuda .........................................................................
ADSs quoted ex-dividend in New York ...........................................................................................................................
Record date in Hong Kong ................................................................................................................................................
Record date in London, New York, Paris and Bermuda1 .................................................................................................
Mailing of Annual Report and Accounts 2012 and/or Annual Review 2012, Notice of Annual General Meeting
4 March 2013
20 March 2013
20 March 2013
21 March 2013
22 March 2013
and dividend documentation .........................................................................................................................................
3 April 2013
Final date for receipt by registrars of forms of election, Investor Centre electronic instructions and revocations
of standing instructions for scrip dividends ..................................................................................................................
Exchange rate determined for payment of dividends in sterling and Hong Kong dollars ...............................................
Payment date: dividend warrants, new share certificates or transaction advices and notional tax vouchers mailed
25 April 2013
29 April 2013
and shares credited to stock accounts in CREST ..........................................................................................................
8 May 2013
1 Removals to and from the Overseas Branch register of shareholders in Hong Kong will not be permitted on this date.
Interim dividends for 2013
The Board has adopted a policy of paying quarterly interim dividends on the ordinary shares. Under this policy it is
intended to have a pattern of three equal interim dividends with a variable fourth interim dividend. It is envisaged that
the first interim dividend in respect of 2013 will be US$0.10 per ordinary share. The proposed timetables for the
dividends in respect of 2013 are:
Announcement ...................................................
Shares quoted ex-dividend in London,
Hong Kong, Paris and Bermuda ...................
ADSs quoted ex-dividend in New York ...........
Record date in Hong Kong ................................
Record date in London, New York, Paris and
Bermuda1 .......................................................
Payment date ......................................................
Interim dividends for 2013
First
Second
Third
Fourth
7 May 2013
5 August 2013
7 October 2013 24 February 2014
22 May 2013
22 May 2013
23 May 2013
21 August 2013
21 August 2013
22 August 2013
23 October 2013
23 October 2013
24 October 2013
12 March 2014
12 March 2014
13 March 2014
24 May 2013
11 July 2013
25 October 2013
23 August 2013
9 October 2013 11 December 2013
14 March 2014
30 April 2014
1 Removals to and from the Overseas Branch Register of shareholders in Hong Kong will not be permitted on these dates.
Dividends are declared in US dollars and, at the election of the shareholder, paid in cash in one of, or in a
combination of, US dollars, sterling and Hong Kong dollars, or, subject to the Board’s determination that a scrip
dividend is to be offered in respect of that dividend, may be satisfied in whole or in part by the issue of new shares in
lieu of a cash dividend.
516
Shareholder profile
At 31 December 2012 the share register recorded the following details:
Ordinary shares held
1-100 ........................................................................................................................................................
101-400 ....................................................................................................................................................
401-500 ....................................................................................................................................................
501-1,000 .................................................................................................................................................
1,001-5,000 ..............................................................................................................................................
5,001-10,000 ............................................................................................................................................
10,001-20,000 ..........................................................................................................................................
20,001-50,000 ..........................................................................................................................................
50,001-200,000 ........................................................................................................................................
200,001-500,000 ......................................................................................................................................
500,001 and above ...................................................................................................................................
Number of
shareholders
Total
shares held
35,872
30,307
7,833
31,490
72,523
18,840
10,978
6,673
3,271
721
1,050
1,075,355
7,425,370
3,538,962
23,056,605
170,851,837
133,212,606
153,114,553
204,789,957
301,012,906
223,700,082
17,254,230,431
Total .........................................................................................................................................................
219,558
18,476,008,664
2012 Annual General Meeting
All Directors listed on pages 302 to 307 attended the 2012 Annual General Meeting with the exception of G Morgan
who was unable to attend and R Fassbind and J Comey who were appointed Directors on 1 January 2013 and
4 March 2013, respectively. G Morgan ceased to be a Director from the conclusion of the 2012 Annual General
Meeting.
All resolutions considered at the 2012 Annual General Meeting held at 11.00am on 25 May 2012 at The Barbican
Centre, London EC2 were passed on a poll as follows:
Resolution
1 To receive the Report and Accounts for 2011 ..................................................
2 To approve the Directors’ Remuneration Report for 2011 ..............................
3 To elect or re-elect the following as Directors:
(a) S A Catz ....................................................................................................
(b) L M L Cha ................................................................................................
(c) M K T Cheung ..........................................................................................
(d) J D Coombe ..............................................................................................
(e) J Faber ......................................................................................................
(f) R A Fairhead ............................................................................................
(g) D J Flint ....................................................................................................
(h) A A Flockhart ...........................................................................................
(i) S T Gulliver ..............................................................................................
(j)
J W J Hughes-Hallett ...............................................................................
(k) W S H Laidlaw .........................................................................................
J P Lipsky .................................................................................................
(l)
(m) J R Lomax ................................................................................................
(n)
I J Mackay ................................................................................................
(o) N R N Murthy ..........................................................................................
(p) Sir Simon Robertson ................................................................................
(q) J L Thornton .............................................................................................
4 To reappoint the Auditor at remuneration to be determined by the
Group Audit Committee ...............................................................................
5 To authorise the Directors to allot shares .........................................................
6 To disapply pre-emption rights (Special Resolution) ......................................
7 To authorise the Company to purchase its own shares ....................................
8 To authorise the Directors to offer a scrip dividend alternative........................
9 To approve general meetings (other than annual general meetings) being
Total votes
For1
Against Vote withheld2
8,674,241,734
7,603,837,582
135,201,316
863,308,512
7,347,647
342,947,482
8,804,928,221
8,648,658,349
8,802,099,054
8,628,180,910
8,796,984,821
8,743,788,851
8,619,018,008
8,774,240,102
8,775,424,304
8,771,227,801
8,749,103,878
8,804,822,657
8,694,903,617
8,780,813,350
8,799,839,273
8,637,007,606
8,248,542,395
8,658,879,219
8,598,678,631
8,613,126,301
8,775,533,630
8,805,094,483
9,610,127
47,870,917
12,615,523
186,062,475
17,580,853
118,900,468
168,004,948
40,569,601
39,522,674
43,514,682
65,588,171
9,552,202
21,801,654
33,915,545
14,888,406
48,054,956
336,922,956
145,175,480
214,223,057
195,480,323
39,890,867
5,763,369
5,875,570
123,714,457
5,630,308
5,852,946
5,861,373
5,802,585
33,368,432
5,687,412
5,558,005
5,732,794
5,762,796
5,949,328
103,551,962
5,752,704
5,752,109
123,743,083
233,310,057
16,773,808
6,232,394
12,092,143
5,250,428
9,412,655
called on 14 clear days’ notice (Special Resolution) ...................................
7,876,386,438
937,298,004
6,966,206
1 Includes discretionary votes.
2 A ‘Vote Withheld’ is not a ‘vote’ in law and is not counted in the calculation of the votes ‘For’ and ‘Against’ the resolution.
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Shareholder Information (continued)
IMS and Interim Results / Shareholder enquiries and communications / Stock symbols / Investor relations
Interim Management Statements and Interim Results
Interim Management Statements are expected to be issued on or around 7 May 2013 and 4 November 2013. The
Interim Results for the six months to 30 June 2013 are expected to be issued on 5 August 2013.
Shareholder enquiries and communications
Enquiries
Any enquiries relating to shareholdings on the share register, for example transfers of shares, change of name or
address, lost share certificates or dividend cheques, should be sent to the Registrars at the address given below. The
Registrars offer an online facility, Investor Centre, which enables shareholders to manage their shareholding
electronically.
Principal Register:
Hong Kong Overseas Branch Register:
Bermuda Overseas Branch Register:
Computershare Investor Services PLC
The Pavilions
Bridgwater Road
Bristol BS99 6ZZ
United Kingdom
Telephone: 44 (0) 870 702 0137
Email via website:
www.investorcentre.co.uk/contactus
Computershare Hong Kong Investor
Services Limited
Rooms 1712-1716, 17th Floor
Hopewell Centre
183 Queen’s Road East
Hong Kong
Telephone: 852 2862 8555
Email: hsbc.ecom@computershare.com.hk
Investors Relations Team
HSBC Bank Bermuda Limited
6 Front Street
Hamilton HM 11
Bermuda
Telephone: 1 441 299 6737
Email:
hbbm.shareholder.services@hsbc.bm
Investor Centre:
www.investorcentre.co.uk
Investor Centre:
www.computershare.com/hk/investors
Investor Centre:
www.computershare.com/investor/bm
Any enquiries relating to ADSs should be sent to the depositary:
The Bank of New York Mellon
Depositary Receipts
PO Box 43006
Providence, RI 02940-3006
USA
Telephone (US): 1 877 283 5786
Telephone (International): 1 201 680 6825
Email: shrrelations@bnymellon.com
Website: www.bnymellon.com/shareowner
Any enquiries relating to shares held through Euroclear France, the settlement and central depositary system for
NYSE Euronext Paris, should be sent to the paying agent:
HSBC France
103, avenue des Champs Elysées
75419 Paris Cedex 08
France
Telephone: 33 1 40 70 22 56
Email: ost-agence-des-titres-hsbc-reims.hbfr-do@hsbc.fr
Website: www.hsbc.fr
If you have been nominated to receive general shareholder communications directly from HSBC Holdings, it is
important to remember that your main contact for all matters relating to your investment remains the registered
shareholder, or perhaps custodian or broker, who administers the investment on your behalf. Therefore any changes
or queries relating to your personal details and holding (including any administration thereof) must continue to be
directed to your existing contact at your investment manager or custodian. HSBC Holdings cannot guarantee dealing
with matters directed to it in error.
518
Further copies of this Annual Report and Accounts 2012 may be obtained by writing to the following departments:
For those in Europe, the Middle East
and Africa:
For those in Asia-Pacific:
For those in the Americas:
Global Communications
HSBC Holdings plc
8 Canada Square
London E14 5HQ
United Kingdom
Communications (Asia)
The Hongkong and Shanghai Banking
Corporation Limited
1 Queen’s Road Central
Hong Kong
Global Publishing Services
HSBC – North America
26525 N Riverwoods Boulevard
Mettawa, Illinois 60045
USA
Electronic communications
Shareholders may at any time choose to receive corporate communications in printed form or to receive a notification
of their availability on HSBC’s website. To receive future notifications of the availability of a corporate
communication on HSBC’s website by email, or revoke or amend an instruction to receive such notifications by
email, go to www.hsbc.com/ecomms. If you provide an email address to receive electronic communications from
HSBC, we will also send notifications of your dividend entitlements by email. If you received a notification of the
availability of this document on HSBC’s website and would like to receive a printed copy of it, or if you would like
to receive future corporate communications in printed form, please write or send an email to the appropriate
Registrars at the address given above. Printed copies will be provided without charge.
Chinese translation
A Chinese translation of this Annual Report and Accounts 2012 is available upon request after 3 April 2013 from the
Registrars:
Computershare Hong Kong Investor Services Limited
Rooms 1712-1716, 17th Floor
Hopewell Centre
183 Queen’s Road East
Hong Kong
Computershare Investor Services PLC
The Pavilions
Bridgwater Road
Bristol BS99 6ZZ
United Kingdom
Please also contact the Registrars if you wish to receive Chinese translations of future documents or if you have
received a Chinese translation of this document and do not wish to receive such translations in future.
Stock symbols
HSBC Holdings ordinary shares trade under the following stock symbols:
London Stock Exchange
Hong Kong Stock Exchange
New York Stock Exchange (ADS)
HSBA
5
HBC
Investor relations
Euronext Paris
Bermuda Stock Exchange
HSB
HSBC
Enquiries relating to HSBC’s strategy or operations may be directed to:
Manager Investor Relations
HSBC Holdings plc
8 Canada Square
London E14 5HQ
United Kingdom
Telephone: 44 020 7991 8041
Facsimile: 44 0845 587 0225
Email:
investorrelations@hsbc.com
SVP Investor Relations
HSBC North America Holdings Inc.
26525 N Riverwoods Boulevard
Mettawa, Illinois 60045
USA
1 224 880 8008
1 847 383 3331
investor.relations.usa@us.hsbc.com
Head of Investor Relations, Asia-Pacific
The Hongkong and Shanghai Banking
Corporation Limited
1 Queen’s Road Central
Hong Kong
852 2822 4908
852 3418 4469
investorrelations@hsbc.com.hk
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Shareholder Information (continued)
Information / Organisation chart
Where more information about HSBC is available
This Annual Report and Accounts 2012, and other information on HSBC, may be viewed on HSBC’s website:
www.hsbc.com.
Reports, statements and information that HSBC Holdings files with the Securities and Exchange Commission
are available at www.sec.gov. Investors can also request hard copies of these documents upon payment of a
duplicating fee, by writing to the SEC at the Office of Investor Education and Advocacy, 100 F Street N.E.,
Washington, DC 20549-0123 or by emailing PublicInfo@sec.gov. Investors should call the Commission at
(202) 551 8090 if they require further assistance. Investors may also obtain the reports and other information that
HSBC Holdings files at www.nyse.com (telephone number (1) 212 656 3000).
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H S B C H O L D I N G S P L C
Shareholder Information (continued)
Taxation of shares and dividends
Taxation of shares and dividends
Taxation – UK residents
The following is a summary, under current law, of
certain UK tax considerations that are likely to be
material to the ownership and disposition of
shares. The summary does not purport to be
a comprehensive description of all the tax
considerations that may be relevant to a holder of
shares. In particular, the summary deals principally
with shareholders who are resident solely in the UK
for UK tax purposes and only with holders who hold
the shares as investments and who are the beneficial
owners of the shares, and does not address the tax
treatment of certain classes of holders such as
dealers in securities. Holders and prospective
purchasers should consult their own advisers
regarding the tax consequences of an investment
in shares in light of their particular circumstances,
including the effect of any national, state or local
laws.
Taxation of dividends
Currently no tax is withheld from dividends paid by
HSBC Holdings. However, dividends are paid with
an associated tax credit which is available for set-off
by certain shareholders against any liability they
may have to UK income tax. Currently, the
associated tax credit is equivalent to 10% of the
combined cash dividend and tax credit, i.e. one-ninth
of the cash dividend.
For individual shareholders who are resident in the
UK for taxation purposes and liable to UK income
tax at the basic rate, no further UK income tax
liability arises on the receipt of a dividend from
HSBC Holdings. Individual shareholders who
are liable to UK income tax at the higher rate or
additional rate are taxed on the combined amount
of the dividend and the tax credit at the dividend
upper rate (currently 32.5%) and the dividend
additional rate (currently 42.5%), respectively. The
UK Government has announced that the dividend
additional rate will be reduced from 42.5% to 37.5%,
with effect on and after 6 April 2013. The tax credit
is available for set-off against the dividend upper
rate and the dividend additional rate liability.
Individual UK resident shareholders are not entitled
to any tax credit repayment.
Although non-UK resident shareholders are
generally not entitled to any repayment of the tax
credit in respect of any UK dividend received, some
such shareholders may be so entitled under the
provisions of a double taxation agreement between
their country of residence and the UK. However, in
522
most cases no amount of the tax credit is, in practice,
repayable.
Information on the taxation consequences of the
HSBC Holdings scrip dividends offered in lieu of the
2011 fourth interim dividend and the first, second
and third interim dividends for 2012 was set out in
the Secretary’s letters to shareholders of 27 March,
29 May, 29 August and 7 November 2012. In no
case, was the difference between the cash dividend
foregone and the market value of the scrip dividend
in excess of 15% of the market value. Accordingly,
the amount of the dividend income chargeable to
tax, and, the acquisition price of HSBC Holdings
US$0.50 ordinary shares (the ‘shares’) for UK
capital gains tax purposes, was the cash dividend
foregone.
Taxation of capital gains
The computation of the capital gains tax liability
arising on disposals of shares in HSBC Holdings
by shareholders subject to UK tax on capital gains
can be complex, partly depending on whether, for
example, the shares were purchased since April
1991, acquired in 1991 in exchange for shares in
The Hongkong and Shanghai Banking Corporation
Limited, or acquired subsequent to 1991 in exchange
for shares in other companies.
For capital gains tax purposes, the acquisition
cost for ordinary shares is adjusted to take account
of subsequent rights and capitalisation issues. Any
capital gain arising on a disposal by a UK company
may also be adjusted to take account of indexation
allowance. If in doubt, shareholders are
recommended to consult their professional advisers.
Stamp duty and stamp duty reserve tax
Transfers of shares by a written instrument of
transfer generally will be subject to UK stamp duty
at the rate of 0.5% of the consideration paid for the
transfer, and such stamp duty is generally payable
by the transferee.
An agreement to transfer shares, or any interest
therein, normally will give rise to a charge to stamp
duty reserve tax at the rate of 0.5% of the
consideration. However, provided an instrument
of transfer of the shares is executed pursuant to the
agreement and duly stamped before the date on
which the stamp duty reserve tax becomes payable,
under the current practice of UK HM Revenue and
Customs it will not be necessary to pay the stamp
duty reserve tax, nor to apply for such tax to be
cancelled. Stamp duty reserve tax is generally
payable by the transferee.
Any US federal tax advice included in this
Annual Report and Accounts is for informational
purposes only; it was not intended or written to be
used, and cannot be used, for the purpose of
avoiding US federal tax penalties.
Taxation of dividends
Currently no tax is withheld from dividends paid by
HSBC Holdings. A US holder must include cash
dividends paid on the shares or ADSs in ordinary
income on the date that such holder or the ADS
depositary receives them, translating dividends paid
in UK pounds sterling into US dollars using the
exchange rate in effect on the date of receipt. A US
holder that elects to receive shares in lieu of a cash
dividend must include in ordinary income the fair
market value of such shares on the dividend payment
date, and the tax basis of those shares will equal such
fair market value.
Subject to certain exceptions for positions that
are held for less than 61 days or are hedged, and
subject to a foreign corporation being considered a
‘qualified foreign corporation’ (which includes not
being classified for US federal income tax purposes
as a passive foreign investment company), certain
dividends (‘qualified dividends’) received by an
individual US holder generally will be subject to US
taxation at maximum rates. Based on the company’s
audited financial statements and relevant market and
shareholder data, HSBC Holdings does not
anticipate being classified as a passive foreign
investment company. Accordingly, dividends paid
on the shares or ADSs generally should be treated as
qualified dividends.
Taxation of capital gains
Gains realised by a US holder on the sale or other
disposition of shares or ADSs normally will not be
subject to UK taxation unless at the time of the sale
or other disposition the holder carries on a trade,
profession or vocation in the UK through a branch or
agency or permanent establishment and the shares or
ADSs are or have been used, held or acquired for the
purposes of such trade, profession, vocation, branch
or agency or permanent establishment. Such gains
will be included in income for US tax purposes, and
will be long-term capital gains if the shares or ADSs
were held for more than one year. A long-term
capital gain realised by an individual holder
generally will be subject to US tax at preferential
rates.
Paperless transfers of shares within CREST, the
UK’s paperless share transfer system, are liable to
stamp duty reserve tax at the rate of 0.5% of the
consideration. In CREST transactions, the tax
is calculated and payment made automatically.
Deposits of shares into CREST generally will not be
subject to stamp duty reserve tax, unless the transfer
into CREST is itself for consideration. Following the
case HSBC pursued before the European Court of
Justice (Case C-569/07 HSBC Holdings plc and
Vidacos Nominees Ltd v The Commissioners for
HM Revenue & Customs) and a subsequent case in
relation to depositary receipts, HMRC now accepts
that the charge to stamp duty reserve tax at 1.5% on
the issue of shares to a depositary receipt issuer or a
clearance service is prohibited.
Taxation – US residents
The following is a summary, under current law,
of the principal UK tax and US federal income tax
considerations that are likely to be material to the
ownership and disposition of shares or American
Depositary Shares (‘ADS’s) by a holder that is a
resident of the US for US federal income tax
purposes (a ‘US holder’) and who is not resident
(while it remains relevant to the charge to UK capital
gains tax) ordinarily resident in the UK for UK tax
purposes. Holders and prospective purchasers should
note that the UK Government has announced that
ordinary residence will cease to be relevant to the
charge to UK capital gains tax for the tax year
2013-14 and subsequent tax years.
The summary does not purport to be a
comprehensive description of all of the tax
considerations that may be relevant to a holder of
shares or ADSs. In particular, the summary deals
only with US holders that hold shares or ADSs as
capital assets, and does not address the tax treatment
of holders that are subject to special tax rules, such
as banks, tax-exempt entities, insurance companies,
dealers in securities or currencies, persons that hold
shares or ADSs as part of an integrated investment
(including a ‘straddle’) comprised of a share or ADS
and one or more other positions, and persons that
own, directly or indirectly, 10% or more of the
voting stock of HSBC Holdings. This discussion
is based on laws, treaties, judicial decisions and
regulatory interpretations in effect on the date
hereof, all of which are subject to change.
Holders and prospective purchasers should
consult their own advisers regarding the tax
consequences of an investment in shares or ADSs
in light of their particular circumstances, including
the effect of any national, state or local laws.
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Shareholder Information (continued)
Taxation of shares and dividends > Cautionary statement
Inheritance tax
Shares or ADSs held by an individual whose
domicile is determined to be the US for the purposes
of the United States-United Kingdom Double
Taxation Convention relating to estate and gift taxes
(the ‘Estate Tax Treaty’) and who is not for such
purposes a national of the UK will not, provided
any US federal estate or gift tax chargeable has
been paid, be subject to UK inheritance tax on the
individual’s death or on a lifetime transfer of shares
or ADSs except in certain cases where the shares or
ADSs (i) are comprised in a settlement (unless, at the
time of the settlement, the settlor was domiciled in
the US and was not a national of the UK), (ii) is
part of the business property of a UK permanent
establishment of an enterprise, or (iii) pertains to
a UK fixed base of an individual used for the
performance of independent personal services. In
such cases, the Estate Tax Treaty generally provides
a credit against US federal tax liability for the
amount of any tax paid in the UK in a case where the
shares or ADSs are subject to both UK inheritance
tax and to US federal estate or gift tax.
Stamp duty and stamp duty reserve tax –
ADSs
If shares are transferred to a clearance service or
American Depositary Receipt (‘ADR’) issuer (which
will include a transfer of shares to the Depositary)
under the current HMRC practice UK stamp duty
and/or stamp duty reserve tax will be payable. The
stamp duty or stamp duty reserve tax is generally
payable on the consideration for the transfer and is
payable at the aggregate rate of 1.5%.
The amount of stamp duty reserve tax payable
on such a transfer will be reduced by any stamp duty
paid in connection with the same transfer.
No stamp duty will be payable on the transfer
of, or agreement to transfer, an ADS, provided that
the ADR and any separate instrument of transfer or
written agreement to transfer remain at all times
outside the UK, and provided further that any such
transfer or written agreement to transfer is not
executed in the UK. No stamp duty reserve tax will
be payable on a transfer of, or agreement to transfer,
an ADS effected by the transfer of an ADR.
US backup withholding tax and information
reporting
Distributions made on shares or ADSs and proceeds
from the sale of shares or ADSs that are paid within
the US, or through certain financial intermediaries to
US holders, are subject to information reporting and
may be subject to a US ‘backup’ withholding tax
unless, in general, the US holder complies with
certain certification procedures or is a corporation or
other person exempt from such withholding. Holders
that are not US persons generally are not subject to
information reporting or backup withholding tax,
but may be required to comply with applicable
certification procedures to establish that they are not
US persons in order to avoid the application of such
information reporting requirements or backup
withholding tax to payments received within the
US or through certain financial intermediaries.
524
Cautionary statement regarding
forward-looking statements
The Annual Report and Accounts 2012 contains
certain forward-looking statements with respect to
HSBC’s financial condition, results of operations
and business.
Statements that are not historical facts, including
statements about HSBC’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 makes no commitment to revise or
update any forward-looking statements to reflect
events or circumstances occurring or existing after
the date of any forward-looking statements.
Written and/or oral forward-looking statements
may also be made in the periodic reports to the US
Securities and Exchange Commission, summary
financial statements to shareholders, proxy statements,
offering circulars and prospectuses, press releases
and other written materials, and in oral statements
made by HSBC’s Directors, officers or employees to
third parties, including financial analysts.
Forward-looking statements involve inherent
risks and uncertainties. Readers are cautioned that a
number of factors could cause actual results to differ,
in some instances materially, from those anticipated
or implied in any forward-looking statement. These
include, but are not limited to:
•
changes in general economic conditions in the
markets in which we operate, such as continuing
or deepening recessions and fluctuations in
employment beyond those factored into
consensus forecasts; changes in foreign
exchange rates and interest rates; volatility in
equity markets; lack of liquidity in wholesale
funding markets; illiquidity and downward price
pressure in national real estate markets; adverse
changes in central banks’ policies with respect
to the provision of liquidity support to financial
markets; heightened market concerns over
sovereign creditworthiness in over-indebted
countries; adverse changes in the funding status
•
•
of public or private defined benefit pensions;
and consumer perception as to the continuing
availability of credit and price competition in
the market segments we serve;
changes in government policy and regulation,
including the monetary, interest rate and other
policies of central banks and other regulatory
authorities; initiatives to change the size,
scope of activities and interconnectedness of
financial institutions in connection with the
implementation of stricter regulation of financial
institutions in key markets worldwide; revised
capital and liquidity benchmarks which could
serve to deleverage bank balance sheets and
lower returns available from the current business
model and portfolio mix; imposition of levies or
taxes designed to change business mix and risk
appetite; the practices, pricing or responsibilities
of financial institutions serving their consumer
markets; expropriation, nationalisation,
confiscation of assets and changes in legislation
relating to foreign ownership; changes in
bankruptcy legislation in the principal markets
in which we operate and the consequences
thereof; general changes in government policy
that may significantly influence investor
decisions; extraordinary government actions as a
result of current market turmoil; other
unfavourable political or diplomatic
developments producing social instability or
legal uncertainty which in turn may affect
demand for our products and services; the costs,
effects and outcomes of product regulatory
reviews, actions or litigation, including any
additional compliance requirements; and the
effects of competition in the markets where we
operate including increased competition from
non-bank financial services companies,
including securities firms; and
factors specific to HSBC, including our success
in adequately identifying the risks we face, such
as the incidence of loan losses or delinquency,
and managing those risks (through account
management, hedging and other techniques).
Effective risk management depends on, among
other things, our ability through stress testing
and other techniques to prepare for events that
cannot be captured by the statistical models it
uses; and our success in addressing operational,
legal and regulatory, and litigation challenges,
notably compliance with the DPA.
525
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Shareholder Information (continued)
Abbreviations
Abbreviations
Abbreviation
Brief description
A
A$
ABS1
ADR
ADS
ALCM
ALCO
AML
ARM1
ARS
B
Basel Committee
Basel I
Basel II1
Basel III1
BMD
BoCom
Bps1
BRL
BSA
BSM
C
C$
CCP1
CCR1
CD
CDO1
CDS1
CDPC
CET11
CGU
CHF
CMB
CML1
CNY
CP1
CPI
CRD1
CRR1
CVA1
D
Dodd-Frank
DoJ
DPA
DPF
DVA1
E
EAD1
EBA
ECB
EDTF
EGP
EL1
EU
Euribor
F
Fannie Mae
FCA
FHFA
first direct
FPC
Freddie Mac
Australian dollar
Asset-backed security
American Depositary Receipt
American Depositary Share
Asset and Liability Capital Management
Asset and Liability Management Committee
Anti-money laundering
Adjustable-rate mortgage
Argentinian peso
Basel Committee on Banking Supervision
1988 Basel Capital Accord
2006 Basel Capital Accord
Basel Committee’s reforms to strengthen global capital and liquidity rules
Bermudan dollar
Bank of Communications Co., Limited, mainland China’s fourth largest bank by market capitalisation
Basis points. One basis point is equal to one hundredth of a percentage point
Brazilian real
Bank Secrecy Act, US
Balance Sheet Management
Canadian dollar
Central counterparty
Counterparty credit risk
Certificate of deposit
Collateralised debt obligation
Credit default swap
Credit derivative product company
Common equity tier 1 ratio
Cash-generating unit
Swiss franc
Commercial Banking, a global business
Consumer and Mortgage Lending portfolio in the US, comprising Consumer Lending and Mortgage
Services businesses in run-off
Chinese yuan
Commercial paper
Consumer price index
Capital Requirements Directive
Customer risk rating
Credit valuation adjustment
The Dodd-Frank Wall Street Reform & Consumer Protection Act, US
Department of Justice, US
The Deferred Prosecution Agreement with DoJ and, if the context so requires, the Deferred Prosecution
Agreement with the New York County District Attorney’s Office, in each case entered into in December
2012
Discretionary participation feature of insurance and investment contracts
Debit valuation adjustment
Exposure at default
European Banking Authority
European Central Bank
Enhanced Disclosure Task Force
Egyptian pound
Expected loss
European Union
European Interbank Offered Rates
Federal National Mortgage Association, US
Financial Conduct Authority, UK
Federal Housing Finance Agency
first direct is a division of HSBC Bank plc
Financial Policy Committee, UK
Federal Home Loan Mortgage Corporation, US
526
Abbreviation
Brief description
FSA
FSMA
FTE
FTSE
G
G20
GAC
GB&M
GDP
GENPRU
Ginnie Mae
Global Markets
GMB
GPB
GPSP
GRC
Group
G-SIB1
H
Hang Seng Bank
HK$
HNAH
Hong Kong
HSBC
HSBC Afore
HSBC Bank
HSBC Bank Argentina
HSBC Bank Bermuda
HSBC Bank Malaysia
HSBC Bank Middle East
HSBC Bank USA
HSBC Canada
Financial Services Authority, UK
Financial Services and Markets Act 2000, UK
Full time equivalent staff
Financial Times – Stock Exchange index
Leaders, Finance Ministers and Central Bank Governors of the Group of Twenty
Group Audit Committee
Global Banking and Markets, a global business
Gross domestic product
The FSA’s General Prudential Sourcebook of rules and guidance
Government National Mortgage Association, US
HSBC’s treasury and capital markets services in GB&M
Group Management Board
Global Private Banking, a global business
Group Performance Share Plan
Group Risk Committee
HSBC Holdings together with its subsidiary undertakings
Global Systemically Important Bank
Hang Seng Bank Limited, one of Hong Kong’s largest banks
Hong Kong dollar
HSBC North America Holdings Inc.
The Hong Kong Special Administrative Region of the People’s Republic of China
HSBC Holdings together with its subsidiary undertakings
HSBC Afore S.A. de C.V.
HSBC Bank plc, formerly Midland Bank plc
HSBC Bank Argentina S.A.
HSBC Bank Bermuda Limited formerly The Bank of Bermuda Limited
HSBC Bank Malaysia Berhad
HSBC Bank Middle East Limited, formerly The British Bank of the Middle East
HSBC’s retail bank in the US, HSBC Bank USA, N.A. (formerly HSBC Bank USA, Inc.)
The sub-group, HSBC Bank Canada, HSBC Trust Company Canada, HSBC Mortgage Corporation
HSBC Finance
HSBC France
HSBC Holdings
HSBC Mexico
HSBC Premier
HSBC Private Bank (Suisse)
HSBC USA
Canada, HSBC Securities Canada and HSBC Financial Co. Canada, consolidated for liquidity purposes
HSBC Finance Corporation, the US consumer finance company (formerly Household International, Inc.)
HSBC’s French banking subsidiary, formerly CCF S.A.
HSBC Holdings plc, the parent company of HSBC
HSBC México S.A., the commercial banking subsidiary of Grupo Financiero HSBC, S.A. de C.V.
HSBC’s premium global banking service
HSBC Private Bank (Suisse) SA, HSBC’s private bank in Switzerland
The sub-group, HSBC USA Inc (the holding company of HSBC Bank USA) and HSBC Bank USA,
HTCD
I
IAS
IASB
ICB
IFRIC
IFRSs
IMM1
Industrial Bank
INR
IRB1
ISDA
K
KPI
KPMG
KRW
L
LFRF
LGD1
Libor
LIC
LTV1
consolidated for liquidity purposes
HSBC Trust Company (Delaware), N.A.
International Accounting Standard
International Accounting Standards Board
Independent Commission on Banking, UK
International Financial Reporting Interpretations Committee
International Financial Reporting Standards
Internal model method
Industrial Bank Co. Limited, a national joint-stock bank in mainland China in which Hang Seng Bank has
a shareholding
Indian rupee
Internal ratings-based
International Swaps and Derivatives Association
Key performance indicator
KPMG Audit Plc and its affiliates
South Korean won
Liquidity and funding risk management framework
Loss given default
London Interbank Offer Rate
Loan impairment charge and other credit risk provision
Loan to value ratio
M
Mainland China
Mazarin
People’s Republic of China excluding Hong Kong
Mazarin Funding Limited, an asset-backed CP conduit
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Shareholder Information (continued)
Abbreviations / Glossary
Abbreviation
Brief description
MENA
Monoline1
MSCI
MXN
N
NYSE
O
OFAC
OIB
OIS
ORMF
OTC1
P
PAB
PD1
Performance Shares1
Ping An
PPI
PRC
Premier
PVIF
R
RBWM
Repo1
Restricted Shares
Middle East and North Africa
Monoline insurance company
Morgan Stanley Capital International index
Mexican peso
New York Stock Exchange
Office of Foreign Assets Control, USA
Oman International Bank S.A.O.G.
Overnight index swap
Operational risk management framework
Over-the-counter
Panamanian balboa
Probability of default
Awards of HSBC Holdings ordinary shares under employee share plans that are subject to corporate
performance conditions
Ping An Insurance (Group) Company of China, Ltd, the second-largest life insurer in the PRC
Payment protection insurance product
People’s Republic of China
See HSBC Premier
Present value of in-force long-term insurance business
Retail Banking and Wealth Management, a global business
Sale and repurchase transaction
Awards of Restricted Shares define the number of HSBC Holdings ordinary shares to which the employee
will become entitled, generally between one and three years from the date of the award, and normally
subject to the individual remaining in employment
Reverse repo
Risk Management Meeting
RM
RMB
RMC
RoRWA
RPI
RRP
RWA1
Security purchased under commitments to sell
The Risk Management Meeting of the Group Management Board
Malaysian ringgit
Renminbi
Risk Management Committee
Return on average risk-weighted assets
Retail price index (UK)
Recovery and resolution plan
Risk-weighted asset
S
S&P
SEC
SIC
SIV1
SME
Solitaire
SPE1
SR
T
The Hongkong and Shanghai
Banking Corporation
TRL
TSR
U
UAE
UK
US$
US
US run-off portfolio
Standard and Poor’s rating agency
Securities and Exchange Commission, US
Securities investment conduit
Structured investment vehicle
Small and medium-sized enterprise
Solitaire Funding Limited, a special purpose entity managed by HSBC
Special purpose entity
Saudi Arabian riyal
The Hongkong and Shanghai Banking Corporation Limited, the founding member of the HSBC Group
Turkish lira
Total shareholder return
United Arab Emirates
United Kingdom
United States dollar
United States of America
Includes our CML, vehicle finance and Taxpayer Financial Services businesses and insurance,
commercial, corporate and treasury activities in HSBC Finance on an IFRSs management basis
V
VAR1
Visa
VIU
VND
Value at risk
Visa Inc.
Value in use
Vietnamese dong
1 Full definition included in Glossary on page 529.
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Glossary
Term
Definition
A
Adjustable-rate mortgages
(‘ARM’s)
Mortgage loans in the US on which the interest rate is periodically changed based on a reference price.
These are included within ‘affordability mortgages’.
Affordability mortgages
Mortgage loans where the customer’s monthly payments are set out at a low initial rate, either variable or
fixed, before resetting to a higher rate once the introductory period is over.
Agency exposures
Exposures to near or quasi-government agencies including public sector entities fully owned by
Alt-A
Arrears
government carrying out non-commercial activities, provincial and local government authorities,
development banks and funds set up by government.
A US description for loans regarded as lower risk than sub-prime, but with higher risk characteristics than
lending under normal criteria.
Customers are said to be in arrears (or in a state of delinquency) when they are behind in fulfilling their
obligations, with the result that an outstanding loan is unpaid or overdue. When a customer is in
arrears, the total outstanding loans on which payments are overdue are described as delinquent.
Asset-backed securities
Securities that represent an interest in an underlying pool of referenced assets. The referenced pool can
(‘ABS’s)
B
Back-testing
comprise any assets which attract a set of associated cash flows but are commonly pools of residential
or commercial mortgages.
A statistical technique used to monitor and assess the accuracy of a model, and how that model would
have performed had it been applied in the past.
Bail-inable debt
Bail-in refers to imposition of losses at the point of non viability (but before insolvency) on bank
liabilities (bail-inable debt) that are not exposed to losses while the institution remains a viable, going
concern. Whether by way of write-down or conversion into equity, this has the effect of recapitalising
the bank (although it does not provide any new funding).
Bank levy
A levy that applies to UK banks, building societies and the UK operations of foreign banks from 1
Basel II
Basel III
January 2011. The amount payable is based on a percentage of the group’s consolidated liabilities and
equity as at 31 December 2011 after deducting certain items the most material of which are those
related to insured deposit balances, tier 1 capital, insurance liabilities, high quality liquid assets and
items subject to a legally enforceable net settlement agreement.
The capital adequacy framework issued by the Basel Committee on Banking Supervision in June 2006 in
the form of the ‘International Convergence of Capital Measurement and Capital Standards’, amended
by subsequent changes to the capital requirements for market risk and re-securitisations, commonly
known as Basel 2.5, which took effect 31 December 2011.
In December 2010, the Basel Committee issued ‘Basel III rules: A global regulatory framework for more
resilient banks and banking systems’ and ‘International framework for liquidity risk measurement,
standards and monitoring’. Together these documents present the Basel Committee’s reforms to
strengthen global capital and liquidity rules with the goal of promoting a more resilient banking sector.
In June 2011, the Basel Committee issued a revision to the former document setting out the finalised
capital treatment for counterparty credit risk in bilateral trades. The Basel III requirements will be
phased in starting on 1 January 2013 with full implementation by 1 January 2019.
Basis point (‘Bps’)
One hundredth of a per cent (0.01%), so 100 basis points is 1%. Used in quoting movements in interest
rates or yields on securities.
C
Capital conservation buffer
Capital planning buffer
A capital buffer, prescribed by regulators under Basel III, and designed to ensure banks build up capital
buffers outside periods of stress which can be drawn down as losses are incurred. Should a bank’s
capital levels fall within the capital conservation buffer range, capital distributions will be constrained
by the regulators.
A capital buffer, prescribed by the FSA under Basel II, and designed to ensure banks build up capital
buffers outside periods of stress which can be drawn down as losses are incurred. Should a bank’s
capital levels fall within the capital planning buffer range, a period of heightened regulatory interaction
would be triggered.
Capital requirements directive
A capital adequacy legislative package issued by the European Commission and adopted by member
(‘CRD’)
states. The first CRD legislative package gave effect to the Basel II proposals in the EU and came into
force on 20 July 2006. CRD II, which came into force on 31 December 2010, subsequently updated
the requirements for capital instruments, large exposure, liquidity risk and securitisation. A further
amendment, CRD III updated market risk capital and additional securitisation requirements and came
into force on 31 December 2011.
CRD IV package comprises a recast Capital Requirements Directive and a new Capital Requirements
Regulation. The package implements the Basel III capital proposals together with transitional
arrangements for some of its requirements. CRD IV proposals are in draft and yet to have legal effect.
Central counterparty (‘CCP’)
An intermediary between a buyer and a seller (generally a clearing house).
Collateralised debt obligation
(‘CDO’)
A security issued by a third-party which references ABSs and/or certain other related assets purchased by
the issuer. CDOs may feature exposure to sub-prime mortgage assets through the underlying assets.
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Shareholder Information (continued)
Glossary
Term
Definition
Collectively assessed
Impairment assessment on a collective basis for homogeneous groups of loans that are not considered
impairment
Commercial paper (‘CP’)
individually significant and to cover losses which have been incurred but have not yet been identified
on loans subject to individual assessment.
An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts
receivable, inventories and meeting short-term liabilities. The debt is usually issued at a discount,
reflecting prevailing market interest rates.
Commercial real estate
Any real estate investment, comprising buildings or land, intended to generate a profit, either from capital
gain or rental income.
Common equity tier 1 capital
(‘CET1’)
The highest quality form of regulatory capital under Basel III that comprises common shares issued and
related share premium, retained earnings and other reserves excluding the cash flow hedging reserve,
less specified regulatory adjustments.
Common reporting (‘COREP’) Harmonised European reporting framework established in the Capital Requirements Directives, to be
mandated by the European Banking Authority.
Compliance risk
The risk that the Group fails to observe the letter and spirit of all relevant laws, codes, rules, regulations
and standards of good market practice, and incurs fines and penalties and suffers damage to its
business as a consequence.
Conduits
HSBC sponsors and manages multi-seller conduits and securities investment conduits (‘SIC’s). The
multi-seller conduits hold interests in diversified pools of third-party assets such as vehicle loans, trade
receivables and credit card receivables funded through the issuance of short-dated commercial paper
and supported by a liquidity facility. The SICs hold predominantly asset-backed securities referencing
such items as commercial and residential mortgages, vehicle loans and credit card receivables funded
through the issuance of both long-term and short-term debt.
Constant currency
A non-GAAP financial measure that adjusts for the year-on-year effects of foreign currency translation
differences by comparing reported results for the reported period with reported results for comparative
period retranslated at exchange rates for the reported period. The foreign currency translation
differences reflect the movements of the US dollar against most major currencies during the reported
period.
Constant net asset value fund
A fund that prices its assets on an amortised cost basis, subject to the amortised book value of the
portfolio remaining within 50 basis points of its market value.
Consumer Mortgage and
Lending (‘CML’)
In the US, the CML portfolio consists of our Consumer Lending and Mortgage Services businesses,
which are in run-off.
The Consumer Lending business offered secured and unsecured loan products, such as first and second
lien mortgage loans, open-ended home equity loans and personal non-credit card loans through branch
locations and direct mail. The majority of the mortgage lending products were for refinancing and debt
consolidation rather than home purchases. In the first quarter of 2009, we discontinued all originations
by our Consumer Lending business.
Prior to the first quarter of 2007, when we ceased new purchase activity, the Mortgage Services business
purchased non-conforming first and second lien real estate secured loans from unaffiliated third parties.
The business also included the operations of Decision One Mortgage Company (‘Decision One’),
which historically originated mortgage loans sourced by independent mortgage brokers and sold these
to secondary market purchasers. Decision One ceased originations in September 2007.
Contractual maturities
The date on which the final payment (principal or interest) of any financial instrument is due to be paid, at
Core tier 1 capital
which point all the remaining outstanding principal and interest have been repaid.
The highest quality form of regulatory capital, under Basel II, that comprises total shareholders’ equity
and related non-controlling interests, less goodwill and intangible assets and certain other regulatory
adjustments.
Countercyclical capital buffer
A capital buffer, prescribed by regulators under Basel III, which aims to ensure that capital requirements
(‘CCB’)
take account of the macro-financial environment in which banks operate. This will provide the banking
sector with additional capital to protect it against potential future losses, when excess credit growth in
the financial system as a whole is associated with an increase in system-wide risk.
Counterparty credit risk
Counterparty credit risk, in both the trading and non-trading books, is the risk that the counterparty to a
(‘CCR’)
transaction may default before completing the satisfactory settlement of the transaction.
Credit default swap
A derivative contract whereby a buyer pays a fee to a seller in return for receiving a payment in the event
Credit derivative product
companies (‘CDPC’s)
of a defined credit event (e.g. bankruptcy, payment default on a reference asset or assets, or
downgrades by a rating agency) on an underlying obligation (which may or may not be held by the
buyer).
Independent companies that specialise in selling credit default protection on corporate exposures in the
form of credit derivatives.
Credit enhancements
Facilities used to enhance the creditworthiness of financial obligations and cover losses due to asset default.
Credit risk
Risk of financial loss if a customer or counterparty fails to meet an obligation under a contract. It arises
mainly from direct lending, trade finance and leasing business, but also from products such as
guarantees, derivatives and debt securities.
Credit valuation adjustment
An adjustment to the valuation of OTC derivative contracts to reflect the creditworthiness of OTC
(‘CVA’)
derivative counterparties. Formerly described as Credit Risk Adjustment.
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Term
Definition
Credit risk mitigation
A technique to reduce the credit risk associated with an exposure by application of credit risk mitigants
such as collateral, guarantee and credit protection.
Credit risk spread
Credit spread risk
Customer deposits
Customer remediation
The premium over the benchmark or risk-free rate required by the market to accept a lower credit quality.
The yield spread between securities with the same coupon rate and maturity structure but with different
associated credit risks. The yield spread rises as the credit rating worsens.
The risk that movements in credit spreads will affect the value of financial instruments.
Money deposited by account holders. Such funds are recorded as liabilities.
Customer remediation refers to activities carried out by HSBC to compensate customers for losses or
damages associated with a failure to comply with regulations. Customer remediation is initiated by
HSBC in response to customer complaints, and not specifically initiated by regulatory action.
Customer risk rating (‘CRR’) A scale of 23 grades measuring internal obligor probability of default.
D
Debit valuation adjustment
(‘DVA’)
Debt restructuring
An adjustment made by an entity to the valuation of OTC derivative liabilities to reflect within fair value
the entity’s own credit risk.
A restructuring by which the terms and provisions of outstanding debt agreements are changed. This is
often done in order to improve cash flow and the ability of the borrower to repay the debt. It can
involve altering the repayment schedule as well as debt or interest charge reduction.
Debt securities
Assets on the Group’s balance sheet representing certificates of indebtedness of credit institutions, public
bodies or other undertakings, excluding those issued by Central Banks.
Debt securities in issue
Transferable certificates of indebtedness of the Group to the bearer of the certificates. These are liabilities
of the Group and include certificates of deposits.
Deed-in-lieu
An arrangement in which a borrower surrenders the deed for a property to the lender without going
through foreclosure proceedings and is subsequently released from any further obligations on the loan.
Defined benefit obligation
The present value of expected future payments required to settle the obligations of a defined benefit plan
Delinquency
See ‘Arrears’.
resulting from employee service.
Deposits by banks
All deposits received from domestic and foreign banks, excluding deposits or liabilities in the form of
debt securities or for which transferable certificates have been issued.
E
Economic capital
The internally calculated capital requirement which is deemed necessary by HSBC to support the risks to
which it is exposed.
Economic profit
The difference between the return on financial capital invested by shareholders and the cost of that
capital. Economic profit may be expressed as a whole number or as a percentage.
Economic value of equity
(‘EVE’) sensitivity
Considers all re-pricing mismatches in the current balance sheet and calculates the change in market value
that would result from a set of defined interest rate shocks.
Encumbered assets
Assets on our balance sheet which have been pledged as collateral against an existing liability.
Equity risk
Eurozone
Expected loss (‘EL’)
The risk arising from positions, either long or short, in equities or equity-based instruments, which create
exposure to a change in the market price of the equities or equity instruments.
Represents the 17 European Union countries that have adopted the euro as their common currency. The
17 countries are Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy,
Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia and Spain.
A regulatory calculation of the amount expected to be lost on an exposure using a 12 month time horizon
and downturn loss estimates. EL is calculated by multiplying the Probability of Default (a percentage)
by the Exposure at Default (an amount) and Loss Given Default (a percentage).
Exposure
A claim, contingent claim or position which carries a risk of financial loss.
Exposure at default (‘EAD’)
The amount expected to be outstanding after any credit risk mitigation, if and when the counterparty
defaults. EAD reflects drawn balances as well as allowance for undrawn amounts of commitments and
contingent exposures.
F
Fair value adjustment
An adjustment to the fair value of a financial instrument which is determined using a valuation technique
(level 2 and level 3) to include additional factors that would be considered by a market participant that
are not incorporated within the valuation model.
Fiduciary risk
The risk to the Group of breaching its fiduciary duties where it acts in a fiduciary capacity as trustee,
investment manager or as mandated by law or regulation.
Financial Reporting
(‘FINREP’)
First lien
Harmonised European financial reporting framework, proposed by the European Union, which will be
used to obtain a comprehensive view of a firm’s risk profile.
A security interest granted over an item of property to secure the repayment of a debt that places its
holder first in line to collect repayment from the sale of the underlying collateral in the event of a
default on the debt.
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Shareholder Information (continued)
Glossary
Term
Definition
Forbearance strategies
Strategies that are employed in order to improve the management of customer relationships, maximise
collection opportunities and, if possible, avoid default, foreclosure or repossession. Such arrangements
include extended payment terms, a reduction in interest or principal repayments, approved external
debt management plans, debt consolidations, the deferral of foreclosures, other modifications and
re-ages.
FSA standard rules
The method prescribed by the FSA for calculating market risk capital requirements in the absence of
VAR model approval.
Funded exposures
A funded exposure is one where the notional amount of a contract is or has been exchanged.
Funding risk
A form of liquidity risk arising when the liquidity needed to fund illiquid asset positions cannot be
obtained at the expected terms and when required.
G
Gap risk
Global Systemically Important
Bank (‘G-SIB’)
Government-sponsored
enterprises (‘GSE’s)
The risk of financial loss arising from a significant change in market price with no accompanying trading
opportunity.
A bank that meets the criteria defined in the Basel Committee's final rules set out in their 4 November
2011 document ‘Global systemically important banks: Assessment methodology and the additional
loss absorbency requirement’. The latest official list of such banks comprised the 28 names, which
include HSBC, published by the Financial Stability Board in November 2012. The Financial Stability
Board is co-ordinating, on behalf of the G20 Group of Governors and Heads of Supervision (‘GHOS’),
the overall set of measures to reduce the moral hazard and risks to the global financial system posed by
global systemically important financial institutions (‘G-SIFI’s) of all kinds.
A group of financial services enterprises created by the US Congress. Their function is to reduce the cost
of capital for certain borrowing sectors of the economy, and to make them more efficient and
transparent. Examples in the residential mortgage borrowing segment are Freddie Mac and Fannie
Mae. GSEs carry the implicit backing, but are not direct obligations, of the US Government.
GPSP Awards
Awards that define the number of HSBC Holdings ordinary shares to which the employee will become
Guarantee
H
Haircuts
Historical rating transition
matrices (‘HRTM’)
Home Equity Lines of Credit
(‘HELoC’s)
I
Impaired loans
entitled, generally five years from the date of the award, and normally subject to individual remaining
in employment. The shares to which the employee becomes entitled are subject to a retention
requirement until cessation of employment.
An undertaking by a party to pay a creditor should a debtor fail to do so.
A discount applied by management when determining the amount at which an asset can be realised. The
discount takes into account the method of realisation including the extent to which an active market for
the asset exists.
HRTMs show the probability of a counterparty with a particular rating moving to a different rating over a
defined time horizon.
A form of revolving credit facility provided to US customers, which is supported in the majority of cases
by a second lien or lower ranking charge over residential property. Holdings of HELoCs are classified
as sub-prime.
Loans where the Group does not expect to collect all the contractual cash flows or expects to collect them
later than they are contractually due.
Impairment allowances
Management’s best estimate of losses incurred in the loan portfolios at the balance sheet date.
Individually assessed
Exposure to loss is assessed on all individually significant accounts and all other accounts that do not
impairment
Insurance risk
qualify for collective assessment.
A risk, other than a financial risk, transferred from the holder of a contract to the insurance provider. The
principal insurance risk is that, over time, the combined cost of claims, administration and acquisition
of the contract may exceed the aggregate amount of premiums received and investment income.
Internal Capital Adequacy
Assessment Process
The Group’s own assessment of the levels of capital that it needs to hold through an examination of its
risk profile from regulatory and economic capital viewpoints.
Internal Model Method (‘IMM’) One of three approaches defined by Basel II to determine exposure values for counterparty credit risk.
Internal ratings-based approach
A method of calculating credit risk capital requirements using internal, rather than supervisory, estimates
(‘IRB’)
Invested capital
of risk parameters.
Equity capital invested in HSBC by its shareholders, adjusted for certain reserves and goodwill previously
amortised or written off.
Investment grade
Represents a risk profile similar to a rating of BBB- or better, as defined by an external rating agency.
IRB advanced approach
A method of calculating credit risk capital requirements using internal PD, LGD and EAD models.
IRB foundation approach
A method of calculating credit risk capital requirements using internal PD models but with supervisory
estimates of LGD and conversion factors for the calculation of EAD.
ISDA Master agreement
Standardised contract developed by ISDA used as an umbrella under which bilateral derivatives contracts
are entered into.
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Term
Definition
K
Key management personnel
L
Legacy credit in GB&M
Directors and Group Managing Directors of HSBC Holdings.
A separately identifiable, discretely managed business comprising Solitaire Funding Limited, the
securities investment conduits, the asset-backed securities trading portfolios and credit correlation
portfolios, derivative transactions entered into directly with monoline insurers, and certain other
structured credit transactions.
Legal proceedings
Legal proceedings include civil court, arbitration or tribunal proceedings brought against HSBC
Legal risk
companies (whether by way of claim or counterclaim) or civil disputes that may, if not settled, result in
court, arbitration or tribunal proceedings.
The risk of financial loss, sanction and/or reputational damage resulting from contractual risk (the risk
that the rights and/or obligations of a Group member within a contractual relationship are defective);
dispute risk (the risk when involved in or managing potential or actual disputes); legislative risk (the risk
that a Group member fails to adhere to laws of the jurisdiction in which it operates); and non contractual
rights risk (the risk that a Group member’s assets are not properly owned or are infringed by others or the
infringement by a Group member of another party’s rights).
Level 1 – quoted market price
Financial instruments with quoted prices for identical instruments in active markets.
Level 2 – valuation technique
using observable inputs
Financial instruments with quoted prices for similar instruments in active markets or quoted prices for
identical or similar instruments in inactive markets and financial instruments valued using models
where all significant inputs are observable.
Level 3 – valuation technique
Financial instruments valued using valuation techniques where one or more significant inputs are
with significant unobservable
inputs
unobservable.
Leveraged finance
Funding provided for entities with higher than average indebtedness, which typically arises from sub-
investment grade acquisitions or event-driven financing.
Leverage ratio
A measure, prescribed by regulators under Basel III, which is the ratio of tier 1 capital to total exposures.
Total exposures include on-balance sheet items, off-balance sheet items and derivatives, and should
generally follow the accounting measure of exposure. This supplementary measure to the risk-based
capital requirements is intended to constrain the build-up of excess leverage in the banking sector.
Liquidity coverage ratio
The ratio of the stock of high quality liquid assets to expected net cash outflows over the following 30
(‘LCR’)
Liquidity risk
Loan modification
Loan re-age
days. High quality liquid assets should be unencumbered, liquid in markets during a time of stress and,
ideally, be central bank eligible. The Basel III rules require this ratio to be at least 100% with effect
from 2015. The LCR is still subject to an observation period and review to address any unintended
consequences.
The risk that HSBC does not have sufficient financial resources to meet its obligations as they fall due, or
will have to do so at an excessive cost. This risk arises from mismatches in the timing of cash flows.
An account management action that results in a change to the original terms and conditions of a loan
either temporarily or permanently without resetting its delinquency status, except in case of a
‘modification re-age’ where delinquency status is also reset to up-to-date. Account modifications may
include revisions to one or more terms of the loan including, but not limited to, a change in interest rate,
extension of the amortisation period, reduction in payment amount and partial forgiveness or deferment
of principal.
An account management action that results in the resetting of the contractual delinquency status of an
account to up-to-date upon fulfilment of certain requirements which indicate that payments are
expected to be made in accordance with the contractual terms.
Loans past due
Loans on which repayments are overdue.
Loan to value ratio (‘LTV’)
A mathematical calculation that expresses the amount of the loan as a percentage of the value of security.
A high LTV indicates that there is less cushion to protect the lender against house price falls or
increases in the loan if repayments are not made and interest is added to the outstanding loan balance.
Loss given default (‘LGD’)
The estimated ratio (percentage) of the loss on an exposure to the amount outstanding at default (EAD)
upon default of a counterparty.
Loss severity
The realised amount of losses incurred (including ancillary amounts owed) when a loan is foreclosed or
disposed of through the arrangement with the borrower. The loss severity is represented as a
percentage of the outstanding loan balance.
M
Market risk
The risk that movements in market risk factors, including foreign exchange rates and commodity prices,
interest rates, credit spreads and equity prices will reduce income or portfolio values.
Medium-term notes (‘MTN’s) Notes issued by corporates across a range of maturities. MTNs are frequently issued by corporates under
Monoline insurers
(‘monolines’)
MTN Programmes whereby notes are offered on a regular and continuous basis to investors.
Entities which specialise in providing credit protection to the holders of debt instruments in the event of
default by the debt security counterparty. This protection is typically held in the form of derivatives
such as CDSs referencing the underlying exposures held.
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Shareholder Information (continued)
Glossary
Term
Definition
Mortgage-backed securities
Securities that represent interests in groups of mortgages, which may be on residential or commercial
(‘MBS’s)
properties. Investors in these securities have the right to cash received from future mortgage payments
(interest and/or principal). When the MBS references mortgages with different risk profiles, the MBS
is classified according to the highest risk class.
Mortgage-related assets
Assets which are referenced to underlying mortgages.
Mortgage vintage
The year a mortgage was originated.
N
Negative equity mortgages
Equity is the value of the asset less the outstanding balance on the loan. Negative equity arises when the
value of the property purchased is below the balance outstanding on the loan.
Net asset value per share
Total shareholders’ equity, less non-cumulative preference shares and capital securities, divided by the
number of ordinary shares in issue.
Net interest income
The amount of interest received or receivable on assets net of interest paid or payable on liabilities.
Net interest income sensitivity Considers all re-pricing mismatches in the current balance sheet, with suitable assumptions for balance
Net principal exposure
Net stable funding ratio
(‘NSFR’)
Non-conforming mortgages
Non-trading portfolios
sheet growth in the future, and calculates the change in net interest income that would result from a set
of defined interest rate shocks.
The gross principal amount of a financial asset after taking account of credit protection purchased but
excluding the effect of any counterparty credit valuation adjustment to that protection. It includes
assets that benefit from monoline protection, except where this protection is purchased with a CDS.
The ratio of available stable funding to required stable funding over a one year time horizon, assuming a
stressed scenario. Available stable funding would include items such as equity capital, preferred stock
with a maturity of over one year and liabilities with an assessed maturity of over one year. The Basel
III rules require this ratio to be over 100% with effect from 2018. The NSFR is still subject to an
observation period and review to address any unintended consequences.
US mortgages that do not meet normal lending criteria. Examples include mortgages where the expected
level of documentation is not provided (such as with income self-certification), or where poor credit
history increases the risk and results in pricing at a higher than normal lending rate.
Portfolios that comprise positions that primarily arise from the interest rate management of our retail and
commercial banking assets and liabilities, financial investments designated as available for sale and
held to maturity, and exposures arising from our insurance operations.
Non-trading risk
The market risk arising from non-trading portfolios.
O
Offset mortgages
A flexible type of mortgage where a borrower’s savings balance(s) held at the same institution can be
used to offset the mortgage balance owing. The borrower pays interest on the net balance which is
calculated by subtracting the credit balance(s) from the debit balance. As part of the offset mortgage a
total facility limit is agreed and the borrower may redraw past capital repayments up this agreed limit.
Overnight Index Swap (‘OIS’)
A method of valuing collateralised interest rate derivatives which uses a discount curve that reflects the
discounting
Operational risk
overnight interest rate typically earned or paid in respect of collateral received.
The risk of loss resulting from inadequate or failed internal processes, people and systems or from
external events, including legal risk.
Over-the-counter (‘OTC’)
A bilateral transaction (e.g. derivatives) that is not exchange traded and that is valued using valuation
models.
P
Pension risk
The risk that contributions from Group companies and members fail to generate sufficient funds to meet
the cost of accruing benefits for the future service of active members, and the risk that the performance
of assets held in pension funds is insufficient to cover existing pension liabilities.
Performance Shares
Awards of HSBC Holdings ordinary shares under employee share plans that are subject to the
achievement of corporate performance conditions.
Personal lending
See ‘Retail loans’.
Prime
A US description for mortgages granted to the most creditworthy category of borrowers.
Private equity investments
Equity securities in operating companies not quoted on a public exchange, often involving the investment
of capital in private companies or the acquisition of a public company that results in its delisting.
Probability of default (‘PD’)
The probability that an obligor will default within a one-year time horizon.
R
Refi rate
The refi (or refinancing) rate is set by the European Central Bank (‘ECB’) and is the price banks pay to
borrow from ECB.
Regulatory capital
The capital which HSBC holds, determined in accordance with rules established by the FSA for the
consolidated Group and by local regulators for individual Group companies.
Regulatory matters
Regulatory matters refer to investigations, reviews and other actions carried out by, or in response to the
actions of, regulators or law enforcement agencies in connection with alleged wrongdoing by HSBC.
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Term
Definition
Renegotiated loans
Loans for which the contractual terms have been changed because of significant concerns about the
borrower’s ability to meet the contractual payments when due.
Repo
(or Sale and repurchase
agreement)
A repo is a short-term funding agreement that allows a borrower to create a collateralised loan by selling
a financial asset to a lender. As part of the agreement the borrower commits to repurchase the security
at a date in the future repaying the proceeds of the loan. For the party on the other end of the
transaction (buying the security and agreeing to sell in the future) it is reverse repurchase agreement
or a reverse repo.
Reputational risk
The risk that illegal, unethical or inappropriate behaviour by the Group itself, members of staff or clients
Residential mortgage
or representatives of the Group will damage HSBC’s reputation, leading, potentially, to a loss of
business, fines or penalties.
A loan to purchase a residential property which is then used as collateral to guarantee repayment of the
loan. The borrower gives the lender a lien against the property, and the lender can foreclose on the
property if the borrower does not repay the loan per the agreed terms.
Restricted Shares
Awards that define the number of HSBC Holdings ordinary shares to which the employee will become
entitled, generally between one and three years from the date of the award, and normally subject to the
individual remaining in employment. The shares to which the employee becomes entitled may be
subject to retention requirement.
Retail loans
Money lent to individuals rather than institutions. This includes both secured and unsecured loans such as
mortgages and credit card balances.
Return on equity
Profit attributable to shareholders of the parent company divided by average ordinary shareholders’
equity.
Risk appetite
An assessment of the types and quantum of risks to which HSBC wishes to be exposed.
Risk-weighted assets
Calculated by assigning a degree of risk expressed as a percentage (risk weight) to an exposure in
(‘RWA’s)
Run-off portfolios
accordance with the applicable Standardised or IRB approach rules.
Legacy credit in GB&M, the US CML portfolio and other US run-off portfolios, including the treasury
services related to the US CML businesses and commercial operations in run-off. Origination of new
business in the run-off portfolios has been discontinued and balances are being managed down through
attrition and sale.
S
Sale and repurchase agreement See repo above.
Seasoning
Second lien
Securitisation
Short sale
The emergence of credit loss patterns in portfolios over time.
A security interest granted over an item of property to secure the repayment of a debt that is issued
against the same collateral as a first lien but that is subordinate to it. In the case of default, repayment
for this debt will only be received after the first lien has been repaid.
A transaction or scheme whereby the credit risk associated with an exposure, or pool of exposures, is
tranched and where payments to investors in the transaction or scheme are dependent upon the
performance of the exposure or pool of exposures. A traditional securitisation involves the transfer of
the exposures being securitised to an SPE which issues securities. In a synthetic securitisation, the
tranching is achieved by the use of credit derivatives and the exposures are not removed from the
balance sheet of the originator.
In relation to credit risk management, a ‘short sale’ is an arrangement in which a bank permits the
borrower to sell the property for less than the amount outstanding under a loan agreement. The
proceeds are used to reduce the outstanding loan balance and the borrower is subsequently released
from any further obligations on the loan.
Single-issuer liquidity facility A liquidity or stand-by line provided to a corporate customer which is different from a similar line
Six filters
provided to a conduit funding vehicle.
An internal measure designed to improve capital deployment across the Group. This examines the
strategic relevance of each business in each country, in terms of connectivity and economic
development, and the current returns, in terms of profitability, cost efficiency and liquidity. The
sixth filter requires adherence to global risk standards.
Sovereign exposures
Exposures to governments, ministries, departments of governments, embassies, consulates and exposures
on account of cash balances and deposits with central banks.
Special purpose entities
A corporation, trust or other non-bank entity, established for a narrowly defined purpose, including for
(‘SPE’s)
carrying on securitisation activities. The structure of the SPE and its activities are intended to isolate its
obligations from those of the originator and the holders of the beneficial interests in the securitisation.
Standardised approach
In relation to credit risk, a method for calculating credit risk capital requirements using External Credit
Assessment Institutions (‘ECAI’) ratings and supervisory risk weights. In relation to operational risk, a
method of calculating the operational capital requirement by the application of a supervisory defined
percentage charge to the gross income of eight specified business lines.
Stressed VAR
A market risk measure based on potential market movements for a continuous one-year period of stress
for a trading portfolio
535
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Shareholder Information (continued)
Glossary / Index
Term
Definition
Structured finance/notes
An instrument whose return is linked to the level of a specified index or the level of a specified asset. The
return on a structured note can be linked to equities, interest rates, foreign exchange, commodities or
credit. Structured notes may or may not offer full or partial capital protection in the event of a decline
in the underlying index or asset.
Structured Investment Vehicles
(‘SIV’s)
Special purpose entities which invest in diversified portfolios of interest-earning assets, generally funded
through issues of commercial paper, medium-term notes and other senior debt to take advantage of the
spread differentials between the assets in the SIV and the funding cost.
Student loan-related assets
Securities with collateral relating to student loans.
Subordinated liabilities
Liabilities which rank after the claims of other creditors of the issuer in the event of insolvency or
liquidation.
Sub-prime
A US description for customers with high credit risk, for example those who have limited credit histories,
modest incomes, high debt-to-income ratios, high loan-to-value ratios (for real estate secured products)
or have experienced credit problems caused by occasional delinquencies, prior charge-offs, bankruptcy
or other credit-related problems.
Sustainability risk
The risk that the environmental and social effects of providing financial services outweigh the economic
benefits.
Sustainable cost savings
Systems risk
T
Tier 1 capital
Permanent cost reductions at a given level of business activity. Sustainable cost savings exclude cost
avoidance and revenue and loan impairment charge benefits as these do not represent operational
expense reductions. Cost savings resulting from business disposals are not classified as sustainable.
The risk of failure or other deficiency in the automated platforms that support the Group’s daily execution
and the systems infrastructure on which they reside, including data centres, networks and distributed
computers.
A component of regulatory capital, comprising core tier 1 and other tier 1 capital. Other tier 1 capital
includes qualifying capital instruments such as non-cumulative perpetual preference shares and hybrid
capital securities.
Tier 2 capital
A component of regulatory capital, comprising qualifying subordinated loan capital, related non-
controlling interests, allowable collective impairment allowances and unrealised gains arising on the
fair valuation of equity instruments held as available-for-sale. Tier 2 capital also includes reserves
arising from the revaluation of properties.
Total compensation ratio
The total compensation ratio represents the proportion of total employee expenses to operating income
net of impairment charges.
Trading portfolios
Portfolios that comprise positions arising from market-making and warehousing of customer-derived
positions.
Trading risk
Troubled debt restructuring
The market risk arising from trading portfolios.
A US description for restructuring a debt whereby the creditor for economic or legal reasons related to a
debtor’s financial difficulties grants a concession to the debtor that it would not otherwise consider.
U
Unencumbered assets
Assets on our balance sheet which have not been pledged as collateral against an existing liability.
Unfunded exposures
An exposure where the notional amount of a contract has not been exchanged.
US Government agency and
Securities that are guaranteed by US Government agencies such as Ginnie Mae, or by US Government
US Government sponsored
enterprises mortgage-related
assets
sponsored entities including Fannie Mae and Freddie Mac.
V
Value-at-risk
(‘VAR’)
W
Wholesale loans
Write-down
Wrong-way risk
A measure of the loss that could occur on risk positions as a result of adverse movements in market risk
factors (e.g. rates, prices, volatilities) over a specified time horizon and to a given level of confidence.
Money lent to sovereign borrowers, banks, non-bank financial institutions and corporate entities.
Reduction in the carrying value of an asset due to impairment or fair value movements.
An adverse correlation between the counterparty’s probability of default and the mark-to-market value of
the underlying transaction.
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Index
A
Abbreviations 526
Accounting
developments (future) 385
policies (critical) 54
policies (significant) 387
Accounts
approval 515
basis of preparation 58, 383
consolidation 372, 384
presentation of information 383
use of estimates 384
Acquisitions and disposals 27, 59, 80
Actuarial assumptions 417
Advances to core funding ratio 23, 205
Annual General Meeting 339, 517
Anti-money laundering and sanctions 510
Areas of special interest 128
Asset-backed securities 185, 268
Assets 46
average balance sheet 33
by country 432
by geographical region 79
by global business 58
charged as security 493
constant currency/reported reconciliation 48
deferred tax 422
encumbered/unencumbered 211
five years 45
held for sale 143, 471
accounting policy 405
held in custody and under administration 118
intangible 465
liquid assets of principal operating entities 263
maturity analysis 485
other 472
risk-weighted 2, 59, 79, 254, 296
trading 436
Associates and joint ventures
interests in 460
share of profit in 43
Auditor
arrangements 322
remuneration 419
report 369
B
Balance sheet
average 33
consolidated 45, 374
constant currency/reported reconciliation 48
data 45, 76, 86, 91, 97, 102, 108, 115, 431
HSBC Holdings 379
insurance manufacturing subsidiaries 235
movement in 2012 46
Balance Sheet Management 185, 222
Bancassurance 233
Basel 288
Board of Directors 309
balance and independence 311
changes 6
committees 318
information and support 312
meetings 310
powers 310
Brand 24
Brazilian labour claims 480
Business model 14, 185
C
Calendar (dividends) 516
Capital 281
future developments 291
generation 294
management 293
measurement and allocation 294
movement in regulatory capital in 2012 285
overview 282
ratio 2, 23
regulatory 294
regulatory and accounting 288
resources 45
return on average invested capital 3
risk 293
structure 286
Capital and performance ratios 2, 23
Carbon dioxide emissions 331
Cash flow
accounting policy 405
consolidated statement 375
HSBC Holdings 380
notes 498
Cautionary statement regarding forward-looking
statements 525
Client assets 118
Collateral and credit enhancements 163, 493
management 212
Commercial Banking 60, 65 204, 432
constant currency/reported profit 26
Commercial real estate 128
Committees (Board) 318
Communication with shareholders 345, 518
Compliance risk 125, 128, 230
Concentration of exposure 178, 259
Conduits 504
Constant currency 25
Contents inside front cover
Contingent liabilities and contractual commitments 208, 500
Contractual maturity of financial liabilities 214
Core tier 1 capital 2, 23, 286
Corporate and commercial lending 154, 165
Corporate governance 301
codes report 316
Corporate Sustainability Committee 330
Cost efficiency ratio 3, 23, 43, 81, 88, 93, 99, 104, 111
Counterparty credit risk 284
CRD IV 298
Credit cards 152
Credit coverage ratios 3
Credit exposure 144
Credit quality 151, 154
classifications 253
Credit risk
in 2012 139
insurance 240, 277
management thereof 124, 252
risk-weighted assets 283
Credit valuation adjustment 56, 441
Critical accounting policies 54
Cross-border exposures 259
Customer accounts 50
Customer deposit markets 204
Customer lending and deposit (combined) 49
Customer recommendation 24
D
Daily distribution of revenues 220
Daily trading/non-trading VAR 219, 220, 221
Dealings in HSBC Holdings plc shares 346
Debit valuation adjustment 56, 441
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Shareholder Information (continued)
Index
Debt securities in issue 474
accounting policy 404
Defined terms inside front cover
Deposits 449
accounting policy 404
average balances and average rates 33
Derivatives 145, 167, 179, 189, 452
accounting policy 395
Directors
annual incentives 355
appointments and re-election 316
biographies 302
Board of Directors 309
conflicts of interest 316
emoluments 361, 419
executive 312
exit payments 359
fees 362
interests 343
non-executive 313
other directorships 363
pensions 365
performance evaluation 315
relations with shareholders 316
remuneration (executive) 354, 361
responsibilities (statement of) 368
service contracts 359
terms of appointment 309
Disclosure philosophy 12
Disposal groups 471, 475
Disposals 18, 27, 52, 78, 117, 499
Diversity and inclusion 335
Dividends 344, 425, 516, 523
payout ratio 29
per share 2, 24
E
Earnings per share 2, 23, 29, 426
Economic background
Europe 81
Hong Kong 88
Latin America 111
Middle East and North Africa 99
North America 104
Rest of Asia-Pacific 93
Economic loss 51
Efficiency and revenue mix ratios 3
Employees 335
compensation and benefits 366, 409
disabled 336
diversity and inclusion 335
engagement 22
issues 331
numbers 42, 335, 409
relations 335
remuneration policy 336
reward 335
Encumbered assets 211
Enhanced Disclosure Task Force 12, 119
Enquiries (from shareholders) 518
Equity 47
Equity securities 222
Europe
balance sheet data 86, 431
collateral 164-167
constant currency/reported reconciliation 178
customer accounts 50
economic background 81
lending 140, 141, 142, 147, 149, 153, 157, 158, 163, 167,
172, 181
loan impairment charges/allowances 169, 170
operating expenses 85
pension plans 248, 279
principal operations 81
538
profit/(loss) 81, 86, 428
profit/(loss) by country 82
review of performance 81
risk-weighted assets 79
Eurozone 129
exposures 192
Events after the balance sheet date 515
Exposures 185, 186
F
Fair value 438
accounting policy 393
adjustments 439
control framework 438
movements 80
valuation bases 441, 442
Fee income (net) 35
Fiduciary risk 126, 231, 273
Filters (six) 18
Financial assets
accounting policy 397
designated at fair value 451
not qualifying for de-recognition 459
reclassification 388, 450
transfers 458
Financial assets and liabilities
accounting policy 397
by measurement basis 432
Financial guarantee contracts
accounting policy 402
Financial highlights 2
Financial instruments
accounting policy (fair value) 393
accounting policy (valuation) 56, 388, 448
at fair value 37, 437
credit quality 154, 253
net income from 406
not at fair value 447
Financial investments 49, 145, 179, 456
accounting policy 394
gains less losses from 38
Financial liabilities designated at fair value 473
contractual maturities 214
Financial risks (insurance) 238, 275
Financial Services Compensation Scheme 501
Financial System Vulnerabilities Committee 328
Financial statements 371
Five-year comparison 29, 45
Footnotes 120, 249, 382
Forbearance 158
Foreclosures 151
Foreign currencies/exchange
accounting policy 401
exposures 493
rates 29, 45
Funding sources (diversity) 209
Funds under management 118
G
Gains on disposal of US branch network, US cards
and Ping An 39
Geographical regions 16, 79
Global businesses 16, 58
Global Banking and Markets 18, 60, 68, 204, 432
constant currency/reported profit 26
Global functions 16
Global People Survey 335
Global Private Banking 19, 60, 72, 204, 432
constant currency/reported profit 26
Glossary 529
Going concern 334
Goodwill
accounting policy 55, 398
and intangible assets 463
Governance codes 316
Group Audit Committee 319
Group CEO’s Business Review 8
Group Chairman’s Statement 4, (letter) 301
Group Management Board 318
Group Remuneration Committee 329, 347
Group Risk Committee 323
Growing HSBC 19
H
Health and safety 336
Held for sale 52, 78, 117, 471
Highlights 1
Hong Kong
balance sheet data 91, 431
collateral 164-167
constant currency/reported reconciliation 178
customer accounts 50
economic background 88
lending 140-142, 147, 149, 153, 157, 158, 163-167, 172,
181
loan impairment charges/allowances 169, 170
pension plans 248, 279
principal operations 88
profit/(loss) 88, 89, 91, 428
review of performance 88
risk-weighted assets 79
HSBC Finance
foreclosures 151
funding 211
loan modifications 158
share plans 338
HSBC Holdings plc
balance sheet 379
cash flow 216, 380
credit risk 184
deferred tax 424
dividends 425
employee compensation 419
financial assets and liabilities 435, 446, 474
financial instruments not at fair value 449
liquidity and funding 216, 265
market risk 270
maturity analysis of assets and liabilities 491
net income from financial instruments 406
share plans 363
statement of changes in equity 381
structural foreign exchange exposures 493
subordinated liabilities 484
I
Impairment
accounting policy 54, 389
allowances 168, 172
assessment 258
charges 28, 41
constant currency/reported reconciliation 177
goodwill 55
impaired loans and advances 143, 162
losses as percentage of loans and advances 176
methodologies 186, 260
movement by industry and geographical region 163, 172
Income statement (consolidated) 29, 372
Information on HSBC (availability thereof) 520
Insurance
accounting policy 402
balance sheet of manufacturing subsidiaries 235
claims incurred (net) and movements in liabilities to
policyholders 40, 407
economic/non-economic assumptions 245
in 2012 233
liabilities under contracts issued 242, 475
net earned premiums 38, 407
products 273
539
PVIF business 124
risk management 125, 233, 273
Interest income/expense (net) 33, 406
accounting policy 387
average balance sheet 33
sensitivity 223, 225, 269
Interest rate derivatives 480
Interim management statements 518
Interim results 518
Internal control 332
Internet crime 135
IFRSs and Hong Kong Financial Reporting Standards
comparison 383
Investment properties 39, 236, 399, 468
Investor relations 519
J
Joint ventures 43, 460
K
Key performance indicators 22
L
Latin America 115, 431
balance sheet data 115, 431
collateral 164-167
constant currency/reported reconciliation 178
customer accounts 50
economic background 111
lending 140-142, 147, 149, 153, 157, 158, 163-167, 172,
181
loan impairment charges/allowances 169, 170
principal operations 111
profit/(loss) 111, 115, 428
profit/(loss) by country 112
review of performance 111
risk-weighted assets 79
Lease commitments 501
accounting policy 399
Legal
proceedings and regulatory matters 506
risk 271
Leveraged finance transactions 190
Liabilities 47
average balance sheet 33
by geographical region 431
constant currency/reported reconciliation 48
deferred tax 422
five years 45
maturity analysis 485
of disposal groups 475
other 475
retirement benefit 413
subordinated 480
trading 473
Life insurance business 234, 273, 477
Liquidity and funding 203
assets 206
in 2012 204
insurance 242, 277
management of risk 124, 261
net contractual cash flows 207
policies and procedures 261
primary sources of funding 261
regulation 216
Loans and advances 2, 139, 144, 179
accounting policy 389
by country 182
collateral 163
concentration of exposure 178
credit quality of 142
delinquency in the US 152
impairment 2, 162
past due but not impaired 156
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Shareholder Information (continued)
Index
renegotiated 158
to banks by geographical region 167, 182
to customers by industry sector and geographical
region 153, 158, 179, 181
write-off 259
M
Madoff 507
Market Capitalisation 3
Market risk 125, 217, 265
in 2012 218
insurance 239, 275
sensitivity analysis 266
Maturity analysis of assets and liabilities 485
Maximum exposure to credit risk 139, 144, 184
Middle East and North Africa
balance sheet data 102, 431
collateral 164-167
constant currency/reported reconciliation 178
customer accounts 50
economic background 99
lending 140-142, 147, 149, 153, 157, 158, 163-167, 172,
181
loan impairment charges/allowances 169, 170
principal operations 99
profit/(loss) 99, 102, 428
profit/(loss) by country 100
review of performance 99
risk-weighted assets 79
Model risk 136
Money market funds 505
Monoline insurers 189
Mortgages
lending 148, 150
mortgage-backed securities 184, 259
US mortgage-related investigations 508
N
Nomination Committee 329
Non-controlling interests 494
Non-GAAP measures 25
Non-interest income
accounting policy 387
Non-life insurance business 234, 273, 476
Non-money market investment funds 505
Non-trading portfolios 221, 268
North America
balance sheet data 108, 431
collateral 164-167
constant currency/reported reconciliation 178
customer accounts 50
economic background 104
lending 140-142, 147, 149, 153, 158, 163-167, 172, 181
loan impairment charges/allowances 169, 170
mortgage lending 150
pension plans 249, 280
personal lending 151
principal operations 104
profit/(loss) 104, 108, 428
profit/(loss) by country 105
review of performance 105
risk-weighted assets 79
Notable items 31, 32
O
Operating expenses 28, 42, 85
Operating income 2, 39
Operating profit 408
Operating model 15
Operational risk 125, 227, 270
in 2012 228
losses/incidents 229, 230
Ordinary shares 45
Organisational structure chart 521
540
Other 74, 432
Outlook 7, 11
P
Payment protection insurance 479
Pension plans
accounting policy 400
defined benefit plans 246, 269, 365, 413, 415
for directors 365
risk 126, 224, 246, 279
Performance 9, 81, 88, 94, 99, 105, 111, 348
Personal lending 130, 140, 147, 164
Pillar I, II and III 295
Ping An 472
Preference shares 340
Preferred securities 480
Principal activities 13
Products and services 60, 427
Profit before tax
by country 82, 88, 94, 100, 105, 112
by geographical region 79, 81, 88, 97, 99, 104, 111, 428
by global business 58, 76, 86, 91, 97, 102, 108, 115
consolidated 29, 372
constant currency/reported reconciliation 26
data 2
underlying 2
Property plant and equipment 118, 467
accounting policy 399
Provisions 478
accounting policy 57, 402
PVIF 243
R
Ratios
advances to core funding 23, 205
capital 2, 287
core tier 1 (CET1) 2, 23, 289, 290
cost efficiency 3, 23, 43, 81, 88, 93, 99, 104, 111
credit coverage 3
customer accounts 2
dividend payout 29
dividends per share 2, 24
earnings per share 2, 23, 29, 426
key performance indicators 22
net assets per share 2, 45
performance 3
risk adjusted revenue growth 24
return on average ordinary shareholders’ equity 3, 23, 29
return on average total assets 3, 29
stressed coverage ratios 205, 262
total equity 2
Reconciliation of reported and underlying items 28
Redenomination risk 201
Regulatory reform 5
Related party transactions 512
Remuneration
clawback 353
committee 329
in 2012 354
key metrics 348
letter 347
members 349
policy 336, 351
report 347
reward strategy 335, 347
structure 347
variable pay pool 348, 352
Renegotiated loans 158, 254
Representations and warranties 191
Repricing gap 226
Reputational risk 126, 246, 278
Rest of Asia-Pacific
balance sheet data 97, 431
collateral 164-167
constant currency/reported reconciliation 178
customer accounts 50
economic background 73
lending 140-142, 147, 149, 153, 157, 158, 163-167, 172,
181
loan impairment charges/allowances 169, 170
principal operations 93
profit/(loss) 93, 97, 428
profit/(loss) by country 94
review of performance 95
Restructuring HSBC 18
Retail Banking and Wealth Management 60, 62, 204, 432
constant currency/reported profit 26
Revenue 28
Reward 335
Risk
appetite 126
business activities 20
business operations 134
capital 293
committee 323
compliance 125, 230, 271
contingent liquidity 208, 265
counterparty 284
credit 124, 137, 240, 252, 283, 296
credit spread 221, 277
cross-currency 265
description 124
dispute 134
economic 131
eurozone 192
factors 20
fiduciary 126, 231, 273
financial (insurance) 238, 275
foreign exchange 225
gap risk 268
geopolitical 131
governance 252
information security 136
insurance operations 125, 232, 233, 273
interest rate 222
internet crime 135
legal 271
liquidity and funding 124, 205, 261, 273
management of 124
market 125, 239, 265, 275
model 136
operational 125, 227, 270
pension 126, 224, 246, 279
policies and practices 252
profile 123, 126
redenomination 201
regulatory 132
reputational 126, 246, 278
scenario stress testing 127
security and fraud 271
sustainability 126, 249, 280, 332
systems 272
top and emerging 22, 130, 325
vendor 272
Risk-weighted assets 2, 59, 79, 294, 296
movement in 2012 282
RoRWA (reconciliation of measures) 3, 52
Run-off portfolios 52, 78, 117
S
Sale and repurchase agreements
accounting policy 395
Securities litigation 506
Securitisations 184, 259, 505
Security and fraud risk 271
Segmental analysis 426
accounting policy 388
Senior management
541
biographies 308, 309
emoluments 366
Share-based payments 411
accounting policy 401
Share capital 340, 495
accounting policy 404
in 2012 342
notifiable interests in 345
ownership guidelines 359
rights and obligations 340
Share information 2, 45
Share plans
for directors 363
for employees 336
HSBC Bank Bermuda plans 338, 497
HSBC Finance plans 338, 497
HSBC France plans 337, 496
Performance Shares and Restricted Share awards 352
Share ownership guidelines 359
Shareholder (communications with) 345
profile 517
Simplifying HSBC 17
Social contribution 7
Special purpose entities 470, 502
Staff development 335
Staff numbers 42, 335
Statement of changes in equity 376
Statement of comprehensive income 373
Stock symbols 519
Strategic direction 17, 62, 65, 68, 72
Stressed coverage ratios 205, 262
Stress testing 127, 266, 293, 326
Structural banking reform 292
Structural foreign exchange exposure 222, 268
Subsidiaries 469
accounting policy 398
Supplier payment policy 344
Sustainability
committee governance risk 330
risk 126, 249, 280
Systemically important banks 291
Systems risk 272
T
Tax
accounting policy 57, 400
deferred tax 422
expense 44
of shares and dividends 522
reconciliation 421
tax and broker-dealer investigations 511
Tier 1 capital (core) 282
Total shareholder return 2, 358
Trading assets 145, 178, 268, 436
accounting policy 393
Trading income (net) 36
Trading liabilities 473
accounting policy 393
Trading portfolios 218, 220
U
UK regulatory reform 291
Underlying performance 26
V
Value at risk 219, 266
Values (HSBC) 13
Vendor risk management 272
Vision (HSBC) 13
W
Wholesale funding 205, 210, 264
Wholesale lending 141, 152
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Shareholder Information (continued)
Contacts
HSBC HOLDINGS PLC
Incorporated in England on 1 January 1959 with limited liability under the UK Companies Act
Registered in England: number 617987
REGISTERED OFFICE AND
GROUP HEAD OFFICE
8 Canada Square
London E14 5HQ
United Kingdom
Telephone: 44 020 7991 8888
Facsimile: 44 020 7992 4880
Web: www.hsbc.com
REGISTRARS
Principal Register
Computershare Investor Services PLC
The Pavilions
Bridgwater Road
Bristol BS99 6ZZ
United Kingdom
Telephone: 44 0870 702 0137
Email: via website
Web: www.investorcentre.co.uk/contactus
Hong Kong Overseas Branch Register
Computershare Hong Kong Investor Services
Limited
Rooms 1712-1716, 17th floor
Hopewell Centre
183 Queen’s Road East
Hong Kong
Telephone: 852 2862 8555
Email: hsbc.ecom@computershare.com.hk
Web: www.computershare.com/hk/investors
Bermuda Overseas Branch Register
Investor Relations Team
HSBC Bank Bermuda Limited
6 Front Street
Hamilton HM11
Bermuda
Telephone: 1 441 299 6737
Email: hbbm.shareholder.services@hsbc.bm
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STOCKBROKERS
Goldman Sachs International
Peterborough Court
133 Fleet Street
London EC4A 2BB
United Kingdom
HSBC Bank plc
8 Canada Square
London E14 5HQ
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ADR Depositary
The Bank of New York Mellon
Depositary Receipts
P.O. Box 43006
Providence, RI 02940-3006
USA
Telephone (US): 1 877 283 5786
Telephone (International): 1 201 680 6825
Email: shrrelations@bnymellon.com
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Paying Agent (France)
HSBC France
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75419 Paris Cedex 08
France
Telephone: 33 1 40 70 22 56
Email: ost-agence-des-titres-hsbc-reims.hbfr-
do@hsbc.fr
Web: www.hsbc.fr
Credit Suisse Securities (Europe) Limited
1 Cabot Square
London E14 4QT
United Kingdom
542
© Copyright HSBC Holdings plc 2013
All rights reserved
No part of this publication may be reproduced, stored in
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HSBC Holdings plc.
Published by Group Finance, HSBC Holdings plc,
London
Cover designed by Black Sun Plc, London; text pages
designed by Group Finance, HSBC Holdings plc,
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and Shanghai Banking Corporation Limited, Hong Kong
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Stock number 99270-3
Photography
Cover by Matthew Mawson
Group Chairman by George Brooks
Group Chief Executive by Patrick Leung
HSBC Holdings plc
8 Canada Square
London E14 5HQ
United Kingdom
Telephone: 44 020 7991 8888
www.hsbc.com